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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended April 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from .................... to ....................
Commission file number: 0-16235
PHP HEALTHCARE CORPORATION
...............................................................................
(exact name of registrant as specified in its charter)
Delaware 54-1023168
........................................... ..................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11440 Commerce Park Drive, Reston, Virginia 22091
........................................... ..................................
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 758-3600
Securities registered pursuant Common Stock, $.01 par value
to Section 12(b) of the Act: Preferred Stock Purchase Rights
Each registered on the New York
Stock Exchange
Securities registered pursuant Common Stock, $.01 par value
to Section 12(g) of the Act: Preferred Stock Purchase Rights
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 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. [ ]
As of June 30, 1995 the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was approximately $77.1 million. As of
June 30, 1995 the number of shares of Common Stock of the Registrant issued and
outstanding was 5,408,341.
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PART I
Item 1. Business
PHP Healthcare Corporation was organized as a Delaware corporation in 1986
and succeeded to the business of a predecessor corporation by merger in March
1986. The predecessor of PHP Healthcare Corporation was originally organized
under Delaware law in 1976 and reincorporated under Missouri law in 1981.
(Unless the context requires otherwise, the terms "Company" and "PHP" include
PHP Healthcare Corporation, its subsidiaries and its predecessor corporation.)
Since its inception, PHP has operated as a provider of health care services
to federal, state and local government agencies. During the past two fiscal
years, the Company made substantial progress in the transformation of its
business from that of a government contractor to that of a full service managed
care company. As part of this transformation, the Company has realigned its
operations to more accurately reflect its two service areas: Commercial
Managed Health Care Services and Government Managed Health Care Services. In
1991 and 1992, over 98% of the Company's revenues were derived from contracts
with government customers. In 1994 and 1995, the percentage of the Company's
revenues derived from contracts in the Government Managed Health Care Services
division was reduced to 69% and 50%, respectively. The percentages of the
Company's revenues derived from individual customers comprising more than 10%
of consolidated revenues for fiscal 1995 were as follows: 33%, 22% and 17% ,
from the federal government, the District of Columbia and Blue Cross Blue
Shield of New Jersey, respectively.
Commercial Managed Health Care Services
PHP's goal is to provide its clients with the necessary tools and services
to obtain high quality, cost effective health care for their constituents. To
achieve this mission, PHP provides geographically focused integrated systems of
care.
The integrated systems of care ("ISOCs") provided by the Company go beyond
the Company's original business of providing primary care services in Company
owned or operated primary care centers. The Company's ISOC product also
involves: (1) market assessment; (2) design of a primary care network with
strategically located centers offering primary medical care, laboratory,
pharmacy and radiology services and, where appropriate, specialty services;
(3) design and development of integrated networks of area medical and surgical
specialists and other health care providers to whom the primary care providers
in the center can refer patients as appropriate; (4) design, procurement and
construction of the primary care centers; (5) physician recruiting and
management; (6) utilization and case management; (7) quality assurance systems;
(8) repricing and claims adjudication interface; (9) client and physician
feedback and reporting; and (10) medical management and patient advocacy
systems.
The Company is able to provide its clients with a complete integrated
system of care encompassing all of the elements described above, or with a
partial system involving only certain of those elements. The Company works
closely with its clients to design the system that best suits all of the
clients' needs and those of their constituents. PHP strives to assure that its
clients and their constituents receive cost effective, quality care in a timely
fashion from the most appropriate provider.
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In late 1992, the Company initiated a strategy to develop the resources and
capabilities necessary to bring its ISOC product to market. The strategy
involved several acquisitions and an enhancement of certain internal
capabilities. In November 1992, PHP acquired EastWest Research Corporation
("EastWest"), a company specializing in the design and development of provider
networks and physician practice management, and in September 1993, PHP acquired
Health Cost Consultants, Inc. ("HCC"), a health care cost containment and case
management company. In addition, over the past two years PHP actively
recruited and hired additional personnel with managed care experience,
including several former executive employees of Fortune 500 companies and large
insurance companies. Most recently in fiscal 1995, as an essential component
of the ISOC, the Company developed a sophisticated management information
system. This system and related integrated data repository enables physicians,
nurses, hospitals, insurance companies, administrators and others involved in
patient care to share information on a timely basis to better manage outcomes.
The Company believes its investment in this strategy, while costly, is
necessary for the Company to develop successfully into a managed care services
company, and that it was responsible for the success enjoyed by the Company in
being awarded a substantial contract with Blue Cross/Blue Shield of New Jersey
("BCBSNJ"), discussed below.
Blue Cross/Blue Shield of New Jersey
In March 1994, PHP entered into an agreement with BCBSNJ to provide a
complete integrated system of care for beneficiaries in the State of New
Jersey. The project represents New Jersey's first statewide integrated health
care delivery system. The contract requires PHP to design, build and manage
ten family health centers. During January and February 1995, nine centers
became operational. The tenth center will open in the fall of 1995. As part
of the management contract, PHP recruited physicians and other center staff,
developed an integrated referral network of medical and surgical specialists,
and designed the utilization, case management and quality assurance systems.
PHP has overall responsibility for management of the day-to-day operations of
each center, including billing and collections, and the recruitment and
management of the physicians and center support employees.
The contract term is ten years. In certain circumstances, BCBSNJ may
terminate the agreement before the end of the ten year term. These termination
rights include termination for cause, termination upon a change in control of
PHP by a competitor of BCBSNJ, termination upon a change in control of PHP
after which substantially all of PHP's senior management does not remain with
the Company for a certain period of time and termination upon certain material
changes in the material assumptions underlying the contract (including
achievement of certain cost savings by PHP). PHP may terminate the agreement
before the end of the term for cause.
The contract with BCBSNJ is on a cost-reimbursement-plus-fee basis with
participation by the Company in the cost savings experienced by BCBSNJ, in
accordance with certain formulae. The contract provides that over its full
term the fee will gradually decrease while the cost savings participation is
anticipated to increase. Although there can be no assurance that the costs
savings projections will be achieved, the Company believes that the contract
provides substantial opportunity for the Company.
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Chartered Health Plan
In August 1993, the Company acquired D.C. Chartered Health Plan, Inc.
("CHP"), a health maintenance organization ("HMO") serving primarily the
government-assisted Medicaid population in the District of Columbia. CHP
operates primarily through the independent practice association ("IPA") HMO
delivery model in which CHP contracts with individual medical providers and
multi-specialty medical groups to provide health care in facilities not
operated by CHP. In March 1995, CHP began to provide health care services
through a staff model delivery format with the opening of its own 15,000 square
foot health center. This facility has a full-time staff of board certified
family, pediatric, internal medicine, obstetrics and gynecology physicians.
The staff includes nurses, radiology and laboratory technicians, pharmacists,
and medical assistants. The center is also affiliated with specialty care and
in-patient providers. The center improves access for CHP beneficiaries while
improving cost effectiveness. CHP plans on increasing its staff model
capabilities in the future, contingent on increased enrollment. CHP will
continue to further develop and maintain its contracted networks of physicians
and hospitals.
CHP currently has approximately 28,000 enrollees. CHP delivers managed
health care services to Medicaid beneficiaries pursuant to a contract with the
government of the District of Columbia. The contract entitles CHP to a fixed
fee per member and is subject to adjustment based on a final settlement. CHP's
current contract with the District of Columbia extends from October 1, 1994,
through September 30, 1995. CHP serves commercial (non-Medicaid) members by
contracting with employers that offer health benefits to their employees.
Primary Care Family Health Centers
The Company also contracts for the delivery of employer-sponsored health
care at primary care facilities developed by PHP. In late calendar year 1992,
the Company commenced operations on two contracts at two assembly facilities to
provide occupational health care services for Chrysler Corporation employees.
In June 1993, the Company opened two family practice centers in the Tampa-
Clearwater, Florida area for GTE Corporation ("GTE") and one family health
center for Bethlehem Steel Corporation ("Bethlehem") near its Pennsylvania
headquarters. The GTE centers provide primary medical care to approximately
25,000 GTE employees, retirees and their families and the Bethlehem facility
serves approximately 37,000 Bethlehem employees, retirees and their families.
In addition, the Company has developed a network of area medical and surgical
specialists to assist the GTE centers in providing comprehensive care to the
GTE beneficiaries.
In February 1995, PHP commenced operations of a family health center for
Northwestern Steel & Wire Company ("Northwestern") providing medical services
for Northwestern's employees, retirees and dependents in Sterling, Illinois.
PHP also developed an outside provider network of area medical and surgical
specialists and other health care providers for the center.
Pursuant to each of these contracts, PHP was responsible for the design and
construction of the centers and is responsible for management of the centers'
day-to-day operations. These contracts are cost-reimbursement-plus-fee or
fixed rate per labor hour and range in term from two to five years.
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In addition, the Company offers basic, non-emergency health care through
its PrimeCare Center located in Virginia. This center serves the needs of
individual walk-in patients as well as local businesses.
Outpatient Surgery Centers
PHP's initial step beyond the provision of government contract services was
the 1992 acquisitions of outpatient surgery centers through a majority-owned
subsidiary, Paragon Ambulatory Surgery, Inc. ("Paragon"). From 1992 through
early fiscal 1995, Paragon acquired ownership interests in, and was responsible
for the management of five surgery centers. During fiscal 1994, the Company
determined that involvement in the freestanding ambulatory surgery center
market was inconsistent with the Company's long-term commercial managed health
care strategy. Accordingly, in April 1994, the Company sold three of the
surgery centers for $9.3 million and in October 1994 sold the remaining two
centers for $11.75 million.
Government Managed Health Care Services
PHP provides a wide variety of managed health care services under various
contracts with government agencies. Under its government contracts, the
Company provides managed health care services in five service groups:
Ambulatory Care -- outpatient primary care for defined populations; Medical
Staffing -- the recruitment and provision of qualified medical, nursing and
mental health specialists and technicians; Mental Health -- inpatient and
outpatient psychiatric services for certain defined populations; Long-term Care
- -- the management of skilled and intermediate care nursing facilities; and
Total Managed Care -- comprehensive health care programs for defined
beneficiary populations.
Ambulatory Care
PHP provides managed outpatient primary care services for various defined
populations. Included in its Ambulatory Care service group are the PRIMUS and
NAVCARE programs, on-site ambulatory clinics and Affordable Healthcare Clinics.
PRIMUS and NAVCARE. PHP is under contract with the U.S. Departments of the
Army, Navy and Air Force to provide managed outpatient health care services to
military dependents, retired military personnel and their dependents, and in
certain circumstances, active military personnel, as part of the Army and Air
Force PRIMUS programs and the Navy NAVCARE program. PHP established the first
PRIMUS center in 1985 and is the leading provider of these services to the
military. Pursuant to these contracts, the Company designs, equips, staffs and
manages primary care centers which provide a wide variety of medical and
pharmaceutical services to the eligible population. These services include the
provision of physicians, nurses, pharmacists and technical and support staff.
These services are generally provided in Company-owned and Company-operated
facilities consistent with the basic plan of the PRIMUS/NAVCARE program. All
of the Company's PRIMUS and NAVCARE centers meet the standards for
accreditation established for ambulatory care clinics by the Joint Commission
on Accreditation of Healthcare Organizations ("JCAHO"), an independent
commission which conducts voluntary accreditation programs. Centers under
PRIMUS and NAVCARE contracts requiring such accreditation are JCAHO accredited.
The centers provide various preventive services, including physical
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examinations, pharmaceutical products, orthopedic and other medical services,
including minor surgery, for pediatric and adult populations. The PRIMUS and
NAVCARE centers are designed with laboratory and radiology equipment on
location and are open 365 days per year with extended hours Monday through
Friday. All military beneficiaries entitled to receive care at military
treatment facilities are eligible for care at the PRIMUS and NAVCARE centers at
no cost to them.
As of June 30, 1995, the Company leased 7 and owned 4 facilities for its
PRIMUS and NAVCARE centers. The terms of these leases expire from fiscal years
1996 to 1999. The Company will remain obligated under some of the leases and
will own such facilities regardless of the duration or funding of the related
PRIMUS and NAVCARE contracts.
These types of contracts are generally awarded on a unit-price and/or fixed
fee basis. The units of service upon which payments are based are outpatient
visits, with the contractual payment per visit varying depending on the type of
service provided. The fixed fee portion is generally a per month amount to
cover basic operating costs.
On-site ambulatory clinics. During fiscal 1995, PHP also provided
outpatient primary care services to the military at three military locations in
Florida and Virginia. Two of these contracts were completed in July 1994 and
the third was completed in March 1995. The services provided by the Company
and the method of calculating payment to the Company under these contracts were
similar to those under the PRIMUS and NAVCARE contracts.
Affordable Healthcare Clinics. PHP staffed and managed two ambulatory care
clinics providing subsidized family practice health care services to a
population of approximately 25,000 low-income residents lacking health
insurance coverage in Fairfax County, Virginia. Fairfax County contracted with
the Company under a cost-reimbursement-plus-fee contract to provide these
services to qualifying residents. This contract was completed in June 1995.
Medical Staffing
The military has turned to private sector contractors to provide medical
staff and management support to its hospitals. Through its national recruiting
network and program staffing experience, PHP recruits qualified medical,
nursing and mental health specialists and technicians to augment military
health care staff on a long-term basis.
During fiscal 1995, PHP provided staff to render nursing services for wards
in both the Portsmouth Naval Hospital in Virginia and the Madigan Army Hospital
in the state of Washington, social work services for 30 Army bases located in
over nineteen states, and radiology services for Offutt Air Force Base in
Nebraska. These types of contracts are generally awarded on a fixed-rate-labor
hour basis. The Portsmouth contract was completed in July 1994.
Mental Health
Since 1980 PHP provided managed psychiatric services for certain patients
at St. Elizabeth's Hospital in Washington, D.C. under a special program with
the federal government. The Company's multilingual staff provided acute
treatment services for chronic psychiatric patients, involving screening,
evaluation, treatment and rehabilitation. The staff employed behavior
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modification, skill training and cultural acclimation programs to enable
patients to re-enter the community. This program was terminated by the
Government in March 1995.
PHP also staffs and manages, for the South Carolina Department of Mental
Health, the Dowdy Gardner Psychiatric Nursing Care Center for geriatric
patients with chronic medical problems. In addition, the Company staffs and
manages inpatient psychiatric services for the Air Force at Offutt Air Force
Base, and both inpatient and outpatient psychiatric services for the Army at
Fitzsimmons Army Medical Center in Colorado and at Fort Hood in Texas.
These types of contracts are generally awarded on cost-reimbursement-plus-
fee, fixed-price and unit-price bases. The units upon which payment is based
are inpatient beds per day.
Long-term Care
In October 1989, PHP began applying its expertise, gained in providing
skilled nursing and specialty services to geriatric patients, to the field of
long-term care. During fiscal year 1990, the Company began staffing and
managing a new 150 bed skilled and intermediate care nursing facility under a
contract with the Alabama Department of Veterans Affairs. During fiscal 1991,
the Company began staffing and managing a similar 220 bed facility for veterans
under a contract with the South Carolina Department of Mental Health. The
Company believes it is one of only a few private companies working with state
governments to meet the long-term care needs of a rapidly growing population of
military veterans. These types of contracts are generally awarded on a unit-
price basis. The units upon which payment is based are inpatient beds per day.
In August 1994 the Company was selected to manage three skilled and
intermediate care nursing facilities for the Alabama Department of Veteran
Affairs. This contract award included the facility currently managed by the
Company and two other facilities, one with 150 beds, the other with 120 beds.
The term of this contract is three years and the price is on a per inpatient
bed day basis.
Total Managed Care
PHP provides specialized comprehensive managed health care programs for
maximum, medium and minimum security facilities. The Company presently
provides such a program for the Arkansas Department of Corrections under a
unit-price contract. The units upon which payment is based are average number
of inmates per month. This contract was re-awarded to the Company in July 1991
for an initial year with five option years; the price for each of the last four
option years will be negotiated annually. Correctional facilities are complex
and unique environments for delivering medical and mental health care services.
The Company incorporates into its correctional facilities programs its
understanding of how these facilities must be managed and how security and
other special issues affect program design and administration.
Government Contract Backlog
As of April 30, 1994 and 1995, the approximate aggregate amounts of the
remaining portions of the then current terms of the Company's government
contracts and all related renewal options were $300 million and $242 million,
respectively. The 1995 backlog amount includes an estimated amount for the
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last option year of the contract with the Arkansas Department of Corrections,
which has not yet been negotiated. There can be no assurance that the renewal
options under any of the Company's government contracts will be exercised, and
the realization of these potential revenues is dependent upon the ordering of
the estimated contract quantities and a variety of contract and other
contingencies, many of which are beyond the control of the Company. See
"Government Contracting Regulation."
Government Contracting Regulation
During the fiscal year ended April 30, 1995, approximately 50% of the
Company's revenues were derived from 34 separate contracts with various
government agencies to provide health care to various government sponsored
populations. The Company received approximately 33% of its total revenues
under 27 contracts with agencies of the federal government. The approximate
percentages of government contract revenues realized by the Company by type of
revenue were as follows: unit-price contracts, 72%; fixed-price contracts,
13%; cost-reimbursement-plus-fee contracts, 9%; and fixed-rate-labor hour
contracts, 6%. The Company's contracts with government agencies generally
provide for payment by the agencies on a monthly or bi-weekly basis and do not
involve reimbursement to the Company under the Medicare or Medicaid programs or
direct payment to the Company by patients.
The Company's contracts with government agencies are obtained primarily
through the competitive bidding process as governed by applicable federal and
state statutes and regulations. Contracts are generally awarded for a base
period of less than one year and corresponding with the government agency's
fiscal year, having two to four one-year renewals at the option of the
government agency, and are subject to appropriation of funds annually by the
appropriate legislative body. There is, therefore, no assurance that the
Company will be able to retain its contracts or, if retained, that all of such
contracts will be fully funded except through the currently funded period.
Under the competitive bidding process, unsuccessful bidders may protest the
award of a contract to another bidder in accordance with a government appeals
process if they believe the award was improper. Such protests could result in
the rebidding, delay or loss of contracts.
The Company generally performs services under fixed-price, unit-price,
cost-reimbursement-plus-fee and fixed-rate-labor hour contracts. Under fixed-
price contracts, the government agency pays the Company an agreed upon price
for services rendered. Under unit-price contracts, the Company receives a
fixed dollar amount per unit of service provided, intended to cover direct
costs, related indirect costs and fee. Under cost-reimbursement-plus-fee
contracts, the government agency reimburses the Company for allowable costs
incurred and pays the Company a negotiated fixed fee, up to contract funding
amounts. Under fixed-rate-labor hour contracts, the Company receives a fixed
hourly rate intended to cover salary costs, other direct costs, related
indirect costs and fee.
Under fixed-price, unit-price and fixed-rate-labor hour contracts, the
Company realizes benefits or detriments resulting from unanticipated cost
variances. Under unit-price contracts, the Company also realizes benefits and
detriments occasioned by unanticipated variances in unit quantities and
resulting revenues.
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Under the Truth in Negotiations Act, the U.S. Government is entitled for
three years after final payment on certain negotiated contracts or contract
modifications to examine all of the Company's cost records with respect to such
contracts to determine whether the Company furnished complete, accurate, and
current cost or pricing data to the Government in connection with the
negotiation of the price of the contract or modification. The U.S. Government
also has the right after final payment to seek a downward adjustment to the
price of a contract or modification if it determines that the contractor failed
to disclose complete, accurate, and current data.
Section 31 of the Federal Acquisition Regulation governs the allowability
of costs incurred by the Company in the performance of U.S. Government
contracts to the extent that such costs are included in its proposals or are
allocated to its U.S. Government contracts during performance of those
contracts. In the opinion of management of the Company, costs proposed,
incurred, and billed to the U.S. Government in connection with the Company's
performance of its U.S. Government contracts complied with Section 31 of the
Federal Acquisition Regulation in all material respects.
The Company's U.S. Government contracts are subject to possible
termination, reduction or modification as a result of changes to or reductions
in the Government's requirements or budgetary resources. Contracts may be
modified or terminated for the convenience of the U.S. Government at any time
during the term of the contract. If a contract is modified, the price of the
contract would be equitably adjusted to reflect the change or reduction. If a
contract were to be terminated for convenience, the Company would be reimbursed
for its allocable, reasonable and allowable costs incurred through the date of
termination and would be paid a reasonable profit or fee on the work actually
performed. If it is determined that the terminated contract would have been in
a loss position if fully performed, a "loss ratio" will be applied to reduce
the Company's recovery of incurred costs so that the recovery will reflect a
proportionate amount of that anticipated loss. In either event, the Company
would be entitled to recover the costs incurred directly as a result of the
termination of the contracts, such as filing a settlement proposal.
The Company believes that it has complied in all material respects with
applicable government requirements. In certain circumstances in which a
contractor has not complied with the terms of a contract or with regulations or
statutes, the contractor may be debarred or suspended from obtaining future
contracts for a specified period of time. While the Company considers the
possibility of suspension or debarment to be remote, any such suspension or
debarment could have a materially adverse effect upon the Company.
State governments with which the Company contracts have statutory or
regulatory provisions relating to government contracting which are generally
comparable to the U.S. Government.
Other
Health Care Regulation
The health care industry is subject to extensive federal, state and local
regulation. In addition, the agreements under which the Company provides
managed health care services generally require the Company to maintain all
required licenses and permits.
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Among other things, under the laws of a number of states, the Company is
prohibited from practicing or holding itself out as being engaged in the
practice of medicine. In 1994, the Company agreed with the Internal Revenue
Service to treat the licensed physicians with whom it contracts directly to
perform medical services as employees, rather than independent contractors, for
federal employment tax purposes. As a result, the Company has entered into
employment agreements with those physicians. The Company believes that these
agreements do not violate any applicable prohibition against the unlicensed
practice of medicine, and that the Company's operations and those of its
subsidiaries are in compliance in all material respects with applicable health
care regulatory requirements. There can be no assurance, however, that a court
or government agency would not conclude otherwise if the question were to be
presented, which could have an adverse effect on the Company and might require
the Company to restructure its affected operations.
PHP arranges for the provision of health care services to non-government
employers and payors. Certain of the facilities and services provided are
subject to licensing and other regulations. Where the Company is specifically
requested to establish a primary care physician organization on behalf of a
client that does not operate such services directly, PHP obtains the necessary
licenses. Where an employer or payor directly employs physicians, PHP provides
assistance in obtaining necessary licenses.
CHP, a wholly owned subsidiary of the Company, is a health maintenance
organization approved to do business in the District of Columbia as a
contractor under Medicaid. CHP files periodic reports and its operations are
subject to periodic examinations by the District of Columbia.
The Company cannot predict the effect of future changes in federal or state
laws, including changes which may result from proposals for comprehensive
federal health care reform legislation now being considered by the U.S.
Congress, or the impact that changes in existing federal health care reform
legislation now being considered by the U.S. Congress, or the impact that
changes in existing federal or state laws or in the interpretation of those
laws might have on the Company.
Current Developments
The current White House Administration has established the White House Task
Force on National Health Care Reform. Congress has considered and debated a
variety of legislative proposals to change the national health care delivery
system. Although legislative activity has recently subsided, the Company
cannot predict the final outcome of this national health care reform process.
The Company believes, however, that its experience in providing managed primary
care services will enable it to respond to changes in the health care industry.
Employees and Independent Contractors
At June 30, 1995, PHP had approximately 3,000 employees, of which
approximately 2,050 were full time, including 123 management and administrative
personnel at its corporate headquarters.
In December 1993, the Company reached a settlement with the IRS in regard
to an audit of the Company's federal employment tax returns for 1988 and 1989.
In connection with the settlement, the Company changed the classification of
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certain physician independent contractors to that of employees beginning
January 1994.
The physicians and the Company are subject to potential liability with
respect to medical malpractice claims. In addition, the Company's contracts
generally require the Company to indemnify the government agency for losses
resulting from any physician's negligence. The Company maintains medical
malpractice insurance covering the physicians, the Company and its agents and
employees in amounts it believes adequate based on historical claims and the
nature and risks of the Company's business. There can be no assurance that a
future claim or claims will not exceed the limits of available insurance
coverage or that such coverage will continue to be available.
Key Management
The Company's success in its business depends on the skills and efforts of
its senior management, some of whom would be difficult to replace. In 1992 the
Company entered into employment agreements with Charles H. Robbins, President
and Chairman of the Board, Jack M. Mazur, Senior Executive Vice President, and
Michael D. Starr, Executive Vice President and Treasurer. These contracts were
originally for a term of two years, renewable automatically at the end of each
year thereafter. The contracts are currently in effect to May 1996. The
Company is the beneficiary of five key-man life insurance policies on Mr.
Robbins and Mr. Mazur in the total amount of $4.25 million.
Competition
The Company has numerous competitors who compete with the Company for
contracts to provide health care services to federal, state and local
government agencies and to employers and others in the private sector. The
competition for a particular contract may consist of national, regional and/or
local providers, depending on the type of health care services involved. A
number of these firms are larger and have greater financial resources and
larger technical staffs than the Company. Federal, state and local government
agencies also can be considered to be in competition with the Company, in that
they may provide services of a similar nature to those provided by the Company.
It is not possible to predict the extent of competition which present or future
activities of the Company will encounter because of changing competitive
conditions, government requirements, government budgeting, technological
developments and other factors. Management believes the principal competitive
factors for the type of services provided by the Company are quality,
responsiveness, experience, ability to perform within estimated time and
expense limits and pricing.
The Company cannot predict the future course of pending federal and state
health care reform initiatives or their effect on the Company's competitive
position.
