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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
FOHP, Inc.
- - - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|X| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction
applies:
Common Stock, par value $.01 per share
--------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
2,083,839
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
$1.04(1)
--------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
$2,167,193(2)
--------------------------------------------------------------
5) Total fee paid:
$433.44(3)
--------------------------------------------------------------
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|_| Fee paid previously with preliminary materials
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount previously paid:
-------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------
3) Filing party:
-------------------------------------------------------------
4) Date filed:
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- - - ------------------------
1. Pursuant to Rule 0-11 (c)(1) promulgated under the Securities Exchange Act
of 1934, as amended, and solely for the purpose of calculating the filing
fee, the per unit value of the shares of FOHP, Inc. Common Stock, par value
$.01 per share ("FOHP Common Stock"), affected by the transaction to which
this filing relates, is based on the book value of such shares as of
September 30, 1998.
2. Estimated solely for purposes of calculating the filing fee required by
Rule 0-11. In accordance with subsection (c)(1) of Rule 0-11, the
transaction value is based on the book value of the 2,083,839 shares of
FOHP Common Stock to be exchanged for cash or payment rights to be issued
or paid, as the case may be, by FOHP, Inc. in connection with the merger of
FHS Transition Company with and into FOHP, Inc.
3. The amount of the filing fee, calculated in accordance with Rule 0-11, is
equal to 1/50th of one percent (1%) of the transaction value as set forth
above.
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PRELIMINARY COPY -- For Information of the
Securities and Exchange Commission Only
[INSERT LOGO]
FOHP, INC.
3501 State Highway 66
Neptune, New Jersey 07753
Dear Shareholder:
You are cordially invited to attend a special meeting of shareholders
of FOHP, Inc. ("FOHP") to be held at the CNA Building, 3501 State Highway 66,
Neptune, New Jersey on January ___, 1999 commencing at 6:00 p.m. local time. The
matters to be considered and voted upon at the special meeting are important to
your investment in FOHP.
At the special meeting, the holders of outstanding FOHP common stock
will be asked to consider and approve an agreement and plan of merger which, if
approved and the transactions contemplated thereby consummated, would result in
the merger of FHS Transition Company, a wholly-owned subsidiary of Foundation
Health Systems, Inc. ("FHS"), into FOHP. If the merger is consummated, you and
the other shareholders of FOHP, other than FHS, will no longer have an equity
position in FOHP and instead will be entitled to choose between the following
forms of consideration for your shares of FOHP common stock: (i) the value of
such shares determined by independent qualified appraisers as of December 31,
1998; or (ii) payment rights, pursuant to which the holder thereof will be
entitled to receive a cash payment of not less than $15.00 per payment right on
July 1, 2001, provided certain conditions are either satisfied or waived. If you
choose to receive payment rights, you will receive one payment right for each
share of FOHP common stock held by you. It is anticipated that the appraisal
value of one share of FOHP common stock will be significantly less than $15.00.
FHS currently owns approximately 98% of the outstanding FOHP common
stock, and intends to vote for the merger. Accordingly, if FHS approves the
merger, the merger will occur, provided all other conditions to the merger are
either satisfied or waived. Upon consummation of the merger, FHS, through a
subsidiary, will own 100% of the then outstanding FOHP common stock.
If the merger is consummated, within ninety days after the effective
date of the merger, each shareholder of FOHP, other than FHS or any shareholder
who dissents from the merger by complying with the procedures set forth in the
New Jersey Business Corporation Act, will receive information about how to
choose between the two forms of consideration and instructions for use in
surrendering the stock certificates representing their shares of FOHP common
stock. The information will include the results of the appraisal of the
outstanding shares of FOHP common stock as of December 31, 1998, described
above. Upon the surrender by a former shareholder of FOHP of each stock
certificate formerly representing shares of FOHP common stock, together with a
properly completed letter of transmittal form that reveals which of the two
forms of consideration has been chosen by the former shareholder, such holder
will receive the form of merger consideration selected by the holder in exchange
therefor. If a non-dissenting shareholder of FOHP does not choose either the
appraisal consideration or payment rights, such shareholder will automatically
receive payment rights for his, her or its shares of
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FOHP common stock. For a complete description of the procedures which must be
followed by a shareholder of FOHP in order for such shareholder to receive the
appraisal consideration or payment rights in the event the merger is
consummated, please review the section captioned "Proposal to Approve the Merger
- - - - Exchange Procedures" in the accompanying Proxy Statement.
The Board of Directors of FOHP has approved the agreement and plan of
merger and the merger contemplated thereby. The Board recommends that you vote
for the merger.
Janney Montgomery Scott Inc. ("JMS") has acted as financial advisor to
FOHP in connection with the merger and has delivered its written opinion dated
July 15, 1998, as updated and confirmed on November 16, 1998, which provides
that, based upon and subject to certain matters stated therein, the payment
rights to be offered to the FOHP shareholders in connection with the merger are
fair to such shareholders from a financial point of view. The full text of JMS'
written opinion, which sets forth a description of the assumptions made, matters
considered and limitations on the review undertaken by JMS, is attached as
Appendix F to the accompanying Proxy Statement and should be read carefully in
its entirety.
Details of the proposed merger and other important information
concerning FOHP and FHS are contained in the Proxy Statement which you are urged
to read.
TO ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
In order to answer any questions you may have with respect to the
merger, the information contained in the Proxy Statement delivered herewith or
the completion and return of a proxy card, a special shareholder hotline has
been established which will provide you direct access to members of our
management during the hours of 8:00 a.m. to 10:00 a.m. and 5:00 p.m. to 7:00
p.m., Monday through Friday, commencing January __, 1999 and ending January __,
1999. Please call _____________________.
Whether or not you plan to attend the special meeting, please sign,
date and return your proxy card in the enclosed, postage prepaid envelope. You
may elect to attend the special meeting and vote your shares even if you have
previously submitted a proxy. Your prompt attention is greatly appreciated.
Sincerely yours,
THOMAS W. WILFONG
President and Chief Executive Officer
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PRELIMINARY COPY -- For Information of the
Securities and Exchange Commission Only
[INSERT LOGO]
FOHP, INC.
3501 State Highway 66
Neptune, New Jersey 07753
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
JANUARY ___, 1999
------------------------
To the Shareholders of FOHP, Inc.
NOTICE IS HEREBY GIVEN, that a special meeting of shareholders (the
"Special Meeting") of FOHP, Inc. ("FOHP") will be held at the CNA Building, 3501
State Highway 66, Neptune, New Jersey on January ___, 1999 commencing at 6:00
p.m. local time, for the following purposes:
1. To consider and vote upon a proposal to approve an Agreement and
Plan of Merger, dated as of November 16, 1998, by and among FOHP,
FHS Transition Company and Foundation Health Systems, Inc., which,
if approved and the transactions contemplated thereby consummated,
would result in the merger of FHS Transition Company with and into
FOHP (the "Merger").
2. To transact such other business as may properly come before the
Special Meeting or any adjournments or postponements thereof.
The Board of Directors of FOHP has fixed the close of business on
December 31, 1998, as the record date for determining shareholders entitled to
receive notice of and to vote at the Special Meeting or any adjournments or
postponements thereof.
Whether or not you expect to attend the Special Meeting, please
complete, sign and date the enclosed proxy card and return it in the
accompanying postage prepaid envelope. You may revoke your proxy either by
written notice to FOHP, by submitting a proxy card dated as of a later date or
in person at the Special Meeting.
If the Merger is consummated, the holders of shares of FOHP Common
Stock, par value $.01 per share, on the record date who did not vote for the
Merger may, by complying with the procedures set forth in the New Jersey
Business Corporation Act, be entitled to dissenters' rights as described
therein.
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The Board of Directors recommends that you vote for the Merger.
By Order of the Board of Directors
THOMAS W. WILFONG
President and Chief Executive Officer
Neptune, New Jersey
January ___, 1999
TO ASSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE COMPLETE,
SIGN AND DATE YOUR PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
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PRELIMINARY COPY -- For Information of the
Securities and Exchange Commission Only
FOHP, INC.
------------------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
------------------------
This Proxy Statement is being furnished to the holders of Common Stock,
par value $.01 per share ( "FOHP Common Stock"), of FOHP, Inc. ("FOHP" or the
"Surviving Corporation") in connection with the solicitation of proxies by the
Board of Directors of FOHP (the "FOHP Board") for use at the special meeting of
shareholders of FOHP to be held at the CNA Building, 3501 State Highway 66,
Neptune, New Jersey on January ___, 1999, and any adjournments or postponements
thereof (the "Special Meeting"). The FOHP Board has fixed the close of business
on December 31, 1998 as the record date (the "Record Date") for the
determination of shareholders entitled to notice of and to vote at the Special
Meeting.
At the Special Meeting, shareholders of FOHP will consider and vote on
the proposed merger described in this Proxy Statement by which FHS Transition
Company, a wholly-owned subsidiary of Foundation Health Systems, Inc. ("FHS"),
will merge with and into FOHP (the "Merger") pursuant to the terms of an
Agreement and Plan of Merger, dated as of November 16, 1998, by and among FOHP,
FHS Transition Company and FHS (the "Merger Agreement"). If the Merger is
consummated, each shareholder of FOHP, other than FHS, will be offered for his,
her or its shares of FOHP Common Stock, the choice of receiving (i) the value
of such shares determined by independent qualified appraisers as of December 31,
1998, or (ii) payment rights (individually a "Payment Right" and collectively
"Payment Rights"), pursuant to which the holder thereof will be entitled to
receive a payment of not less than $15.00 per Payment Right on or about July 1,
2001, provided certain conditions are either satisfied or waived. If a
shareholder of FOHP chooses to receive Payment Rights, such shareholder will
receive one Payment Right for each share of FOHP Common Stock held by him, her
or it. It is anticipated that the appraisal value of one share of FOHP Common
Stock will be significantly less then $15.00.
FOR A MORE COMPLETE DESCRIPTION OF THE TERMS OF THE MERGER, INCLUDING A
DESCRIPTION OF THE CONSIDERATION TO BE OFFERED TO THE FOHP SHAREHOLDERS FOR
THEIR SHARES OF FOHP COMMON STOCK, SEE "SUMMARY OF THE MERGER" BEGINNING ON PAGE
7 HEREOF AND "THE MERGER" BEGINNING ON PAGE 39 HEREOF.
This Proxy Statement and the accompanying Notice of Special Meeting and
form of proxy are first being mailed to shareholders of FOHP on or about January
___, 1999.
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FOR DISCUSSION OF CERTAIN RISK FACTORS THAT SHAREHOLDERS OF FOHP SHOULD
CONSIDER BEFORE VOTING FOR OR AGAINST THE MERGER OR BEFORE CHOOSING THE
CONSIDERATION BEING OFFERED IN THE MERGER, SEE "RISK FACTORS" BEGINNING ON PAGE
18 HEREOF. ALSO, SEE "DISSENTERS' RIGHTS," BEGINNING ON PAGE 55 HEREOF, FOR A
DESCRIPTION OF THE RIGHT TO DISSENT FROM THE MERGER. FAILURE TO COMPLY WITH THE
PROCEDURES LISTED IN THE SECTION HEREOF CAPTIONED "DISSENTERS' RIGHTS" MAY
RESULT IN THE LOSS OF THE RIGHT TO DISSENT FROM THE MERGER.
NEITHER THE MERGER NOR THE PAYMENT RIGHTS HAVE BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE FAIRNESS OR MERITS OF THE MERGER NOR UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
Date of this Proxy Statement is January ___, 1999.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
FORWARD LOOKING STATEMENTS.........................................................................6
FOHP SHAREHOLDER HOTLINE...........................................................................6
SUMMARY OF THE MERGER..............................................................................7
The Companies...................................................................................7
The Special Meeting.............................................................................8
Background of the Merger........................................................................8
Reasons for the Merger.........................................................................11
The Merger.....................................................................................12
Consideration to be Offered to FOHP Shareholders in the Merger.................................12
Comparison of Shareholder Rights...............................................................13
Recommendation of the FOHP Board...............................................................14
Opinion of Financial Advisor to FOHP...........................................................14
Conditions to the Merger.......................................................................14
Termination of Merger Agreement................................................................15
Required Vote to Approve Merger Agreement......................................................15
Dissenters' Rights.............................................................................15
Related Agreements.............................................................................15
Accounting Treatment of the Merger.............................................................16
Certain Federal Income Tax Consequences of the Merger..........................................16
RISK FACTORS......................................................................................18
FOHP SELECTED FINANCIAL DATA......................................................................26
FHS SELECTED FINANCIAL DATA.......................................................................30
MARKET PRICE INFORMATION..........................................................................33
FOHP...........................................................................................33
FHS............................................................................................33
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT.......................................35
THE SPECIAL MEETING...............................................................................37
General Information............................................................................37
Voting Securities..............................................................................37
THE MERGER........................................................................................39
Background of the Merger.......................................................................39
Reasons for the Merger.........................................................................44
The Merger Agreement...........................................................................44
</TABLE>
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<TABLE>
<S> <C>
Consideration to be Offered to FOHP Shareholders in the Merger.................................46
Contribution Agreement.........................................................................48
Recommendation of the FOHP Board...............................................................49
Opinion of Financial Advisor to FOHP...........................................................50
Required Vote to Approve Merger Agreement......................................................51
Non-Transferability of Payment Rights..........................................................51
Exchange Procedures............................................................................51
Accounting Treatment of the Merger.............................................................52
Certain Federal Income Tax Consequences of the Merger..........................................52
Inquires Regarding the Merger..................................................................54
DISSENTERS' RIGHTS................................................................................55
Introduction...................................................................................55
Notice of Dissent..............................................................................55
Demand for Payment of Fair Value...............................................................55
Submission of Share Certificates...............................................................56
Submission of Financial Information of Fair Value Offer........................................56
Demand for Judicial Proceeding to Determine Fair Value.........................................56
Loss of Dissenters' Rights.....................................................................56
RECENT DEVELOPMENTS...............................................................................57
FOHP...........................................................................................57
FHS............................................................................................57
HMO Subsidiary Merger..........................................................................57
MANAGEMENT OF SURVIVING CORPORATION...............................................................58
BOARD OF DIRECTORS OF SURVIVING CORPORATION.......................................................59
RELATED AGREEMENTS................................................................................63
DESCRIPTION OF PAYMENT RIGHTS.....................................................................67
COMPARISON OF SHAREHOLDER RIGHTS..................................................................77
AVAILABLE INFORMATION.............................................................................78
INCORPORATION OF DOCUMENTS BY REFERENCE...........................................................78
EXPERTS...........................................................................................80
SHAREHOLDER PROPOSALS.............................................................................80
OTHER BUSINESS....................................................................................81
LIST OF DEFINED TERMS..............................................................................i
</TABLE>
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APPENDICES
<TABLE>
<S> <C>
Appendix A Agreement and Plan of Merger
Appendix B Amended and Restated Certificate of Incorporation of
Surviving Corporation
Appendix C By-laws of Surviving Corporation
Appendix D-1 Form of Payment Right - Hospital Shareholders
Appendix D-2 Form of Payment Right - Non-Hospital Shareholders
Appendix E Contribution Agreement
Appendix F Fairness Opinion of Janney Montgomery Scott Inc.
Appendix G Sections 14A:11-1 through 11-11 of the New Jersey Business
Corporation Act regarding Dissenters' Rights
</TABLE>
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FORWARD LOOKING STATEMENTS
This Proxy Statement contains forward-looking statements that are
subject to risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of operations of FOHP
and FHS set forth under "Risk Factors," "The Merger" and "Description of Payment
Rights," and those preceded by, followed by or that include the words
"believes," "expects," "anticipates" or similar expressions. For those
statements, FOHP and FHS claim the protection of the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. You should understand that the following important factors, in
addition to those discussed elsewhere in this document and in the documents
which we incorporate by reference, could affect the future results of FOHP and
FHS, and could cause those results to differ materially from those expressed in
such forward-looking statements: materially adverse changes in economic
conditions in the markets served by the companies; a significant delay in the
expected closing of the Merger; future regulatory actions and conditions in the
companies' operating areas; and competition from others in the managed health
care industry.
FOHP SHAREHOLDER HOTLINE
In order to answer any questions you may have with respect to the
Merger, the information contained in this Proxy Statement or the completion and
return of the proxy card delivered herewith, a special shareholder hotline has
been established which will provide you direct access to members of FOHP's
management during the hours of 8:00 a.m. to 10:00 a.m. and 5:00 p.m. to 7:00
p.m., Monday through Friday, commencing January __, 1999 and ending January __,
1999. Please call ______________________.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT TO VOTE ON THE MERGER. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED
IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED JANUARY ___, 1999. YOU
SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS
ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS
PROXY STATEMENT TO FOHP SHAREHOLDERS NOR THE ISSUANCE BY FOHP OF ANY PAYMENT
RIGHTS IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
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SUMMARY OF THE MERGER
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. THIS
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MORE DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROXY STATEMENT OR THE APPENDICES. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ CAREFULLY THIS PROXY STATEMENT AND THE DOCUMENTS WE HAVE
REFERRED YOU TO, INCLUDING THE MERGER AGREEMENT. SEE "AVAILABLE INFORMATION" ON
PAGE 78 HEREOF.
THE COMPANIES
FOHP
FOHP, a New Jersey corporation, was formed in May 1994 to effect the
reorganization of First Option Health Plan of New Jersey, Inc. ("FOHP-NJ"), a
New Jersey corporation which operates as a health maintenance organization
("HMO") in the State of New Jersey, into a holding company structure (the
"Reorganization"). The Reorganization was consummated on June 8, 1995. Pursuant
to the Reorganization, FOHP-NJ became a wholly-owned subsidiary of FOHP. All
health care benefit products and services are provided by FOHP'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 Certificate of Authority
("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 FOHP on June 8,
1995. Currently, it is FOHP's principal subsidiary.
The principal executive offices of FOHP are located at 3501 State
Highway 66, Neptune, New Jersey 07753, and its telephone number at such location
is (732) 918-6700.
FHS
FHS, a Delaware corporation, is an integrated managed care organization
which administers the delivery of managed health care services. FHS' HMOs,
insured preferred provider organizations and government contracts subsidiaries
provide health benefits to 6.2 million individuals in 21 states through group,
individual, Medicare risk, Medicaid and CHAMPUS programs. FHS' subsidiaries also
offer managed health care products related to behavioral health, dental, vision
and prescription drugs, and offer managed health care product coordination for
multi-region employers and administrative services for medical groups and
self-funded benefits programs. 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, including FOHP. FHS currently owns
approximately 98% of the outstanding FOHP Common Stock.
7
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The principal executive offices of FHS are located at 21600 Oxnard
Street, Woodland Hills, California 91367, and its telephone number at such
location is (818) 676-6978.
FHS TRANSITION COMPANY
FHS Transition Company, a New Jersey corporation, has been formed
solely for the purpose of effecting the Merger and has not conducted any
business and has no significant assets or liabilities nor will it conduct any
business or have significant assets or liabilities prior to the Merger. All the
outstanding shares of capital stock of FHS Transition Company are held by FHS.
FHS Transition Company was formed so that it could be merged with and into FOHP
to effect the Merger. At the effective time (the "Effective Time") of the Merger
of FHS Transition Company with and into FOHP, FHS Transition Company shall cease
to exist.
THE SPECIAL MEETING
The Special Meeting will be held at the CNA Building, 3501 State
Highway 66, Neptune, New Jersey on January __, 1999 commencing at 6:00 p.m.
local time. Holders of record of FOHP Common Stock at the close of business on
the Record Date are entitled to notice of, and will be entitled to vote at, the
Special Meeting. At the Special Meeting, the shareholders of FOHP will be asked
to consider and approve the Merger Agreement. See "The Special Meeting"
beginning on page 37 hereof.
BACKGROUND OF THE MERGER
During the first quarter of 1996, FOHP learned that FOHP-NJ had a
statutory net worth deficiency. To raise the capital necessary for FOHP-NJ to
remain in compliance with its statutory net worth requirements, the FOHP Board
determined that FOHP needed to locate potential investors who would be
interested in acquiring a significant equity position in FOHP. 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, FOHP entered into a Securities Purchase Agreement (the
"Securities Purchase Agreement") with Health Systems International, Inc., the
predecessor to FHS ("HSI").
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 FOHP or its actuaries prior to such quarter, HSI 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, the
Securities Purchase Agreement was terminated and replaced by an amended
Securities Purchase Agreement which became effective on March 14, 1997 (the
"Amended Securities Purchase Agreement").
On April 16, 1997, the Amended Securities Purchase Agreement, and the
transactions contemplated thereby, were approved by the shareholders of FOHP. On
April 30, 1997, pursuant to the Amended Securities Purchase Agreement, FHS
purchased from FOHP a convertible debenture in the aggregate principal amount of
$51,701,120.38 (the "Initial Debenture"). The
8
<PAGE> 15
principal amount of the Initial Debenture was convertible, at the option of FHS,
into up to 71% of FOHP's capital stock on a fully-diluted basis.
At the closing of the purchase of the Initial Debenture, FHS converted
$1,701,120.38 of the principal amount of the Initial Debenture into 168,109
shares of FOHP 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 FOHP Common Stock, and, as a result, owned at that time 71%
of the outstanding shares of FOHP Common Stock.
Pursuant to the Amended Securities Purchase Agreement, as clarified by
a letter agreement dated April 30, 1997 between FHS and FOHP (the "Letter
Agreement"), FHS has the right to infuse additional capital into FOHP, for
additional convertible debentures ("Convertible Debentures") in substantially
the same form as the Initial Debenture, in the event that it is determined that
FOHP-NJ needs capital to meet applicable statutory net worth requirements.
The Amended Securities Purchase Agreement also provides that FHS may,
at its option, acquire during 1999, through a tender offer or merger (the
"Buy-out Transaction"), all of the then outstanding shares of FOHP Common Stock
not held by FHS at a purchase price per share that is determined by independent
appraisers (the "Appraisal Consideration"). In the Buy-out Transaction, the
hospital, physician and other non-hospital provider shareholders of FOHP
(collectively, the "Provider Shareholders," and individually a "Provider
Shareholder") would receive cash or, at FHS' sole option, registered FHS Class A
Common Stock, par value $.001 per share ("FHS Class A Common Stock"), for their
shares of FOHP Common Stock. The FOHP Board, as constituted prior to FHS'
purchase of the Initial Debenture, approved, for purposes of Section 14A:10A-4
of the New Jersey Shareholders Protection Act, the Buy-out Transaction, provided
such transaction occurs in 1999 and certain other conditions are met.
As FOHP continued to reduce its medical claims back-log during the
second quarter of 1997, it became apparent that FOHP's incurred but not yet
reported reserve ("IBNR") was not adequate to ensure payment of all outstanding
claims. In addition, it was anticipated that FOHP would continue to incur
significant operating losses until certain unprofitable products were phased-out
or revised and administrative expenses reduced. As a result, management of FOHP
informed the FOHP Board that FOHP would likely need a capital infusion in excess
of $18 million by December 31, 1997 so that FOHP-NJ could meet applicable
statutory net worth requirements by year end.
Recognizing that an additional capital infusion by FHS of more than $18
million in exchange for additional Convertible Debentures would result in a
significant dilution to the equity position of the Provider Shareholders, and
that such dilution would reduce the amount of Appraisal Consideration that the
Provider Shareholders would be entitled to receive in the Buy-out Transaction,
the FOHP Board and FHS began, in July 1997, discussing various alternatives
directed at preserving the Provider Shareholders' original investment in FOHP
(the "Alternate Consideration").
On September 2, 1997, the FOHP Board formed a special committee,
comprised of Mr. Bruce G. Coe, Mr. Christopher M. Dadlez, Dr. Mark L. Engel and
Mr. John J. Gantner (the "Special Committee"), for purposes of identifying and
negotiating with prospective financial
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advisors for possible engagement by the FOHP Board to counsel and advise the
FOHP Board in evaluating and acting upon any Alternate Consideration proposal.
No member of the Special Committee is or was affiliated with FHS nor serves or
has served as an officer or employee of FOHP. After careful evaluation of the
information and proposals submitted by various prospective financial advisors,
the Special Committee recommended that Janney Montgomery Scott Inc. ("JMS" or
the "Financial Advisor") should be engaged. On October 14, 1997, JMS was engaged
by the FOHP Board as its financial advisor.
In order to satisfy certain statutory net worth requirements applicable
to FOHP-NJ, and in accordance with the Amended Securities Purchase Agreement, as
clarified by the Letter Agreement, FHS elected on December 8, 1997 to infuse $29
million into FOHP in exchange for a Convertible Debenture (the "New Convertible
Debenture") in form and substance substantially similar to the Initial
Debenture. 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 FOHP Common Stock. After the partial conversion of the New
Convertible Debenture, FHS owned 97,913,161 shares of the 100,000,000 shares of
FOHP Common Stock then outstanding, which represented approximately 98% of the
fully-diluted equity of FOHP.
In December 1997, FHS also contributed an additional $24 million to
FOHP to satisfy certain statutory net worth requirements applicable to FOHP-NJ
in return for additional subordinated debentures which are not convertible into
shares of FOHP Common Stock. Further, FHS contributed $19,897,801 to FOHP as
additional paid in capital to satisfy certain statutory net worth requirements
applicable to FOHP-NJ as of June 30, 1998.
FHS and the members of the FOHP Board who were not affiliated with FHS
nor employees of FOHP (the "Non-FHS Directors"), assisted by legal counsel and
JMS, held discussions from October 1997 through June 1998 for purposes of
developing an Alternate Consideration proposal. The Non-FHS Directors believed
it was necessary that any Alternate Consideration to be offered for a share of
FOHP Common Stock be equal to at least $15.00, the amount originally paid by a
Provider Shareholder to FOHP for one share of FOHP Common Stock. After several
months of discussion, FHS was willing to offer a Provider Shareholder the
opportunity to obtain $15.00 for each share of FOHP Common Stock held by him,
her or it, provided that the Provider Shareholder continue to participate in the
provider network of FOHP-NJ, or its successor, until December 31, 2001, and
provided certain other conditions are met.
On June 17, 1998, the FOHP Board approved a form of the Buy-out
Transaction pursuant to which FOHP and Physicians Health Services of New Jersey,
Inc. ("PHS-NJ"), an affiliate of FHS which operates as an HMO in New Jersey,
would merge with and into FOHP-NJ (the "Original Merger"), and, in connection
therewith, the Provider Shareholders would be offered the choice of receiving
from FHS either the Appraisal Consideration or Alternate Consideration for their
shares of FOHP Common Stock. The FOHP Board's approval of the Original Merger
was subject to the receipt by the FOHP Board of a written opinion from JMS that
the Alternate Consideration to be offered in the Original Merger to the Provider
Shareholders for their shares of FOHP Common Stock was fair to such holders from
a financial point of view.
A term sheet (the "Term Sheet") outlining the proposed Alternate
Consideration to be offered in the Original Merger was presented to JMS in June
1998. On July 2, 1998, at a special
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meeting of the FOHP Board, JMS informed the FOHP Board that the Alternate
Consideration to be offered in the Original Merger was fair to the Provider
Shareholders from a financial point of view, and, shortly thereafter, JMS
provided the FOHP Board with a written opinion, dated July 15, 1998, to that
effect. In reliance on JMS' opinion that the Alternate Consideration to be
offered in the Original Merger was fair to the Provider Shareholders from a
financial point of view, the FOHP Board, through a majority of the Non-FHS
Directors, definitively approved the Original Merger at the special meeting held
on July 2, 1998.
The Original Merger was to become effective on January 1, 1999,
provided that all governmental approvals and other conditions thereto had been
obtained or satisfied by that date. It was necessary for the Original Merger to
become effective by January 1, 1999 so that PHS-NJ and FOHP-NJ could consolidate
and operate as one plan as directed by the New Jersey Departments of Banking and
Insurance and Health and Senior Services (the "Departments"). However, during
early September 1998, it became apparent to FOHP management that FOHP would
probably not be able to hold the Special Meeting by December 31, 1998.
In order for the consolidation of the HMO operations of FOHP-NJ and
PHS-NJ to occur on January 1, 1999 as originally contemplated, it was proposed
to the FOHP Board that the Original Merger be restructured into a two step
merger process. The first step would involve a merger of PHS-NJ into FOHP-NJ to
be effective January 1, 1999 (the "HMO Subsidiary Merger"). The second step
would be the Merger described in this Proxy Statement, which would take effect
shortly after the Special Meeting was held.
After reviewing drafts of the merger documents relating to the HMO
Subsidiary Merger and the Merger Agreement relating to the Merger, the members
of the FOHP Board participating in a special meeting held on October 14, 1998,
unanimously approved the HMO Subsidiary Merger and the Merger, subject to
receipt by the FOHP Board of written confirmation from JMS that its opinion
dated July 15, 1998, which provided that the Alternate Consideration to be
offered in the Original Merger to the Provider Shareholders for their shares of
FOHP Common Stock was fair to such Provider Shareholders from a financial point
of view, had not changed as a result of the new two step merger process.
After reviewing the Merger Agreement and related documents, JMS
confirmed in writing on November 16, 1998, that its original opinion dated July
15, 1998 had not been affected by the restructuring of the Original Merger into
the two step merger process, and that the Payment Rights to be offered by FOHP
to the Provider Shareholders in connection with the Merger was fair to the
Provider Shareholders from a financial point of view. See "The Merger -
Background of the Merger" beginning on page 39 hereof.
REASONS FOR THE MERGER
Pursuant to the Amended Securities Purchase Agreement, FHS may acquire
through the Buy-out Transaction, all of the outstanding FOHP Common Stock held
by the Provider Shareholders, provided such transaction occurs in 1999. The
reason for the Merger is to effect the Buy-out Transaction contemplated by the
Amended Securities Purchase Agreement. See "The Merger - Reasons for the Merger"
beginning on page 44 hereof.
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THE MERGER
If the Merger Agreement is approved by the shareholders of FOHP, FHS
Transition Company will merge with and into FOHP, and FOHP will become a
wholly-owned subsidiary of Physicians Health Services, Inc. ("PHS"), which is
the parent of PHS-NJ and a wholly-owned subsidiary of FHS. In other words, if
the Merger is consummated, the Provider Shareholders will receive either the
Appraisal Consideration or Payment Rights for their shares of FOHP Common Stock
and will no longer have an equity position in FOHP. If a Provider Shareholder
chooses to receive Payment Rights for his, her or its shares of FOHP Common
Stock, the only entitlement that the Provider Shareholder would have as the
holder of Payment Rights is the right to be paid not less than $15.00 per
Payment Right on or about July 1, 2001, provided certain conditions are either
satisfied or waived.
At the Effective Time of the Merger, the Certificate of Incorporation
and By-laws of FOHP will be amended to, among other things, delete all
provisions relating to preemptive rights, restrictions on the issuance of FOHP
Common Stock, restrictions on the transfer of FOHP Common Stock, business
combinations, covenants of Hospital Shareholders (as hereinafter defined),
cumulative voting on the election of directors, dissenters' rights, actions
requiring super majority approval of the FOHP Board or approval by directors
with no affiliation to FHS, which are currently contained therein. All of the
current directors and executive officers of FOHP and FOHP-NJ will be the
directors and executive officers of the Surviving Corporation. As a result of
the Merger, all real property and personal property, tangible and intangible, of
every kind and description, belonging to FHS Transition Company and FOHP shall
vest in and belong to the Surviving Corporation, including all FOHP's ownership
interest in FOHP-NJ, and the Surviving Corporation shall be liable for all the
obligations and liabilities of such corporations. See "The Merger - The Merger
Agreement" beginning on page 44 hereof.
CONSIDERATION TO BE OFFERED TO FOHP SHAREHOLDERS IN THE MERGER
In connection with the Merger, each Provider Shareholder will be
offered a choice of consideration for his, her or its shares of FOHP Common
Stock. Pursuant to the Merger Agreement, a Provider Shareholder will be entitled
to choose to receive for his, her or its shares of FOHP Common Stock either the
consideration described in subparagraph (i) or the consideration described in
subparagraph (ii) below:
(i) the Appraisal Consideration, which shall equal the value of
such shares of FOHP Common Stock as of December 31, 1998, as
determined by an independent qualified appraiser selected by
FHS and an independent qualified appraiser selected by FOHP,
provided, that if the appraisers selected by FHS and FOHP do
not agree on the value of the FOHP Common Stock, then the two
appraisers will select a third independent qualified appraiser
and the value of the FOHP Common Stock will be determined
using the two closest appraisals, or, in certain instances,
all three appraisals, or
(ii) the Alternate Consideration, which shall be comprised of
Payment Rights entitling the holder thereof to a cash payment
of not less than $15.00 per Payment Right on or about July 1,
2001 from FOHP, provided such holder remains a
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provider to FOHP-NJ until July 1, 2001, agrees in writing to
remain a provider to FOHP-NJ until December 31, 2001, and
certain other conditions are either satisfied or waived.
If a physician or other non-hospital Provider Shareholder (individually
a "Non-Hospital Shareholder" and collectively, the "Non-Hospital Shareholders")
chooses to receive Payment Rights for his, her or its shares of FOHP Common
Stock, and such Non-Hospital Shareholder remains a provider to FOHP-NJ until
July 1, 2001, and agrees in writing to remain a provider to FOHP-NJ until
December 31, 2001, the Non-Hospital Shareholder will be entitled to receive
additional consideration of $2.25 per Payment Right and a Pro-Rata Portion (as
defined on page 74 hereof) of a bonus pool (the "Bonus Pool") to be funded by
monies forfeited by Provider Shareholders who choose to receive either (i)
Payment Rights, but who fail to satisfy the conditions contained therein
applicable to them, or (ii) the Appraisal Consideration and the per share
Appraisal Consideration is less than $15.00, provided, however, that the
Continuing Hospital Provider Condition (as defined on page 69 hereof) is
satisfied and FOHP-NJ, as the surviving corporation in the HMO Subsidiary
Merger, produces an annualized return on average common equity capital of at
least 10% for the period January 1, 1999 through June 30, 2001, where initial
capital is set at $130 million for FOHP-NJ, plus any increase in retained
earnings for FOHP-NJ through the period January 1, 1999 to June 30, 2001,
excluding any non-recurring extraordinary items, as defined under generally
accepted accounting principles ("GAAP"). The determination of annualized return
on average common equity capital for the period January 1, 1999 through June 30,
2001 shall be computed using pre-tax earnings. See "Risk Factors" beginning on
page 18 hereof and "The Merger - Consideration to be offered to FOHP
Shareholders in the Merger" beginning on page 46 hereof.
IT IS ANTICIPATED THAT THE APPRAISAL CONSIDERATION FOR ONE SHARE OF
FOHP COMMON STOCK WILL BE SIGNIFICANTLY LESS THAN $15.00.
IF A PROVIDER SHAREHOLDER ELECTS TO RECEIVE PAYMENT RIGHTS FOR HIS, HER
OR ITS SHARES OF FOHP COMMON STOCK, AND ANY OF THE CONDITIONS TO PAYMENT
CONTAINED THEREIN ARE NOT SATISFIED, THE PROVIDER SHAREHOLDER COULD RECEIVE NO
PAYMENT OR A REDUCED PAYMENT FOR HIS, HER OR ITS SHARES OF FOHP COMMON STOCK.
SEE "RISK FACTORS" BEGINNING ON PAGE 18 HEREOF AND "DESCRIPTION OF PAYMENT
RIGHTS" BEGINNING ON PAGE 67 HEREOF.
ONCE A PROVIDER SHAREHOLDER ELECTS TO RECEIVE PAYMENT RIGHTS FOR HIS,
HER OR ITS SHARES OF FOHP COMMON STOCK, SUCH PROVIDER SHAREHOLDER WILL NO LONGER
BE ENTITLED TO THE APPRAISAL CONSIDERATION. SEE "THE MERGER CONSIDERATION TO BE
OFFERED TO FOHP SHAREHOLDERS IN THE MERGER" BEGINNING ON PAGE 46 HEREOF.
IF A NON-DISSENTING PROVIDER SHAREHOLDER FAILS TO CHOOSE EITHER THE
APPRAISAL CONSIDERATION OR PAYMENT RIGHTS, SUCH SHAREHOLDER WILL AUTOMATICALLY
RECEIVE PAYMENT RIGHTS FOR HIS, HER OR ITS SHARES OF FOHP COMMON STOCK.
COMPARISON OF SHAREHOLDER RIGHTS
As holders of FOHP Common Stock, Provider Shareholders are entitled to
vote on certain matters brought before the shareholders of FOHP, such as the
election of directors and
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certain business combinations, as well as share in any dividends or
distributions declared by FOHP for the benefit of its shareholders. If the
Merger is consummated, (i) the non-dissenting Provider Shareholders will receive
either the Appraisal Consideration or Payment Rights for their shares of FOHP
Common Stock, and (ii) the dissenting Provider Shareholders will receive the
fair value for their shares of FOHP Common Stock as determined under Chapter 11
of the NJBCA. As a result, no Provider Shareholder will have an equity position
in FOHP after the Merger, and, therefore, will not have the rights formerly held
by FOHP shareholders. See "Comparison of Shareholder Rights."
RECOMMENDATION OF THE FOHP BOARD
The FOHP Board has approved the Merger Agreement and recommends that
the FOHP shareholders vote FOR the proposal to approve the Merger Agreement.
This recommendation is based on the several factors described in this Proxy
Statement. See "The Merger - Background of the Merger; Reasons for the Merger;
and Recommendation of the FOHP Board" beginning on page 39 hereof.
OPINION OF FINANCIAL ADVISOR TO FOHP
On July 15, 1998, JMS delivered its written opinion to the FOHP Board
to the effect that, as of the date of such opinion and based upon and subject to
certain matters stated therein, the Alternate Consideration to be offered to the
Provider Shareholders in the Original Merger was fair to the Provider
Shareholders from a financial point of view. On November 16, 1998, JMS confirmed
in writing that its opinion dated July 15, 1998 was not affected by the
restructuring of the Original Merger into the two step merger process.
Therefore, based upon and subject to certain matters stated in the opinion
letter dated July 15, 1998, JMS is of opinion that the Payment Rights to be
offered to the Provider Shareholders in the Merger are fair to the Provider
Shareholders from a financial point of view. A copy of JMS' written opinion
dated July 15, 1998, which sets forth the assumptions made, procedures followed,
matters considered and limitations on and scope of the review by JMS, and update
thereto dated November 16, 1998, are attached as Appendix F to this Proxy
Statement. See "The Merger Opinion of Financial Advisor to FOHP" beginning on
page 50 hereof.
THE OPINION OF JMS IS DIRECTED TO THE FOHP BOARD, ADDRESSES ONLY THE
FAIRNESS OF THE PAYMENT RIGHTS TO BE OFFERED TO THE PROVIDER SHAREHOLDERS FROM A
FINANCIAL POINT OF VIEW, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
PROVIDER SHAREHOLDER AS TO HOW SUCH PROVIDER SHAREHOLDER SHOULD VOTE AT THE
SPECIAL MEETING OR WHICH CONSIDERATION THE PROVIDER SHAREHOLDER SHOULD CHOOSE TO
RECEIVE IF THE MERGER IS CONSUMMATED. PROVIDER SHAREHOLDERS ARE ENCOURAGED TO
READ JMS' OPINION IN ITS ENTIRETY.
CONDITIONS TO THE MERGER
The obligation of each party to the Merger Agreement to complete the
Merger is subject to several conditions, including, among others: (i ) the
approval of the Merger Agreement by the holders of a majority of the outstanding
shares of FOHP Common Stock, (ii) no statute, rule,
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regulation, executive order, decree, injunction or restraining order shall have
been enacted, promulgated, enforced or otherwise made applicable (and not
repealed or superceded) by any court of competent jurisdiction, administrative
agency or commission or other governmental authority or instrumentality, which
prohibits the consummation of the transactions contemplated by the Merger
Agreement, (iii) the receipt of requisite governmental consents and approvals to
consummate the Merger, and (iv) the execution and delivery by FOHP and FHS of
the Contribution Agreement (the "Contribution Agreement") attached as Appendix E
to this Proxy Statement, pursuant to which FHS will irrevocably commit to
contribute to FOHP the amount of cash necessary for FOHP to pay, among other
things, all amounts payable under the Payment Rights to be issued in connection
with the Merger. See "The Merger - The Merger Agreement" beginning on page 44
hereof and "The Merger - The Contribution Agreement" beginning on page 48
hereof.
TERMINATION OF MERGER AGREEMENT
Any time before the Effective Time of the Merger, the Merger Agreement
may be terminated and the Merger abandoned, or the consummation of the
transactions contemplated by the Merger may be delayed, by the FOHP Board for
any reason.
REQUIRED VOTE TO APPROVE MERGER AGREEMENT
The approval of the majority of the outstanding shares of FOHP Common
Stock is required to approve the Merger Agreement. FHS currently owns
approximately 98% of the outstanding shares of FOHP Common Stock. Accordingly,
if FHS approves the Merger Agreement, the Merger will occur, provided all of the
other conditions to the Merger are either satisfied or waived.
DISSENTERS' RIGHTS
If the Merger is consummated, holders of shares of FOHP Common Stock on
the Record Date that do not vote for the Merger may, by complying with the
procedures prescribed in the New Jersey Business Corporation Act (the "NJBCA"),
be entitled to the dissenters' rights as described therein. See Appendix G.
Failure to comply precisely with the requirements of the applicable provisions
of the NJBCA may result in a loss of dissenters' rights. See "Dissenters'
Rights" beginning on page 55 hereof.
RELATED AGREEMENTS
In connection with FHS' purchase of the Initial Debenture, FHS and FOHP
entered into a General Administrative Services Management Agreement (the
"Administrative Management Agreement"), pursuant to which FHS oversees the
management of FOHP and assists FOHP's management in provider contracting,
utilization review and quality assurance, employee relations, sales and
marketing, and strategic planning, among other services. FOHP pays FHS a
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fee based on allocated corporate charges for the services provided by FHS under
the Administrative Management Agreement. See "Related Agreements."
In addition, FHS and FOHP have entered into a Management Information
Systems and Claims Processing Services Management Agreement (the "MIS
Agreement," and together with the Administrative 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 FOHP's subsidiaries. The MIS Agreement will become effective
at FHS' option. See "Related Agreements."
