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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:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| 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
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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)
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4) Proposed maximum aggregate value of transaction:
$2,167,193(2)
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5) Total fee paid:
$433.44(3)
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|X| 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.:
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3) Filing party:
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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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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 July 29, 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 shares of 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) twenty-five cents ($0.25) for each share of FOHP common stock held by
you, which is the approximate value of one share of FOHP common stock as of
December 31, 1998, as determined by an independent qualified appraiser; 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 that 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.
FHS currently owns more than 99% of the outstanding shares of FOHP
common stock, and intends to vote for the merger. Accordingly, if FHS approves
the merger, the merger will occur, provided that all of the 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 shares of FOHP
common stock.
If the merger is consummated, within ninety days after the effective
date of the merger, each former shareholder of FOHP, other than FHS or any
former 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 discussed above and
instructions for use in surrendering the stock certificate(s) formerly
representing the shareholder's shares of FOHP common stock. Upon the surrender
by a former shareholder of FOHP of stock certificate(s) 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 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 "The Merger
- - Exchange Procedures" in the accompanying Proxy Statement.
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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.
JMS also was engaged by FOHP to appraise the value of the outstanding
shares of FOHP common stock. A description of the assumptions made, matters
considered and limitations on the review undertaken by JMS in determining the
approximate value of the outstanding shares of FOHP common stock as of December
31, 1998, is discussed in the section captioned "The Merger - The Appraisal" in
the accompanying Proxy Statement.
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. In addition, we have also enclosed for your review a copy of the FOHP
Annual Report on Form 10-K for the year ended December 31, 1998 and FOHP
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. The Form
10-K and Form 10-Q contain additional information concerning FOHP and its
operations.
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 July 6, 1999 and ending July 28,
1999. Please call (732) 643-6300.
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,
/s/ THOMAS W. WILFONG
THOMAS W. WILFONG
President and Chief Executive Officer
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FOHP, INC.
3501 State Highway 66
Neptune, New Jersey 07753
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
JULY 29, 1999
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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 July 29, 1999 commencing at 6:00 p.m.
local time, for the following purposes:
1. To consider and vote upon a proposal to approve the 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 June
1, 1999, 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
/s/ THOMAS W. WILFONG
THOMAS W. WILFONG
President and Chief Executive Officer
Neptune, New Jersey
June 30, 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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FOHP, INC.
------------------------
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
------------------------
This Proxy Statement is being furnished to the holders of Common Stock,
par value $.01 per share ( "FOHP Common Stock"), of FOHP, Inc. ("FOHP" or the
"Surviving Corporation") in connection with the solicitation of proxies by the
Board of Directors of FOHP (the "FOHP Board") for use at the special meeting of
shareholders of FOHP to be held at the CNA Building, 3501 State Highway 66,
Neptune, New Jersey on July 29, 1999, and any adjournments or postponements
thereof (the "Special Meeting"). The FOHP Board has fixed the close of business
on June 1, 1999 as the record date for the determination of shareholders
entitled to notice of and to vote at the Special Meeting.
At the Special Meeting, shareholders of FOHP will consider and vote on
the proposed merger described in this Proxy Statement by which FHS Transition
Company, a wholly-owned subsidiary of Foundation Health Systems, Inc. ("FHS"),
will merge with and into FOHP (the "Merger") pursuant to the terms of the
Agreement and Plan of Merger, dated as of November 16, 1998, by and among FOHP,
FHS Transition Company and FHS (the "Merger Agreement"). If the Merger is
consummated, each shareholder of FOHP, other than FHS, will be offered for his,
her or its shares of FOHP Common Stock, the choice of receiving (i) twenty-five
cents ($.25) for each share of FOHP Common Stock held by the shareholder, which
is the approximate value of one share of FOHP Common Stock as of December 31,
1998, as determined by an independent qualified appraiser (the "Appraisal
Consideration"), or (ii) payment rights (individually, a "Payment Right," and
collectively, the "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 that 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.
IF A SHAREHOLDER OF FOHP 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.
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
6 HEREOF, "SPECIAL FACTORS" BEGINNING ON PAGE 10 HEREOF, AND "THE MERGER"
BEGINNING ON PAGE 37 HEREOF.
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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 June
30, 1999.
FOR A 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
21 HEREOF. ALSO, SEE "DISSENTERS' RIGHTS," BEGINNING ON PAGE 60 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 June 30, 1999.
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TABLE OF CONTENTS
SUMMARY OF THE MERGER.....................................................6
The Companies..........................................................6
The Special Meeting....................................................7
The Merger.............................................................7
Conditions to the Merger...............................................8
Termination of Merger Agreement........................................8
Required Vote to Approve Merger Agreement..............................8
Dissenters' Rights.....................................................9
Related Agreements.....................................................9
Accounting Treatment of the Merger.....................................9
SPECIAL FACTORS..........................................................10
Background of the Merger..............................................10
Reasons for the Merger................................................14
Consideration to be Offered to FOHP Shareholders in the Merger........14
Comparison of Rights of Holders of FOHP Common Stock to Holders
of Payment Rights...................................................17
Opinion of Financial Advisor to FOHP..................................17
The Appraisal.........................................................18
Evaluation of Fairness of Merger by FOHP and FHS......................18
Recommendation of the FOHP Board......................................19
Certain Federal Income Tax Consequences of the Merger.................19
RISK FACTORS.............................................................21
FOHP SELECTED FINANCIAL DATA.............................................24
FHS SELECTED FINANCIAL DATA..............................................28
MARKET PRICE INFORMATION.................................................31
FOHP..................................................................31
FHS...................................................................31
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT..............33
THE SPECIAL MEETING......................................................35
General Information...................................................35
Voting Securities.....................................................35
THE MERGER...............................................................37
Background of the Merger..............................................37
Reasons for the Merger................................................43
The Merger Agreement..................................................44
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Consideration to be Offered to FOHP Shareholders in the Merger........46
Contribution Agreement................................................48
Opinion of Financial Advisor to FOHP..................................48
The Appraisal.........................................................51
Evaluation of Fairness of Merger by FOHP and FHS......................54
Recommendation of the FOHP Board......................................55
Required Vote to Approve Merger Agreement.............................56
Non-Transferability of Payment Rights.................................56
Exchange Procedures...................................................56
Accounting Treatment of the Merger....................................57
Certain Federal Income Tax Consequences of the Merger.................57
DISSENTERS' RIGHTS.......................................................60
Introduction..........................................................60
Notice of Dissent.....................................................60
Demand for Payment of Fair Value......................................60
Submission of Share Certificates......................................61
Submission of Financial Information of Fair Value Offer...............61
Demand for Judicial Proceeding to Determine Fair Value................61
Loss of Dissenters' Rights............................................61
RECENT DEVELOPMENTS......................................................62
HMO Subsidiary Merger.................................................62
Conversion of New Convertible Debenture...............................62
MANAGEMENT OF SURVIVING CORPORATION......................................63
BOARD OF DIRECTORS OF SURVIVING CORPORATION..............................64
RELATED AGREEMENTS.......................................................67
DESCRIPTION OF PAYMENT RIGHTS............................................71
COMPARISON OF RIGHTS OF HOLDERS OF FOHP COMMON STOCK TO HOLDERS
OF PAYMENT RIGHTS......................................................81
AVAILABLE INFORMATION....................................................82
INCORPORATION OF DOCUMENTS BY REFERENCE..................................82
EXPERTS..................................................................84
SHAREHOLDER PROPOSALS....................................................84
OTHER BUSINESS...........................................................85
LIST OF DEFINED TERMS....................................................86
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APPENDICES
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
Appendix H Appraisal of Janney Montgomery Scott Inc.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO 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 JUNE 30, 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 82 HEREOF.
THE COMPANIES
FOHP
----
FOHP, a New Jersey corporation, was formed in May 1994 to effect the
reorganization of Physicians Health Services of New Jersey, Inc. ("PHS-NJ")
(formerly 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, 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 FOHP. All health care benefit products and services
are provided by FOHP's subsidiaries.
PHS-NJ, a New Jersey corporation, was formed as First Option Health
Plan of New Jersey, Inc. in May 1993 to operate as an HMO in the State of New
Jersey. PHS-NJ received its Certificate of Authority 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 FOHP on June 8, 1995.
Currently, PHS-NJ is FOHP's principal subsidiary.
On January 1, 1999, Physicians Health Services of New Jersey, Inc., a
New Jersey HMO controlled by FHS, merged with and into PHS-NJ. Upon consummation
of the merger of Physicians Health Services of New Jersey, Inc. into PHS-NJ,
PHS-NJ changed its name from First Option Health Plan of New Jersey, Inc. to
Physicians Health Services of New Jersey, Inc. See "Recent Developments."
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' operations
consist of two operating segments: Health Plan Services and Government
Contracts/Specialty Services. Through its subsidiaries, FHS offers groups,
individual, Medicaid and Medicare HMO and preferred provider organization plans;
government sponsored managed care plans; and managed care products related to
administration and cost containment, behavioral health, dental, vision and
pharmaceutical products and other services. FHS operates and conducts its HMO
and other
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businesses through its wholly and majority owned subsidiaries, including FOHP.
FHS currently owns more than 99% of the outstanding FOHP Common Stock.
The principal executive offices of FHS are located at 21650 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 of
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 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 July 29, 1999 commencing at 6:00 p.m. local
time. Holders of record of FOHP Common Stock at the close of business on June 1,
1999 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 35 hereof.
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"), a Delaware
corporation which is a wholly-owned subsidiary of FHS. In other words, if the
Merger is consummated, the shareholders of FOHP, other than FHS, 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
shareholder chooses to receive Payment Rights for his, her or its shares of FOHP
Common Stock, the only entitlement that the 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 that certain conditions were 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 PHS-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
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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 PHS-NJ, and the Surviving Corporation shall be liable for all of the
obligations and liabilities of such corporations. See "The Merger - The Merger
Agreement" beginning on page 44 hereof.
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, 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 needed by 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 - Contribution
Agreement" on page 48 hereof.
TERMINATION OF MERGER AGREEMENT
At 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 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. The proposal to approve the Merger Agreement must
be approved by not less than sixty-six and two-thirds percent (66 2/3%) of the
votes cast at the Special Meeting.
FHS currently owns more than 99% of the outstanding shares of FOHP
Common Stock. Accordingly, if FHS approves the Merger Agreement, the Merger will
occur, provided that all of the other conditions to the Merger are either
satisfied or waived.
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DISSENTERS' RIGHTS
If the Merger is consummated, holders of shares of FOHP Common Stock on
June 1, 1999 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 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 60 hereof.
RELATED AGREEMENTS
In connection with FHS' initial investment in FOHP, 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 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" beginning on page 67 hereof.
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 less than 1% 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.
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<PAGE> 16
SPECIAL FACTORS
THE FOLLOWING ARE CERTAIN SPECIAL FACTORS THAT SHOULD BE CONSIDERED IN
EVALUATING THE MERGER AGREEMENT AND THE MERGER CONTEMPLATED THEREBY, AND IN
CHOOSING THE CONSIDERATION BEING OFFERED IN THE MERGER.
BACKGROUND OF THE MERGER
During the first quarter of 1996, FOHP learned that PHS-NJ had a
statutory net worth deficiency. To raise the capital necessary for PHS-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.
("HSI"), the predecessor to FHS.
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 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, FHS had the right
to infuse additional capital into FOHP in 1997, for additional convertible
debentures ("Convertible Debentures") in substantially the same form as the
Initial Debenture, in the event that it was determined that PHS-NJ needed
capital to meet applicable statutory net worth requirements.
The Amended Securities Purchase Agreement also provided that FHS could,
at its option, acquire during 1999, through a tender offer or merger, all of the
then outstanding shares of
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FOHP Common Stock not held by FHS at a purchase price per share to be determined
by independent appraisers. In any such tender offer or merger, the hospital,
physician and other 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 transactions contemplated in the Amended Securities Purchase
Agreement allowing for FHS to acquire all of the outstanding FOHP Common Stock,
provided that any such transaction occurred in 1999 and certain other conditions
were met. See "The Merger - Reasons for the Merger; Evaluation of Fairness of
Merger by FOHP and FHS."
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 PHS-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 consideration that the Provider
Shareholders would be entitled to receive in any transaction whereby FHS would
acquire all of the outstanding FOHP Common Stock pursuant to the Amended
Securities Purchase Agreement, the FOHP Board and FHS began, in July 1997,
discussing various alternatives directed at preserving the Provider
Shareholders' investment in FOHP.
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 advisors for possible engagement by the
FOHP Board to counsel and advise the FOHP Board in evaluating and acting upon
any proposal structured to preserve the Provider Shareholders' investment in
FOHP. 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 PHS-NJ, and in accordance with the Amended Securities Purchase Agreement, as
clarified by the letter agreement dated April 30, 1997, 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
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<PAGE> 18
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 PHS-NJ in
return for subordinated debentures which are not convertible into shares of FOHP
Common Stock. 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.
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 a proposal aimed at preserving the Provider Shareholders' investment
in FOHP. The Non-FHS Directors believed it was necessary that any 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
continued to participate in the provider network of PHS-NJ, or its successor,
until December 31, 2001, and provided that certain other conditions were met.
On June 17, 1998, the FOHP Board approved a form of transaction
pursuant to which FOHP and Physicians Health Services of New Jersey, Inc., a New
Jersey HMO controlled by FHS, would merge with and into PHS-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
Payment Rights 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 Payment Rights to be offered in the Original Merger to
the Provider Shareholders for their shares of FOHP Common Stock were fair to
such holders from a financial point of view.
A term sheet (the "Term Sheet") outlining the terms and conditions of
the Payment Rights to be offered in the Original Merger 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 Payment Rights to be offered in the Original Merger were
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 Payment Rights to be
offered in the Original Merger were 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 Physicians Health Services of New
Jersey, Inc. (the HMO controlled by FHS) and PHS-NJ
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(formerly First Option Health Plan of New Jersey, Inc.) 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 Physicians
Health Services of New Jersey, Inc. 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 Physicians Health Services of New Jersey, Inc. and PHS-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 Payments Rights to be offered in
the Original Merger to the Provider Shareholders for their shares of FOHP Common
Stock were 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 were fair to the
Provider Shareholders from a financial point of view. See "The Merger -
Background of the Merger" beginning on page 37 hereof.
On December 31, 1998, FHS converted $1,197,183 of the principal amount
of the New Convertible Debenture into 399,003,000 shares of FOHP Common Stock.
As a result of such conversion, FHS currently owns 496,916,161 shares of FOHP
Common Stock, representing more than 99% of the outstanding FOHP Common Stock.
See "Recent Developments - Conversion of New Convertible Debenture."
In January 1999, FOHP (through the Non-FHS Directors) engaged JMS to
appraise the value of the outstanding shares of FOHP Common Stock as of December
31, 1998. On June 1, 1999, JMS delivered a letter to the FOHP Board setting
forth the approximate value of the outstanding shares of FOHP Common Stock as of
December 31, 1998 (the "Appraisal"). The Appraisal provides that, based upon and
subject to certain matters stated therein, the approximate value of one share of
FOHP Common Stock as of December 31, 1998 was twenty-five cents ($0.25).
See "The Merger - The Appraisal."
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<PAGE> 20
REASONS FOR THE MERGER
Pursuant to the Amended Securities Purchase Agreement, FHS may acquire
through a tender offer or merger, all of the outstanding shares of FOHP Common
Stock held by the Provider Shareholders, provided that such transaction occurs
in 1999. 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.
As of December 31, 1996, PHS-NJ was approximately $45,300,000 below
125% of the statutory net worth requirement applicable to it. During the first
quarter of 1997, the New Jersey Department of Banking and Insurance (the "DOI")
informed HSI, the predecessor to FHS, and the FOHP Board that if HSI and FOHP
did not consummate the sale of the Initial Debenture by April 30, 1997, the DOI
intended to petition the New Jersey Superior Court for an order to allow the DOI
to place PHS-NJ into rehabilitation. If PHS-NJ was placed into rehabilitation,
it was likely that none of the shareholders of FOHP would receive any
distribution on the shares of FOHP Common Stock held by them since all of the
assets of FOHP would have been used to pay the liabilities and other debts of
PHS-NJ and FOHP before any distributions would have been made to the FOHP
shareholders. To induce FHS to purchase the Initial Debenture, the FOHP Board,
as then constituted, agreed to permit FHS to acquire 100% of the outstanding
shares of FOHP Common Stock after FHS' purchase of the Initial Debenture,
provided that certain conditions were met and that such purchase did not occur
until 1999. See "The Merger - Reasons for the Merger; Evaluation of Fairness of
Merger by FOHP and FHS" beginning on page 43 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 (i)
the Appraisal Consideration described in subparagraph (a) below or (ii) the
Payment Rights described in subparagraph (b)(1) below if the Provider
Shareholder is not a hospital or the Payment Rights described in subparagraph
(b)(2) below if the Provider Shareholder is a Hospital Shareholder (as defined
on page 21 hereof):
(a) Twenty-five cents ($0.25) for each share of FOHP Common Stock
held by the Provider Shareholder, which is the approximate
value of one share of FOHP Common Stock as of December 31,
1998, as determined by an independent qualified appraiser (see
"The Merger - The Appraisal" beginning on page 51 hereof), or
(b) (1) Payment Rights entitling the holder thereof, other
than a Hospital Shareholder, to a cash payment of not
less than $15.00 per Payment Right on or about July 1,
2001 from FOHP, provided that the following conditions
are either satisfied or waived:
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(A) the holder of the Payment Rights remains a
provider to PHS-NJ until July 1, 2001, and
agrees in writing to remain a provider to
PHS-NJ until December 31, 2001; and
(B) no more than (i) five (5) Large Hospital
Shareholders (as defined on page 73 hereof)
shall have left the PHS-NJ provider network
prior to December 31, 2001, (ii) seven (7)
Small Hospital Shareholders (as defined on
page 75 hereof) shall have left the PHS-NJ
provider network prior to December 31, 2001,
or (iii) three (3) Large Hospital
Shareholders and four (4) Small Hospital
Shareholders shall have left the PHS-NJ
provider network prior to December 31, 2001,
for any reason other than a breach by PHS-NJ
of its provider agreement with the Hospital
Shareholder (the "Continuing Hospital
Provider Condition").
(2) Payment Rights entitling a Hospital Shareholder to a cash
payment of not less than $15.00 per Payment Right on or
about July 1, 2001 from FOHP, provided that the following
conditions are either satisfied or waived:
(A) the Hospital Shareholder remains a provider
to PHS-NJ until July 1, 2001, and agrees in
writing to remain a provider to PHS-NJ until
December 31, 2001, on the terms and subject
to the conditions contained in the existing
provider agreement between the Hospital
Shareholder and PHS-NJ, as revised, where
necessary, to (I) 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 (x) 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 (y) 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 PHS-NJ, and
(II) extend such provider agreement to apply
to all FHS affiliated entities;
(B) the Hospital Shareholder must be in
compliance with the enrollment obligations
applicable to the Hospital Shareholder
currently contained in the Certificate of
Incorporation of FOHP, as modified by the
Hospital Shareholder and FOHP;
(C) the Hospital Shareholder must make timely
payments of premium to PHS-NJ, and shall be
current in such payment as of July 1, 2001;
and
(D) the Continuing Hospital Provider Condition
described in subparagraph (b)(1)(B) above
shall have been satisfied.
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Any Provider Shareholder who or which is not a hospital (individually,
a "Non-Hospital Shareholder," and collectively, the "Non-Hospital
Shareholders"), and chooses to receive Payment Rights for his, her or its shares
of FOHP Common Stock, will be entitled to receive additional consideration as
set forth below:
(i) $2.25 per Payment Right; and
(ii) a Pro-Rata Portion (as defined on page 78 hereof) of a bonus
pool (the "Bonus Pool") to be funded by (a) the amount
forfeited by Provider Shareholders who elect to receive
Payment Rights, but who fail to satisfy the conditions
contained therein applicable to them, plus the (b) amount
equal to the product of $14.75 (the remainder of $15.00, the
principal amount of a Payment Right, minus $0.25, the per
share Appraisal Consideration), multiplied by the number of
shares of FOHP Common Stock held by the Provider Shareholders
who elect to receive the Appraisal Consideration.
Provided, however, that PHS-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 PHS-NJ, plus any increase in
retained earnings for PHS-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") , and without giving effect to
the quota share reinsurance arrangement among PHS-NJ, The Guardian Life
Insurance Company of America ("Guardian") and PHS/Bermuda, Ltd., an affiliate of
PHS-NJ. 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 21 hereof, "The Merger -
Consideration to be Offered to FOHP Shareholders in the Merger" beginning on
page 46 hereof and "The Merger - Opinion of Financial Advisor to FOHP" beginning
on page 48 hereof.
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 21 HEREOF AND "DESCRIPTION OF
PAYMENT RIGHTS" BEGINNING ON PAGE 71 HEREOF.
IF THE CONTINUING HOSPITAL SHAREHOLDER CONDITION IS NOT SATISFIED, NO
PAYMENT WILL BE MADE UNDER ANY PAYMENT RIGHT UNLESS FOHP EXPRESSLY WAIVES SUCH
CONDITION. ACCORDINGLY, THE RIGHT TO RECEIVE PAYMENT UNDER A PAYMENT RIGHT IS
DEPENDENT ON CIRCUMSTANCES OUTSIDE THE CONTROL OF THE ELECTING SHAREHOLDERS.
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.