Item 2. Properties
As of June 30, 1995 the Company leased facilities for the provision of
medical services at 22 locations in seven states covering an aggregate of
approximately 106,000 square feet of space. The leases expire at various dates
from fiscal years 1996 to 1999.
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In addition to leased facilities, the Company owns seven parcels of real
property on which it has constructed facilities to provide contracted services.
These facilities are located in six states and cover an aggregate of
approximately 67,000 square feet. All properties are subject to mortgages
related to the Company's primary credit agreement. See Note 5 of Notes to
Consolidated Financial Statements.
All of the clinic facilities are modern and well maintained. The Company
considers these facilities to be adequate for carrying out its contract
requirements and commercial business.
In May 1993, the Company purchased an office building in Reston, Virginia
for approximately $12 million. The building contains approximately 165,000
square feet of rentable commercial office space of which 113,000 square feet
was under lease at the time of purchase. The Company is utilizing a portion of
the available office space for consolidation of its corporate operations. In
July 1994, the Company sold the Reston, Virginia building for approximately
$14.8 million. In conjunction with the sale, the Company signed a fifteen year
lease for 55,000 square feet of space in the building. The Company completed
its relocation to Reston in August 1994 and has sublet the former corporate
offices in Alexandria, Virginia. See Note 9(c) of Notes to the Consolidated
Financial Statements.
The Company acquired a 19,000 square foot building in San Diego, California
intended, at the time of purchase, for use in provision of contracted services.
The Company no longer has the contractual requirement for this site. In
February 1995, the Company leased the building over a five-year period ending
in June 2000.
See Note 11(a) of Notes to Consolidated Financial Statements for
information concerning the Company's lease rental obligations.
Item 3. Legal Proceedings
The Company is a defendant in various legal proceedings incidental to its
business, including actions involving medical malpractice claims, employment
matters and contractual arrangements. In the opinion of management, after
consultation with counsel, these proceedings will not have a material adverse
effect on the Company's financial position, results of operations or cash
flows. See Note 11(c) of Notes to the Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information as of the date hereof with
respect to the Company executive officers. Pursuant to their employment
agreements with the Company as extended by the Board of Directors, Messrs.
Robbins, Mazur and Starr will serve in the capacities indicated through
April 30, 1996. Messrs. Picini and Lavoie have been appointed to terms which
will expire at the annual meeting of the Board of Directors held immediately
after the 1995 Annual Meeting of Shareholders, or until their successors are
<PAGE> 13
duly elected and qualified. Pursuant to his employment agreement, John P. Cole
will serve as Executive Vice President until September 1996.
<TABLE>
<CAPTION>
Continuously
Positions or Offices Served as Executive
Name with the Company Officer Since Age
- ------------------ -------------------------------- -------------------- ---
<C> <C> <C> <C>
Charles H. Robbins President and Chairman of 1976 64
the Board
Jack M. Mazur Senior Executive Vice 1976 53
President and Director
Michael D. Starr Executive Vice President, 1981 51
Treasurer and Director
Anthony M. Picini Senior Vice President, Finance 1990 40
and Chief Financial Officer
Julien J. Lavoie Senior Vice President and 1991 63
Director
John P. Cole Executive Vice President 1994 54
</TABLE>
Anthony M. Picini joined the Company in December 1989 as Chief Financial
Officer and became Vice President Finance in 1990, and Senior Vice President
Finance in 1993. Prior to joining the Company, Mr. Picini was a Senior Manager
with the accounting firm of KPMG Peat Marwick LLP, managing auditing and
accounting services provided to public and private commercial companies.
John P. Cole is Executive Vice President of the PHP Healthcare with
responsibility of marketing the Company's managed health care products and
services. Previously, he was President and Chief Executive Officer of JP Cole
& Associates which exclusively marketed PHP products and services. JP Cole &
Associates was merged into PHP Healthcare in October 1994. Mr. Cole is a 30-
year veteran of the employee benefits field having held senior executive
positions with Prudential, AMI, Blue Cross of California, and Lincoln National
Corporation. Prior to starting JP Cole & Associates in 1993, Mr. Cole was
Senior Vice President at Aetna Health Plans where he had responsibility for
both sales and delivery of health care in markets across the United States.
Information concerning Messrs. Robbins, Mazur, Starr and Lavoie under the
heading "Election of Directors" in the Company's 1995 Proxy Statement is hereby
incorporated by reference as if set forth in full.
<PAGE> 14
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
On August 17, 1992, the Company's Common Stock began trading on the New
York Stock Exchange under the symbol "PPH". Prior thereto, the stock was
traded on the National Association of Securities Dealers Automated Quotation
("NASDAQ") National Market System under the symbol "PHPH". The following table
sets forth, for the periods indicated, the high and low sales prices of the
Common Stock as reported on the New York Stock Exchange.
<TABLE>
<CAPTION>
Fiscal Year Ended High Low
- ---------------------------------------------------- ---------- ----------
<S> <C> <C>
April 30, 1996
First Quarter
(through June 30, 1995). . . . . . . . . . . . 21 3/4 16 5/8
April 30, 1995
Fourth Quarter . . . . . . . . . . . . . . . . 20 3/8 9 3/4
Third Quarter. . . . . . . . . . . . . . . . . 12 1/8 9 5/8
Second Quarter . . . . . . . . . . . . . . . . 12 5/8 9
First Quarter. . . . . . . . . . . . . . . . . 13 3/8 8 3/4
April 30, 1994
Fourth Quarter . . . . . . . . . . . . . . . . 11 1/8 7 3/8
Third Quarter. . . . . . . . . . . . . . . . . 8 1/2 5 7/8
Second Quarter . . . . . . . . . . . . . . . . 8 1/4 5 5/8
First Quarter. . . . . . . . . . . . . . . . . 9 7/8 5 1/4
</TABLE>
As of June 30, 1995, there were approximately 950 holders of record of
the Company's Common Stock. Based on a review of its nominee account listings,
the Company estimates it has approximately 4,700 beneficial owners.
The Company has never paid cash dividends on its Common Stock and does
not expect to do so in the foreseeable future. The Company intends to retain
all earnings to provide funds for the operation and expansion of its business.
The Company's bank credit agreement precludes the payment of cash dividends
without the bank's approval.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below with respect
to the Company's consolidated statements of operations and balance sheets is
derived from the Consolidated Financial Statements of the Company as audited by
Coopers & Lybrand, LLP, independent accountants, for the year ended April 30,
1995 and KPMG Peat Marwick LLP, independent public accountants for the prior
four years, and gives retroactive effect to the one-for-four split of the
Common Stock in the form of a 25% stock dividend distributed on February 25,
1991 to holders of record on February 11, 1991. The data presented below
should be read in conjunction with and is qualified by reference to the
<PAGE> 15
Consolidated Financial Statements of the Company and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See Items 7 and 8.
<TABLE>
<CAPTION>
Year Ended April 30,
1991 1992 1993 1994 1995
(In thousands, except per share amounts)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . $ 95,323 $117,790 $126,026 $148,683 $204,131
Direct costs . . . . . . . . . . . . . . . . . . . . 79,958 100,813 116,840 140,397 182,053
--------- --------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . 15,365 16,977 9,186 8,286 22,078
General and administrative expenses. . . . . . . . . 8,293 10,093 13,201 16,936 19,660
--------- --------- --------- --------- ---------
Operating income (loss). . . . . . . . . . . . . 7,072 6,884 (4,015) (8,650) 2,418
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . (1,061) (283) (1,071) (3,288) (2,209)
Interest income. . . . . . . . . . . . . . . . . -- 409 74 186 422
Miscellaneous income (expense) . . . . . . . . . 139 25 (325) (504) 1,015
Minority interest in earnings (losses)
of subsidiaries. . . . . . . . . . . . . . . . -- 39 (225) (213) (159)
--------- --------- --------- --------- ---------
Earnings (loss) before income taxes. . . . . . . 6,150 7,074 (5,562) (12,469) 1,487
Income tax expense (benefit) . . . . . . . . . . . . 2,415 2,807 (1,806) (3,135) 535
--------- --------- --------- --------- ---------
Net earnings (loss). . . . . . . . . . . . . . . $ 3,735 $ 4,267 $ (3,756) $ (9,334) $ 952
========= ========= ========= ========= =========
Net earnings (loss) per common share:
Primary. . . . . . . . . . . . . . . . . . . . . $ .89 $ .85 $ (.75) $ (1.85) $ .17
========= ========= ========= ========= ========
Fully diluted. . . . . . . . . . . . . . . . . . $ .88 $ .85 $ (.75) $ (1.85) $ .16
========= ========= ========= ========= ========
Weighted average number of common
shares outstanding:
Primary. . . . . . . . . . . . . . . . . . . . . 4,216 5,043 4,998 5,043 5,613
========= ========= ========= ========= ========
Fully diluted. . . . . . . . . . . . . . . . . . 4,230 5,043 4,998 5,058 5,955
========= ========= ========= ========= ========
Balance Sheet Data:
Working capital. . . . . . . . . . . . . . . . . . . $ 7,949 $ 15,677 $ 20,753 $ 7,736 $ 15,422
Total assets . . . . . . . . . . . . . . . . . . . . 32,639 55,742 73,821 87,111 71,150
Short-term debt. . . . . . . . . . . . . . . . . . . 3,335 2,526 4,283 4,589 2,247
Long-term debt . . . . . . . . . . . . . . . . . . . 8,459 7,414 28,888 39,643 24,454
Stockholders' equity . . . . . . . . . . . . . . . . 9,797 32,626 25,733 17,296 20,328
</TABLE>
<PAGE> 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
In fiscal 1995 the Company achieved parity between its Government and
Commercial Managed Health Care Service revenues after having been a 98%
Government business as recently as fiscal 1992.
Revenues from the Commercial Managed Health Care Services division have
grown to $102.2 million or 50% of total revenues from $1.3 million or 1% of
total revenues in 1992. Operations in this division consist of: (1) the
Company's wholly owned subsidiary, D.C. Chartered Health Plan, Inc., which
operates an HMO in the District of Columbia, serving primarily the government
assisted Medicaid population, (2) the Company's project with Blue Cross Blue
Shield of New Jersey ("BCBSNJ") to operate ten family health centers, manage
and maintain an integrated network of specialists, and provide utilization and
case management, and (3) family health centers which are operated either on a
contract basis for large employers or on a commercial walk-in basis. This
division also includes the ambulatory surgery centers previously managed
through a majority owned subsidiary, Paragon Ambulatory Surgery, Inc.
("Paragon"). In April 1994 the Company sold three of its outpatient surgery
centers and in September 1994 sold the remaining two centers. Management
determined that these centers were inconsistent with the Company's long-term
commercial strategy.
Revenues from the Government Managed Health Care Service division have
decreased slightly from a peak of $116.4 million in 1992 to $101.5 million in
1995. The Company provides health care services to government agencies across
a diverse scope of service groups including ambulatory care, medical staffing,
mental health, long-term care, and total managed care. Government health care
services have become increasingly price competitive as the government moves
toward increased privatization of services and attempts to reduce spending.
In addition, Department of Defense health care services are increasingly bid in
larger regional contracts for an expanded scope of services.
Revenues from the operations of the Reston, Virginia office building
acquired in May 1993 and sold in July 1994 are included as Other revenue.
The Company's revenues have almost doubled from $118 million in 1992 to
$204 million in 1995. Gross profit margins decreased to 7% and 6% in 1993 and
1994, respectively, from 14% in 1992. In 1995, the gross profit margin was
11%. The decreased gross profit margins in 1993 and 1994 were due to increased
competition for the Company's government contracts and certain other events in
1993 and 1994. The Company earned net income of $952,000 in 1995 after net
losses of $3.8 million and $9.3 million in 1993 and 1994, respectively. The
1993 and 1994 losses were due to the decrease in gross profits, increased
business development costs related to commercial business efforts, increased
corporate support staff costs, government contract proposal activity costs,
increased interest expense resulting from various acquisitions and capital
expenditures to meet operational needs, and certain other significant
nonrecurring events.
The Company expects that gross profits will continue to increase in fiscal
1996 although not as significantly as the increase from 1994 to 1995. The
anticipated improvement is based on CHP's expanding enrollment and favorable
new contract with the District of Columbia, and the continuation of the
<PAGE> 17
operational phase of the BCBSNJ project under which the Company began providing
health care services in January 1995.
CHP, the Company's wholly owned health maintenance organization, earns
substantially all of its revenue under a prepaid Medicaid contract with the
D.C. Department of Human Services (DCDHS) to provide health care services to
the Medicaid recipients of the District of Columbia. The Medicaid program is
jointly funded by the District of Columbia and the Health Care Finance
Administration (HCFA) of the Department of Health and Human Services (HHS).
Under a three-year contract ended September 30, 1994, interim payments were
provided on an enrollment basis with a final settlement at the end of the
contract period, subject to a defined upper payment limit as determined by
HCFA. Final settlement with DCDHS and HCFA is subject to an audit of CHP's
activities. The Company believes final settlement should result in amounts due
the Company at April 30, 1995 in excess of $20 million, which is expected to be
lower than the actual upper payment limit. Due to the complexity inherent in
the contract and the definition of the settlement process as provided for in
the contract, the Company has recorded amounts due under the contract of $6.7
million and $8.0 million at April 30, 1994 and 1995, which represents the
Company's conservative interpretation of amounts due under the contract. The
Company believes that final settlement will occur during fiscal 1996. In
addition, proposed congressional legislation is pending which upon passage
would, in management's opinion, result in a retroactive entitlement of the full
recovery of the settlement receivable.
Effective October 1, 1994, CHP entered into a new one-year contract with
DCDHS. CHP receives capitation payments for the inpatient services under the
risk portion of the contract. Additionally, CHP receives interim payments with
an annual final settlement for the other services under the non-risk portion of
the contract. At April 30, 1995, CHP recorded accounts receivable of $1.9
million, for the difference between what was due under the contract versus what
was received. Final settlement of amounts due under this contract is subject
to an audit of the Company's activities by DCDHS.
The following table sets forth, for the periods indicated, certain items in
the Company's Consolidated Statements of Operations as a percentage of
revenues:
<TABLE>
<CAPTION>
Fiscal Year Ended April 30
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues 100% 100% 100%
Direct costs 93 94 89
Gross profit 7 6 11
General and administrative expenses 10 12 10
Operating income (loss) (3) (6) 1
Net earnings (loss) (3) (6) 1
</TABLE>
<PAGE> 18
Results of Operations
Fiscal Year 1995 Compared to Fiscal Year 1994
The following table indicates revenues by the Company's service divisions
and the related percentage of total revenues:
<TABLE>
<CAPTION>
1994 1995
------------------ ------------------
Revenues % of Revenues % of
Division (000's) Total (000's) Total
- --------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Government Managed Health Care Services $102,248 68.8 $101,455 49.7
Commercial Managed Health Care Services 43,204 29.0 102,220 50.1
Other Revenue 3,231 2.2 456 0.2
-------- -------- -------- --------
Total $148,683 100.0 $204,131 100.0
======== ======== ======== ========
</TABLE>
The Company's revenues increased by 37% or $55 million, to $204 million in
fiscal 1995 compared to $149 million in fiscal 1994. This growth was almost
entirely due to the Commercial Managed Health Care Services division.
Commercial Managed Health Care Services division revenue more than doubled
from $43.2 million for the year ended April 30, 1994 to $102.2 million for the
year ended April 30, 1995, an increase of $59 million. This substantial
increase in revenue occurred through an acquisition and the commencement of new
projects. The BCBSNJ project generated 58% of the division's revenue growth.
During 1995, the Company completed the pre-operational and construction phases
of the BCBSNJ contract and in January and February 1995 commenced operation of
nine community-based health care centers and related ISOC services. The
Company expects that the BCBSNJ fiscal 1996 revenues will be less than the
amounts recognized in fiscal 1995 due to $30 million of non-recurring
construction and pre-operational revenues in 1995. CHP provided 41% of the
revenue growth in the Commercial Managed Health Care Services division. This
growth was primarily due to twelve months of operations in fiscal 1995 versus
only eight months of operations in fiscal 1994, beginning with its acquisition
in August 1993. CHP's revenue also increased due to a favorable new contract
with the District of Columbia which commenced in October 1994 and an expansion
of membership enrollment. Additional revenue increases resulted from expanded
utilization at existing primary care projects and the commencement of
operations at a new project for Northwestern Steel and Wire. Offsetting these
revenue increases was a decrease in revenue, resulting from the sale of three
outpatient surgery centers in April 1994 and the remaining two outpatient
surgery centers in September 1994.
Government Managed Health Care Services division revenue decreased
marginally by 1% from $102.2 million in 1994 to $101.5 million in 1995. This
flat level of revenue was attributable to offsetting increases and decreases.
Revenue increases were due to: (1) an expanded inmate population and increased
contract rate with the Arkansas Department of Corrections, (2) a non-recurring
<PAGE> 19
write-off of $3.1 million in fiscal 1994 resulting from actual costs being
greater than expected, and (3) a contractual expansion of services at an
existing PRIMUS project. Revenue decreases resulted from the completion of
several contracts including a large Medical Staffing contract completed in July
1994, three On-Site Ambulatory contracts completed throughout fiscal 1995, and
a large Mental Health project completed in March 1995.
Other revenue consisted of the operations of the Reston, Virginia office
building which was acquired in May 1993 and sold in July 1994. Operational
revenues associated with this building decreased from $3.2 million to $456,000
in 1994 and 1995, respectively.
The Company's gross profit increased by $13.8 million, almost tripling from
$8.3 million in 1994 to $22.1 million in 1995. This increase was due to
significant improvement in both the Government and Commercial Managed Health
Care Services divisions.
The Commercial Managed Health Care Services division gross profit increase
was almost entirely attributable to CHP. CHP's gross profit improvement
resulted from a favorable new contract with the District of Columbia which
commenced in October 1994 and an expansion in enrollment. A decrease in gross
profit resulted from the sale of three outpatient surgery centers in April 1994
and the remaining two centers in September 1994.
The Government Managed Health Care Services division gross profit increased
in 1995 for two reasons. First, the Company incurred two large write-offs in
fiscal 1994 that were non-recurring. One write-off of $2.1 million related to
a PRIMUS contract with the Army. This contract was modified in fiscal 1995 and
currently operates at a modest profit. The Company continues to pursue an
equitable claim adjustment with the Federal Government for $1.9 million related
to this contract. The second write-off of $3.1 million related to two long-
term care nursing home contracts. This write-off was prompted by lower than
anticipated margins as one of the facilities reached full utilization, an
anticipated rate increase at one facility that did not materialize, and actual
costs in excess of previous estimates. The Company did not experience similar
write-offs in fiscal 1995. The second reason for the gross profit increase in
1995 compared with 1994 is an overall decrease in costs at the Company's
PRIMUS/NAVCARE projects. During 1995, the Company experienced improved cost
control in part resulting from the reduction of services to more properly match
the explicit contract requirements. In addition to the increases discussed
above, the Government Managed Health Care Service division gross profits
decreased due to the completion of a large Medical Staffing project in July
1994.
General and administrative ("G & A") expenses increased 16% or $2.7
million, to $19.6 million for fiscal 1995 from $16.9 million for fiscal 1994.
This increase is predominantly a function of the Company's initiatives in the
Commercial Managed Health Care Service division and is due to: (1) twelve
months of G & A expenses associated with CHP in fiscal 1995, compared with only
eight months in fiscal 1994, and (2) increased corporate salary costs related
to both the hiring of additional managed health care professionals in
conjunction with the Company's commercial market initiatives and the expansion
of support service personnel.
Interest expense decreased 33%, or $1.1 million, to $2.2 million in 1995
from $3.3 million in 1994. This decrease is primarily a function of the
decrease in the Company's long-term debt resulting from the sale of three
outpatient surgery centers in April 1994, the sale of the Reston office
<PAGE> 20
building in July 1994, and the sale of the remaining two outpatient surgery
centers in September 1994.
Miscellaneous income and expense changed by $1,519,000 from an expense of
$504,000 in 1994 to income of $1,015,000 in 1995. This increase is the net
result of a few large income and expense items in fiscal 1995. Included in the
fiscal 1995 amount is an expense or loss amount of $750,000 related to the
sublease of the Company's former headquarters facility in Alexandria Virginia,
an income amount of $650,000 related to the removal of a valuation allowance
which had been established in fiscal 1994 related to receivables from officers,
an income amount of $540,000 related to the removal of a valuation allowance
against a note receivable from a tenant in the Reston, Virginia building, and a
gain amount of $340,000 related to the sale of the remaining two outpatient
surgery centers.
The effective income tax rates of 36% in fiscal 1995 and 25% in 1994
represent the combined federal and state income tax rates adjusted as
necessary. The 1994 income tax rate is less than the 1995 income tax rate
primarily as a result of a valuation allowance relating to certain deferred tax
assets.
The Company earned net income of $952,000 in 1995 compared with a net loss
of $9.3 million in 1994, resulting in primary earnings per share of $0.17 in
1995 ($0.16 fully diluted), compared with a primary and fully diluted loss of
$1.85 per share in 1994.
Fiscal Year 1994 Compared to Fiscal Year 1993
The following table indicates revenues by the Company's service divisions
and the related percentage of total revenues:
<TABLE>
<CAPTION>
1993 1994
------------------ ------------------
Revenues % of Revenues % of
Division (000's) Total (000's) Total
- --------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Government Managed Health Care Services $117,409 93.2 $102,248 68.8
Commercial Managed Health Care Services 8,617 6.8 43,204 29.0
Other Revenue -- -- 3,231 2.2
-------- -------- -------- --------
Total $126,026 100.0 $148,683 100.0
======== ======== ======== ========
</TABLE>
The Company's revenues increased 18% to $149 million in 1994 compared with
$126 million in 1993. This overall growth largely resulted from significant
growth in the Managed Health Care Services division revenues.
Commercial Managed Health Care Services division revenue increased five
fold from approximately $8.6 million in 1993 to approximately $43.2 million in
1994. This substantial increase in revenues occurred through acquisitions and
<PAGE> 21
the commencement of new projects. During 1994, the Company acquired CHP,
Health Cost Consultants, Inc. (HCC) and an outpatient surgery center. CHP
provided approximately two-thirds of the revenue growth since its acquisition
in August 1993. Additionally, the Company commenced 2 new projects in June
1993, management of two family health centers for GTE Corporation and one
family health center for Bethlehem Steel Corporation. Also, in May 1994 PHP
established a walk-in family health center at the site of a former PRIMUS
clinic.
Government Managed Health Care Services division revenue decreased by 13%
to $102 million. Substantially all of this net decrease resulted from the
completion of four PRIMUS/NAVCARE contracts. In addition, the eleven re-
awarded projects have reduced contractual rates. Additional decreases in
revenue include: (1) a significant permanent reduction in the utilization of
services on an Army Hospital nurse staffing contract, (2) decreased revenues on
two long-term care nursing home projects resulting from actual costs being
greater than expected, and (3) a decrease in utilization of services on a Navy
Hospital nurse staffing contract which expired in early fiscal 1995. The
Company was not awarded the follow-on contract. The impact of these revenue
decreases was somewhat offset by increases in revenue from an increased inmate
population and contract price on the Company's contract with the Arkansas
Department of Corrections, increased utilization of services on the Company's
two affordable health care clinics, increased utilization of services on one
mental health project and an expansion of services on another mental health
project.
Other Revenue consisted of the operations of the Reston, Virginia office
building acquired in May 1993. This building was sold in July 1994.
PHP's gross profit decreased 10% to $8.3 million in 1994, compared to $9.2
million in 1993. This decrease is a net result of significant increases in the
Commercial Managed Health Care Services division and significant decreases in
the Government Managed Health Care Services division.
A little over one-half of the increase in gross profit in the Commercial
Managed Health Care Services division was due to PHP's newly acquired
subsidiary, CHP. Commercial Managed Health Care Services gross profits also
increased due to: (1) the acquisition of an additional outpatient surgery
center in May 1993, (2) the GTE Corporation and Bethlehem Steel Corporation
family health centers which became operational in June 1993, and (3) the
managed care consulting services contract started and completed in fiscal 1994.
Also, in fiscal 1993 the Company incurred a direct cost write-off related to a
project to assist in the development of a direct health care delivery system
which upon contract finalization was not reimbursed to the Company. In
addition, Commercial Managed Health Care Services gross profits were adversely
affected by the operation of three walk-in family health centers which were
operated at the sites of former PRIMUS contract sites. Because of the losses
incurred, two of these locations were closed down within five months of
conversion; the third continues to operate as it has currently achieved its
break-even point.
The Government Managed Health Care Services division gross profit decreased
substantially due to three major reasons. First, during fiscal 1994 the
Company earned significantly less gross profit from its PRIMUS/NAVCARE
contracts. This occurred because: (1) four contracts were completed early in
fiscal 1994; (2) the contractual rates on the eleven projects the Company was
re-awarded were reduced from prior levels; and (3) the Company experienced
higher labor, pharmaceutical, and other medical services costs in the operation
<PAGE> 22
of these contracts compared with the prior year. Secondly, the Company
reported less gross profit on two long-term care nursing home contracts due to
lower than anticipated margins as one of the facilities became fully utilized,
the absence of an anticipated rate increase at one facility, and actual costs
in excess of amounts previously estimated. These adjustments resulted in
write-offs in the fourth quarter of fiscal 1994 of $3.1 million and should not
recur in the future. Lastly, the Company wrote down an account receivable and
established a contract loss provision amounting in total to $2.1 million during
the fourth quarter on a PRIMUS contract. This contract was re-awarded to the
Company in late fiscal 1993 and has been serving a population with a
substantially different demographic mix than the assumptions used to compete
for the contract award. The Company is pursuing an equitable claim adjustment
of approximately $1.9 million with the Federal Government for the additional
costs incurred. The Company is negotiating with the Army to change the
contract on a prospective basis.