ACCOUNTING TREATMENT OF THE MERGER
Effective December 1, 1997, FOHP became a consolidated subsidiary of
FHS. The purchase of the shares of FOHP Common Stock not currently held by FHS,
which represent approximately 2% of the outstanding shares of FOHP Common Stock,
will be accounted for by FHS as a purchase in accordance with Accounting
Principles Board Opinion 16.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Each Provider Shareholder who elects to receive the Appraisal
Consideration will recognize, in the Provider Shareholder's fiscal year in which
the Merger is consummated, either gain or loss in an amount which is equal to
the difference between (x) the aggregate amount of the Appraisal Consideration
received by the Provider Shareholder less (y) the Provider Shareholder's
aggregate adjusted basis in the shares of FOHP Common Stock exchanged. It is
anticipated that the Appraisal Consideration will be significantly less than
$15.00, which is the amount originally paid to FOHP for one share of FOHP Common
Stock by the Provider Shareholders. Accordingly, it is anticipated that any
Provider Shareholder electing to receive the Appraisal Consideration would
recognize a loss.
The amount of gain or loss to be recognized by a Hospital Shareholder
on the exchange of such shareholder's shares of FOHP Common Stock for the
Alternate Consideration shall be equal to the difference between (i) the
aggregate amount paid under such shareholder's Payment Rights less the aggregate
amount of the consideration received under the Payment Rights which is deemed to
be imputed interest income, less (ii) the Hospital Shareholder's aggregate
adjusted basis in the shares of FOHP Common Stock exchanged. The amount of gain
or loss to be recognized by a Non-Hospital Shareholder on the exchange of such
shareholder's shares of FOHP Common Stock for the Alternate Consideration shall
be equal to the difference between (i) an amount which is the sum of (a) the
aggregate amount received under the shareholder's Payment Rights less the
aggregate amount of the consideration received under the Payment Rights which is
deemed to be imputed interest income and (b) the amount of the Bonus Payment
received, less (ii) the Non-Hospital Shareholder's aggregate adjusted basis in
the shares of FOHP Common Stock exchanged. Each Provider Shareholder who elects
to receive the Alternate Consideration shall not be required to recognize the
amount of the gain or loss realized with respect to the Alternate Consideration
until the fiscal year in which the Alternate Consideration is paid to the
Provider Shareholder, unless such shareholder elects otherwise.
If the Provider Shareholder holds his, her or its shares of FOHP Common
Stock as a capital asset, any gain or loss recognized with respect to the
exchange of shares of FOHP
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Common Stock for either the Appraisal Consideration or the Alternate
Consideration is capital in nature and, if the Provider Shareholder has complied
with the requisite holding period provided for in the Code, such capital gain or
loss shall be long-term and taxed at the applicable capital gains tax rate as
provided for in the Code. Any part of the amount received pursuant to the
Payment Rights which is imputed as interest income shall be treated as ordinary
income and taxed in the year in which the Alternate Consideration is paid at the
Provider Shareholder's applicable ordinary tax rates as provided for in the
Code.
THE DISCUSSION SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF ALL TAX CONSEQUENCES OF THE MERGER, NOR DOES IT ATTEMPT TO
DESCRIBE ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE IMPORTANT TO A
PROVIDER SHAREHOLDER IN LIGHT OF SUCH SHAREHOLDER'S PARTICULAR CIRCUMSTANCES,
INCLUDING, WITHOUT LIMITATION, IF THE PROVIDER SHAREHOLDER IS A TAX EXEMPT
ENTITY. EACH PROVIDER SHAREHOLDER'S SEPARATE CIRCUMSTANCES MAY AFFECT THE TAX
CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER. IN ADDITION, NO INFORMATION IS
PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER UNDER
APPLICABLE FOREIGN, STATE OR LOCAL LAWS. CONSEQUENTLY, EACH PROVIDER SHAREHOLDER
IS ADVISED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER.
See "The Merger - Certain Federal Income Tax Consequences of the
Merger" for a more complete discussion of the federal income tax consequences of
the Merger on the Provider Shareholders.
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RISK FACTORS
THE FOLLOWING ARE CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY THE
PROVIDER SHAREHOLDERS IN EVALUATING THE MERGER AGREEMENT AND THE MERGER
CONTEMPLATED THEREBY, AND IN CHOOSING THE CONSIDERATION BEING OFFERED IN THE
MERGER.
UNSECURED PAYMENT UNDER PAYMENT RIGHTS. Any payment under the Payment
Rights to be issuable in the Merger will be made by FOHP using monies
contributed to FOHP from FHS pursuant to the Contribution Agreement. Although a
substantial portion of FHS' payment obligation to FOHP under the Contribution
Agreement will be evidenced by a promissory note, such obligation will not be
secured. Consequently, if FHS were to become bankrupt or otherwise insolvent
under applicable bankruptcy or insolvency laws prior to payment being made under
the Payment Rights, and FOHP did not have sufficient capital to make payment on
the Payment Rights, holders of Payment Rights might not receive any payment or
may receive a reduced payment thereunder.
Although FHS has generated a profit in four of the past five years, and
has total assets exceeding $3.8 billion, including over $250 million in cash and
cash equivalents, the following factors could affect the future operations of
FHS and its ability to make payment under the Contribution Agreement:
(a) Control Over and Predictability of Health Care Costs - The
profitability of FHS depends in large part upon its ability to
accurately predict and control health care costs through
underwriting criteria, utilization management and negotiation
of favorable provider contracts. Changes in health care
practices, inflation, new technologies, major epidemics,
disasters and catastrophes, clusters of high-cost cases, new
mandated benefits or other regulatory changes, and numerous
other factors affecting the delivery and cost of health care
are beyond any health plan's control and may adversely affect
FHS' ability to predict or control health care costs and
claims. In addition, there can be no assurance that provider
agreements negotiated in the future will not result in
substantially higher health care costs.
(b) Adequacy of Reserves - FHS' HMO and insurance subsidiaries are
required to maintain reserves to cover their estimated
ultimate liability with respect to reported and unreported
claims incurred. These reserves do not represent an exact
calculation of liabilities but rather estimates involving
judgment and actuarial projections. Establishment of reserves
is an inherently uncertain process and there can be no
certainty that currently established reserves will prove to be
adequate to cover actual ultimate expenses. Subsequent actual
experience could result in reserves being too low. Higher than
expected claim costs could require reserves for prior periods
to be increased, which would have an adverse impact on FHS'
earnings in future periods.
(c) Competition - The managed health care industry is highly
competitive, with major competitors including Blue Cross/Blue
Shield plans, other indemnity insurers and other national and
regional HMOs, preferred provider
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organizations and third party administrator companies. A
number of FHS' competitors are more established in the health
care industry and have substantially larger memberships and
greater financial resources than FHS. In addition, employers
may choose to self-insure their health care risk while seeking
benefit administration and utilization review services from
third parties to assist them in controlling and reporting
health care costs.
(d) Dependence upon Health Care Providers - FHS' profitability and
the success of the its long-range business plans will depend
upon its ability to attract and retain qualified health care
providers. The failure to retain key medical groups,
independent practice associations and hospitals could
adversely affect FHS' operating results and future
profitability. There can be no assurance that FHS will
successfully maintain a cost effective, stable provider
network.
(e) Government Regulation - The health care industry in general,
and HMOs and insurance companies in particular, are subject to
substantial federal and state regulation including, but not
limited to, regulations relating to cash reserves, adequacy of
reserves, minimum net worth, licensing requirements, approval
of policy language and benefits, mandatory products and
benefits, provider compensation arrangements, premium rates
and periodic examinations by state and federal agencies. The
laws and rules governing the business of FHS and the
interpretation of those laws and rules are subject to frequent
change. Existing and future laws and rules could force FHS to
change how it does business and may restrict FHS' revenue and
enrollment growth or both and increase its health care and
administrative costs. In addition, the failure to comply with
these rules and regulations could result in substantial fines
and penalties or in the imposition of a "cease and desist"
order which could prevent FHS from offering a product or
service. Regulatory approvals must be obtained and maintained
to market many of FHS' products and services. Delays in
obtaining or failure to obtain or maintain such approvals
could adversely affect FHS' revenue or the number of its
enrollees, or could increase costs.
(f) Acquisitions and Dispositions - A significant part of the
business strategies of FHS has been to diversify into new
geographic markets and new product areas through acquisitions.
As a result, FHS is subject to the uncertainties and risks
associated with any business that has grown rapidly and has
expanded into new geographic and product areas.
(g) Dependence upon Key Personnel - The future success of FHS
depends in large part upon the continued service of its senior
management and other key personnel. The loss of a significant
group of senior management or key personnel or the inability
to attract and retain qualified employees could have an
adverse affect on FHS' operating results and future
profitability.
(h) Information Systems - FHS' business is significantly dependant
upon effective information systems. FHS has many different
information systems for its various businesses. FHS is in the
process of attempting to reduce the number of
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systems and also upgrade and expand its information system
capabilities. Failure of FHS to maintain an effective and
efficient information system, or to effectively and timely
integrate and consolidate the systems of its various
subsidiaries, could result in the loss of existing customers
and difficulty in attracting new customers, customer and
provider disputes, regulatory problems, increases in
administrative expenses or other adverse consequences which
could have an adverse affect on FHS' operating results and
future profitability.
(i) Health Care Reform - There have been numerous legislative and
regulatory initiatives at both the federal and state levels to
address, among other aspects of the nation's health care
system, the continuing increases in health care costs and the
lack of health care coverage for a significant segment of the
population. All or any of these potential forms of legislation
could adversely affect FHS' business. In addition, certain of
the legislative and regulatory initiatives have also been as a
result of recent negative publicity regarding the purported
denial of care to enrollees by managed health care companies.
Continued negative publicity regarding the managed care
industry could also have a material adverse affect on FHS'
business.
(j) Exposure to Evolving Theories of Recovery - FHS, like HMOs and
other health insurers generally, excludes certain health care
services from coverage under its plans. FHS is, in its
ordinary course of business, subject to the claims of its
enrollees arising out of decisions to restrict coverage for
treatment or to restrict reimbursement for certain services.
Several recent proceedings filed against managed care
companies have successfully challenged HMOs' decisions to deny
coverage of treatment sought by enrollees. Compensatory
damages (including damages for emotional distress) and
punitive damages, which are generally not covered by
insurance, except in certain states where such coverage is
permitted, have been awarded. Punitive damages have been
awarded on the premises that the defendant HMOs have, in bad
faith, denied coverage of the treatment sought. Although each
lawsuit must succeed or fail on its own merits, FHS
anticipates that claims alleging bad faith may become more
common in enrollees' actions against managed care companies.
The loss of any such claim, if it results in a significant
punitive or other damage award or a directive that FHS effect
significant changes in its operations, could adversely affect
FHS' business. In addition, HMO enrollees are challenging
certain features of HMOs' financial arrangements with their
contracting providers, in particular, that these arrangements
contain certain financial incentives to control unnecessary
referrals to specialists and unnecessary hospitalizations. The
enrollees contend that these financial arrangements, and the
capitation system for reimbursing providers as well, provide
participating providers with improper incentives to furnish
less than adequate medical care to enrollees. State
legislatures are also considering managed care reimbursement
methodologies and their effect on access to and quality of,
medical care. The financial and operational impact which such
evolving theories of recovery and legislation, if enacted,
will have on the managed care industry generally, and on FHS
in particular, is unknown. In addition, the risk of potential
liability under
20
<PAGE> 27
punitive damages may make it more difficult to obtain
reasonable settlements of such coverage claims.
(k) Impact of Year 2000 Issue - FHS recognizes that the arrival of
the Year 2000 requires computer systems to be able to
recognize the date change from 1999 to 2000 and, like other
companies, is assessing and modifying its computer
applications and business processes to provide for their
continued functionality.
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of FHS' computer programs that have time
sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to
process transactions, prepare invoices or engage in normal
business activities. In addition, the year 2000 problems of
FHS' providers and customers, including governmental entities,
can affect FHS' operations, which are highly dependent upon
information technology for processing claims, determining
eligibility and exchanging information.
FHS, for itself and on behalf of its subsidiaries, including
FOHP, has undertaken a comprehensive review of the Year 2000
issue and its affect on the operations of FHS and its
subsidiaries. Set forth below is a brief description of FHS'
effort to address the Year 2000 issue:
o Project Status. The Year 2000 effort for FHS has the
highest priority of technology projects. The project
has dedicated resources with multiple teams to
address unique systems environments. Uniform project
management techniques have been adopted with overall
oversight responsibility residing with FHS' Chief
Technology Officer, assisted by a special project
manager hired by FHS. Selected systems will be
retired with the business functions being converted
to Year 2000 compliant systems. A number of the FHS'
systems include packaged software from large vendors
that FHS is closely monitoring to ensure that those
systems are Year 2000 compliant. FHS believes that
vendors will make timely updates available to ensure
that all remaining software is Year 2000 compliant.
The remaining systems' compliance with Year 2000 will
be addressed by internal technical staff. FHS has
engaged IBM to assist in the program management of
the project. FHS has also retained legal consultants
to assist in the review of insurance and FHS'
obligations and rights, and intends to retain a
technical consultant to help develop contingency
plans.
FHS has divided its Year 2000 effort into five
phases: (1) Assessment and Strategy; (2) Detailed
Analysis and Planning; (3) Remediation; (4) Testing
and Implementation; and (5) Certification. FHS
believes that Phase 1 is almost complete. FHS has
requested that each of its geographical and specialty
service divisions conduct a detailed internal
self-assessment as to their compliance, needs, risks
and contingency planning, which will then be
21
<PAGE> 28
reviewed and prioritized at the corporate level. FHS
believes that it has completed approximately 80% of
Phase 2, approximately 30% of Phase 3 and
approximately 15% of Phase 4 relating to its internal
technology. FHS has established the third quarter of
1999 to complete all phases and is endeavoring to
accelerate completion ahead of that time.
FOHP is a member of FHS' Northeast Division. FOHP is
presently converting its claims and billing systems
to a common northeast platform which is maintained by
PHS, a wholly-owned subsidiary of FHS. Therefore, PHS
is providing, on behalf of the members of FHS'
Northeast Division, a Year 2000 compliance report to
FHS.
o Third Parties. FHS has commenced an inventory of
third party relationships, identifying them and
analyzing their strategic importance to FHS and its
subsidiaries and their Year 2000 readiness. FHS
expects to complete its risk assessment for third
parties in the fourth quarter of 1998. There can be
no assurances that the systems of other companies on
which FHS or FOHP relies will be compliant on a
timely basis, or that the failure by a third party to
be compliant would not have a material adverse effect
on FHS or FOHP.
o Costs. FHS is evaluating on an ongoing basis the
related costs to resolve its potential Year 2000
problems. FHS currently estimates that the total cost
for the project will exceed $17 million, excluding
the costs to accelerate the replacement of hardware
or software otherwise required to be purchased by
FHS, and the use of existing personnel to assist in
the project. In this quarter, the first quarter in
which FHS separately tracked the costs relating to
the project, FHS has expended approximately $5.3
million, relating to, among other things, the cost to
repair or replace software and related hardware
problems, cost of assessment, analysis and planning
and internal and external communications. The
percentage of the total cost of the Year 2000 project
attributable to FOHP has not yet been determined.
However, FOHP does not believe that any allocation of
the costs of the Year 2000 project to FOHP will have
a material affect on FOHP's operations.
Notwithstanding the foregoing, the costs of the
project and the timetable in which FHS plans to
complete the Year 2000 compliance requirements are
based on estimates derived from utilizing numerous
assumptions of future events including the continued
availability of certain resources, third party
modification plans and other factors. There can
therefore be no assurance that these estimates will
be achieved and actual results and costs could differ
materially from these estimates.
Certain insurance coverages for defense costs
associated with Year 2000 litigation have already
been secured under FHS' Directors and Officers
Liability Insurance policy and will be re-evaluated
upon renewal of that policy. At this time it is
unclear as to extent of existing insurance coverage,
22
<PAGE> 29
if any, FHS may have to cover potential Year 2000
costs and liabilities under its other insurance
policies. FHS is currently analyzing the availability
of such coverage under other existing and future
insurance policies and products.
o Contingency Planning. An important part of FHS' Year
2000 project involves identifying worst case
scenarios and seeking to develop contingency plans.
Each geographical and specialty services division of
FHS is ranking its critical business functions in one
of four categories, from the most important (a
function which is vital to the line of business and
which has a significant impact on FHS' reputation and
critical daily operations, for which an alternative
must be immediately available), to the least
important (a function which has a negligible effect
on FHS' provision of services and reputation and for
which alternatives are readily available). In
addition to acting to address the most critical
problems first in its remediation effort, FHS will
also seek to develop its contingency plans to
prioritize the most critical business functions. FHS
has just begun its efforts in this area.
o Risks. FHS and FOHP are highly dependent upon their
own information technology systems and that of their
providers and customers. If FHS, FOHP or a third
party failed to correct a material Year 2000 problem
such failure could result in a failure of or
interruption in FHS' or FOHP's business activities
and operations. Such interruptions and failures could
materially and adversely affect FHS' or FOHP's
results of operations, liquidity and financial
condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the
uncertainty of the readiness of third-party providers
and customers, neither FHS nor FOHP is able to
determine at this time whether the Year 2000 problem
will have a material adverse, effect on FHS' or
FOHP's results of operations, liquidity or financial
condition. FHS' Year 2000 project is expected to
reduce significantly FHS' and FOHP's level of
uncertainty and the possibility of significant or
long-lasting interruptions of FHS' or FOHP's business
operations; however, FHS and FOHP believe that it is
impossible to predict all of the areas in which
material problems may arise.
Since its inception, FOHP's losses have exceeded $130,000,000. Based
upon FOHP's operating history, no assurance can be given that FOHP would have
sufficient funds to make full payment on the Payment Rights in the event that
FHS is unable to make payment to FOHP pursuant to the Contribution Agreement. In
addition, the future operations of FOHP will be affected by many of the same
factors that will affect FHS as discussed above. Any of the factors described
above could have an adverse effect on FOHP's ability to make payment on the
Payment Rights in the event FHS is unable to make payment to FOHP pursuant to
the Contribution Agreement.
23
<PAGE> 30
CONDITIONS TO PAYMENT UNDER PAYMENT RIGHTS. Prior to a Provider
Shareholder receiving any payment under a Payment Right, certain conditions, as
set forth below, must be either satisfied or waived.
o If the Continuing Hospital Provider Condition (as defined on
page 69 hereof) is not satisfied, no payment will be made
under the Payment Rights to any Hospital Shareholder (as
defined below) or Non-Hospital Shareholder unless FOHP, in its
sole discretion, waives such condition. In other words, if (i)
five Large Hospital Shareholders (i.e., a Hospital Shareholder
which originally purchased 33,315 shares of FOHP Common
Stock), (ii) seven Small Hospital Shareholders (i.e., a
Hospital Shareholder which originally purchased 13,334 shares
of FOHP Common Stock), or (iii) three Large Hospital
Shareholders and four Small Hospital Shareholders, should
leave the FOHP-NJ provider network prior to July 1, 2001, or
not agree to remain a provider in the FOHP-NJ provider network
for the period commencing July 1, 2001 and ending December 31,
2001, for any reason other than because of a breach of their
provider agreements by FOHP-NJ, then FOHP would not be
obligated to make any payments under the Payment Rights issued
to the Provider Shareholders in connection with the Merger. As
used herein, the term "Hospital Shareholder" shall mean a
licensed New Jersey hospital or acute care institution which
has entered into a provider agreement with FOHP-NJ to provide
health care related services to the members of FOHP-NJ's
health care benefits plans and owns, either directly or
through an affiliate, shares of FOHP Common Stock
(collectively, the "Hospital Shareholders").
o If a Non-Hospital Shareholder fails to satisfy the
Non-Hospital Shareholder Condition (as such term is defined on
page 73 hereof), such Non-Hospital Shareholder will not be
entitled to payment under any Payment Right held by him, her
or it, unless FOHP, in its sole discretion, waives such
condition.
o If a Hospital Shareholder fails to satisfy the Hospital
Participation and Reimbursement Condition (as defined on page
67 hereof), the amount payable under a Payment Right held by
the Hospital Shareholder shall be reduced by $10.00, unless
such condition is waived by FOHP, in its sole discretion, and
if a Hospital Shareholder fails to satisfy the Hospital
Enrollment and Premium Payment Condition (as defined on page
68 hereof), the amount payable under a Payment Right held by
the Hospital Shareholder shall be reduced by $5.00, unless
such condition is waived by FOHP, in its sole discretion.
CONSEQUENTLY, IF A PROVIDER SHAREHOLDER ELECTS TO RECEIVE PAYMENT
RIGHTS FOR HIS, HER OR ITS SHARES OF FOHP COMMON STOCK AND ANY CONDITIONS
CONTAINED THEREIN ARE NOT SATISFIED, THE PROVIDER SHAREHOLDER COULD RECEIVE NO
PAYMENT OR A REDUCED PAYMENT FOR HIS, HER OR ITS SHARES OF FOHP COMMON STOCK.
SEE "DESCRIPTION OF PAYMENT RIGHTS" BEGINNING ON PAGE 67 HEREOF, FOR A MORE
COMPLETE DESCRIPTION OF THE PAYMENT RIGHTS.
NON-TRANSFERABILITY OF PAYMENT RIGHTS. Certificates representing
Payment Rights will be non-negotiable and the Payment Rights will not be
transferable or assignable by the holders
24
<PAGE> 31
thereof, unless such transfer or assignment is expressly authorized in writing
by FOHP. Accordingly, there will be no public market for the Payment Rights.
CONDITIONS TO BONUS PAYMENTS. If a Non-Hospital Shareholder chooses to
receive Payment Rights for his, her or its shares of FOHP Common Stock, and such
Non-Hospital Shareholder remains a provider to FOHP-NJ until July 1, 2001, and
agrees in writing to remain a provider to FOHP-NJ until December 31, 2001, the
Non-Hospital Shareholder will be entitled to receive additional consideration of
$2.25 per Payment Right and a Pro-Rata Portion (as defined on page 74 hereof) of
the Bonus Pool to be funded by monies forfeited by Provider Shareholders who
receive Payment Rights, but who fail to satisfy the conditions contained therein
applicable to them, or who receive the Appraisal Consideration and such per
share Appraisal Consideration is less than $15.00, provided, however, that the
Continuing Hospital Provider Condition (as defined on page 69 hereof) is
satisfied and FOHP-NJ, as the surviving corporation in the HMO Subsidiary
Merger, produces an annualized return on average common equity capital of at
least 10% for the period January 1, 1999 through June 30, 2001, where initial
capital is set at $130,000,000 for FOHP-NJ, plus any increase in retained
earnings for FOHP-NJ through the period January 1, 1999 through June 30, 2001,
excluding any non-recurring extraordinary items, as defined under GAAP.
Since its inception, FOHP's losses have exceeded $130,000,000, most of
which were attributable to the operations of FOHP-NJ. For any Non-Hospital
Shareholder to be able to receive the Bonus Payment (as defined on page 73
hereof) under a Payment Right, FOHP-NJ would have to generate sufficient net
income to produce an annualized return on average common equity of at least 10%
for the period January 1, 1999 through June 30, 2001. Based upon FOHP-NJ's
operating history, no assurance can be given that FOHP-NJ can generate
sufficient net income to produce an annualized return on average common equity
of at least 10% for the period January 1, 1999 through June 30, 2001.
In addition, the future operations of FOHP-NJ will be affected by many
of the same factors that will affect FHS and FOHP as discussed under the Risk
Factor captioned "Unsecured Payment under Payment Rights." Any of the factors
described in the aforementioned Risk Factor could have an adverse affect on the
operating results and future profitability of FOHP-NJ.
25
<PAGE> 32
FOHP SELECTED FINANCIAL DATA
FOHP, INC. AND SUBSIDIARIES
The following selected consolidated financial data of FOHP as of and
for the years ended December 31, 1997, 1996, and 1995 are derived from
consolidated financial statements of FOHP which have been audited by Ernst &
Young LLP ("Ernst & Young"), independent auditors. Such data is qualified in its
entirety by reference to historical financial information set forth in FOHP's
Annual Report on Form 10-K for the year ended December 31, 1997. The selected
consolidated financial data as of and for the nine months ended September 30,
1998 and 1997 are derived from unaudited consolidated financial statements and
are qualified in their entirety by reference to historical financial information
set forth in FOHP's Quarterly Report on Form 10-Q for the period ended September
30, 1998. Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1998.
Prior to the Reorganization, FOHP did not conduct any business nor did
it have any significant assets or liabilities. Accordingly, the selected
financial data 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 are derived from the financial statements of FOHP-NJ, FOHP's
principal subsidiary, which have been audited by Ernst & Young.
26
<PAGE> 33
FOHP - SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------------- ---------------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Revenue:
<S> <C> <C> <C> <C> <C>
Premium revenue from $ 95,373,859 $ 97,781,152 $ 132,575,894 $ 135,544,112 $ 63,630,797
owners/providers
Other premium revenue 155,609,981 176,701,692 239,132,416 112,125,670 38,819,206
Interest and other income 5,338,442 4,688,130 5,697,921 9,706,526 8,844,036
------------- ------------- ------------- ------------- -------------
Total Revenue 256,322,282 279,170,974 $ 377,406,231 $ 257,376,308 $ 111,294,039
------------- ------------- ------------- ------------- -------------
Expenses:
Medical Services to 36,511,078 44,075,607 63,882,103 37,026,903 17,319,035
owners/providers
Hospital services to 21,679,794 35,272,791 64,553,166 30,156,890 11,068,909
owners/providers
Other medical services 89,389,190 113,337,276 148,812,233 105,551,393 38,548,819
Other hospital services 53,078,117 90,701,465 101,521,355 63,760,554 24,637,249
Selling, general and administrative 42,240,995 36,665,217 55,106,022 50,734,197 32,638,106
Management fee - QualMed, Inc. -- 5,546,233 7,502,899 -- --
Management fee - Foundation Health 1,907,000 -- -- -- --
Systems, Inc.
Interest - Foundation Health 1,604,188 1,247,336 1,790,410 -- --
Systems, Inc.
Restructuring Costs -- 1,134,097 12,825,570 -- --
Other 3,538,539 1,068,934 1,495,355 890,553 1,751,263
------------- ------------- ------------- ------------- -------------
Total Expenses $ 249,948,901 $ 329,048,956 $ 457,489,113 $ 288,120,490 $ 125,963,381
------------- ------------- ------------- ------------- -------------
Provision for income taxes 3,825,954 2,139 2,139 924 71,603
------------- ------------- ------------- ------------- -------------
Net income (loss) $ 2,547,427 $ (49,880,121) $ (80,085,021) $ (30,745,106) $ (14,740,945)
------------- ------------- ------------- ------------- -------------
Net income (loss) per common share $ 0.03 $ (22.85) $ (9.18) $ (14.64) $ (8.65)
============= ============= ============= ============= =============
<CAPTION>
FINANCIAL DATA
FOR FOHP-NJ
PREDECESSOR
TO FOHP
--------------------------------
FOR THE PERIOD FROM MAY
18, 1993 (DATE OF INCEPTION)
TO DECEMBER 31,
--------------------------------
1994 1993
------------- -------------
Revenue:
<S> <C> <C>
Premium revenue from $ 5,639,724 --
owners/providers
Other premium revenue 1,803,624 --
Interest and other income 1,177,171 22,151
------------- -------------
Total Revenue $ 8,620,519 $ 22,151
------------- -------------
Expenses:
Medical Services to 1,405,175 --
owners/providers
Hospital services to 808,920 --
owners/providers
Other medical services 2,272,694 --
Other hospital services 1,710,020 --
Selling, general and administrative 10,624,261 2,063,239
Management fee - QualMed, Inc. -- --
Management fee - Foundation Health -- --
Systems, Inc.
Interest - Foundation Health -- --
Systems, Inc.
Restructuring Costs -- --
Other 240,021 40,847
------------- -------------
Total Expenses $ 17,588,091 $ 2,104,086
------------- -------------
Provision for income taxes -- --
------------- -------------
Net income (loss) $ (8,967,572) $ (2,081,935)
------------- -------------
Net income (loss) per common share $ (8.40) $ (2.52)
============= =============
</TABLE>
27
<PAGE> 34
FOHP SUMMARIZED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
-------------------------------- ---------------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 29,340,408 $ 27,804,585 $ 79,266,721 $ 36,664,911 $ 23,882,286
Goodwill (net) $ 105,710,312 -- 107,730,254 -- --
Other 75,486,827 31,092,415 31,614,256 17,578,306 13,479,547
------------- ------------- ------------- ------------- -------------
Total Assets $ 210,537,547 $ 58,897,000 $ 218,611,231 $ 54,252,217 $ 37,361,833
============= ============= ============= ============= =============
Liabilities and Shareholders'
(Deficiency) Equity:
Liabilities:
Medical claims payable,
accounts payable,
accrued expenses and
other current liabilities 68,775,686 82,438,609 110,883,068 80,118,284 32,482,794
Convertible debentures 12,145,655 50,503,459 11,294,406 -- --
Subordinated debentures 24,737,761 -- 24,000,000 -- --
------------- ------------- ------------- ------------- -------------
Total Liabilities 105,659,102 132,942,068 $ 146,178,014 $ 80,118,284 $ 32,482,794
FOHP-NJ Practitioner
Provider Common Stock,
$.01 par value, 511,800
shares issued and
outstanding (at
December 31, 1994,
redeemable at $3,900,000) -- -- -- -- --
Shareholders' (Deficiency)
Equity:
Common stock subscribed -- -- -- -- --
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 22,550 1,000,000 21,002 21,002
FOHP-NJ Institutional Provider
Common Stock, $.01
par value, 1,020,051
shares issued and outstanding -- -- -- -- --
FOHP-NJ Other Provider
Common Stock, $.01
par value, 40,002 shares
issued and outstanding -- -- -- -- --
Additional paid-in capital 237,951,597 32,348,061 208,053,796 30,648,489 30,648,489
<CAPTION>
FINANCIAL DATA OF
FOHP-NJ
PREDECESSOR TO
FOHP
--------------------------------
AS OF DECEMBER 31,
--------------------------------
1994 1993
------------- -------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 13,030,295 $ 10,503,225
Goodwill (net) -- --
Other 7,050,765 390,965
------------- -------------
Total Assets $ 20,081,060 $ 10,894,190
============= =============
Liabilities and Shareholders'
(Deficiency) Equity:
Liabilities:
Medical claims payable,
accounts payable,
accrued expenses and
other current liabilities 8,101,405 576,125
Convertible debentures -- --
Subordinated debentures -- --
------------- -------------
Total Liabilities $ 8,101,405 $ 576,125
FOHP-NJ Practitioner
Provider Common Stock,
$.01 par value, 511,800
shares issued and
outstanding (at
December 31, 1994,
redeemable at $3,900,000) 7,677,000 --
Shareholders' (Deficiency)
Equity:
Common stock subscribed -- 12,400,000
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 -- --
FOHP-NJ Institutional Provider
Common Stock, $.01
par value, 1,020,051
shares issued and outstanding 10,201 --
FOHP-NJ Other Provider
Common Stock, $.01
par value, 40,002 shares
issued and outstanding 400 --
Additional paid-in capital 15,341,561 --
</TABLE>
28
<PAGE> 35
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
-------------------------------- ---------------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Deficit (134,073,152) (106,415,679) (136,620,579) (56,535,558) (25,790,452)
------------- ------------- ------------- ------------- -------------
Total Shareholders'
(Deficiency) Equity 104,878,445 (74,045,068) 72,423,217 (25,886,067) 4,879,039
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Shareholders' (Deficiency)
Equity $ 210,537,547 $ 58,897,000 $ 218,611,231 $ 54,252,217 $ 37,361,833
============= ============= ============= ============= =============
<CAPTION>
FINANCIAL DATA OF
FOHP-NJ
PREDECESSOR TO
FOHP
--------------------------------
AS OF DECEMBER 31,
--------------------------------
1994 1993
------------- -------------
<S> <C> <C>
Deficit (11,049,507) (2,081,935)
Total Shareholders'
(Deficiency) Equity 4,302,655 10,318,065
------------- -------------
Total Liabilities and
Shareholders' (Deficiency)
Equity $ 20,081,060 $ 10,894,190
============= =============
</TABLE>
29
<PAGE> 36
FHS SELECTED FINANCIAL DATA
FOUNDATION HEALTH SYSTEMS, INC. AND SUBSIDIARIES
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of FHS as of and for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993 are derived from
consolidated financial statements of FHS. Such data is qualified in its entirety
by reference to historical financial information set forth in FHS' Annual Report
on Form 10-K for the year ended December 31, 1997. The selected consolidated
financial data as of and for the nine months ended September 30, 1998 and 1997
are derived from unaudited consolidated financial statements and are qualified
in their entirety by reference to historical financial information set forth in
FHS' Quarterly Reports on Form 10-Q. Operating results for the nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1998.
FHS - SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31
---------------------------- -----------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Health plan premiums .................................... $ 5,566,749 $ 4,304,421 $ 5,829,444 $ 5,395,125
Government contracts revenues ........................... 705,573 698,517 949,168 908,730
Specialty services ...................................... 283,942 244,549 342,107 316,993
Investment and other income ............................. 70,035 89,333 114,300 88,392
----------- ----------- ----------- -----------
6,626,299 5,336,820 7,235,019 6,709,240
----------- ----------- ----------- -----------
Expenses
Health plan services .................................... 4,864,056 3,606,501 4,912,532 4,598,074
Government contracts health care services ............... 544,138 520,798 711,757 706,076
Specialty services ...................................... 230,394 209,833 290,319 289,744
Selling, general and administrative ..................... 769,880 612,368 851,826 859,996
Amortization and depreciation ........................... 94,945 73,480 98,353 112,916
Interest ................................................ 67,680 47,575 63,555 45,372
Merger, restructuring, and other costs .................. 137,987 346,109 338,425 44,108
Gem costs ............................................... -- 57,500 57,500
----------- ----------- ----------- -----------
6,709,080 5,474,164 7,324,267 6,656,286
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and minority interest ........................ (82,781) (137,344) (89,248) 52,954
Income tax provision (benefit) ............................. (21,356) (38,979) (21,418) 14,124
Minority interest .......................................... -- -- -- --
----------- ----------- ----------- -----------
Income (loss) from continuing operations ................... (61,425) (98,365) (67,830) 38,830
Discontinued operations:
Income (loss) from operations, net of tax ............... -- 25,619 (30,409) 25,084
Gain (loss) on disposition, net of tax .................. -- -- (88,845) 20,317
----------- ----------- ----------- -----------
Net income (loss) .......................................... (61,425) (72,746) $ (187,084) $ 84,231
=========== =========== =========== ===========
Basic earnings (loss) per share
Continuing operations ................................... $ (.50) $ (.79) $ (0.55) $ 0.31
Discontinued operations ................................. -- .21 (0.25) 0.20
Discontinued operations gain (loss) on disposition ...... -- -- (0.72) 0.16
----------- ----------- ----------- -----------
Net ..................................................... $ (.50) $ (.58) $ (1.52) $ 0.67
=========== =========== =========== ===========
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Health plan premiums .................................... $ 4,557,965 $ 3,863,965 $ 3,196,112
Government contracts revenues ........................... 279,380 209,980 860,498
Specialty services ...................................... 210,533 139,853 111,626
Investment and other income ............................. 66,510 51,698 42,151
----------- ----------- -----------
5,113,637 4,265,496 4,210,387
----------- ----------- -----------
Expenses
Health plan services .................................... 3,643,463 3,091,890 2,562,650
Government contracts health care services ............... 174,040 147,629 688,800
Specialty services ...................................... 182,380 121,299 101,391
Selling, general and administrative ..................... 657,275 536,209 531,558
Amortization and depreciation ........................... 89,356 66,741 55,832
Interest ................................................ 33,463 23,081 26,643
Merger, restructuring, and other costs .................. 20,164 125,379 29,725
Gem costs ...............................................
----------- ----------- -----------
4,800,141 4,112,228 3,996,599
----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and minority interest ........................ 313,496 153,268 213,788
Income tax provision (benefit) ............................. 124,345 70,169 98,399
Minority interest .......................................... -- -- 7,275
----------- ----------- -----------
Income (loss) from continuing operations ................... 189,151 83,099 108,114
Discontinued operations:
Income (loss) from operations, net of tax ............... 3,028 18,434 6,218
Gain (loss) on disposition, net of tax .................. -- -- --
----------- ----------- -----------
Net income (loss) .......................................... $ 192,179 $ 101,533 $ 114,332
=========== =========== ===========
Basic earnings (loss) per share
Continuing operations ................................... $ 1.54 $ 0.73 $ 0.96
Discontinued operations ................................. 0.02 0.16 0.06
Discontinued operations gain (loss) on disposition ...... -- -- --
----------- ----------- -----------
Net ..................................................... $ 1.56 $ 0.89 $ 1.02
=========== =========== ===========
</TABLE>
30
<PAGE> 37
FHS - SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 YEAR ENDED DECEMBER 31
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Diluted earnings (loss) per share
Continuing operations ................ $ (.50) $ (.79) $ (0.55) $ 0.31 $ 1.53 $ 0.72 $ 0.95
Discontinued operations .............. -- .21 (0.25) 0.20 0.02 0.16 0.05
Discontinued operations gain (loss) on
disposition ........................ -- -- (.072) 0.16 -- -- --
-------- -------- -------- -------- -------- -------- --------
Net .................................. $ (.50) $ (.58) $ (1.52) $ 0.67 $ 1.55 $ 0.88 $ 1.00
======== ======== ======== ======== ======== ======== ========
Weighted average common and common stock
equivalent shares outstanding:
Basic ................................ 121,903 123,947 123,333 124,453 122.741 113,723 112,294
Diluted .............................. 121,903 123,947 123,821 124,966 123,674 115,658 113,879
</TABLE>
31
<PAGE> 38
FHS - SUMMARIZED BALANCE SHEET INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30 AS OF DECEMBER 31
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash & cash equivalents and investments .... $ 924,885 $ 747,676 $1,125,246 $1,137,133 $ 885,974
Total assets ............................... 3,870,557 3,264,912 4,076,350 3,423,776 2,733,765
Notes payable and capital leases
noncurrent................................ 1,431,360 917,130 1,308,979 791,618 547,522
Stockholders' equity ....................... 847,921 1,019,329 895,974 1,183,411 1,068,255
<CAPTION>
AS OF DECEMBER 31
-----------------------
1994 1993
---------- ----------
<S> <C> <C>
Balance Sheet Data
Cash & cash equivalents and investments .... $ 872,244 $ 840,185
Total assets ............................... 2,218,506 1,775,475
Notes payable and capital leases
noncurrent................................ 301,356 360,687
Stockholders' equity ....................... 877,466 522,622
</TABLE>
32
<PAGE> 39
MARKET PRICE INFORMATION
FOHP
There is no public market for the FOHP Common Stock, and FOHP has no
current intention of listing or including any shares of FOHP Common Stock on a
stock exchange or quotation system since shares of FOHP Common Stock can be held
by or transferred only to (i) providers to FOHP's subsidiaries which operate as
HMOs, (ii) FHS, or (iii) FOHP. Accordingly, it is improbable that a market will
develop for the FOHP Common Stock.
Since its inception, FOHP has not sold any shares of FOHP Common Stock
for any price other than $15.00, except for shares issued to FHS upon conversion
of the Initial Debenture and New Convertible Debenture. In addition, FOHP is not
aware of any sale of FOHP Common Stock by one provider to another for any price
other than $15.00.
As of December 7, 1998, 99,997,000 shares of FOHP Common Stock were
outstanding and were held by 2,629 shareholders of FOHP, including 97,913,161
shares held by FHS, 1,006,717 shares held by 41 Hospital Shareholders and
1,075,122 shares held by 2,587 Non-Hospital Shareholders.
FOHP has not paid any cash dividends on FOHP Common Stock, and does not
expect to pay any dividends in the future.
The certificates representing Payment Rights to be offered by FOHP to
the Provider Shareholders in the Merger will be non-negotiable and the Payment
Rights will not be transferable or assignable by the holders thereof, unless
such transfer or assignment is expressly authorized in writing by FOHP.
Accordingly, there will be no public market for the Payment Rights.
FHS
The following table sets forth the high and low sales prices of FHS
Class A Common Stock on The New York Stock Exchange, Inc. since January 2, 1996.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Calendar Quarter - 1996
First Quarter................................................ 37 1/8 30 3/8
Second Quarter............................................... 37 1/8 26 7/8
Third Quarter................................................ 28 7/8 19 3/8
Fourth Quarter............................................... 29 1/8 22 5/8
Calendar Quarter - 1997
First Quarter................................................ 30 3/4 23 1/8
Second Quarter............................................... 33 24 1/4
Third Quarter................................................ 33 15/16 29 11/16
Fourth Quarter............................................... 33 3/8 22 1/16
</TABLE>
33
<PAGE> 40
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Calendar Quarter - 1998
First Quarter................................................ 29 1/16 22 1/4
Second Quarter............................................... 32 5/8 25 3/8
Third Quarter................................................ 26 7/8 9
Fourth Quarter (through December 7, 1998).................... 15 3/4 5 7/8
</TABLE>
On November 13, 1998, the last full trading day prior to the day the
Merger Agreement was entered into by the parties thereto, the last reported
sales price per share of the FHS Class A Common Stock was $14 13/16 per share.
No dividends have been paid by FHS during the preceding two fiscal
years. FHS has no present intention of paying any dividends on FHS Class A
Common Stock.
FHS is a holding company and, therefore, its ability to pay dividends
depends on distributions received from its subsidiaries, which are subject to
regulatory net worth requirements and certain additional state regulations which
may restrict the declaration of dividends by HMOs, insurance companies and
licensed managed health care plans. The payment of any dividend is at the
discretion of the FHS' Board of Directors and depends upon FHS' earnings,
financial position, capital requirements and such other factors as FHS' Board of
Directors deems relevant.
Under the Credit Agreement entered into on July 8, 1997 with Bank of
America as agent, FHS cannot declare or pay cash dividends to its stockholders
or purchase, redeem or otherwise acquire shares of its capital stock or
warrants, rights or options to acquire such shares for cash except to the extent
permitted under such Credit Agreement as described in FHS' Annual Report on Form
10-K for the year ended December 31, 1997, which is incorporated herein by
reference.
