UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
------------------------------------------
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
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FOHP, INC.
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(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3314813
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3501 STATE HIGHWAY 66, NEPTUNE, NEW JERSEY 07753
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(Address of principal executive offices) (Zip Code)
(732) 918 - 6700
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
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 [ ] 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.
499,000,000 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE, OUTSTANDING AS OF
MAY 21, 1999
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INDEX PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations 4
For the period January 1, 1999 to March 31, 1999
For the period January 1, 1998 to March 31, 1998
Condensed Consolidated Statements of Shareholders'
(Deficiency) Equity 5
For the period January 1, 1998 to December 31, 1998
For the period January 1, 1999 to March 31, 1999
Condensed Consolidated Statements of Cash Flows 6
For the period January 1, 1999 to March 31, 1999
For the period January 1, 1998 to March 31, 1998
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 24
Signature Page 25
2
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<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOHP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1999 1998
------------------------------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 45,603,700 $ 44,052,058
Marketable securities 275,078 -
Accounts receivable from owners/providers, net of allowances for doubtful accounts
and retroactive terminations of $1,524,149 in 1999 and $1,546,616 in 1998 11,087,437 5,138,201
Other accounts receivable, net of allowance for doubtful accounts and retroactive
terminations of $653,206 in 1999 and $662,836 in 1998. 9,263,630 4,918,844
Due from Integrated Pharmacy Services, Inc. 763,042 3,540,608
Prepaid and other current assets 69,435 513,073
-----------------------------------
Total current assets 67,062,322 58,162,784
Restricted cash 66,421,741 57,855,421
Furniture and equipment, net 4,724,642 1,730,136
Goodwill, net of accumulated amortization of $3,366,570 in 1999 and $2,693,256 in 1998 95,564,543 96,237,857
Deferred tax asset 5,575,739 3,942,798
Other assets 107,993 350,419
-----------------------------------
Total assets $ 239,456,980 $ 218,279,415
===================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable to owners/providers $ 11,873,171 $ 18,106,942
Other medical claims payable 58,751,110 42,249,530
Accounts payable 3,624,985 215,855
Accrued expenses, including restructuring accrual of approximately $1,207,753
in 1999 and $1,577,000 in 1998 12,458,607 9,512,535
Due to Foundation Health Systems, Inc. 738,959 1,446,459
Due to other affiliates 1,597,032 612,989
Unearned premium 2,568,012 1,204,911
-----------------------------------
Total current liabilities 91,611,876 73,349,221
Convertible debentures payable to Foundation Health Systems, Inc. 11,336,934 11,131,386
Subordinated debentures payable to Foundation Health Systems, Inc. 25,533,254 25,113,575
-----------------------------------
Total liabilities 128,482,064 109,594,182
Shareholders' equity:
Preferred Stock, $1.00 par value, 1,000,000 shares authorized,
none issued or outstanding
Common Stock, $.01 par value, 499,000,000 shares authorized,
issued and outstanding 1,011,941 1,011,941
Additional paid-in capital 268,150,758 239,135,758
Accumulated deficit (158,187,783) (131,462,466)
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Total shareholders' equity 110,974,916 108,685,233
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Total liabilities and shareholders' equity $ 239,456,980 $ 218,279,415
============= =============
</TABLE>
See accompanying notes
3
<PAGE>
FOHP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
REVENUE:
Premiums from owners/providers $ 24,906,154 $ 34,981,939
Other premium revenue 61,500,728 54,891,193
Other, principally administrative service fees 351,975 875,331
Interest income 1,450,989 1,232,062
------------------------------------
Total revenue 88,209,846 91,980,525
------------------------------------
EXPENSES:
Medical services to owners/providers 14,555,350 25,493,241
Other medical services 71,064,357 51,703,616
Selling, general and administrative 1,292,206 14,706,604
Management fee - Foundation Health Systems, Inc. - 635,000
Management fee - Physicians Health Services, Inc. 7,925,779 -
Amortization of goodwill 673,314 673,314
Depreciation and other amortization 269,609 363,399
Interest - Foundation Health Systems, Inc. 601,615 515,598
Other interest 79,821 109,151
------------------------------------
Total expenses 96,462,051 94,199,923
------------------------------------
NET LOSS BEFORE PROVISION FOR INCOME TAXES (8,252,205) (2,219,398)
Benefit for income taxes (3,431,555) (1,329,713)
------------------------------------
NET LOSS $ (4,820,650) $ (889,685)
====================================
NET LOSS PER COMMON SHARE $ (0.01) $ (0.01)