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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 RIGHTS OF HOLDERS OF FOHP COMMON STOCK TO HOLDERS OF PAYMENT
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 the Appraisal Consideration or Payment Rights for their shares of
FOHP Common Stock, and (ii) the dissenting Provider Shareholders will receive
the fair value of 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.
FOHP Common Stock is currently registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, as a result of such
registration, FOHP must file periodic reports with the Securities and Exchange
Commission (the "SEC") containing financial and other material disclosure with
respect to FOHP and its operations. Since FHS will be the only holder of FOHP
Common Stock after the consummation of the Merger, FOHP will terminate the
registration of the FOHP Common Stock under the Exchange Act. As a result,
FOHP's obligation to file periodic reports under the Exchange Act will be
suspended and FOHP will not be obligated to provide the holders of Payment
Rights with the financial and other information required to be included in such
reports.
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 Payment Rights to be offered to the Provider
Shareholders in the Original Merger were 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 48 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
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<PAGE> 24
PROVIDER SHAREHOLDER SHOULD CHOOSE TO RECEIVE IF THE MERGER IS CONSUMMATED.
PROVIDER SHAREHOLDERS ARE ENCOURAGED TO READ JMS' OPINION IN ITS ENTIRETY.
THE APPRAISAL
In January 1999, FOHP (through the Non-FHS Directors) engaged JMS to
appraise the value of the outstanding shares of FOHP Common Stock as of December
31, 1998. On June 1, 1999, JMS delivered the Appraisal to the FOHP Board. The
Appraisal provides that, based upon and subject to certain matters stated
therein, the approximate value of one share of FOHP Common Stock as of December
31, 1998 was twenty-five cents ($0.25). A copy of the Appraisal dated June 1,
1999, which sets forth the assumptions made, matters considered and limitations
on and scope of review by JMS, is attached as Appendix H to this Proxy
Statement. See "The Merger The Appraisal" beginning on page 51 hereof.
THE APPRAISAL IS ADDRESSED TO THE FOHP BOARD 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 THE APPRAISAL IN ITS ENTIRETY.
EVALUATION OF FAIRNESS OF MERGER BY FOHP AND FHS
When the FOHP Board approved the Amended Securities Purchase Agreement,
pursuant to which FHS has the right to acquire 100% ownership of FOHP, the FOHP
Board recognized that FOHP was either insolvent or becoming insolvent due to the
continuing losses of PHS-NJ, FOHP's principal subsidiary. Based on the then
current financial condition of FOHP, the FOHP Board determined that, in order to
allow FOHP to correct its operating deficiencies and generate a profit, any
acquisition by FHS of the FOHP Common Stock held by the Provider Shareholders
should not occur prior to 1999.
Inasmuch as any transaction pursuant to which FHS could obtain 100%
ownership of FOHP would take place during 1999, the FOHP Board and FHS
determined, prior to FHS' purchase of the Initial Debenture, that a fair method
for determining the purchase price to be paid by FHS for the shares of FOHP
Common Stock held by the Provider Shareholders in any such transaction would be
an appraisal conducted by one or more independent qualified appraisers selected
by FOHP and FHS. Accordingly, based on the foregoing and in reliance on the
Appraisal delivered by JMS, the FOHP Board and FHS believe that the Appraisal
Consideration of twenty-five cents ($0.25) per share of FOHP Common Stock is
fair to the Provider Shareholders.
As a result of reserve inadequacies and the continuing operating losses
of FOHP, FHS had to infuse more than $70 million of additional capital into
FOHP. Recognizing that the additional infusions of capital by FHS, and related
dilution of the equity interest of the Provider Shareholders in FOHP as a result
of the conversion of the New Convertible Debenture issued to FHS in connection
with such capital infusions, had significantly reduced the amount of any
consideration that a Provider Shareholder would receive for his, her or its
shares of FOHP
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Common Stock under the Amended Securities Purchase Agreement, the FOHP Board and
FHS developed the Payment Rights as an alternative to the Appraisal
Consideration.
In reliance on the fairness opinion issued by JMS on July 15, 1998, as
later confirmed, and recognizing that FHS is under no obligation to offer any
consideration to the Provider Shareholders other than the Appraisal
Consideration, which is significantly less than the $15.00 principal amount of
the Payment Rights, the FOHP Board and FHS believe that the Payment Rights being
offered in the Merger are fair to the Provider Shareholders. See "The Merger -
Evaluation of Fairness of Merger by FOHP and FHS."
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;
Opinion of Financial Advisor to FOHP; The Appraisal; Evaluation of Fairness of
Merger by FOHP and FHS; and Recommendation of the FOHP Board" beginning on page
37 hereof.
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. Inasmuch
as the Appraisal Consideration for one share of FOHP Common Stock is
significantly less than $15.00, which is the amount originally paid to FOHP for
one share of FOHP Common Stock by the Provider Shareholders, 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 Payment
Rights 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 Payment Rights 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 Payment Rights
shall not be required to recognize the amount of the gain or loss realized with
respect to the Payment Rights
19
<PAGE> 26
until the fiscal year in which payment is made on the Payment Rights to the
Provider Shareholder, unless such shareholder elects otherwise.
If a 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 Payment Rights is capital in nature and, if the Provider Shareholder has
complied with the requisite holding period provided for in the Internal Revenue
Code of 1986, as amended (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 payment is made on the Payment Rights 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" beginning on page 57 hereof, for a more complete discussion of the
federal income tax consequences of the Merger on the Provider Shareholders.
20
<PAGE> 27
RISK FACTORS
THE FOLLOWING ARE CERTAIN RISK 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. If FOHP does not have
sufficient funds to make full payment on the Payment Rights, FHS will
contribute, pursuant to the Contribution Agreement, the funds needed by FOHP to
make full payment on the Payment Rights. FHS' payment obligation to FOHP under
the Contribution Agreement will not be secured. Consequently, if FHS was 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 $3.7 billion, including over $615 million in cash and
cash equivalents, no assurance can be given that FHS will have sufficient
capital to contribute to FOHP in the event FOHP needed additional capital to
make full payment on the Payment Rights.
Since its inception, FOHP's losses have exceeded $158,000,000. 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.
IF A SPECIFIED NUMBER OF HOSPITAL SHAREHOLDERS LEAVE PHS-NJ'S PROVIDER
NETWORK, HOLDERS OF PAYMENT RIGHTS WILL NOT BE ENTITLED TO PAYMENT THEREUNDER.
If the Continuing Hospital Provider Condition (as defined on page 15 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 PHS-NJ provider network prior to July 1,
2001, or not agree to remain a provider in the PHS-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 PHS-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 PHS-NJ to
provide health care related services to the members of PHS-NJ's health care
benefits plans and owns, either directly or through an affiliate, shares of FOHP
Common Stock (collectively, the "Hospital Shareholders").
21
<PAGE> 28
LOSS OF RIGHT TO RECEIVE PAYMENT UNDER PAYMENT RIGHTS IF PROVIDER
STATUS OF NON-HOSPITAL SHAREHOLDER TERMINATES. If a Non-Hospital Shareholder's
provider status terminates prior to July 1, 2001, or the Non-Hospital
Shareholder does not agree to remain a provider in the PHS-NJ provider network
for the period commencing July 1, 2001 and ending December 31, 2001, 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.
LOSS OF RIGHT BY HOSPITAL SHAREHOLDER TO RECEIVE FULL PAYMENT UNDER
PAYMENT RIGHTS FOR FAILURE TO MAINTAIN PROVIDER STATUS. If a Hospital
Shareholder fails to remain a provider to PHS-NJ until July 1, 2001, or the
Hospital Shareholder does not agree to remain a provider in the PHS-NJ provider
network for the period commencing July 1, 2001 and ending December 31, 2001, on
the terms and subject to the conditions contained in the existing provider
agreement between the Hospital Shareholder and PHS-NJ, as revised, where
necessary, to (i) 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 (a) 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 (b) 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 PHS-NJ, and (ii) extend such provider agreement to
apply to all FHS affiliated entities, the payment 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.
LOSS OF RIGHT BY HOSPITAL SHAREHOLDER TO RECEIVE FULL PAYMENT UNDER
PAYMENT RIGHTS FOR FAILURE TO MEET ENROLLMENT OBLIGATIONS. If a Hospital
Shareholder fails to comply with the enrollment obligations applicable to the
Hospital Shareholder which are currently contained in the Certificate of
Incorporation of FOHP, as modified by the Hospital Shareholder and FOHP, 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.
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 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 RECEIPT OF BONUS PAYMENTS UNDER PAYMENT RIGHTS HELD BY
NON-HOSPITAL SHAREHOLDERS. 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 PHS-NJ until July 1, 2001, and
agrees in writing to remain a provider to PHS-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 78 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, provided,
however, that:
o the Continuing Hospital Provider Condition (as defined on page 15
hereof) is satisfied; and
22
<PAGE> 29
o PHS-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 PHS-NJ, 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 GAAP, and without giving
effect to the quota share reinsurance arrangement among PHS-NJ,
Guardian and PHS/Bermuda, Ltd., an affiliate of PHS-NJ.
Since its inception, FOHP's losses have exceeded $158,000,000, most of
which were attributable to the operations of PHS-NJ. For any Non-Hospital
Shareholder to be able to receive the Bonus Payment (as defined on page 78
hereof) under a Payment Right, PHS-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 PHS-NJ's
operating history, no assurance can be given that PHS-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.
23
<PAGE> 30
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, 1998, 1997, 1996 and 1995 are derived from
consolidated financial statements of FOHP. 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, 1998. The selected
consolidated financial data as of and for the three months ended March 31, 1999
and 1998 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 Reports on Form 10-Q for the periods ended March 31,
1999 and 1998, as amended. Operating results for the three months ended March
31, 1999 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1999.
Prior to the reorganization of PHS-NJ which occurred in June 1995, 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 for the year ended December 31, 1994 are derived from the financial
statements of PHS-NJ, FOHP's principal subsidiary.
24
<PAGE> 31
FOHP - SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
<TABLE>
<CAPTION>
FINANCIAL
DATA
FOR PHS-NJ
THREE MONTHS ENDED PREDECESSOR
MARCH 31, FOR THE YEAR ENDED DECEMBER 31, TO FOHP
------------------------- ------------------------------------------------------ ------------
1999 1998 1998 1997 1996 1995 1994
------------ ----------- ------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Premium revenue from
owners/providers $24,906,154 $34,981,939 $118,591,143 $132,575,894 $135,544,112 $63,630,797 $5,639,724
Other premium revenue 61,500,728 54,891,193 209,268,135 239,132,416 112,125,670 38,819,206 1,803,624
Interest and other income 1,802,964 2,107,393 6,822,455 5,697,921 9,706,526 8,844,036 1,177,171
------------ ----------- ------------ ------------- ------------- ------------- ------------
Total revenue 88,209,846 91,980,525 334,681,733 377,406,231 257,376,308 111,294,039 8,620,519
------------ ----------- ------------ ------------- ------------- ------------- ------------
Expenses:
Medical services to owners/providers 7,771,903 13,693,633 46,895,944 63,882,103 37,026,903 17,319,035 1,405,175
Hospital services to
owners/providers 6,783,447 11,799,608 32,154,087 64,553,166 30,156,890 11,068,909 808,920
Other medical services 37,945,174 33,148,428 109,423,870 148,812,233 105,551,393 38,548,819 2,272,694
Other hospital services 33,119,183 18,555,188 75,026,204 101,521,355 63,760,554 24,637,249 1,710,020
Selling, general and administrative 1,292,206 14,706,604 53,199,216 55,106,022 50,734,197 32,638,106 10,624,261
Management fee - Foundation Health
Systems, Inc. 7,925,779 635,000 2,543,000 7,502,899 --- --- ---
Interest - Foundation Health
Systems, Inc. 601,615 515,598 2,229,890 1,790,410 --- --- ---
Restructuring costs --- --- (2,250,000) 12,825,570 --- --- ---
Other 1,022,744 1,145,864 4,761,178 1,495,355 890,553 1,751,263 240,021
------------ ----------- ------------ ------------- ------------- ------------- ------------
Total expenses 96,462,051 94,199,923 323,983,389 457,489,113 288,120,490 125,963,381 17,588,091
------------ ----------- ------------ ------------- ------------- ------------- ------------
Provision (benefit) for income taxes (3,431,555) (1,329,713) 5,540,231 2,139 924 71,603 ---
------------ ----------- ------------ ------------- ------------- ------------- ------------
Net income (loss) $(4,820,650) $(889,685) $5,158,113 $(80,085,021) $(30,745,106) $(14,740,945) $(8,967,572)
------------ ----------- ------------ ------------- ------------- ------------- ------------
Net income (loss) per common share $(.01) $(.01) $.05 $(9.18) $(14.64) $(8.65) $(8.40)
============ =========== ============ ============= ============= ============= ============
</TABLE>
25
<PAGE> 32
FOHP SUMMARIZED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
FINANCIAL
DATA OF
PHS-NJ
PREDECESSOR
TO
AS OF MARCH 31, AS OF DECEMBER 31, FOHP
--------------------------- ------------------------------------------------------- ------------
1999 1998 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $45,603,700 $58,322,853 $44,052,058 $79,266,721 $36,664,911 $23,882,286 $13,030,295
Goodwill (net) 95,564,543 107,056,940 96,237,857 107,730,254 - - - - - - - - -
Other 98,288,737 41,655,707 77,989,500 31,614,256 17,578,306 13,479,547 7,050,765
------------ ------------ ------------ ------------ ----------- ----------- -----------
Total assets $239,456,980 $207,035,500 $218,279,415 $218,611,231 $54,252,217 $37,361,833 $20,081,060
============ ============ ============ ============ =========== =========== ===========
Liabilities and shareholders'
(deficiency) equity:
Liabilities:
Medical claims payable,
accounts payable, accrued
expenses and other
current liabilities 91,611,876 92,393,725 73,349,221 110,883,068 80,118,284 32,482,794 8,101,405
Convertible debentures 11,336,934 11,800,442 11,131,386 11,294,406 - - - - - - - - -
Subordinated debentures 25,533,254 24,000,000 25,113,575 24,000,000 - - - - - - - - -
------------ ------------ ------------ ------------ ----------- ----------- -----------
Total liabilities 128,482,064 128,194,167 109,594,182 146,178,014 80,118,284 32,482,794 8,101,405
PHS-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:
FOHP, Inc. preferred stock, $1.00
par value, 1,000,000
shares authorized, none
issued and outstanding - - - - - - - - - - - - - - - - - - - - -
FOHP, Inc. common stock,
$.01 par value,
499,000,000 shares
authorized, 499,000,000
issued and outstanding 1,011,941 1,000,000 1,011,941 1,000,000 21,002 21,002 - - -
PHS-NJ institutional provider
common stock, $.01
par value, 1,020,051 shares
issued and outstanding - - - - - - - - - - - - - - - - - - 10,201
PHS-NJ other provider
common stock, $.01
par value, 40,002 shares
issued and outstanding - - - - - - - - - - - - - - - - - - 400
</TABLE>
26
<PAGE> 33
FOHP SUMMARIZED BALANCE SHEET INFORMATION (CONTINUED FROM PRIOR PAGE)
<TABLE>
<CAPTION>
FINANCIAL
DATA OF
PHS-NJ
PREDECESSOR
TO
AS OF MARCH 31, AS OF DECEMBER 31, FOHP
--------------------------- ----------------------------------------------------- ------------
1999 1998 1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Additional paid-in capital 268,150,758 215,351,597 239,135,758 208,053,796 30,648,489 30,648,489 15,341,561
Deficit (158,187,783) (137,510,264) (131,462,466) (136,620,579) (56,535,558) (25,790,452) (11,049,507)
------------- ------------- ------------- ------------- ------------ ------------ ------------
Total shareholders'
(deficiency) equity 110,974,916 78,841,333 108,685,233 72,423,217 (25,886,067) 4,879,039 4,302,655
------------- ------------- ------------- ------------- ------------ ------------ ------------
Total liabilities and
shareholders' (deficiency)
equity $239,456,980 $207,035,500 $218,279,415 $218,611,231 $54,252,217 $37,361,833 $20,081,060
============= ============= ============= ============= ============ ============ ============
</TABLE>
27
<PAGE> 34
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, 1998, 1997, 1996, 1995 and 1994 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, 1998. The selected consolidated
financial data as of and for the three months ended March 31, 1999 and 1998 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 three months
ended March 31, 1999 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1999.
FHS--STATEMENT OF OPERATIONS INFORMATION
FOR THE FIVE YEARS ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues
Health plan premiums................... $7,440,981 $5,829,444 $5,395,125 $4,557,214 $3,863,965
Government contracts (i)............... 989,409 949,168 908,730 279,380 209,980
Specialty services (i)................. 366,645 342,107 316,993 210,533 139,853
Investment and other income............ 99,041 114,300 88,392 66,510 51,698
---------- ---------- ----------- ---------- ----------
Total revenues 8,896,076 7,235,019 6,709,240 5,113,637 4,265,496
---------- ---------- ----------- ---------- ----------
Expenses
Health plan services (i)............... 6,547,747 4,912,532 4,598,074 3,643,463 3,091,890
Government contracts health 757,047
care services(i)..................... 711,757 706,076 174,040 147,629
Specialty services (i)................. 307,675 290,319 289,744 182,380 121,299
Selling, general and administrative(i). 1,042,556 851,826 859,996 657,275 536,209
Amortization and depreciation.......... 128,093 98,353 112,916 89,356 66,741
Interest............................... 92,159 63,555 45,372 33,463 23,081
Asset impairment, merger, restructuring,
and other charges.................... 274,953 395,925 44,108 20,164 125,379
---------- ---------- ----------- ---------- ----------
Total expenses 9,150,230 7,324,267 6,656,286 4,800,141 4,112,228
---------- ---------- ----------- ---------- ----------
Income (loss) from continuing operations
before income taxes..................... (254,154) (89,248) 52,954 313,496 153,268
Income tax provision (benefit)............ (88,996) (21,418) 14,124 124,345 70,169
---------- ---------- ----------- ---------- ----------
Income (loss) from continuing
operations.............................. (165,158) (67,830) 38,830 189,151 83,099
Discontinued operations:
Income (loss) from operations, net
of tax............................... --- (30,409) 25,084 3,028 18,434
Gain (loss) on disposition, net of
tax.................................. --- (88,845) 20,317 --- ---
---------- ---------- ----------- ---------- ----------
Net income (loss)......................... $(165,158) $(187,084) $84,231 $192,179 $101,533
========== ========== =========== ========== ==========
Basic earnings (loss) per share
Continuing operations.................. $(1.35) $(0.55) $0.31 $1.54 $0.73
Income (loss) from discontinued
operations, net of tax............... --- (0.25) 0.20 0.02 0.16
Gain (loss) on disposition of
discontinued operations, net of tax.. --- (0.72) 0.16 --- ---
---------- ---------- ----------- ---------- ----------
Net.................................... $(1.35) $(1.52) $0.67 $1.56 $0.89
---------- ---------- ----------- ---------- ----------
</TABLE>
28
<PAGE> 35
FHS--STATEMENT OF OPERATIONS INFORMATION
FOR THE FIVE YEARS ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Diluted earnings (loss) per share
Continuing operations.................. $(1.35) $(0.55) $0.31 $1.53 $0.72
Income (loss) from discontinued
operations, net of tax............... --- (0.25) 0.20 0.02 0.16
Gain (loss) on disposition of
discontinued operations, net
of tax............................... --- (0.72) 0.16 --- ---
------- ------- ------- ------- -------
Net.................................... $(1.35) $(1.52) $0.67 $1.55 $0.88
======= ======= ======= ======= =======
Weighted average shares outstanding:
Basic.................................. 121,974 123,333 124,453 122,741 113,723
Diluted................................ 121,974 123,333 124,966 123,674 115,658
</TABLE>
FHS--SUMMARIZED BALANCE SHEET
INFORMATION AS OF DECEMBER 31, 1998,
1997, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Cash & cash equivalents and
investments available for sale....... $1,288,947 $1,112,361 $1,122,916 $871,818 $840,332
Total assets........................... 3,929,541 4,076,350 3,423,776 2,733,765 2,218,506
Notes payable and capital leases
noncurrent........................... 1,254,278 1,308,979 791,618 547,522 301,356
Stockholders' equity (ii).............. 744,042 895,974 1,183,411 1,068,255 877,466
</TABLE>
(i) Health plan services costs include medical management expenses.
Specialty services costs include the selling, general and
administrative expenses of FHS' specialty services division. FHS
separately reported the revenues and expenses of its government
contracts and specialty services divisions. This presentation was
changed beginning with FHS' quarter ended March 31, 1999.
(ii) No cash dividends were declared in each of the years presented.
29
<PAGE> 36
FHS--STATEMENT OF OPERATIONS INFORMATION
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues
Health plan premiums....................................................... $1,855,423 $1,844,484
Government contracts/Specialty services (i)................................ 348,352 304,740
Investment and other income................................................ 18,657 26,150
Gain on sale of pharmacy benefits management operations.................... 53,558 ---
---------- ----------
Total revenues 2,275,990 2,175,374
---------- ----------
Expenses
Health plan services (i)................................................... 1,564,777 1,544,092
Government contracts/Specialty services (i)................................ 238,799 191,468
Selling, general and administrative (i).................................... 321,915 343,850
Depreciation............................................................... 17,739 17,820
Amortization............................................................... 10,984 13,021
Interest................................................................... 21,938 21,861
Restructuring and other costs.............................................. 21,059 ---
---------- ----------
Total expenses 2,197,211 2,132,112
---------- ----------
Income from operations before income taxes and cumulative effect of change in
accounting principle....................................................... 78,779 43,262
Income tax provision.......................................................... 31,441 17,024
---------- ----------
Income before cumulative effect of change in accounting principle............. 47,338 26,238
Cumulative effect of change in accounting principle........................... 5,417 ---
---------- ----------
Net income.................................................................... $41,921 $26,238
========== ==========
Basic and diluted earnings per share
Income before cumulative effect of change in accounting principle.......... $0.39 $0.22
Cumulative effect of change in accounting principle........................ 0.05 ---
---------- ----------
Net income................................................................. $0.34 $0.22
========== ==========
Weighted average shares outstanding:..........................................
