<PAGE> 1
Securities and Exchange Commission
Washington, DC 20549
--------------------
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended January 31, 1995
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number 0-16235
PHP Healthcare Corporation
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1023168
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(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
11440 Commerce Park Drive, Reston, VA 22091
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(Address of principal executive offices)
Registrant's telephone number including area code
(703) 758-3600
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (i) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (ii) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share, outstanding as of January 31, 1995,
5,437,238 shares.
<PAGE> 2
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of Operations
and Financial Condition 12
PART II - OTHER INFORMATION 20
SIGNATURES 21
EXHIBIT INDEX 22
<PAGE> 3
<TABLE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three Months and Nine Months ended January 31, 1994 and 1995
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Nine Months
-------------------- --------------------
1994 1995 1994 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,939 $57,004 $113,209 $148,823
Direct Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 36,439 51,593 100,705 131,911
--------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . 4,500 5,411 12,504 16,912
General and administrative expenses. . . . . . . . . . . . . . . 3,545 4,779 10,451 14,272
--------- --------- --------- ---------
Operating income. . . . . . . . . . . . . . . . . . . . . . 955 632 2,053 2,640
Other income (expense):
Interest expense. . . . . . . . . . . . . . . . . . . . . . (922) (376) (2,440) (1,760)
Interest income . . . . . . . . . . . . . . . . . . . . . . 125 106 171 316
Miscellaneous income (expense). . . . . . . . . . . . . . . 13 22 22 (257)
Minority interest in (earnings) losses of subsidiaries. . . 50 --- (146) (159)
--------- --------- --------- ---------
Earnings (loss) before income taxes . . . . . . . . . . . . 221 384 (340) 780
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . 82 139 (125) 281
--------- --------- --------- ---------
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . $ 139 $ 245 $ (215) $ 499
========= ========= ========= =========
Net earnings (loss) per share. . . . . . . . . . . . . . . . . . $ 0.03 $ 0.04 $ (0.04) $ 0.09
--------- --------- --------- ---------
Weighted average number of common shares outstanding . . . . . . 5,079 5,825 5,027 5,530
========= ========= ========= =========
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<CAPTION>
April 30, January 31,
1994 1995
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,370 $ 1,537
Accounts receivable, net (note 2) . . . . . . . . . . . . . . . . . . . . . 18,915 23,805
Contract settlement receivable, net (note 2). . . . . . . . . . . . . . . . 6,700 6,316
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,332 491
Pharmaceutical and medical supplies . . . . . . . . . . . . . . . . . . . . 1,537 1,139
Property held for sale, net . . . . . . . . . . . . . . . . . . . . . . . . 263 263
Notes receivable from officers. . . . . . . . . . . . . . . . . . . . . . . 1,586 2,866
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,426 4,751
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 36,129 41,168
Notes receivable (notes 4 and 5(a)). . . . . . . . . . . . . . . . . . . . . . . --- 900
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 37,431 23,419
Excess and cost over fair value of assets acquired, net of accumulated
amortization of $1,244 in April and $766 in January . . . . . . . . . . . . 12,109 3,515
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,442 2,511
----------- -----------
$ 87,111 $ 71,513
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable to bank (note 3). . . . . . . . . . . . $ 2,534 $ 1,368
Current maturities of notes payable - other (note 3). . . . . . . . . . . . 2,055 1,176
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,944 13,831
Claims payable - medical services . . . . . . . . . . . . . . . . . . . . . 6,388 6,066
Accrued salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . 7,374 8,445
Billings in excess of costs . . . . . . . . . . . . . . . . . . . . . . . . 2,098 1,352
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . 28,393 32,238
Notes payable to bank, net of current maturities (note 3). . . . . . . . . . . . 36,469 16,201
Notes payable - other, net of current maturities (note 3). . . . . . . . . . . . 3,174 1,011
Deferred gain (note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 1,167
Deferred lease obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 243
----------- -----------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 68,243 50,860
----------- -----------
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,572 4
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares authorized, none issued . . --- ---
Common stock, $.01 par value, 25,000,000 shares authorized,
7,070,851 shares issued. . . . . . . . . . . . . . . . . . . . . . . . 71 71
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 27,793 29,369
<PAGE> 5
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . (2,522) (2,023)
Treasury stock, 1,995,042 common shares in April and 1,633,613
common shares in January, at cost (notes 5 and 6). . . . . . . . . . . (8,046) (6,768)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 17,296 20,649
Commitments and contingencies (notes 2 and 7). . . . . . . . . . . . . . . . . .