====================================
</TABLE>
See accompanying notes
4
<PAGE>
FOHP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------- ADDITIONAL SHAREHOLDERS
PAR PAID-IN ACCUMULATED (DEFICIENCY)
SHARES VALUE CAPITAL DEFICIT EQUITY
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<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 100,000,000 $1,000,000 $208,053,796 $(136,620,579) $ 72,433,217
Redemption of Common Stock (3,000) (30) (1,050) (1,080)
Issued Common Stock (December 31, 1998 at
$.003 per share) 399,003,000 11,971 1,185,211 1,197,182
Net income for the period January 1, 1998 to
December 31, 1998 5,158,113 5,158,113
Capital contributed by Foundation Health
Systems, Inc. 29,897,801 29,897,801
--------------------------------------------------------------------------
Balance at December 31, 1998 (audited) 499,000,000 1,011,941 239,135,758 (131,462,466) 108,685,233
Increase in equity due to merger of Physicians
Health Services of New Jersey, Inc. into First
Option Health Plan of New Jersey, Inc. 29,015,000 (21,904,667) 7,110,333
Net loss for the period January 1, 1999 to
March 31, 1999 (4,820,650) (4,820,650)
--------------------------------------------------------------------------
Balance at March 31, 1999 499,000,000 $1,011,941 $268,150,758 $(158,187,783) $110,974,916
==========================================================================
</TABLE>
See accompanying notes
5
<PAGE>
FOHP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
JANUARY 1, 1999 JANUARY 1, 1998
TO MARCH 31, 1999 TO MARCH 31, 1998
-----------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,820,650) $ (889,685)
Adjustments to reconcile net loss to cash;
Depreciation and amortization 942,923 1,036,713
Interest cost converted to debt 625,227 506,036
Loss on disposal of fixed assets 12,000 -
Changes in operating assets and liabilities:
Accounts receivable from owners/providers (5,949,236) (3,558,751)
Other accounts receivable 5,767,081 (160,423)
Due from other affiliates 13,256,202 -
Income tax receivables - (1,331,638)
Prepaid expenses and other current assets 580,999 212,993
Restricted cash (560,204) (4,785,370)
Deferred tax asset (533,286) -
Other assets 242,426 10,900
Medical claims payable to owners/providers (6,233,771) (6,875,578)
Other medical claims payable 2,822,667 (5,866,072)
Accounts payable 2,021,916 303,799
Accrued expenses 1,750,416 451,654
Due to Foundation Health Systems, Inc. (707,500) 644,562
Due to QualMed, Inc. - (504,559)
Due to other affiliates (108,796) -
Unearned premium revenue (7,343,630) (6,635,635)
Other liabilities - (8,054)
--------------------------------------------
Net cash provided by (used in) operating activities 1,764,784 (27,449,108)
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (275,078) -
Physicians Health Services of New Jersey, Inc.
December 31, 1998 cash and cash equivalents 2,936,052 -
Purchases and additions of furniture and equipment (2,874,116) 792,561
--------------------------------------------
Net cash used in investing activities (213,142) 792,561
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributed by Foundation Health Systems, Inc. - 7,297,801
--------------------------------------------
Net increase (decrease) in cash and cash equivalents
at the end of the period 1,551,642 (20,943,868)
Cash and cash equivalents at the beginning of the period 44,052,058 79,266,721
--------------------------------------------
Cash and cash equivalents at the end of the period $ 45,603,700 $ 58,322,853
============================================
Interest paid for the period $ 70,274 $ 73,336
============================================
State income taxes paid for the period $ 200 $ 1,075
============================================
</TABLE>
See accompanying notes
6
<PAGE>
FOHP, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1999
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
Physicians Health Services of New Jersey, Inc.("PHS-NJ"), formerly known as
First Option Health Plan of New Jersey, Inc. PHS-NJ, a New Jersey corporation
formed in May 1993 as First Option Health Plan of New Jersey, Inc., 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 Pennsylvania, Inc., a Pennsylvania
corporation, First Option Health Plan of Maryland, Inc., a Maryland corporation,
and FOHP Agency, Inc., a New Jersey corporation, each formed in 1995. These
other subsidiaries are not active. Since January 1, 1998, First Option Health
Plan of New York, Inc., First Option Health Plan of Delaware, Inc. and First
Option Dental, Inc., former inactive subsidiaries of the Company, have been
dissolved.
The Company is a New Jersey corporation that was formed in May 1994. The Company
was formed to effect the reorganization of PHS-NJ into a holding company
structure (the "Reorganization"), which was consummated on June 8, 1995. The
Reorganization was completed through an exchange of PHS-NJ's outstanding common
stock for shares of the Company's Common Stock-NJ. In connection with the
Reorganization, PHS-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, PHS-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 HMOs in states
other than New Jersey. In December 1996, the Company sold all of the outstanding
common stock of FMCO.
