UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the quarterly period ended March 31, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-25944
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FOHP, Inc.
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(Exact name of registrant as specified in its charter)
New Jersey 22-3314813
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2 Bridge Avenue, Building 6, Red Bank, New Jersey 07701-1106
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(Address of principal executive offices) (Zip Code)
(908) 842 - 5000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, 2,086,839 shares outstanding as of May 13, 1997
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations 4
For the period January 1, 1997 to March 31, 1997
For the period January 1, 1996 to March 31, 1996
Condensed Consolidated Statements of Shareholders' (Deficiency) Equity 5
For the period January 1, 1996 to December 31, 1996
For the period January 1, 1997 to March 31, 1997
Condensed Consolidated Statements of Cash Flows 6
For the period January 1, 1997 to March 31, 1997
For the period January 1, 1996 to March 31, 1996
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature Page 15
</TABLE>
2
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------------------
(unaudited) (audited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 46,525,513 $ 36,664,911
Accounts receivable from owners/ providers, net of allowance for retroactive
terminations of $538,348 in 1997 and $1,600,000 in 1996 11,580,179 8,206,471
Other accounts receivable, net of allowance for doubtful accounts of
$100,000 in 1997 and 1996 and net of allowance for retroactive terminations
of $1,061,652 and $0, respectively 2,446,287 3,666,887
Prepaids and other current assets 1,706,389 1,904,360
------------------------------
Total current assets 62,258,368 50,442,629
Long-term Assets:
Restricted Cash 1,282,195 1,265,449
Furniture and equipment (at cost, net of accumulated depreciation
and amortization of $1,579,465 and $1,338,474, respectively) 1,832,961 1,884,558
Other assets 903,957 659,581
==============================
Total Assets $ 66,277,481 $ 54,252,217
==============================
Liabilities and Shareholders' Deficiency
Current Liabilities:
Medical claims payable to owners/providers $ 18,438,349 $ 13,775,534
Other medical claims payable 73,413,918 55,370,457
Accrued expenses 7,391,666 4,626,336
Accounts payable 672,261 536,779
Unearned premium revenue 1,710,459 4,598,662
Other 80,603 1,210,516
------------------------------
Total current liabilities 101,707,256 80,118,284
Shareholders' Deficiency:
Common Stock, $.01 par value, 100,000,000 shares authorized,
Common Stock-NJ, 2,086,839 shares issued and outstanding 20,869 21,002
Additional paid-in capital 30,648,622 30,648,489
Accumulated deficit (66,099,266) (56,535,558)
------------------------------
Total shareholders' deficiency (35,429,775) (25,866,067)
------------------------------
Total liabilities and shareholders' deficiency $ 66,277,481 $ 54,252,217
==============================
</TABLE>
See accompanying notes
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
1997 1996
-----------------------------
(unaudited) (unaudited)
Revenue:
Premiums from owners/providers $ 30,925,956 $ 34,350,853
Other premium revenue 53,118,605 15,710,669
Other, principally administrative service fees 686,269 1,507,295
Interest income 607,871 337,914
-----------------------------
Total revenue 85,338,701 51,906,731
-----------------------------
Expenses:
Medical expenses to owners/providers 22,025,229 12,234,187
Other medical expenses 59,362,413 31,245,226
Selling, general and administrative 13,270,783 11,199,722
Depreciation and amortization 240,991 189,208
Interest 1,557 1,893
-----------------------------
Total expenses 94,900,973 54,870,236
-----------------------------
Net loss before provision for income taxes (9,562,272) (2,963,505)
Provision for income taxes 1,436 515
-----------------------------
Net loss $ (9,563,708) $ (2,964,020)
============================
Net loss per common share $ (4.56) $ (1.41)
============================
See accompanying notes
4
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------------- Additional Total
Par Paid-In Accumulated Shareholders
Shares Value Capital Deficit (Deficiency) Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 2,100,173 $ 21,002 $ 30,648,489 $(25,790,452) $ 4,879,039
