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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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/XX/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended April 30, 1996
OR
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/__/ 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
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Commission file number: 0-16235
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PHP HEALTHCARE CORPORATION
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(exact name of registrant as specified in its charter)
Delaware 54-1023168
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
11440 Commerce Park Drive, Reston, Virginia 20191
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (703) 758-3600
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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
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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, 1996 the aggregate market value of the Common Stock
held by non-affiliates of the Registrant was approximately $248 million. As of
June 30, 1996 the number of shares of Common Stock of the Registrant issued and
outstanding was 10,966,950.
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PART I
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Item 1. Business
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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.)
Overview
PHP designs, develops and operates patient-oriented Integrated Systems of
Care ("ISOCs") which serve the needs of managed care organizations, self-
insured employers, health care providers and provider systems, and government
agencies. The Company develops and operates each integrated system by: (i)
developing and maintaining a network of physicians, hospitals, and other
providers; (ii) organizing and managing the individual and group practices of
physicians who participate in the network; (iii) operating information
systems to coordinate and integrate the services, measure outcomes, and
provide financial results of the system; and (iv) entering into contracts
with various third party payors, such as health maintenance organizations
("HMOs"), insurers, or employee health benefit plans on behalf of the
network. The Company manages 17 ISOCs for its clients and has two more ISOCs
under development, owns 26,000 and 9,000-member HMOs primarily serving the
Medicaid population in the District of Columbia and the Commonwealth of
Virginia, respectively, and manages inpatient and outpatient health care
services under 21 active government contracts and subcontracts, providing
care in over 70 health care facilities. As of April 30, 1996, the Company
contracted with or employed over 3,000 physicians.
Industry
Health care in the United States historically has been delivered through a
fragmented system of health care providers on a fee-for-service basis which
provides few incentives for the efficient utilization of resources and has
contributed to increases in health care costs. Employers, insurance companies
and government agencies have increasingly turned to managed care in an
attempt to effectively manage the costs of health care. This focus on cost
containment and the shift to managed care is forcing hospital and physician
providers to seek ways to organize themselves into more efficient health care
delivery systems. At the same time, payors and their intermediaries,
including HMOs and governmental agencies, are seeking to contract with
organized networks that can provide a full array of health care services. To
achieve this, many payors and their intermediaries, including HMOs and
governmental entities, are increasingly looking to outside companies which
offer skilled management and advanced information systems. In addition, these
payors and intermediaries often seek to share the risk of providing services
through capitation arrangements which provide for fixed payments for patient
care over a specified period of time.
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Strategy
The Company works closely with its clients to design systems which best suit
their needs and those of their constituents. PHP strives to assure that its
clients and their constituents receive cost effective, high quality care in a
timely fashion from the most appropriate health care provider. The Company
develops ISOCs to serve managed care organizations, self-insured employers,
health care providers and provider systems, and government agencies. It also
serves as a network integrator, using the ISOC model, to assist health care
providers in creating and managing integrated health care delivery systems.
The Company provides the business and medical management expertise,
information systems, and marketing to strategically link health care
components into delivery systems with significant competitive advantages. Key
components and concepts behind the Company's ISOC strategy include:
Focus on Managed Care. The Company designs physician and hospital networks
in a particular local market to meet the needs of HMOs and other managed care
payors in specified service areas, identifying and recruiting primary and
specialty care physicians and integrating such physicians with hospitals into
a network that provides comprehensive medical coverage to enrollees. The
Company seeks to benefit from the movement among employers and payors to
reduce health care costs and the trend toward prepaid managed health care.
The Company believes that its network structure and management techniques
enable it to effectively contain costs and negotiate favorable capitation and
shared-risk arrangements through implementation of information systems,
utilization and quality management systems, referral procedures and risk
management programs, and assistance with physician credentialing and
contracting with payors.
Create and Develop Fully Integrated Health Care Delivery Networks. The
Company designs and develops provider networks and physician practice
management capabilities centered around the primary care provider. Each
multi-specialty provider network is designed to meet the specific medical
needs of a targeted community. The Company believes that these networks can
(i) provide physicians and hospitals with greater access to managed care
contracts by facilitating contractual relationships with multiple HMOs, (ii)
establish a single point of entry into an integrated heath care delivery
network for HMOs and other payors and (iii) offer patients a comprehensive
range of medical care in convenient locations through primary and specialty
providers conveniently located in target markets.
Utilize Information Systems. The Company's information systems enable
physicians, nurses, hospitals, insurance companies, administrators and others
involved in patient care to share information on a timely basis without
duplication. Information is collected on all aspects of each patient
encounter within the ISOC, including measures reflecting clinical outcomes,
access, service availability, cost-efficiency, and patient satisfaction.
Physicians are directly assisted in the exam room with an automated patient
record that is electronically updated with progress notes and other data,
such as laboratory results. An outcomes tracking system provides information
on patient satisfaction, patient health status and ambulatory care and
hospital outcomes. The utilization review/case management system provides
critical information regarding the need for referrals and the management of
high cost episodes of care. Finally, a data warehouse/repository provides
physicians with a longitudinal medical record, containing complete medical
records of all patients. It provides administrators with complete clinical
and financial records of each encounter of every member of the ISOC, which
allows both fixed and ad hoc reporting capabilities for comparing
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physician performance within the system, as well as "benchmark" comparisons of
financial and clinical performance of the ISOC to other health care plans.
Focus on Primary Care Physicians. The Company's strategy is to affiliate (on
an exclusive basis where appropriate) with primary care physicians which the
Company believes are increasingly the principal determinants of the location
of patient care and the amount and degree of ancillary services, including
referrals to specialists. The primary care physician represents the initial
point of access into a fully integrated health care delivery system in which,
in many cases, the primary care physician is capable of providing similar
levels of quality of care for significantly less cost than specialist
providers. PHP's ISOC models are based on a foundation of primary care
physicians and related care-givers who are employed or managed by the
Company, and who deliver care at Company-owned or managed primary care
facilities and offices. These centers provide laboratory, radiology and
pharmacy services in addition to primary care physician and nursing services.
Purchasing, billing, payroll and all administrative functions are performed
and managed by experienced executive and administrative personnel, freeing
physicians and other care-givers to devote their time to patient care.