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 by either party upon 90 days written notice; agreements with
physicians may be terminated by either party upon 60 days written notice. The
Provider Agreements may also be terminated for breaches specified therein. The
Provider Agreements, among other things, establish covered services, billing and
payment procedures, and reimbursement methods.
Effective December 8, 1997, through the conversion of debentures (the
"Convertible Debentures") into shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), the Company became a 98% owned subsidiary of
Foundation Health Systems, Inc. ("FHS"), a Delaware corporation. On December 31,
1998, FHS converted additional Convertible Debentures into shares of Common
Stock, which increased its ownership interest to 99.6%.
On January 1, 1999, Physicians Health Services of New Jersey, Inc., a New Jersey
corporation controlled by FHS which operated as an HMO in the State of New
Jersey, merged with and into PHS-NJ pursuant to an Agreement and Plan of Merger
dated October 26, 1998. In connection with the merger, PHS-NJ changed its name
from First Option Health Plan of New Jersey, Inc. to Physicians Health Services
of New Jersey, Inc. The purpose of the merger was to consolidate the operations
of the HMOs controlled by FHS in the State of New Jersey into substantially one
corporation. This merger was accounted for as a pooling of interest of entities
under common control. Accordingly, the results of operations for the three
months ended March 31, 1999, include the results of the merged entity.
7
<PAGE>
FOHP, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1999
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated
November 16, 1998, FHS will acquire the remaining 0.4% outstanding ownership
interest in the Company from the provider shareholders of FOHP. In connection
with the Merger, a provider shareholder of FOHP will be offered for his, her or
its shares of Common Stock either the value of such shares at December 31, 1998
as determined by one or more independent appraisers or payment rights (one
payment right per share). The payment rights would entitle provider shareholders
to receive a payment of not less than $15 per share of Common Stock on or about
July 1, 2001, provided that certain conditions are either satisfied or waived.
The Merger Agreement is subject to several conditions, including shareholder and
regulatory approval.
The Company is dependent upon 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 Company generated a net loss of $4,820,650 for the three-month period ended
March 31, 1999 and has an accumulated deficit of $158,229,058 at March 31, 1999.
In order for the Company's principal operating subsidiary, PHS-NJ (See Note 5),
to meet statutory net worth requirements set forth in its COA granted by the New
Jersey Department of Banking and Insurance (the "DOI") and the New Jersey
Department of Health and Senior Services (the "DOH") (the DOI and DOH are
collectively referred to herein as the "Departments"), the Company must generate
sufficient operating profits and/or obtain one or more capital contributions
from FHS.
In connection with PHS-NJ's plan to remedy its statutory net worth deficiency at
December 31, 1995, as set forth in a plan of action submitted to the Departments
(See Note 5), the Board of Directors of the Company approved an investment by
FHS of approximately $51.7 million into the Company effective April 30, 1997.
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 Common Stock. On December 1, 1997, FHS
converted the remaining $50,000,000 of principal into 4,941,049 shares of Common
Stock. On December 8, 1997, due to the continued operating losses of PHS-NJ in
1997, FHS invested an additional $29,897,801 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
Common Stock, increasing FHS' ownership interest in the Company to approximately
98%.
On December 31, 1998, FHS converted $1,197,182 of principal of the New
Convertible Debenture into 399,003,000 shares of Common Stock. After the
conversion, 499,000,000 shares of Common Stock were outstanding, with FHS owning
496,916,161 of such shares or 99.6% of the fully diluted equity of the Company.
The price per share paid by FHS upon conversion of the Convertible Debentures
was calculated in accordance with the Amended and Restated Securities Purchase
Agreement (the "Amended Securities Purchase Agreement") entered into by FHS, the
Company and PHS-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 March 31, 1999, $4,020,776 of
defaulted interest is included in the principal amount of the Convertible
Debentures.
8
<PAGE>
FOHP, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1999
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 estimated 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.
In December 1997, FHS also contributed an additional $24,000,000 to the Company
to satisfy certain statutory net worth requirements applicable to PHS-NJ in
return for additional subordinated debentures (the "Subordinated Debentures")
which are not convertible into 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 PHS-NJ through March 31, 1999.
The financial information for the three month periods ended March 31, 1999 and
March 31, 1998 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. Such
information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Part I -
Item 2 hereof.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. The
following is a summary of 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 these 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.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at estimated net realizable value by including
provisions for retroactive terminations and uncollectible amounts.
9
<PAGE>
FOHP, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1999
RESTRICTED CASH
At March 31, 1999, PHS-NJ maintained $64,999,334 on deposit with the DOI, as
required to meet its "Minimum Insolvency Deposit for Healthcare Expenditures"
under current insurance regulations. In addition, PHS-NJ is required to maintain
a $1,200,000 cash reserve with the Health Care Financing Administration ("HCFA")
for its federal programs. As of March 31, 1999, PHS-NJ had $1,422,407 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 PHS-NJ and the State
of New Jersey Department of Human Services, Division of Medical Assistance and
Health Services ("NJDHS-DMAHS"). The contract with NJDHS is renewable annually.
