SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25944
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FOHP, INC.
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(Exact name of registrant as specified in
its charter)
NEW JERSEY 22-3314813
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3501 State Highway 66
Neptune, New Jersey 07753
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(Address of principal Zip Code
executive offices)
Registrant's telephone number,
including area code: (732) 918-6700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of class)
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(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of the Registrant's Common
Stock, par value $.01 per share ("Common Stock"), held by non-affiliates of the
Registrant, as of March 15, 1998, was $1,483,504. The Common Stock is the only
class of the Registrant's capital stock with shares currently issued and
outstanding. Inasmuch as shares of Common Stock are not listed on any exchange
or quoted on any quotation system, nor has there been any regular trading in
shares of Common Stock since the inception of the Registrant, the aforestated
aggregate market value of outstanding Common Stock held by non-affiliates of the
Registrant was computed by multiplying the number of shares of Common Stock held
by non-affiliates of the Registrant as of March 15, 1998, by $.72, the average
per share purchase price paid by Foundation Health Systems, Inc. in connection
with the conversion of Debentures (as defined herein) into shares of Common
Stock in 1997.
As of March 15, 1998, the number of outstanding shares of Common
Stock-NJ was 100,000,000.
Documents incorporated by Part of Form 10-K into which
reference into this report document is incorporated
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None None
Certain information included in this report and other filings of the
Registrant under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as well as information
communicated orally or in writing between the dates of such filings, contains or
may contain forward looking information that is subject to certain risks, trends
and uncertainties that could cause actual results to differ materially from
expected results. Among these risks, trends and uncertainties are matters
related to national and local economic conditions, the effect of governmental
regulation on the Registrant and its subsidiaries, the competitive environment
in which the Registrant and its subsidiaries operate, the relationship between
the Registrant and Foundation Health Systems, Inc., the holder of approximately
98% of the Registrant's Common Stock, and the ability of the Registrant and its
subsidiaries to generate or raise sufficient capital to remain in compliance
with any applicable statutory net worth or other capital requirements and to
continue to operate their businesses as currently operated. See "Description of
Business," "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and "Certain Relationships and Related Transactions."
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PART I
ITEM 1. BUSINESS.
(A) GENERAL DEVELOPMENT OF BUSINESS
FOHP, Inc., a New Jersey corporation (the "Company" or "Registrant"),
was formed in May 1994 to effect the reorganization (the "Reorganization") of
First Option Health Plan of New Jersey, Inc., a New Jersey corporation which
operates as a health maintenance organization ("HMO") in the State of New Jersey
("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 and the former holders of FOHP-NJ common
stock received shares of the Company's Common Stock-NJ ("Common Stock-NJ"). All
the outstanding shares of Common Stock-NJ were later converted on a one for one
basis into shares of Common Stock in connection with amendments made to the
Company's Certificate of Incorporation in April 1997. See "Description of
Business."
During 1997, Foundation Health Systems, Inc., a Delaware corporation
formerly known as Health Systems International, Inc. ("FHS"), purchased
convertible debentures from the Company in the aggregate principal amount of
$80,701,120.38 (each a "Debenture" and collectively, the "Debentures"). FHS
converted approximately $70,654,050 principal amount of the Debentures into
97,913,161 shares of Common Stock, which represents approximately 98% of the
outstanding Common Stock of the Company. See "Description of Business
Transaction with FHS; Description of FHS" and "Certain Relationships and Related
Transactions."
The principal executive offices of the Company are located at 3501
State Highway 66, Neptune, New Jersey 07753 and its telephone number at such
location is (732) 918-6700.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Since its inception, substantially all of the Company's revenues,
operating results and assets have been attributable to the operation of FOHP-NJ,
an HMO which operates in the State of New Jersey.
(C) DESCRIPTION OF BUSINESS
In response to exclusively profit driven managed care organizations
generally operated by large insurance companies, FOHP-NJ, a wholly-owned
subsidiary of the Company, was formed in May 1993 by certain New Jersey
hospitals and physicians to operate as a provider owned HMO in New Jersey.
FOHP-NJ received a Certificate of Authority ("COA") to operate as an HMO in New
Jersey in June 1994, and commenced operations on July 1, 1994. FOHP-NJ's
objective was to have quality medical care delivered by its network of
providers, in a cost effective manner, to as many persons as possible. To ensure
that the health care
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providers associated with FOHP-NJ would maintain control over and participate in
the management of the HMO, only health care providers associated with FOHP-NJ
were permitted to purchase shares of FOHP-NJ common stock. In addition, to
ensure that the hospitals and physicians participating in the FOHP-NJ provider
network were able to contribute equally to the governance of FOHP-NJ, the
Certificate of Incorporation of FOHP-NJ required that the Board of Directors of
FOHP-NJ initially be comprised of an equal number of physician-designated
directors and hospital-designated directors.
In early 1995, it became apparent to the Board of Directors of FOHP-NJ
that the health plans offered by FOHP-NJ would become more attractive to
prospective employer groups with employees in New Jersey and neighboring states
if the employees had access to the hospitals, physicians and other health care
providers located or practicing in the states neighboring New Jersey. As a
result, FOHP-NJ was reorganized into a holding company structure to facilitate
the formation of HMOs in states other than New Jersey. Pursuant to the
Reorganization, the Company, which was formed solely for purposes of effecting
the Reorganization, acquired all of the outstanding shares of each class of
FOHP-NJ common stock and, as a result, FOHP-NJ became a wholly-owned subsidiary
of the Company and the former holders of FOHP-NJ common stock received shares of
Common Stock-NJ, which were later converted on a one for one basis into Common
Stock.
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 requirement. FOHP-NJ's COA provides that if its net worth is, or is
expected to be, less than 125% of the minimum requirement, FOHP-NJ is required
to submit to the New Jersey Department of Banking and Insurance (the "DOI") and
the New Jersey Department of Health and Senior Services (the "DOH", and together
with the DOI, the "Departments") a plan of action to address the deficiency or
expected deficiency. FOHP-NJ addressed this potential deficiency by submitting
in April 1996 a plan of action to the Departments which outlined the actions
which had been taken and measures to be used by FOHP-NJ to correct the potential
deficiency.
Although the operational changes implemented by the Company to increase
capital in 1996 enabled the Company to reduce operating losses, the Company's
Board of Directors (the "Board" or "Board of Directors") recognized that such
changes would not allow the Company to adequately address FOHP-NJ's statutory
net worth deficiency. In order to adequately address FOHP-NJ's statutory net
worth deficiency, the Board believed that the Company needed to infuse a
significant amount of capital into FOHP-NJ. To raise the required capital, the
Company considered offering, in a public offering, securities to the providers
in the FOHP-NJ provider network. A public offering of securities was ultimately
rejected by the Board because the Board did not believe that the Company could
raise the capital needed in a public offering, given the Company's deteriorating
financial condition.
To raise the capital necessary for FOHP-NJ to remain in compliance with
its statutory net worth requirements, the Board determined that the Company
needed to effect a private
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placement of capital to an investor interested in acquiring a significant equity
position in the Company.
TRANSACTION WITH FHS
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After considering proposals submitted by several large health care
corporations, an insurer with affiliations to a provider-owned HMO, and several
private investor groups, on October 24, 1996, the Company entered into a
Securities Purchase Agreement with FHS (the "Securities Purchase Agreement"). As
a result of a significant increase in medical claims expense during the fourth
quarter of 1996, due to more complete payment data that was not available to the
Company or its actuaries prior to such quarter, FHS was not obligated to
consummate the transactions contemplated by the Securities Purchase Agreement
and therefore elected in late January 1997 to renegotiate the terms and
conditions of the Securities Purchase Agreement. Shortly thereafter, on February
10, 1997, the Securities Purchase Agreement was terminated and replaced by an
amended Securities Purchase Agreement. On March 13, 1997, the amended Securities
Purchase Agreement was amended to clarify certain provisions therein and in the
proposed Certificate of Incorporation of the Company attached as an exhibit
thereto (as so amended, the "Amended Securities Purchase Agreement"). The
Amended Securities Purchase Agreement was declared effective on March 14, 1997.
The Amended Securities Purchase Agreement, and the transactions
contemplated thereby, were approved by the shareholders of the Company on April
16, 1997. To effect the transactions contemplated by the Amended Securities
Purchase Agreement, including the sale of Debentures to FHS, the shareholders of
the Company also approved (i) certain amendments to the Certificate of
Incorporation of the Company relating to changes in the classes of securities
authorized for issuance by the Company, (ii) certain amendments to the
Certificate of Incorporation of the Company relating to changes in the rights of
shareholders of the Company, and (iii) certain amendments to the Certificates of
Incorporation and By-laws of the Company and FOHP-NJ relating to the Boards of
Directors of the Company and FOHP-NJ and changes in the composition thereof.
On April 30, 1997, pursuant to the Amended Securities Purchase
Agreement, FHS purchased from the Company a Debenture in the aggregate principal
amount of $51,701,120.38 (the "Initial Debenture"). The principal amount of the
Initial Debenture was convertible, at the option of FHS, into up to 71% of the
Company'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, which represented
approximately 7.5% of the Company's then outstanding Common Stock.
Effective December 1, 1997, FHS converted the remaining $50 million of
the principal amount of the Initial Debenture 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.
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In connection with FHS' purchase of the Initial Debenture, FHS and the
Company entered into a General Administrative Services Management Agreement (the
"Administrative Management Agreement"), pursuant to which FHS oversees the
management of the Company and assists the Company's management in provider
contracting, utilization review and quality assurance, employee relations, sales
and marketing, and strategic planning, among other services. The Company pays
FHS 2% of its premium revenue for the services provided by FHS under the
Administrative Management Agreement. See "Certain Relationships and Related
Transactions."
In addition, FHS and the Company have entered into a Management
Information Systems and Claims Processing Services Management Agreement (the
"MIS Agreement," and together with the Administration Management Agreement, the
"Management Agreements"), pursuant to which FHS would provide claims processing,
record keeping and data processing services to all the health plans offered, or
to be offered, by the Company's subsidiaries. The MIS Agreement will become
effective at FHS's option. See "Certain Relationships and Related Transactions."
In connection with the sale of the Initial Debenture, FHS and the
Company entered into a letter agreement (the "Letter Agreement") which clarifies
FHS's right under the Amended Securities Purchase Agreement to infuse additional
capital into the Company 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 could, at
any time prior to December 31, 1997, at its own discretion, contribute up to
$5,000,000 in additional capital to the Company 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 FHS
contributes additional capital to the Company 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
In order to satisfy certain statutory net worth requirements applicable
to FOHP-NJ, and in accordance with the Amended Securities Purchase Agreement as
amended by the Letter Agreement, FHS elected on December 8, 1997 to infuse $29
million into the Company in exchange for a Debenture (the "New Convertible
Debenture") in form and substance substantially similar to the Initial Debenture
issued to FHS on April 30, 1997. Immediately upon receipt of the New Convertible
Debenture, FHS converted approximately $18,952,930 of the principal amount
thereof into 92,804,003 shares of 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 outstanding, which represents approximately 98% of the
fully-diluted equity of the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation."
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As of year end 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 additional subordinated debentures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
DESCRIPTION OF FHS
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FHS is an integrated managed care organization which administers the
delivery of managed health care services. Through its subsidiaries, FHS offers
group, individual, Medicaid, Medicare and preferred provider organization
("PPO") plans; government sponsored managed care plans; and managed care
products related to administration and cost-containment, behavioral health,
dental, vision and pharmaceutical products and services. Over the past several
years, FHS has developed a diversified product line and has achieved geographic
expansion throughout the United States. FHS operates and conducts its HMO and
other businesses through its wholly and majority owned subsidiaries, such as the
Company.
FHS currently operates in the managed health care industry segment, and
in 1997 FHS operated in six different divisions (the "Divisions") within such
segment, including three regional operational divisions (the "Operational
Divisions") and three additional specialty divisions (the "Specialty
Divisions"). Such Divisions encompass the following three primary lines of
business in which FHS continues to operate: (i) health plan operations (through
the three regional Operational Divisions described below); (ii) government
contracts (through the Government Operations Division); and (iii) specialty
services (through the Specialty Services Division). FHS has discontinued its
operations in the Workers' Compensation Division (the sixth Division in which
FHS operated in 1997).
FHS is one of the largest managed health care companies in the United
States, with more than 4.3 million full-risk and administrative services only
("ASO") members through its Operational Divisions. FHS provides a comprehensive
range of health care services through HMOs organized in three Operational
Divisions located in the following geographical regions: the California Division
(encompassing only the State of California), the Eastern Division (West
Virginia, Ohio, Connecticut, Pennsylvania, New York, New Jersey and Florida) and
the Western Division (Washington, Oregon, Idaho, Colorado, New Mexico, Utah,
Arizona, Texas, Oklahoma and Louisiana). FHS also operates PPO networks
providing access to health care services in over 45 states and owns four health
and life insurance companies licensed to sell insurance in 35 states and the
District of Columbia.
FHS's HMOs market traditional HMO products to employer groups and
Medicare and Medicaid products directly to employer groups and individuals.
Health care services that are provided to FHS's commercial and individual
members include primary and specialty physician care, hospital care, laboratory
and radiology services, prescription drugs, dental and vision care, skilled
nursing care, physical therapy and mental health.
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The Eastern Division currently includes FHS operations in Ohio, West
Virginia, Connecticut, Pennsylvania, New York, New Jersey, and Florida. During
1997, FHS acquired Advantage Health, the trade name for a group of managed
health care companies headquartered in Pittsburgh, with operations in West
Virginia, Ohio and Pennsylvania; Physicians Health Services, Inc. ("PHS"), a
group of managed health care companies headquartered in Connecticut with
operations in Connecticut, New Jersey and New York; and the Company.
FHS's Northeast region, a subset of FHS's Eastern Division, was
recently formed in January 1998. FHS's Northeast region includes the Company,
PHS and M.D. Health Plan, a Connecticut based HMO.
DESCRIPTION OF FOHP-NJ
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FOHP-NJ is the Company's principal subsidiary and only subsidiary which
has obtained a COA to operate as an HMO. FOHP-NJ operates an HMO in the State of
New Jersey pursuant to a COA issued by the Departments. FOHP-NJ has established
a provider network and has entered into provider agreements with NJ
Practitioners, NJ Acute Care Institutions and NJ Other Providers (as such terms
are defined below). FOHP-NJ has entered into provider agreements with (i) 62 NJ
Acute Care Institutions located throughout New Jersey's 21 counties, (ii)
approximately 11,000 NJ Practitioners, practicing in primary care and 30 medical
specialities throughout New Jersey, and (iii) approximately 75 NJ Other
Providers. Providers contracting with FOHP-NJ are not required to be
shareholders of the Company. Currently, of the approximately 11,137 providers
who have contracted with FOHP-NJ, 2,629 are shareholders of the Company.
As used herein, a "NJ Acute Care Institution" shall mean a hospital or
acute care institution, licensed by the DOH, which has entered into a provider
agreement with FOHP-NJ to provide health care services to the members of
FOHP-NJ's health plans; a "NJ Practitioner" shall mean a member of the medical
staff of a NJ Acute Care Institution, or a physician designated by a NJ Acute
Care Institution, who is licensed to practice medicine or osteopathy in the
State of New Jersey and who has entered into a provider agreement with FOHP-NJ
to provide health care services to the members of FOHP-NJ's health plans; and
"NJ Other Provider" shall mean a health care provider or professional, other
than a NJ Practitioner or NJ Acute Care Institution, licensed, certificated or
authorized to operate or practice in the State of New Jersey, who has entered
into a provider agreement with FOHP-NJ.
Each member of FOHP-NJ's provider network has entered into a provider
agreement with FOHP-NJ. Each provider agreement has a one-year term and is
renewable annually. Such agreements with NJ Acute Care Institutions and NJ Other
Providers may be terminated by mutual consent or, after the initial one-year
term, by either party upon 90 days notice; agreements with NJ Practitioners may
be terminated by either party upon 60 days notice. The 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 NJ Acute Care Institution
shareholders as
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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. Preferred Providers (i.e., members of FOHP-NJ's
provider network) are permitted to contract with other entities, including other
health plans.
FOHP-NJ markets its services to employers, including NJ Acute Care
Institutions which are providers of health care services to FOHP-NJ and
shareholders of the Company. Pursuant to the Company's Certificate of
Incorporation, NJ Acute Care Institutions which own shares of Common Stock,
directly or through affiliates, are required to offer a FOHP-NJ health plan to
their employees under certain circumstances. In the event that a NJ Acute Care
Institution fails to comply with such requirements, the Company may elect to
repurchase the shares of Common Stock held by the NJ Acute Care Institution. See
"Marketing."
BENEFITS PROVIDED BY FOHP-NJ
FOHP-NJ currently offers two principal types of coverage plans, point
of service ("POS") and Non-POS, each having multiple variations. Under both
types of product, each new FOHP-NJ member will be required to select a primary
care physician from a list supplied by FOHP-NJ. All medical care thereafter
received by the member under a Non-POS plan, including specialist and hospital
care, will be supervised by the primary care physician who is familiar with the
member's medical history. A POS plan will permit members to utilize providers
who are not under contract with FOHP-NJ. In such circumstances, members will be
subject to higher co-payments and be responsible for payment of any difference
between what FOHP-NJ pays for covered services and the amount of the charges
incurred for such services. Generally, FOHP-NJ will pay no more than 80% and the
member will pay no less than 20% of the charges for covered services when care
is provided by non-Preferred Providers.
FOHP-NJ's health plans require precertification for hospital admissions
and diagnostic and outpatient procedures. Except for co-payments, FOHP-NJ covers
all other charges for treatment at non-Preferred Provider emergency rooms in the
event of a medical emergency or urgently needed services, as determined by
FOHP-NJ.
Generally, rates for each employer group are fixed for a twelve-month
period and may be increased for each renewal term; provided, however, that the
new rate methodology must be submitted to the DOI and there can be no assurance
that any new rate methodology will be accepted by the DOI. Renewal dates vary
among employer groups. FOHP-NJ utilizes a system of community rating by class,
adjusted (with respect to employer groups of more than 100 employees) by age,
sex and industry classification, in determining its rates for various employers
in the proposed service area. Accordingly, rates can vary between employer
groups for coverage under the same FOHP-NJ health plan. FOHP-NJ has also
established rates for the health benefits plans required by the State of New
Jersey to be offered by all HMOs that choose to market to small employer groups
(50 employees or less), which are based on overall
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community rates for New Jersey calculated by independent consulting actuaries,
as statutorily required. Proposed rates for the basic health care coverage
required by the State of New Jersey is submitted to the DOI. Rates will also be
affected by federal regulations which generally limit experience rating of group
accounts.
FOHP-NJ health plans require members to make co-payments directly to
the treating health care provider for office visits to physicians and other
health care providers, physician house calls and certain hospital emergency room
visits. All FOHP-NJ plans allow subscribers to enroll their spouses and eligible
dependents.
FOHP-NJ offers multiple coverage plans to employer groups of more than
50 employees. Some coverages in each product are subject to annual maximum
benefits. Generally, the products within each POS and Non-POS plan are
distinguished by the amount of the applicable co-payments and the obligation of
the POS member to pay to the provider the difference between what FOHP-NJ pays
and the total charges.
FOHP-NJ offers seven small employer group (50 employees or less)
products. Five of them are identical to the small business plans designed by the
Board of Directors of the Small Employer Health Benefits Program, the regulatory
agency responsible for the regulation of small business health insurance
products in New Jersey. The other two small employer group products are offered
as riders to one of the four other small employer products. Either rider makes
that product virtually identical to one of FOHP-NJ's large employer group
products.
FOHP-NJ also offers a dental plan and has expanded the coverage of the
benefits plans offered by FOHP-NJ to include vision care. Moreover, commencing
in December 1995, FOHP-NJ began offering Non-POS products to individuals as
required by the State of New Jersey. The Non-POS products being offered by
FOHP-NJ to individuals pursuant to the state requirement contain all the state
mandated benefits, including coverage for preventive care, in-patient hospital
care, substance abuse and mental health. All the products offered to individuals
by FOHP-NJ as required by the State of New Jersey require co-payments. See
"Government Regulation."
FOHP-NJ currently offers coverage for Medicaid beneficiaries in the New
Jersey counties of Essex, Cumberland, Gloucester, Hudson, Middlesex, Passaic,
Union, Mercer and Camden. In December 1995, FOHP-NJ qualified federally as an
HMO, and, as a result, currently offers coverage for Medicare beneficiaries in
New Jersey.
FOHP-NJ also provides utilization management and its PPO product to the
members of self-funded plans. In addition, FOHP-NJ provides its PPO product to a
number of other self-funded plans. FOHP-NJ also offers pharmacy, mental health
and chemical dependency management services through third parties who or which
have entered into sub-contract arrangements with FOHP-NJ.
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In addition to offering services as an HMO, FOHP-NJ offers
administrative services, including access to FOHP-NJ's provider network, to
health plans governed by the Employee Retirement Income Security Act of 1974, as
amended, such as employer groups which are self-insured, as well as to such
groups as ASOs, Third Party Administrators and Managed or Coordinated Care
Organizations ("MCOs").
ARRANGEMENTS WITH NJ PRACTITIONERS
FOHP-NJ may contract with Individual or Independent Practice
Associations (individually, an "IPA"), Physician Hospital Organizations or NJ
Practitioners. Under the terms of FOHP-NJ's practitioner provider agreement, NJ
Practitioners will provide primary and specialty care to FOHP-NJ members.
FOHP-NJ has entered into provider agreements with physicians and others who are
not shareholders to provide services to its members. NJ Practitioners will be
paid pursuant to a fee schedule established by FOHP-NJ and will only bill
members of a FOHP-NJ plan for co-payments and non-covered services, if any. The
fees paid to NJ Practitioners are based on a percentage of the fees payable
under the fee schedule developed for Medicare. Co-payments, in amounts approved
by FOHP-NJ, are collected directly by the NJ Practitioner from the member.
In addition to specifying the types of services required, each
practitioner provider agreement imposes various requirements and standards (many
of which are also mandated by applicable federal and state law) on NJ
Practitioners.
Each member selects a primary care physician from a list of primary
care physicians who are under contract with FOHP-NJ. Under the Non-POS plans
offered by FOHP-NJ, primary care physicians are required, when medically
necessary and appropriate, to refer members to specialist physicians, hospitals
and other health care providers who are under contract with FOHP-NJ.
FOHP-NJ is a named insured under the Company's comprehensive general
liability insurance, with coverage of at least $1,000,000 per occurrence and
$10,000,000 in the aggregate per year. In addition, FOHP-NJ maintains HMO
reinsurance for those situations where the acute care of a commercial, Medicaid
or Medicare member exceeds $150,000 in a calendar year, with a per member annual
maximum of $1,000,000 and lifetime maximum of $2,000,000. Individual physicians,
including any physician practicing in an IPA or other group, must maintain
professional liability insurance coverage of at least $1,000,000 per occurrence
and $3,000,000 in the aggregate per year.
ARRANGEMENTS WITH NJ ACUTE CARE INSTITUTIONS
FOHP-NJ's agreements with NJ Acute Care Institutions provide, among
other things, for a reimbursement schedule setting the amounts to be paid to the
NJ Acute Care Institutions by FOHP-NJ for services provided to members. The
reimbursement schedule of a provider agreement between a NJ Acute Care
Institution and FOHP-NJ is individually negotiated. Rates
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paid to NJ Acute Care Institutions for services provided to members of FOHP-NJ's
health plans vary from institution to institution and are based on, among other
things, the type of services provided by, and the location of, the NJ Acute Care
Institution. The agreements are site specific. Therefore, in the event of a
merger or acquisition or similar transaction between a NJ Acute Care Institution
and another institution, services provided to members of FOHP-NJ health plans
pursuant to an agreement between it and the affected NJ Acute Care Institution
are required to be provided only at the location of such institution. Also,
under the terms of such agreements, NJ Acute Care Institutions are required to
use their best efforts to notify FOHP-NJ within 48 hours or one business day of
a member's emergency admission. NJ Practitioners are required to notify and
receive prior approval from FOHP-NJ for all elective hospital admissions.
Agreements with participating NJ Acute Care Institutions prohibit the NJ Acute
Care Institutions from billing a member of a FOHP-NJ health plan for any
services paid for under such plan except for any applicable co-payment.
In addition to specifying the types of services required, each
agreement with a NJ Acute Care Institution imposes various requirements and
standards (some of which are also mandated under state and federal law) on the
NJ Acute Care Institution.
Each NJ Acute Care Institution must maintain a policy of general
liability insurance in amounts of at least $1,000,000 per occurrence and
$3,000,000 in the aggregate per year. In addition, each NJ Acute Care
Institution must maintain professional liability insurance coverage in amounts
required by the State of New Jersey. Each NJ Acute Care Institution has agreed
to indemnify FOHP-NJ, and FOHP-NJ has agreed to indemnify each such NJ Acute
Care Institution, against liability arising from its actions, except to the
extent that injury results from the negligence of the other party.
ARRANGEMENTS WITH NJ OTHER PROVIDERS
FOHP-NJ contracts with NJ Other Providers such as skilled nursing
facilities and home health care agencies to provide services to members. These
providers are paid pursuant to a program rate which is individually negotiated
with FOHP-NJ. Payment procedures, service authorization requirements,
obligations imposed on the provider, and insurance and indemnification
obligations are similar to those outlined above for NJ Acute Care Institutions.
OTHER ARRANGEMENTS INVOLVING FOHP-NJ
FOHP-NJ arranges for the provision of certain services to members
including mental health/chemical dependency, pharmacy, laboratory and radiology
through risk sharing arrangements with other entities, where feasible and not
prohibited by applicable law.
COMPETITION
The competition for prospective enrollees in prepaid health plans has
increased over the past few years as a result of the significant increase in the
number of companies offering HMO
-12-
<PAGE>
and other managed care products. For example, FOHP-NJ competes with other
prepaid health plans and with traditional health insurers as well as with
self-insured programs, PPOs and other MCOs. Other programs or entities may be
substantially better capitalized than FOHP-NJ. Moreover, a number of traditional
health insurers have begun to aggressively market HMO and other managed care
products of their own. In addition, competition may be affected if any federal
legislation or regulation with respect to health plans or health care providers
is adopted. See "Government Regulation."
Competition among HMOs and traditional and other health insurers is
based principally on benefits offered and premium cost. FOHP-NJ, which operates
an HMO, may find itself at a competitive disadvantage if its premiums are higher
than those of other HMOs or traditional health insurers. Premiums negotiated
with employers, fee schedules negotiated with hospitals, physicians and other
providers, the scope of benefits offered, unique benefit designs and access to
physicians and hospitals constitute the principal methods of competition.
MARKETING
FOHP-NJ markets its health care benefits products and services to
prospective members through full-time marketing representatives, selected
brokers and consultants and other sales professionals under the direction of a
Director of Sales. Marketing efforts are concentrated on employer groups of all
sizes with particular emphasis placed on employers with fewer than 1,000
employees.