The Other Service division gross profit resulted from the operations of the
Company's building in Reston, Virginia. This gross profit included a one-time
gain on lease termination of approximately $1,046,000. Subsequent to year end,
in July 1994 the Company sold this building. See Note 9 of Notes to
Consolidated Financial Statements.
General and administrative expenses increased to $16.9 million in 1994
compared to $13.2 million in 1993. This increase is largely a function of the
Company's managed health care service initiatives and is due to: (1) G & A
expenses associated with CHP, acquired in August 1993, (2) increased corporate
salary costs related to the hiring of additional managed health care
professionals in conjunction with the marketing of the Company's integrated
systems of care, and (3) increased corporate salary costs due to the expansion
of support service personnel.
The Company had an operating loss of $8.6 million in 1994, compared to an
operating loss of $4.0 million in 1993. This decrease was the net result of
decreases in gross profit margin and increases in G & A discussed above.
Interest expense increased to $3.3 million in 1994 compared to $1.1 million
in 1993. This increase was due to an increase in the interest rate on the
Company's primary banking agreement from approximately 4.4% at April 30, 1993,
to 7.75% at April 30, 1994. In addition, the Company incurred interest expense
in 1994 related to the approximately $10 million in nonrecourse debt associated
with the purchase of the office building in Reston, Virginia in May 1993.
Also, the Company's interest expense increased due to higher outstanding debt
amounts in 1994 compared with 1993 associated with certain investments the
Company made beginning in fiscal 1994 in the acquisition and development of
property and equipment at several project sites.
The effective income tax rates of 25% in 1994 and 33% in 1993 represent the
combined federal and state income tax rates adjusted for nondeductible and
nontaxable items. The 1994 income tax rate is less than the 1993 income tax
rate primarily as a result of a valuation allowance relating to certain
deferred tax assets. In the states where the 1994 loss is not allowed to be
carried back these losses can be utilized on a carryforward basis.
The Company incurred a net loss of $9.3 million in 1994, compared to a net
loss of $3.8 million in 1993, resulting in a net loss per share of $1.85 in
1994, compared with a net loss per share of $0.75 in 1993.
<PAGE> 23
Liquidity and Capital Resources
Typically, the Company's principal sources of funds are operations and bank
borrowings.
During the year ended April 30, 1995, operations used $3.9 million in cash.
This represents an increase in cash used by operations of $3.4 million compared
with the $500,000 used by operations in the prior year. In general, the
increase in cash used by operations is a result of an increase in accounts
receivable related to the BCBSNJ contract and the CHP contracts with DCDHS.
The Company's number of days revenue in average outstanding receivables was
41 days in 1995 and 49 days in 1994. This improvement is a result of changes
in the Company's mix of business, specifically certain commercial revenues that
are on a prepaid basis.
In July 1994, the Company, through a wholly owned subsidiary, sold its
office building in Reston, Virginia for a gross sales price of approximately
$14.8 million. Using the proceeds from the sale, the Company paid in full the
related non-recourse mortgage notes of approximately $9.4 million and made an
advance payment of $2 million on the Company's $15 million term note with its
primary bank.
In September 1994, the Company sold the remaining two of its outpatient
surgery centers for $11.75 million in cash. As part of the sale, the
purchasers assumed approximately $5 million in existing related notes payable.
Using the proceeds from this sale, the Company made an advance payment in
October 1994, of $5 million on the $15 million term note with its primary bank.
In April 1995, the Company increased its available borrowings under its
revolving promissory note up to $22 million with its primary bank. In
conjunction with this increase, certain of the financial covenants were
restructured.
The Company believes that the current cash equivalents, anticipated cash
flow generated by operations and expanded borrowing capabilities will be
sufficient for known future capital needs of the Company. There may be,
however, further expansion opportunities which require additional external
financing and the Company may, from time to time, consider obtaining such funds
through the public and private issuance of equity or debt securities.
Impact of Inflation
Inflation is considered in all contract proposals with contract terms in
excess of one year. The consideration of inflationary factors is particularly
important with respect to unit-price, fixed-rate-labor hour, and fixed-price
contracts. Historically, inflation has not had a significant impact of the
operations of the Company. While health care costs nationally are increasing,
the Company's primary exposure relating to this trend has been related to
salaries of health care professionals and costs of pharmaceuticals which the
Company estimates and prices into all of its long term contracts. The Company
believes that only one of its existing contracts could be significantly
impacted by other inflationary health care trends. The Company may however
become involved in future contracts where inflation and increasing health care
costs may be an important factor.
<PAGE> 24
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Schedule
Page
----
Consolidated Financial Statements
Report of Independent Accountants - Year ended April 30, 1995. . . . . . . . 25
Independent Auditors Report - Years ended April 30, 1993 and 1994. . . . . . 26
Consolidated Balance Sheets, April 30, 1994 and 1995 . . . . . . . . . . . . 27
Consolidated Statements of Operations,
Years Ended April 30, 1993, 1994 and 1995 . . . . . . . . . . . . . . . 29
Consolidated Statements of Stockholders' Equity,
Years Ended April 30, 1993, 1994 and 1995 . . . . . . . . . . . . . . . 30
Consolidated Statements of Cash Flows,
Years Ended April 30, 1993, 1994 and 1995. . . . . . . . . . . . . . . . . 31
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 33
Consolidated Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts,
Years ended April 30, 1993, 1994 and 1995. . . . . . . . . . . . . . . . . 55
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
PHP Healthcare Corporation:
We have audited the consolidated financial statements and the financial
statement schedule of PHP Healthcare Corporation and subsidiaries as of
April 30, 1995 and for the year then ended, as listed in the index on page 24
of this Form 10-K. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PHP
Healthcare Corporation and subsidiaries as of April 30, 1995 and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. In addition, in our opinion,
the financial statement schedule for the year ended April 30, 1995, referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Washington, D.C.
July 6, 1995
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHP Healthcare Corporation:
We have audited the consolidated balance sheet of PHP Healthcare Corporation
and subsidiaries as of April 30, 1994, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the years in
the two-year period ended April 30, 1994. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as of and for the years ended April 30,
1993 and 1994 as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PHP
Healthcare Corporation and subsidiaries at April 30, 1994, and the results of
their operations and their cash flows for each of the years in the two-year
period ended April 30, 1994, in conformity with generally accepted accounting
principles. Also in our opinion the related financial statement schedule, when
considered in relation to the basic financial statements, taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in Notes 1 and 6 to the consolidated financial statements, the
Company adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", in
fiscal year 1994.
KPMG Peat Marwick LLP
Washington, D.C.
September 12, 1994
<PAGE> 27
<TABLE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1994 and 1995
(In thousands, except share data)
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,370 $ 1,178
Accounts receivable, net (note 3). . . . . . . . . . . . . . . . . . . . . . . . . . 18,915 24,537
Contract settlement receivable, net (note 3) . . . . . . . . . . . . . . . . . . . . 6,700 8,022
Pharmaceutical and medical supplies. . . . . . . . . . . . . . . . . . . . . . . . . 1,537 1,089
Receivables from officers (note 10). . . . . . . . . . . . . . . . . . . . . . . . . 1,586 2,912
Income tax receivable (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,332 592
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,689 2,099
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,129 40,429
Property and equipment, net (note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . 37,431 23,096
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $1,244 in 1994 and $810 in 1995 (note 9) . . . . . . . . . 12,109 3,092
Deferred income taxes (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,125
Receivables from officers, net (note 10) . . . . . . . . . . . . . . . . . . . . . . . . -- 885
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,442 2,523
-------- --------
$87,111 $71,150
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable to banks (note 5). . . . . . . . . . . . . . . . $ 2,534 $ 1,368
Current maturities of notes payable - other (note 5) . . . . . . . . . . . . . . . . 2,055 879
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,944 6,405
Claims payable - medical services. . . . . . . . . . . . . . . . . . . . . . . . . . 6,388 6,000
Accrued salaries and benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,374 8,129
Deferred income taxes (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,507
Billings in excess of costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,098 719
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,393 25,007
Notes payable to banks, net of current maturities (note 5) . . . . . . . . . . . . . . . 36,469 23,280
Notes payable - other, net of current maturities (note 5). . . . . . . . . . . . . . . . 3,174 1,174
Deferred gain on sale of building (note 9) . . . . . . . . . . . . . . . . . . . . . . . -- 1,085
Deferred lease obligation (note 11). . . . . . . . . . . . . . . . . . . . . . . . . . . 207 272
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,243 50,818
-------- --------
Minority interest (note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,572 4
-------- --------
(Continued)
<PAGE> 28
Stockholders' equity (notes 7, 8, 9 and 10):
Preferred stock, $.01 par value, 500,000 shares authorized, none issued. . . . . . . -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
7,070,851 and 7,073,351 shares issued in 1994 and 1995, respectively . . . . . . . 71 71
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,793 29,443
Note receivable from sale of stock (note 7). . . . . . . . . . . . . . . . . . . . . -- (900)
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,522) (1,570)
Treasury stock, 1,995,042 common shares in 1994 and 1,665,010
common shares in 1995, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . (8,046) (6,716)
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . 17,296 20,328
Commitments and contingencies (notes 3, 5, 10, and 11) . . . . . . . . . . . . . . . . .
-------- --------
$87,111 $71,150
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 29
<TABLE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended April 30, 1993, 1994 and 1995
(In thousands, except per share data)
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,026 $148,683 $204,131
Direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,840 140,397 182,053
---------- ---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . 9,186 8,286 22,078
General and administrative expenses. . . . . . . . . . . . . . . . . . 13,201 16,936 19,660
---------- ---------- ----------
Operating income (loss) . . . . . . . . . . . . . . . . . . . (4,015) (8,650) 2,418
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (1,071) (3,288) (2,209)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . 74 186 422
Miscellaneous income (expense) (note 10) . . . . . . . . . . . . . (325) (504) 1,015
Minority interest in earnings of subsidiaries. . . . . . . . . . . (225) (213) (159)
---------- ---------- ----------
Earnings (loss) before income taxes . . . . . . . . . . . . . (5,562) (12,469) 1,487
Income tax expense (benefit) (note 6). . . . . . . . . . . . . . . . . (1,806) (3,135) 535
---------- ---------- ----------
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . $ (3,756) $ (9,334) $ 952
========== ========== ==========
Net earnings (loss) per common share:
Primary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.75) $ (1.85) $ .17
========== ========== ==========
Fully diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.75) $ (1.85) $ .16
========== ========== ==========
Weighted average number of common shares outstanding:
Primary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,998 5,043 5,613
========== ========== ==========
Fully diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,998 5,058 5,955
========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 30
<TABLE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended April 30, 1993, 1994 and 1995
(In thousands)
<CAPTION>
Note
Common Stock Additional Receivable Retained Treasury Stock Total
-------------- Paid-In from Sale Earnings ---------------------- Stockholders'
Shares Amount Capital of Stock (Deficit) Shares Amount Equity
------ ------ ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
April 30, 1992 7,062 $ 71 $27,289 $ -- $10,568 1,913 $(5,302) $32,626
Shares issued to
directors 9 -- 84 -- -- -- -- 84
Purchase of treasury
stock -- -- -- -- -- 200 (3,221) (3,221)
Net loss -- -- -- -- (3,756) -- -- (3,756)
------ ------ ---------- ---------- ---------- ---------- ---------- -------------
Balances at
April 30, 1993 7,071 71 27,373 -- 6,812 2,113 (8,523) 25,733
Treasury stock issued
in acquisition -- -- 420 -- -- (118) 477 897
Net loss -- -- -- -- (9,334) -- -- (9,334)
------ ------ ---------- ---------- ---------- ---------- ---------- -------------
Balances at
April 30, 1994 7,071 71 27,793 -- (2,522) 1,995 (8,046) 17,296
Shares issued to
directors -- -- 60 -- -- (13) 52 112
Exercise of stock
options 2 -- 14 -- -- -- -- 14
Treasury stock issued
in acquisition -- -- 1,079 -- -- (217) 875 1,954
Sale of treasury stock -- -- 497 (900) -- (100) 403 --
Net earnings -- -- -- -- 952 -- -- 952
------ ------ ---------- ---------- ---------- ---------- ---------- -------------
Balances at
April 30, 1995 7,073 $ 71 $29,443 $(900) $(1,570) 1,665 $(6,716) $20,328
====== ====== ========== ========== ========== ========== ========== ==============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 31
<TABLE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended April 30, 1993, 1994 and 1995
(In thousands)
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . $ (3,756) $ (9,334) $ 952
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Minority interest in earnings of subsidiaries . . . . . . . . 225 213 159
Depreciation and amortization . . . . . . . . . . . . . . . . 2,964 4,158 3,401
Increase (decrease) in deferred income taxes. . . . . . . . . (258) 99 382
Other items, net. . . . . . . . . . . . . . . . . . . . . . . 589 650 (378)
Changes in operating assets and liabilities, net of effects
from purchase/sale of subsidiaries:
Decrease (increase) in accounts receivable, net . . . . . (1,057) 1,439 (6,069)
Increase in contract settlement receivable, net . . . . . -- (4,100) (1,322)
Decrease (increase) in income tax receivable. . . . . . . (1,546) (1,185) 2,741
Decrease (increase) in pharmaceutical and medical
supplies. . . . . . . . . . . . . . . . . . . . . . . . (645) (35) 264
Decrease (increase) in other current assets . . . . . . . (331) 1,706 (499)
Increase in other assets. . . . . . . . . . . . . . . . . (440) (681) (1,081)
Increase (decrease) in accounts payable . . . . . . . . . 2,000 1,672 (1,539)
Increase (decrease) in claims payable . . . . . . . . . . -- 1,523 (388)
Increase in accrued salaries and benefits . . . . . . . . 734 1,815 852
Increase (decrease) in billings in excess of costs. . . . (1,099) 1,616 (1,465)
Increase (decrease) in deferred lease obligation. . . . . 1 (25) 63
---------- ---------- ----------
Net cash used in operating activities . . . . . . . . (2,619) (469) (3,927)
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . . . . . . (11,148) (20,769) (6,217)
Net proceeds from the sale of property and equipment . . . . . . . -- -- 14,045
Acquisition of property held for sale. . . . . . . . . . . . . . . (2,021) -- --
Deposit on acquisition of subsidiary . . . . . . . . . . . . . . . (3,200) 3,200 --
Acquisition of subsidiaries, net of cash acquired (note 9) . . . . (142) (3,842) (811)
Disposition of subsidiaries, net of cash conveyed (note 9) . . . . -- 8,992 10,790
---------- ---------- ----------
Net cash provided by (used in) investing activities . . . . . (16,511) (12,419) 17,807
---------- ---------- ----------
(Continued)
<PAGE> 32
Cash flows from financing activities:
Net proceeds under revolving promissory notes. . . . . . . . . . . 9,017 4,939 6,590
Borrowings on notes payable. . . . . . . . . . . . . . . . . . . . 20,040 14,102 751
Repayments on notes payable. . . . . . . . . . . . . . . . . . . . (6,227) (5,699) (20,845)
Receivables from officers. . . . . . . . . . . . . . . . . . . . . (602) (1,587) (1,561)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . (3,221) -- --
Issuance of treasury stock to directors. . . . . . . . . . . . . . -- -- 112
Proceeds from the exercise of stock options. . . . . . . . . . . . -- -- 14
Distributions paid to limited partners . . . . . . . . . . . . . . (209) (485) (133)
Contributions from limited partners. . . . . . . . . . . . . . . . 260 -- --
---------- ---------- ----------
Net cash provided by (used in) financing activities . . . . . 19,058 11,270 (15,072)
---------- ---------- ----------
Net decrease in cash and cash equivalents . . . . . . . . . . (72) (1,618) (1,192)
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . 4,060 3,988 2,370
---------- ---------- ----------
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . $ 3,988 $ 2,370 $ 1,178
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 949 $ 3,203 $ 1,922
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 16 5 22
Supplemental disclosure of non-cash investing and
financing activities (note 9):
Sale of treasury stock for note receivable . . . . . . . . . . . . -- -- $ 900
Forfeiture of acquisition note and corresponding excess
cost over fair value of assets acquired. . . . . . . . . . . . . . -- -- $ 50
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 33
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1994 and 1995
(1) Summary of Significant Accounting Policies
(a) Organization and Business
PHP Healthcare Corporation and its subsidiaries (the Company) operate in a
single industry providing health care and related support services primarily on
a contractual basis to federal, state and local government agencies, and
commercial entities.
In fiscal 1992, the Company commenced the management of ambulatory surgery
centers acquired or developed through its majority owned subsidiary, Paragon
Ambulatory Surgery, Inc. (Paragon). In fiscal 1995, the Company acquired the
remaining ownership interest in Paragon. Immediately thereafter, the Company
sold all of its interest in the remaining two ambulatory surgery centers
managed by Paragon.
In fiscal 1994, the Company acquired the operations of a health maintenance
organization, D.C. Chartered Health Plan, Inc. (CHP), serving the District of
Columbia Medicaid and Aid for Families with Dependent Children (AFDC)
residents.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of PHP
Healthcare Corporation and its majority owned subsidiaries. All significant
intercompany account balances and transactions have been eliminated in
consolidation.
(c) Revenue Recognition
The Company engages in fixed-price, unit-price, cost-reimbursement-plus-
fee, and fixed-rate-labor hour contracts. Revenue on fixed-price contracts and
unit-price contracts is recognized using either the percentage-of-completion
method or as services are performed based on contracted rates. The percentage-
of-completion method measures revenue principally by comparing the cost of
services performed to date with the total estimated cost of services required
through completion applied to the entire estimated contract value. Revenue on
cost-reimbursement-plus-fee contracts is recognized on the basis of direct and
indirect costs incurred during the period plus the fee earned. Revenue on
fixed-rate-labor hour contracts is recognized as services are performed based
on contractual rates.
Billings in excess of costs represents amounts billed in accordance with
contract provisions for which future contract services are to be performed.
Costs to complete estimates are reviewed periodically and revised as
required. Provisions are made for the full amount of anticipated losses, if
any, on all contracts in the period in which they are first determinable.
Costs under cost-reimbursement contracts with the federal government are
subject to government audit upon contract completion. Therefore, all contract
costs, including direct and indirect expenses, are potentially subject to
<PAGE> 34
adjustment prior to final reimbursement. Management believes that adequate
provisions for such adjustments, if any, have been made in the accompanying
consolidated financial statements. All indirect expense recovery rates for
fiscal year 1990 and prior have been approved by the U.S. government.
Patient service revenue is reported at the estimated net realizable amounts
from patients, third party payors, and others for services rendered primarily
based on contractually determined rates.
The percentages of the Company's revenues derived from individual customers
comprising more than 10% of consolidated revenues were as follows: 72%, 49%
and 33% for 1993, 1994 and 1995, respectively, from the federal government;
none, 15% and 22% for 1993, 1994 and 1995, respectively, from the District of
Columbia; none, none and 17% for 1993, 1994, and 1995, respectively, from Blue
Cross/Blue Shield of New Jersey.
The Company's accounts and contract settlement receivables related to the
individual customers noted above are $9.3 million, $9.95 million, and $7.2
million from the federal government, the District of Columbia, and Blue
Cross/Blue Shield of New Jersey, respectively, at April 30, 1995.
(d) Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with original maturities of 3 months or less to be
cash equivalents. Cash equivalents consist of money market accounts and
certificates of deposit amounting to $1.7 million and $100,000 at April 30,
1994 and 1995, respectively.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation on buildings,
furniture and equipment is computed on a straight-line or accelerated method
over estimated useful lives of 3 to 30 years. Leasehold improvements and
equipment under capital lease are amortized using the straight-line method over
the shorter of the lease term or estimated useful lives of the assets.
Construction in progress consists of all construction related costs,
excluding land acquisition cost, incurred for property under development.
Depreciation on these properties commences when construction is complete and
the assets are placed into service.
Property held for sale, consisting of land and equipment, are stated at the
lower of cost or net realizable value. Property held for sale is included as
other current assets.
(f) Excess of Cost Over Fair Value of Net Assets Acquired
The excess of the purchase price over the estimated fair value of tangible
and identifiable intangible net assets acquired is capitalized and amortized on
a straight-line basis over periods of estimated benefit of 10 to 40 years.
Contingent amounts payable related to acquired entities achieving certain
profitability goals are recorded as additional excess cost over fair value of
assets acquired ($977,000 and $569,000 in 1994 and 1995, respectively) and are
amortized on a straight line basis over the remaining amortization period. The
Company assesses the recoverability of this intangible asset by determining
whether the balance can be recovered through estimated undiscounted future
<PAGE> 35
operating cash flows of the acquired operation. The amount of impairment, if
any, is measured based on projected discounted future operating cash flows.
(g) Precontract costs
Recoverable costs directly related to contracts incurred prior to
commencement of services are capitalized as precontract costs and amortized to
contract expense over the estimated period of benefit, generally 1 to 2 years
and are included as other current assets.
(h) Income Taxes
Effective May 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109). The cumulative effect of this change in accounting for income
taxes on the consolidated financial statements was immaterial. SFAS 109
requires a change from the deferred method of accounting for income taxes.
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
Pursuant to the deferred method under APB Opinion 11, which was applied in
1993 and prior years, deferred income taxes are recognized for income and
expense purposes using the tax rate applicable for the year of the calculation.
Under the deferred method, deferred taxes are not adjusted for subsequent
changes in tax rates.
(i) Health Care Services Expense and Claims Payable
Medical health care services expense includes claims paid and payable and
capitation payments paid to certain providers. Claims payable are estimated
based on actuarial evaluations of providers' claims submitted and include
provisions for incurred but not reported claims. Health care services expense
is included as direct costs.
(j) Treasury Stock
The Company uses the cost method of accounting for treasury stock.
Issuances of treasury stock are relieved from treasury at the then weighted
average cost per share. The difference between the issuance value of the
shares and the weighted average cost per share is recorded as additional paid-
in-capital.
(k) Earnings (loss) Per Common Share
Earnings (loss) per common share is computed by dividing net earnings
(loss) by the weighted average number of common shares outstanding, which are
adjusted for the assumed exercise of stock options, stock warrants, and
convertible debt, if dilutive. Common share equivalents, which include
dilutive stock options and warrants, are computed using the treasury stock
method. The convertible debt is computed using the "if converted" method.
<PAGE> 36
(l) Reclassifications
Certain amounts in the 1993 and 1994 consolidated financial statements have
been reclassified to conform with the 1995 presentation.
(2) Joint Venture
In February 1992, the Company and Blue Cross of California entered into an
agreement to form and fund a joint venture management company in connection
with a development effort related to the operation of the CHAMPUS Reform
Initiative (CRI) contract for California and Hawaii. As of April 30, 1993,
approximately $1.1 million was advanced by the Company to fund incremental
direct costs incurred by the management company. On July 28, 1993 the
Department of Defense announced the award of the CRI contract to another
bidder. Accordingly, in fiscal 1993, the Company wrote-off its investment in
the joint venture management company represented by the advances of $1.1
million.
(3) Accounts Receivable
Accounts receivable, net includes the following at April 30 (in thousands):
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Contract receivables:
Billed:
Contracts in process . . . . . . . . . . . . . $ 8,508 $10,921
Final billings on completed contracts. . . . . -- 260
Contract claim . . . . . . . . . . . . . . . . 1,900 1,900
---------- ----------
10,408 13,081
---------- ----------
Unbilled:
Incurred costs and accrued profits . . . . . . 8,331 11,876
Retainages . . . . . . . . . . . . . . . . . . 154 485
---------- ----------
8,485 12,361
---------- ----------
Total contract receivables . . . . . . . . 18,893 25,442
Patient service receivables. . . . . . . . . . . . . 1,554 385
Other receivables. . . . . . . . . . . . . . . . . . 554 748
---------- ----------
Total. . . . . . . . . . . . . . . . . . . 21,001 26,575
Less allowance for doubtful accounts receivable. . . (2,086) (2,038)
---------- ----------
Accounts receivable, net . . . . . . . . . $18,915 $24,537
========== ==========
</TABLE>
<PAGE> 37
In April 1994, the Company submitted a Request for Equitable Adjustment
(REA) under a contract with the Department of the Army for material changes in
the nature of the contract requirements from those represented during the
contract proposal process. The REA was denied by the Army and the Company has
submitted a claim for its increased costs of performance under the contract
pursuant to the Contracts Dispute Act of 1978. Billed accounts receivable of
$1.9 million as of April 30, 1994 and 1995, have been fully reserved pending
further actions by the Board of Contract Appeals.
Substantially all net receivables are expected to be collected within one
year.
Contract Settlement Receivable
CHP, the Company's wholly owned health maintenance organization, earns
substantially all of its revenue under a prepaid Medicaid contract with the
D.C. Department of Human Services (DCDHS) to provide health care services to
the Medicaid recipients of the District of Columbia. The Medicaid program is
jointly funded by the District of Columbia and the Health Care Finance
Administration (HCFA) of the Department of Health and Human Services (HHS).
Under a three-year contract ended September 30, 1994, interim payments
were provided on an enrollment basis with a final settlement at the end of the
contract period, subject to a defined upper payment limit as determined by HCFA
of HHS. Final settlement with DCDHS and HCFA is subject to an audit of CHP's
activities. The Company believes final settlement should result in amounts due
the Company at April 30, 1995 in excess of $20 million, which is expected to be
lower than the actual upper payment limit. Due to the complexity inherent in
the contract and the definition of the settlement process as provided for in
the contract, the Company has recorded amounts due under the contract of $6.7
million and $8.0 million at April 30, 1994 and 1995, which represents the
Company's conservative interpretation of amounts due under the contract. The
Company believes that final settlement will occur during fiscal 1996. In
addition, proposed congressional legislation is pending which upon passage
would in management's opinion result in a retroactive entitlement of the full
recovery of the settlement receivable.