Design Patient Oriented Programs. PHP's ISOCs are constructed with the
recognition that the need and demand for costly health care services are, to
a large degree, generated by the decisions and actions of patients. PHP has
the ability to manage patient-oriented educational programs. Disease-specific
offerings, wellness training, prevention programs, decision assist programs,
after hours nurse triage and other components are all integrated into the
system. The result is a system of care that empowers patients to become
knowledgeable and active participants who, in partnership with their
providers, optimize decisions affecting resource utilization, as well as
individual health and productivity.
Develop New Markets. The Company's growth strategy is based on actively
developing existing and new markets, and making selective acquisitions and
joint ventures in such markets. The Company develops existing markets by: (i)
capturing additional revenues from existing practices as patients migrate
from traditional fee-for-service plans to capitated managed care programs,
(ii) adding new physicians to existing networks and (iii) contracting with
payors to expand the number of capitated lives within existing physician
practices. In addition, the Company grows by developing new physician and
hospital networks in identified markets to serve managed care organizations,
self-insured employers, health care providers and provider systems and
government agencies through selected acquisitions and joint ventures and by
serving as a network integrator.
Development
PHP was founded in 1975. At that time, the Company's primary focus was the
provision of health care services to government agencies. The Company's
government contracts required the Company to manage health care providers in
a variety of delivery sites. These sites include hospitals (both acute care
and psychiatric), skilled nursing facilities, staffing services, and, most
significantly, primary care settings. In 1992, management realized that the
knowledge, expertise and skills which the Company had acquired in managing
health care providers for government agencies could also be applied to serve
the commercial managed care market. At the same time, management supplemented
the Company's existing competencies with additional skills and capabilities
in order to take full advantage of the opportunities available in commercial
managed care. Over the past several years,
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therefore, PHP invested resources to (i) acquire enhanced capabilities in
benefit design, network development and medical management, (ii) develop health
care information systems capable of supporting integrated health care delivery
systems and (iii) employ and retain executives with experience in the commercial
managed care environment.
In 1993, PHP acquired EastWest Research Corporation ("EastWest"), a
consulting firm specializing in the design, development, and maintenance of
provider networks. The EastWest acquisition provided the Company with the
capabilities necessary to identify specialists and inpatient facilities to
complement PHP's primary care centers and create a total care system within a
community. A second key acquisition was the acquisition of Health Cost
Consultants, Inc. ("HCC"), a consulting firm engaged in the design and
implementation of utilization management systems, case management techniques,
and medical protocols that can be applied at point-of-service and from remote
locations. This system permits support personnel and primary care physicians
to make the necessary decisions for each patient on-site and to coordinate
care with specialists and hospitals directly. In addition, over the past two
years the Company has actively recruited and hired additional medical
personnel with managed care expertise. With the addition of these resources,
the Company acquired the means necessary to integrate and manage health care
providers in provider networks to address the needs of commercial managed
care entities. Further, these resources provided the Company with the
capability to demonstrate to such entities that PHP's integrated systems can
potentially improve access, enhance quality and reduce cost.
PHP recently established a Company-owned ISOC to provide services to D.C.
Chartered beneficiaries in the District of Columbia and announced the
formation of a limited liability company with St. Vincent's Health Services
Corporation that has established and manages an ISOC in Fairfield County,
Connecticut. The Company also incorporated Virginia Chartered Health Plan,
Inc. ("Virginia Chartered") in the Commonwealth of Virginia and received a
license from the Commonwealth's Bureau of Insurance to operate an HMO in
August of 1995. Initial enrollment began in Richmond and the Tidewater area
in October 1995, and currently there are 9,000 enrollee members. The Company
has modeled Virginia Chartered on its Medicaid HMO in the District of
Columbia. Virginia Chartered is supported, pursuant to a management contract,
by the corporate services of the Company's Medicaid HMO in the District of
Columbia which provides the necessary management functions to develop and
manage an ISOC for the health plan. In January 1996 the Company sold a 30%
interest in Virginia Chartered to University Health Services, Inc. ("UHS"), a
non-stock corporation created by Virginia Commonwealth University.
Operations
Until fiscal 1994, PHP operated almost exclusively as a provider of health
care services to federal, state and local government agencies. During the
past three fiscal years, however, the Company has invested significant
resources to refocus its business from that of a government contractor to
that of a full service managed care company. To better serve the needs of the
commercial and government health care marketplace, the Company has realigned
its operations into two related but distinct divisions: Commercial Managed
Health Care Services and Government Managed Health Care Services.
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Commercial Managed Health Care Services
D.C. Chartered Health Plan. D.C. Chartered Health Plan, Inc. ("D.C.
Chartered") was formed in August 1988 and acquired by PHP in August 1993.
D.C. Chartered was a pioneer in the development of managed health care for
Medicaid beneficiaries receiving Aid to Families with Dependent Children
("AFDC"). Currently, over 25,000 AFDC recipients and approximately 1,000
commercial employees and their dependents are enrolled in D.C. Chartered. The
District of Columbia first started providing managed care for Medicaid
beneficiaries in 1988. D.C. Chartered was one of the first to offer managed
care to Medicaid beneficiaries in the District. Approximately 44,000 Medicaid
beneficiaries are currently enrolled in managed care plans (over 57% of whom
are D.C. Chartered members) pursuant to a District mandate which began
implementation in the spring of 1994.
Each member enrolled in D.C. Chartered is assigned a primary care physician.
D.C. Chartered has over 650 physicians under contract, including 58 primary
care physicians (eight of whom exclusively support D.C. Chartered). D.C.
Chartered's members receive prescriptions, health education, nutrition
counseling, transportation to and from appointments, and, when necessary,
referrals to specialists and hospital services. Following D.C. Chartered's
acquisition by PHP, the Company installed key elements of its ISOC to support
the health plan, including network development, utilization review and
quality assurance services. As PHP's ISOC continued to evolve, additional
capabilities have been implemented at D.C. Chartered, including the Company's
information systems. In March 1995, PHP opened a primary care health center
in the District of Columbia. The Chartered Family Health Center ("FHC") is
modeled on PHP's ISOC model. D.C. Chartered also contracts with nine D.C.
hospitals which are included in the ISOC. The FHC has a full-time staff of
board certified family, pediatric, obstetrics/gynecology and internal
medicine physicians. D.C. Chartered's staff also includes nurses, radiology
and laboratory technicians, pharmacists and medical assistants.