FOHP-NJ markets its services to employers, including NJ Acute Care
Institutions which are providers to FOHP-NJ and are either shareholders of the
Company or affiliated with shareholders of the Company. Pursuant to the
Company's Certificate of Incorporation, if the existing health plan of any NJ
Acute Care Institution shareholder is a self-insured plan, such NJ Acute Care
Institution is obliged to offer a FOHP-NJ health plan to its employees as their
exclusive plan in accordance with a timetable determined by FOHP-NJ to be
feasible. The Company's Certificate of Incorporation also provides that NJ Acute
Care Institutions which are shareholders or affiliated with shareholders and
offer one or more health plans, including any self-insured plan, are obliged to
offer a FOHP-NJ health plan and have at least 50% of its employees enrolled in a
FOHP-NJ health plan by January 1, 1996, and at least 75%of its employees
enrolled in a FOHP-NJ health plan by January 1, 1997, and NJ Acute Care
Institutions which are shareholders or affiliated with shareholders and are
subject to collective bargaining agreements are required to use their best
efforts to offer a FOHP-NJ health plan to their non-union employees on a
"non-exclusive" basis. In addition, NJ Acute Care Institutions which are
shareholders or affiliated with shareholders and are subject to collective
bargaining agreements are required to use their best efforts to qualify a
FOHP-NJ health plan as the union- designated plan and to pay reasonable
deductibles or other costs to so qualify a FOHP-NJ health plan.
The provisions in the Certificate of Incorporation of the Company with
respect to the above described covenants of the NJ Acute Care Institutions which
own shares of Common
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<PAGE>
Stock or of the affiliates of NJ Acute Care Institutions which own shares of
Common Stock (collectively referred to herein as "NJ Institutional
Shareholders," and individually referred to herein as a "NJ Institutional
Shareholder") shall continue until December 31, 1999. The Company's Certificate
of Incorporation also provides that, if, upon the termination of the covenants
contained therein as they relate to a specific NJ Institutional Shareholder, the
NJ Institutional Shareholder or its affiliated NJ Acute Care Institution
proposes to offer to its employees any health plan similar to a health plan
offered by FOHP-NJ, such NJ Institutional Shareholder shall provide prior
written notice to FOHP-NJ of the material terms of the Bona Fide Offer (as
hereinafter defined) by such other health benefits plans. In the event FOHP-NJ
offers to provide an FOHP-NJ health plan containing terms at least as favorable
in all material respects to the employees of the NJ Institutional Shareholder or
its affiliated NJ Acute Care Institution as those contained in the Bona Fide
Offer, such NJ Institutional Shareholder or its affiliated NJ Acute Care
Institution shall offer such FOHP-NJ health plan to its employees on the same
basis as it would have been obligated under the covenants if such covenants had
not terminated.
In the event a NJ Institutional Shareholder or its affiliated NJ Acute
Care Institution (i) breaches any of the covenants in the proposed Certificate
of Incorporation of the Company applicable to it, or (ii) fails to provide
reimbursement rates (a) for in-patient visits at the lower of (I) the lowest
rate of reimbursement received by such provider from nongovernmental payors for
each line of business, or (II) the rate of reimbursement reflecting a reduction
(compared to calendar 1996 rates) of 5% in in-patient costs, provided that such
reduction is solely as a result of rate reductions and not through utilization
or medical management efforts, and (b) for out-patient visits at the lower of
(I) the lowest rate of reimbursement received by such providers from
nongovernmental payors for each line of business, or (II) the rate of
reimbursement reflecting a reduction (compared to calendar 1996 rates) of 10% in
out-patient costs, provided that such reduction is solely as a result of rate
reductions and not through utilization or medical management efforts, then the
Company shall have the option to purchase all or a portion of the Common Stock
held by the NJ Institutional Shareholder at a purchase price equal to the lowest
of (i) the Book Value (as such term is defined in the Company's Certificate of
Incorporation), (ii) the lowest shareholder equity reflected on the Company's
quarter-end balance sheets during the period of noncompliance giving rise to the
repurchase right, excluding any Debentures issued to FHS, prepared in accordance
with generally accepted accounting principles, divided by the number of
outstanding shares of Common Stock on a fully diluted basis, or (iii) the
original purchase price paid by such NJ Institutional Shareholder for such
shares of Common Stock. The Company shall have full discretion with respect to
its election to exercise or not to exercise the foregoing rights of repurchase
with respect to any given shareholder, taking into account any factors the
Company deems appropriate relating to such shareholder's relationships with the
Company or the Company's business or otherwise, and the Company's election to
make or not to make a repurchase from one shareholder shall have no effect on
the Company's election to make or not to make a repurchase from any other
shareholder.
On March 3, 1997, the Company redeemed the shares of one NJ Acute Care
Institution which had not complied with its enrollment obligations. The Company
is currently reviewing
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<PAGE>
whether to redeem the Company Common Stock held by other non-compliant NJ Acute
Care Institutions.
A "Bona Fide Offer" shall mean an offer of a health benefits plan which
is prepared with the objective of covering the offeror's (i) health care costs
and administrative expenses in the case of risk products, and (ii) costs of
performing administrative services and any risk assumed (e.g., reinsurance) in
the case of self funded products. An offer by any health benefits plan below the
offeror's costs for the purpose of achieving market share increases shall not
constitute a Bona Fide Offer.
GOVERNMENT REGULATION
For a tax exempt hospital or other entity to maintain its tax exempt
status under section 501(c)(3) of the Internal Revenue Code of 1986, as amended
(the "Code"), its income or assets may not be utilized to inure to the benefit
of (i) an individual considered to be an insider by virtue of his or her
relationship with the exempt organization (generally, any person having a
personal or private interest in the activities of an organization exempt under
section 501(c)(3) of the Code, including any physician employed by or with
admitting privileges at a tax exempt hospital, is often referred to as an
"insider"), or (ii) any other person. Any conduct in contravention of the
furtherance of the entity's exempt purposes may result in the loss of a health
care provider's tax exempt status. In the case of an insider, a compensation
arrangement in excess of fair market value, a below market loan, or a no rent or
below market rent arrangement may constitute private inurement, or, in the case
of any other person or entity (including, among others, vendors or key staff
personnel), an excessive benefit which is not incidental to the accomplishment
of the entity's exempt purposes may constitute private inurement.
Federal law prohibits the payment or receipt of remuneration directly
or indirectly for referring or furnishing any service for which payment may be
made under the Medicare or Medicaid programs. The applicable statute, known as
the Medicare/Medicaid Anti-Kickback Statute, prohibits, among other things, an
entity from selecting a physician or other investor based upon his, her or its
ability to make referrals or from offering such an investor (i) a greater
investment opportunity, or (ii) a disproportionately large return on a
disproportionately small investment. The statute imposes criminal as well as
other penalties for engaging in prohibited practices.
Federal law also prohibits physician referrals to clinical laboratories
in which they or members of their families have a financial interest and,
effective January 1, 1995, prohibits referrals by physicians for additional
designated health services to other entities in which physicians or their family
members have a financial interest. The Stark II Amendments specifically exclude
from the prohibition, in-network referrals by physicians who have ownership or
investment interests in, or compensation arrangements with, certain Medicare
health organizations, federally qualified HMOs, or other prepaid plans operating
under a demonstration project.
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<PAGE>
Management does not believe that any arrangements between the Company
or any of its subsidiaries and its shareholders or directors is violative of the
Medicare/Medicaid Anti-Kickback Statute or the Stark II Amendments. No Company
shareholder nor any provider of services to a subsidiary of the Company is
required to make referrals as a condition of making or maintaining an investment
interest in the Company or otherwise. If any arrangement between the Company or
a subsidiary of the Company and its shareholders or directors was found to
contravene current law or in the event any change in the law prohibits any such
arrangement, the Company would seek to restructure such arrangement.
New Jersey has also adopted legislation which prohibits physicians from
referring patients to health care services in which they or their immediate
families have a significant beneficial interest unless such interests are
disclosed in advance to such patients. The restriction does not apply to
services provided in a physician's medical office or to certain therapies or
protocols.
Federal antitrust laws generally prohibit agreements between
competitors that unreasonably restrict competition and, as such laws relate to
the Company, may prohibit, among other things, the disclosure of information by
a provider to FOHP-NJ relating to (i) the providers' rates, costs, salaries and
benefits, and (ii) the terms, prices and conditions of any managed care plan in
which the provider participates, unless such information is a matter of public
record. Such laws also may prohibit the disclosure by FOHP-NJ of the prices and
terms of any arrangement between FOHP-NJ and one of its providers to other
providers in FOHP-NJ's provider network. In an effort to prevent any such
conduct, the Company has distributed an Antitrust Compliance Manual to its NJ
Institutional Shareholders and requires that each NJ Institutional Shareholder
acknowledge the receipt of such manual. In addition, the Company includes
information regarding prohibitions under federal antitrust laws in the provider
agreements entered into by FOHP-NJ and NJ Practitioners. Any prohibited
disclosure or other violations of the federal antitrust laws could subject the
Company or FOHP-NJ or any of their directors or shareholders to monetary damages
and other penalties under such antitrust laws.
HMOs are subject to extensive governmental regulation. Among the areas
regulated are the scope of benefits required to be made available to members,
reserves required to be maintained, the manner in which members' co-payments are
structured, procedures for review of quality assurance, enrollment requirements,
the relationship between the HMO and its health care providers and the financial
condition of the HMO. Any HMO formed in New Jersey is regulated by two
governmental departments, the DOI and the DOH. The DOI monitors the financial
condition of an HMO formed in New Jersey whereas the DOH reviews quality and
access issues.
In June 1994, FOHP-NJ, the Company's only subsidiary licensed as an
HMO, received its COA from the Departments. In December 1995, FOHP-NJ received
approval from the U.S. Health Care Financing Administration of the U.S.
Department of Health and Human Services (commonly known as "HCFA") to operate as
a federally qualified HMO and, as a result, is now providing services to
Medicare beneficiaries. In February 1995, FOHP-NJ entered into an agreement with
the New Jersey Department of Human Services to provide services to Medicaid
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<PAGE>
recipients, and it has received approval to provide such services in nine New
Jersey counties.
If a New Jersey HMO fails to meet the statutory net worth requirements
applicable to it, the DOI has the power to suspend or revoke the HMO's COA.
Without a COA, an entity cannot conduct business as an HMO in New Jersey.
Federal law requires a federally qualified HMO to have a positive net
worth (however, no amount is specified) and to provide evidence of financing
until revenues are sufficient to support operations. The financial reserves of
federally qualified HMOs are required to provide adequately against the risk of
insolvency, but the amount of such reserves are not specified in applicable
regulations and is subject to the discretion of the Secretary of the United
States Department of Health and Human Services.
Provisions affecting HMOs were enacted as part of the federal "Balanced
Budget Act of 1997." The Balanced Budget Act of 1997 provides Medicare
beneficiaries with the option to enroll in a new Medicare + Choice Program which
allows provider-sponsored networks and other non-HMO entities to contract
directly with Medicare to provide services to Medicare + Choice Program
beneficiaries. The Balanced Budget Act of 1997 also includes provisions
impacting on state administered Medicaid managed care plans. These provisions
include, among others, provisions relating to increased beneficiary protection
and quality assurance.
As a result of legislation enacted by the State of New Jersey in 1991
and 1993, New Jersey HMOs must offer health care benefits plans to individuals
including hospital expense coverage and annual physical examinations for a
defined period. HMOs which do not offer coverage to individuals are subject to
an assessment. Additionally, legislation adopted in New Jersey, which became
effective on July 1, 1994, requires health insurers, including HMOs which
provide pharmacy services, to permit enrollees to select their own pharmacists
and pharmacies. In 1995, New Jersey enacted legislation which requires that a
mother delivering a baby be permitted to remain at the facility where the baby
was born for a minimum of 48 or 96 hours, depending upon the method of birth.
Legislation also was enacted in New Jersey in 1995 which requires health
insurers, including HMOs, to provide certain mandated diabetes benefits.
In 1997, the New Jersey legislature enacted the "Health Care Quality
Act." Among other things, the Health Care Quality Act provides that health
insurers, including HMOs, must disclose information regarding the terms and
conditions of their health benefit plans, as well as other related information,
to subscribers at the time of enrollment and annually thereafter. The Health
Care Quality Act also imposes on an HMO requirements with respect to the
responsibilities of the HMO's medical director, the HMO's utilization management
program and the HMO's relationship with participating providers. The legislation
also requires an HMO to offer a POS plan to every contract holder (either
directly or through a selective contracting arrangement) which would allow a
covered person to receive covered services from out-of- network health care
providers. Also in 1997, the DOH adopted extensive amendments to the New Jersey
regulations applicable to HMOs for purposes of providing additional protections
to consumers of HMO products and promote consumer confidence in HMOs. Generally,
the
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<PAGE>
amended regulations provide, among other things, that a member of an HMO plan
shall be entitled to appeal service denials to an independent medical panel and
require health plans to disclose operational information, including information
regarding financial incentives provided to physicians by HMOs in their
reimbursement procedures.
Prior to the adopting of the Health Care Quality Act, the DOH, in
consultation with the DOI, adopted new regulations (the "POS Regulations")
intended generally to apply to HMOs offering POS products. The POS Regulations
clarify the circumstances under which an HMO may contract with a health insurer,
health service corporation or medical service corporation to provide indemnity
benefits or services. Under the POS Regulations, it is necessary for an HMO
offering POS products to enter into a contractual arrangement with a licensed
indemnity carrier. In response to these regulations, FOHP-NJ has entered into a
contractual arrangement with an indemnity carrier.
Generally, rates and proposed coverage benefits must be submitted to
the DOI prior to their imposition. There can be no assurance that rates
submitted by FOHP-NJ will be accepted without objection or approved.
Finally, it is impossible to predict whether federal legislation or
regulations with respect to health plans or health care providers will be
adopted or the impact that any such federal legislation or regulations may have
on the health care delivery system.
EMPLOYEES
At March 15, 1998, the Company, through its principal subsidiary
FOHP-NJ, employed 361 full-time and 18 part-time active employees. In addition,
the Company currently utilizes the services of approximately 150 temporary
employees. The Company currently has four executive officers who are employed by
FHS pursuant to the Administrative Management Agreement. See "Certain
Relationships and Related Transactions." None of the Company's employees is
represented by a union. The Company believes that the relationships with its
employees are satisfactory.
ITEM 2. PROPERTIES.
The Company, through FOHP-NJ, subleases approximately 59,706 square
feet of office space at 3501 State Highway 66, Neptune, New Jersey 07754. The
lease has a term of approximately 3 years ending on January 30, 1999 and
contains a 5 year renewal option. The monthly rental of the lease term is
$77,120.25 plus certain additional charges and expenses, including maintenance,
utilities and taxes. The monthly rental of the 5 year option of the lease is
$84,504.16 plus certain additional charges and expenses, including maintenance,
utilities and taxes.
The Company also leases approximately 11,000 square feet of office
space at 2 Bridge Avenue, Building 6, Red Bank, New Jersey 07701-1106. The lease
has a term of 5 years
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<PAGE>
ending August 31, 1999, and a 5 year renewal option. The monthly rental ranges
from $10.00 to $12.50 per square foot over the initial term of the lease, plus
certain additional charges and expenses including common maintenance charges,
utilities and taxes. The monthly rental of the 5 year option term of the lease
ranges from approximately $14.00 to $16.00 per square foot.
The Company also leases office space in several other locations in New
Jersey, including Mt. Laurel and Roseland.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal, governmental, administrative or other
proceedings pending against the Company or its properties or to which the
Company is a party, and to the knowledge of management no such material
proceedings are threatened or contemplated except as provided below:
The Company recently received a letter from the DOH dated January 23,
1998 (the "DOH Letter"), in which the DOH states that it is in receipt of
information that indicates that the Company is in violation of a number of
provisions of the statutes and rules governing HMOs in New Jersey. In the DOH
Letter, the DOH alleges that the Company constructively terminated its provider
contracts with certain NJ Acute Care Institutions by unilaterally adding new
terms to the existing contracts between the Company and such NJ Acute Care
Institutions. More specifically, the DOH alleges that the Company had stated
that it would not honor its existing agreements with certain NJ Acute Care
Institutions for the provision of surgical services unless all anesthesiologists
at the hospitals became providers in the Company's provider network. The DOH
also states in the DOH Letter its intention to levy fines against the Company
based on the information that it has already received with respect to the
Company and on any additional information obtained by the DOH during its
investigation of the Company.
In the DOH Letter, the DOH specifically alleges that (i) the Company
violated N.J.A.C. 8:38-2.7 for failure to notify the DOH of a change in and
reduction of its provider network, which could result in a fine up to $1,000 per
day for the period commencing December 15, 1997 and continuing to the date of
the DOH Letter, (ii) the Company violated N.J.A.C. 8:38-3.5(a) for failure to
provide members currently undergoing a course of treatment with at least thirty
(30) days prior notice of termination from the network of the provider who was
treating the member, which could result in a fine of up to $1,000 per affected
member per day for the period commencing December 15, 1997 until the day the
Company reversed its denial of the treatment of the member (the DOH identified
only two incidents involving members in the DOH Letter), and (iii) the Company
violated N.J.A.C. 8:38-3.5(b) for failure to provide notice to all its health
care providers with whom it has contracted and its members who reside in the
counties where the alleged terminated NJ Acute Care Institutions are located or
in the counties adjacent to such counties, which could result in a fine of up to
$1,000 per affected member per day and up to $1,000 per affected health care
provider per day for the period commencing December 15, 1997 and continuing to
the date of the DOH Letter.
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The Company has complied with all requests from the DOH and, based on
the information provided to the DOH, the Company does not believe there is a
basis for the DOH to levy any fines against the Company. The Company is
currently attempting to resolve this matter with the DOH without the need of a
formal hearing. In addition, because the January 23, 1998 letter was a
constructive notice of fines, and not an actual notice of fines, it is not
possible to predict at this time what fines or other actions, if any, the DOH
will levy or take against the Company or the amount or extent of any such fines
or actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter ended December 31, 1997, no matter was
submitted to a vote of security holders of the Company through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
There is no public market for the Company's Common Stock, and the
Company has no current intention of listing or including any shares of Common
Stock on a stock exchange or quotation system since shares of Common Stock can
be held by or transferred only to providers to the Company's subsidiaries which
operates as HMOs, FHS and the Company. Accordingly, it is improbable that a
market will develop for the Company's securities.
In addition, pursuant to the Amended Securities Purchase Agreement, FHS
may effect, in 1999, a transaction which would result in each shareholder of the
Company, other than FHS, being required, through a merger, to exchange or sell
his, her or its shares of Common Stock for cash or securities of an issuer other
than the Company. FHS has informed the Company that, at such time, it will
comply with applicable disclosure obligations under the Exchange Act, including
without limitation applicable requirements under Rule 13e-3. See "Certain
Relationships and Related Transactions."
Since its inception, the Company has not sold any shares of Common
Stock for any price other than $15, other than shares issued to FHS upon
conversion of Debentures. In addition, the Company is not aware of any sale of
Common Stock by one provider to another for any price other than $15.
As of March 15, 1998, 100,000,000 shares of Common Stock were
outstanding and were held by 2,630 shareholders of the Company, including
97,913,161 shares held by FHS, 1,006,717 shares held by 41 NJ Acute Care
Institutions, 1,036,786 shares held by 2585 NJ Practitioners, 40,002 shares held
by 2 NJ Other Providers and 3,334 shares held by an IPA.
The Company has not paid any cash dividends on Company Common Stock.
The Board of Directors of the Company will review the Company's dividend policy
from time to time to determine the desirability and feasibility of paying cash
dividends after giving consideration to the Company's earnings, financial
condition, capital requirements and such other factors as the Board of Directors
of the Company deems relevant.
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ITEM 6. SELECTED FINANCIAL DATA.
Prior to the Reorganization, the Company did not conduct any business
nor did it have any significant assets or liabilities. Accordingly, the selected
financial information as of December 31, 1994 and 1993 and for the year ended
December 31, 1994 and for the period from May 19, 1993 (date of inception of
FOHP-NJ) to December 31, 1993 is derived from the financial statements of
FOHP-NJ, the Company's principal subsidiary. The data should be read in
conjunction with the consolidated financial statements of the Company and the
related notes thereto and management's discussion and analysis thereof appearing
elsewhere in this report.
The selected financial information as of December 31, 1997, 1996 and
1995, and for the years ended December 31, 1997, 1996 and 1995, is derived from
the consolidated financial statements of the Company and should be read in
conjunction with the consolidated financial statements of the Company and the
related notes thereto and management's discussion and analysis thereof appearing
elsewhere in this report.
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SUMMARIZED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
FINANCIAL DATA OF
FOHP-NJ
PREDECESSOR TO
THE COMPANY
----------------------------
DECEMBER 31, DECEMBER 31,
---------------------------------------------------- ----------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalentS $ 79,266,721 $36,664,911 $23,882,286 $13,030,295 $10,503,225
Goodwill 107,730,254 -- -- -- --
Other 31,614,256 17,587,306 13,479,547 7,050,765 390,965
------------ ----------- ----------- ----------- -----------
Total Assets $218,611,231 $54,252,217 $37,361,833 $20,081,060 $10,894,190
============ =========== =========== =========== ===========
Liabilities and Shareholders'
(Deficiency) Equity:
Liabilities:
Medical claims payable,
accounts payble,
accrued expenses and
other current liabilities 110,883,608 80,118,284 32,482,794 8,101,405 576,125
Convertible debentures 11,294,406 -- -- -- --
Subordinated debentures 24,000,000 -- -- -- --
------------ ----------- ------------- ------------ ----------
Total Liabilities $146,178,014 $80,118,284 $32,482,794 $8,101,405 $576,125
FOHP-NJ Practitioner
Provider Common
STOCK, $.01 par value,
511,800 shares issued and
outstanding (at December
31, 1994, redeemable at
$3,900,000) -- -- -- 7,677,000 --
Common stock subscribed -- -- -- -- 12,400,000
Shareholders' (Deficiency)
Equity:
Preferred Stock, $1.00 par value,
10,000,000 shares authorized,
none issued and outstanding -- -- -- -- --
FOHP, Inc. Common Stock
$.01 par value, 100,000,000
shares authorized, 100,000,000
issued and outstanding 1,000,000 21,002 21,002 -- --
</TABLE>
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SUMMARIZED BALANCE SHEET INFORMATION (CONT.)
<TABLE>
<CAPTION>
FINANCIAL DATA OF
FOHP-NJ
PREDECESSOR TO
THE COMPANY
DECEMBER 31, DECEMBER 31,
---------------------------------------- --------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FOHP-NJ Other Provider Common
Stock, $.01 par value,
40,002 Shares issued and
outstanding -- -- -- 400 --
Additional paid-in capital 208,053,796 30,648,489 30,648,489 15,341,561 --
Deficit (136,620,579) (56,535,558) (25,790,452) (11,049,507) (2,081,935)
------------ ----------- ----------- ----------- -----------
Total Shareholders'
(Deficiency) Equity 72,433,217 (25,866,067) 4,879,039 4,302,655 10,318,065
------------ ----------- ----------- --------- -----------
Total Liabilities and Shareholders'
(Deficiency) Equity $218,611,231 $54,252,217 $37,361,833 $20,081,060 $10,894,190
============ =========== =========== =========== ===========
</TABLE>
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Summarized Statement of Operations Information
<TABLE>
<CAPTION>
FINANCIAL DATA OF FOHP-NJ
PREDECESSOR TO THE COMPANY
-------------------------------
FOR THE PERIOD
FROM MAY 18,
FOR THE YEAR 1993 (DATE OF
FOR THE YEAR ENDED ENDED INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
----------------------------- ------------ ------------
REVENUE: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Premium revenue from owners/providers $132,575,894 $135,544,112 $ 63,630,797 $5,639,724 --
Other premium revenue 239,132,416 112,125,670 38,819,206 1,803,624 --
Interest and other income 5,697,921 9,706,526 8,844,036 1,177,171 $22,151
------------ ------------ ------------ ---------- ----------
Total Revenue $377,406,231 $257,376,308 $111,294,039 $8,620,519 $22,151
------------ ------------ ------------ ---------- ----------
Expenses:
Medical services to owners/providers 63,882,103 37,026,903 17,319,035 1,405,175 --
Hospital services to owners/providers 64,553,166 30,156,890 11,068,909 808,920 --
Other medical services 148,812,233 105,551,393 38,548,819 2,727,694 --
Other hospital services 101,521,355 63,760,554 24,637,249 1,710,020 --
Selling, general and administrative 55,106,022 50,734,197 32,638,106 10,624,261 2,063,239
Management Fee - Qualmed, Inc. 7,502,899 -- -- -- --
Interest - Foundation Health
Systems, Inc. 1,790,410 -- -- -- --
Restructuring Costs 12,825,570 -- -- -- --
Other 1,495,355 890,553 1,751,263 240,021 40,847
------------- ------------ ----------- ----------- ----------
Total Expenses $457,489,113 $288,120,490 $125,963,381 $17,588,091 $2,104,086
------------ ------------ ------------ ----------- ----------
Provision for state income taxes 2,139 924 71,603 -- --
--------------- -------------- ------------ ----------- ----------
Net loss ($80,085,021) ($30,745,106) ($14,740,945) ($8,967,572) ($2,081,935)
-------------- ------------ ------------ ---------- -----------
Net loss per common share ($9.18) ($14.64) ($8.65) ($8.40) ($2.52)
=============== ============= ============= =========== ===========
</TABLE>
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<PAGE>
ITEM 7. 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 March 15, 1998, FOHP-NJ had entered into
provider agreements with 62 NJ Acute Care Institutions, approximately 11,000 NJ
Practitioners and approximately 75 NJ Other Providers. The provider agreements
have an initial term of one-year and are renewable annually. Such agreements
with NJ Acute Care Institutions and NJ Other Providers may be terminated by
mutual consent or, after the initial one-year term, by either party upon 90 days
notice; agreements with NJ Practitioners may be terminated by either party upon
60 days notice. The agreements also may be terminated for breaches specified
therein. The terms and conditions of provider agreements are not affected by
whether the provider is, or is not, a shareholder of the Company. However, some
agreements with NJ Institutional Shareholders as subscribers in FOHP-NJ health
plans are different from the subscriber agreements of non-shareholders in that
premium rates for those NJ Institutional 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's health plans vary
from institution to institution and are based on, among other things, the type
of services provided by, and the location of, the NJ Acute Care Institution.