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 PHS-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 PHS-NJ and HCFA for
services provided to Medicare eligible recipients. The contract with HCFA is
renewable annually. Premiums are earned monthly on a per capita basis, based on
the number of eligible members enrolled in PHS-NJ health plans.
In 1996, Physicians Health Services of New Jersey, Inc. entered into marketing
and reinsurance agreements with The Guardian Life Insurance Company of America
("Guardian"). Pursuant to quota share reinsurance agreements, the Company writes
its HMO/POS In-Network business and cedes 50% to Guardian and writes its HMO/POS
out-of-network business and cedes 100% to Guardian, which retrocedes 50% to
PHS/Bermuda, Ltd., an affiliate of PHS-NJ. As part of the arrangement, the
Company recovers from Guardian a specified portion of the administrative expense
related to the activity.
Premiums ceded to Guardian under the above arrangement for the three-month
period ended March 31, 1999 were approximately $6,493,500, and health care
expenses ceded to Guardian under the above arrangement were approximately
$1,202,000 for the same period.
OTHER REVENUE
Other revenue consists principally of fees for administrative service only
contracts, which are recognized as income as services are rendered.
10
<PAGE>
FOHP, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1999
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.
PHS-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 NJDHS-DMAHS for Medicaid, providers are reimbursed for health
care services provided to Medicaid 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.
PHS-NJ also contracts with another party for the arrangement of mental health
services provided to enrollees in its health care plans. PHS-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 PHS-NJ and
the servicer. If costs are greater than the capitation payments, any shortfall
must be funded equally by PHS-NJ and the servicer.
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 three-month periods ended
March 31, 1999 and 1998 (499,000,000 in 1999 and 100,000,000 in 1998,
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.
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 (6.63% as of March 31, 1999). Interest is due and
payable within ten days after the end of each quarter, subject to the terms
noted above.
11
<PAGE>
FOHP, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1999
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
PHS-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
PHS-NJ's statutory net worth is, or is expected to be, less than 125% of the
minimum statutory net worth requirement applicable to it, PHS-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 PHS-NJ's
statutory net worth as of December 31, 1995 may have been below 125% of the
minimum statutory net worth requirement applicable to PHS-NJ. PHS-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 PHS-NJ to correct the potential deficiency.
As part of the plan of action, on April 30, 1997, the Company sold the Initial
Convertible Debenture to FHS in the principal amount of $51,701,120.38. The
principal amount of the Initial Convertible Debenture was converted by FHS into
71% of FOHP's capital stock on a fully-diluted basis.
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FOHP, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 1999
To facilitate the sale of the Initial Convertible Debenture to FHS, the
Departments agreed to rescind their conditions attached to their approval of the
plan of action submitted by PHS-NJ in April 1996, subject to the Department's
right to require PHS-NJ to submit a new plan of action if PHS-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 PHS-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 PHS-NJ. In
December 1997, the Departments further agreed to permit PHS-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 PHS-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 March 31, 1999, PHS-NJ was
approximately $14,764,591 above the 100% of the minimum statutory net worth
requirement.
In addition to the minimum statutory net worth requirements, PHS-NJ may not pay
dividends to its parent without prior approval of the Commissioner of the DOI.
6. RELATED PARTY TRANSACTIONS
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
(Physicians Health Services, Inc.), a monthly management fee which is currently
based on allocated corporate charges, including substantially all general and
administrative expenses previously paid separately by FOHP. For the three-month
period ended March 31, 1999, the Company charged $7,925,779 to expense related
to these management fees.
The amounts due to FHS at March 31, 1999 and March 31, 1998, respectively,
represent management fees payable and interest payable related to the
Convertible Debentures (which haven't been converted to principal at March 31,
1999) and Subordinated Debentures. Amounts due to other affiliates, which are
wholly-owned by FHS, represent cost allocations due for administration services.
The balances due from Integrated Pharmacy Services, Inc. ("IPS") represent
amounts due for payments made by the Company, on behalf of IPS, for pharmacy
services.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company, a New Jersey corporation, was formed in May 1994 to effect
the Reorganization of PHS-NJ (formerly First Option Health Plan of New Jersey,
Inc.) into a holding company structure. The Reorganization was consummated on
June 8, 1995. Pursuant to the Reorganization, PHS-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.