Basic...................................................................... 122,233 121,614
Diluted.................................................................... 122,233 121,907
</TABLE>
FHS--SUMMARIZED BALANCE SHEET INFORMATION
AS OF MARCH 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF MARCH 31
----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Balance Sheet Data
Cash & cash equivalents and investments available for sale.................. $1,179,939 $947,438
Total assets................................................................ 3,711,422 3,946,886
Notes payable and capital leases noncurrent................................. 1,193,679 1,353,420
Stockholders' equity (ii)................................................... 784,996 927,402
</TABLE>
(i) FHS reclassified medical management expenses from health plan services
costs to selling, general and administrative ("SG&A") expenses. FHS
also reclassified the SG&A expenses of its specialty services division
from Government contracts/Specialty services costs to SG&A expenses.
FHS is reporting the revenues and expenses of its Government
contracts/Specialty services segment on a combined basis. This
presentation was changed beginning with FHS' quarter ended March 31,
1999 and comparable prior quarter amounts were conformed to the current
period presentation.
(ii) No cash dividends were declared in each of the periods presented.
30
<PAGE> 37
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 only can be
held by or transferred 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 June 1, 1999, 499,000,000 shares of FOHP Common Stock were
outstanding and were held by 2,629 shareholders of FOHP, including 496,916,161
shares held by FHS, 1,006,717 shares held by 41 Hospital Shareholders and
1,077,122 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 the 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, 1997.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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>
31
<PAGE> 38
<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............................................... 15 3/4 5 7/8
Calendar Quarter - 1999
First Quarter................................................ 12 7/16 7 11/16
Second Quarter (through June 1, 1999)....................... 19 7/8 10 13/16
</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 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, and as amended pursuant to a Letter Agreement dated as of
March 27, 1998, the First Amendment and Waiver to Credit Agreement dated as of
April 6, 1998, the Second Amendment to Credit Agreement dated as of July 31,
1998, the Third Amendment to Credit Agreement dated as of November 6, 1998 and
the Fourth Amendment to Credit Agreement dated as of March 26, 1999, 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' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
As of June 1, 1999, 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 is the only holder of record of FHS'
Class B Common Stock, par value $.001 per share, 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 California Wellness Foundation to an unrelated
third party, such shares automatically convert into shares of FHS Class A Common
Stock.
32
<PAGE> 39
PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of June 1, 1999, with
respect to the beneficial ownership (as defined in Rule 13d-3 of 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 1998, 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>
Foundation Health Systems, Inc. (2).................................. 496,916,161 (3) 99.6%(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).................................................. ---
Dr. Om P. Sawhney (4)................................................ 5,800 (8) (5)
Thomas W. Wilfong (6) (9)............................................ ---
Roger W. Birnbaum (10)............................................... ---
Dr. Joseph Singer (9)................................................ 8,000 (5)
Donald Parisi (9).................................................... ---
Marc M. Stein (9).................................................... ---
All Directors and Executive Officers
as a Group (13 persons).............................................. 26,417 (7)(8) (5)
</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 21650 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 the principal amount of the New
Convertible Debenture into 92,804,003 shares of FOHP Common Stock and, in
December 1998, FHS converted $1,197,183 of the principal amount of the New
Convertible Debenture into 399,003,000 shares of FOHP Common Stock. If
33
<PAGE> 40
FHS elects to convert the remaining amount 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 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 is an executive officer of FOHP.
(10) Such person was a former executive officer and director of FOHP.
34
<PAGE> 41
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 July 29, 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 June
30, 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 June 1, 1999, the number of outstanding shares of FOHP Common
Stock was 499,000,000. Only shareholders of record on the books of FOHP at the
close of business on June 1, 1999 will be entitled to vote at the Special
Meeting.
35
<PAGE> 42
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 not
less than sixty-six and two-thirds percent (66-2/3%) 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.
36
<PAGE> 43
THE MERGER
BACKGROUND OF THE MERGER
During the first quarter of 1996, FOHP learned that PHS-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. PHS-NJ's Certificate of Authority
provided that if its net worth is, or is expected to be, less than 125% of the
minimum requirement, PHS-NJ is required to submit to the Departments a plan of
action to address the deficiency or expected deficiency. PHS-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 PHS-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 PHS-NJ's
statutory net worth deficiency. In order to adequately address PHS-NJ's
statutory net worth deficiency, the FOHP Board believed that FOHP needed to
infuse a significant amount of capital into PHS-NJ. To raise the required
capital, FOHP considered offering, in a public offering, securities to the
providers in the PHS-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 PHS-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
37
<PAGE> 44
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 PHS-NJ relating to the Boards of Directors of FOHP and PHS-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 the 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 a letter agreement which clarified FHS' right under the Amended
Securities Purchase Agreement to infuse additional capital into FOHP in the
event that PHS-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 PHS-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 could,
at its option, acquire during 1999, pursuant to a tender offer of merger, all of
the outstanding shares of FOHP Common Stock not held by FHS at a purchase price
per share to be determined by one or more independent appraisers. In any such
tender offer or merger, 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 transactions contemplated in the Amended
Securities Purchase Agreement allowing for FHS to acquire all of the outstanding
FOHP Common Stock, provided that any such transaction occurred in 1999 and
certain other conditions were met. See "Reasons for the Merger" and "Evaluation
of Fairness of Merger by FOHP and FHS."
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
38
<PAGE> 45
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 PHS-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 consideration that the Provider
Shareholders would be entitled to receive in any transaction contemplated in the
Amended Securities Purchase Agreement pursuant to which FHS would acquire all of
the outstanding shares of FOHP Common Stock not held by it, the FOHP Board and
FHS began, in July 1997, discussing various alternatives directed at preserving
the Provider Shareholders' 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
any proposal aimed at preserving the Provider Shareholders' investment in FOHP.
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
between FOHP and FHS regarding any proposal aimed at preserving the Provider
Shareholders' investment in FOHP. 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. and
A.G. Edwards & Son, Inc.
On September 16, 1997, members of the Special Committee and legal
counsel to FOHP met with representatives of JMS, Gerard, Klauser, Mattison &
Co., Inc. and A.G. Edwards & Son, Inc., 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 proposal aimed at preserving the Provider
Shareholders' investment in FOHP; (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,
39
<PAGE> 46
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
preserving the Provider Shareholders' investment in FOHP.
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 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 PHS-NJ in
return for subordinated debentures which are not convertible into shares of FOHP
Common Stock. 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.
FHS and the Non-FHS Directors, assisted by legal counsel and JMS, held
discussions from October 1997 through June 1998 for purposes of developing a
proposal aimed at preserving the Provider Shareholders' investment in FOHP.
Initially, FHS wanted any alternative 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 have complete control over FOHP after acquiring 100%
ownership of FOHP, 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 PHS-NJ provider network. Based on these inquiries, the Non-FHS Directors
believed it necessary for any per share consideration to be offered to the
Provider Shareholders be equal to 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. 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 PHS-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 PHS-NJ were satisfied.
40
<PAGE> 47
In March and April, 1998, several representatives of the Non-FHS
Directors and FHS met with various Provider Shareholders to discuss the
operational changes recently made by FOHP to address concerns raised by the
provider network and discuss the proposal being developed by FHS and the Non-FHS
Directors to preserve the Provider Shareholders' investment in FOHP.
At the March 4, 1997 meeting, representatives of FOHP and FHS spent a
significant amount of time discussing the operational changes made by FOHP
during the past several months to address concerns raised by the provider
network relating to claims payment, staffing, utilization review and the
existing claims processing system. Several of the Provider Shareholders at the
meeting voiced their displeasure over the communication, or lack thereof,
between the Provider Shareholders and FOHP. Management of FOHP responded by
explaining that the recent operational changes should allow for better
communication between the Provider Shareholders and FOHP. It was also discussed
at the meeting that FHS and the Non-FHS Directors would like to meet with the
Provider Shareholders to discuss the proposal being jointly developed by FHS and
the Non-FHS Directors to preserve the Provider Shareholders' investment in FOHP.
On April 22, 1997, representatives of FHS and several Non-FHS Directors
and their advisors met with the Provider Shareholders to discuss the proposal
being developed by FHS and the Non-FHS Directors which was aimed at preserving
the Provider Shareholders' investment in FOHP. The meeting began with a brief
presentation by representatives of FOHP on the reasons why FHS had to infuse
additional capital into FOHP during the past twelve (12) month period and the
dilutive effect such infusions have had on the individual investment of each
Provider Shareholder in FOHP. It was then explained that the Non-FHS Directors
and FHS had been working together on a proposal aimed at preserving the Provider
Shareholders' investment in FOHP. Representatives of FHS explained that,
although FHS had the right pursuant to the Amended Securities Purchase Agreement
to acquire all the shares of FOHP Common Stock held by the Provider Shareholders
at an appraised value, FHS understood that the appraised value of the FOHP
Common Stock held by the Provider Shareholders would be significantly less than
$15.00 per share, and that many Provider Shareholders would be upset to receive
such consideration. The FHS representatives continued by explaining that FHS has
a significant investment in FOHP and wants to preserve that investment by
providing incentive to the Provider Shareholders to continue supporting the
PHS-NJ provider network. The representatives of FHS then outlined the proposal
being developed by FHS and the Non-FHS Directors which provided the Provider
Shareholders with an opportunity to receive at least $15.00 for each share of
FOHP Common Stock held by them. The FOHP and FHS representatives then listened
to various comments made by the Provider Shareholders. It became apparent to FHS
from the comments being made by the Provider Shareholders, representing both
physicians and hospitals, that there should be some additional incentive, other
than the $15.00 payment under a Payment Right, for the Non-Hospital Shareholders
to remain in the PHS-NJ provider network until December 31, 2001.
As a result of its meetings in March and April, 1998 with the Non-FHS
Directors and various Provider Shareholders, FHS decided to offer Non-Hospital
Shareholders the ability to not only receive $15.00 for each share of FOHP
Common Stock held by them, but the ability to receive an additional $2.25 per
share of FOHP Common Stock and a percentage of a Bonus Pool
41
<PAGE> 48
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,
provided that certain performance criteria were met by PHS-NJ.
In April and May, 1998, FHS and the Non-FHS Directors prepared and
negotiated the Term Sheet outlining the Original Merger and proposed Payment
Rights.
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 Payment Rights to be offered in the Original Merger to the
Provider Shareholders for their shares of FOHP Common Stock were fair to such
holders from a financial point of view. The Term Sheet outlining the terms and
conditions of the Payment Rights 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 Payment Rights to be offered in the Original Merger were
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 Payment Rights to be
offered in the Original Merger were 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, Physicians Health Services of New Jersey, Inc. and
PHS-NJ, could consolidate and operate as one plan as directed by the
Departments. In addition, the administrative burden and cost of operating
Physicians Health Services of New Jersey, Inc. and PHS-NJ as separate HMOs
during any portion of 1999 could have had 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 Physicians Health
Services of New Jersey, Inc. 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 Payment Rights offered to the Provider
Shareholders in connection with the acquisition by FHS of 100% ownership in
FOHP. 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 any cash that is needed by
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 Payment Rights to be offered to the
Provider Shareholders for their shares of FOHP Common Stock were 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 were fair to the
Provider Shareholders from a financial point of view.
On December 31, 1998, FHS converted $1,197,183 of the principal amount
of the New Convertible Debenture into 399,003,000 shares of FOHP Common Stock.
As a result of such conversion, FHS currently owns 496,916,161 shares of FOHP
Common Stock, representing more than 99% of the outstanding FOHP Common Stock.
See "Recent Developments - Conversion of New Convertible Debenture."
In January 1999, FOHP (through the Non-FHS Directors) engaged JMS to
appraise the value of the outstanding shares of FOHP Common Stock as of December
31, 1998. In selecting JMS to conduct the appraisal, the FOHP Board recognized
that JMS' knowledge of FOHP and the Merger would facilitate the appraisal
process and, as a result of such knowledge, JMS would be able to complete the
appraisal at a lower cost to FOHP than an appraiser who had no prior knowledge
of FOHP or the Merger.
On June 1, 1999, JMS delivered the Appraisal to the FOHP Board. The
Appraisal provides that, based upon and subject to certain matters stated
therein, the value of one share of FOHP Common Stock as of December 31, 1998 was
twenty-five cents ($0.25). See "The Appraisal."
REASONS FOR THE MERGER
Pursuant to the Amended Securities Purchase Agreement, FHS may acquire,
through a tender offer or merger, all of the outstanding shares of 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
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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.
As of December 31, 1996, PHS-NJ was approximately $45,300,000 below
125% of the statutory net worth requirement applicable to it. During the first
quarter of 1997, the DOI informed HSI, the predecessor to FHS, and the FOHP
Board that if HSI and FOHP did not consummate the sale of the Initial Debenture
by April 30, 1997, the DOI intended to petition the New Jersey Superior Court
for an order to allow the DOI to place PHS-NJ into rehabilitation. If PHS-NJ was
placed into rehabilitation, it was likely that none of the shareholders of FOHP
would have received any distribution on the shares of FOHP Common Stock held by
them since all of the assets of FOHP would have been used to pay the liabilities
and other debts of PHS-NJ and FOHP before any distributions would have been made
to the FOHP shareholders. During negotiations between FOHP and HSI with respect
to the Amended Securities Purchase Agreement, it became apparent, for the
reasons set forth above, that FHS would not purchase the Initial Debenture
unless it had the right to later acquire 100% ownership of FOHP. To induce FHS
to purchase the Initial Debenture, the FOHP Board, as then constituted, agreed
to permit FHS to acquire 100% of the outstanding shares of FOHP Common Stock
after FHS' purchase of the Initial Debenture, provided certain conditions were
met and that such purchase did not occur until 1999. The FOHP Board reasoned
that, inasmuch as the purchase price for the shares of FOHP Common Stock not
held by FHS would be based on an appraisal of the value of FOHP, by delaying
FHS' right to acquire 100% ownership would give FOHP the opportunity to increase
in value. See "Evaluation of Fairness of Merger by FOHP and FHS."
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 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 July 1, 2001, provided that certain conditions were
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 PHS-NJ will be the directors and executive
officers of the Surviving Corporation. As a result of the Merger, all real
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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
PHS-NJ, and the Surviving Corporation shall be liable for all the obligations
and liabilities of such corporations.
At the effective time of the Merger, all shares of FHS Transition
Company stock issued and outstanding immediately prior to the effective time of
the Merger, all of which are held by FHS, will 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 of the Merger.
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
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;
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(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 Payment Rights to be offered to the Provider
Shareholders pursuant to the Merger Agreement are 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 any cash that is needed by 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 - At 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) Payment
Rights.
Pursuant to the Merger Agreement, each of FHS and FOHP (through the
Non-FHS Directors) were entitled to select, in its sole discretion, a qualified
independent appraiser to appraise the value of the shares of FOHP Common Stock
outstanding as of December 31, 1998. In January 1999, FOHP (through the Non-FHS
Directors) engaged JMS to appraise the value of the outstanding shares of FOHP
Common Stock as of December 31, 1998. On June 1, 1999, JMS delivered the
Appraisal to the FOHP Board, which provided that, based upon and subject to
certain matters stated therein, the approximate value of one share of FOHP
Common Stock as of December 31, 1998 was twenty-five cents ($0.25). See "The
Appraisal."
FHS elected not to engage its own qualified independent appraiser to
appraise the value of the shares of FOHP Common Stock outstanding as of December
31, 1998. FHS was of the view that another appraiser would likely not determine
a value materially different than the value determined by JMS and, therefore,
another appraisal would not be cost effective.
In lieu of receiving the Appraisal Consideration, a Provider
Shareholder can choose to receive 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.
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Each Payment Right issued to a Hospital Shareholder will entitle the
Hospital Shareholder to receive a cash payment of $15.00 on or about July 1,
2001 from FOHP, provided that the Hospital Shareholder Conditions (defined on
page 71 hereof) have been met by the Hospital Shareholder and the Continuing
Hospital Provider Condition (as defined on page 15 hereof) shall have been
satisfied. If a Hospital Shareholder fails to comply with the Hospital
Participation and Reimbursement Condition (as defined on page 71 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 73 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 or about
July 1, 2001 from FOHP, provided that the Non-Hospital Shareholder Condition (as
defined on page 77 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 FOHP Common Stock, and the Non-Hospital Shareholder remains a provider
to PHS-NJ until July 1, 2001, and agrees in writing to remain a provider to
PHS-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 78 hereof) of the Bonus Pool funded by the amount
forfeited by Provider Shareholders who receive Payment Rights, but who fail to
satisfy the conditions contained therein applicable to them, plus the amount
equal to the product of $14.75 (the remainder of $15.00, the principal amount of
a Payment Right, minus $0.25, the per share Appraisal Consideration) multiplied
by the number of shares of FOHP Common Stock held by the Provider Shareholders
who elect to receive the Appraisal Consideration; provided, however, that (i)
the Continuing Hospital Provider Condition is satisfied, and (ii) PHS-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
PHS-NJ, plus any increase in retained earnings for PHS-NJ through the period
January 1, 1999 to June 30, 2001, excluding any non-recurring extraordinary
items, as defined under GAAP, and without giving effect to the quota share
reinsurance arrangement among PHS-NJ, Guardian and PHS/Bermuda, Ltd., an
affiliate of PHS-NJ. 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 71 HEREOF, FOR A
MORE COMPLETE DESCRIPTION OF THE PAYMENT RIGHTS.
SEE "THE APPRAISAL" BEGINNING ON PAGE 51 HEREOF, FOR A MORE COMPLETE
DESCRIPTION OF THE DETERMINATION OF THE APPRAISAL CONSIDERATION.
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
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FACTORS" BEGINNING ON PAGE 21 HEREOF AND "DESCRIPTION OF PAYMENT RIGHTS"
BEGINNING ON PAGE 71 HEREOF.
IF THE CONTINUING HOSPITAL SHAREHOLDER CONDITION IS NOT SATISFIED, NO
PAYMENT WILL BE MADE UNDER ANY PAYMENT RIGHT UNLESS FOHP EXPRESSLY WAIVES SUCH
CONDITION. ACCORDINGLY, THE RIGHT TO RECEIVE PAYMENT UNDER A PAYMENT RIGHT IS
DEPENDENT ON CIRCUMSTANCES OUTSIDE THE CONTROL OF THE ELECTING SHAREHOLDERS.
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 needed by 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 aforementioned purposes, and, during the
period the Payment Rights are outstanding, FOHP will not be permitted to incur
any indebtedness which could affect its ability to make full payment on the
Payment Rights.
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 special meeting of the FOHP Board, JMS delivered
its oral opinion, subsequently confirmed in writing on July 15, 1998, that the
Payment Rights to be offered to the Provider Shareholders in the Original Merger
were 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
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such consideration was agreed to as a result of 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.
For purposes of determining whether the Payment Rights were fair to the
Provider Shareholders from a financial point of view, JMS had to first estimate
the appraised value of the outstanding FOHP Common Stock as of December 31,
1998. In estimating the appraised value of the FOHP Common Stock as of December
31, 1998, JMS relied on forecasts furnished by FOHP, without independently
verifying the accuracy of such forecasts, which provided that, as of December
31, 1998, FOHP's premium revenue would be approximately $353.8 million, FOHP's
medical expenses would be approximately $294.8 million, FOHP's administrative
expenses would be approximately $82.4 million, and FOHP's pre-tax income would
be approximately $7.3 million. FOHP's forecasts also provided that, for 1998,
enrollment in FOHP's health plans would average approximately 230,000 members.
In addition, for purposes of estimating the appraised value of the outstanding
FOHP Common Stock as of December 31, 1998, JMS assumed that, as of December 31,
1998, there would be 99,997,000 shares of FOHP Common Stock outstanding and that
the Provider Shareholders would continue to own approximately 2,100,000 or 2% of
those shares.
In reliance on FOHP's forecasts, and based on the assumption described
above, JMS estimated that the appraised value per share of FOHP Common Stock as
of December 31, 1998 would be within a range of $0.80 to $2.60.
JMS next estimated the present value of a Payment Right as of December
31, 1998. In order to estimate the present value of a Payment Right as of
December 31, 1998, JMS had to determine an appropriate range of discount rates
for valuing the future cash flows of FOHP. JMS began by creating a weighted
average cost of capital model based on publicly traded industry comparable
companies. Based on the weighted average cost of capital model that it
developed, JMS identified what it believed to be an appropriate industry
baseline weighted average cost of capital for a publicly traded company with a
similar capital structure to FOHP. In developing an appropriate range of
discount rates for valuing the future cash flows of FOHP, JMS adjusted the
weighted average cost of capital of publicly traded industry comparable
companies identified by it to account for FOHP's plans to (i) lower its medical
loss ratio, (ii) reduce corporate overhead, and (iii) increase its premiums.
Based on the foregoing, JMS' final range of discount rates fell between 25% and
35%. Applying such discount rates, JMS estimated the present value of the $15.00
payment under a Payment Right, as of December 31, 1998, to be approximately
$8.50, and the estimated present value of the Bonus Payment, as of December 31,
1998, to be approximately $1.00.