Effective October 1, 1994, CHP entered into a new one-year contract with
DCDHS. CHP receives capitation payments for the inpatient services under the
risk portion of the contract. Additionally, CHP receives interim payments with
an annual final settlement for the other services under the non-risk portion of
the contract. At April 30, 1995, CHP recorded accounts receivable of $1.9
million, for the difference between what was due under the contract versus what
was received. Final settlement of amounts due under this contract is subject
to an audit of the Company's activities by DCDHS.
<PAGE> 38
(4) Property and Equipment
Property and equipment consist of the following at April 30 (in
thousands):
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . $ 6,451 $ 3,969
Buildings. . . . . . . . . . . . . . . . . . . . . . 22,822 9,202
Leasehold improvements . . . . . . . . . . . . . . . 4,807 6,612
Equipment. . . . . . . . . . . . . . . . . . . . . . 11,260 12,277
Furniture and fixtures . . . . . . . . . . . . . . . 3,544 3,914
Vehicles . . . . . . . . . . . . . . . . . . . . . . 125 125
Construction in progress . . . . . . . . . . . . . . 178 7
---------- ----------
49,187 36,106
Less accumulated depreciation and amortization . . . (11,756) (13,010)
---------- ----------
Property and equipment, net . . . . . . . . . . $37,431 $23,096
========== ==========
</TABLE>
As of April 30, 1994 and 1995, $1,056,000 in furniture and fixtures and
related accumulated depreciation of $202,000 and $415,000, respectively, were
obligated under capital leases.
Depreciation and amortization expense for property and equipment totaled
$2.6 million, $3.6 million and $3.1 million for the years ended April 30, 1993,
1994 and 1995, respectively.
<PAGE> 39
(5) Notes Payable
(a) Notes Payable to Banks
The notes payable to banks consists of the following at April 30 (in
thousands):
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Various term notes, collateralized by certain land,
building, fixtures and equipment, with market
adjusting interest rates ranging between 6.75% and
7.25% at April 30, 1994, with final payment due
dates from March 1995 to February 1998; the
Company was released from these obligations in
October 1994 (note 9(b)) . . . . . . . . . . . . . $ 2,124 --
Term note of $15 million collateralized by all
assets, interest due monthly at 1% above bank
prime (10% at April 30, 1995), principal due in
quarterly installments of $342,000 with final
payment due in April 1998. . . . . . . . . . . . . 12,857 4,102
Revolving promissory note, collateralized by all
assets, with a maximum credit line of $15 million
in 1994 and $22 million in 1995, interest due
monthly at 1% above bank prime (10% at April 30,
1995), due August 1996 . . . . . . . . . . . . . . 13,956 20,546
Nonrecourse term notes of $10 million,
collateralized by certain real property, interest
due monthly at 6.25% for the first three years and
8% for the next two years, principal due April
1998, repaid in July 1994 (note 9(c)). . . . . . . 9,416 --
Term note of $650,000, collateralized by the
assignment of a certificate of deposit of equal
amount, interest due monthly at a minimum of the
bank's certificate of deposit rate plus 2%, due
December 1995, repaid in July 1994 . . . . . . . . 650 --
---------- ----------
Total notes payable to banks. . . . . . . . 39,003 24,648
Less current maturities . . . . . . . . . . (2,534) (1,368)
---------- ----------
Notes payable to banks, net of current
maturities. . . . . . . . . . . . . . . . . $36,469 $23,280
========== ==========
</TABLE>
Scheduled maturities of notes payable to banks at April 30, 1995 are as
follows (in thousands): $1,368 in 1996, $21,914 in 1997, and $1,366 in 1998.
The Company repaid $7 million on its term note during fiscal 1995 upon the
sale of its office building and two ambulatory surgery centers and as a result,
the quarterly term note repayments were reduced to $342,000 from $536,000.
<PAGE> 40
The revolving promissory note contains a letter of credit facility whereby
the bank will issue for the account of the Company, irrevocable stand-by
letters of credit in connection with certain contract performance requirements.
The amount of outstanding stand-by letters of credit reduces the amount of
funds available under the revolving note agreement. Under this agreement, the
Company had issued stand-by letters of credit amounting to approximately $1
million and $2.2 million at April 30, 1994 and 1995, respectively.
The revolving promissory note functions similar to a line of credit with
daily advances and repayments. Accordingly, revolving promissory note activity
is presented as a net amount in the consolidated statements of cash flows.
During the year ended April 30, 1994, the Company secured an additional
temporary revolving credit facility from its primary bank of $4.5 million
bearing interest at the bank's prime rate plus 1%. Borrowings under this
facility were repaid in full in April 1994, and the facility is no longer
available.
The Company's credit agreement contains certain covenants which, in
addition to other restrictions, limit the amount of capital expenditures and
additional borrowings. The Company is also precluded from the payment of cash
dividends without the bank's approval, and is required to maintain certain
financial ratios.
<PAGE> 41
(b) Notes Payable - Other
The notes payable - other consists of the following at April 30 (in
thousands):
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Installment debt with a face value of $2 million,
collateralized by a security interest in Paragon's
management agreement with the ambulatory surgery
centers, discounted at an effective interest rate
of 8.5% with varying semi-annual installment
payments beginning December 1992, due June 1995;
the Company was released from this obligation in
October 1994 (note 9(b)) . . . . . . . . . . . . . $ 929 --
Term note of $3.8 million, secured by an assignment
of partnership interests, interest based on the
prime rate with a base of 7.5% and a ceiling of
10%, principal and interest due in five annual
installments ending April 1997. The Company was
released from this obligation in October 1994
(note 9(b)). . . . . . . . . . . . . . . . . . . . 2,278 --
Various collateralized term notes of $651,000 in
1994 and $591,000 in 1995, interest from 6% to
12.7% with various installment payments due
August 1997. . . . . . . . . . . . . . . . . . . . 536 393
Insurance notes of $457,000 in 1994 and $246,000 in
1995, monthly installments of principal and
interest, interest from 7.3% to 7.6% due
November 1995. . . . . . . . . . . . . . . . . . . 271 166
Obligations under capital leases, for certain
equipment and fixtures, monthly installments of
principal and interest of $27,000, interest at
4.1%, due May 1998 . . . . . . . . . . . . . . . . 1,215 935
Convertible promissory notes of $500,000, interest
due annually on April 30 at 7%, convertible into
common stock at $9.00 per share starting
September 1995, due September 1999 (notes 7(a)
and 9(a)). . . . . . . . . . . . . . . . . . . . . -- 500
Promissory notes of $417,000, interest at 7%,
monthly payments due August 1995 (note 9(a)) . . . -- 59
---------- ----------
Total notes payable - other . . . . . . . . 5,229 2,053
Less current maturities . . . . . . . . . . (2,055) (879)
---------- ----------
Notes payable - other, net of current
maturities . . . . . . . . . . . . . . . . $3,174 $1,174
========== ==========
</TABLE>
<PAGE> 42
Scheduled maturities of notes payable-other at April 30, 1995 are as
follows (in thousands): $879 in 1996, $324 in 1997, $323 in 1998, $27 in 1999,
and $500 in 2000.
The Company's weighted average interest rate on short-term borrowings
outstanding at April 30, 1994 and 1995 was 7.3% and 8.7%, respectively.
(6) Income Taxes
Income tax expense (benefit) consists of the following at April 30 (in
thousands):
<TABLE>
<CAPTION>
Current Deferred Total
-------- -------- --------
<S> <C> <C> <C>
1993:
Federal . . . . . . . . . . . . . . . . $ (794) $ (866) $(1,660)
State . . . . . . . . . . . . . . . . . (70) (76) (146)
-------- -------- --------
$ (864) $ (942) $(1,806)
======== ======== ========
1994:
Federal . . . . . . . . . . . . . . . . $(2,911) $ 90 $(2,821)
State . . . . . . . . . . . . . . . . . (323) 9 (314)
-------- -------- --------
$(3,234) $ 99 $(3,135)
======== ======== ========
1995:
Federal . . . . . . . . . . . . . . . . $ (270) $ 752 $ 482
State . . . . . . . . . . . . . . . . . (30) 83 53
-------- -------- --------
$ (300) $ 835 $ 535
======== ======== ========
</TABLE>
<PAGE> 43
Income tax expense (benefit) differs from the amounts computed by applying
the U.S. federal income tax rate of 34 percent to earnings (loss) before income
taxes as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit). . . . $(1,891) $(4,239) $ 506
Increase (decrease) in income tax resulting
from:
State income tax expense (benefit),
net of federal income taxes . . . . . . . (96) (496) 69
Non-deductible subsidiary losses
(excluded earnings) . . . . . . . . . . . 71 113 (205)
Amortization of excess cost over fair
value of assets acquired. . . . . . . . . 46 49 196
Nondeductible items related to sale of
subsidiary. . . . . . . . . . . . . . . . -- -- 1,489
Change in the valuation allowance
allocated to income tax expense . . . . . -- 1,515 (1,707)
Other . . . . . . . . . . . . . . . . . . . 64 (77) 187
-------- -------- --------
$(1,806) $(3,135) $ 535
======== ======== ========
Effective income tax rate. . . . . . . . . . . . (32.5%) (25.1%) 36.0%
======== ======== ========
</TABLE>
<PAGE> 44
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at April 30,
1994 and 1995, are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to differing
recognition methods. . . . . . . . . . . . . . . . $ 1,209 $ 560
Property and equipment, principally due to
difference in depreciation . . . . . . . . . . . . 655 823
Land and building, due to valuation methods. . . . . 230 793
Accrued employee benefits. . . . . . . . . . . . . . 821 1,092
Accrued contract and sublease losses . . . . . . . . 338 295
State and federal net operating loss
carryforwards. . . . . . . . . . . . . . . . . . . 855 1,722
Alternative minimum tax credit carryforwards . . . . 455 400
--------- ---------
Total gross deferred tax assets . . . . . . . . 4,563 5,685
Less valuation allowance. . . . . . . . . . . . (2,160) --
--------- ---------
Net deferred tax assets . . . . . . . . . . . . $ 2,403 $ 5,685
--------- ---------
Deferred tax liabilities:
Accounts receivable, principally due to differing
recognition methods. . . . . . . . . . . . . . . . $ 1,722 $ 5,503
Property and equipment, principally due to
difference in depreciation . . . . . . . . . . . . 487 414
Precontract costs. . . . . . . . . . . . . . . . . . 118 73
Deferred lease obligations . . . . . . . . . . . . . 76 77
--------- ---------
Total deferred tax liabilities. . . . . . . . . $ 2,403 $ 6,067
--------- ---------
Net deferred income tax liability . . . . . . . $ -- $ 382
========= =========
</TABLE>
The valuation allowance for deferred tax assets was $2,160,000 at
April 30, 1994. The valuation allowance was reduced in fiscal year 1995 by
$2,160,000 and is zero as of April 30, 1995. Completion of fiscal year 1994
income tax returns during fiscal year 1995 resulted in a decrease of $453,000
to the income tax receivable due to the inability to carryback certain
subsidiary losses. Accordingly, there was a corresponding increase in net
deferred tax assets during fiscal year 1995.
<PAGE> 45
For the year ended April 30, 1993, the deferred income tax benefit results
from differences between the amount of income and expense recognized for
financial statement reporting and tax filing purposes. The major items
comprising these differences and the related tax effects are as follows (in
thousands):
<TABLE>
<CAPTION>
1993
----------
<S> <C>
Excess tax over book revenues. . . . . . . . . . . . . . . . . . $(301)
Contract retainages. . . . . . . . . . . . . . . . . . . . . . . (182)
Reduction in valuation of assets . . . . . . . . . . . . . . . . (211)
Excess book over tax loss on sublease. . . . . . . . . . . . . . (135)
Excess book over tax depreciation. . . . . . . . . . . . . . . . (84)
Compensatory stock options . . . . . . . . . . . . . . . . . . . (74)
Excess book over tax vacation expense. . . . . . . . . . . . . . 18
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
----------
$(942)
==========
</TABLE>
As of April 30, 1995, the Company has federal and state net operating loss
carryforwards of approximately $3.7 million and $4.6 million, respectively,
available to offset future federal and state taxable income, expiring
principally in fiscal years 2008 and 2009. These carryforwards have certain
annual dollar limits. In addition, the Company has alternative minimum tax
credit carryforwards of approximately $400,000 which are available to reduce
future federal regular income taxes, if any, over an indefinite period.
(7) Capital Stock
(a) Note Receivable
On September 29, 1994, the Company sold 100,000 shares of treasury stock
at $9.00 per share for a note receivable in the amount of $900,000 to a
financial advisory services firm in which the managing director is also a
director of the Company and the two partners in the firm are also employees of
the Company. The note receivable is collateralized by a pledge and escrow of
150,000 shares of the Company's common stock and by convertible notes payable
of $500,000 by the Company to the same parties.
(b) Additional Paid-In-Capital and Treasury Stock
The Company purchased 200,000 shares of its common stock at an average
price of $16.11 per share during the year ended April 30, 1993. These shares
are held as treasury stock.
In August 1993, the Company issued 118,024 shares of treasury stock in
exchange for 100% of the common stock of D.C. Chartered Health Plan, Inc.
Additionally, the acquisition terms provided for a guarantee of the future
market price of 66,185 shares of the stock at $8.75 per share on August 31,
1995. The Company recognized additional paid-in-capital of $173,736, equal to
<PAGE> 46
the difference between the market price on the date of acquisition and the
guaranteed future market price for those shares.
In September 1994, the Company issued 190,000 shares of treasury stock in
exchange for the minority interests in Paragon and issued 27,143 shares of
treasury stock in exchange for 100% of the common stock of J.P. Cole &
Associates. The J.P. Cole & Associates acquisition terms provided for future
consideration of an additional 44,286 shares of the Company's treasury stock,
which are held in escrow (note 10(d)).
(c) Stock Rights
On April 10, 1992, the Board of Directors of the Company declared a
dividend distribution of one preferred stock purchase right (the Rights) for
each share of common stock outstanding at April 20, 1992 or issued thereafter.
The Board of Directors also designated and reserved 50,000 shares of preferred
stock as "Series A Junior Preferred Stock". Each Right when exercisable,
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series A Junior Participating Preferred Stock, at an exercise
price of $85, subject to adjustment. The Rights will become exercisable after
public announcement that, without consent of a majority of disinterested
members of the Board of Directors, a third party has acquired or obtained
beneficial ownership of 15% or more of the outstanding Common Shares or 10
business days after commencement or public announcement of an offer of such an
event. The Rights, which do not have voting rights, expire in April 2002, and
may be redeemed in whole by the Company at $.01 per Right at any time prior to
their expiration or the acquisition by a third party of 15% or more of the
Company's Common Stock. In the event that the Company is acquired in a merger
or other business combination transaction or 50% or more of its consolidated
assets or earning power is sold, provision shall be made so that each holder of
a Right shall have the right to receive, upon exercise thereof at the then
current exercise price, that number of shares of common stock of the surviving
company which at the time of such transaction would have a market value of two
times the exercise price of the Right. At April 30, 1994, and 1995, 5,075,809
and 5,452,627 rights are outstanding, respectively.
(d) Directors' Retainer Plan
Commencing on May 1, 1993, and thereafter for any fiscal quarter, each
Director of the Company may elect to have the full amount of his retainer paid
in the form of common shares of the Company under this plan. The number of
shares issued is calculated based on the then current market value of the
stock. The Board of Directors of the Company has authorized 50,000 common
shares for issuance under this plan. In October 1994, the Company issued
12,889 shares of treasury stock to the Board of Directors, pursuant to the
Directors' Plan.
(8) Stock Options and Warrants
In November 1986, the Board of Directors adopted and the shareholders
approved the Company's 1986 Stock Option Plan. Effective May 1, 1991, the
Board of Directors adopted, and effective September 30, 1991 the shareholders
approved, the Amended and Restated PHP Healthcare Corporation 1986 Stock Option
Plan (the Plan).
The Plan provided for the granting of options to purchase a maximum of
750,000 shares of the Company's stock to eligible employees and officers of the
<PAGE> 47
Company. In November 1994, the shareholders approved an increase in the
maximum to 1,750,000 shares. The Plan provides for the granting of options
which qualify as incentive stock options as well as non-qualified stock
options. All incentive stock options granted under the Plan must have an
exercise price of not less than 100% of the fair market value of the common
stock on the date of grant, and non-qualified stock options must have an
exercise price of not less than 60% of the fair market value of the common
stock on the date of grant. All options granted prior to April 30, 1991, under
the Plan may be exercised no earlier than two years from the date of grant.
All options granted since April 30, 1991, are exercisable ratably on an annual
basis over three to five years from the date of grant. Options are canceled 90
days after termination of employment if not exercised.
The following is a summary of activity of the stock option plan in 1993,
1994 and 1995:
<TABLE>
<CAPTION>
Shares Price Amount
------------ ------------ ------------
<S> <C> <C> <C>
Options outstanding at April 30, 1992. . 704,750 3.90-22.50 $12,723,449
Options granted in 1993. . . . . . . 35,000 8.125 284,375
Options exercised in 1993. . . . . . -- -- --
Options canceled in 1993 . . . . . . 2,300 13.00-22.50 43,675
------------ ------------ ------------
Options outstanding at April 30, 1993. . 737,450 3.90-22.50 12,964,149
Options granted in 1994. . . . . . . 17,000 6.00 102,000
Options exercised in 1994. . . . . . -- -- --
Options canceled in 1994 . . . . . . 7,050 13.00-22.50 129,175
------------ ------------ ------------
Options outstanding at April 30, 1994. . 747,400 3.90-22.50 12,936,974
Options granted in 1995. . . . . . . 1,339,325 6.08-11.875 11,567,330
Options exercised in 1995. . . . . . 2,500 5.75 14,375
Options canceled in 1995 . . . . . . 667,075 6.08-22.50 12,235,072
------------ ------------ ------------
Options outstanding at April 30, 1995. . 1,417,150 $3.90-22.50 $12,254,857
============ ============ ============
Options exercisable at April 30, 1995. . 45,869
============
</TABLE>
On June 10, 1994, the Stock Option Committee of the Board of Directors
adopted a resolution whereby each holder of outstanding stock options under the
Plan is allowed to surrender outstanding stock options on or before
September 15, 1994, in return for an equal number of options with an exercise
price equal to 60% of the fair market value of the Company's common stock on
June 10, 1994. The new options vest ratably in one-third increments over three
years and expire in ten years. A total of 657,850 options were surrendered and
canceled with a corresponding issuance of new options with a grant price of
$6.08 under the provisions of this resolution.
<PAGE> 48
The Company has also granted options outside of the Plan. The following
is a summary of stock option activity outside of the Plan in 1993, 1994 and
1995:
<TABLE>
<CAPTION>
Shares Price Amount
------------ ------------ -------------
<S> <C> <C> <C>
Options outstanding at April 30, 1992. . 76,250 7.60-11.00 $ 683,250
Options granted in 1993. . . . . . . -- -- --
Options exercised in 1993. . . . . . -- -- --
Options canceled in 1993 . . . . . . 33,750 7.60 256,500
------------ ------------ ------------
Options outstanding at April 30, 1993. . 42,500 7.60-11.00 426,750
Options granted in 1994. . . . . . . -- -- --
Options exercised in 1994. . . . . . -- -- --
Options canceled in 1994 . . . . . . -- -- --
------------ ------------ ------------
Options outstanding at April 30, 1994. . 42,500 7.60-11.00 426,750
Options granted in 1995. . . . . . . 162,143 9.00 1,459,287
Options exercised in 1995. . . . . . -- -- --
Options canceled in 1995 . . . . . . -- -- --
------------ ------------ ------------
Options outstanding at April 30, 1995. . 204,643 $7.60-11.00 $1,886,037
============ ============ ============
Options exercisable at April 30, 1995. . 110,000
============
</TABLE>
To the extent any options are granted at an exercise price less than the
fair market value at the date of the grant, the Company records compensation
expense equal to the difference in such prices ratably over the applicable
vesting period. The Company recorded compensation expense of $207,000,
$207,000, and $1,065,000 in 1993, 1994, and 1995, respectively, in the
consolidated statement of operations relating to options.
In conjunction with the acquisition of EastWest Research Corporation on
November 1, 1992, the Company issued 10,000 stock warrants at $11.50 per share,
10,000 stock warrants at $15.00 per share, and 10,000 stock warrants at $24.00
per share. In December 1994, 25% of these warrants were canceled. The 22,500
remaining warrants are exercisable in varying percentages after two years and
expire seven years from the date of issuance. The value assigned to these
warrants was immaterial. The number of these stock warrants which are
exercisable at April 30, 1995 is 2,250.
(9) Acquisition, Development, and Sale of Subsidiaries
(a) Acquisition of Remaining Interests in Paragon
Effective September 29, 1994, the Company acquired the remaining 49%
ownership interest in Paragon for $125,000 in cash, notes payable of $917,000
and 190,000 shares of the Company's treasury stock. After one year, $500,000
of the notes payable are convertible into Company stock at a conversion price
<PAGE> 49
of $9.00 per share. The acquisition was accounted for using the purchase
method of accounting and accordingly, the purchase price was allocated to the
acquired share of tangible and identifiable intangible assets and liabilities
based on their respective fair values. The excess cost over the estimated fair
value of the acquired share of net assets approximated $1.9 million. Subsequent
to the acquisition, Paragon was merged into the Company. The results of
operations for Paragon have been included in the consolidated statements from
November 5, 1991, when the Company first purchased the majority interest. If
the purchase of the remaining ownership interest had occurred on May 1, 1993 or
1994, the effect on the Company's results of operations would have been
immaterial.
(b) Sale of Surgery Centers
Effective April 1, 1994, Paragon sold 100% of its interest in three
separate surgery centers represented by four wholly owned subsidiaries for
approximately $9.3 million in cash. The related gain on disposition of
approximately $200,000 is included as miscellaneous income in fiscal year 1994.
Effective September 30, 1994, the Company sold 100% of its interest in two
separate ambulatory surgery centers for approximately $11.75 million in cash
plus the assumption of related notes payable of approximately $5 million. The
related gain on disposition after the write-off of the excess cost over the
estimated fair value of net assets resulting from the acquisition of the
centers is approximately $340,000 and is included as miscellaneous income in
fiscal year 1995.
(c) Purchase and Sale of Office Building
On May 4, 1993, the Company, through a wholly owned subsidiary, purchased
an office building in Reston, Virginia for approximately $12 million. The
building contains approximately 165,000 square feet of rentable commercial
office space of which approximately 113,000 square feet was under lease at the
time of the purchase. The Company is utilizing a portion of the available
office space for consolidation and expansion of its corporate operations. In
conjunction with the purchase, the Company obtained financing in the form of
nine year, nonrecourse mortgage notes of approximately $10 million with
interest rates which vary during the term of the notes from 6.25% to 8.0% per
annum.
In July 1994, the Company, through a wholly owned subsidiary, sold the
office building in Reston, Virginia for approximately $14.8 million. The
Company leases approximately 55,000 square feet of the building under a 15 year
lease and accordingly, the gain on this sale of approximately $1.2 million has
been deferred and is being amortized ratably over the life of this lease. In
conjunction with this sale, the Company repaid in full non-recourse notes of
approximately $9.4 million.
(d) Acquisition of Health Maintenance Organization
On August 31, 1993, the Company exchanged 118,024 shares of common stock
valued at $722,897 for 100% of the common stock of D.C. Chartered Health Plan,
Inc. (CHP). Additionally, the Company provided a guarantee of the future price
of a portion of those shares issued valued at $173,736, as described in note
7(b). This acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the acquired
tangible and identifiable intangible assets and assumed liabilities based on
their respective fair values. The excess cost over the estimated fair value of
<PAGE> 50
the acquired net assets of approximately $1.9 million is being amortized on
a straight line basis over 40 years. The results of operations for CHP are
included in the consolidated statements from August 31, 1993. If the purchase
had occurred on May 1, 1992 or 1993, the effect on the Company's results of
operations and net loss per common share would have been immaterial. Unaudited
pro forma consolidated revenues of the Company would have been approximately
$149.6 million and $160.5 million for the years ended April 30, 1993 and 1994.
(e) Acquisition of Utilization Management Firm
On September 10, 1993, the Company acquired 100% of the common stock of
Health Cost Consultants, Inc. (HCC) for $332,000 in cash and a two year note of
$175,000. This acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the acquired
tangible and identifiable intangible assets and assumed liabilities based on
their respective fair values. There was no excess cost over the estimated fair
value of the acquired net assets. The results of operations for HCC are
included in the consolidated statements from September 10, 1993. If the
purchase had occurred on May 1, 1992 or 1993, the effect on the Company's net
income and loss per share would have been immaterial.