PHS-NJ, a New Jersey corporation, was formed in May 1993 to operate as
an HMO in the State of New Jersey. PHS-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,
PHS-NJ became a wholly-owned subsidiary of the Company on June 8, 1995. On
January 1, 1999, Physicians Health Services of New Jersey, Inc., a New Jersey
HMO controlled by FHS, merged with and into PHS-NJ. At the effective time of the
merger, PHS-NJ changed its name to "Physicians Health Services of New Jersey,
Inc." The purpose of the merger was to consolidate the FHS controlled operations
in the State of New Jersey into primarily one corporation. Currently, PHS-NJ is
the Company's principal subsidiary.
PHS-NJ markets a comprehensive range of health care benefit plan
products pursuant to contractual arrangements with physicians, hospitals and
other health care providers. As of May 21, 1999, PHS-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 PHS-NJ health plans are different from the subscriber agreements of
non-shareholders in that premium rates for those NJ Acute Care Institutions 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.
PHS-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 PHS-NJ for services provided to members. The
reimbursement schedule of a provider agreement between a NJ Acute Care
Institution and PHS-NJ is individually negotiated. Rates paid to NJ Acute Care
Institutions for services provided to members of PHS-NJ's health plans vary from
institution to institution and are based on, among other things, the types of
services provided by, and the location of, the NJ Acute Care Institution.
Agreements with participating
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NJ Acute Care Institutions prohibit the NJ Acute Care Institutions from billing
a member of a PHS-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
PHS-NJ and are prohibited from billing members of a PHS-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 PHS-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, PHS-NJ has
agreed to provide the employer groups with health coverage in return for a
monthly premium. PHS-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.
In 1996, Physicians Health Services of New Jersey, Inc. entered into
marketing and reinsurance agreements with Guardian. Pursuant to quota share
reinsurance agreements, the Company writes its HMO/POS In-Network business and
cedes 50% to Guardian and writes its HMO/POS out-of-network business and cedes
100% to Guardian, which retrocedes 50% to PHS/Bermuda, Ltd., an affiliate of
PHS-NJ. As part of the arrangement, the Company recovers from Guardian a
specified portion of the administrative expense related to the activity.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
PREMIUM REVENUE. For the three-month period ended March 31, 1999,
medical premium revenue totaled $86.4 million or $3.5 million less than the
$89.9 million of medical premium revenue generated during the same period in
1998. This decrease was due to reduced enrollment in PHS-NJ health benefit
plans, specifically in the Medicare line of business and by certain NJ Acute
Care Institutions. Approximately 29% of medical premium generated in 1999 and
approximately 39% of medical premium generated in 1998 was attributable to NJ
Acute Care Institutions, which are obligated to enroll their employees in PHS-NJ
health plans. The Company believes that it will benefit by its inclusion in the
formation of FHS' Northeast Division, which is comprised of three health plans
with a total of more than one million members in the New York tri-state area,
and the merger of Physicians Health Services of New Jersey, Inc. into PHS-NJ,
and that such inclusion and merger 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 March 31, 1999 was $352 thousand compared to $875
thousand of other revenue
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for the same period of the prior year. Interest income for the first quarter of
1999 was $1.5 million, as compared to the $1.2 million generated in the first
quarter of 1998.
MEDICAL AND HOSPITAL SERVICES. Total expenses attributable to medical
and hospital services for the three-month period ended March 31, 1999 were $86.3
million or $9.2 million higher than expenses incurred for the same period in
1998. This increase was a result of increased utilization in PHS-NJ health
benefit plans, changes in the mix of products offered by PHS-NJ, and the
establishment of higher initial claims reserves in 1999. In addition, the
medical loss ratio (i.e., the percentage of each premium dollar used to pay
medical expenses) for the three-month period ended March 31, 1999 was 99.9%
compared to 85.8% for the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $9.9 million for the three-month period ended
March 31, 1999, including a $7.9 million administrative management fee charged
by Physicians Health Services, Inc., a wholly-owned subsidiary of FHS, and $602
thousand interest expense associated with the Convertible Debentures and
Subordinated Debentures issued to FHS, as compared to $16.0 million incurred for
the same period in 1998. This decrease was primarily attributable to certain
synergies realized in the last quarter of 1998 and first quarter of 1999 from a
restructuring plan established during fiscal year 1997. Such restructuring plan
was related to the anticipated merger of Physicians Health Services of New
Jersey, Inc. and First Option Health Plan of New Jersey, Inc. which was effected
January 1, 1999.
OTHER EXPENSES. Depreciation and amortization expenses for the
three-month period ended March 31, 1999 decreased by $100 thousand from the $1.0
million incurred during the same period in 1998. This decrease was primarily the
result of disposal of certain assets included in the restructuring charge.
