UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 0-25944
-------------------------------------------------
FOHP, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3314813
- - --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
3501 STATE HIGHWAY 66, NEPTUNE, NEW JERSEY 07753
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(732) 918 - 6700
- - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, 99,997,000 SHARES OUTSTANDING AS OF NOVEMBER 12, 1998
<PAGE>
INDEX PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statements of Operations 4
For the periods July 1 to September 30, 1998 and 1997
For the periods January 1 to September 30, 1998 and 1997
Condensed Consolidated Statements of Shareholders' (Deficiency) Equity 5
For the period January 1, 1997 to December 31, 1997
For the period January 1, 1998 to September 30, 1998
Condensed Consolidated Statements of Cash Flows 6
For the periods January 1, 1998 to September 30, 1998
For the periods January 1, 1997 to September 30, 1997
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
Signature Page 21
2
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 29,340,408 $ 79,266,721
Accounts receivable from owners/providers, net of allowance for doubtful accounts
and retroactive terminations of $840,783 in 1998 and $922,354 in 1997 11,415,826 11,096,487
Other accounts receivable, net of allowance for doubtful accounts and retroactive
terminations of $2,757,248 in 1998 and $2,507,619 in 1997. 3,391,750 3,131,333
Prepaid and other current assets 596,845 635,548
------------------------------------------
Total current assets 44,744,829 94,130,089
Restricted Cash 57,276,629 13,846,682
Furniture and equipment (at cost, net of accumulated depreciation
and amortization of $2,685,845 and $2,349,874, respectively) 2,422,398 2,480,042
Goodwill (net of accumulated amortization of $2,019,942 and $0, respectively) 105,710,312 107,730,254
Other assets 383,379 424,164
------------------------------------------
Total Assets $ 210,537,547 $ 218,611,231
==========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Medical claims payable to owners/providers $ 13,527,494 $ 20,308,241
Other medical claims payable 31,564,153 62,614,704
Accounts payable 1,540,874 746,369
Accrued expenses 16,808,870 17,512,845
Due to Foundation Health Systems, Inc. 1,569,293 543,075
Due to QualMed, Inc. 1,269,630 1,192,716
Due to Other Affiliates 213,136 -
Unearned premium 2,282,236 7,965,658
------------------------------------------
Total current liabilities 68,775,686 110,883,608
Convertible debentures 12,145,655 11,294,406
Subordinated debentures 24,737,761 24,000,000
------------------------------------------
Total Liabilities 105,659,102 146,178,014
Shareholders' Equity:
Preferred Stock, $1.00 par value, 10,000,000 shares authorized,
none issued or outstanding
FOHP, Inc. Common Stock, $.01 par value, 100,000,000 shares authorized,
100,000,000 in 1998 and 100,000,000 in 1997 issued and outstanding 1,000,000 1,000,000
Additional paid-in capital 237,951,597 208,053,796
Accumulated deficit (134,073,152) (136,620,579)
------------------------------------------
Total shareholders' equity 104,878,445 72,433,217
------------------------------------------
Total Liabilities and Shareholders' Equity $ 210,537,547 $ 218,611,231
==========================================
</TABLE>
See accompanying notes
3
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------------------- --------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Premiums from owners/providers $ 28,710,191 $ 36,793,341 $ 95,373,859 $ 97,781,152
Other premium revenue 50,901,751 60,943,037 155,609,981 176,701,692
Other, principally administrative service fees 585,148 888,817 2,098,682 1,797,068
Interest income 1,009,308 1,200,923 3,239,760 2,891,062
------------------------------- ------------------------------
Total revenue 81,206,398 99,826,118 256,322,282 279,170,974
------------------------------- ------------------------------
EXPENSES:
Medical services to owners/providers 19,602,135 32,646,831 60,197,453 78,638,764
Other medical services 45,738,318 81,753,021 140,460,726 204,748,375
Selling, general and administrative 13,530,625 11,468,890 42,240,995 36,665,217
Management fee - QualMed, Inc. - 2,006,759 - 5,546,233
Management fee - Foundation Health Systems, Inc. 636,000 - 1,907,000 -
Amortization of goodwill 673,314 - 2,019,942 -
Depreciation and other amortization 378,679 410,408 1,117,312 1,000,678
Interest - Foundation Health Systems, Inc. 558,728 743,877 1,604,188 1,247,336
Other interest 143,029 39,265 401,285 68,256
Restructuring costs - - - 1,134,097
------------------------------ ------------------------------
Total expenses 81,260,828 129,069,051 249,948,901 329,048,956
------------------------------ ------------------------------
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (54,430) (29,242,933) 6,373,381 (49,877,982)
Provision (benefit) for income taxes (33,286) 103 3,825,954 2,139
------------------------------ ------------------------------
NET INCOME (LOSS) $ (21,144) $ (29,243,036) $ 2,547,427 $ (49,880,121)
============================== ==============================
NET INCOME (LOSS) PER COMMON SHARE $ -- $ (12.97) $ 0.03 $ (22.85)
============================== ==============================
</TABLE>
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, 1996 2,100,173 $ 21,002 $ 30,648,489 $ (56,535,558) $ (25,866,067)
Net loss for the period January 1, 1997 to
December 31, 1997 (80,085,021) (80,085,021)
Retirement of Common Stock-NJ (13,334) (133) 133 0
Conversion of debentures into shares of
FOHP, Inc. Common Stock 168,109 1,681 1,699,440 1,701,121
Reclassification of Common Stock-NJ to Common
Stock:
Common Stock-NJ (2,086,839) (20,869) (20,869)
Common Stock 2,086,839 20,869 20,869
Issued Common Stock (December 1, 1997