Based on its comparison of the estimates of the appraised value of the
FOHP Common Stock as of December 31, 1998 to the estimated present value of the
Payment Rights as of December 31, 1998, JMS concluded that the Payment Rights to
be offered to the Provider
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Shareholders in connection with the Merger are fair to the Provider Shareholders
from a financial point of view.
In connection with its opinion, JMS reviewed the Term Sheet setting
forth the terms and conditions relating to the Payment Rights, the Merger
Agreement and related documents and certain financial and other information of
FOHP, PHS and FHS, including certain internal analyses, reports and forecasts.
JMS also held discussions with senior management of FOHP, PHS and FHS concerning
the current operations, financial condition and prospects of FOHP and PHS. In
addition, JMS (i) reviewed the historical financial statements 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 Payment Rights 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
independently verify any information furnished to it by such companies 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 and were based on 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 the date of the opinion, and such other
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.
FOHP also engaged JMS to appraise the value of the outstanding shares
of FOHP Common Stock as of December 31, 1998. See "The Appraisal." JMS will be
paid $85,000 for such engagement, plus customary legal and other expenses.
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 ABOVE 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 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
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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.
THE APPRAISAL
Pursuant to the Merger Agreement, each of FHS and FOHP (through the
Non-FHS Directors) were entitled to select, in its sole discretion, a qualified
independent appraiser to appraise the value of the shares of FOHP Common Stock
outstanding as of December 31, 1998. In satisfaction of its obligation to select
a qualified independent appraiser, in January 1999, FOHP (through the Non-FHS
Directors) engaged JMS to appraise the value of the outstanding shares of FOHP
Common Stock as of December 31, 1998. 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. In
selecting JMS to conduct the appraisal, the Non-FHS Directors recognized that
JMS' knowledge of FOHP and the Merger would facilitate the appraisal process
and, as a result of such knowledge, JMS would be able to complete the appraisal
at a lower cost to FOHP than an appraiser who had no prior knowledge of FOHP and
the Merger.
In connection with the Appraisal, JMS reviewed the Merger Agreement and
related documents and certain financial and other information of FOHP, PHS and
FHS, including certain internal analyses, reports and forecasts. JMS also held
discussions with senior management of FOHP, PHS and FHS concerning the current
operations, financial condition and prospects of FOHP. In addition, JMS (i)
reviewed the historical financial statements of FOHP and PHS, (ii) compared the
financial position and operating results of FOHP with those of publicly traded
companies deemed relevant by JMS, (iii) compared certain financial terms of FHS'
acquisition of FOHP 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
independently verify any information furnished to it by such companies 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 and were based on the best currently available information and
judgments of the future financial performance of FOHP. 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.
The Appraisal was based on financial, economic, market and other
conditions as they existed on the date of the Appraisal, and such other
information made available to representatives of JMS. JMS is not obligated to
update, revise or reaffirm the Appraisal.
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No limitations were imposed by FOHP on JMS with respect to the
investigations made or procedures followed in connection with the preparation
and delivery of the Appraisal. Payment of JMS' fee was not contingent upon the
conclusion reported in the Appraisal.
The preparation of an appraisal is a complex process that involves
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of these methods to the particular
circumstance. Therefore, such an appraisal is not necessarily susceptible to
partial analysis or summary description. JMS believes that its analyses must be
considered as a whole and that selecting portions thereof or portions of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying the Appraisal.
JMS made numerous assumptions with respect to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of FOHP, PHS and FHS. Any estimates contained in
JMS' analyses are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses. Additionally, estimates of the values of businesses and securities
does not purport to be appraisals or necessarily reflect the prices at which
businesses or securities may be sold. Accordingly, such analyses and estimates
are inherently subject to substantial uncertainty. Subject to the foregoing, the
following is a summary of the material financial analyses performed by JMS.
In determining the approximate value of the outstanding shares of FOHP
Common Stock as of December 31, 1998, JMS utilized the following four valuation
methodologies: (i) reported book value per share of the outstanding FOHP Common
Stock as of December 31, 1998; (ii) discounted cash flow analysis (discounted to
December 31, 1998); (iii) comparable transaction analysis; and (iv) comparable
company analysis. JMS placed equal reliance on all four valuation methodologies
in determining the approximate value of the outstanding shares of FOHP Common
Stock as of December 31, 1998.
REPORTED BOOK VALUE PER SHARE - The reported book value per share of
the outstanding FOHP Common Stock as of December 31, 1998 was approximately
twenty-two cents ($0.22). The reported book value per share of the outstanding
FOHP Common Stock was determined by dividing the remainder of total assets minus
total liabilities as of December 31, 1998 ($218,279,415 - $109,594,182 =
$108,685,233) by the number of outstanding shares of FOHP Common Stock on that
date (499,000,000).
DISCOUNTED CASH FLOW ANALYSIS - JMS performed a discounted cash flow
analysis for FOHP using actual results for 1998 and financial forecasts provided
by FOHP for enrollment, premium revenue, medical expenses, administrative
expenses, other expenses, and pre-tax income for fiscal years 1999 through 2002.
Such forecasts provided that, for the years ending December 31, 1999, 2000, 2001
and 2002, FOHP's premium revenue would be approximately $441.8 million (year
1999), $510.2 million (year 2000), $589.2 million (year 2001) and $680.4 million
(year 2002), FOHP's medical expenses would be approximately $360.7 million (year
1999), $415.8 million (year 2000), $479.3 million (year 2001) and $552.6 million
(year 2002), and FOHP's pre-tax income would be approximately $16.3 million
(year 1999), $26.0 million (year 2000), $32.2 million (year 2001) and $39.6
million (year 2002). FOHP's forecasts also provided that for 1999, 2000, 2001
and 2002 enrollment in FOHP's health plans would average approximately 281,638
members (year 1999), 309,052 members (year 2000), 339,186 members
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(year 2001) and 372,312 members (year 2002). All cash flows were discounted at a
rate of 25%. The terminal values were computed using a range of multiples from
10x to 14x 2003 forecasted net income. JMS arrived at such a discount rate by
developing and applying a weighted average cost of capital model based on
selected publicly traded HMOs, and arrived at such terminal values through its
analysis of the trading characteristics of the common stock of selected publicly
traded HMOs. This discounted cash flow analysis indicated a value for each share
of FOHP Common Stock outstanding as of December 31, 1998 of approximately
twenty-three cents ($0.23).
COMPARABLE TRANSACTION ANALYSIS - JMS reviewed publicly available
information relating to certain merger and acquisition transactions in respect
of companies primarily in industries related to FOHP's business ("Comparable
Transactions"). JMS examined multiples of the value of common equity and
indebtedness assumed in each of the Comparable Transactions to, among other
measures, the acquired companies' revenue, earnings before income taxes,
depreciation and amortization ("EBITDA") and earnings before income taxes
("EBIT"), and examined multiples of the value of the common equity in each of
the Comparable Transactions to net income. For each measure, revenue, EBITDA,
EBIT and net income consisted of the latest twelve months of available financial
information on the respective date of each transaction.
JMS identified and examined twelve Comparable Transactions that were
completed since January 1, 1998. Based on its comparison of the Comparable
Transactions to the Merger, JMS median per share value of the outstanding FOHP
Common Stock was approximately thirty-three cents ($0.33) and average per share
value was approximately forty-one cents ($0.41). JMS also noted that the
foregoing price range included a control premium that was not present in the
Merger.
COMPARABLE COMPANY ANALYSIS - Using publicly available information, JMS
compared the financial performance of FOHP with corresponding data and ratios of
certain similar publicly traded companies. JMS selected these companies from the
universe of possible companies based upon JMS' view as to the comparability of
financial and operating characteristics of these companies to FOHP. JMS compared
FOHP with the following companies: Coventry Health Care, Inc., Mid Atlantic
Medical Services, RightCHOICE Managed Care, American Medical Security Group,
Trigon Healthcare, Inc., Oxford Health Plans, Inc., Sierra Health Services and
United Wisconsin Services, Inc. (the "Comparable Companies").
In comparing the financial performance of FOHP to the financial
performance of each of the Comparable Companies, JMS calculated and reviewed
various multiples and financial information, including price to revenue, price
to pre-tax income, price to book value and price per enrolled member in a health
plan. Applying these multiples to FOHP's financial results for the year ended
December 31, 1998, resulted in a median per share value as of December 31, 1998
of approximately sixteen cents ($0.16) and an average per share value of
approximately seventeen cents ($0.17).
In determining the value of the outstanding shares of FOHP Common Stock
as of December 31, 1998, JMS also reviewed various economic conditions affecting
FOHP and the managed care industry and also reviewed the current state and
anticipated direction of the managed care industry.
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Based on the foregoing, and placing equal reliance on all four
valuation methodologies, JMS determined that the approximate value of one share
of FOHP Common Stock as of December 31, 1998 was twenty-five cents.($0.25). More
specifically, JMS determined the approximate value of one share of FOHP Common
Stock as of December 31, 1998 by adding (i) the reported book value per share as
of December 31, 1998 ($0.22), (ii) the value of each share of FOHP Common Stock
as of December 31, 1998 as determined by using the discounted cash flow analysis
($0.23), (iii) the average of the median per share value ($0.33) and the average
per share value ($0.41) of each share of FOHP Common Stock as of December 31,
1998 as determined by using the comparable transaction analysis, and (iv) the
average of the median per share value ($0.16) and the average per share value
($0.17) of each share of FOHP Common Stock as of December 31, 1998 as determined
by using the comparable company analysis, and dividing by four.
It should be noted that for purposes of the fairness opinion issued by
JMS in July 1998 with respect to the Payment Rights, JMS estimated that the
appraised value per share of FOHP Common Stock as of December 31, 1998 would be
within a range of $0.80 to $2.60. Such estimate was based on financial forecasts
furnished by FOHP for the year ended December 31, 1998 and the assumption that
there would be 99,997,000 shares of FOHP Common Stock outstanding as of December
31, 1998 and that the Provider Shareholders would continue to own approximately
2,100,000 or 2% of those shares. On December 31, 1998, FHS converted $1,197,183
of the principal amount of the New Convertible Debenture into 399,000,000 shares
of FOHP Common Stock. As a result of such conversion, and related dilution of
the Provider Shareholders' equity position in FOHP, the value of the shares of
FOHP Common Stock held by the Provider Shareholders was significantly reduced.
See "Opinion of Financial Advisor to FOHP" and "Recent Developments."
THE FULL TEXT OF THE APPRAISAL, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS OF REVIEW BY JMS, IS ATTACHED HERETO AS
APPENDIX H AND IS INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ CAREFULLY
AND IN ITS ENTIRETY IN CONNECTION WITH THIS PROXY STATEMENT. THE ABOVE SUMMARY
OF THE APPRAISAL IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
THE APPRAISAL. THE APPRAISAL IS ADDRESSED TO THE FOHP BOARD 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 THE APPRAISAL, JMS DID NOT ADMIT THAT IT IS AN EXPERT WITHIN THE
MEANING OF THE TERM "EXPERT" AS USED IN THE SECURITIES ACT, AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER, OR THAT THE APPRAISAL IS A REPORT OR
VALUATION WITHIN THE MEANING OF SECTION 11 OF THE SECURITIES ACT.
EVALUATION OF FAIRNESS OF MERGER BY FOHP AND FHS
When the FOHP Board approved the Amended Securities Purchase Agreement,
pursuant to which FHS has the right to acquire 100% ownership of FOHP, the FOHP
Board recognized that FOHP was either insolvent or becoming insolvent due to the
continuing losses of PHS-NJ, FOHP's principal subsidiary. The FOHP Board also
recognized that even if FHS infused approximately $51.7 million into FOHP
through the purchase of the Initial Debenture, the value of the FOHP Common
Stock would not increase significantly until FOHP was able to generate
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profit from its operations. Based on the then current financial condition of
FOHP, the FOHP Board determined that, in order to allow FOHP to correct its
operating deficiencies and generate a profit, any acquisition by FHS of the FOHP
Common Stock held by the Provider Shareholders should not occur prior to 1999.
Inasmuch as FHS could not obtain 100% ownership of FOHP prior to 1999,
the FOHP Board and FHS determined, before FHS' purchase of the Initial
Debenture, that a fair method for determining the purchase price to be paid by
FHS for shares of FOHP Common Stock held by the Provider Shareholders in any
acquisition transaction would be an appraisal conducted by one or more
independent appraisers selected by FOHP and FHS. Accordingly, based on the
foregoing and in reliance on the Appraisal delivered by JMS, the FOHP Board and
FHS believe that the Appraisal Consideration of twenty-five cents ($0.25) per
share of FOHP Common Stock is fair to the Provider Shareholders.
Shortly after FHS purchased the Initial Debenture, the FOHP Board and
FHS learned that FOHP's reserves were not adequate to ensure payment of all
outstanding claims and 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 of such reserve inadequacies and
the continuing operating losses of FOHP, FHS had to infuse more than $70 million
of additional capital into FOHP. Recognizing that the additional infusions of
capital by FHS, and related dilution of the equity interest of the Provider
Shareholders in FOHP as a result of the conversion of the New Convertible
Debenture issued to FHS in connection with such capital infusions, had
significantly reduced the amount of consideration a Provider Shareholder would
receive for his, her or its shares of FOHP Common Stock, the FOHP Board and FHS
developed the Payment Rights as an alternative to the Appraisal Consideration.
In reliance on the fairness opinion issued by JMS on July 15, 1998, as
later confirmed, and recognizing that FHS is under no obligation to offer any
consideration to the Provider Shareholders other than the Appraisal
Consideration, which is significantly less than the $15.00 principal amount of
the Payment Rights, the FOHP Board and FHS believe that the Payment Rights being
offered in the Merger are fair to the Provider Shareholders.
RECOMMENDATION OF THE FOHP BOARD
For the reasons discussed elsewhere in this Proxy Statement, 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,
a future merger transaction pursuant to which FHS would acquire all the
outstanding shares of FOHP Common Stock not held by it, provided such
transaction occurred in 1999 and the following conditions were 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 merger 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
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substantially similar to those currently contained in FOHP's By-Laws for a
period ending six (6) years from the date of the merger 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 transactions 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 merger 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
transactions 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 Payment Rights from a financial
point of view, has approved the Merger Agreement and recommends it to the
Provider Shareholders.
REQUIRED VOTE TO APPROVE MERGER AGREEMENT
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. The proposal to approve the Merger Agreement must
be approved by not less than sixty-six and two-thirds percent (66-2/3%) of the
votes cast at the Special Meeting.
FHS currently owns more than 99% 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 of the Merger, 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 of the Merger, other than
FHS and holders of dissenting shares, a form of 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
Payment Rights in exchange therefor. A Provider Shareholder who has not
dissented from the Merger will be asked in the
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letter of transmittal to select either the Appraisal Consideration or 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 less than 1% 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. 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. Inasmuch as the Appraisal Consideration for one share of FOHP Common
Stock is significantly less than $15.00, which is the amount originally paid to
FOHP for one share of FOHP Common Stock by the Provider Shareholders, it is
anticipated that any Provider Shareholder electing to receive the Appraisal
Consideration would recognize a loss.
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(II) PAYMENT RIGHTS
If a Provider Shareholder elects to receive Payment Rights 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
satisfied. The amount due under a Payment Right received by a Non-Hospital
Shareholder will be reduced to zero if certain conditions set forth within the
Payment Rights and described herein are not satisfied. For a comprehensive
description of the elements of the Payment Rights 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 Payment
Rights 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 Payment Rights 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 payment under the Payment Rights,
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 Payment Rights to be issued 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 Payment Rights shall not be required to recognize the
amount of the gain or loss realized with respect to the Payment Rights, until
the fiscal year in which payment under the Payment Rights are made 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 Common Stock for either the Appraisal Consideration
or the Payment Rights 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 payment under the Payment Rights
is made at the Provider Shareholder's applicable ordinary tax rates as provided
for in the Code.
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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.
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DISSENTERS' RIGHTS
INTRODUCTION
Sections 14A:11-1 through 11-11 of the NJBCA permit shareholders of a
corporation 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 G.
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
July 29, 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 Payment Rights. 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
At the time of filing the demand for payment, or within twenty (20)
days thereafter, you must submit to FOHP, or an authorized agent thereof, 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.
61
<PAGE> 68
RECENT DEVELOPMENTS
HMO SUBSIDIARY MERGER
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 (formerly First Option Health Plan of
New Jersey, Inc.) pursuant to the Agreement and Plan of Merger dated as of
October 26, 1998. At the effective time of the HMO Subsidiary 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 HMO Subsidiary Merger was
to consolidate the FHS controlled HMO operations in the State of New Jersey into
primarily one corporation.
CONVERSION OF NEW CONVERTIBLE DEBENTURE
On December 31, 1998, FHS converted $1,197,183 of the principal amount
of the New Convertible Debenture into 399,003,000 shares of FOHP Common Stock
pursuant to the conversion formula contained therein. Pursuant to the New
Convertible Debenture, FHS is entitled to receive an additional 1.42 percent of
the total equity of FOHP for each $1,000,000 of the principal amount of the New
Convertible Debenture it elects to convert. As a result of the December 31, 1998
conversion, FHS currently owns 496,916,161 shares of FOHP Common Stock,
representing more than 99% of the outstanding FOHP Common Stock.
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<PAGE> 69
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>
Thomas W. Wilfong 43 President and Chief Executive Officer
Dr. Joseph Singer 41 Vice President and Chief Medical Officer
Donald Parisi 43 Vice President, Secretary and General Counsel
Marc M. Stein 47 Chief Financial Officer
</TABLE>
Mr. Thomas W. Wilfong has served as President and Chief Executive
Officer of FOHP since April 1, 1998 and as Chief Operating Officer of FHS'
Northeast Division since December 8, 1998. Mr. Wilfong served as President of
FHS' New Jersey operations from February 1998 to December 1998 and served as
Executive Director of PHS' New Jersey operations from August 1996 to February
1998. From 1993 to August 1996, Mr. Wilfong served as Vice President of Medical
Management of Central New Jersey Medical Group and from July 1986 to 1993 he
served as a Regional Administrator for Central New Jersey Medical Group and
Rutgers Community Health Plan. 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 PHS-NJ on December 1, 1994
and has served as the Vice President, Medical Affairs and Medical Director of
PHS-NJ since February 1995. Prior to joining PHS-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 PHS-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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<PAGE> 70
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>
Dr. John F. Bonamo 48 Obstetrician and Gynecologist
95 Northfield Avenue
West Orange, NJ 07052
Mr. Bruce G. Coe 68 President Emeritus of New Jersey Business and
41 Lambert Lane Industry Association
Lambertville, NJ 08530
Ms. Karen A. Coughlin 51 President and Chief Executive Officer of FHS
Physicians Health Services, Inc. Northeast Division
One Far Mill Crossing
Shelton, CT 06484
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 52 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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<PAGE> 71
<TABLE>
<CAPTION>
Name and Address Age Principal Occupation or Employment
---------------- --- ----------------------------------
<S> <C>
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 07753
</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 Intensive Care Unit for Cleveland's Fairview
General Hospital. She has served as a director of FOHP since November 18, 1998.
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<PAGE> 72
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 PHS-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 PHS-NJ since January 1994
and as Chairman of the Board of PHS-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 PHS-NJ
since January 1994.
Mr. John J. Gantner has served as Treasurer of the Robert Wood Johnson
University Hospital since May 1995. Between January 1993 and May 1995, he served
as a special financial consultant to the Robert Wood Johnson University
Hospital. 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.
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 PHS-NJ since January 1994.
Mr. Thomas W. Wilfong. See "Management of Surviving Corporation."
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<PAGE> 73
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). Each of the executives report to FHS' senior management. All of the
executives of FOHP 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), or (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 of FOHP. 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.
67
<PAGE> 74
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, that 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 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
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<PAGE> 75
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 FOHP 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> 76
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> 77
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 or about 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 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 Hospital
Shareholder and PHS-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 PHS-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 PHS-NJ's inception was self-insured, the Hospital
Shareholder shall offer a PHS-NJ health plan to its
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<PAGE> 78
employees as its exclusive plan; (B) if the Hospital
Shareholder offered one or more health plans,
including any self-insured plan, at PHS-NJ's
inception, the Hospital Shareholder 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 Hospital Shareholder is subject to a
collective bargaining agreement, the Hospital
Shareholder 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 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 PHS-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 PHS-NJ of
the material terms of any Bona Fide Offer (as defined
below) offered by such other health benefit 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 Hospital
Shareholder as those contained in the Bona Fide
Offer, such Hospital Shareholder shall offer PHS-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 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.
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<PAGE> 79
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 a Hospital Shareholder to comply with the
Hospital Participation and Reimbursement Condition in
subpart (i) above would 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 would 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 or about
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 PHS-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.
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> 80
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> 81
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>
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<PAGE> 82
(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.
(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 about 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 needed by 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.
(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 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 holders' provider agreements
with PHS-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 Voting, Dividends or Related Rights - Payment Rights do not
represent an equity interest in FOHP. Accordingly, neither the
certificates representing the Payment Rights nor the Payment
Rights entitle the holder to any voting, dividends or other
rights generally associated with equity securities.
(j) No Interest - No interest will be paid on any amount payable
under a Payment Right.
(k) 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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<PAGE> 83
(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 or about 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.
(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
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 his, her or its existing provider
agreement with PHS-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 PHS-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 will 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
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<PAGE> 84
(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").