Agreements with participating NJ Acute Care Institutions prohibit the NJ Acute
Care Institutions from billing a member of a
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FOHP-NJ health plan for any services paid for under such plan except for any
applicable co-payment, 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 a FOHP-NJ health plan except
for co-payments and non-covered services, if any. The fees paid to NJ
Practitioners are based on a percentage of the fees payable under the fee
schedule developed for Medicare. Co-payments, co-insurance and deductibles 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 (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 cancelled by the
employer group upon 30 days written notice. Under these contracts, FOHP-NJ has
agreed to provide the employer groups with health coverage in return for a
monthly premium. FOHP-NJ utilizes a system of community rating by class,
adjusted (with respect to employer groups of 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 YEARS ENDED DECEMBER 31, 1997 AND 1996
PREMIUM REVENUE. For the year ended December 31, 1997, medical premium
revenue totalled $371.7 million or $124.0 million more than the $247.7 million
of medical premium revenue generated during the same period in 1996. This
increase was due to the significant subscriber growth experienced during 1997.
Approximately 35% of medical premium revenue generated in 1997 and approximately
55% of medical premium revenue generated in 1996 was attributable to NJ Acute
Care Institutions which are obligated to enroll their employees in FOHP-NJ
health plans. The 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 as FOHP-NJ's current sales efforts continue to
focus on products which are not sold directly to employees of providers of
FOHP-NJ. The Company also believes that it will benefit by its inclusion in the
formation of FHS's 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.
OTHER REVENUE. Other revenue, principally administrative fees, for the
year ended December 31, 1997 was $2.0 million compared to $7.9 million of other
revenue for 1996. This decrease is attributed to the sale of First Managed Care
Option, Inc. ("FMCO"), formally a wholly owned subsidiary of the Company, in the
last quarter of 1996. Interest income for 1997 was $3.7 million, a $1.9 million
increase from the $1.8 million generated in 1996. The increase
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<PAGE>
in interest income was due to the larger cash reserves related to the
investments by FHS in April 1997 and December 1997.
MEDICAL AND HOSPITAL SERVICE EXPENSES. Total expenses attributable to
medical and hospital service for the year ended December 31, 1997 were $378.8
million or $142.4 million higher than expenses incurred 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 year ended December 31, 1997 was 101.9%
compared to 95.5% for the same period in 1996. This increase was a result of
increased utilization in FOHP-NJ health benefit plans, changes in the mix of
products offered by FOHP-NJ, the inability of FOHP-NJ to effectively control
utilization and referrals due to the significant growth of FOHP-NJ, and an
increase in claims reserves to an amount at the high end of an actuarially
determined range to reflect the Company's recent fluctuation of claims payment
patterns. The 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 the future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totalled $64.4 million for the year ended December 31,
1997, including a $7.5 million administrative management fee charged by FHS and
$1.8 million interest expense associated with the Debentures, compared to $50.8
million incurred for the same period in 1996. This increase in selling, general
and administrative expenses was the result of the significant growth of FOHP-NJ.
OTHER EXPENSES. Depreciation and amortization expenses for the year
ended December 31, 1997 increased by $525 thousand from the $879 thousand
incurred during 1996. This increase was mostly the result of the costs of the
Debentures being amortized in 1997 (approximately $309,000).
RESTRUCTURING COSTS. During 1997, the Company estimated and recorded a
restructuring charge of $12.8 million in connection with the FHS investment. The
plan of restructuring primarily includes costs associated with work force
reductions, terminations of existing contracts, asset impairment and the
write-off of unamortized merger costs.
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
PREMIUM REVENUE. For the year ended December 31, 1996, medical premium
revenue totalled $247.7 million or $145.2 million more than the $102.5 million
of medical premium revenue generated in 1995. Medical premium revenue generated
by the Company during the year ended December 31, 1996 was substantially greater
than the medical premium revenue generated by the Company during the year ended
December 31, 1995, due to the significant subscriber growth experienced during
1996. Approximately 55% of medical premium revenue generated in 1996 and
approximately 62% of medical premium revenue generated in 1995 was
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<PAGE>
attributable to NJ Acute Care Institutions which are obligated to enroll their
employees in FOHP-NJ health plans. The Company believes that the percentage of
medical premium revenue attributable to NJ Acute Care Institutions will continue
to decrease as FOHP-NJ's operations grow and FOHP-NJ begins to fully benefit
from current marketing efforts focused on individuals and businesses who or
which are not providers to FOHP-NJ.
OTHER REVENUE. Other revenue, principally administrative fees, for the
year ended December 31, 1996 was $7.9 million compared to $7.6 million of other
revenue for the prior year. This increase is attributed to the subscriber growth
in self-insured products. Interest income for 1996 was $1.8 million, a $600
thousand increase from the $1.2 million generated in 1995. The increase in
interest income was due to the larger cash reserves maintained by the Company in
1996.
MEDICAL AND HOSPITAL SERVICE EXPENSES. Total expenses attributable to
medical and hospital service for the year ended December 31, 1996 were $236.4
million or $144.8 million higher than expenses incurred in 1995. The increase in
medical and hospital service expenses from 1995 to 1996 was primarily
attributable to a significant increase in enrollees in FOHP-NJ health plans. In
addition, the medical loss ratio (i.e., the percentage of each premium dollar
used to pay medical expenses) increased in 1996 to 95.5% from 89.3% in 1995 as a
result of increased enrollment in the FOHP-NJ health plans, changes in the mix
of products offered by FOHP-NJ, and the inability of FOHP-NJ to effectively
control utilization and referrals due to the significant growth of FOHP-NJ. The
Company believes that recent operational changes, specifically the
implementation of a modified provider reimbursement schedule, will lower the
percentage of medical expenses to premium dollars in the future.
Medical and hospital services expenses are accrued in the period the
services are provided to enrollees in the FOHP-NJ health plans, based in part on
estimates for hospital and other health care services which have been incurred
but not yet reported. Such estimates are monitored and reviewed by the Company
and its outside actuaries on a monthly basis and, as settlements are made or
estimates adjusted, the resulting differences are reflected in the current
period of operations. Since FOHP-NJ recently began operations and lacks
significant historical experience, the estimate for incurred but not yet
reported medical claims is based on currently available industry ratios of
claims expense to premiums earned as well as the limited historical experience
of FOHP-NJ.
In the spring of 1996, the number of medial claims that had not been
processed by the Company's outside claims administrator increased as a result of
the significant increase in the number of enrollees in the FOHP-NJ health plans
and the systems limitations of the outside claims administrator engaged by the
Company to provide claims processing services. During the summer of 1996, the
Company, in an effort to decrease the medical claims backlog, began using its
own personnel to process claims and notified its outside claims administrator
that if it did not begin to perform its claims processing functions in a manner
consistent with the contract between FOHP-NJ and the claims administrator,
FOHP-NJ would withhold payments as permitted in such contract. As a result of
these efforts, the medical claims backlog was reduced
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<PAGE>
significantly by the end of the third quarter of 1996. In the fourth quarter of
1996, the Company and its outside actuaries, using the same methodology for
estimating incurred but not yet reported medical claims as had been used since
FOHP-NJ first received its COA to operate as an HMO, but having more claims
payment data available as a result of the reduction in the claims backlog,
realized that they had previously underestimated the amount of the incurred but
not yet reported medical claims and that, as a result, FOHP-NJ's incurred but
not yet reported reserve needed to be increased in the fourth quarter of 1996 by
approximately $13 million. The Company believes that the underestimation was due
to FOHP-NJ's limited historical experience and the high medical costs related to
new products offered by FOHP-NJ, such as Medicare products, Medicaid products
and small business products.
As a result of a significant increase in medical claims expenses during
the fourth quarter of 1996, including an increase in FOHP-NJ's incurred but not
yet reported reserve by approximately $13 million due to more complete payment
data that were not available to the Company and its outside actuaries prior to
such quarter, and the deterioration of the financial condition of the Company as
a result of continuing losses generated from operations due to over utilization
and high medical costs related to FOHP-NJ's Medicare products, Medicaid products
and small business products, the Company's losses for the year ended December
31, 1996 increased by approximately $17 million from the approximately $14
million reported by the Company as of September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totalled $50.8 million for the year ended December 31,
1996 compared to $32.6 million incurred in 1995. This increase was the result of
the significant growth of the Company and FOHP-NJ.
OTHER EXPENSES. Depreciation and amortization expenses for the year
ended December 31, 1996 increased by $205 thousand from the $674 thousand
incurred in 1995. This increase was a result of the significant investment in
capital equipment in the end of 1995 and the beginning of 1996. Interest expense
decreased in 1996 to $11,200 from the $90,000 incurred in 1995. This decrease
was primarily the result of the repayment of the short-term financing for the
acquisition of FMCO.
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
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<PAGE>
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, FOHP-NJ's COA originally provided that if FOHP-NJ's
statutory net worth is, or is expected to be, less than 125% of the minimum
requirement, FOHP-NJ is required to submit to the 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 requirement. FOHP-NJ addressed this
potential deficiency by submitting in April 1996 a plan of action to the
Departments which outlined the actions which had been 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, the Company 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 the
Company's capital stock on a fully diluted basis. See "Notes to Consolidated
Financial Statements - Note 2." 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 fails 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 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 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 25% increments each quarter during 1998.
In connection with the sale of the Initial Debenture, FHS and the
Company entered into the Letter Agreement which clarifies FHS's right under the
Amended Securities Purchase Agreement to infuse additional capital into the
Company in the event that it is determined that FOHP-NJ needs capital to meet
applicable statutory net worth requirements. 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 the Company 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
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<PAGE>
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 the Company to meet a Net
Capital Shortfall or projected Net Capital Shortfall in accordance with the
terms of the Letter Agreement, FHS would be issued additional convertible
debentures in substantially the same form as the Debentures.
The Amended Securities Purchase Agreement also provides that if the
Company projects a Net Capital Shortfall and FHS does not advance funds to the
Company to satisfy such Net Capital Shortfall, the Company 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.
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 full conversion of the Initial
Debenture, FHS owned 5,109,158 shares of the 7,195,997 shares of Common Stock
outstanding, which represented 71% of the fully diluted equity of the Company.
In order to satisfy certain 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 the receipt of the New
Convertible Debenture, FHS converted approximately $18,952,930 of the principal
amount thereof into 92,804,003 shares of 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 outstanding, which represents approximately
98% of the fully-diluted equity of the Company.
As of December 31, 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 additional subordinated debentures.
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." It is estimated that this deposit covering two months of incurred
health expenditures will be approximately $50 million. A final determination of
the deposit will be made in 1998. One- fourth of the deposit, or $12.5 million
(including interest earned), was made prior to September 30, 1997. The remainder
of the deposit must be in quarterly installments during 1998, recalculated as of
year-end 1997.
IMPACT OF YEAR 2000
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,
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<PAGE>
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will function properly with respect to dates in the Year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
The Company has developed a plan to modify its information technology to be
ready for the Year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999 and as yet is unable to estimate the cost. The Company does not
expect this project to have a significant effect on operations. Expenditures
through December 31, 1997 have not been material. The Company will implement its
plan by placing a higher priority on the systems with significant operational
implications. The Company will continue to implement systems with strategic
value through some projects may be delayed due to resource constraints.
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<PAGE>
ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the
Company called for by this item are submitted as a separate section of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS OF THE REGISTRANT
The name, age and position of each person serving as an executive
officer of the Company are set forth below and brief summaries of their business
experience and certain other information with respect to each of them is set
forth in the information which follows the table:
NAME AGE POSITION
---- --- --------
Roger W. Birnbaum 61 President and Chief Executive
Officer
Dr. Joseph Singer 40 Executive Vice President and Chief
Medical Officer
Donald Parisi 42 Senior Vice President, Secretary and General
Counsel
Marc M. Stein 46 Chief Financial Officer
- - ----------
Roger W. Birnbaum has served as President and Chief Executive Officer
of the Company since June 1, 1997, and served on the Company's Board of
Directors from April 16, 1997 to March 25, 1998. Prior to becoming President and
Chief Executive Officer of the Company, he served as the President of the
Princeton HealthCare Group from October 1991. From July 1972 to September 1991,
Mr. Birnbaum served as the President and Chief Executive Officer of HIP/Rutgers
Health Plan, Inc. Mr. Birnbaum has been a Professor of Health Care at Rutgers
State University of New Jersey since July 1972 and Adjunct Associate Professor
at the University of Medicine and Dentistry of New Jersey since January 1974.
Mr. Birnbaum is on the Board of Directors of Caldwell B. Esselstyn Foundation
and the Board of Trustees of Rutgers Community Health Foundation.
Dr. Joseph Singer has served as Executive Vice President and Chief
Medical Officer of the Company since June 8, 1995. Dr. Singer also has served as
Executive Vice President, Medical Affairs and Medical Director of FOHP-NJ since
February 1995. Prior to joining FOHP-NJ, Dr. Singer was a practicing physician
in Moorestown and Medford, New Jersey, with a family practice and specialty in
geriatrics.
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<PAGE>
Donald Parisi has served as Senior Vice President, Secretary and
General Counsel of the Company since June 1, 1997 and from June 8, 1995 to
December 1996. Mr. Parisi served as acting President and Chief Executive Officer
of the Company from December 1996 to May 31, 1997. Mr. Parisi served as Vice
President, Legal Affairs and General Counsel of FOHP-NJ from August 1994 to June
8, 1995. From 1992 to 1994 he was a partner in the law firm of Donington,
Karcher, Leroe, Salmond, Ronan & Rainone and from 1988 to 1992 he served as a
Deputy Attorney General for the State of New Jersey.
Marc M. Stein has served as Chief Financial Officer of the Company
since February 18, 1997. Prior to becoming the Chief Financial Officer of the
Company, he served as Treasurer of HIP Insurance Company of New Jersey and
financial officer of HIP Health Plan of Pennsylvania from February 1995. From
November 1992 to February 1995, Mr. Stein served as Senior Vice President of HIP
of Greater New York.
Pursuant to the Administrative Management Agreement, each of Mr.
Birnbaum, Dr. Singer, Mr. Parisi, and Mr. Stein is employed by FHS. The salaries
and benefits of the aforementioned executive officers is either paid by or
charged to the Company. See "Executive Compensation-Employment Agreements" and
"Certain Relationships and Related Transactions."
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CURRENT DIRECTORS OF THE REGISTRANT
The name, address, age and principal occupation or employment of each
director currently serving on the Board of Directors of the Company is set forth
below:
PRINCIPAL OCCUPATION
NAME AND ADDRESS AGE OR EMPLOYMENT
---------------- --- ----------------------
Dr. John F. Bonamo 47 Obstetrician and Gynecologist
95 Northfield Avenue
West Orange, NJ 07052
Sister Jane Frances Brady 62 President of St. Joseph's Hospital and
St. Joseph's Hospital and Medical Center
Medical Center
703 Main Street
Paterson, NJ 07503
Mr. Bruce G. Coe 67 President Emeritus of New Jersey Business
41 Lambert Lane and Industry Association
Lambertville, NJ 08530
Mr. Christopher M. Dadlez 44 Executive Vice President of Saint Barnabas
Saint Barnabas Health Care Health Care System
System
Old Short Hills Road
Livingston, NJ 07039
Dr. Mark L. Engel 51 Ophthalmologist
733 North Beers Street
Holmdel, NJ 07733
Dr. Thomas J. Feneran 49 Urologist
102 East Bay Avenue, Suite C
Manahawkin, NJ 08050
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<PAGE>
PRINCIPAL OCCUPATION
NAME AND ADDRESS AGE OR EMPLOYMENT
---------------- --- ---------------------------
Mr. John J. Gantner 45 Senior Vice President of Finance and
Robert Wood Johnson Treasurer of the Robert Wood Johnson
University Hospital University Hospital
One Robert Wood Johnson Place
New Brunswick, NJ 08903
Mr. Jay M. Gellert 44 President and Chief Operating Officer
Foundation Health Systems, Inc. of Foundation Health Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA 91367
Mr. Laurence M. Merlis 43 Executive Vice President of the
Meridian Health System Meridian Health System
Monmouth Shores Corporate Park
1350 Campus Parkway
Wall, NJ 07753
Mr. Robert L. Natt 49 President and Chief Executive Officer
Physician Health Services, Inc. of FHS Northeast Region
One Far Mill Crossing
Shelton, CT 06484
Dr. Om P. Sawhney 60 Plastic Surgeon
1550 Park Avenue
South Plainfield, NJ 07080
Mr. Thomas W. Wilfong 42 President of New Jersey Operations of
FOHP, Inc. Foundation Health Systems, Inc.
3501 State Highway 66
Neptune, NJ 07754
- - -------------
There are no family relationships among the current directors or
executive officers of the Company. None of the executive officers or directors
of the Company are directors of any company registered pursuant to Section 12 of
the Exchange Act or subject to the requirements of Section 15(d) of the Exchange
Act or any company registered as an investment company under the Investment
Company Act of 1940. Pursuant to the By-laws of FOHP-NJ, each person serving on
the Board of the Company automatically serves on the Board of Directors of FOHP-
NJ.
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Dr. John F. Bonamo has been an obstetrician and gynecologist in private
practice since 1981. He is Secretary of the Department of OB/GYN of Saint
Barnabas Medical Center. Dr. Bonamo serves as Chairman of the Board of MetroWest
I.P.A. He has served as a director of the Company since April 16, 1997.
Sister Jane Frances Brady has served as the President of St. Joseph's
Hospital and Medical Center since November 1972. She also serves as Treasurer of
St. Joseph's Hospital and Medical Center and the Paterson Economic Development
Corporation. Sister Jane Frances Brady serves as a trustee of St. Joseph's
Hospital and Medical Center Foundation and as Chairperson of the Board of the
Via Caritas Health System. In addition, she serves as the President of Hospital
Alliance of New Jersey. She has served as a director of the Company since April
16, 1997 and as a director of FOHP-NJ since January 1994.
Mr. Bruce G. Coe is currently serving as President Emeritus of the New
Jersey Business and Industry Association. From 1982 to 1996 he served as
President of the New Jersey Business and Industry Association. Mr. Coe serves on
the Boards of Directors of New Jersey Resources Corporation. He also serves on
the Boards of Trustees of New Jersey Future and New Jersey Historical Society.
He has served as a director of the Company since April 16, 1997.
Mr. Christopher M. Dadlez, FACHE, has been Executive Vice President of
the Saint Barnabas Health Care System since June 1996. From March 1992 to June
1996, Mr. Dadlez served as the President and Chief Executive Officer of Monmouth
Medical Center. From January 1995 to May 1996, Mr. Dadlez served as the
President of Mid-Atlantic Health Group. From June 1984 to March 1992, he was
Executive Vice President and Chief Operating Officer of Sinai Hospital,
Baltimore, Maryland. Mr. Dadlez serves on the Board of Trustees of the New
Jersey Hospital Association and Ronald McDonald House. He serves as Chairman of
Long Branch Tomorrow and is on the Board of Trustees of the Greater Long Branch
Chamber of Commerce. He has served as a director of the Company since June 7,
1995 and as a director of FOHP-NJ since January 1994.
Dr. Mark L. Engel, an ophthalmologist, has served as President of
Ophthalmic Physicians of Monmouth since August 1975. From January 1989 through
December 1990 he served as President of the Bayshore Hospital Medical Staff. Dr.
Engel is a trustee of Ophthalmic Physicians of Monmouth. He has served as a
director of the Company since June 7, 1995 and as Chairman of the Board of the
Company since April 16, 1997. Dr. Engel also served as a director of FOHP-NJ
since January 1994 and as Chairman of the Board of FOHP-NJ since June 1995.
Dr. Thomas J. Feneran has been a physician in private practice since
June 1983. He is an urologist, associated in Drs. Feneran & Fernicola, P.C. Dr.
Feneran serves as a physician representative to the Board of Trustees of
Southern Ocean County Hospital. He has served as a director of the Company since
June 7, 1995 and as a director of FOHP-NJ since January 1994.
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Mr. John J. Gantner has served as Treasurer of the Robert Wood Johnson
University Hospital since May 1995. In 1993, he joined Robert Wood Johnson
University as Senior Vice President of Finance. From October 1988 to December
1992, Mr. Gantner was a partner in the New York/New Jersey office of Ernst &
Young. Mr. Gantner is a Certified Public Accountant and a Certified Managerial
Accountant. He has served as a director of the Company since April 16, 1997.
Mr. Jay M. Gellert became President and Chief Operating Officer of FHS
on May 7, 1997. From April 1, 1997 until May 7, 1997, Mr. Gellert served as
Executive Vice President and Chief Operating Officer of FHS. Mr. Gellert served
as a director and President and Chief Operating Officer of Health Systems
International, Inc., a predecessor of FHS, from June 1996 until April 1, 1997.
Prior to joining FHS, Mr. Gellert directed Shattuck Hammond Partners Inc.'s
strategic advisory engagements in the area of integrated delivery systems
development, managed care network formation and physician group practice
integration. Prior to joining Shattuck Hammond Partners, Inc. Mr. Gellert was an
independent consultant, and from 1988 to 1991, he served as President and Chief
Executive Officer of Bay Pacific Health Corporation. From 1985 to 1988 Mr.
Gellert was Senior Vice President and Chief Operating Officer for California
Healthcare System. He has served as a director of the Company since March 25,
1998.
Mr. Laurence M. Merlis has served as an Executive Vice President of the
Meridian Health System since January 1, 1997. Prior thereto, Mr. Merlis served
as President and Chief Executive Officer of Riverview Medical Center for the
period May 1993 to January 1997. From January 1986 through May 1993 he served as
President of East Orange General Hospital. Mr. Merlis serves on the Board of
Directors of Monmouth-Ocean Hospital Corporation. He also is a member of the
Board of Trustees of the New Jersey Hospital Association. He has served a
director of the Company since April 16, 1997 and as a director of FOHP-NJ since
January 1994.
Mr. Robert L. Natt became President of the Northeast region of FHS in
January 1998. Previously, he served as President and Co-Chief Executive Officer
of PHS, now a subsidiary of FHS, from August 1996 until December 1997, when FHS
acquired PHS. From 1985 through August 1996, Mr. Natt served as Chief Operating
Officer of PHS. He has served as a director of the Company since March 25, 1998.
Dr. Om P. Sawhney has been a practicing physician in Plastic Surgery &
Rehabilitation Medicine Associates since January 1974. Dr. Sawhney is a
consultant to the Audit Committee - Medical Inter Insurance Exchange and the
Board of Managers of Associates in Medical Service at Muhlenberg, L.L.C. He is
on the Board of Directors of the Muhlenberg Foundation and the Central Jersey
I.P.A. Dr. Sawhney is also President of Associates in Medicine and Surgery, P.A.
He has served as a director of the Company since June 7, 1995 and as a director
of FOHP-NJ since January 1994.
Mr. Thomas W. Wilfong has served as President of FHS' New Jersey
operations since February 1998. Mr. Wilfong served as Executive Director of
PHS's New Jersey operations
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from August 1996 to February 1998. From July 1986 to August 1996, Mr. Wilfong
served as Vice President of Medical Management of Central New Jersey Medical
Group. He has served as a director of the Company since March 25, 1998.
DIRECTOR COMPENSATION; COMMITTEE SERVICE
The members of the Company's Board of Directors and any committee
thereof may be paid their expenses, if any, relating to their attendance at
Board or committee meetings, and directors who are not full-time employees of
the Company may be paid a fixed sum for attendance at Board or committee
meetings or paid a stated salary as a director. Currently, the members of the
Company's Board of Directors are entitled to receive an annual retainer of
$10,000 and $500 for each Board meeting attended, $300 for each telephonic Board
meeting in which the director participates, $300 for each committee meeting
attended, and $200 for each telephonic committee meeting in which a director
participates. The Chairman of the Board is entitled to receive an additional
$5,000 annual retainer and the chairpersons of the following committees are
entitled to receive a $2,000 annual retainer: Audit Committee; Finance
Committee; Medical Affairs Committee; and Grievance Committee.
The Company paid approximately $107,150 during the fiscal year-ended
December 31, 1997 to members of the Board of Directors for their services as
directors and committee members.
COMMITTEES
Pursuant to the Company's By-laws, the Company has an Audit Committee
which is responsible for evaluating and recommending the appointment of
independent auditors for the Company and its subsidiaries, and for reviewing, in
consultation with such auditors, the annual financial statements (on a
consolidated and separate company basis), systems of internal controls and
accounting principles of the Company and its subsidiaries.
In addition, pursuant to the Company's By-laws, the Board of Directors
may, by one or more resolutions passed by a majority of the directors then in
office, establish such other committees as it shall determine necessary for the
operations of the Company. The Board of Directors has empowered the members of
the Audit Committee to act as the Company's Compensation Committee which shall
make decisions relating to the compensation of the officers, directors and
employees of the Company. The Compensation Committee is currently comprised of
the following directors: Mr. Bruce G. Coe, Mr. John J. Gantner, Mr. Laurence M.
Merlis and Dr. Om P. Sawhney.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
During the fiscal year ended December 31, 1997, the Compensation
Committee consisted of Mr. Coe, Mr. Gantner, Mr. Merlis and Dr. Sawhney.
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During the fiscal year ended December 31, 1997, no executive officer of
the Company, served as a member of the compensation committee or as a director
of another entity, except for any subsidiary or affiliate of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission (the
"Commission"). Executive officers, directors and greater than 10% percent
shareholders are required by the Commission's regulations to furnish the Company
with copies of all Forms 3, 4 and 5 that they file.
Based solely on the Company's review of the copies of such forms it has
received, the Company believes that all its executive officers, directors and
greater than 10% beneficial owners complied with all filing requirements
applicable to them with respect to events or transactions during fiscal 1997
except that the Form 4 required to be filed by FHS in January 1998 in connection
with the conversion of Debentures was filed in February 1998.
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ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company and its
subsidiaries, for the fiscal years ended December 31, 1997, 1996 and 1995, of
the persons serving as the Chief Executive Officer of the Company during the
fiscal year ended December 31, 1997, and the next three highest paid executive
officers of the Company in fiscal 1997 (collectively, the "Named Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- -------------------------------------------------
AWARDS PAYOUTS
------------------------- -------
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ LTIP Compensa-
Principal Position Year Salary($) Bonus($) sation($) Award(s)($) SARS(#) Payouts tion($)(1)(2)
- - ------------------ ---- -------- -------- --------- ----------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Roger W. Birnbaum 1997 $140,615(3) $25,000(4) -- -- -- -- $85,722(5)
President and
Chief Executive Officer
Joseph Singer 1997 240,000 28,000 -- -- -- -- 5,035
Executive Vice President 1996 239,354 -- -- -- -- -- 4,905
and Chief Medical 1995 177,217 -- -- -- -- -- --
Officer
Donald Parisi(6) 1997 151,346 40,000 -- -- -- -- 5,056
Senior Vice President, 1996 144,231 -- -- -- -- -- 4,981
Secretary and General 1995 120,019 -- -- -- -- -- 2,361
Counsel
Marc M. Stein 1997 144,038(7) 35,000(8) -- -- -- -- 5,132
Chief Financial Officer
</TABLE>
- - ------------
(1) Includes amounts contributed by the Company under its 401(k) Plan. All
full-time employees who have completed 30 days of service with the
Company or any of its subsidiaries are eligible to participate in the
401(k) Plan which allows eligible employees to save up to 15% of their
pre-tax compensation (subject to a maximum amount per year established
annually pursuant to the Code) through a payroll deduction. Subject to
the discretion of the Board of Directors, the Company may make matching
contributions to the 401(k) Plan. Amounts contributed by the Company to
the accounts of the Named Officers for fiscal 1997 are as follows: Mr.