Under a provider agreement with the D.C. Department of Human Services (the
"Department"), D.C. Chartered receives a monthly fixed, per capita fee
divided between a risk and non-risk portion for services provided to AFDC and
AFDC-related Medicaid enrollees. Under the agreement, the capitated fee is
allocated to a non-risk portion covering physician, outpatient, and other
services and a risk portion covering inpatient hospital services. At the end
of each contract period, for the non-risk portion, D.C. Chartered must
provide an accounting of its costs and services to enable the Department to
determine the final amount due to D.C. Chartered or the Department under the
agreement. The non-risk portion of the capitation fee may not exceed the
federal fee-for-service upper payment limit for covered Medicaid services.
D.C. Chartered assumes full financial risk for inpatient hospital services
and assumes all gains or losses from the provision of such services. The
agreement requires D.C. Chartered to maintain an escrow account in an amount
based on its estimated expenditures, which the Department may use to recover
capitation payments and the cost of care for enrollees in the event of a
default. The Department reserves the right to terminate the agreement if a
default occurs. The agreement is subject to annual renewal.
In April 1996, the United States Congress enacted legislation which provides
for a retroactive waiver (covering the period October 1, 1991 - October 1,
1999) of the 75%/25% Medicaid HMO enrollment limitations. Accordingly, CHP's
non-risk provider agreements will be retroactively superceded with risk
provider agreements. Under a risk provider agreement, CHP will be paid a
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monthly capitation amount for all medical services provided during the
retroactive period and in the future.
D.C. Chartered's business strategy lies in its fundamental commitment to
promoting access and emphasizing prevention and health maintenance, as well
as treatment. Many elements of D.C. Chartered focus on increasing access to
its services by (i) improving knowledge and awareness of benefits, (ii)
providing extensive wellness and preventative health care services, and (iii)
directly providing transportation to and from health care appointments.
Management believes that this commitment enhances D.C. Chartered's ability to
control cost, and improves accountability within the system.
Blue Cross Blue Shield of New Jersey. In March 1994, PHP entered into an
agreement with Medigroup, Inc., a wholly owned subsidiary of Blue Cross Blue
Shield of New Jersey, Inc. ("BCBSNJ"), to provide ten complete integrated
systems of care for beneficiaries throughout the State of New Jersey. Under
this contract, PHP designed and built and is currently managing ten family-
health-center-based ISOCs throughout New Jersey. As part of the management
agreement, 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. All ten ISOCs
are currently operational. The BCBSNJ contract is for a term of ten years on
a cost-reimbursement-plus-management fee basis. The contract provides for PHP
to participate in certain cost savings experienced by BCBSNJ and requires PHP
to refund a portion of its management fee if the costs savings do not meet
certain targets.
The agreement with BCBSNJ provides BCBSNJ the right to terminate the
agreement without cause upon 90 days' notice. If it elects to terminate the
agreement on this basis, BCBSNJ is required to pay to PHP a termination fee,
payable over a three-year period, in an amount dependent on the remaining
term of the agreement. The termination payment would be $45 million if such a
termination were effected prior to 1997, and the amount of the termination
payment is reduced by $5 million on January 1 of each year thereafter,
beginning with January 1, 1997. The agreement also contains provisions
permitting termination by BCBSNJ for cause in the event of a material breach
by PHP or upon the occurrence of certain other circumstances.
In April 1996, the Company entered into a non-binding letter of intent with
BCBSNJ to acquire the ten primary care facilities which PHP designed and
built, and is currently managing for BCBSNJ.
Under the letter of intent, PHP would acquire the health centers' assets for
up to $33 million in cash. The Company intends that the health centers will
serve as the cornerstone of its new generation of integrated systems of care
(ISOC). The ISOC will operate on a non-exclusive basis as a participating
provider network of BCBSNJ, HMO Blue and other third party payers. The ISOC
is expected to resemble other networks to be managed by PHP as presently
contemplated in Connecticut, Georgia and Florida, which are intended to align
the Company with local hospital and physician partners. PHP and BCBSNJ/HMO
Blue expect to enter into provider agreements giving favorable pricing to the
BCBSNJ/HMO Blue managed care products.
Completion of the transaction is subject to, among other things, the
completion of due diligence, the execution of definitive agreements and the
receipt of all necessary consents and approvals. The
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letter of intent expired on June 30, 1996, without extension; however, the
Company and BCBSNJ continue to negotiate the proposed transaction.
Corporate Health Centers. The Company has introduced key elements of its
ISOC to self-insured employers through its contracts to deliver employer-
sponsored health care at primary care facilities developed and operated by
PHP. The Company's corporate health center contracts generally provide for
PHP to design, construct, equip and operate the centers. In late 1992, PHP
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 service area for GTE Corporation ("GTE"), and one family health
venture 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 other GTE health care professionals in providing
comprehensive health care services 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
approximately 10,000 Northwestern employees, retirees and dependents in
Sterling, Illinois. PHP also developed an outside provider network of medical
and surgical specialists to complement the primary care services offered in
the center. The Company's corporate health center contracts provide for
payment based on a cost-reimbursement-plus-fixed-fee, or fixed-rate per labor
hour basis and generally contain terms ranging from three to five years. The
initial term of the GTE contract expired on December 31, 1995 and is
operating on a month-to-month basis while a proposed renewal of the agreement
is under discussion.
Connecticut Health Enterprises. In November 1995, PHP and St. Vincent's
Health Services Corporation ("St. Vincent's"), an affiliate of the Daughters
of Charity National Health System East, Inc. (the "Daughters of Charity-
East"), formed Connecticut Health Enterprises, L.L.C. ("CHE"), a limited
liability company for the purpose of developing an ISOC in Fairfield County,
Connecticut. The CHE ISOC commenced operations in April 1996 and functions as
an alliance between PHP, St. Vincent's, Fairfield County physicians and other
hospitals and ancillary providers. This system of health care will be
marketed to insurers, HMOs, and government agencies, which will contract for
a total health care delivery system.
Georgia Health Enterprises. In April 1996, PHP and St. Mary's Health Care
System, Inc. of Athens, Georgia, announced the formation of Georgia Health
Enterprises, L.L.C. ("GHE"), a limited liability company for the purpose of
developing an ISOC in the Athens, Georgia market. The GHE ISOC will function
similarly to the CHE venture described above. PHP is currently developing
similar ISOC ventures in other states with other strategic partners.