at $10.12 per share) 4,941,049 49,410 49,950,590 50,000,000
Issued Common Stock (December 8, 1997
at $.20 per share) 92,804,003 928,040 18,024,890 18,952,930
Goodwill 107,730,254 107,730,254
------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 100,000,000 1,000,000 208,053,796 (136,620,579) 72,433,217
Net income for the period January 1, 1998 to
September 30, 1998 2,547,427 2,547,427
Capital contributed by Foundation Health Systems, Inc. 29,897,801 29,897,801
------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 (UNAUDITED) 100,000,000 $ 1,000,000 $ 237,951,597 $(134,073,152) $ 104,878,445
==============================================================================
</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, 1998 JANUARY 1, 1997
TO SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1997
----------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 2,547,427 $ (49,880,121)
Adjustments to reconcile net income (loss) to cash flows
used in operating activities:
Depreciation and amortization 3,137,254 1,000,678
Interest cost converted to debt 1,589,010 503,459
Changes in operating assets and liabilities:
Accounts receivable from owners/providers (319,339) 52,230
Other accounts receivable (260,417) (878,108)
Prepaid expenses and other current assets 38,703 1,200,104
Restricted cash (43,429,947) (12,398,571)
Other assets 40,785 (18,283)
Medical claims payable to owners/providers (6,780,747) -
Other medical claims payable (31,050,551) 3,514,425
Accounts payable 794,505 47,394
Accrued expenses (703,975) 1,506,177
Due to Foundation Health Systems, Inc. 1,026,218 1,830,830
Due to QualMed, Inc. 76,914 -
Due to Other Affiliates 213,136 -
Unearned premium revenue (5,683,422) (3,400,222)
Other liabilities - (1,178,279)
-----------------------------------------------
Net cash flows used in operating activities (78,764,446) (58,098,287)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (1,059,668) (1,270,724)
-----------------------------------------------
Net cash used in investing activities (1,059,668) (1,270,724)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributed by Foundation Health Systems, Inc. 29,897,801 51,701,120
Payment of issue costs - (1,192,435)
-----------------------------------------------
Net cash provided by financing activities 29,897,801 50,508,685
Net decrease in cash and cash equivalents at the end of the period (49,926,313) (8,860,326)
Cash and cash equivalents at the beginning of the period 79,266,721 36,664,911
-----------------------------------------------
Cash and cash equivalents at the end of the period $ 29,340,408 $ 27,804,585
===============================================
Interest paid for the period $ 400,948 $ 43,696
===============================================
State income taxes paid for the period $ 625 $ 1,939
===============================================
</TABLE>
See accompanying notes
6
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
1. GENERAL
FOHP, Inc. (the "Company" or "FOHP") serves as the holding company for its
wholly-owned subsidiaries. The Company's principal operating subsidiary is First
Option Health Plan of New Jersey, Inc. ("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 Company include First Option Health Plan
of New York, Inc. ("FOHP-NY"), a New York corporation, First Option Health Plan
of Pennsylvania, Inc., a Pennsylvania corporation, First Option Health Plan of
Maryland, Inc. ("FOHP-MD"), a Maryland corporation, and FOHP Agency, Inc., a New
Jersey corporation, each formed in 1995. These other subsidiaries have not
commenced operations. The Board of Directors of the Company recently approved
the dissolution of FOHP-NY and FOHP-MD. First Option Health Plan of Delaware,
Inc. and First Option Dental, Inc., former inactive subsidiaries of the Company,
were dissolved during the second quarter of 1998.
The Company is a New Jersey corporation which was formed in May 1994. The
Company was formed to effect the reorganization of 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 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 Company.
Pursuant to the Reorganization, FOHP-NJ and FMCO became wholly-owned
subsidiaries of the Company. Prior to the Reorganization, the 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. In
December 1996, the Company sold all of the outstanding common stock of FMCO.
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"), the Board of
Directors of the Company discontinued the Company's expansion efforts in states
other than New Jersey, including expansion efforts in New York, Pennsylvania and
Maryland. The Company currently has no plans to expand into any other state.
Effective December 8, 1997, through the conversion of debentures (the
"Convertible Debentures") into shares of Common Stock, the Company became a 98%
owned subsidiary of Foundation Health Systems, Inc. (Note 2). The Company is
dependent upon Foundation Health Systems, Inc. ("FHS") to provide sufficient
capital to meet its operating and statutory financial requirements. It is the
intention of FHS to provide such funds, as needed.
The financial information for the nine month periods ended September 30, 1998
and September 30, 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
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.
7
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company has generated a net loss of $21,144 for the three-month period ended
September 30, 1998 and has an accumulated deficit of $134,073,152 at September
30, 1998. In order for the Company's principal operating subsidiary FOHP-NJ to
meet statutory net worth requirements set forth in its COA granted by the
Departments, the Company must generate sufficient operating profits and/or
obtain one or more capital contributions from FHS. See Note 5.