As of December 7, 1998, there were approximately 2,000 holders of
record and an additional approximately 30,000 beneficial holders of FHS Class A
Common Stock. The California Wellness Foundation (the "CWF") is the only holder
of record of FHS' Class B Common Stock, par value $.001 per share ("FHS Class B
Common Stock"), which constitutes approximately 4% of FHS' aggregate equity.
Under FHS' Certificate of Incorporation, shares of FHS Class B Common Stock have
the same economic benefits as shares of FHS' Class A Common Stock, but are
non-voting. Upon the sale or other transfer of shares of FHS Class B Common
Stock by the CWF to an unrelated third party, such shares automatically convert
into FHS Class A Common Stock.
34
<PAGE> 41
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of December 7, 1998, with
respect to the beneficial ownership (as defined in Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), of the FOHP Common Stock
by each director of FOHP, each of FOHP's executive officers who earned over
$100,000 in fiscal 1997, each person or group of persons known by FOHP to be the
beneficial owner of more than 5% of FOHP Common Stock, and all directors and
executive officers of FOHP as a group:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
FOHP COMMON STOCK
-----------------------------------
PERCENT OF
NAME OF BENEFICIAL OWNER NO. OF SHARES (1) CLASS
- - - ------------------------ ----------------- -----
<S> <C> <C> <C> <C>
Foundation Health Systems, Inc. (2).................................. 97,913,161 (3) 97.9%(3)
Dr. John F. Bonamo (4)............................................... 1,500 (5)
Karen A. Coughlin (6)................................................
Bruce G. Coe (4)..................................................... --
Christopher M. Dadlez (4)............................................ --
Dr. Mark L. Engel (4)................................................ 7,017 (7) (5)
Dr. Thomas J. Feneran (4)............................................ 4,100 (5)
John J. Gantner (4).................................................. --
Jay M. Gellert (6)................................................... --
Laurence M. Merlis (4)............................................... --
Dr. Om P. Sawhney (4)................................................ 5,800 (8) (5)
Thomas W. Wilfong (6) (10)........................................... --
Roger W. Birnbaum (9)................................................ --
Dr. Joseph Singer (10)............................................... 8,000 (5)
Donald Parisi (10)................................................... --
Marc M. Stein (10)................................................... --
All Directors and Executive Officers
as a Group (15 persons).............................................. 26,417 (7)(8)
</TABLE>
- - - ----------
(1) Except as otherwise indicated, all of the shares of FOHP Common Stock
are held beneficially and of record.
(2) FHS' principal offices are located at 21600 Oxnard Street, Woodland
Hills, CA 91367.
(3) Such number and percentage do not include or give effect to the number
of shares of FOHP Common Stock that FHS has the right to receive upon
full conversion of the New Convertible Debenture. In December 1997, FHS
converted approximately $18,952,930 of
35
<PAGE> 42
the principal amount of the New Convertible Debenture into 92,804,003
shares of FOHP Common Stock. If FHS elects to convert the remaining
$10,047,070 of the New Convertible Debenture, FHS would receive, in
accordance with a formula set forth in the New Convertible Debenture,
additional shares of FOHP Common Stock, resulting in FHS owning more
than 99.9% of the then outstanding FOHP Common Stock.
(4) Such person currently serves as a Non-FHS Director of FOHP.
(5) Shares beneficially owned do not exceed 1% of the FOHP's outstanding
FOHP Common Stock.
(6) Such person is affiliated with FHS and serves as a director of FOHP.
(7) Includes an aggregate of 417 shares of FOHP Common Stock held by Dr.
Barbara Engel, Dr. Mark L. Engel's wife, as to which shares he
disclaims any beneficial interest.
(8) Includes an aggregate of 500 shares of FOHP Common Stock held by Dr.
Veena Sawhney, Dr. Om P. Sawhney's wife, as to which shares he
disclaims any beneficial interest.
(9) Such person was a former executive officer and director of FOHP.
(10) Such person is an executive officer of FOHP.
36
<PAGE> 43
THE SPECIAL MEETING
GENERAL INFORMATION
This Proxy Statement is being furnished to the holders of FOHP Common
Stock in connection with the solicitation of proxies by the FOHP Board for use
at the Special Meeting to be held at the CNA Building, 3501 State Highway 66,
Neptune, New Jersey on January ___, 1999, and at any adjournments or
postponements thereof, pursuant to the accompanying Notice of Special Meeting of
Shareholders. A form of proxy for use at the Special Meeting is also enclosed.
FOHP anticipates mailing this Proxy Statement to its shareholders on or about
January ___, 1999. The principal executive offices of FOHP are located at 3501
State Highway 66, Neptune, New Jersey 07753.
At the Special Meeting, the shareholders of FOHP will be asked to
consider and vote upon a proposal to approve the Merger Agreement, which, if
approved, and the transactions contemplated thereby consummated, would result in
the Merger of FHS Transition Company with and into FOHP.
Shareholders may revoke the authority granted by their execution of
proxies at any time before the effective exercise of proxies by filing written
notice of such revocation with the secretary of the Special Meeting. Presence at
the Special Meeting does not in and of itself revoke the proxy. Also, any grant
of a proxy subsequent to an earlier grant of a proxy, revokes the earlier proxy.
All shares represented by executed and unrevoked proxies will be voted in
accordance with the specifications therein. Proxies submitted without
specification will be voted FOR the proposal to approve the Merger Agreement.
Management of FOHP is not aware, to date, of any matter being presented at the
Special Meeting other than the matter described herein, but, if any other matter
is properly presented, the persons named in the proxy will vote thereon
according to their best judgment.
Proxies for use at the Special Meeting are being solicited by the FOHP
Board. The cost of preparing, assembling and mailing the proxy material is to
borne by FOHP. It is not anticipated that any compensation will be paid for
soliciting proxies, and FOHP does not intend to employ specially engaged
personnel in the solicitation of proxies. It is contemplated that proxies will
be solicited principally through the mail, but directors, officers and employees
of FOHP or its subsidiaries may, without additional compensation, solicit
proxies personally or by telephone, telegraph, facsimile transmission or special
letter.
VOTING SECURITIES
The voting securities entitled to vote at the Special Meeting consist
of shares of FOHP Common Stock, with each share entitling its owner to one vote
per share. On December 31, 1998, the number of outstanding shares of FOHP Common
Stock was 99,997,000. Only shareholders of record on the books of FOHP at the
close of business on December 31, 1998 will be entitled to vote at the Special
Meeting.
37
<PAGE> 44
The holders of a majority of the outstanding shares of FOHP Common
Stock, present in person or by proxy and entitled to vote, will constitute a
quorum at the Special Meeting for purposes of acting upon the proposal to
approve the Merger Agreement. Abstentions and broker non-votes will be counted
for purposes of determining whether a quorum is present at the Special Meeting.
The proposal to approve the Merger Agreement must be approved by a
majority of the votes cast at the Special Meeting.
All votes will be tabulated by the inspector of election appointed at
the Special Meeting who will separately tabulate affirmative votes, negative
votes, abstentions and broker non-votes. Under New Jersey law, any proxy
submitted and containing an abstention or broker non-vote will not be counted as
a vote cast on any matter to which it relates.
38
<PAGE> 45
THE MERGER
BACKGROUND OF THE MERGER
During the first quarter of 1996, FOHP learned that FOHP-NJ's statutory
net worth as of December 31, 1995 may have been below 125 % of the minimum
requirement set by the State of New Jersey. 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 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 FOHP to increase
capital in 1996 enabled FOHP to reduce operating losses, the FOHP Board
recognized that such changes would not allow FOHP to adequately address
FOHP-NJ's statutory net worth deficiency. In order to adequately address
FOHP-NJ's statutory net worth deficiency, the FOHP Board believed that FOHP
needed to infuse a significant amount of capital into FOHP-NJ. To raise the
required capital, FOHP 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 FOHP Board because the FOHP Board did not believe
that FOHP could raise the capital needed in a public offering, given FOHP's
deteriorating financial condition.
To raise the capital necessary for FOHP-NJ to remain in compliance with
its statutory net worth requirements, the FOHP Board determined that FOHP needed
to locate potential investors who would be interested in acquiring a significant
equity position in FOHP.
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, FOHP entered into the Securities
Purchase Agreement with HSI. 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 FOHP or its actuaries prior to such quarter, HSI
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 the Amended Securities Purchase Agreement. On March 13, 1997, the
Amended Securities Purchase Agreement was amended to clarify certain provisions
therein and in the proposed Certificate of Incorporation of FOHP attached as an
exhibit thereto. 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 FOHP on April 16,
1997. To effect the transactions contemplated by the Amended Securities Purchase
Agreement, including the sale of the Initial Debenture to FHS, the shareholders
of FOHP also approved (i) certain amendments to the Certificate of Incorporation
of FOHP relating to changes in the classes of securities
39
<PAGE> 46
authorized for issuance by FOHP, (ii) certain amendments to the Certificate of
Incorporation of FOHP relating to changes in the rights of shareholders of FOHP,
and (iii) certain amendments to the Certificates of Incorporation and By-laws of
FOHP and FOHP-NJ relating to the Boards of Directors of FOHP and FOHP-NJ and
changes in the composition thereof.
On April 30, 1997, pursuant to the Amended Securities Purchase
Agreement, FHS purchased from FOHP the Initial Debenture in the aggregate
principal amount of $51,701,120.38. The principal amount of the Initial
Debenture was convertible, at the option of FHS, into up to 71 % of FOHP's
capital stock on a fully-diluted basis. At the closing of the purchase of the
Initial Debenture, FHS converted $1,701,120.38 of principal amount of the
Initial Debenture into 168,109 shares of FOHP Common Stock, which represented
approximately 7.5 % of FOHP's then outstanding FOHP 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 FOHP Common Stock, and,
as a result, owned at that time 71% of the outstanding shares of FOHP Common
Stock.
In connection with the sale of the Initial Debenture, FHS and FOHP
entered into the Letter Agreement which clarified FHS' right under the Amended
Securities Purchase Agreement to infuse additional capital into FOHP in the
event that FOHP-NJ needed capital to meet applicable statutory net worth
requirements (referred to herein as a "Net Capital Shortfall"). Pursuant to the
Amended Securities Purchase Agreement, as clarified by 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 FOHP to be used in connection with
certain anticipated liabilities and contribute up to such additional amounts as
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
contributed additional capital to FOHP to meet a Net Capital Shortfall or
projected Net Capital Shortfall, FHS would be issued additional Convertible
Debentures in substantially the same form as the Initial Debenture.
The Amended Securities Purchase Agreement also provided that FHS may,
at its option, acquire during 1999 pursuant to the Buy-out Transaction, all of
the outstanding shares of FOHP Common Stock not held by FHS at a purchase price
per share that is determined by independent appraisers. In the Buy-out
Transaction, the Provider Shareholders would receive for their shares of FOHP
Common Stock, cash or, at FHS' sole option, registered FHS Class A Common Stock.
The FOHP Board, as constituted prior to FHS' purchase of the Initial Debenture,
approved, for purposes of Section 14A:10A-4 of the New Jersey Shareholders
Protection Act, the Buy-out Transaction, provided that the transaction occurs in
1999 and certain other conditions are met.
As FOHP continued to reduce its medical claims back-log during the
second quarter of 1997, it became apparent that FOHP's reserves were not
adequate to ensure payment of all outstanding claims. In addition, it was
anticipated that FOHP would continue to incur significant operating losses until
certain unprofitable products were phased-out or revised and administrative
expenses reduced. As a result, management of FOHP informed the FOHP Board that
FOHP would likely need a capital infusion in excess of $18 million by December
31, 1997 so that FOHP-NJ could meet applicable statutory net worth requirements
by year end.
40
<PAGE> 47
Recognizing that an additional capital infusion by FHS of more than $18
million in exchange for additional Convertible Debentures would result in a
significant dilution to the equity position of the Provider Shareholders, and
that such dilution would reduce the amount of Appraisal Consideration that the
Provider Shareholders would be entitled to receive in the Buy-out Transaction,
the FOHP Board and FHS began, in July 1997, discussing various alternatives
directed at preserving the Provider Shareholders' original investment in FOHP.
On September 2, 1997, the FOHP Board formed the Special Committee. The
Special Committee was authorized to negotiate with prospective financial
advisors for possible engagement by FOHP in connection with the development of
Alternate Consideration proposals. The Special Committee was comprised of the
following FOHP Board members, none of whom had or has an affiliation with FHS:
Mr. Bruce G. Coe, Mr. Christopher M. Dadlez, Dr. Mark L. Engel and Mr. John J.
Gantner. At the direction of the Special Committee, Mr. Gantner contacted
approximately eight prospective financial advisors about representing FOHP in
connection with any discussions by FOHP with FHS regarding the Alternate
Consideration. After a careful evaluation of the information submitted by
several of the prospective financial advisors by the members of the Special
Committee, the list of prospective financial advisors was narrowed to the
following three companies: JMS, Gerard, Klauser, Mattison & Co., Inc. ("GKM")
and A.G. Edwards & Son, Inc. ("A.G. Edwards").
On September 16, 1997, members of the Special Committee and legal
counsel to FOHP met with representatives of JMS, GKM and A.G. Edwards, in person
and by teleconference, to discuss the scope of the proposed engagement and the
experience of the financial advisors in providing services similar to those that
would be needed if engaged by FOHP to serve as financial advisor to the FOHP
Board. Inasmuch as no senior representatives of JMS could meet with the members
of the Special Committee on September 16, 1997, several Special Committee
members and legal counsel met with several senior representatives of JMS on
September 23, 1997 for purposes of discussing the proposed engagement. On
September 25, 1997, the Special Committee met to discuss the strengths and
weaknesses of each of the prospective financial advisors. The Special Committee
used, among other criteria, the following six criteria to evaluate the
prospective financial advisors: (i) cost of engagement; (ii) the ability of the
prospective financial advisor to create valuation models for purposes of
evaluating any Alternative Consideration proposal; (iii) the capabilities of the
prospective financial advisor in assisting in negotiations with FHS; (iv)
whether the Provider Shareholders would be comfortable with any fairness opinion
issued by the prospective financial advisor; (v) the prospective financial
advisor's understanding of FOHP; and (vi) cost of retainer.
After discussing the various prospective financial advisors, and
evaluating the terms and conditions of the proposed engagement letters submitted
by the prospective financial advisors, the Special Committee selected JMS as the
financial advisor it would recommend to the FOHP Board. The Special Committee's
recommendation was based on JMS' experience and expertise in transactions
similar to the Merger, its understanding of FOHP from previous engagements, its
reputation in the health care and investment communities, and the cost of
engagement as compared to the other prospective financial advisors. On October
14, 1997, JMS was engaged by FOHP to assist the FOHP Board in its continuing
discussions with FHS regarding an Alternate Consideration proposal.
41
<PAGE> 48
In order to satisfy certain statutory net worth requirements applicable
to FOHP-NJ, and in accordance with the Amended Securities Purchase Agreement as
clarified by the Letter Agreement, FHS elected on December 8, 1997 to infuse $29
million into FOHP in exchange for the New Convertible Debenture. Immediately
upon receipt of the New Convertible Debenture, FHS converted approximately
$18,952,930 of the principal amount thereof into 92,804,003 shares of FOHP
Common Stock. After the partial conversion of the New Convertible Debenture, FHS
owned 97,913,161 shares of the 100,000,000 shares of FOHP Common Stock then
outstanding, which represented approximately 98 % of the fully-diluted equity of
FOHP.
In December 1997, FHS also contributed an additional $24 million to
FOHP to satisfy certain statutory net worth requirements applicable to FOHP-NJ
in return for additional subordinated debentures which are not convertible into
shares of FOHP Common Stock. Further, FHS contributed $19,897,801 to FOHP as
additional paid in capital to satisfy certain statutory net worth requirements
applicable to FOHP-NJ as of June 30, 1998.
FHS and the Non-FHS Directors, assisted by legal counsel and JMS, held
discussions from October 1997 through June 1998 for purposes of developing an
Alternate Consideration proposal. Initially, FHS wanted the Alternate
Consideration to be directly related to the performance of FOHP, or any
successor thereto, for a specified time period. The Non-FHS Directors were not
comfortable with FHS' performance-based proposal inasmuch as FHS would control
FOHP, and any successor thereto, after the consummation of the Buy-out
Transaction, and thereby could influence the future performance of FOHP or any
successor thereto to its advantage.
During the period of discussions between FHS and the Non-FHS Directors,
several of the Non-FHS Directors made inquiries to various Provider Shareholders
regarding what form and amount of consideration they would consider fair for
their interest in FOHP and which would encourage them to continue in and support
the FOHP-NJ provider network. Based on these inquiries, the Non-FHS Directors
believed that it was necessary that any per share Alternate Consideration to be
offered to the Provider Shareholders would need to equal at least $15.00, the
amount originally paid by the Provider Shareholders to FOHP for one share of
FOHP Common Stock. Believing the value of FOHP to be much less than $15.00 per
share, FHS initially was not willing to offer that much consideration to the
Provider Shareholders as Alternate Consideration. After several months of
discussion, FHS became willing to offer each Provider Shareholder the
opportunity to receive at least $15.00 for each share of FOHP Common Stock held
by him, her or it, provided, that (i) the Provider Shareholder continued to
participate in the provider network of FOHP-NJ, or its successor, until December
31, 2001, and (ii) certain other conditions aimed at preserving the provider
network and maintaining the number of covered lives in the health plans
currently offered by FOHP-NJ were satisfied.
In March and April, 1998, several representatives of the Non-FHS
Directors and FHS met with various Provider Shareholders to discuss the
Alternate Consideration proposal being developed by FHS based on its discussions
with the Non-FHS Directors. At such meetings, FHS and the Non-FHS Directors
received various comments from Provider Shareholders regarding the Alternate
Consideration proposal. As a result of such meetings, FHS decided to offer
Non-Hospital Shareholders the ability to not only receive $15.00 for their
shares of FOHP Common Stock, but the ability to receive an additional $2.25 per
share of FOHP Common Stock and a
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percentage of a Bonus Pool which would be funded by monies forfeited by Provider
Shareholders who chose to receive Payment Rights, but who failed to satisfy the
conditions contained therein applicable to them, or chose to receive the
Appraisal Consideration and the per share Appraisal Consideration was less than
$15.00 per share, provided that certain performance criteria was met by FOHP-NJ.
In April and May, 1998, FHS and the Non-FHS Directors prepared and
negotiated the Term Sheet outlining the proposed Alternate Consideration.
On June 17, 1998, the FOHP Board approved the Original Merger outlined
in the Term Sheet, subject to the receipt by the FOHP Board of a written opinion
from JMS that the Alternate Consideration to be offered in the Original Merger
to the Provider Shareholders for their shares of FOHP Common Stock was fair to
such holders from a financial point of view. The Term Sheet outlining the
proposed Alternate Consideration was presented to JMS in June 1998.
On July 2, 1998, at a special meeting of the FOHP Board, JMS informed
the FOHP Board that the Alternate Consideration to be offered in the Original
Merger was fair to the Provider Shareholders from a financial point of view,
and, shortly thereafter, JMS provided the FOHP Board with a written opinion
dated July 15, 1998 to that effect. In reliance on JMS' opinion that the
Alternate Consideration to be offered in the Original Merger was fair to the
Provider Shareholders from a financial point of view, the FOHP Board
definitively approved the Merger at the special meeting held on July 2, 1998. At
the July 2, 1998 special meeting of the FOHP Board, the members of the FOHP
Board affiliated with FHS excused themselves from the meeting prior to the FOHP
Board acting upon the Merger, because of their affiliation with FHS. After the
FHS affiliated directors left the meeting, the Non-FHS Directors at the meeting,
constituting a majority of Non-FHS Directors, unanimously approved the Merger.
The Original Merger was to become effective on January 1, 1999,
provided that all governmental approvals and other conditions thereto had been
obtained or satisfied by that date. It was necessary for the Original Merger to
become effective by January 1, 1999 so that the two separate New Jersey HMO
operations controlled by FHS, PHS-NJ and FOHP-NJ, could consolidate and operate
as one plan as directed by the Departments. In addition, the administrative
burden and cost of operating FOHP-NJ and PHS-NJ as separate HMOs during any
portion of 1999 could have an adverse effect on the results of operations of
such companies and thereby negatively impact any bonus monies payable under the
Payment Rights.
During early September 1998, it became apparent to FOHP management that
FOHP would probably not be able to hold the Special Meeting by December 31,
1998. In order for the consolidation of the HMO operations of FOHP-NJ and PHS-NJ
to occur on January 1, 1999 as originally contemplated, it was proposed to the
FOHP Board that the Original Merger be restructured into a two step merger
process. The first step would be the HMO Subsidiary Merger. The second step
would be the Merger described in this Proxy Statement, which would take effect
soon after all necessary governmental approvals were obtained and the Special
Meeting was held.
On September 24, 1998, the FOHP Board discussed, at a regularly
scheduled meeting of the FOHP Board, the two step merger process and the
offering of Payment Rights in connection
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with the Merger. The FOHP Board found that the two step merger process achieved
the desired objectives of having the HMO Subsidiary Merger become effective on
January 1, 1999, and having the Alternate Consideration offered to the Provider
Shareholders in connection with the Buy-out Transaction. In addition, the FOHP
Board determined that in order to facilitate the offering of the Payment Rights,
FOHP should issue such Payment Rights provided that FHS irrevocably commits to
contribute to FOHP all the cash necessary for FOHP to make full payment under
the Payment Rights.
After reviewing drafts of the merger documents relating to the HMO
Subsidiary Merger and the Merger Agreement relating to the Merger, the members
of the FOHP Board participating in a special meeting held on October 14, 1998,
unanimously approved the HMO Subsidiary Merger and the Merger, subject to
receipt by the FOHP Board of written confirmation from JMS that its opinion
dated July 15, 1998, which provided that the Alternate Consideration to be
offered to the Provider Shareholders for their shares of FOHP Common Stock was
fair to such Provider Shareholders from a financial point of view, had not
changed as a result of the new two step merger process.
After reviewing the Merger Agreement and related documents, JMS
confirmed in writing on November 16, 1998, that its original opinion dated July
15, 1998 had not been affected by the restructuring of the Original Merger into
the two step merger process and that the Payment Rights to be offered by FOHP to
the Provider Shareholders in connection with the Merger was fair to the Provider
Shareholders from a financial point of view.
REASONS FOR THE MERGER
Pursuant to the Amended Securities Purchase Agreement, FHS may acquire,
through the Buy-out Transaction, all of the outstanding FOHP Common Stock held
by the Provider Shareholders, provided such transaction occurs in 1999. FHS
recognized when it purchased the Initial Debenture from FOHP on April 30, 1997,
that if it converted the Initial Debenture into a majority equity position in
FOHP, at some later date it would want to acquire a 100% equity position in
FOHP. By acquiring a 100% equity position in FOHP, FHS would have greater
flexibility in operating FOHP within the FHS consolidated group and would not
have to incur the additional administrative expenses associated with minority
shareholders. Consequently, the reason for the Merger is to effect the Buy-out
Transaction contemplated by the Amended Securities Purchase Agreement so as to
allow FHS to obtain a 100% equity position in FOHP.
THE MERGER AGREEMENT
The Merger - If the Merger Agreement is approved by the shareholders of
FOHP, FHS Transition Company will merge with and into FOHP, and FOHP will become
a wholly-owned subsidiary of PHS, which is the parent of PHS-NJ and a
wholly-owned subsidiary of FHS. In other words, if the Merger is consummated,
the Provider Shareholders will receive either the Appraisal Consideration or
Payment Rights for their shares of FOHP Common Stock and will no longer have an
equity position in FOHP. If a Provider Shareholder chooses to receive Payment
Rights for his, her or its shares of FOHP Common Stock, the only entitlement
that the Provider Shareholder would have as the holder of Payment Rights is the
right to be paid not less than
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$15.00 per Payment Right on July 1, 2001, provided certain conditions are either
satisfied or waived.
At the Effective Time of the Merger, the Certificate of Incorporation
and By-laws of FOHP will be amended to, among other things, delete all
provisions relating to preemptive rights, restrictions on the issuance of FOHP
Common Stock, restrictions on the transfer of FOHP Common Stock, business
combinations, covenants of Hospital Shareholders, cumulative voting on the
election of directors, dissenters' rights, actions requiring super-majority
approval of the FOHP Board or approval by directors with no affiliation to FHS,
which are currently contained therein. All of the current directors and
executive officers of FOHP and FOHP-NJ will be the directors and executive
officers of the Surviving Corporation. As a result of the Merger, all real
property and personal property, tangible and intangible, of every kind and
description, belonging to FOHP and FHS Transition Company shall vest in and
belong to the Surviving Corporation, including all FOHP's ownership interest in
FOHP-NJ, and the Surviving Corporation shall be liable for all the obligations
and liabilities of such corporations.
At the Effective Time, all shares of FHS Transition Company stock
issued and outstanding immediately prior to the Effective Time, all of which are
held by FHS, shall be cancelled.
Contemporaneously with the consummation of the Merger, FHS will
contribute to PHS all of its rights, title and interest in and to all the
outstanding shares of FOHP Common Stock held by FHS. Consequently, FOHP will
become a wholly-owned subsidiary of PHS on the Effective Date.
Conditions to the Merger - The obligation of each party to the Merger
Agreement to complete the Merger is subject to the following conditions:
(i) the approval of the Merger Agreement by the holders of a
majority of the outstanding shares of FOHP Common Stock;
(ii) the Surviving Corporation shall have provided in its By-laws
indemnification provisions substantially similar to those
currently contained in the By-laws of FOHP and shall have
agreed to maintain such indemnification provisions for the
period ending six (6) years from the Effective Time 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 approval of the Amended Securities Purchase Agreement and
the Merger by the FOHP Board;
(iii) the Surviving Corporation shall have in place an officers' and
directors' liability insurance coverage policy or policies
with terms and conditions substantially similar to those
contained in the officers' and directors' liability insurance
coverage policy or policies maintained by FOHP prior to the
execution and delivery of the Amended Securities Purchase
Agreement, and shall have agreed to maintain such policy or
policies for the period ending six (6) years from the
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Effective Time 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 approval of the Amended Securities
Purchase Agreement and the Merger by the FOHP Board, which
insurance shall provide coverage for former directors of FOHP;
(iv) no statute, rule, regulation, executive order, decree,
injunction or restraining order shall have been enacted,
promulgated, enforced or otherwise made applicable (and not
repealed or superceded) by any court of competent
jurisdiction, administrative agency or commission or other
governmental authority or instrumentality, which prohibits the
consummation of the transactions contemplated by the Merger
Agreement;
(v) receipt of requisite governmental consents and approvals to
consummate the Merger;
(vi) the written fairness opinion of JMS, dated July 15, 1998, as
updated and confirmed on November 16, 1998, which provides
that the Alternate Consideration to be offered to the Provider
Shareholders pursuant to the Merger Agreement is fair from a
financial point of view, shall not have been retracted,
terminated or altered or amended in any material way; and
(vii) the execution and delivery by FOHP and FHS of the Contribution
Agreement attached as Appendix E to this Proxy Statement,
pursuant to which FHS will irrevocably commit to contribute to
FOHP the amount of cash necessary for FOHP to pay, among other
things, all amounts payable under the Payment Rights to be
issued in connection with the Merger.
Termination of Merger Agreement - Any time before the Effective Time of
the Merger, the Merger Agreement may be terminated and the Merger abandoned, or
the consummation of the transactions contemplated by the Merger may be delayed,
by the FOHP Board for any reason.
CONSIDERATION TO BE OFFERED TO FOHP SHAREHOLDERS IN THE MERGER
In connection with the Merger, each Provider Shareholder will be
offered a choice of consideration. Pursuant to the Merger Agreement, each
Provider Shareholder will be entitled to receive for his, her or its shares of
FOHP Common Stock either (i) the Appraisal Consideration, or (ii) the Alternate
Consideration, which is comprised of Payment Rights.
The Appraisal Consideration shall be determined as follows: FHS and
FOHP (through the Non-FHS Directors) shall each select an independent qualified
appraiser to appraise the value of the FOHP Common Stock outstanding on December
31, 1998 (the "FOHP Stock Value"). The two independent qualified appraisers
shall exchange their respective appraisals within ten (10) business days and
submit such appraisals to FOHP and FHS. If the two independent qualified
appraisers agree on an appraisal for the FOHP Stock Value, the Appraisal
Consideration shall be the agreed upon amount. If only one of the appraisers
submits an appraisal within the ten (10) business day period, the FOHP Stock
Value shall be the amount set
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forth in such appraisal. If the two independent qualified appraisers submit
their appraisals within the ten (10) business day period but cannot agree upon
the amount of the FOHP Stock Value, the two independent qualified appraisers
shall select a third independent qualified appraiser to appraise the value of
the outstanding FOHP Common Stock as of December 31, 1998. The third independent
qualified appraiser shall submit its appraisal to FHS and FOHP within ten (10)
business days of being selected. The FOHP 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 FOHP Stock Value. The
following is an example of the valuation method described above. Assuming that
FHS' independent qualified appraiser valued the aggregate FOHP Stock Value at
$50 million, FOHP's independent qualified appraisal valued the aggregate FOHP
Stock Value at $150 million and the third independent qualified appraiser valued
the aggregate FOHP Stock Value at $125 million, the aggregate FOHP Stock Value
would be $137.5 million (the average of the two closest appraisals); if, however
the third independent qualified appraiser appraised the FOHP Stock Value at $105
million (greater than $100 million by an amount less than 7.5% of $100 million),
the aggregate FOHP Stock Value would be approximately $101.7 million (the
average of all three). After determining the aggregate FOHP Stock Value, the
Appraisal Consideration to be paid for one share of FOHP Common Stock would be
determined by dividing the FOHP Stock Value by the number of then outstanding
shares of FOHP Common Stock, including those held by FHS.
In lieu of receiving the Appraisal Consideration, a Provider
Shareholder can choose to receive the Alternate Consideration, which is
comprised of Payment Rights. A Provider Shareholder who chooses to receive
Payment Rights, would receive one Payment Right for each share of FOHP Common
Stock held by him, her or it.
Each Payment Right issued to a Hospital Shareholder will entitle the
Hospital Shareholder to receive a cash payment of $15.00 on July 1, 2001 from
FOHP, provided that the Hospital Shareholder Conditions (defined on page 67
hereof) have been met by the Hospital Shareholder and the Continuing Hospital
Provider Condition (as defined on page 69 hereof) shall have been satisfied. If
a Hospital Shareholder fails to comply with the Hospital Participation and
Reimbursement Condition (as defined on page 67 hereof), the amount payable under
a Payment Right held by the Hospital Shareholder shall be reduced by $10.00, and
if a Hospital Shareholder fails to satisfy the Hospital Enrollment and Premium
Payment Condition (as defined on page 68 hereof), the amount payable under a
Payment Right held by the Hospital Shareholder shall be reduced by $5.00.
Each Payment Right issued to a Non-Hospital Shareholder shall entitle
the Non-Hospital Shareholder to receive a cash payment of $15.00 on July 1, 2001
from FOHP, provided that the Non-Hospital Shareholder Condition (as defined on
page 73 hereof) has been met by the Non-Hospital Shareholder and the Continuing
Hospital Provider Condition shall have been satisfied. If a Non-Hospital
Shareholder chooses to receive Payment Rights for his, her, or its shares of
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FOHP Common Stock, and the Non-Hospital Shareholder remains a provider to
FOHP-NJ until July 1, 2001, and agrees in writing to remaining a provider to
FOHP-NJ until December 31, 2001, the Non-Hospital Shareholder will be entitled
to receive additional consideration of $2.25 per Payment Right and a Pro-Rata
Portion (as defined on page 74 hereof) of the Bonus Pool funded by monies
forfeited by Provider Shareholders who receive Payment Rights, but who fail to
satisfy the conditions contained therein applicable to them, or who choose to
receive the Appraisal Consideration and such per share Appraisal Consideration
is less than $15.00; provided, however, that (i) the Continuing Hospital
Provider Condition is satisfied, and (ii) FOHP-NJ, as the surviving corporation
in the HMO Subsidiary Merger, produces an annualized return on average common
equity capital of at least 10% for the period January 1, 1999 through June 30,
2001, where initial capital is set at $130 million for FOHP-NJ, plus any
increase in retained earnings for FOHP-NJ through the period January 1, 1999 to
June 30, 2001, excluding any non-recurring extraordinary items, as defined under
GAAP. The determination of annualized return on average common equity capital
for the period January 1, 1999 through June 30, 2001 shall be computed using
pre-tax earnings.
SEE "DESCRIPTION OF PAYMENT RIGHTS" BEGINNING ON PAGE 67 HEREOF, FOR A
MORE COMPLETE DESCRIPTION OF THE PAYMENT RIGHTS.
IT IS ANTICIPATED THAT THE APPRAISAL CONSIDERATION FOR ONE SHARE OF
FOHP COMMON STOCK WILL BE SIGNIFICANTLY LESS THAN $15.00.
IF A PROVIDER SHAREHOLDER ELECTS TO RECEIVE PAYMENT RIGHTS FOR HIS, HER
OR ITS SHARES OF FOHP COMMON STOCK, AND ANY OF THE CONDITIONS TO PAYMENT
CONTAINED THEREIN ARE NOT SATISFIED, THE PROVIDER SHAREHOLDER WILL RECEIVE NO
PAYMENT OR A REDUCED PAYMENT FOR HIS, HER OR ITS SHARES OF FOHP COMMON STOCK,
UNLESS FOHP DIRECTS OTHERWISE. SEE "RISK FACTORS" BEGINNING ON PAGE 18 HEREOF
AND "DESCRIPTION OF PAYMENT RIGHTS" BEGINNING ON PAGE 74 HEREOF.
ONCE A PROVIDER SHAREHOLDER ELECTS TO RECEIVE PAYMENT RIGHTS FOR HIS,
HER OR ITS SHARES OF FOHP COMMON STOCK, SUCH PROVIDER SHAREHOLDER WILL NO LONGER
BE ENTITLED TO THE APPRAISAL CONSIDERATION.
IF A NON-DISSENTING PROVIDER SHAREHOLDER FAILS TO CHOOSE EITHER THE
APPRAISAL CONSIDERATION OR PAYMENT RIGHTS, SUCH SHAREHOLDER WILL AUTOMATICALLY
RECEIVE PAYMENT RIGHTS FOR HIS, HER OR ITS SHARES OF FOHP COMMON STOCK.
CONTRIBUTION AGREEMENT
In connection with the Merger, FHS and FOHP will enter into the
Contribution Agreement, pursuant to which FHS will irrevocably commit to
contribute to FOHP the amount of cash necessary for FOHP to pay: (i) all amounts
payable under the Payment Rights issued in connection with the Merger; (ii) any
Appraisal Consideration due and owing to any Hospital Shareholder or
Non-Hospital Shareholder in connection with the Merger; (iii) all amounts due
and owing to any Hospital Shareholder or Non-Hospital Shareholder who dissents
from the Merger; and (iv) any expenses incurred by FOHP in connection with the
Merger. All funds contributed by FHS to FOHP pursuant to the Contribution
Agreement will be restricted for the
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aforementioned purposes. In the event that FHS fails to make the contributions
to FOHP set forth in the Contribution Agreement, each Provider Shareholder shall
have standing, as a third party beneficiary to the Contribution Agreement, for
the sole purpose of bringing action against FHS to compel FHS to fulfill its
contribution obligations set forth in the Contribution Agreement.
During the period the Payment Rights are outstanding, FOHP will not be
permitted to incur any indebtedness which could affect its ability to apply all
of the funds to be contributed by FHS under the Contribution Agreement to the
payment of the Payment Rights or otherwise affect its ability to make full
payment on the Payment Rights.
Contemporaneously with the consummation of the Merger, FHS will issue
and deliver to FOHP an intercompany note, as further evidence of FHS' obligation
to contribute to FOHP on June 30, 2001 the amounts payable under the Payment
Rights to be issued in connection with the Merger.
RECOMMENDATION OF THE FOHP BOARD
The FOHP Board, as constituted prior to FHS' purchase of the Initial
Debenture, approved, for purposes of Section 14A:10A-4 of the New Jersey
Shareholders Protection Act, the Buy-out Transaction, provided such transaction
occurs in 1999 and the following conditions are met: (i) the consideration to be
paid or distributed to the Provider Shareholders in respect of each share of
FOHP Common Stock in connection with the Buy-out Transaction must include cash
in the amount equal to the Appraisal Consideration or such number of shares of
FHS Class A Common Stock that shall have a market value equal to the Appraisal
Consideration; (ii) the Provider Shareholders shall be afforded dissenters'
rights in the same manner and under the same terms and conditions as is provided
under Chapter 11 of the NJBCA, regardless of whether such Provider Shareholders
would otherwise have been entitled to such rights under the NJBCA; (iii) FOHP,
or any successor thereto, shall provide in its By-laws indemnification
provisions substantially similar to those currently contained in FOHP's By-Laws
for a period ending six (6) years from the date of the Buy-out Transaction, or,
if earlier, for the period ending on the date on which the statute of
limitations has expired with respect to FOHP Board's approval of the Amended
Securities Purchase Agreement and the Buy-out Transaction contemplated thereby;
and (iv) FOHP, or any successor thereto, shall maintain officers' and directors'
insurance with terms and conditions substantially similar to those contained in
the officers' and directors' insurance maintained by FOHP prior to the execution
and delivery of the Amended Securities Purchase Agreement for the period ending
six (6) years from the date of the Buy-out Transaction, or, if earlier, for the
period ending the date on which the statute of limitations has expired with
respect to the FOHP Board's approval of the Amended Securities Purchase
Agreement and the Buy-out Transaction contemplated thereby, which insurance
shall provide coverage for former directors of FOHP. The Merger Agreement
incorporates each of the aforementioned conditions, and, therefore, has been
approved by the FOHP Board.
In addition, the current FOHP Board, in reliance on the fairness
opinion issued by JMS as to the fairness of the Alternate Consideration from a
financial point of view, has approved the Merger Agreement and recommends it to
the Provider Shareholders.
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OPINION OF FINANCIAL ADVISOR TO FOHP
FOHP engaged JMS to act as its financial advisor in connection with the
Merger. JMS is a nationally recognized firm and, as part of its investment
banking business, is regularly engaged in the valuation of businesses and their
securities in connection with the preparation of fairness opinions, mergers and
acquisitions, rights, offerings, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate, and other purposes. FOHP selected JMS as its
financial advisor on the basis of its experience and expertise in transactions
similar to the Merger, its understanding of FOHP from previous engagements, its
reputation in the health care and investment communities and the cost of
engagement as compared to other prospective financial advisors.
At the July 2, 1998 meeting of the FOHP Board, JMS delivered its oral
opinion, subsequently confirmed in writing on July 15, 1998, that the Alternate
Consideration to be offered to the Provider Shareholders in the Original Merger
was fair to such shareholders from a financial point of view, as of the date of
such opinion. JMS did not determine the form or amount of consideration to be
received by Provider Shareholders in the Original Merger. The amount of such
consideration was agreed to as a result of the negotiations between FHS and the
Non-FHS Directors on the FOHP Board. No limitations were imposed by FOHP on JMS
with respect to the investigations made or procedures followed in rendering its
opinion. Payment of JMS' fee was not contingent upon the conclusion reported in
JMS' fairness opinion.
On November 16, 1998, JMS confirmed in writing that its opinion dated
July 15, 1998 was not affected by the restructuring of the Original Merger into
the two step merger process. Therefore, based upon and subject to certain
matters stated in the opinion letter dated July 15, 1998, JMS is of the opinion
that the Payment Rights to be offered to the Provider Shareholders in connection
with the Merger are fair to the Provider Shareholders from a financial point of
view.
THE FULL TEXT OF JMS' WRITTEN OPINION TO THE FOHP BOARD, WHICH SETS
FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS OF REVIEW BY JMS,
AND UPDATE THERETO DATED NOVEMBER 16, 1998, ARE ATTACHED HERETO AS APPENDIX F
AND ARE INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ CAREFULLY AND IN
THEIR ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT. THE FOLLOWING SUMMARY OF
JMS' OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
OPINION. JMS' OPINION IS ADDRESSED TO THE FOHP BOARD ONLY AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY PROVIDER SHAREHOLDER AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING OR WHICH CONSIDERATION THE
PROVIDER SHAREHOLDER SHOULD CHOOSE TO RECEIVE IF THE MERGER IS CONSUMMATED. IN
FURNISHING ITS OPINION, JMS DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE
MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER, OR
THAT ITS OPINION IS A REPORT OR VALUATION WITHIN THE MEANING OF SECTION 11 OF
THE SECURITIES ACT.
In connection with its opinion, JMS reviewed the Term Sheet setting
forth the terms and conditions relating to the Alternate Consideration, the
revised merger documents and certain financial and other information of FOHP,
PHS and FHS, including certain internal analyses, reports, forecasts and other
information. JMS also held discussions with senior management of FOHP, PHS and
FHS concerning the current operations, financial condition and prospects of
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FOHP and PHS. In addition, JMS (i) reviewed the historic financial statement of
FOHP and PHS, (ii) compared the financial positions and operating results of
FOHP with those of publicly traded companies deemed relevant by JMS, (iii)
compared certain financial terms of the Alternate Consideration to certain
financial terms of selected other business combinations deemed relevant by JMS,
(iv) performed customary investment banking evaluation procedures, and (v)
conducted such other financial studies, analyses and investigations, and
reviewed such other factors as JMS deemed relevant.
In connection with its review of FOHP, PHS and FHS, JMS did not assume
any obligation independently to verify the foregoing information and relied on
such information being accurate and complete in all material respects. With
respect to financial projections, JMS assumed that they had been reasonably
prepared on the basis reflecting the best currently available information and
judgments of the future financial performance of FOHP and PHS. JMS did not make
any independent evaluation or appraisal of the assets or liabilities of FOHP,
nor was JMS furnished with such evaluations or appraisals.
JMS' opinion is based on financial, economic, market and other
conditions as they existed on, and information made available to representatives
of JMS. JMS is not obligated to update, revise or reaffirm its opinion.
Based upon its review of FOHP, PHS and FHS and, subject to the matters
stated in its opinion, JMS has determined that the Payment Rights to be offered
to the FOHP Provider Shareholders in connection with the Merger are fair to such
shareholders from a financial point of view.