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
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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 health care services under various contracts
with government agencies. Under its government contracts, the Company
provides managed care services in five service groups: (i) ambulatory care -
outpatient primary care for defined populations; (ii) medical staffing - the
recruitment and provision of qualified medical, nursing and mental health
specialists and technicians; (iii) mental health - inpatient and outpatient
psychiatric services for certain defined populations; (iv) long-term care -
the management of skilled and intermediate care nursing facilities; and (v)
total managed care - comprehensive health care programs for defined
beneficiary populations. The Company's government contracts are generally
awarded for a base period of less than one year, have two to four one-year
renewals at the option of the government agency and generally may be modified
or terminated for the convenience of the government agency at any time during
the contract.
Ambulatory Care. PHP provides managed outpatient primary care services for
various defined populations. Included in the Company's Ambulatory Care
service group are its PRIMUS and NAVCARE programs. 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 a
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. The centers
provide various preventive services, including physical 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. 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.
Also included in the Company's Ambulatory Care service group is the TRICARE
PRIME program. TRICARE PRIME is a new managed care program involving the
U.S. Departments of the Army, Navy and Air Force. The TRICARE PRIME program
is a pilot program started in the Tidewater area of Virginia, and is designed
to serve the greater than 420,000 eligible military beneficiaries in that
area. PHP was awarded this fixed unit-price subcontract effective October
1995; the primary
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contractor is Sentara Health Systems. The initial contract period is one year
ending in September 1996, with four one year options exercisable at the federal
government's discretion. There is a total of nine facilities under the primary
contract with Sentara; of those, PHP operates five, one Company-owned, Company-
operated and four Government-owned, Company-operated. Under this subcontract,
PHP provides managed outpatient health care services to military dependents,
retired military personnel and their dependents, and active military personnel.
Services are primarily provided on an enrollment basis; however, non-enrollees
may use the facilities utilizing allotted "pool visits", if available. The
services that PHP provides include, but are not limited to: primary care;
coordination of specialty referrals and hospitalization; emergency care; X-ray,
laboratory and pharmacy services; and, routine health care exams. The facilities
are open 365 days per year, with extended hours Monday through Friday.
A new service offered to enrollees through the TRICARE PRIME program is the
Telephone Triage service (TTS), through which nurses provide medical advice
24 hours per day, 365 days per year. The TTS is the "gatekeeper" of this
contract, performing demand management and ensuring patients who do not need
physician services are provided self-care advice or are provided over the
counter medications at the clinic without seeing a physician. In addition to
medical advice, the TTS also performs patient scheduling for all TRICARE
PRIME clinics.
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. PHP currently
provides staff to render 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.
Mental Health. PHP 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 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 a fixed-price or unit-price
basis. For contracts awarded on a unit-price basis, the payment is based upon
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.
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Additionally, in April 1996, PHP was selected by the State Veterans Affairs
Commission of Mississippi to manage three 150-bed skilled and intermediate
care nursing facilities. Operation of these facilities is anticipated to
commence in August and September 1996. 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.
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. 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 is
negotiated annually. In May 1996 the Company was awarded a similar contract
with the Maryland Department of Corrections with an initial term of one year
and two one-year options.
11
<PAGE>
Government Contract Backlog
As of April 30, 1995 and 1996, 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 $242 million and $411 million,
respectively. 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, 1996, approximately 47% of the
Company's revenues were derived from 27 separate contracts and subcontracts
with various government agencies to provide health care to various government
sponsored populations. The Company received approximately 27% of its total
revenues under 20 contracts and subcontracts 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, 72.9%; fixed-price contracts, 20.2%; cost-reimbursement-plus-fee
contracts, 0.6%; and fixed-rate-labor hour contracts, 6.3%. 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.
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.
12
<PAGE>
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.
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. Any such suspension or
debarment of the Company could have a material adverse effect upon the
Company's business.
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.
Limitations on Reimbursement
A major portion of the Company's revenues are derived from third party
payors, such as governmental programs, private insurance plans and managed
care organizations. In particular, for the year ended April 30, 1996 ,
approximately 28%, of the Company's revenues were derived from
13
<PAGE>
the Medicaid program, a cooperative state-federal program for medical assistance
to the poor. Reflecting a trend in the health care industry, third party payors
increasingly are negotiating with health care providers such as the Company
concerning the prices charged for medical services, with the goal of lowering
reimbursement and utilization rates. There can be no assurance that any future
reduction in reimbursement rates would be offset through enhancement of
operating efficiencies, or that any such enhancement of operating efficiencies
would occur. Third party payors may also deny reimbursement if they determine
that a treatment was not performed in accordance with the cost-effective
treatment methods established by such payors, was experimental or for other
reasons. In addition, funding for governmental programs, such as Medicaid, is
under increased scrutiny.
Health Care Regulation
The health care industry is subject to extensive federal regulation relating
to licensure, conduct of operations and prices for services.
The laws of many states prohibit physicians from splitting fees with non-
physicians and prohibit non-physician entities from practicing medicine.
These laws vary from state to state, have been subject to limited judicial
and regulatory interpretation, and are enforced by the courts and by
regulatory authorities with broad discretion. Although the Company seeks to
structure its operations so as to comply with these laws, there can be no
assurance that the Company's present or future operations will not be
successfully challenged as violating, or determined to have violated, such
laws, or that the enforceability of the provisions of agreements governing
such operations will not be limited. Any such result could have a material
adverse effect on the Company.
The laws in most states also regulate the business of insurance and the
operation of HMOs. Many states also regulate the establishment and operation
of networks of health care providers. Although the Company seeks to structure
its operations so as to comply with these laws in the states in which it
does business, there can be no assurance that future interpretations of
insurance laws and health care network laws by the regulatory authorities
in these states or in the states into which the Company may expand will
not require licensure or a restructuring of some or all of the Company's
operations. The Company's Medicaid HMO is not presently subject to licensure
requirements in the District of Columbia. However, legislation has been
proposed which would require the licensure of HMOs in the District of Columbia
and subject the Company to additional regulatory requirements. The Company is
unable to predict what HMO legislation or regulation, if any, will be adopted
in the District of Columbia and what effect, if any,
14
<PAGE>
such legislation or regulation would have on the Company's business. No
assurance can be given that future HMO legislation or regulation in the District
of Columbia or in other states will not have a material adverse effect on the
Company's business, financial condition or results of operation.