Net loss for the period January 1, 1996 to
December 31, 1996 (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)
Net loss for the period January 1, 1997 to
March 31, 1997 (9,563,708) (9,563,708)
Retirement of common stock (13,334) (133) 133 0
------------------------------------------------------------------------
Balance at March 31, 1997 (unaudited) 2,086,839 $ 20,869 $ 30,648,622 $(66,099,266) $(35,429,775)
========================================================================
</TABLE>
See accompanying notes
5
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the period For the period
January 1, 1997 January 1, 1996
to March 31, 1997 to March 31, 1996
--------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities
<S> <C> <C>
Net loss $ (9,563,708) $ (2,964,020)
Adjustments to reconcile net loss to cash flows provided by
(used in) operating activities:
Depreciation and amortization 240,991 189,208
Provision for accounts receivable bad debts/retro terms 0 515,323
Changes in operating assets and liabilities:
Increase in accounts receivable (2,153,108) (6,973,157)
Decrease (increase) in prepaids and other current assets 197,971 (446,874)
Increase in restricted cash (16,746) (17,213)
Decrease (increase) in other assets 5,810 (102,501)
Increase in medical claims payable 22,706,276 7,628,837
Increase in accounts payable and accrued expenses 2,900,812 1,416,634
(Decrease) increase in unearned premium revenue (2,888,203) 203,113
(Decrease) increase in other current liabilities (1,129,913) 322,987
-------------------------------------
Net cash flows provided by (used in) operating activities 10,300,182 (227,663)
Cash flows from investing activities
Purchases of furniture and equipment (189,394) (309,960)
-------------------------------------
Net cash used in investing activities (189,394) (309,960)
Cash flows from financing activities
Payment of stock/bond issue costs (250,186) (210,076)
-------------------------------------
Net cash used in financing activities (250,186) (210,076)
Net increase (decrease) in cash and cash equivalents
at the end of the period 9,860,602 (747,699)
Cash and cash equivalents at the beginning of the period 36,664,911 23,882,286
-------------------------------------
Cash and cash equivalents at the end of the period $ 46,525,513 $ 23,134,587
=====================================
Interest paid for the period $ 1,557 $ 1,544
=====================================
State income taxes paid for the period $ 1,198 $ 515
=====================================
</TABLE>
See accompanying notes
6
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
1. General
FOHP, Inc. ("FOHP" or the "Holding Company") is a New Jersey corporation which
was formed in May 1994. The Holding Company was formed to effect the
reorganization (the "Reorganization") of First Option Health Plan of New Jersey,
Inc. ("FOHP-NJ"), which was consummated on June 8, 1995. The Reorganization was
completed through an exchange of FOHP-NJ's outstanding common stock for shares
of the Holding Company's Common Stock-NJ. In connection with the Reorganization,
FOHP-NJ distributed, as a dividend, all of the outstanding common stock of
First Managed Care Option, Inc. ("FMCO") to the Holding Company. Pursuant to the
Reorganization, FOHP-NJ and FMCO became wholly-owned subsidiaries of FOHP. Prior
to the Reorganization, the Holding Company did not conduct any business nor did
it have any significant assets or liabilities. The primary purpose of the
Reorganization was to facilitate the formation of additional health maintenance
organizations in states other than New Jersey. FMCO was subsequently sold to an
unrelated third party in December, 1996.
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 a health maintenance organization ("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. ("FOHP-PA"), 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 4 hereof and the conditions imposed by the New
Jersey Departments of Banking and Insurance and Health and Senior Services (the
"Departments") in connection therewith, the Board of Directors of the Holding
Company discontinued the Holding Company's expansion efforts in states other
than New Jersey, including expansion efforts in New York, Pennsylvania and
Maryland. It is not determinable at this time when, or if, the Holding Company
will continue expansion efforts in any state other than New Jersey.