In connection with FOHP-NJ's plan to remedy its statutory net worth deficiency,
the Board of Directors of the Company approved an investment by FHS of
approximately $51.7 million into the Company. FHS invested $51,701,121 into the
Company through the purchase of a Convertible Debenture (the "Initial
Convertible Debenture") convertible into 71% of the Company's outstanding
equity, on a fully diluted basis. At the closing of the purchase of the Initial
Convertible Debenture, which occurred on April 30, 1997, FHS converted
$1,701,121 of the principal amount of the Initial Convertible Debenture into
168,109 shares of the Company's Common Stock. On December 1, 1997, FHS converted
the remaining $50,000,000 of principal into 4,941,049 shares of the Company's
Common Stock. On December 8, 1997, due to the continued operating losses of
FOHP-NJ, FHS invested an additional $29,000,000 into the Company in exchange for
a Convertible Debenture (the "New Convertible Debenture") in form and substance
substantially similar to the Initial Convertible Debenture issued to FHS on
April 30, 1997. Immediately upon receipt of the New Convertible Debenture, FHS
converted $18,952,930 of the principal amount thereof into 92,804,003 shares of
the Company's Common Stock. The price per share paid by FHS upon conversion of
the Convertible Debentures was calculated in accordance with the Amended
Securities Purchase Agreement (the "Amended Securities Purchase Agreement")
entered into by FHS, the Company and FOHP-NJ in connection with the sale of the
Initial Convertible Debenture. The Convertible Debentures accrue interest at a
variable rate adjusted on a calendar quarterly basis. Such interest is due and
payable within ten days after the end of each calendar quarter. Any such
interest not paid when due and payable is considered defaulted interest and
shall be added to the principal amount of the Convertible Debentures. At
September 30, 1998, $2,836,346 of defaulted interest is included in the
principal amount of the Convertible Debentures.
In connection with the purchase by FHS of the Company's Common Stock through the
conversion of Convertible Debentures, goodwill totaling $107,730,254 has been
recorded to reflect the excess of FHS' purchase price over the appropriate fair
value of the net assets acquired. The acquisition was treated as a purchase for
accounting purposes. The goodwill is being amortized on a straight-line basis
over 40 years. Amortization for the nine-month period ended September 30, 1998
totaling $2,019,942 has been reflected in the statement of operations.
In December 1997, FHS also contributed an additional $24,000,000 to the Company
to satisfy certain statutory net worth requirements applicable to FOHP-NJ in
return for additional subordinated debentures (the "Subordinated Debentures")
which are not convertible into the Company's Common Stock, but otherwise have
substantially the same terms as the Convertible Debentures. Further, FHS
contributed $29,897,801 to FOHP as additional paid in capital to satisfy certain
statutory net worth requirements applicable to FOHP-NJ during 1998.
8
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
The following are significant accounting policies of the Company:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include money market funds and U.S. Treasury Bills
with original maturities of three months or less when purchased. Fair market
values, 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 by including
provisions for retroactive terminations and uncollectible amounts.
RESTRICTED CASH
At September 30, 1998, FOHP-NJ was required to maintain $69,115,157 on deposit
with the New Jersey Department of Banking and Insurance (the "DOI") to meet its
"Minimum Insolvency Deposit for Healthcare Expenditures" (the "Insolvency
Deposit") under current insurance regulations. The Insolvency Deposit was
required to be funded by June 30, 1998. As of September 30, 1998, FOHP-NJ had
$55,886,738 on deposit with the DOI. FOHP-NJ has obtained approval from the DOI
to fund the remaining Insolvency Deposit on December 31, 1998. Inasmuch as the
Insolvency Deposit is based on current financial statements, the remainder of
the deposit is subject to a revised calculation as of September 30, 1998. In
addition, FOHP-NJ is required to maintain $1,200,000 cash reserve with the
Health Care Financing Administration ("HCFA") for its federal programs. As of
September 30,1998, FOHP-NJ had $1,389,891 on deposit for its federal programs.
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).
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-
9
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
DMAHS"). The contract with NJDHS-DMAHS had 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 health plans. 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 HCFA for
services provided to Medicare eligible recipients. The contract with HCFA had an
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 health plans.
OTHER REVENUE
Other revenue consists principally of fees for administrative service only
contracts, which are recognized as 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.
INCOME TAXES
The Company's operations are included in FHS' consolidated federal and state
income tax returns. The Company records income taxes in accordance with
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. Under FHS' tax allocation method, a tax provision or tax benefit is
allocated to the Company based upon a calculation of the Company's income taxes
as if it filed separate income tax returns.
PER SHARE DATA
Per share data are based on the weighted average number of shares of all classes
of common stock outstanding during the comparative nine-month periods ended
September 30 (100,000,000 in 1998 and 2,183,196 in 1997, respectively).
3. SUBORDINATED DEBT
In accordance with the terms of the Convertible Debentures and Subordinated
Debentures, repayment of principal and interest will occur only from free and
divisible surplus as reflected in the financial statements of the Company and
with written approval of the Commissioner of the DOI. In the event of
dissolution or liquidation of the Company, no repayment on these notes can be
made unless and until all other liabilities of the Company have been satisfied.