Anti-fraud and abuse amendments codified under the Social Security Act of
1935, as amended (the "Social Security Act"), prohibit certain business
practices and relationships that may affect the provision and cost of health
care services reimbursable under the Medicare and Medicaid programs. These
amendments include anti-kickback provisions prohibiting the solicitation,
payment, receipt or offering of any direct or indirect remuneration for the
referral of Medicare or Medicaid patients or for the ordering or providing of
Medicare or Medicaid covered services, items or equipment. Sanctions for
violating the anti-kickback provisions include criminal penalties and civil
sanctions, including fines and possible exclusion from the Medicare and
Medicaid programs. In addition, Section 1877 of the Social Security Act (the
"Stark law") restricts physician referrals to certain providers, including
hospitals, with which they have a financial arrangement. Sanctions for
violation of the Stark law include civil money penalties and exclusion from
the Medicare and Medicaid programs. The Stark law and the anti-kickback
provisions of the Social Security Act are broadly worded and often vague, and
the future interpretation of these provisions and their applicability to the
Company's operations cannot be predicted with certainty. Although the Company
seeks to arrange its business relationships so as to comply with these laws,
there can be no assurance that the Company's present or future operations
will not be accused of violating, or be determined to have violated, such
provisions. Any such result could have a material adverse effect on the
Company.
Health Care Reform
In recent years, an increasing number of legislative proposals have been
introduced in Congress and in some state legislatures that would effect major
changes in the health care system, either nationally or at the state level.
The Company is unable to predict what health care reform legislation, if any,
will be adopted and what effect, if any, such legislation may have on the
Company's business. No assurance can be given that future health care and
welfare reform legislation will not have a material adverse effect on the
Company's business, financial condition or results of operations.
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,
15
<PAGE>
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.
Employees and Independent Contractors
At June 30, 1996, PHP had approximately 3,328 employees, of which
approximately 2,150 were full time, including 121 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
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,
Chairman of the Board and Chief Executive Officer, Jack M. Mazur, President,
and Michael D. Starr, Senior 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 Company is the beneficiary of five key-
man life insurance policies on Mr. Robbins and Mr. Mazur in the total amount
of $4.28 million.
Item 2. Properties
----------
As of June 30, 1996 the Company leased facilities for the provision of
medical services and for its corporate headquarters and other administrative
offices at 20 locations in eight states covering an aggregate of
approximately 231,000 square feet of space. The leases expire at various
dates from fiscal years 1996 to 1999.
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 4 of Notes to
Consolidated Financial Statements.
16
<PAGE>
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 relocated its corporate
operations to this building. 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.
17
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------
The following sets forth certain information as of the date hereof with
respect to the Company's 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, 1997, automatically renewable annually thereafter. 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 1996 Annual Meeting of
Shareholders, or until their successors are duly elected and qualified.
Pursuant to his employment agreement, John P. Cole will serve as Executive
Vice President until September 1996.
<TABLE>
<CAPTION>
Continuosly
Positions or Offices Served as Executive
Name with the Company Officer Since Age
- ---- ---------------- ------------- ---
<S> <C> <C> <C>
Charles H. Robbins Chairman, Chief 1976 65
Executive Officer and a
Director
Jack M. Mazur President and a Director 1976 54
Michael D. Starr Senior Executive Vice 1981 52
President, Treasurer,
Chief Executive Officer
- Government Managed
Care Services and a
Director
Anthony M. Picini Senior Vice President 1990 41
and Chief Financial
Officer
Julien J. Lavoie Senior Vice President - 1991 64
Information Systems and
a Director
John P. Cole Executive Vice President 1994 55
William J. Lubin Executive Vice President 1996 43
and Chief Executive
Officer - Commercial
Managed Care Services
</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 the
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.
18
<PAGE>
William J. Lubin joined PHP in August 1994 as Senior Vice President for
Managed Care. In late 1994 he assumed the position of Chief Operating
Officer, Commercial Managed Care. In October 1995, he became Chief Executive
Officer of Commercial Managed Care Services. In April 1996, he became
Executive Vice President. Prior to joining PHP, Mr. Lubin held management
positions with Aetna Health Plans, Travelers Insurance Companies, Lincoln
National, and Blue Cross and Blue Shield of Connecticut.
Information concerning Messrs. Robbins, Mazur, Starr and Lavoie under the
heading "Election of Directors" in the Company's 1996 Proxy Statement is
hereby incorporated by reference as if set forth in full.