(f) Supplemental Disclosure of Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Acquisition of subsidiaries
Fair value of assets acquired. . . . . . . . . . . . . . . . $ 94 $7,597 $ 1,343
Excess of cost over fair value of assets acquired. . . . . . 778 4,900 2,439
Liabilities assumed including seller financed
long-term debt . . . . . . . . . . . . . . . . . . . . . . (616) (6,725) --
Notes payable issued . . . . . . . . . . . . . . . . . . . . -- -- (1,017)
Value of stock and guarantee issued. . . . . . . . . . . . . -- (897) (1,954)
------------ ------------ ------------
Cash paid. . . . . . . . . . . . . . . . . . . . . . . . . . 256 4,875 811
Less cash acquired . . . . . . . . . . . . . . . . . . . . . (114) (1,033) --
------------ ------------ ------------
Acquisition of subsidiaries, net of cash acquired. . . . . . $ 142 $3,842 $ 811
============ ============ ============
Disposition of subsidiaries
Fair value of assets sold. . . . . . . . . . . . . . . . . . -- $9,886 $ 5,964
Write-off of excess of cost over fair value of assets. . . . -- 4,114 11,130
Liabilities assumed by purchaser . . . . . . . . . . . . . . -- (4,670) (5,721)
------------ ------------ ------------
Cash received. . . . . . . . . . . . . . . . . . . . . . . . -- 9,330 11,373
Less cash conveyed . . . . . . . . . . . . . . . . . . . . . -- (338) (583)
------------ ------------ ------------
Disposition of subsidiaries, net of cash . . . . . . . . . . -- $8,992 $10,790
============ ============ ============
</TABLE>
<PAGE> 51
(10) Related-Party Transactions
(a) Legal and Financial Advisory Services
During 1993, 1994, and 1995, legal services were provided by law firms in
which one director of the Company is a partner. During the years ended April
30, 1993, 1994, and 1995 total billings approximated $298,000, $315,000, and
$257,000, respectively, all of which was expensed in the consolidated
statements of operations. At April 30, 1993, 1994, and 1995 amounts due the
law firms approximated $9,000, $200,000 and $142,000, respectively.
In 1993, 1994, and 1995, financial advisory services were provided the
Company by a firm in which the managing general partner was also a director of
the Company and the two partners in the firm are also employees of the Company.
During 1993, 1994 and 1995, total billings approximated $39,000, $10,000, and
$86,000, respectively. At April 30, 1993, 1994, and 1995, no amounts were due
the firm.
In 1993, financial advisory services relating to acquisitions were
provided to Paragon by the same firm in which the managing general partner and
one other partner were two of the minority shareholders of the subsidiary.
During fiscal years 1993 and 1994, and 1995, total billings from this firm to
Paragon approximated $491,000, none and none, respectively. These amounts were
included in the cost of surgery center acquisitions. At April 30, 1993, 1994
and 1995, no amounts were due the firm for these services. In addition, during
1993, 1994 and 1995, approximately $50,000, none and none, respectively, was
paid to the financial advisory firm for rent of shared office facilities with
Paragon.
(b) Senior Executive Loan Program
On November 5, 1992, the Board of Directors approved a Senior Executive
Loan Program (the Program). Loans made pursuant to this Program may not exceed
two and one-half times the executive's annual salary. The loans are to be
repaid in one year and bear interest at two percent above the Company's short-
term borrowing rate. The loans are collateralized by Company stock owned by
the senior executive or a second position in stock previously pledged provided
there remains sufficient equity in the stock. In 1994, the Program was amended
to increase the maximum credit limit from two and one-half to three and one-
half times the executive's total annual salary and the due dates on the amounts
outstanding were extended for twelve months to March 1995. In 1995, the due
dates were extended an additional twelve months. As of April 30, 1994 and
1995, a total of $1.6 million and $2.9 million, respectively, was outstanding
(including accrued interest) to two directors/officers under the Program.
(c) Other Notes and Advances
The Company has advanced amounts to an officer of a subsidiary of the
Company in the form of promissory notes due from October 1995 to April 1998.
The notes bear interest rates from 8% to 10.75%. One of the notes is
collateralized by the officer's stock in the Company. As of April 30, 1994 and
1995, the amounts outstanding were $383,000 and $357,000, respectively.
In accordance with the Board of Directors' approval, the Company makes
premium payments relating to certain insurance policies on behalf of certain
officers of the Company. These advances are owed to the Company and are
collateralized by assignment of the underlying cash surrender value and related
death benefit. During 1994, $650,000 of these amounts were reserved,
<PAGE> 52
representing the excess of the advances over the accumulated cash surrender
value. During 1995, the officers signed promissory notes bearing interest at
7% and due in April 2002 for the amounts advanced; accordingly, the previously
recorded reserve was eliminated. The establishment of the reserve and
subsequent elimination are included as miscellaneous expense and income. The
promissory notes total $885,000 at April 30, 1995.
(d) J.P. Cole & Associates
During fiscal year 1994 the Company entered into an agreement with an
affiliate, J.P. Cole & Associates, which performed exclusive marketing services
for the Company. The operating results of the affiliate have been combined
with the Company's consolidated financial statements since August 1993. One of
the minority shareholders of the affiliate is a director of the Company. A
sales and service agreement with the affiliate provided for the payment of
commissions related to successful marketing efforts as defined.
Effective September 30, 1994, the Company purchased the affiliate for
$100,000 in cash, 71,429 shares of the Company's common stock, and options to
purchase 71,429 shares of the Company's common stock at $9.00 per share. Under
the terms of the purchase agreement, 44,286 shares of the 71,429 shares of the
common stock issued are held in escrow subject to forfeiture absent the
achievement of certain performance conditions. Additionally, options to
purchase 27,143 shares of common stock are immediately exercisable and options
to purchase 44,286 shares of common stock are exercisable subject to
achievement of certain performance conditions.
(11) Commitments and Contingencies
(a) Leases as Lessee
The Company has several noncancelable operating leases, principally for
office space and equipment, that expire on various dates over the next fifteen
years. The office leases provide for increased real estate taxes and building
operating costs through annual adjustments. Total rental expense for operating
leases for the years ended April 30, 1993, 1994 and 1995 was approximately
$3.25 million, $3.1 million, and $4.3 million, respectively.
Future minimum rental payments under noncancelable operating leases at
April 30, 1995, are as follows: $3.2 million in 1996, $3.1 million in 1997,
$2.2 million in 1998, $1.2 million in 1999, $1.0 million in 2000, and $9.3
million thereafter.
At April 30, 1994 and 1995, the deferred lease obligations of $207,000,
and $272,000 respectively, represent the excess of rent expense, recorded on a
straight-line basis, over the cash payments required under certain leases.
(b) Leases as Lessor
The Company leased office space to third parties in the building which it
owned (see note 9(c)) and sublets office space at another facility. These
leases expire on various dates over the next nine years and provide for
increased real estate taxes and building operating costs through annual
adjustments. For the years ended April 30, 1994 and 1995, total rental income
from operating leases of $2.2 million and $600,000 are included as revenues.
Additionally, income from lease terminations of $1.0 million is included as
revenue for the year ended April 30, 1994.
<PAGE> 53
In fiscal year 1995, the Company removed a $540,000 valuation allowance
related to a tenant note receivable because its collectibility was no longer
considered uncertain. Payments on this note are to commence in August 1995 for
a duration of two years.
In July 1994, the Company entered into a sublease agreement as lessor for
approximately 15,700 square feet of office space in Alexandria, Virginia. The
resultant net loss for amounts owing on the original lease for this space of
approximately $750,000 is included as miscellaneous expense in fiscal year
1995.
(c) Commitments and Contingencies - Other
The Company is a defendant in various legal actions. The principal
actions allege or involve claims under contractual arrangements, employment
matters and medical malpractice with an estimated possible range of loss
between approximately $400,000 and $1.2 million in excess of insurance
coverage. The Company has recorded reserves of $400,000 related to these
actions at April 30, 1995. In the opinion of management, after consultation
with legal counsel, the possible additional losses related to these actions, if
any, will not result in any material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows. The
Company maintains medical malpractice insurance coverage which provides for
reimbursement of any claim amounts in excess of $250,000 per incident.
(12) Employee Benefit and Health Plans
(a) Employee Benefit Plan
The Company has a qualified defined contribution savings plan covering
substantially all full-time employees as allowed under Section 401(k) of the
Internal Revenue Code. The plan permits participant contributions and requires
a minimum contribution from the Company, which vests over two years, based on
participants' contribution. Participants may elect to defer up to 12% of their
annual compensation by contributing to the plan. Total expenses related to
this plan for the years ended April 30, 1993, 1994 and 1995 were $181,000,
$235,000, and $187,000, respectively.
A second qualified defined contribution savings plan was adopted in
November 1993 for all employees of one of the Company's subsidiaries.
Subsequent to the merger of this subsidiary into the Company in September 1994,
the plan was terminated. No contribution from the Company was required and
participants were allowed to defer up to 17% of their annual compensation by
contributing to the plan.
(b) Employee Welfare Plan
The Company has a contributory employee welfare benefit plan covering
substantially all employees which provides health and medical benefits to the
plan participants. Participation is at the discretion of the employee. Claims
in excess of $100,000 per person per year are underwritten by an insurance
company. Total cost of the plan for the years ended April 30, 1993, 1994, and
1995 was $1.5 million, $2.6 million, and $2.4 million, respectively.
<PAGE> 54
(13) Fourth Quarter Information (Unaudited)
Fourth quarter 1994 revenues, earnings and earnings per share amounts
declined from previous quarters primarily as a result of certain events that
occurred during the fourth quarter. The more significant events, on a pre-tax
basis, relate to: a reduction of $1.5 million on an account receivable and a
related $550,000 contract loss provision on a government contract for which the
Company has filed a claim; a reduction in revenue of $3.1 million on two long-
term contracts accounted for using the percentage of completion method
resulting from actual and future billings and costs varying from previous
estimates; a reduction in revenue of $1.1 million on ten PRIMUS/NAVCARE
contracts resulting from decreased utilization of contract services and
increased contract costs; and legal fees and settlements on three malpractice
lawsuits totaling approximately $800,000.
<PAGE> 55
<TABLE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1995, 1994, and 1993
Additions Deductions
---------------------------------------- ------------
Balance at Charged to Charged Balance
Beginning Costs and to Other Receivable at End
of Year Expenses Accounts Charge-offs of Year
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended April 30, 1995
- --------------------------
Allowance for doubtful accounts
(deducted from accounts
receivable) . . . . . . . . . . . . $ 186,170 $ 38,132 $ -- $ 85,807<F1> $ 138,495
Claim allowance. . . . . . . . . . . . 1,900,000 -- -- -- 1,900,000
Note receivable allowance. . . . . . . 536,879 (536,879) -- -- --
Allowance for receivables
from officers. . . . . . . . . . . . 650,000 (650,000) -- -- --
Deferred tax asset
valuation allowance. . . . . . . . . 2,160,000 (2,160,000) -- -- --
------------ ------------ ------------ ------------ ------------
$5,433,049 $(3,308,747) $ -- $ 85,807 $2,038,495
============ ============ ============ ============ ============
Year Ended April 30, 1994
- -------------------------
Allowance for doubtful accounts
(deducted from accounts
receivable). . . . . . . . . . . . . $ 294,609 $ 23,574 $ 57,419<F2>$ 189,432<F3> $ 186,170
Claim allowance. . . . . . . . . . . . -- 1,900,000 -- -- 1,900,000
Note receivable allowance. . . . . . . -- 536,879 -- -- 536,879
Allowance for receivables
from officers. . . . . . . . . . . . -- 650,000 -- -- 650,000
Deferred tax asset
valuation allowance. . . . . . . . . 285,000 1,875,000 -- -- 2,160,000
------------ ------------ ------------ ------------ ------------
$ 579,609 $4,985,453 $ 57,419 $189,432 $5,433,049
============ ============ ============ ============ ============
Year Ended April 30, 1993
- ------------------------
Allowance for doubtful
accounts (deducted from
accounts receivable) . . . . . . . . $ 451,316 -- $ 32,255 $188,962<F4> $ 294,609
============ ============ ============ ============ ============
(Continued)
<PAGE> 56
- ---------------
<FN>
<F1> (a) Represents allowance for doubtful accounts receivable for two ambulatory surgery centers sold
during fiscal year 1995.
<F2> (b) Represents allowance for doubtful accounts receivable for a subsidiary acquired during fiscal year
1994.
<F3> (c) $84,037 represents allowance for three ambulatory surgery centers sold during fiscal year 1993,
and $105,395 represents charge-off of uncollectible receivables.
<F4> (d) Represents charge-off of uncollectible receivables.
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On January 9, 1995, the Registrant solicited Statements of Qualifications
from several independent accounting firms, including KPMG Peat Marwick LLP,
the Registrant's public accountants for the fiscal years ended April 30, 1994
and April 30, 1993, to provide audit services for its consolidated financial
statements for the year ended April 30, 1995. On January 11, 1995, KPMG Peat
Marwick LLP indicated that it had decided not to stand for re-appointment and,
therefore, would not submit a Statement of Qualifications. The decision to
solicit proposals to perform audit services was recommended by the Audit
Committee and approved by the Board of Directors.
The audit reports of KPMG Peat Marwick LLP on the Registrant's
consolidated financial statements as of and for the fiscal years ended
April 30, 1994 and 1993 did not contain an adverse opinion or a disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope or
accounting principle except with respect to the Registrant's adoption of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, in fiscal year ended April 30,
1994. In addition, during fiscal year 1993 and 1994 and any subsequent
interim period during which KPMG Peat Marwick LLP served as the Registrant's
independent public accountants, there were no disagreements with KPMG Peat
Marwick LLP on any matter of accounting principles, or practices, financial
statement disclosure, or auditing scope or procedures which, if not satisfied
to KPMG Peat Marwick LLP's satisfaction, would have caused it to make a
reference to the subject matter of the disagreement in connection with its
reports. In connection with its audit of the Registrant's consolidated
financial statements for the fiscal year ended April 30, 1994, KPMG Peat
Marwick LLP issued a letter relating to internal controls to the Board of
Directors that identified what KPMG Peat Marwick LLP considered to be a
reportable condition relating to timely financial reporting and the
Registrant's accounting decision-making process.
On March 17, 1995, the Registrant engaged Coopers & Lybrand, L.L.P. as
the Registrant's independent accounting firm to provide audit services for the
Registrant's consolidated financial statements.
<PAGE> 57
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item for directors is set forth in the
Company's 1995 Proxy statement under the heading "Election of Directors" and is
incorporated herein by this reference as if set forth in full.
Item 11. Executive Compensation
The information required by this Item is set forth in the Company's 1995
Proxy statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth in the Company's 1995
Proxy statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is set forth in the Company's 1995
Proxy statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.
<PAGE> 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements. The financial statements of
the Company and the report thereon of Coopers & Lybrand, LLP for
the year ended April 30, 1995 and KPMG Peat Marwick LLP for the
years ended April 30, 1993 and 1994 are filed as a part of this
report (see Part II, Item 8).
2. Consolidated Financial Statement Schedule. The schedule
required to be filed by the Company as part of this report is
attached hereto and identified as Schedule II. All other
schedules are omitted because they are not applicable or not
required, or because the required information is either
incorporated herein by reference or included in the financial
statements or notes thereto included in this report.
3. Exhibits.
Exhibit No. Description
3.1 Certificate of Incorporation of the Company,
including all amendments thereto. (8)
3.2 Bylaws of the Company, as amended. (6)
4.1 Rights Agreement between the Company and Riggs
National Bank, N.A., as Rights Agent, dated as of
April 10, 1992. (7)
10.2 Credit Agreement by and between the Company and
NationsBank of Virginia, N.A., dated effective
March 8, 1994. (10)
10.2A Second Amendment to Amended and Restated Credit
Agreement by and between the Company and
NationsBank of Virginia, N.A., dated effective
April 26, 1995.
10.3 Form of Indemnification Agreements between PHP
Healthcare Corporation and each of Charles H.
Robbins, Michael D. Starr, George E. Schaefer,
M.D., Jack M. Mazur, Stephen I. Frates, Ronald J.
Raben, David M. Thomas, Julien J. Lavoie, Paul T.
Cuzmanes, George B. Randolph, Charles P. Reilly
and Donald J. Ruffing. (3)
* 10.4 Form of "Split Dollar Agreement" entered into
between PHP Healthcare Corporation and each of
Charles H. Robbins, Jack M. Mazur and Michael D.
Starr. (9)
* 10.5 Terms of Senior Executive Loan Program adopted by
the Board of Directors November 5, 1992. (9)
<PAGE> 59
10.8 Articles of Merger of PHP Healthcare Corporation
and PHP Corporation.(1)
10.10 Lease Agreement, between PHP Healthcare
Corporation and Mark Center Plaza dated December
5, 1986 (relating to former executive offices of
the Company at 4900 Seminary Road, Alexandria,
Virginia.) (2)
10.10.1 Lease Agreement between PHP Healthcare Corporation
and Commerce Park Development Corporation dated
May 5, 1993 (relating to current executive offices
of the Company at 11440 Commerce Park Drive,
Reston, Virginia.) (10)
10.10.1A Amendment No. 1 to Lease Agreement dated July 14,
1994. (10)
* 10.11 Employment Agreements dated May 1, 1992 by and
between the Company and each of Charles H.
Robbins, Jack M. Mazur and Michael D. Starr. (10)
* 10.12 Amended and Restated PHP Healthcare Corporation
1986 Stock Option Plan, as amended. (10)
* 10.13 Stock Option Agreement by and between the Company
and Julien J. Lavoie, dated as of November 26,
1990. (5) [Exhibit 10.21]
* 10.14 Stock Option Agreement by and between the Company
and Anthony M. Picini, dated as of December 4,
1990. (5) [Exhibit 10.22]
10.15 Letter agreement by and between the Company and
Shamrock Investments re engagement as financial
advisor, dated May 31, 1990 (subsequently
superseded by letter agreement dated March 1,
1991). (5) [Exhibit 10.23]
10.16 Letter agreement by and between the Company and
Shamrock Investments re engagement as financial
advisor (including grant of stock option), dated
March 1, 1991. (5) [Exhibit 10.24]
10.16A Amendment to letter agreement of March 1, 1991,
between the Company and Shamrock Investments,
dated May 31, 1992. (8)
10.17 Subscription Agreement dated as of November 5,
1991, among the Company, Paragon Ambulatory
Surgery, Inc. ("Paragon") and persons affiliated
with Shamrock Investments (the "Shamrock
Investors"). (6) [Exhibit 10.1]
10.18 Stockholder Agreement dated as of November 5,
1991, among the Company, Paragon and the Shamrock
Investors. (6) [Exhibit 10.2]
<PAGE> 60
10.19 Management Agreement dated as of November 5, 1991,
between the Company and Paragon. (6) [Exhibit
10.3]
10.20 Financial Advisory Agreement dated as of
November 5, 1991, between Paragon and Shamrock
Investments. (6) [Exhibit 10.4]
10.20A Amendment to Financial Advisory Agreement, dated
as of May 1, 1992.(8)
10.21 Purchase Agreement between 11440 Commerce Park
Corporation and Sunset Hill Corporation and
Commerce Park L.C., dated March 9, 1993, with
First and Second Amendments thereto dated
March 29, 1993 and April 15, 1993, respectively
("Building Purchase Agreement"). (9)
10.22 Assignment of Building Purchase Agreement from
Commerce Park L.C. to the Company's wholly owned
subsidiary, Commerce Park Development Corporation,
dated May 5, 1993. (9)
10.23 Sale Agreement between Commerce Park V, Inc. and
Commerce Park Development Corporation, the
Company's wholly owned subsidiary, dated July 15,
1994. (10)
10.24 Agreement between Medigroup, Inc. and PHP
Healthcare Corporation dated March 30, 1994. (10)
10.25 Provider Agreement between the District of
Columbia Department of Human Services and D.C.
Chartered Health Plan, Inc. dated September 24,
1991. (10)
10.26 District of Columbia Medicaid Managed Care
Program, Provider Agreement dated September 15,
1994 by and between the Department of Human
Services and D.C. Chartered Health Plan, Inc.
* 10.27 Employment Agreement dated September 29, 1994 by
and between the Company and John. P. Cole. (11)
[Exhibit 8]
* 10.28 Employment Agreement dated August 1, 1994 by and
between the Company and Charles P. Reilly. (11)
[Exhibit 6]
11 Statement re Computation of Per Share Earnings.
21 List of Subsidiaries.
23 Consent of Independent Accountants.
23A Consent of Independent Auditors - Years ended
April 30, 1994 and 1993.
<PAGE> 61
27 Financial Data Schedule.
- ---------------
(1) Indicates an exhibit to the Company's Registration Statement on Form
S-18 (Registration No. 33-9372, effective November 20, 1986), bearing
the same exhibit number, which is incorporated herein by reference.
(2) Indicates an exhibit to the Company's 10-K Report (File No. 33-9372)
for the period ended April 30, 1987, bearing the same exhibit number,
which is incorporated herein by reference.
(3) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235)
for the period ended April 30, 1989, bearing the same exhibit number,
which is incorporated herein by reference.
(4) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235)
for the period ended April 30, 1990, bearing the exhibit number, which
is incorporated herein by reference.
(5) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235)
for the period ended April 30, 1991, bearing the exhibit number in
brackets, which is incorporated herein by reference.
(6) Indicates an exhibit to the Company's 8-K Current Report (File
No.-0-16235) reporting an event on November 5, 1991, bearing the
exhibit number in brackets, which is incorporated herein by reference.
(7) Indicates an exhibit to the Company's 8-K Current Report (File
No. 0-16235) reporting an event on April 10, 1992, bearing the same
exhibit number, which is incorporated herein by reference.
(8) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235)
for the period ended April 30, 1992, bearing the same exhibit number,
which is incorporated herein by reference.
(9) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235)
for the period ended April 30, 1993, bearing the same exhibit number,
which is incorporated herein by reference.
(10) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235)
for the period ended April 30, 1994, bearing the same exhibit number,
which is incorporated herein by reference.
(11) Indicates an exhibit to the Company's 8-K Report (File No. 0-16235),
reporting an event on October 3, 1994, bearing the exhibit number in
brackets, which is incorporated herein by reference.
* Indicates a management contract or compensatory plan or arrangement
required to be filed an exhibit hereto.
(b) Reports on Form 8-K.
Item 4 Form 8-K filed on March 17, 1995.
<PAGE> 62
(c) Exhibits.
See Item 14(a)3.
(d) Financial Statement Schedules.
See Item 14(a)2.
<PAGE> 63
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.
PHP HEALTHCARE CORPORATION
Date: July 28, 1995 By: /s/ Charles H. Robbins
-------------------------------------
Charles H. Robbins
Chairman of the Board and President
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 dates indicated.
Signature Title Date
- -------------------------- ------------------------------------ -------------
/s/ Charles H. Robbins Chairman of the Board and July 28, 1995
- -------------------------- President (Chief Executive
Charles H. Robbins Officer)
/s/ Jack M. Mazur Director July 28, 1995
- --------------------------
Jack M. Mazur
/s/ Michael D. Starr Director July 28, 1995
- --------------------------
Michael D. Starr
/s/ George E. Schaefer Director July 28, 1995
- --------------------------
George E. Schaefer, M.D.
/s/ Paul T. Cuzmanes Director July 28, 1995
- --------------------------
Paul T. Cuzmanes
/s/ Julien J. Lavoie Director July 28, 1995
- --------------------------
Julien J. Lavoie
/s/ Donald J. Ruffing Director July 28, 1995
- --------------------------
Donald J. Ruffing
/s/ Charles P. Reilly Director July 28, 1995
- --------------------------
Charles P. Reilly
/s/ Joseph G. Mathews Director July 28, 1995
- --------------------------
Joseph G. Mathews
<PAGE> 64
Signature Title Date
- -------------------------- ------------------------------------ -------------
/s/ Anthony M. Picini Senior Vice President Finance, July 28, 1995
- -------------------------- Chief Financial Officer
Anthony M. Picini Chief Accounting Officer
<PAGE> 65
EXHIBIT INDEX
No. Item
- ------ ----------------------------------------------------------------------
10.2A Second Amendment to Amended and Restated Credit Agreement by and
between the Company and NationsBank of Virginia, N.A., dated effective
April 26, 1995.
10.26 District of Columbia Medicaid Managed Care Program, Provider Agreement
dated September 15, 1994 by and between the Department of Human
Services and D.C. Chartered Health Plan, Inc.
11 Statement re Computation of Per Share Earnings
21 List of Subsidiaries
23 Consent of Independent Accountants - Year ended April 30, 1995
23A Consent of Independent Auditors - Years ended April 30, 1994 and 1993
27 Financial Data Schedule
<PAGE> 1
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT is made as
of this ____ day of April, 1995, by and between PHP HEALTHCARE CORPORATION (the
"Company"), a Delaware corporation with its principal office at 11440 Commerce
Park Drive, Reston, Virginia 22091, and NATIONSBANK, N.A. (the "Bank"),
formerly NationsBank of Virginia, N.A., a national banking association with its
principal office at 1111 East Main Street, Richmond, Virginia 23219.
The Company and the Bank are parties to an Amended and Restated Credit
Agreement dated as of March 8, 1994, as amended by an Amendment to Amended and
Restated Credit Agreement dated as of September 19, 1994 (as so amended, the
"Credit Agreement"); the Company has requested that the Bank make additional
loans to it; the Bank is willing to do so upon the terms and conditions
contained herein; and the Company and the Bank desire to amend the Credit
Agreement further as herein provided. Capitalized terms used herein and not
defined herein shall have the meanings ascribed to them in the Credit
Agreement.
ACCORDINGLY, the Company and the Bank covenant and agree as follows:
1. Definitions.
(a) Commitment Termination Date. The definition of "Commitment
Termination Date" in Subsection 1.1 of the Credit Agreement is amended to read
as follows:
"Commitment Termination Date" means August 31, 1996 or such later date as may
be agreed to in writing by the Bank.
(b) Maximum Aggregate Commitment Amount. Subsection 1.1 of the Credit
Agreement is amended by adding a new definition to read as follows:
"Maximum Aggregate Commitment Amount" means Twenty-Two Million Dollars
($22,000,000) or such lesser amount to which it may be reduced as provided in
Subsections 2.1(d) and 2.1(e).