10
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
The Convertible Debentures and Subordinated Debentures are due December 31, 2002
and accrue interest at a rate determined quarterly based on the rate charged to
FHS under its credit facility (6.01% as of September 30, 1998). Interest is due
and payable within ten days after the end of each quarter, subject to the terms
noted above.
4. COMMON STOCK
In connection with the April 30, 1997 investment by FHS, the Certificate of
Incorporation of the Company was amended to, among other things, reclassify the
Company's capital stock. In October 1998, the Certificate of Incorporation of
the Company was further amended to increase the number of shares of Common Stock
authorized for issuance and decrease the number of shares of Preferred Stock
authorized for issuance. As a result, the Company currently has 500,000,000
shares of authorized capital stock, which is comprised of 499,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock,
par value $1.00 per share. In connection with the reclassification of the
Company's capital stock, each outstanding share of Common Stock-NJ was converted
into one share of Common Stock. As a result, all 2,086,839 shares of Common
Stock-NJ outstanding at the time FHS made its initial investment in FOHP were
converted into Common Stock. Prior to the April 30, 1997 investment by FHS, the
authorized capital stock of the Company totaled 100 million shares and was
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. During 1995, the Company issued 2,100,173 shares of Common
Stock-NJ. There were no additional shares of Common Stock-NJ issued during 1996.
The Certificate of Incorporation and By-Laws of the Company include significant
restrictions on the issuance and transfer of shares of Common Stock. The
Certificate of Incorporation of the Company provides that only FHS and health
care providers who enter into and maintain a provider agreement with a
subsidiary of the Company may purchase Common Stock. Acute care institutions
that enter into a provider agreement with a subsidiary of the Company may
purchase shares of Common Stock directly or through an affiliate.
The Company may, but is not obligated to, repurchase shares of Common Stock from
any shareholder whose provider agreement terminates for any reason or upon the
occurrence of certain events, as described in the Company's Certificate of
Incorporation. The determination of the repurchase price of the shares is also
described in the Company's Certificate of Incorporation.
5. STATUTORY NET WORTH AND DIVIDEND RESTRICTIONS
FOHP-NJ, pursuant to its COA to operate an HMO in New Jersey, is required to
maintain a minimum statutory net worth. In addition, the COA provides that if
FOHP-NJ's statutory net worth is, or is expected to be, less than 125% of the
minimum statutory net worth requirement applicable to it, FOHP-NJ is required to
submit to the Departments a plan of action to address the deficiency or expected
deficiency. During the first quarter of 1996, the Company 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 applicable to FOHP-NJ. FOHP-NJ addressed
this potential deficiency by submitting to the Departments 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.
11
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
As part of the plan of action, on April 30, 1997, the Company sold the Initial
Debenture to FHS in the principal amount of $51,701,120.38. The principal amount
of the Initial Debenture was converted by FHS, into 71% of FOHP's capital stock
on a fully-diluted basis.
To facilitate the sale of the Initial Debenture to FHS, the Departments agreed
to rescind their conditions attached to their approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ to submit a new plan of action if FOHP-NJ failed to increase its net
worth to 100% of the minimum statutory net worth requirement, provided that FHS
guaranteed, 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 December 1997,
the Departments further agreed to permit FOHP-NJ's net worth to remain below
100% until December 31, 1998, provided that it attain certain benchmarks each
quarter during 1998.
In December 1997, FHS contributed an additional $24 million to the Company to
satisfy certain statutory net worth requirements applicable to FOHP-NJ in return
for the New Convertible Debenture. Further, FHS contributed $29,897,801 to the
Company as additional paid in capital to satisfy certain statutory net worth
requirements applicable to FOHP-NJ during 1998. At September 30, 1998, FOHP-NJ
was approximately $11.1 million above the 100% of the minimum statutory net
worth requirement.
In addition to the minimum statutory net worth requirements, FOHP-NJ may not pay
dividends to its parent without prior approval of the Commissioner of the DOI.
6. RELATED PARTY TRANSACTION
Pursuant to an administrative management agreement entered into by FHS and FOHP
in connection with the closing of the Amended Securities Purchase Agreement with
FHS, the Company is required to pay FHS, or a designated subsidiary of FHS
(QualMed, Inc.), a monthly management fee which is currently based on allocated
corporate charges. For the nine-month period ended September 30, 1998, the
Company charged $1,907,000 to expense related to these management fees.
The amount due to FHS at September 30, 1998, represents management fees payable
and interest payable related to the Debentures. The amount due to QualMed, Inc.
at September 30, 1998 primarily represents cost allocations for claims
processing services. Amounts due to MD Health Plan, Inc. and Physician Health
Services, Inc. represent cost allocations for administrative services. Balances
due to QualMed Health & Life, Inc. and Integrated Pharmacy Services, Inc.
represent amounts due for administration of reinsurance and pharmacy services,
respectively.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The 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 Company. Prior to the Reorganization, the
Company did not conduct any business nor did it have any significant assets or
liabilities. The Company does not conduct, nor does management believe that it
will conduct, any business. All health care benefit products and services are,
and will be, provided by the 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 Company on June 8, 1995. Currently, it
is the Company's principal subsidiary.