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
PREMIUM REVENUE. For the three-month period ended March 31, 1998,
medical premium revenue totaled $89.9 million or $5.9 million more than the
$84.0 million of medical premium revenue generated during the same period in
1997. Approximately 38% of medical premium revenue generated in 1998 and
approximately 36% of medical premium revenue generated in 1997 was attributable
to NJ Acute Care Institutions, which are obligated to enroll their employees in
PHS-NJ health plans. The Company believes that the percentage of medical premium
revenue attributable to NJ Acute Care Institutions will decrease as PHS-NJ's
operations grow and PHS-NJ continues to benefit from current marketing efforts
focused on commercial products which are not marketed directly to employees of
providers of PHS-NJ. The Company also believes that it will benefit by its
inclusion in the formation of FHS' Northeast Division, 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
three-month period ended March 31, 1998 was $875 thousand compared to $686
thousand of other revenue for the same period of the prior year. Interest income
for the first quarter of 1998 was $1.2 million, a $624 thousand increase from
the $608 thousand generated in the first quarter of 1997. The
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increase 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 three-month period ended March 31, 1998 were $77.2
million or $3.3 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 March 31, 1998 was 85.8% compared to 95.8% 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, along with enhanced utilization management efforts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $16.0 million for the three-month period ended
March 31, 1998, including a $635 thousand administrative management fee charged
by FHS and $516 thousand interest expense associated with the Convertible
Debentures and Subordinated Debentures, compared to $14.2 million incurred for
the same period in 1997. The increase in selling, general and administrative
expenses was the result of an increase in resources needed to reduce claims
backlog as well as the payments of interest in 1998 associated with the
Convertible Debentures and Subordinated Debentures.
OTHER EXPENSES. Depreciation and amortization expenses for the three-month
period ended March 31, 1998 increased by $796 thousand from the $241 thousand
incurred during the same period in 1997. This increase was mostly the result of
amortization of goodwill associated with FHS' investment in the Company.
LIQUIDITY AND CAPITAL RESOURCES
Gross proceeds of approximately $12,400,000, received by PHS-NJ from
the private offering and sale of 826,708 shares of common stock in 1993, were
sufficient to cover the expenses incurred by PHS-NJ in connection with the
formation and development of its business. In order to fund its continuing
development activities, PHS-NJ sold 744,445 shares of common stock in a public
offering which closed on October 31, 1994. Gross proceeds received by PHS-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.
PHS-NJ is required by the Departments to maintain a minimum statutory
net worth. In addition, if PHS-NJ's statutory net worth is, or is expected to
be, less than 125% of the minimum statutory net worth requirement, PHS-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 PHS-NJ's statutory net worth as of December 31, 1995 may have been below
125% of the minimum statutory net worth requirement. PHS-NJ addressed this
potential
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deficiency by submitting to the Departments in April 1996 a plan of action,
which outlined the actions taken and measures to be used by PHS-NJ to correct
the potential deficiency.
As part of the plan of action, on April 30, 1997, the Company sold to
FHS the Initial Convertible Debenture in the aggregate principal amount of
$51,701,120.38, pursuant to the Amended Securities Purchase Agreement. The
principal amount of the Initial Convertible 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 Convertible Debenture, FHS
converted $1,701,120.38 of principal amount of the Initial Convertible Debenture
into 168,109 shares of Common Stock.
To facilitate the sale of the Initial Convertible Debenture to FHS, the
Departments agreed to rescind their conditions attached to their approval of the
plan of action submitted by PHS-NJ in April 1996, subject to the Departments'
right to require PHS-NJ to submit a new plan of action if PHS-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, PHS-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 Convertible Debenture, provided that FHS guaranteed, in form
satisfactory to the Commissioner of the DOI, that PHS-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 PHS-NJ. In December 1997, the Departments
further agreed to permit PHS-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 Convertible Debenture, FHS
and the Company entered into a letter agreement which clarified FHS' right under
the Amended Securities Purchase Agreement to infuse additional capital into the
Company in the event that it is determined that PHS-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 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 anticipated full year 1997 operating results) in order for
PHS-NJ to meet 100% of the minimum statutory net worth requirement 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 Amended Securities Purchase Agreement, as
clarified by the letter agreement, FHS would be issued additional Convertible
Debentures.
Effective December 1, 1997, FHS converted the remaining $50 million of
the principal amount of the Initial Convertible 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 PHS-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.
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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 then
outstanding, which represented approximately 98% of the fully-diluted equity of
the Company.
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 and 1,000,000 shares of Preferred Stock, par value $1.00 per share.
On December 31, 1998, FHS converted $1,197,182 of the principal amount
of the New Convertible Debenture into 399,003,000 shares of Common Stock. After
this conversion, 499,000,000 shares of Common Stock were outstanding, with FHS
owning 496,916,161 of such shares or approximately 99.6% of the fully-diluted
equity of the Company. The price per share paid by FHS upon conversion of the
New Convertible Debenture was calculated in accordance with the Amended
Securities Purchase Agreement entered into by FHS, the Company and PHS-NJ in
connection with the sale of the Initial Convertible Debenture.