----------- -----------
$ 87,111 $ 71,513
=========== ===========
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 6
<TABLE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
January 31,
1994 1995
----------- -----------
<S> <C> <C>
Net cash provided by (used in) operating activities. . . . . . . . . . . . . . . $ (267) $ 983
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . . . . . . . . (19,442) (5,545)
Disposition of property and equipment . . . . . . . . . . . . . . . . . . . --- 151
Net proceeds from sale of property and equipment. . . . . . . . . . . . . . --- 14,040
Escrow deposit applied to acquisition of subsidiary . . . . . . . . . . . . 3,200 ---
Acquisition of subsidiaries, net of cash acquired . . . . . . . . . . . . . (3,082) (694)
Disposition of subsidiaries, net. . . . . . . . . . . . . . . . . . . . . . --- 10,826
----------- -----------
Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . (19,324) 18,778
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under revolving promissory note . . . . . . . . 8,561 (1,173)
Borrowings on long-term notes payable . . . . . . . . . . . . . . . . . . . 12,499 504
Repayments on long-term notes payable . . . . . . . . . . . . . . . . . . . (4,307) (19,792)
Distributions paid to minority partners . . . . . . . . . . . . . . . . . . (381) (133)
----------- -----------
Net cash provided by (used in) financing activities. . . . . . . . . . . . . . . 16,372 (20,594)
----------- -----------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . (3,219) (833)
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . 3,988 2,370
----------- -----------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . $ 769 $ 1,537
=========== ===========
<FN>
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE> 7
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
January 31, 1995
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
In the opinion of the Company, the interim condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The interim condensed consolidated
financial statements should be read in conjunction with the Company's April 30,
1993 and 1994 audited consolidated financial statements. The interim operating
results are not necessarily indicative of the operating results for the full
fiscal year. Certain amounts in the fiscal year 1994 condensed consolidated
financial statements have been reclassified to conform with the 1995
presentation.
(2) Accounts Receivable
(a) Contract Claim
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, and January 31, 1995, have been fully reserved
pending further actions by the Board of Contract Appeals.
(b) Contract Settlement Receivable
D.C. Chartered Health Plan, Inc. (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). The contract provides for interim payments on an
enrollment basis with a final settlement at the end of the contract period
(September 30, 1994), subject to a defined upper payment limit as determined by
HCFA of HHS. Final settlement with DCDHS and HCFA will be subject to an audit
of CHP's activities. The Company believes final settlement should result in
amounts due the Company at April 30, 1994 of up to approximately $29.3 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 through April 30, 1994 and $6.3 million
through January 31, 1995 which represents the Company's conservative
interpretation of amounts due under the contract. The Company believes that
<PAGE> 8
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
final settlement will occur during fiscal 1995. Additionally, currently
pending is proposed congressional legislation 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 more favorable contract with DCDHS which includes a higher premium rate.
(3) Notes Payable
(a) Notes Payable to Bank
The notes payable to bank consists of the following:
<TABLE>
<CAPTION>
April 30, January 31,
1994 1995
----------- -----------
(in thousands)
<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 January 31, 1995 with final payment
due dates from March 1995 to February 1998, the Company was
released from this obligation in September 1994 (note 5(b)). $ 2,124 ---
Term note of $15 million, collateralized by all assets, interest due
monthly at 1% above bank prime (9.5% at January 31, 1995),
principal due in quarterly installments of $342,000, with final
payment due April 1998. 12,857 4,786
Revolving promissory note, collateralized by all assets with a
maximum credit line of $15 million, interest due monthly at 1%
above bank prime (9.5% at January 31, 1995), due August 1996. 13,956 12,783
Non recourse 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 commencing in April 1998,
repaid in July 1994 (note 6). 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% (7.4% at April 30, 1994), due
December 1995, repaid in July 1994. 650 ---
----------- -----------
Total notes payable to bank 39,003 17,569
Less current maturities 2,534 1,368
----------- -----------
Notes payable to bank, net of current maturities $ 36,469 $ 16,201
=========== ===========
</TABLE>
<PAGE> 9
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
In December 1994, the Company extended its credit agreement with its
primary bank with the revolving promissory note being extended to August 1996
and the term note repayments changed to $342,000 per quarterly installment
continuing through April 1998.