(c) "Maximum Revolving Credit Commitment Amount". The definition of
"Maximum Revolving Credit Commitment" in Subsection 1.1 of the Credit Agreement
is amended to read as follows:
"Maximum Revolving Credit Commitment Amount" shall mean the lesser of (i) the
Maximum Aggregate Commitment Amount as it may be reduced from time to time as
herein provided or (ii) the Collateral Loan Value.
2. Advances. Subsection 2.1(a) of the Credit Agreement is amended to
read as follows:
(a) Advances. The Bank agrees, subject to the terms and conditions
contained herein, to make revolving credit loans (which loans are hereinafter
collectively referred to as the "Revolving Credit Loans" and individually as a
"Revolving Credit Loan") to the Company and to issue for the account of the
Company or for the account of the Company and one or more Subsidiaries standby
letters of credit from time to time during the period from the date of this
Agreement until the Commitment Termination Date, provided that the aggregate
principal amount of the Revolving Credit Loans outstanding from time to time,
<PAGE> 2
any Unpaid Reimbursement Obligations and the amount of outstanding Letters of
Credit shall not at any time exceed the Maximum Aggregate Commitment Amount, as
it may be reduced from time to time, and provided further that the aggregate
principal amount of the Revolving Credit Loans outstanding from time to time
and any Unpaid Reimbursement Obligations shall not at any time exceed the
Collateral Loan Value, as hereinafter defined.
3. Collateral Loan Value. Subsection 2.1(b) of the Credit Agreement is
amended to read as follows:
(b) Collateral Loan Value. The Collateral Loan Value as of any time
shall be the sum without duplication of:
(i) one hundred percent (100%) of the Net Eligible Accounts
Receivable owing to the Company, PHP Family, Sterling, D.C. Chartered and PHP
NJ MSO, Inc. from a Qualified Government Obligor;
(ii) one hundred percent (100%) of the Net Eligible Accounts
Receivable owing to the Company, PHP Family, Sterling, D.C. Chartered and PHP
NJ MSO, Inc. from any account obligor or obligors other than a Qualified
Government Obligor;
(iii) the lesser of (y) forty percent (40%) of amounts which the
Company, PHP Family, Sterling, D.C. Chartered and PHP NJ MSO, Inc. will bill to
a Qualified Government Obligor or another account obligor within thirty (30)
days of such date and will be Net Eligible Accounts receivable, and (z) Four
Million Dollars ($4,000,000); and
(iv) the lesser of the accounts receivable owing D.C. Chartered
from the District of Columbia or Six Million Three Hundred Thousand Dollars
($6,300,000).
4. Net Eligible Accounts Receivable. The first paragraph of
Subsection 2.1(c) of the Credit Agreement is amended to read as follows:
(c) Net Eligible Accounts Receivable. For purposes of this Agreement,
Net Eligible Accounts Receivable shall include only those receivables due and
owing to the Company, PHP Family, Sterling, D.C. Chartered or PHP NJ MSO, Inc.
which are valid in all respects and represent money due for services provided
and drugs and other goods provided, for which there are no offsets or counter-
claims of any nature whatsoever and the assignment of which is not prohibited
or limited in any respect except as provided in 31 U.S.C. Section 3727 or in
any applicable state law containing comparable notice provisions and shall not
include any receivable which is not paid within ninety (90) days of the date it
is billed and shall not include any receivable for which the Company, PHP
Family, Sterling, D.C. Chartered or PHP NJ MSO, Inc. has received a check,
draft or other remittance which has not been honored, or any claim against any
obligor which is the subject of any insolvency or bankruptcy proceeding. No
receivable shall be a Net Eligible Account Receivable unless the Bank has a
duly perfected first priority security interest therein and in the proceeds
thereof.
Subsection 2.1(c) of the Credit Agreement is further amended by the
addition of a new paragraph (v) to read as follows:
(v) Accounts Owing PHP NJ MSO, Inc. No account receivable owing PHP
NJ MSO, Inc. shall be a Net Eligible Account Receivable and no amount which
<PAGE> 3
will be billed to any account obligor shall be included in the Collateral Loan
Value unless PHP NJ MSO, Inc. has in its files:
(A) written documentation that the account obligor has offered to
purchase services from PHP NJ MSO, Inc., which offer has been accepted by PHP
NJ MSO, Inc. This documentation may consist of a written contract between the
account obligor and PHP NJ MSO, Inc. or a written offer to purchase services
from the account obligor and a written acceptance of such offer signed by an
officer or an employee of PHP NJ MSO, Inc.
(B) except in the case of unbilled amounts described in (b)(iii)
above, a copy of the invoice properly prepared and in the proper amount, which
invoice shall have been sent to the account obligor.
In any event, except with the prior written consent of the Bank, there
shall not be included in Net Eligible Accounts Receivable or otherwise in the
Collateral Loan Value any receivable due or to be due upon billing from any
account obligor if more than fifty percent of the aggregate receivables due PHP
NJ MSO, Inc., or which will be due PHP NJ MSO, Inc., after the billing of such
amounts from such account obligor are not Net Eligible Accounts Receivable or
otherwise includable in the Collateral Loan Value.
The present paragraph (v) of Subsection 2.1(c) is redesignated paragraph
(vi) and clause (y) thereof is amended to read as follows:
(y) Any receivable due or to be due upon billing from any account obligor
if more than fifty percent (50%) of the aggregate receivables due the Company,
PHP Family, Sterling, D.C. Chartered and PHP NJ MSO, Inc. or which will be due
the Company, PHP Family, Sterling, D.C. Chartered and PHP NJ MSO, Inc. after
the billing of such amount, from such account debtor are not Net Eligible
Accounts Receivable or otherwise includable in the Collateral Loan Value.
5. Reduction of Maximum Aggregate Commitment Amount. Subsection 2.1 of
the Credit Agreement is amended by the addition of new paragraphs (d) and (e)
to read as follows:
(d) Mandatory Reduction of Maximum Aggregate Commitment Amount. (i) If
the Maximum Aggregate Commitment Amount has not been previously reduced to
Eighteen Million Five Hundred Thousand Dollars ($18,500,000), the Maximum
Aggregate Commitment Amount will be automatically reduced by the first Three
Million Five Hundred Thousand Dollars ($3,500,000) of net proceeds received by
the Company or Virginia Chartered Health Plan, Inc. from the sale of an equity
interest in Virginia Chartered Health Plan, Inc. and (ii) if the Maximum
Aggregate Commitment Amount has not been previously reduced to Twelve Million
Two Hundred Thousand Dollars ($12,200,000), the Maximum Aggregate Commitment
Amount will be automatically reduced by (x) one hundred percent (100%) of the
first Six Million Three Hundred Thousand Dollars ($6,300,000) collected by D.C.
Chartered on the account receivable owing it from the District of Columbia (the
"D.C. Receivable") and (y) twenty-five percent (25%) of all amounts collected
by D.C. Chartered on the D.C. Receivable in excess of Six Million Three Hundred
Thousand Dollars ($6,300,000).
(e) Optional Reduction or Termination of Maximum Aggregate Commitment
Amount. The Company may at any time and from time to time upon not less than
one (1) day's prior written or telegraphic notice to the Bank reduce or
terminate in its entirety the Maximum Aggregate Commitment Amount, provided
that the amount of any such reduction shall be not less than One Hundred
Thousand Dollars ($100,000), and no such reduction or termination shall reduce
<PAGE> 4
the Maximum Aggregate Commitment Amount below the sum of the aggregate
principal amount of the Revolving Credit Loans then outstanding and any Unpaid
Reimbursement Obligations.
6. Revolving Credit Note. Subsection 2.4 of the Credit Agreement is
amended to read as follows:
2.4. Revolving Credit Note. The obligation of the Company to repay the
Revolving Credit Loans shall be evidenced by the Company's promissory note
(which note is hereinafter referred to as the "Revolving Credit Note") in the
amount of Twenty-Two Million Dollars ($22,000,000) or such lesser amount as may
have been advanced thereunder and remain unpaid, payable to the order of the
Bank at 1111 East Main Street, Richmond, Virginia, or at such other place as
the noteholder may from time to time designate in writing, substantially in the
form of Exhibit B-1 attached hereto with the blanks therein appropriately
completed, dated the date of the Second Amendment to Amended and Restated
Credit Agreement between the Company and the Bank, and payable on the
Commitment Termination Date. The Revolving Credit Note shall bear interest at
the rate or rates and payable on the dates as provided in Section 6.
7. Revolving Credit Fees. Subsection 2.5(b) of the Credit Agreement is
amended to read as follows:
(b) Commitment Fee. The Company paid the Bank on the date the
Original Credit Agreement was executed, and agrees to pay on each anniversary
of such date until the Commitment Termination Date, a Revolving Credit
Commitment Fee equal to one-quarter of one percent (1/4 of 1%) of the Maximum
Aggregate Commitment Amount as of the date such payment is due, provided the
amount of such fee payable in 1996 and each subsequent year shall be prorated
if the Commitment Termination Date is not at least one year later than the date
such fee is payable.
8. Additional Fees. The Credit Agreement is further amended by the
addition of a new Subsection 2.5(c) and a new Subsection 2.5(d) to read as
follows:
(c) Restructuring Fee. The Company will pay the Bank on the date the
Agreement is amended to increase the Maximum Aggregate Commitment Amount to
Twenty-Two Million Dollars a restructuring fee of Seventy Thousand Dollars
($70,000).
(d) Supplemental Revolving Credit Commitment Fees. If on or before
August 15, 1995 the Company has not reduced the Maximum Aggregate Commitment
Amount to an amount which is not greater than Eighteen Million Five Hundred
Thousand Dollars ($18,500,000), the Company will pay the Bank on August 15,
1995 a Supplemental Revolving Credit Commitment Fee of Fifty Thousand Dollars
($50,000). If on or before December 31, 1995 the Company has not reduced the
Maximum Aggregate Commitment Amount to an amount which is not greater than
Twelve Million Two Hundred Thousand Dollars ($12,200,000), the Company will pay
the Bank on December 31, 1995 an additional Supplemental Revolving Credit
Commitment Fee of One Hundred Thousand Dollars ($100,000).
9. Mandatory Prepayments. Subsection 2.7(b) of the Credit Agreement is
amended by adding a sentence at the end of that Subsection to read: "The
Company shall also prepay the Revolving Credit Loans as provided in
Subsection 9.14."
<PAGE> 5
10. Letters of Credit Facility. The first sentence of Subsection 3.1 of
the Credit Agreement is amended to read as follows:
Upon the terms and subject to the conditions contained in this Agreement and in
the L/C Applications, the Bank agrees to issue for the account of the Company
or for the account of the Company and one or more Subsidiaries from time to
time prior to the Commitment Termination Date irrevocable standby letters of
credit (collectively, the "Letters of Credit" and each, a "Letter of Credit")
in an aggregate amount which, together with any Unpaid Reimbursement
Obligations, the amount of any Letters of Credit then outstanding, and the
outstanding balance of the Revolving Credit Loans will not exceed the Maximum
Aggregate Commitment Amount.
11. Term Note. The third sentence of Subsection 4.2 of the Credit
Agreement is hereby deleted, and the following language is substituted in its
place:
Each of the first six (6) installments shall be in the principal amount of Five
Hundred Thirty-Five Thousand Seven Hundred Fourteen and 28/100 Dollars
($535,714.28). Each of the next thirteen (13) installments shall be in the
principal amount of Three Hundred Forty-Two Thousand Dollars ($342,000).
12. Repayment of Term Loan Note. The Bank covenants and agrees that
notwithstanding anything to the contrary contained in the Term Loan Note, the
principal amount of the installments payable under the Term Loan Note on and
after January 31, 1995 will be Three Hundred Forty-Two Thousand Dollars
($342,000), except that in any event the final installment, which is due and
payable on April 30, 1998, shall be in such amount as shall be necessary to pay
in full the entire unpaid principal balance of the Term Loan.
13. Alternate Performance Interest Rate. Subsection 6.2 of the Credit
Agreement is amended to read as follows:
6.2. Alternate Performance Interest Rate. If, as of the end of any
fiscal quarter of the Company ending on or after January 31, 1995, the Company
shall have (a) a ratio of consolidated total liabilities to Tangible Net Worth
computed in accordance with the provisions of Subsection 10.1 of not more than
3.5 to 1 and (b) a Fixed Charge Coverage Ratio as defined in Subsection 9.3 of
not less than 1.3 to 1, all as shown in the periodic filing made by the Company
with the Securities and Exchange Commission (the "SEC") or any governmental
agency or authority succeeding to any or all of the functions of the SEC, and
no Default or Event of Default shall have occurred and be continuing, then
commencing on the date such periodic filing is made which reflects such
condition and continuing until a periodic filing is made reflecting the
condition described in Subsection 6.3 or reflecting that the condition
described in this Subsection 6.2 no longer exists, all Revolving Credit Loans
and the Term Loan shall bear interest at a rate per annum one-half of one
percent (1/2%) above the Prime Rate, such rate to be adjusted as of the date of
each change in the Prime Rate.
14. Best Performance Interest Rate. The lead-in paragraph of
Subsection 6.3 of the Credit Agreement is amended to read as follows:
Best Performance Interest Rate. If, as of the end of any fiscal quarter of
the Company ending on or after January 31, 1995, the Company shall have (a) a
ratio of consolidated total liabilities to Tangible Net Worth computed in
accordance with the provisions of Subsection 10.1 of not more than 2.3 to 1 and
(b) a Fixed Charge Coverage Ratio as defined in Subsection 9.3 of not less than
<PAGE> 6
1.75 to 1, all as shown in the periodic filing made by the Company with the SEC
or any governmental agency or authority succeeding to any or all of the
functions of the SEC, and no Default or Event of Default shall have occurred
and be continuing, then commencing on the date such periodic filing is made
which reflects such condition and continuing until a periodic filing is made
reflecting that the condition described in this Subsection 6.3 no longer
exists, the interest rate on the Revolving Credit Loans and the Term Loan shall
be determined as follows:
15. Subsidiaries. Subsection 7.1 of the Agreement is amended to read as
follows:
The Company has the following wholly owned Subsidiaries and none others:
Primary Care Corporation
Sterling Communities Corporation
PHP Travel, Ltd.
Paragon JSC, Inc.
Paragon DSSC, Inc.
PHP Family Healthcare Corporation
Health Cost Consultants, Inc.
D.C. Chartered Health Plan, Inc.
PHP NJ MSO, Inc.
Virginia Chartered Health Plan, Inc.
Commerce Park Development Corporation
East West Research Corporation
16. Pledge Agreement. Subsection 8.4 of the Credit Agreement is amended
to read as follows:
8.4. Pledge Agreement. The Company shall have executed and delivered
to the Bank a Pledge Agreement (the "Pledge Agreement") in the form of
Exhibit I-1 attached hereto pledging to the Bank and granting to the Bank a
security interest in all of the capital stock of Commerce Park Development
Corporation, Health Cost Consultants, Inc., PHP NJ MSO, Inc., PHP Family
Healthcare Corporation and Virginia Chartered Health Plan, Inc. and shall have
physically delivered to the Bank certificates evidencing all shares of such
corporations owned by the Company, together in each case with a duly executed
stock power.
17. Evidence of Corporate Action. Subsection 8.12 of the Credit Agreement
is amended to read as follows:
8.12. Evidence of Corporate Action. The Bank shall have received
certified copies of papers evidencing all corporate action taken by the Company
to authorize this Agreement, the Notes, the Security Agreement to which it is a
party, the Pledge Agreement and the Mortgages and the borrowings hereunder,
certified copies of papers evidencing all corporate action taken by PHP Family
to authorize the Security Agreement to which it is a party, certified copies of
papers evidencing all corporate action taken by Sterling to authorize the
Security Agreement to which it is a party, certified copies of papers
evidencing all corporate action taken by D.C. Chartered to authorize the
Security Agreement to which it is a party, and such other papers as the Bank
shall reasonably require, and at the time of the issuance of each Letter of
Credit the Bank shall have received certified copies of papers evidencing all
corporate action taken by the Company and each Subsidiary which is a party to
such L/C Application to authorize the L/C Application for such Letter of
Credit.
<PAGE> 7
18. Financial Statements and Information. Subsection 9.1 of the Credit
Agreement is amended to read as follows:
9.1. Financial Statements and Information. Furnish to the Bank (a)
as soon as available but in no event more than thirty (30) days after the end
of each calendar month a cash flow statements and a profit statement for the
Company and its subsidiaries in such form as shall be reasonably acceptable to
the Bank; (b) as soon as available but in no event more than thirty (30) days
after the end of each calendar month a Borrowing Base Certificate dated as of
the first day of such month, or if the first day is not a Business Day dated as
of the next succeeding Business Day, and an unbilled accounts receivable
analysis report substantially in the form of Exhibit R attached hereto dated as
of the last day of the preceding calendar month; (c) as soon as available but
in no event more than forty-five (45) days after the close of each fiscal
quarter of the Company, a consolidated balance sheet of the Company and its
subsidiaries as of the end such quarter and a consolidated statement of
earnings for the Company and its Subsidiaries for the quarterly period then
ended and for that portion of the fiscal year ending on such date, accompanied
by an aging of accounts receivable and a schedule setting forth the
calculations to show compliance with the financial covenants contained herein,
certified by the chief financial officer or any other duly authorized executive
officer of the Company, together with a certificate of that officer stating
whether any event has occurred or condition exists that constitutes an Event of
Default or a Default hereunder and, if so, stating the facts with respect
thereto; (d) as soon as available, but in no event more than one hundred twenty
(120) days after the close of each of the Company's fiscal years, a copy of the
annual audit report of the Company in reasonable detail, prepared in accordance
with GAAP applied on a basis consistent with that of the preceding year and
certified by KPMG Peat Marwick or other independent certified public
accountants satisfactory to the Bank, which report shall include a consolidated
balance sheet of the Company and its Subsidiaries as of the end of such fiscal
year, and related consolidated statements of earnings, stockholders' equity and
cash flows for such fiscal year, and accompanied by an aging of accounts
receivable and a schedule setting forth the calculations to show compliance
with the financial covenants contained herein, certified by the chief financial
officer or any other duly authorized executive officer of the Company, together
with a certificate of that officer stating whether any event has occurred or
condition exists that constitutes an Event of Default or a Default hereunder
and, if so, stating the facts with respect thereto; (e) promptly upon their
receipt, copies of all management letters received by the Company from its
accountants; (f) promptly upon their becoming available, copies of all
financial statements, reports, notices, and proxy statements sent by the
Company or any of its Significant Subsidiaries to all or substantially all of
its stockholders, and of all regular, periodic and special reports filed by the
Company or any of its Subsidiaries with any securities exchange or with the
Securities and Exchange Commission or any governmental authority succeeding to
any or all of the functions of said commission; and (g) such additional
information, reports, or statements as the Bank may from time to time
reasonably request, such information to be provided as soon as available but in
no event more than thirty (30) days after receipt by the Company of such
request.
19. Tangible Net Worth. Section 9.2 of the Credit Agreement is amended to
read as follows:
9.2. Tangible Net Worth. Maintain Tangible Net Worth as of
January 31, 1995 of not less than Ten Million Dollars ($10,000,000) and as of
the end of each fiscal quarter thereafter of not less than the sum of Ten
<PAGE> 8
Million Dollars ($10,000,000) plus seventy percent (70%) of the cumulative
consolidated earnings of the Company and its Subsidiaries for each fiscal
quarter ending after January 31, 1995 (without reduction for any losses).
20. Minimum Fixed Charge Coverage Ratio. Subsection 9.3 of the Credit
Agreement is amended to read as follows:
9.3. Minimum Fixed Charge Coverage Ratio. Maintain a ratio, measured
as of the end of each fiscal quarter, of (a) the sum of its consolidated net
earnings before interest expense, income taxes, depreciation and amortization
for such quarter to (b) the sum of (i) one-quarter of the current maturities of
long-term debt as shown on the consolidated balance sheet as of such date and
(ii) consolidated interest expense for such quarter, all as determined in
accordance with GAAP, of not less than 1.2 to 1 as of the end of each fiscal
quarter. The ratio computed as provided in this Subsection 9.3 is herein
referred to as the "Fixed Charge Coverage Ratio."
21. Affirmative Covenants. The Credit Agreement is further amended by the
addition of new Subsections 9.17, 9.18, 9.19 and 9.20 to read as follows:
9.17. Sale of Equity Interest in Virginia Chartered Health Plan, Inc.
Promptly upon the sale of an equity interest in Virginia Chartered Health Plan,
Inc. notify the Bank of such sale.
9.18. Receivables of D.C. Chartered. Cause D.C. Chartered to use its best
efforts to collect accounts receivable owing it by the District of Columbia and
promptly upon receipt of any payment of such accounts notify the Bank.
9.19. Security Interests. Upon request by the Bank at any time and from
time to time promptly and in any event within twenty (20) days of the receipt
of such request, cause each of its Subsidiaries designated by the Bank to
authorize, execute and deliver to the Bank a security agreement in such form as
may be reasonably requested by the Bank granting the Bank a security interest
in all accounts receivable of such Subsidiary including those thereafter
arising to secure all obligations of the Company to the Bank, execute and file
financing statements in the appropriate form and in the appropriate offices to
perfect such security interest and provide the Bank with receipted copies
thereof and a report of a search of the financing statements on file in such
offices showing that there are no prior financing statements of record naming
such Subsidiary as debtor and containing a description of accounts and that no
notice of federal tax lien has been filed against such Subsidiary.
9.20. Opinion of Counsel. Cause an opinion of counsel (which may be
in-house counsel) substantially in the form of Exhibit Q-1 attached hereto to
be delivered promptly to the Bank.
22. Liabilities to Tangible Net Worth. Subsection 10.1 of the Credit
Agreement is amended to read as follows:
10.1. Liabilities to Tangible Net Worth Ratio. Permit the ratio of
(a) consolidated total liabilities of the Company and its Subsidiaries to (b)
Tangible Net Worth to exceed 5.5 to 1 as of January 31, 1995, or as of the end
of any fiscal quarter thereafter.
<PAGE> 9
23. Representations and Warranties. The Company represents and warrants
to the Bank as follows:
23.1. Prior Representations. The representations and warranties
made by the Company in Subsection 7.2 of the Credit Agreement are true and
correct as of the date of this Amendment except to the extent that such
representations and warranties relate solely to an earlier date.
23.2. Corporate Authority. The Company has full corporate power and
authority to enter into this Amendment and to execute and deliver the Revolving
Credit Note. No consent or approval of stockholders or consent or approval of,
notice to or filing with, any public authority is required as a condition to
the validity of this Amendment or the Credit Agreement as amended hereby.
23.3. Binding Agreements. This Amendment and the Revolving Credit
Note constitute and the Credit Agreement as amended hereby constitutes the
valid and legally binding obligation of the Company enforceable in accordance
with their terms, except to the extent such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization and moratorium laws and
similar laws relating generally to the enforcement of creditors' rights.
23.4. No Conflicting Agreements. There is no charter, bylaw or
preference stock provision of the Company and no provision of any existing
mortgage, indenture, contract or agreement binding on the Company or any
Subsidiary or affecting their properties that would conflict with or in any way
prevent the execution, delivery or carrying out of the terms of the Credit
Agreement as amended hereby.
23.5. Absence of Defaults. No Event of Default or Default has
occurred and is continuing.
24. Costs and Expenses. The Company will pay all out-of-pocket expenses
incurred by the Bank in the preparation of this Amendment, including, but not
limited to, the reasonable fees and disbursements of counsel for the Bank.
25. Prior Agreement. Except as otherwise expressly amended by this
Amendment and except as the terms thereof may have been waived from time to
time in writing by the Bank, the Credit Agreement is and shall continue to be
in full force and effect in accordance with its terms. The parties hereto
further covenant and agree that each reference in any note, agreement or other
document to the "Credit Agreement" shall be deemed to refer to the Credit
Agreement as amended by this Amendment and as it may be amended from time to
time hereafter.
26. Governing Law. This Amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the Commonwealth of Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
PHP HEALTHCARE CORPORATION
By
-------------------------------------
Its
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<PAGE> 10
NATIONSBANK, N.A.
By
-------------------------------------
Its
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<PAGE> 1
EXHIBIT 10.26
===============================================================================
District of Columbia Medicaid Managed Care Program
Department of Human Services
Provider Agreement
===============================================================================
Name of Provider: DC Chartered Health Plan Inc.
Address: 820 First Street, N.E., Suite LL100
Washington, D.C. 20002
This AGREEMENT made and entered into this 15 day of September 1994, by and
between the Commission on Health Care Finance, D.C. Department of Human
Services, hereinafter referred to as the "Department", and the above named
Provider is, as stated above, hereinafter designated as the "provider."
