[GIORDANO, HALLERAN & CIESLA, P.C.]
March 31, 1997
Securities and Exchange Commission
Document Control
450 Fifth Street, N.W.
Washington, DC 20549
RE: FOHP, Inc.
Annual Report on Form 10-K for the year ended December 31, 1996
Commission File No.: 0-25944
Ladies and Gentlemen:
On behalf of our client, FOHP, Inc. (the "Company"), we are submitting
to the Securities and Exchange Commission a copy of the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 ("Form 10-K"), and all
exhibits thereto.
Please direct any comments you may have with respect to the Form 10-K
submitted herewith to the undersigned at (908) 741-3900.
Very truly yours,
/s/ PAUL T. COLELLA
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PAUL T. COLELLA
PTC/lav
Enclosure
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-25944
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FOHP, INC.
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(Exact name of registrant as specified in
its charter)
New Jersey 22-3314813
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Building 6
2 Bridge Avenue
Red Bank, New Jersey 07701-1106
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(Address of principal Zip Code
executive offices)
Registrant's telephone number,
including area code: (908) 842-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock-NJ
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(Title of class)
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(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of the Registrant's Common
Stock-NJ, par value $.01 per share ("Common Stock-NJ"), held by non-affiliates
of the Registrant, as of March 15, 1997, was $31,302,585. Common Stock-NJ is the
only class of the Registrant's Common Stock with shares currently issued and
outstanding. Inasmuch as shares of Common Stock-NJ are not listed on any
exchange or quoted on any quotation system, nor has there been any regular
trading in shares of Common Stock-NJ since the inception of the Registrant, the
aforestated aggregate market value of outstanding Common Stock-NJ held by
non-affiliates of the Registrant was computed by multiplying the number of
shares of Common Stock-NJ held by non-affiliates of the Registrant as of March
15, 1997, by $15, the per share sales price of Common Stock-NJ sold by the
Registrant in its last offering of Common Stock-NJ, which ended on September 1,
1995.
As of March 15, 1997, the number of outstanding shares of Common
Stock-NJ was 2,086,839.
Documents incorporated by Part of Form 10-K into which
reference into this report document is incorporated
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None None
Certain information included in this report and other filings of the
Registrant under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as well as information
communicated orally or in writing between the dates of such filings, contains or
may contain forward looking information that is subject to certain risks, trends
and uncertainties that could cause actual results to differ materially from
expected results. Among these risks, trends and uncertainties are matters
related to national and local economic conditions, the effect of governmental
regulation on the Registrant and its subsidiaries, the competitive environment
in which the Registrant and its subsidiaries operate, the Amended and Restated
Securities Purchase Agreement dated February 10, 1997, as amended (the "Amended
Securities Purchase Agreement"), among the Registrant, First Option Health Plan
of New Jersey, Inc. ("FOHP-NJ") and Health Systems International, Inc. ("HSI"),
and the ability of the Registrant and its subsidiaries to generate or raise
sufficient capital to remain in compliance with any applicable statutory net
worth or other capital requirements and to continue to operate their businesses
as currently operated. See "Description of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
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PART I
ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS
FOHP, Inc., a New Jersey corporation (the "Holding Company" or
"Registrant"), was formed in May 1994 to effect the reorganization (the
"Reorganization") of FOHP-NJ, a New Jersey corporation which operates as a
health maintenance organization ("HMO") in the State of New Jersey, into a
holding company structure. The Reorganization was consummated on June 8, 1995.
Pursuant to the Reorganization, FOHP-NJ became a wholly-owned subsidiary of the
Holding Company and the former holders of FOHP-NJ common stock received shares
of Common Stock-NJ, the only class of Holding Company Common Stock with shares
issued and outstanding.
Prior to the Reorganization, the Holding Company did not conduct any
business nor did it have any significant assets or liabilities. After the
Reorganization, the Holding Company was issued all the authorized capital stock
of First Option Health Plan of New York, Inc., a New York corporation formed in
May 1995 to offer health care benefit products in the State of New York
("FOHP-NY"), if approval to operate as an HMO in such state is obtained, and was
issued all the authorized capital stock of First Option Health Plan of
Pennsylvania, Inc., a Pennsylvania corporation formed in May 1995 to offer
health care benefit products in the Commonwealth of Pennsylvania ("FOHP-PA"), if
approval to operate as an HMO in such state is obtained. In December 1995, the
Holding Company formed First Option Health Plan of Delaware, Inc. for purposes
of operating an HMO in the State of Delaware ("FOHP-DE"), and formed First
Option Health Plan of Maryland, Inc. for purposes of operating an HMO in the
State of Maryland ("FOHP-MD"). The current assets of the Holding Company consist
principally of the capital stock of its aforementioned wholly-owned
subsidiaries.
During the summer of 1996, as a result of FOHP-NJ's statutory net worth
deficiency 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 (the "Board" or "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. It is not determinable at this time when, or if, the Holding Company
will continue expansion efforts in any state other than New Jersey. See
"Description of Business - Recent Developments - Proposed Transaction with HSI"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operation."
The principal executive offices of the Holding Company are located at 2
Bridge Avenue, Building 6, Red Bank, New Jersey 07701-1106 and its telephone
number at such location is (908) 842-5000.
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(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Since its inception, substantially all of the Holding Company's
revenues, operating results and assets have been attributable to the operation
of FOHP-NJ, an HMO which operates in the State of New Jersey.
(C) DESCRIPTION OF BUSINESS
In response to exclusively profit driven managed care organizations
generally operated by large insurance companies, FOHP-NJ, a wholly-owned
subsidiary of the Holding Company, was formed in May 1993 by certain New Jersey
hospitals and physicians to operate as a provider owned HMO in New Jersey.
FOHP-NJ received a Certificate of Authority ("COA") to operate as an HMO in New
Jersey in June 1994, and commenced operations on July 1, 1994. FOHP-NJ's
objective was to have quality medical care delivered by its network of
providers, in a cost effective manner, to as many persons as possible. To ensure
that the health care providers associated with FOHP-NJ would maintain control
over and participate in the management of the HMO, only health care providers
associated with FOHP-NJ were permitted to purchase shares of FOHP-NJ common
stock. In addition, to ensure that the hospitals and physicians participating in
the FOHP-NJ provider network were able to contribute equally to the governance
of FOHP-NJ, the Certificate of Incorporation of FOHP-NJ required that the Board
of Directors of FOHP-NJ initially be comprised of an equal number of
physician-designated directors and hospital-designated directors.
In early 1995, it became apparent to the Board of Directors of FOHP-NJ
that the health plans offered by FOHP-NJ would become more attractive to
prospective employer groups with employees in New Jersey and neighboring states
if the employees had access to the hospitals, physicians and other health care
providers located or practicing in the states neighboring New Jersey. As a
result, FOHP-NJ was reorganized into a holding company structure to facilitate
the formation of HMOs in states other than New Jersey. Pursuant to the
Reorganization, the Holding Company, which was formed solely for purposes of
effecting the Reorganization, acquired all of the outstanding shares of each
class of FOHP-NJ common stock and, as a result, FOHP-NJ became a wholly-owned
subsidiary of the Holding Company and the former holders of FOHP-NJ common stock
received shares of Common Stock-NJ, the only class of Holding Company Common
Stock with shares currently issued and outstanding.
RECENT DEVELOPMENTS
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 New Jersey Department of Banking and Insurance (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
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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.
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
provider network. A public offering of securities was ultimately rejected by the
Board because the Board did not believe that the Holding Company could raise the
capital needed in a public offering, given the Holding Company's deteriorating
financial condition.
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.
PROPOSED TRANSACTION WITH HSI - After considering proposals submitted
by several large health care corporations, an insurer with affiliations to a
provider-owned HMO, and several private investor groups, on October 24, 1996,
the Holding Company and FOHP-NJ entered into a Securities Purchase Agreement
(the "Original Securities Purchase Agreement") with HSI, a national,
well-capitalized managed health care organization with more than 1.9 million HMO
and administrative services only members.
As a result of a significant increase in medical claims expense during
the fourth quarter of 1996, due to more complete payment data that was not
available to the Holding Company or its actuaries prior to such quarter, HSI was
not obligated to consummate the transactions contemplated by the Original
Securities Purchase Agreement and therefore elected in late January 1997 to
renegotiate the terms and conditions of the Original Securities Purchase
Agreement. Shortly thereafter, on February 10, 1997, the Original Securities
Purchase Agreement was terminated and replaced by the Amended Securities
Purchase Agreement. On March 13, 1997, the Amended Securities Purchase Agreement
was amended to clarify certain provisions therein and in the proposed
Certificate of Incorporation of the Holding Company attached as an exhibit
thereto. The Amended Securities Purchase Agreement was declared effective on
March 14, 1997.
Pursuant to the Amended Securities Purchase Agreement:
o The Holding Company will issue, and HSI will purchase, convertible
debentures ("Debentures") in the aggregate principal amount of up to $50,000,000
(plus an amount (the "Phase-In Management Fee Amount"), currently estimated to
be $1,700,000, equal to the phase-in management fee described below), of which
approximately $43,300,000 will be initially
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issued (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").
At the Initial Closing, HSI will be paid a phase-in 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.
o The Debentures will be convertible, at the option of HSI, into shares
of Common Stock, par value $.01 per share ("New Common Stock"), of the Holding
Company which will be available for issuance after the amendments to the Holding
Company's Certificate of Incorporation described below are effected. If the
Debentures are exercised in full, the shares of New Common Stock issued to HSI
will represent 71% 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 New Common Stock
representing approximately 2.3% of the Holding Company's outstanding equity
(based on $1,700,000 principal amount of Debentures).
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 Holding Company and HSI will enter into a General Administrative
Services Management Agreement (the "Administrative Management Agreement")
pursuant to which HSI will manage, for a fee, all of the Holding Company's
administrative services.
o The Holding Company and HSI will enter into a Management Information
Systems and Claims Processing Services Management Agreement (the "MIS Management
Agreement") pursuant to which HSI will provide claims processing, record keeping
and data processing services to all the health plans offered, or to be offered,
by the Holding Company and its subsidiaries. The MIS Management Agreement will
become effective at HSI's option and upon the occurrence of certain other
conditions precedent.
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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 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 59.5% 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 that, if the transactions contemplated by the
Amended Securities Purchase Agreement (collectively the "Transaction") are not
consummated (which consummation requires the prior approval by the Holding
Company's shareholders of the Transaction) on or before April 30, 1997, the DOI
intends to petition the New Jersey Superior Court for an order to allow the DOI
to place FOHP-NJ into rehabilitation. It is also the understanding of the Board
of Directors that it is the DOI's intention to place FOHP-NJ into rehabilitation
if the Transaction is not consummated by such date. 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 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.
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 Exchange Act, including without
limitation applicable requirements under Rule 13e-3.
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 date
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of the Initial Closing, (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 (as hereinafter defined) shall have been approved
by the shareholders and the Certificates of Incorporation of the Holding Company
and FOHP-NJ, as proposed to be amended and restated, shall have been filed with
the Office of the Secretary of State of the State of New Jersey, (iv) the
delivery by the Holding Company of Debentures having an aggregate principal
amount equal to approximately $43,300,000, (v) the Holding Company shall have
received a minimum number of modified provider agreements from the providers in
the FOHP-NJ provider network, (vi) all authorizations, approvals, consents and
waivers of any governmental authority necessary for the consummation of any and
all 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, 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 date of the Initial
Closing, (viii) the Holding Company shall have terminated the agreement dated
January 16, 1995 between Sierra Health Services, Inc. and 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 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 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 an Additional Debenture Advance Adjustment in
consultation with the
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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 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 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.
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 Initial
Closing under the Amended Securities Purchase Agreement.
As a condition to consummating the transactions contemplated by the
Amended Securities Purchase Agreement, the shareholders of the Holding Company
must approve (i) amendments to the Certificate of Incorporation of the Holding
Company relating to changes in the classes of securities authorized for issuance
by the Holding Company, (ii) amendments to the Certificate of Incorporation of
the Holding Company relating to changes in the rights of shareholders of the
Holding Company, and (iii) amendments to the Certificates of Incorporation and
By-laws of the Holding Company and FOHP-NJ (the amendments described in clauses
(i), (ii) and (iii) are collectively referred to herein as the "Amendments"). If
the Amendments are approved by the shareholders, the Certificates of
Incorporation and By-laws of the Holding Company and FOHPNJ 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;
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 Incorporation or By-laws of the Holding Company or the
certificate of incorporation or by-laws of any subsidiary thereof;
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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
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 certain business combinations 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.
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.
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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.
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.
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 the then
outstanding shares of New Common Stock. In addition, the By-laws 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 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.
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 provider network
will no longer have a right to direct representation on the Board of Directors
of FOHP-NJ.
The shareholders of the Holding Company will vote on the Transaction
and Amendments at the Holding Company's 1996 Annual Meeting of Shareholders
scheduled for April 16, 1997. If the Transaction and Amendments are approved by
the shareholders of the Holding Company at the 1996 Annual Meeting of
Shareholders, the Holding Company anticipates consummating the Transaction
shortly thereafter.
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SALE OF FIRST MANAGED CARE OPTION, INC. - In late December 1996, the
Holding Company sold all of its interest in First Managed Care Option, Inc., a
New York corporation which specializes in the management of treatment and
services rendered to employees injured in the workplace, automobile accidents
and other trauma based victims ("FMCO"), to ABSCO Ltd. Corp. ("ABSCO") for an
aggregate purchase price of $250,000. In connection with the sale of FMCO to
ABSCO, FOHP-NJ entered into a network access agreement with FMCO, pursuant to
which FMCO will offer to the entities with which it contracts, the opportunity
to avail themselves to the services provided by FOHP-NJ's provider network. In
addition, the Holding Company and ABSCO entered into an accounts receivable
agreement, pursuant to which the Holding Company will receive, subject to
certain limitations, 25% of the accounts receivable of FMCO for which payment
was outstanding in excess of 90 days at the close of business on September 30,
1996, when and if collected from FMCO after November 1, 1996.
FOHP-NJ
FOHP-NJ is the Holding Company's principal subsidiary and only
subsidiary which has obtained a COA to operate as an HMO. FOHP-NJ operates an
HMO in the State of New Jersey pursuant to a COA issued by the Departments.
FOHP-NJ has established a provider network and has entered into provider
agreements with NJ Practitioners, NJ Acute Care Institutions and NJ Other
Providers (as such terms are defined below). FOHP-NJ has entered into provider
agreements with (i) 51 NJ Acute Care Institutions located throughout New
Jersey's 21 counties, (ii) approximately 10,000 NJ Practitioners, practicing in
primary care and 30 medical specialities throughout New Jersey, and (iii)
approximately 75 NJ Other Providers. Providers contracting with FOHP-NJ are not
required to be shareholders of the Holding Company. Currently, of the
approximately 10,126 providers who have contracted with FOHP-NJ, 2,629 are
shareholders of the Holding Company.
As used herein, a "NJ Acute Care Institution" shall mean a hospital or
acute care institution, licensed by the New Jersey Department of Health and
Senior Services (the "DOH"), which has entered into a provider agreement with
FOHP-NJ to provide health care services to the members of FOHP-NJ's health
plans; a "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 is licensed to practice medicine or osteopathy in the State of
New Jersey and who has entered into a provider agreement with FOHP-NJ to provide
health care services to the members of FOHP-NJ's health plans; and "NJ Other
Provider" shall mean a health care provider or professional, other than a NJ
Practitioner or NJ Acute Care Institution, licensed, certificated or authorized
to operate or practice in the State of New Jersey, which has entered into a
provider agreement with FOHP-NJ.
Each member of FOHP-NJ's provider network has entered into a provider
agreement with FOHP-NJ. Each provider agreement has a one-year term and is
renewable annually. Such agreements with NJ Acute Care Institutions and NJ Other
Providers may be terminated by mutual consent or, after the initial one-year
term, by either party upon 90 days notice; agreements with NJ Practitioners may
be terminated by either party upon 60 days notice. The
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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. Preferred Providers (i.e., members of FOHP-NJ's provider
network) are permitted to contract with other entities, including other health
plans.
FOHP-NJ markets its services to employers, including NJ Acute Care
Institutions which are providers of health care services to FOHP-NJ and
shareholders of the Holding Company. Pursuant to the Holding Company's
Certificate of Incorporation, NJ Acute Care Institutions which own directly, or
through affiliates, shares of Common Stock-NJ are required to offer a FOHP-NJ
plan to their employees under certain circumstances. In the event that a NJ
Acute Care Institution fails to comply with such requirements, the Holding
Company may elect to repurchase the shares of Common Stock-NJ held by the NJ
Acute Care Institution. See "Marketing."
BENEFITS PROVIDED BY FOHP-NJ
FOHP-NJ currently offers two principal types of coverage plans, point
of service ("POS") and Non-POS, each having multiple variations. Under both
types of product, each new FOHP-NJ member will be required to select a primary
care physician from a list supplied by FOHP-NJ. All medical care thereafter
received by the member under a Non-POS plan, including specialist and hospital
care, will be supervised by the primary care physician who is familiar with the
member's medical history. A POS plan will permit members to utilize providers
who are not under contract with FOHP-NJ, subject to FOHP-NJ's prior approval. In
such circumstances, members will be subject to higher co-payments and be
responsible for payment of any difference between what FOHP-NJ pays for covered
services and the amount of the charges incurred for such services. Generally,
FOHP-NJ will pay no more than 80% and the member will pay no less than 20% of
the charges for covered services when care is provided by non-Preferred
Providers.
FOHP-NJ's health plans require precertification for hospital admissions
and diagnostic and outpatient procedures. Except for co-payments, FOHP-NJ covers
all other charges for treatment at non-Preferred Provider emergency rooms in the
event of a medical emergency or urgently needed services, as determined by
FOHP-NJ.
Generally, rates for each employer group are fixed for a twelve-month
period and may be increased for each renewal term; provided, however, that rate
increases must be submitted to the DOI and there can be no assurance that any
such rate increase will be accepted by the DOI. Renewal dates vary among
employer groups. 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
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area. Accordingly, rates can vary between employer groups for coverage under the
same FOHP-NJ plan. FOHP-NJ has also established rates for the health benefits
plans required by the State of New Jersey to be offered by all HMOs that choose
to market to small employer groups (less than 50 employees), which are based on
overall community rates for New Jersey calculated by independent consulting
actuaries, as statutorily required. Proposed rates for the basic health care
coverage required by the State of New Jersey must be submitted to the DOI. Rates
will also be affected by federal regulations which generally prohibit experience
rating of group accounts.
FOHP-NJ health plans require members to make co-payments directly to
the treating health care provider for office visits to physicians and other
health care providers, physician house calls and certain hospital emergency room
visits. All FOHP-NJ plans allow subscribers to enroll their spouses and eligible
dependents.
FOHP-NJ offers multiple coverage plans to employer groups of 50 or more
employees. Some coverages in each product are subject to annual maximum
benefits. Generally, the products within each POS and Non-POS plan are
distinguished by the amount of the applicable co-payments and the obligation of
the POS member to pay to the provider the difference between what FOHP-NJ pays
and the total charges.