(b) Notes Payable-Other
The notes payable-other consists of the following:
<TABLE>
<CAPTION>
April 30, January 31,
1994 1994
----------- -----------
(in thousands)
<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 September 1994 (note 5(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% (7.5% at April 30, 1994), principal and interest
due in five annual installments ending April 1997, the Company
was released from this obligation in September 1994 (note 5(b)). 2,278 ---
Various secured and unsecured term notes of $591,000, interest from
6% to 12.7% with various installment payments due August 1997. 536 403
Insurance note of $504,000, monthly installments of principal and
interest at 5% due April 1995. 271 138
Obligations under capital leases, for certain equipment and fixtures,
monthly payments of principal and interest of $27,000, interest at
4.1%, due May 1998. 1,215 1,006
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 29, 1995 due September 29, 1999
(notes 4 and 5(a)). --- 500
Promissory notes of $430,000, interest at 7%, monthly payments
due August 1995 (note 5(a)) --- 140
----------- -----------
Total notes payable-other 5,229 2,187
Less current maturities 2,055 1,176
----------- -----------
Notes payable-other, net of current maturities $ 3,174 $ 1,011
=========== ===========
</TABLE>
<PAGE> 10
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
(4) Common Stock
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 secured by a pledge and escrow of 150,000 shares of the
Company's common stock and convertible notes payable of $500,000 by the Company
to the same parties.
(5) Acquisition 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 $930,000
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
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 is approximately $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, 1992 or 1993, the effect on the Company's results of operations would
have been immaterial.
(b) Sale of Surgery Centers
Effective September 30, 1994, the Company sold 100% of its interest in two
separate 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 was
approximately $350,000 and is included in miscellaneous income.
(c) Acquisition of J.P. Cole & Associates, Inc.
Effective September 30, 1994, the Company acquired 100% of the common stock
of J.P. Cole & Associates, Inc. in exchange for 27,143 shares of the Company's
treasury stock, 27,143 options to purchase shares of the Company's stock at
$9.00 per share, and a note payable of $100,000, plus future consideration of
an additional 44,286 shares of the Company's treasury stock and an additional
44,286 options to purchase shares of the Company's stock at $9.00 per share.
The future consideration is contingent on the realization of certain defined
future revenues resulting from the marketing efforts of J.P. Cole & Associates.
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
<PAGE> 11
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
share of net assets of approximately $380,000 is being amortized on a straight-
line basis over ten years. Any contingent consideration due as a result of the
Company achieving certain revenue levels resulting from the marketing efforts
of J.P. Cole & Associates during the next three years will be accounted for as
additional excess cost over fair value of assets acquired and will be amortized
over the remaining amortization period on a straight-line basis. Prior to the
acquisition, the results of operations of J.P. Cole & Associates were combined
with the Company's consolidated financial statements since August 1993. The
results of operations of J.P. Cole & Associates, Inc. are included in the
consolidated statements from October 1, 1994.
(6) Sale of Office Building
In July 1994, the Company, through a wholly owned subsidiary, sold its
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. The pre-tax gain on this sale of approximately $1.3 million will be
deferred and recognized ratably over the life of this lease in accordance with
sale-leaseback accounting guidelines. In conjunction with this sale, the
Company repaid in full non-recourse notes of approximately $9.4 million.
(7) Commitments and Contingencies
(a) Legal action against HSI
On May 2, 1994, Paragon Ambulatory Surgery, Inc. filed suit in the U.S.
District Court for the Middle District of Florida against Health South, Inc.