Birnbaum - $4,750; Dr. Singer - $4,750; Mr. Parisi - $4,750; and Mr.
Stein - $4,750.
(2) Includes amounts of insurance premiums paid by the Company in fiscal
1997 with respect to term life insurance for the benefit of the Named
Officers. Amounts paid by the Company for the benefit of the Named
Officers are as follows: Mr. Birnbaum - $972; Dr. Singer - $285; Mr.
Parisi - $306; and Mr. Stein - $382.
(3) Represents the period June 1, 1997 to December 31, 1997.
(4) Such bonus was earned in fiscal year 1997 but was not paid until March
1998.
(5) Mr. Birnbaum served as a consultant to FHS from February to May 1997 for
which he was paid a consultant fee by FHS of $80,000.
(6) Mr. Parisi served as acting President and Chief Executive Officer from
December, 1996 to May 31, 1997.
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(7) Represents the period February 18, 1997 to December 31, 1997.
(8) Such bonus was earned in fiscal year 1997 but was not paid until February
1998
EMPLOYMENT AGREEMENTS
Effective June 1, 1997, Roger W. Birnbaum became the President and Chief
Executive Officer of the Company pursuant to an employment letter agreement
entered into by Mr. Birnbaum and FHS dated May 6, 1997 (the "Birnbaum Employment
Agreement"). In accordance with the terms of the Birnbaum Employment Agreement,
Mr. Birnbaum (i) earns a monthly base salary of approximately $20,833, (ii) is
eligible to receive a monthly automobile allowance of $1,000, (iii) is
guaranteed a management bonus of at least $25,000 for 1997 and 1998, (iv) may be
granted stock options to acquire FHS stock in an amount comparable to peer
managers of FHS upon the approval of the FHS Compensation and Stock Option
Committee, and (v) is entitled to other customary benefits provided by FHS to
its employees. Mr. Birnbaum recently was paid his 1997 bonus of $25,000.
Pursuant to the terms of the Birnbaum Employment Agreement, Mr. Birnbaum's
employment with FHS is on an "employee-at-will" basis and FHS may at any time
terminate Mr. Birnbaum's employment for any reason other than cause by giving 60
days' prior written notice; provided, however, that upon such termination Mr.
Birnbaum will be entitled to receive his base salary for six (6) months after
the date of such termination (the "Birnbaum Severance Payments"), and, if such
termination is within the first twelve (12) months of Mr. Birnbaum's employment,
Mr. Birnbaum will be paid as an employed consultant at his base salary at the
time of termination for an additional six (6) months. As a consequence of the
formation of FHS's Northeast region, Mr. Birnbaum's employment as President and
Chief Executive Officer of the Company will terminate as of April 1, 1998. In
connection with such termination, Mr. Birnbaum will receive the Birnbaum
Severance Payments provided under the Birnbaum Employment Agreement commencing
October 1, 1998. From April 1, 1998 to September 30, 1998, Mr. Birnbaum will
provide consulting services to the Company as set forth in the Birnbaum
Employment Agreement.
Effective July 1, 1997, FHS entered into an employment letter agreement
(the "Singer Employment Agreement") with Dr. Joseph Singer pursuant to which Dr.
Singer will remain as Chief Medical Officer of the Company. The Singer
Employment Agreement supercedes all prior employment agreements relating to Dr.
Singer's employment by the Company. In accordance with the terms of the Singer
Employment Agreement, Dr. Singer (i) earns a monthly salary of $20,000, (ii) is
eligible to receive a monthly automobile allowance of $1,000, (iii) received a
$28,000 signing bonus in 1997, (iv) is eligible to participate in the FHS
Management Bonus Plan under which he may earn a percentage of his base salary as
a bonus subject to the discretion of the FHS Compensation and Stock Option
Committee, and (v) is eligible to receive and/or participate in the benefits
customarily provided by FHS to its employees. Pursuant to the terms of the
Singer Employment Agreement, Dr. Singer is an "employee-at-will" and is eligible
to receive four (4) months of severance pay upon his leaving the employ of FHS,
provided that such termination is not by reason of "just cause," as defined in
the Singer Employment Agreement.
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Pursuant to an employment letter agreement dated February 6, 1997
between FHS and Marc M. Stein, Mr. Stein became Chief Financial Officer of the
Company on February 18, 1997. Pursuant to such letter agreement, Mr. Stein was
recently paid a bonus of $35,000 or 20% of his annual base salary. On February
9, 1998, FHS and Mr. Stein entered into another employment letter agreement (the
"Stein Employment Agreement"), which agreement supersedes the previous
employment letter agreement dated February 6, 1997. The Stein Employment
Agreement terminates on March 31, 1999, provided that such agreement may be
terminated prior thereto at the discretion of FHS. In accordance with the terms
of the Stein Employment Agreement, Mr. Stein (i) earns an annual salary of
$175,000, (ii) is eligible to participate in the 1998 FHS Management Bonus Plan
and in the 1999 FHS Management Bonus Plan on a prorated basis, (iii) is entitled
to receive a monthly automobile allowance of $500, (iv) is eligible to
participate in the FHS Management Stock Option Plan, and (v) receives other
customary benefits provided by FHS to its employees. Provided that Mr. Stein
remains employed by FHS until March 31, 1999, or if his employment is terminated
prior to March 31, 1999 for any reason other than "just cause," as defined in
the Stein Employment Agreement, Mr. Stein will receive as retention bonus equal
to three months salary on March 31, 1999. Pursuant to the terms of the Stein
Employment Agreement, if Mr. Stein's employment is terminated for any reason
other than "just cause" prior to March 31, 1999, FHS will continue to pay Mr.
Stein his salary through September 30, 1999, which includes six (6) months
severance. If, on January 31, 1999, FHS offers continued employment to Mr. Stein
and Mr. Stein rejects such offer, Mr. Stein will be entitled to six (6) months
severance commencing April 1, 1999 and his retention bonus as described in the
Stein Employment Agreement.
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ITEM 12. PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP MANAGEMENT.
The following table sets forth information as of March 15, 1998, with
respect to the beneficial ownership (as defined in Rule 13d-3 of the Exchange
Act) of the Company's Common Stock, which is the only class of the Company's
capital stock with shares issued and outstanding, by each director of the
Company, each of the Named Officers (as defined in the section herein captioned
"Executive Compensation"), each person or group of persons known by the Company
to be the beneficial owner of more than 5% of Common Stock, and all directors,
nominees for director and executive officers of the Company as a group:
BENEFICIAL OWNERSHIP OF
COMMON STOCK
--------------------------
PERCENT OF
NAME OF BENEFICIAL OWNER NO. OF SHARES (1) CLASS
- - ------------------------- ----------------- ---------
Foundation Health Systems, Inc.(2)................... 97,913,161 97.9%
Dr. John F. Bonamo (3)............................... 1,500 (4)
Sister Jane Frances Brady (3)........................ --
Bruce G. Coe (3)..................................... --
Christopher M. Dadlez (3)............................ --
Dr. Mark L. Engel (3)................................ 7,017 (5) (4)
Dr. Thomas J. Feneran (3)............................ 4,100 (4)
John J. Gantner (3).................................. --
Jay M. Gellert (3)................................... --
Laurence M. Merlis (3)............................... --
Robert L. Natt (3)................................... --
Dr. Om P. Sawhney (3) (6)............................ 5,800 (6) (4)
Thomas W. Wilfong (3) ............................... --
Roger W. Birnbaum (7)................................ --
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Dr. Joseph Singer (7)................................ 8,000 (4)
Donald Parisi (7).................................... --
Marc M. Stein (7).................................... --
All Directors and Executive Officers
as a Group (16 persons).............................. 26,417 (5)(6) (4)
- - ---------------
(1) Except as otherwise indicated, all of the shares of Common Stock are held
beneficially and of record.
(2) FHS's principal offices are located at 21600 Oxnard Street, Woodland
Hills, CA 91367.
(3) Such person currently serves as a director of the Company.
(4) Shares beneficially owned do not exceed 1% of the Company's outstanding
Common Stock.
(5) Includes an aggregate of 417 shares of Common Stock held by Dr. Barbara
Engel, Dr. Mark L. Engel's wife, as to which shares he disclaims any
beneficial interest.
(6) Includes an aggregate of 500 shares of Common Stock held by Dr. Veena
Sawhney, Dr. Om P. Sawhney's wife, as to which shares he disclaims any
beneficial interest.
(7) Such person is an executive officer of the Company.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
MANAGEMENT AGREEMENTS WITH FHS
Each of the Management Agreements provides that FHS will employ the
business executives in charge of the Company and each of its subsidiaries, and
each executive in charge of a principal business division, unit or function
(including, but not limited to finance, legal, operations, sales and marketing,
information systems, medical management, and provider contracting and relations)
(collectively, the "Executives"). Each of the Executives will report to FHS's
senior management. All the Executives shall be appointed by the Company's Board
of Directors to the offices requested by FHS: PROVIDED, HOWEVER, that the Board
may reject any proposed appointee it reasonably finds to be of insufficient
ethical character for such office; and provided further, that the Board may,
after due consultation with FHS based on a reasonable determination of
intentional and material unethical behavior or insubordination or willful
misconduct or gross negligence, remove any such Executive. Currently, Mr. Roger
W. Birnbaum, President and Chief Executive Officer of the Company, Dr. Singer,
Executive Vice President and Medical Director of the Company, Mr. Donald Parisi,
Senior Vice President, General Counsel and Secretary of the Company; and Mr.
Marc M. Stein, Chief Financial Officer of the Company, are employed by FHS.
Each of the Management Agreements provides that the Company will employ an
internal auditor who will report directly to the Board of Directors.
Each of the Management Agreements has an initial term of five years,
subject to automatic one year renewal terms unless either party provides written
notice of non-renewal to the other party at least two years prior to the then
current term of the agreement. A party may terminate either of the Management
Agreements if (i) the other party is in material breach of the agreement
(subject to certain rights to cure any such breach); (ii) the other party (a)
becomes insolvent, (b) voluntarily seeks, consents to or acquiesces in the
benefit or benefits of any Debtor Relief Law (as defined in the Management
Agreements) or (c) becomes a party to (or be made the subject of) any proceeding
provided by any Debtor Relief Law, other than as a creditor or claimant (unless,
in the event the proceeding is voluntary, the petition instituting the voluntary
proceeding is dismissed within 45 days of the date it was filed).
Under the Administrative Management Agreement, FHS is entitled to receive
a monthly management fee (the "Management Fee") equal to the sum of (a) 2% of
the total revenue of the health plans offered by the Company (the "FOHP Health
Plans") for such month plus (b) reimbursement for (i) direct expenses incurred
by third parties and (ii) salaries and benefits of the Executives; PROVIDED,
HOWEVER, that the aggregate amount of payments to be made to FHS with respect to
clause (a) for each calendar year during the term of the Administrative
Management Agreement shall in no event be less than $5,000,000.
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In connection with the sale of the Initial Debenture, the Company paid FHS
a phase-in period management fee of $1,701,120.38, which was based on certain
administrative services provided by FHS to the Company from January 1, 1997 to
April 30, 1997.
At the end of each month during the term of the Administrative Management
Agreement, FHS shall provide the Company with statements setting forth the
Management Fee for such month. The Management Fee for any month shall become
payable within ten days after receipt by the Company from FHS of the statements
for such month.
In the event that FHS establishes a regional or centralized multi-entry
system relating to functions ordinarily and customarily handled at the plan
level and not described in the MIS Management Agreement (such as plan level
accounting and membership services), FHS shall have the right to transfer such
functions performed by the FOHP Health Plans to such regional system, in which
case the Company shall be obligated to pay to FHS the share of such regional
systems costs incurred by FHS with respect to such function which is allocable
to the FOHP Health Plans; provided, however, the regionalization or
centralization of functions by FHS must result, in the aggregate, in cost
savings to the FOHP Health Plans and any data processing functions performed
under such regionalization or centralization shall not cost more than what is
contemplated under the Company's current Management Information Services
Agreement (the "HSII Agreement") with Health Systems Integration, Inc. ("HSII").
In the event any of the Management Fees due and payable to FHS under the
Administrative Management Agreement are not paid, such Management Fees may, at
FHS's option, be added to the principal amount of the Debentures except that
Management Fees due and payable during calendar year 1998 may only be added to
such principal amount to the extent permitted by the Debentures. Any due and
payable but unpaid Management Fees not added to the principal amount of the
Debentures shall bear interest at the rate of the Initial Debenture until paid
in their entirety or added to the principal amount of the Debentures.
As compensation under the MIS Management Agreement, the Company will (i)
pay FHS fees and charges to be specified by FHS upon the effectiveness of the
agreement, which fees and charges shall be no greater than the compensation paid
to HSII pursuant to the HSII Agreement and (ii) reimburse FHS for such costs and
expenses as to which HSII is entitled to reimbursement under the HSII Agreement
and documents related thereto.
FHS is required to provide and perform the following services under the
Administrative Management Agreement, subject to the direction of the FOHP Health
Plans and consistent with the manner in which FHS provides such services to its
other subsidiaries, without disadvantage to the Company or the FOHP Health
Plans; (i) manage the diagnosis and assessment of the information/operating
systems of the FOHP Health Plans and provide support for all necessary
conversions, supplements and enhancements to such systems; (ii) manage the FOHP
Health Plans in their provider contracting efforts and provider relations
matters, including the establishment of appropriate provider reimbursement
structures; (iii) provide human resources and employee benefit corporate
management services to the FOHP Health Plans in recruiting employees and
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in implementing personnel policies and procedures and employee benefit programs;
(iv) provide consultation and assistance to the FOHP Health Plans in connection
with governmental relations and legislative activities (including regulatory
compliance matters) affecting the FOHP Health Plans; (v) provide consultation
and assistance to the FOHP Health Plans in conducting analyses of the
marketplace in which they operate and in developing an appropriate strategic
plan; (vi) provide consultation and assistance to the FOHP Health Plans in
connection with the development and dissemination of enrollment and disclosure
materials for enrollees thereof, employers and other groups contracting with any
of the FOHP Health Plans and other third parties; (vii) provide administrative
support to the FOHP Health Plans in the formulation review and implementation of
the utilization review and quality assurance programs thereof; (viii) provide
consultation and assistance to the FOHP Health Plans in connection with
protecting the confidentiality of the records thereof and ensuring compliance
with all applicable federal, state and local laws and regulations relating to
the records thereof; (ix) consult with and assist the FOHP Health Plans in
support of the medical management policies and procedures thereof, in preparing
and negotiating contracts with participating providers, subscriber groups,
vendors and other third parties; (x) provide consultation and assistance to the
FOHP Health Plans in the preparation of the annual budget thereof, which will
set forth their major operating objectives, anticipated revenues, expenses, cash
flow and capital expenditures; (xi) provide oversight management to the FOHP
Health Plans in recording and analyzing the financial condition thereof,
including financial review and analysis of health care costs incurred thereby
and assist in the preparation of appropriate federal, state and local tax
returns and provide the FOHP Health Plans with advice as to appropriate tax
accruals; (xii) provide consultation and assistance to the FOHP Health Plans in
the establishment, review and modification of collection policies and programs
designed to minimize the number and amount of outstanding accounts receivable
thereof; (xiii) provide consultation and assistance in implementing the FOHP
Health Plans' premium structures, which premium structures shall take into
account the financial obligations of the FOHP Health Plans, the importance of
providing quality health care at a reasonable cost and competition of the FOHP
Health Plans and the service areas; (xiv) give advice to the FOHP Health Plans
concerning various business insurance programs, including but not limited to,
professional liability insurance, directors and officers liability insurance,
reinsurance and workers' compensation insurance; (xv) provide consultation and
assistance to the FOHP Health Plans in connection with the sales and marketing
efforts of the FOHP Health Plans, including assistance with regard to the
selection of advertising agencies, the conduct of surveys respecting the
satisfaction of subscriber groups and enrollees of the FOHP Health Plans and the
FOHP Health Plans' sales programs and techniques; (xvi) provide to the FOHP
Health Plans actuarial and data analysis services, and assistance in the
development of underwriting standards; (xvii) assist the Boards of Directors of
the Company and its subsidiaries in reviewing the short, medium and long range
objectives of the FOHP Health Plans and in formulating recommendations with
respect thereto; and (xviii) provide such other services, not specifically
mentioned herein, that are mutually agreed upon between the parties.
FHS shall provide and perform the following services under the MIS
Management Agreement: (i) provide all claims processing, record keeping and data
processing services to the
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FOHP Health Plans that are currently provided by HSII pursuant to the HSII
Agreement; and (ii) provide such other related services as are mutually agreed
upon between the parties.
Under each of the Management Agreements, FHS will defend, indemnify and
hold the FOHP Health Plans and, among others, their respective officers,
directors, shareholders, employees and agents, from and against any and all
claims, actions, damages, obligations, losses, liabilities, costs and expenses,
including attorneys' fees, other professional fees, costs of collection and
other costs of defense ("Management Agreement Damages"), resulting from FHS's
gross negligence or willful misconduct. In addition, the Company has agreed to
defend, indemnify and hold FHS and, among others, its officers, directors,
shareholders, employees and agents, from and against any and all Management
Agreement Damages resulting from FHS's execution of the Management Agreements or
performance of services thereunder, provided that no such indemnification shall
be provided to the extent that such Management Agreement Damages result from
FHS's gross negligence or willful misconduct.
EXCHANGE/CASH OFFER FOR SHARES
FHS may at any time during 1999, at its option, either make an offer to
shareholders of the Company to exchange shares of FHS Common Stock (referred to
herein as the "Exchange Offer") or make an offer to pay cash (referred to herein
as the "Cash Offer") for the shares of Common Stock of the Company held by the
Company's shareholders, other than FHS. FHS is required to furnish the Company
with ten days written notice of its intention to promptly make such Exchange
Offer or Cash Offer, as the case may be (the date of such notification to be
referred to herein as the "Offer Notice Date"). In the Exchange Offer, FHS would
agree to exchange, for each outstanding share of Common Stock, the number of
shares of FHS Common Stock as shall have a Purchaser Stock Market Value (as
hereinafter defined) equal to the Company Stock Value (as hereinafter defined)
of the share of Common Stock that is being exchanged. In the Cash Offer, FHS
would agree to pay in cash, for each outstanding share of Common Stock, a
purchase price equal to the Company Stock Value of the share of Common Stock
being purchased.
The term "Purchaser Stock Market Value" means the average closing sales
price of the FHS Common Stock on the New York Stock Exchange, Inc. (or, if such
FHS Common Stock is not at such time listed on the New York Stock Exchange,
Inc., on such other national securities exchange as the FHS Common Stock shall
at such time be listed or quoted) for the five consecutive trading days
immediately preceding the date on which the Exchange Offer is commenced by FHS;
PROVIDED, HOWEVER, that, in the event FHS Common Stock shall at such time not be
listed or quoted on any national securities exchange, "Purchaser Stock Market
Value" shall be determined in accordance with the procedures for the
determination of the Company Stock Value as described below.
The "Company Stock Value" shall be determined as follows: FHS and the
Company (through the directors of the Company with no affiliation with FHS)
shall, within ten days after the Offer Notice Date, each select an independent
qualified appraiser to appraise the Company
-51-
<PAGE>
Stock Value. The two independent qualified appraisers shall exchange their
respective appraisals within ten business days and submit such appraisals to the
Company and FHS. If the two independent qualified appraisers agree on an
appraisal for the Company Stock Value, the Company Stock Value shall be the
agreed-upon amount. If only one of such appraisers so submits an appraisal
within the ten business day period, the Company Stock Value shall be the amount
set forth in such appraisal. If the two independent qualified appraisers submit
their appraisals within the ten business day period but cannot agree upon a
Company Stock Value, the two independent qualified appraisers shall select a
third independent qualified appraiser to appraise the Company Stock Value. The
third independent qualified appraiser shall submit its appraisal with ten
business days to FHS and the Company. The Company Stock Value shall be
determined by taking the average of the two appraisals which are closest to each
other; PROVIDED, HOWEVER, that if the appraisal amount which is less than the
highest appraisal and greater than the lowest appraisal is greater or less than
the average amount of the other appraisals by an amount representing no more
than 7.5%, then the average of all three appraisals will be the Company Stock
Value. The following is an example for the valuation method described above.
Assuming that FHS's independent qualified appraiser valued the aggregate Company
Stock Value at $50,000,000, the Company's independent qualified appraiser valued
the aggregate Company Stock Value at $150,000,000 and the third independent
qualified appraiser valued the aggregate Company Stock Value at $125,000,000,
the aggregate Company Stock Value would be $137,500,000 (the average of the two
closest appraisals); if, however the third independent qualified appraiser
appraised the Company Stock Value at $105,000,000 (greater than $100,000,000 by
an amount less than 7.5% of $100,000,000), the aggregate Company Stock Value
would be approximately $101,700,000 (the average of all three). After
determining the aggregate Company Stock Value, the value of each share of Common
Stock will be determined by dividing the Company Stock Value by the number of
then outstanding shares of Common Stock.
MERGER
At any time during the 1999 calendar year, FHS may effect a merger,
business combination or consolidation transaction involving the Company for the
purpose of obtaining 100% of the then outstanding equity of the Company (the
"Merger"), which Merger has been approved by the Board of Directors of the
Company and therefore is not prohibited by the New Jersey Shareholders
Protection Act, subject to the following terms and conditions:
(a) the amount of consideration to be paid or distributed to the
shareholders of the Company in respect of each share of Common Stock in
connection with the Merger will either be (i) cash in an amount equal to the
Company Stock Value of such share of Common Stock or (ii) such number of shares
of FHS Common Stock as shall have a Purchaser Stock Market Value equal to the
Company Stock Value of such share of Common Stock;
(b) the shareholders of the Company, other than FHS, shall be
afforded dissenters' rights in the same manner and under the same terms and
conditions as is provided under Chapter
-52-
<PAGE>
11 of the New Jersey Business Corporation Act, regardless of whether such
shareholders would otherwise have been entitled to such rights under the New
Jersey Business Corporation Act.
(c) the Company, or any successor thereto, shall provide in its
By-laws indemnification provisions substantially similar to those currently
contained in the Company's By-laws for the period ending six years from the date
of the Merger, or, if earlier, for the period ending on the date on which the
statute of limitations has expired with respect to the Company's Board of
Directors' approval of the Amended Securities Purchase Agreement and the Merger
contemplated thereby; and
(d) the Company, or any successor thereto, shall maintain officer and
director insurance with terms and conditions substantially similar to those
contained in the officer and director insurance currently maintained by the
Company for the period ending six years from the date of the Merger, or, if
earlier, for the period ending the date on which the statute of limitations has
expired with respect to the Company's Board of Directors' approval of the
Amended Securities Purchase Agreement and the Merger contemplated thereby, which
insurance shall provide coverage for former directors of the Company.
ALTERNATE PROPOSAL
Recognizing that the additional infusions of capital into the Company
to satisfy certain statutory net worth requirements applicable to FOHP-NJ, and
the subsequent conversion of Debentures issued by the Company to FHS in
connection with such infusions, has resulted in a significant dilution of the
provider shareholders' interest in the Company, FHS is contemplating providing
the provider shareholders with alternate consideration in the event of an
Exchange Offer, Cash Offer or Merger (the "Alternate Proposal"). FHS is
proposing that in the event of an Exchange Offer, Cash Offer or Merger, provider
shareholders will be offered a choice between (i) the per share consideration
determined in accordance with the appraisal formula described in the section
hereof captioned "Exchange/Cash Offer for Shares," or (ii) the alternate per
share consideration calculated in accordance with the Alternate Proposal. FHS is
currently discussing with the Board the terms and conditions of the Alternate
Proposal. FHS has expressed an intention of offering to each NJ Practitioner
$15.00 for each share of Common Stock held by him or her which would be payable
on July 1, 2001, provided that the NJ Practitioner remains in the Company's
provider network until December 31, 2001 and certain other conditions are met.
FHS and the Company anticipate finalizing the Alternate Proposal over the next
several weeks, including the type and amount of consideration to be offered to
the NJ Acute Care Institutions or their affiliates holding shares of Common
Stock.
EXECUTIVE OFFICERS OF NJ ACUTE CARE INSTITUTIONS SERVING ON BOARD OF
DIRECTORS
The following directors of the Company are executive officers of NJ
Acute Care Institutions which have purchased, either directly or through an
affiliate, shares of Common Stock; Sister Jane Frances Brady, President and
Chief Executive Officer of St. Joseph's Hospital and Medical Center; Mr.
Christopher Dadlez, Executive Vice President of Saint Barnabas Health Care
-53-
<PAGE>
System, which includes Clara Maass Medical Center, Irvington General Hospital,
Monmouth Medical Center, Newark Beth Israel Medical Center, Saint Barnabas
Medical Center, Union Hospital, Wayne General Hospital and West Hudson Hospital;
Mr. John J. Gantner, Senior Vice President of Finance and Treasurer of the
Robert Wood Johnson University Hospital; and Mr. Laurence M. Merlis, Executive
Vice President of the Meridian Health System, which includes Riverview Medical
Center, Jersey Shore Medical Center and the Medical Center of Ocean County. See
"Current Directors of the Registrant." In addition, a large percentage of the
revenues of FOHP-NJ is generated from NJ Acute Care Institutions who have
enrolled employees in FOHP-NJ plans as required by the Certificate of
Incorporation of the Company.
GUARANTIES AND LETTERS OF CREDIT
In March 1996, Mr. William Roberts, former Chairman of the Board of the
Company, secured from Chase Manhattan Bank (formerly Chemical Bank) a $3,000,000
letter of credit (the "Chase Manhattan Letter of Credit") which could be drawn
upon by the Company in the event the Company was required to contribute capital
to FOHP-NJ so that FOHP-NJ remained in compliance with the statutory net worth
and other capital requirements applicable to it. The Company paid $48,500 in
bank fees in connection with the Chase Manhattan Letter of Credit.
Contemporaneously with the issuance of the Chase Manhattan Letter of Credit, the
Company and Mr. Roberts entered into a reimbursement agreement pursuant to which
Mr. Roberts would be reimbursed by the Company for any amounts he was required
to pay Chase Manhattan Bank in connection with any draw against the Chase
Manhattan Letter of Credit by the Company. Under the terms of the reimbursement
agreement between Mr. Roberts and the Company, the Company paid to Mr. Roberts a
fee of $10,000 per month through May, 1996 and $20,000 per month thereafter
until April 1997.