19
<PAGE>
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, 1997
First Quarter
(through June 30, 1996).. 36 28 1/4
April 30, 1996
Fourth Quarter........... 32 5/8 23 3/8
Third Quarter............ 28 1/4 20
Second Quarter........... 20 10 5/16
First Quarter............ 10 7/8 8 5/16
April 30, 1995
Fourth Quarter........... 10 3/16 4 7/8
Third Quarter............ 6 1/16 4 11/16
Second Quarter........... 6 5/16 4 1/2
First Quarter............ 6 11/16 4 3/8
</TABLE>
As of June 30, 1996 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 L.L.P, independent public accountants, as of and for the
years ended April 30, 1995 and 1996, and KPMG Peat Marwick, LLP, independent
public accountants as of and for the years ended April 30, 1994, 1993 and
1992, and gives retroactive effect to the two-for-one split of the Common
Stock effected in the form of a 100% stock dividend distributed on November
20, 1995, to holders of record on November 1, 1995. The data presented below
should be read in conjunction with and is qualified by reference to the
Consolidated Financial
20
<PAGE>
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,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues................................ $117,790 $126,026 $148,683 $204,131 $203,360
Direct Costs............................ 100,813 116,840 140,397 182,053 163,582
-------- -------- -------- -------- --------
Gross Profit............................ 16,977 9,186 8,286 22,078 39,778
General and administrative
expenses.............................. 10,093 13,201 16,936 19,660 27,173
-------- -------- -------- -------- --------
Operating income (loss)................. 6,884 (4,015) (8,650) 2,418 12,605
Other income (expense):
Interest expense...................... (283) (1,071) (3,288) (2,209) (3,363)
Interest income....................... 409 74 186 422 1,448
Miscellaneous income (expense)........ 25 (325) (504) 1,015 69
Gain on sale of subsidiary stock...... --- --- --- --- 2,247
Minority interest in (earnings) losses
of subsidiaries..................... 39 (225) (213) (159) 212
-------- -------- -------- -------- --------
Earnings (loss) before income taxes..... 7,074 (5,562) (12,469) 1,487 13,218
Income tax expense (benefit)............ 2,807 (1,806) (3,135) 535 4,100
-------- -------- -------- -------- --------
Net earnings (loss)..................... $ 4,267 $ (3,756) $ (9,334) $ 952 $ 9,118
======== ======== ======== ======== ========
Net earnings (loss) per common share:
Primary............................... $ .42 $ (.38) $ (0.93) $ .08 $ .68
======== ======== ======== ======== ========
Fully diluted......................... $ .42 $ (.38) $ (0.92) $ .08 $ .66
======== ======== ======== ======== ========
Weighted average number of common
shares outstanding:
Primary............................... 10,086 9,996 10,085 11,226 13,429
======== ======== ======== ======== ========
Fully diluted......................... 10,086 9,996 10,117 11,910 13,873
======== ======== ======== ======== ========
Balance Sheet Data:
Working capital......................... $ 15,677 $ 20,753 $ 7,736 $ 15,422 $ 68,562
Total assets............................ 55,742 73,821 87,111 71,150 135,355
Short-term debt......................... 2,526 4,283 4,589 2,247 545
Long-term debt.......................... 7,414 28,888 39,643 24,454 67,529
Stockholders' equity.................... 32,626 25,733 17,296 20,328 30,747
</TABLE>
21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
- ---------------------
General
In response to the industry shift to manage and integrate the various components
of the health care delivery system, PHP has transformed to a managed care
solutions company. Over the past three years, the Company has altered its focus
from an historic dependence on government contracts to a focus on commercial
managed care markets. Prior to 1993, over 98% of PHP's revenue came from
government-related contracts. PHP's government service contracts required the
Company to manage health care providers in a variety of delivery settings. In
1992, management realized that the knowledge, expertise and skills which the
Company had acquired in managing health care providers for government agencies
could also be applied to serve the commercial managed care market. At the same
time, management supplemented the Company's existing competencies with
additional skills and capabilities in order to take full advantage of the
opportunities available in commercial managed care. The Company added to
existing capabilities by making several key acquisitions, investing in
information systems and recruiting experienced managed care executives. With
this added expertise, PHP has expanded its commercial business so that, in
fiscal 1995 and 1996, its commercial business accounted for approximately 50% of
PHP's total revenues.
Revenues from the Commercial Managed Health Care Services division have
grown, in part as a result of acquisitions, to $106.9 million or 52.6% of
total revenues in 1996 from $1.3 million or 1% of total revenues in 1992.
Operations in this division consist of the Company's integrated system of
care applied in whole or in part to: (i) the Company's project with Blue
Cross Blue Shield to operate ten ISOCs in the State of New Jersey, (ii)
family health centers which are operated on a contract basis for large
employers, and (iii) the Company's HMOs in the District of Columbia and
Virginia, primarily serving the government assisted Medicaid population. In
these operations, the Company undertakes to provide specified health care
benefits to the participating populations. The Company is compensated for
these services through a combination of capitation fees, management fees,
cost reimbursements, incentive fees related to cost savings and profits from
equity participation.
Revenues from the Government Managed Health Care Services division have
decreased slightly from a peak of $116.4 million in 1992 to $96.4 million in
1996. Operations in this division consist of health care services provided
to government agencies across a diverse scope of service groups including
ambulatory care, medical staffing, mental health, long-term care, and total
managed care. The Company generally performs these services under unit-
price, fixed-price, cost-reimbursement-plus-fee, and fixed-rate-labor hour
contracts.
The Company's revenues have increased from $118.0 million in 1992 to $203.4
million in 1996. Gross profit margins increased to 19% and 11% in 1996 and
1995, respectively, after having decreased to 7% and 6% in 1993 and 1994,
respectively. The Company earned net income of $9.1 million and $952,000 in
1996 and 1995, respectively, after net losses of $3.8 million and $9.3
million in 1993 and 1994, respectively. The 1993 and 1994 losses were due to
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
22
<PAGE>
acquisitions and capital expenditures to meet operational needs, and write-
offs of receivables under certain contracts.
The following table sets forth, for the years indicated, certain items in the
Company's Consolidated Statements of Operations expressed as a percentage of
revenues:
<TABLE>
<CAPTION>
Year Ended April 30,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues............................. 100.0% 100.0% 100.0%
Direct costs......................... 80.4 89.2 94.4
----- ----- -----
Gross profit......................... 19.6 10.8 5.6
General and administrative expenses.. 13.4 9.6 11.4
----- ----- -----
Operating income (loss).............. 6.2 1.2 (5.8)
Other income (expense)............... 0.3 (0.5) (2.6)
----- ----- -----
Earnings (loss) before income taxes.. 6.5 0.7 (8.4)
Income tax expense (benefit)......... 2.0 0.2 (2.1)
----- ----- -----
Net earnings (loss).................. 4.5 0.5 (6.3)
===== ===== =====
</TABLE>
The following table indicates revenues by the Company's service divisions and
the related percentage of total revenues:
<TABLE>
<CAPTION>
Year Ended April 30,
-------------------
1996 1995 1994
---- ---- ----
Revenues % of Revenues % of Revenues % of
(000's) Total (000's) Total (000's) Total
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Division
- --------
Government Managed Health Care Services $ 96,424 47.4 $101,455 49.7 $102,248 68.8
Commercial Managed Health Care Services 106,936 52.6 102,220 50.1 43,204 29.0
Other Revenue --- --- 456 0.2 3,231 0.2
-------- ----- -------- ----- -------- -----
Total $203,360 100.0 $204,131 100.0 $148,683 100.0
======== ===== ======== ===== ======== =====
</TABLE>
Results of Operations
Fiscal Year 1996 Compared to Fiscal Year 1995
---------------------------------------------
The Company's revenue decreased by 0.4% or $700,000 to $203.4 million in
fiscal year 1996 compared to $204.1 million for the prior fiscal year. This
slight decrease is the net result of an increase in the Commercial Managed
Health Care Service division and a decrease in the Government Managed Health
Care Service division. The fiscal 1995 Commercial Managed Health Care
Service division revenues included $30.0 million of non-recurring
construction and pre-operational revenue on the BCBSNJ ISOC project.