REQUIRED VOTE TO APPROVE MERGER AGREEMENT
The approval of the majority of the outstanding shares of FOHP Common
Stock is required to approve the Merger Agreement. FHS currently owns
approximately 98% of the outstanding shares of FOHP Common Stock. Accordingly,
if FHS approves the Merger Agreement, the Merger will occur, provided all of the
other conditions to the Merger are either satisfied or waived.
NON-TRANSFERABILITY OF PAYMENT RIGHTS
The Payment Rights to be offered in connection with the Merger will not
be registered under federal or state securities laws but will be offered and
issued pursuant to exemptions therefrom. In addition, certificates representing
Payment Rights will be non-negotiable and the Payment Rights will not be
transferable or assignable by the holders thereof, unless such transfer of
assignment is expressly authorized in writing by FOHP. Accordingly, there will
be no public market for the Payment Rights.
EXCHANGE PROCEDURES
Within ninety (90 ) days after the Effective Time, the Surviving
Corporation or an exchange agent (the "Exchange Agent") engaged by the Surviving
Corporation will mail to each holder of record of shares of FOHP Common Stock
immediately prior to the Effective Time,
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other than FHS and holders of dissenting shares, a form of letter of transmittal
(the "Letter of Transmittal") and instructions for use in surrendering the stock
certificates representing their shares of FOHP Common Stock and receiving either
the Appraisal Consideration or Alternate Consideration in the form of Payment
Rights in exchange therefor. The Letter of Transmittal will set forth the per
share Appraisal Consideration as of December 31, 1998, as determined pursuant to
the Amended Securities Purchase Agreement and explained herein under the caption
"The Merger - Consideration to be Received in the Merger." A Provider
Shareholder who has not dissented from the Merger will be asked in the Letter of
Transmittal to select either the Appraisal Consideration or Alternate
Consideration in the form of Payment Rights in exchange for his, her or its
shares of FOHP Common Stock. Upon the surrender of each stock certificate
formerly representing shares of FOHP Common Stock, together with a properly
completed Letter of Transmittal revealing the choice of consideration, the
Surviving Corporation or Exchange Agent shall deliver to the holder of such
certificate the form of Merger consideration selected by such holder in exchange
therefor.
If any certificate representing shares of FOHP Common Stock shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the person claiming such certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation or Exchange Agent, the posting by such
person of a bond in such reasonable amount as the Surviving Corporation or
Exchange Agent may direct as indemnity against any claim that may be made
against the Surviving Corporation or Exchange Agent with respect to such
certificate, the Surviving Corporation or Exchange Agent will issue or pay in
exchange for such lost, stolen or destroyed certificate the Merger consideration
deliverable in respect therefor.
ACCOUNTING TREATMENT OF THE MERGER
Effective December 1, 1997, FOHP became a consolidated subsidiary of
FHS. The purchase of the shares of FOHP Common Stock not currently held by FHS,
which represent approximately 2% of the outstanding shares of FOHP Common Stock,
will be accounted for by FHS as a purchase in accordance with Accounting
Principles Board Opinion 16.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion addresses and summarizes the material federal
income tax consequences of the Provider Shareholders with respect to the Merger.
(I) APPRAISAL CONSIDERATION
If a Provider Shareholder elects to receive the Appraisal Consideration
in exchange for his, her or its shares of FOHP Common Stock, the Provider
Shareholder will be entitled to receive from FOHP a cash payment in an amount
equal to the product of (i) the appraised value of a share of FOHP Common Stock
multiplied by (ii) the number of shares of FOHP Common Stock held by the
Provider Shareholder. For a comprehensive description of the Appraisal
Consideration, including the appraisal procedures to be followed in determining
the value of a share of FOHP Common Stock, see "The Merger - Consideration to be
Offered to FOHP Shareholders in the Merger." Each Provider Shareholder who
elects to receive the Appraisal Consideration will recognize, in the Provider
Shareholder's fiscal year in which the Merger is
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consummated, either gain or loss in an amount which is equal to the difference
between (x) the aggregate amount of the Appraisal Consideration received by the
Provider Shareholder less (y) the Provider Shareholder's aggregate adjusted
basis in the shares of FOHP Common Stock exchanged. It is anticipated that the
Appraisal Consideration will be significantly less than $15.00, which is the
amount originally paid to FOHP for one share of FOHP Common Stock by the
Provider Shareholders. Accordingly, it is anticipated that any Provider
Shareholder electing to receive the Appraisal Consideration would recognize a
loss.
(II) ALTERNATE CONSIDERATION
If a Provider Shareholder elects to receive the Alternate Consideration
in exchange for his, her or its shares of FOHP Common Stock, the Provider
Shareholder shall be entitled to receive from FOHP one Payment Right for each
share of FOHP Common Stock held by the Provider Shareholder. Each Payment Right
becomes due and payable on or about July 1, 2001, and entitles a Hospital
Shareholder to receive from FOHP a cash payment in the amount of $15.00, and a
Non-Hospital Shareholder to receive from FOHP a cash payment in the amount of
$15.00 plus the amount of the Bonus Payment, if any. The amount due under a
Payment Right received by a Hospital Shareholder will be reduced to $10.00,
$5.00 or zero if certain conditions set forth within the Payment Rights and
described herein are not met and satisfied. The amount due under a Payment Right
received by a Non-Hospital Shareholder will be reduced to zero if certain other
conditions set forth within the Payment Rights and described herein are not met
and satisfied. For a comprehensive description of the elements of the Alternate
Consideration and the conditions for the payment thereof, see "Description of
Payment Rights."
The amount of gain or loss to be realized by a Hospital Shareholder on
the exchange of such shareholder's shares of FOHP Common Stock for the Alternate
Consideration shall be equal to the difference between (i) the aggregate amount
received under such shareholder's Payment Rights less the aggregate amount of
the consideration received under the Payment Rights which is allocated as
imputed interest income, less (ii) the Hospital Shareholder's aggregate adjusted
basis in the shares of FOHP Common Stock exchanged. The amount of gain or loss
realized by a Non-Hospital Shareholder on the exchange of such shareholder's
shares of FOHP Common Stock for the Alternate Consideration shall be equal to
the difference between (i) an amount which is the sum of (a) the aggregate
amount received under the shareholder's Payment Rights less the aggregate amount
of the consideration received under the Payment Rights allocated as imputed
interest income and (b) the amount of the Bonus Payment received, less (ii) the
Non-Hospital Shareholder's aggregate adjusted basis in the shares of FOHP Common
Stock exchanged. As the conditions to the payment of the Alternate
Consideration, including the Bonus Payment, are material and the failure to
satisfy the applicable conditions may result in the forfeiture of part or all of
the entire amount of the Alternate Consideration to be paid to a Provider
Shareholder, and as the amount of the Bonus Payment which may be paid to a
Non-Hospital Shareholder is not capable of being determined before July 1, 2001,
each Provider Shareholder who elects to receive the Alternate Consideration
shall not be required to recognize the amount of the gain or loss realized with
respect to the Alternate Consideration, until the fiscal year in which the
Alternate Consideration is paid to the Provider Shareholder, unless such
shareholder elects otherwise.
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If the Provider Shareholder holds his, her or its shares of FOHP Common
Stock as a capital asset, any gain or loss recognized with respect to the
exchange of shares of FOHP Common Stock for either the Appraisal Consideration
or the Alternate Consideration is capital in nature and, if the Provider
Shareholder has complied with the requisite holding period provided for in the
Code, such capital gain or loss shall be long-term and will be taxed at the
applicable capital gains tax rate as provided for in the Code. Any part of the
amount of the consideration received by a Provider Shareholder pursuant to the
Payment Rights which is deemed to be imputed interest income shall be treated as
ordinary income and taxed in the year in which the Alternate Consideration is
paid at the Provider Shareholder's applicable ordinary tax rates as provided for
in the Code.
THE DISCUSSION SET FORTH ABOVE DOES NOT PURPORT TO BE A COMPLETE
DESCRIPTION OF ALL TAX CONSEQUENCES OF THE MERGER, NOR DOES IT ATTEMPT TO
DESCRIBE ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE IMPORTANT TO A
PROVIDER SHAREHOLDER IN LIGHT OF SUCH SHAREHOLDER'S PARTICULAR CIRCUMSTANCES,
INCLUDING, WITHOUT LIMITATION, IF THE PROVIDER SHAREHOLDER IS A TAX EXEMPT
ENTITY. EACH PROVIDER SHAREHOLDER'S SEPARATE CIRCUMSTANCES MAY AFFECT THE TAX
CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER. IN ADDITION, NO INFORMATION IS
PROVIDED HEREIN WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER UNDER
APPLICABLE FOREIGN, STATE OR LOCAL LAWS. CONSEQUENTLY, EACH PROVIDER SHAREHOLDER
IS ADVISED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING
PROVISIONS OF THE CODE, EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER
AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS, ALL OF WHICH ARE SUBJECT
TO AMENDMENT OR CHANGE. THERE CAN BE NO ASSURANCE THAT THE INTERNAL REVENUE
SERVICE ("IRS") WILL NOT TAKE A CONTRARY POSITION WITH RESPECT TO THE FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER, AND NO RULINGS OF THE IRS WILL BE SOUGHT
OR OBTAINED IN CONNECTION WITH THE MERGER. THERE CAN BE NO ASSURANCE THAT, IN
THE EVENT OF AN AUDIT, THE IRS WOULD NOT CHALLENGE THE TAX TREATMENT OF THE
TRANSACTIONS DESCRIBED HEREIN OR THAT, IN THE EVENT OF SUCH A CHALLENGE, THE
POSITIONS SET FORTH HEREIN WOULD BE SUSTAINED.
INQUIRES REGARDING THE MERGER
In order to answer any questions you may have with respect to the
Merger, the information contained in this Proxy Statement or the completion and
return of the proxy card delivered herewith, a special shareholder hotline has
been established which will provide you direct access to members of FOHP's
management during the hours of 8:00 a.m. to 10:00 a.m. and 5:00 p.m. to 7:00
p.m., Monday through Friday, commencing January ___, 1999 and ending January
___, 1999. Please call _____________________.
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DISSENTERS' RIGHTS
INTRODUCTION
Sections 14A:11-1 through 11-11 of the NJBCA permit shareholders to
dissent from certain corporate actions, including any sale, lease, exchange or
other disposition of all or substantially all of the corporation's assets, which
is outside the regular or usual course of business. Under certain circumstances,
dissenting shareholders may receive payment in cash for the fair value of their
shares. If the parties cannot agree on fair value, it will be determined by a
judicial proceeding. The following summary of dissenters' rights is not a
complete statement of the provisions of the NJBCA and is qualified in its
entirety by reference to the NJBCA and the text of sections 14A:11-1 through
11-11. A copy of sections 14A:11-1 through 11-11 of the NJBCA is attached hereto
as Appendix H.
NOTICE OF DISSENT
If you wish to exercise your dissenters' rights in connection with the
Merger, you must file a notice with FOHP of your dissent, stating that you
intend to demand payment for your shares if the proposed Merger is consummated.
The notice must be filed with FOHP before the vote is taken on the proposed
Merger at the Special Meeting. Filed means that the notice must have been
received by FOHP prior to the shareholders' vote on the Merger. The Special
Meeting is scheduled to be held at 3501 State Highway 66, Neptune, New Jersey on
January __, 1999. IF YOU FAIL TO FILE YOUR NOTICE OF DISSENT BEFORE THAT TIME
YOU WILL LOSE THE RIGHT TO DISSENT.
A notice of dissent must be sent to FOHP at the following address:
FOHP, Inc.
3501 State Highway 66
Neptune, New Jersey 07753
Attention: Donald Parisi, Vice President
General Counsel and Secretary
The notice must include your name, and the number of shares of FOHP
Common Stock you own. If you vote in favor of the Merger, or otherwise consent
to it, even if you have already filed a notice of dissent, you will not be
entitled to exercise dissenters' rights.
DEMAND FOR PAYMENT OF FAIR VALUE
If the Merger is approved and consummated, FOHP must notify each
shareholder who dissents from the Merger within ten (10) days after the
consummation of the Merger. The notification must be given by certified mail. If
you wish to preserve your dissenters' rights, you must then send a written
notice to FOHP within twenty (20) days after the mailing of the notice from
FOHP, demanding payment of the fair value of your shares of FOHP Common Stock.
After you have made the demand, you shall have no rights in FOHP other than the
right to receive the fair value of your shares of FOHP Common Stock. You cannot
therefore receive
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either the Appraisal Consideration or Alternate Consideration. Please note that
you may not dissent as to less than all of the shares of FOHP Common Stock
beneficially owned by you with respect to which you have the right to dissent.
SUBMISSION OF SHARE CERTIFICATES
In addition, at the time of filing the demand for payment, or within
twenty (20) days thereafter, you must submit the certificate or certificates
representing your shares of FOHP Common Stock. FOHP shall then conspicuously
note on the certificates that a demand for payment has been made. The
certificates shall then be returned to you.
SUBMISSION OF FINANCIAL INFORMATION OF FAIR VALUE OFFER
Not later than ten (10) days after the expiration of the period within
which you may make a written demand to be paid the fair value of your shares of
FOHP Common Stock, FOHP must mail to you and each of the other dissenters to the
Merger, if any, the most recent financial statements of FOHP and may offer to
pay each dissenter a specified price per share. If FOHP and any dissenter agree
upon the fair value of the shares within thirty (30) days after the expiration
of the ten (10) day period previously specified in this paragraph, FOHP shall
pay the agreed upon amount to that dissenter upon surrender to FOHP of the
certificate or certificates representing the shares of FOHP Common Stock.
DEMAND FOR JUDICIAL PROCEEDING TO DETERMINE FAIR VALUE
If FOHP and any dissenter fail to agree upon a fair value within a
specified thirty (30) day period, that dissenter shall have an additional thirty
(30) days in which to demand that FOHP commence an action in the New Jersey
Superior Court for the determination of the fair value of the shares. FOHP shall
have thirty (30) days after receipt of the demand in which to institute the
action. If FOHP fails or refuses to institute the action within thirty (30)
days, the dissenter may commence the action in the name of FOHP, but not less
than thirty (30) days after the expiration of the time within which FOHP was
required to commence the action.
LOSS OF DISSENTERS' RIGHTS
PLEASE NOTE THAT IF YOU FAIL TO TAKE EACH OF THE STEPS DESCRIBED ABOVE
WITHIN THE TIME LIMITS SPECIFIED YOU WILL LOSE YOUR RIGHT TO DISSENT AND TO
RECEIVE THE FAIR VALUE OF YOUR SHARES OF FOHP COMMON STOCK. YOU MAY ALSO LOSE
YOUR RIGHT TO DISSENT AND TO RECEIVE THE FAIR VALUE OF YOUR SHARES UNDER SECTION
14A:11-4 OF THE NJBCA. You may withdraw your election to dissent at any time if
FOHP consents in writing. If you lose or abandon your right to dissent you will
nevertheless be entitled to receive the same consideration offered to the
Provider Shareholders who did not dissent from the Merger. NO FURTHER NOTICE
WILL BE PROVIDED BY FOHP TO ITS SHAREHOLDERS WITH RESPECT TO THE RIGHT TO
DISSENT. FAILURE TO COMPLY WITH ANY OF THE PROVISIONS OF SECTIONS 14A:11-1
THROUGH 11-11 OF THE NJBCA MAY RESULT IN THE LOSS OF YOUR DISSENTERS' RIGHTS.
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RECENT DEVELOPMENTS
FOHP
On July 13, 1998, the Audit and Finance Committees (the "Committees")
of FOHP approved the appointment of Deloitte & Touche LLP ("Deloitte" ) as
FOHP's independent accountants for the year ending December 31, 1998. Deloitte
replaces Ernst & Young as FOHP's independent accountants. Ernst & Young was
replaced as FOHP's independent accountants as of July 13, 1998. The change of
independent accountants was made in connection with the acquisition by FHS of
approximately 98% of the outstanding equity of FOHP. FHS currently engages
Deloitte as its independent accountants. The Committees and FHS determined that
only one independent accounting firm should be engaged by FHS and its
subsidiaries so that there is a consistent and efficient review of the
individual and consolidated financial statements of FHS and its subsidiaries,
including FOHP. See also FOHP's Current Report on Form 8-K dated July 13, 1998,
as amended, which is incorporated herein by reference.
FHS
On August 7, 1998, Jay M. Gellert was appointed the Chief Executive
Officer of FHS, succeeding Malik M. Hasan, MD, who retired. Dr. Hasan will
continue as Non-Executive Chairman of the Board of Directors of FHS and has
indicated that he will resign as Chairman and from the Board of Directors of FHS
sometime between January 1, 1999 and FHS' next annual meeting of shareholders
expected to be held in May 1999. For the remainder of 1998, Dr. Hasan's duties
will include presiding at meetings of the FHS Board of Directors, managing other
board matters and providing counsel and support to Mr. Gellert.
Mr. Gellert, formerly President and Chief Operating Officer of FHS, is
now the President and Chief Executive Officer of FHS. As President and Chief
Executive Officer, Mr. Gellert will be directly responsible for FHS' strategic
direction with all FHS senior line and staff management reporting directly to
him.
HMO SUBSIDIARY MERGER
FOHP-NJ, a wholly-owned subsidiary of FOHP which operates as an HMO in
the State of New Jersey, and PHS-NJ, a wholly-owned subsidiary of PHS which
operates as an HMO in the State of New Jersey, have entered into an Agreement
and Plan of Merger dated as of October 26, 1998, pursuant to which PHS-NJ will
merge with and into FOHP-NJ. The HMO Subsidiary Merger is expected to be
effective as of January 1, 1999. At the effective time of the HMO Subsidiary
Merger, FOHP-NJ will change its name to Physicians Health Services of New
Jersey, Inc. The purpose of the HMO Subsidiary Merger is to consolidate the FHS
controlled HMO operations in the State of New Jersey into primarily one
corporation.
Upon consummation of the Merger, FOHP will become a wholly-owned
subsidiary of PHS. FOHP-NJ, as the surviving corporation in the HMO Subsidiary
Merger, will remain as a wholly-owned subsidiary of FOHP.
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MANAGEMENT OF SURVIVING CORPORATION
The name, age and position of each person who will serve as an
executive officer of the Surviving Corporation 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:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas W. Wilfong 43 President and Chief Executive Officer
Dr. Joseph Singer 41 Vice President and Chief Medical Officer
Donald Parisi 42 Vice President, Secretary and General Counsel
Marc M. Stein 46 Chief Financial Officer
</TABLE>
Mr. Thomas W. Wilfong has served as President and Chief Executive
Officer of FOHP since April 1, 1998 and as President of FHS' New Jersey
operations since February 1998. Mr. Wilfong served as Executive Director of PHS'
New Jersey operations 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 FOHP since
March 25, 1998.
Dr. Joseph Singer has served as a Vice President and Chief Medical
Officer of FOHP since June 8, 1995. Dr. Singer joined FOHP-NJ on December 1,
1994 and has served as a 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.
Donald Parisi has served as a Vice President, Secretary and General
Counsel of FOHP since June 1, 1997 and from June 8, 1995 to December 1996. Mr.
Parisi served as acting President and Chief Executive Officer of FOHP from
December 1996 to June 8, 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 FOHP since
February 18, 1997. Prior to becoming the Chief Financial Officer of FOHP, 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 Finance for HIP of
Greater New York.
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BOARD OF DIRECTORS OF SURVIVING CORPORATION
The name, address, age and principal occupation or employment of each
person who will serve as a director on the Board of Directors of the Surviving
Corporation is set forth below:
<TABLE>
<CAPTION>
Name and Address Age Principal Occupation or Employment
---------------- --- ----------------------------------
<S> <C> <C>
Dr. John F. Bonamo 47 Obstetrician and Gynecologist
95 Northfield Avenue
West Orange, NJ 07052
Ms. Karen A. Coughlin 50 President and Chief Executive Officer of FHS
Physicians Health Services, Inc. Northeast Division
One Far Mill Crossing
Shelton, CT 06484
Mr. Bruce G. Coe 68 President Emeritus of New Jersey Business and
41 Lambert Lane Industry Association
Lambertville, NJ 08530
Mr. Christopher Dadlez 45 Executive Vice President of Saint Barnabas
Saint Barnabas Health Care System Health Care 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 50 Urologist
102 East Bay Avenue, Suite C
Manahawkin, NJ 08050
Mr. John J. Gantner 46 Senior Vice President of Finance and Treasurer
Robert Wood Johnson of the Robert Wood Johnson University Hospital
University Hospital
One Robert Wood Johnson Place
New Brunswick, NJ 08903
</TABLE>
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<TABLE>
<CAPTION>
Name and Address Age Principal Occupation or Employment
---------------- --- ----------------------------------
<S> <C> <C>
Mr. Jay M. Gellert 44 President and Chief Executive Officer of
Foundation Health Systems, Inc. Foundation Health Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA 91367
Mr. Laurence M. Merlis 44 Executive Vice President of the Meridian Health
Meridian Health System System
Monmouth Shores Corporate Park
1350 Campus Parkway
Wall, NJ 07753
Dr. Om P. Sawhney 61 Plastic Surgeon
1550 Park Avenue
South Plainfield, NJ 07080
Mr. Thomas W. Wilfong 43 President and Chief Executive Officer of FOHP,
FOHP, Inc. Inc.
3501 State Highway 66
Neptune, NJ 07754
</TABLE>
Each person selected to serve on the Board of Directors of the
Surviving Corporation currently serves as a director of FOHP.
There are no family relationships among the persons who will serve as
directors and/or executive officers of the Surviving Corporation. None of the
persons who will serve as executive officers or directors of the Surviving
Corporation 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.
Dr. John F. Bonamo has been an obstetrician and gynecologist in private
practice since 1981. He is Clinical Chief 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 FOHP since April 16, 1997.
Ms. Karen A. Coughlin became President and Chief Executive Officer of
FHS' Northeast Division in October 1998. Prior to joining FHS, Ms. Coughlin
served as President of one of two operating divisions of Humana, Inc., a leading
national health care company. During her 18 year tenure with Humana, Inc., Ms.
Coughlin also served as Vice President and General Manager of Humana, Inc. in
Chicago, Illinois and as a Vice President of Humana Health Care Plans of
Kentucky. In the not-for-profit sector, Ms. Coughlin served as head nurse of the
Pediatric Intensive Care Unit of Loma Linda University Center in California, as
Assistant Professor of Nursing for Minot State University in North Dakota, and
as a staff nurse in the Neonatal
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Intensive Care Unit for Cleveland's Fairview General Hospital. She has served as
a director of FOHP since November 18, 1998.
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 FOHP 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 FOHP 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 FOHP since June 7, 1995 and as Chairman of the Board of FOHP 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 the private practice of
urology since June 1983. He is associated in Drs. Feneran & Fernicola, P.C. He
has served as a director of FOHP since June 7, 1995 and as a director of FOHP-NJ
since January 1994.
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 FOHP since April 16, 1997.
Mr. Jay M. Gellert became President and Chief Operating Officer of FHS
on May 7, 1997, and assumed the position of Chief Executive Officer of FHS on
August 7, 1998. From April 1, 1997 until May 7, 1997, Mr. Gellert served as
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
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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 FOHP 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 Vice Chairman and a
member of the Board of Trustees of the New Jersey Hospital Association. He has
served as a director of FOHP since April 16, 1997 and as a director of FOHP-NJ
since January 1994.
Dr. Om P. Sawhney has been a practicing physician in Plastic Surgery &
Rehabilitation Medicine Associates since January 1974. Dr. Sawhney is a
consultant to the Audit Committee of the 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 FOHP since June 7, 1995 and as a
director of FOHP-NJ since January 1994.
Mr. Thomas W. Wilfong. See "Management of Surviving Corporation."
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RELATED AGREEMENTS
In connection with FHS' purchase of the Initial Debenture pursuant to
the Amended Securities Purchase Agreement, FOHP and FHS entered into the
Management Agreements. Each of the Management Agreements provides that FHS will
employ the business executives in charge of FOHP 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 report to FHS' senior
management. All the Executives shall be appointed by the FOHP Board to the
offices requested by FHS: provided, however, that the FOHP Board may reject any
proposed appointee it reasonably finds to be of insufficient ethical character
for such office; and provided further, that the FOHP 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. Thomas W. Wilfong,
President and Chief Executive Officer of FOHP, Dr. Singer, Vice President and
Chief Medical Officer of FOHP, Mr. Donald Parisi, Vice President, General
Counsel and Secretary of FOHP; and Mr. Marc M. Stein, Chief Financial Officer of
FOHP, are employed by FHS.
Each of the Management Agreements provides that FOHP will employ an
internal auditor who will report directly to the FOHP Board.
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"). Originally, the
Management Fee equaled the sum of (i) 2% of the total revenue of the health
plans offered by FOHP (the "FOHP Health Plans") for a month plus (ii)
reimbursement for (a) direct expenses incurred by third parties and (b) salaries
and benefits of the Executives. Subsequent to the execution of the
Administrative Management Agreement and conversion of the Initial Debenture,
FOHP and FHS agreed that the Management Fee to be charged FOHP by FHS under the
Administrative Management Agreement should be based on allocated corporate
charges and not on the formula originally provided in the Administrative
Management Agreement.
In connection with the sale of the Initial Debenture, FOHP paid FHS a
phase-in period management fee of $1,701,120.38, which was based on certain
administrative services provided by FHS to FOHP from January 1, 1997 to April
30, 1997.
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<PAGE> 70
At the end of each month during the term of the Administrative
Management Agreement, FHS shall provide FOHP 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 FOHP 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 FOHP 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 was contemplated
under FOHP's then-existing 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' option, be added to the principal amount of the Convertible Debentures
issued by FOHP to FHS 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 Convertible Debentures. Any due and payable but unpaid
Management Fees not added to the principal amount of the Convertible Debentures
issued by FOHP to FHS shall bear interest at the rate of the Initial Debenture
until paid in their entirety or added to the principal amount of the Convertible
Debentures.
As compensation under the MIS Management Agreement, FOHP 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 was 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 FOHP 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 in implementing personnel policies and
procedures and employee benefit programs; (iv) provide consultation and
assistance to the FOHP Health Plans in
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<PAGE> 71
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 conditions 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 the competition of the
FOHP Health Plans in 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 FOHP Health Plans that had been 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'
gross negligence or willful misconduct. In addition, FOHP has agreed to defend,
indemnify and hold FHS and, among others, its officers, directors, shareholders,
employees and agents, from
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<PAGE> 72
and against any and all Management Agreement Damages resulting from FHS'
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' gross negligence or willful
misconduct.
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<PAGE> 73
DESCRIPTION OF PAYMENT RIGHTS
In connection with the Merger, the Provider Shareholders will be
offered Payment Rights for their shares of FOHP Common Stock, as an alternative
to the Appraisal Consideration. Each Payment Right will entitle the holder
thereof to a cash payment of not less than $15.00 on or about July 1, 2001 if
certain conditions are either satisfied or waived. Certain of the conditions to
be satisfied prior to any payment being made under a Payment Right are different
for Hospital Shareholders and Non-Hospital Shareholders. Set forth below is a
description of the Payment Rights issuable to Hospital Shareholders and a
description of the Payment Rights issuable to Non-Hospital Shareholders:
(I) PAYMENT RIGHTS - HOSPITAL SHAREHOLDERS
(a) Payment - Each Payment Right issued to a Hospital Shareholder
will entitle the Hospital Shareholder to a cash payment of
$15.00 on July 1, 2001 from FOHP, provided that the Hospital
Shareholder Conditions described in subpart (b) below have
been met by the Hospital Shareholder and the Continuing
Hospital Provider Condition described in subpart (c) below
shall have been satisfied.
(b) Hospital Shareholder Conditions - In order to receive the full
$15.00 payment under a Payment Right, a Hospital Shareholder
would have to meet the following conditions (the "Hospital
Shareholder Conditions"):
(i) Hospital Participation and Reimbursement Condition -
The Hospital Shareholder must continue to participate
in FOHP-NJ's provider network until July 1, 2001, and
agree in writing to continue to participate in
FOHP-NJ's provider network until December 31, 2001,
on the terms and subject to the conditions contained
in the existing provider agreement between the
Hospital Shareholder and FOHP-NJ, as revised, where
necessary, to (A) provide that reimbursement rates
for the Hospital Shareholder shall remain at their
March 1, 1998 levels until at least December 31,
1999, and thereafter shall be changed annually only
to the lesser of (1) the December 31, 1999 rate plus
or minus an annual cost of living adjustment as
reflected in the latest consumer price index for New
York, or (2) the December 31, 1999 rate plus or minus
the average of the rate increase or decrease then
most recently obtained by the two managed care plans
with the lowest rates at the Hospital Shareholder,
not including FOHP-NJ, and (B) extend such provider
agreement to apply to all FHS affiliated entities
(the "Hospital Participation and Reimbursement
Condition").
(ii) Hospital Enrollment and Premium Payment Condition -
The Hospital Shareholder must continue to comply with
the enrollment obligations applicable to the Hospital
Shareholder currently contained in the Certificate of
Incorporation of FOHP, which provide that: (A) if the
only health benefits plan of the Hospital Shareholder
at FOHP-NJ's inception was self-insured, the Hospital
Shareholder shall offer a FOHP-NJ health plan to its
employees as its exclusive plan; (B) if the Hospital
Shareholder offered one
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<PAGE> 74
or more health plans, including any self-insured
plan, at FOHP-NJ's inception, the Hospital
Shareholder must offer a FOHP-NJ health plan to its
employees and have at least 75% of its employees
enrolled in FOHP-NJ health plans; and (C) if the
Hospital Shareholder is subject to a collective
bargaining agreement, the Hospital Shareholder is
required to (1) use its best efforts to offer a
FOHP-NJ health plan to its non-union employees on a
non-exclusive basis, (2) use its best efforts to
qualify a FOHP-NJ health plan as the union designated
plan, and (3) pay reasonable deductibles or other
costs to qualify a FOHP-NJ health plan as the union
designated plan; provided, however, that those
Hospital Shareholders which have entered into letter
agreements with FOHP that modify the enrollment
obligations applicable to the Hospital Shareholder
set forth in FOHP's Certificate of Incorporation,
would continue to be subject to those agreements
until December 31, 1999, as amended to provide that
the Hospital Shareholder shall continue to offer a
pharmacy rider through FOHP-NJ, to the same extent
and under the same terms and conditions as it has
offered such rider prior to March 1, 1998, with the
exception that the pharmacy rider shall reimburse the
participating pharmacist for the cost of generic
drugs only, whenever a generic substitution is
available, regardless of whether the prescribing
physician prescribes "Dispense as Written." Pursuant
to the Payment Rights issued to Hospital
Shareholders, the aforementioned enrollment
obligations, whether in FOHP's Certificate of
Incorporation or in a letter agreement, would
continue until December 31, 1999, and thereafter if
the Hospital Shareholder proposes to offer to its
employees any health benefits plan, such Hospital
Shareholder shall provide prior notice to FOHP-NJ of
the material terms of any Bona Fide Offer (as defined
below) offered by such other health benefit plan. In
the event FOHP-NJ offers to provide a health plan
containing terms at least as favorable in all
material respects to the employees of the Hospital
Shareholder as those contained in the Bona Fide
Offer, such Hospital Shareholder shall offer
FOHP-NJ's health plan to its employees on the same
basis as it would have been obligated under the
enrollment obligations if such enrollment obligations
had not expired.
The Hospital Shareholder must also make timely
payments of premium to FOHP-NJ and shall be current
in such payments as of July 1, 2001.
A "Bona Fide Offer" is an offer of a health benefits
plan which is prepared with the objective of covering
the offerer's (A) health care costs and
administrative expenses in the case of risk products,
and (B) 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 offerer's costs for the
purpose of achieving market share increases shall not
constitute a Bona Fide Offer.
The conditions set forth in this subpart (ii) shall
be collectively referred to as the "Hospital
Enrollment and Premium Payment Condition."
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<PAGE> 75
(iii) Reduction in Amount Payable Under Payment Rights -
Failure by a Hospital Shareholder to comply with the
Hospital Participation and Reimbursement Condition in
subpart (i) above will result in a reduction of the
amount of the Payment Rights held by the Hospital
Shareholder by $10 per Payment Right. Failure by a
Hospital Shareholder to comply with the Hospital
Enrollment and Premium Payment Condition in subpart
(ii) above will result in a reduction of the amount
of the Payment Rights held by the Hospital
Shareholder by $5.00 per Payment Right. For example,
if the Continuing Hospital Provider Condition
discussed in subpart (c) below is satisfied and a
Hospital Shareholder complies with the Hospital
Participation and Reimbursement Condition in subpart
(i) above, but fails to comply with the Hospital
Enrollment and Premium Payment Condition in subpart
(ii) above, such Hospital Shareholder will receive
$10.00 for each Payment Right held by it on July 1,
2001.
(c) Continuing Hospital Provider Condition - In order for any
Hospital Shareholder or Non-Hospital Shareholder to receive
any payment under a Payment Right, no more than (i) five (5)
Large Hospital Shareholders (as defined below) shall have
failed to comply with the Hospital Participation and
Reimbursement Condition, (ii) seven (7) Small Hospital
Shareholders (as defined below) shall have failed to comply
with the Hospital Participation and Reimbursement Condition,
or (iii) three (3) Large Hospital Shareholders and four (4)
Small Hospital Shareholders shall have failed to comply with
the Hospital Participation and Reimbursement Condition,
provided, however, that in calculating the number of
non-complying Hospital Shareholders for purposes of subparts
(i), (ii) and (iii), a Large Hospital Shareholder or Small
Hospital Shareholder which fails to comply with the Hospital
Participation and Reimbursement Condition as a result of a
breach by FOHP-NJ of its provider agreement with the Hospital
Shareholder, shall not be counted as having failed to comply
with the Hospital Participation and Reimbursement Condition
(the "Continuing Hospital Provider Condition").
A "Large Hospital Shareholder" shall mean a Hospital
Shareholder which currently is a provider in the FOHP provider
network and originally purchased 33,315 shares of FOHP Common
Stock.
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<PAGE> 76
Set forth below is a list of the Large Hospital Shareholders:
<TABLE>
<CAPTION>
INSTITUTION LOCATION COUNTY
----------- -------- ------
<S> <C> <C>
Christ Hospital Jersey City Hudson
Clara Maass Medical Center Belleville Essex
Community Medical Center Toms River Ocean
Elizabeth General Medical Center Elizabeth Union
Englewood Hospital and Medical Center Englewood Bergen
Holy Name Hospital Teaneck Bergen
JFK Medical Center Edison Middlesex
Kimball Medical Center Lakewood Ocean
Memorial Hospital of Burlington County Mt. Holly Burlington
Monmouth Medical Center Long Branch Monmouth
Morristown Memorial Hospital Morristown Morris
Muhlenberg Regional Medical Center Plainfield Union
Newark Beth Israel Medical Center Newark Essex
Pascack Valley Hospital Westwood Bergen
Riverview Medical Center Red Bank Monmouth
Robert Wood Johnson University Hospital New Brunswick Middlesex
Saint Barnabas Medical Center Livingston Essex
Somerset Medical Center Somerville Somerset
Southern Ocean County Hospital Manahawkin Ocean
St. Francis Medical Center Trenton Mercer
St. Joseph's Hospital and Medical Center Paterson Passaic
St. Peter's Medical Center New Brunswick Middlesex
The Valley Hospital Ridgewood Bergen
</TABLE>
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<PAGE> 77
A "Small Hospital Shareholder" shall mean a Hospital Shareholder which
currently is a provider in the FOHP provider network and originally purchased
13,334 shares of FOHP Common Stock
Set forth below is a list of the Small Hospital Shareholders:
<TABLE>
<CAPTION>
INSTITUTION LOCATION COUNTY
----------- -------- ------
<S> <C> <C>
Barnert Hospital Paterson Passaic
Bayshore Community Hospital Holmdel Monmouth
Beth Israel - Passaic Passaic Passaic
Burdette Tomlin Memorial Hospital Cape May Courthouse Cape May
CentraState Medical Center Freehold Monmouth
Chilton Memorial Hospital Pompton Plains Morris
Hackettstown Hospital Hackettstown Warren
Hunterdon Medical Center Flemington Hunterdon
Irvington General Hospital Irvington Essex
William B. Kessler Memorial Hospital Hammonton Atlantic
Mercer Medical Center Trenton Mercer
Newton Memorial Hospital Newton Sussex
Our Lady of Lourdes Camden Camden
South Jersey Hospital System Bridgeton, Millville and Cumberland and Salem
Elmer
The Medical Center at Princeton Princeton Mercer
Underwood Memorial Hospital Woodbury Gloucester
Union Hospital Union Union
West Hudson Hospital Kearny Hudson
</TABLE>
(d) Waiver of Conditions by FOHP - FOHP, at its sole discretion,
may waive any of the conditions to payment set forth in the
Payment Rights held by any Hospital Shareholder. Any waiver by
FOHP of a condition to payment set forth in the Payment Rights
held by one Hospital Shareholder shall have no effect on
whether FOHP elects to waive or not to waive any conditions to
payment set forth in the Payment Rights held by another
Hospital Shareholder.
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<PAGE> 78
(e) Payment Procedure - Any consideration paid by FOHP under the
Payment Rights to the Hospital Shareholders shall be in the
form of a corporate or certified check which shall be mailed
or otherwise delivered on or shortly after July 1, 2001.
(f) Contribution Agreement between FOHP and FHS - Pursuant to the
Contribution Agreement, FHS will irrevocably commit to
contribute to FOHP the cash necessary for FOHP to make full
payment on all outstanding Payment Rights issued by FOHP in
connection with the Merger. Any funds contributed by FHS to
FOHP for the payment of Payment Rights will be restricted for
that purpose only. The Contribution Agreement provides that
each holder of Payment Rights is a third party beneficiary to
such agreement for the sole purpose of compelling FHS, if
necessary, to make the cash contributions to FOHP contemplated
by the Contribution Agreement.
(g) Change of Control - In the event FHS is acquired by or merged
with another entity and the senior management or Board of
Directors of FHS is substantially replaced as a result of such
transaction, or FOHP or any successor thereto shall become
controlled prior to July 1, 2001 by an entity other than FHS
(or an entity controlled by FHS), the holders of Payment
Rights shall be entitled to full payment thereunder; provided,
that such holders shall agree in writing to continue to
participate in the FOHP-NJ provider network or that of its
successors, for a period ending on the earlier to occur of (i)
eighteen (18) months from the date of the transaction, or (ii)
December 31, 2001, on the same terms and subject to the same
conditions as contained in the holders' provider agreements
with FOHP-NJ as in effect immediately prior to the
transaction.
(h) Non-Transferability of Payment Rights - The certificate
representing a Payment Right will be non-negotiable and no
Payment Right will be transferable or assignable by a Hospital
Shareholder without the express written consent of FOHP
(i) No Interest - No interest will be paid on any amount payable
under a Payment Right.
(j) Governing Law - A Payment Right shall be governed by, and
construed in accordance with, the laws of the State of New
Jersey.
(II) PAYMENT RIGHTS - NON-HOSPITAL SHAREHOLDERS
(a) Payment - Each Payment Right issued to a Non-Hospital
Shareholder will entitle the Non-Hospital Shareholder to a
cash payment of $15 on July 1, 2001 from FOHP, provided that
the Non-Hospital Shareholder Condition described in subpart
(b) below has been met by the Non-Hospital Shareholder and the
Continuing Hospital Shareholder Condition described in part
I(c) above shall have been satisfied.
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<PAGE> 79
(b) Non-Hospital Shareholder Condition - In order to receive the
full $15 payment under a Payment Right, a Non-Hospital
Shareholder would have to meet the following condition (the
"Non-Hospital Shareholder Condition"):
The Non-Hospital Shareholder must continue to participate
FOHP-NJ's provider network until July 1, 2001, and agree in
writing to continue to participate in FOHP-NJ's provider
network until December 31, 2001, on the terms and subject to
the conditions contained in his, her or its existing provider
agreement with FOHP-NJ, as revised to apply to all FHS
affiliated entities. Any Non-Hospital Shareholder who has
retired, died, ceased practicing in New Jersey, or has been
terminated by FOHP-NJ prior to December 31, 2001, shall be
deemed to have satisfied this condition.
(c) Continuing Hospital Provider Condition - The Continuing
Hospital Provider Condition discussed in part I (c) above
shall have been satisfied.
(d) Bonus Pool - Any consideration not paid to a Hospital
Shareholder or Non-Hospital Shareholder under the Payment
Rights issued in connection with the Merger, due to failure of
the Hospital Shareholder or Non-Hospital Shareholder to meet
the conditions applicable to him, her or it under the Payment
Rights, shall be made available to those Non-Hospital
Shareholders who complied with the Non-Hospital Shareholder
Condition, provided that the Continuing Hospital Provider
Condition has been satisfied. In addition, if any Hospital
Shareholder or Non-Hospital Shareholder elects to receive the
Appraisal Consideration for his, her or its shares of FOHP
Common Stock instead of Payment Rights, the difference between
$15.00 and the per share amount of the Appraisal Consideration
paid to the Non-Hospital Shareholder for his, her or its
shares of FOHP Common Stock would be made available to those
Non-Hospital Shareholders who comply with the Non-Hospital
Shareholder Condition, provided that the Continuing Hospital
Provider Condition is satisfied.
If the Continuing Hospital Provider Condition is satisfied,
each Non-Hospital Shareholder who has satisfied the
Non-Hospital Shareholder Condition shall be entitled to the
sum of:
(i) the product of (A) the number of shares of FOHP
Common Stock held by the Non-Hospital Shareholder
prior to the Merger multiplied by (B) $2.25, plus
(ii) the Non-Hospital Shareholder's Pro-Rata Portion (as
defined below) of (A) the aggregate reduction in the
$15.00 principal amount payable under each Payment
Right issued in connection with the Merger, and (B)
the amount equal to the product of (x) $15.00 minus
the per share amount of the Appraisal Consideration,
multiplied by (y) the number of shares of FOHP Common
Stock purchased from Provider Shareholders who elect
to receive the Appraisal Consideration (subpart (i)
plus subpart (ii) shall be referred to herein as the
"Bonus Payment").