The Chase Manhattan Letter of Credit was to expire on January 2, 1997.
However, in December 1996, the Chase Manhattan Letter of Credit was extended
until March 31, 1997. In connection with the extension of the Chase Manhattan
Letter of Credit, the Company paid $8,550 in bank fees. The Chase Manhattan
Letter of Credit was later extended until April 30, 1997, for which the Company
paid Chase Manhattan Bank $4,000 in bank fees. The Chase Manhattan Letter of
Credit expired on April 30, 1997 without being drawn upon by the Company.
On March 29, 1996, certain NJ Practitioners, each a shareholder of the
Company, secured from Carnegie Bank a $3,475,000 letter of credit (the "Carnegie
Letter of Credit") which could be drawn upon by the Company in the event the
Company was required to contribute capital to FOHP-NJ so that FOHP-NJ remained
in compliance with the statutory net worth and other capital requirements
applicable to it. The NJ Practitioners who secured the Carnegie Letter of Credit
are: Dr. Chris Anayiotos, Dr. Tun Chu, Dr. Miguel Damien, Dr. Shirley Hoh, Dr.
Renny Lin, Dr. Carl Raso, Dr. Donato Santangelo, III, Dr. Mohammad A. Sarraf,
Dr. Mohammed Shafi, Dr. Kishori P. Shah, Dr. Gary Siemons, Dr. John Sutherland,
Dr. Kock-Yen Tsang, Dr. Lewis Wetstein, Dr. Renato Ynaya and Dr. Henry Yu.
-54-
<PAGE>
The Company paid $52,125 in bank fees in connection with the Carnegie
Letter of Credit. Contemporaneously with the issuance of the Carnegie Letter of
Credit, the Company entered into a separate reimbursement agreement with each NJ
Practitioner who secured the Carnegie Letter of Credit, pursuant to which the NJ
Practitioner would be reimbursed by the Company for any amounts he or she was
required to pay Carnegie Bank in connection with any draw against the Carnegie
Letter of Credit by the Company. Under the terms of the reimbursement
agreements, the Company paid to the NJ Practitioners who secured the Carnegie
Letter of Credit an aggregate fee of $173,750 or 2.5% of the aggregate amount of
the guaranties furnished by the NJ Practitioners to secure the Carnegie Letter
of Credit.
The Carnegie Letter of Credit was to expire on January 1, 1997.
However, in December 1996, the Carnegie Letter of Credit was extended until
March 31, 1997. In connection with the extension of the Carnegie Letter of
Credit, the Company paid $14,681 in bank fees and an aggregate fee of
approximately $43,000 to the NJ Practitioners who secured the Carnegie Letter of
Credit. The Carnegie Letter of Credit was later extended to April 30, 1997, for
which the Company paid $20,000 in bank fees and an aggregate fee of
approximately $43,438 to the NJ Practitioners who secured the Carnegie Letter of
Credit. The Carnegie Letter of Credit expired on April 30, 1997 without being
drawn upon by the Company.
In March and April 1996, Dr. Randall Krakauer, a former member of the
Board of Directors of FOHP-NJ and shareholder of the Company, and John L.
Adessa, a former President and Chief Executive Officer of the Company, each
secured from CoreStates Bank a separate letter of credit (the "CoreStates
Letters of Credit") which could be drawn upon by the Company in the event the
Company was required to contribute capital to FOHP-NJ so that FOHP-NJ remained
in compliance with the statutory net worth and other capital requirements
applicable to it. Dr. Krakauer secured a $300,000 letter of credit and Mr.
Adessa secured a $323,000 letter of credit. The Company paid $7,199 in bank fees
in connection with the CoreStates Letters of Credit. As consideration for
securing a letter of credit, the Company paid Dr. Krakauer $7,500 and Mr. Adessa
$8,075, or 2.5% of the amount of the letter of credit secured by each
individual.
In September 1996, the amount of the letter of credit secured by Mr.
Adessa from CoreStates Bank was reduced from $323,000 to $100,000, and on
January 1, 1997, the remaining amount of the letter of credit expired.
The letter of credit secured by Dr. Krakauer was to expire on January
1, 1997. However, in December 1996, the letter of credit secured by Dr. Krakauer
was extended until March 31, 1997. In connection with the extension of the
letter of credit, the Company paid approximately $800 in bank fees and a fee of
$1,875 to Dr. Krakauer. The letter of credit secured by Dr. Krakauer was later
extended until April 30, 1997, for which Dr. Krakauer was paid a fee of $650 and
CoreStates Bank was paid bank fees of approximately $1,000. The letter of credit
expired on April 30, 1997 without being drawn upon by the Company.
-55-
<PAGE>
In March and April 1996, certain NJ Acute Care Institutions and certain
affiliates of NJ Acute Care Institutions executed guaranties on behalf of the
Company and in favor of FOHP-NJ which guaranteed the payment of the Company's
capital obligation to FOHP-NJ. The name of each NJ Acute Care Institution and
affiliate of a NJ Acute Care Institution which guaranteed the Company's capital
obligation to FOHP-NJ and the amount guaranteed by each such entity is as
follows: Community-Kimball Health Care Systems, Inc. (an affiliate of Kimball
Medical Center and Community Medical Center) - $250,000; Saint Barnabas
Corporation (an affiliate of Saint Barnabas Medical Center) - $250,000; Monmouth
Medical Center - $250,000; Barnert Hospital - $100,000; Bayshore Community
Hospital - $100,000; Burdette Tomlin Memorial Hospital - $100,000; Chilton
Memorial Hospital - $100,000; C.H. Management Corp. (an affiliate of Christ
Hospital) - $250,000; Comprehensive Health & Education Corp. (an affiliate of
Muhlenberg Regional Medical Center) - $250,000; JFK Medical Center - $250,000;
Memorial Health Alliance (an affiliate of Memorial Hospital of Burlington
County) - $250,000; Mercer Medical Center - $100,000; Newton Memorial Hospital -
$100,000; Our Lady of Lourdes Health Care Services, Inc. (an affiliate of Our
Lady of Lourdes Hospital) - $100,000; Beth Israel Hospital (Passaic) - $100,000;
The Valley Hospital - $250,000; Riverview Health Affiliates (an affiliate of
Riverview Medical Center) - $250,000; West Hudson Hospital - $100,000; St.
Joseph's Hospital and Medical Center - $250,000; Morristown Memorial Hospital -
$250,000; Elizabeth General Health Services Corp. (an affiliate of Elizabeth
General Medical Center) - $100,000; Englewood Healthcare Ent. (an affiliate of
Englewood Hospital and Medical Center) - $250,000; MidJersey Health Corporation
(an affiliate of Hunterdon Medical Center) - $100,000; and Robert Wood Johnson
University Hospital - $250,000.
In addition, in July and August, 1996, Holy Name Hospital guaranteed
$150,000 of the Company's capital obligation to FOHP-NJ, and The Valley Hospital
and West Hudson Hospital guaranteed an additional $50,000 and $25,000 of such
obligation, respectively.
Each guarantor's liability under its institutional guaranty was to
expire on January 1, 1997. However, in December 1996, each institutional
guaranty was extended until March 31, 1997. In connection with the extension of
the institutional guaranties, the Company paid $100 to each guarantor. Most of
the institutional guaranties were extended to April 30, 1997. By April 30, 1997,
all the institutional guaranties had expired without liability to any NJ Acute
Care Institution.
-56-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
Reference is made to the Index of Financial
Statements hereinafter contained.........................F-1
Other than the Financial Data Schedule included as Exhibit 27, no
Financial Statement Schedules are required to, nor will any, be filed
with this Annual Report on Form 10-K.
3. EXHIBITS
Reference is made to the Index of Exhibits
hereinafter contained....................................E-1
(b) REPORTS ON FORM 8-K
During the fourth quarter ended December 31, 1997, no Current Reports
on Form 8-K were filed by the Company with the Commission.
-57-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FOHP, INC.
----------
(Registrant)
Date: March 30, 1998 By: /S/ Roger W. Birnbaum
----------------------
Roger W. Birnbaum, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- -----
/s/ Roger W. Birnbaum President and Chief March 30, 1998
- - --------------------- Executive Officer
Roger W. Birnbaum (Principal Executive
Officer)
/s/ Marc M. Stein Chief Financial Officer March 30, 1998
- - --------------------- (Principal Financial and
Marc M. Stein Accounting Officer)
/s/ Mark L. Engel Chairman of the Board March 30, 1998
- - ---------------------
Dr. Mark L. Engel
/s/ John F. Bonamo
- - --------------------- Director March 30, 1998
Dr. John F. Bonamo
/s/ Sister Jane Frances Brady Director March 30, 1998
- - -----------------------------
Sister Jane Frances Brady
-58-
<PAGE>
SIGNATURE TITLE DATE
-------- ----- ----
/s/ Bruce G. Coe Director March 30, 1998
- - --------------------
Bruce G. Coe
/s/ Christopher M. Dadlez Director March 30, 1998
- - -------------------------
Christopher M. Dadlez
/s/ Thomas J. Feneran Director March 30, 1998
- - -------------------------
Dr. Thomas J. Feneran
/s/ John J. Gantner Director March 30, 1998
- - ---------------------
John J. Gantner
/s/ Jay M. Gellert Director March 30, 1998
- - ---------------------
Jay M. Gellert
/s/ Laurence M. Merlis Director March 30, 1998
- - ----------------------
Laurence M. Merlis
/s/ Robert L. Natt Director March 30, 1998
- - ---------------------
Robert L. Natt
/s/ Om P. Sawhney Director March 30, 1998
- - ---------------------
Dr. Om P. Sawhney
/s/ Thomas W. Wilfong Director March 30, 1998
- - ---------------------
Thomas W. Wilfong
-59-
<PAGE>
Consolidated Financial Statements
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
December 31, 1997
CONTENTS
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets.................................................F-3
Consolidated Statements of Operations.......................................F-4
Consolidated Statements of Shareholders' (Deficiency) Equity................F-5
Consolidated Statements of Cash Flows.......................................F-6
Notes to Consolidated Financial Statements..................................F-7
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
FOHP, Inc.
We have audited the accompanying consolidated balance sheets of FOHP, Inc. (the
"Company") and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' (deficiency) equity and
cash flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of FOHP, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for the years ended December 31, 1997,
1996 and 1995, in conformity with generally accepted accounting principles.
Iselin, New Jersey Ernst & Young LLP
February 13, 1998
F-2
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
-------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 79,266,721 $ 36,664,911
Accounts receivable from owners/providers, net of allowance
for doubtful accounts and retroactive terminations of
$922,354 in 1997 and $1,600,000 in 1996 (NOTE 3) 11,096,487 8,206,471
Other accounts receivable, net of allowances for doubtful
accounts and retroactive terminations of $2,507,619 in 1997
and $100,000 in 1996 (NOTE 3) 3,131,333 3,666,887
Prepaids and other current assets 635,548 1,904,360
-----------------------------
Total current assets 94,130,089 50,442,629
Restricted cash (NOTE 2) 13,846,682 1,265,449
Furniture and equipment, net (NOTE 4) 2,480,042 1,884,558
Goodwill (NOTE 2) 107,730,254 --
Other assets 424,164 659,581
-----------------------------
$218,611,231 $ 54,252,217
=============================
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
Current liabilities:
Medical claims payable to owners/providers $ 20,308,241 $ 13,775,534
Other medical claims payable 62,614,704 55,370,457
Accounts payable and accrued expenses 18,251,160 5,163,115
Due to Foundation Health Systems, Inc. (NOTE 11) 543,075
Due to QualMed, Inc. (NOTE 11) 1,192,716
Unearned premium 7,965,658 4,598,662
Other 8,054 1,210,516
-----------------------------
Total current liabilities 110,883,608 80,118,284
Convertible debentures (NOTE 2) 11,294,406
Subordinated debentures (NOTE 5) 24,000,000
------------------------------
Total liabilities 146,178,014 80,118,284
Commitments and contingencies (NOTE 10)
Shareholders' (deficiency) 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 1997 and 2,100,173 in 1996
issued and outstanding (NOTE 6) 1,000,000 21,002
Additional paid-in capital 208,053,796 30,648,489
Accumulated deficit (136,620,579) (56,535,558)
-----------------------------
Total shareholders' (deficiency) equity $ 72,433,217 (25,866,067)
=============================
$218,611,231 54,252,217
=============================
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Revenue:
Premiums from owners/providers $132,575,894 $135,544,112 $ 63,630,797
Other premium revenue 239,132,416 112,125,670 38,819,206
Other, principally administrative service fees 2,045,011 7,863,006 7,621,790
Interest income 3,652,910 1,843,520 1,222,246
---------------------------------------------------
Total revenue 377,406,231 257,376,308 111,294,039
Expenses:
Medical services to owners/providers 63,882,103 37,026,903 17,319,035
Hospital services to owners/providers 64,553,166 30,156,890 11,068,909
Other medical services 148,812,233 105,551,393 38,548,819
Other hospital services 101,521,355 63,760,554 24,637,249
Selling, general and administrative 55,106,022 50,734,197 32,638,106
Management fee - QualMed, Inc. (NOTE 11) 7,502,899
Depreciation and amortization 1,404,192 879,306 674,433
Interest - Foundation Health Systems, Inc. 1,790,410
Other interest 91,163 11,247 90,048
Restructuring costs (NOTE 12) 12,825,570
Write-off of intangible asset (NOTE 7) 986,782
---------------------------------------------------
Total expenses 457,489,113 288,120,490 125,963,381
---------------------------------------------------
Net loss before provision for state income taxes (80,082,882) (30,744,182) (14,669,342)
Provision for state income taxes (NOTE 8) 2,139 924 71,603
---------------------------------------------------
Net loss $(80,085,021) $(30,745,106) $(14,740,945)
===================================================
Net loss per common share $ (9.18) $ (14.64) $ (8.65)
===================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Statements of Shareholders' (Deficiency) Equity
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------------- ADDITIONAL SHAREHOLDERS'
PAR PAID-IN ACCUMULATED (DEFICIENCY)
SHARES VALUE CAPITAL DEFICIT EQUITY
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 1,060,053 $ 10,601 $ 15,341,561 $(11,049,507) $ 4,302,655
Reclassification of FOHP-NJ Practitioner
Provider Common Stock from temporary equity 511,800 5,118 7,671,882 7,677,000
Redemption of FOHP-NJ Practitioner Provider
Common Stock (100) (1) (1,499) (1,500)
Conversion of outstanding shares of FOHP-NJ
Common Stock to FOHP, Inc. Common Stock-NJ:
FOHP-NJ Institutional Provider (1,020,051) (10,201) (10,201)
FOHP-NJ Other Provider (40,002) (400) (400)
FOHP-NJ Practitioner Provider (511,700) (5,117) (5,117)
FOHP, Inc. Common Stock-NJ issued (at $15 per
share) 2,100,173 21,002 7,931,516 7,952,518
Payment of issue costs (294,971) (294,971)
Net loss (14,740,945) (14,740,945)
-------------------------------------------------------------------------------
Balance at December 31, 1995 2,100,173 21,002 30,648,489 (25,790,452) 4,879,039
Net loss (30,745,106) (30,745,106)
------------------------------------------------------------------------------
Balance at December 31, 1996 2,100,173 21,002 30,648,489 (56,535,558) (25,866,067)
Redemption of FOHP, Inc. Common Stock-NJ (13,334) (133) 133 -
Conversion of outstanding shares of FOHP, Inc.
Common Stock-NJ to Common Stock:
FOHP, Inc. Common Stock-NJ (2,086,839) (20,869) (20,869)
Issued Common Stock (at $.01 per share) 2,086,839 20,869 20,869
Issued Common Stock (April 30, 1997 at $10.12
per share) 168,109 1,681 1,699,440 1,701,121
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 (NOTE 2) $107,730,254 107,730,254
Net loss (80,085,021) (80,085,021)
------------------------------------------------------------------------------
Balance at December 31, 1997 100,000,000 $1,000,000 $208,053,796 $(136,620,579) $72,433,217
==============================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(80,085,021) $(30,745,106) $(14,740,945)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,404,192 879,306 674,433
Loss from sale of assets 80,966
Write-off of deferred issuance costs 1,132,656
Write-off of intangible asset 986,782
Interest cost converted to debt 1,247,337
Changes in operating assets and liabilities:
Accounts receivable from owners/providers (2,890,016) (1,865,379) (4,539,229)
Other accounts receivable 535,554 (414,248) (2,075,825)
Prepaid expenses and other current assets 1,268,812 (1,369,609) 232,524
Restricted cash (12,581,233) (64,648) (893,610)
Other assets 235,417 (368,448) 207,136
Medical claims payable to owners/providers 6,532,707 5,417,849 6,496,873
Other medical claims payable 7,244,247 36,767,869 14,990,425
Accounts payable and accrued expenses 13,088,045 872,013 1,787,571
Due to Foundation Health Systems, Inc. 543,075
Due to QualMed, Inc. 1,192,716
Unearned premium revenue 3,366,996 4,257,570 216,193
Other liabilities (1,202,462) 320,189 890,327
--------------------------------------------------
Net cash (used in) provided by operating activities (58,886,012) 13,687,358 4,232,655
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (1,799,093) (904,733) (1,020,993)
Proceeds from sale of equipment 27,260
--------------------------------------------------
Net cash used in investing activities (1,771,833) (904,733) (1,020,993)
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred issuance costs (1,441,465)
Issuance of convertible debentures 80,701,120
Issuance of subordinate debentures 24,000,000
Issuance of common stock 7,640,329
-------------------------------------------------
Net cash provided by financing activities 103,259,655 - 7,640,329
-------------------------------------------------
Increase in cash and cash equivalents 42,601,810 12,782,625 10,851,991
Cash and cash equivalents at beginning of year 36,664,911 23,882,286 13,030,295
-------------------------------------------------
Cash and cash equivalents at end of year $ 79,266,721 $ 36,664,911 $23,882,286
=================================================
SUPPLEMENTAL INFORMATION
Interest paid for the year $ 48,319 $ 7,488 $ 725,123
=================================================
Conversion of debentures into common stock $ 70,654,051 $ - $ -
=================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements
December 31, 1997
1. GENERAL
FOHP, Inc. (the "Company") 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. ("FOHP-PA"), a Pennsylvania corporation, First Option Health
Plan of Maryland, Inc.("FOHP-MD"), a Maryland corporation, First Option Health
Plan of Delaware, Inc.("FOHP-DE"), a Delaware corporation, and FOHP Agency,
Inc., a New Jersey corporation, each formed in 1995, and First Option Dental,
Inc.("First Dental"), a New Jersey corporation, formed in 1996. These other
subsidiaries have not commenced operations. The Board of Directors of the
Company recently approved the dissolution of FOHP-NY, FOHP-MD, FOHP-DE and First
Dental.
The Company is a New Jersey corporation which was formed in May 1994. The
Company was formed to effect the reorganization of First Option Health Plan of
New Jersey, Inc. ("FOHP-NJ") into a holding company structure (the
"Reorganization"), which was consummated on June 8, 1995. The Reorganization was
completed through an exchange of FOHP-NJ's outstanding common stock for shares
of the 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.
Effective December 8, 1997, through the conversion of debentures (the
"Convertible Debentures") to common stock, the Company became a 98% owned
subsidiary of Foundation Health Systems, Inc. (Note 2). The Company is dependent
upon the availability of funds, as needed, from 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.
During the summer of 1996, as a result of FOHP-NJ's statutory net worth
deficiency discussed in Note 2 and the conditions imposed by the New Jersey
Departments of Banking and Insurance and Health and Senior Services (the
"Departments"), the Board of Directors of the Company discontinued the Company's
expansion efforts in states other
F-7
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
1. GENERAL (CONTINUED)
than New Jersey, including expansion efforts in New York, Pennsylvania and
Maryland. The Company currently has no plans to expand into any other state.
The statement of operations and statement of cash flows for 1996 include the
results of the wholly-owned subsidiary, FMCO, which was sold on December 31,
1996. On a consolidated basis, the revenue and operating results of FMCO were
not a significant part of the Company's revenue and operating results (Note 7).
Health care providers investing in the Company are required to enter into
provider agreements (the "Provider Agreements") with the Company. The Provider
Agreements have an initial term of one year and are renewable annually. Such
agreements with acute care institutions and certain other health care providers
may be terminated either by mutual consent of both parties or, after the initial
one year term, by either party upon 90 days written notice; agreements with
physicians may be terminated by either party upon 60 days written notice.
Provider agreements also may be terminated for breaches specified therein. The
Provider Agreements, among other things, establish covered services, billing and
payment procedures, and reimbursement methods.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company has incurred a 1997 consolidated net loss of $80,085,021 and has an
accumulated deficit of $136,620,579 at December 31, 1997. In order for the
Company's principal operating subsidiary FOHP-NJ to meet its 1997 statutory net
worth requirements pursuant to its COA granted by the Departments, the Company
must generate sufficient operating profits and/or obtain one or more capital
infusions.
In an effort to increase capital, FOHP-NJ effected several operational changes
in 1996. The operational changes made by FOHP-NJ included (a) the implementation
of a modified provider reimbursement schedule which became effective on April 1,
1996, for purposes of reducing medical costs, (b) the implementation of a hiring
freeze and suspension of bonus payments and the use of consultants in order to
control FOHP-NJ's administrative costs, (c) the implementation of a program to
generate increased operating profits by requiring certain acute care
shareholders which had not met their enrollment commitments to meet such
commitments in order to remain shareholders of the Company and providers in the
FOHP-NJ network, and (d) the discontinuation of expansion efforts in states
other than New Jersey. In connection with FOHP-NJ's plan to remedy the statutory
net worth deficiency, in October 1996 the Board of Directors of the Company
initially approved a $30 million investment by FHS, a Delaware corporation
F-8
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
formerly known as Health Systems International, Inc., into the Company. At
closing, FHS was to purchase $30 million of debentures convertible into 40% of
the Company's outstanding equity and FHS would have received an option to
acquire another 11% ownership. After closing, FHS would have been obligated to
either acquire up to an additional 20% of the outstanding equity of the Company,
or require the Company to have repurchased that amount with FHS financing.
However, due to a significant increase in medical claims expenses during the
fourth quarter of 1996 as a result of more complete claim payment data, in
January 1997 FHS exercised its right to re-negotiate certain terms of the
original Securities Purchase Agreement among FHS, the Company and FOHP-NJ. Under
the terms of the renegotiated Securities Purchase Agreement (the "Amended
Securities Purchase Agreement"), 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 the 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 is calculated in accordance with the Amended
Securities Purchase Agreement. 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
December 31, 1997, $1,247,337 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 totalling $107,730,254 has been
recorded to reflect the excess of FHS's purchase price over the approximate fair
value of the net assets acquired. The acquisition was treated as a purchase for
accounting purposes. Allocation of purchase price is subject to valuations and
other studies which are not yet complete. However, management of the Company
does not believe such differences will have a material impact on the results of
operations and shareholders' equity. The goodwill will be amortized on a
straight line basis not exceeding forty years. Amortization for the one month
period ended December 31, 1997, which approximated $368,000, has not been
reflected in the Statement of Operations as it has been deemed immaterial to the
Company's operations.
As of December 31, 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.
F-9
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following are significant accounting policies of the Company:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
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 at December 31, 1997
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 December 31, 1997, FOHP-NJ was required to maintain $49,384,483 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 regulation. The Insolvency Deposit is
calculated based on the current financial statements and is required to be
funded by June 30, 1998. As of December 31, 1997, FOHP-NJ had $12,510,878 on
deposit with the DOI. FOHP-NJ has obtained approval from the DOI to fund the
remaining Insolvency Deposit quarterly through December 31, 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
December 31, 1997, FOHP-NJ had $1,335,804 on deposit for its federal
programs.
F-10
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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-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. 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
F-11
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
continually monitored and reviewed and, as settlements are made or estimates
adjusted, the resulting differences are reflected in the current period of
operations.
FOHP-NJ's arrangements for commercial products with hospitals are primarily on a
per diem reimbursement basis and with physicians on a discounted fee for service
basis.
Under the contract with the NJDHS-DMAHS for Medicaid and HCFA for Medicare,
providers are reimbursed for health care services provided to Medicaid and
Medicare eligible members on a per member, per month capitation basis for
primary care services, fee for service basis for specialty services and per diem
arrangement for inpatient services. For 1996, payments to providers are subject
to a withhold of up to 15% of the reimbursement rate for Medicaid claims and 10%
for Medicare claims. The Medicaid withholds are segregated into geographically
designated risk pools. Payments from the risk pools are settled annually with
the participating providers based on annual incurred costs. At settlement, if
there is a surplus in any of the risk pools, such surplus is first used to fund
deficits in other risk pools, after which any remaining surplus will be
distributed among all providers. The Medicare withhold program is a statewide
program with one risk pool which covers anticipated health care expenses. At
settlement, if there is a surplus of funds, FOHP-NJ will retain 10% for a
contingency reserve pool that will be available to offset any future year
losses, with the remaining surplus funds being distributed among the providers.
If a deficit fund exists, the withholds will be applied to the deficit with
FOHP-NJ assuming the responsibility for the remaining deficit. Estimated
surpluses associated with these contracts are included in medical claims
payable. During 1997, Medicare and Medicaid withhold programs were terminated.
FOHP-NJ also contracts with another party for the arrangement of mental health
services provided to enrollees in its health plans. FOHP-NJ pays for such
services on a capitated basis. If the costs of such services are less than the
capitation payments, the amount of any savings is shared equally by FOHP-NJ and
the servicer. If costs are greater than the capitation payments, any shortfall
must be funded equally by FOHP-NJ and the servicer.
Also included in medical claims payable is a premium deficiency accrual related
to FOHP-NJ's Medicare product.
F-12
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
Advertising costs are charged to operations when the advertising first takes
place and approximated $1,131,000, $2,154,000 and $1,692,000 for the years 1997,
1996 and 1995, respectively.
INCOME TAXES
The Company provides for income taxes based on income recognized for financial
statement purposes. The Company recognizes a deferred tax asset or liability for
the expected future tax effects attributable to the temporary differences
between the tax and financial statement bases of assets and liabilities.
Deferred tax assets and liabilities are adjusted to reflect changes in tax rates
or other provisions of applicable federal and state tax laws in the period in
which such changes are enacted. Deferred tax assets are recognized unless it is
more likely than not that some portion or all of the deferred tax assets will
not be recovered.
PER SHARE DATA
Per share data are based on the weighted average number of shares of all classes
of common stock outstanding during the period (8,724,799 in 1997, 2,100,173 in
1996 and 1,703,908 in 1995).
In December 1997, FHS converted Convertible Debentures into the Company's Common
Stock. If the conversion had been effective January 1, 1997, the net loss per
common share would have been $0.80.
RECLASSIFICATION
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the current year presentation.