FOHP-NJ offers seven small employer group (less than 50 employees)
products. Five of them are identical to the small business plans designed by the
Board of Directors of the Small Employer Health Benefits Program, the regulatory
agency responsible for the regulation of small business health insurance
products in New Jersey. The other two small employer group products are offered
as riders to one of the four other small employer products. Either rider makes
that product virtually identical to one of FOHP-NJ's large employer group
products.
FOHP-NJ also offers a dental plan and has expanded the coverage of the
benefits plans offered by FOHP-NJ to include vision care. Moreover, commencing
in December 1995, FOHP-NJ began offering Non-POS products to individuals as
required by the State of New Jersey. The Non-POS products being offered by
FOHP-NJ to individuals pursuant to the state requirement contain all the state
mandated benefits, including coverage for preventive care, in-patient hospital
care, substance abuse and mental health. All the products offered to individuals
by FOHP-NJ as required by the State of New Jersey require co-payments. See
"Government Regulation."
FOHP-NJ currently offers coverage for Medicaid beneficiaries in the New
Jersey counties of Essex, Cumberland, Gloucester, Hudson, Middlesex, Passaic,
Union, Mercer and Camden. In December 1995, FOHP-NJ qualified federally as an
HMO, and, as a result, currently offers coverage for Medicare beneficiaries in
New Jersey.
FOHP-NJ also provides utilization management and its own preferred
provider
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organization product to the members of self-funded plans such as NJ CAR,
formerly known as the New Jersey Automobile Dealers Association, a major New
Jersey trade association which provides health care benefits through a program
of self-insurance. In addition, FOHP-NJ provides its preferred provider
organization product to a number of other self-funded plans, including the North
Jersey Municipalities Health Insurance Fund and the New Jersey Builders'
Association. FOHP-NJ also offers pharmacy, mental health and chemical dependency
management services through third parties who or which have entered into
sub-contract arrangements with FOHP-NJ.
In addition to offering services as an HMO, FOHP-NJ offers
administrative services, including access to FOHP-NJ's provider network, to
health plans governed by the Employee Retirement Income Security Act of 1974, as
amended, such as employer groups which are self-insured, as well as to such
groups as Administrative Service Organizations, Third Party Administrators and
Managed or Coordinated Care Organizations ("MCOs").
ARRANGEMENTS WITH NJ PRACTITIONERS
FOHP-NJ may contract with Individual or Independent Practice
Associations (individually, an "IPA"), Physician Hospital Organizations or NJ
Practitioners. Under the terms of FOHP-NJ's practitioner provider agreement, NJ
Practitioners will provide primary and specialty care to FOHP-NJ members.
FOHP-NJ has entered into provider agreements with physicians and others who are
not shareholders to provide services to its members. NJ Practitioners will be
paid pursuant to a fee schedule established by FOHP-NJ and will only bill
members of a FOHP-NJ plan 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. In
the future, FOHP-NJ may consider entering into capitation arrangements with NJ
Practitioners.
In addition to specifying the types of services required, each
practitioner provider agreement imposes various requirements and standards (many
of which are also mandated by applicable federal and state law) on NJ
Practitioners.
Each member selects a primary care physician from a list of primary
care physicians who are under contract with FOHP-NJ. Under the Non-POS plans
offered by FOHP-NJ, primary care physicians are required, when medically
necessary and appropriate, to refer members to specialist physicians, hospitals
and other health care providers who are under contract with FOHP-NJ.
FOHP-NJ is a named insured under the Holding Company's comprehensive
general liability insurance, with coverage of at least $1,000,000 per occurrence
and $10,000,000 in the aggregate per year. In addition, FOHP-NJ maintains HMO
reinsurance for those situations where the acute care of a commercial or
Medicaid member exceeds $75,000 in a calendar year or the acute care of a
Medicare member exceeds $100,000 in a calendar year, with a per
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member annual maximum of $1,000,000 and lifetime maximum of $2,000,000.
Individual physicians, including any physician practicing in an IPA or other
group, must maintain professional liability insurance coverage of at least
$1,000,000 per occurrence and $3,000,000 in the aggregate per year.
ARRANGEMENTS WITH NJ ACUTE CARE INSTITUTIONS
FOHP-NJ's agreements with NJ Acute Care Institutions provide, among
other things, for 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. The
agreements are site specific. Therefore, in the event of a merger or acquisition
or similar transaction between a NJ Acute Care Institution and another
institution, services provided to members of FOHP-NJ pursuant to an agreement
between it and the affected NJ Acute Care Institution are required to be
provided only at the location of such institution. Also, under the terms of such
agreements, NJ Acute Care Institutions are required to use their best efforts to
notify FOHP-NJ within 48 hours or one business day of a member's emergency
admission. NJ Practitioners are required to notify and receive prior approval
from FOHP-NJ for all elective hospital admissions. Agreements with participating
NJ Acute Care Institutions prohibit the NJ Acute Care Institutions from billing
a member of a FOHP-NJ health plan for any services paid for under such plan
except for any applicable co-payment.
In addition to specifying the types of services required, each
agreement with a NJ Acute Care Institution imposes various requirements and
standards (some of which are also mandated under state and federal law) on the
NJ Acute Care Institution.
Each NJ Acute Care Institution must maintain a policy of general
liability insurance in amounts of at least $1,000,000 per occurrence and
$3,000,000 in the aggregate per year. In addition, each NJ Acute Care
Institution must maintain professional liability insurance coverage in amounts
required by the State of New Jersey. Each NJ Acute Care Institution has agreed
to indemnify FOHP-NJ, and FOHP-NJ has agreed to indemnify each such NJ Acute
Care Institution, against liability arising from its actions, except to the
extent that injury results from the negligence of the other party.
ARRANGEMENTS WITH NJ OTHER PROVIDERS
FOHP-NJ contracts with NJ Other Providers such as skilled nursing
facilities and home health care agencies to provide services to members. These
providers are paid pursuant to a program rate which is individually negotiated
with FOHP-NJ. Payment procedures, service authorization requirements,
obligations imposed on the provider, and insurance and indemnification
obligations are similar to those outlined above for NJ Acute Care Institutions.
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OTHER ARRANGEMENTS INVOLVING FOHP-NJ
FOHP-NJ arranges for the provision of certain services to members
including mental health/chemical dependency, pharmacy, laboratory and radiology
through affiliates or revenue generating relationships with other entities,
where feasible and not prohibited by applicable law.
COMPETITION
The competition for prospective enrollees in prepaid health plans has
increased over the past few years as a result of the significant increase in the
number of companies offering HMO and other managed care products. For example,
FOHP-NJ competes with other prepaid health plans and with traditional health
insurers as well as with self-insured programs, Preferred Provider Organizations
and other MCOs. Other programs or entities may be substantially better
capitalized than FOHP-NJ. Moreover, a number of traditional health insurers have
begun to aggressively market HMO and other managed care products of their own.
In addition, competition may be affected if any federal legislation or
regulation with respect to health plans or health care providers is adopted. See
"Government Regulation."
Competition among HMOs and traditional and other health insurers is
based principally on benefits offered and premium cost. FOHP-NJ which operates
an HMO may find itself at a competitive disadvantage if its premiums are higher
than those of other HMOs or traditional health insurers. Premiums negotiated
with employers, fee schedules negotiated with hospitals, physicians and other
providers, the scope of benefits offered, unique benefit designs and access to
physicians and hospitals constitute the principal methods of competition.
MARKETING
FOHP-NJ markets its health care benefits products and services to
prospective members through full-time marketing representatives, selected
brokers and consultants and other sales professionals under the direction of a
Vice President of Sales and Marketing. Marketing efforts are concentrated on
employer groups of all sizes with particular emphasis placed on employers with
fewer than 1,000 employees.
FOHP-NJ markets its services to employers, including NJ Acute Care
Institutions which are providers to FOHP-NJ and are either shareholders of the
Holding Company or affiliated with shareholders of the Holding Company. If the
existing health plan of any NJ Acute Care Institution is a self-insured plan,
such NJ Acute Care Institution is obliged to offer a FOHP-NJ health plan to its
employees as their exclusive plan in accordance with a timetable determined by
FOHP-NJ to be feasible. NJ Acute Care Institutions which offer one or more
health plans, including any self-insured plan, are obliged to offer a FOHP-NJ
health plan and have at least 50% of its employees enrolled in a FOHP-NJ health
plan by January 1, 1996, and at least 75%of its employees enrolled in a FOHP-NJ
health plan by January 1, 1997, and NJ Acute Care Institutions which are subject
to collective bargaining agreements are required to use their best efforts to
offer a FOHP-NJ health plan to their non-union employees on a "non-exclusive"
basis.
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In addition, NJ Acute Care Institutions which are subject to collective
bargaining agreements are required to use their best efforts to qualify a
FOHP-NJ health plan as the union-designated plan and to pay reasonable
deductibles or other costs to so qualify a FOHP-NJ health plan.
If a NJ Acute Care Institution fails to satisfy its enrollment
obligations, the Holding Company has the right to purchase (but is not obligated
to purchase) all of the shares of Common Stock-NJ held by the NJ Acute Care
Institution at a purchase price equal to the lesser of the Book Value (as
defined in the Holding Company's Certificate of Incorporation and used herein)
or the original purchase price paid for such shares. On March 3, 1997, the
Holding Company redeemed the shares of one NJ Acute Care Institution which had
not complied with its enrollment obligations. The Holding Company is currently
reviewing whether to redeem the Holding Company Common Stock held by any other
non-compliant NJ Acute Care Institution.
The Certificate of Incorporation of the Holding Company, as proposed to
be amended in connection with the Transaction, 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 the affiliates of NJ Acute Care Institutions which own shares of Common
Stock-NJ (collectively referred to herein as "NJ Institutional Shareholders,"
and individually referred to herein 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, a NJ Institutional Shareholder or its affiliated
NJ Acute Care Institution will be required to keep its employees in a FOHP-NJ
health plan for a longer period of time if the NJ Institutional Shareholder 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 plan similar to a
health 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 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
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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 or a portion of the New Common Stock held by the NJ Institutional
Shareholder at a purchase price equal to the lowest of (i) the Book Value, (ii)
the lowest shareholder equity reflected on the Holding Company's quarter-end
balance sheets during the period of noncompliance giving rise to the repurchase
right, excluding any convertible debentures issued to HSI, prepared in
accordance with generally accepted accounting principles, divided by the number
of outstanding shares of New Common Stock on a fully diluted basis or (iii) the
original purchase price paid by such NJ Institutional Shareholder for such
shares of New Common Stock. The Holding Company shall have full discretion with
respect to its election to exercise or not to exercise the foregoing rights of
repurchase with respect to any given shareholder, taking into account any
factors the Holding Company deems appropriate relating to such shareholder's
relationships with the Holding Company or the Holding Company's business or
otherwise, and the Holding Company's election to make or not to make a
repurchase from one shareholder shall have no effect on the Holding Company's
election to make or not to make a repurchase from any other shareholder.
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.
GOVERNMENT REGULATION
For a tax exempt hospital or other entity to maintain its tax exempt
status under section 501(c)(3) of the Internal Revenue Code of 1986, as amended
(the "Code"), its income or assets may not be utilized to inure to the benefit
of (i) an individual considered to be an insider by virtue of his or her
relationship with the exempt organization (generally, any person having a
personal or private interest in the activities of an organization exempt under
section 501(c)(3) of the Code, including any physician employed by or with
admitting privileges at a tax exempt hospital, is often referred to as an
"insider"), or (ii) any other person. Any conduct in contravention of the
furtherance of the entity's exempt purposes may result in the loss of a health
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care provider's tax exempt status. In the case of an insider, a compensation
arrangement in excess of fair market value, a below market loan, or a no rent or
below market rent arrangement may constitute private inurement, or, in the case
of any other person or entity (including, among others, vendors or key staff
personnel), an excessive benefit which is not incidental to the accomplishment
of the entity's exempt purposes may constitute private inurement.
Federal law prohibits the payment or receipt of remuneration directly
or indirectly for referring or furnishing any service for which payment may be
made under the Medicare or Medicaid programs. The applicable statute, known as
the Medicare/Medicaid Anti-Kickback Statute, prohibits, among other things, an
entity from selecting a physician or other investor based upon his, her or its
ability to make referrals or from offering such an investor (i) a greater
investment opportunity, or (ii) a disproportionately large return on a
disproportionately small investment. The statute imposes criminal as well as
other penalties for engaging in prohibited practices.
Federal law also prohibits physician referrals to clinical laboratories
in which they or members of their families have a financial interest and,
effective January 1, 1995, prohibits referrals by physicians for additional
designated health services to other entities in which physicians or their family
members have a financial interest. The Stark II Amendments specifically exclude
from the prohibition, in-network referrals by physicians who have ownership or
investment interests in, or compensation arrangements with, certain Medicare
health organizations, federally qualified HMOs, or other prepaid plans operating
under a demonstration project.
Management does not believe that any arrangements between the Holding
Company or any of its subsidiaries and its shareholders or directors is
violative of the Medicare/Medicaid Anti-Kickback Statute or the Stark II
Amendments. No Holding Company shareholder nor any provider of services to a
subsidiary of the Holding Company is required to make referrals as a condition
of making or maintaining an investment interest in the Holding Company or
otherwise. If any arrangement between the Holding Company or a subsidiary of the
Holding Company and its shareholders or directors was found to contravene
current law or in the event any change in the law prohibits any such
arrangement, the Holding Company would seek to restructure such arrangement.
New Jersey has also adopted legislation which prohibits physicians from
referring patients to health care services in which they or their immediate
families have a significant beneficial interest unless such interests are
disclosed in advance to such patients. The restriction does not apply to
services provided in a physician's medical office or to certain therapies or
protocols.
Federal antitrust laws generally prohibit agreements between
competitors that unreasonably restrict competition and, as such laws relate to
the Holding Company, may prohibit, among other things, the disclosure of
information by a provider to FOHP-NJ relating to (i) the providers' rates,
costs, salaries and benefits, and (ii) the terms, prices and conditions of any
managed care plan in which the provider participates, unless such information is
a matter
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of public record. Such laws also may prohibit the disclosure by FOHP-NJ of the
prices and terms of any arrangement between FOHP-NJ and one of its providers to
other providers in FOHP-NJ's provider network. In an effort to prevent any such
conduct, the Holding Company has distributed an Antitrust Compliance Manual to
its NJ Institutional Shareholders and requires that each NJ Institutional
Shareholder acknowledge the receipt of such manual. In addition, the Holding
Company includes information regarding prohibitions under federal antitrust laws
in the provider agreements entered into by FOHP-NJ and NJ Practitioners. Any
prohibited disclosure or other violations of the federal antitrust laws could
subject the Holding Company or FOHP-NJ or any of their directors or shareholders
to monetary damages and other penalties under such antitrust laws.
HMOs are subject to extensive governmental regulation. Among the areas
regulated are the scope of benefits required to be made available to members,
reserves required to be maintained, the manner in which members' co-payments are
structured, procedures for review of quality assurance, enrollment requirements,
the relationship between the HMO and its health care providers and the financial
condition of the HMO. Any HMO formed in New Jersey is regulated by two
governmental departments, the DOI and the DOH. The DOI monitors the financial
condition of an HMO formed in New Jersey whereas the DOH reviews quality and
access issues.
In June 1994, FOHP-NJ, the Holding Company's only subsidiary licensed
as an HMO, received its COA from the Departments. In December 1995, FOHP-NJ
received approval from the U.S. Health Care Financing Administration of the U.S.
Department of Health and Human Services (commonly known as "HCFA") to operate as
a federally qualified HMO and, as a result, is now providing services to
Medicare beneficiaries. In February 1995, FOHP-NJ entered into an agreement with
the New Jersey Department of Human Services to provide services to Medicaid
recipients, and it has received approval to provide such services in nine New
Jersey counties.
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 $45,700,000 below
125% of the statutory net worth requirement applicable to it, and approximately
$42,000,000 below 100% of its statutory net worth requirement. If the
Transaction is not consummated, the DOI has indicated that it will require the
Holding Company to draw against the letters of credit made available to it for
purposes of contributing to FOHP-NJ such monies for net worth purposes. See
"Certain Relationships and Related Transactions." 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
$34,700,000 at 125% of the statutory net worth requirement applicable to it and
approximately $31,000,000 at 100% of such statutory net worth requirement.
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The DOI has informed HSI that, if the Transaction is not consummated (which
consummation requires the prior approval by the Holding Company's shareholders
of the Transaction and Amendments) on or before April 30, 1997, the DOI intends
to petition the New Jersey Superior Court for an order to allow the DOI to place
FOHP-NJ into rehabilitation. It is also the understanding of the Board of
Directors that it is the DOI's intention to place FOHP-NJ into rehabilitation if
the Transaction is not consummated by such date. 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 the shareholders.
Federal law requires a federally qualified HMO to have a positive net
worth (however, no amount is specified) and to provide evidence of financing
until revenues are sufficient to support operations. The financial reserves of
federally qualified HMOs are required to provide adequately against the risk of
insolvency, but the amount of such reserves are not specified in applicable
regulations and is subject to the discretion of the Secretary of the United
States Department of Health and Human Services.
As a result of legislation enacted by the State of New Jersey in 1991
and 1993, New Jersey HMOs must offer health care benefits plans to individuals
including hospital expense coverage and annual physical examinations for a
defined period. HMOs which do not offer coverage to individuals are subject to
an assessment. Additionally, legislation adopted in New Jersey, which became
effective on July 1, 1994, requires health insurers, including HMOs which
provide pharmacy services, to permit enrollees to select their own pharmacists
and pharmacies. In 1995, New Jersey enacted legislation which requires that a
mother delivering a baby be permitted to remain at the facility where the baby
was born for a minimum of 48 or 96 hours, depending upon the method of birth.
The new maternity length of stay law will result in longer hospital stays for
mothers giving birth and, as a result, increased costs to most New Jersey HMOs,
including FOHP-NJ. Legislation also was enacted in New Jersey in 1995 which
requires health insurers, including HMOs, to provide certain mandated diabetes
benefits.
The DOH, in consultation with the DOI, has adopted new regulations
intended generally to apply to HMOs offering POS products. The new regulations
are intended to clarify the circumstances under which an HMO may contract with a
health insurer, health service corporation or medical service corporation to
provide indemnity benefits or services. Under the new regulations, it will be
necessary for an HMO offering POS products to enter into a contractual
arrangement with a licensed indemnity carrier. In response to the new
regulations, FOHP-NJ has entered into a contractual arrangement with an
indemnity carrier. The Holding Company does not anticipate the new regulations
having a significant effect on the operating results of FOHP-NJ.
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The DOH recently adopted extensive amendments to the New Jersey
regulations applicable to HMOs which are intended to provide additional
protections to consumers of HMO products and promote consumer confidence in HMOs
generally. The amended regulations provide that a member of an HMO plan shall be
entitled to appeal service denials to an independent medical panel and require
health plans to disclose operational information, including information
regarding financial incentives provided to physicians by HMOs in their
reimbursement procedures. FOHP-NJ currently does not provide such financial
incentives to physicians. The amended regulations also outline the requirements
for an HMO to maintain a sufficient network of providers, impose additional
requirements for HMO utilization management programs, and set forth new
financial standards and reporting requirements. Compliance with these standards
and requirements may result in additional costs to HMOs, including FOHP-NJ.