FOHP-NJ markets a comprehensive range of health care benefit plan products,
pursuant to contractual arrangements with physicians, hospitals and other health
care providers. As of November 12, 1998, FOHP-NJ had entered into provider
agreements with 62 New Jersey hospitals and acute care institutions ("NJ Acute
Care Institutions"), approximately 11,000 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 provider agreements are not affected by whether the provider is,
or is not, a shareholder of the Company. However, some agreements with
shareholders that are NJ Acute Care Institutions and subscribers in FOHP-NJ
health plans are different from the subscriber agreements of non-shareholders in
that premium rates for those NJ Acute Care Institutions that are shareholders
are capped to be within a certain corridor (+/- 4%) from their prior year
premium rates. There are 24 NJ Acute Care Institutions with such subscriber
agreements.
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 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 an FOHP-NJ health plan for any services paid for under
such plan except for any applicable co-payment, co-insurance, deductibles 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, co-insurance and deductibles in amounts approved by
FOHP-NJ, are collected directly by the NJ Practitioner from the member.
13
<PAGE>
Subscriber contracts are entered into with large employer groups (more than 50
employees) and small employer groups (50 employees or less). 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 100 or more employees) by age, sex and industry
classification, in determining its rates for various employers in the proposed
service area. Premium revenue generated from subscriber contracts is recorded as
revenue in the month in which subscribers are entitled to service. Premiums
collected in advance are reported as unearned premium revenue.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
PREMIUM REVENUE. For the three-month period ended September 30, 1998, medical
premium revenue totaled $79.6 million or $18.1 million less than the $97.7
million of medical premium revenue generated during the same period in 1997.
This decrease was due to reduced enrollment in FOHP-NJ health benefit plans,
specifically in the Medicare line of business. Approximately 36% of medical
premium revenue generated in 1998 and approximately 37% of medical premium
revenue generated in 1997 was attributable to NJ Acute Care Institutions, which
are obligated to enroll their employees in FOHP-NJ health plans. The Company
believes that it will benefit by its inclusion in the formation of FHS'
Northeast region, which is comprised of three health plans with a total of more
than one million members in the New York tri-state area, and that such inclusion
will result in a greater percentage of future premium revenue attributable to
members who are not employees of NJ Acute Care Institutions.
OTHER REVENUE. Other revenue, principally administrative fees, for the
three-month period ended September 30, 1998 was $585 thousand compared to $889
thousand of other revenue for the same period of the prior year. Interest income
for the second quarter of 1998 was $1.0 million, as compared to the $1.2 million
generated in 1997.
MEDICAL AND HOSPITAL SERVICE EXPENSES. Total expenses attributable to medical
and hospital service for the three-month period ended September 30, 1998 were
$65.3 million or $49.1 million lower than expenses incurred for the same period
in 1997. The decrease in medical and hospital service expenses from 1997 to 1998
was primarily attributable to a decrease in enrollees in the Medicare line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare lines of business. 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 September 30, 1998 was 82.0% compared to 117.1% for the
same period in 1997. The Company believes that this decrease is attributed to
recent operational changes, specifically the implementation of a modified
provider reimbursement schedule, enhanced utilization management efforts, a
reduction of Medicare enrollment, which had a higher medical loss ratio than the
Company's other lines of business, and a reduction of the IBNR reserve due to
more complete claims payment data being available to the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $14.8 million for the three-month period ended
September 30, 1998, including a $636 thousand administrative management fee
charged by FHS and $559 thousand interest expense associated with the
Convertible and Subordinated Debentures, compared to $14.2 million incurred for
the same period in 1997.
OTHER EXPENSES. Depreciation and amortization expenses for the three-month
period ended September 30, 1998 increased by $642 thousand from the $410
thousand incurred during the same period in 1997. This increase was primarily
the result of amortization of goodwill associated with FHS' investment in the
Company.
14
<PAGE>
FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
PREMIUM REVENUE. For the nine-month period ended September 30, 1998, medical
premium revenue totaled $251.0 million or $23.5 million less than the $274.5
million of medical premium revenue generated during the same period in 1997.
This decrease was due to reduced enrollment in FOHP-NJ health benefit plans,
specifically in the Medicare line of business. Approximately 38% of medical
premium revenue generated in the first nine months of 1998 and approximately 35%
of medical premium generated in the first nine months of 1997 was attributable
to NJ Acute Care Institutions which are obligated to enroll their employees in
FOHP-NJ health plans. The Company believes that it will benefit by its inclusion
in the formation of FHS' Northeast region, which is comprised of three health
plans with a total of more than one million members in the New York tri-state
area, and that such inclusion will result in a greater percentage of future
premium revenue attributable to members who are not employees of NJ Acute Care
Institutions.
OTHER REVENUE. Other revenue, principally administrative fees, for the
nine-month period ended September 30, 1998 was $2.1 million compared to $1.8
million of other revenue for the same period of the prior year. Interest income
for the first nine months of 1998 was $3.2 million, a $300 thousand increase
from the $2.9 million generated in the first nine months of 1997. The increase
in interest income was due to the larger cash reserves related to additional
capital contributions from FHS in December 1997 and during 1998.