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 GAAP, and without giving
effect to the quota share reinsurance arrangement among
PHS-NJ, Guardian and PHS/Bermuda, Ltd., an affiliate of PHS-NJ
(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 Appraisal
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;
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<PAGE> 85
o The Appraisal Consideration equals $0.25 per share of
FOHP Common Stock and, as a result, $737,500 (50,000
shares x $14.75 = $737,500) 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.
o PHS-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 $4,179, as determined below:
$2,250 (1,000 shares x $2.25)
+
$1,929 (Pro-Rata Portion)
------
$4,179
======
The Non-Hospital Shareholder's Pro-Rata Portion would be determined as
follows:
(i) $15,000 (1,000 shares x $15) divided by $13,512,500
(900,000 shares x $15 = $13,500,000 plus $12,500 paid
as Appraisal Consideration) equals .00111.
------
(ii) $750,000 forfeited by Non-Hospital Shareholders plus
$250,000 forfeited by Hospital Shareholders plus
$737,500 (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 $1,737,500.
----------
.00111 x 1,737,500 = $1,929
---------------------------
(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
79
<PAGE> 86
certified check which shall be mailed or otherwise delivered
on or about 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 needed by 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.
(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 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 holders' provider agreements
with PHS-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 Voting, Dividends or Related Rights - Payment Rights do not
represent an equity interest in FOHP. Accordingly, neither the
certificates representing the Payment Rights nor the Payment
Rights entitle the holder to any voting, dividends or other
rights generally associated with equity securities.
(l) No Interest - No interest will be paid on any amount payable
under a Payment Right.
(m) 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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<PAGE> 87
COMPARISON OF RIGHTS OF HOLDERS OF FOHP COMMON STOCK
TO HOLDERS OF PAYMENT 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 of 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 that certain conditions
are either satisfied or waived.
FOHP Common Stock is currently registered under the Exchange Act, and,
as a result of such registration, FOHP must file periodic reports with the SEC
containing financial and other material disclosure with respect to FOHP and its
operations. Since FHS will be the only holder of FOHP Common Stock after the
consummation of the Merger, FOHP will terminate the registration of the FOHP
Common Stock under the Exchange Act. As a result, FOHP's obligation to file
periodic reports under the Exchange Act will be suspended and FOHP will not be
obligated to provide the holders of Payment Rights with the financial and other
information required to be included in such reports.
81
<PAGE> 88
AVAILABLE INFORMATION
FHS and FOHP file annual, quarterly and special reports, proxy
statements and other information with 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, with respect to the fairness of the Payment rights to
the Provider Shareholders from a financial point of view, have been attached to
this Proxy Statement as Appendix F, and a copy of the Appraisal dated June 1,
1999, with respect to the approximate value of one share of FOHP Common Stock as
of December 31, 1999, has been attached to this Proxy Statement as Appendix H.
In addition, a copy of JMS' written opinion, a copy of the update thereto, and a
copy of JMS' appraisal 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, 1998.
2. FOHP's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, as
amended.
3. FOHP's Current Report on Form 8-K, dated January 1, 1999, as amended.
A COPY OF FOHP'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1998 AND A COPY OF FOHP'S QUARTERLY REPORT FOR THE QUARTER ENDED MARCH 31,
1999, AS AMENDED, ARE 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.
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.
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<PAGE> 89
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, 1998.
2. FHS' Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
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:
<TABLE>
<S> <C>
FOUNDATION HEALTH SYSTEMS, INC. FOHP, INC.
ATTN: DIRECTOR OF INVESTOR RELATIONS ATTN: DONALD PARISI, VICE PRESIDENT,
21650 OXNARD STREET GENERAL COUNSEL AND SECRETARY
WOODLAND HILLS, CALIFORNIA 91367 3501 STATE HIGHWAY 66
TELEPHONE (818) 676-6978 NEPTUNE, NEW JERSEY 07753
TELEPHONE: (732) 918-6700
</TABLE>
IN ORDER TO ENSURE TIMELY DELIVERY OF ANY INFORMATION INCORPORATED BY REFERENCE,
ANY REQUEST SHOULD BE MADE BY JULY 21, 1999.
83
<PAGE> 90
EXPERTS
The consolidated financial statements as of and for the year ended
December 31, 1998, which are incorporated into this Proxy Statement by reference
to FOHP's Annual Report on Form 10-K for the year ended December 31, 1998, 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.
The consolidated financial statements of FOHP as of and for the years
ended December 31, 1997 and 1996, appearing in FOHP's Annual Report (Form 10-K)
for the year ended December 31, 1998, 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
schedule incorporated into this Proxy Statement by reference to FHS' Annual
Report on Form 10-K for the year ended December 31, 1998 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 & Touche LLP 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 July 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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<PAGE> 91
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 JULY 6, 1999 AND ENDING JULY 28,
1999. PLEASE CALL (732) 643-6300.
By Order of the Board of Directors
/s/ THOMAS W. WILFONG
THOMAS W. WILFONG
President and Chief Executive Officer
June 30, 1999
85
<PAGE> 92
LIST OF DEFINED TERMS
<TABLE>
<S> <C>
Administrative Management Agreement......................... 9
Amended Securities Purchase Agreement....................... 10
Appraisal................................................... 13
Appraisal Consideration..................................... 1
Bonus Payment............................................... 78
Bonus Pool.................................................. 16
Code........................................................ 20
Comparable Companies........................................ 53
Comparable Transactions..................................... 53
Contribution Agreement...................................... 8
Convertible Debentures...................................... 10
Departments................................................. 13
DOI......................................................... 14
EBIT........................................................ 53
EBITDA...................................................... 53
Exchange Act................................................ 17
Exchange Agent.............................................. 56
FHS......................................................... 1
FHS Class A Common Stock.................................... 11
Financial Advisor........................................... 11
FOHP........................................................ 1
FOHP Board.................................................. 1
FOHP Common Stock........................................... 1
FOHP Health Plans........................................... 67
GAAP........................................................ 16
HMO......................................................... 6
HMO Subsidiary Merger....................................... 13
Hospital Participation and Reimbursement Condition.......... 71
Hospital Shareholder Conditions............................. 71
Hospital Shareholders....................................... 21
HSI......................................................... 10
HSII........................................................ 68
HSII Agreement.............................................. 68
Initial Debenture........................................... 10
IRS......................................................... 59
JMS......................................................... 11
Management Agreement Damages................................ 69
Management Agreements....................................... 9
Management Fee.............................................. 67
Merger...................................................... 1
Merger Agreement............................................ 1
MIS Agreement............................................... 9
Net Capital Shortfall....................................... 38
New Convertible Debenture................................... 11
NJBCA....................................................... 9
</TABLE>
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<PAGE> 93
<TABLE>
<S> <C>
Non-FHS Directors........................................... 12
Non-Hospital Shareholder Condition.......................... 77
Non-Hospital Shareholders................................... 16
Original Merger............................................. 12
Payment Rights.............................................. 1
PHS......................................................... 7
PHS-NJ...................................................... 6
Provider Shareholders....................................... 11
SEC......................................................... 17
Securities Act.............................................. 51
Securities Purchase Agreement............................... 10
SG&A........................................................ 30
Special Committee........................................... 11
Special Meeting............................................. 1
Surviving Corporation....................................... 1
Term Sheet.................................................. 12
</TABLE>
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<PAGE> 94
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:
A-1
<PAGE> 95
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: President of FHS Northeast Division
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 nine (9)
directors and the names and addresses of the directors are:
NAME AND ADDRESS NAME AND ADDRESS
---------------- ----------------
Dr. John F. Bonamo Dr. Thomas J. Feneran
95 Northfield Avenue 102 East Bay Avenue, Suite C
West Orange, NJ 07052 Manahawkin, NJ 08050
Mr. Bruce G. Coe Mr. John J. Gantner
41 Lambert Lane Robert Wood Johnson University
Lambertville, NJ 08530 Hospital
One Robert Wood Johnson Place
New Brunswick, NJ 08903
Ms. Karen A. Coughlin Dr. Om P. Sawhney
Physicians Health Services, Inc. 1550 Park Avenue
One Far Mill Crossing South Plainfield, NJ 07080
Mr. Christopher M. Dadlez
Saint Barnabas Health Care System Mr. Thomas W. Wilfong
Old Short Hills Road FOHP, Inc.
Livingston, NJ 07039 3501 State Highway 66
Neptune, NJ 07753
Dr. Mark L. Engel
733 North Beers Street
Holmdel, NJ 07733
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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.
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 nine (9) 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.
C-12
<PAGE> 120
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 or
about 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").
D-1-a
<PAGE> 121
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 PHS-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
D-1-b
<PAGE> 122
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, the 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
D-1-c
<PAGE> 123
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 _____________ ___,
1999 (the "Contribution Agreement"), pursuant to which FHS has
irrevocably committed to contributing to FOHP the cash needed by
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.
(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.
D-1-d
<PAGE> 124
(i) No Voting, Dividend or Related Rights. The Payment Rights
represented by this Certificate do not represent an equity
interest in FOHP. Accordingly, neither this Certificate nor the
Payment Rights represented hereby entitle the Holder to any
voting, dividend or other rights generally associated with equity
securities.
(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-1-e
<PAGE> 125
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 or
about 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> 126
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> 127
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, and without giving effect to the
quota share reinsurance arrangement among PHS-NJ, The
Guardian Life Insurance Company of America and PHS/Bermuda,
Ltd., an affiliate of PHS-NJ (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
D-2-c
<PAGE> 128
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 (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 _____________ ___,
1999 (the "Contribution Agreement"), pursuant to which FHS has
irrevocably committed to contributing to FOHP the cash needed by
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.
(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 Voting, Dividend or Related Rights. The Payment Rights
represented by this Certificate do not represent an equity
interest in FOHP. Accordingly, neither this Certificate nor the
Payment Rights represented hereby entitle the Holder to any
voting, dividend or other rights generally associated with equity
securities.
(k) No Interest. No interest will be paid on any amount payable under
the Payment Rights represented hereby.
D-2-d
<PAGE> 129
(l) 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-e
<PAGE> 130
APPENDIX E
CONTRIBUTION AGREEMENT
This Contribution Agreement ("Agreement"), entered into as of
____________ ___, 1999, is between Foundation Health Systems, Inc., a Delaware
corporation("FHS"), and FOHP, Inc., a New Jersey corporation ("FOHP").
RECITALS
WHEREAS, FHS currently owns more than ninety-nine percent (99%) of the
outstanding FOHP common stock, par value $.01 per share ("FOHP Common Stock");
WHEREAS, less than one percent (1%) 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 Physicians Health Services of New Jersey, Inc. (formerly 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, dated November
16, 1998, 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 one or more
independent qualified appraisers as of December 31, 1998 (the Appraisal
Consideration"), or (ii) payment rights (individually a "Payment Right," and
collectively, the "Payment Rights"), pursuant to which a 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, FHS will,
pursuant to this Agreement, irrevocably commit to contribute to FOHP that amount
of cash needed by 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 needed by FOHP to pay:
(a) all amounts payable under the Payment Rights to be issued in
connection with the Merger;
E-1
<PAGE> 131
(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.
It being expressly understood by the parties hereto, that FHS
shall only contribute cash to FOHP for payment of FOHP's
obligations set forth in subparts (a) through (d) above if FOHP
does not have sufficient cash to make such payments, and FHS
shall only contribute such cash as is needed by FOHP to make full
payment.
2. 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.
3. Limitation on Additional Indebtedness. During the period the
Payment Rights are outstanding, FOHP will not incur any
indebtedness which could affect its ability to make full payment
on the Payment Rights.
4. Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of FOHP and FHS, and their respective
successors and assigns.
5. 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.
6. 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.
E-2
<PAGE> 132
7. 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.
8. 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.
9. 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:
E-3
<PAGE> 133
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> 134
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 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> 135
[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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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
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<PAGE> 137
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> 140
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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<PAGE> 141
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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<PAGE> 142
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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<PAGE> 144
APPENDIX H
[JANNEY MONTGOMERY SCOTT INC. LETTERHEAD]
June 1, 1999
The Board of Directors of
FOHP, Inc.
3501 State Highway 66
Neptune, NJ 07753
Attention: Dr. Mark Engel, Chairman
Ladies and Gentlemen:
On January 7, 1999, the Board of Directors of FOHP, Inc. ("FOHP" or the
"Company") requested Janney Montgomery Scott Inc.'s ("JMS") opinion, as
investment bankers, of the fair market value as of December 31, 1998 of the
Company's outstanding common stock (the "Outstanding Common Stock"). Subsequent
thereto, JMS was engaged to render its written opinion of the fair market value
of the Outstanding Common Stock. It is our understanding that this valuation may
be utilized in connection with the personal financial planning of the physician,
hospital and other provider shareholders of FOHP (the "Provider Shareholders")
in connection with the Agreement and Plan of Merger dated November 16, 1998
among FOHP, Foundation Health Systems, Inc. ("FHS") and FHS Transition Company
(the "Agreement").
The Agreement provides that one form of consideration to be offered to
the Provider Shareholders for their shares of Outstanding Common Stock is cash.
The per share amount to be determined by appraisals conducted by one or more
qualified independent appraisers. Pursuant to the Agreement, each of FOHP and
FHS may choose, at its sole discretion, to engage a qualified independent
appraiser to appraise the value of the Outstanding Common Stock.
The equity capitalization of FOHP at December 31, 1998 was 499,000,000
shares of common stock, of which the Provider Shareholders owned less than 1% of
the Outstanding Common Stock. It is our opinion that at December 31, 1998, FOHP
would have had an approximate fair market value of $124,750,000 or $0.25 per
share (based on 499,000,000 shares outstanding).
H-1
<PAGE> 145
FOHP, INC.
Page 2
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 and valuation ranges developed through customary investment
banking techniques. It should be understood that although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Payment of JMS' fee is not contingent upon the
conclusion reported.
It should be understood that this letter is for the information of the
Board of Directors in connection with the consummation of the transactions
contemplated by the Agreement and does not constitute a recommendation to any
Provider Shareholder. 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.
Sincerely yours,
JANNEY MONTGOMERY SCOTT INC.
By: /s/ WILLIAM J. BARRETT
--------------------------------
William J. Barrett
Senior Vice President
H-2
<PAGE> 146
PROXY
FOHP, INC.
SPECIAL MEETING OF SHAREHOLDERS -- JULY 29, 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 July 29, 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
------------------------
-------------------------------------
-------------------------------------
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.
<PAGE> 147
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, 1998
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 of (I.R.S. Employer Identification No.)
incorporation or organization)
3501 State Highway 66
Neptune, New Jersey 07753
- ---------------------------------------- --------
(Address of principal executive offices) Zip Code
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> 148
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, 1999, was $458,445. 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, 1999, by the per share book
value of the Common Stock as of December 31, 1998.
As of March 15, 1999, the number of outstanding shares of Common Stock
was 499,000,000.
Documents incorporated by Part of Form 10-K into which
reference into this report document is incorporated
-------------------------- ------------------------
None Not Applicable
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 and affiliates, the
competitive environment in which the Registrant and its subsidiaries and
affiliates operate, the relationship between the Registrant and Foundation
Health Systems, Inc., the holder of more than 99% of the Registrant's Common
Stock, including the proposed merger of FHS Transition Company, a wholly-owned
subsidiary of Foundation Health Systems, Inc., into the Registrant, and the
ability of the Registrant and its subsidiaries to generate or raise sufficient
capital to remain in compliance with any applicable statutory net worth or other
capital requirements and to continue to operate their businesses as currently
operated. See "Description of Business," "Management's Discussion and Analysis
of Financial Condition and Results of Operation" and "Certain Relationships and
Related Transactions."
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PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
FOHP, Inc., a New Jersey corporation (the "Company" or "Registrant"),
was formed in May 1994 to effect the reorganization (the "Reorganization") of
First Option Health Plan of New Jersey, Inc., a New Jersey corporation which
operates as a health maintenance organization ("HMO") in the State of New Jersey
("FOHP-NJ"), into a holding company structure. The Reorganization was
consummated on June 8, 1995. Pursuant to the Reorganization, FOHP-NJ became a
wholly-owned subsidiary of the Company. All health care benefit products and
services are provided by the Company's subsidiaries. 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
approximately $80 million (each a "Convertible Debenture" and collectively, the
"Convertible Debentures"). FHS has converted approximately $72 million principal
amount of the Convertible Debentures into 496,916,161 shares of Common Stock,
which represents more than 99% of the outstanding Common Stock of the Company.
The Company and FHS have entered into a merger agreement pursuant to which FHS
will acquire a 100% ownership interest in the Company. See "Description of
Business - Transactions with FHS; The Merger; Description of FHS" and "Certain
Relationships and Related Transactions."
On January 1, 1999, Physicians Health Services of New Jersey, Inc., a
New Jersey HMO controlled by FHS ("PHS-NJ"), merged with and into FOHP-NJ. At
the effective time of the merger, FOHP-NJ changed its name to "Physicians Health
Services of New Jersey, Inc." See "Description of Business - Merger of FOHP-NJ
and Physicians Health Services of New Jersey, Inc."
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.
The Company 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, and all the former shareholders of FOHP-NJ became
shareholders of the Company.
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TRANSACTIONS WITH FHS
During the first quarter of 1996, the Company 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 Board of
Directors of the Company (the "FOHP Board") determined that the Company needed
to locate potential investors who would be interested in acquiring a significant
equity position in the Company. On October 24, 1996, the Company entered into a
Securities Purchase Agreement with Health Systems International, Inc., the
predecessor to FHS, which was later amended and, as so amended, 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 the
Company. On April 30, 1997, pursuant to the Amended Securities Purchase
Agreement, FHS purchased from the Company a Convertible Debenture in the
aggregate principal amount of $51,701,120.38 (the "Initial Convertible
Debenture"). 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 the principal amount of the Initial Convertible
Debenture into 168,109 shares of the Company's Common Stock. Effective December
1, 1997, FHS converted the remaining $50 million of the principal amount of the
Initial Convertible Debenture into 4,941,049 shares of Common Stock, and, as a
result, owned at that time 71% of the outstanding shares of the Company's Common
Stock.
Pursuant to the Amended Securities Purchase Agreement, as clarified by
a letter agreement dated April 30, 1997 between FHS and the Company, FHS had the
right to infuse additional capital into the Company in 1997, for additional
Convertible Debentures in substantially the same form as the Initial Convertible
Debenture, in the event that it was determined that FOHP-NJ needed capital to
meet applicable statutory net worth requirements.
The Amended Securities Purchase Agreement also provided that FHS may,
at its option, acquire during 1999, through a tender offer or merger, all of the
then outstanding shares of the Company's Common Stock not held by FHS at a
purchase price per share that is determined by independent appraisers. In any
such tender offer or merger, the hospital, physician and other provider
shareholders of the Company (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, for
their shares of Common Stock of the Company.
As the Company continued to reduce its medical claims back-log during
the second quarter of 1997, it became apparent that the Company's reserves were
not adequate to ensure payment of all outstanding claims. In addition, it was
anticipated that the Company 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 the Company informed
the FOHP Board that the Company 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.
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Recognizing that an additional capital infusion by FHS of more than $18
million in exchange for additional Convertible Debentures could result in a
significant dilution to the equity position of the Provider Shareholders, and
that such dilution would reduce the amount of consideration that the Provider
Shareholders would be entitled to receive in any transaction whereby FHS would
acquire all of the outstanding Common Stock of the Company pursuant to the
Amended Securities Purchase Agreement, the FOHP Board and FHS began, in July
1997, discussing various alternatives directed at preserving the Provider
Shareholders' investment in the Company.
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 a letter agreement dated April 30, 1997, FHS elected on December 8,
1997 to infuse $29 million into the Company in exchange for a Convertible
Debenture (the "New Convertible Debenture") in form and substance substantially
similar to the Initial 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 Common Stock. After the
partial conversion of the New Convertible Debenture, FHS owned 97,913,161 shares
of the 100,000,000 shares of the Company's Common Stock then outstanding, which
represented approximately 98% of the fully-diluted equity of the Company. On
December 31, 1998, FHS converted $1,197,183 of the principal amount of the New
Convertible Debenture into 399,003,000 shares of Common Stock pursuant to the
conversion formula contained therein. As a result of such conversion, FHS
currently owns 496,916,161 shares of Common Stock, representing more than 99% of
the outstanding shares of the Company's Common Stock.
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 which are not convertible into
shares of Common Stock (the "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.
FHS and the members of the FOHP Board who were not affiliated with FHS
nor employees of the Company (the "Non-FHS Directors"), assisted by legal
counsel and a financial advisor retained by the FOHP Board, held discussions
from October 1997 through June 1998 for purposes of developing a proposal aimed
at preserving the Provider Shareholders' investment in the Company. The Non-FHS
Directors believed it was necessary that any consideration to be offered for a
share of Common Stock be equal to at least $15.00, the amount originally paid by
a Provider Shareholder to the Company for one share of the Company's 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 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.
THE MERGER
Pursuant to the terms of the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of November 16, 1998, by and among the Company, FHS and
FHS Transition Company, a wholly-owned subsidiary of FHS, FHS Transition Company
will merge with and into the Company (the "Merger"), and the Company will become
a wholly-owned subsidiary of Physicians Health Services, Inc. ("PHS"), a
Delaware corporation which is a wholly-owned
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subsidiary of FHS. In connection with the Merger, a Provider Shareholder will be
entitled to choose to receive for his, her and its shares of Common Stock of the
Company either (i) the value of such shares as determined by one or more
independent qualified appraisers as of December 31, 1998, or (ii) payment rights
(individually a "Payment Right," and collectively, the "Payment Rights"),
pursuant to which a 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 the holder
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, and a specified number of
hospital providers in the FOHP-NJ provider network does not leave the network
prior to December 31, 2001. In addition, a hospital provider that chooses to
receive Payment Rights will be subject to additional conditions to payment
relating to reimbursements rates, enrollment of hospital employees in FOHP-NJ
health plans and payments of premiums to FOHP-NJ.