Generally, rates and proposed coverage benefits must be submitted to
the DOI prior to their imposition. There can be no assurance that rates
submitted by FOHP-NJ will be accepted without objection or approved.
Finally, it is impossible to predict whether federal legislation or
regulations with respect to health plans or health care providers will be
adopted or the impact that any such federal legislation or regulations may have
on the health care delivery system.
EMPLOYEES
At March 15, 1997, the Holding Company, through its principal
subsidiary FOHP-NJ, employed 333 full-time and 17 part-time active employees,
including 2 executive officers. None of the Holding Company's employees is
represented by a union. The Holding Company believes that the relationships with
its employees are satisfactory.
ITEM 2. PROPERTIES.
The Holding Company currently leases, pursuant to three separate
leases, approximately 25,675 square feet of office space at 2 Bridge Avenue,
Building 6, Red Bank, New Jersey 07701-1106. Each lease has a term of 5 years
ending 1999 or 1998 and a 5 year renewal option. The monthly rental ranges from
$10.00 to $12.50 per square foot over the initial terms of the leases, plus
certain additional charges and expenses including common maintenance charges,
utilities and taxes. The monthly rental of the 5 year option term of each of the
leases ranges from approximately $14.00 to $16.00 per square foot. The office
space leased by the Holding Company in Red Bank, which also includes the
principal executive offices of FOHP-NJ, is located in a newly restored
office/commercial complex designed to accommodate the Holding Company's and
FOHP-NJ's operations. Part of the cost of leasing the Red Bank, New Jersey
facility is allocated to FOHP-NJ.
In addition, the Holding Company, through FOHP-NJ, subleases
approximately 59,706 square feet of office space at 3501 State Highway 66,
Neptune, New Jersey 07754. The lease has a term of approximately 3 years ending
on January 30, 1999 and contains a 5 year renewal
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<PAGE>
option. The monthly rental of the lease term is $77,120.25 plus certain
additional charges and expenses, including maintenance, utilities and taxes. The
monthly rental of the 5 year option of the lease is $84,504.16 plus certain
additional charges and expenses, including maintenance, utilities and taxes.
The Holding Company also leases office space in several other locations
in New Jersey, including Mt. Laurel.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal, governmental, administrative or other
proceedings pending against the Holding Company or its properties or to which
the Holding Company is a party, and to the knowledge of management no such
material proceedings are threatened or contemplated except as provided below:
The DOI has informed HSI that, if the Transaction is not consummated
(which consummation requires the prior approval by the Holding Company's
shareholder of the Transaction and Amendments) on or before April 30, 1997, the
DOI intends to petition the New Jersey Superior Court for an order to allow the
DOI to place FOHP-NJ into rehabilitation. It is also the understanding of the
Board of Directors that it is the DOI's intention to place into rehabilitation
if the Transaction is not consummated by such date. If FOHP-NJ is placed into
rehabilitation, it is likely that none of the shareholders of the Holding
Company will receive an distribution of 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. See "Description of Business Recent
Developments; Government Regulation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter ended December 31, 1996, no matter was
submitted to a vote of security holders of the Holding Company through the
solicitation of proxies or otherwise.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no public market for any class of the Holding Company's Common
Stock, and the Holding Company has no current intention of listing or including
any shares of Common Stock-NJ or any other class of Holding Company Common Stock
on a stock exchange or quotation system since shares of Holding Company Common
Stock can be held by or transferred only to providers to the Holding Company's
subsidiaries which operates as HMOs and the Holding Company. If the Transaction
and Amendments are approved by the Holding Company's shareholders, the current
restrictions on the issuance and transfer of shares of Holding Company Common
Stock will remain in place, except that HSI will be permitted to purchase shares
of Holding Company Common Stock. Accordingly, it is improbable that a market
will develop for the Holding Company's securities, regardless of whether the
Transaction is consummated.
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 Exchange Act, including without
limitation applicable requirements under Rule 13e-3.
Since its inception, the Holding Company has not sold any shares of
Common Stock-NJ for any price other than $15. In addition, the Holding Company
is not aware of any sale of Common Stock-NJ by one provider to another for any
price other than $15.
As of March 15, 1997, 2,086,839 shares of Common Stock-NJ were
outstanding and were held by 2,629 shareholders of the Holding Company,
including 1,006,717 shares held by 41 NJ Acute Care Institutions, 1,036,786
shares held by 2,585 NJ Practitioners, 40,002 shares held by 2 NJ Other
Providers and 3,334 shares held by an IPA.
The Holding Company has not paid any cash dividends on Holding Company
Common Stock. Pursuant to the terms of the Amended Securities Purchase
Agreement, the Holding Company is restricted from paying cash dividends on
Holding Company Common Stock until the consummation of the Transaction. After
the consummation of the Transaction, it is expected that the Board of Directors
of the Holding Company, as then constituted, will review its dividend policy
from time to time to determine the desirability and feasibility of paying cash
dividends after giving consideration to the Holding Company's earnings,
financial condition, capital requirements and such other factors as the Board of
Directors of the Holding Company deems relevant.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Prior to the Reorganization, the Holding Company did not conduct any
business nor did it have any significant assets or liabilities. Accordingly, the
selected financial information as of December 31, 1994 and 1993 and for the year
ended December 31, 1994 and for the period from May 19, 1993 (date of inception
of FOHP-NJ) to December 31, 1993 is derived from the financial statements of
FOHP-NJ, the Holding Company's principal subsidiary. The data should be read in
conjunction with the consolidated financial statements of the Holding Company
and the related notes thereto and management's discussion and analysis thereof
appearing elsewhere in this report.
The selected financial information as of December 31, 1996 and 1995,
and for the years ended December 31, 1996 and 1995, is derived from the
consolidated financial statements of the Holding Company and should be read in
conjunction with the consolidated financial statements of the Holding Company
and the related notes thereto and management's discussion and analysis thereof
appearing elsewhere in this report.
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<PAGE>
<TABLE>
Summarized Balance Sheet Information
<CAPTION>
Financial Data of
FOHP-NJ
Predecessor to
the Holding Company
-------------------------------
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $36,664,911 $23,882,286 $ 13,030,295 $10,503,225
Other 17,587,306 13,479,547 7,050,765 390,965
----------- ----------- ----------- -----------
Total Assets $54,252,217 $37,361,833 $ 20,081,060 $10,894,190
=========== =========== ============ ===========
Liabilities and Shareholders'
(Deficiency) Equity:
Liabilities:
Medical claims payable,
accounts payable,
accrued expenses and
other liabilities $80,118,284 $32,482,794 $ 8,101,405 $ 576,125
FOHP-NJ Practitioner
Provider Common
Stock, $.01 par value,
511,800 shares issued and
outstanding (at December 31,
1994, redeemable at
$3,900,000) --- --- 7,677,000 ---
Shareholders' (Deficiency)
Equity:
Common stock subscribed --- --- --- 12,400,000
FOHP-NJ Institutional
Provider Common Stock, $.01
par value, 1,020,051 shares
issued and outstanding --- --- 10,201 ---
FOHP-NJ Other Provider Common
Stock, $.01 par value,
40,002 shares issued and
outstanding --- --- 400 ---
Common Stock-NJ, $.01 par
value 2,100,173 shares
issued and outstanding 21,002 21,002 --- ---
Additional paid-in capital 30,648,489 30,648,489 15,341,561 ---
Deficit ( 56,535,558) ( 25,790,452) ( 11,049,507) ( 2,081,935)
----------- ----------- ----------- ----------
Total Shareholders'
(Deficiency) Equity ( 25,866,067) 4,879,039 4,302,655 10,318,065
----------- ----------- ----------- -----------
Total Liabilities and
Shareholders' (Deficiency)
Equity $54,252,217 $37,361,833 $20,081,060 $10,894,190
=========== =========== =========== ===========
</TABLE>
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<PAGE>
<TABLE>
Summarized Statement of Operations Information
<CAPTION>
Financial Data of
FOHP-NJ
Predecessor to
the Holding Company
----------------------------------
For the
period from
May 19, 1993
For the year ended For the year (date of
December 31, ended inception) to
-------------------------------- December 31, December 31,
1996 1995 1994 1993
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Premium revenue from
owners/providers $135,544,112 $ 63,630,797 $ 5,639,724 $ ---
Other premium revenue 112,125,670 38,819,206 1,803,624 ---
Interest and other income 9,706,526 8,844,036 1,177,171 22,151
------------ ------------ ------------ -----------
Total Revenue 257,376,308 111,294,039 8,620,519 22,151
------------ ------------ ------------ -----------
Expenses:
Medical services to
owners/providers 37,026,903 17,319,035 1,405,175 ---
Hospital services to
owners/providers 30,156,890 11,068,909 880,920 ---
Other medical services 105,496,580 38,548,819 2,727,694 ---
Other hospital services 63,760,554 24,637,249 1,710,020 ---
Selling, general and
administrative 50,789,010 32,638,106 10,624,261 2,063,239
Other 890,553 1,751,263 240,021 40,847
------------ ------------ ------------ ------------
Total Expenses $288,120,490 $125,963,381 $ 17,588,091 $ 2,104,086
------------ ------------ ------------ ------------
Provision for state
income taxes 924 71,603 --- ---
------------ ------------ ------------ ------------
Net loss $(30,745,106) $(14,740,945) $ (8,967,572) $ (2,081,935)
------------ ============ ============ ============
Net loss per common share $ (14.64) $ (8.65) $ (8.40) $ (2.52)
============ ============ ============ ============
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
OVERVIEW
The Holding Company, a New Jersey corporation, was formed in May 1994
to effect the Reorganization of FOHP-NJ into a holding company structure. The
Reorganization was consummated on June 8, 1995. Pursuant to the Reorganization,
FOHP-NJ became a wholly-owned subsidiary of the Holding Company. Prior to the
Reorganization, the Holding Company did not conduct any business nor did it have
any significant assets or liabilities. The Holding Company does not conduct, nor
does management believe that it will conduct, any business 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 March 15, 1997, FOHP-NJ had entered into
provider agreements with 51 NJ Acute Care Institutions, approximately 10,000 NJ
Practitioners and approximately 75 NJ Other Providers. The provider agreements
have an initial term of one-year and are renewable annually. Such agreements
with NJ Acute Care Institutions and NJ Other Providers may be terminated by
mutual consent or, after the initial one-year term, by either party upon 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 effected 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 FOHP-NJ plan for any services paid
for under such plan except for any applicable co-payment.
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<PAGE>
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 YEARS ENDED DECEMBER 31, 1996 AND 1995
PREMIUM REVENUE. For the year ended December 31, 1996, medical premium
revenue totalled $247.7 million or $145.2 million more than the $102.5 million
of medical premium revenue generated in 1995. Medical premium revenue generated
by the Holding Company during the year ended December 31, 1996 was substantially
greater than the medical premium revenue generated by the Holding Company during
the year ended December 31, 1995, due to the significant subscriber growth
experienced during 1996. Approximately 55% of medical premium revenue generated
in 1996 and approximately 62% of medical premium revenue generated in 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 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
year ended December 31, 1996 was $7.9 million compared to $7.6 million of other
revenue for the prior year. This increase is attributed to the subscriber growth
in self-insured products. Interest income for 1996 was $1.8 million, a $600
thousand increase from the $1.2 million generated in 1995. The increase in
interest income was due to the larger cash reserves maintained by the Holding
Company in 1996.
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<PAGE>
MEDICAL AND HOSPITAL SERVICE EXPENSES. Total expenses attributable to
medical and hospital service for the year ended December 31, 1996 were $236.4
million or $144.8 million higher than expenses incurred in 1995. The increase in
medical and hospital service expenses from 1995 to 1996 was primarily
attributable to a significant increase in enrollees in FOHP-NJ health plans. In
addition, the medical loss ratio (i.e., the percentage of each premium dollar
used to pay medical expenses) increased in 1996 to 95% from 89% in 1995 as a
result of increased enrollment in the FOHP-NJ health plans, changes in the mix
of products offered by FOHP-NJ, and the inability of FOHP-NJ to effectively
control utilization and referrals due to the significant growth of FOHP-NJ. The
Holding Company believes that recent operational changes, specifically the
implementation of a modified provider reimbursement schedule, will lower the
percentage of medical expenses to premium dollars in the future.
Medical and hospital services expenses are accrued in the period the
services are provided to enrollees in the FOHP-NJ health plans, based in part on
estimates for hospital and other health care services which have been incurred
but not yet reported. Such estimates are monitored and reviewed by the Holding
Company and its outside actuaries on a monthly basis 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
significant historical experience, the estimate for incurred but not yet
reported medical claims is based on currently available industry ratios of
claims expense to premiums earned as well as the limited historical experience
of FOHP-NJ.
In the spring of 1996, the number of medial claims that had not been
processed by the Holding Company's outside claims administrator increased as a
result of the significant increase in the number of enrollees in the FOHP-NJ
health plans and the systems limitations of the outside claims administrator
engaged by the Holding Company to provide claims processing services. During the
summer of 1996, the Holding Company, in an effort to decrease the medical claims
backlog, began using its own personnel to process claims and notified its
outside claims administrator that if it did not begin to perform its claims
processing functions in a manner consistent with the contract between FOHP-NJ
and the claims administrator, FOHP-NJ would withhold payments as permitted in
such contract. As a result of these efforts, the medical claims backlog was
reduced significantly by the end of the third quarter of 1996. In the fourth
quarter of 1996, the Holding Company and its outside actuaries, using the same
methodology for estimating incurred but not yet reported medical claims as had
been used since FOHP-NJ first received its COA to operate as an HMO, but having
more claims payment data available as a result of the reduction in the claims
backlog, realized that they had previously underestimated the amount of the
incurred but not yet reported medical claims and that, as a result, FOHP-NJ's
incurred but not yet reported reserve needed to be increased in the fourth
quarter of 1996 by approximately $13 million. The Holding Company believes that
the underestimation was due to FOHP-NJ's limited historical experience and the
high medical costs related to new products offered by FOHP-NJ, such as Medicare
products, Medicaid products and small business products.
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<PAGE>
As a result of a significant increase in medical claims expenses during
the fourth quarter of 1996, including an increase in FOHP-NJ's incurred but not
yet reported reserve by approximately $13 million due to more complete payment
data that were not available to the Holding Company and its outside actuaries
prior to such quarter, and the deterioration of the financial condition of the
Holding Company as a result of continuing losses generated from operations due
to over utilization and high medical costs related to FOHP-NJ's Medicare
products, Medicaid products and small business products, the Holding Company's
losses for the year ended December 31, 1996 increased by approximately $17
million from the approximately $14 million reported by the Holding Company as of
September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totalled $50.8 million for the year ended December 31,
1996 compared to $32.6 million incurred in 1995. This increase was the result of
the significant growth of the Holding Company and FOHP-NJ.
OTHER EXPENSES. Depreciation and amortization expenses for the year
ended December 31, 1996 increased by $205 thousand from the $674 thousand
incurred in 1995. This increase was a result of the significant investment in
capital equipment in the end of 1995 and the beginning of 1996. Interest expense
decreased in 1996 to $11,200 from the $90,000 incurred 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 $102.5 million or $95.0 million more than the $7.4 million 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, principally administrative fees, for the
year ended December 31, 1995 was $7.6 million compared to $700 thousand of other
revenue for the prior year. Interest income increased by $800 thousand from $400
thousand in 1994 to $1.2 million 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
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<PAGE>
self-insured employer groups. The increase in interest income was due to the
larger cash reserves maintained by the Holding Company in 1995.
MEDICAL AND HOSPITAL SERVICE EXPENSES. Total expenses attributable to
medical and hospital service during 1995 was $91.6 million or $84.9 million
higher than such expenses 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 EXPENSES. Selling, general and
administrative expenses totalled $32.6 million during 1995 compared to $10.6
million 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 thousand from the $231 thousand 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., 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.
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
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<PAGE>
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 125% of the minimum
requirement. FOHP-NJ addressed this potential deficiency by submitting in April
1996 a plan of action to the DOI which outlined the actions which had been taken
and measures to be used by FOHP-NJ to correct the potential deficiency. The plan
of action also outlined the actions to be taken by the Holding Company and
FOHP-NJ to ensure that FOHP-NJ remained in compliance with applicable statutory
net worth requirements in 1996.
The plan of action submitted by FOHP-NJ provides that in the event that
either the DOI or the DOH requires that FOHP-NJ obtain additional capital to
remain in compliance with the statutory net worth and other capital requirements
applicable to FOHP-NJ as an HMO licensed in New Jersey, the Holding Company will
contribute such capital to FOHP-NJ. To assure that the Holding Company has
sufficient capital to contribute to FOHP-NJ in the event that FOHP-NJ is
required to obtain additional capital to remain in compliance with the statutory
net worth and other capital requirements applicable to it, certain directors and
shareholders of the Holding Company either (i) arranged for the issuance of
letters of credit by various banks, against which the Holding Company may draw
if required to fund the payment of its obligations to FOHP-NJ 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 provider
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
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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; 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. The DOI
has informed HSI, that, if the Initial Closing occurs on or before April 30,
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 health 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.
The letters of credit and institutional guarantees available to the
Holding Company expire on March 31, 1997. Pursuant to the Amended Securities
Purchase Agreement, all the letters of credit and institutional guarantees
currently available to the Holding Company must be in effect on the closing date
of the Transaction. Inasmuch as the Transaction will not be consummated by March
31, 1997, the Holding Company is seeking extensions of the letters of credit and
institutional guarantees currently available to it. If any of the letters of
credit or institutional guarantees is not extended, the DOI has authorized the
Holding Company to require payment under any such instrument.
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ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the
Holding Company called for by this item are submitted as a separate section of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE REGISTRANT
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 41 Acting President and Chief Executive
Officer, Secretary and General Counsel
Dr. Joseph Singer 39 Executive Vice President and Chief
Medical Officer
- --------------
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.
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CURRENT DIRECTORS OF THE REGISTRANT
The name, address, age and principal occupation or employment of each
director currently serving on the Board of Directors of the Holding Company is
set forth below:
NAME AND ADDRESS AGE PRINCIPAL OCCUPATION OR EMPLOYMENT
Mr. William Roberts 59 President of Monmouth
Monmouth Capital Capital Corporation and
Corporation Chairman of the Board of FOHP, Inc.
126 East 56th Street
New York, NY 10022
Mr. Michael W. Azzara 49 President and Chief Executive
The Valley Hospital Officer of The Valley Hospital
223 North Van Dien Avenue and a Director of FOHP, Inc.
Ridgewood, NJ 07450
Mr. Christopher Dadlez 43 Executive Vice President of Saint Barnabas
Saint Barnabas Health Care Health Care System and a Director of
System FOHP, Inc.
Old Short Hills Road
Livingston, NJ 07039
Dr. Mark Engel 50 Ophthalmologist and a Director of
733 North Beers Street FOHP, Inc.
Holmdel, NJ 07733
Dr. Stephen D. Feldman 48 Physician and a Director of
101 Old Short Hills Road FOHP, Inc.
West Orange, NJ 07052
Dr. Thomas J. Feneran 49 Urologist and a Director of
53 Nautilus Drive FOHP, Inc.
Manahawkin, NJ 08050
Mr. John R. Kopicki 53 President and Chief Executive
Muhlenberg Regional Medical Officer of Muhlenberg Regional
Center Medical Center and a Director of
Park Avenue & Randolph Road FOHP, Inc.