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<PAGE> 80
Provided, however, that the Bonus Payment shall only be made
if FOHP-NJ's operations in New Jersey produce an annualized
return on average common equity capital of at least 10% for
the period January 1, 1999 through June 30, 2001, where
initial capital is set at $130 million, plus any increase in
retained earnings for FOHP-NJ through the period January 1,
1999 through June 30, 2001, excluding any non-recurring
extraordinary items, as defined under GAAP (the determination
of annualized return on average common equity capital for the
period January 1, 1999 through June 30, 2001 shall be computed
using pre-tax earnings).
The "Pro-Rata Portion" of any given Non-Hospital Shareholder
shall equal the product of (A) the quotient of (1) the amount
of consideration received by the Non-Hospital Shareholder in
the Merger (other than the Bonus Payment) divided by (2) the
total consideration payable to all Non-Hospital Shareholders
in the Merger (other than the Bonus Payment) multiplied by (B)
the aggregate amount of the $15.00 principal amount payable
under each Payment Right not paid under the Payment Rights
issued in the Merger plus the amount equal to the product of
(x) $15.00 minus the per share amount of the Alternate
Consideration, multiplied by (y) the number of shares of FOHP
Common Stock purchased from Provider Shareholders in exchange
for the Appraisal Consideration.
(e) Example of Bonus Payment- If we assume that:
o Prior to the Merger, there are 1,000,000 shares of
outstanding FOHP Common Stock held by Non-Hospital
Shareholders;
o After the Merger, (i) Non-Hospital Shareholders who
held 900,000 shares of outstanding FOHP Common Stock
prior to the Merger, choose to receive Payment Rights
and satisfy the Non-Hospital Shareholder Condition,
(ii) shareholders who held 50,000 shares of
outstanding FOHP Common Stock prior to the Merger,
choose to receive Payment Rights, but fail to satisfy
the Non-Hospital Shareholder Condition, and, as a
result, $750,000 (50,000 shares x $15.00 = $750,000)
is forfeited by the affected Non-Hospital
Shareholders, and (iii) Non-Hospital Shareholders who
held 50,000 shares of outstanding FOHP Common Stock
prior to the Merger, elect to receive Appraisal
Consideration;
o The Appraisal Consideration equals $1.00 per share of
FOHP Common Stock and, as a result, $700,000 (50,000
shares x $14.00 = $700,000) is added to the monies to
be made available in the Bonus Pool.
o $250,000 payable to the Hospital Shareholders is
forfeited due to failure by certain Hospital
Shareholders to meet either or both of the Hospital
Participating and Reimbursement Condition or Hospital
Enrollment and Premium Payment Condition.
o The Continuing Hospital Provider Condition has been
satisfied.
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<PAGE> 81
o FOHP-NJ's operations in New Jersey provide an
annualized return on average common equity for the
period of January 1, 1999 through June 30, 2001 of at
least 10%.
Based on the above assumptions, a Non-Hospital Shareholder who held
1,000 shares of FOHP Common Stock prior to the Merger would receive a Bonus
Payment of $4,132, as determined below:
$2,250 (1,000 shares x $2.25)
+
$1,882 (Pro-Rata Portion)
------
$4,132
======
The Non-Hospital Shareholder's Pro-Rata Portion would be determined as
follows:
(i) $15,000 (1,000 shares x $15) divided by $13,550,000
(900,000 shares x $15 = $13,500,000 plus $50,000 paid
as Appraisal Consideration) equals .001107.
(ii) $750,000 forfeited by Non-Hospital Shareholders plus
$250,000 forfeited by Hospital Shareholders plus
$700,000 (which is the amount available to the
Non-Hospital Shareholders who satisfy the
Non-Hospital Shareholder Condition as a result of
certain Non-Hospital Shareholders electing to receive
the Appraisal Consideration) equals $1,700,000.
.001107 x 1,700,000 = $1,882
(f) Waiver of Conditions by FOHP - FOHP, at its sole discretion,
may waive any of the conditions to payment set forth in the
Payment Rights held by any Non-Hospital Shareholder. Any
waiver by FOHP of a condition to payment set forth in the
Payment Rights held by one Non-Hospital Shareholder shall have
no effect on whether FOHP elects to waive or not to waive any
conditions to payment set forth in the Payment Rights held by
another Non-Hospital Shareholder.
(g) Payment Procedure - Any consideration paid by FOHP under the
Payment Rights to the Non-Hospital Shareholders shall be in
the form of a corporate or certified check which shall be
mailed or otherwise delivered on or shortly after July 1,
2001.
(h) Contribution Agreement between FOHP and FHS - Pursuant to the
Contribution Agreement, FHS will irrevocably commit to
contribute to FOHP the cash necessary for FOHP to make full
payment on all outstanding Payment Rights issued by FOHP in
connection with the Merger. Any funds contributed by FHS to
FOHP for the payment of Payment Rights will be restricted for
that purpose only. The Contribution Agreement provides that
each holder of Payment Rights is a third party beneficiary to
such agreement for the sole
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<PAGE> 82
purpose of compelling FHS, if necessary, to make the cash
contributions to FOHP contemplated by the Contribution
Agreement.
(i) Change of Control - In the event FHS is acquired by or merged
with another entity and the senior management or Board of
Directors of FHS is substantially replaced as a result of such
transaction, or FOHP or any successor thereto shall become
controlled prior to July 1, 2001 by an entity other than FHS
(or an entity controlled by FHS), the holders of Payment
Rights shall be entitled to full payment thereunder; provided,
that such holders shall agree in writing to continue to
participate in the FOHP-NJ provider network or that of its
successors, for a period ending on the earlier to occur of (i)
eighteen (18) months from the date of the transaction, or (ii)
December 31, 2001, on the same terms and subject to the same
conditions as contained in the holders' provider agreements
with FOHP-NJ as in effect immediately prior to the
transaction.
(j) Non-Transferability of Payment Rights - The certificate
representing a Payment Right will be non-negotiable and no
Payment Right will be transferable or assignable by a
Non-Hospital Shareholder without the express written consent
of FOHP.
(k) No Interest - No interest will be paid on any amount payable
under a Payment Right.
(l) Governing Law - A Payment Right shall be governed by, and
construed in accordance with, the laws of the State of New
Jersey.
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COMPARISON OF SHAREHOLDER RIGHTS
As holders of FOHP Common Stock, Provider Shareholders are entitled to
vote on certain matters brought before the shareholders of FOHP, such as the
election of directors and certain business combinations, as well as share in any
dividends or distributions declared by FOHP for the benefit of its shareholders.
If the Merger is consummated, (i) the non-dissenting Provider Shareholders will
receive either Appraisal Consideration or Payment Rights for their shares of
FOHP Common Stock, and (ii) the dissenting Provider Shareholders will receive
the fair value for their shares of FOHP Common Stock as determined under Chapter
11 of the NJBCA. As a result, no Provider Shareholder will have an equity
position in FOHP after the Merger. The only entitlement that a Provider
Shareholder would have as the holder of a Payment Right is the right to be paid
not less than $15.00 on or about July 1, 2001, provided certain conditions are
either satisfied or waived.
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AVAILABLE INFORMATION
FHS and FOHP file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC" ). You may read and copy any reports, statements or other information
that such companies file at the SEC's public reference rooms at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, 7 World Trade Center, 13th Floor,
New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. Filings
with the SEC by FHS and FOHP are also available to the public from commercial
document retrieval services and at the SEC's site on the World Wide Web at
http://www.sec.gov.
A copy of JMS' written opinion dated July 15, 1998, and update thereto
dated November 16, 1998, have been attached to this Proxy Statement as Appendix
F. In addition, a copy of JMS' written opinion and a copy of the update thereto
will be made available to any shareholder of FOHP or his, her or its duly
authorized representative for inspection and copying at the principal executive
offices of FOHP located at 3501 State Highway 66, Neptune, New Jersey, during
regular business hours.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
Proxy Statement, which means that we can disclose important information to you
by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this Proxy
Statement, except for any information superceded by information in this Proxy
Statement.
This Proxy Statement incorporates by reference the following documents
previously filed with the SEC by FOHP (File No. 0-25944) pursuant to the
Exchange Act:
1. FOHP's Annual Report on Form 10-K for the year ended December 31, 1997, as
amended.
2. FOHP's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
3. FOHP's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
4. FOHP's Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
5. FOHP's Current Report on Form 8-K, dated July 13, 1998, as amended.
A COPY OF FOHP'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1997 AND QUARTERLY REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1998 IS BEING
DELIVERED WITH THIS PROXY STATEMENT. INASMUCH AS INFORMATION IS BEING
INCORPORATED BY REFERENCE FROM THE AFOREMENTIONED ANNUAL REPORT ON FORM 10-K AND
QUARTERLY REPORT ON FORM 10-Q, YOU ARE URGED TO REVIEW SUCH DOCUMENTS IN
CONNECTION WITH YOUR REVIEW OF THIS PROXY STATEMENT.
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<PAGE> 85
We are also incorporating by reference additional documents that are
filed by FOHP with the SEC between the date of this Proxy Statement and the date
of the Special Meeting.
This Proxy Statement incorporates by reference the following documents
previously filed with the SEC by FHS (File No. 1-12718) pursuant to the Exchange
Act:
1. FHS' Annual Report on Form 10-K for the year ended December 31, 1997.
2. FHS' Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
3. FHS' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
4. FHS' Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
We are also incorporating by reference additional documents that are
filed by FHS with the SEC between the date of this Proxy Statement and the date
of the Special Meeting.
THIS PROXY STATEMENT INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT FOHP AND FHS THAT IS NOT INCLUDED HEREIN OR DELIVERED HEREWITH. SUCH
INFORMATION IS AVAILABLE WITHOUT CHARGE UPON REQUEST FROM:
FOUNDATION HEALTH SYSTEMS, INC. FOHP, INC.
ATTN: DIRECTOR OF INVESTOR RELATIONS ATTN:
21600 OXNARD STREET 3501 STATE HIGHWAY 66
WOODLAND HILLS, CALIFORNIA 91367 NEPTUNE, NEW JERSEY 07753
TELEPHONE (818) 676-6978. TELEPHONE: (732) 918-6700
IN ORDER TO ENSURE TIMELY DELIVERY OF ANY INFORMATION INCORPORATED BY REFERENCE,
ANY REQUEST SHOULD BE MADE BY JANUARY _____, 1999.
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<PAGE> 86
EXPERTS
The consolidated financial statements of FOHP appearing in FOHP's
Annual Report (Form 10-K) for the year ended December 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon included therein and incorporated herein by reference. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements and related financial statement
schedules incorporated into this Proxy Statement from FHS' Annual Report on Form
10-K for the year ended December 31, 1997 have been audited by Deloitte & Touche
LLP, independent auditors, as stated in the report which is incorporated herein
by reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing. A
representative of Deloitte will be present at the Special Meeting to answer
questions by shareholders and will have the opportunity to make a statement, if
so desired.
SHAREHOLDER PROPOSALS
Shareholder proposals for presentation at FOHP's next annual meeting of
shareholders must be received by FOHP at its principal executive offices for
inclusion in its proxy statement and form of proxy relating to that meeting no
later than April 30, 1999. FOHP's By-Laws contain certain procedures which must
be followed in connection with shareholder proposals. However, please note that
if the Merger is consummated, PHS, a wholly-owned subsidiary of FHS, will become
the sole shareholder of FOHP, and, as a result, no proxy materials will be
distributed in connection with future FOHP shareholder meetings.
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OTHER BUSINESS
It is not expected that any matter not referred to herein will be
present for action at the Special Meeting. If any other matters are properly
brought before the Special Meeting, the persons named in the proxies or
authorized substitutes will have discretion to vote on such matters and on
matters incident to the conduct of the Special Meeting in accordance with their
best judgment.
ALL SHAREHOLDERS ARE URGED TO FILL IN, SIGN AND SEND IN THEIR PROXIES
WITHOUT DELAY TO AMERICAN STOCK TRANSFER AND TRUST COMPANY, 40 WALL STREET, NEW
YORK, NEW YORK 10005. PROMPT RESPONSE IS HELPFUL AND YOUR COOPERATION WILL BE
APPRECIATED.
IN ORDER TO ANSWER ANY QUESTIONS YOU MAY HAVE WITH RESPECT TO THE
MERGER OR THE COMPLETION AND RETURN OF A PROXY CARD, A SPECIAL SHAREHOLDERS
HOTLINE HAS BEEN ESTABLISHED WHICH WILL PROVIDE YOU DIRECT ACCESS TO MEMBERS OF
OUR SENIOR MANAGEMENT DURING THE HOURS OF 8:00 A.M. TO 10:00 A.M. AND 5:00 P.M.
TO 7:00 P.M., MONDAY THROUGH FRIDAY, COMMENCING JANUARY ___, 1999 AND ENDING
JANUARY ___, 1999. PLEASE CALL ______________________.
By Order of the Board of Directors
THOMAS W. WILFONG
President and Chief Executive Officer
January ___, 1999
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<PAGE> 88
LIST OF DEFINED TERMS
<TABLE>
<S> <C>
A.G. Edwards..................................................................41
Administrative Management Agreement...........................................15
Alternate Consideration........................................................9
Amended Securities Purchase Agreement..........................................8
Appraisal Consideration........................................................9
Bonus Payment.................................................................73
Bonus Pool....................................................................13
Buy-out Transaction............................................................9
COA............................................................................7
Committees....................................................................57
Continuing Hospital Provider Condition........................................69
Contribution Agreement........................................................15
Convertible Debentures.........................................................9
CWF...........................................................................34
Deloitte......................................................................57
Departments...................................................................11
Effective Time.................................................................8
Ernst & Young.................................................................26
Exchange Act..................................................................35
Exchange Agent................................................................51
Executives....................................................................63
FHS............................................................................1
FHS Class A Common Stock.......................................................9
FHS Class B Common Stock......................................................34
Financial Advisor.............................................................10
FOHP...........................................................................1
FOHP Board.....................................................................1
FOHP Common Stock..............................................................1
FOHP Health Plans.............................................................63
FOHP Stock Value..............................................................46
FOHP-NJ........................................................................7
GAAP..........................................................................13
GKM...........................................................................41
HMO............................................................................7
HMO Subsidiary Merger.........................................................11
Hospital Participation and Reimbursement Condition............................67
Hospital Shareholder Conditions...............................................67
Hospital Shareholders.........................................................24
HSI............................................................................8
HSII..........................................................................64
HSII Agreement................................................................64
IBNR...........................................................................9
Initial Debenture..............................................................8
IRS...........................................................................54
JMS...........................................................................10
</TABLE>
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<PAGE> 89
<TABLE>
<S> <C>
Letter Agreement...............................................................9
Letter of Transmittal.........................................................52
Management Agreement Damages..................................................65
Management Agreements.........................................................16
Management Fee................................................................63
Merger.........................................................................1
Merger Agreement...............................................................1
MIS Agreement.................................................................16
Net Capital Shortfall.........................................................40
New Convertible Debenture.....................................................10
NJBCA.........................................................................15
Non-FHS Directors.............................................................10
Non-Hospital Shareholder Condition............................................73
Non-Hospital Shareholders.....................................................13
Original Merger...............................................................10
Payment Rights.................................................................1
PHS...........................................................................12
PHS-NJ........................................................................10
Provider Shareholders..........................................................9
Record Date....................................................................1
Reorganization.................................................................7
SEC...........................................................................78
Securities Act................................................................50
Securities Purchase Agreement..................................................8
Special Committee..............................................................9
Special Meeting................................................................1
Surviving Corporation..........................................................1
Term Sheet....................................................................10
</TABLE>
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger ("Agreement"), dated as of November 16, 1998,
is by and among Foundation Health Systems, Inc., a Delaware corporation ("FHS"),
FHS Transition Company, a New Jersey corporation ("Merger Sub"), and FOHP, Inc.,
a New Jersey corporation ("FOHP" or the "Surviving Corporation").
RECITALS
WHEREAS, (i) Merger Sub is a wholly-owned subsidiary of FHS, and (ii)
FHS owns approximately ninety-eight percent (98%) of the issued and outstanding
capital stock of FOHP;
WHEREAS, the Boards of Directors of FHS, Merger Sub and FOHP have
determined that it is in the best interests of their respective shareholders to
merge Merger Sub with and into FOHP (the "Merger") pursuant to the terms, and
subject to the conditions, of this Agreement;
WHEREAS, upon the terms and subject to the conditions set forth in this
Agreement, (i) Merger Sub will be merged with and into FOHP in accordance with
the applicable provisions of the New Jersey Business Corporation Act ("New
Jersey Corporate Law"), (ii) each share of FOHP common stock, par value $.0l per
share ("FOHP Common Stock"), issued and outstanding immediately prior to the
"Effective Time" (as such term is defined in Section 1.2 of this Agreement),
except for the shares beneficially owned by FHS and except as otherwise
expressly provided herein, will be converted into the right to receive the
"Merger Consideration" (as such term is defined in Section 2.l(b) of this
Agreement), (iii) all of the shares of Merger Sub common stock, par value $.0l
per share ("Merger Sub Common Stock"), issued and outstanding immediately prior
to the Effective Time will be cancelled; and (iv) FHS will contribute all of its
FOHP Common Stock to Physicians Health Services, Inc., a Delaware corporation
and wholly-owned subsidiary of FHS ("PHS"); and
WHEREAS, FHS, Merger Sub and FOHP desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements set forth herein, FHS,
Merger Sub and FOHP hereby agree as follows:
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ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time and upon the terms and subject to
the conditions hereof and in accordance with the provisions of New Jersey
Corporate Law, Merger Sub will be merged with and into FOHP, whereupon the
separate corporate existence of Merger Sub shall cease and FOHP shall continue
as and be the Surviving Corporation in the Merger. Merger Sub and FOHP are
sometimes hereinafter referred to individually as a "Constituent Corporation"
and collectively as the "Constituent Corporations."
1.2 Effective Time of Merger. Subject to the terms and conditions of
this Agreement, and as promptly as practicable after satisfaction of all of the
conditions to each party's obligation to consummate the Merger contained in
Article V of this Agreement, or, to the extent permitted hereunder, waiver
thereof, a duly executed copy of this Agreement and a certificate of merger (the
"Certificate of Merger") in such form as required by, and executed in accordance
with, the relevant provisions of New Jersey Corporate Law, shall be filed with
the New Jersey Department of Treasury, Division of Revenue (the "State
Department"). If the Certificate of Merger is filed before January 1, 1999, it
shall provide that the Merger will be effective on January 1, 1999. If the
Certificate of Merger is filed after January 1, 1999, the Merger shall be
effective at such time as the Certificate of Merger is filed with the State
Department or such other time as is stated therein. The date on which the Merger
is effective shall be the "Effective Time." This Agreement is intended by the
Constituent Corporations to constitute the plan of merger contemplated by
Section 14A:10-1 of New Jersey Corporate Law.
1.3 Effects of the Merger.
(a) At the Effective Time, the separate corporate existence of Merger
Sub shall cease and Merger Sub shall be merged with and into FOHP which, as the
Surviving Corporation, shall survive the Merger and continue its separate
corporate existence under the laws of the State of New Jersey. The Surviving
Corporation shall succeed to all the properties and assets of the Constituent
Corporations and to all debts, causes of action and other interests due or
belonging to the Constituent Corporations and shall be subject to, and
responsible for, all the debts, obligations, liabilities and duties of the
Constituent Corporations as provided in Section 14A:10-6 of New Jersey Corporate
Law. To the extent permitted by law, the Surviving Corporation shall possess all
the rights, powers and franchises, of a public as well as of a private nature,
and shall be subject to all the restrictions, disabilities and duties of each of
the Constituent Corporations. All rights, privileges, powers and franchises of
each of the Constituent Corporations and all property, real, personal and mixed,
and all debts due to each of the Constituent Corporations on whatever account,
and all other things in action belonging to each of the Constituent
Corporations, shall be vested in the Surviving Corporation. All property,
rights, privileges, powers, franchises and all choses in action and every other
interest shall thereafter be the property of the Surviving Corporation as they
were of the Constituent Corporations. The title to any real estate, whether by
deed or otherwise, and any other property, whether real, personal or mixed,
vested in any of the Constituent Corporations, shall not revert or be in any way
impaired by reason of the Merger. Any devise, bequest, gift or grant contained
in any will or in any instrument, made before or after the Merger, to or for the
benefit of any of the
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Constituent Corporations, shall inure to the benefit of the Surviving
Corporation. Insofar as may be necessary to preserve any of the assets of the
Constituent Corporations, the existence of each Constituent Corporation shall be
deemed to continue in and through the Surviving Corporation. Any claim, action
or proceeding, civil or criminal, pending by or against either Constituent
Corporation, may be prosecuted as if the Merger had not taken place, and the
Surviving Corporation may be substituted in place of either of the Constituent
Corporations in connection with such claim, action or proceeding. Any judgment
rendered against either of the Constituent Corporations may be enforced against
the Surviving Corporation. Neither the rights of creditors nor any liens upon
the property of either of the Constituent Corporations shall be impaired by this
Merger.
(b) If, at any time after the Effective Time, the Surviving Corporation
shall consider or be advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in the Surviving Corporation its
right, title or interest in, to or under any of the rights, properties or assets
of the Constituent Corporations acquired or to be acquired by the Surviving
Corporation as a result of or in connection with the Merger, or otherwise to
carry out the purpose and intent of this Agreement, the officers and directors
of the Surviving Corporation shall be authorized to execute and deliver, in the
name and on behalf of either of the Constituent Corporations, all such deeds,
bills of sale, assignments, assumption agreements and assurances and to take and
do, in the name and on behalf of each of such Constituent Corporations or
otherwise, all such other actions and things as may be necessary or desirable to
vest, perfect or confirm any and all right, title and interest in, to and under
such rights, properties or assets of the Surviving Corporation or otherwise to
carry out the purpose and intent of this Agreement.
1.4 Certificate of Incorporation and By-laws.
(a) The Certificate of Incorporation of FOHP, as in effect immediately
prior to the Effective Time, shall be amended and restated, and, as so amended
and restated, the Certificate of Incorporation of FOHP shall be the Certificate
of Incorporation of the Surviving Corporation until thereafter changed or
amended as provided therein or under applicable law. Attached hereto as Exhibit
A is a copy of FOHP's Certificate of Incorporation, as amended and restated in
accordance herewith, which will be filed with the Certificate of Merger in order
to effect the amendments thereto.
(b) The By-laws of FOHP, as in effect immediately prior to the
Effective Time, shall be amended and restated as of the Effective Time (which
amended and restated By-laws are attached hereto as Exhibit B) and, as so
amended and restated, the By-laws of FOHP shall be the By-laws of the Surviving
Corporation until altered, amended or repealed as provided therein or under
applicable law.
1.5 Board of Directors. The directors of FOHP at the Effective Time (as
set forth on Exhibit C attached hereto) shall, from and after the Effective
Time, be the directors of the Surviving Corporation until their successors have
been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Surviving Corporation's
Certificate of Incorporation and/or By-laws.
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1.6 Officers. The officers of FOHP at the Effective Time (as set forth
on Exhibit D attached hereto) shall, from and after the Effective Time, be the
officers of the Surviving Corporation until their successors have been duly
elected or appointed and qualified or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and/or By-laws.
ARTICLE II
CONSIDERATION FOR THE MERGER
2.1 Consideration for the Merger; Conversion or Cancellation of Merger
Sub Common Stock and FOHP Common Stock in the Merger; Contribution of FOHP
Common Stock. At the Effective Time, by virtue of the Merger and without any
action on the part of FHS, Merger Sub, FOHP or the holders of the shares of the
capital stock of the Constituent Corporations, the following shall occur:
(a) MERGER SUB COMMON STOCK - All of the shares of Merger Sub Common
Stock issued and outstanding immediately prior to the Effective Time, all of
which are owned and held by FHS, shall be automatically cancelled.
(b) FOHP COMMON STOCK HELD BY HOSPITAL SHAREHOLDERS AND NON-HOSPITAL
SHAREHOLDERS - Each holder of a share of FOHP Common Stock, other than FHS,
shall cease to have any rights as a shareholder of FOHP, except for such rights
as the shareholder may have pursuant to this Agreement or applicable law. Except
for Dissenting Shares (as defined in Section 2.2 hereof), each share of FOHP
Common Stock issued and outstanding immediately prior to the Effective Time
which is owned or held by any person other than FHS (which includes hospital
shareholders ("Hospital Shareholders") and physician shareholders and other
non-hospital shareholders ("Non-Hospital Shareholders")), shall be converted
into the right to receive the consideration in either (i) or (ii) below (the
"Merger Consideration"):
(i) an amount equal to the per share value of the FOHP Common Stock
determined in accordance with Section 6.4 of the Amended Securities Purchase
Agreement (as such term is defined in Section 2.2 hereof)(the "Appraisal
Consideration"), which will be payable in cash (a copy of Section 6.4 of the
Amended Securities Purchase Agreement has been attached hereto as Exhibit E); or
(ii) an amount equal to not less than fifteen dollars ($15.00) payable
on or about July 1, 2001, provided that certain conditions have either been
satisfied or waived (the "Alternate Consideration"). (FOHP would offer payment
rights (collectively, "Payment Rights," and individually a "Payment Right") to
the Hospital Shareholders and Non-Hospital Shareholders entitling the holders
thereof to a payment in cash of not less than fifteen dollars ($15.00) per
Payment Right on or about July 1, 2001 from FOHP, provided the conditions
contained therein have either been satisfied or waived. One Payment Right would
be issued by FOHP to a Hospital Shareholder or Non-Hospital Shareholder for each
share of FOHP Common Stock held by such shareholder. The form of Payment Right
to be offered to Hospital Shareholders in the Merger has been attached hereto as
Exhibit F-1 and the form of Payment
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Right to be offered to Non-Hospital Shareholders in the Merger has been attached
hereto as Exhibit F-2.)
Each FOHP Hospital Shareholder and Non-Hospital Shareholder shall
determine which form of the Merger Consideration he, she or it will receive in
exchange for the shareholder's shares of FOHP Common Stock.
(c) FOHP COMMON STOCK HELD IN TREASURY - As of the Effective Time, each
share of FOHP Common Stock held in the treasury of FOHP, if any, shall be
cancelled and retired without payment of any consideration therefor. Upon the
consummation of the Merger, the only shares of FOHP Common Stock which will be
outstanding will be the shares held by FHS.
(d) FOHP COMMON STOCK HELD BY FHS. - Contemporaneously with the
consummation of the Merger, FHS will contribute to PHS all of its right, title
and interest in and to all the outstanding shares of FOHP Common Stock held by
FHS. Consequently, FOHP will become a wholly-owned subsidiary of PHS on the date
the Merger becomes effective.
2.2 Dissenting Shares. Pursuant to Chapter 11 of New Jersey Corporate
Law, any shareholder of FOHP who does not vote in favor of the Merger would not
ordinarily have the right to dissent from the Merger and demand payment of the
fair value of such person's shares of FOHP Common Stock. However, Section 6.4(c)
of the Amended and Restated Securities Purchase Agreement, dated February 10,
1997, by and among FOHP, FOHP-NJ and Health Systems International, Inc. (the
predecessor to FHS), as amended on March 13, 1997 and clarified on April 30,
1997 (as so amended and clarified the "Amended Securities Purchase Agreement"),
provides that if FHS undertakes a merger, business combination or consolidation
transaction (a "Merger Transaction") involving FOHP for the purpose of obtaining
one hundred percent (100%) of the then-outstanding equity of FOHP, then any such
Merger Transaction must provide that the shareholders of FOHP, other than FHS,
shall be afforded dissenters' rights in the same manner and under the same
conditions as are provided under Chapter 11 of New Jersey Corporate Law,
regardless of whether such shareholders would otherwise be entitled to such
rights under New Jersey Corporate Law. Accordingly, in connection with the
Merger, which constitutes a Merger Transaction, shares of FOHP Common Stock
outstanding immediately prior to the Effective Time and held by a shareholder of
FOHP, other than FHS, who has not voted to approve and adopt the Merger or
consented thereto in writing and who, as permitted by the Amended Securities
Purchase Agreement, has demanded appraisal for such shares in accordance with
Section 14A:11-2 of New Jersey Corporate Law (the "Dissenting Shares"), shall
not be converted into the right to receive the Merger Consideration unless such
holder's right to appraisal is terminated pursuant to Section 14A:11-4 of New
Jersey Corporate Law. If, after the Effective Time, a shareholder's right to
appraisal is terminated, the shares of FOHP Common Stock held by the shareholder
shall no longer be considered Dissenting Shares for purposes of this Agreement
and shall be treated as if they had been converted as of the Effective Time into
the right to receive the Merger Consideration. Upon making demand for appraisal
rights, a dissenting shareholder shall cease to have any of the rights of a FOHP
shareholder, except the right to be paid what is agreed or determined to be the
fair value of such person's shares of FOHP Common Stock and any other rights of
a dissenting shareholder under Chapter 11 of New Jersey Corporate Law.
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2.3 Exchange of Certificates representing FOHP Common Stock.
(a) Within ninety (90) days after the Effective Time, the Surviving
Corporation or an exchange agent (the "Exchange Agent") engaged by the Surviving
Corporation will mail to each holder of record of shares of FOHP Common Stock
immediately prior to the Effective Time, other than FHS and holders of
Dissenting Shares, a form of letter of transmittal (the "Letter of Transmittal")
and instructions for use in surrendering the stock certificates representing
their shares of FOHP Common Stock and receiving either the Appraisal
Consideration or Alternative Consideration in the form of Payment Rights in
exchange therefor. The Letter of Transmittal will set forth the per share
Appraisal Consideration as of December 31, 1998, as determined pursuant to the
Amended Securities Purchase Agreement. An FOHP shareholder who has not dissented
from the Merger will be asked in the Letter of Transmittal to select either the
Appraisal Consideration or Alternate Consideration in the form of Payment Rights
in exchange for his, her or its shares of FOHP Common Stock.
(b) Upon the surrender of each stock certificate formerly representing
shares of FOHP Common Stock, together with a properly completed Letter of
Transmittal, the Surviving Corporation or Exchange Agent shall deliver to the
holder of such certificate the form of Merger Consideration selected by such
holder in exchange therefor.
(c) If any certificate representing shares of FOHP Common Stock shall
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming such certificate to be lost, stolen or destroyed
and, if required by the Surviving Corporation or Exchange Agent, the posting by
such person of a bond in such reasonable amount as the Surviving Corporation or
Exchange Agent may direct as indemnity against any claim that may be made
against the Surviving Corporation or Exchange Agent with respect to such
certificate, the Surviving Corporation or Exchange Agent will pay or issue in
exchange for such lost, stolen or destroyed certificate the Merger Consideration
deliverable in respect therefor pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Each of the Constituent Corporations makes the following
representations and warranties: (i) it is a duly organized and lawful existing
corporation in the State of New Jersey, (ii) it has filed all federal, state and
other governmental tax returns which are required to be filed, and has paid, or
has made adequate provision for the payment of, all taxes which have or may
become due, (iii) no claims or additional assessments have been made against it
by federal, state or other governmental bodies for any taxes, franchise fees or
other assessments, (iv) no judicial or administrative proceedings are pending or
threatened against it which will have a material adverse effect on its assets or
businesses, and (v) it has good and marketable title to all of its property and
assets except as otherwise disclosed to the other parties hereto.
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ARTICLE IV
COVENANTS
From and after the date of this Agreement through the Effective Time of
the Merger, neither Merger Sub nor FOHP will, except with the prior written
consent of FHS, (i) incur any obligation or liability, absolute or contingent,
except liabilities and obligations incurred in the ordinary course of business,
(ii) discharge or satisfy any lien or encumbrance or pay any liability or
obligation, absolute or contingent, other than current liabilities shown on its
latest balance sheet, or incurred since the date of said balance sheet in the
ordinary course of business, (iii) mortgage, pledge, create a security interest
in, or subject to lien or other encumbrance any of its assets except in the
ordinary course of business, (iv) sell, assign or transfer any of its assets or
cancel any debts or claims except in the ordinary course of business, (v) waive
any right of substantial value, or (vi) enter into any transaction other than in
the ordinary course of business.
ARTICLE V
CONDITIONS OF MERGER
The obligation of FHS, Merger Sub and FOHP to consummate and effect the
Merger contemplated by this Agreement shall be subject to fulfillment at or
prior to the Effective Time of the following conditions:
5.1 Shareholder Approval. This Agreement must be approved and adopted
by the sole shareholder of Merger Sub and the shareholders of FOHP.
5.2 Indemnification of Directors of FOHP. The Surviving Corporation
shall have provided in its By-laws indemnification provisions substantially
similar to those currently contained in FOHP's By-laws and shall maintain such
indemnification provisions for the period ending six (6) years from the
Effective Time 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 approval of
the Amended Securities Purchase Agreement and the Merger by the Board of
Directors of FOHP.
5.3 Officers' and Directors' Liability Insurance Coverage. The
Surviving Corporation shall have in place an officers' and directors' liability
insurance coverage policy or policies with terms and conditions substantially
similar to those contained in the officers' and directors' liability insurance
coverage policy or policies maintained by FOHP immediately prior to the
execution and delivery of the Amended Securities Purchase Agreement, and shall
maintain such policy or policies for the period ending six (6) years from the
Effective Time 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 approval of
the Amended Securities Purchase Agreement and the Merger by the Board of
Directors of FOHP, which insurance shall provide coverage for former directors
of FOHP.
5.4 Illegality or Legal Constraint. No statute, rule, regulation,
executive order, decree, injunction or restraining order shall have been
enacted, promulgated or enforced or otherwise made applicable (and not repealed
or superseded) by any court of competent jurisdiction, administrative agency or
commission or other governmental authority or
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instrumentality (the "Governmental Entities"), which prohibits the consummation
of the transactions contemplated by this Agreement.
5.5 Governmental Approvals. The parties hereto shall have made the
requisite filings with all Governmental Entities as shall be required pursuant
to applicable laws, rules and regulations, and such Governmental Entities, to
the extent required by applicable law, shall have approved the transactions
contemplated by this Agreement.
5.6 Fairness Opinion. The written fairness opinion, dated July 15,
1998, as updated and confirmed on November 16, 1998, by Janney Montgomery Scott
Inc., financial advisor to FOHP, which provides that the Alternate Consideration
to be offered to the holders of shares of FOHP Common Stock pursuant to this
Agreement is fair from a financial point of view, shall not have been retracted,
terminated or altered or amended in any material way.
5.7 Contribution Agreement between FHS and FOHP. FOHP and FHS will have
entered into the contribution agreement (the "Contribution Agreement") attached
hereto as Exhibit G, pursuant to which FHS will irrevocably commit to contribute
to FOHP the amount of cash necessary for FOHP to pay (a) all amounts payable
under the Payment Rights issued in connection with the Merger, (b) any Appraisal
Consideration due and owing to any Hospital Shareholder or Non-Hospital
Shareholder in connection with the Merger, (c) all amounts due and owing to any
Hospital Shareholder or Non-Hospital Shareholder who dissents from the Merger,
and (d) any expenses incurred by FOHP in connection with the Merger. All funds
contributed by FHS to FOHP pursuant to the Contribution Agreement attached
hereto as Exhibit G, will be restricted for the purposes set forth therein.
ARTICLE VI
TERMINATION AND AMENDMENT
6.1 Termination. At any time before the Effective Time, and whether
before or after approval of this Agreement by the sole shareholder of Merger Sub
and the shareholders of FOHP, this Agreement may be terminated and the Merger
abandoned, or the consummation of the transactions contemplated by the Merger
may be delayed, by the Board of Directors of FOHP for any reason, including,
without limitation, non-satisfaction of any condition to the consummation of the
Merger.
6.2 Effect of Termination. Upon the termination of this Agreement, it
shall forthwith become null and void and no party hereto shall have any
liability or further obligation to any other party to this Agreement.
6.3 Amendment. The Board of Directors of FOHP, together with the Boards
of Directors of FHS and Merger Sub, may amend, modify and supplement this
Agreement, to the extent permitted by New Jersey Corporate Law and pursuant to
an instrument in writing, at any time prior to the consummation of the Merger,
whether before or after the approval of this Agreement by the shareholders of
Merger Sub and FOHP.
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ARTICLE VII
GENERAL AND MISCELLANEOUS PROVISIONS
7.1 Captions. The Article, Section and Paragraph captions herein are
inserted for convenience of reference only, do not constitute a part hereof, and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
7.2 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.3 Applicable Law. This Agreement and the issues concerning the
validity of this Agreement, the construction of its terms and the interpretation
and enforcement of the rights and duties of the parties shall be governed by,
and construed in accordance with, the laws of the State of New Jersey.
7.4 Entire Agreement. This Agreement, including the attachments
referred to herein, constitutes the entire agreement with respect to the Merger,
and supersedes all other prior agreements and understandings, both written and
oral, among the parties, or any of them, with respect to the Merger, and except
as otherwise expressly provided herein, is not intended to confer upon any other
person any rights or remedies hereunder.
7.5 Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, each of which shall remain in full force and
effect.
7.6 Assignment. This Agreement shall be binding upon and inure to the
benefit of the respective successors and assigns of the parties hereto.
7.7 Survival. The representations and warranties made herein shall not
survive the termination of this Agreement or the Effective Time. This Section
7.7 shall not limit any covenant or agreement of the parties hereto which by its
terms contemplates performance after the termination of this Agreement or the
Effective Time.
7.8 Merger Expenses. Unless otherwise agreed by the parties hereto, FHS
shall pay all fees, costs and expenses incurred in connection with the Merger
and the other actions contemplated by this Agreement.
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7.9 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the other parties shall be in writing and
delivered personally or sent by registered or certified mail, postage prepaid,
or by facsimile transmission (with a confirming copy sent by overnight courier),
as follows:
(a) If to FHS or Merger Sub, to:
Foundation Health Systems, Inc.
21600 Oxnard Street
Woodland Hills, CA 91367
Attention: Senior Vice President,
General Counsel and Secretary
Fax: (818) 676-8958
(b) If to FOHP, to:
FOHP, Inc.
3501 State Highway 66
Neptune, New Jersey 07753
Attention: Vice President,
General Counsel and Secretary
Fax: (732) 918-6407
With a copy to:
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
P. O. Box 190
Middletown, New Jersey 07748
Attention: Paul T. Colella, Esq.
Fax: (732) 224-6599
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first above
written.
FOHP, INC.
By: /s/ Thomas W. Wilfong
---------------------------------------
Name: Thomas W. Wilfong
Title: President and Chief Executive Officer
FOUNDATION HEALTH SYSTEMS, INC.
By: /s/ Karen A. Coughlin
---------------------------------------
Name: Karen A. Coughlin
Title:
FHS TRANSITION COMPANY
By: /s/ Donald Parisi
---------------------------------------
Name: Donald Parisi
Title: Vice President
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APPENDIX B
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF FOHP, INC.
FOHP, Inc., a corporation organized under the laws of the State of New
Jersey on May 24, 1994, has, since its formation, amended its Certificate of
Incorporation by an Amended and Restated Certificate of Incorporation filed on
June 8, 1995, by an Amended and Restated Certificate of Incorporation filed on
December 7, 1995, and by an Amended and Restated Certificate of Incorporation
filed on April 17, 1997.
Pursuant to N.J. Stat. Ann. 14A:9-5, the Corporation hereby (i)
restates its Certificate of Incorporation, to embody in one document its
original certificate and the subsequent amendments thereto, and (ii) further
amends its Certificate of Incorporation as set forth herein.
The Corporation hereby certifies the following which (i) sets forth in
full its Certificate of Incorporation, as of this date, and (ii) supersedes and
replaces its original Certificate of Incorporation and all amendments filed
prior to the date hereof:
ARTICLE I
CORPORATE NAME
The name of the Corporation is FOHP, Inc.
ARTICLE II
PURPOSE OF CORPORATION
The purpose of the Corporation is to engage in any activity within the
purposes for which corporations may be organized under the New Jersey Business
Corporation Act.
ARTICLE III
CAPITAL STOCK
A. Authorized Capital Stock. The total number of shares of capital
stock which the Corporation shall have authority to issue is five hundred
million (500,000,000) shares. Of these shares, four hundred and ninety-nine
million (499,000,000) shares are classified as Common Stock, par value $.01 per
share, and one million (1,000,000) shares are classified as Preferred Stock, par
value $1.00 per share ("Preferred Stock").
B. Preferred Stock. The Board of Directors of the Corporation is hereby
authorized to issue, from time to time, shares of Preferred Stock in series and
to fix the number of shares in each series; the designations, powers,
preferences and relative, participating, optional or other special rights
thereof and the qualifications, limitations or restrictions thereon; including,
subject to any limitation hereinafter set forth but otherwise without
limitation, any of the following: (1)
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provisions relating to voting rights of each share in such series, including
multiple or fractional votes per share; (2) provisions relating to the call or
redemption thereof, including, without limitation, the times and prices for such
calls or redemptions and provisions relating to sinking funds therefor and the
retirement thereof, if any; (3) provisions relating to the right to receive
dividends, including, without limitation, the rate of such dividends, whether
such dividends shall be cumulative or non-cumulative and, if cumulative, the
conditions on which such dividends shall be accrued and paid, and any
preferential rights thereto or rights in relation to dividends payable on any
other classes or series of stock of the Corporation; (4) the rights thereof upon
the dissolution of, or upon any distribution of the assets of, the Corporation;
and (5) except as otherwise explicitly prohibited by this Certificate of
Incorporation, provisions relating to the conversion thereof into, or the
exchange thereof for, shares of any class or any other series of the same class
of stock of the Corporation or exchange for any other security of the
Corporation or any other company.
ARTICLE IV
BOARD OF DIRECTORS
The current Board of Directors of the Corporation consists of eleven
(11) directors and the names and addresses of the directors are:
NAME AND ADDRESS NAME AND ADDRESS
---------------- ----------------
Dr. John F. Bonamo Mr. John J. Gantner
95 Northfield Avenue Robert Wood Johnson University
West Orange, NJ 07052 Hospital
One Robert Wood Johnson Place
New Brunswick, NJ 08903
Ms. Karen A. Coughlin Mr. Jay M. Gellert
Physicians Health Services, Inc. Foundation Health Systems, Inc.