WITNESSETH:
WHEREAS, persons receiving public assistance payments from the Department of
Human Services and other persons eligible for care under the Medical Assistance
Program operating under Title XIX of the Social Security Act, are in need of
Medical Care;
WHEREAS, Section 1902(a)(27) of Title XIX of the Social Security Act requires
states to enter into written agreement with every person or institution
providing services under the State Plan for Medical Assistance (Title XIX);
WHEREAS, pursuant to Commission's Order 70-83 and PL-90-227 which makes the
D.C. Department of Human Services the agency responsible for administering the
Medical Assistance Program (Title XIX) in the District of Columbia, and
authorizes the Department of Human Services to take all necessary steps for the
proper and efficient administration of the District of Columbia Medical
Assistance Program;
WHEREAS, to participate in the District of Columbia Medical Assistance Program,
the provider must when applicable: (1) be licensed in jurisdiction where
located; (2) be currently in compliance with standards for licensure in that
jurisdiction; (3) in compliance with applicable Federal and District standards
for participation in Title XIX of the Social Security Act;
WHEREAS, the prospective provider has filed an application with the Department
to provide medical care in the form of services to persons eligible under the
Title XIX Medical Assistance Program and said application is incorporated by
reference into this Agreement and made a part hereof the same as if it were
written herein and;
WHEREAS, the prospective provider has demonstrated to the satisfaction of the
Department that it meets the financial requirements to serve as a provider and
has the resources to provide services to Medicaid Managed Care recipients under
the requirements of the program;
September 13, 1994
<PAGE> 2
WHEREAS, the prospective provider has expressed to the Department its interest
in participating in the D.C. Medicaid Managed Care Program for AFDC and AFDC-
related recipients, established pursuant to the authority set forth in the
Medicaid Managed Care Act of 1992 as Amended, D.C. Law 9-247, D.C. Code,
Sec 1-359(d) and Mayor's Order No. 93-218;
NOW, THEREFORE, the parties intending to be legally bound hereby agree as
follows:
TERMS AND CONDITIONS
ARTICLE 1
GENERAL PROVIDER QUALIFICATIONS
A. Each provider shall execute a Medicaid managed care provider agreement
with the Department.
B. Each provider shall admit or refer all AFDC and AFDC-related Medicaid
recipients requiring hospital care only to a hospital located in the
District unless:
(1) Emergency care is required and a non-District hospital is the
closest emergency facility to the recipient at the time of the
emergency; or
(2) The enrollee requires a specialized service not available in a
hospital located in the District.
C. Each provider shall maintain a staffed business office in the
District.
ARTICLE 2
SPECIFIC PROVIDER QUALIFICATIONS
A. Providers shall enter into non-risk, other risk contracts or a
combination of the two with the Department to provide a predefined set
of services to AFDC and AFDC-related recipients for a fixed, prepaid,
capitated fee.
B. Providers shall meet the requirements of an HMO as defined in the
State Plan of Medical Assistance.
C. Each provider shall establish a Medicaid Advisory Committee, which
shall meet at least quarterly to advise the provider on matters
regarding service to AFDC and AFDC-related Medicaid enrollees. At
least two (2) members of the Advisory Committee shall be AFDC and
AFDC-related Medicaid recipients enrolled in the provider.
September 13, 1994
<PAGE> 3
ARTICLE 3
FINANCIAL REQUIREMENTS - PROVIDERS
A. Each provider shall ensure through its contracts, subcontracts, and
any other appropriate manner that neither enrollees nor the District
are held liable for debts of the provider in the event of the
provider's insolvency.
B. Each start up provider shall deposit into an escrow account,
established and held in trust in a financial institution in the
District for the sole purpose of holding such deposits, a surety bond,
cash, securities, letters of credit, or an acceptable combination of
these in an amount that shall be the greater of the following:
(1) Five percent (5%) of its estimated expenditures for health care
services rendered to Medicaid recipients in its first year of
operation;
(2) Twice its estimated average monthly uncovered expenditures for
services rendered to Medicaid recipients in its first year of
operation; or
(3) One-hundred thousand dollars ($100,000).
C. Each on-going provider shall deposit in an escrow account, established
and held in trust in a financial institution in the District for the
sole purpose of holding such deposits, a surety bond, cash,
securities, letters of credit, or an acceptable combination of these
in the following amounts:
(1) In the first year of operation, a deposit equal to the greater of
a sum equal to one (1) month's estimated expenditures or one-
hundred thousand dollars ($100,000);
(2) In the second year of operation, a deposit equal to two percent
(2%) of its estimated annual expenditures; and
(3) In the third and subsequent years of operation, a deposit equal to
three percent (3%) of its annual expenditures for the year at
issue.
D. For the purposes of section C., the second and each subsequent year's
estimate shall be based on the prior year's operating expenses and
delivery arrangements.
E. The Department may require a provider to update its insolvency
deposits on a quarterly basis if the organization is experiencing
rapid growth and may order suspension of new Medicaid enrollments
until the appropriate deposit is certified to the Department. The
provider may also request its deposit be updated quarterly if
enrollment has declined.
F. Except as specified in section G, all income from deposits shall
belong to the depositing organization and shall be paid to the
depositing organization as the income becomes available.
September 13, 1994
<PAGE> 4
G. If a provider defaults, the Department reserves the right to use the
deposit to recover any capitation payments issued to the organization
and to cover the cost of care for AFDC and AFDC-related Medicaid
recipients enrolled in the provider's@plan until the AFDC and AFDC-
related Medicaid recipients are assigned to another provider.
H. All funds held in escrow shall be invested only in securities or other
investments permitted by District laws that govern the investment of
assets that constitute the legal reserves of life insurance.
I. Unless otherwise provided in this article, each provider shall obtain,
at its own expense, reinsurance in the form of individual stop loss
protection, for those services for which the provider is at risk, as
detailed in Addendum I.
J. Any director, officer, employee, or partner of a provider who
receives, collects, disburses, or invests funds in connection with the
activities of the organization shall be responsible for the funds as a
fiduciary of the provider.
K. Each provider shall maintain in force a fidelity bond in an amount of
not less than one-hundred thousand dollars ($100,000) per person for
each officer and employee who has a fiduciary responsibility or duty
to the organization.
L. Each provider shall provide and maintain public liability and
malpractice insurance, as applicable, in an amount sufficient to cover
all claims that may arise out of the organization's operations under,
the terms of the Medicaid provider agreement and shall provide proof
of insurance coverage to the Department upon application to provide
managed care services to AFDC and AFDC-related Medicaid recipients.
If any carrier of public liability or malpractice insurance cancels a
provider's insurance, the provider shall send written notice of the
cancellation to the Department within 24 hours of having, received
said notice.
M. Each provider shall maintain unemployment compensation coverage and
workers' compensation insurance in accordance with applicable federal
and District law and regulations. If any carrier of unemployment or
worker's compensation insurance cancels the provider's insurance, the
provider shall send written notice of the cancellation to the
Department within 24 hours of the insurer's notice to the provider of
its intent to cancel.
N. If a provider's liability, malpractice, worker's compensation or
unemployment compensation insurance is canceled or lapses, the
Organization shall cease to provide any services to AFDC and AFDC-
related Medicaid recipients until the insurance is reinstated or
comparable insurance is purchased. The Department shall not pay any
provider for any services provided to an AFDC or AFDC-related Medicaid
recipients while the organization operated without insurance. If the
Department does make a payment for services rendered while the
provider operated without insurance, the organization shall reimburse
the Department for the payments. The Department reserves the right to
adjust any future payments to the provider or its successors to
recover any payments made while the provider operated without
September 13, 1994
<PAGE> 5
insurance. The Department may also use the provider's deposit to
obtain coverage for AFDC and AFDC-related recipients while the
provider is operating without the required insurance.
O. Providers operated by the District government are exempt from the
financial and insurance requirements in this agreement.
ARTICLE 4
REQUIRED INFORMATION
A. Each provider shall submit the following to the Department with its
application for a Medicaid Managed Care provider agreement:
(1) A copy of the basic organizational documents of the prepaid,
capitated provider, including an organizational chart and current
articles of incorporation;
(2) A copy of the by-laws or any other documents that regulate the
conduct of the internal affairs of the prepaid, capitated
provider;
(3) A description of the organization's ownership structure and a
list of major owners, including stockholders who own or control
five percent (5%) or more outstanding shares;
(4) A list of board members and each member's business affiliations,
interests in, and ownership of, other health care providers or
related services or providers;
(5) A statement of the prepaid, capitated provider's policies and
procedures governing payment of claims to health care providers;
(6) A statement of the prepaid, capitated provider's policies and
procedures governing the distribution of revenues to owners
(distribution of revenues may include bonuses, dividends, stock
options, and other incentives);
(7) A list of the name, address and specialty of each physician who
participates in the prepaid, capitated provider's plan and a copy
of their licenses and evidence of the board certification of each
physician who participates in the plan;
(8) A roster of key personnel, the qualifications of each person in a
key position and a copy of the position description for each key
position;
(9) A written description of the prepaid, capitated provider's
credentialing procedures;
(10) The number of clinical, administrative and marketing employees
who will provide services to Medicaid recipients;
(11) The form of evidence of coverage to be issued to enrollees;
September 13, 1994
<PAGE> 6
(12) For on-going prepaid, capitated providers, financial statements
that show the prepaid, capitated provider's assets, liabilities,
and sources of financial support, including the most recent
audited financial statement;
(13) For new, prepaid, capitated providers, pro forma operating
statements and balance sheets and written documentation of
sources of working capital, other sources of funding, and
documentation that the organization has ready access to these
funds;
(14) A written description of the proposed marketing plan;
(15) A written description of the medical record and statistical
reporting systems;
(16) A copy of the proposed enrollee grievance process;
(17) A statement on the prepaid, capitated provider's background and
experience in serving low-income, diversified population groups
in the District or similar populations in other states;
(18) A copy of the prepaid, capitated provider's proposed plan for
handling, out-of-plan and out-of-area emergency coverage;
(19) A list of all companies in which the prepaid, capitated provider
or its officers have a financial interest;
(20) A copy of any agreement with any hospital located in the District
and a copy of the inpatient care admission policies, which shall
ensure that each of the organization's AFDC and AFDC-related
Medicaid enrollees shall receive hospital inpatient care in a
hospital located in the District;
(21) A list of subcontractors that will provide services to AFDC and
AFDC-related Medicaid recipients and a copy of each subcontract;
(22) The address of each site at which services will be provided to
AFDC and AFDC-related Medicaid recipients;
(23) A description of the procedures and programs that ensure the
availability and accessibility of urgent and emergency services
on a twenty-four (24) hour, seven (7) day per week basis;
(24) A copy of the prepaid, capitated provider's plan to ensure that
the services provided are effective and of a consistently high
quality; and
(25) A written description of the enrollment process.
B. Each provider shall provide to the Department written notice of the
termination of any agreement between the provider and a hospital to
provide inpatient care, or any other significant change in the
agreement between the provider and the hospital, not less than thirty
(30) calendar days prior to the effective date of the change.
September 13, 1994
<PAGE> 7
C. Each provider shall notify the Department, in writing, within thirty
(30) days of any material modification of the information in section
2304.1 of the regulations implementing the Medicaid Managed Care
Program.
D. Each provider shall make available to the Department for inspection
and copying, copies of all standards, protocols, manuals, and other
documents used to arrive at decisions on the provision of care to AFDC
and AFDC-related Medicaid recipients.
E. Each provider shall provide to the Department at the beginning of each
quarter, a list of the names and qualifications of each physician
enrolled or disenrolled as a part of the plan's network or panel
during, the previous quarter.
F. Except as noted in section E, each provider shall notify the
Department, in writing, within thirty (30) days of any material change
in the information required in Section 2304.
ARTICLE 5
MARKETING
A. Each provider shall submit to the Department for its prior written
approval all marketing plans, procedures, and materials including the
following:
(1) Marketing, policies and manuals;
(2) A written description of proposed marketing approaches;
(3) Marketing brochures and fliers;
(4) Advertising copy and public service announcements;
(5) Enrollment training guidelines;
(6) A written description of the basis on which marketing personnel
will be compensated; and
(7) Nominal value marketing gifts.
B. No provider shall engage in any deceptive marketing practice that
misleads, confuses, or defrauds an eligible enrollee or the
Department.
C. Marketing materials distributed to Medicaid recipients for use in
selecting a primary care provider, as defined in section 2599 of the
Managed Care Regulations, shall be clear and shall include at least
the following:
(1) A statement that enrollment in the provider is voluntary;
(2) A statement that all necessary health care, except emergency care
and services excluded under managed care must be obtained through
the provider;
<PAGE> 8
(3) A description of the benefits package and excluded services;
(4) The days and hours of service;
(5) The address of each facility or service site;
(6) A description of the procedures to follow to receive services
after hours;
(7) Telephone numbers to access emergency care services;
(8) A statement that disenrollment from the provider is subject to
the limitations described in Chapter 25 of the Managed Care
Regulations;
(9) A description of the provider grievance process, including
methods for filing grievances and the right of a member to
receive assistance from the personal representative of the-
member's choice; and
(10) A statement of the member's rights and responsibilities.
D. Except as provided in section A, each provider shall not provide cash,
gift incentives, or rebates to prospective enrollees.
E. Each provider shall not claim or assert superior medical care or
provider skills or make untruthful, misleading or deceptive statements
regarding the merits of its plan.
F. Each provider shall not compensate marketing representatives based on
commissions or other incentives that are based upon the number of new
AFDC or AFDC-related Medicaid recipients enrolled.
G. Each eligible AFDC and AFDC-related Medicaid recipient in the category
or categories covered under the managed care provider agreement shall
be considered a potential enrollee and may not be discriminated
against on the basis of health status or need for health care
services.
H. Providers shall not solicit AFDC or AFDC-related Medicaid recipients
already enrolled in another D.C. Medicaid Managed Care provider,
except during the period of open enrollment.
I. Each provider agrees that neither it nor its agents will represent to
an AFDC or AFDC-related Medicaid recipient that he or she is required
to enroll in the provider.
ARTICLE 6
EVIDENCE OF COVERAGE
A. Each provider agrees to provide each enrollee with written evidence of
coverage prior to the effective date of enrollment, which shall
include the following.
September 13, 1994
<PAGE> 9
(1) Notification of the recipient's effective date of enrollment;
(2) A plan membership card;
(3) Information regarding the conditions of enrollment in the plan
and the scope, content, duration and limitation of coverage;
(4) An explanation of the procedure for obtaining benefits,
including, the address and telephone number of the provider's
office or facility and the days that the office or facility is
open and service is available;
(5) Information as to where and how urgent and emergency medical care
are available on a twenty four (24) hour, seven (7) day,a week
basis, and an explanation of out-of-plan coverage;
(6) Notification that loss of Medicaid eligibility will result in
loss of plan enrollment under Medicaid sponsorship, except as
otherwise provided in the Medicaid managed care provider
agreement;
(7) Notification of the enrollee's responsibility to report any third
party payment source to the Department and the consequences of
not doing so;
(8) A copy of the provider's grievance,process, including methods for
filing, Grievances and the right of a member to receive
assistance from the personal representative of the member's
choice;
(9) Information regarding allowable reasons and procedures for
disenrolling from the provider's plan; and
(10) Notification of the plan's responsibility to arrange for a
comprehensive physical examination for the enrollee(s) if the
enrollee(s) desires such an examination.
ARTICLE 7
SERVICE DELIVERY AND QUALITY ASSURANCE REQUIREMENTS GENERAL
A. Each provider shall to provide each enrollee with high quality health
care at locations that ensure reasonable availability and
accessibility to enrollees.
B. Each provider shall to provide either directly or by referral, each
service in the Medicaid managed care benefits package listed in
Addendum I, including patient management and referrals and approvals.
C. Each provider shall ensure that urgent and emergency medical care is
available to AFDC and AFDC-related Medicaid enrollees on a twenty-four
(24) hour basis, seven (7) days a week, either through the provider or
through other appropriate facilities.
September 13, 1994
<PAGE> 10
D. Each provider shall conduct an orientation program to inform AFDC and
AFDC-related recipients of available services and facilities.
E. Each AFDC and AFDC-related Medicaid recipient enrolled in a provider
shall receive service through the same health care providers and
facilities that serve non-AFDC and AFDC-related Medicaid enrollees.
F. Each AFDC and AFDC-related Medicaid enrollee shall be fully integrated
into the provider membership and shall not be treated in a manner
different from non-AFDC or AFDC-related Medicaid enrollees.
G. Each provider shall allow each enrollee, to the maximum extent
feasible, the freedom to choose from among its participating primary
care physician and shall notify the Department in writing of the
primary care physician selected by or assigned to the AFDC or AFDC-
related recipient by the end of the first month Of enrollment in the
plan. Any chances in primary care physician shall be reported to the
Department, in writing, on a monthly basis.
H. Each provider shall provide health education programs for its
enrollees in languages understood by the population being served. The
education programs shall include, at a minimum, the following:
(1) Information on the importance and availability of preventive
care;
(2) Information on the importance and availability of childhood
immunizations;
(3) Information on the importance of, right to, and procedure for
scheduling the Early Periodic Screening, Diagnosis and Treatment
(EPSDT) screens for children covered by Medicaid;
(4) Information on birth control and on the importance and
availability of prenatal and well baby care;
(5) Information on proper nutrition for pregnant women and children;
and
(6) Information on preventive and treatment measures for drug abuse
and alcoholism.
I. Each provider shall have a system of follow-up of patient care for
enrollees with chronic and acute illnesses, including an appointment
follow-up system for persons who do not appear for appointments.
J. Waiting times for appointments for AFDC and AFDC-related Medicaid
enrollees shall not exceed the waiting times for non-AFDC or AFDC-
related Medicaid enrollees of the provider.
K. Each provider shall maintain a current, unified medical record on each
enrollee.
September 13, 1994
<PAGE> 11
L. Each provider shall establish and maintain a quality assurance program
to review the quality, appropriateness and timeliness of the services
performed. The quality assurance program shall be approved by the
Department in accordance with the requirements of section M.
M. The provider's quality assurance program shall:
(1) Be consistent with federal Medicaid utilization review and
control regulations;
(2) Provide for review, by appropriate health care professionals, of
the process followed in providing health services;
(3) Provide for systematic data collection on performance,
utilization and treatment outcomes;
(4) Provide for interpretation of this data to the practitioners; and
(5) Provide for making needed changes.
N. The provider shall obtain accreditation through an external review by
an independent quality accreditation organization such as the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO) or the
National Committee for Quality Assurance (NCQA). This process must
begin within 12 months of entry into the D.C. Medicaid Managed Care
Program and provisional accreditation must be received by the end of
the third year of participation in the program.
ARTICLE 8
PAYMENT FOR SERVICES
A. The Department shall not make any payment for Medicaid services to a
provider unless the provider has executed a Medicaid managed care
provider agreement.
B. Except as provided in Article 24, each provider's Medicaid managed
care provider agreement with the Department shall be for a twelve (12)
month period.
C. Under this agreement, the provider and the Department are entering
into an other risk contract whereby the provider agrees to provide
certain services on a risk basis and other services on a non-risk
basis, as detailed in Addendum 1. Reimbursement to the provider shall
not exceed the upper limits defined in 42 CFR 447.361 for those
services provided on a risk basis. Reimbursement to the provider
shall not exceed the upper limit defined in 42 CFR 447.362 for those
services provided on a non-risk basis.
D. The Department shall pay the provider a monthly fixed, per capita fee
for the covered services it provides to AFDC and AFDC-related Medicaid
enrollees. The monthly fixed, per capita fee will be allocated
between the risk and non-risk portions of this agreement. The portion
of the monthly fixed, per capita fee allocated to the non-risk portion
September 13, 1994
<PAGE> 12
of the contract will represent an interim payment which is subject to
the settlement provisions of Section I.
E. The Department shall calculate a separate monthly fixed, per capita
fee for adults and for children.
F. No provider shall be paid a monthly fixed, per capita fee in excess of
ninety-two and one-half percent (92.5%) of historical Medicaid program
costs for the eligible Medicaid population inflated forward from the
base year.
G. Within 90 days of the end of the contract period, the provider shall
submit to the Department an accounting of its actual expenditures for
services rendered to enrolled recipients on a non-risk basis, as
detailed in Addendum I, during the period. The data shall include
actual encounter and expenditure data in sufficient detail that the
Department can use the data to compute the amount the District would
have paid for the same services had they been received from a provider
receiving fee-for-service reimbursement from the program.
The data may be presented in aggregate form, but the submission must
include supporting documentation in sufficient detail to allow the
Department to desegregate the data to sustain the aggregate data on
audit (patient, provider, dates of service, service provided or
procedure performed, etc.) The supporting documentation must identify
the patients and providers by Medicaid managed care identification
numbers, and documentation regarding medical services or procedures
must identify the service or procedure using the Medicaid billing
terminology in use at the time the service is provided (e.g., DRG,
ICD-9, CPT4).
H. At the end of the contract period, the Department shall calculate the
difference between the medical and administrative costs incurred by
the provider in rendering required non-risk services to enrolled
recipients, and the total capitated payments related to the non-risk
portion of the contract made to the provider for enrolled managed care
recipients during the contract period. The calculation shall be
completed within 60 days of the date the Department receives the
required information from the provider.
I. The Department shall issue a final settlement payment that shall not
exceed the federal upper limit for the difference between the
capitated payments for the nonrisk portion of the contract made to-the
provider for recipients enrolled during the contract period and the
calculated cost of providing those non-risk services had they been
provided by fee-for-service providers enrolled in the Medicaid
program. The payment shall be made within 30 days of the completion
the calculation.
J. Emergency services provided to members of a provider by a health care
provider that does not have a written agreement with the provider to
provide services shall be reimbursed by the Department in accordance
with the rate or methodology described in the State Plan of Medical
Assistance. Reimbursement by the Department is limited to emergency
room services. If the patient is admitted to a non-contract hospital,
the provider is responsible for reimbursement.
September 13, 1994
<PAGE> 13
K. Services not covered under the provider's Medicaid managed care
provider agreement but covered by the Medicaid program shall be
reimbursed by the Department on a fee-for-service basis in accordance
with the rate or methodology described in the State Plan of Medical
Assistance.
L. A provider that subcontracts with a Federally Qualified Health Center
(FQHC) shall permit FQHCs to elect to be paid at one hundred percent
(100%) of reasonable costs for the services described in section
1905(a)(2)(C) of the Social Security Act in accordance with the
requirements of section 1903(m)(2)(A) of the Social Security Act.
M. If the Medicaid program institutes a chance in Medicaid services that
leads to an increase or decrease of three (3) percent or more in the
total cost of care within the term of the Medicaid Managed Care
provider agreement, notice will be provided to the provider and the
capitated rate shall be recalculated within thirty (30) days of the
date of notice. In accordance with Section N below, the effective
date of the change in Medicaid Services will be the effective date
of.the rate change.
N. No capitation rate increase or decrease shall be effective until
thirty (30) days after the notice of the rate change has been
published in the "D.C. Register".
O. The Department shall, at the written request of the provider, make
available to the organization, data utilized to compute the capitation
rates and reports that attest to the actuarial soundness of the
method.
P. No provider shall impose co-payment requirements, or other fees on
AFDC and AFDC-Related Medicaid enrollees.
Q. The Department shall pay a capitated payment to the provider each
month for each Medicaid recipient enrolled as of the fifteenth (15)
day of the previous month. The Department shall send each provider a
roster of AFDC and AFDC-related Medicaid enrollees in the form of a
remittance advice on or before the first day of the month which shall
serve as the basis for determining payment for that month. Except as
provided in Section R, reimbursement shall be rendered only for
persons listed on the remittance advice as eligible members of the
plan.
R. The Department shall pay a capitated payment to the provider for a
newborn when the mother is enrolled with provider at the time of the
birth. Payment by the Department shall not occur until the newborn
has been assigned a D.C. Medicaid number. At the time of payment, the
Department shall make retroactive payments to the provider from the
month of the newborn's birth.
S. If an enrollee loses Medicaid eligibility, voluntarily elects to
change providers, or is involuntarily disenrolled by the provider in
accordance with the requirements of the program, the Department shall
cease payments to the provider for that recipient effective the last
day of the month in which eligibility is terminated or the
disenrollment becomes effective.
September 13, 1994
<PAGE> 14
T. If a D.C. Medicaid Managed Care recipient receives a service covered
by the D.C. Medicaid Managed Care program from a provider other than
her/his primary care provider of record, the Department shall not
reimburse the provider rendering the service unless the service was
authorized by the primary care provider of record and is eligible for
reimbursement by the Department in accordance with the requirements of
the program.
U. The Department reserves the right to withhold the capitated payment
for recipients in the D.C. Medicaid Managed Care Program for which
accurate addresses or current locations cannot be determined by either
the Department or the provider.
ARTICLE 9
GRIEVANCE SYSTEM - PROVIDER
A. Each provider shall have a grievance system in accordance with 42 CFR
434.32 with reasonable procedures for the prompt resolution of
complaints initiated by enrollees.
B. Each provider shall submit its proposed grievance system to the
Department for written approval prior to implementation.
C. The grievance system shall include a Grievance Committee for reviewing
enrollee complaints with one or more AFDC and AFDC-related Medicaid
enrollees on the Committee.
D. An enrollee may pursue a grievance with the assistance of a personal
representative of his or her choice.
E. A written record of each Grievance review shall be prepared and shall
be maintained by the provider and made available to the Department
upon written request.
F. The provider agrees to submit to the Department an annual report of
grievances within ninety (90) days of the close of the contract
period. The Annual Report shall include the following:
(1) The total number of grievances initiated by enrollees;
(2) A summary description of the types of grievances initiated; and
(3) A summary description of any action taken to resolve grievances.
GRIEVANCE SYSTEM - THE DEPARTMENT
A. Each AFDC and AFDC-related recipient that is aggrieved by an
individual decision of the Department affecting the recipient's right
to select a provider or receive a covered service through the
District's Medicaid Managed Care program shall be entitled to a
hearing before the Department's Office of Fair Hearings as provided in
D.C. Code Sections 3-210.1 to 3-210.18 and 42 CFR Part 431, Subpart E.
September 13, 1994
<PAGE> 15
ARTICLE 10
CONFIDENTIALITY OF INFORMATION - GENERAL
A. The provider agrees to protect all information, records, and data
collected and maintained by the provider or its subcontractors that
relate to enrollees from unauthorized disclosure.