Plainfield, NJ 07061
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NAME AND ADDRESS AGE PRINCIPAL OCCUPATION OR EMPLOYMENT
Dr. Joel F. Lehrer 65 Physician and a Director of
315 Cedar Lane FOHP, Inc.
Teaneck, NJ 07666
Dr. Paul F. Low 50 Urologist and a Director of
81 Highway 37 West FOHP, Inc.
Toms River, NJ 08755
Barry H. Ostrowsky, Esq. 46 Executive Vice President and General
Saint Barnabas Health Care Counsel of Saint Barnabas Health Care
System System and a Director of FOHP, Inc.
Old Short Hills Road
Livingston, NJ 07039
Donald Parisi, Esq. 41 Acting President and Chief
FOHP, Inc. Executive Officer, Secretary,
2 Bridge Avenue General Counsel and a
Red Bank, NJ 07701-1106 Director of FOHP, Inc.
Mr. Mark D. Pilla 42 Executive Vice President of Saint Barnabas
Community Medical Center Health Care System, President and Chief
99 State Highway 37 West Executive Officer of each of Community
Toms River, NJ 08755 Medical Center and Kimball Medical Center
and a Director of FOHP, Inc.
Dr. Om P. Sawhney 59 Plastic Surgeon and a Director of
1550 Park Avenue FOHP, Inc.
South Plainfield, NJ 07080
- ----------
There are no family relationships among the current directors or
executive officers. 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.
William Roberts has been the President of Monmouth Capital Corporation,
a private investment firm in New York, since 1980. He has served as Chairman of
the Board of the Holding Company since June 7, 1995. In addition, he served as
director of FOHP-NJ from May 1993 until the consummation of the Reorganization.
Michael Azzara has served as President and Chief Executive Officer of
The Valley Hospital since May 1981. Mr. Azzara presently serves on the Board of
Trustees of Valley Home and Community Health Care. He also serves on the Board
of Directors of Valley Health Services, Inc., Ridgewood Savings Bank, The Center
for Health Affairs, and Health Insurance Company/Princeton Insurance Company
(HCIC/PIC). He is a member of the Advisory Board
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of Directors of The Governance Institute in La Jolla, California and is
President of Valley Care Corporation and Ridgewood Executive Plaza Association.
Mr. Azzara was Vice Chairman of the Board of Directors of Valley Health
Affiliates from 1991 through 1993. He has served as a director of the Holding
Company since June 7, 1995, and has also served as a director of FOHP-NJ since
January 1994.
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 the 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 the Holding Company since
June 7, 1995, and as a director of FOHP-NJ since January 1994.
Dr. Mark L. 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 7, 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.
Dr. Stephen D. Feldman has been a physician in private practice since
1980. Dr. Feldman serves as the President of St. Barnabas MetroWest IPA. He has
served as a director of the Holding Company since June 7, 1995, and has also
served as a director of FOHP-NJ since January 1994.
Dr. Thomas J. Feneran has been a physician in private practice since
June 1983. He is an 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 7, 1995, and has also served as a director of FOHP-NJ since
January 1994.
John R. Kopicki has served as the President and Chief Executive Officer
of Muhlenberg Regional Medical Center since December 1990. From November 1983
through December 1990 he served as Chief Operating Officer of Muhlenberg
Regional Medical Center. Mr. Kopicki also serves as a director of United
National Bank and United National Bank Corp. He also serves as Trustee and
President of the Muhlenberg Foundation and as Governor of Muhlenberg Regional
Medical Center. He has served as a director of the Holding Company since June 7,
1995, and has also served as a director of FOHP-NJ since January 1994.
Dr. Joel F. Lehrer has practiced as a physician and has been the
Surgeon Practice
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Manager of Northern Jersey Ear, Nose and Throat Associates, P.A. since January
1989. Dr. Lehrer is a trustee of the Lotos Club, NYC, and Holy Name Physicians
Organization. He has served as a director of the Holding Company since June 7,
1995, and has also served as a director of FOHP-NJ since January 1995.
Dr. Paul F. Low has been an urologist in private practice since July
1978. Dr. Low is a member of the Board of Trustees of Community Kimball Health
Care System and President of Paragron Healthcare. Dr. Low is also the former
President of Coastal Care I.P.A. He has served as a director of the Holding
Company since June 7, 1995, and has also served as a director of FOHP-NJ since
January 1994.
Barry H. Ostrowsky, Esq. has served as Executive Vice President and
General Counsel of the Saint Barnabas Health Care System since January 1997.
Prior thereto, he served as the Senior Vice President and General Counsel of St.
Barnabas Medical Center since April 1991. From June 1975 through March 1991 he
was employed by Brach, Eichler, Rosenberg, Silver, Bernstein, Hammer &
Gladstone, P.C. Mr. Ostrowsky is also on the Board of Directors of The Multicare
Companies Inc., a New Jersey corporation which provides long-term care service
in selected regions. He has served as a director of the Holding Company since
June 7, 1995, and has also served as a director of FOHP-NJ since January 1994.
Donald Parisi, Esq. - Information regarding Mr. Parisi is included
under the caption "Executive Officers of the Registrant."
Mark D. Pilla has served as Executive Vice President of the Saint
Barnabas Health Care System since June 1997 and as President of Kimball Medical
Center since October 1994. Mr. Pilla has served as the President of the
Community Medical Center since 1987 and as its Chief Operating Officer since
1982. From 1982 to 1987, he served as Community Medical Center's Senior Vice
President. Mr. Pilla is a former member of the Board of the Voluntary Hospital
Association of New Jersey and is Chairman of the Board of Trustees of Shoreline
Behavioral Health, a VHA psychiatric center in Toms River, New Jersey. He has
served as a director of the Holding Company since June 7, 1995, and has also
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. He has
served as a director of the Holding Company since June 7, 1995, and has also
served as a director of FOHP-NJ since January 1994.
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NOMINEES FOR DIRECTOR
Set forth below is the age and the principal occupation or employment
of each person nominated to serve as a member of the Board of Directors. The
shareholders will vote on the following nominees for director at the 1996 Annual
Meeting of Shareholders of the Holding Company scheduled for April 16, 1997.
Principal Occupation
NOMINEE AGE OR EMPLOYMENT
Mr. Roger W. Birnbaum 60 President of Princeton HealthCare Group
1460 Route 9 North
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 Hospital and
St. Joseph's Hospital and Medical Center
Medical Center
703 Main Street
Paterson, NJ 07503
Mr. Bruce G. Coe 66 President Emeritus of New Jersey Business
41 Lambert Lane and Industry Association
Lambertville, NJ 08530
Mr. Christopher Dadlez 43 Executive Vice President of Saint Barnabas
Saint Barnabas Health Care Health Care System and a Director of
System FOHP, Inc.
Old Short Hills Road
Livingston, NJ 07039
Dr. Mark Engel 50 Ophthalmologist and a Director of FOHP, Inc.
733 North Beers Street
Holmdel, NJ 07733
Dr. Thomas J. Feneran 48 Urologist and a Director of FOHP, Inc.
53 Nautilus Drive
Manahawkin, NJ 08050
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Principal Occupation
NOMINEE AGE OR EMPLOYMENT
Mr. John Gantner 44 Senior Vice President of Finance and
Robert Wood Johnson Treasurer of the Robert Wood Johnson
University Hospital University Hospital
One Robert Wood Johnson Place
New Brunswick, NJ 08903
Mr. Laurence M. Merlis 42 President and Chief Executive Officer of
Riverview Medical Center Riverview Medical Center
One Riverview Plaza
Red Bank, NJ 07701
Dr. Om P. Sawhney 59 Plastic Surgeon and a Director of FOHP, Inc.
1550 Park Avenue
South Plainfield, NJ 07080
- ----------
Each nominee for 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 persons nominated by the
Holding Company to become directors. None of the nominees for 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
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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.
Mr. Christopher M. Dadlez - Information regarding Mr. Dadlez is
included under the caption "Current Directors of the Registrant."
Dr. Mark Engel - Information regarding Dr. Engel is included under the
caption "Current Directors of the Registrant."
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 - Information regarding Dr. Feneran is included
under the caption "Current Directors of the Registrant."
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 - Information regarding Dr. Sawhney is included under
the caption "Current Directors of the Registrant."
DIRECTOR COMPENSATION; COMMITTEE SERVICE
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 such 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
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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. The Board of Directors of
FOHP-NJ may in the future consider the appropriateness of compensation to
outside directors. 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 approximately $139,000 during the fiscal year ended
December 31, 1996 to physician directors.
COMMITTEES
Pursuant to the Holding Company's By-laws adopted in connection with
the Reorganization, the Holding Company has an Audit Committee which is
responsible for evaluating and recommending the appointment of independent
auditors for the Holding Company and its subsidiaries, and for reviewing, in
consultation with such auditors, the annual financial statements (on a
consolidated and separate company basis), systems of internal controls and
accounting principles of the Holding Company and its subsidiaries.
In addition, the Holding Company's By-laws provides for the
establishment of the following advisory committees: Finance Committee,
Compensation Committee, Strategic Planning Committee and Medical Affairs
Committee. The composition of any advisory committee may include persons who are
not directors of the Holding Company.
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. The Compensation Committee is currently comprised of the
following three directors: Mr.Roberts, Mr. Kopicki and Dr. Engel.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
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 capital obligation to FOHP-NJ. The guarantee
terminated on March 27, 1996. Mr.
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Roberts was paid $10,000 for providing this guarantee.
Simultaneously with the termination of Mr. Roberts' $6,000,000
guarantee, 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, the Holding Company will pay to Mr.
Roberts 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
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. Inasmuch as the consummation of the Transaction will not occur
prior to March 31, 1997, the Chase Manhattan Letter of Credit was extended until
April 30, 1997.
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 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 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 guarantee 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.
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 note plus all accrued interest is not paid within 90 days from the date the
note is
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issued, the note will then become payable on demand and bear an interest rate on
any amount outstanding after the initial 90 day period equal to the lesser of:
(i) 20%; or (ii) the highest rate permitted by law. Furthermore, if, at the time
the note is issued by the Holding Company, or at any time during the period the
note is outstanding, Mr. Roberts is eligible to own shares of the Common
Stock-NJ, Mr. Roberts, at his sole option, may convert the principal amount of
the note into shares of Common Stock-NJ at a conversion rate of fifteen dollars
per share (as adjusted to give effect to any stock splits, stock dividends or
any other adjustments occurring after December 31, 1995); provided, however,
that if Mr. Roberts is eligible to own shares of Common Stock-NJ, and chooses
not to convert the note into shares of Common Stock-NJ, any amount owed under
the note will accrue interest at a rate equal to the prime rate of 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 Holding Company Common Stock. 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 Holding Company Common Stock. 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 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.
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, FOHP-PA, FOHP-DE, FOHP-MD, FOHP Agency, Inc. and FMCO, each of which is
or was 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 provider 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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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 Securities and
Exchange Commission (the "Commission"). Executive officers, directors and
greater than 10% percent shareholders are required by the Commission'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 1996 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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ITEM 11. 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
Name and Compen- Stock Options/ LTIP Compensa-
PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($) AWARD(S)($) SARS(#) PAYOUTS TION($)(1)(2)
- ------------------ ---- --------- -------- --------- ----------- ------- ------- -------------
<S> <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
Officer
Paul Kimmins(13) 1996 150,000 --- --- --- --- --- ---
Former Executive Vice 1995 124,731 15,000 --- --- --- --- 5,404
President
James S. Vaccaro(14) 1996 121,811 --- --- --- --- --- 58,838(15)
Former Executive Vice 1995 114,788 --- --- --- --- --- ---
President and Chief
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 employees to save
up to 15% of their pre-tax
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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.
EMPLOYMENT AGREEMENTS
Joseph Singer, M.D., pursuant to an agreement between the Holding
Company and Alliance Medical Group, Inc. ("Alliance") dated November 30, 1994
(the "Singer Employment Agreement"), is employed as an Executive Vice President
and as the Chief Medical Officer of the Holding Company. In November 30, 1996,
the Singer Employment Agreement was automatically renewed for a two year period
and shall continually be renewed for periods of two years unless either the
Holding Company or Alliance gives the other written notice of nonrenewal at
least twelve months prior to the expiration of the then current term.
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
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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 HMO, 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.
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.
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ITEM 12. PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP MANAGEMENT.
The following table sets forth information as of March 15, 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:
BENEFICIAL OWNERSHIP OF
COMMON STOCK-NJ
------------------------------------
Percent of
NAME OF BENEFICIAL OWNER NO. OF SHARES (1) CLASS
- ------------------------- ----------------- ---------
Saint Barnabas Corporation(2)........ 206,677 (3) 9.9%
William Roberts (4).................. --
John L. Adessa (5)................... --
Michael W. Azzara (4)................ --
Christopher Dadlez (4)(6)............ --
Dr. Mark Engel (4)(6)................ 7,017 (7) (8)
Dr. Stephen D. Feldman (4)........... 2,000 (8)
Dr. Thomas J. Feneran (4)(6)......... 4,100 (8)
John R. Kopicki (4).................. --
Dr. Joel F. Lehrer (4)............... 1,717 (8)
Dr. Paul F. Low (4).................. 12,400 (8)
Barry H. Ostrowsky (4)............... --
Mark D. Pilla (4).................... --
Dr. Om P. Sawhney (4)(6)............. 5,800 (9) (8)
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BENEFICIAL OWNERSHIP OF
COMMON STOCK-NJ
-------------------------------
Percent of
NAME OF BENEFICIAL OWNER NO. OF SHARES (1) CLASS
- ------------------------- ----------------- --------
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) (8)
All Directors, Nominees for Director
and Executive Officers as a Group (20 persons) 42,534 (7)(9) 2.0%
- ----------
(1) Except as otherwise indicated, all of the shares of Common Stock-NJ are
held beneficially and of record.
(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 owning shares of Common Stock-NJ, other than Saint Barnabas
Medical Center, and the number of shares of Common Stock-NJ owned by them
either directly
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<PAGE>
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 December 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.
(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. Seitzman's
husband, as to which shares Ms. Seitzman disclaims any beneficial
interest.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following directors of the Holding Company are executive officers of
NJ Acute Care Institutions of their affiliates which have purchased, either
directly or through an 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. See "Current Directors of the Registrant." In addition, a large
percentage of the revenues of FOHP-NJ is generated from NJ Acute Care
Institutions who have enrolled employees in FOHP-NJ plans as required by the
Certificate of Incorporation of the Holding Company.
Effective December 31, 1995, William B. Roberts, the Chairman of the Board
of Directors of the Holding Company, guaranteed the payment of up to $6,000,000
of the Holding Company's capital obligation to FOHP-NJ. The guarantee terminated
on March 27, 1997. Mr. Roberts was paid $10,000 for providing this guarantee.
Simultaneously with the termination of Mr. Roberts' $6,000,000 guarantee, 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 in Compensation
Decisions."
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 Bank letter of credit are: Dr. Chris Anayiotos, Dr. Tun Chu, Dr. Miguel
Damien, Dr. Shirley Hoh, Dr. Renny Lin, Dr. Carl Raso, Dr. Donato Santangelo,
III, Dr. Mohammad 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 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
the reimbursement agreements, the Holding Company paid to the NJ Practitioners
who
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secured the Carnegie Letter of Credit an aggregate fee of $173,750 or 2.5% of
the aggregate amount of the guarantees 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. Inasmuch as the consummation of the Transaction will not occur prior to
March 31, 1997, the Holding Company is currently seeking a 30 day extension of
the Carnegie Letter of Credit. If the extension is not granted, the DOI has
authorized the Holding Company to draw against the Carnegie Letter of Credit
prior to March 31, 1997.
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 in Compensation Decisions." 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 9 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 shareholder of the Holding Company, and John L. Adessa,
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
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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 CoreStates Letters of Credit. In connection
with 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 or 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 aspects, 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 had agreed not to make any draw against the letter of credit
secured by Mr. Adessa from CoreStates Bank until the Holding Company exhausted
all its rights against any other letter of credit or guarantee made available to
the Holding Company. 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. Inasmuch as the consummation of the Transaction
will not occur prior to March 31, 1997, the letter of credit secured by Dr.
Krakauer was extended until April 30, 1997.
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 guarantee the payment of the
Holding Company's capital obligation to FOHP-NJ. The name of each NJ Acute Care
Institution and affiliate of a NJ Acute Care Institution 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
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- - $250,000; Riverview Health Affiliates (an affiliate of Riverview Medical
Center) - $250,000; West Hudson Hospital - $100,000; St. Joseph's Hospital and
Medical Center - $250,000; Morristown Memorial Hospital - $250,000; Elizabeth
General Health Services Corp. (an affiliate of Elizabeth General Medical Center)
- - $100,000; Englewood Healthcare Ent. (an affiliate of Englewood Hospital and
Medical Center) - $250,000; MidJersey Health Corporation (an affiliate of
Hunterdon Medical Center) - $100,000; and Robert Wood Johnson University
Hospital - $250,000.
In addition, in July and August, 1996, Holy Name Hospital guaranteed
$150,000 of the Holding Company's capital obligation to FOHP-NJ, and The Valley
Hospital and West Hudson Hospital guaranteed an additional $50,000 and $25,000
of such obligation, respectively.
Pursuant to the terms of the guarantees furnished by certain NJ Acute
Care Instituion (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.
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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 31, 1997. In connection with the extension of
the Institutional Guarantees, the Holding Company paid $100 to each guarantor.
Inasmuch as the consummation of the Transaction will not occur prior to March
31, 1997, the Holding Company is currently seeking a 30 day extension of each
Institutional Guarantee. If any of the Institutional Guarantees is not extended,
the DOI has authorized the Holding Company to require payment under any such
Institutional Guarantee by March 31, 1997.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
Reference is made to the Index of Financial
Statements hereinafter contained..............................F-1
Other than the Financial Data Schedule included as Exhibit 27, no
Financial Statement Schedules are required to, nor will any, be filed
with this Annual Report on Form 10-K.
3. EXHIBITS
Reference is made to the Index of Exhibits
hereinafter contained.........................................E-1
(b) REPORTS ON FORM 8-K
During the fourth quarter ended December 31, 1996, the following
Current Report on Form 8-K was filed by the Holding Company with the
Commission:
Form 8-K (Item 5. Other Events), date of earliest event reported,
October 24, 1996, with respect to the execution of the Original
Securities Purchase Agreement by and among the Holding Company, FOHP-NJ
and HSI.
-60-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FOHP, INC.