In December 1997, FHS also contributed an additional $24 million to the
Company to satisfy certain statutory net worth requirements applicable to PHS-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 PHS-NJ during 1998.
On January 1, 1999, Physicians Health Services of New Jersey, Inc., a
New Jersey corporation controlled by FHS which operated as an HMO in the State
of New Jersey, merged with and into PHS-NJ pursuant to an Agreement and Plan of
Merger dated October 26, 1998. In connection with the merger, PHS-NJ changed its
name from First Option Health Plan of New Jersey, Inc. to Physicians Health
Services of New Jersey, Inc. The purpose of the merger was to consolidate the
operations of the HMOs controlled by FHS in the State of New Jersey into
substantially one corporation.
Pursuant to new HMO regulations adopted in the State of New Jersey,
PHS-NJ is required to maintain a "Minimum Insolvency Deposit for Health Care
Expenditures." As of March 31, 1999, the deposit covering two months of incurred
health care expenditures is approximately $65.0 million. The initial deposit, or
$12.5 million, 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. These deposits (including the PHS-NJ deposit of $7.9 million
added from the merger of Physicians Health Services of New Jersey, Inc. into
PHS-NJ plus interest earned) have been deemed sufficient in accordance with the
HMO regulations and therefore no additional deposits should be required.
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IMPACT OF YEAR 2000
The Company, and its parent, FHS, recognize that the arrival of the
year 2000 (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 the
Company, 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.
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 and has the full support of FHS' management. The project
has dedicated resources with multiple teams to address its unique systems
environment. 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. An executive management
committee is also actively and directly involved in an oversight capacity in
FHS' Year 2000 project and receives monthly reports from the project manager. In
addition, the project manager regularly meets with FHS' audit committee to
further discuss FHS' Year 2000 issues.
FHS is addressing its Year 2000 issues in several ways. Selected
systems are being 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 purchased software is Year 2000
compliant. The remaining systems' compliance with Year 2000 will be addressed by
internal technical staff. FHS has engaged IBM Global Services to assist in the
program management of the project. In addition, FHS has assessed its third party
relationships with respect to non-information technology assets and services,
has retained IBM's The Wilkerson Group, and is developing contingency plans to
provide continuity of material relationships. Legal consultants have been
retained to assist with insurance review and assessment of FHS' obligations and
rights.
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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. During the first quarter of 1999, FHS
made substantial progress in its efforts to address Year 2000 issues. FHS has
established the third quarter of 1999 to complete all phases and is endeavoring
to accelerate completion ahead of that time. The following table sets forth the
estimated percentage completion of each of FHS' Year 2000 phases with respect to
its Year 2000 project overall.
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
------- ------- ------- ------- -------
Overall - May 1999 100% 100% 93% 55% 3%
Overall - February 1999 100% 83% 54% 11% 0%
(as reported in FHS'
Annual Reporton Form
10-K)
THIRD PARTIES. FHS' inventory of third party relationships has
identified general purpose utility vendors, care delivery organizations (such as
providers), and customer service vendors and certain other entities as
strategically important to FHS. The assessment continues and is expected to be
completed within the second quarter of 1999. FHS is also in the process of
following-up with the important third parties identified in the assessment to
help ensure that the relationships will not be materially interrupted or
affected by the Year 2000 problem. There can be no assurance that the systems of
other companies on which the Company and FHS rely will be compliant on a timely
basis, or that the failure by a third party to be compliant would not have a
material adverse affect on the Company or FHS.
COSTS. FHS is evaluating on an on-going basis the related costs to
resolve its potential Year 2000 problems. FHS has reduced its estimate of the
total cost for the project from approximately $42.7 million to $36-$40 million,
excluding the costs to accelerate the replacement of hardware or software
otherwise required to be purchased by FHS. The decrease is a result principally
of a reduction in the anticipated duration of the employment of outside
consultants and contractors and a shift of certain responsibilities to inside
labor. Through the first quarter of 1999, FHS expended approximately $20.2
million relating to, among other things, the cost to repair or replace software
and related hardware problems, the cost of assessment, analysis and planning and
internal and external communications. FHS currently estimates that the
percentages of its total expenditures for Year 2000 issues will be approximately
as follows: 35% for internal costs, 20% for outside consultants and contractors,
and 35% for software-related and hardware-related costs. FHS has established a
line-item in its overall operating budget specifically to cover Year 2000 costs.