Any Provider Shareholder who or which is not a hospital, and chooses to
receive Payment Rights for his, her or its shares of Common Stock of the Company
in connection with the Merger, will be entitled to receive additional
consideration of (i) $2.25 per Payment Right, and (ii) a pro rata portion of a
bonus pool to be funded by monies forfeited by Provider Shareholders; provided,
however, that the additional consideration will only be paid if FOHP-NJ produces
an annualized return on average common equity capital of at least 10% for the
period January 1, 1999 through June 30, 2001.
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 the majority of the
outstanding shares of the Company's Common Stock; (ii) 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; (iii) the receipt of requisite governmental consents and approvals to
consummate the Merger; and (iv) the execution and delivery by the Company and
FHS of a contribution agreement pursuant to which FHS will commit to contribute
to the Company the amount of cash necessary for the Company to pay, among other
things, all amounts payable under the Payment Rights to be issued in connection
with the Merger.
The approval of the majority of the outstanding shares of the Company's
Common Stock is required to approve the Merger Agreement. FHS currently owns
more than 99% of the outstanding shares of 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.
If the Merger is consummated, no Provider Shareholder will have an
equity position in the Company. As a result, FHS, or an affiliate thereof, as
the sole shareholder of the Company, will terminate the registration of the
Common Stock under the Exchange Act. Consequently, the Company's obligation to
file periodic reports under the Exchange Act, such as this Annual Report on Form
10-K, will be suspended shortly after the Merger.
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DESCRIPTION OF FHS
FHS 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
5.8 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 and vision services, 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 the Company.
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 New Jersey Department of Banking and
Insurance (the "DOI") and the New Jersey Department of Health and Senior
Services (the "DOH") (the DOI and the DOH are collectively referred to herein as
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 specialties 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, 2,628 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 a
"NJ Other Provider" shall mean a health care provider or professional, other
than a NJ Practitioner or NJ Acute Care Institution, licensed, certified 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 shareholders that are NJ Acute
Care Institutions and subscribers in FOHP-NJ health plans are different from the
subscriber agreements of non-
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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.
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 that 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 that 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."
MERGER OF FOHP-NJ AND PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC.
On January 1, 1999, PHS-NJ, a New Jersey HMO controlled by FHS, merged
with and into FOHP-NJ pursuant to an Agreement and Plan of Merger dated as of
October 26, 1998. At the effective time of the merger, FOHP-NJ changed its name
to "Physicians Health Services of New Jersey, Inc." The purpose of the merger
was to consolidate the FHS controlled HMO operations in the State of New Jersey
into primarily one corporation.
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 community rates for
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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, 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. Four 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 three small employer group products are
offered as riders to one of the four other small employer products. Each 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
certain counties of New Jersey.
FOHP-NJ also provides utilization management and its Preferred Provider
Organization ("PPO") product to the members of 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.
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 are paid
pursuant to a fee schedule established by FOHP-NJ and 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
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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 $175,000 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 an 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 types
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 an 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 an 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
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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 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 managed or
coordinated care organizations. 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 that 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
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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
75% of its employees enrolled in a FOHP-NJ health plan, 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 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 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 (1) the lowest
rate of reimbursement received by such provider from nongovernmental payors for
each line of business, or (2) 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 outpatient visits at the lower of (1)
the lowest rate of reimbursement received by such providers from nongovernmental
payors for each line of business, or (2) 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 (A) the
Book Value (as such term is defined in the Company's Certificate of
Incorporation), (B) 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 Convertible 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 (C)
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
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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 affect on the Company's election to make or not to make a
repurchase from any other shareholder.
Pursuant to the form of Payment Rights to be issued in connection with
the Merger, an NJ Acute Care Institution will have to comply with enrollment and
reimbursement rate commitments similar to those currently contained in the
Company's Certificate of Incorporation, as discussed above, to receive full
payment under a Payment Right.
A "Bona Fide Offer" shall mean an offer of a health benefits plan that
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"), (i) it must be operated exclusively for charitable purposes and
(ii) its income or assets may not be utilized to inure to the benefit of 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 and having the ability to control or influence its activities,
including key staff personnel or any physician employed by or with admitting
privileges at a tax exempt hospital, is often referred to as an "insider"). 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. Any
transaction with any person or entity (including, among others, vendors) which
results in an excessive benefit which is not incidental to the accomplishment of
the entity's exempt purposes may constitute private benefit thereby jeopardizing
the entity'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.
Federal law prohibits the payment or receipt of remuneration directly
or indirectly for referring business or furnishing any service for which payment
may be made under the Medicare or Medicaid programs. Section 1128B(b) of the
Social Security Act, known as the Medicare/Medicaid Anti-Kickback Statute, and
implementing regulations and advisory opinions, prohibit, 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 entities in which the
physician or a member of his or her family has a financial interest for certain
designated health services. The statute, adopted as part of the Omnibus Budget
Reconciliation Act of 1989, as subsequently amended, and more commonly known as
the Stark Laws, specifically excludes from the prohibition, in-network referrals
by physicians who have ownership or investment interests in, or
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<PAGE> 160
compensation arrangements with, certain Medicare competitive medical plans,
federally qualified HMOs, or other prepaid plans operating under a demonstration
project.
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 Laws. 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 should prohibit 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 specified
services.
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 recipients,
and it has received approval to provide such services in nine New Jersey
counties.
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<PAGE> 161
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 promoting consumer confidence in HMOs.
Generally, the 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
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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.
Additional amendments to the New Jersey HMO regulations have been
recently proposed. The proposed amendments address financial and insolvency
issues relating to HMOs. More specifically, the proposed amendments would, among
other things, require that a minimum of 60% of an HMO's admitted assets be in
cash, cash equivalents or investments; require that HMO guarantors have certain
liquid assets available to the HMO; require that an HMO maintain reserve
liabilities in an amount sufficient to provide for continued health care
services to members who, on the date of termination of an HMO contract, are
confined in an inpatient facility until discharge from the facility; change the
basis of the required HMO solvency deposit from claims to premium; require an
HMO to file with the Commissioner of the DOI an annual certification with an
actuarial opinion certified by a member of the American Academy of Actuaries or
an active fellow the Society of Actuaries that the reserves required under the
HMO regulations and included in the HMO's annual report are sufficient; require
that HMOs submit a quarterly certification that includes information identical
to that contained in the annual certification; and require additional annual and
quarterly reports. In addition to these amendments, the Commissioner of the DOH,
in consultation with the Commissioner of the DOI, intends to propose in the near
future further amendments to the HMO regulations addressing other issues,
including pre-operational review of unlicensed subcontractors and the
standardization of rate filing. If the proposed amendments are adopted, HMOs
operating in New Jersey, including FOHP-NJ, could be subject to increased
operating restrictions and additional reporting requirements which could have an
adverse impact on operating results.
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, 1999, the Company, through its principal subsidiary
FOHP-NJ, employed 393 full-time and 16 part-time active employees. In addition,
the Company currently utilizes the services of approximately 51 temporary
employees. The Company currently has four executive officers who are employed by
FHS or one of its subsidiaries pursuant to the Administrative Management
Agreement (as hereinafter defined). See "Certain Relationships and Related
Transactions." None of the Company's employees are represented by a union. The
Company believes that its relationships with its employees are satisfactory.
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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 07753. The
lease expires on February 28, 2004. The monthly rental during the lease term 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 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 Mt. Laurel, New Jersey.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter ended December 31, 1998, 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 only
can be held by or transferred to (i) providers to the Company's subsidiaries
which operate as HMOs, (ii) FHS, or (iii) the Company. Accordingly, it is
improbable that a market will develop for the Common Stock.
Since its inception, the Company has not sold any shares of Common
Stock for any price other than $15.00, except for shares issued to FHS upon
conversion of the Initial Convertible Debenture and New Convertible Debenture.
In addition, the Company is not aware of any sale of Common Stock by one
provider to another for any price other than $15.00.
As of March 15, 1999, 499,000,000 shares of Common Stock were
outstanding and were held by 2,629 shareholders, including 496,916,161 shares
held by FHS, 1,006,717 shares held by 41 NJ Institutional Shareholders and
1,077,122 shares held by 2,587 NJ Practitioners and NJ Other Providers.
The Company has not paid any cash dividends on Common Stock, and does
not expect to pay any dividends in the future.
The certificates representing Payment Rights to be offered by the
Company 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 the Company. Accordingly, there will be no public market for the Payment
Rights.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected financial information as of December 31, 1998, 1997, 1996,
1995, and for the years ended December 31, 1998, 1997, 1996 and 1995, is derived
from the consolidated financial statements of the Company. 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 for the year ended December 31, 1994 is
derived from the financial statements of FOHP-NJ, the Company's principal
subsidiary. The selected financial information 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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<TABLE>
<CAPTION>
SUMMARIZED BALANCE SHEET INFORMATION
FINANCIAL DATA
OF FOHP-NJ
PREDECESSOR TO
THE COMPANY
-----------
AS OF
AS OF DECEMBER 31, DECEMBER 31,
---------------------------------------------------------- ------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 44,052,058 $ 79,266,721 $ 36,664,911 $ 23,882,286 $ 13,030,295
Goodwill (net) 96,237,857 107,730,254 --- --- ---
Other 77,989,500 31,614,256 17,578,306 13,479,547 7,050,765
------------ ------------ ------------ ------------ ------------
Total Assets $218,279,415 $218,611,231 $ 54,252,217 $ 37,361,833 $ 20,081,060
============ ============ ============ ============ ============
Liabilities and Shareholders'
Equity (Deficiency):
Liabilities:
Medical claims payable,
accounts payable, accrued
expenses and other
current liabilities $ 73,349,221 $110,883,608 $ 80,118,284 $ 32,482,794 $ 8,101,405
Convertible debentures 11,131,386 11,294,406 --- --- ---
Subordinated debentures 25,113,575 24,000,000 --- --- ---
------------ ------------ ------------ ------------ ------------
Total Liabilities 109,594,182 146,178,014 80,118,284 32,482,794 8,101,405
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' Equity
(Deficiency):
FOHP, Inc. Preferred Stock,
$1.00 par value,
1,000,000 shares
authorized, none
issued and outstanding --- --- --- --- ---
FOHP, Inc. Common Stock
$.01 par value,
499,000,000 shares
authorized, 499,000,000
shares issued and
outstanding 1,011,941 1,000,000 21,002 21,002 ---
</TABLE>
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<PAGE> 167
SUMMARIZED BALANCE SHEET INFORMATION (CONT.)
<TABLE>
<CAPTION>
FINANCIAL DATA
OF FOHP-NJ
PREDECESSOR TO
THE COMPANY
-------------
AS OF
AS OF DECEMBER 31, DECEMBER 31,
--------------------------------------------------------------- -------------
1998 1997 1996 1995 1994
------------- ------------ ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C>
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 239,135,758 208,053,796 30,648,489 30,648,489 15,341,561
Deficit (131,462,466) (136,620,579) (56,535,558) (25,790,452) (11,049,507)
------------- ------------- ------------- ------------- -------------
Total Shareholders' Equity
(Deficiency) 108,685,233 72,433,217 (25,886,067) 4,879,039 11,979,655
------------- ------------- ------------- ------------- -------------
Total Liabilities and
Shareholders' Equity
(Deficiency) $ 218,279,415 $ 218,611,231 $ 54,252,217 $ 37,361,833 $ 20,081,060
============= ============= ============= ============= =============
</TABLE>
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<TABLE>
<CAPTION>
SUMMARIZED STATEMENT OF OPERATIONS INFORMATION
FINANCIAL DATA OF
FOHP-NJ
PREDECESSOR TO THE
COMPANY
-------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------------------------------- -------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
Revenue:
Premium revenue from
owners/providers $ 118,591,143 $ 132,575,894 $ 135,544,112 $ 63,630,797 $ 5,639,724
Other premium revenue 209,268,135 239,132,416 112,125,670 38,819,206 1,803,624
Interest and other income 6,822,455 5,697,921 9,706,526 8,844,036 1,177,171
------------- ------------- ------------- ------------- ------------
Total Revenue 334,681,733 377,406,231 257,376,308 111,294,039 8,620,519
------------- ------------- ------------- ------------- ------------
Expenses:
Medical services to owners/providers 46,895,944 63,882,103 37,026,903 17,319,035 1,405,175
Hospital services to
owners/providers 32,154,087 64,553,166 30,156,890 11,068,909 880,920
Other medical services 109,423,870 148,812,233 105,551,393 38,548,819 2,727,694
Other hospital services 75,026,204 101,521,355 63,760,554 24,637,249 1,710,020
Selling, general and administrative 53,199,216 55,106,022 50,734,197 32,638,106 10,624,261
Management fee - Foundation Health
Systems, Inc. 2,543,000 7,502,899 -- -- --
Interest - Foundation Health
Systems, Inc. 2,229,890 1,790,410 -- -- --
Restructuring costs (2,250,000) 12,825,570 -- -- --
Other 4,761,178 1,495,355 890,553 1,751,263 240,021
------------- ------------- ------------- ------------- ------------
Total Expenses 323,983,389 457,489,113 288,120,490 125,963,381 17,588,091
------------- ------------- ------------- ------------- ------------
Provision for income taxes 5,540,231 2,139 924 71,603 --
------------- ------------- ------------- ------------- ------------
Net income (loss) $ 5,158,113 $ (80,085,021) $ (30,745,106) $ (14,740,945) $ (8,967,572)
============= ============= ============= ============= ============
Net income (loss) per common share $ .05 $ (9.18) $ (14.64) $ (8.65) $ (8.40)
============= ============= ============= ============= ============
</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, 1999, 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 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 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 an 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 types
of services provided by, and the location of, the NJ Acute Care Institution.
Agreements with participating NJ Acute Care Institutions prohibit the NJ Acute
Care Institutions from billing a member of a FOHP-NJ health plan for any
services paid for under such plan except for any applicable co-payment,
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
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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, 1998 AND 1997
PREMIUM REVENUE. For the year ended December 31, 1998, medical premium
revenue totaled $327.9 million or $43.8 million less than the $371.7 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 generated in
1998 and approximately 35% of medical premium 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 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 PHS-NJ into FOHP-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
year ended December 31, 1998 was $2.5 million compared to $2.0 million of other
revenue for the same period of the prior year. Interest income for 1998 was $4.3
million, as compared to the $3.7 million generated in 1997.
MEDICAL AND HOSPITAL SERVICES. Total expenses attributable to medical
and hospital services for the year ended December 31, 1998 were $263.5 million
or $115.3 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 year
ended December 31, 1998 was 80.3% compared to 101.9% 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 claims reserves due to more complete claims
payment data being available to the Company as a result of a reduction of the
significant medical claims back-log which had existed at December 31, 1997.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $58.4 million for the year ended December 31,
1998, including a $2.5 million administrative management fee charged by FHS and
$2.2 million interest expense associated with the Convertible Debentures and
Subordinated Debentures issued to FHS, as compared to $64.5 million incurred for
the same period in 1997. This decrease was primarily the result of a decrease in
the management fee charged by FHS to FOHP.
OTHER EXPENSES. Depreciation and amortization expenses for the year
ended December 31, 1998 increased by $2.8 million from the $1.4 million incurred
during the same period in 1997. This increase was primarily the result of
amortization of goodwill associated with FHS' investment in the Company.
RESTRUCTURING COSTS. During 1998, the Company recorded a reduction of
$2.2 million of its estimated $12.8 million restructuring charge originally
recorded in 1997 in connection with the FHS investment as a result of
management's reevaluation of estimated restructuring costs. The plan of
restructuring primarily includes costs associated with work force reductions,
terminations and settlements of existing contracts and asset impairment. Of the
$2.2 million reduction, $2.0 million is related to the continuation of a mental
health contract during 1998 that was originally expected to be terminated as
part of the overall restructuring plan.
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
PREMIUM REVENUE. For the year ended December 31, 1997, medical premium
revenue totaled $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 significant subscriber growth experienced during 1997. Approximately
35% of medical premium revenue generated in 1997 and approximately 55% of
medical premium 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'
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
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., 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 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 SERVICES. Total expenses attributable to medical
and hospital services for the year ended December 31, 1997 were $378.8 million
or $142.4 million higher than expenses incurred for the same period in 1996. The
increase in medical and hospital service expenses from 1996 to 1997 was
primarily attributable to a significant increase in enrollees in FOHP-NJ health
plans. In addition, the medical loss ratio (i.e., the percentage of each premium
dollar used to pay medical expenses) for the 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
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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 totaled $64.4 million for the year ended December 31,
1997, including a $7.5 million management fee charged by FHS and $1.8 million
interest expense associated with the Convertible Debentures and Subordinated
Debentures issued to FHS, 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
Convertible 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 and settlements of existing contracts and asset
impairment.
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, 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. 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.
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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 FOHP-NJ in April 1996, subject to the Departments'
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 Convertible 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 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 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 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
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 Amended Securities Purchase Agreement, as
clarified by the letter agreement, FHS would be issued additional Convertible
Debentures.
The Amended Securities Purchase Agreement also provided 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.
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.
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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 92,804,003 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 the Company's Common
Stock. After this conversion, 499,000,000 shares of the Company's 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 FOHP-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
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 December 31, 1998, the deposit covering two months of
incurred health care expenditures is approximately $56 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 interest earned) have
been deemed sufficient in accordance with the HMO regulations and no additional
deposits were required at December 31, 1998.
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
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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
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. An executive management
committee is also actively involved 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 is in the process of
assessing its third party relationships with respect to non-information
technology assets and services. FHS has also retained legal consultants to
assist in the review of insurance and FHS' obligations and rights, and IBM's The
Wilkerson Group, technical consultants specializing in health care, 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' geographical and specialty service divisions are conducting a
detailed self-assessment as to their compliance, needs, risks, and contingency
planning, which will then be reviewed and prioritized at the corporate level.
During the fourth quarter of 1998, FHS continued moving forward in its efforts
to address Year 2000 issues, though its overall progress was less significant
due to organizational changes and restructuring. The Year 2000 project is
experiencing increased progress at the start of 1999. 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
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completion of each of FHS' Year 2000 phases as of February 1999 with respect to
its core applications and information technology infrastructure, and its Year
2000 project overall.
Phase 1 Phase 2 Phase 3 Phase 4 Phase 5
------- ------- ------- ------- -------
Core applications and
IT infrastructure 100% 94% 56% 15% 0%
Overall 100% 83% 54% 11% 0%
THIRD PARTIES. FHS has commenced an inventory of third party
relationships, identifying them and analyzing their strategic importance to FHS
and their Year 2000 readiness. The strategically important third party
relationships identified by FHS are general purpose utility vendors, care
delivery organizations (such as providers), and customer service vendors. FHS
now anticipates completing its risk assessment for third parties in the second
quarter of 1999. 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 currently estimates that the total
cost for the project will be approximately $42.7 million, excluding the costs to
accelerate the replacement of hardware or software otherwise required to be
purchased by FHS. Through 1998, FHS expended approximately $13.6 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. FHS estimates that the percentages of its
total expenditures for Year 2000 issues will be approximately as follows: 35%
for internal costs, 37% for outside consultants and contractors, 6.5% for
software-related costs, and 21.5% for 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
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.
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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
prioritizing its mission critical business functions in order to address the
most critical issues 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 are assessing 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 currently projecting to complete the
assessment of its most critical business functions by the end of the first
quarter of 1999 and the documentation and validation of its contingency plans 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 initiated formal communications 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 timely converted,
or that the failure to convert by another company would not have a material
adverse affect on the Company or FHS. 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
forepart of this report.
ITEM 7A. 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
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business operations are not exposed to market risk relating to interest rate
risk, foreign currency exchange risk, commodity price risk or equity price risk.
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.
On July 13, 1998, the Audit and Finance Committees of the Company
approved the appointment of Deloitte & Touche LLP ("Deloitte") as the Company's
independent accountants for the year ended December 31, 1998. Deloitte replaced
Ernst & Young LLP ("Ernst & Young") as the Company's independent accountants.
Ernst & Young was replaced as the Company's independent accountants as of July
13, 1998. The change of independent accountants was made in connection with the
acquisition by FHS of substantially all of the outstanding equity of the
Company. FHS currently engages Deloitte as its independent accountants. The
Audit and Finance Committees of the Company 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 the
Company. See also the Company's Current Report on Form 8-K dated July 13, 1998,
as amended.
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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
---- --- --------
Thomas W. Wilfong 43 President and Chief Executive Officer
Dr. Joseph Singer 41 Vice President and Chief Medical Officer
Donald Parisi 43 Vice President, Secretary and General Counsel
Marc M. Stein 47 Chief Financial Officer
Mr. Thomas W. Wilfong has served as President and Chief Executive
Officer of the Company since April 1, 1998 and as Chief Operating Officer of
FHS' Northeast Division since December 8, 1998. Mr. Wilfong served as President
of FHS' New Jersey operations from February 1998 to December 1998 and 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 the Company since March 25, 1998.
Dr. Joseph Singer has served as a Vice President and Chief Medical
Officer of the Company since June 8, 1995. Dr. Singer joined FOHP-NJ on December
1, 1994 and has served as the 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 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 June 1, 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
Finance for HIP of Greater New York.