F-13
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
3. ACCOUNTS RECEIVABLE
The following is the activity of the allowances for doubtful accounts and
retroactive terminations:
ACCOUNTS
RECEIVABLE FROM
OWNERS/ OTHER ACCOUNTS
PROVIDERS RECEIVABLE
--------------------------------
Balance, January 1, 1995 $ 100,300
Provision for bad debts 232,604
Provision for retroactive terminations 442,256
Write-offs (98,945)
----------------
Balance, December 31, 1995 676,215
Provision for bad debts 431,849
Provision for retroactive terminations $1,600,000 349,579
Write-offs (1,357,643)
--------------------------------
Balance, December 31, 1996 1,600,000 100,000
Provision for bad debts 32,316 475,775
Provision for retroactive terminations 2,283,905
Write-offs (709,962) (352,061)
--------------------------------
Balance, December 31,1997 $ 922,354 $ 2,507,619
================================
4. FURNITURE AND EQUIPMENT
Furniture and equipment consists of
the following:
1997 1996
----------------------------------
Leasehold improvements $ 247,640 $ 258,381
Furniture and fixtures 767,401 806,518
Equipment 3,740,779 2,090,020
Automobiles 74,096 68,113
----------------------------------
4,829,916 3,223,032
Less accumulated depreciation (2,349,874) (1,338,474)
----------------------------------
$2,480,042 $ 1,884,558
==================================
Depreciation expense was $1,095,383, $879,306 and $563,769 for 1997, 1996 and
1995, respectively.
F-14
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
5. 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 audited 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.
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 (5.85% as of December 31, 1997). Interest is due
and payable within ten days after the end of each quarter, subject to the terms
noted above.
6. COMMON STOCK
In March 1997, the Company redeemed 13,334 shares of Common Stock-NJ at no cost
from a New Jersey acute care institution which had not complied with the
enrollment provisions of the Company's Certificate of Incorporation applicable
to it.
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. As a result, the 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, and 10,000,000 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 of the Company's Certificate of Incorporation
was amended, 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
F-15
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
6. COMMON STOCK (CONTINUED)
providers who enter into and maintain a provider agreement with a subsidiary of
the Company may purchase Common Stock. Acute care institutions which 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.
7. FMCO
In August 1995, FOHP-NJ and the sellers of FMCO (the "Sellers") agreed to
terminate their existing relationships and entered into a Settlement Agreement
and General Release (the "Settlement Agreement"). Pursuant to this Settlement
Agreement, the consulting agreements between the Sellers and FMCO were
terminated and, in connection therewith, the Sellers were paid, in the
aggregate, $218,000 which is included in the Holding Company's 1995 selling,
general and administrative expenses.
In December 1995, management determined that due to the recent loss of business
volume from certain FMCO customers and because of current and projected
operating losses of FMCO, the recoverability of this intangible asset could not
be assured. Accordingly, the net carrying value of $986,782 was written-off in
1995.
In December 1996, the Company sold all of the outstanding common stock of FMCO
to an unrelated third party for $250,000, plus, subject to certain limitations,
a percentage of collections on accounts receivable that were greater than 90
days old as of September 30, 1996 collected after November 1, 1996. As a result
of the transaction, the Company recorded a loss of approximately $145,000.
Revenues and operating results of FMCO were not significant in 1996.
8. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
No federal income taxes have been provided for or paid since the Company and its
subsidiaries have incurred operating losses and income tax reporting purposes.
For state purposes, each entity files separately. At December 31, 1997, net
operating loss ("NOL")
F-16
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
carryforwards for federal and state income tax reporting purposes approximate
$105,200,000 subject to the limitation discussed below. These losses will be
available to offset future taxable income. Such NOL's expire through 2012 for
federal purposes and between 2000 and 2012 for state tax purposes.
Internal Revenue Code Section 382 limits the potential utilization of net
operating loss carryforwards in periods following a corporate "ownership
change". In general, for federal income tax purposes, an ownership change is
deemed to occur if the percentage of stock of a loss corporation owned by one or
more "5% shareholders" has increased by more than 50 percentage points over the
lowest percentage of such stock owned during a three year testing period. As a
result of FHS's investment in the Company during 1997, a change in ownership has
occurred and the Company's ability to utilize its NOL carryforwards will be
significantly limited.
The tax effects of temporary differences that give rise to deferred tax assets
are as follows:
DECEMBER 31
1997 1996
-------------------------------
Capitalization of start-up costs and
organization costs $ 603,000 $ 2,987,000
Net operating loss carryforwards 42,990,000 15,039,000
Reserve discounting 877,000 738,000
Allowances for doubtful accounts and
retroactive terminations 1,200,000 595,000
Other 2,287,000 726,000
Restructuring costs 3,832,000
-------------------------------
Total deferred tax assets 51,789,000 20,085,000
Valuation allowance for deferred
tax assets (51,789,000) (20,085,000)
-------------------------------
Net deferred tax assets $ - $ -
===============================
The valuation allowance has been recorded due to the uncertainty of the
realization of the deferred tax asset since the realization of such asset is
dependent on future operating profits of the Company.
F-17
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The effective income tax rate for 1997, 1996 and 1995 varied from the statutory
federal income tax rate as follows:
1997 1996 1995
-----------------------------
Statutory federal income tax rate 35% 35% 35%
State income taxes 6 6 6
-----------------------------
Subtotal 41 41 41
Valuation allowance (41) (41) (41)
-----------------------------
Effective income tax rate -% -% -%
=============================
9. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution (401[k]) plan covering
substantially all of its employees. Employees may contribute to the plans after
completing certain service requirements. The Company matches 50% of employee
contributions not to exceed (i) limits established under Section 415 of the
Internal Revenue Code or (ii) the lesser of 25% of compensation or $30,000.
Total plan expense for 1997, 1996 and 1995 amounted to $403,000, $406,000 and
$197,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under noncancelable lease arrangements. The
leases are for terms of 5 years and generally provide for renewal options of up
to 5 additional years. Total rent expense for 1997, 1996 and 1995 was
approximately $1,403,000, $1,796,000 and $927,000, respectively.
The following is a schedule of minimum future payments on long-term operating
leases at December 31, 1997:
1998 $1,868,334
1999 702,844
2000 298,742
2001 167,978
2002 44,602
----------
$3,082,500
==========
F-18
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
SERVICE AGREEMENT
FOHP-NJ entered into an agreement with a claims processing company to provide
recordkeeping and data processing functions to FOHP-NJ on a fee for services
basis. The agreement expires March 31, 1998. FOHP-NJ has the right to terminate
this agreement without cause upon not less than 180 days prior written notice
provided that FOHP-NJ does so by acquiring a license for the system used by the
service bureau processor. The cost for the system license is approximately
$800,000 and is subject to reduction as long as the Company continues the
agreement.
MEDICARE CONSULTING AGREEMENT
In January 1995, FOHP-NJ entered into an agreement with another company to
assist FOHP-NJ in obtaining approval from HCFA to offer health care products to
Medicare beneficiaries in New Jersey. Such approval was obtained in December
1995. Fees paid by FOHP-NJ, including specified bonus payments, under the
agreement totaled $1,012,604, $1,621,186 and $392,000 in 1997, 1996 and 1995,
respectively. In addition, a variable percentage (.5% to 1%) of any Medicare
revenue generated by FOHP-NJ for a total of eight years after FOHP-NJ entered
into a Medicare Risk Contract with HCFA will be payable to the other company.
The minimum payment for each year, pursuant to such variable percentage, is
$1,000,000 and the maximum for any such payment is $3,500,000. In connection
with the sale of Convertible Debentures (see Note 2), the Company has agreed
under the terms of the Amended Securities Purchase Agreement with FHS to
negotiate a termination of its agreement with the other company. The Company is
currently involved in litigation with respect to this matter. Management
believes that such litigation will not result in a material adverse effect on
the Company's consolidated financial statements.
REINSURANCE ARRANGEMENTS
The Company has entered into a reinsurance contract to limit its losses on
individual claims. The reinsurance contract for 1997 provides for reimbursement
of eligible hospital claims per enrollee which exceed $150,000 for all enrollees
within a calendar year up to a maximum reimbursement per enrollee of $1,000,000
per calendar year and $2,000,000 per lifetime. The reinsurance contracts for
1996 and 1995 were consistent with the 1997 contract, except the contracts
provided for reimbursement of eligible hospital claims which exceed $75,000 for
commercial and Medicaid enrollees and $100,000 for Medicare enrollees. Per diem
arrangements with hospitals are also subject to maximum limits dependent upon
length of stay, and claims per enrollee which exceed certain deductibles are
subject to coinsurance provisions.
F-19
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Reinsurance expense, net of recoveries, was approximately $4,294,000, $55,000
and $695,000 for the years ended 1997, 1996 and 1995, respectively, and is
included in medical and hospital services expense.
STATUTORY NET WORTH
Financial statements issued in accordance with statutory accounting practices
differ from financial statements issued in accordance with generally accepted
accounting principles (GAAP). Statutory financial statements exclude certain
items included in GAAP financial statements. These "non-admitted" items include
certain assets such as prepaid expenses, equipment other than certain computer
equipment, organizational costs, certain loans and receivables, supplies and
other items.
FOHP-NJ, pursuant to its COA to operate an HMO in New Jersey, is required to
maintain a minimum statutory net worth. The minimum statutory net worth
requirement at December 31, 1997 and 1996 amounted to $23,694,000 and
$15,054,000, respectively. In addition, under the terms of its COA, if net worth
is less than 125% of the required minimum, FOHP-NJ is required to submit a plan
of action to the DOI. FOHP-NJ has obtained approval of its Plan of Action which
states FOHP-NJ will have a positive statutory net worth for the year ended
December 31, 1997 and that FOHP-NJ statutory net worth will be 100% of the
required minimum by December 31, 1998. FOHP-NJ's statutory net worth
requirements are shown below:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- -------------------------------------------
GAAP ELIMINATIONS STATUTORY GAAP ELIMINATIONS STATUTORY
-------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets $108,142,744 $3,463,563 $104,679,181 $ 62,225,369 $12,009,871 $50,215,498
Liabilities 104,252,789 104,252,789 76,705,815 76,705,815
-----------------------------------------------------------------------------------------
Net equity
(deficiency) $ 3,889,955 $3,463,563 $ 426,392 $(14,480,446) $12,009,871 $(26,490,317)
=========================================================================================
</TABLE>
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.
F-20
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
11. RELATED PARTY TRANSACTION
Pursuant to the Amended Securities Purchase Agreement with FHS, the Company is
required to pay FHS, or a designated subsidiary of FHS (QualMed, Inc.), a
management fee based on 2% of total revenue of the Company's health plans. For
the year ended December 31, 1997, the Company charged $7,502,899 to expense
related to these management fees.
The amount due to FHS at December 31, 1997, represents interest payable related
to the Convertible Debentures. The amount due to QualMed, Inc. at December 31,
1997 primarily represents management fees payable.
12. RESTRUCTURING COSTS
Pursuant to the Amended Securities Purchase Agreement with FHS, the Company
recorded the impact of a restructuring plan designed to increase overall
profitability of FOHP-NJ by scaling back certain product lines that have not met
profitability expectations. Restructuring costs of approximately $12.8 million
represent provision for lease termination costs, employee termination benefits
and write-down of the related assets. Included in the total restructuring costs
is approximately $2.6 million related to employee termination benefits for
approximately 140 employees from various departments of the Company. As of
December 31, 1997, approximately $116,000 of termination benefits have been paid
and six employees have been actually terminated.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
RESTRICTED CASH: The fair value of restricted cash is determined through
quoted market prices.
CONVERTIBLE AND SUBORDINATED DEBENTURES: The Company's Convertible Debentures
and Subordinated Debentures carry variable interest rates, therefore, fair
values approximate carrying values.
F-21
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
The carrying amounts and fair values of the Company's financial instruments are
as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $79,266,721 $79,266,721 $36,664,911 $36,664,911
Restricted cash 13,846,682 13,846,682 1,265,449 1,265,449
Convertible debentures 11,294,406 11,294,406
Subordinated debentures 24,000,000 24,000,000
</TABLE>
The carrying amount of all other financial instruments reported in the
consolidated balance sheets approximate their fair value.
14. IMPACT OF YEAR 2000 (UNAUDITED)
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, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will function properly with respect to dates in the Year 2000 and
thereafter. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
F-22
<PAGE>
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Consolidated Financial Statements (continued)
14. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
The Company has developed a plan to modify its information technology to be
ready for the Year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999 and as yet is unable to estimate the cost. The Company does not
expect this project to have a significant effect on operations. Expenditures
through December 31, 1997 have not been material. The Company will implement its
plan by placing a higher priority on the systems with significant operational
implications. The Company will continue to implement systems with strategic
value though some projects may be delayed due to resource constraints.
F-23
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
EXHIBITS
to
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1997
--------------------------
FOHP, INC.
(Exact name of registrant as
specified in its charter)
--------------------------
================================================================================
<PAGE>
FOHP, INC.
EXHIBIT INDEX
EXHIBIT NO.
- - -----------
b 2.1 Agreement of Merger and Plan of Reorganization dated April
12, 1995 among FOHP-NJ, the Registrant and FOHP Transition
Company, a wholly-owned subsidiary of the Registrant.
f 3.1 Amended and Restated Certificate of Incorporation of the
Registrant, as filed with the Secretary of State of the
State of New Jersey on April 17, 1997.
ff 3.2 By-laws of Registrant, as amended.
fff 4.1 Specimen certificate representing Registrant's Common Stock.
4.2 Convertible Subordinated Surplus Debentures in the aggregate
principal amount of $29,000,000 issued by the Registrant to
Foundation Health Systems, Inc. ("FHS") on December 8, 1997.
4.3 Subordinated Surplus Debentures in the aggregate principal
amount of $24,000,000 issued by the Registrant to FHS on
December 31, 1997.
(*) 10.1 Employment Agreement dated May 6, 1997 between FHS and Roger
W. Birnbaum.
(*) 10.2 Employment Agreement dated July 1, 1997 among the
Registrant, FHS and Joseph Singer, M.D.
(*) 10.3 Employment Agreement dated February 8, 1998 between FHS and
Marc M. Stein.
a 10.7 Lease Agreement dated September 1, 1994 between Theodore G.
Sourlis and Elaine Sourlis, husband and wife, and First
Option Health Plan of New Jersey, Inc. ("FOHP-NJ"), a
wholly-owned subsidiary of the Registrant, and the undated
Addendum thereto.
E-1
<PAGE>
a 10.10 Form of Hospital Participation (provider) Agreement required
to be executed by each NJ Acute Care Institution
participating in the FOHP-NJ network and by FOHP-NJ.
a 10.11 Form of Individual Practice Association (provider) agreement
required to be executed by FOHP-NJ and the IPAs
participating in the FOHP-NJ network.
a 10.12 Form of Individual Practitioner Participation (provider)
Agreement required to be executed by FOHP-NJ and each NJ
Practitioner participating in the FOHP-NJ network.
a 10.13 Form of Provider Agreement (Non-Acute Care) required to be
executed by FOHP-NJ and each NJ Other Provider participating
in the FOHP-NJ network.
c 10.14.1 Form of First Option Master Group Contract (point of
service) for large employer groups.
c 10.14.2 Form of First Option Master Group Contract (health
maintenance organization) for large employer groups.
c 10.14.3 Form of First Option Master Group Contract for small
employer groups.
c 10.14.4 Form of First Option Individual Contract for individuals.
b 10.21 Agreement to provide HMO services to Medicaid recipients
dated February 8, 1995 between FOHP-NJ and the State of New
Jersey Department of Human Services, Division of Medical
Assistance and Health Services.
d 10.22 Sublease dated as of December 15, 1995 between FOHP-NJ and
The Continental Insurance Company.
d 10.28 Mental Health Management Agreement dated July 1, 1994
between FOHP-NJ and Mental Health Network, Inc., and
amendment thereto entered into in January 1996.
d 10.33 Contract between FOHP-NJ and the Secretary of the Department
of Health and Human Services, who has delegated authority to
the Administrator of the Health Care Financing
Administration, with respect to health insurance benefits
for the aged and disabled (Contract No. H3155).
E-2
<PAGE>
d 10.43 Capital Contribution Agreement dated as of December 31, 1995
between the Registrant and FOHP-NJ.
e 10.45.1 Amended and Restated Securities Purchase Agreement dated
February 10, 1997 among the Registrant, FOHP-NJ and Health
Systems International, Inc. (the predecessor to FHS) and the
following exhibits thereto: Exhibit A - Form of Debentures;
Exhibit B-1 - Form of Amended and Restated Certificate of
Incorporation of the Registrant; Exhibit B-2 - Form of
By-laws of the Registrant; Exhibit B-3 - Form of Amended and
Restated Certificate of Incorporation of FOHP-NJ; Exhibit
B-4 - Form of By-laws of FOHP-NJ; Exhibit D-1 - Form of
General Administrative Services Management Agreement; and
Exhibit D-2 - Form of Management Information Systems and
Claims Processing Services Agreement. Upon the request of
the Securities and Exchange Commission, the Registrant
agrees to furnish a copy of Exhibit C-1 - Form of Exclusive
Plan Hospital Provider Agreement, Exhibit C-2 - Forms of
Non-Exclusive Plan Hospital Provider Agreements, Exhibit E -
Form of Investors Agreement, Exhibit F - Form of Opinion of
Outside Counsel of Registrant and FOHP-NJ, Exhibit G - Form
of Officer's Certificate and Exhibit H - Form of Opinion of
Outside Counsel of Health Systems International, Inc., and
Schedules 2.1A through 2.25 as follows: Schedule 2.1A -
Subsidiaries; Schedule 2.1B - Good Standing; Schedule 2.3 -
Rights of First Refusal; Schedule 2.4(a) - SEC Reports;
Schedule 2.4(b) - Unreported Liabilities and Obligations;
Schedule 2.5 - Company's Reports; Schedule 2.6 -
Noncontravention; Schedule 2.7 - Litigation; Schedule 2.9 -
Compliance with Law; Schedule 2.10 - Certain Material
Contracts and Defaults; Schedule 2.11 - Consents; Schedule
2.12 - Licenses, Permits and Governmental Approvals;
Schedule 2.14 - Environmental Matters; Schedule 2.15 -
Properties and Assets; Schedule 2.16 - Taxes; Schedule 2.20
- Insurance; Schedule 2.22 - Employment/Severance Matters;
and Schedule 2.25 - Employee Benefit Plans.
e 10.45.2 Amendment dated March 13, 1997 to the Amended and Restated
Securities Purchase Agreement referenced in Exhibit 10.45.1.
g 10.46 Form of General Administrative Services Management Agreement
dated April 30, 1997 between FHS and the Registrant.
E-3
<PAGE>
h 10.47 Form of Management Information Systems and Claims Processing
Services Agreement dated April 30, 1997 between FHS and the
Registrant.
21. Subsidiaries of the Registrant.
i 27. Financial Data Schedule for year ended December 31, 1997.
- - ----------------
(*) Constitutes a management contract required to be filed as an
exhibit pursuant to Item 14(c) of Form 10-K.
a Incorporated by reference to the identically numbered
exhibit to the Registrant's Registration Statement on Form
S-4 (Registration No. 33-89356).
b Incorporated by reference to the identically numbered
exhibit to Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (Registration No. 33-89356).
c Incorporated by reference to the identically numbered
exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-80817).
d Incorporated by reference to the identically numbered
exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
e Incorporated by reference to Appendices A-H of the
Registrant's definitive Proxy Statement filed with the
Commission on March 19, 1997 in connection with the
Registrant's 1996 Annual Meeting of Shareholders.
f Incorporated by reference to Exhibit 2.1 of the Registrant's
Registration Statement on Form 8-A, effective July 8, 1997.
ff Incorporated by reference to Exhibit 2.2 of the Registrant's
Registration Statement on Form 8-A, effective July 8, 1997.
fff Incorporated by reference to Exhibit 4 of the Registrant's
Registration Statement on Form 8-A, effective July 8, 1997.
E-4
<PAGE>
g Incorporated by reference to Appendix C of the Registrant's
definitive Proxy Statement filed with the Commission on
March 19, 1997 in connection with the Registrant's 1996
Annual Meeting of Shareholders.
h Incorporated by reference to Appendix D of the Registrant's
definitive Proxy Statement filed with the Commission on
March 19, 1997 in connection with the Registrant's 1996
Annual Meeting of Shareholders.
i The Financial Data Schedule is submitted in electronic
format only.
E-5
EXHIBIT 4.2
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SUCH ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
FOHP, INC.
CONVERTIBLE SUBORDINATED SURPLUS DEBENTURES
December 8, 1997
FOHP, Inc., a New Jersey corporation (the "Company"), for value
received, promises to pay to Foundation Health Systems, Inc., a Delaware
corporation formerly known as "Health Systems International, Inc." ("FHS"), or
its registered assigns, the principal sum (such principal sum being referred to
herein as the "Principal Amount") of $29,000,000 and accrued and unpaid interest
thereon. The Principal Amount hereof, and the interest thereon, shall be payable
at the main office of the Company or by mail to the registered address of the
holder hereof on December 8, 2002 (the "Maturity Date"), subject to the
provisions set forth in Section 4 hereof. No such payment shall be required to
the extent that such Principal Amount and interest is or has been converted into
Conversion Shares (as such term is defined in Section 2 hereof) under the terms
of the Debentures evidenced by this instrument (the "Debentures").
These Debentures have been issued in return for additional capital
contributions made by FHS pursuant to Section 6.2 of the Amended and Restated
Securities Purchase Agreement, dated February 10, 1997, as amended by an
Amendment dated as of March 13, 1997, among FHS, the Company and First Option
Health Plan of New Jersey, Inc., a New Jersey corporation and a wholly-owned
subsidiary of FOHP ("FOHP-NJ") (referred to herein, as so amended, as the
"Purchase Agreement"). The Company previously issued to FHS on April 30, 1997
debentures initially representing approximately $51.6 million of principal
amount, the entire remaining principal amount of which debentures was converted
into common stock, par value $.01 per share ("Common Stock"), of FOHP as of
December 1, 1997.
The following is a statement of the rights of the holder hereof and the
conditions to which these Debentures are subject, and to which the holder
hereof, by the acceptance hereof, agrees:
1. Interest. The Principal Amount hereof shall bear interest at an
annual rate equal to the rate charged to FHS under its credit facility (the "BA
Facility") issued by a consortium of commercial banks led by Bank of America,
National Trust & Savings Association or such credit facility as is used to
refinance the BA Facility (the "Rate"), which Rate shall be subject to
adjustment at the beginning of each calendar quarter and shall become due and
-1-
<PAGE>
payable, subject to the provisions of Section 4.1(b) hereof, with respect to any
given calendar quarter within 10 days after the end of such quarter. Any such
interest not paid when due and payable shall be considered "Defaulted Interest"
and shall be included in the Principal Amount hereunder.
2. Conversion.
(a) Any and all portions of the Principal Amount shall be
convertible into such number of shares (referred to herein as "Conversion
Shares") of Common Stock of the Company, at any time prior to or on the Maturity
Date (such conversion ratio being referred to herein as the "Conversion Ratio"),
which will equal, for each $1,000,000 of Principal Amount so converted, an
additional 1.42 percent of the total equity of the Company, as of the date
hereof (as such total equity may be increased from time to time to reflect any
securities issued pursuant to Section 6.2 of, or otherwise expressly
contemplated to be issued under, the Purchase Agreement) on a fully-diluted
basis (i.e., taking into account the conversion of all other securities
convertible into shares of Common Stock, the exercise of all warrants and
options exercisable for shares of Common Stock, and such partial conversion of
such Principal Amount); provided that, once the number of such Conversion
Shares, when added to the other shares of Common Stock and other securities
convertible into shares of Common Stock held by FHS, represent 99.99% of the
fully diluted equity of the Company, then the balance of such Principal Amount
shall not be considered convertible hereunder but shall be subject to and have
all other benefits under the terms and provisions of this Agreement.
(b) The Company hereby represents, warrants and agrees that it
will take all action necessary to ensure that there will exist enough remaining
authorized shares of Common Stock in order to issue such number of Conversion
Shares into which these Debentures are convertible in order to represent the
additional percentages of total equity of the Company as set forth in this
Section 2.
(c) In order to exercise its conversion rights provided under
the terms of this Section 2, the holder hereof will surrender these Debentures,
together with a notice of conversion indicating the portion of the Principal
Amount converted into Conversion Shares substantially in the form attached
hereto as Exhibit A, to the Company at any time during usual business hours at
its office at 1501 Route 66, Neptune, NJ 07754, Attention: President (or at such
other address as the Company may designate from time to time by written notice
to the holder).
3. Issuance of Stock on Conversion.
3.1 Delivery of Certificates. These Debentures shall
have been deemed to have been surrendered for conversion and converted at the
close of business on the date on which these Debentures and notice of conversion
from the holder hereof are received by the Company, and on such receipt the
Company will issue and deliver at its sole expense, as soon as practicable after
such date, a certificate or certificates of its Common Stock evidencing the
number of shares into which these Debentures have been converted to the holder
hereto.
3.2 Lost Certificates. In the event such certificate
or certificates are
-2-
<PAGE>
lost, mutilated or destroyed, such certificate or certificates may be replaced,
provided notice is submitted by the holder of such certificate or certificates,
along with any other required supporting documentation.
3.3 No Fractional Shares. No fractional shares shall
be issued on conversion hereof. If upon any conversion of these Debentures the
holder hereof would be entitled to recover a fraction of a share of Common
Stock, such fraction of a share shall be rounded up or down, as the case may be,
to the nearest whole number of shares of Common Stock.
3.4 Adjustment upon Changes in Capitalization. In the
event of any change in Common Stock by reason of a stock dividend, stock split,
merger, recapitalization, combination, exchange of shares, issuer tender offer
or share repurchase or other similar transaction, the type and number of shares
or securities into which the Debentures is convertible shall be adjusted
appropriately.
4. Ranking of Debentures.
4.1 Obligation to Repay.
(a) The obligation of the Company to repay the
Principal Amount and accrued interest under these Debentures shall be
subordinated to all other indebtedness of the Company and its subsidiaries.
(b) No payments shall be made, in respect of all or
any portion of the Principal Amount or interest thereon, except with the prior
written approval of the New Jersey Department. Such approval may not be withheld
if the Company or FHS provides the New Jersey Department with notice at least 10
business days in advance of any such payments that FOHP-NJ's statutory surplus
will exceed 125 percent of FOHP-NJ's minimum net worth requirement after payment
of the requested amount and for the near future, unless the New Jersey
Department determines that FOHP-NJ's financial condition would be adversely
affected as a result of such payment. The Principal Amount shall be suspended
and shall not mature to the extent FOHP-NJ's net worth, as determined by the New
Jersey Department, is inadequate to make interest payments on these Debentures.
4.2 Bankruptcy, Dissolution and Liquidation. Upon any
bankruptcy, dissolution or liquidation of the Company, these Debentures shall
thereupon be deemed to be converted into Conversion Shares and shall thereupon
be treated as pari passu with then-outstanding shares of capital stock of the
Company.