------------
(Registrant)
Date: March 28, 1997 By:/S/ DONALD PARISI
-----------------
DONALD PARISI, Acting President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ DONALD PARISI Acting President and Chief March 28, 1997
- ------------------------------------ Executive Officer and
Donald Parisi Director (Principal
Executive Officer)
/S/ JOHN MCCARTHY Vice President March 28, 1997
- ------------------------------------ (Principal Financial and
John McCarthy Accounting Officer)
/S/ WILLIAM ROBERTS Chairman of the Board March 28, 1997
- ------------------------------------
William Roberts
/S/ MICHAEL W. AZZARA Director March 28, 1997
- ------------------------------------
Michael W. Azzara
</TABLE>
-61-
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ CHRISTOPHER DADLEZ Director March 28, 1997
- ------------------------------------
Christopher Dadlez
/S/ MARK ENGEL Director March 28, 1997
- ------------------------------------
Dr. Mark Engel
/S/ STEPHEN D. FELDMAN Director March 28, 1997
- ------------------------------------
Dr. Stephen D. Feldman
/S/ THOMAS J. FENERAN Director March 21, 1997
- ------------------------------------
Dr. Thomas J. Feneran
/S/ JOHN R. KOPICKI Director March 28, 1997
- ------------------------------------
John R. Kopicki
/S/ JOEL F. LEHRER Director March 28, 1997
- ------------------------------------
Dr. Joel F. Lehrer
/S/ PAUL F. LOW Director March 28, 1997
- ------------------------------------
Dr. Paul F. Low
/S/ BARRY H. OSTROWSKY Director March 19, 1997
- ------------------------------------
Barry H. Ostrowsky
/S/ MARK D. PILLA Director March 28, 1997
- ------------------------------------
Mark D. Pilla
/S/ OM P. SAWHNEY Director March 18, 1997
- ------------------------------------
Dr. Om P. Sawhney
</TABLE>
-62-
<PAGE>
Consolidated Financial Statements
and Other Financial Information
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
December 31, 1996
Contents
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets..................................................F-4
Consolidated Statements of Operations........................................F-5
Consolidated Statements of Shareholders' (Deficiency) Equity.................F-6
Consolidated Statements of Cash Flows........................................F-7
Notes to Consolidated Financial Statements...................................F-8
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
FOHP, Inc.
We have audited the accompanying consolidated balance sheets of FOHP, Inc. (the
"Holding Company") and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' (deficiency) equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Holding 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, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Holding Company will continue as a going concern. As shown in the
consolidated financial statements, the Holding Company has incurred a 1996 net
loss of $30,745,106 and has an accumulated deficit of $56,535,558 at December
31, 1996. Also, the Holding Company's principal operating subsidiary, First
Option Health Plan of New Jersey, Inc. ("FOHP-NJ"), has not met its statutory
net worth requirements pursuant to its Certificate of Authority granted by the
New Jersey Departments of Banking and Insurance and Health and Senior Services
(the "Departments"). As discussed in Note 2, the Holding Company anticipates
raising additional capital through the sale of convertible debentures which, in
management's opinion, will provide the capital necessary for FOHP-NJ to meet the
Departments' statutory net worth requirements. However, the sale of the
convertible debentures is subject to the approval of the shareholders of the
Holding Company.
F-2
<PAGE>
Accordingly, these matters raise substantial doubt about the Holding Company's
ability to continue as a going concern. (Management's plans in regard to these
matters are further described in Note 2.) The 1996 consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Iselin, New Jersey Ernst & Young LLP
February 14, 1997
F-3
<PAGE>
<TABLE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Balance Sheets
<CAPTION>
DECEMBER 31
1996 1995
----------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 36,664,911 $ 23,882,286
Accounts receivable from owners/providers, net of allowance
for retroactive terminations of $1,600,000 in 1996 (NOTE 4) 8,206,471 6,341,092
Other accounts receivable, net of allowances for doubtful
accounts and retroactive terminations of $100,000 in 1996 and
$676,215 in 1995 (NOTE 4) 3,666,887 3,252,639
Prepaids and other current assets 1,904,360 534,751
----------------------------------
Total current assets 50,442,629 34,010,768
Long-term assets:
Restricted cash (NOTE 2) 1,265,449 1,200,801
Furniture and equipment, net (NOTE 5) 1,884,558 1,859,131
Other assets 659,581 291,133
----------------------------------
Total assets $ 54,252,217 $ 37,361,833
==================================
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Medical claims payable to owners/providers $ 13,775,534 $ 8,357,685
Other medical claims payable 55,370,457 18,602,588
Accounts payable and accrued expenses 5,163,115 4,291,102
Unearned premium 4,598,662 341,092
Other 1,210,516 890,327
----------------------------------
Total current liabilities 80,118,284 32,482,794
Commitments and contingencies (NOTE 9)
Shareholders' (deficiency) equity:
FOHP, Inc., 100,000,000 shares authorized, $.01 par value;
Common Stock-NJ, 2,100,173 shares issued and outstanding (NOTE 6) 21,002 21,002
Additional paid-in capital 30,648,489 30,648,489
Accumulated deficit (56,535,558) (25,790,452)
----------------------------------
Total shareholders' (deficiency) equity (25,866,067) 4,879,039
----------------------------------
Total liabilities and shareholders' (deficiency) equity $ 54,252,217 $ 37,361,833
==================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
<TABLE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Statements of Operations
<CAPTION>
Year ended December 31
1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Premiums from owners/providers $ 135,544,112 $ 63,630,797 $ 5,639,724
Other premium revenue 112,125,670 38,819,206 1,803,624
Other, principally administrative service fees 7,863,006 7,621,790 749,817
Interest income 1,843,520 1,222,246 427,354
-------------------------------------------------------------
Total revenue 257,376,308 111,294,039 8,620,519
Expenses:
Medical services to owners/providers 37,026,903 17,319,035 1,405,175
Hospital services to owners/providers 30,156,890 11,068,909 880,920
Other medical services 105,496,580 38,548,819 2,727,694
Other hospital services 63,760,554 24,637,249 1,710,020
Selling, general and administrative 50,789,010 32,638,106 10,624,261
Depreciation and amortization 879,306 674,433 231,057
Interest 11,247 90,048 8,964
Write-off of intangible asset (NOTE 2) 986,782
-------------------------------------------------------------
Total expenses 288,120,490 125,963,381 17,588,091
-------------------------------------------------------------
Net loss before provision for state income taxes (30,744,182) (14,669,342) (8,967,572)
Provision for state income taxes (NOTE 6) 924 71,603
-------------------------------------------------------------
Net loss $ (30,745,106) $ (14,740,945) $ (8,967,572)
=============================================================
Net loss per common share $ (14.64) $ (8.65) $ (8.40)
=============================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
<TABLE>
<CAPTION>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Statements of Shareholders' (Deficiency) Equity
COMMON STOCK TOTAL
----------------------- ADDITIONAL COMMON SHAREHOLDERS'
PAR PAID-IN STOCK ACCUMULATED (DEFICIENCY)
SHARES VALUE CAPITAL SUBSCRIBED DEFICIT EQUIT
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 -- $ -- $ -- $ 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 Prac-
titioner Provider Common Stock (100) (1) (1,499) (1,500)
Conversion of outstanding shares
of FOHP-NJ Common Stock to
FOHP, Inc. Common Stock-NJ:
FOHP-NJ Institutional Provider (1,020,051) (10,201) (10,201)
FOHP-NJ Other Provider (40,002) (400) (400)
FOHP-NJ Practitioner Provider (511,700) (5,117) (5,117)
FOHP, Inc. Common Stock-NJ
issued (at $15 per share) 2,100,173 21,002 7,931,516 7,952,518
Payment of issue costs (294,971) (294,971)
Net loss (14,740,945) (14,740,945)
--------------------------------------------------------------------------------------
Balance at December 31, 1995 2,100,173 21,002 30,648,489 -- (25,790,452) 4,879,039
Net loss (30,745,106) (30,745,106)
--------------------------------------------------------------------------------------
Balance at December 31, 1996 2,100,173 $ 21,002 $ 30,648,489 $ -- $(56,535,558) $(25,866,067)
======================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
<TABLE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Statements of Cash Flows
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(30,745,106) $(14,740,945) $ (8,967,572)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for bad debts and retroactive terminations 2,381,428 674,860 100,300
Depreciation 879,306 563,769 221,835
Amortization of cost in excess of assets acquired 110,664 9,222
Write-off of intangible asset 986,782
Changes in operating assets and liabilities:
Increase in accounts receivable from owners/providers (4,246,807) (4,539,229) (1,801,863)
Increase in other accounts receivable (414,248) (2,750,685) (778,197)
(Increase) decrease in prepaids and other current
assets (1,369,609) 232,524 (661,038)
Increase in restricted cash (64,648) (893,610) (307,191)
(Increase) decrease in other assets (368,448) 207,136 (410,283)
Increase in medical claims payable to
owners/providers 5,417,849 6,496,873 1,468,045
Increase in other medical claims payable 36,767,869 14,990,425 3,267,585
Increase in accounts payable and accrued expenses 872,013 1,787,571 1,835,586
Increase in unearned premium 4,257,570 216,193 124,899
Increase in other liabilities 320,189 890,327
-----------------------------------------------
Net cash provided by (used in) operating activities 13,687,358 4,232,655 (5,898,672)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (904,733) (1,020,993) (1,368,975)
Purchase of FMCO, net of cash acquired (834,445)
-----------------------------------------------
Net cash used in investing activities (904,733) (1,020,993) (2,203,420)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 7,640,329 10,629,162
-----------------------------------------------
Net cash provided by financing activities -- 7,640,329 10,629,162
-----------------------------------------------
Increase in cash and cash equivalents 12,782,625 10,851,991 2,527,070
Cash and cash equivalents at beginning of year 23,882,286 13,030,295 10,503,225
-----------------------------------------------
Cash and cash equivalents at end of year $ 36,664,911 $ 23,882,286 $ 13,030,295
===============================================
Interest paid for the year $ 7,488 $ 75,123 $ 9,057
===============================================
</TABLE>
F-7
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
1. GENERAL
FOHP, Inc. (the "Holding Company" or "FOHP") is a New Jersey corporation which
was formed in May 1994. The Holding Company was formed to effect the
reorganization of First Option Health Plan of New Jersey, Inc. ("FOHP-NJ") into
a holding company structure (the "Reorganization"), which was consummated on
June 8, 1995. The Reorganization was completed through an exchange of FOHP-NJ's
outstanding common stock for shares of the Holding Company's Common Stock-NJ. In
connection with the Reorganization, FOHP-NJ distributed, as a dividend, all of
the outstanding common stock of First Managed Care Option, Inc. ("FMCO") to the
Holding Company. Pursuant to the Reorganization, FOHP-NJ and FMCO became
wholly-owned subsidiaries of FOHP. Prior to the Reorganization, the Holding
Company did not conduct any business nor did it have any significant assets or
liabilities. The primary purpose of the Reorganization was to facilitate the
formation of additional health maintenance organizations in states other than
New Jersey.
The Holding Company serves as the holding company for its wholly-owned
subsidiaries to which it provides management and consulting services. The
Holding Company's principal operating subsidiary is FOHP-NJ. FOHP-NJ, a New
Jersey corporation formed in May 1993, received its Certificate of Authority
("COA") to operate as an HMO in New Jersey in June 1994. Other wholly-owned
subsidiaries of the Holding Company include First Option Health Plan of New
York, Inc. ("FOHP-NY"), a New York corporation, First Option Health Plan of
Pennsylvania, Inc. ("FOHPPA"), a Pennsylvania corporation, First Option Health
Plan of Maryland, Inc., a Maryland corporation, First Option Health Plan of
Delaware, Inc., a Delaware corporation, and FOHP Agency, Inc., a New Jersey
corporation, each formed in 1995, and First Option Dental, Inc. formed in 1996.
These other subsidiaries have not commenced operations. Each of FOHP-NY and
FOHP-PA has filed an application for a COA to operate as an HMO in its state of
incorporation.
During the summer of 1996, as a result of FOHP-NJ's statutory net worth
deficiency discussed in Note 2 and the conditions imposed by the New Jersey
Departments of Banking and Insurance and Health and Senior Services (the
"Departments"), 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 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 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 1996 net loss of $30,745,106 and has an
accumulated deficit of $56,535,558 at December 31, 1996. Also, the Holding
Company's principal operating subsidiary FOHP-NJ has not met its statutory
F-8
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
net worth requirements pursuant to its COA granted by the Departments. In order
for FOHP-NJ to meet its statutory net worth requirements, the Holding Company or
FOHP-NJ must generate sufficient operating profits and/or obtain additional
equity financing. In an effort to increase capital, FOHP-NJ effected several
operational changes in 1996. The operational changes made by FOHP-NJ's 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-NJ'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 in order 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. In connection with FOHP-NJ's plan to remedy the
statutory net worth deficiency, in October 1996 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. 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 medical claims expenses during the fourth quarter of
1996 as a result of more complete claim payment data, in January 1997 HSI
exercised its right to renegotiate certain terms of the original Securities
Purchase Agreement among HSI, the Holding Company and FOHP-NJ. Under the terms
of the renegotiated Securities Purchase Agreement (the "Amended Securities
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. The satisfactory completion of
these efforts and negotiations is essential in order for FOHP-NJ to meet its
statutory net worth requirement. In addition, the Amended Securities Purchase
Agreement is subject to the approval of the shareholders of the Holding Company.
The New Jersey Department of Banking and Insurance ("DOI") has informed HSI
that, if the transaction with HSI is not consummated (which consummation
requires the prior approval by the Holding Company's shareholders of the
transaction with HSI) on or before April 30, 1997 the DOI intends to petition
the New Jersey Superior Court for an order to allow the DOI to place FOHP-NJ
into rehabilitation. It is also the understanding of the Holding Company's Board
of Directors that it is the DOI's intention to place FOHP-NJ into rehabilitation
if the transaction with HSI is not consummated by such date. Accordingly, these
matters raise substantial doubt about the Holding Company's ability to continue
as a going concern.
These consolidated financial statements have been prepared assuming the Holding
Company will continue as a going concern and do not include any adjustments that
might result from the outcome of this uncertainty.
The following are significant accounting policies of the Holding Company:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Holding
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
F-9
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, as determined through quoted market prices, of the cash equivalents
approximate carrying value. Cash and cash equivalents at December 31, 1996 were
on deposit with two commercial banks.
RESTRICTED CASH
FOHP-NJ is required to maintain $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 useful lives of the depreciable assets (3 to 5
years).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at estimated net realizable value by including
provisions for retroactive terminations and uncollectible amounts.
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
amounted to $110,664. The carrying value of this intangible asset was written
off in 1995.
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.
F-10
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 NJDHSDMAHS 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. Members may
disenroll at any time other than months 2 through 6 of membership and
eligibility is determined by NJDHS-DMAHS.
Certain premium revenue is earned under a contract between FOHP-NJ and the
Health Care Financing Administration ("HCFA") for services provided to Medicare
eligible recipients. The contract with HCFA has a initial term of 12 months and
may be renewed for successive one year terms. Premiums are earned monthly on a
per capita basis, based on the number of eligible members enrolled in FOHP-NJ.
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 for Medicaid and HCFA for
Medicare, providers are reimbursed for health care services provided to Medicaid
and Medicare 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 for Medicaid claims and 10% for
Medicare claims. The Medicaid withholds are segregated into geographically
designated risk pools. Payments from the risk pools 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. The
F-11
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Medicare withhold program is a statewide program which has one risk pool which
covers anticipated health care expenses. At settlement, if there is a surplus of
funds, FOHP-NJ will retain 10% for a contingency reserve pool that will be
available to offset any future year losses, with the remaining surplus funds
being distributed among the providers. If a deficit fund exists, the withholds
will be applied to the deficit with FOHP-NJ assuming the responsibility for the
remaining deficit. Estimated surpluses associated with these contracts are
included in medical claims payable.
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.
ADVERTISING COSTS
Advertising costs are charged to operations when the advertising first takes
place and approximated $2,154,000, $1,692,000 and $758,000 for the years 1996,
1995 and 1994, respectively.
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 (2,100,173 in 1996, 1,703,908 in
1995 and 1,067,997 in 1994).
RECLASSIFICATION
Certain reclassifications have been made to the 1995 and 1994 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 years
1995 and 1994, as defined in the Agreement. Since these revenue goals were met
for calendar year 1994, additional consideration of $600,000 was
F-12
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
3. ACQUISITION (CONTINUED)
payable to the sellers of the stock (the "Sellers") and was included in expense
in 1994 since the payment related to services performed by the Sellers.
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.
In December 1995, management determined that due to the recent loss of business
volume from certain FMCO customers and because of current and projected
operating losses of FMCO, the recoverability of this intangible asset could not
be assured. Accordingly, the net carrying value of $986,782 was written-off in
1995.
In December 1996, the Holding Company sold all of the outstanding common stock
of FMCO to an unrelated third party for $250,000 plus, subject to certain
limitations, a percentage of collections on accounts receivable that were
greater than 90 days old as of September 30, 1996 collected after November 1,
1996. As a result of the transaction, the Holding Company recorded a loss of
approximately $145,000. Revenues and operating results of FMCO were not
significant in 1996, 1995 or 1994.
4. ACCOUNTS RECEIVABLE
The following is the activity of the allowances for doubtful accounts and
retroactive terminations:
Balance, January 1, 1995 $ 100,300
Provision for bad debts 232,604
Provision for retroactive terminations 442,256
Write-offs (98,945)
-----------
Balance, December 31, 1995 676,215
Provision for bad debts 431,849
Provision for retroactive terminations 1,949,579
Write-offs (1,357,643)
-----------
Balance, December 31, 1996 $ 1,700,000
===========
F-13
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
5. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
1996 1995
----------------------------------
Leasehold improvements $ 258,381 $ 55,118
Furniture and fixtures 806,518 947,485
Equipment 2,090,020 1,372,218
Automobiles 68,113 61,198
----------------------------------
3,223,032 2,436,019
Less accumulated depreciation (1,338,474) (576,888)
----------------------------------
$ 1,884,558 $ 1,859,131
==================================
6. COMMON STOCK
At December 31, 1996, the authorized common stock of the Holding Company totals
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. There were no
additional shares of Common Stock-NJ issued during 1996.
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 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 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.
F-14
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
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. At December 31, 1996, net operating loss ("NOL") carryforwards
for federal and state income tax reporting purposes (which may be subject to
certain limitations) approximate $39,640,600 and $36,815,200 respectively. These
losses will be available to offset future taxable income. Such NOL's expire
through 2011 for federal purposes, as well as New York, Delaware and Maryland
state purposes, through 2002 for New Jersey state purposes and 1999 for
Pennsylvania state purposes.
The tax effects of temporary differences that give rise to deferred tax assets
are as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
-----------------------------------
<S> <C> <C>
Capitalization of start-up costs and organization costs $ 2,987,000 $ 2,630,000
Net operating loss carryforwards 15,039,000 6,209,000
Amortization of acquired intangibles 553,000
Reserve discounting 738,000 574,000
Allowances for doubtful accounts and retroactive terminations 595,000 81,000
Other 726,000 268,000
Total deferred tax assets 20,085,000 10,315,000
-----------------------------------
Valuation allowance for deferred tax assets (20,085,000) (10,315,000)
-----------------------------------
Net deferred tax assets $ -- $ --
===================================
</TABLE>
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 1996, 1995 and 1994 varied from the statutory
federal income tax rate as follows:
1996 1995 1994
------------------------------------
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 -% -% -%
====================================
F-15
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
8. 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. Employees may contribute to the plans
after completing certain service requirements. The Holding Company matches 50%
of employee contributions not to exceed (i) limits established under Section 415
of the Internal Revenue Code or (ii) the lesser of 25% of compensation or
$30,000. Total plan expense for 1996, 1995 and 1994 amounted to $406,000,
$197,000 and $1,000, respectively.