Pursuant to the Administrative Management Agreement (as hereinafter
defined), each of Mr. Wilfong, Dr. Singer, Mr. Parisi, and Mr. Stein is employed
by FHS or a subsidiary thereof. 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:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS AGE OR EMPLOYMENT
- ---------------- --- -------------
<S> <C> <C>
Dr. John F. Bonamo 48 Obstetrician and Gynecologist
95 Northfield Avenue
West Orange, NJ 07052
Mr. Bruce G. Coe 68 President Emeritus of New Jersey Business and
41 Lambert Lane Industry Association
Lambertville, NJ 08530
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. 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 52 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>
PRINCIPAL OCCUPATION
NAME AND ADDRESS AGE OR EMPLOYMENT
- ---------------- --- -------------
<S> <C> <C>
Mr. Jay M. Gellert 45 President and Chief Executive Officer of
Foundation Health Systems, Inc. Foundation Health Systems, Inc.
21600 Oxanard Street
Woodland Hills, CA 91367
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 07753
</TABLE>
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.
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 the Company since April 16, 1997.
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 Board 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.
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 Intensive Care Unit for Cleveland's Fairview
General Hospital. She has served as a director of the Company since November 18,
1998.
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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 Boards 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 FOHP 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 the private practice of
urology since June 1983. He is associated in Drs. Feneran & Fernicola, P.C. He
has served as a director of the Company 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 the Company 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 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. Mr.
Gellert serves on the Board of Directors of Paragon Health Network, Inc. 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 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
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<PAGE> 183
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 - Information regarding Mr. Wilfong is included
under the caption "Executive Officers of the Registrant."
DIRECTOR COMPENSATION; COMMITTEE SERVICE
The members of the FOHP Board and any committee thereof may be paid
their expenses, if any, relating to their attendance at FOHP Board or committee
meetings, and directors who are not full-time employees of the Company may be
paid a fixed sum for attendance at FOHP Board or committee meetings or paid a
stated salary as a director. Currently, the members of the FOHP Board are
entitled to receive an annual retainer of $10,000 and $500 for each FOHP Board
meeting attended, $300 for each telephonic FOHP 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 $129,900 during the year ended December
31, 1998 to members of the FOHP Board, or charitable organizations designated by
certain members of the FOHP Board, 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 FOHP Board 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 FOHP Board 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 and Dr. Om P.
Sawhney.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN
COMPENSATION DECISIONS
During the year ended December 31, 1998, the Compensation Committee
consisted of Mr. Coe, Mr. Gantner and Dr. Sawhney.
During the year ended December 31, 1998, no executive officer of the
Company, served as a member of the compensation committee or as a director of
another entity, except for a subsidiary or affiliate of the Company.
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<PAGE> 184
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 1998
except that the Form 4 required to be filed by FHS in January 1999 in connection
with the conversion of Convertible Debentures on December 31, 1998 has not yet
been filed.
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<PAGE> 185
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 years ended December 31, 1998, 1997 and 1996, of the
persons serving as the Chief Executive Officer of the Company during the year
ended December 31, 1998, and the next three highest paid executive officers of
the Company in 1998 (collectively, the "Named Officers"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------------------- -----------------------------------------------
Awards Payouts
----------------------- --------
Other Securities
Annual Restricted Underlying LTIP All other
Name and Compen- Stock Options/ Payouts Compensation
Principal Position Year Salary($) Bonus($) sations($) Award(s)($) SARs(#) ($) ($)(1)(2)
- ------------------------- ---- ------------ --------- --------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas W. Wilfong 1998 $133,462(3) $ -- $ -- $ -- $ -- $ -- $ --
President and Chief
Executive Officer
Roger W. Birnbaum (4) 1998 74,038(5) 25,000(6) -- -- -- -- 208,754(7)
Former President and 1997 140,615(8) 25,000(9) -- -- -- -- 85,722
Chief Executive
Officer
Joseph Singer, M.D. 1998 252,923 -- -- -- -- -- 5,336
Vice President and 1997 240,000 28,000 -- -- -- -- 5,035
Chief Medical Officer 1996 239,354 -- -- -- -- -- 4,905
Donald Parisi 1998 163,346 -- -- -- -- -- 5,336
Vice President, 1997 151,346 40,000 -- -- -- -- 5,056
Secretary and 1996 144,231 -- -- -- -- -- 4,981
General Counsel
Marc M. Stein 1998 184,423 -- -- -- -- -- 5,336
Chief Financial 1997 144,038 (10) 35,000(9) -- -- -- -- 5,132
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 FOHP Board, the Company may make matching
contributions to the 401(k) Plan. Amounts contributed by the Company to
the accounts of the Named Officers for 1998 are as follows: Mr. Wilfong
- $0; Mr. Birnbaum - $5,000; Dr. Singer - $5,000; Mr. Parisi - $5,000;
and Mr. Stein - $5,000.
(2) Includes amounts of insurance premiums paid by the Company in 1998 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. Wilfong - $0; Mr. Birnbaum - $336; Dr. Singer - $336;
Mr. Parisi - $336; and Mr. Stein $336.
(3) Represents the period April 1, 1998 to December 31, 1998.
(4) Mr. Birnbaum served as President and Chief Executive Officer of the
Company from June 1, 1997 to April 1, 1998.
(5) Represents the period January 1, 1998 to March 31, 1998.
(6) Such bonus was earned in fiscal 1998 and is payable in 1999.
(7) Of this amount, $189,423 represents severance and consulting payments
pursuant to his employment agreement with the Company, and $13,995
represents unused vacation pay.
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<PAGE> 186
(8) Represents the period June 1, 1997 to December 31, 1997.
(9) Such bonus was earned in fiscal year 1997 but was not paid until March
1998.
(10) Represents the period February 18, 1997 to December 31, 1997.
EMPLOYMENT AGREEMENTS
Effective June 1, 1998, Thomas W. Wilfong and PHS, a subsidiary of FHS,
entered into an employment letter agreement (the "Wilfong Employment Agreement")
pursuant to which Mr. Wilfong will act as the President and Chief Executive
Officer of the Company. The Wilfong Employment Agreement supercedes all prior
employment agreements relating to Mr. Wilfong's employment by the Company. In
accordance with the terms of the Wilfong Employment Agreement, Mr. Wilfong (i)
earns an annual salary of $190,000, (ii) is eligible to participate in the FHS
Executive Incentive Plan with a maximum benefit of 40% of his base salary for
1998 and 50% of his base salary for 1999, (iii) is eligible to participate in
FHS' Stock Option Program, and (iv) is eligible to receive and/or participate in
the benefits customarily provided by FHS to its employees. The Wilfong
Employment Agreement may be terminated by FHS or Mr. Wilfong at any time. In the
event that Mr. Wilfong's employment is terminated by FHS for any reason other
than "cause" (as defined in the Wilfong Employment Agreement), FHS will provide
Mr. Wilfong with a minimum of 60 days notice and a severance package, provided
he agrees to enter into a standard general release agreement, totaling one year
of base salary in effect at the date of termination.
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"). As a consequence of the formation of FHS' Northeast
Division, Mr. Birnbaum's employment as President and Chief Executive Officer of
the Company ended as of April 1, 1998. In connection with such separation, Mr.
Birnbaum received six months of additional salary as severance. In addition,
pursuant to the Birnbaum Employment Agreement, Mr. Birnbaum provided consulting
services to the Company for a six month period following the termination of his
employment for $125,000.
Effective July 1, 1997, FHS entered into an employment letter agreement
(the "Singer Employment Agreement") with Dr. Joseph Singer pursuant to which Dr.
Singer remained 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
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.
On February 9, 1998, FHS and Mr. Stein entered into an employment
letter agreement (the "Stein Employment Agreement"), which agreement superseded
a previous employment letter agreement dated February 6, 1997. In accordance
with the terms of the Stein Employment
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<PAGE> 187
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 months severance. The
Stein Employment Agreement was amended on October 14, 1998 to extend the term of
the agreement until June 30, 1999. The Stein Employment Agreement, as amended,
now provides that Mr. Stein will receive a retention bonus equal to 10% of his
salary if he remains employed by FHS until June 30, 1999 or if his employment is
terminated for any reason other than "just cause."
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<PAGE> 188
ITEM 12. PRINCIPAL SHAREHOLDERS AND SECURITY OWNERSHIP MANAGEMENT.
The following table sets forth information as of March 15, 1999, with
respect to the beneficial ownership (as defined in Rule 13d-3 of the Exchange
Act), of the Company's Common Stock 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 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)................. 496,916,161(3) 99.6%(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).................................. --
Dr. Om P. Sawhney (4)............................... 5,800 (8) (5)
Thomas W. Wilfong (6) (9)........................... --
Roger W. Birnbaum (10).............................. --
Dr. Joseph Singer (9)............................... 8,000 (5)
Donald Parisi (9)................................... --
Marc M. Stein (9)................................... --
All Directors and Executive Officers
as a Group (14 persons)............................. 26,417 (7)(8) (5)
- ----------
(1) Except as otherwise indicated, all of the shares of 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 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 the principal amount of the New
Convertible Debenture into 92,804,003 shares of Common Stock and, in
December 1998, FHS converted $1,197,183 of the principal amount of the
New Convertible Debenture into 399,003,000 shares of Common Stock . If
FHS elects to convert the remaining New Convertible Debenture, FHS
would receive, in accordance with a formula set forth in the New
Convertible Debenture, additional shares of Common Stock, resulting in
FHS owning more than 99.9% of the then outstanding Common Stock.
(4) Such person currently serves as a Non-FHS Director of the Company.
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<PAGE> 189
(5) Shares beneficially owned do not exceed 1% of the outstanding Common
Stock.
(6) Such person is affiliated with FHS and serves as a director of the
Company.
(7) 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.
(8) 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.
(9) Such person is an executive officer of the Company.
(10) Such person was a former executive officer and director of the Company.
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<PAGE> 190
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
MANAGEMENT AGREEMENTS
In connection with FHS' initial investment in the Company, 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 providing
contracting, utilization review and quality assurance, employee relations, sales
and marketing, and strategic planning, among other services. 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 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 the
Company's subsidiaries. The MIS Agreement will be effective at FHS' option.
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). Each of the executives report to FHS' senior management. All the
executives of the Company 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 the Company, Dr. Singer, Vice President and Chief Medical
Officer of the Company, Mr. Donald Parisi, Vice President, General Counsel and
Secretary of the Company, and Mr. Marc M. Stein, Chief Financial Officer of
Company, are employed by FHS or a subsidiary thereof.
Each of the Management Agreements provides that the Company 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), or (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 the Company (the "FOHP Health Plans") for a month, plus (ii)
reimbursement for (a) direct expenses incurred by third parties, and
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<PAGE> 191
(b) salaries and benefits of the executives of the Company. Subsequent to the
execution of the Administrative Management Agreement and conversion of the
Initial Convertible Debenture, the Company and FHS agreed that the Management
Fee to be charged the Company 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 Convertible 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 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 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 was
contemplated under the Company'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 the Company 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 the Company to FHS shall bear interest at the rate of the Initial
Convertible Debenture until paid in their entirety or added to the principal
amount of the Convertible 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 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 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
-45-
<PAGE> 192
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 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.
-46-
<PAGE> 193
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, 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' 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.
MERGERS
The Company and FHS have entered the Merger Agreement, pursuant to
which FHS Transition Company will merge with and into the Company. See
"Description of Business - The Merger."
On January 1, 1999, PHS-NJ, a New Jersey HMO controlled by FHS, merged
with and into FOHP-NJ. See "Description of Business - Merger of FOHP-NJ and
Physicians Health Services of New Jersey, Inc."
EXECUTIVE OFFICERS OF NJ ACUTE CARE INSTITUTIONS AND FHS SERVING ON
FOHP BOARD.
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; Mr. Christopher Dadlez, Executive Vice
President of Saint Barnabas Health Care 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; and Mr. John J. Gantner, Senior Vice
President of Finance and Treasurer of the Robert Wood Johnson University
Hospital. See "Directors and Executive Officers of the Registrant - Current
Directors of the Registrant." In addition, a large percentage of the revenues of
FOHP-NJ is generated from NJ Acute Care Institutions that have enrolled
employees in FOHP-NJ plans as required by the Certificate of Incorporation of
the Company.
Each of Karen A. Coughlin, Jay M. Gellert and Thomas W. Wilfong serve
as executive officers of FHS and currently serve as directors of the Company.
See "Directors and Executive Officers of the Registrant - Current Directors of
the Registrant."
-47-
<PAGE> 194
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, 1998, no Current Reports
on Form 8-K were filed by the Company with the Commission.
-48-
<PAGE> 195
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, 1999 By: /s/ THOMAS W. WILFONG
---------------------------------------
Thomas W. Wilfong, 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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ THOMAS W. WILFONG President and Chief Executive March 30, 1999
-------------------------- Officer (Principal Executive
Thomas W. Wilfong Officer) and Director
/s/ MARC M. STEIN Chief Financial Officer (Principal March 30, 1999
-------------------------- Financial and Accounting Officer)
Marc M.Stein
/s/ DR. MARK L. ENGEL Chairman of the Board March 30, 1999
--------------------------
Dr. Mark L. Engel
/s/ DR. JOHN F. BONAMO Director March 30, 1999
--------------------------
Dr. John F. Bonamo
/s/ KAREN A. COUGHLIN Director March 30, 1999
--------------------------
Karen A. Coughlin
/s/ BRUCE G. COE Director March 30, 1999
--------------------------
Bruce G. Coe
</TABLE>
-49-
<PAGE> 196
Signature Title Date
- --------- ----- ----
/s/ CHRISTOPHER M. DADLEZ Director March 30, 1999
--------------------------
Christopher M. Dadlez
/s/ DR. THOMAS J. FENERAN Director March 30, 1999
--------------------------
Dr. Thomas J. Feneran
/s/ JOHN J. GANTNER Director March 30, 1999
--------------------------
John J. Gantner
/s/ JAY M. GELLERT Director March 30, 1999
--------------------------
Jay M. Gellert
/s/ DR. OM P. SAWHNEY Director March 30, 1999
--------------------------
Dr. Om P. Sawhney
-50-
<PAGE> 197
CONSOLIDATED FINANCIAL STATEMENTS
FOHP, INC. AND SUBSIDIARIES
DECEMBER 31, 1998
CONTENTS
Reports of Independent Auditors F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE> 198
INDEPENDENT AUDITORS' REPORT
The Board of Directors
FOHP, Inc.
Neptune, NJ
We have audited the accompanying consolidated balance sheet of FOHP Inc. and
subsidiaries as of December 31, 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of FOHP, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such 1998 financial statements present fairly, in all material
respects, the consolidated financial position of FOHP Inc. and subsidiaries as
of December 31, 1998 and the consolidated results of their operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Hartford, CT
February 26, 1999
F-2
<PAGE> 199
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 the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years ended December 31, 1997 and 1996. 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 the consolidated results of their
operations and their cash flows for the years ended December 31, 1997 and 1996,
in conformity with generally accepted accounting principles.
Iselin, New Jersey
February 13, 1998 Ernst & Young LLP
F-3
<PAGE> 200
FOHP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 44,052,058 $ 79,266,721
Accounts receivable from owners/providers, net of allowances
for doubtful accounts and retroactive terminations of
$1,546,616 in 1998 and $922,354 in 1997 5,138,201 11,096,487
Other accounts receivable, net of allowances for doubtful
accounts and retroactive terminations of $662,836 in 1998
and $2,507,619 in 1997 4,918,844 3,131,333
Due from Integrated Pharmacy Services, Inc. 3,540,608 --
Prepaids and other current assets 513,073 635,548
--------------------------------------------
Total current assets 58,162,784 94,130,089
Restricted cash 57,855,421 13,846,682
Furniture and equipment, net 1,730,136 2,480,042
Goodwill, net of accumulated amortization of $2,693,256
and $0 at December 31, 1998 and 1997, respectively 96,237,857 107,730,254
Deferred tax asset 3,942,798 --
Other assets 350,419 424,164
--------------------------------------------
Total assets $ 218,279,415 $ 218,611,231
============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Medical claims payable to owners/providers $ 18,106,942 $ 20,308,241
Other medical claims payable 42,249,530 62,614,704
Accounts payable 215,855 741,010
Accrued expenses, including restructuring accrual
of approximately $1,577,000 and $12,709,000 at
December 31, 1998 and 1997, respectively 9,512,535 17,510,150
Due to Foundation Health Systems, Inc. 1,446,459 543,075
Due to other affiliates 612,989 1,192,716
Unearned premium 1,204,911 7,965,658
Other current liabilities -- 8,054
--------------------------------------------
Total current liabilities 73,349,221 110,883,608
Convertible debentures payable to Foundation Health Systems, Inc. 11,131,386 11,294,406
Subordinated debentures payable to Foundation Health Systems, Inc. 25,113,575 24,000,000
--------------------------------------------
Total liabilities 109,594,182 146,178,014
--------------------------------------------
Commitments and contingencies (Note 10)
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, 499,000,000 shares and 100,000,000 shares issued
and outstanding at December 31, 1998 and 1997, respectively 1,011,941 1,000,000
Additional paid-in capital 239,135,758 208,053,796
Accumulated deficit (131,462,466) (136,620,579)
--------------------------------------------
Total shareholders' equity 108,685,233 72,433,217
--------------------------------------------
Total liabilities and shareholders' equity $ 218,279,415 $ 218,611,231
============================================
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 201
FOHP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Revenue:
Premiums from owners/providers $ 118,591,143 $ 132,575,894 $ 135,544,112
Other premium revenue 209,268,135 239,132,416 112,125,670
Other, principally administrative service fees 2,513,576 2,045,011 7,863,006
Interest income 4,308,879 3,652,910 1,843,520
------------------------------------------------
Total revenue 334,681,733 377,406,231 257,376,308
------------------------------------------------
Expenses:
Medical services to owners/providers 46,895,944 63,882,103 37,026,903
Hospital services to owners/providers 32,154,087 64,553,166 30,156,890
Other medical services 109,423,870 148,812,233 105,551,393
Other hospital services 75,026,204 101,521,355 63,760,554
Selling, general and administrative 53,199,216 55,106,022 50,734,197
Management fee - Foundation Health Systems, Inc. 2,543,000 7,502,899 --
Depreciation & amortization 4,224,987 1,404,192 879,306
Interest - Foundation Health Systems, Inc. 2,229,890 1,790,410 --
Other interest 536,191 91,163 11,247
Restructuring costs (2,250,000) 12,825,570 --
------------------------------------------------
Total expenses 323,983,389 457,489,113 288,120,490
------------------------------------------------
Net income (loss) before provision for income taxes 10,698,344 (80,082,882) (30,744,182)
Provision for income taxes 5,540,231 2,139 924
------------------------------------------------
Net income (loss) $ 5,158,113 $ (80,085,021) $ (30,745,106)
================================================
Net income (loss) per common share $ 0.05 $ (9.18) $ (14.64)
================================================
Net income (loss) per common share - assuming dilution $ -- $ (9.18) $ (14.64)
=================================================
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 202
FOHP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------------------- ADDITIONAL SHAREHOLDERS'
PAR PAID-IN ACCUMULATED EQUITY
SHARES VALUE CAPITAL DEFICIT (DEFICIENCY)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 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 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
Redemption of Common Stock (3,000) (30) (1,050) (1,080)
Capital contribution from Foundation Health
Systems, Inc. 29,897,801 29,897,801
Issued Common Stock (December 31,
1998 at $.003 per share) 399,003,000 11,971 1,185,211 1,197,182
Net income 5,158,113 5,158,113
---------------------------------------------------------------------------------
Balance at December 31, 1998 499,000,000 $ 1,011,941 $ 239,135,758 $(131,462,466) $ 108,685,233
=================================================================================
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 203
FOHP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Cash Flows from operating activities
Net income (loss) $ 5,158,113 $ (80,085,021) $ (30,745,106)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 4,224,987 1,404,192 879,306
Loss on disposal of fixed assets 434,689 80,966 --
Write-off of deferred issuance costs -- 1,132,656 --
Interest cost converted to debt 2,147,737 1,247,337 --
Tax settlements with Foundation Health Systems, Inc. 8,799,141 -- --
Changes in operating assets and liabilities:
Accounts receivable from owners/providers 5,958,286 (2,890,016) (1,865,379)
Other accounts receivable (1,787,511) 535,554 (414,248)
Due from Integrated Pharmacy Services, Inc. (3,540,608) -- --
Prepaids and other current assets 122,475 1,268,812 (1,369,609)
Restricted cash (44,008,739) (12,581,233) (64,648)
Deferred tax asset (3,942,798) -- --
Other assets 73,745 235,417 (368,448)
Medical claims payable to owners/providers (2,201,299) 6,532,707 5,417,849
Other medical claims payable (20,365,174) 7,244,247 36,767,869
Accounts payable and accrued expenses (8,522,770) 13,088,045 872,013
Due to Foundation Health Systems, Inc. 903,384 543,075 --
Due to other affiliates (579,727) 1,192,716 --
Unearned premium revenue (6,760,747) 3,366,996 4,257,570
Other current liabilities (8,054) (1,202,462) 320,189
-------------------------------------------------
Net cash (used in) provided by operating activities (63,894,870) (58,886,012) 13,687,358
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture and equipment (1,216,514) (1,799,093) (904,733)
Proceeds from sale of furniture and equipment -- 27,260 --
-------------------------------------------------
Net cash used in investing activities (1,216,514) (1,771,833) (904,733)
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Deferred issuance costs -- (1,441,465) --
Capital contribution from parent 29,897,801 -- --
Issuance of convertible debentures -- 80,701,120 --
Issuance of subordinated debentures -- 24,000,000 --
Redemption of common stock (1,080) -- --
-------------------------------------------------
Net cash provided by financing activities 29,896,721 103,259,655 --
-------------------------------------------------
Increase (decrease) in cash and cash equivalents (35,214,663) 42,601,810 12,782,625
Cash and cash equivalents at beginning of period 79,266,721 36,664,911 23,882,286
=================================================
Cash and cash equivalents at end of period 44,052,058 79,266,721 36,664,911
=================================================
SUPPLEMENTAL INFORMATION:
- -------------------------
Cash paid for interest $ 536,191 $ 48,319 $ 7,488
=================================================
Conversion of debentures into common stock $ 1,197,182 $ 70,654,051 $ --
=================================================
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 204
FOHP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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") during 1998. 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 are 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 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 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 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 ("Common
Stock"), the Company became a 98% owned subsidiary of Foundation Health Systems,
Inc. ("FHS"), a Delaware corporation (Note 2). 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. ("PHS-NJ"), a
New Jersey corporation which operated as an HMO in the State of New Jersey,
merged with and into FOHP-NJ pursuant to an Agreement and Plan of Merger dated
October 26, 1998. In connection with the merger, FOHP-NJ changed its name to
Physicians Health Services of New Jersey, Inc. The purpose of the merger was to
consolidate the operations of FOHP-NJ and PHS-NJ, both FHS controlled HMOs in
the State of New Jersey, into one corporation. This merger will be accounted for
as a pooling of interest of entities under common control.