(HSI) and others seeking damages as a result of the defendants' alleged
interference in Paragon's planned sale of the common stock of two of its
surgery centers. Paragon was seeking relief in connection with defendants'
subsequent efforts to diminish the value and marketability of Paragon's
investment and various breaches of the original agreement, under which Paragon
initially acquired interests in the surgery centers from one or more of the
defendants. In conjunction with the sale of the two surgery centers in
September 1994, the suit was dismissed (see note 5(b)).
On June 20, 1994, HSI and others filed a lawsuit in the Circuit Court,
Fourth Judicial Circuit, Duval County, Florida against Paragon and the two
centers in question alleging that they breached their fiduciary duties and
management agreements. The plaintiffs were seeking damages, termination of the
agreements, and relief from non-competition agreements to which they were a
party. They were also seeking to compel consent to HSI's acquisition of
interests in the surgery centers. In conjunction with the sale of the two
surgery centers in September 1994, the suit was dismissed (see note 5(b)).
<PAGE> 12
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
GENERAL
In 1991 and 1992, PHP earned over 98% of its revenues through contracts
with federal, state and local government agencies. In 1992 the Company
developed and implemented a strategy to extend its managed health care services
to the commercial marketplace. The Company's success with this initiative is
evidenced by a shift in fiscal 1994 government contracting revenues to 69% of
total revenues, while total revenues continued to grow. The Company
anticipates that this trend will continue, and that revenues from non-
government contracting sources will be over 40% of total revenue for fiscal
1995. The Company's strategy to more actively pursue and develop business in
the commercial marketplace has resulted in the Company's operations aligning
into two health care service areas: the Commercial Managed Health Care Services
division and the Government Managed Health Care Services division.
Revenues from the Commercial Managed Health Care Services division have
grown to $43.2 million or 29% of total revenues in 1994 from $1.3 million in
1992. The operations in this division have consisted of: (1) the Company's
wholly owned subsidiary, D. C. Chartered Health Plan, Inc. (CHP), which
operates an HMO in the District of Columbia, serving primarily the government
assisted Medicaid population, (2) family health centers which are operated
either on a contract basis for large employers or on a commercial walk-in
basis, and (3) management of ambulatory surgery centers which were acquired by
the Company's majority owned subsidiary Paragon Ambulatory Surgery, Inc.
("Paragon"). In addition, in late fiscal 1994, the Company was awarded a
significant contract with Blue Cross Blue Shield of New Jersey ("BCBSNJ") to
implement the Company's integrated system of care on behalf of BCBSNJ's own
HMO, HMO Blue. This project involves the development and operation of ten
family health centers, development of an integrated network of specialists, and
utilization and case management. The Company began construction and pre-
operational contract activities in early fiscal 1995 and the centers commenced
operations in January 1995. In April 1994 the Company sold three of its
outpatient surgery centers and in September 1994 sold the remaining two
centers. The Company determined that management of these centers was
inconsistent with its long term strategy.
Revenues from the Government Managed Health Care Services division have
gradually decreased from $116.4 million, representing 99% of total revenues, in
1992 to $102.2 million, or 69% of total revenues, in 1994. 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. The Company has
actively pursued contract awards and was successful in winning most of its
contracts that expired and were re-competed.
Additionally, revenues from operations of the Reston, Virginia office
building acquired in May 1993 are included as Other revenues. This building
was sold in July 1994.
<PAGE> 13
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
Since 1992, the Company's overall revenues have increased approximately
26%, from $118 million to $149 million in 1994. Gross profit margins have
decreased over the last three years from 14% in 1992, to 7% in 1993, and 6% in
1994, resulting from the diversification of the Company's operations, increased
competition for the Company's government contracts and certain other events in
1993 and 1994. The Company's net earnings have decreased from $4.3 million net
earnings in 1992 to a $9.3 million net loss in 1994 due to the decrease in
gross profit, the increase in business development costs related to commercial
business efforts, increased corporate support staff costs, government contract
proposal activity costs, increased interest expense resulting from various
capital expenditures to meet operational needs, and certain other substantial
nonrecurring 1993 and 1994 events.