The operating subsidiaries for each line of business of FHS, however, are paying
for the costs of assessment, planning, remediation and testing of Year 2000
issues for their respective 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 be no assurances that these
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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 the 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. FHS has completed its assessment of its mission critical business
functions and has sought to prioritize them in order to address the most
critical issues first in remediation efforts and to develop alternatives to
these critical processes as part of contingency planning. A mission critical
business activity or system is one that cannot be without an automated or
functional system for a period of 21 days without causing significant business
impact to the particular line of business. Among other things, FHS' divisions
have assessed potential negative impacts on a valid member's ability to receive
services, the ability to generate revenue, the need for additional expenditures,
compliance with legal, regulatory or accreditation requirements, meeting
contractual obligations and reimbursing providers, vendors and agents. FHS is in
the process of documenting and validating its contingency plans and expects to
complete such process by the end of the second quarter of 1999. FHS currently
anticipates that its contingency plans will include the use of manual as well as
on-line files of its members to avoid disruption in the verification of
membership and eligibility for the provision of health care services to its
members.
RISKS. The Company and FHS are highly dependent upon their own
information technology systems and that of their providers and customers.
Failure by the Company, FHS or a third party to correct a material Year 2000
problem could result in a failure of or an interruption in the Company's or FHS'
business activities and operations. Such interruptions and failures could
materially and adversely affect the Company's or FHS' 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 the Company nor FHS is able to
determine at this time whether the Year 2000 problems will have a material
adverse effect on the Company's or FHS' results of operations, liquidity or
financial condition. FHS' Year 2000 project is expected to reduce significantly
the Company's and FHS' level of uncertainty and the possibility of significant
or long-lasting interruptions of the Company's and FHS' business operations;
however, the Company and FHS believe that it is impossible to predict all of the
areas in which material problems may arise.
FHS has been formally communicating with others with whom it does
significant business to determine their Year 2000 issues. FHS is currently
projecting to complete its assessment of third party risks by the end of the
second quarter of 1999. There can be no assurances that the systems of other
companies on which the Company's or FHS' systems rely will be Year 2000 ready,
that any Year 2000 problems of such companies will be timely remedied, or that
the failure by another company to be Year 2000 ready would not have a material
adverse affect on the Company or FHS.
22
<PAGE>
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 could cause the Company's actual results to differ
materially from those projected in these forward-looking statements, which
cautionary statements are contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998. The information contained herein is
intended to be a "Year 2000 Readiness Disclosure" as defined in the Year 2000
Information and Readiness Disclosure Act of 1998 enacted on October 19, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company currently has no outstanding bank or external financing.
Moreover, all of the Company's investments are in money market funds and U.S.
Treasury Bills with original maturities of three months or less when purchased.
Accordingly, the Company believes that its business operations are not exposed
to market risk relating to interest rate risk, foreign currency exchange risk,
commodity price risk or equity price risk.
23
<PAGE>
PART II - OTHER INFORMATION
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 March 31, 1999, the Company
filed the following Current Report on Form 8-K with the Securities and Exchange
Commission:
Form 8-K (Item 2 - Acquisition or Disposition of Assets), date of earliest event
reported January 1, 1999, with respect to the merger of Physicians Health
Services of New Jersey, Inc. with and into First Option Health Plan of New
Jersey, Inc., and amendment no. 1 thereto.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
FOHP, INC.
---------------------------------------
(Registrant)
JUNE 8, 1999 /s/ Thomas W. Wilfong
------------ ---------------------------------------
Date (Signature)**
THOMAS W. WILFONG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JUNE 8, 1999 /s/ Marc M. Stein
------------ ---------------------------------------
Date (Signature)**
MARC M. STEIN
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
25
<PAGE>
FOHP, INC. AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED
MARCH 31,
1999 1998
-----------------------------
Net Loss $ (4,820,650) $ (889,685)
=============================
Weighted average number of common shares:
Shares outstanding quarter ended 3/31/99 499,000,000
Shares outstanding quarter ended 3/31/98 100,000,000
Weighted average shares outstanding 499,000,000 100,000,000
=============================
NET LOSS PER COMMON SHARE $ (0.01) $ (0.01)
=============================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000937817
<NAME> FIRST OPTION HEALTH PLAN
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 45,603,700
<SECURITIES> 275,078
<RECEIVABLES> 20,351,067
<ALLOWANCES> 2,177,355
<INVENTORY> 0
<CURRENT-ASSETS> 67,062,322
<PP&E> 8,137,415
<DEPRECIATION> 3,412,773
<TOTAL-ASSETS> 239,456,980
<CURRENT-LIABILITIES> 91,611,876
<BONDS> 36,870,188
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0
<COMMON> 1,011,941
<OTHER-SE> 109,962,975
<TOTAL-LIABILITY-AND-EQUITY> 239,456,980
<SALES> 0
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<INCOME-TAX> (3,431,555)
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