Exclusive of the non-recurring construction and pre-operational revenue
earned on the BCBSNJ ISOC project in fiscal year 1995, Commercial Managed
Health Care Service division revenue increased by $34.7 million or 48.1% to
$106.9 million in fiscal 1996 compared to $72.2 million in fiscal 1995. This
net increase is the result of several increases and decreases. The largest
increase
23
<PAGE>
in Commercial Managed Health Care Service division revenue was due
to an increase in operational revenue on the BCBSNJ ISOC project which
commenced operations in January 1995 and was therefore operating throughout
fiscal 1996 but only four months during fiscal 1995. The second largest
increase in Commercial Managed Health Care Service division revenue was
provided by the CHP, the Company's Medicaid HMO in the District of Columbia,
and resulted from an expanded enrollment and a new contract at a higher
premium rate. Additional revenue increases resulted from: (1) revenue
earned during the current period for ISOC development efforts related to
strategic ventures in Connecticut, Georgia, and other markets, (2) revenue
resulting from the commencement of operations in November 1995 at the
Company's subsidiary, Virginia Chartered Health Plan, Inc. ("VACHP"), a
Medicaid HMO operating in selected markets in the Commonwealth of Virginia,
(3) increased utilization at two existing ISOC projects for large employers,
(4) increased software sales at the Company's wholly owned subsidiary, Health
Cost Consultants ("HCC"), a case management and utilization review services
company, and (5) the commencement of operations at a new ISOC project for a
large employer in January 1995.
In addition to the Commercial Managed Health Care Service division revenue
decrease related to the construction and pre-operational phases of the BCBSNJ
ISOC project, other revenue decreases resulted from the sale of two
outpatient surgery centers in September 1994, and the non-recurrence of
construction and pre-operational revenues earned in the prior year related to
an ISOC project for a large employer which became operational in January
1995.
Government Managed Health Care Service division revenue decreased by $5.0
million to $96.4 million in fiscal 1996 compared to $101.4 million in fiscal
1995. This decrease is primarily related to the completion of seven
ambulatory care projects, two mental health projects, and four medical
staffing projects. Offsetting these revenue decreases were revenue increases
resulting from: (1) the commencement of operations on two new long-term care
nursing home projects in June 1995, (2) the commencement of operations on a
new ambulatory care project in October 1995, (3) the commencement of
operations on a new medical staffing project in January 1995, (4) an expanded
inmate population and an increase in the contract rate on a total managed
care correctional facilities project, (5) an increased contract rate on a
long-term care nursing home project, and (6) the expansion of services and a
corresponding increase in contract rate on one PRIMUS project.
The Company's gross profit increased by 80.1% or $17.7 million to $39.8
million in fiscal 1996 compared to $22.1 million in fiscal 1995. As a
percentage of revenue, gross profit increased to 19.6% in fiscal 1996
compared to 10.8% in the prior fiscal year. This overall gross profit
improvement resulted from a significant increase in the Commercial Managed
Health Care Service division as well as an increase in the Government Managed
Health Care Service division.
The Commercial Managed Health Care Service division gross profit increase was
primarily attributable to an expanded enrollment and a new contract at a
higher premium rate at the Company's Medicaid HMO in the District of
Columbia. A gross profit increase also resulted from the commencement of
activity on the operating portion of the BCBSNJ ISOC project in January 1995,
and the commencement of operations in December 1995 at the Company's Medicaid
HMO in the Commonwealth of Virginia. These Commercial Managed Health Care
Service division gross profit increases were tempered by a decrease resulting
from the sale of the remaining two outpatient surgery centers in September
1994.
24
<PAGE>
The Government Managed Health Care Service division gross profit increase was
due to (1) an increased contract rate at a long-term care nursing home
project, (2) increased utilization, improved cost control, and higher award
fee revenue at three ambulatory care projects with the Navy, (3) an expansion
of services and a corresponding increase in the contract rate on one PRIMUS
project, and (4) an expanded inmate population and an increased contract rate
on a total managed care correctional facilities project. Government Managed
Health Care Service division gross profits decreased due to the completion of
certain projects as cited above for causing revenues to decrease, and due to
a decrease in utilization and the contract rate at one NAVCARE project which
was completed in September 1995.
General and administrative expenses increased 38.1% or $7.5 million to $27.2
million in fiscal 1996 from $19.7 million in the prior year. As a percentage
of revenue, general and administrative expenses increased to 13.4% in fiscal
1996 compared to 9.7% during the prior year. The increase is primarily a
function of the Company's Commercial Managed Health Care initiatives and is
due to: (1) increased general and administrative expenses associated with
CHP and its growing enrollment, (2) additional general and administrative
expenses associated with the new VACHP subsidiary, (3) increased corporate
compensation costs related to the hiring and retention of existing and
additional management personnel and support staff, and (4) increased facility
expenses resulting from the Company's new expanded Corporate headquarters
office space.
Operating income increased more than fivefold from $2.4 million in fiscal
1995 to $12.6 million for the current year. Operating margin increased to
6.2% from 1.2%. This increase was due to the increased gross profit margins,
reduced by increased general and administrative expenses.
Interest expense increased 52.2%, or $1,154,000 to $3,363,000 for fiscal 1996
from $2,209,000 in fiscal 1995. This increase is primarily a result of the
interest on the $69 million in convertible subordinated debentures sold by
the Company on December 18, 1995. Partially offsetting this increase is a
decrease in interest expense resulting from a decrease in the average
outstanding long-term debt of the Company resulting from the sale of the
Reston office building in July 1994, and the sale of the remaining two
outpatient surgery centers in September 1994.
Interest income increased by $1,026,000 from $422,000 in fiscal 1995 to
$1,448,000 in the current year. This increase is due to the interest earned
on the approximately $40 million in cash and cash equivalents currently
available to the Company resulting from the sale of $69 million in
convertible subordinated debentures in December 1995.