The Company expects that gross profits will increase over the next several
years. This anticipated improvement is based on the expectation that no
additional contract write-offs will be necessary, CHP's expanding enrollment
and favorable new contract with the District of Columbia, and the commencement
of the operational phase of the BCBSNJ contract in January 1995. The Company
expects that the increase in gross profits will provide for an improvement in
operating income and net earnings over prior fiscal years.
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).
The contract provides for interim payments 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 will be subject to an audit of CHP's activities. The Company believes
final settlement should result in amounts due the Company at April 30, 1994 of
up to approximately $29.3 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 $6.3
million through April 30, 1994, and January 31, 1995, respectively, which
represents the Company's conservative interpretation of amounts due under the
contract. The Company believes that final settlement will occur during fiscal
1995. Additionally, currently pending is proposed congressional legislation
which upon passage would result in management's opinion in retroactive
entitlement of the full recovery of the settlement receivable.
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. Thereafter, the Company determined to write off its investment in the
joint venture management company represented by the advances of $1.1 million as
of April 30, 1993. Subsequently, however, the Department of Defense has
<PAGE> 14
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
reopened this procurement and the joint venture management company has
submitted a revised bid. This procurement is expected to be decided in mid-
1995.
RESULTS OF OPERATIONS
The Three Months Ended January 31, 1994 Compared To
The Three Months Ended January 31, 1995
The following table indicates revenues by the Company's service divisions and
the related percentage of total revenues:
<TABLE>
<CAPTION>
January 31, 1994 January 31, 1995
------------------ ------------------
Revenues % of Revenues % of
Division (000's) Total (000's) Total
- --------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Government Managed Health Care Services $ 26,406 64.5 $ 25,208 44.2
Commercial Managed Health Care Services 13,818 33.8 31,796 55.8
Other Revenue 715 1.7 0 0.0
-------- -------- -------- --------
Total $ 40,939 100.0 $ 57,004 100.0
-------- -------- -------- --------
</TABLE>
The Company's revenues increased by 39% or $16 million to $57 million for
the quarter ended January 31, 1995 compared to the quarter ended January 31,
1994. This overall increase is due to the significant growth in the Commercial
Managed Health Care Services division
Commercial Managed Health Care Services division revenue increased by $18
million to $31.8 million from $13.8 million for the quarters ended January 31,
1995 and January 31, 1994, respectively. Approximately 78% of this revenue
growth resulted from the Company's contract with BCBSNJ. During the three
months ended January 31, 1995, the Company substantially completed the pre-
operational and construction activities and in early January, nine of the ten
health centers became operational. The level of revenues earned on the BCBSNJ
project during the fiscal quarter ended January 31, 1995 are not expected to
continue in the future. The construction phase of the contract is
substantially complete and the near future operating revenues will be less than
the amounts recognized for construction during this past three month period.
CHP provided approximately 22% of the revenue growth in the Commercial Managed
Health Care Services division for the quarter ended January 31, 1995 which is
attributable to an increase in premium rate and an increase in enrolled
membership. CHP's revenue should continue to grow during fiscal 1995 due to
expanding enrollment. These revenue increases were slightly offset by revenue
<PAGE> 15
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
decreases 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 by 5% to
$25.2 million for the quarter ended January 31, 1995 compared to $26.4 million
for the quarter ended January 31, 1994. This decrease is primarily due to the
completion of three Medical Staffing and two On-site Ambulatory Care contracts.
This decrease in revenue was mitigated by an increase resulting from an
expanded inmate population and increased contract rate on the Arkansas
Department of Corrections project.
The Other revenue consists of the operations of the Reston, Virginia office
building acquired in May 1993. This building was sold in July 1994, resulting
in a decrease in Other revenue of $715,000 for the three months ended January
31, 1995 compared to the prior year.
The Company's gross profit increased by 20% or $909,000 to $5.4 million for
the third quarter ended January 31, 1995 compared to the prior year third
quarter. This overall gross profit increase is due to increases in the
Commercial Managed Health Care Services division, slight gross profit decreases
in the Government Managed Health Care Services division, and decreases in gross
profit from Other revenue sources.
A substantial portion of the increase in the Commercial Managed Health Care
Services division gross profit was attributable to CHP. CHP's gross profit
increase resulted from increases in the premium rate in its new contract.