B. Except as otherwise provided by federal law or regulation, the use or
disclosure of information concerning enrollees shall be restricted to
purposes directly related to the administration of the Medicaid
program in accordance with 42 CFR 431.302.
C. The information to be safeguarded shall include all information listed
in 42 CFR 431.305.
D. The requirements of sections A, B and C above shall survive the
termination or expiration of the agreement.
ARTICLE 11
THIRD PARTY LIABILITY RECOVERY
A. The provider agrees to comply with the Health Care Assistance
Reimbursement Act of 1984, effective June 14, 1984 (D.C. Law 5-86:
D.C. Code Section 3-501 et seq.)
ARTICLE 12
ADVANCE DIRECTIVES
A. Providers must maintain written policies and procedures concerning
advance directives with respect to all adult individuals receiving
medical care by or through the organization and is required to:
1. Provide written information to such individuals concerning:
a. An individual's right under District law (whether
statutory or recognized by the courts of the State) to
make decisions concerning such medical care, including the
right to accept or refuse medical or surgical treatment
and the right to formulate, at the individual's option,
advance directives; and
b. The written policies of the organization respecting the
implementation of such rights, including a clear and
precise statement of limitation if the organization cannot
implement an advance directive as a matter of conscience;
2. Provide this information at the time of enrollment;
3. Document in the individual's medical record whether or not the
individual has executed an advance directive;
September 13, 1994
<PAGE> 16
4. Not condition the provision of care or otherwise discriminate against
an individual based on whether or not the individual has executed an
advance directive.
ARTICLE 13
CLIA CERTIFICATION
A. Each provider shall to utilize the services only of laboratories
certified under the provisions of the Clinical Laboratory Improvement
Amendments of 1988 (CLIA) for tests performed on a managed care
enrollee. The cost of services provided by a laboratory that is not
CLIA certified shall be deducted from the annual final settlement
payment.
ARTICLE 14
SUBCONTRACTS
A. Each provider shall not enter into any contract or subcontract that
terminate the legal obligation of the provider to ensure that all
activities carried out by the contractor or subcontractor conform to
the provisions of the provider's Medicaid managed care provider
agreement. Subject to these conditions, any service or function
required to be provided by the provider may be subcontracted to a
qualified organization or person.
B. Each subcontract entered into by the provider for services covered by
the organization's Medicaid managed care provider agreement shall be
submitted to the Department for approval prior to the execution of the
subcontract.
C. The Department shall notify the provider, in writing, of its approval
or disapproval of the proposed subcontract within fifteen (15)
business days of receipt of the proposed subcontract and supporting
documentation required by the Department. The Department shall
specify the reasons for any disapproval, which shall be based only on
District or federal law or regulations.
D. Failure to notify the provider of the approval or disapproval of the
proposed subcontract within the fifteen (15) day time limit referenced
in section C. above shall be construed as approval of the proposed
subcontract.
E. If a provider executes a subcontract for services covered by the
organization's Medicaid managed care provider agreement without the
prior written approval of the Department, the Department may terminate
the provider's Medicaid Managed Care provider agreement in accordance
with the procedures in Article 22.
F. The Department may require the provider to furnish additional
information relating, to the ownership of the subcontractor, the
subcontractor's ability to carry out the proposed obligations under
September 13, 1994
<PAGE> 17
the subcontract, and the procedures to be followed by the provider to
monitor the execution of the subcontract.
G. Subject to the provisions of Sections A and B above, a provider may
enter into a subcontract with a health care provider who is not
enrolled in the Medicaid program but who otherwise meets all other
federal and District requirements for participation in the Medicaid
program.
H. The provider shall not to enter into a subcontract for Medicaid
services with a health care provider who has been convicted of any
crime or who has been the subject of any sanction described in section
1128 of the Social Security Act. The Department shall not reimburse a
provider for any services provided to a Medicaid recipient by a
subcontractor who has been convicted of a crime or the subject of a
sanction described in section 1128 of the Social Security Act.
I. Except as provided in Article 1, the provider agrees not to enter into
a subcontract with a hospital located outside the District to provide
inpatient hospital services to District AFDC and AFDC-related Medicaid
recipients.
J. Each subcontract shall be in writing and shall contain, at a minimum,
the following
(1) Information identifying each party, including the name, address
and type of organization;
(2) The legal basis for operating as a health care provider in the
District, including licenses, accreditation, certificates of
operation, and registration;
(3) A description of services to be provided or other activities to
be performed by the subcontractor in a form that permits the
Department to definitively determine the nature and scope of the
Medicaid obligations that have been subcontracted;
(4) An agreement that financial and programmatic information,
records, and data collected and maintained by the subcontractor
that relate to the AFDC and AFDC-related Medicaid recipients
and/or services provided to them shall be made available to the
prepaid, capitated provider and the Department for inspection.
(5) An agreement that the subcontractor shall look solely to the
prepaid, capitated provider for compensation for services
provided to enrollees in the District's AFDC and AFDC-related
Medicaid Managed Care Program;
(6) A description of the payment methodology to be utilized to
reimburse the subcontractor;
(7) Assurances of appropriate professional liability coverage;
(8) Assurances that the subcontractor shall comply with all
applicable provisions of District and federal law and regulations
pertaining to Title XIX of the Social Security Act and all
September 13, 1994
<PAGE> 18
District and federal laws and regulations applicable to the
service or activity covered by the subcontract;
(9) An agreement that the subcontractor shall submit encounter data
to the prepaid, capitated provider; and
(10) If the subcontract is subject to assignment, an agreement that no
assignment shall take effect without prior written approval from
the Department.
K. The provider shall notify the Department, in writing, of the
termination of any subcontract and any arrangements made to ensure
continuation of the services covered by the terminated subcontract not
less than thirty (30) days prior to the effective date of the
termination.
L. If the Department determines that the termination or expiration of a
subcontract materially affects the ability of the provider to carry
out its responsibility under its Medicaid managed care provider
agreement, the Department may terminate this Medicaid Managed Care
provider agreement.
ARTICLE 15
AUDIT AND REPORTING REQUIREMENTS
A. Each provider shall file a financial statement annually with the
Department, which shall be certified by at least two (2) principal
officers. The financial statement shall be filed with the Department
not more than ninety (90) days after the close of the organization's
fiscal year.
B. The provider shall have the financial statement described in section A
audited by an independent certified public accountant.
C. The audited financial statement shall clearly indicate total expenses
and revenues and specify the expenses and revenues attributable to
AFDC and AFDC-related Medicaid enrollees.
D. Upon the Department's written request, the provider shall assist the
federal government or its agents, or the Department in the inspection
and audit of any financial records of the provider or its
subcontractors. Records of the provider and its subcontractors shall
be available for inspection and audit by the Department.
E. Annual audit reports and records shall be retained by the provider for
at least five (5) year period.
F. If any litigation, claim, negotiation, audit, or other action
involving the records described in this section is initiated before
the expiration of the five (5) year period, the records shall be
retained until completion of the action and final resolution of all
issues that arise from the litigation, claim, negotiation, audit, or
September 13, 1994
<PAGE> 19
other action, including any appeal and the expiration of any right of
appeal, or until the end of the five (5) year period, whichever is
later.
G. Each month provider shall submit reports of program utilization,
costs, and other information necessary to assess the performance of
the provider. The Department has developed the content and format of
these reports as detailed in Addendum III. The Department reserves
the right to amend the reporting requirements as necessary to meet
chances in federal reporting requirements.
H. Each quarter, each provider shall submit a summary of program
utilization in the format prescribed by the Department. This
quarterly summary shall include the following information with respect
to Medicaid eligible adults and children:
(1) The number of member months in the quarter;
(2) The number of new enrollees;
(3) The number of persons disenrolled;
I. The provider shall prepare semiannual summaries of financial
performance under its Medicaid Managed Care provider agreement that
describes the total clinical expenditures incurred and assigned
contribution to overhead.
J. The quarterly utilization summary and semiannual financial summary
shall be submitted to the Department not later than ninety (90) days
after the close of the quarter or the six (6) month semi-annual review
period.
ARTICLE 16
ACCESS TO INFORMATION
A. Each provider and its subcontractors shall maintain all records
required by the Medicaid Managed Care provider agreement, at cost, for
five (5) years or until all audits are completed, whichever is longer.
The records shall include all physical records originated or prepared
in connection with the performance of the Medicaid Managed Care
provider agreement, including but not limited to, books, reports,
working papers, documents, financial records, medical records and
charts, and the other documentation pertaining to costs, payments
received and made, and services provided to covered enrollees.
B. Each provider shall permit authorized personnel of the Department, the
United States Department of Health and Human Services, the Controller
General of the United States and any of their duly authorized
representatives full access to the records for audit purposes.
C. The Department may examine the records of any provider and its
subcontractors which were prepared in the course of carrying out the
prepaid health plan's obligation under its Medicaid Managed Care
provider agreement. The Department may conduct on-site inspections
September 13, 1994
<PAGE> 20
and periodic medical audits of such records of as often as it is
necessary to protect the interests of the Department and AFDC and
AFDC-related Medicaid recipients in the District.
ARTICLE 17
USE OF INFORMATION AND DATA
A. The Department shall have a license, free of charge, to use any data
or information system, including software developed exclusively for
the D.C. Medicaid Managed Care program, documentation and manuals,
developed solely by the provider pursuant to the implementation of the
provider's Medicaid Managed Care provider agreement.
B. Data, information, and reports collected or prepared by the provider
in the course of carrying out its obligations under the Medicaid
Managed Care provider agreement shall not be used by the provider for
any purpose not directly related to meeting the terms of the Medicaid
Managed Care provider agreement without the prior written permission
of the Department.
C. The Department may reproduce, publish and otherwise use and authorize
others to use, for District, state or federal government purposes, any
material developed by the provider in the course of the performance of
the Medicaid Managed Care provider agreement, subject to the terms of
Article 10, Section C.
ARTICLE 18
ASSIGNMENT OF RIGHTS
A. No provider shall assign or transfer any right gained by qualifying as
a contractor with the Department.
ARTICLE 19
MEDICAID PROGRAM AND RECIPIENTS HELD HARMLESS
A. Each provider shall hold harmless the District government, the
Department and AFDC or AFDC-related Medicaid recipients against any
loss, damage, expense and liability of any kind that arises from any
action of the organization or its subcontractors in the performance of
the Medicaid Managed Care provider agreement.
B. Each subcontract shall contain a provision that requires the
subcontractor to look solely to the provider for payment for services
rendered.
September 13, 1994
<PAGE> 21
ARTICLE 20
NON-DISCRIMINATION
A. Each provider shall comply with all applicable laws, regulations, and
orders that prohibit discrimination on the basis of race, age, sex,
marital status, personal appearance, sexual orientation, family
responsibilities, physical disability, education, political
affiliation, source of income, and place of residence or business.
ARTICLE 21
SANCTIONS FOR NON-COMPLIANCE
A. If the Department determines that a provider has failed to comply with
the provisions of this agreement or other applicable federal or
District law or regulations, the Department may, in accordance with 29
DCMR Chapter 13:
(a) Suspend further enrollment of Medicaid recipients by the
provider;
(b) Withhold part of the organization's Medicaid payments;
(c) Use all or part of the deposit as detailed in Article 3; and
(d) Terminate the Medicaid managed care provider agreement within
thirty (30) days from the date of notice of termination to the
provider.
B. Before taking any action described above, the Department shall provide
written notice which shall include at least the following:
(a) A citation to the law or regulation that has been violated;
(b) The sanction to be applied and the date the sanction will be
imposed;
(c) The basis for the Department's determination the sanction should
be imposed; and
(d) The time frame and procedure for the provider to appeal the
Department's determination.
C. A provider's appeal of action pursuant to Article 22 shall not stay
the effective date of the proposed action.
D. The Department shall provide reasonable written notice of a proposed
sanction to AFDC and AFDC-related Medicaid recipients enrolled in the
organization's managed care plan and others who may be affected by the
proposed sanction. Notice to AFDC and AFDC-related Medicaid
recipients shall be by first-class mail, postage prepaid, at the
address reflected in the Department's records.
September 13, 1994
<PAGE> 22
ARTICLE 22
ENROLLMENT AND DISENROLLMENT
Each provider shall accept and enroll each eligible AFDC and AFDC-related
Medicaid recipient who applies for or is assigned to the plan, subject to
the requirements of Article 23, Section E.
A. The following categories of AFDC and AFDC-related Medicaid recipients
are not eligible to participate in the District's Medicaid Managed
Care Program:
(1) Residents in a nursing facility or intermediate care facility for
the mentally retarded;
(2) Recipients eligible for Medicaid for a period that is less than
three (3) months;
(3) Recipients eligible for a period that is retroactive;
(4) Foster children who reside outside the District; and
(5) Restricted recipients.
B. Except as provided in Section C below, enrollment by a Medicaid
recipient in a provider shall be voluntary.
C. There shall be an open enrollment period during which the prepaid,
capitated provider will accept individuals who are eligible to be
covered under the contract
(1) In the order in which they apply;
(2) Without restriction, unless authorized by the Regional
Administration; and
(3) Up to the limits set under the contract.
D. An AFDC or AFDC-related Medicaid recipient who does not voluntarily
select a primary care provider within ten (10) days of being certified
or recertified as eligible for Medicaid shall be assigned to a health
maintenance organization or a primary care provider that is an
employee or entity of the District government using an automated
random assignment process.
E. The provider shall not enroll or be assigned a number of Medicaid
recipients that exceeds a number equal to two thousand (2000) times
the number of primary care physicians available to serve AFDC and
AFDC-related Medicaid recipients.
F. The provider may limit total Medicaid enrollment by including in its
application for a Medicaid Managed Care agreement the total maximum
number of AFDC and AFDC-related Medicaid enrollees that the
organization will accept. Acceptance of the enrollment ceiling by the
Department shall not obligate the Department to assign or otherwise
September 13, 1994
<PAGE> 23
ensure that the primary care provider shall receive that number of
enrollees.
G. The provider may chance its enrollment ceiling by notifying the
Department of the new enrollment ceiling in writing, thirty (30) days
prior to the effective date of the change.
H. The provider shall request Department approval for enrollment of each
eligible AFDC and AFDC-related Medicaid applicant in writing.
I. If the Department approves an enrollment by the fifteenth (15th) day
of the month, the AFDC and AFDC-related Medicaid recipient's
enrollment shall be effective on the first day of the following month.
J. If the Department approves an enrollment after the fifteenth (15th)
day of the month, the AFDC and AFDC-related Medicaid recipient's
enrollment shall be effective on the first day of the second month
after the month in which the Department approves the enrollment.
K. The provider must inform recipients who are potential enrollees, at
least 30 days before the start of each new period of enrollment and no
less than twice per year, of their disenrollment rights.
L. Except as provided in Section M and N, an AFDC or AFDC-related
Medicaid enrollee may voluntarily disenroll from a provider at any
time without cause.
M. To disenroll during the open season period, an AFDC or AFDC-related
Medicaid enrollee shall notify the Commission on Health Care Finance
in accordance with the requirements of the program.
N. A voluntary disenrollment shall be effective on the first full day of
the following month if the disenrollment request form is dated on
before the 15th of the month, but in no case shall the disenrollment
be effective later than the first day of the second month after the
month in which the AFDC or AFDC-related Medicaid recipient requests
disenrollment.
0. During the months two (2) through six (6) of membership, AFDC and
AFDC-related Medicaid recipients enrolled with a fee-for-service
primary care provider or in the plan of a provider that meets the
requirements 42 CFR 434.27(d)(1), may disenroll if their request to
disenroll is upheld in the grievance process or if an enrollee
requests in writing to the State Agency and the organization
disenrollment for good cause, the request cites the reason(s) why the
enrollee wishes to disenroll (i.e. poor quality care, lack of access
to necessary specialty services covered under the State plan), and the
agency determines that good cause for disenrollment exists.
P. The provider may disenroll a member who demonstrates a pattern of
disruptive or abusive behavior or of missing scheduled appointments
without notice, or whose utilization of services is fraudulent or
deceptive.
September 13, 1994
<PAGE> 24
Q. A primary, care provider shall submit a written request to the
Department for written approval of each proposed involuntary
disenrollment.
R. Except as provided in Sections Q and T, an involuntary disenrollment
shall be effective not later than the first day of the second month
following the approval of the involuntary disenrollment by the
Department.
S. A primary care provider shall disenroll an AFDC or AFDC-related
Medicaid recipient if the recipient is admitted to a nursing facility,
intermediate care facility for the mentally retarded, mental
institution or other long term care facility and is expected to remain
in the facility for more than thirty (30) days. The disenrollment
shall be effective not later than the first day of the first full
month following the date of admission.
T. Except as provided in Section Q, no AFDC or AFDC-related Medicaid
enrollee shall be disenrolled solely because of an adverse change in
health status.
U. Each AFDC or AFDC-related Medicaid recipient enrolled in a provider
whose enrollment is subsequently terminated due to loss of Medicaid
eligibility shall have the opportunity to convert to a non-group
enrollment contract consistent with conversion privileges offered
members of other groups carolled in the provider.
V. The Department shall disenroll an AFDC or AFDC-related Medicaid
recipient when the recipient becomes ineligible for Medicaid. The
disenrollment shall be effective not later than the first day of the
first full month following the effective date of the termination of
Medicaid eligibility.
ARTICLE 23
TERMS OF THE AGREEMENT
A. The term of the agreement shall be from the first day of the
District's fiscal year through the end of the fiscal year (October 1
through September 30 of the following calendar car). Agreements
entered into during the fiscal year shall be in effect from fifteen
(15) days after the date of the signing of the agreement through the
end of the fiscal year. The agreement may be renewed for successive
one year periods by written agreement between the Department and the
prepaid, capitated provider.
B. The term of the agreement may be extended for a period not to exceed
three (3) months if the Department and the prepaid, capitated provider
are unable to complete negotiations on a succeeding agreement prior to
the expiration date of this agreement. The effective date of the
succeeding agreement shall be October 1.
September 13, 1994
<PAGE> 25
ARTICLE 24
TERMINATION OF THE AGREEMENT
A. The Department or the provider may terminate this agreement for cause
or convenience by giving 60 days written notice of intent to terminate
the agreement to the other party. Termination of this agreement shall
not discharge the responsibilities of either party with respect to
services or items furnished prior to termination, including retention
of records and verification of overpayment or underpayment.
B. The provider shall be responsible for providing written notice to
recipients 30 days prior to the effective date of the termination in
the form prescribed by the Department and shall be responsible for
notifying the Department of those recipients who are undergoing
treatment of an acute condition.
C. Upon termination, the provider shall submit to the Department all
outstanding invoices for allowable services rendered prior to the date
of termination in the form prescribed by the Department. The invoices
shall be submitted by no later than 30 days following the effective
date of termination.
D. The provider shall also submit to the Department all financial,
performance and other reports required as a condition of this
agreement within 60 days of the effective date of termination.
E. The Department reserves the right to terminate this agreement upon
receipt of:
1. Notification from the United States Department of Health and
Human Services of the withdrawal of federal financial
participation in all or part for the cost of covered services; or
2. Notification by the District of the unavailability of District
funds for the continuation of the agreement;
3. Notification by the appropriate District agencies, or other
appropriate licensing or certifying bodies that the licenses
and/or certificates under which the provider operates has been
revoked, or that it/they have expired and will not be renewed; or
4. Notification that the owners, officers, managers or other persons
with substantial contractual relationships have been convicted of
certain crimes or received certain sanctions as specified in
Section 1128 of the Social Security Act.
F. The Department reserves the right to terminate this agreement in the
event of a default by the provider. In the event of such a default
the Department shall have the right to recover any capitation payments
issued to a managed care organization for periods after the effective
dates of the termination.
September 13, 1994
<PAGE> 26
G. The following shall constitute default by a provider:
1. Inability of the provider to provide the services described in
this agreement.
2. Insolvency of the provider.
3. Failure of the provider to adhere to the provisions of this
agreement.
H. The Department may, at its sole discretion, offer to renegotiate any
provision of this agreement if such 7.2 negotiation would remove any
of the causes of termination specified in the proceeding paragraph.
SIGNATORIES TO AGREEMENT
Provider Name DC Chartered Health Plan Inc.
Address 820 First St., N.W., Suite LL100
Washington, D.C. 20002
/s/ Robert P. Bowles, Jr.
- ------------------------------------------------
Authorized Signature
President and Chairman Sept. 15, 1994
- ------------------------------------------------ -----------------------------
Title Date
TITLE XIX AGENCY: Department of Human Services
Commission on Health Care Finance
District of Columbia
/s/ A. Rue Brown
- ------------------------------------------------
Authorized Signature
Commissioner, Commission on Health Care Finance Sept. 15, 1994
- ------------------------------------------------ -----------------------------
Title Date
September 13, 1994
<PAGE> 1
<TABLE>
Exhibit 11
PHP HEALTHCARE CORPORATION
Statement Re: Computation of per Share Earnings
For the Years Ended April 30,
<CAPTION>
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Primary Earnings
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . $(3,756,000) $(9,333,987) $ 952,280
============ ============ ============
Weighted average number of common shares outstanding . . . . . 4,998,163 5,036,468 5,294,395
Add common share equivalents (determined using the "treasury
stock" method) representing shares issuable upon
exercise of stock options and warrants. . . . . . . . . . 25,764 6,233 344,322
Shares held in escrow. . . . . . . . . . . . . . . . . . . . . -- -- (25,834)
------------ ------------ ------------
Weighted average number of shares used in calculation of
primary income per share. . . . . . . . . . . . . . . . . 5,023,927 5,042,701 5,612,883
============ ============ ============
Net earnings (loss) per common share . . . . . . . . . . . . . $ (.75) $ (1.85) $ 0.17
============ ============ ============
Fully Diluted Earnings
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . $(3,756,000) $(9,333,987) $ 952,280
Net interest expense related to convertible debt. . . . . . . -- -- 12,712
------------ ------------ ------------
Net earnings (loss) as adjusted. . . . . . . . . . . . . . . . $(3,756,000) $(9,333,987) $ 964,992
============ ============ ============
Weighted average number of common shares outstanding . . . . . 4,998,163 5,036,468 5,294,395
Add common share equivalents (determined using the
"treasury stock" method) representing shares issuable
upon exercise of stock options and warrants . . . . . . . 3,945 21,853 653,986
Assumed conversion of convertible debt . . . . . . . . . . . . -- -- 32,408
Shares held in escrow. . . . . . . . . . . . . . . . . . . . . -- -- (25,834)
------------ ------------ ------------
Weighted average number of shares used in calculation of
primary income per share. . . . . . . . . . . . . . . . . 5,002,108 5,058,321 5,954,955
============ ============ ============
Net earnings (loss) per common share . . . . . . . . . . . . . $ (.75) $ (1.85) $ 0.16
============ ============ ============
</TABLE>
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
STATE OF
NAME OF SUBSIDIARY INCORPORATION DOING BUSINESS AS
- -------------------------------------- -------------------- -----------------
Primary Care Corporation Missouri N/A
Primary Care Associates Partnership PrimeCare
Sterling Communities Corporation Delaware N/A
PHP Family Healthcare Corporation Delaware N/A
PHP Travel, Ltd. Virginia N/A
EastWest Research Corporation Maryland N/A
Paragon JSC, Inc. Florida N/A
Paragon DSSC, Inc. Florida N/A
Commerce Park Development Corp. Virginia N/A
Health Cost Consultants, Inc. Virginia N/A
D.C. Chartered Health Plan, Inc. District of Columbia N/A
Virginia Chartered Health Plan, Inc. Virginia N/A
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
PHP Healthcare Corporation
We consent to the incorporation by reference in the registration statement
(No. 33-41577) on Form S-8 of PHP Healthcare Corporation of our report dated
July 6, 1995, on our audit of the consolidated financial statements and
financial statement schedule of PHP Healthcare Corporation and subsidiaries as
of April 30, 1995, and for the year ended April 30, 1995, which report is
included in this annual report on Form 10-K of PHP Healthcare Corporation.
/S/ Coopers & Lybrand L.L.P.
Washington, D.C.
July 24, 1995
<PAGE> 1
Exhibit 23A
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
PHP Healthcare Corporation
We consent to the incorporation by reference in the registration statement
(No. 33-41577) on Form S-8 of PHP Healthcare Corporation of our report dated
September 12, 1994, relating to the consolidated balance sheet of PHP
Healthcare Corporation and subsidiaries as of April 30, 1994 and the related
consolidated statements of operations and cash flows and related schedule for
each of the years in the two-year period ended April 30, 1994 which report
appears in the April 30, 1995 annual report on Form 10-K of PHP Healthcare
Corporation. Our report refers to a change in the method of accounting for
income taxes.
/S/ KPMG Peat Marwick LLP
Washington, D.C.
July 25, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR PHP HEALTHCARE CORPORATION AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000803568
<NAME> PHP HEALTHCARE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-START> MAY-01-1994
<PERIOD-END> APR-30-1995
<CASH> 1,178
<SECURITIES> 0
<RECEIVABLES> 34,597
<ALLOWANCES> 2,038
<INVENTORY> 1,089
<CURRENT-ASSETS> 40,429
<PP&E> 36,106
<DEPRECIATION> 13,010
<TOTAL-ASSETS> 71,150
<CURRENT-LIABILITIES> 25,007
<BONDS> 24,454
<COMMON> 71
0
0
<OTHER-SE> 26,973
<TOTAL-LIABILITY-AND-EQUITY> 71,150
<SALES> 0
<TOTAL-REVENUES> 204,131
<CGS> 0
<TOTAL-COSTS> 182,053
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,209
<INCOME-PRETAX> 1,487
<INCOME-TAX> 535
<INCOME-CONTINUING> 952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 952
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