One Far Mill Crossing 21600 Oxnard Street
Shelton, CT 06484 Woodland Hills, CA 91367
Mr. Bruce G. Coe Mr. Laurence M. Merlis
41 Lambert Lane Meridian Health System
Lambertville, NJ 08530 Monmouth Shores Corporate Park
1350 Campus Parkway
Wall, NJ 07753
Dr. Mark L. Engel Dr. Om P. Sawhney
733 North Beers Street 1550 Park Avenue
Holmdel, NJ 07733 South Plainfield, NJ 07080
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NAME AND ADDRESS NAME AND ADDRESS
---------------- ----------------
Dr. Thomas J. Feneran Mr. Thomas W. Wilfong
102 East Bay Avenue, Suite C FOHP, Inc.
Manahawkin, NJ 08050 3501 State Highway 66
Neptune, NJ 07753
Mr. Christopher M. Dadlez
Saint Barnabas Health Care System
Old Short Hills Road
Livingston, NJ 07039
ARTICLE V
REGISTERED OFFICE AND AGENT
The address of the Corporation's registered office in the State of New
Jersey is 820 Bear Tavern Road, 3rd Floor, West Trenton, New Jersey 08628, and
the Corporation's registered agent at such address is The Corporation Trust
Company.
ARTICLE VI
LIMITATION ON LIABILITY OF DIRECTORS AND OFFICERS
To the fullest extent permitted by the laws of the State of New Jersey,
as they exist or may hereafter be amended, the directors and officers of the
Corporation shall not be personally liable to the Corporation or its
shareholders for damages for breach of any duty owed to the Corporation or its
shareholders, except that the provisions of this Article VI shall not relieve a
director or officer from liability for any breach of duty based upon an act or
omission (a) in breach of such person's duty of loyalty to the Corporation or
its shareholders, (b) not in good faith or involving a knowing violation of law,
or (c) resulting in receipt by such person of an improper personal benefit.
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IN WITNESS WHEREOF, FOHP, Inc. has caused this Amended and Restated
Certificate of Incorporation to be executed on the ___ day of _________________,
1999, by a duly authorized officer.
FOHP, INC.
By:
--------------------------------
Name: Thomas W. Wilfong
Title: President and Chief Executive
Officer
Filed By:
PAUL T. COLELLA, ESQ.
Giordano, Halleran & Ciesla, P.C.
125 Half Mile Road
Lincroft, New Jersey 07738
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APPENDIX C
BY-LAWS
OF
FOHP, INC.
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal office of FOHP, Inc. (the
"Corporation") shall be located at 3501 State Highway 66, Neptune, New Jersey
07753 or at such other place as is determined by the Corporation's Board of
Directors (the "Board" or "Board of Directors").
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such
other places, both within and without the State of New Jersey, as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
ARTICLE II
SHAREHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the shareholders for the
election of directors and for any other purpose shall be held at such time and
place, within or without the State of New Jersey, as stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
SECTION 2. ANNUAL MEETING. Annual meetings of shareholders shall be
held in the month of April or May on such day as the Board of Directors shall
designate at which the shareholders shall elect a Board of Directors and
transact such other business as may properly be brought before the meeting.
SECTION 3. NOTICE OF ANNUAL MEETING. Notice of the annual meeting shall
be given by mailing, not more than sixty (60) days nor less than ten (10) days
prior to the date of the annual meeting, a written notice stating the date, time
and place thereof, directed to each shareholder of record entitled to vote at
the meeting at his, her or its address as the same appears upon the records of
the Corporation.
SECTION 4. LIST OF SHAREHOLDERS. Prior to each annual or special
meeting of the shareholders, the officer who has charge of the stock ledger of
the Corporation shall prepare and make a complete list of the shareholders
entitled to vote at said meeting, which shall be arranged in alphabetical order
and include the address of and the number of shares registered in the name of
each shareholder. The list shall be produced and kept at the place of the
meeting during the whole time thereof and may be inspected by any shareholder
who may be present.
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SECTION 5. SPECIAL MEETINGS. Special meetings of the shareholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
Corporation's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), may be called by the President, and shall be
called by the President or Secretary at the request in writing of a majority of
the directors then in office. Such request shall state the purpose or purposes
of the proposed meeting.
SECTION 6. NOTICE OF SPECIAL MEETING. Written or telegraphic notice of
a special meeting of shareholders, stating the date, time, place and purpose
thereof, shall be given to each shareholder entitled to vote thereat, not more
than sixty (60) days nor less than ten (10) days before the date fixed for the
meeting.
SECTION 7. BUSINESS TRANSACTED AT A SPECIAL MEETING. Business
transacted at any special meeting of shareholders shall be limited to the
purpose or purposes stated in the notice.
SECTION 8. QUORUM. Except as otherwise provided in the Certificate of
Incorporation, the holders of issued and outstanding shares of Corporation
capital stock entitled to cast a majority of the votes at a meeting of
shareholders, present in person or by proxy, shall constitute a quorum for the
transaction of business at any meeting of the shareholders; provided, that when
a specified matter is required to be voted on by a class or series of capital
stock, voting as a separate class, the holders of issued and outstanding shares
of such series or class entitled to cast a majority of the votes at a meeting of
the holders of shares of such series or class, present in person or by proxy,
shall constitute a quorum for the transaction of business with respect to such
matter.
SECTION 9. METHOD OF VOTING. Except as otherwise provided in the
Certificate of Incorporation, each shareholder shall, at every meeting of the
shareholders, be entitled to one vote for each share of capital stock held by
such shareholder.
Every shareholder entitled to vote at a meeting of shareholders or to
express consent without a meeting may authorize another person or persons to act
for him, her or it by proxy. Every proxy shall be executed in writing by the
shareholder or his, her or its agent, except that a proxy may be given by a
shareholder or his, her or its agent by telegram or cable or its equivalent. No
proxy shall be valid for more than eleven (11) months, unless a longer time is
expressly provided therein. Unless it is coupled with an interest, a proxy shall
be revocable at will. A proxy shall not be revoked by the death or incapacity of
a shareholder but such proxy shall continue in force until revoked by the
personal representative or guardian of the shareholder. The presence at any
meeting of any shareholder who has given a proxy shall not revoke such proxy
unless the shareholder shall file written notice of such revocation with the
secretary of the meeting prior to the voting of such proxy.
A person named in a proxy as the attorney or agent of a shareholder
may, if the proxy so provides, substitute another person to act in his, her or
its place, including any other person named as an attorney or agent in the same
proxy. The substitution shall not be effective until an instrument effecting it
is filed with the Secretary of the Corporation.
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SECTION 10. ACTION BY SHAREHOLDERS WITHOUT A MEETING. Whenever the vote
of shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action by any provision of the New Jersey Business
Corporation Act or provision of the Certificate of Incorporation, the meeting
and the vote of shareholders may be dispensed with if all the shareholders who
would have been entitled to vote upon the action if such meeting were held shall
consent in writing to such corporate action being taken, and in the case of any
action to be taken pursuant to Chapter 10 of Title 14A of the Revised Statutes
of the State of New Jersey, the Corporation provides to all other shareholders
the advance notification required by N.J.S.A. 14A:5-6(2)(b).
Subject to the provisions of N.J.S.A. 14A:5-6(2), whenever the vote of
shareholders at a meeting thereof is required or permitted to be taken in
connection with any corporate action by any provision of the New Jersey Business
Corporation Act or provision of the Certificate of Incorporation, other than the
election of directors, the meeting and vote of shareholders may be dispensed
with and the action may be taken without a meeting upon the written consent of
shareholders who would have been entitled to cast the minimum number of votes
which would be necessary to authorize such action at a meeting at which all
shareholders entitled to vote thereon were present and voting.
SECTION 11. CONDUCT AT MEETINGS. At each meeting of shareholders, the
Chairman of the Board of Directors or in his or her absence the President of the
Corporation or in his or her absence any Vice President of the Corporation or in
his or her absence a chairman chosen by the vote of a majority in interest of
the shareholders present in person or represented by proxy and entitled to vote
thereat, shall act as chairman. The Secretary or in his or her absence an
Assistant Secretary or in the absence of the Secretary and all Assistant
Secretaries a person whom the chairman of the meeting shall appoint shall act as
secretary of the meeting and keep a record of the proceedings thereof. The Board
of Directors shall be entitled to make such rules or regulations for the conduct
of meetings of shareholders as it shall deem necessary, appropriate or
convenient. Subject to such rules and regulations, the chairman shall have the
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgement of such chairman, are necessary, appropriate or
convenient for the proper conduct of the meeting, including, without limitation,
establishing an agenda or order of business for the meeting, rules and
procedures for maintaining order at the meeting and the safety of those present,
limitations on participation in such meeting to shareholders of record of the
Corporation and their duly authorized and constituted proxies, and such other
persons as the chairman shall permit, restrictions on entry at the meeting after
the time fixed for the commencement thereof, limitations on the time allotted to
questions or comments by participants and regulations with respect to the
opening and closing of the polls for balloting on matters which are to be voted
on by ballot. The chairman shall have absolute authority over matters of
procedure and there shall be no appeal from the ruling of the chairman. The
chairman may rule that a resolution, nomination or motion not be submitted to
the shareholders for a vote unless seconded by a shareholder or a proxy for a
shareholder. The chairman may require that any person who is neither a bona fide
shareholder nor a proxy for a bona fide shareholder leave the meeting, and upon
the refusal of a shareholder to comply with a procedural ruling of the chairman
which the chairman deems necessary for the proper conduct of the meeting, may
require that such shareholder leave the meeting. The chairman may, on his or her
own motion, summarily adjourn any meeting for any period he or she deems
necessary if he or she rules that orderly procedures
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cannot be maintained at the meeting. Unless, and to the extent, determined by
the Board of Directors or the chairman of the meeting, meetings of shareholders
shall not be required to be held in accordance with rules of parliamentary
procedure.
SECTION 12. PROCEDURE NECESSARY TO BRING BUSINESS BEFORE AN ANNUAL
MEETING. To be properly brought before an annual meeting of shareholders,
business must be either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
properly brought before the meeting by or at the direction of the Board, or (c)
properly brought before the meeting by a shareholder. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a shareholder, the shareholder must have given timely notice thereof
in writing, either by personal delivery or by United States mail, postage
prepaid, to the Secretary of the Corporation not less than one hundred twenty
(120) days in advance of the date of the Corporation's proxy statement released
to shareholders in connection with the previous year's annual meeting of
shareholders; provided, however, that if the Corporation did not release a proxy
statement in connection with the previous year's annual meeting then the
shareholder must give such notice not later than one hundred twenty (120) days
prior to the anniversary date of the immediately preceding annual meeting. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and record
address of the shareholder proposing such business, (iii) the class and number
of shares of the Corporation which are beneficially owned by the shareholder,
and (iv) any material interest of the shareholder in such business.
Notwithstanding anything in the By-laws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 12 of Article 11 and any other applicable
requirements; provided, however, that nothing in this Section 12 of Article 11
shall be deemed to preclude discussion by any shareholder of any business
properly brought before the annual meeting.
The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 12 of
Article 11 or any other applicable requirements, which determination shall be
conclusive, and, as a result, any such business shall not be transacted.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND ELECTION OF DIRECTORS. The number of directors
which shall constitute the entire Board shall be not less than six (6) nor more
than fifty (50) directors. As of ____________ ___, 1999, the Board shall consist
of _________ (___) directors, and thereafter the number of directors which shall
constitute the whole Board may be increased or decreased by resolution of the
Board of Directors or shareholders, but in no case shall be less than three (3)
directors. The directors shall be elected at the annual meeting of shareholders,
or at a special meeting of shareholders called for such purpose, and each
director elected shall hold office until his or her successor is elected and
qualified. Directors need not be shareholders.
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SECTION 2. NOMINATIONS. Nominations for the election of directors may
be made by the Board of Directors or a committee appointed by the Board of
Directors or by a shareholder entitled to vote in the election of directors
generally.
SECTION 3. VACANCIES; NEWLY CREATED DIRECTORSHIP. Vacancies and newly
created directorships resulting from any increase in the authorized number of
directors may be filled by a majority of the directors then in office, or by a
sole remaining director, and the directors so chosen shall hold office until
their successors are duly elected and shall qualify, unless sooner displaced. If
there are no directors in office, then an election of directors may be held in
the manner provided by statute.
SECTION 4. GOVERNANCE. The business of the Corporation shall be
governed by the Board. The Board of Directors may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by statute or
by the Certificate of Incorporation directed or required to be exercised or done
by the shareholders.
SECTION 5. REMOVAL. Any director or directors may be removed from
office either with or without cause by the shareholders pursuant to Section
14A:6-6 of the New Jersey Business Corporation Act.
SECTION 6. MEETINGS. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of New
Jersey. The first meeting of each newly elected Board of Directors shall be held
at such time and place as shall be fixed by the vote of the shareholders at the
annual meeting, and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the shareholders to fix the
time or place of such first meeting of the newly elected Board of Directors, or
in the event such meeting is not held at the time and place so fixed by the
shareholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
Board of Directors, or as shall be specified in a written waiver signed by all
of the directors, or upon the conclusion of the shareholders' meeting at which
time they were elected, without further notice. At such meeting the Board of
Directors shall elect from their own number a Chairman of the Board for the
ensuing year and until his or her successor is elected and qualified, and
transact such other business as may come before the meeting.
SECTION 7. REGULAR MEETINGS. Regular meetings of the Board may be held
on five (5) days written notice, at such time as shall be from time to time
determined by the Board. Written notice for any such meeting shall state the
place, date and time of the meeting and shall be delivered either personally or
by first class mail, facsimile or overnight courier service.
SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board or the President, and shall be called
by the President or Secretary at the request in writing of at least one-third
(1/3) of the directors then in office. Written notice of any special meeting
shall be given, either personally or by first class mail, facsimile or overnight
courier service, to each director at least two (2) days prior to the date
thereof.
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SECTION 9. PLACE OF MEETING; WAIVER OF NOTICE. Meetings of the Board of
Directors shall be held at such place as shall be designated in the notice of
meeting if notice is required. Notice of any meeting, if required, need not be
given to any director who signs a waiver of notice before or after the meeting.
The attendance of any director at any meeting without the director protesting
prior to the conclusion of such meeting the lack of notice thereof shall
constitute a waiver of notice by such director.
SECTION 10. ADJOURNMENT. Any meeting of the Board of Directors shall be
adjourned upon the request of a majority of the directors on the Board who are
present at the meeting, for a period of not more than ten (10) days. Also, any
meeting of a committee of the Board or any other committee established by the
Corporation shall be adjourned upon the request of a majority of the persons on
the committee who are present at the meeting, for a period of not more than ten
(10) days.
SECTION 11. QUORUM. Except as otherwise provided in the Certificate of
Incorporation, a majority of the directors then in office shall constitute a
quorum for the transaction of business at any meeting of the Board of Directors.
SECTION 12. MANNER OF ACTING. Except as otherwise provided in the
Certificate of Incorporation or herein, the act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
SECTION 13. ACTION WITHOUT A MEETING. Any action required or permitted
to be taken by the Board of Directors or by a committee thereof may be taken
without a meeting if, prior to such action, all of the members of the Board or
committee consent in writing to a resolution authorizing the action. Such
written consents may be executed in counterparts, and shall be filed with the
minutes of the Corporation.
SECTION 14. TELEPHONIC ATTENDANCE AT MEETING. Any or all directors may
participate in a meeting of the Board of Directors or a committee of the Board
by means of conference telephone or any means of communication by which all
persons participating in the meeting are able to hear each other.
SECTION 15. COMMITTEES.
(a) FORMATION OF COMMITTEES. The Board of Directors may, by one
or more resolutions passed by a majority of the directors then in office,
establish such other committees as it shall determine necessary for the
operations of the Corporation. Such committee or committees shall have such name
or names as may be determined from time to time by a resolution adopted by the
Board. Moreover, upon a resolution passed by a majority of the directors then in
office, the Board may designate one or more committees, comprised solely of
directors of the Corporation, to exercise the power of the Board in the
management of the business and affairs of the Corporation. Only committees whose
membership is exclusively reserved for directors may be vested with the powers
of the Board. All other committees shall have and may exercise such authority as
the Board establishes by resolution or these By-laws permit, subject to any
limitation imposed by law. The filling of vacancies in a committee, the
abolishing of a committee and the removal of persons serving on a committee
shall be as set
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forth in a resolution adopted by the Board unless otherwise set forth in the
provisions of these By-laws applicable to such committee. Each committee shall
keep regular minutes of its meetings and report same to the Board of Directors
when required. Except as may otherwise be provided in a resolution adopted by
the Board, committee members and chairpersons shall serve one (1) year terms.
(b) RESTRICTIONS ON COMMITTEE MEMBERS. Members of any committee
of the Corporation who are affiliated with or represent an entity, including its
officers, directors, employees and agents, that provides health care services on
behalf of the Corporation or any subsidiary or affiliate thereof pursuant to an
agreement with the Corporation or any subsidiary or affiliate thereof are
prohibited from using their participation as a committee member of the
Corporation to obtain or exchange competitive information pertaining to other
providers that provide similar health care services on behalf of the Corporation
or any subsidiary or affiliate thereof pursuant to an agreement with the
Corporation or any subsidiary or affiliate thereof. Competitive information
includes, but is not limited to, information related to an individual provider's
rates, discounts, costs, prices, salaries, terms of participation in other
health plans, or strategic or marketing plans.
(c) QUORUM. A majority of the members of a committee or
subcommittee shall constitute a quorum for the transaction of business at any
meeting of such committee or subcommittee.
(d) REQUIRED VOTE. The act of a majority of the members present
at a meeting at which a quorum is present shall be the act of the committee or
subcommittee.
SECTION 16. COMPENSATION OF DIRECTORS. The directors may be paid their
expenses, if any, relating to their attendance at meetings of the Board of
Directors, and directors who are not full-time employees of the Corporation may
be paid a fixed sum for attendance at meetings of the Board of Directors or a
stated salary as a director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board, a President, one or
more Vice Presidents, a Treasurer and a Secretary. The Board of Directors may
also choose one or more Assistant Secretaries or Assistant Treasurers, and may
designate one or more Vice Presidents to be executive or senior Vice Presidents.
One person may hold two (2) or more offices, but the person serving as President
may not serve simultaneously as Secretary.
SECTION 2. TERM; REMOVAL. The officers of the Corporation shall hold
office until their successors are chosen and qualify. Any officer elected or
appointed by the Board of Directors may be removed or suspended at any time by
the affirmative vote of a majority of the directors at any meeting of the Board
at which there is a quorum, without the necessity of specifying any
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cause therefor and without any prior notice of such action to the officer so
removed or suspended. All officers, employees and agents, other than officers
elected or appointed by the Board of Directors, may be suspended or removed by
the committee of the Board of Directors or officer appointing them.
SECTION 3. CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the shareholders and the Board of Directors. He or
she shall, in the absence or the disability of the President, perform the duties
and exercise the powers of the President, and shall perform such other duties as
may be delegated to him or her by the Board of Directors.
SECTION 4. PRESIDENT. The President, who shall be the Chief Executive
Officer of the Corporation, shall in general, subject to the control of the
Board of Directors, supervise and control all of the business and affairs of the
Corporation. All other officers shall be subject to the authority and
supervision of the President. The President may enter into and execute in the
name of the Corporation contracts or other instruments in the regular course of
business or contracts or other instruments not in the regular course of business
which are authorized, either generally or specifically, by the Board of
Directors. The President shall have the general powers and duties of management
usually vested in the office of President of a corporation.
SECTION 5. VICE PRESIDENTS. The Board of Directors may appoint one or
more Vice Presidents who shall perform such duties and possess such powers as
shall be assigned him or her by the President or the Board.
SECTION 6. TREASURER AND ASSISTANT TREASURER. The Treasurer shall have
charge and custody of, and be responsible for, all funds and securities of the
Corporation, shall keep or cause to be kept regular books of account for the
Corporation and shall perform such other duties and possess such other powers as
are incident to the office of Treasurer or as shall be assigned to the Treasurer
by the President or the Board. The Assistant Treasurer, or if there shall be
more than one, the Assistant Treasurers, in the order determined by the Board,
shall, in the absence or disability of the Treasurer, perform the duties and
exercise the powers of the Treasurer set forth herein and as the President or
the Board from time to time may prescribe.
SECTION 7. SECRETARY AND ASSISTANT SECRETARY. The Secretary shall cause
notices of all meetings to be served as prescribed in these By-laws or by
statute, shall keep or cause to be kept the minutes of all meetings of the
shareholders and of the Board of Directors, shall have charge of the corporate
records and seal of the Corporation and shall keep a register of the post-office
address of each shareholder which shall be furnished to the Secretary by such
shareholder. The Secretary shall perform such other duties and possess such
other powers as are incident to the office of the Secretary or as are assigned
by the President or the Board. The Assistant Secretary, or if there shall be
more than one, the Assistant Secretaries, in the order determined by the Board,
shall, in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary set forth herein and as the President or
the Board from time to time may prescribe.
SECTION 8. SUBORDINATE OFFICERS AND AGENTS. The Board may appoint such
other officers and agents as it shall deem necessary or desirable, who shall
hold their offices for such
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terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the President or the Board.
ARTICLE V
EXECUTION OF DOCUMENTS
SECTION 1. COMMERCIAL PAPER AND CONTRACTS. All checks, notes, drafts
and other commercial paper of the Corporation shall be signed by the President
or the Treasurer of the Corporation or by such other person or persons as the
Board of Directors may from time to time designate.
SECTION 2. OTHER INSTRUMENTS. All contracts, deeds, mortgages and other
instruments shall be executed by the President or any Vice President, and, if
necessary or required by law, by the Secretary or any Assistant Secretary, or
such other person or persons as the Board of Directors may from time to time
designate.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year.
ARTICLE VII
CERTIFICATES REPRESENTING SHARES
Certificates representing shares of capital stock of the Corporation
shall be in such form as shall be determined by the Board of Directors and shall
be executed by the President or any Vice President and by the Secretary or the
Treasurer, unless the Board of Directors shall direct otherwise.
ARTICLE VIII
RECORD DATE
For the purpose of determining the shareholders entitled to notice of
or to vote at any meeting of shareholders or any adjournment thereof, or to
express consent to or dissent from any proposal without any meeting or for the
purpose of determining shareholders entitled to receive payment of any dividend
or allotment of any right, or in order to make a determination of shareholders
for any other purpose, the Board of Directors shall fix, in advance, a date as
the record date for any such determination of shareholders. Such date shall not
be more than sixty (60) days nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action or event to
which it relates. When a determination of shareholders of record for a
shareholders' meeting has been made as provided in this Article VIII, such
determination shall apply to any adjournment thereof, unless the Board of
Directors fixes a new record date for the adjourned meeting.
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ARTICLE IX
DIVIDENDS
The Board of Directors may from time to time declare, and the
Corporation may pay, dividends or make other distributions on its outstanding
shares of capital stock in the manner and upon the terms and conditions provided
by the Certificate of Incorporation and by statute.
ARTICLE X
AMENDMENT
These By-laws may be altered, amended or repealed, or new by-laws may
be adopted by the Board of Directors, at any regular meeting of the Board of
Directors or of any special meeting of the Board of Directors. These By-laws, or
any new by-laws adopted by the Board, may also be altered, amended or repealed,
or new by-laws may be adopted, by the shareholders, at any annual or special
meeting of shareholders if notice of such alteration, amendment, repeal or
adoption of new by-laws is contained in the notice of such meeting.
ARTICLE XI
INDEMNIFICATION
SECTION 1. The Corporation shall indemnify a Corporate Agent (as
defined in Section 8 of this Article) against his or her expenses and
liabilities actually and reasonably incurred in connection with the defense of
any proceeding involving the Corporate Agent by reason of his or her being or
having been such a Corporate Agent, other than a proceeding by or in the right
of the Corporation, if (a) such Corporate Agent acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation and (b) with respect to any criminal proceeding,
such Corporate Agent had no reasonable cause to believe his or her conduct was
unlawful. The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that such Corporate Agent did not meet the
applicable standards of conduct set forth in subparts (a) and (b) herein.
SECTION 2. The Corporation shall indemnify a Corporate Agent against
his or her liabilities and expenses, actually or reasonably incurred by him or
her in connection with the defense, in any proceeding, by or in the right of the
Corporation to procure a judgment in its favor which involves the Corporate
Agent by reason of his or her being or having been such Corporate Agent, if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation. However, in such
proceeding no indemnification shall be provided in respect of any claim, issue
or matter as to which such Corporate Agent shall have been adjudged liable to
the Corporation unless and only to the extent that the New Jersey Superior Court
or the court in which such proceeding was brought shall determine upon
application that despite the adjudication of liability, but in view of all
circumstances of the case, such Corporate Agent is fairly and reasonably
entitled to indemnity for such expenses or liabilities as the New Jersey
Superior Court or such other court shall deem proper.
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SECTION 3. The Corporation shall indemnify a Corporate Agent against
expenses (including attorneys fees) to the extent that such Corporate Agent has
been successful on the merits or otherwise in any proceeding referred to in
Sections 1 and 2 of this Article or in defense of any claim, issue or matter
therein.
SECTION 4. Any indemnification under Section 1 of this Article and,
unless ordered by a court, under Section 2 of this Article, may be made by the
Corporation only as authorized in a specific case upon a determination that
indemnification is proper in the circumstances because the Corporate Agent met
the applicable standard of conduct set forth in Sections 1 or 2 of this Article.
Such determination shall be made: (a) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to or otherwise
involved in the proceeding; (b) if such a quorum is not obtainable, or, even if
obtainable and such quorum of the Board of Directors by a majority vote of the
disinterested directors so directs, by independent legal counsel in a written
opinion, such counsel to be designated by the Board of Directors; or (c) by the
shareholders.
SECTION 5. Expenses incurred by a Corporate Agent in connection with a
proceeding may be paid by the Corporation in advance of the final disposition of
the proceeding, as authorized by the Board of Directors, upon receipt of an
undertaking by or on behalf of the Corporate Agent to repay such amount unless
it shall ultimately be determined that he or she is entitled to be indemnified
as provided in this Article XI.
SECTION 6. The indemnification and advancement of expenses provided by
or granted pursuant to the other sections of this Article shall not exclude any
other rights to which a Corporate Agent may be entitled under the Corporation's
Certificate of Incorporation, a By-law, agreement, vote of shareholders, or
otherwise; provided, that no indemnification shall be made to or on behalf of a
Corporate Agent if a judgment or other final adjudication adverse to the
Corporate Agent establishes that his or her acts or omissions (a) were in breach
of his or her duty of loyalty to the Corporation or its shareholders, (b) were
not in good faith or involved a knowing violation of law, or (c) resulted in
receipt by the Corporate Agent of an improper personal benefit.
SECTION 7. The Corporation shall have the power to purchase and
maintain insurance on behalf of any Corporate Agent against any expenses
incurred in any proceeding and any liabilities asserted against him or her by
reason of his or her being or having been a Corporate Agent, whether or not the
Corporation would have the power to indemnify him or her against such expenses
and liabilities under the provisions of this section. The Corporation may
purchase such insurance from, or such insurance may be reinsured in whole or in
part by, an insurer owned by or otherwise affiliated with the Corporation,
whether or not such insurer does business with other insurers.
SECTION 8. For purposes of this Article XI, the following definitions,
as well as all other definitions set forth in N.J.S.A. 14A:3-5, shall apply:
(a) "Corporate Agent" shall mean any person who is or was a
director, officer, employee or agent of the indemnifying corporation or of any
constituent corporation absorbed by the indemnifying corporation in
consolidation or merger and any person who is or was a director,
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officer, trustee, employee or agent of any Other Enterprise, serving as such at
the request of the indemnifying corporation, or of any such constituent
corporation, or the legal representative of any such director, officer, trustee,
employee or agent. Furthermore, any Corporate Agent also serving as a
"fiduciary" of an employee benefit plan governed by the Act of Congress entitled
"Employee Retirement Income Security Act of 1974" (ERISA) as amended from time
to time, shall serve in such capacity as a Corporate Agent, if the corporation
shall have requested any such person to serve. Additionally, the corporation
shall be deemed to have requested such person to serve as a fiduciary of an
employee benefit plan, only where the performance by such person of his or her
duties to the corporation also imposes duties on, or otherwise involves services
by, such person to the plan or participants or beneficiaries of the plan.
(b) "Other Enterprise" shall mean any domestic or foreign
corporation other than the indemnifying corporation, and any partnership, joint
venture, sole proprietorship, trust or other enterprise (including employee
benefit plans governed by ERISA), whether or not for profit, served by a
Corporate Agent.
ARTICLE XII
INCONSISTENCY WITH CERTIFICATE OF INCORPORATION
In the event that any of the provisions of these By-laws is
inconsistent with any provision of the Corporation's Certificate of
Incorporation, the provision of the Certificate of Incorporation shall apply.
As Amended and Restated: ______________ ___, 1999.
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APPENDIX D-1
CERTIFICATE NO. __________
FORM OF PAYMENT RIGHT - HOSPITAL SHAREHOLDERS
This Certificate, representing ________ Payment Rights (individually, a
"Payment Right," and collectively, the "Payment Rights") of FOHP, Inc., a New
Jersey corporation ("FOHP"), entitles___________ (the "Holder"), a licensed New
Jersey hospital or acute care institution which has entered into a provider
agreement with PHS-NJ (as defined below), or an affiliate thereof, in accordance
with the terms and subject to the conditions set forth herein, to the payment
provided below:
(a) Payment. For each Payment Right represented by this Certificate,
the Holder shall be entitled to a cash payment of $15.00 on July
1, 2001 from FOHP; provided that the Hospital Shareholder
Conditions described in subpart (b) below have been met by the
Holder and the Continuing Hospital Provider Condition described
in subpart (c) below shall have been satisfied.
(b) Hospital Shareholder Conditions. In order to receive the full
$15.00 payment under a Payment Right represented by this
Certificate, the Holder or its affiliated hospital or acute care
institution must meet the following conditions (the "Hospital
Shareholder Conditions"):
(i) Hospital Participation and Reimbursement Condition - The
Holder or its affiliated hospital or acute care institution
must continue to participate in the provider network of
Physicians Health Services of New Jersey, Inc. (formerly
First Option Health Plan of New Jersey, Inc. ("FOHP-NJ")),
a New Jersey corporation which operates as a health
maintenance organization in New Jersey ("PHS-NJ"), until
July 1, 2001, and agree in writing to continue to
participate in PHS-NJ's provider network until December 31,
2001, on the terms and subject to the conditions contained
in the existing provider agreement between the Holder or
its affiliated hospital or acute care institution and
PHS-NJ as revised, where necessary, to (A) provide that
reimbursement rates for the Holder or its affiliated
hospital or acute care institution shall remain at their
March 1, 1998 levels until at least December 31, 1999, and
thereafter shall be changed annually only to the lesser of
(1) the December 31, 1999 rate plus or minus an annual cost
of living adjustment as reflected in the latest consumer
price index for New York, or (2) the December 31, 1999 rate
plus or minus the average of the rate increase or decrease
then most recently obtained by the two managed care plans
with the lowest rates at the Holder or its affiliated
hospital or acute care institution, not including PHS-NJ,
and (B) extend such provider agreement to apply to all
entities affiliated with Foundation Health Systems, Inc., a
Delaware corporation and ultimate parent of FOHP ("FHS").
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The condition set forth in this subpart (i) shall be
referred to as the "Hospital Participation and
Reimbursement Condition."
(ii) Hospital Enrollment and Premium Payment Condition - The
Holder or its affiliated hospital or acute care institution
must continue to comply with the following enrollment
obligations, which were previously set forth in the
Certificate of Incorporation of FOHP: (A) if the only
health benefits plan of the Holder or its affiliated
hospital or acute care institution at the inception of
FOHP-NJ was self-insured, the Holder or its affiliated
hospital or acute care institution shall offer a FOHP-NJ
health plan to its employees as its exclusive plan; (B) if
the Holder or its affiliated hospital or acute care
institution offered one or more health plans at the
inception of FOHP-NJ, including any self-insured plan, the
Holder or its affiliated hospital or acute care institution
must offer a PHS-NJ health plan to its employees and have
at least 75% of its employees enrolled in PHS-NJ health
plans; and (C) if the Holder or its affiliated hospital or
acute care institution is subject to a collective
bargaining agreement, the Holder or its affiliated hospital
or acute care institution is required to (1) use its best
efforts to offer a PHS-NJ health plan to its non-union
employees on a non-exclusive basis, (2) use its best
efforts to qualify a PHS-NJ health plan as the union
designated plan, and (3) pay reasonable deductibles or
other costs to qualify a PHS-NJ health plan as the union
designated plan; provided, however, that if the Holder or
its affiliated hospital or acute care institution has
entered into a letter agreement with FOHP that modifies the
enrollment obligations applicable to the Holder or its
affiliated hospital or acute care institution as set forth
above and as previously set forth in FOHP's Certificate of
Incorporation, the Holder will continue to be subject to
such agreement until December 31, 1999, as amended to
provide that the Holder or its affiliated hospital or acute
care institution shall continue to offer a pharmacy rider
through PHS-NJ, to the same extent and under the same terms
and conditions as such rider was offered prior to March 1,
1998, with the exception that the pharmacy rider shall
reimburse the participating pharmacist for the cost of
generic drugs only, whenever a generic substitution is
available, regardless of whether the prescribing physician
prescribes "Dispense as Written." The aforementioned
enrollment obligations shall continue until December 31,
1999, and thereafter if the Holder or its affiliated
hospital or acute care institution proposes to offer to its
employees any health benefits plan, such Holder or its
affiliated hospital or acute care institution shall provide
prior notice to PHS-NJ of the material terms of any Bona
Fide Offer (as defined below) offered by such other health
benefits plan. In the event PHS-NJ offers to provide a
health plan containing terms at least as favorable in all
material respects to the employees of the Holder or its
affiliated hospital or acute care institution as those
contained in the Bona Fide Offer, such Holder or its
affiliated hospital or acute care institution shall offer
PHS-NJ's health plan to its employees on the same basis as
it would have been
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obligated under the above enrollment obligations if such
enrollment obligations had not expired. The Holder or its
affiliated hospital or acute care institution must also
make timely payments of premium to PHS-NJ and shall be
current in such payments as of July 1, 2001.
A "Bona Fide Offer" is an offer of a health benefits plan
which is prepared with the objective of covering the
offerer's (A) health care costs and administrative expenses
in the case of risk products, and (B) 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 offerer's costs for
the purpose of achieving market share increases shall not
constitute a Bona Fide Offer.
The conditions set forth in this subpart (ii) shall be
collectively referred to as the "Hospital Enrollment and
Premium Payment Condition."
(iii) Reduction in Amount Payable Under Payment Rights - Failure
by the Holder or its affiliated hospital or acute care
institution to comply with the Hospital Participation and
Reimbursement Condition in subpart (i) above will result in
a reduction of the amount of the Payment Rights contained
herein by $10.00 per Payment Right. Failure by the Holder
or its affiliated hospital or acute care institution to
comply with the Hospital Enrollment and Premium Payment
Condition in subpart (ii) above will result in a reduction
of the amount of the Payment Rights contained herein by
$5.00 per Payment Right. For example, if the Continuing
Hospital Provider Condition discussed in subpart (c) below
is satisfied and the Holder or its affiliated hospital or
acute care institution complies with the Hospital
Participation and Reimbursement Condition in subpart (i)
above, but fails to comply with the Hospital Enrollment and
Premium Payment Condition in subpart (ii) above, Holder
will receive $10.00 for each Payment Right represented by
this Certificate on or about July 1, 2001.
(c) Continuing Hospital Provider Condition. In order for the Holder
to receive any payment hereunder, no more than (i) five (5) Large
Hospital Shareholders (as defined below) shall have failed to
comply with the Hospital Participation and Reimbursement
Condition, (ii) seven (7) Small Hospital Shareholders (as defined
below) shall have failed to comply with the Hospital
Participation and Reimbursement Condition, or (iii) three (3)
Large Hospital Shareholders and four (4) Small Hospital
Shareholders shall have failed to comply with the Hospital
Participation and Reimbursement Condition, provided, however,
that in calculating the number of non-complying Large Hospital
Shareholders and Small Hospital Shareholders for purposes of
subparts (i), (ii) and (iii), a Large Hospital Shareholder or
Small Hospital Shareholder which fails to comply with the
Hospital Participation and Reimbursement Condition as a result of
a breach by PHS-NJ of its provider agreement with the Large
Hospital Shareholder or Small
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Hospital Shareholder, shall not be counted as having failed to
comply with the Hospital Participation and Reimbursement
Condition (the "Continuing Hospital Provider Condition").
A "Large Hospital Shareholder" shall mean a New Jersey licensed
hospital or acute care institution which currently is a provider
in the PHS-NJ provider network and originally purchased, either
directly or through an affiliate, 33,315 shares of FOHP Common
Stock, par value $.01 per share ("FOHP Common Stock"), and a
"Small Hospital Shareholder" shall mean a New Jersey licensed
hospital or acute care institution which currently is a provider
in the PHS-NJ provider network and originally purchased, either
directly or through an affiliate, 13,334 shares of FOHP Common
Stock.
(d) Change of Control. In the event FHS is acquired by or merged with
another entity and the senior management or Board of Directors of
FHS is substantially replaced as a result of such transaction, or
if FOHP or any successor thereto shall become controlled prior to
July 1, 2001 by an entity other than FHS (or an entity controlled
by FHS), the Holder hereof shall be entitled to full payment
hereunder; provided, that Holder shall agree in writing to
continue to participate in the PHS-NJ provider network or that of
its successors, for a period ending on the earlier to occur of
(i) eighteen (18) months from the date of the transaction, or
(ii) December 31, 2001, on the same terms and subject to the same
conditions as contained in the Holder's provider agreement with
PHS-NJ as in effect immediately prior to the transaction. FOHP
shall give notice to the Holder hereof prior to, simultaneously
with or promptly after the consummation of a transaction
described in this subpart (d).
(e) Waiver of Conditions by FOHP. FOHP, in its sole discretion, may
waive any of the conditions to payment set forth in this
Certificate.
(f) Payment Procedure. Any consideration to be paid by FOHP under
this Certificate to the Holder shall be in the form of a
corporate or certified check which shall be mailed or otherwise
delivered on or shortly after July 1, 2001.
(g) Contribution Agreement between FOHP and FHS. FOHP and FHS have
entered into a Contribution Agreement dated _____________ ___,
1998 (the "Contribution Agreement"), pursuant to which FHS has
irrevocably committed to contributing to FOHP the cash necessary
for FOHP to make full payment on all outstanding Payment Rights
issued by FOHP in connection with the merger of FHS Transition
Company with and into FOHP. Any funds contributed by FHS to FOHP
for the payment of Payment Rights will be restricted for that
purpose only. The Contribution Agreement provides that each
holder of Payment Rights, including the Holder, is a third party
beneficiary to such agreement for the sole purpose of compelling,
if necessary, FHS to make the cash contributions to FOHP
contemplated by the Contribution Agreement.
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(h) Non-Transferability of Payment Rights. This Certificate is
non-negotiable and neither this Certificate nor the Payment
Rights represented hereby are transferable or assignable by the
Holder without the express written consent of FOHP.
(i) No Interest. No interest will be paid on any amount payable under
the Payment Rights represented hereby.
(j) Governing Law. This Certificate and the Payment Rights
represented hereby shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
FOHP, INC.
By:
-----------------------------
Name:
Title:
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<PAGE> 122
APPENDIX D-2
CERTIFICATE NO. __________
FORM OF PAYMENT RIGHT - NON-HOSPITAL SHAREHOLDERS
This Certificate, representing ________ Payment Rights (individually, a
"Payment Right," and collectively, the "Payment Rights") of FOHP, Inc., a New
Jersey corporation ("FOHP"), entitles___________ (the "Holder"), a licensed New
Jersey physician or other non-hospital provider of health care services which
has entered into a provider agreement with PHS-NJ (as defined below), in
accordance with the terms and subject to the conditions set forth herein, to the
payment provided below:
(a) Payment. For each Payment Right represented by this Certificate,
the Holder shall be entitled to a cash payment of $15.00 on July
1, 2001 from FOHP; provided that the Non-Hospital Shareholder
Condition described in subpart (b) below has been met by the
Holder and the Continuing Hospital Provider Condition described
in subpart (c) below shall have been satisfied.
(b) Non-Hospital Shareholder Condition. In order to receive the full
$15.00 payment under a Payment Right represented by this
Certificate, the Holder must meet the following condition (the
"Non-Hospital Shareholder Condition"):
The Holder must continue to participate in the provider network
of Physicians Health Services of New Jersey, Inc. (formerly First
Option Health Plan of New Jersey, Inc.), a New Jersey corporation
which operates as a health maintenance organization in New Jersey
("PHS-NJ"), until July 1, 2001, and agree in writing to continue
to participate in PHS-NJ's provider network until December 31,
2001, on the terms and subject to the conditions contained in
his, her or its existing provider agreement with PHS-NJ, as
revised, where necessary, to apply to all entities affiliated
with Foundation Health Systems, Inc., a Delaware corporation and
the ultimate parent of FOHP ("FHS"). If the Holder retires, dies,
ceases to practice in New Jersey, or has been terminated by
PHS-NJ prior to December 31, 2001, this condition shall be deemed
to have been satisfied.
(c) Continuing Hospital Provider Condition. In order for the Holder
to receive any payment hereunder, no more than (i) five (5) Large
Hospital Shareholders (as defined below) shall have failed to
comply with the Hospital Participation and Reimbursement
Condition (as described below), (ii) seven (7) Small Hospital
Shareholders (as defined below) shall have failed to comply with
the Hospital Participation and Reimbursement Condition, or (iii)
three (3) Large Hospital Shareholders and four (4) Small Hospital
Shareholders shall have failed to comply with the Hospital
Participation and Reimbursement Condition, provided, however,
that in calculating the number of non-complying Large Hospital
Shareholders and Small Hospital Shareholders for purposes of
subparts (i), (ii) and (iii), a Large Hospital Shareholder or
Small Hospital Shareholder which fails to comply with the
Hospital Participation and Reimbursement Condition as a
D-2-a
<PAGE> 123
result of a breach by PHS-NJ of its provider agreement with the
Large Hospital Shareholder or Small Hospital Shareholder, shall
not be counted as having failed to comply with the Hospital
Participation and Reimbursement Condition (the "Continuing
Hospital Provider Condition").