Offsetting this gross profit increase was a decrease resulting from the sale of
three outpatient surgery centers in April 1994 and the remaining two outpatient
surgery centers in September 1994.
The Government Managed Health Care Services division gross profit decrease
was primarily due to decreased utilization and increased costs on one
ambulatory care project and the completion of three Medical Staffing contracts.
These decreases were offset by an increase in gross profits on two
PRIMUS/NAVCARE contracts which were restructured to more favorable terms.
General and administrative expenses increased 34% or $1.3 million to $4.8
million for the quarter ended January 31, 1995 from $3.5 million for the prior
year third quarter. This increase is largely a function of the Company's
managed health care service initiatives and is due to: (1) increased corporate
salary costs related to the hiring of additional commercial managed health care
professionals in conjunction with the marketing of the Company's integrated
systems of care, and (2) increased corporate salary costs due to the expansion
of support service personnel.
<PAGE> 16
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
Interest expense decreased $546,000 to $376,000 for the quarter ended
January 31, 1995 compared with $922,000 for the same quarter during the prior
fiscal year. This decrease is a function of the decrease in the Company's
long-term debt resulting from (1) the sale of three surgery centers in April
1994, (2) the sale of the Reston office building in July 1994, and (3) the sale
of the remaining two surgery centers in September 1994.
The effective income tax rates of 36% in fiscal 1995 and 37% in fiscal 1994
represent the combined federal and state income tax rates adjusted as
necessary.
RESULTS OF OPERATIONS
The Nine Months Ended January 31, 1994 Compared To
The Nine Months Ended January 31, 1995
The following table indicates revenues by the Company's service divisions and
the related percentage of total revenues:
<TABLE>
<CAPTION>
January 31, 1994 January 31, 1995
------------------ ------------------
Revenues % of Revenues % of
Division (000's) Total (000's) Total
- --------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Government Managed Health Care Services $ 81,119 71.6 $ 77,043 51.8
Commercial Managed Health Care Services 29,420 26.0 71,324 47.9
Other Revenue 2,670 2.4 456 0.3
-------- -------- -------- --------
Total $113,209 100.0 $148,823 100.0
-------- -------- -------- --------
</TABLE>
The Company's revenues increased by 31% or $36 million to $149 million for
the nine months ended January 31, 1995 compared to the nine months ended
January 31, 1994. This significant growth resulted almost entirely from the
Commercial Managed Health Care Services division.
Commercial Managed Health Care Services division revenue more than doubled
to $71 million for the nine months ended January 31, 1995 compared to $29
million for the nine months ended January 31, 1994. Approximately 52% of this
revenue growth resulted from the Company's contract with BCBSNJ. The Company
started and substantially completed the pre-operational and construction
activities during the nine months ended January 31, 1995, and nine of the ten
health centers became operational in early January 1995. The level of revenues
earned on the BCBSNJ project during the nine months ended January 31, 1995 are
not expected to continue in the future.
<PAGE> 17
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
The construction and pre-operational phases of the contract are substantially
complete and the near future operating revenues will be less than the amounts
recognized for the construction and pre-operational phases during this past
nine month period. CHP provided approximately 46% of the revenue growth in the
Commercial Managed Health Care Services division for the nine months ended
January 31, 1995. CHP's revenue growth is attributable to nine months of
operations in fiscal 1995 compared with four months in fiscal 1994 (acquired in
August 1993) and an increase in premium rate. CHP's revenue should continue to
grow during fiscal 1995 due to a favorable new contract with the District of
Columbia which commenced in October 1994 and expanding enrollment. These
revenue increases were offset by a 12% 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 by 5% to
$77 million for the nine months ended January 31, 1995 compared to $81 million
for the nine months ended January 31, 1994. This decrease is primarily due to
the completion of three Medical Staffing, two On-site Ambulatory, and two
PRIMUS/NAVCARE contracts, and reduced contract rates on the eleven re-awarded
PRIMUS/NAVCARE projects. These decreases in revenue were offset by an increase
in revenue from an expanded inmate population and increased contract rate on
the Arkansas Department of Corrections project.