9. 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 1996, 1995 and 1994 was
approximately $1,796,000, $927,000 and $200,000, respectively.
The following is a schedule of minimum future payments on long-term operating
leases at December 31, 1996:
1997 $ 994,161
1998 966,693
1999 458,161
2000 127,062
2001 1,185
--------------
$ 2,547,262
==============
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,
1996, these contracts expire within 1 to 2 years and provide for minimum
compensation of approximately $1,140,000 and $358,000 for the years ending 1997
and 1998, respectively.
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 cost for the system license is approximately
$800,000 and is subject to reduction as long as the Holding Company continues
the agreement.
F-16
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 totaled
$1,621,186, $392,000 and $62,000 in 1996, 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 FOHPNJ 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. In connection with the sale of convertible
debentures (see Note 2), the Holding Company has agreed under the terms of the
Amended Securities Purchase Agreement with HSI to negotiate a termination of its
agreement with the other company.
REINSURANCE ARRANGEMENTS
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 for 1996 and 1995 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 certain deductibles are subject to coinsurance provisions.
Reinsurance expense, net of recoveries, was approximately $55,000, $695,000 and
$101,436 for the years ended 1996, 1995 and 1994, respectively, and is included
in medical and hospital services expense.
STATUTORY NET WORTH
Financial statements issued in accordance with statutory accounting practices
differ from financial statements issued in accordance with generally accepted
accounting principles (GAAP). Statutory financial statements exclude certain
items included in GAAP financial statements. These "non-admitted" items include
certain assets such as certain prepaid expenses, equipment other than certain
computer equipment, organizational costs, certain loans and receivables,
supplies and other items.
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, 1996 and 1995 amounted to $15,054,000 and
$5,523,000. In addition, under the terms of its COA, if statutory net worth is
less than 125% of the minimum required
F-17
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
($18,818,000 and $6,904,000 at December 31, 1996 and 1995, respectively),
FOHP-NJ is required to submit a plan of action to the DOI. FOHP-NJ's statutory
net worth requirements are shown below:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------------------------
GAAP Eliminations Statutory GAAP Eliminations Statutory
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets $ 62,225,369 $12,359,871 $ 49,865,498 $38,211,395 $8,049,000 $30,162,395
Liabilities 76,705,815 76,705,815 28,631,898 28,631,898
----------------------------------------------------------------------------------------------------
Net deficiency
(equity) $(14,480,446) $12,359,871 $(26,840,317) $ 9,579,497 $8,049,000 $ 1,530,497
====================================================================================================
</TABLE>
FOHP submitted a plan of action to the DOI that outlined the measures FOHP would
use to address FOHP-NJ's statutory net worth deficiency, which was approved by
the DOI in 1996. FOHP has also obtained the DOI's approval of its plan to raise
capital to address FOHP-NJ's statutory net worth deficiency by selling
convertible debentures to HSI. If FOHP's sale of convertible debentures to HSI
is consummated, HSI will invest up to $50 million in the Holding Company. 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. In connection with meeting the statutory net worth requirements, the
Holding Company has also obtained certain financial commitments and guarantees.
Certain institutional owner/providers have executed corporate guarantees of
capital on behalf of the Holding Company totaling approximately $4.4 million. In
addition, certain physician shareholders and other individuals have secured
letters of credit for the benefit of the Holding Company totaling approximately
$6.7 million. No amounts have been drawn under these commitments and all the
guarantees and letters of credit expire March 31, 1997.
In addition to the minimum statutory net worth requirements, FOHP may not pay
dividends to its parent without prior approval of the Commissioner of Insurance.
F-18
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
10. PRO FORMA FINANCIAL INFORMATION
The following pro forma condensed consolidated balance sheet gives effect to the
proposed sale of convertible debentures to HSI (as discussed in Note 2) as if
the sale had occurred on December 31, 1996.
Pro Forma Condensed Consolidated Balance Sheet
December 31, 1996
<TABLE>
<CAPTION>
Pro Forma Pro Forma
As Reported Adjustments Results
---------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 36,664,911 $ 51,100,000(1) $ 87,764,911
Accounts receivable from owner/providers, net 8,206,471 8,206,471
Other current assets 5,571,247 5,571,247
---------------------------------------------------------------
Total current assets 50,442,629 51,100,000 101,542,629
Other non-current assets 3,809,588 3,809,588
---------------------------------------------------------------
Total assets $ 54,252,217 $ 51,100,000 $ 105,352,217
===============================================================
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Medical claims payable to owners/providers $ 13,775,534 $ 13,775,534
Other medical claims payable 55,370,457 55,370,457
Other current liabilities 10,972,293 10,972,293
------------ ------------
Total current liabilities 80,118,284 80,118,284
Long-term debt-convertible debentures $ 51,100,000(1) 51,100,000
Total shareholders' (deficiency) equity (25,866,067) (25,866,067)
---------------------------------------------------------------
$ 54,252,217 $ 51,100,000 $ 105,352,217
===============================================================
</TABLE>
(1) Adjustment represents the sale of convertible debentures to HSI. The
debentures are convertible into 71% of the Holding Company's outstanding
equity, bear interest at 6% and mature in 2002.
F-19
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
10. PRO FORMA FINANCIAL INFORMATION (CONTINUED)
The following pro forma condensed consolidated statement of operations gives
effect to the proposed sale of convertible debentures to HSI (as discussed in
Note 2) as if the sale had occurred on January 1, 1996.
Pro Forma Condensed Consolidated Statement of Operations
Year ended December 31, 1996
<TABLE>
<CAPTION>
Pro Forma Pro Forma
As Reported Adjustments Results
--------------------------------------------------
<S> <C> <C> <C>
Revenue:
Premiums from owners/providers $135,544,112 $135,544,112
Other premium revenue 112,125,670 112,125,670
Other, principally administrative service fees 7,863,006 7,863,006
Interest income 1,843,520 1,843,520
-------------- -------------
257,376,308 257,376,308
Expenses:
Medical services to owners/providers 37,026,903 37,026,903
Hospital services to owners/providers 30,156,890 30,156,890
Other medical services 105,496,580 105,496,580
Other hospital services 63,760,554 63,760,554
Selling, general and administrative 50,777,763 $ 5,910,656 (1) 56,688,419
Interest 11,247 3,060,000 (2) 3,071,247
Other expense 891,477 891,477
--------------------------------------------------
288,121,414 8,970,656 297,092,070
--------------------------------------------------
Net loss $(30,745,106) $(8,970,656) $(39,715,762)
==================================================
Net loss per common share before
conversion of debentures $ (14.64) $ (4.27) $ (18.91)
==================================================
Net loss per common share after
conversion of debentures $ (14.64) $ 9.58 (3) $ (5.06)
==================================================
</TABLE>
(1) Adjustment consists of two components: an $800,000 fee paid to the
investment banker utilized in the HSI transaction and a $5,110,656
management fee paid to HSI based on 2% of total revenue of the Holding
Company's health plans.
(2) Adjustment represents one year's interest on the outstanding debentures
calculated at 6%.
F-20
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1996
10. PRO FORMA FINANCIAL INFORMATION (CONTINUED)
(3) Calculated as follows:
Net loss, pro forma results $(39,715,762)
Add interest expense 3,060,000
------------
$(36,655,762)(A)
============
Shares outstanding during 1996 2,100,173
Shares issued assuming conversion of convertible debentures 5,141,803
------------
7,241,976(B)
============
Net loss per common share assuming conversion
(A divided by B) $ (5.06)
============
F-21
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
EXHIBITS
TO
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
--------------------------
FOHP, INC.
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
--------------------------
================================================================================
<PAGE>
FOHP, INC.
EXHIBIT INDEX
EXHIBIT NO.
- -----------
y 2.1 Agreement of Merger and Plan of Reorganization dated April
12, 1995 among FOHP-NJ, the Registrant and FOHP Transition
Company, a wholly-owned subsidiary of the Registrant.
k 3.1 Amended and Restated Certificate of Incorporation of the
Registrant, as filed with the Secretary of State of New
Jersey on December 7, 1995.
k 3.2 Amended and Restated Certificate of Incorporation of
FOHP-NJ, as filed with the Secretary of State of New Jersey
on December 7, 1995.
k 3.5 By-laws of Registrant, as amended.
k 3.6 Amended and Restated By-laws of FOHP-NJ.
y 4.1 Specimen certificate representing Registrant's Common
Stock-NJ.
(*) k 10.1 Employment Agreement dated October 27, 1995 among the
Registrant, FOHP-NJ and John L. Adessa.
(*) z 10.2 Amendment dated as of November 15, 1995 to Employment
Agreement dated October 27, 1995 among the Registrant,
FOHP-NJ and John L. Adessa.
(*) 10.3 Employment Agreement dated July 17, 1995 between the
Registrant and Paul J. Kimmins.
x 10.4 Managed Care Management Information Service Agreement dated
August 1, 1993 between Health Systems Integration, Inc.
("HSII") and FOHP-NJ.
z 10.4.1 Addendum dated May 5, 1995 to Managed Care Management
Information Service Agreement dated August 1, 1993 between
HSII and FOHP-NJ.
E-1
<PAGE>
x 10.5 Lease Agreement dated August 18, 1993 between Theodore G.
Sourlis and Elaine Sourlis, husband and wife, and FOHP-NJ
and the Addendum thereto dated August 1993.
x 10.6 Lease Agreement dated November 17, 1993 between Theodore G.
Sourlis and Elaine Sourlis, husband and wife, and FOHP-NJ
and the undated Addendum thereto.
x 10.7 Lease Agreement dated September 1, 1994 between Theodore G.
Sourlis and Elaine Sourlis, husband and wife, and FOHP-NJ
and the undated Addendum thereto.
(*) 10.9 Agreement dated November 30, 1994 between the Registrant and
Alliance Medical Group, Inc., concerning the employment by
the Registrant of Joseph Singer, M.D.
x 10.10 Form of Hospital Participation (provider) Agreement required
to be executed by each NJ Acute Care Institution
participating in the FOHP-NJ network and by FOHP-NJ.
x 10.11 Form of Individual Practice Association (provider) agreement
required to be executed by FOHP-NJ and the IPAs
participating in the FOHP-NJ network.
x 10.12 Form of Individual Practitioner Participation (provider)
Agreement required to be executed by FOHP-NJ and each NJ
Practitioner participating in the FOHP-NJ network.
x 10.13 Form of Provider Agreement (Non-Acute Care) required to be
executed by FOHP-NJ and each NJ Other Provider participating
in the FOHP-NJ network.
k 10.14.1 Form of First Option Master Group Contract (point of
service) for large employer groups (50 or more persons).
k 10.14.2 Form of First Option Master Group Contract (health
maintenance organization) for large employer groups (50 or
more persons).
k 10.14.3 Form of First Option Master Group Contract for small
employer groups (less than 50 persons).
k 10.14.4 Form of First Option Individual Contract for individuals.
E-2
<PAGE>
x 10.16 Agreement dated January 6, 1995 between FOHP-NJ and Sierra
Health Services, Inc.
x 10.17 Agreement dated July 1, 1994 between FOHP-NJ and NJADA Group
Insurance Trust.
x 10.18 Agreement dated August 1, 1994 between FOHP-NJ and EBP
HealthPlans, Inc.
x 10.19 Agreement dated October 31, 1994 between FOHP-NJ and
National Prescription Administrators, Inc.
x 10.20 Agreement dated October 31, 1994 between FOHP-NJ and CFI.
y 10.21 Agreement to provide HMO services to Medicaid recipients
dated February 8, 1995 between FOHP-NJ and the State of New
Jersey Department of Human Services, Division of Medical
Assistance and Health Services.
z 10.22 Sublease dated as of December 15, 1995 between FOHP-NJ and
The Continental Insurance Company
z 10.28 Mental Health Management Agreement dated July 1, 1994
between FOHP-NJ and Mental Health Network, Inc., and
amendment thereto entered into in January 1996.
z 10.33 Contract between FOHP-NJ and the Secretary of the Department
of Health and Human Services, who has delegated authority to
the Administrator of the Health Care Financing
Administration, with respect to health insurance benefits
for the aged and disabled (Contract No. H3155).
z 10.34 Guarantee dated as of December 31, 1995, in the amount of
$6,000,000, provided by William B. Roberts to FOHP-NJ.
z 10.35 Form of Guarantee which has been provided to FOHP-NJ by each
of the following NJ Institutional Shareholders in the amount
set forth next to such shareholder's name; 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
E-3
<PAGE>
Center - $250,000; Holy Name Hospital - $150,000; 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 - $300,000;
Riverview Health Affiliates (an affiliate of Riverview
Medical Center) - $250,000; West Hudson Hospital - $125,000;
St. Joseph's Hospital and Medical Center - $250,000;
Morristown Memorial Hospital - $250,000; Elizabeth General
Health Services Corp. (an affiliate of Elizabeth General
Medical Center) - $100,000; Englewood Healthcare Ent. (an
affiliate of Englewood Hospital and Medical Center) -
$250,000; and Robert Wood Johnson University Hospital -
$250,000.
z 10.36 Guarantee in the amount of $100,000, provided by MidJersey
Health Corporation (an affiliate of Hunterdon Medical
Center) to FOHP-NJ.
z 10.37 Guarantee in the amount of $250,000, provided by Community-
Kimball Health Care Systems, Inc. (an affiliate of Kimball
Medical Center and Community Medical Center) to FOHP-NJ.
z 10.38 Guarantee in the amount of $250,000, provided by Saint
Barnabas Corporation (an affiliate of Saint Barnabas Medical
Center) to FOHP-NJ.
z 10.39 Reimbursement Agreement dated March 26, 1996 between the
Registrant and William B. Roberts.
z 10.40 Form of Reimbursement Agreement entered into by the
Registrant and the following physician shareholders of the
Registrant who secured the $3,435,000 Letter of Credit
issued for the Registrant by Carnegie Bank on March 29,
1996, and form of addendum thereto: 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. Mohammad 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.
z 10.41 Reimbursement Agreement entered into by the Registrant and
Dr. Randall Krakauer, the physician shareholder of the
Registrant who
E-4
<PAGE>
secured the $300,000 Letter of Credit issued for the
Registrant by CoreStates Bank on March 27, 1996.
10.42 Reimbursement Agreements entered into by the Registrant and
Mr. John L. Adessa, the former President and Chief Executive
Officer of the Registrant who secured the $323,000 Letter of
Credit issued for the Registrant by CoreStates Bank on April
11, 1996.
z 10.43 Capital Contribution Agreement dated as of December 31, 1995
between the Registrant and FOHP-NJ.
10.44 Forms of First and Second Amendments to the Guarantees
included as exhibits 10.35, 10.36, 10.37 and 10.38 hereto.
b 10.45.1 Amended and Restated Securities Purchase Agreement dated
February 10, 1997 among the Registrant, FOHP-NJ and Health
Systems International, Inc. and the following exhibits
thereto: Exhibit A - Form of Debentures; Exhibit B-1 - Form
of Amended and Restated Certificate of Incorporation of the
Registrant; Exhibit B-2 - Form of By-laws of the Registrant;
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 D-1 - Form of General Administrative
Services Management Agreement; and Exhibit D-2 - Form of
Management Information Systems and Claims Processing
Services Agreement. Upon the request of the Securities and
Exchange Commission, the Registrant agrees to furnish a copy
of Exhibit C-1 - Form of Exclusive Plan Hospital Provider
Agreement, Exhibit C-2 - Forms of Non-Exclusive Plan
Hospital Provider Agreements, Exhibit E - Form of Investors
Agreement, Exhibit F - Form of Opinion of Outside Counsel of
Registrant and FOHP-NJ, Exhibit G - Form of Officer's
Certificate and Exhibit H - Form of Opinion of Outside
Counsel of Health Systems International, Inc., and Schedules
2.1A through 2.25 as follows: 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
E-5
<PAGE>
- Employment/Severance Matters; and Schedule 2.25 - Employee
Benefit Plans.
b 10.45.2 Amendment dated March 13, 1997 to the Amended and Restated
Securities Purchase Agreement referenced in Exhibit 10.45.1.
21. Subsidiaries of the Registrant.
j 27. Financial Data Schedule for year ended December 31, 1996.
- ----------
(*) Constitutes a management contract required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
x Incorporated by reference to the identically numbered exhibit to the
Registrant's Registration Statement on Form S-4 (Registration No.
33-89356).
y Incorporated by reference to the identically numbered exhibit to
Amendment No. 1 to the Registrant's Registration Statement on Form
S-4 (Registration No. 33-89356).
k Incorporated by reference to the identically numbered exhibit to the
Registrant's Registration Statement on Form S-1 (Registration No.
33-80817).
z Incorporated by reference to the identically numbered exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995.
b Incorporated by reference to Appendices A-H of the Registrant's
definitive Proxy Statement filed with the Commission on March 19,
1997 in connection with the Registrant's 1996 Annual Meeting of
Shareholders.
j The Financial Data Schedule is submitted in electronic format only.
E-6
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
================================================================================
Between FOHP, INC. (FOHP) and PAUL J. KIMMINS (Employee).
WHEREAS, FOHP and Employee believe a written employment agreement is appropriate
to describe their relationship and to serve as the basis for effective
communication between them,
NOW, THEREFORE, FOHP and Employee, for the consideration specified in this
Agreement, agree as follows:
1. TERM. FOHP and Employee hereby agree that FOHP employ Paul J. Kimmins as
Executive Vice President, Financial and Business Services of FOHP, Inc.
for an indefinite period which shall be no less than two years from July
1, 1995. During his employment, Employee shall be subject to immediate
termination for egregious misconduct. At the conclusion of the two year
period, Employee's employment agreement shall automatically renew itself
from year to year and thereafter if FOHP wishes to terminate the
employment relationship, it may do so provided a minimum six-months
written notice of non-renewal is provided to Employee of the intention to
end the employment relationship. Also, if FOHP does not wish to continue
the employment relationship at the end of the initial two year period, the
requirement of the minimum six-months written notice of non-renewal shall
also apply. During the period of notice of such non-renewal, Employee may
continue to work (at the discretion of FOHP, Inc.) the remainder of the
contract term.
2. RESPONSIBILITIES. Employee desires to enter into the full and active
employment, reporting directly to the President and CEO of FOHP, Inc. The
general responsibilites the Employee will be accountable for are as
follow:
Page 1 of 6
<PAGE>
a. FINANCIAL FUNCTION. All financial functions of each Strategic Business
Unit (SBU) in the family of FOHP, Inc. Shall be under Employee's
supervision. These shall include Commercial HMO/PPO Programs and
Partnership Program.
Strategic Business Divisions which are part of FOHP, Inc. and all FOHP,
Inc. corporate financial activities shall remain under the control of the
Chief Operating Officer. It is expected that all financial results of each
of the SBU's under Employee's authority will provide information to FOHP,
Inc. For the purposes of consolidated reporting.