F-8
<PAGE> 205
Selected financial information for PHS-NJ as of and for the year ended December
31, 1998 is as follows:
Revenue $ 55,512,000
Net (Loss) $(13,074,000)
Total Assets $45,550,000
Total Liabilities $42,414,000
Shareholders' Equity $3,136,000
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 Agreement, a provider shareholder of FOHP will receive 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 rate per share). Such payment rights would entitle provider
shareholders to receive a payment of not less than $15 per share 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 net income of $5,158,113 in 1998 and had an accumulated
deficit of $131,462,466 at December 31, 1998. In order for the Company's
principal operating subsidiary, FOHP-NJ (See Note 7), 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 FOHP-NJ's plan to remedy its statutory net worth deficiency
at December 31, 1995 (See Note 7) and a corresponding plan of action submitted
to the Departments, 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 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 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 the Company's Common Stock, increasing
FHS's 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 the Company's Common Stock.
After this conversion, 499,000,000 shares of the Company's 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 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 December 31, 1998, $3,395,074 of defaulted interest is included
in the principal amount of the Convertible Debentures.
F-9
<PAGE> 206
In connection with the purchase by FHS of the Company's Common Stock through the
conversion of Convertible Debentures, goodwill totaling $107,730,254 was
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. Amortization for the year ended December 31, 1998, totaling
$2,693,256, has been reflected in the accompanying statement of operations. As a
result of the utilization in 1998 of certain of the Company's preacquisition net
deferred tax assets by FHS, the Company reduced goodwill by $8,799,141. In the
event that the deferred tax assets related to the net operating loss
carryforwards are used by FHS, the future tax benefits will be allocated to
reduce goodwill. The Company evaluates the recoverability of goodwill from
expected future cash flows. Impairments would be recognized in operating results
if a permanent diminution in value were to occur.
In December 1997, FHS 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.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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.
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, 1998, FOHP-NJ maintained $56,448,778 on deposit with the New
Jersey Department of Banking and Insurance (the "DOI"), as required, to meet its
"Minimum Insolvency Deposit for Healthcare Expenditures" under current insurance
regulations. In addition, FOHP-NJ is required to maintain a $1,200,000 cash
reserve with the Health Care Financing Administration ("HCFA") for its federal
programs. As of December 31,1998, FOHP-NJ had $1,406,643 on deposit for its
federal programs.
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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 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
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 SERVICES
Medical and hospital services costs 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.
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 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.
FOHP-NJ also contracts with another party for the arrangement of mental health
services provided to enrollees in its health care 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 for the year 1997 is a premium
deficiency accrual related to FOHP-NJ's Medicare product.
INCOME TAXES
The Company's operations are included in FHS' consolidated federal and state
income tax returns. 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, however, benefits are
not allocated to the Company if such benefits can't be used by FHS. Deferred
taxes are provided for the
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expected future income tax consequences of events that have been recognized in
the Company's financial statements. Deferred tax assets and liabilities are
determined based on the temporary differences between the financial statement
carrying amounts and the tax bases of assets or liabilities using enacted tax
rates in effect in the years in which the temporary differences are expected to
reverse.
PER SHARE DATA
Per share data considered in net income (loss) per common share is based on the
weighted average number of shares of Common Stock outstanding during the related
period (101,000,000 in 1998, 8,724,000 in 1997 and 2,100,000 in 1996).
For net income (loss) per common share - assuming dilution for 1998, net income
in the accompanying consolidated statements of operations was increased by the
interest expense (after tax effect impact considering a 41% tax rate) related to
Convertible Debentures (See Note 1) for an adjusted "numerator" of $6,474,000.
The weighted average number of shares for all classes of Common Stock
outstanding during 1998 of 101,000,000 was increased for the following:
(i) If the December 31, 1998 conversion of Convertible Debentures into
399,003,000 shares of Common Stock had occurred on January 1, 1998,
the weighted average shares would have been approximately 400,000,000.
(ii) If the remaining Convertible Debentures of $11,131,386 were converted
into common shares at .003 per share (the conversion rate applied at
December 31, 1998 for the above-mentioned 399,003,000 shares) on
January 1, 1998, an additional 3,712,129,000 of common shares would be
considered for dilutive purposes.
The adjusted weighted average shares or the "denominator" for purposes of
calculating net income (loss) per common share - assuming dilution was
4,112,129,000. Consequently, net income (loss) per common share - assuming
dilution for 1998 was .0016. For 1997 and 1996, net income (loss) per common
share - assuming dilution is equal to net income (loss) per common share as
based on the net loss for such periods, conversion of Convertible Debentures as
performed above would be antidilutive (decrease the loss per share).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) depends on the intended use of the
derivative and resulting designation if used as a hedge. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
The adoption of SFAS No. 133 is not expected to have a material, if any, impact
on the Company's consolidated financial statements.
RECLASSIFICATION
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform with the current year presentation.
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3. ACCOUNTS RECEIVABLE
The following is the activity of the allowances for doubtful accounts and
retroactive terminations:
ACCOUNTS
RECEIVABLE
FROM OTHER
OWNERS/ ACCOUNTS
PROVIDERS RECEIVABLE
------------------------------
Balance, January 1, 1996 $ -- $ 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
Provision for bad debts 794,838 1,098,379
Reduction in retroactive terminations -- (1,730,905)
Write-offs (170,576) (1,212,257)
------------------------------
Balance, December 31, 1998 $ 1,546,616 $ 662,836
==============================
4. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following:
1998 1997
------------------------------
Leasehold Improvements $ 237,062 $ 247,640
Furniture and fixtures 719,744 767,401
Equipment 3,526,249 3,740,779
Automobiles 33,836 74,096
------------------------------
4,516,891 4,829,916
Less accumulated depreciation (2,786,755) (2,349,874)
------------------------------
$ 1,730,136 $2,480,042
==============================
Depreciation expense was $1,531,731, $1,095,383 and $879,306 for 1998, 1997 and
1996, respectively.
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 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 (6.19% and 5.98% as of December 31, 1998 and 1997,
respectively). Interest is due and payable within ten days after the end of each
quarter, subject to the terms noted above.
6. 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,
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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 an HMO
subsidiary of the Company may purchase Common Stock. Acute care institutions
that enter into a provider agreement with an HMO 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. In October 1998, the
Company repurchased 3,000 shares at a cost of $.36 per share from a physician
who left the provider network. 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 provision of the Company's Certificate of
Incorporation applicable to it.
7. STATUTORY NET WORTH AND DIVIDEND RESTRICTIONS
FOHP-NJ, pursuant to its COA to operate as 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.
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 $51,701,121. The
principal amount of the Initial Convertible Debenture was converted by FHS, into
71% of FOHP's capital stock on a fully-diluted basis.
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 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
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worth requirements applicable to FOHP-NJ during 1998. At December 31, 1998,
FOHP-NJ was approximately $17,515,000 above 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.
8. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows for the years ended December 31:
1998 1997 1996
Current:
Federal $ 6,750,865 $ -- $ --
State 1,808,006 2,139 924
-----------------------------------------------
Total current 8,558,871 2,139 924
-----------------------------------------------
Deferred:
Federal (2,431,248) -- --
State (587,392) -- --
-----------------------------------------------
Total Deferred (3,018,640) -- --
-----------------------------------------------
Total provision for
===============================================
income taxes $ 5,540,231 $ 2,139 $ 924
===============================================
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows for the years ended December 31:
1998 1997 1996
Statutory federal income tax rate 35% 35% 35%
State income taxes, net of federal
income tax effect 7% 6% 6%
Goodwill amortization 9% -- --
Other permanent differences 1% -- --
------------------------------------
Effective income tax rate 52% 41% 41%
-- (41)% (41)%
------------------------------------
Valuation allowance
Effective income tax rate 52% -- --
====================================
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Significant components (approximated) of the Company's deferred tax assets and
liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Capitalization of start-up costs and organization costs $ 231,000 $ 603,000
Net operating loss carryforwards 45,060,000 42,990,000
Reserve discounting 875,000 877,000
Allowance for doubtful accounts and retroactive terminations 903,000 1,200,000
Other 1,289,000 2,287,000
Restructuring costs 645,000 3,832,000
-----------------------------------
Total deferred tax assets 49,003,000 51,789,000
Valuation allowance for deferred tax assets (45,060,000) (51,789,000)
-----------------------------------
Net deferred tax assets $ 3,943,000 $ --
===================================
</TABLE>
As of December 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $110 million which may be subject to carryover
limitations under Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"). A valuation allowance has been provided to account for the
potential limitations associated with utilization of net operating loss
carryforwards as well as 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. The net operating loss carryforwards expire between 2008
and 2012.
The valuation allowance decreased by approximately 6.7 million in 1998 while
such allowance increased by approximately 31.7 million in 1997. In the event
that the deferred tax assets related to the net operating loss carryforward are
utilized, the future tax benefits realized by FHS will be allocated to reduce
goodwill.
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 Code or (ii) the
lesser of 25% of compensation or $30,000. Total plan expense for 1998, 1997 and
1996 amounted to $359,000, $403,000 and $406,000, 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 1998, 1997 and 1996 was
approximately $1,400,000, $1,403,000 and $1,796,000, respectively.
The following is a schedule of minimum future payments on long-term operating
leases at December 31, 1998:
1999 $714,780
2000 199,995
2001 19,669
2002 1,186
--------
$935,630
========
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MEDICARE CONSULTING AGREEMENT
In January 1995, FOHP-NJ entered into an agreement with an unrelated company to
assist FOHP-NJ in obtaining approval from the 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 and $1,621,186 in 1997 and 1996, respectively. No
payments were made in 1998 pending a negotiation of a termination of the
agreement. 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 would be payable to the consulting
company. The minimum payment for each year, pursuant to such variable
percentage, was $1,000,000 and the maximum for any such payment was $3,500,000.
In connection with the sale of Convertible Debentures (see Note 2), the Company
agreed under the terms of the Amended Securities Purchase Agreement with FHS to
negotiate termination of its agreement with the company.
In 1998, a settlement agreement was reached between the two companies whereby
FOHP-NJ paid $6 million (which was accrued in 1997) for a final settlement of
payments due to the company for revenue generated by FOHP-NJ under the Medicare
Risk Contract (See Note 12). Additionally, and separate from the aforementioned
$6 million settlement, the consulting company reimbursed FOHP-NJ $2.5 million
related to the significant losses incurred by FOHP-NJ under the Medicare Risk
Contract. Such reimbursement was recorded as a decrease to medical service costs
in the accompanying consolidated statements of operations during 1998.
REINSURANCE ARRANGEMENTS
The Company has entered into a reinsurance contract to limit its losses on
individual claims. The reinsurance contract for 1998 provides for reimbursement
of eligible hospital claims per enrollee which exceed $175,000 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
1997 and 1996 were consistent with the 1998 contract, except that the contracts
provided for reimbursement of eligible hospital claims which exceed $150,000 and
$75,000 for all enrollees for 1997 and 1996, respectively. Additionally for
1996, the contract provided for reimbursement of eligible hospital claims which
exceed $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.
Reinsurance expense, net of recoveries, was approximately $1,538,000, $4,294,000
and $55,000 for 1998, 1997 and 1996, respectively.
LITIGATION
The Company is involved in litigation matters involving certain claims which
arise in the normal course of business, none of which, in the opinion of
management, are expected to have a material adverse effect on the Company's
financial statements.
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 accounts receivable greater than 90 days past due,
prepaid expenses, equipment other than certain computer equipment, organization
costs, certain loans and other 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, 1998 and 1997 amounted to $16,570,000 and
$23,694,000, respectively. In addition, under the terms of its COA, if net worth
is less than 125% of the required minimum, FOHP-NJ was required to submit a plan
of action to
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<PAGE> 214
the DOI. In the first quarter of 1996, FOHP-NJ learned that its net worth was
less than 125% of the required minimum and, as a result, obtained approval of a
plan of action to address such shortfall from the Departments. The plan of
action required FOHP-NJ to have a positive statutory net worth for the year
ended December 31, 1997 and a statutory net worth of 100% of the required
minimum by December 31, 1998. FOHP-NJ's statutory net worth at December 31, 1998
and 1997, respectively, were as follows:
<TABLE>
<CAPTION>
1998 1997
GAAP ELIMINATIONS STATUTORY GAAP ELIMINATIONS STATUTORY
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets $117,553,168 $2,958,452 $114,594,716 $108,142,744 $3,463,563 $104,679,181
Liabilities 80,508,863 -- 80,508,863 104,252,789 -- 104,252,789
-----------------------------------------------------------------------------------------
Net equity $ 37,044,305 $2,958,452 $ 34,085,853 $ 3,889,955 $3,463,563 $ 426,392
=========================================================================================
</TABLE>
11. 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 a monthly management fee which is
currently based on allocated corporate charges. For the years ended December 31,
1998 and 1997, FHS charged $2,543,000 and $7,502,899, respectively, to FOHP
which is included as management fees in the accompanying statements of
operations.
The amount due to FHS at December 31, 1998, represents management fees payable
and interest payable related to the Convertible Debentures (which haven't been
converted to principal at December 31, 1998) and Subordinated Debentures.
Amounts due to other affiliates, which are wholly owned by FHS, represent cost
allocations for administrative services. The balances due from Integrated
Pharmacy Services, Inc. ("IPS") represents amounts due for payments made by the
Company, on behalf of IPS, for pharmacy services.
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
were recorded in 1997 and represented estimated contract settlements, provisions
for lease termination costs, employee termination benefits, write-down of the
related assets and other miscellaneous items. Included in total restructuring
costs was approximately $2.6 million related to employee termination benefits
for approximately 140 employees from various departments of the Company. In
addition, $6 million related to an anticipated settlement of a Medicare
consulting contract with a non-related company and $2 million related to the
anticipated termination of a mental health contract were included in
restructuring costs at December 31, 1997. As of December 31, 1997, approximately
$116,000 of employee termination benefits were paid and six employees were
terminated.
During 1998, the following activity occurred related to restructuring charges
resulting in a current year decrease of approximately $11,132,000 and an ending
restructuring accrual balance of approximately $1,577,000. The ending
restructuring accrual is solely related to employee termination benefits which
management believes will be fully paid by the third quarter of fiscal year 1999.
Such accrual is included in accrued expenses in the accompanying consolidated
balance sheets:
(i) $6 million of settlement costs related to a terminated Medicare
consulting contract was paid during 1998;
(ii) Approximately $978,000 of employee termination benefits were paid as
of December 31, 1998, including approximately $116,000 paid during
1997;
(iii) Approximately $100,000 of payments made for a lease buyout;
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<PAGE> 215
(iv) Asset write-offs, disposals and other non-cash charges of
approximately $1.92 million; and
(v) 1998 reduction of the restructuring accrual of $2.25 million, which
is recorded in the accompanying statements of operations, as a
result of management's re-evaluation of estimated restructuring
costs. Of the $2.25 reduction, $2 million is related to the
continuation of a mental health contract during 1998 that was
originally expected to be terminated as part of the overall
restructuring plan.
No additions were recorded to the restructuring accrual during 1998.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments, including cash and cash
equivalents, restricted cash, and the debentures (convertible and subordinated)
approximate their carrying value at December 31, 1998 and 1997.
F-19
<PAGE> 216
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, 1998
-------------------------
FOHP, INC.
(EXACT NAME OF REGISTRANT AS
SPECIFIED IN ITS CHARTER)
-------------------------
================================================================================
<PAGE> 217
FOHP, INC.
EXHIBIT INDEX
EXHIBIT NO.
----------
b 2.1 Agreement of Merger and Plan of Reorganization
dated April 12, 1995 among the Registrant, First
Option Health Plan of New Jersey, Inc.
("FOHP-NJ"), a wholly-owned subsidiary of the
Registrant, and FOHP Transition Company, a
wholly-owned subsidiary of the Registrant.
2.2 Agreement and Plan of Merger dated as of October
26, 1998 between FOHP-NJ and Physicians Health
Services of New Jersey, Inc. and the following
exhibits thereto: Exhibit A - Amended and
Restated Certificate of Incorporation of
Physicians Health Services of New Jersey, Inc.
(formerly First Option Health Plan of New Jersey,
Inc.); Exhibit B - By-Laws of Physicians Health
Services of New Jersey, Inc.; Exhibit C -
Directors of Physicians Health Services of New
Jersey, Inc.; and Exhibit D - Officers of
Physicians Health Services of New Jersey, Inc.
j 2.3 Agreement and Plan of Merger dated as of November
16, 1998 by and among Foundation Health Systems,
Inc. ("FHS"), FHS Transition Company and the
Registrant and the following exhibits thereto:
Exhibit A - Amended and Restated Certificate of
Incorporation of the Registrant; Exhibit B -
By-laws of the Registrant; Exhibit F-1 - Form of
Payment Right - Hospital Shareholders; Exhibit
F-2 - Form of Payment Right - Non-Hospital
Shareholders; and Exhibit G - Contribution
Agreement. Upon the request of the Securities and
Exchange Commission (the "Commission"), the
Registrant agrees to furnish a copy of Exhibit C
- Directors of Surviving Corporation, Exhibit D -
Officers of Surviving Corporation and Exhibit E -
Section 6.4 of the Amended Securities Purchase
Agreement.
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.
3.2 Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of the
Registrant, as filed with the Department of
Treasury, Division of Revenue of the State of New
Jersey on October 6, 1998.
ff 3.3 By-laws of Registrant, as amended.
fff 4.1 Specimen certificate representing Registrant's
Common Stock.
E-1
<PAGE> 218
i 4.2 Convertible Subordinated Surplus Debentures in
the aggregate principal amount of $29,000,000
issued by the Registrant to FHS on December 8,
1997.
i 4.3 Subordinated Surplus Debentures in the aggregate
principal amount of $24,000,000 issued by the
Registrant to FHS on December 31, 1997.
(*) i 10.1 Employment Agreement dated May 6, 1997 between
FHS and Roger W. Birnbaum.
(*) i 10.2 Employment Agreement dated July 1, 1997 among the
Registrant, FHS and Joseph Singer, M.D.
(*) i 10.3 Employment Agreement dated February 8, 1998
between FHS and Marc M. Stein.
(*) 10.3.1 Addendum to Employment Agreement between FHS and
Marc M. Stein dated October 14, 1998.
(*) 10.4 Employment Agreement dated June 10, 1998 between
Thomas W. Wilfong and Physicians Heath Services,
Inc., a subsidiary of FHS.
a 10.7 Lease Agreement dated September 1, 1994 between
Theodore G. Sourlis and Elaine Sourlis, husband
and wife, and FOHP-NJ, and an undated addendum
thereto.
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> 219
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 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 General Administrative Services Management
Agreement dated April 30, 1997 between FHS and
the Registrant.
h 10.47 Management Information Systems and Claims
Processing Services Agreement dated April 30,
1997 between FHS and the Registrant.
21. Subsidiaries of the Registrant.
E-3
<PAGE> 220
k 27. Financial Data Schedule for Year ended December
31, 1998.
- ---------------------------------
(*) 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).
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.
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.
E-4
<PAGE> 221
i Incorporated by reference to the identically
numbered exhibit to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1997.
j Incorporated by reference to Appendices A, B, C,
D-1, D-2 and E of the Registrant's preliminary
Proxy Statement filed with the Commission on
February 4, 1999 in connection with the proposed
merger of FHS Transition Company with and into
the Registrant.
k The Financial Data Schedule is submitted in
electronic format only.
E-5
<PAGE> 222
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
-------------------------------------------------
FOHP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3314813
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or 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 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
<PAGE> 223
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
<PAGE> 224
<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)
------------- -------------
Total shareholders' equity 110,974,916 108,685,233
------------- -------------
Total liabilities and shareholders' equity $ 239,456,980 $ 218,279,415
============= =============
</TABLE>
See accompanying notes
3
<PAGE> 225
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> 226
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
---------------------------------------------------------------------------
<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> 227
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> 228
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> 229
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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