The Other revenue consists of the operations of the Reston, Virginia office
building acquired in May 1993. This building was sold in July 1994, resulting
in a decrease in Other revenues of $2.2 million for the nine months ended
January 31, 1995 compared to the prior year.
The Company's gross profit increased by 35% or $4.4 million to $16.9
million for the nine months ended January 31, 1995 compared to the nine months
ended January 31, 1994. This substantial increase is attributable to the
Commercial Managed Health Care Services division.
Substantially all of the increase in the Commercial Managed Health Care
Services division gross profit was attributable to CHP. CHP's gross profit
increase resulted the same factors as cited for its revenue increase.
Offsetting this gross profit increase was a decrease resulting from the sale of
three outpatient surgery centers in April 1994 and the remaining two outpatient
surgery centers in September 1994.
The Government Managed Health Care Services division gross profit decrease
was primarily due to (1) a reduction in the contract rates on the re-awarded
PRIMUS/NAVCARE projects, (2) the completion of three Medical Staffing contracts
and two On-site Ambulatory contracts, and (3) increased costs at two nursing
home projects. These gross profit decreases were offset by increases resulting
from a decrease in costs at one nursing home project and an expanded inmate
population and increased contract price on the Arkansas Department of
Corrections project.
<PAGE> 18
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
General and administrative expenses increased 37% or $3.8 million to $14.2
million for the nine months ended January 31, 1995 from $10.4 million for the
prior year nine month period. 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.
Interest expense decreased $680,000 to $1,760,000 for the nine months ended
January 31, 1995 compared with $2,440,000 for the prior year nine month period.
This decrease is a function of the decrease in the Company's long-term debt
resulting from (1) the sale of three surgery centers in April 1994, (2) the
sale of the Reston office building in July 1994, and (3) the sale of the
remaining two surgery centers in September 1994.
The effective income tax rates of 36% in fiscal 1995 and 37% in fiscal 1994
represent the combined federal and state income tax rates adjusted as
necessary.
<PAGE> 19
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES
Typically, the Company's principal sources of funds are operations and bank
borrowings.
During the nine months ended January 31, 1995, operations provided $983,000
in cash. This represents an increase in cash provided by operations of
$1,250,000 compared with the $267,000 in cash used by operations in the prior
year nine month period. In general, the increase in cash provided by
operations is primarily due to the increase in profitability for the nine
months ended January 31, 1995 compared with the same period in the prior year.
At January 31, 1995, the Company had unusually high accounts receivable and
accounts payable balances due to the construction activities on the BCBSNJ
project. This is a temporary situation which the Company anticipates will
return to previous levels before the end of the fiscal year.
The Company's number of days revenue in average outstanding receivables was
38 days for the nine months ended January 31, 1995, compared to 49 days for the
year ended April 30, 1994. The 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. The Company paid in full related non-recourse notes of
approximately $9.4 million. Additionally, the Company prepaid $2 million on
the $15 million term note in August 1994.
In September 1994, the Company sold the remaining two if its outpatient
surgery centers for $11.75 million in cash. As part of the sale, the
purchasers assumed approximately $5.0 million in existing related notes
payable. Additionally, the Company prepaid $5 million on the $15 million term
note in October 1994.
The Company believes that the current cash and 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 or private issuance of equity or debt securities.
<PAGE> 20
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, on May 2, 1994, Paragon Ambulatory Surgery, Inc.
filed suit in the U.S. District Court for the Middle District of Florida
against Health South, Inc. (HSI) and others seeking damages as a result of the
defendants' alleged interference in Paragon's planned sale of the common stock
of two of its surgery centers. Paragon was seeking relief in connection with
defendants' subsequent efforts to diminish the value and marketability of
Paragon's investment and various breaches of the original agreement, under
which Paragon initially acquired interests in the surgery centers from one or
more of the defendants. In conjunction with the sale of the two surgery
centers in September 1994, the suit has been dismissed.