MEDICAL AND HOSPITAL SERVICE EXPENSES. Total expenses attributable to medical
and hospital service for the nine-month period ended September 30, 1998 were
$200.7 million or $82.7 million less than expenses incurred for the same period
in 1997. The decrease in medical and hospital service expenses from 1997 to 1998
was primarily attributable to a decrease in enrollees in the Medicare line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare lines of business. In addition, the medical loss ratio (i.e., the
percentage of each premium dollar used to pay medical expenses) for the
nine-month period ended September 30, 1998 was 79.9% compared to 103.2% for the
same period in 1997. The Company believes that this decrease is attributed to
recent operational changes, specifically the implementation of a modified
provider reimbursement schedule, enhanced utilization management efforts, a
reduction of Medicare enrollment, which had a higher medical loss ratio than the
Company's other lines of business, and a reduction of the IBNR reserve due to
more complete claims payment data being available to the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $46.2 million for the nine-month period ended
September 30, 1998, including a $1.9 million management fee payable to FHS,
compared to $44.7 million incurred for the same period in 1997.
OTHER EXPENSES. Depreciation and amortization expenses for the nine-month period
ended September 30, 1998 increased by $2.1 million from $1.0 million incurred
during the same period in 1997. This increase was mostly the result of
amortization of goodwill associated with FHS' investment in the Company.
15
<PAGE>
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 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 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 Departments 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 Departments 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 Departments in April 1996 a plan of action,
which outlined the actions taken and measures to be used by FOHP-NJ to correct
the potential deficiency.
As part of the plan of action, on April 30, 1997, FOHP sold to FHS the Initial
Debenture in the aggregate principal amount of $51,701,120.38, pursuant to the
Amended Securities Purchase Agreement. The principal amount of the Initial
Debenture was convertible, at the option of FHS, into 71% of FOHP's capital
stock on a fully diluted basis. At the closing of the purchase of the Initial
Debenture, FHS converted $1,701,120.38 of principal amount of the Initial
Debenture into 168,109 shares of Common Stock.
To facilitate the sale of the Initial Debenture to FHS, the Departments agreed
to rescind their conditions attached to their approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ to submit a new plan of action if FOHP-NJ failed to increase its net
worth to 100% of the minimum statutory net worth requirement by December 31,
1997. In addition, the Departments 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 Initial
Debenture, provided that FHS guaranteed, 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 December 1997 the Departments further agreed to permit
FOHP-NJ's net worth to remain below 100% until December 31, 1998, provided that
it attain certain benchmarks each quarter during 1998.
In connection with the sale of the Initial Debenture, FHS and FOHP entered into
a Letter Agreement (the "Letter Agreement") which clarifies FHS' 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 had the right to, at any time
prior to December 31, 1997, contribute up to $5,000,000 in additional capital to
FOHP to be used in connection with certain anticipated liabilities and
contribute 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 as of December 31,
1997. In the event that FHS contributed additional capital to FOHP to meet a Net
Capital Shortfall or projected Net Capital Shortfall in accordance with the
terms of the Amended Securities Purchase Agreement, as clarified by the Letter
Agreement, FHS would be issued additional Convertible 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 Common Stock to
all the then-current shareholders of the Company to raise capital to satisfy the
Net Capital Shortfall.
16
<PAGE>
Effective December 1, 1997, FHS converted the remaining $50 million of the
principal amount of the Initial Debenture, dated as of April 30, 1997, into
4,941,049 shares of Common Stock. After the conversion, FHS owned 5,109,158
shares of the 7,195,997 shares of Common Stock then outstanding, which
represented 71% of the fully diluted equity of the Company.
In order to satisfy certain statutory net worth requirements applicable to
FOHP-NJ and in accordance with the Amended Securities Purchase Agreement, FHS
elected on December 8, 1997 to infuse $29 million into the Company in exchange
for the New Convertible Debenture. Immediately upon receipt of the New
Convertible Debenture, FHS converted approximately $18,952,930 of the principal
amount thereof into 92,804,000 shares of the Common Stock. After the partial
conversion of the New Convertible Debenture, FHS owned 97,913,161 shares of the
100,000,000 shares of Common Stock then outstanding, which represented
approximately 98% of the fully-diluted equity of the Company.
In December 1997, FHS also contributed an additional $24 million to the Company
to satisfy certain statutory net worth requirements applicable to FOHP-NJ in
return for Subordinated Debentures. Further, FHS contributed $29,897,801 to the
Company as additional paid in capital to satisfy certain statutory net worth
requirements applicable to FOHP-NJ during 1998.
Pursuant to new HMO regulations adopted in the State of New Jersey, FOHP-NJ is
required to maintain a "Minimum Insolvency Deposit for Health Care
Expenditures." As of September 30, 1998, it is estimated that this deposit
covering two months of incurred health care expenditures will be approximately
$69 million. The initial deposit, or $12.5 million (including interest earned),
was made by September 30, 1997. An additional $4.6 million was deposited on
March 31, 1998, $9.5 million was deposited on April 2, 1998, $14.6 million was
deposited on June 30, 1998 and $14.1 million was deposited on September 30,
1998. The remainder of the deposit will be made by December 31, 1998 and is
subject to a revised calculation as of September 30, 1998.
During the fourth quarter of 1998, the Company will significantly decrease
membership in its self-insured line of business, which consists primarily of
administrative service only contracts. Management does not expect this decrease
in membership to have a material effect on operations.