The financial information for the three month period ended March 31, 1997
included herein are unaudited. Such information includes all adjustments,
including adjustments of a normal and recurring nature, which, in the opinion of
management, are necessary for a fair presentation of the Holding Company's
financial position, results of operations and cash flows. Additionally, such
information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Part I -
Item 2 hereof.
2. Basis of Presentation and Significant Accounting Policies
The Holding Company has incurred a loss of $9,563,708 for the three month period
ended March 31, 1997 and has an accumulated deficit of $66,099,266 as of March
31, 1997. In order for the Holding Company's principal operating subsidiary
FOHP-NJ to meet its 1997 statutory net worth requirements pursuant to its
7
<PAGE>
COA granted by the Departments, the Holding Company must generate sufficient
operating profits and/or obtain one or more capital infusions .
In connection with FOHP-NJ's plan to remedy the statutory net worth deficiency,
the Board of Directors of the Holding Company approved an investment by
Foundation Health Systems, Inc., a Delaware corporation formerly known as Health
Systems International, Inc. ("FHS"), of approximately $51.7 million into the
Holding Company. The shareholders of the Holding Company approved the investment
on April 16, 1997 and the investment was made and related transactions were
consummated on April 30, 1997. At closing, FHS purchased $51,701,120.38 of
principal amount of convertible debentures (the "Debentures") which are
convertible into a maximum of 71% of the Holding Company's outstanding equity,
on a fully diluted basis. FHS has the right to acquire the remaining shares of
the Holding Company's outstanding equity through December 31, 1999 by tender
offer or merger.
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 statement of operations and statement of cash flows for 1996 include the
results of the wholly-owned subsidiary, FMCO, which was sold December 31, 1996.
The revenue and operating results were not significant.
The following are significant accounting policies of the Holding Company:
Principles of Consolidation. The consolidated financial statements
include the accounts of the Holding Company and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents. Cash and cash equivalents include money
market funds and US 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 were on deposit with two commercial banks.
Accounts Receivable. Accounts receivable are reported at estimated net
realizable value including provisions for retroactive terminations and
uncollectible amounts.
Restricted Cash. FOHP-NJ is required to maintain, at a minimum,
$1,000,000 on deposit with the New Jersey Department of Banking and Insurance
(the "DOI").
Income Taxes. The Holding Company provides for income taxes based on
income recognized for financial statement purposes. The Holding Company
recognizes a deferred tax asset or liability for the expected future tax effects
attributable to the temporary differences between the tax and financial
statement basis of assets and liabilities. Deferred tax assets and liabilities
are adjusted to reflect changes in tax rates or other provisions of applicable
federal and state tax laws in the period in which such changes are enacted.
Deferred tax assets are recognized unless it is more likely than not that some
portion or all of the deferred tax assets will not be recovered.
Per Share Data. Per share data are based on the weighted average number
of shares of all classes of Common Stock outstanding during the comparative
three month periods ended March 31 (2,100,173 in 1996 and 2,095,728 in 1997).
3. Common Stock
At March 31, 1997, the authorized capital stock of the Holding Company totaled
100 million shares and was comprised of the following classes of Common Stock,
$.01 par value: Common Stock-NJ, Common
8
<PAGE>
Stock-NY, Common Stock-PA, Common Stock-DE and Unclassified Common Stock. 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 or as of March 31,
1997. In March 1997, the Holding Company redeemed 13,334 shares of Common
Stock-NJ from an NJ acute care institution (as hereinafter defined) which had
not complied with the enrollment provisions of the Certificate of Incorporation
of the Holding Company applicable to it.
In April 1997, the Certificate of Incorporation of the Holding Company was
amended to, among other things, reclassify the Holding Company's capital stock.
As a result, the Holding Company currently has 110,000,000 shares of authorized
capital stock which is comprised of 100,000,000 shares of Common Stock, par
value $.01 per share ("New Common Stock"), and 10,000,000 shares of Preferred
Stock, par value $1.00 per share. In connection with the reclassification of the
Holding Company's capital stock, each outstanding share of Common Stock-NJ was
converted into one share of New Common Stock. As a result, all 2,086,839 shares
of Common Stock-NJ were converted into New Common Stock.