A "Large Hospital Shareholder" shall mean a licensed New Jersey
hospital or acute care institution which currently is a provider
in the PHS-NJ provider network and originally purchased, either
directly or through an affiliate, 33,315 shares of FOHP Common
Stock, par value $.01 per share ("FOHP Common Stock"), and a
"Small Hospital Shareholder" shall mean a licensed New Jersey
hospital or acute care institution which currently is a provider
in the PHS-NJ provider network and originally purchased, either
directly or through an affiliate, 13,334 shares of FOHP Common
Stock.
For a Large Hospital Shareholder or Small Hospital Shareholder to
satisfy the "Hospital Participation and Reimbursement Condition"
it must continue to participate in PHS-NJ's provider network
until July 1, 2001, and agree in writing to continue to
participate in PHS-NJ's provider network until December 31, 2001,
on the terms and subject to the conditions contained in the
existing provider agreement between the Large Hospital
Shareholder or Small Hospital Shareholder and PHS-NJ, as revised,
where necessary, to (A) provide that reimbursement rates for the
Large Hospital Shareholder or Small Hospital Shareholder shall
remain at their March 1, 1998 levels until at least December 31,
1999, and thereafter shall be changed annually only to the lesser
of (1) the December 31, 1999 rate plus or minus an annual cost of
living adjustment as reflected in the latest consumer price index
for New York, or (2) the December 31, 1999 rate plus or minus the
average of the rate increase or decrease then most recently
obtained by the two managed care plans with the lowest rates at
the Large Hospital Shareholder or Small Hospital Shareholder not
including PHS-NJ, and (B) extend such provider agreement to apply
to all FHS affiliated entities.
(d) Bonus Pool. Any consideration not paid to a holder of Payment
Rights issued in connection with the merger (the "Merger") of FHS
Transition Company with and into FOHP, due to the failure of the
holder to meet the conditions applicable to him, her or it under
the Payment Rights, shall be made available to those former
physicians and other non-hospital shareholders of FOHP, including
the Holder (individually, a "Non-Hospital Shareholder," and
collectively, the "Non-Hospital Shareholders"), who comply with
the Non-Hospital Shareholder Condition, provided that the
Continuing Hospital Provider Condition has been satisfied. In
addition, if any Large Hospital Shareholder, Small Hospital
Shareholder or Non-Hospital Shareholder elects to receive the
appraisal consideration (the "Appraisal Consideration") offered
in the Merger for his, her or its shares of FOHP Common Stock
instead of Payment Rights, the difference between $15.00 and the
per share amount of the Appraisal Consideration paid to the Large
Hospital Shareholder, Small Hospital Shareholder or Non-Hospital
Shareholder for his, her or its shares of FOHP Common Stock shall
be made available to those Non-Hospital
D-2-b
<PAGE> 124
Shareholders who comply with the Non-Hospital Shareholder
Condition, provided that the Continuing Hospital Provider
Condition is satisfied.
If the Continuing Hospital Provider Condition is satisfied, each
Non-Hospital Shareholder who has satisfied the Non-Hospital
Shareholder Condition shall be entitled, in addition to the
$15.00 payment provided in subpart (a) hereof, to the sum of:
(i) the product of (A) the number of shares of FOHP Common
Stock held by the Non-Hospital Shareholder prior to the
Merger multiplied by (B) $2.25, plus
(ii) the Non-Hospital Shareholder's Pro-Rata Portion (as defined
below) of (A) the aggregate reduction in the $15.00
principal amount payable under each Payment Right issued in
connection with the Merger, and (B) the amount equal to the
product of (x) $15.00 minus the per share amount of the
Appraisal Consideration, multiplied by (y) the number of
shares of FOHP Common Stock purchased from former FOHP
shareholders who elected to receive the Appraisal
Consideration (subpart (i) plus subpart (ii) shall be
referred to herein as the "Bonus Payment"); provided,
however, that the Bonus Payment shall only be made if
PHS-NJ's operations in New Jersey produce an annualized
return on average common equity capital of at least 10% for
the period January 1, 1999 through June 30, 2001, where
initial capital is set at $130 million, plus any increase
in retained earnings for PHS-NJ through the period January
1, 1999 through June 30, 2001, excluding any non-recurring
extraordinary items, as defined under generally accepted
accounting principles (the determination of annualized
return on average common equity capital for the period
January 1, 1999 through June 30, 2001 shall be computed
using pre-tax earnings).
The "Pro-Rata Portion" of any given Non-Hospital Shareholder
shall equal the product of (A) the quotient of (1) the amount of
consideration received by the Non-Hospital Shareholder in the
Merger (other than the Bonus Payment) divided by (2) the total
consideration payable to all Non-Hospital Shareholders in the
Merger (other than the Bonus Payment) multiplied by (B) the
aggregate amount of the $15.00 principal amount payable under
each Payment Right not paid under the Payment Rights issued in
the Merger, plus the amount equal to the product of (x) $15.00
minus the per share amount of the Alternate Consideration,
multiplied by (y) the number of shares of FOHP Common Stock
purchased from former FOHP shareholders in exchange for the
Appraisal Consideration.
(e) Change of Control. In the event FHS is acquired by or merged with
another entity and the senior management or Board of Directors of
FHS is substantially replaced as a result of such transaction, or
if FOHP or any successor thereto shall become controlled prior to
July 1, 2001 by an entity other than FHS (or an entity controlled
by FHS), the Holder hereof shall be entitled to full payment
hereunder; provided, that Holder shall agree in writing to
continue to participate in the PHS-
D-2-c
<PAGE> 125
NJ provider network or that of its successors, for a period
ending on the earlier to occur of (i) eighteen (18) months from
the date of the transaction, or (ii) December 31, 2001, on the
same terms and subject to the same conditions as contained in the
Holder's provider agreement with PHS-NJ as in effect immediately
prior to the transaction. FOHP shall give notice to the Holder
hereof prior to, simultaneously with or promptly after the
consummation of a transaction described in this subpart (e).
(f) Waiver of Conditions by FOHP. FOHP, in its sole discretion, may
waive any of the conditions to payment set forth in this
Certificate.
(g) Payment Procedure. Any consideration to be paid by FHS under this
Certificate to the Holder shall be in the form of a corporate or
certified check which shall be mailed or otherwise delivered on
or shortly after July 1, 2001.
(h) Contribution Agreement between FOHP and FHS. FOHP and FHS have
entered into a Contribution Agreement dated _____________ ___,
1998 (the "Contribution Agreement"), pursuant to which FHS has
irrevocably committed to contributing to FOHP the cash necessary
for FOHP to make full payment on all outstanding Payment Rights
issued by FOHP in connection with the Merger of FHS Transition
Company with and into FOHP. Any funds contributed by FHS to FOHP
for the payment of Payment Rights will be restricted for that
purpose only. The Contribution Agreement provides that each
holder of Payment Rights, including the Holder, is a third party
beneficiary to such agreement for the sole purpose of compelling,
if necessary, FHS to make the cash contributions to FOHP
contemplated by the Contribution Agreement.
(i) Non-Transferability of Payment Rights. This Certificate is
non-negotiable and neither this Certificate nor the Payment
Rights represented hereby are transferable or assignable by the
Holder without the express written consent of FOHP.
(j) No Interest. No interest will be paid on any amount payable under
the Payment Rights represented hereby.
(k) Governing Law. This Certificate and the Payment Rights
represented hereby shall be governed by, and construed in
accordance with, the laws of the State of New Jersey.
FOHP, INC.
Dated: By:
-------------------- -----------------------------
Name:
Title:
D-2-d
<PAGE> 126
APPENDIX E
CONTRIBUTION AGREEMENT
This Contribution Agreement ("Agreement"), entered into as of
____________ ___, 1998, is between Foundation Health Systems, Inc., a Delaware
corporation("FHS"), and FOHP, Inc., a New Jersey corporation ("FOHP").
RECITALS
WHEREAS, FHS currently owns approximately ninety-eight percent (98%) of
the outstanding FOHP common stock, par value $.01 per share ("FOHP Common
Stock");
WHEREAS, approximately two percent (2%) of the outstanding FOHP Common
Stock is held by New Jersey physicians, hospitals and other health care
providers ("Provider Shareholders") who comprise a portion of the provider
network of First Option Health Plan of New Jersey, Inc., a wholly-owned
subsidiary of FOHP which operates as a health maintenance organization in New
Jersey;
WHEREAS, pursuant to an Agreement and Plan of Merger, FHS Transition
Company, a New Jersey corporation and wholly-owned subsidiary of FHS, will merge
with and into FOHP (the "Merger");
WHEREAS, in connection with the Merger, the shares of FOHP Common Stock
held by the Provider Shareholders will be cancelled and, in exchange therefor,
each Provider Shareholder will be given the choice of receiving (i) the value of
his, her or its shares of FOHP Common Stock determined by independent qualified
appraisers as of December 31, 1998 (the Appraisal Consideration"), or (ii)
payment rights (individually a "Payment Right" and collectively "Payment
Rights"), pursuant to which the holder thereof will be entitled to a cash
payment of not less than fifteen dollars ($15.00) per Payment Right on or about
July 1, 2001 from FOHP, provided certain conditions are either satisfied or
waived; and
WHEREAS, as part of its continuing commitment to FOHP and the Provider
Shareholders, FHS will, pursuant to this Agreement, irrevocably commit to
contribute to FOHP that amount of cash necessary for FOHP to pay (i) all amounts
payable under the Payment Rights, (ii) any Appraisal Consideration due and owing
to the Provider Shareholders in connection with the Merger, (iii) all amounts
due and owing to the Provider Shareholders who dissent from the Merger, and (iv)
any expenses incurred by FOHP in connection with the Merger.
NOW, THEREFORE, in consideration of the premises and the mutually
dependent covenants and agreements herein contained, and of other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Contribution by FHS to FOHP. FHS hereby irrevocably commits to
contribute to FOHP the amount of cash necessary for FOHP to pay:
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(a) all amounts payable under the Payment Rights to be issued
in connection with the Merger;
(b) any Appraisal Consideration due and owing to the Provider
Shareholders in connection with the Merger;
(c) all amounts due and owing to the Provider Shareholders who
dissent from the Merger; and
(d) any expenses incurred by FOHP in connection with the
Merger.
2. Intercompany Note. Contemporaneously with the consummation of the
Merger, FHS will issue and deliver to FOHP an intercompany note,
substantially in the form as is attached hereto as Exhibit A, as
further evidence of FHS' obligation to contribute to FOHP on June
30, 2001 the amounts payable under the Payment Rights to be
issued in connection with the Merger.
3. Limitation on use of Contributed Funds. Any funds contributed by
FHS to FOHP pursuant to this Agreement are limited to the
payments set forth in Section 1 hereof, and shall not be used for
any other purpose.
4. Limitation on Additional Indebtedness. During the period the
Payment Rights are outstanding, FOHP will not incur any
indebtedness which could affect its ability to apply all the
funds to be contributed by FHS hereunder to the payment of the
Payment Rights or otherwise affect its ability to make full
payment on the Payment Rights.
5. Provider Shareholders as Third Party Beneficiaries. In the event
FHS fails to make the contributions to FOHP set forth in Section
1 hereof, each Provider Shareholder shall have standing, as a
third party beneficiary to this Agreement, for the sole purpose
of bringing action against FHS to compel FHS to fulfill its
contribution obligations set forth herein.
6. Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of FOHP and FHS, and their respective
successors and assigns.
7. Complete Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the subject matter
hereof and supercedes all prior oral or written communications,
negotiations, understandings and agreements among the parties
hereto. This Agreement may not be amended, changed, waived or
terminated, without a written instrument signed by FHS and FOHP,
and approved by the holders of the majority of the outstanding
Payment Rights.
8. Counterparts. This Agreement may be executed in two counterparts,
each of which shall be deemed to be an original, but both of
which shall constitute the same agreement.
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<PAGE> 128
9. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
10. Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, each of which shall
remain in full force and effect.
11. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New Jersey.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
FOHP, INC.
By:
----------------------------------
Name:
Title:
FOUNDATION HEALTH SYSTEMS, INC.
By:
----------------------------------
Name:
Title:
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<PAGE> 129
APPENDIX F
[JANNEY MONTGOMERY SCOTT INC. LETTERHEAD]
July 15, 1998
The Board of Directors of
FOHP, Inc.
3501 State Highway 66
Neptune, NJ 07753
Attention: Dr. Mark Engel, Chairman
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to FOHP, Inc., a New Jersey Corporation ("FOHP" or the "Company"), and its
minority holders of outstanding shares of common stock ("Minority Stockholders")
of the alternate consideration per share to be offered to the Minority
Stockholders (the "Alternate Consideration") as set forth in the revised term
sheet dated July 10, 1998 ("Term Sheet") presented by Foundation Health Systems,
Inc. ("FHS") a Delaware Corporation and the holder of approximately 98% of the
Company's outstanding equity. The Term Sheet proposes modifications to FHS'
right to purchase (the "Original Proposal") all of the outstanding common stock
of FOHP, Inc. in 1999 in accordance with the terms and conditions of the Amended
and Restated Securities Purchase Agreement dated February 10, 1997, among FOHP,
First Option Health Plan of New Jersey, Inc., and FHS, as amended (the "Amended
Agreement").
Janney Montgomery Scott Inc. ("JMS"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with the preparation of fairness opinions, mergers and
acquisitions, rights offerings, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate, and other purposes.
In connection with our opinion, we have reviewed the Term Sheet, certain
financial and other information of FOHP, Physicians Health Services, Inc.
("PHS"), a wholly owned subsidiary of FHS, and FHS, including certain internal
analyses, reports, forecasts and other information. We
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<PAGE> 130
FOHP, INC.
Page 2
have held discussions with senior management of FOHP, PHS and FHS concerning the
current operations, financial condition and prospects of FOHP and PHS. In
addition, we have (i) reviewed the historic financial statements of FOHP and
PHS; (ii) compared the financial positions and operating results of FOHP with
those of publicly traded companies we deemed relevant; (iii) compared certain
financial terms of the Alternate Consideration to certain financial terms of
selected other business combinations we deemed relevant; (iv) performed
customary investment banking valuation procedures; and (v) conducted such other
financial studies, analyses and investigations, and reviewed such other factors,
as we deemed relevant.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for purposes of this opinion.
With respect to financial projections, we assumed that they have been reasonably
prepared on basis reflecting the best currently available information and
judgments of the future financial performance of FOHP and PHS. We have not made
any independent valuation or appraisal of the assets or liabilities of the
Company, nor have we been furnished with such valuations or appraisals.
Our opinion is necessarily based on financial, economic, market and other
conditions as they exist on, and information made available to us as of, the
date hereof. It should be understood that, although subsequent developments may
effect this opinion, we do not have any obligation to update, revise or reaffirm
this opinion. Payment of JMS' fairness opinion fee is not contingent upon the
conclusion reported.
It should be understood that this letter is for the information of the Board of
Directors only in connection with its consideration of the Alternate
Consideration and does not constitute a recommendation to any Minority
Stockholder on the Alternate Consideration. While this opinion may be included
in a Registration Statement or Proxy Statement filed in conjunction with this
transaction, it may not be used for any other purpose without our prior written
consent for which no additional compensation or expenses shall be paid or
reimbursed and which consent shall not be unreasonably withheld.
Based upon and subject to the foregoing, it is our opinion, as of the date
hereof, the Alternate Consideration is fair, from a financial point of view, to
the Minority Stockholders of FOHP.
Sincerely yours,
JANNEY MONTGOMERY SCOTT INC.
By: /s/ William J. Barrett
------------------------------------
William J. Barrett
Senior Vice President
F-2
<PAGE> 131
[JANNEY MONTGOMERY SCOTT INC. LETTERHEAD]
November 16, 1998
The Board of Directors of
FOHP, Inc.
3501 State Highway 66
Neptune, NJ 07753
Attention: Dr. Mark Engel, Chairman
Ladies and Gentlemen:
This will update Janney Montgomery Scott Inc.'s opinion letter dated
July 15, 1998 (herein, the "Letter"). The terms used herein have the meanings
defined in the Letter. We understand that, subsequent to the delivery of our
opinion, the following modifications to the offering and delivery of the
Alternate Consideration will be made, which will directly affect our opinion:
o Payment rights (i.e., the "Alternate Consideration") will be
issued by FOHP rather than FHS; however, FHS, through a separate
contribution agreement with FOHP, will irrevocably commit to
contribute to FOHP the amount of cash necessary for FOHP to make
full payment on all payment rights. Any funds contributed by FHS
to FOHP for the payment of payment rights will be restricted to
that purpose. In addition, any appraisal consideration paid by
FOHP, or other consideration paid by FOHP as the result of the
exercise of dissenters' rights by Minority Stockholders in
connection with the merger of FHS Transition Company with and into
FOHP (the "Merger"), will be funded by FHS.
o Contemporaneously with the consummation of the Merger, FHS will
contribute all of its FOHP stock to PHS; as a result, FOHP will
become a wholly-owned subsidiary of PHS.
In connection with this updating of our opinion, we have reviewed the
agreement and plan of merger dated November 16, 1998, and held discussions with
FOHP's counsel and certain board members and employees of FOHP.
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<PAGE> 132
FOHP, INC.
Page 2
Based upon and subject to the foregoing, it is our opinion, at the date
hereof, that the modifications to be made to the offering and delivery of the
Alternate Consideration will not change our July 15, 1998 opinion.
Sincerely yours,
JANNEY MONTGOMERY SCOTT INC.
By: /s/ William J. Barrett
------------------------------------
William J. Barrett
Senior Vice President
F-4
<PAGE> 133
APPENDIX G
CHAPTER 11. RIGHTS OF DISSENTING SHAREHOLDERS.
<TABLE>
<CAPTION>
SECTION
<S> <C>
14A:11-1 RIGHT OF SHAREHOLDERS TO DISSENT.
14A:11-2 NOTICE OF DISSENT; DEMAND FOR PAYMENT; ENDORSEMENT OF CERTIFICATES.
14A:11-3 "DISSENTING SHAREHOLDER" DEFINED; DATE FOR DETERMINATION OF FAIR VALUE.
14A:11-4 TERMINATION OF RIGHT OF SHAREHOLDER TO BE PAID THE FAIR VALUE OF HIS SHARES.
14A:11-5 RIGHTS OF DISSENTING SHAREHOLDER
14A:11-6 DETERMINATION OF FAIR VALUE BY AGREEMENT.
14A:11-7 PROCEDURE ON FAILURE TO AGREE UPON FAIR VALUE; COMMENCEMENT OF ACTION TO
DETERMINE FAIR VALUE.
14A:11-8 ACTION TO DETERMINE FAIR VALUE; JURISDICTION OF
COURT; APPOINTMENT OF APPRAISER.
14A:11-9 JUDGMENT IN ACTION TO DETERMINE FAIR VALUE.
14A:11-10 COSTS AND EXPENSES OF ACTION.
14A:11-11 DISPOSITION OF SHARES ACQUIRED BY CORPORATION.
</TABLE>
14A:11-1. RIGHT OF SHAREHOLDERS TO DISSENT.
(1) Any shareholder of a domestic corporation shall have the right to dissent
from any of the following corporate actions
(a) Any plan of merger or consolidation to which the corporation is a
party, provided that, unless the certificate of incorporation
otherwise provides
(i) A shareholder shall not have the right to dissent from any plan
of merger or consolidation with respect to shares
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(A) Of a class or series which is listed on a national
securities exchange or is held of record by not less than
1,000 holders on the record date fixed to determine the
shareholders entitled to vote upon the plan of merger or
consolidation; or
(B) For which, pursuant to the plan of merger or
consolidation, he will receive (x) cash, (y) shares,
obligations or other securities which, upon consummation
of the merger or consolidation, will either be listed on a
national securities exchange or held of record by not less
than 1,000 holders, or (z) cash and such securities;
(ii) A shareholder of a surviving corporation shall not have the right
to dissent from a plan of merger, if the merger did not require
for its approval the vote of such shareholders as provided in
section 14A:10-5.1 or in subsections 14A:10-3(4), 14A:10-7(2) or
14A:10-7(4); or
(b) Any sale, lease, exchange or other disposition of all or
substantially all of the assets of a corporation not in the usual or
regular course of business as conducted by such corporation, provided
that, unless the certificate of incorporation otherwise provides, the
shareholder shall not have the right to dissent
(i) With respect to shares of a class or series which, at the record
date fixed to determine the shareholders entitled to vote upon
such transaction, is listed on a national securities exchange or
is held of record by not less than 1,000 holders; or
(ii) From a transaction pursuant to a plan of dissolution of the
corporation which provides for distribution of substantially all
of its net assets to shareholders in accordance with their
respective interests within 1 year after the date of such
transaction, where such transaction is wholly for
(A) cash; or
(B) shares, obligations or other securities which, upon
consummation or the plan of dissolution will either be
listed on a national securities exchange or held of record
by not less than 1,000 holders; or
(C) cash and such securities; or
(iii) from a sale pursuant to an order of a court having jurisdiction.
(2) Any shareholder of a domestic corporation shall have the right to
dissent with respect to any shares owned by him which are to be acquired
pursuant to section 14A:10-9.
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(3) A shareholder may not dissent as to less than all of the shares
owned beneficially by him and with respect to which a right of dissent exists. A
nominee or fiduciary may not dissent on behalf of any beneficial owner as to
less than all of the shares of such owner with respect to which the right of
dissent exists.
(4) A corporation may provide in its certificate of incorporation that
holders of all its shares, or of a particular class or series thereof, shall
have the right to dissent from specified corporate actions in addition to those
enumerated in subsection 14A:11-1(1), in which case the exercise of such right
of dissent shall be governed by the provisions of this Chapter.
14A:11-2. NOTICE OF DISSENT; DEMAND FOR PAYMENT; ENDORSEMENT OF
CERTIFICATES.
(1) Whenever a vote is to be taken, either at a meeting of shareholders
or upon written consents in lieu of a meeting pursuant to section 14A:5-6, upon
a proposed corporate action from which a shareholder may dissent under section
14A:11-1, any shareholder electing to dissent from such action shall file with
the corporation before the taking of the vote of the shareholders on such
corporate action, or within the time specified in paragraphs 14A:5-6(2)(b) or
14A:5-6(2)(c), as the case may be, if no meeting of shareholders is to be held,
a written notice of such dissent stating that he intends to demand payment for
his shares if the action is taken.
(2) Within 10 days after the date on which such corporate action takes
effect, the corporation, or, in the case of a merger or consolidation, the
surviving or new corporation, shall give written notice of the effective date of
such corporate action, by certified mail to each shareholder who filed written
notice of dissent pursuant to subsection 14A:11-2(1), except any who voted for
or consented in writing to the proposed action.
(3) Within 20 days after the mailing of such notice, any shareholder to
whom the corporation was required to give such notice and who has filed a
written notice of dissent pursuant to this section may make written demand on
the corporation, or, in the case of a merger or consolidation, on the surviving
or new corporation, for the payment of the fair value of his shares.
(4) Whenever a corporation is to be merged pursuant to section
14A:10-5.1 or subsection 14A:10-7(4) and shareholder approval is not required
under subsections 14A:10-5.1(5) and 14A:10-5.1(6), a shareholder who has the
right to dissent pursuant to section 14A:11-1 may, not later than 20 days after
a copy or summary of the plan of such merger and the statement required by
subsection 14A:10-5.1(2) is mailed to such shareholder, make written demand on
the corporation or on the surviving corporation, for the payment of the fair
value of his shares.
(5) Whenever all the shares, or all the shares of a class or series,
are to be acquired by another corporation pursuant to section 14A:10-9, a
shareholder of the corporation whose shares are to be acquired may, not later
than 20 days after the mailing of notice by the acquiring corporation pursuant
to paragraph 14A:10-9(3)(b), make written demand on the acquiring corporation
for the payment of the fair value of his shares.
(6) Not later than 20 days after demanding payment for his shares
pursuant to this section, the shareholder shall submit the certificate or
certificates representing his shares to the
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<PAGE> 136
corporation upon which such demand has been made for notation thereon that such
demand has been made, whereupon such certificate or certificates shall be
returned to him. If shares represented by a certificate on which notation has
been made shall be transferred, each new certificate issued therefor shall bear
similar notation, together with the name of the original dissenting holder of
such shares, and a transferee of such shares shall acquire by such transfer no
rights in the corporation other than those which the original dissenting
shareholder had after making a demand for payment of the fair value thereof.
(7) Every notice or other communication required to be given or made by
a corporation to any shareholder pursuant to this Chapter shall inform such
shareholder of all dates prior to which action must be taken by such shareholder
in order to perfect his rights as a dissenting shareholder under this Chapter.
14A:11-3. "DISSENTING SHAREHOLDER" DEFINED; DATE FOR DETERMINATION OF
FAIR VALUE.
(1) A shareholder who has made demand for the payment of his shares in
the manner prescribed by subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) is
hereafter in this Chapter referred to as a "dissenting shareholder."
(2) Upon making such demand, the dissenting shareholder shall cease to
have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights of a dissenting shareholder under this
Chapter.
(3) "Fair value" as used in this Chapter shall be determined
(a) as of the day prior to the day of the meeting of
shareholders at which the proposed action was approved or as
of the day prior to the day specified by the corporation for
the tabulation of consents to such action if no meeting of
shareholders was held; or
(b) in the case of a merger pursuant to section 14A:10-5.1 or
subsection 14A:10-7(4) in which shareholder approval is not
required, as of the day prior to the day on which the board
of directors approved the plan of merger; or
(c) in the case of an acquisition of all the shares or all the
shares of a class or series by another corporation pursuant
to section 14A:10-9, as of the day prior to the day on which
the board of directors of the acquiring corporation
authorized the acquisition, or, if a shareholder vote was
taken pursuant to section 14A:10-12, as of the day provided
in paragraph 14A:11-3(3)(a).
In all cases, "fair value" shall exclude any appreciation or
depreciation resulting from the proposed action.
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14A:11-4. TERMINATION OF RIGHT OF SHAREHOLDER TO BE PAID THE FAIR VALUE
OF HIS SHARES.
(1) The right of a dissenting shareholder to be paid the fair value of
his shares under this Chapter shall cease if
(a) he has failed to present his certificates for notation as
provided by subsection 14A:11-2(6), unless a court having
jurisdiction, for good and sufficient cause shown, shall
otherwise direct;
(b) his demand for payment is withdrawn with the written consent
of the corporation;
(c) the fair value of the shares is not agreed upon as provided
in this Chapter and no action for the determination of fair
value by the Superior Court is commenced within the time
provided in this Chapter;
(d) the Superior Court determines that the shareholder is not
entitled to payment for his shares;
(e) the proposed corporate action is abandoned or rescinded; or
(f) a court having jurisdiction permanently enjoins or sets
aside the corporate action.
(2) In any case provided for in subsection 14A:11-4(1), the rights of
the dissenting shareholder as a shareholder shall be reinstated as of the date
of the making of a demand for payment pursuant to subsections 14A:11-2(3),
14A:11-2(4) or 14A:11-2(5) without prejudice to any corporate action which has
taken place during the interim period. In such event, he shall be entitled to
any intervening preemptive rights and the right to payment of any intervening
dividend or other distribution, or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu thereof,
at the election of the board, the fair value thereof in cash as of the time of
such expiration or completion.
14A:11-5. RIGHTS OF DISSENTING SHAREHOLDER.
(1) A dissenting shareholder may not withdraw his demand for payment of
the fair value of his shares without the written consent of the corporation.
(2) The enforcement by a dissenting shareholder of his right to receive
payment for his shares shall exclude the enforcement by such dissenting
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in subsection 14A:11-4(2) and except that
this subsection shall not exclude the right of such dissenting shareholder to
bring or maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is ultra vires, unlawful or fraudulent as to such
dissenting shareholder.
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14A:11-6. DETERMINATION OF FAIR VALUE BY AGREEMENT.
(1) Not later than 10 days after the expiration of the period within
which shareholders may make written demand to be paid the fair value of their
shares, the corporation upon which such demand has been made pursuant to
subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) shall mail to each
dissenting shareholder the balance sheet and the surplus statement of the
corporation whose shares he holds, as of the latest available date which shall
not be earlier than 12 months prior to the making of such offer and a profit and
loss statement or statements for not less than a 12-month period ended on the
date of such balance sheet or, if the corporation was not in existence for such
12-month period, for the portion thereof during which it was in existence. The
corporation may accompany such mailing with a written offer to pay each
dissenting shareholder for his shares at a specified price deemed by such
corporation to be the fair value thereof. Such offer shall be made at the same
price per share to all dissenting shareholders of the same class, or, if divided
into series, of the same series.
(2) If, not later than 30 days after the expiration of the 10-day
period limited by subsection 14A:11-6(1), the fair value of the shares is agreed
upon between any dissenting shareholder and the corporation, payment therefor
shall be made upon surrender of the certificates representing such shares.
14A:11-7. PROCEDURE ON FAILURE TO AGREE UPON FAIR VALUE; COMMENCEMENT
OF ACTION TO DETERMINE FAIR VALUE.
(1) If the fair value of the shares is not agreed upon within the
30-day period limited by subsection 14A:11-6(2), the dissenting shareholder may
serve upon the corporation upon which such demand has been made pursuant to
subsections 14A:11-2(3), 14A:11-2(4) or 14A:11-2(5) a written demand that it
commence an action in the Superior Court for the determination of the fair value
of the shares. Such demand shall be served not later than 30 days after the
expiration of the 30-day period so limited and such action shall be commenced by
the corporation not later than 30 days after receipt by the corporation of such
demand, but nothing herein shall prevent the corporation from commencing such
action at any earlier time.
(2) If a corporation fails to commence the action as provided in
subsection 14A:11-7(1), a dissenting shareholder may do so in the name of the
corporation, not later than 60 days after the expiration of the time limited by
subsection 14A:11-7(1) in which the corporation may commence such an action.
14A:11-8. ACTION TO DETERMINE FAIR VALUE; JURISDICTION OF COURT;
APPOINTMENT OF APPRAISER. In any action to determine the fair value of shares
pursuant to this Chapter:
(a) The Superior Court shall have jurisdiction and may proceed
in the action in a summary manner or otherwise;
(b) All dissenting shareholders, wherever residing, except those
who have agreed with the corporation upon the price to be
paid for their shares, shall be made parties thereto as an
action against their shares quasi in rem;
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(c) The court in its discretion may appoint an appraiser to
receive evidence and report to the court on the question of
fair value, who shall have such power and authority as shall
be specified in the order of his appointment; and
(d) The court shall render judgment against the corporation and
in favor of each shareholder who is a party to the action
for the amount of the fair value of his shares.
14A:11-9. JUDGMENT IN ACTION TO DETERMINE FAIR VALUE.
(1) A judgment for the payment of the fair value of shares shall be
payable upon surrender to the corporation of the certificate or certificates
representing such shares.
(2) The judgment shall include an allowance for interest at such rate
as the court finds to be equitable, from the date of the dissenting
shareholder's demand for payment under subsections 14A:11-2(3), 14A:11-2(4) or
14A:11-2(5) to the day of payment. If the court finds that the refusal of any
dissenting shareholder to accept any offer of payment, made by the corporation
under section 14A:11-6, was arbitrary, vexatious or otherwise not in good faith,
no interest shall be allowed to him.
14A:11-10. COSTS AND EXPENSES OF ACTION. The costs and expenses of
bringing an action pursuant to section 14A:11-8 shall be determined by the court
and shall be apportioned and assessed as the court may find equitable upon the
parties or any of them. Such expenses shall include reasonable compensation for
an reasonable expenses of the appraiser, if any, but shall exclude the fees and
expenses of counsel for and experts employed by any party; but if the court
finds that the offer of payment made by the corporation under section 14A:11-6
was not made in good faith, or if no such offer was made, the court in its
discretion may award to any dissenting shareholder who is a party to the action
reasonable fees and expenses of his counsel and of any experts employed by the
dissenting shareholder.
14A:11-11. DISPOSITION OF SHARES ACQUIRED BY CORPORATION.
(1) The shares of a dissenting shareholder in a transaction described
in subsection 14A:11-1(1) shall become reacquired by the corporation which
issued them or by the surviving corporation, as the case may be, upon the
payment of the fair value of shares.
(2) (Deleted by amendment, P.L. 1995, c. 279.)
(3) In an acquisition of shares pursuant to section 14A:10-9 or section
14A:10-13, the shares of a dissenting shareholder shall become the property of
the acquiring corporation upon the payment by the acquiring corporation of the
fair value of such shares. Such payment may be made, with the consent of the
acquiring corporation, by the corporation which issued the shares, in which case
the shares so paid for shall become reacquired by the corporation which issued
them and shall be cancelled.
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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
- - - ----------------------------
FOHP, INC.
----------------------------------------
(Exact name of registrant as specified in
its charter)
NEW JERSEY 22-3314813
--------------------------------------- -------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3501 State Highway 66
Neptune, New Jersey 07753
--------------------------------------- -------------------------
(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
- - - ------------------ ---------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
-----------------------------------------------------------------
(Title of class)
-----------------------------------------------------------------
(Title of class)
<PAGE> 141
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of the Registrant's Common
Stock, 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
-------------------------- ------------------------
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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<PAGE> 142
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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<PAGE> 144
placement of capital to an investor interested in acquiring a significant equity
position in the Company.
TRANSACTION WITH FHS
- - - --------------------
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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<PAGE> 145
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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<PAGE> 146
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
- - - ------------------
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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<PAGE> 147
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
- - - ----------------------
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
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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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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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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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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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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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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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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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<PAGE> 164
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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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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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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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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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> 170
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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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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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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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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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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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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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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<PAGE> 178
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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<PAGE> 180
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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<PAGE> 181
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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<PAGE> 182
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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<PAGE> 183
(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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<PAGE> 184
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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<PAGE> 186
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
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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
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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
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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.
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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.
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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.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
Reference is made to the Index of Financial
Statements hereinafter contained.........................F-1
Other than the Financial Data Schedule included as Exhibit 27, no
Financial Statement Schedules are required to, nor will any, be filed
with this Annual Report on Form 10-K.
3. EXHIBITS
Reference is made to the Index of Exhibits
hereinafter contained....................................E-1
(b) REPORTS ON FORM 8-K
During the fourth quarter ended December 31, 1997, no Current Reports
on Form 8-K were filed by the Company with the Commission.
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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
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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
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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> 200
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> 201
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> 202
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> 203
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> 204
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> 205
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> 206
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> 207
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> 208
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> 209
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> 210
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> 211
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> 212
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> 213
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> 214
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> 215
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> 216
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> 217
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> 218
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> 219
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> 220
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> 221
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> 222
================================================================================
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> 223
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> 224
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> 225
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> 226
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> 227
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
<PAGE> 228
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 0-25944
-------------------------------------------------
FOHP, INC.
- - - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3314813
- - - --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
3501 STATE HIGHWAY 66, NEPTUNE, NEW JERSEY 07753
- - - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(732) 918 - 6700
- - - -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- - - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, 99,997,000 SHARES OUTSTANDING AS OF NOVEMBER 12, 1998
<PAGE> 229
INDEX PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statements of Operations 4
For the periods July 1 to September 30, 1998 and 1997
For the periods January 1 to September 30, 1998 and 1997
Condensed Consolidated Statements of Shareholders' (Deficiency) Equity 5
For the period January 1, 1997 to December 31, 1997
For the period January 1, 1998 to September 30, 1998
Condensed Consolidated Statements of Cash Flows 6
For the periods January 1, 1998 to September 30, 1998
For the periods January 1, 1997 to September 30, 1997
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
Signature Page 21
2
<PAGE> 230
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------------------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 29,340,408 $ 79,266,721
Accounts receivable from owners/providers, net of allowance for doubtful accounts
and retroactive terminations of $840,783 in 1998 and $922,354 in 1997 11,415,826 11,096,487
Other accounts receivable, net of allowance for doubtful accounts and retroactive
terminations of $2,757,248 in 1998 and $2,507,619 in 1997. 3,391,750 3,131,333
Prepaid and other current assets 596,845 635,548
------------------------------------------
Total current assets 44,744,829 94,130,089
Restricted Cash 57,276,629 13,846,682
Furniture and equipment (at cost, net of accumulated depreciation
and amortization of $2,685,845 and $2,349,874, respectively) 2,422,398 2,480,042
Goodwill (net of accumulated amortization of $2,019,942 and $0, respectively) 105,710,312 107,730,254
Other assets 383,379 424,164
------------------------------------------
Total Assets $ 210,537,547 $ 218,611,231
==========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Medical claims payable to owners/providers $ 13,527,494 $ 20,308,241
Other medical claims payable 31,564,153 62,614,704
Accounts payable 1,540,874 746,369
Accrued expenses 16,808,870 17,512,845
Due to Foundation Health Systems, Inc. 1,569,293 543,075
Due to QualMed, Inc. 1,269,630 1,192,716
Due to Other Affiliates 213,136 -
Unearned premium 2,282,236 7,965,658
------------------------------------------
Total current liabilities 68,775,686 110,883,608
Convertible debentures 12,145,655 11,294,406
Subordinated debentures 24,737,761 24,000,000
------------------------------------------
Total Liabilities 105,659,102 146,178,014
Shareholders' Equity:
Preferred Stock, $1.00 par value, 10,000,000 shares authorized,
none issued or outstanding
FOHP, Inc. Common Stock, $.01 par value, 100,000,000 shares authorized,
100,000,000 in 1998 and 100,000,000 in 1997 issued and outstanding 1,000,000 1,000,000
Additional paid-in capital 237,951,597 208,053,796
Accumulated deficit (134,073,152) (136,620,579)
------------------------------------------
Total shareholders' equity 104,878,445 72,433,217
------------------------------------------
Total Liabilities and Shareholders' Equity $ 210,537,547 $ 218,611,231
==========================================
</TABLE>
See accompanying notes
3
<PAGE> 231
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------------------- --------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Premiums from owners/providers $ 28,710,191 $ 36,793,341 $ 95,373,859 $ 97,781,152
Other premium revenue 50,901,751 60,943,037 155,609,981 176,701,692
Other, principally administrative service fees 585,148 888,817 2,098,682 1,797,068
Interest income 1,009,308 1,200,923 3,239,760 2,891,062
------------------------------- ------------------------------
Total revenue 81,206,398 99,826,118 256,322,282 279,170,974
------------------------------- ------------------------------
EXPENSES:
Medical services to owners/providers 19,602,135 32,646,831 60,197,453 78,638,764
Other medical services 45,738,318 81,753,021 140,460,726 204,748,375
Selling, general and administrative 13,530,625 11,468,890 42,240,995 36,665,217
Management fee - QualMed, Inc. - 2,006,759 - 5,546,233
Management fee - Foundation Health Systems, Inc. 636,000 - 1,907,000 -
Amortization of goodwill 673,314 - 2,019,942 -
Depreciation and other amortization 378,679 410,408 1,117,312 1,000,678
Interest - Foundation Health Systems, Inc. 558,728 743,877 1,604,188 1,247,336
Other interest 143,029 39,265 401,285 68,256
Restructuring costs - - - 1,134,097
------------------------------ ------------------------------
Total expenses 81,260,828 129,069,051 249,948,901 329,048,956
------------------------------ ------------------------------
NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (54,430) (29,242,933) 6,373,381 (49,877,982)
Provision (benefit) for income taxes (33,286) 103 3,825,954 2,139
------------------------------ ------------------------------
NET INCOME (LOSS) $ (21,144) $ (29,243,036) $ 2,547,427 $ (49,880,121)
============================== ==============================
NET INCOME (LOSS) PER COMMON SHARE $ -- $ (12.97) $ 0.03 $ (22.85)
============================== ==============================
</TABLE>
See accompanying notes
4
<PAGE> 232
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------- ADDITIONAL TOTAL
PAR PAID-IN ACCUMULATED SHAREHOLDERS
SHARES VALUE CAPITAL DEFICIT (DEFICIENCY) EQUITY
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 2,100,173 $ 21,002 $ 30,648,489 $ (56,535,558) $ (25,866,067)
Net loss for the period January 1, 1997 to
December 31, 1997 (80,085,021) (80,085,021)
Retirement of Common Stock-NJ (13,334) (133) 133 0
Conversion of debentures into shares of
FOHP, Inc. Common Stock 168,109 1,681 1,699,440 1,701,121
Reclassification of Common Stock-NJ to Common
Stock:
Common Stock-NJ (2,086,839) (20,869) (20,869)
Common Stock 2,086,839 20,869 20,869
Issued Common Stock (December 1, 1997
at $10.12 per share) 4,941,049 49,410 49,950,590 50,000,000
Issued Common Stock (December 8, 1997
at $.20 per share) 92,804,003 928,040 18,024,890 18,952,930
Goodwill 107,730,254 107,730,254
------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 100,000,000 1,000,000 208,053,796 (136,620,579) 72,433,217
Net income for the period January 1, 1998 to
September 30, 1998 2,547,427 2,547,427
Capital contributed by Foundation Health Systems, Inc. 29,897,801 29,897,801
------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998 (UNAUDITED) 100,000,000 $ 1,000,000 $ 237,951,597 $(134,073,152) $ 104,878,445
==============================================================================
</TABLE>
See accompanying notes
5
<PAGE> 233
FOHP, INC. & SUBSIDIARIES
(SUCCESSOR TO FIRST OPTION HEALTH PLAN OF NEW JERSEY, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1998 JANUARY 1, 1997
TO SEPTEMBER 30, 1998 TO SEPTEMBER 30, 1997
----------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 2,547,427 $ (49,880,121)
Adjustments to reconcile net income (loss) to cash flows
used in operating activities:
Depreciation and amortization 3,137,254 1,000,678
Interest cost converted to debt 1,589,010 503,459
Changes in operating assets and liabilities:
Accounts receivable from owners/providers (319,339) 52,230
Other accounts receivable (260,417) (878,108)
Prepaid expenses and other current assets 38,703 1,200,104
Restricted cash (43,429,947) (12,398,571)
Other assets 40,785 (18,283)
Medical claims payable to owners/providers (6,780,747) -
Other medical claims payable (31,050,551) 3,514,425
Accounts payable 794,505 47,394
Accrued expenses (703,975) 1,506,177
Due to Foundation Health Systems, Inc. 1,026,218 1,830,830
Due to QualMed, Inc. 76,914 -
Due to Other Affiliates 213,136 -
Unearned premium revenue (5,683,422) (3,400,222)
Other liabilities - (1,178,279)
-----------------------------------------------
Net cash flows used in operating activities (78,764,446) (58,098,287)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (1,059,668) (1,270,724)
-----------------------------------------------
Net cash used in investing activities (1,059,668) (1,270,724)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributed by Foundation Health Systems, Inc. 29,897,801 51,701,120
Payment of issue costs - (1,192,435)
-----------------------------------------------
Net cash provided by financing activities 29,897,801 50,508,685
Net decrease in cash and cash equivalents at the end of the period (49,926,313) (8,860,326)
Cash and cash equivalents at the beginning of the period 79,266,721 36,664,911
-----------------------------------------------
Cash and cash equivalents at the end of the period $ 29,340,408 $ 27,804,585
===============================================
Interest paid for the period $ 400,948 $ 43,696
===============================================
State income taxes paid for the period $ 625 $ 1,939
===============================================
</TABLE>
See accompanying notes
6
<PAGE> 234
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
1. GENERAL
FOHP, Inc. (the "Company" or "FOHP") serves as the holding company for its
wholly-owned subsidiaries. The Company's principal operating subsidiary is First
Option Health Plan of New Jersey, Inc. ("FOHP-NJ"). FOHP-NJ, a New Jersey
corporation formed in May 1993, received its Certificate of Authority ("COA") to
operate as a health maintenance organization ("HMO") in New Jersey in June 1994.