IMPACT OF YEAR 2000
The Company, and its parent, FHS, recognize that the arrival of the Year 2000
requires computer systems to be able to recognize the date change from 1999 to
2000 and, like other companies, are assessing and modifying their computer
applications and business processes to provide for their continued
functionality.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, prepare invoices or
engage in normal business activities. In addition, the year 2000 problems of the
Company's providers and customers, including governmental entities, can affect
the Company's operations, which are highly dependent upon information technology
for processing claims, determining eligibility and exchanging information.
FHS, for itself and on behalf of its subsidiaries, including FOHP, has
undertaken a comprehensive review of the Year 2000 issue and its affect on the
operations of FHS and its subsidiaries. The Company has assisted FHS in
addressing the Year 2000 issue as it pertains to the Company. However, FHS will
ultimately direct how the Company addresses the Year 2000 issue and will
initially incur all the costs associated with ensuring that the Company is Year
2000 compliant, which costs may be allocated to the Company at a future point in
time.
17
<PAGE>
Set forth below is a brief description of FHS' effort to address the Year 2000
issue:
PROJECT STATUS. The Year 2000 effort for FHS has the highest priority of
technology projects. The project has dedicated resources with multiple teams to
address unique systems environments. Uniform project management techniques have
been adopted with overall oversight responsibility residing with FHS' Chief
Technology Officer, assisted by a special project manager hired by FHS. Selected
systems will be retired with the business functions being converted to Year 2000
compliant systems. A number of the FHS' systems include packaged software from
large vendors that FHS is closely monitoring to ensure that those systems are
Year 2000 compliant. FHS believes that vendors will make timely updates
available to ensure that all remaining software is Year 2000 compliant. The
remaining systems' compliance with Year 2000 will be addressed by internal
technical staff. FHS has engaged IBM to assist in the program management of the
project. FHS has also retained legal consultants to assist in the review of
insurance and FHS' obligations and rights, and intends to retain a technical
consultant to help develop contingency plans.
FHS has divided its Year 2000 effort into five phases: (1) Assessment and
Strategy; (2) Detailed Analysis and Planning; (3) Remediation; (4) Testing and
Implementation; and (5) Certification. FHS believes that Phase 1 is almost
complete. FHS has requested that each of its geographical and specialty service
divisions conduct a detailed internal self-assessment as to their compliance,
needs, risks and contingency planning, which will then be reviewed and
prioritized at the corporate level. FHS believes that it has completed
approximately 80% of Phase 2, approximately 30% of Phase 3 and approximately 15%
of Phase 4 relating to its internal technology. FHS has established the third
quarter of 1999 to complete all phases and is endeavoring to accelerate
completion ahead of that time.
The Company is a member of FHS' Northeast Region. The Company is presently
converting its claims and billing systems to a common northeast platform which
is maintained by PHS, a wholly-owned subsidiary of FHS. Therefore, PHS is
providing, on behalf of the members of FHS' Northeast Region, a Year 2000
compliance report to FHS.
THIRD PARTIES. FHS has commenced an inventory of third party relationships,
identifying them and analyzing their strategic importance to FHS and its
subsidiaries and their Year 2000 readiness. FHS expects to complete its risk
assessment for third parties in the fourth quarter of 1998. There can be no
assurances that the systems of other companies on which FHS or the Company
relies will be compliant on a timely basis, or that the failure by a third party
to be compliant would not have a material adverse effect on FHS or the Company.
COSTS. FHS is evaluating on an ongoing basis the related costs to resolve its
potential Year 2000 problems. FHS currently estimates that the total cost for
the project will exceed $17 million, excluding the costs to accelerate the
replacement of hardware or software otherwise required to be purchased by FHS,
and the use of existing personnel to assist in the project. In this quarter, the
first quarter in which FHS separately tracked the costs relating to the project,
FHS has expended approximately $5.3 million, relating to, among other things,
the cost to repair or replace software and related hardware problems, cost of
assessment, analysis and planning and internal and external communications. The
percentage of the total cost of the Year 2000 project attributable to the
Company has not yet been determined. However, the Company does not believe that
any allocation of the costs of the Year 2000 project to the Company will have a
material affect on the Company's operations.
Notwithstanding the foregoing, the costs of the project and the timetable in
which FHS plans to complete the Year 2000 compliance requirements are based on
estimates derived from utilizing numerous assumptions of future events including
the continued availability of certain resources, third party modification plans
and other factors. There can therefore be no assurance that these estimates will
be achieved and actual results and costs could differ materially from these
estimates.
18
<PAGE>
Certain insurance coverages for defense costs associated with Year 2000
litigation have already been secured under FHS' Directors and Officers Liability
Insurance policy and will be re-evaluated upon renewal of that policy. At this
time it is unclear as to extent of existing insurance coverage, if any, FHS may
have to cover potential Year 2000 costs and liabilities under its other
insurance policies. FHS is currently analyzing the availability of such coverage
under other existing and future insurance policies and products.
CONTINGENCY PLANNING. An important part of FHS' Year 2000 project involves
identifying worst case scenarios and seeking to develop contingency plans. Each
geographical and specialty services division of FHS is ranking its critical
business functions in one of four categories, from the most important (a
function which is vital to the line of business and which has a significant
impact on FHS' reputation and critical daily operations, for which an
alternative must be immediately available), to the least important (a function
which has a negligible effect on FHS' provision of services and reputation and
for which alternatives are readily available). In addition to acting to address
the most critical problems first in its remediation effort, FHS will also seek
to develop its contingency plans to prioritize the most critical business
functions. FHS has just begun its efforts in this area.