At December 31, 1994, the authorized common stock of FOHP-NJ, the predecessor to
the Holding Company, totaled 10 million shares. The authorized common stock of
FOHP-NJ was comprised of the following classes of common stock, $.01 par value:
Institutional Provider Common Stock; Practitioner Provider Common Stock and
Other Provider Common Stock. During 1994, FOHP-NJ issued 1,020,051 shares of
Institutional Provider Common Stock, 511,800 shares of Practitioner Provider
Common Stock, and 40,002 shares of Other Provider Common Stock.
The Certificate of Incorporation and By-Laws of the Holding Company include
significant restrictions on the issuance and transfer of shares of New Common
Stock. The Certificate of Incorporation of the Holding Company requires that
only FHS and health care providers who enter into and maintain a provider
agreement with a subsidiary of the Holding Company may purchase New Common
Stock. Acute care institutions which enter into a provider agreement with a
subsidiary of the Holding Company may purchase shares of New Common Stock
directly or through an affiliate.
The Holding Company may, but is not obligated to, repurchase shares of New
Common Stock from any shareholder whose provider agreement terminates for any
reason or upon the occurrence of certain events, as described in the Certificate
of Incorporation. The determination of the repurchase price of the shares is
also described in the Certificate of Incorporation.
4. Statutory Net Worth & Dividend Restrictions
FOHP-NJ 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 statutory net worth requirement, FOHP-NJ is required to
submit to the DOI a plan of action to address the deficiency or expected
deficiency. During the first quarter of 1996, FOHP learned that FOHP-NJ's
statutory net worth as of December 31, 1995 may have been below 125% of the
minimum statutory net worth requirement. FOHP-NJ addressed this potential
deficiency by submitting to the DOI in April 1996 a plan of action which
outlined the actions which had been taken and measures to be used by FOHP-NJ to
correct the potential deficiency. Although FOHP-NJ implemented the plan of
action, as of March 31, 1997, FOHP-NJ was approximately $60.5 million below 125%
of the minimum statutory net worth requirement, and approximately $56.2 million
below 100% of the minimum statutory net worth requirement.
To raise the capital necessary for FOHP-NJ to remain in compliance with
applicable statutory net worth requirements, on April 30, 1997, FOHP sold to FHS
the Debentures in the aggregate principal amount of $51,701,120.38, pursuant to
the Amended and Restated Securities Purchase Agreement, dated February 10, 1997,
among FOHP, FOHP-NJ and FHS, as amended by the amendment thereto dated as of
March 13, 1997 (referred to herein, as so amended, as the "Amended Securities
Purchase Agreement"). The principal amount of the Debentures are convertible, at
the option of FHS, into up to 71% of FOHP's capital stock on a fully-diluted
basis.
9
<PAGE>
To facilitate the sale of the Debentures to FHS, the DOI agreed to rescind the
plan of action submitted by FOHP-NJ in April 1996, subject to the DOI's right to
require FOHP-NJ to submit a new plan of action if FOHP-NJ fails to increase its
net worth to 100% of the minimum statutory net worth requirement by year end. In
addition, the DOI has agreed that subsequent to December 31, 1997, FOHP-NJ will
only be required to maintain net worth at 100% of the minimum statutory net
worth requirement applicable to it, and not 125% of the minimum statutory net
worth requirement as required prior to the sale of the Debentures, provided that
FHS guarantees, in form satisfactory to the Commissioner of the DOI, that
FOHP-NJ's net worth will be maintained at a level equal to or in excess of 100%
of the minimum statutory net worth requirement applicable to FOHP-NJ.