4.3 No Impairment. Nothing contained in this Section
4 shall impair, as between the Company and the holder hereof, the obligation of
the Company, which is absolute and unconditional, to pay to the holder hereof
the Principal Amount and interest thereon (except to the extent these Debentures
are converted into Conversion Shares) provided that the approval of the State of
New Jersey Department of Banking and Insurance referenced in Section 4.1 herein
is obtained.
-3-
<PAGE>
5. Covenants.
5.1 Affirmative Covenants. From and after the date
hereof until the earlier of the Maturity Date or the conversion of these
Debentures, the Company shall comply with and perform each of the following
covenants and agreements:
5.1.1 Financial Reporting. The Company will furnish
to FHS copies of the following financial statements, reports and information:
(a) as soon as available and in any event within 90
days after the end of each fiscal year of the Company, a copy of the Company's
consolidated annual report (including audited balance sheets, statements of
operations, statements of stockholders' equity and statements of cash flow) for
the Company and its subsidiaries for such fiscal year, prepared in accordance
with generally accepted accounting principles ("GAAP") consistent with the
preceding year, certified by Ernst & Young, LLP or such other independent public
accountants as shall be approved by the holder hereof, which approval shall not
be unreasonably withheld;
(b) as soon as available and in any event within 45
days after the end of each calendar quarter, a consolidated balance sheet,
statement of operations and statement of cash flow for the Company and its
subsidiaries, as of the end of, and for, each such quarter, prepared in
accordance with GAAP consistently applied (subject to the absence of notes and
to customary and reasonable year-end adjustments), certified by the Company's
chief financial officer as fairly and accurately representing the financial
condition of the Company and its subsidiaries as of the end of, and for, the
period covered thereby; and
(c) such other information with respect to the
financial condition and operations of the Company and its subsidiaries as the
holder hereof may reasonably request.
5.1.2 Payment of Taxes and Claims. The Company will
duly pay and discharge, as the same become due and payable, all taxes,
assessments and governmental and other charges, levies or claims levied or
imposed, which are, or which if unpaid might become, a lien or charge upon the
properties, assets, earnings or business of the Company or any of its operating
subsidiaries; provided, however, that nothing contained in this Section 5.1.2
shall require the Company to pay and discharge, or cause to be paid and
discharged, any such tax, assessment, charge, levy or claim so long as the
Company in good faith shall contest the validity thereof and shall set aside on
its books adequate reserves with respect thereto. In the event the Company fails
to satisfy its obligations under this Section 5.1.2, FHS may, but is not
obligated to, satisfy such obligations in whole or in part, and any payments
made and expenses incurred in doing so shall constitute additional indebtedness
to FHS and shall be paid or reimbursed by the Company as additional Principal
Amount.
5.1.3 Selection of Accountants. As long as these
Debentures are outstanding, the holder hereof shall have the right to approve
the accounting firm retained or to be retained by the Company to render
accounting advice thereto (such approval not to be unreasonably withheld).
-4-
<PAGE>
5.1.4 Maintenance of Corporate Existence and Properties.
(a) The Company will, and will cause each of its
operating subsidiaries to, at all times do or cause to be done all things
necessary to maintain, preserve and renew its corporate charter and its rights,
and comply in all material respects with all related laws applicable to the
Company and such operating subsidiary; provided, however, that nothing contained
in this paragraph shall (i) require the Company or such operating subsidiary to
maintain, preserve or renew any right not material in the conduct of the
business of the Company or such operating subsidiary, (ii) prevent the
termination of the corporate existence of such operating subsidiary of the
Company if, in the reasonable opinion of the Board of Directors of the Company,
such termination is not disadvantageous to the holder hereof or (iii) require
the Company or such operating subsidiary to comply with any law so long as the
validity or applicability thereof shall be contested in good faith by
appropriate proceedings.
(b) The Company will as soon as practicable give
written notice to the holder hereof of any litigation, arbitration or
governmental investigation or proceeding, which has been instituted or, to the
knowledge of the Company, is threatened against the Company or any of its
operating subsidiaries, or any of their respective properties, which (i)
involves or is likely to involve a claim or claims for damages, penalties or
awards in excess of $100,000 in the case of claims for which the Company is not
adequately insured or in excess of $300,000 in the case of claims for which the
Company is adequately insured; (ii) if determined adversely to the Company or
such operating subsidiary would have a material adverse effect thereon; or (iii)
relates to the Purchase Agreement or any documents executed pursuant thereto.
(c) The Company will provide or cause to be provided
for itself and its operating subsidiaries insurance against loss or damage of
the kinds customarily insured against by corporations similarly situated, with
reputable insurers, in such amounts, with such deductibles and by such methods
as shall be adequate, and in no event involving material differences from the
insurance currently generally maintained.
(d) The Company will keep true books of records and
accounts in which full and correct entries in all material respects will be made
of all its business transactions and the business transactions of its operating
subsidiaries, and will reflect in its financial statements adequate accruals and
appropriations to reserves, all in accordance with GAAP (subject to customary
and reasonable year-end adjustments) and as otherwise required by the New Jersey
Department.
(e) The Company will, and will cause each of its
operating subsidiaries to, comply with all applicable statutes, rules,
regulations, orders and restrictions relating to federal, state and local laws
and of any governmental department, commission, board, regulatory authority,
bureau, agency and instrumentality with respect thereto, and of any court,
arbitrator or other body with jurisdiction and authority, in respect of the
conduct of the respective businesses thereof and the ownership of their
respective properties, except those, the violations of which would not have a
material adverse effect thereon and except such as are being contested in good
faith.
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5.1.5 Notice of Event of Default. In addition to any
other reporting requirements set forth herein, the Company shall have an
immediate obligation to report to the holder hereof the occurrence of any Event
of Default (as defined in Section 6 hereof) or any event which, with the giving
of notice or the passage of time, or both, would constitute any such Event of
Default.
5.1.6 Board Composition.
(a) Prior to full conversion of these Debentures and
while they are outstanding, FHS shall be permitted to designate such number of
directors on the Board of Directors of the Company and the Boards of Directors
of each of the Company's Subsidiaries as represents the greater of (i) no less
than 15 percent of the directors on the Board of Directors of the Company and
the Boards of Directors of each of the Company's subsidiaries or (ii) such
greater percentage of the directors on the Board of Directors of the Company and
of the Boards of Directors of each of the Company's subsidiaries as is equal to
the percentage ownership by FHS of all outstanding Common Stock in the event
such percentage exceeds 15 percent.
(b) Upon conversion of the entire Principal Amount,
FHS, through its ownership of Conversion Shares, shall be permitted to designate
and elect such number of directors on the Board of Directors of the Company and
the Boards of Directors of each of the Company's subsidiaries as represents the
percentage of the directors on the Board of Directors of the Company and the
Board of Directors of each of the Company's subsidiaries as is equal to FHS'
percentage ownership of all outstanding Common Stock, with such number of
directors to be increased as such ownership may be increased from time to time
notwithstanding any "staggered term" or other conflicting provision (but subject
to the requirements set forth in Article III Section 1 of the Bylaws of the
Company that, during the period specified therein, there be at least three
directors on such Board of Directors who are not designees of FHS).
(c) In no event shall the number of directors of the
Board of Directors of the Company or the board of directors of any of the
Company's subsidiaries exceed 12 without the prior written consent of the holder
hereof (subject to the requirements set forth in Article III Section 1 of the
By-laws of the Company that, during the period specified therein, there be at
least three directors on such Board of Directors who are not designees of FHS).
5.1.7 Use of Proceeds. The Company shall, immediately
upon receipt of the Principal Amount at the Closing on the date hereof, make a
capital contribution of such amount to FOHP-NJ.
5.1.8 Increase of Authorized Capital. In accordance
with Section 2(b) hereof, the Company shall take all action necessary to ensure
that there will exist enough remaining authorized shares of Common Stock in
order to issue such number of Conversion Shares into which these Debentures are
convertible in order to represent the additional percentages of total equity of
the Company set forth in and consistent with Section 2(a) hereof.
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5.2 Negative Covenants. From and after the date
hereof, the Company shall not, and shall cause its operating subsidiaries to
not, do any of the following:
5.2.1 Restrictions on Sale of Assets, Consolidations,
Mergers and Acquisitions.
(a) The Company will not, and will cause each of its
operating subsidiaries to not, sell, lease, transfer or otherwise dispose of all
or a substantial portion of its assets (other than in connection with the sale
of securities issued by the United States government the proceeds of which are
used to purchase additional securities of the United States government).
(b) The Company shall not, and shall cause each of
its operating subsidiaries to not, without the prior written consent of the
holder hereof, consolidate with or merge into any other person or entity or
permit any other person or entity to consolidate with or merge into it;
provided, however, that a subsidiary of the Company may consolidate with or
merge into the Company or a wholly-owned subsidiary of the Company.
(c) The Company shall not and shall cause each of its
operating subsidiaries to not, acquire, by asset or stock purchase, merger or
otherwise, the assets or stock of any other corporation or partnership without
the prior written consent of the holder hereof.
5.2.2 Additional Indebtedness. The Company will not,
and will cause each of its operating subsidiaries to not, create, incur, assume
or suffer to exist any indebtedness for borrowed money ("Borrowed Money") after
the date hereof except for (i) Borrowed Money evidenced by these Debentures and
(ii) other Borrowed Money, incurred with the consent of the holder hereof, the
proceeds of which are used in the ordinary course of business of the Company or
such operating subsidiary, as the case may be.
5.2.3 Liens and Encumbrances. The Company will not,
and will cause each of its operating subsidiaries to not, cause or permit any of
its assets or properties, whether now owned or hereafter acquired, to be subject
to any liens or encumbrances except in the ordinary course of business of the
Company or such operating subsidiary, as the case may be.
5.2.4 Guarantees. The Company shall not and shall
cause each of its operating subsidiaries to not, become liable as a guarantor,
or otherwise, without the prior written consent of the holder hereof, except for
guarantees provided as to obligations of a wholly-owned subsidiary of the
Company.
5.2.5 Restrictions on Dividends, Distributions and
Investments. The Company will not, without the prior written consent of the
holder hereof:
(a) declare or pay any dividend or make any other
distributions on any shares of the Company's capital stock;
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(b) except as otherwise permitted by the Purchase
Agreement, redeem, purchase or otherwise acquire for value any shares of the
Company's capital stock or any warrants, rights or other options to purchase
such capital stock; or
(c) except as otherwise permitted by the Purchase
Agreement permit its ownership of voting capital stock of any subsidiary of the
Company to be less than 100 percent.
5.2.6 Issuance of Additional Stock. Except as
otherwise expressly contemplated herein, the Company will not, without the prior
written consent of the holder hereof, issue any additional shares of Common
Stock or any other capital stock of the Company, or any options, stock
appreciation rights, warrants or other rights to acquire the Common Stock or any
interest therein, or other rights to acquire authorized and unissued shares of
capital stock of the Company, or modify terms of existing securities so as to in
any manner dilute the existing conversion rights of the holder hereof.
5.2.7 Granting of Pre-Emptive Rights and Rights of
First Refusal. Except as otherwise expressly contemplated herein, the Company
will not, without the prior written consent of the holder hereof, grant any
pre-emptive rights or rights of first refusal to any shareholders of the
Company.
5.2.8 Additional Prohibited Transactions. Neither the
Company nor any of its subsidiaries shall take any of the following actions or
engage in any of the following transactions without the prior written consent of
the holder hereof:
(a) amend its certificate of incorporation or bylaws
(except to take the action to increase the authorized number of shares of Common
Stock as contemplated by Section 5.1.8 hereof);
(b) make capital expenditures (including such
expenditures made by the Company and all such subsidiaries) exceeding, in the
aggregate, $1,000,000 during any calendar year;
(c) make any material change in the scope of the
business of the Company;
(d) file for receivership, dissolution, liquidation
or bankruptcy;
(e) acquire equity securities (other than pursuant to
a buy back or repurchase of equity securities issued by the Company) or assets
of any other person or entity involving payments aggregating in excess of
$1,000,000 during any calendar year;
(f) file a registration statement with respect to the
public sale of securities of the Company under the Securities Act of 1933, as
amended; or
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(g) enter into, assume or become bound by any
agreement to do any of the foregoing or otherwise attempt to do any of the
foregoing.
6. Default.
6.1 Events of Default. An "Event of Default" shall
exist if any of the following occurs and is continuing as to the Company:
(a) Default shall be made by the Company on a payment
of the Principal Amount or interest on these Debentures, when and as such
Principal Amount and interest, as the case may be, shall become due and payable
by acceleration or otherwise; or
(b) Default shall be made in the performance or
observance of any covenant, condition, undertaking or agreement contained in
these Debentures or the Purchase Agreement (other than any defaults relating to
actions taken by, or omissions of, FHS in connection with the performance of its
obligations under the Management Agreements) (as defined in the Purchase
Agreement), and such default shall continue for 20 days without being cured
after the holder hereof provides to the Company written notice of such default;
or
(c) Any warranty, representation or other statement
made by or on behalf of the Company contained in these Debentures or the
Purchase Agreement shall be false or misleading in any material respect at the
time such warranty, representation or other statement, as the case may be, was
made; or
(d) The Company or any of its operating subsidiaries
shall (i) file a petition seeking relief for itself under the United States
Bankruptcy Code, as now constituted or hereafter amended from time to time, or
file an answer consenting to, admitting the material allegations of or otherwise
not controverting, or fail timely to controvert, a petition filed against the
Company seeking relief under the United States Bankruptcy Code, as now
constituted or hereafter amended from time to time or (ii) file a petition or
answer with respect to relief under the provisions of any other now-existing or
future applicable bankruptcy, insolvency or other similar law of the United
States or any state thereof or of any other country or province thereof or
jurisdiction providing for the reorganization, winding-up or liquidation of
corporations or an arrangement, composition, extension or adjustment with
creditors; or
(e) (i) An order for relief shall be entered against
the Company or any of its operating subsidiaries under the United States
Bankruptcy Code, as now constituted or hereafter amended from time to time,
which order is not stayed and remains unstayed for a period of 45 days, (ii) the
entry of an order, judgment or decree by operation of law or by a court or by
the New Jersey Department having jurisdiction in the premises which is not
stayed and remains unstayed for a period of 45 days (A) adjudging the Company or
any of its operating subsidiaries bankrupt or insolvent under, or ordering
relief against the Company or any of its operating subsidiaries or by the New
Jersey Department under, or approving a properly-filed petition seeking relief
against the Company or any of its operating subsidiaries or by the New Jersey
Department under the provisions of any other now-existing or future applicable
bankruptcy,
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<PAGE>
insolvency or other similar law of the United States or any state thereof or of
any other country or province thereof or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or any arrangement,
composition, extension or adjustment with creditors, (B) appointing a receiver,
supervisor, liquidator, assignee, sequestrator, trustee or custodian of the
Company or any of its operating subsidiaries or of any substantial portion of
the property of the Company or any such operating subsidiaries, or (C) ordering
the reorganization, winding-up or liquidation of the affairs of the Company or
any of its subsidiaries, or (iii) the expiration of 60 days after the filing of
any involuntary petition against the Company or any of its operating
subsidiaries seeking any of the relief specified in paragraph (d) of this
Section 6.1 or this Section 6.1 (e) without dismissal of such petition; or
(f) The Company or any of its operating subsidiaries
shall (i) make a general assignment for the benefit of creditors, (ii) consent
to the appointment of, or taking possession of all or a substantial part of the
property of the Company or any such operating subsidiary by, a receiver,
supervisor, liquidator, assignee, sequestrator, trustee or custodian of the
Company or any such operating subsidiary, (iii) admit its insolvency or
inability to pay its debts generally as such debts become due, (iv) fail
generally to pay its debts as such debts become due or (v) take any action
(including such actions taken by the Company's directors or a majority of the
Company's shareholders) regarding the dissolution or liquidation of the Company
or any such operating subsidiary.
6.2 Remedies. In case any one or more of the Events
of Default specified in Section 6.1 hereof shall have occurred and be
continuing, the holder hereof shall have the right to accelerate payment of the
entire Principal Amount, and all interest accrued thereon, and, upon such
acceleration, such Principal Amount and interest shall thereupon become
immediately due and payable, without any presentment, demand, protest or other
notice of any kind (which presentment demand, protest or other notice of any
kind are hereby expressly waived), and the Company shall forthwith pay to the
holder hereof the entire then outstanding Principal Amount, and interest accrued
thereon, due pursuant to these Debentures; provided, however, that any such
payment by the Company must be in accordance with Section 4.1(b) hereof.
7. Miscellaneous.
7.1 Waiver and Amendment. Any provision of these
Debentures may be amended, waived or modified only upon the written consent of
the Company, the holder hereof and the New Jersey Department.
7.2 Notices. Any notice or other communication
required or permitted hereunder shall be in writing and shall be delivered
personally, telegraphed, telexed, sent by facsimile transmission, sent by
certified, registered or express mail, postage prepaid, or sent by reputable
overnight courier. Any such notice shall be deemed given when so delivered
personally, telegraphed, telexed or sent by facsimile transmission or, if
mailed, two days after the date of deposit in the United States mail or, if sent
by overnight courier, the business day next succeeding the date the notice is
sent, as follows:
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(a) if to FHS, to:
Foundation Health Systems, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attention: Senior Vice President, General
Counsel and Secretary
Fax: (719) 585-8175
(b) if to the Company, to:
FOHP, Inc.
1501 Route 66
Neptune, New Jersey 07701
Attention: Senior Vice President, General
Counsel and Secretary
Fax: (732) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9998
Attention: Charles I. Weissman, Esq.
Fax: (212) 758-9526
and with an additional copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Post Office Box 190
Middletown, New Jersey 07748
Attention: Paul T. Colella, Esq.
Fax: (908) 224-6599
Any party may by notice given in accordance with this section to the other party
designate another address or person for receipt of notices hereunder.
7.3 Governing Law. These Debentures shall be governed
by, and construed in accordance with, the laws of the State of New Jersey.
7.4 Headings. The headings herein are for purposes of
convenience and reference only, and shall not affect the construction hereof.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed, issued and delivered this 8th day of December, 1997.
FOHP, INC.
By:/s/ Roger Birnbaum
------------------------
Name: Roger Birnbaum
Title: President and Chief Executive
Officer
Acknowledged and Agreed:
FOUNDATION HEALTH SYSTEMS, INC.
By:/s/ Michael E. Jansen
--------------------------
Name: Michael E. Jansen, Esq.
Title: Vice President, Assistant
General Counsel and
Assistant Secretary
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<PAGE>
EXHIBIT A TO CONVERTIBLE SUBORDINATED SURPLUS DEBENTURES
The holder of Convertible Subordinated Surplus Debentures,
dated as of December 8, 1997 (the "Debentures"), issued by FOHP, Inc. (the
"Company") hereby notifies the Company, in accordance with Section 2 of the
Debentures, of its conversion of $ ____ of the Principal Amount (as such term is
defined in the Debentures) of the Debentures into _____ shares of common stock,
par value $.01 per share, of the Company.
Principal Amount to be Converted Number of Shares
IN WITNESS WHEREOF, this Notice of Conversion is executed as
of ______ ___, ____.
--------------------
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EXHIBIT 4.3
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SUCH ACT OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION
IS NOT REQUIRED.
FOHP, INC.
SUBORDINATED SURPLUS DEBENTURES
December 31, 1997
FOHP, Inc., a New Jersey corporation (the "Company"), for value
received, promises to pay to Foundation Health Systems, Inc., a Delaware
corporation formerly known as "Health Systems International, Inc." ("FHS"), or
its registered assigns, the principal sum (such principal sum being referred to
herein as the "Principal Amount") of $24,000,000 and accrued and unpaid interest
thereon. The Principal Amount hereof, and the interest thereon, shall be payable
at the main office of the Company or by mail to the registered address of the
holder hereof on December 31, 2002 (the "Maturity Date"), subject to the
provisions set forth in Section 2 hereof.
These Debentures have been issued in return for additional capital
contributions made by FHS pursuant to Section 6.2 of the Amended and Restated
Securities Purchase Agreement, dated February 10, 1997, as amended by an
Amendment dated as of March 13, 1997, among FHS, the Company and First Option
Health Plan of New Jersey, Inc., a New Jersey corporation and a wholly-owned
subsidiary of FOHP ("FOHP-NJ") (referred to herein, as so amended, as the
"Purchase Agreement"). The Company previously issued to FHS (1) on April 30,
1997 debentures initially representing approximately $51.6 million of principal
amount, the entire remaining principal amount of which debentures was converted
into common stock, par value $.01 per share ("Common Stock"), of FOHP as of
December 1, 1997; and (2) on December 8, 1997 debentures initially representing
approximately $29 million of principal amount, convertible into Common Stock of
FOHP.
The following is a statement of the rights of the holder hereof and the
conditions to which these Debentures are subject, and to which the holder
hereof, by the acceptance hereof, agrees:
1. Interest. The Principal Amount hereof shall bear interest
at an annual rate equal to the rate charged to FHS under its credit facility
(the "BA Facility") issued by a consortium of commercial banks led by Bank of
America, National Trust & Savings Association or such credit facility as is used
to refinance the BA Facility (the "Rate"), which Rate shall be subject to
adjustment at the beginning of each calendar quarter and shall become due and
payable, subject to the provisions of Section 2.1(b) hereof, with respect to any
given
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calendar quarter within 10 days after the end of such quarter. Any such interest
not paid when due and payable shall be considered "Defaulted Interest" and shall
be included in the Principal Amount hereunder.
2. Ranking of Debentures.
2.1 Obligation to Repay.
(a) The obligation of the Company to repay the
Principal Amount and accrued interest under these Debentures shall be
subordinated to all other indebtedness of the Company and its subsidiaries.
(b) No payments shall be made, in respect of all or
any portion of the Principal Amount or interest thereon, except with the prior
written approval of the New Jersey Department. Such approval may not be withheld
if the Company or FHS provides the New Jersey Department with notice at least 10
business days in advance of any such payments that FOHP-NJ's statutory surplus
will exceed 125 percent of FOHP-NJ's minimum net worth requirement after payment
of the requested amount and for the near future, unless the New Jersey
Department determines that FOHP-NJ's financial condition would be adversely
affected as a result of such payment. The Principal Amount shall be suspended
and shall not mature to the extent FOHP-NJ's net worth, as determined by the New
Jersey Department, is inadequate to make interest payments on these Debentures.
2.2 No Impairment. Nothing contained in this Section
2 shall impair, as between the Company and the holder hereof, the obligation of
the Company, which is absolute and unconditional, to pay to the holder hereof
the Principal Amount and interest thereon provided that the approval of the New
Jersey Department of Banking and insurance referenced in Section 2.1 herein is
obtained.
3. Covenants.
3.1 Affirmative Covenants. From and after the date
hereof until the Maturity Date, the Company shall comply with and perform each
of the following covenants and agreements:
3.1.1 Financial Reporting. The Company will furnish
to FHS copies of the following financial statements, reports and information:
(a) as soon as available and in any event within 90
days after the end of each fiscal year of the Company, a copy of the Company's
consolidated annual report (including audited balance sheets, statements of
operations, statements of stockholders' equity and statements of cash flow) for
the Company and its subsidiaries for such fiscal year, prepared in accordance
with generally accepted accounting principles ("GAAP") consistent with the
preceding year, certified by Ernst & Young, LLP or such other independent public
accountants as shall be approved by the holder hereof, which approval shall not
be unreasonably withheld;
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(b) as soon as available and in any event within 45
days after the end of each calendar quarter, a consolidated balance sheet,
statement of operations and statement of cash flow for the Company and its
subsidiaries, as of the end of, and for, each such quarter, prepared in
accordance with GAAP consistently applied (subject to the absence of notes and
to customary and reasonable year-end adjustments), certified by the Company's
chief financial officer as fairly and accurately representing the financial
condition of the Company and its subsidiaries as of the end of, and for, the
period covered thereby; and
(c) such other information with respect to the
financial condition and operations of the Company and its subsidiaries as the
holder hereof may reasonably request.
3.1.2 Payment of Taxes and Claims. The Company will
duly pay and discharge, as the same become due and payable, all taxes,
assessments and governmental and other charges, levies or claims levied or
imposed, which are, or which if unpaid might become, a lien or charge upon the
properties, assets, earnings or business of the Company or any of its operating
subsidiaries; PROVIDED, HOWEVER, that nothing contained in this Section 3.1.2
shall require the Company to pay and discharge, or cause to be paid and
discharged, any such tax, assessment, charge, levy or claim so long as the
Company in good faith shall contest the validity thereof and shall set aside on
its books adequate reserves with respect thereto. In the event the Company fails
to satisfy its obligations under this Section 3.1.2, FHS may, but is not
obligated to, satisfy such obligations in whole or in part, and any payments
made and expenses incurred in doing so shall constitute additional indebtedness
to FHS and shall be paid or reimbursed by the Company as additional Principal
Amount.
3.1.3 Selection of Accountants. As long as these
Debentures are outstanding, the holder hereof shall have the right to approve
the accounting firm retained or to be retained by the Company to render
accounting advice thereto (such approval not to be unreasonably withheld).
3.1.4 Maintenance of Corporate Existence and
Properties.
(a) The Company will, and will cause each of its
operating subsidiaries to, at all times do or cause to be done all things
necessary to maintain, preserve and renew its corporate charter and its rights,
and comply in all material respects with all related laws applicable to the
Company and such operating subsidiary; PROVIDED, HOWEVER, that nothing contained
in this paragraph shall (i) require the Company or such operating subsidiary to
maintain, preserve or renew any right not material in the conduct of the
business of the Company or such operating subsidiary, (ii) prevent the
termination of the corporate existence of such operating subsidiary of the
Company if, in the reasonable opinion of the Board of Directors of the Company,
such termination is not disadvantageous to the holder hereof or (iii) require
the Company or such operating subsidiary to comply with any law so long as the
validity or applicability thereof shall be contested in good faith by
appropriate proceedings.
(b) The Company will as soon as practicable give
written notice to the holder hereof of any litigation, arbitration or
governmental investigation or proceeding, which has been instituted or, to the
knowledge of the Company, is threatened against the Company or
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any of its operating subsidiaries, or any of their respective properties, which
(i) involves or is likely to involve a claim or claims for damages, penalties or
awards in excess of $100,000 in the case of claims for which the Company is not
adequately insured or in excess of $300,000 in the case of claims for which the
Company is adequately insured; (ii) if determined adversely to the Company or
such operating subsidiary would have a material adverse effect thereon; or (iii)
relates to the Purchase Agreement or any documents executed pursuant thereto.
(c) The Company will provide or cause to be provided
for itself and its operating subsidiaries insurance against loss or damage of
the kinds customarily insured against by corporations similarly situated, with
reputable insurers, in such amounts, with such deductibles and by such methods
as shall be adequate, and in no event involving material differences from the
insurance currently generally maintained.