Divisions which are not included today, but which may be included later,
are the following: Workers Compensation (FMCO), Medicaid, Medicare, and
Affiliated Health Services.
b. BUSINESS SERVICES. Responsible, within each of the previously described
SBU's, for the assistance and/or direction of the following, which shall
not be considered an all inclusive list:
o Business Plan Development
o Pro-forma Development
o Budgets
o Actuarial and Rating Services
o New Product Pricing/Feasibility studies
c. PARTNERSHIP INITIATIVES. Responsible, with the President and CEO of FOHP,
for:
(i) Development of partnership arrangements and/or corporate structures
which facilitate partnership activities, corporate affiliations
and/or product introductions. As of today (more may be added) these
include the following:
o Health Insurance Plan of New York (HIP)
o United Insurance Companies, Inc. (UICI)
o First Choice of Long Island (working with FOHP, NY)
o Alliance Health Plan (working with GPD, FOHP, Inc.)
(ii) Identifying partnership opportunities and strategies in new or
contiguous geographic areas of operation and bringing these new
programs to market. There are many other activities and
responsibilities which Employee may be asked to take responsibility
for and/or operate. As a newly formed and high
Page 2 of 6
<PAGE>
growth organization, neither FOHP nor the President and CEO of FOHP,
Inc. can commit to a fixed set of responsibilities which do not
change, nor can FOHP stipulate to a fixed set of responsibilities for
any single manager for the duration of their employment
3. SALARY. Paul J. Kimmins shall be paid $150,000 per year for his salary.
a. Employee shall be eligible for an annual bonus up to 20% of base
salary. The annual bonus will be determined by the President and CEO
of FOHP, Inc. based on the successful attainment of yearly goals and
objectives and will be payable no later than thirty (30) days after
the end of each year of the Agreement.
b. Employee shall receive a signing bonus of $5,000, payable in
Employee's first paycheck from FOHP.
c. Provided Employee is employed pursuant to this Agreement on July 1,
1997, Employee will be paid a deferred incentive payment equal to
seven percent (7%) of the total amount of base compensation and
annual bonuses paid to Employee during the term of this Agreement.
Said deferred incentive payment will be paid to Employee no later
than July 31, 1997. FOHP will account for, but not be required to
fund the deferred incentive payment until it is required to pay the
Employee said monies in accordance with the terms of this Paragraph
and the Agreement.
4. BENEFITS. The following benefits will be provided by FOHP:
a. HEALTH INSURANCE (MEDICAL AND DENTAL): Coverage will be available in
accordance with that provided to senior management of FOHP.
b. 401-K PENSION AND STOCK OPTIONS: Employee shall be eligible for
participation and the same contributions provided to senior
management of FOHP for such plan(s) as may exist, now or in the
future.
c. VACATION: Employee shall accrue four (4) weeks vacation each contract
year.
d. SICK LEAVE: Employee shall receive annual sick leave in accordance
with the policy of FOHP, provided, however, in the case of Employee's
prolonged and continuous
Page 3 of 6
<PAGE>
illness, FOHP will pay Empl;oyee full salary for the first three (3)
months of such illness.
e. DISABILITY: Short-term and long-term disability insurance will be
available in accordance with the amount of coverage provided to
senior management of FOHP and shall be fully paid for by FOHP.
f. LIFE INSURANCE: Coverage at a fixed amount shall be provided in
accordance with that provided to senior management of FOHP and shall
be fully paid by FOHP. Additional coverage may be obtained at
Employee's expense.
g. Employee shall be provided with an AUTOMOBILE, gasoline credit card,
automobile insurance and maintenance, all at FOHP's expense.
h. Employee shall also be reimbursed for other business-related expenses
in accordance with FOHP policy for employee REIMBURSEMENT.
5. SEVERANCE
a. In the event FOHP terminates the employment of Employee prior to the
expiration of the term of this Agreement for reasons other than those
set forth in Paragraph 1 of this Agreement, (said termination
hereinafter referred to as SEVERANCE) Employee shall be paid the
greater of the amount of monies remaining and due according to this
contract or a one (1) year salary payment (plus earned bonuses and
benefits). In addition, in the event FOHP does not renew this
Agreement, then;
b. FOHP will pay to Employee, in lump sum, on or before September 15,
1997, an amount equal to the sum of the following: (i) One half (1/2)
times the base compensation in effect for the employment year ending
July 31, 1997.
c. In the event employment with FOHP or its successor is involuntarily
terminated, employee will receive professional outplacement support
at company expense.
d. In the event of Severance, FOHP agrees to make no announcement
regarding said Severance unless the timing, form, and manner of any
such announcement is explicitly agreed upon by Employee.
Page 4 of 6
<PAGE>
6. CHANGE TO FOHP OWNERSHIP. FOHP and Employee agree if there is a change in
FOHP ownership which affects Employee's management position, Employee will
receive the considerations provided below. "Change to FOHP Ownership"
shall mean a merger, consolidation, and/or sale of all or a major portion
of the assets or the stock of FOHP. If such change occurs and affects
Employee's position (in terms of compensation, title, authority, duties,
reporting relationships, reports, geographic location, etc.) and no
equivalent or better position is available in FOHP or a new or successor
organization which is acceptable to Employee, Employee shall receive all
the compensation and benefits provided under paragraphs 5 a, b, c, and d
of this Agreement.
7. INDEMNIFICATION. Employee shall be indemnified to the fullest extend
permitted by law against any claims asserted against him personally
arising out of or related to his position with FOHP or its affiliated
entities, provided employee has not acted egregiously, permitted fraud or
other illegal acts, or engaged in gross misconduct. Indemnification shall
include payment of attorneys fees, legal costs and expenses, and costs of
settlement.
8. CHANGES TO AGREEMENT. No written or oral modification, amendment, addition
to this Agreement, nor waiver of any of its provisions, shall be valid or
enforceable unless in writing and signed by the signatories to this
Agreement.
9. ENTIRE AGREEMENT. This Agreement contains the entire agreement between
FOHP and Paul J. Kimmins with respect to the subject matter contained
herein and supersedes any other prior or contemporaneous agreement either
oral or in writing purporting to govern this subject matter. Paul J.
Kimmins and FOHP have agreed to relocation allowances and/or
reimbursements as shown in Attachment A.
10. SEVERABILITY. The invalidity or unenforceability of any provisions of this
Agreement shall in no way affect the validity or enforceability of any
other provision.
11. WAIVER. Failure to insist upon strict compliance with any of the terms,
covenants, or
Page 5 of 6
<PAGE>
conditions set forth in this Agreement shall not be deemed a waiver of
such term, covenant, or condition, nor shall any waiver or relinquishment
of any right or power under the Agreement at any one or more times be
deemed a waiver or relinquishment of such right or power at any other time
or times.
12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey and applicable federal
law.
I UNDERSTAND AND AGREE TO THE TERMS AND CONDITIONS OF THE AGREEMENT AS SET FORTH
ABOVE.
FOHP, INC.
/S/JOHN L. ADESSA /S/PAUL J. KIMMINS
- ----------------------------------- -----------------------------------
John L. Adessa Paul J. Kimmins
President & Chief Executive Officer Executive Vice President, Financial
& Business Services
7/17/95 7/17/95
- ----------------------------------- -----------------------------------
Date Date
Enc.: Attachment A
Page 6 of 6
<PAGE>
ATTACHMENT A
- --------------------------------------------------------------------------------
RELOCATION AND/OR TEMPORARY LIVING:
If you choose to begin work without your family moving with you, FOHP will rent
an apartment for you from February 1 until (no later than) August 30, 1995. In
addition, we will provide you with bi-weekly trips home, and a living allowance.
If you wish to move your family, as soon as possible, we will rent a home until
(no later than) August 30, or until a home can be purchased (whichever comes
first.)
In the latter case, FOHP will assist you in obtaining a bridge loan and either
pay for the bridge loan or current mortgage (whichever is less for up to 12
months from the date the bridge loan is obtained. FOHP will also cover the cost
of the move and provide $10,000 toward closing costs.*
- --------------------------------------------------------------------------------
*If you wish to stay with either your family or your wife's family until you
find a home, FOHP will pay you $10,000 more toward your closing costs.
Page 7 of 7
EXHIBIT 10.9
AGREEMENT
Between FOHP, Inc. ("FOHP") and Alliance Medical Group, Inc.
("Subcontractor"), concerning the employment by FOHP of Joseph Singer, M.D.
("Employee").
WHEREAS Subcontractor currently employs Employee and,
WHEREAS both Employee and Subcontractor desire to have FOHP employ
Employee according to the terms of this Agreement,
NOW, THEREFORE, FOHP, Employee and Subcontractor, for the consideration
specified in this Agreement, agree as follows:
1. TERM. FOHP, Employee and Subcontractor hereby agree that FOHP employ
Employee as Chief Medical Officer for FOHP, Inc. and as Medical Director of
First Option Health Plan of New Jersey, Inc., both for an indefinite period,
which shall be no less that two years from the date Employee begins active
employment. During his employment, Employee shall be subject to immediate
termination for egregious misconduct or loss of license. At the conclusion of
the INITIAL two year period, Employee's employment agreement shall automatically
renew itself for two year periods and thereafter UNLESS EITHER FOHP OR
SUBCONTRACTOR GIVES TO THE OTHER written notice of non-renewal AT LEAST TWELVE
MONTHS PRIOR TO THE EXPIRATION of the initial two YEAR PERIOD OR TWELVE MONTHS
PRIOR TO THE EXPIRATION OF ANY TWO YEAR RENEWAL PERIOD, AS THE CASE MAY BE.
During the period of notice of such non-renewal, Employee shall continue to work
the remainder of the THEN CURRENT term.
2. RESPONSIBILITIES. Subcontractor and Employee agree that Employee
shall devote to FOHP 80% of the total time commitment set forth in his contract
with Subcontractor.
3. SALARY. Subcontractor shall be paid $240,000.00 per year for the
salary and benefits of Employee. Providing benefits to Employee shall be the
obligation of Subcontractor and not FOHP; however, FOHP shall provide payment to
Subcontractor for those benefits included within the annual compensation set
forth above.
4. AUTOMOBILE AND EXPENSES. Employee shall be provided with an
<PAGE>
automobile, gasoline credit card, automobile insurance and maintenance, all at
FOHP's expense. Employee shall also be reimbursed for other business-related
expenses in accordance with FOHP policy for employee reimbursement.
5. CHANGES TO AGREEMENT. No written or oral modification, amendment,
addition to this Agreement, nor waiver of any of its provisions, shall be valid
or enforceable unless in writing and signed by the signatories to this
Agreement.
6. ENTIRE AGREEMENT. This Agreement contains the entire agreement among
FOHP, Employee and Subcontractor with respect to the subject matter contained
herein and supersedes any other prior or contemporaneous agreement whether oral
or in writing purporting to govern this subject matter.
7. SEPARABILITY. The invalidity or unenforceability of any provisions
of this Agreement shall in no way affect the validity or enforceability of any
other provision.
8. WAIVER. Failure to insist upon strict compliance with any of the
terms, covenants, or conditions set forth in this Agreement shall not be deemed
a waiver of such term, covenant or condition, nor shall any waiver or
relinquishment of any right or power under the Agreement at any one or more
times be deemed a waiver or relinquishment of such right or power at any other
times or times.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey and applicable federal law.
I understand and agree to the terms and conditions of the Agreement as
set forth above.
FOHP, INC. ALLIANCE MEDICAL GROUP, INC.
/S/JOHN L. ADDESSA /s/ W. Dean Kinsey
------------------ -------------------
By: John Adessa, President By: W. Dean Kinsey
and Chief Executive Officer President
Dated: 11/30/94 Dated: 11/29/94
---------------- -----------------
/S/JOSEPH SINGER
-------------------
Joseph Singer, M.D.
Dated: 11/29/94
<PAGE>
EXHIBIT 10.42
REIMBURSEMENT AGREEMENT
(CoreStates Bank Letter of Credit)
This Reimbursement Agreement (the "Agreement"), made as of April 11,
1996, by and between John L. Adessa, an individual residing at 15 Conover Lane,
Rumson, New Jersey 07760 ("Adessa"), and FOHP, Inc., a New Jersey corporation
with offices at 2 Bridge Avenue, Building 6, Red Bank, New Jersey 07701-1106
("FOHP").
RECITALS
WHEREAS, to remain in compliance with the statutory net worth and other
capital requirements of certain regulatory bodies of the State of New Jersey,
First Option Health Plan of New Jersey, Inc. ("FOHP-NJ"), a wholly-owned
subsidiary of FOHP which operates as a health maintenance organization in the
State of New Jersey, must have a certain amount of readily ascertainable
capital; and
WHEREAS, FOHP desires that Adessa secure a letter of credit (the
"Letter of Credit") from CoreStates Bank (the "Bank") in the amount of Three
Hundred and Twenty Three Thousand ($323,000.00) Dollars (the "LC Amount"), which
may be drawn upon by FOHP in the event that FOHP is required to contribute
capital to FOHP-NJ so that FOHP-NJ remains in compliance with the statutory net
worth and other capital requirements of certain regulatory bodies of the State
of New Jersey;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
representations contained herein, and for other good and valuable consideration
also recited herein, the receipt and sufficiency of which are hereby
acknowledged and agreed to, the parties hereto agree as follows:
ARTICLE ONE
CONSIDERATION FOR LETTER OF CREDIT
As consideration for Adessa securing the Letter of Credit, FOHP hereby
agrees to pay Adessa a single flat fee of two and one-half (2.5%) percent of the
LC Amount (the "Flat Fee"). The Flat Fee will be paid by FOHP by corporate
check.
ARTICLE TWO
DRAW ON LETTER OF CREDIT
Contemporaneous with any payment by Adessa to the Bank which is made as
a result of a draw against the Letter of Credit by FOHP, FOHP will become
obligated to reimburse Adessa for the amount of such draw. Interest on such
obligation will be payable monthly at a rate equal to the prime rate of a
national bank chosen by FOHP plus four (4%) percent. The principal amount of the
obligation plus all accrued interest will be payable to Adessa within nine (9)
months from the date the obligation is first incurred by FOHP.
<PAGE>
ARTICLE THREE
AFFIRMATIVE COVENANTS OF FOHP
Until this Agreement terminates by its terms, FOHP hereby covenants and
agrees that:
Section 3.1 MAINTAIN CORPORATE EXISTENCE AND QUALIFICATIONS. FOHP will
use its best efforts to maintain and preserve in full force and effect, its
corporate existence and rights, franchises, licenses and qualifications
necessary to continue its business.
Section 3.2 INFORMATION AND DOCUMENTS TO BE FURNISHED TO ADESSA. FOHP
will furnish to Adessa its annual consolidated financial statements, which have
been audited by an independent accounting firm, as soon as delivered to any
creditor of FOHP, but in no event later than one hundred and twenty (120) days
after the end of each fiscal year.
Section 3.3. ACCESS TO RECORDS AND PROPERTY. At any time and from time
to time, upon the request by Adessa, FOHP shall give the representatives of
Adessa access during normal business hours to, and permit any of them to
examine, audit, copy or make extracts from, any and all books, records and
documents in the possession of FOHP or any independent contractor relating to
FOHP's affairs, and to inspect any of its properties wherever located.
Section 3.4 BANK COSTS AND FEES. FOHP will pay all Bank costs and fees
relating to the issuance of the Letter of Credit.
Section 3.5 INDEMNIFICATION. FOHP undertakes to indemnify Adessa from
any and all liability, loss or damage in excess of the LC Amount that Adessa may
suffer as a result of any claim, demand, cost, or judgment brought or procured
against Adessa by the Bank in connection with the Letter of Credit; provided,
that FOHP shall not indemnify Adessa for any liability, loss or damage that
Adessa may suffer as a result of any claim, damage, cost or judgment brought or
procured against Adessa by the Bank, if such liability, loss or damage was
incurred in connection with Adessa's refusal to pay all or a portion of the LC
Amount to the Bank under the terms of the Letter of Credit.
Section 3.6 ORDER OF DRAW; REDUCTION IN LETTER OF CREDIT. FOHP agrees
not to draw against the Letter of Credit unless it first exhausts all its rights
against (i) any letter of credit which is payable to FOHP and secured by
physicians who are providers to FOHP-NJ and shareholders of FOHP (collectively,
"Physician Backed Letters of Credit," and individually, a "Physician Backed
Letter of Credit"), (ii) any guaranty of a hospital which is a provider to
FOHP-NJ, or guaranty of an affiliate thereof, which guarantees all or a portion
of the capital obligations of FOHP to FOHP-NJ (collectively, "Institutional
Guaranties," and individually, an "Institutional Guaranty"), (iii) the letter of
credit payable to FOHP secured by William B. Roberts with Chemical Bank in the
amount of three million ($3,000,000) dollars (the "Roberts LC"), and (iv) the
letter of credit payable to FOHP secured by Randall
-2-
<PAGE>
Krakauer with CoreStates Bank in the amount of three hundred thousand ($300,000)
dollars (the "Krakauer LC"). In addition, in the event FOHP determines that it
no longer requires all of (a) the Letter of Credit, (b) the Physician Backed
Letters of Credit, (c) the Institutional Guaranties, (d) the Roberts LC, and (e)
the Krakauer LC and thereby desires to reduce or terminate one or more of such
instruments, FOHP will reduce or terminate the Letter of Credit before reducing
or terminating any Physician Backed Letter of Credit, any Institutional
Guaranty, the Roberts LC or the Krakauer LC.
ARTICLE FOUR
NEGATIVE COVENANTS OF FOHP
Until this Agreement terminates by its terms, FOHP hereby covenants and
agrees that:
Section 4.1 WITHDRAWAL CONDITIONS. FOHP will not draw against the
Letter of Credit unless the following conditions are satisfied: (i) FOHP must
furnish written evidence to Adessa that either or both the New Jersey Department
of Insurance ("DOI") and/or the New Jersey Department of Health ("DOH") has
required that FOHP-NJ obtain additional capital to remain in compliance with the
statutory net worth and other capital requirements applicable to FOHP-NJ; and
(ii) FOHP 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 DOH and remain in
compliance with the statutory net worth and other capital requirements
applicable to it, and provides written representation to that effect.
Section 4.2 MERGER. FOHP will not, without the prior written consent of
Adessa, merge into any other entity.
Section 4.3 DISPOSITION OF ASSETS. FOHP will not, without the prior
written consent of Adessa, sell, lease, transfer, convey or otherwise dispose of
more than fifty (50%) percent of its assets during any six (6) month period.
Section 4.4 LOANS. FOHP will not, without the prior written consent of
Adessa, make loans to any person, firm or entity.
Section 4.5 TRANSFERS OF NOTES OR ACCOUNTS RECEIVABLE. FOHP will not,
without the prior written consent of Adessa, sell, assign, transfer, discount or
otherwise dispose of any accounts receivables or any promissory note payable to
it with or without recourse, except in the ordinary course of business.
Section 4.6 DIVIDENDS. FOHP will not, without the prior written consent
of Adessa, declare or pay any cash dividends or make any distribution on, or
redeem, retire or otherwise acquire directly or indirectly, any share of its
stock, other than redemptions by FOHP of its stock in accordance with the
provisions of its Amended and Restated Certificate of Incorporation.
-3-
<PAGE>
ARTICLE FIVE
BREACH OF COVENANTS
In the event FOHP materially breaches any of the covenants contained in
Article Three or Article Four of this Agreement (each a "Material Breach"),
Adessa shall provide FOHP written notice of the Material Breach (a "Notification
Letter"). Upon the receipt of a Notification Letter and until the Material
Breach discussed in the Notification Letter is remedied, FOHP shall not draw
against the Letter of Credit.