In the event that it is determined that FOHP-NJ needs capital to meet applicable
statutory net worth requirements, FHS may, at its sole discretion, contribute
additional capital to FOHP in accordance with the Amended Securities Purchase
Agreement and a letter agreement (the "Letter Agreement") between FHS and FOHP
which clarifies FHS's right to contribute additional capital to FOHP.
5. Medical Expenses
Medical expenses include healthcare costs, medical management and reinsurance
expense (net of recoveries). During 1996 medical management and reinsurance were
classified as selling, general and administrative expenses. These expenses were
restated accordingly for 1996.
6. Management Agreement
In connection with FHS's purchase of the Debentures, FHS and FOHP entered into a
General Administrative Services Management Agreement (the "Administrative
Management Agreement"), pursuant to which FHS will oversee the management of
FOHP and will assist FOHP's management in provider contracting, utilization
review and quality assurance, employee relations, sales and marketing, and
strategic planning, among other services. FOHP will pay FHS 2% of its premium
revenue for the services provided by FHS under the Administrative Management
Agreement.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview
The Holding Company, a New Jersey corporation, was formed in May 1994 to effect
the Reorganization of FOHP-NJ into a holding company structure. The
Reorganization 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 May 1, 1997, FOHP-NJ had entered into provider agreements
with 51 New Jersey hospitals and acute care institutions ("NJ Acute Care
Institutions"), approximately 10,000 physicians licensed to practice in New
Jersey ("NJ Practitioners"), and approximately 75 other health care providers.
The provider agreements have an initial term of one year and are renewable
annually. Such agreements with NJ Acute Care Institutions and other health care
providers who are not NJ Practitioners may be terminated by mutual consent or,
after the initial one year term, by either party upon 90 days notice; agreements
with NJ Practitioners may be terminated by either party upon 60 days notice. The
agreements also may be terminated for breaches specified therein. The terms and
conditions of a provider agreement or any agreement with a subscriber are not
affected by whether the provider or subscriber is, or is not, a shareholder of
the Holding Company.
FOHP-NJ's agreements with NJ Acute Care Institutions provide for, among other
things, a reimbursement schedule setting the amounts to be paid to the NJ Acute
Care Institutions by FOHP-NJ for services provided to members. The reimbursement
schedule of a provider agreement between a NJ Acute Care Institution and FOHP-NJ
are individually negotiated. Rates paid to NJ Acute Care Institutions for
services provided to members of FOHP-NJ 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 health plan for any services paid for under
such plan except for any applicable co-payment and non-covered services.
NJ Practitioners are paid pursuant to a fee schedule established by FOHP-NJ and
are prohibited from billing members of an 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 canceled 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.
11
<PAGE>
Results of Operations
For the three months ended March 31, 1997, and 1996
Premium Revenue. For the three-month period ended March 31, 1997, medical
premium revenue totaled $84 million or $34 million more than the $50 million of
medical premium revenue generated during the same period in 1996. Medical
premium revenue generated by the Holding Company during the three-month period
ended March 31, 1997 was substantially greater than the medical premium revenue
generated by the Holding Company during the same period in 1996 due to the
significant subscriber growth experienced since the end of the first quarter of
1996. Approximately 37% of medical premium revenue generated in the first
quarter of 1997 and approximately 69% of medical premium revenue generated in
the first quarter of 1996 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 continues to benefit from current marketing efforts focused on
commercial, medicare and medicaid products which are not marketed directly to
employees of providers of FOHP-NJ.
Other Revenue. Other revenue, principally administrative fees, for the
three-month period ended March 31, 1997 was $686 thousand compared to $1.5
million of other revenue for the same period of the prior year. This decrease is
attributed to the sale of FMCO, formally a wholly-owned subsidiary of the
Holding Company, in the last quarter of 1996. Interest income for the first
quarter of 1997 was $608 thousand, a $270 thousand increase from $338 thousand
generated in the first quarter of 1996. The increase in interest income was due
to the larger cash reserves maintained by the Holding Company in the first
quarter of 1997.