On June 20, 1994, HSI and others filed a lawsuit in the Circuit Court,
Fourth Judicial Circuit, Duval County, Florida against Paragon and the two
centers in question alleging that they breached their fiduciary duties and
management agreements. Plaintiffs were seeking damages, termination of the
agreements, and relief from non-competition agreements they made. They also
were seeking to compel consent to HSI's acquisition of interests in the surgery
centers. In conjunction with the sale of the two surgery centers in September
1994, the suit has been dismissed.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
11.0 Statement re: Computation of per share earnings for the three
months and nine months ended January 31, 1994 and 1995
b) Reports on Form 8-K
On January 17, 1995, the Registrant filed a Report on Form 8-K describing
under Item 4 thereof a change in the Registrant's Certifying Accountant.
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 Registrant currently anticipates that new independent public
accountants will be appointed in March 1995.
<PAGE> 21
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
PHP HEALTHCARE CORPORATION
(Registrant)
By: /S/ ANTHONY M. PICINI
---------------------------------
ANTHONY M. PICINI
Senior Vice President of Finance
and Chief Financial Officer
Date: March 15, 1995
<PAGE> 22
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Item Page
- ------- ---------------------------------------------------------------- ----
11.0 Statement re: Computation of per share earnings for the three
months and nine months ended January 31, 1994 and 1995 23
27.0 Financial Data Schedule (submitted for the information of the
Securities and Exchange Commission) 24
<PAGE> 23
EXHIBIT 11
<TABLE>
Statement Re: Computation of per Share Earnings
Three Months and Nine Months ended
January 31, 1994 and 1995
<CAPTION>
Three Months Nine Months
ended January 31, ended January 31,
------------------------ ------------------------
1994 1995 1994 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Primary
Net earnings (loss) . . . . . . . . . . . . . . . . $ 139,000 $ 245,000 $ (215,000) $ 499,000
Weighted average number of common
shares outstanding. . . . . . . . . . . . . . . . . 5,075,809 5,437,238 5,023,354 5,236,443
Add common share equivalents (determined using the
"treasury stock" method) representing shares
issuable upon exercise of stock options and
warrants. . . . . . . . . . . . . . . . . . . . . . 3,551 388,137 3,702 293,371
---------- ----------- ----------- -----------
Weighted average number of shares used in
calculation of primary earnings per share . . . . . 5,079,360 5,825,375 5,027,056 5,529,814
=========== =========== =========== ===========
Primary earnings (loss) per common share . . . . . . . . $ 0.03 $ 0.04 $ (0.04) $ 0.09
=========== =========== =========== ===========
Fully diluted
Net earnings (loss) . . . . . . . . . . . . . . . . $ 139,000 $ 245,000 $ (215,000) $ 499,000
Weighted average number of common
shares outstanding. . . . . . . . . . . . . . . . . 5,075,809 5,437,238 5,023,354 5,236,443
Add common share equivalents (determined using the
"treasury stock" method) representing shares
issuable upon exercise of stock options, warrants,
and convertible notes payable . . . . . . . . . . . 5,808 304,533 5,808 252,629
----------- ----------- ----------- -----------
Weighted average number of shares used in
calculation of fully diluted earnings per share . . 5,081,617 5,741,771 5,029,162 5,489,072
=========== =========== =========== ===========
Fully diluted earnings (loss) per common share . . . . . $ 0.03 $ 0.04 $ (0.04) $ 0.09
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDLE 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>
<MULTIPLIER> 1,000
<CIK> 0000803568
<NAME> PHP HEALTHCARE CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-START> MAY-01-1994
<PERIOD-END> JAN-31-1995
<CASH> 1,537
<SECURITIES> 0
<RECEIVABLES> 30,121
<ALLOWANCES> 2,084
<INVENTORY> 1,139
<CURRENT-ASSETS> 41,168
<PP&E> 36,839
<DEPRECIATION> 13,420
<TOTAL-ASSETS> 71,513
<CURRENT-LIABILITIES> 32,238
<BONDS> 17,212
<COMMON> 71
0
0
<OTHER-SE> 27,346
<TOTAL-LIABILITY-AND-EQUITY> 71,513
<SALES> 0
<TOTAL-REVENUES> 148,823
<CGS> 0
<TOTAL-COSTS> 131,911
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,760
<INCOME-PRETAX> 780
<INCOME-TAX> 281
<INCOME-CONTINUING> 499
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 499
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