ARTICLE SIX
MISCELLANEOUS
Section 6.1 TERMINATION. This Agreement shall terminate upon the
earlier of (a) the termination of the Letter of Credit, (b) the termination of
Adessa's employment with FOHP for any reason, (c) the death of Adessa or (d)
Adessa becoming "disabled" as such term is defined in the employment agreement
between FOHP and Adessa, the effective date of which was October 27, 1995.
Section 6.2. NOTICES. All notices, requests, consents and other
communications shall be in writing and shall be delivered in person or delivered
by telex, telegram, telecopy, a nationally recognized overnight courier service
or mailed by first class registered or certified mail, postage prepaid, to the
addresses set forth above or, in any case, at such other address or addresses as
shall have been furnished in writing to all parties to this Agreement.
All such notices, requests, consents and other communications shall be
deemed to have been delivered (a) in the case of personal delivery, telex,
telegram or telecopy, on the date of such delivery, (b) in the case of a
nationally recognized overnight courier service, on the second business day
following the date of dispatch, and (c) in the case of mailing, on the fifth
business day following deposit of a notice, request, consent or other
communication, in the U.S. Mail.
Section 6.3 ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement and understanding between the parties as to the subject matter hereof
and merges and supersedes all prior discussions, agreements and understandings
of every kind and nature between them and no party hereto shall be bound by any
condition, definition, warranty, representation or agreement other than as
expressly provided for in this Agreement or as may be, on a date subsequent to
or contemporaneous with the date hereof, duly set forth in writing signed by
each of the parties hereto. This Agreement shall not be changed, modified or
amended except by a writing signed by all the parties hereto.
Section 6.4 GOVERNING LAW. This Agreement and its validity,
construction and performance shall be governed in all respects by the laws of
the State of New Jersey, without giving effect to principles of conflict of
laws. Further, in the event that any dispute arises between the parties to this
Agreement, unless otherwise set forth herein, such dispute shall be
-4-
<PAGE>
settled by a court of competent jurisdiction of the State of New Jersey or the
United States District Court for the District of New Jersey and the parties
hereto agree to submit to the jurisdiction of the courts of the State of New
Jersey or the United States District Court for the District of New Jersey.
Section 6.5 SEVERABILITY. If any provision of this Agreement or the
application of any provision hereof to any person or circumstance is held
invalid, the remainder of this Agreement and the application of such provision
to other persons or circumstances shall not be affected unless the provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
Section 6.6 BENEFIT OF PARTIES, ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
representatives, successors, heirs and assigns. This Agreement may not be
assigned by either party hereto except with the prior written consent of the
other party hereto.
Section 6.7 HEADINGS. The headings in the Sections of this Agreement
are inserted for convenience of reference only and shall not constitute a part
hereof.
Section 6.8 PUBLICITY. No news release or other public announcement
pertaining in any way to the transactions contemplated by this Agreement shall
be made by Adessa without the prior consent of FOHP.
Section 6.9 CONSTRUCTION. As used in this Agreement, words in the
singular shall be construed as including the plural and vice versa and words in
one gender shall include all genders unless the context shall clearly require
otherwise.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement or caused this Agreement to be executed by a duly authorized corporate
officer thereof as of the day and year first above written.
/S/ JOHN L. ADESSA
------------------
JOHN L. ADESSA
FOHP, INC.
By:/S/ DONALD PARISI
--------------------
DONALD PARISI
Senior Vice President and
General Counsel
-5-
<PAGE>
REIMBURSEMENT AGREEMENT
(CoreStates Bank Letter of Credit)
This Reimbursement Agreement (the "Agreement"), made as of September
13, 1996, by and between John L. Adessa, an individual residing at 15 Conover
Lane, Rumson, New Jersey 07760 ("Adessa"), and FOHP, Inc., a New Jersey
corporation with offices at 2 Bridge Avenue, Building 6, Red Bank, New Jersey
07701-1106 ("FOHP").
RECITALS
WHEREAS, in April 1996, Adessa secured a letter of credit (the "Letter
of Credit") from CoreStates Bank (the "Bank") in the amount of Three Hundred and
Twenty Three Thousand ($323,000.00) Dollars (the "LC Amount"), which may be
drawn upon by FOHP in the event that FOHP is required to contribute capital to
First Option Health Plan of New Jersey, Inc. ("FOHP-NJ") so that FOHP-NJ remains
in compliance with the statutory net worth and other capital requirements of
certain regulatory bodies of the State of New Jersey;
WHEREAS, in connection with the Letter of Credit, FOHP and Adessa
entered into a Reimbursement Agreement dated April 11, 1996 (the "First
Reimbursement Agreement"), pursuant to which FOHP agreed to reimburse Adessa for
any amounts drawn against the Letter of Credit;
WHEREAS, Adessa and FOHP would like to reduce the LC Amount of the
Letter of Credit to $100,000 (the "New LC Amount"); and
WHEREAS, in connection with the reduction of the LC Amount, Adessa and
FOHP believe it necessary to terminate the First Reimbursement Agreement and
substitute therefor this Agreement;
NOW, THEREFORE, in consideration of the mutual promises, covenants and
representations contained herein, and for other good and valuable consideration
also recited herein, the receipt and sufficiency of which are hereby
acknowledged and agreed to, the parties hereto agree as follows:
ARTICLE ONE
REPLACEMENT OF FIRST REIMBURSEMENT AGREEMENT
The First Reimbursement Agreement, and all amendments and addendums
thereto, is terminated as of the date hereof, and this Agreement shall be
substituted therefor.
<PAGE>
ARTICLE TWO
DRAW ON LETTER OF CREDIT
Contemporaneous with any payment by Adessa to the Bank which is made as
a result of a draw against the Letter of Credit by FOHP, FOHP will become
obligated to reimburse Adessa for the amount of such draw. Interest on such
obligation will be payable monthly at a rate equal to the prime rate of a
national bank chosen by FOHP plus four (4%) percent. The principal amount of the
obligation plus all accrued interest will be payable to Adessa within nine (9)
months from the date the obligation is first incurred by FOHP.
ARTICLE THREE
AFFIRMATIVE COVENANTS OF FOHP
Until this Agreement terminates by its terms, FOHP hereby covenants and
agrees that:
Section 3.1 MAINTAIN CORPORATE EXISTENCE AND QUALIFICATIONS. FOHP will
use its best efforts to maintain and preserve in full force and effect, its
corporate existence and rights, franchises, licenses and qualifications
necessary to continue its business.
Section 3.2 INFORMATION AND DOCUMENTS TO BE FURNISHED TO ADESSA. FOHP
will furnish to Adessa its annual consolidated financial statements, which have
been audited by an independent accounting firm, as soon as delivered to any
creditor of FOHP, but in no event later than one hundred and twenty (120) days
after the end of each fiscal year.
Section 3.3 ACCESS TO RECORDS AND PROPERTY. At any time and from time
to time, upon the request by Adessa, FOHP shall give the representatives of
Adessa access during normal business hours to, and permit any of them to
examine, audit, copy or make extracts from, any and all books, records and
documents in the possession of FOHP or any independent contractor relating to
FOHP's affairs, except for confidential information or materials or minutes of
meetings of the Board of Directors.
Section 3.4 BANK COSTS AND FEES. FOHP will pay all Bank costs and fees
relating to the issuance of the Letter of Credit.
Section 3.5 INDEMNIFICATION. FOHP undertakes to indemnify Adessa from
any and all liability, loss or damage in excess of the New LC Amount that Adessa
may suffer as a result of any claim, demand, cost, or judgment brought or
procured against Adessa by the Bank in connection with the Letter of Credit;
provided, that FOHP shall not indemnify Adessa for any liability, loss or damage
that Adessa may suffer as a result of any claim, damage, cost or judgment
brought or procured against Adessa by the Bank, if such liability, loss or
damage was incurred in connection with Adessa's refusal to pay all or a portion
of the New LC Amount to the Bank under the terms of the Letter of Credit.
-2-
<PAGE>
ARTICLE FOUR
WITHDRAWAL CONDITIONS
Until this Agreement terminates by its terms, FOHP hereby covenants and
agrees that it will not draw against the Letter of Credit unless the following
conditions are satisfied: (i) FOHP must furnish written evidence to Adessa that
either or both the New Jersey Department of Insurance ("DOI") and/or the New
Jersey Department of Health ("DOH") has required that FOHP-NJ obtain additional
capital to remain in compliance with the statutory net worth and other capital
requirements applicable to FOHP-NJ; and (ii) FOHP 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 DOH and remain in compliance with the statutory net worth and
other capital requirements applicable to it, and provides written representation
to that effect.
In addition to the above conditions, FOHP agrees not to draw against
the Letter of Credit unless it first exhausts all its rights against (i) any
letter of credit which is payable to FOHP and secured by physicians who are
providers to FOHP-NJ and shareholders of FOHP (collectively, "Physician Backed
Letters of Credit," and individually, a "Physician Backed Letter of Credit"),
(ii) any guaranty of a hospital which is a provider to FOHP-NJ, or guaranty of
an affiliate thereof, which guarantees all or a portion of the capital
obligations of FOHP to FOHP-NJ (collectively, "Institutional Guaranties," and
individually, an "Institutional Guaranty"), (iii) the letter of credit payable
to FOHP secured by William B. Roberts with Chemical Bank in the amount of three
million ($3,000,000) dollars (the "Roberts LC"), and (iv) the letter of credit
payable to FOHP secured by Randall Krakauer with CoreStates Bank in the amount
of three hundred thousand ($300,000) dollars (the "Krakauer LC"). In addition,
in the event FOHP determines that it no longer requires all of (a) the Letter of
Credit, (b) the Physician Backed Letters of Credit, (c) the Institutional
Guaranties, (d) the Roberts LC, and (e) the Krakauer LC and thereby desires to
reduce or terminate one or more of such instruments, FOHP will reduce or
terminate the Letter of Credit before reducing or terminating any Physician
Backed Letter of Credit, any Institutional Guaranty, the Roberts LC or the
Krakauer LC.
ARTICLE FIVE
BREACH OF COVENANTS OR CONDITIONS
In the event FOHP materially breaches any of the covenants or
conditions contained in Article Three or Article Four of this Agreement (each a
"Material Breach"), Adessa shall provide FOHP written notice of the Material
Breach (a "Notification Letter"). Upon the receipt of a Notification Letter and
until the Material Breach discussed in the Notification Letter is remedied, FOHP
shall not draw against the Letter of Credit.
-3-
<PAGE>
ARTICLE SIX
MISCELLANEOUS
Section 6.1 TERMINATION. This Agreement shall terminate upon the
termination of the Letter of Credit.
Section 6.2 NOTICES. All notices, requests, consents and other
communications shall be in writing and shall be delivered in person or delivered
by telex, telegram, telecopy, a nationally recognized overnight courier service
or mailed by first class registered or certified mail, postage prepaid, to the
addresses set forth above or, in any case, at such other address or addresses as
shall have been furnished in writing to all parties to this Agreement.
All such notices, requests, consents and other communications shall be
deemed to have been delivered (a) in the case of personal delivery, telex,
telegram or telecopy, on the date of such delivery, (b) in the case of a
nationally recognized overnight courier service, on the second business day
following the date of dispatch, and (c) in the case of mailing, on the fifth
business day following deposit of a notice, request, consent or other
communication, in the U.S. Mail.
Section 6.3 ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement and understanding between the parties as to the subject matter hereof
and merges and supersedes all prior discussions, agreements and understandings
of every kind and nature between them and no party hereto shall be bound by any
condition, definition, warranty, representation or agreement other than as
expressly provided for in this Agreement or as may be, on a date subsequent to
or contemporaneous with the date hereof, duly set forth in writing signed by
each of the parties hereto. This Agreement shall not be changed, modified or
amended except by a writing signed by all the parties hereto.
Section 6.4 GOVERNING LAW. This Agreement and its validity,
construction and performance shall be governed in all respects by the laws of
the State of New Jersey, without giving effect to principles of conflict of
laws. Further, in the event that any dispute arises between the parties to this
Agreement, unless otherwise set forth herein, such dispute shall be settled by a
court of competent jurisdiction of the State of New Jersey or the United States
District Court for the District of New Jersey and the parties hereto agree to
submit to the jurisdiction of the courts of the State of New Jersey or the
United States District Court for the District of New Jersey.
Section 6.5 SEVERABILITY. If any provision of this Agreement or the
application of any provision hereof to any person or circumstance is held
invalid, the remainder of this Agreement and the application of such provision
to other persons or circumstances shall not be affected unless the provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
-4-
<PAGE>
Section 6.6 BENEFIT OF PARTIES, ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
representatives, successors, heirs and assigns. This Agreement may not be
assigned by either party hereto except with the prior written consent of the
other party hereto.
Section 6.7 HEADINGS. The headings in the Sections of this Agreement
are inserted for convenience of reference only and shall not constitute a part
hereof.
Section 6.8 PUBLICITY. No news release or other public announcement
pertaining in any way to the transactions contemplated by this Agreement shall
be made by Adessa without the prior consent of FOHP.
Section 6.9 CONSTRUCTION. As used in this Agreement, words in the
singular shall be construed as including the plural and vice versa and words in
one gender shall include all genders unless the context shall clearly require
otherwise.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement or caused this Agreement to be executed by a duly authorized corporate
officer thereof as of the day and year first above written.
/S/ JOHN L. ADESSA
------------------
JOHN L. ADESSA
FOHP, INC.
By:/S/ DONALD PARISI
--------------------
DONALD PARISI
Senior Vice President and
General Counsel
-5-
EXHIBIT 10.44
AMENDMENT TO GUARANTY
This Amendment to the Guaranty (the "Guaranty") of certain obligations of
FOHP, Inc. (the "Obligor") to First Option Health Plan of New Jersey, Inc. (the
"Beneficiary") furnished by Entity (the "Guarantor"), is made as of December 6,
1996.
RECITALS
WHEREAS, the term of the Guaranty is to expire January 1, 1997;
WHEREAS, each of the Guarantor, Obligor and Beneficiary believes it to be
in its best interest that the term of the Guaranty be extended until the earlier
of (i) the close of the Securities Purchase Agreement dated October 24, 1996
among the Obligor, the Beneficiary and Health Systems International, Inc., or
(ii) March 31, 1997; and
WHEREAS, in consideration for the extension of the term of the Guaranty,
the Obligor will pay $100 to the Guarantor.
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:
1. DEFINITIONS. Capitalized terms used herein without definition are used
as defined in the Guaranty.
2. AMENDMENTS. Section 3.1 of the Guaranty is hereby deleted in its
entirety and the following provision shall be substituted therefor;
Section 3.1 TERM OF THE GUARANTY. The Guarantor's liability under this
Guaranty shall continue until the earlier of (i) the close of the
Securities Purchase Agreement dated October 24, 1996 among the
Obligor, the Beneficiary and Health Systems International, Inc., or
(ii) March 31, 1997.
3. CONSIDERATION. As consideration for the Guarantor extending the term of
the Guaranty as provided for herein, the Obligor hereby agrees to pay One
Hundred and 00/100 ($100.00) Dollars to the Guarantor.
<PAGE>
Page Two
IN WITNESS WHEREOF, the parties hereto executed this Amendment to the
Guaranty or caused this Amendment to the Guranty to be executed by their duly
authorized corporate officers as of the day and year first above written.
THE GUARANTOR:
BY:
----------------------------
(FIELD) Institution Name
THE OBLIGOR:
BY:
----------------------------
Donald Parisi
Senior Vice President,
Secretary and General Counsel
<PAGE>
SECOND AMENDMENT TO GUARANTY
This Second Amendment to the Guaranty (the "Guaranty") of certain
obligations of FOHP, Inc. (the "Obligor") to First Option Health Plan of New
Jersey, Inc. (the "Beneficiary") furnished by Entity (the "Guarantor"), is made
as of March 12, 1997.
RECITALS
WHEREAS, the term of the Guaranty, as previously amended, is to expire on
March 31, 1997;
WHEREAS, each of the Guarantor, Obligor and Beneficiary believes it to be
in its best interest that the term of the Guaranty be extended until the earlier
of (i) the close of the Amended and Restated Securities Purchase Agreement dated
February 10, 1997 among the Obligor, the Beneficiary and Health Systems
International, Inc., or (ii) April 30, 1997; and
WHEREAS, in consideration for the extension of the term of the Guaranty,
the Obligor will pay $33 to the Guarantor.
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:
1. DEFINITIONS. Capitalized terms used herein without definition are used
as defined in the Guaranty.
2. AMENDMENTS. Section 3.1 of the Guaranty is hereby deleted in its
entirety and the following provision shall be substituted therefor;
Section 3.1 TERM OF THE GUARANTY. The Guarantor's liability under this
Guaranty shall continue until the earlier of (i) the close of the
Amended and Restated Securities Purchase Agreement dated February 10,
1997 among the Obligor, the Beneficiary and Health Systems
International, Inc., or (ii) April 30, 1997.
3. CONSIDERATION. As consideration for the Guarantor extending the term of
the Guaranty as provided for herein, the Obligor hereby agrees to pay
thirty-three and 00/100 ($33.00) Dollars to the Guarantor.
<PAGE>
Page Two
IN WITNESS WHEREOF, the parties hereto executed this Second Amendment to
the Guaranty or caused this Second Amendment to the Guaranty to be executed by
their duly authorized corporate officers as of the day and year first above
written.
THE GUARANTOR:
BY:
-----------------------------
Field Institution Name
THE OBLIGOR:
BY:
-----------------------------
Donald Parisi
Acting President and CEO
EXHIBIT 21
NAME OF SUBSIDIARY STATE OF INCORPORATION
1. First Option Health Plan New Jersey
of New Jersey, Inc.
2. First Option Health Plan of New York
New York, Inc.
3. First Option Health Plan of Pennsylvania
Pennsylvania, Inc.
4. First Option Health Plan
of Delaware, Inc. Delaware
5. First Option Health Plan of Maryland
Maryland, Inc.
6. FOHP Agency, Inc. New Jersey
7. First Option Dental, Inc. New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FOHP,
INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL INFORMATION IN SUCH
REPORT.
</LEGEND>
<CIK> 0000937817
<NAME> FOHP, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 36,664,911
<SECURITIES> 0
<RECEIVABLES> 3,766,887
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 50,442,629
<PP&E> 3,223,032
<DEPRECIATION> 1,338,474
<TOTAL-ASSETS> 54,252,217
<CURRENT-LIABILITIES> 80,118,284
<BONDS> 0
0
0
<COMMON> 21,002
<OTHER-SE> (25,887,069)
<TOTAL-LIABILITY-AND-EQUITY> 54,252,217
<SALES> 0
<TOTAL-REVENUES> 257,376,308
<CGS> 0
<TOTAL-COSTS> 236,440,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,247
<INCOME-PRETAX> (30,744,182)
<INCOME-TAX> 924
<INCOME-CONTINUING> (30,745,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,745,106)
<EPS-PRIMARY> (14.64)
<EPS-DILUTED> (14.64)
</TABLE>