Medical and Hospital Service Expenses. Total expenses attributable to medical
and hospital service for the three-month period ended March 31, 1997 were $81.4
million or $37.9 million higher than expenses incurred for the same period in
1996. The increase in medical and hospital service expenses from 1996 to 1997
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) for the three month period ended
March 31, 1997 was 96.8% compared to 86.8% for the same period in 1996. This
increase was a result of increased utilization in FOHP-NJ health benefit plans
and changes in the mix of products offered by FOHP-NJ. The Holding Company
believes that recent operational changes, specifically the implementation of a
modified provider reimbursement schedule, along with enhanced utilization
management efforts, will lower the percentage of medical expenses to premium
dollars in future quarters.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $13.3 million for the three-month period ended
March 31, 1997, including a $1.7 million management fee payable to FHS, compared
to $11.9 million incurred for the same period in 1996. The increase was
principally due to continued resource committment to infrastructure, which is
necessary to support enrollment growth.
Other Expenses. Depreciation and amortization expenses for the three-month
period ended March 31, 1997 increased by $52 thousand from $189 thousand
incurred during the same period in 1996. This increase was a result of the
significant investment in capital equipment in the end of 1996 and the beginning
of 1997.
Liquidity and Capital Resources
Gross proceeds of approximately $12,400,000, received by FOHP-NJ from the
private offering and sale of 826,708 shares of common stock in 1993, were
sufficient to cover the expenses incurred by FOHP-NJ in connection with the
formation and development of its business. In order to fund its continuing
development activities, FOHP-NJ sold 744,445 shares of common stock in a public
offering which closed on October 31, 1994. Gross proceeds received by FOHP-NJ as
a result of the sale of stock in the public offering amounted to $11,166,675.
Further, in order to fund its continuing development of HMOs in New York,
Pennsylvania and several other states, the Holding Company sold 529,120 shares
of Common Stock-NJ to NJ Practitioners in an offering which ended on September
1, 1995. Gross proceeds received by The Holding Company as a result of the sale
of Common Stock-NJ in the offering to NJ Practitioners amounted to $7,937,000.
FOHP-NJ is required by the DOI to maintain a minimum statutory net worth. In
addition, if FOHP-NJ's statutory net worth is, or is expected to be, less than
125% of the minimum statutory net worth requirement, FOHP-NJ is required to
submit to the DOI a plan of action to address the deficiency or expected
deficiency. During the first quarter of 1996, FOHP learned
12
<PAGE>
that FOHP-NJ's statutory net worth as of December 31, 1995 may have been below
125% of the minimum statutory net worth requirement. FOHP-NJ addressed this
potential deficiency by submitting to the DOI in April 1996 a plan of action
which outlined the actions which had been taken and measures to be used by
FOHP-NJ to correct the potential deficiency. Although FOHP-NJ implemented the
plan of action, as of March 31, 1997, FOHP-NJ was approximately $60.5 million
below 125% of the minimum statutory net worth requirement, and approximately
$56.2 million below 100% of the minimum statutory net worth requirement.
To raise the capital necessary for FOHP-NJ to remain in compliance with
applicable statutory net worth requirements, on April 30, 1997, FOHP sold to FHS
the Debentures in the aggregate principal amount of $51,701,120.38, pursuant to
the Amended and Restated Securities Purchase Agreement. The principal amount of
the Debentures are convertible, at the option of FHS, into up to 71% of FOHP's
capital stock on a fully-diluted basis. At the closing of the purchase of the
Debentures, FHS converted $1,701,120.38 of principal amount of Debentures into
168,109 shares of New Common Stock.