Other wholly-owned subsidiaries of the Company include First Option Health Plan
of New York, Inc. ("FOHP-NY"), a New York corporation, First Option Health Plan
of Pennsylvania, Inc., a Pennsylvania corporation, First Option Health Plan of
Maryland, Inc. ("FOHP-MD"), a Maryland corporation, and FOHP Agency, Inc., a New
Jersey corporation, each formed in 1995. These other subsidiaries have not
commenced operations. The Board of Directors of the Company recently approved
the dissolution of FOHP-NY and FOHP-MD. First Option Health Plan of Delaware,
Inc. and First Option Dental, Inc., former inactive subsidiaries of the Company,
were dissolved during the second quarter of 1998.
The Company is a New Jersey corporation which was formed in May 1994. The
Company was formed to effect the reorganization of FOHP-NJ into a holding
company structure (the "Reorganization"), which was consummated on June 8, 1995.
The Reorganization was completed through an exchange of FOHP-NJ's outstanding
common stock for shares of the Company's Common Stock-NJ. In connection with the
Reorganization, FOHP-NJ distributed, as a dividend, all of the outstanding
common stock of First Managed Care Option, Inc. ("FMCO") to the Company.
Pursuant to the Reorganization, FOHP-NJ and FMCO became wholly-owned
subsidiaries of the Company. Prior to the Reorganization, the Company did not
conduct any business nor did it have any significant assets or liabilities. The
primary purpose of the Reorganization was to facilitate the formation of
additional health maintenance organizations in states other than New Jersey. In
December 1996, the Company sold all of the outstanding common stock of FMCO.
During the summer of 1996, as a result of FOHP-NJ's statutory net worth
deficiency and the conditions imposed by the New Jersey Departments of Banking
and Insurance and Health and Senior Services (the "Departments"), the Board of
Directors of the Company discontinued the Company's expansion efforts in states
other than New Jersey, including expansion efforts in New York, Pennsylvania and
Maryland. The Company currently has no plans to expand into any other state.
Effective December 8, 1997, through the conversion of debentures (the
"Convertible Debentures") into shares of Common Stock, the Company became a 98%
owned subsidiary of Foundation Health Systems, Inc. (Note 2). The Company is
dependent upon Foundation Health Systems, Inc. ("FHS") to provide sufficient
capital to meet its operating and statutory financial requirements. It is the
intention of FHS to provide such funds, as needed.
The financial information for the nine month periods ended September 30, 1998
and September 30, 1997 included herein are unaudited. Such information includes
all adjustments, including adjustments of a normal and recurring nature, which,
in the opinion of management, are necessary for a fair presentation of the
Company's financial position, results of operations and cash flows.
Additionally, such information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Part I - Item 2 hereof.
7
<PAGE> 235
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company has generated a net loss of $21,144 for the three-month period ended
September 30, 1998 and has an accumulated deficit of $134,073,152 at September
30, 1998. In order for the Company's principal operating subsidiary FOHP-NJ to
meet statutory net worth requirements set forth in its COA granted by the
Departments, the Company must generate sufficient operating profits and/or
obtain one or more capital contributions from FHS. See Note 5.
In connection with FOHP-NJ's plan to remedy its statutory net worth deficiency,
the Board of Directors of the Company approved an investment by FHS of
approximately $51.7 million into the Company. FHS invested $51,701,121 into the
Company through the purchase of a Convertible Debenture (the "Initial
Convertible Debenture") convertible into 71% of the Company's outstanding
equity, on a fully diluted basis. At the closing of the purchase of the Initial
Convertible Debenture, which occurred on April 30, 1997, FHS converted
$1,701,121 of the principal amount of the Initial Convertible Debenture into
168,109 shares of the Company's Common Stock. On December 1, 1997, FHS converted
the remaining $50,000,000 of principal into 4,941,049 shares of the Company's
Common Stock. On December 8, 1997, due to the continued operating losses of
FOHP-NJ, FHS invested an additional $29,000,000 into the Company in exchange for
a Convertible Debenture (the "New Convertible Debenture") in form and substance
substantially similar to the Initial Convertible Debenture issued to FHS on
April 30, 1997. Immediately upon receipt of the New Convertible Debenture, FHS
converted $18,952,930 of the principal amount thereof into 92,804,003 shares of
the Company's Common Stock. The price per share paid by FHS upon conversion of
the Convertible Debentures was calculated in accordance with the Amended
Securities Purchase Agreement (the "Amended Securities Purchase Agreement")
entered into by FHS, the Company and FOHP-NJ in connection with the sale of the
Initial Convertible Debenture. The Convertible Debentures accrue interest at a
variable rate adjusted on a calendar quarterly basis. Such interest is due and
payable within ten days after the end of each calendar quarter. Any such
interest not paid when due and payable is considered defaulted interest and
shall be added to the principal amount of the Convertible Debentures. At
September 30, 1998, $2,836,346 of defaulted interest is included in the
principal amount of the Convertible Debentures.
In connection with the purchase by FHS of the Company's Common Stock through the
conversion of Convertible Debentures, goodwill totaling $107,730,254 has been
recorded to reflect the excess of FHS' purchase price over the appropriate fair
value of the net assets acquired. The acquisition was treated as a purchase for
accounting purposes. The goodwill is being amortized on a straight-line basis
over 40 years. Amortization for the nine-month period ended September 30, 1998
totaling $2,019,942 has been reflected in the statement of operations.
In December 1997, FHS also contributed an additional $24,000,000 to the Company
to satisfy certain statutory net worth requirements applicable to FOHP-NJ in
return for additional subordinated debentures (the "Subordinated Debentures")
which are not convertible into the Company's Common Stock, but otherwise have
substantially the same terms as the Convertible Debentures. Further, FHS
contributed $29,897,801 to FOHP as additional paid in capital to satisfy certain
statutory net worth requirements applicable to FOHP-NJ during 1998.
8
<PAGE> 236
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
The following are significant accounting policies of the Company:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include money market funds and U.S. Treasury Bills
with original maturities of three months or less when purchased. Fair market
values, as determined through quoted market prices, of the cash equivalents
approximate carrying value. Cash and cash equivalents were on deposit with two
commercial banks.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at estimated net realizable value by including
provisions for retroactive terminations and uncollectible amounts.
RESTRICTED CASH
At September 30, 1998, FOHP-NJ was required to maintain $69,115,157 on deposit
with the New Jersey Department of Banking and Insurance (the "DOI") to meet its
"Minimum Insolvency Deposit for Healthcare Expenditures" (the "Insolvency
Deposit") under current insurance regulations. The Insolvency Deposit was
required to be funded by June 30, 1998. As of September 30, 1998, FOHP-NJ had
$55,886,738 on deposit with the DOI. FOHP-NJ has obtained approval from the DOI
to fund the remaining Insolvency Deposit on December 31, 1998. Inasmuch as the
Insolvency Deposit is based on current financial statements, the remainder of
the deposit is subject to a revised calculation as of September 30, 1998. In
addition, FOHP-NJ is required to maintain $1,200,000 cash reserve with the
Health Care Financing Administration ("HCFA") for its federal programs. As of
September 30,1998, FOHP-NJ had $1,389,891 on deposit for its federal programs.
FURNITURE AND EQUIPMENT
Furniture and equipment are recorded at cost. Depreciation is calculated on the
straight-line method over the useful lives of the depreciable assets (3 to 5
years).
PREMIUM REVENUE
Subscriber contracts for commercial managed care products are on a yearly basis
subject to cancellation by the employer group upon 30 days written notice.
Premium revenue is recorded as revenue in the month in which subscribers are
entitled to service. Premiums collected in advance are reported as unearned
premium revenue.
Certain premium revenue is earned under a contract between FOHP-NJ and the State
of New Jersey Department of Human Services, Division of Medical Assistance and
Health Services ("NJDHS-
9
<PAGE> 237
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
DMAHS"). The contract with NJDHS-DMAHS had an initial term of 18 months and may
be renewed for successive one year terms. The contract can be suspended (by
NJDHS-DMAHS) or terminated (by either party) upon the occurrence of certain
events. Premiums are earned monthly on a per capita basis, based on the number
of eligible members enrolled in FOHP-NJ health plans. Members may disenroll at
any time other than months 2 through 6 of membership and eligibility is
determined by NJDHS-DMAHS.
Certain premium revenue is earned under a contract between FOHP-NJ and HCFA for
services provided to Medicare eligible recipients. The contract with HCFA had an
initial term of 12 months and may be renewed for successive one-year terms.
Premiums are earned monthly on a per capita basis, based on the number of
eligible members enrolled in FOHP-NJ health plans.
OTHER REVENUE
Other revenue consists principally of fees for administrative service only
contracts, which are recognized as income as services are rendered.
MEDICAL AND HOSPITAL SERVICE EXPENSES
Medical and hospital service expenses are accrued in the period the services are
provided to enrollees, based in part on estimates for hospital and other health
care services which have been incurred but not reported ("IBNR"). Such estimates
are continually monitored and reviewed and, as settlements are made or estimates
adjusted, the resulting differences are reflected in the current period of
operations.
INCOME TAXES
The Company's operations are included in FHS' consolidated federal and state
income tax returns. The Company records income taxes in accordance with
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. Under FHS' tax allocation method, a tax provision or tax benefit is
allocated to the Company based upon a calculation of the Company's income taxes
as if it filed separate income tax returns.
PER SHARE DATA
Per share data are based on the weighted average number of shares of all classes
of common stock outstanding during the comparative nine-month periods ended
September 30 (100,000,000 in 1998 and 2,183,196 in 1997, respectively).
3. SUBORDINATED DEBT
In accordance with the terms of the Convertible Debentures and Subordinated
Debentures, repayment of principal and interest will occur only from free and
divisible surplus as reflected in the financial statements of the Company and
with written approval of the Commissioner of the DOI. In the event of
dissolution or liquidation of the Company, no repayment on these notes can be
made unless and until all other liabilities of the Company have been satisfied.
10
<PAGE> 238
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
The Convertible Debentures and Subordinated Debentures are due December 31, 2002
and accrue interest at a rate determined quarterly based on the rate charged to
FHS under its credit facility (6.01% as of September 30, 1998). Interest is due
and payable within ten days after the end of each quarter, subject to the terms
noted above.
4. COMMON STOCK
In connection with the April 30, 1997 investment by FHS, the Certificate of
Incorporation of the Company was amended to, among other things, reclassify the
Company's capital stock. In October 1998, the Certificate of Incorporation of
the Company was further amended to increase the number of shares of Common Stock
authorized for issuance and decrease the number of shares of Preferred Stock
authorized for issuance. As a result, the Company currently has 500,000,000
shares of authorized capital stock, which is comprised of 499,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock,
par value $1.00 per share. In connection with the reclassification of the
Company's capital stock, each outstanding share of Common Stock-NJ was converted
into one share of Common Stock. As a result, all 2,086,839 shares of Common
Stock-NJ outstanding at the time FHS made its initial investment in FOHP were
converted into Common Stock. Prior to the April 30, 1997 investment by FHS, the
authorized capital stock of the Company totaled 100 million shares and was
comprised of the following classes of Common Stock, $.01 par value: Common
Stock-NJ, Common Stock-NY, Common Stock-PA, Common Stock-DE and Unclassified
Common Stock. During 1995, the Company issued 2,100,173 shares of Common
Stock-NJ. There were no additional shares of Common Stock-NJ issued during 1996.
The Certificate of Incorporation and By-Laws of the Company include significant
restrictions on the issuance and transfer of shares of Common Stock. The
Certificate of Incorporation of the Company provides that only FHS and health
care providers who enter into and maintain a provider agreement with a
subsidiary of the Company may purchase Common Stock. Acute care institutions
that enter into a provider agreement with a subsidiary of the Company may
purchase shares of Common Stock directly or through an affiliate.
The Company may, but is not obligated to, repurchase shares of Common Stock from
any shareholder whose provider agreement terminates for any reason or upon the
occurrence of certain events, as described in the Company's Certificate of
Incorporation. The determination of the repurchase price of the shares is also
described in the Company's Certificate of Incorporation.
5. STATUTORY NET WORTH AND DIVIDEND RESTRICTIONS
FOHP-NJ, pursuant to its COA to operate an HMO in New Jersey, is required to
maintain a minimum statutory net worth. In addition, the COA provides that if
FOHP-NJ's statutory net worth is, or is expected to be, less than 125% of the
minimum statutory net worth requirement applicable to it, FOHP-NJ is required to
submit to the Departments a plan of action to address the deficiency or expected
deficiency. During the first quarter of 1996, the Company learned that FOHP-NJ's
statutory net worth as of December 31, 1995 may have been below 125% of the
minimum statutory net worth requirement applicable to FOHP-NJ. FOHP-NJ addressed
this potential deficiency by submitting to the Departments in April 1996 a plan
of action which outlined the actions which had been taken and measures to be
used by FOHP-NJ to correct the potential deficiency.
11
<PAGE> 239
FOHP, Inc. and Subsidiaries
(Successor to First Option Health Plan of New Jersey, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 1998
As part of the plan of action, on April 30, 1997, the Company sold the Initial
Debenture to FHS in the principal amount of $51,701,120.38. The principal amount
of the Initial Debenture was converted by FHS, into 71% of FOHP's capital stock
on a fully-diluted basis.
To facilitate the sale of the Initial Debenture to FHS, the Departments agreed
to rescind their conditions attached to their approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ to submit a new plan of action if FOHP-NJ failed to increase its net
worth to 100% of the minimum statutory net worth requirement, provided that FHS
guaranteed, in form satisfactory to the Commissioner of the DOI, that FOHP-NJ's
net worth will be maintained at a level equal to or in excess of 100% of the
minimum statutory net worth requirement applicable to FOHP-NJ. In December 1997,
the Departments further agreed to permit FOHP-NJ's net worth to remain below
100% until December 31, 1998, provided that it attain certain benchmarks each
quarter during 1998.
In December 1997, FHS contributed an additional $24 million to the Company to
satisfy certain statutory net worth requirements applicable to FOHP-NJ in return
for the New Convertible Debenture. Further, FHS contributed $29,897,801 to the
Company as additional paid in capital to satisfy certain statutory net worth
requirements applicable to FOHP-NJ during 1998. At September 30, 1998, FOHP-NJ
was approximately $11.1 million above the 100% of the minimum statutory net
worth requirement.
In addition to the minimum statutory net worth requirements, FOHP-NJ may not pay
dividends to its parent without prior approval of the Commissioner of the DOI.
6. RELATED PARTY TRANSACTION
Pursuant to an administrative management agreement entered into by FHS and FOHP
in connection with the closing of the Amended Securities Purchase Agreement with
FHS, the Company is required to pay FHS, or a designated subsidiary of FHS
(QualMed, Inc.), a monthly management fee which is currently based on allocated
corporate charges. For the nine-month period ended September 30, 1998, the
Company charged $1,907,000 to expense related to these management fees.
The amount due to FHS at September 30, 1998, represents management fees payable
and interest payable related to the Debentures. The amount due to QualMed, Inc.
at September 30, 1998 primarily represents cost allocations for claims
processing services. Amounts due to MD Health Plan, Inc. and Physician Health
Services, Inc. represent cost allocations for administrative services. Balances
due to QualMed Health & Life, Inc. and Integrated Pharmacy Services, Inc.
represent amounts due for administration of reinsurance and pharmacy services,
respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The Company, a New Jersey corporation, was formed in May 1994 to effect the
Reorganization of FOHP-NJ into a holding company structure. The Reorganization
was consummated on June 8, 1995. Pursuant to the Reorganization, FOHP-NJ became
a wholly owned subsidiary of the Company. Prior to the Reorganization, the
Company did not conduct any business nor did it have any significant assets or
liabilities. The Company does not conduct, nor does management believe that it
will conduct, any business. All health care benefit products and services are,
and will be, provided by the Company's subsidiaries.
FOHP-NJ, a New Jersey corporation, was formed in May 1993 to operate as an HMO
in the State of New Jersey. FOHP-NJ received its COA in June 1994 to operate as
an HMO in the service area encompassing the entire State of New Jersey and
commenced operations on July 1, 1994. Pursuant to the Reorganization, FOHP-NJ
became a wholly owned subsidiary of the Company on June 8, 1995. Currently, it
is the Company's principal subsidiary.
FOHP-NJ markets a comprehensive range of health care benefit plan products,
pursuant to contractual arrangements with physicians, hospitals and other health
care providers. As of November 12, 1998, FOHP-NJ had entered into provider
agreements with 62 New Jersey hospitals and acute care institutions ("NJ Acute
Care Institutions"), approximately 11,000 physicians licensed to practice in New
Jersey ("NJ Practitioners"), and approximately 75 other health care providers.
The provider agreements have an initial term of one year and are renewable
annually. Such agreements with NJ Acute Care Institutions and other health care
providers who are not NJ Practitioners may be terminated by mutual consent or,
after the initial one year term, by either party upon 90 days notice; agreements
with NJ Practitioners may be terminated by either party upon 60 days notice. The
agreements also may be terminated for breaches specified therein. The terms and
conditions of provider agreements are not affected by whether the provider is,
or is not, a shareholder of the Company. However, some agreements with
shareholders that are NJ Acute Care Institutions and subscribers in FOHP-NJ
health plans are different from the subscriber agreements of non-shareholders in
that premium rates for those NJ Acute Care Institutions that are shareholders
are capped to be within a certain corridor (+/- 4%) from their prior year
premium rates. There are 24 NJ Acute Care Institutions with such subscriber
agreements.
FOHP-NJ's agreements with NJ Acute Care Institutions provide for, among other
things, a reimbursement schedule setting the amounts to be paid to the NJ Acute
Care Institutions by FOHP-NJ for services provided to members. The reimbursement
schedule of a provider agreement between a NJ Acute Care Institution and FOHP-NJ
is individually negotiated. Rates paid to NJ Acute Care Institutions for
services provided to members of FOHP-NJ health plans vary from institution to
institution and are based on, among other things, the type of services provided
by, and the location of, the NJ Acute Care Institution. Agreements with
participating NJ Acute Care Institutions prohibit the NJ Acute Care Institutions
from billing a member of an FOHP-NJ health plan for any services paid for under
such plan except for any applicable co-payment, co-insurance, deductibles and
non-covered services.
NJ Practitioners are paid pursuant to a fee schedule established by FOHP-NJ and
are prohibited from billing members of an FOHP-NJ health plan except for
co-payments and non-covered services, if any. The fees paid to NJ Practitioners
are based on a percentage of the fees payable under the fee schedule developed
for Medicare. Co-payments, co-insurance and deductibles in amounts approved by
FOHP-NJ, are collected directly by the NJ Practitioner from the member.
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Subscriber contracts are entered into with large employer groups (more than 50
employees) and small employer groups (50 employees or less). Such contracts are
generally for a term of one year, but may be canceled by the employer group upon
30 days written notice. Under these contracts, FOHP-NJ has agreed to provide the
employer groups with health coverage in return for a monthly premium. FOHP-NJ
utilizes a system of community rating by class, adjusted (with respect to
employer groups of 100 or more employees) by age, sex and industry
classification, in determining its rates for various employers in the proposed
service area. Premium revenue generated from subscriber contracts is recorded as
revenue in the month in which subscribers are entitled to service. Premiums
collected in advance are reported as unearned premium revenue.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
PREMIUM REVENUE. For the three-month period ended September 30, 1998, medical
premium revenue totaled $79.6 million or $18.1 million less than the $97.7
million of medical premium revenue generated during the same period in 1997.
This decrease was due to reduced enrollment in FOHP-NJ health benefit plans,
specifically in the Medicare line of business. Approximately 36% of medical
premium revenue generated in 1998 and approximately 37% of medical premium
revenue generated in 1997 was attributable to NJ Acute Care Institutions, which
are obligated to enroll their employees in FOHP-NJ health plans. The Company
believes that it will benefit by its inclusion in the formation of FHS'
Northeast region, which is comprised of three health plans with a total of more
than one million members in the New York tri-state area, and that such inclusion
will result in a greater percentage of future premium revenue attributable to
members who are not employees of NJ Acute Care Institutions.
OTHER REVENUE. Other revenue, principally administrative fees, for the
three-month period ended September 30, 1998 was $585 thousand compared to $889
thousand of other revenue for the same period of the prior year. Interest income
for the second quarter of 1998 was $1.0 million, as compared to the $1.2 million
generated in 1997.
MEDICAL AND HOSPITAL SERVICE EXPENSES. Total expenses attributable to medical
and hospital service for the three-month period ended September 30, 1998 were
$65.3 million or $49.1 million lower than expenses incurred for the same period
in 1997. The decrease in medical and hospital service expenses from 1997 to 1998
was primarily attributable to a decrease in enrollees in the Medicare line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare lines of business. In addition, the medical loss ratio (i.e., the
percentage of each premium dollar used to pay medical expenses) for the
three-month period ended September 30, 1998 was 82.0% compared to 117.1% for the
same period in 1997. The Company believes that this decrease is attributed to
recent operational changes, specifically the implementation of a modified
provider reimbursement schedule, enhanced utilization management efforts, a
reduction of Medicare enrollment, which had a higher medical loss ratio than the
Company's other lines of business, and a reduction of the IBNR reserve due to
more complete claims payment data being available to the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $14.8 million for the three-month period ended
September 30, 1998, including a $636 thousand administrative management fee
charged by FHS and $559 thousand interest expense associated with the
Convertible and Subordinated Debentures, compared to $14.2 million incurred for
the same period in 1997.
OTHER EXPENSES. Depreciation and amortization expenses for the three-month
period ended September 30, 1998 increased by $642 thousand from the $410
thousand incurred during the same period in 1997. This increase was primarily
the result of amortization of goodwill associated with FHS' investment in the
Company.
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FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
PREMIUM REVENUE. For the nine-month period ended September 30, 1998, medical
premium revenue totaled $251.0 million or $23.5 million less than the $274.5
million of medical premium revenue generated during the same period in 1997.
This decrease was due to reduced enrollment in FOHP-NJ health benefit plans,
specifically in the Medicare line of business. Approximately 38% of medical
premium revenue generated in the first nine months of 1998 and approximately 35%
of medical premium generated in the first nine months of 1997 was attributable
to NJ Acute Care Institutions which are obligated to enroll their employees in
FOHP-NJ health plans. The Company believes that it will benefit by its inclusion
in the formation of FHS' Northeast region, which is comprised of three health
plans with a total of more than one million members in the New York tri-state
area, and that such inclusion will result in a greater percentage of future
premium revenue attributable to members who are not employees of NJ Acute Care
Institutions.
OTHER REVENUE. Other revenue, principally administrative fees, for the
nine-month period ended September 30, 1998 was $2.1 million compared to $1.8
million of other revenue for the same period of the prior year. Interest income
for the first nine months of 1998 was $3.2 million, a $300 thousand increase
from the $2.9 million generated in the first nine months of 1997. The increase
in interest income was due to the larger cash reserves related to additional
capital contributions from FHS in December 1997 and during 1998.
MEDICAL AND HOSPITAL SERVICE EXPENSES. Total expenses attributable to medical
and hospital service for the nine-month period ended September 30, 1998 were
$200.7 million or $82.7 million less than expenses incurred for the same period
in 1997. The decrease in medical and hospital service expenses from 1997 to 1998
was primarily attributable to a decrease in enrollees in the Medicare line of
business as well as enhanced utilization efforts in the Commercial, Medicaid and
Medicare lines of business. In addition, the medical loss ratio (i.e., the
percentage of each premium dollar used to pay medical expenses) for the
nine-month period ended September 30, 1998 was 79.9% compared to 103.2% for the
same period in 1997. The Company believes that this decrease is attributed to
recent operational changes, specifically the implementation of a modified
provider reimbursement schedule, enhanced utilization management efforts, a
reduction of Medicare enrollment, which had a higher medical loss ratio than the
Company's other lines of business, and a reduction of the IBNR reserve due to
more complete claims payment data being available to the Company.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $46.2 million for the nine-month period ended
September 30, 1998, including a $1.9 million management fee payable to FHS,
compared to $44.7 million incurred for the same period in 1997.
OTHER EXPENSES. Depreciation and amortization expenses for the nine-month period
ended September 30, 1998 increased by $2.1 million from $1.0 million incurred
during the same period in 1997. This increase was mostly the result of
amortization of goodwill associated with FHS' investment in the Company.
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LIQUIDITY AND CAPITAL RESOURCES
Gross proceeds of approximately $12,400,000, received by FOHP-NJ from the
private offering and sale of 826,708 shares of common stock in 1993, were
sufficient to cover the expenses incurred by FOHP-NJ in connection with the
formation and development of its business. In order to fund its continuing
development activities, FOHP-NJ sold 744,445 shares of common stock in a public
offering which closed on October 31, 1994. Gross proceeds received by FOHP-NJ as
a result of the sale of stock in the public offering amounted to $11,166,675.
Further, in order to fund its continuing development of HMOs in New York,
Pennsylvania and several other states, the Company sold 529,120 shares of Common
Stock-NJ to NJ Practitioners in an offering which ended on September 1, 1995.
Gross proceeds received by the Company as a result of the sale of Common
Stock-NJ in the offering to NJ Practitioners amounted to $7,937,000.
FOHP-NJ is required by the Departments to maintain a minimum statutory net
worth. In addition, if FOHP-NJ's statutory net worth is, or is expected to be,
less than 125% of the minimum statutory net worth requirement, FOHP-NJ is
required to submit to the Departments a plan of action to address the deficiency
or expected deficiency. During the first quarter of 1996, FOHP learned that
FOHP-NJ's statutory net worth as of December 31, 1995 may have been below 125%
of the minimum statutory net worth requirement. FOHP-NJ addressed this potential
deficiency by submitting to the Departments in April 1996 a plan of action,
which outlined the actions taken and measures to be used by FOHP-NJ to correct
the potential deficiency.
As part of the plan of action, on April 30, 1997, FOHP sold to FHS the Initial
Debenture in the aggregate principal amount of $51,701,120.38, pursuant to the
Amended Securities Purchase Agreement. The principal amount of the Initial
Debenture was convertible, at the option of FHS, into 71% of FOHP's capital
stock on a fully diluted basis. At the closing of the purchase of the Initial
Debenture, FHS converted $1,701,120.38 of principal amount of the Initial
Debenture into 168,109 shares of Common Stock.
To facilitate the sale of the Initial Debenture to FHS, the Departments agreed
to rescind their conditions attached to their approval of the plan of action
submitted by FOHP-NJ in April 1996, subject to the Department's right to require
FOHP-NJ to submit a new plan of action if FOHP-NJ failed to increase its net
worth to 100% of the minimum statutory net worth requirement by December 31,
1997. In addition, the Departments agreed that subsequent to December 31, 1997,
FOHP-NJ will only be required to maintain net worth at 100% of the minimum
statutory net worth requirement applicable to it, and not 125% of the minimum
statutory net worth requirement as required prior to the sale of the Initial
Debenture, provided that FHS guaranteed, in form satisfactory to the
Commissioner of the DOI, that FOHP-NJ's net worth will be maintained at a level
equal to or in excess of 100% of the minimum statutory net worth requirement
applicable to FOHP-NJ. In December 1997 the Departments further agreed to permit
FOHP-NJ's net worth to remain below 100% until December 31, 1998, provided that
it attain certain benchmarks each quarter during 1998.
In connection with the sale of the Initial Debenture, FHS and FOHP entered into
a Letter Agreement (the "Letter Agreement") which clarifies FHS' right under the
Amended Securities Purchase Agreement to infuse additional capital into FOHP in
the event that it is determined that FOHP-NJ needs capital to meet applicable
statutory net worth requirements (referred to herein as a "Net Capital
Shortfall"). Pursuant to the Letter Agreement, FHS had the right to, at any time
prior to December 31, 1997, contribute up to $5,000,000 in additional capital to
FOHP to be used in connection with certain anticipated liabilities and
contribute such additional amounts that may be projected to be required from
time to time (based upon reasonable projections prepared by FHS taking into
account anticipated full year 1997 operating results) in order for FOHP-NJ to
meet 100% of the minimum statutory net worth requirements as of December 31,
1997. In the event that FHS contributed additional capital to FOHP to meet a Net
Capital Shortfall or projected Net Capital Shortfall in accordance with the
terms of the Amended Securities Purchase Agreement, as clarified by the Letter
Agreement, FHS would be issued additional Convertible Debentures.
The Amended Securities Purchase Agreement also provides that if FOHP projects a
Net Capital Shortfall and FHS does not advance funds to FOHP to satisfy such Net
Capital Shortfall, FOHP may initiate a pro rata offering of its Common Stock to
all the then-current shareholders of the Company to raise capital to satisfy the
Net Capital Shortfall.
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Effective December 1, 1997, FHS converted the remaining $50 million of the
principal amount of the Initial Debenture, dated as of April 30, 1997, into
4,941,049 shares of Common Stock. After the conversion, FHS owned 5,109,158
shares of the 7,195,997 shares of Common Stock then outstanding, which
represented 71% of the fully diluted equity of the Company.
In order to satisfy certain statutory net worth requirements applicable to
FOHP-NJ and in accordance with the Amended Securities Purchase Agreement, FHS
elected on December 8, 1997 to infuse $29 million into the Company in exchange
for the New Convertible Debenture. Immediately upon receipt of the New
Convertible Debenture, FHS converted approximately $18,952,930 of the principal
amount thereof into 92,804,000 shares of the Common Stock. After the partial
conversion of the New Convertible Debenture, FHS owned 97,913,161 shares of the
100,000,000 shares of Common Stock then outstanding, which represented
approximately 98% of the fully-diluted equity of the Company.
In December 1997, FHS also contributed an additional $24 million to the Company
to satisfy certain statutory net worth requirements applicable to FOHP-NJ in
return for Subordinated Debentures. Further, FHS contributed $29,897,801 to the
Company as additional paid in capital to satisfy certain statutory net worth
requirements applicable to FOHP-NJ during 1998.
Pursuant to new HMO regulations adopted in the State of New Jersey, FOHP-NJ is
required to maintain a "Minimum Insolvency Deposit for Health Care
Expenditures." As of September 30, 1998, it is estimated that this deposit
covering two months of incurred health care expenditures will be approximately
$69 million. The initial deposit, or $12.5 million (including interest earned),
was made by September 30, 1997. An additional $4.6 million was deposited on
March 31, 1998, $9.5 million was deposited on April 2, 1998, $14.6 million was
deposited on June 30, 1998 and $14.1 million was deposited on September 30,
1998. The remainder of the deposit will be made by December 31, 1998 and is
subject to a revised calculation as of September 30, 1998.
During the fourth quarter of 1998, the Company will significantly decrease
membership in its self-insured line of business, which consists primarily of
administrative service only contracts. Management does not expect this decrease
in membership to have a material effect on operations.
IMPACT OF YEAR 2000
The Company, and its parent, FHS, recognize that the arrival of the Year 2000
requires computer systems to be able to recognize the date change from 1999 to
2000 and, like other companies, are assessing and modifying their computer
applications and business processes to provide for their continued
functionality.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, prepare invoices or
engage in normal business activities. In addition, the year 2000 problems of the
Company's providers and customers, including governmental entities, can affect
the Company's operations, which are highly dependent upon information technology
for processing claims, determining eligibility and exchanging information.
FHS, for itself and on behalf of its subsidiaries, including FOHP, has
undertaken a comprehensive review of the Year 2000 issue and its affect on the
operations of FHS and its subsidiaries. The Company has assisted FHS in
addressing the Year 2000 issue as it pertains to the Company. However, FHS will
ultimately direct how the Company addresses the Year 2000 issue and will
initially incur all the costs associated with ensuring that the Company is Year
2000 compliant, which costs may be allocated to the Company at a future point in
time.
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Set forth below is a brief description of FHS' effort to address the Year 2000
issue:
PROJECT STATUS. The Year 2000 effort for FHS has the highest priority of
technology projects. The project has dedicated resources with multiple teams to
address unique systems environments. Uniform project management techniques have
been adopted with overall oversight responsibility residing with FHS' Chief
Technology Officer, assisted by a special project manager hired by FHS. Selected
systems will be retired with the business functions being converted to Year 2000
compliant systems. A number of the FHS' systems include packaged software from
large vendors that FHS is closely monitoring to ensure that those systems are
Year 2000 compliant. FHS believes that vendors will make timely updates
available to ensure that all remaining software is Year 2000 compliant. The
remaining systems' compliance with Year 2000 will be addressed by internal
technical staff. FHS has engaged IBM to assist in the program management of the
project. FHS has also retained legal consultants to assist in the review of
insurance and FHS' obligations and rights, and intends to retain a technical
consultant to help develop contingency plans.
FHS has divided its Year 2000 effort into five phases: (1) Assessment and
Strategy; (2) Detailed Analysis and Planning; (3) Remediation; (4) Testing and
Implementation; and (5) Certification. FHS believes that Phase 1 is almost
complete. FHS has requested that each of its geographical and specialty service
divisions conduct a detailed internal self-assessment as to their compliance,
needs, risks and contingency planning, which will then be reviewed and
prioritized at the corporate level. FHS believes that it has completed
approximately 80% of Phase 2, approximately 30% of Phase 3 and approximately 15%
of Phase 4 relating to its internal technology. FHS has established the third
quarter of 1999 to complete all phases and is endeavoring to accelerate
completion ahead of that time.
The Company is a member of FHS' Northeast Region. The Company is presently
converting its claims and billing systems to a common northeast platform which
is maintained by PHS, a wholly-owned subsidiary of FHS. Therefore, PHS is
providing, on behalf of the members of FHS' Northeast Region, a Year 2000
compliance report to FHS.
THIRD PARTIES. FHS has commenced an inventory of third party relationships,
identifying them and analyzing their strategic importance to FHS and its
subsidiaries and their Year 2000 readiness. FHS expects to complete its risk
assessment for third parties in the fourth quarter of 1998. There can be no
assurances that the systems of other companies on which FHS or the Company
relies will be compliant on a timely basis, or that the failure by a third party
to be compliant would not have a material adverse effect on FHS or the Company.
COSTS. FHS is evaluating on an ongoing basis the related costs to resolve its
potential Year 2000 problems. FHS currently estimates that the total cost for
the project will exceed $17 million, excluding the costs to accelerate the
replacement of hardware or software otherwise required to be purchased by FHS,
and the use of existing personnel to assist in the project. In this quarter, the
first quarter in which FHS separately tracked the costs relating to the project,
FHS has expended approximately $5.3 million, relating to, among other things,
the cost to repair or replace software and related hardware problems, cost of
assessment, analysis and planning and internal and external communications. The
percentage of the total cost of the Year 2000 project attributable to the
Company has not yet been determined. However, the Company does not believe that
any allocation of the costs of the Year 2000 project to the Company will have a
material affect on the Company's operations.
Notwithstanding the foregoing, the costs of the project and the timetable in
which FHS plans to complete the Year 2000 compliance requirements are based on
estimates derived from utilizing numerous assumptions of future events including
the continued availability of certain resources, third party modification plans
and other factors. There can therefore be no assurance that these estimates will
be achieved and actual results and costs could differ materially from these
estimates.
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Certain insurance coverages for defense costs associated with Year 2000
litigation have already been secured under FHS' Directors and Officers Liability
Insurance policy and will be re-evaluated upon renewal of that policy. At this
time it is unclear as to extent of existing insurance coverage, if any, FHS may
have to cover potential Year 2000 costs and liabilities under its other
insurance policies. FHS is currently analyzing the availability of such coverage
under other existing and future insurance policies and products.
CONTINGENCY PLANNING. An important part of FHS' Year 2000 project involves
identifying worst case scenarios and seeking to develop contingency plans. Each
geographical and specialty services division of FHS is ranking its critical
business functions in one of four categories, from the most important (a
function which is vital to the line of business and which has a significant
impact on FHS' reputation and critical daily operations, for which an
alternative must be immediately available), to the least important (a function
which has a negligible effect on FHS' provision of services and reputation and
for which alternatives are readily available). In addition to acting to address
the most critical problems first in its remediation effort, FHS will also seek
to develop its contingency plans to prioritize the most critical business
functions. FHS has just begun its efforts in this area.
RISKS. FHS and the Company are highly dependent upon their own information
technology systems and that of their providers and customers. If FHS, the
Company or a third party failed to correct a material Year 2000 problem such
failure could result in a failure of or interruption in FHS' or the Company's
business activities and operations. Such interruptions and failures could
materially and adversely affect FHS' or the Company's results of operations,
liquidity and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the readiness
of third-party providers and customers, neither FHS nor the Company is able to
determine at this time whether the Year 2000 problem will have a material
adverse, effect on FHS' or the Company's results of operations, liquidity or
financial condition. FHS' Year 2000 project is expected to reduce significantly
FHS' and the Company's level of uncertainty and the possibility of significant
or long-lasting interruptions of FHS' or the Company's business operations;
however, FHS and the Company believe that it is impossible to predict all of the
areas in which material problems may arise.
Forward-looking statements contained in this Year 2000 section should be read in
connection with the Company's cautionary statements identifying important risk
factors that would cause the Company's actual results to differ materially from
those projected in these forward-looking statements, which cautionary statements
were previously filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
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ITEM 5. OTHER INFORMATION
AMENDMENT TO CERTIFICATE OF INCORPORATION OF THE COMPANY - On October
6, 1998, a Certificate of Amendment to the Company's Certificate of
Incorporation was filed with the Department of Treasury, Division of Revenue of
the State of New Jersey, pursuant to which the total number of shares of the
Company's authorized capital stock was increased from 110,000,000 shares to
500,000,000 shares. Of the 500,000,000 shares of authorized capital stock,
499,000,000 shares are classified as Common Stock and 1,000,000 shares are
classified as Preferred Stock.
HMO SUBSIDIARY MERGER - FOHP-NJ, a wholly-owned subsidiary of the
Company, and Physicians Health Services of New Jersey, Inc. ("PHS-NJ"), a
wholly-owned subsidiary of Physicians Health Services, Inc., which is a
wholly-owned subsidiary of FHS, have entered into an Agreement and Plan of
Merger dated as of October 26, 1998, pursuant to which PHS-NJ will merge with
and into FOHP-NJ (the "HMO Subsidiary Merger"). Each of FOHP-NJ and PHS-NJ
currently operates as an HMO in the State of New Jersey. The HMO Subsidiary
Merger is expected to be effective as of January 1, 1999. At the effective time
of the HMO Subsidiary Merger, FOHP-NJ will change its name to Physicians Health
Services of New Jersey, Inc. The purpose of the HMO Subsidiary Merger is to
consolidate the FHS controlled HMO operations in the State of New Jersey into
primarily one corporation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 11 - Computation of Earnings Per Share.
Exhibit 27 - Financial Data Schedule.
Reports on Form 8-K - For the three months ended September 30, 1998, the Company
filed the following Current Report on Form 8-K with the Securities and Exchange
Commission:
Form 8-K (Item 4. Changes in Registrant's Certifying Accountant), date of
earliest event reported July 13, 1998, with respect to the appointment of
Deloitte & Touche LLP as the Company's independent accountants for the year
ending December 31, 1998, as amended.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FOHP, INC.
----------------------------------
(Registrant)
NOVEMBER 12, 1998 /s/ Thomas W. Wilfong
----------------- ----------------------------------
Date (Signature)**
THOMAS W. WILFONG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NOVEMBER 12, 1998 /s/ Marc M. Stein
----------------- ----------------------------------
Date (Signature)**
MARC M STEIN
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
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PROXY
FOHP, INC.
SPECIAL MEETING OF SHAREHOLDERS -- JANUARY , 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby nominates and appoints Thomas W. Wilfong and Donald
Parisi, or any one of them, as the true and lawful attorneys, agents and proxies
of the undersigned, with full power of substitution to each, to vote with
respect to all of the shares of Common Stock of FOHP, Inc. (the "Corporation")
that the undersigned may be entitled to vote at the Special Meeting of
Shareholders of said Corporation to be held at the CNA Building, 3501 State
Highway 66, Neptune, New Jersey on January , 1999 at 6:00 p.m. local time (the
"Special Meeting"), and at any and all adjournments or postponements thereof,
with all powers that the undersigned would possess if personally present and
especially (but without limiting the general authorization and power hereby
given) to vote as indicated herein.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED,
AND IF NO INSTRUCTIONS TO THE CONTRARY ARE INDICATED, WILL BE VOTED FOR THE
PROPOSAL TO APPROVE THE AGREEMENT AND PLAN OF MERGER DESCRIBED IN PARAGRAPH 1
BELOW.
1. To approve the Agreement and Plan of Merger dated as of November 16, 1998
among the Corporation, FHS Transition Company and Foundation Health Systems,
Inc., and the transactions contemplated thereby.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, upon such other matters as may properly come before the
Special Meeting or any adjournments or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A FOR VOTE ON THE PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF MERGER DESCRIBED IN PARAGRAPH 1 ABOVE.
NOTE: Please mark, sign, date and return this Proxy promptly in the envelope
provided. No postage is required if mailed in the United States.
Dated: , 1999
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IMPORTANT: Please sign exactly as
your name appears at the left. When
signing as attorney, executor,
administrator, trustee or guardian,
please set forth your full title. If
the signatory is a corporation,
please write the full corporate name
and have this proxy signed by a duly
authorized officer of such
corporation. Joint owners should each
sign.