(d) The Company will keep true books of records and
accounts in which full and correct entries in all material respects will be made
of all its business transactions and the business transactions of its operating
subsidiaries, and will reflect in its financial statements adequate accruals and
appropriations to reserves, all in accordance with GAAP (subject to customary
and reasonable year-end adjustments) and as otherwise required by the New Jersey
Department.
(e) The Company will, and will cause each of its
operating subsidiaries to, comply with all applicable statutes, rules,
regulations, orders and restrictions relating to federal, state and local laws
and of any governmental department, commission, board, regulatory authority,
bureau, agency and instrumentality with respect thereto, and of any court,
arbitrator or other body with jurisdiction and authority, in respect of the
conduct of the respective businesses thereof and the ownership of their
respective properties, except those, the violations of which would not have a
material adverse effect thereon and except such as are being contested in good
faith.
3.1.5 Notice of Event of Default. In addition to any
other reporting requirements set forth herein, the Company shall have an
immediate obligation to report to the holder hereof the occurrence of any Event
of Default (as defined in Section 4 hereof) or any event which, with the giving
of notice or the passage of time, or both, would constitute any such Event of
Default.
3.1.6 Board Composition.
(a) Prior to the maturity of these Debentures and
while they are outstanding, FHS shall be permitted to designate such number of
directors on the Board of Directors of the Company and the Boards of Directors
of each of the Company's Subsidiaries as represents the greater of (i) no less
than 15 percent of the directors on the Board of Directors of the Company and
the Boards of Directors of each of the Company's subsidiaries or (ii) such
greater percentage of the directors on the Board of Directors of the Company and
of the Boards of Directors of each of the Company's subsidiaries as is equal to
the percentage ownership by FHS of all outstanding Common Stock in the event
such percentage exceeds 15 percent.
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(b) After maturity of these Debentures, FHS shall be
permitted to designate and elect such number of directors on the Board of
Directors of the Company and the Boards of Directors of each of the Company's
subsidiaries as represents the percentage of the directors on the Board of
Directors of the Company and the Board of Directors of each of the Company's
subsidiaries as is equal to FHS' percentage ownership of all outstanding Common
Stock, with such number of directors to be increased as such ownership may be
increased from time to time notwithstanding any "staggered term" or other
conflicting provision (but subject to the requirements set forth in Article III
Section 1 of the Bylaws of the Company that, during the period specified
therein, there be at least three directors on such Board of Directors who are
not designees of FHS).
(c) In no event shall the number of directors of the
Board of Directors of the Company or the board of directors of any of the
Company's subsidiaries exceed 12 without the prior written consent of the holder
hereof (subject to the requirements set forth in Article III Section 1 of the
By-laws of the Company that, during the period specified therein, there be at
least three directors on such Board of Directors who are not designees of FHS).
3.1.7 Use of Proceeds. The Company shall,
immediately upon receipt of the Principal Amount at the Closing on the date
hereof, make a capital contribution of such amount to FOHP-NJ.
3.2 Negative Covenants. From and after the date
hereof, the Company shall not, and shall cause its operating subsidiaries to
not, do any of the following:
3.2.1 Restrictions on Sale of Assets, Consolidations,
Mergers and Acquisitions.
(a) The Company will not, and will cause each of its
operating subsidiaries to not, sell, lease, transfer or otherwise dispose of all
or a substantial portion of its assets (other than in connection with the sale
of securities issued by the United States government the proceeds of which are
used to purchase additional securities of the United States government).
(b) The Company shall not, and shall cause each of
its operating subsidiaries to not, without the prior written consent of the
holder hereof, consolidate with or merge into any other person or entity or
permit any other person or entity to consolidate with or merge into it;
provided, however, that a subsidiary of the Company may consolidate with or
merge into the Company or a wholly-owned subsidiary of the Company.
(c) The Company shall not and shall cause each of
its operating subsidiaries to not, acquire, by asset or stock purchase, merger
or otherwise, the assets or stock of any other corporation or partnership
without the prior written consent of the holder hereof.
3.2.2 Additional Indebtedness. The Company will not,
and will cause each of its operating subsidiaries to not, create, incur, assume
or suffer to exist any indebtedness for borrowed money ("Borrowed Money") after
the date hereof except for (i) Borrowed Money
-5-
<PAGE>
evidenced by these Debentures and (ii) other Borrowed Money, incurred with the
consent of the holder hereof, the proceeds of which are used in the ordinary
course of business of the Company or such operating subsidiary, as the case may
be.
3.2.3 Liens and Encumbrances. The Company will not,
and will cause each of its operating subsidiaries to not, cause or permit any of
its assets or properties, whether now owned or hereafter acquired, to be subject
to any liens or encumbrances except in the ordinary course of business of the
Company or such operating subsidiary, as the case may be.
3.2.4 Guarantees. The Company shall not and shall
cause each of its operating subsidiaries to not, become liable as a guarantor,
or otherwise, without the prior written consent of the holder hereof, except for
guarantees provided as to obligations of a wholly-owned subsidiary of the
Company.
3.2.5 Restrictions on Dividends, Distributions and
Investments. The Company will not, without the prior written consent of the
holder hereof:
(a) declare or pay any dividend or make any other
distributions on any shares of the Company's capital stock;
(b) except as otherwise permitted by the Purchase
Agreement, redeem, purchase or otherwise acquire for value any shares of the
Company's capital stock or any warrants, rights or other options to purchase
such capital stock; or
(c) except as otherwise permitted by the Purchase
Agreement permit its ownership of voting capital stock of any subsidiary of the
Company to be less than 100 percent.
3.2.6 Issuance of Additional Stock. Except as
otherwise expressly contemplated herein, the Company will not, without the prior
written consent of the holder hereof, issue any additional shares of Common
Stock or any other capital stock of the Company, or any options, stock
appreciation rights, warrants or other rights to acquire the Common Stock or any
interest therein, or other rights to acquire authorized and unissued shares of
capital stock of the Company, or modify terms of existing securities.
3.2.7 Granting of Pre-emptive Rights and Rights of
First Refusal. Except as otherwise expressly contemplated herein, the Company
will not, without the prior written consent of the holder hereof, grant any
pre-emptive rights or rights of first refusal to any shareholders of the
Company.
3.2.8 Additional Prohibited Transactions. Neither
the Company nor any of its subsidiaries shall take any of the following actions
or engage in any of the following transactions without the prior written consent
of the holder hereof:
(a) amend its certificate of incorporation or
bylaws;
-6-
<PAGE>
(b) make capital expenditures (including such
expenditures made by the Company and all such subsidiaries) exceeding, in the
aggregate, $1,000,000 during any calendar year;
(c) make any material change in the scope of the
business of the Company;
(d) file for receivership, dissolution, liquidation
or bankruptcy;
(e) acquire equity securities (other than pursuant
to a buy back or repurchase of equity securities issued by the Company) or
assets of any other person or entity involving payments aggregating in excess of
$1,000,000 during any calendar year;
(f) file a registration statement with respect to
the public sale of securities of the Company under the Securities Act of 1933,
as amended; or
(g) enter into, assume or become bound by any
agreement to do any of the foregoing or otherwise attempt to do any of the
foregoing.
4. Default.
4.1 Events of Default. An "Event of Default" shall
exist if any of the following occurs and is continuing as to the Company:
(a) Default shall be made by the Company on a
payment of the Principal Amount or interest on these Debentures, when and as
such Principal Amount and interest, as the case may be, shall become due and
payable by acceleration or otherwise; or
(b) Default shall be made in the performance or
observance of any covenant, condition, undertaking or agreement contained in
these Debentures or the Purchase Agreement (other than any defaults relating to
actions taken by, or omissions of, FHS in connection with the performance of its
obligations under the Management Agreements) (as defined in the Purchase
Agreement), and such default shall continue for 20 days without being cured
after the holder hereof provides to the Company written notice of such default;
or
(c) Any warranty, representation or other statement
made by or on behalf of the Company contained in these Debentures or the
Purchase Agreement shall be false or misleading in any material respect at the
time such warranty, representation or other statement, as the case may be, was
made; or
(d) The Company or any of its operating subsidiaries
shall (i) file a petition seeking relief for itself under the United States
Bankruptcy Code, as now constituted or hereafter amended from time to time, or
file an answer consenting to, admitting the material allegations of or otherwise
not controverting, or fail timely to controvert, a petition filed against the
Company seeking relief under the United States Bankruptcy Code, as now
constituted or hereafter amended from time to time or (ii) file a petition or
answer with respect to relief under
-7-
<PAGE>
the provisions of any other now-existing or future applicable bankruptcy,
insolvency or other similar law of the United States or any state thereof or of
any other country or province thereof or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or an arrangement,
composition, extension or adjustment with creditors; or
(e) (i) An order for relief shall be entered against
the Company or any of its operating subsidiaries under the United States
Bankruptcy Code, as now constituted or hereafter amended from time to time,
which order is not stayed and remains unstayed for a period of 45 days, (ii) the
entry of an order, judgment or decree by operation of law or by a court or by
the New Jersey Department having jurisdiction in the premises which is not
stayed and remains unstayed for a period of 45 days (A) adjudging the Company or
any of its operating subsidiaries bankrupt or insolvent under, or ordering
relief against the Company or any of its operating subsidiaries or by the New
Jersey Department under, or approving a properly-filed petition seeking relief
against the Company or any of its operating subsidiaries or by the New Jersey
Department under the provisions of any other now-existing or future applicable
bankruptcy, insolvency or other similar law of the United States or any state
thereof or of any other country or province thereof or jurisdiction providing
for the reorganization, winding-up or liquidation of corporations or any
arrangement, composition, extension or adjustment with creditors, (B) appointing
a receiver, supervisor, liquidator, assignee, sequestrator, trustee or custodian
of the Company or any of its operating subsidiaries or of any substantial
portion of the property of the Company or any such operating subsidiaries, or
(C) ordering the reorganization, winding-up or liquidation of the affairs of the
Company or any of its subsidiaries, or (iii) the expiration of 60 days after the
filing of any involuntary petition against the Company or any of its operating
subsidiaries seeking any of the relief specified in paragraph (d) of this
Section 4.1 or this Section 4.1(e) without dismissal of such petition; or
(f) The Company or any of its operating subsidiaries
shall (i) make a general assignment for the benefit of creditors, (ii) consent
to the appointment of, or taking possession of all or a substantial part of the
property of the Company or any such operating subsidiary by, a receiver,
supervisor, liquidator, assignee, sequestrator, trustee or custodian of the
Company or any such operating subsidiary, (iii) admit its insolvency or
inability to pay its debts generally as such debts become due, (iv) fail
generally to pay its debts as such debts become due or (v) take any action
(including such actions taken by the Company's directors or a majority of the
Company's shareholders) regarding the dissolution or liquidation of the Company
or any such operating subsidiary.
4.2 Remedies. In case any one or more of the Events
of Default specified in Section 4.1 hereof shall have occurred and be
continuing, the holder hereof shall have the right to accelerate payment of the
entire Principal Amount, and all interest accrued thereon, and, upon such
acceleration, such Principal Amount and interest shall thereupon become
immediately due and payable, without any presentment, demand, protest or other
notice of any kind (which presentment demand, protest or other notice of any
kind are hereby expressly waived), and the Company shall forthwith pay to the
holder hereof the entire then outstanding Principal Amount, and interest accrued
thereon, due pursuant to these Debentures; PROVIDED, HOWEVER, that any such
payment by the Company must be in accordance with Section 2.1(b) hereof.
-8-
<PAGE>
5. Miscellaneous.
5.1 Waiver and Amendment. Any provision of these
Debentures may be amended, waived or modified only upon the written consent of
the Company, the holder hereof and the New Jersey Department.
5.2 Notices. Any notice or other communication
required or permitted hereunder shall be in writing and shall be delivered
personally, telegraphed, telexed, sent by facsimile transmission, sent by
certified, registered or express mail, postage prepaid, or sent by reputable
overnight courier. Any such notice shall be deemed given when so delivered
personally, telegraphed, telexed or sent by facsimile transmission or, if
mailed, two days after the date of deposit in the United States mail or, if sent
by overnight courier, the business day next succeeding the date the notice is
sent, as follows:
(a) if to FHS, to:
Foundation Health Systems, Inc.
225 North Main Street
Pueblo, Colorado 81003
Attention: Senior Vice President, General Counsel and Secretary
Fax: (719) 585-8175
(b) if to the Company, to:
FOHP, Inc.
1501 Route 66
Neptune, New Jersey 07701
Attention: Senior Vice President, General
Counsel and Secretary
Fax: (732) 842-5404
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9998
Attention: Charles I. Weissman, Esq.
Fax: (212) 758-9526
-9-
<PAGE>
and with an additional copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Post Office Box 190
Middletown, New Jersey 07748
Attention: Paul T. Colella, Esq.
Fax: (908) 224-6599
Any party may by notice given in accordance with this section to the other party
designate another address or person for receipt of notices hereunder.
5.3 Governing Law. These Debentures shall be
governed by, and construed in accordance with, the laws of the State of New
Jersey.
5.4 Headings. The headings herein are for purposes
of convenience and reference only, and shall not affect the construction hereof.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed, issued and delivered this 31st day of December, 1997.
FOHP, INC.
By: /s/ ROGER BIRNBAUM
------------------------
Name: Roger Birnbaum
Title: President and Chief Executive
Officer
Acknowledged and Agreed:
FOUNDATION HEALTH SYSTEMS, INC.
By: /s/ MICHAEL E. JANSEN
--------------------------
Name: Michael E. Jansen, Esq.
Title: Vice President, Assistant
General Counsel and
Assistant Secretary
-10-
EXHIBIT 10.1
May 6, 1997
Mr. Roger Birnbaum
204 Harrison Avenue
Highland Park, NJ 08904
Dear Roger:
We are pleased to extend to you an offer of employment with Foundation Health
Systems, Inc. ("FHS") or one of its appropriate subsidiaries in the exempt
position of Chief Executive Officer for First Option Health Plan ("FOHP") with a
monthly base salary of $20,833.33 effective upon approval of the FHS
Compensation and Stock Option Committee (pending meeting to be held in May
1997). You are also eligible to receive a monthly auto allowance of $1,000.00
upon such employment.
In addition, you will receive a guaranteed management bonus of at least
$25,000.00 for 1997 and 1998. Your bonus target will be 50% of base salary.
Bonus payout will be based upon appropriate financial and statistic results
which you are accountable for in your business unit, as well as FHS's financial
results. Information regarding the FHS Management Bonus Plan will be forthcoming
(after FHS Board Approval). Also, your participation in the FHS Management Bonus
Plan will be on an ongoing basis.
FHS will recommend to the Compensation and Stock Option Committee of FHS that
you be granted stock options in an amount comparable to peer managers of FHS at
the time option recommendations for other recent hires are presented to the
Committee.
FHS may at any time terminate your employment for any reason other than Cause
(as defined below) by giving you at least 60 days' prior written notice of the
effective date of termination. In the event such termination occurs you will be
entitled to continue to receive your base salary for six (6) months after the
date of such termination, as if you were still employed for such period, as a
severance payment. In addition to such severance payment, if your employment
terminates for any reason other than Cause within the first twelve (12) months
of employment you will be paid as an employed consultant, at your base salary at
the time of termination, for an additional six (6) months during which you will
perform assignments at a satisfactory level determined by FHS Management.
For purposes of this agreement, Cause shall only mean a felony conviction,
misappropriation or embezzlement. If FHS terminates employment for Cause, FHS
and its affiliates shall have no further obligation hereunder from and after the
effective date of termination. You will sign an acknowledgment that you have
received and read the HSI Code of Business Conduct, understand it, and subscribe
to its standards and provisions.
You will be eligible for consideration to receive and/or participate in the
fringe benefits set forth in FHS's applicable Plan Documents, Associate
Handbooks and/or Policy Statements, subject to FHS's right to enhance, increase,
reduce, eliminate or otherwise modify at any time these or other fringe benefits
(including the bonus plan reference above). FHS benefits include:
Associate 401(k) Savings Plan.
<PAGE>
Employee Stock Purchase Plan.
Group medical coverage for you and your eligible dependents at current
monthly rates applicable to FHS's employees.
Group dental coverage for you and your eligible dependents at current
monthly rates applicable to FHS's employees.
Short-term and long-term disability benefits.
Company paid holidays and paid time off plan.
We are jointly agreeing, through this letter, that your employment with FHS is
voluntary, on both our parts, and on an "employee-at-will" basis. While we both
hope that our relationship will be a continuing one, we also agree that your
employment is not for a fixed term, but is subject to termination by you or by
FHS at any time with notice as described above and for reasons which either
party believes sufficient in its discretion.
The foregoing constitutes all of our agreements and understandings regarding
your employment. There are no other oral or written agreements regarding your
employment and no one else is authorized to make other agreements. Nothing in
this offer of employment, or in any oral or written policy of FHS, may be
construed to create an express or implied contract or to impose further
contractual obligations in connection with your employment.
Please acknowledge your acceptance of this employment confirmation by signing
the original of this letter. The attached forms should be completed and returned
along with the signed duplicate letter to our Corporate Human Resources
Department at your earliest convenience, but, in any event, prior to your
employment start date.
Roger, this is an exciting time for FHS and we know you can make significant
contributions to our success. If you have any questions or wish to discuss this
confirmation, please feel free to contact either of us.
Sincerely,
/s/ Doug Werner /s/ Sharon Maguire
- - -------------------- ------------------------
Doug Werner Sharon Maguire
Sr. Vice President Vice President of
Strategic Planning and Human Resources
Business Development
Acknowledgment:
/s/ Roger W. Birnbaum May 13, 1997
- - ----------------------- ------------
Signature Date
EXHIBIT 10.2
July 1, 1997
Mr. Joseph Singer, M.D.
c/o First Option Health Plan
2 Bridge Avenue
Red Bank, New Jersey 07701
Dear Joseph:
We are pleased to extend to you an offer of employment with Foundation Health
Systems International ("FHS") in the exempt position of Chief Medical Officer
for First Option Health Plan, with a monthly salary of $20,000.00 effective July
1, 1997. You are also eligible to receive a monthly auto allowance of $1,000.00.
You will receive a $28,000.00 sign on bonus. You will report to Roger Birnbaum,
President/CEO, First Option Health Plan.
You will be eligible to participate in the FHS Management Bonus Plan. Under this
Plan you can earn a percentage of your base salary as a bonus, which will be
equivalent with peers in similar positions. The FHS Management Bonus Plan will
be subject to the discretion of the FHS Compensation and Stock Option Committee,
if certain goals based upon FHS's, First Option Health Plan's and your
individual performance are achieved. You must also be actively employed and on
FHS's payroll at the time any such bonus is to be paid.
By signing this offer letter all previous employment contracts with FOHP are now
null and void.
It is company policy that FHS associates are required to maintain all salary
related matters in a strictly confidential manner.
You will be eligible to receive four months of severance pay upon your leaving
the employ of the company as long as you are not terminated by the company for a
reason of "just cause". "Just cause includes, without limitation, acts of
dishonesty, insubordination or moral turpitude, conviction or arraignment of a
felony, habitual drunkenness, narcotic drug addiction, or other material
misconduct of any kind.
You will be eligible for consideration to receive and/or participate in the
fringe benefits set forth in FHS's applicable Plan Documents, Associate
Handbooks and/or Policy Statements, subject to FHS's right to enhance, increase,
reduce, eliminate or otherwise modify at any time these or other fringe benefits
(including the bonus plan reference above). FHS benefits include:
Associate 401(k) Savings Plan.
Employee Stock Purchase Plan.
Group medical coverage for you and your eligible dependents at current
monthly rates applicable to FHS's employees.
Group dental coverage for you and your eligible dependents at current
monthly rates applicable to FHS's employees.
Short-term and long-term disability benefits.
<PAGE>
Company paid holidays and paid time off plan.
Education assistance program.
Pre-tax spending accounts.
You will also receive reimbursement for one CME program per year which would
include 5 company paid days and reasonable costs for travel, meals and lodging
to attend this program.
We are jointly agreeing, through this letter, that your employment with FHS is
voluntary, on both our parts. While we both hope that our relationship will be a
continuing one, we also agree that your employment is not for a fixed term, but
is subject to termination by you or by FHS at any time with or without notice
and for reasons which either party believes sufficient in its discretion.
The foregoing constitutes all of our agreements and understandings regarding
your employment. There are no other oral or written agreements regarding your
employment and no one else is authorized to make other agreements. Nothing in
this offer of employment, or in any oral or written policy of FHS, may be
construed to create an express or implied contact or to impose further
contractual obligations in connection with your employment.
Please acknowledge your acceptance of this employment confirmation by signing
the duplicate copy of this letter. The attached forms should be completed and
returned along with the signed duplicate letter to our Corporate Human Resources
Department at your earliest convenience, but, in any event, prior to your
employment start date.
Joseph, this is an exciting time for FHS and we know you can make significant
contributions to our success. If you have any questions or wish to discuss this
confirmation, please feel free to contact either of us.
Sincerely,
FOHP FHS
/s/ ROGER BIRNBAUM /s/ SHARON MAGUIRE
- - --------------------- -------------------------
Roger Birnbaum Sharon Maguire
President & CEO Vice President of
Human Resources
Acknowledgment:
/s/ JOSEPH SINGER
- - ---------------------- __________________
Signature Date
EXHIBIT 10.3
February 9, 1998
Mr. Marc M. Stein
94 Morning Dew Court
Old Bridge, NJ 08857
LETTER OF AGREEMENT
Dear Marc:
I am very pleased that the discussions we had a few weeks ago resulted in our
jointly agreeing that you would continue to be employed as an associate of
Foundation Health Systems ("FHS"), Northeast Region. You will be based in New
Jersey and remain in your current position as Chief Financial Officer of First
Option Health Plan of New Jersey, Inc. ("First Option") until at least March 31,
1999. The potential of a longer term role for you in the FHS Northeast Region
will depend upon the development of the regional management structure over the
coming months.
I have outlined the components of our agreement for your review.
1. You will continue in your current position as Chief Financial
Officer, First Option, until at least March 31, 1999. You will continue to be
paid your current biweekly rate of $6,730.76, less all deductions required by
law until that date. You will report to the FHS Northeast Regional Chief
Financial Officer with a dotted line to the FHS New Jersey President.
2. During your period of employment, the following compensation and
benefits will be in effect:
A. Your base salary will be $175,000 annually.
B. You will be eligible to participate in the 1998 FHS
Management Bonus Plan in accordance with your position with
the Company. You will also be eligible to participate in the
1999 FHS Management Bonus Plan on a prorated basis.
C. You will receive a monthly automobile allowance in the
amount of $500.00 which will be paid to you through the last
month that you receive severance.
D. Associate 401K Savings Plan.
E. Associate Stock Purchase Plan.
<PAGE>
F. You will be eligible to continue to participate and vest in
the FHS Management Stock Option Plan in accordance with your
position with the Company.
G. Group medical, vision, dental and pharmacy coverage for you
and your eligible dependents at current monthly rates
applicable to First Option associates.
H. Short-term and long-term disability benefits.
I. Group Life Insurance in the amount of $200,000.
3. If you remain employed by FHS until March 31, 1999 or if your
employment is terminated for any reason other than "just cause" prior to March
31, 1999, you will receive an additional retention bonus equivalent to three
months of salary which will be paid on March 31, 1999. "Just cause" includes,
acts of dishonesty, moral turpitude, conviction or arraignment of a felony,
habitual drunkenness, or narcotic drug addiction.
4. The following salary continuation and severance provisions will be
provided for you:
A. If FHS terminates your employment for any reason other than
"just cause" prior to March 31, 1999, FHS will continue to
pay you at your current biweekly rate of $6,730.76, less all
deductions required by law through September 30, 1999. Your
additional retention bonus will also be paid to you on the
date of termination.
B. On January 31, 1999, FHS will inform you of the status of a
potential future role in the Company. If an offer is made to
you to continue employment with FHS, you will have the right
to either accept or reject the offer. If you do not accept,
you will be entitled to six (6) months severance starting
April 1, 1999 and your additional retention bonus as
described in this agreement. If you accept, you will still
be entitled to six (6) months severance if you are
terminated in the future for any reason other than "just
cause".
C. FHS will pay any unused vacation pay, less all deductions
required by law.
D. You will continue to vest in the 401K Plan until the end of
the month that your severance payments end, but will not be
eligible to make contributions to the Plan from your
severance pay.
E. FHS further agrees to provide you with health benefits until
the end of the month that your severance payments end.
Thereafter, you will be eligible for COBRA benefits.
Information regarding the election of COBRA coverage will be
forthcoming.
F. FHS will provide outplacement service to you in accordance
with your position in the Company.
<PAGE>
Marc, I look forward to our continued business relationship, and acknowledge the
challenges you faced this past year in reorganizing the finance department at
First Option. Both Brian Crary and I appreciate what you have accomplished, and
thank you for agreeing to remain in your current position, You are an integral
part of the process of putting the FHS Northeast Region together, and it is
critical that we continue to have your commitment and support.
Please indicate your acceptance of this agreement by signing below.
Sincerely,
/s/ Robert Natt /s/ Marc M. Stein
- - ------------------ ----------------------
Robert Natt Marc M. Stein
President & CEO
Foundation Health Systems
Northeast Region
EXHIBIT 21
NAME OF SUBSIDIARY STATE OF INCORPORATION
------------------ ----------------------
1. First Option Health Plan New Jersey
of New Jersey, Inc.
2. First Option Health Plan of New York
New York, Inc.
3. First Option Health Plan of Pennsylvania
Pennsylvania, Inc.
4. First Option Health Plan Delaware
of Delaware, Inc.
5. First Option Health Plan of Maryland
Maryland, Inc.
6. FOHP Agency, Inc. New Jersey
7. First Option Dental, Inc. New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 79,266,721
<SECURITIES> 0
<RECEIVABLES> 14,227,820
<ALLOWANCES> 3,429,973
<INVENTORY> 0
<CURRENT-ASSETS> 94,130,089
<PP&E> 4,829,916
<DEPRECIATION> 2,349,874
<TOTAL-ASSETS> 110,880,977
<CURRENT-LIABILITIES> 110,883,608
<BONDS> 35,294,406
0
0
<COMMON> 1,000,000
<OTHER-SE> (36,297,037)
<TOTAL-LIABILITY-AND-EQUITY> 110,880,977
<SALES> 0
<TOTAL-REVENUES> 377,406,231
<CGS> 0
<TOTAL-COSTS> 378,768,857
<OTHER-EXPENSES> 74,046,687
<LOSS-PROVISION> 2,791,996
<INTEREST-EXPENSE> 1,881,573
<INCOME-PRETAX> (80,082,882)
<INCOME-TAX> 2,139
<INCOME-CONTINUING> (80,085,021)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (80,085,021)
<EPS-PRIMARY> (9.18)
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