To facilitate the sale of the Debentures to FHS, the DOI agreed to rescind the
plan of action submitted by FOHP-NJ in April 1996, subject to the DOI's right to
require FOHP-NJ to submit a new plan of action if FOHP-NJ fails to increase its
net worth to 100% of the minimum statutory net worth requirement by year end. In
addition, the DOI has agreed that subsequent to December 31, 1997, FOHP-NJ will
only be required to maintain net worth at 100% of the minimum statutory net
worth requirement applicable to it, and not 125% of the minimum statutory net
worth requirement as required prior to the sale of the Debentures, provided that
FHS guarantees, in form satisfactory to the Commissioner of the DOI, that
FOHP-NJ's net worth will be maintained at a level equal to or in excess of 100%
of the minimum statutory net worth requirement applicable to FOHP-NJ.
In connection with the sale of the Debentures, FHS and FOHP entered into the
Letter Agreement which clarifies FHS's right under the Amended Securities
Purchase Agreement to infuse additional capital into FOHP in the event that it
is determined that FOHP-NJ needs capital to meet applicable statutory net worth
requirements (referred to herein as a "Net Capital Shortfall"). Pursuant to the
Letter Agreement, FHS may, at any time prior to December 31, 1997, at its own
discretion, contribute up to $5,000,000 in additional capital to FOHP to be used
in connection with certain anticipated liabilities and contribute up to such
additional amounts that may be projected to be required from time to time (based
upon reasonable projections prepared by FHS taking into account anticipated full
year 1997 operating results) in order for FOHP-NJ to meet 100% of the minimum
statutory net worth requirements (or such higher percentage that may be required
by the appropriate regulators) as of December 31, 1997. In the event that, in
accordance with the terms of the Letter Agreement, FHS contributes additional
capital to FOHP to meet a Net Capital Shortfall or projected Net Capital
Shortfall, FHS will be issued additional convertible debentures in substantially
the same form as the Debentures.
The Amended Securities Purchase Agreement also provides that if FOHP projects a
Net Capital Shortfall and FHS does not advance funds to FOHP to satisfy such Net
Capital Shortfall, FOHP may initiate a pro rata offering of its New Common Stock
to all the then-current shareholders of FOHP to raise capital to satisfy the Net
Capital Shortfall.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - See attached exhibit on following page regarding computation of
earnings per share.
Exhibit 27 - Financial Data Schedule
Reports on Form 8-K - For the three months ended March 31, 1997, the Holding
Company filed no Current Reports on Form 8-K.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
FOHP, Inc.
---------------------------------------------------------
(Registrant)
May 14, 1997 /s/ Donald Parisi
- ---------------- ---------------------------------------------------------
Date (Signature)**
Donald Parisi
Acting President and Chief Executive Officer
May 14, 1997 /s/ Marc Stein
- ---------------- ---------------------------------------------------------
Date (Signature)**
Marc Stein
Principal Financial and Accounting Officer
15
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended
March 31,
1997 1996
---------------------------
Net Income (Loss) $(9,563,708) $(2,964,020)
===========================
Weighted average number of common shares:
Shares outstanding at 2/28/97 2,100,173
Shares outstanding at 3/31/97 2,086,839
Shares outstanding quarter ended 3/31/96 2,100,173
Weighted average shares outstanding 2,095,728 2,100,173
===========================
Net (loss) per common share $ (4.56) $ (1.41)
===========================
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 46,525,513
<SECURITIES> 0
<RECEIVABLES> 303,577
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 62,258,368
<PP&E> 3,412,426
<DEPRECIATION> 1,579,465
<TOTAL-ASSETS> 66,277,481
<CURRENT-LIABILITIES> 101,707,256
<BONDS> 0
0
0
<COMMON> 20,869
<OTHER-SE> (35,450,644)
<TOTAL-LIABILITY-AND-EQUITY> 66,277,481
<SALES> 0
<TOTAL-REVENUES> 85,338,701
<CGS> 0
<TOTAL-COSTS> 81,387,642
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,557
<INCOME-PRETAX> (9,562,272)
<INCOME-TAX> 1,436
<INCOME-CONTINUING> (9,563,708)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,563,708)
<EPS-PRIMARY> (4.56)
<EPS-DILUTED> (4.56)
</TABLE>