RISKS. FHS and the Company are highly dependent upon their own information
technology systems and that of their providers and customers. If FHS, the
Company or a third party failed to correct a material Year 2000 problem such
failure could result in a failure of or interruption in FHS' or the Company's
business activities and operations. Such interruptions and failures could
materially and adversely affect FHS' or the Company's results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the readiness
of third-party providers and customers, neither FHS nor the Company is able to
determine at this time whether the Year 2000 problem will have a material
adverse, effect on FHS' or the Company's results of operations, liquidity or
financial condition. FHS' Year 2000 project is expected to reduce significantly
FHS' and the Company's level of uncertainty and the possibility of significant
or long-lasting interruptions of FHS' or the Company's business operations;
however, FHS and the Company believe that it is impossible to predict all of the
areas in which material problems may arise.
Forward-looking statements contained in this Year 2000 section should be read in
connection with the Company's cautionary statements identifying important risk
factors that would cause the Company's actual results to differ materially from
those projected in these forward-looking statements, which cautionary statements
were previously filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
19
<PAGE>
ITEM 5. OTHER INFORMATION
AMENDMENT TO CERTIFICATE OF INCORPORATION OF THE COMPANY - On October
6, 1998, a Certificate of Amendment to the Company's Certificate of
Incorporation was filed with the Department of Treasury, Division of Revenue of
the State of New Jersey, pursuant to which the total number of shares of the
Company's authorized capital stock was increased from 110,000,000 shares to
500,000,000 shares. Of the 500,000,000 shares of authorized capital stock,
499,000,000 shares are classified as Common Stock and 1,000,000 shares are
classified as Preferred Stock.
HMO SUBSIDIARY MERGER - FOHP-NJ, a wholly-owned subsidiary of the
Company, and Physicians Health Services of New Jersey, Inc. ("PHS-NJ"), a
wholly-owned subsidiary of Physicians Health Services, Inc., which is a
wholly-owned subsidiary of FHS, have entered into an Agreement and Plan of
Merger dated as of October 26, 1998, pursuant to which PHS-NJ will merge with
and into FOHP-NJ (the "HMO Subsidiary Merger"). Each of FOHP-NJ and PHS-NJ
currently operates as an HMO in the State of New Jersey. The HMO Subsidiary
Merger is expected to be effective as of January 1, 1999. At the effective time
of the HMO Subsidiary Merger, FOHP-NJ will change its name to Physicians Health
Services of New Jersey, Inc. The purpose of the HMO Subsidiary Merger is to
consolidate the FHS controlled HMO operations in the State of New Jersey into
primarily one corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 - Computation of Earnings Per Share.
Exhibit 27 - Financial Data Schedule.
Reports on Form 8-K - For the three months ended September 30, 1998, the Company
filed the following Current Report on Form 8-K with the Securities and Exchange
Commission:
Form 8-K (Item 4. Changes in Registrant's Certifying Accountant), date of
earliest event reported July 13, 1998, with respect to the appointment of
Deloitte & Touche LLP as the Company's independent accountants for the year
ending December 31, 1998, as amended.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOHP, INC.
----------------------------------
(Registrant)
NOVEMBER 12, 1998 /s/ Thomas W. Wilfong
----------------- ----------------------------------
Date (Signature)**
THOMAS W. WILFONG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NOVEMBER 12, 1998 /s/ Marc M. Stein
----------------- ----------------------------------
Date (Signature)**
MARC M STEIN
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
21
<PAGE>
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------------------------------
<S> <C> <C>
Net Income (Loss) $ 2,547,427 $ (49,880,121)
====================================
Weighted average number of common shares:
Shares outstanding quarter ended 9/30/98 100,000,000
Shares outstanding at 2/28/97 2,100,173
Shares outstanding at 4/30/97 2,086,839
Shares outstanding at 6/30/97 2,254,948
Shares outstanding at 9/30/97 2,254,948
Weighted average shares outstanding 100,000,000 2,183,196
====================================
NET INCOME (LOSS) PER COMMON SHARE $ 0.03 $ (22.85)
====================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial information extracted from Form 10-Q
for the quarter ended September 30, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,340,408
<SECURITIES> 0
<RECEIVABLES> 18,405,607
<ALLOWANCES> 3,598,031
<INVENTORY> 0
<CURRENT-ASSETS> 44,744,829
<PP&E> 5,108,243
<DEPRECIATION> 2,685,845
<TOTAL-ASSETS> 210,537,547
<CURRENT-LIABILITIES> 68,775,686
<BONDS> 36,883,416
0
0
<COMMON> 1,000,000
<OTHER-SE> 103,878,445
<TOTAL-LIABILITY-AND-EQUITY> 210,537,547
<SALES> 0
<TOTAL-REVENUES> 256,322,282
<CGS> 0
<TOTAL-COSTS> 200,658,179
<OTHER-EXPENSES> 47,270,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,019,942
<INCOME-PRETAX> 6,373,381
<INCOME-TAX> 3,825,954
<INCOME-CONTINUING> 2,547,427
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,547,427
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