In fiscal 1996 the Company recognized a gain of $2.2 million related to the
sale of a 30% interest in its VACHP subsidiary for $3 million in cash.
The effective income tax rates of 31.0% and 36.0% for fiscal years 1996 and
1995, respectively, represent the combined federal and state income tax rates
adjusted as necessary. The gain resulting from the sale of a 30% interest in
VACHP to University Health Services, Inc., is a non-taxable transaction and
therefore no provision for income taxes was included in the Company's results
of operations for fiscal 1996. Exclusive of this gain, the combined
effective income tax rate for the year would have been 37.4%.
25
<PAGE>
Net earnings increased by $8.2 million, from $952,000, to $9.1 million, for
fiscal years 1995 and 1996, respectively, resulting in primary earnings per
share of $.68 in 1996 ($.66 fully diluted), compared with primary and fully
diluted earnings per share of $0.08 in 1995.
Fiscal Year 1995 Compared to Fiscal Year 1994
---------------------------------------------
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 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.
26
<PAGE>
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 pursued an
equitable claim adjustment with the Federal Government for $1.9 million
related to this contract. The claim was settled for $300,000 in September
1995. 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 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 general and
administrative 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 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.
27
<PAGE>
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 and fully diluted earnings per
share of $0.08 in 1995, compared with a primary loss per share of $.93 in
1994 ($.92 fully diluted).
LIQUIDITY AND CAPITAL RESOURCES
Typically, the Company's principal sources of funds are operations and bank
borrowings. In December 1995, however, the Company issued $69 million of
convertible subordinated debentures resulting in net proceeds of $65.4
million. The Company used these proceeds to extinguish all outstanding bank
debt and will use the remaining amount to fund expansion of its Commercial
Managed Care Services division.
During the year ended April 30, 1996, operations provided $6.4 million in
cash. This represents an increase in cash provided by operations of $10.3
million compared with the $3.9 million used by operations in the prior year.
The primary cause of this increase in cash provided by operations was an
increase in net earnings from $1.0 million to $9.1 million. This increase in
net earnings and the resultant impact on cash provided by operations was
lessened by an increase in accounts receivable, particularly a $4.0 million
in current premium for April 1996 due from the District of Columbia which was
received a few days after year-end on May 3, 1996.
The Company's number of days revenue in average outstanding receivables was
57 days in 1996 and 41 days in 1995. This increase is a result of the
current premium and other amounts due from the District of Columbia referred
to above, and certain other business ventures the Company is pursuing in its
Commercial Managed Health Care Service division.
Investing activities used $400,000 in cash during 1996 compared to $17.8
million provided during 1995. The cash used during 1996 is due to
acquisitions of property and equipment reduced by proceeds from the sale of
stock in a subsidiary. During the prior year the Company generated net cash
from investing activities, principally through the sale of its office
building in Reston, Virginia, and the sale of two of its outpatient surgery
centers.
Financing activities provided $41.5 million in cash during 1996 compared to
$15.1 million used in financing activities during 1995. In December 1995 the
Company sold $69 million of convertible subordinated debentures resulting in
net proceeds of $65.4 million. With these proceeds the Company completely
repaid all outstanding bank debt. During the prior year the Company's use of
cash as a result of financing activities was due to: (1) the repayment in
full of non-recourse notes and certain prepayments of term notes as a result
of the sale of its office building in Reston, Virginia and, (2) certain
repayments of revolving promissory notes and term notes as a result of the
sale of two of its outpatient surgery centers.
28
<PAGE>
The Company believes that the current cash and cash equivalents, anticipated
cash flow generated by operations and its 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 on 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.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Consolidated Financial Statements and Schedule
-------------------------------------------------------
Consolidated Financial Statements Page
- --------------------------------- ----
Report of Independent Accountants, Years
ended April 30, 1996 and 1995....................................... F-1
Independent Auditors Report, Year ended April 30, 1994............... F-2
Consolidated Balance Sheets, April 30, 1996 and 1995................. F-3
Consolidated Statements of Operations,
Years Ended April 30, 1996, 1995 and 1994........................... F-4
Consolidated Statements of Stockholders' Equity,
Years Ended April 30, 1996, 1995 and 1994........................... F-5
Consolidated Statements of Cash Flows,
Years Ended April 30, 1996, 1995 and 1994........................... F-6
Notes to Consolidated Financial Statements........................... F-8
Consolidated Financial Statement Schedule:
- ------------------------------------------
Schedule II - Valuation and Qualifying Accounts,
Years ended April 30, 1996, 1995 and 1994........................... F-22
30
<PAGE>
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 year ended April 30, 1994,
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 report of KPMG Peat Marwick LLP on the Registrant's consolidated
financial statements as of and for the fiscal year ended April 30, 1994 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 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.
31
<PAGE>
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 1996 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 1996
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 1996
Proxy statement under the heading "Security Ownership of Certain Beneficial
Owners and Management" 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 1996
Proxy statement under the heading "Election of Directors" and is incorporated
herein by this reference as if set forth in full.
32
<PAGE>
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 L.L.P. for the
years ended April 30, 1996 and 1995, and KPMG Peat Marwick LLP for the
statements of operations and cash flows for the year ended April 30,
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. (12)
10.3 Form of Indemnification Agreements between PHP Healthcare
Corporation and each of Charles H. Robbins, Michael D.
Starr, George E. Schafer, 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)
33
<PAGE>
* 10.5 Terms of Senior Executive Loan Program adopted by the
Board of Directors November 5, 1992. (9)
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]
34
<PAGE>
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. (12)
* 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 - Year ended April 30,
1994.
27 Financial Data Schedule.
- --------------------------
35
<PAGE>
(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.
(12) Indicates an exhibit to the Company's 10-K Report (File No. 0-16235) for
the period ended April 30, 1995, bearing the same exhibit number, which is
incorporated herein by reference.
* Indicates a management contract or compensatory plan or arrangement required
to be filed an exhibit hereto.
36
<PAGE>
(b) Reports on Form 8-K.
-------------------
1. Item 5 Form 8-K dated July 11, 1996, disclosing earnings for
fiscal year 1996.
2. Item 5 Form 8-K dated April 16, 1996, disclosing letter of
intent with Blue Cross Blue Shield of New Jersey.
(c) Exhibits.
--------
See Item 14(a)3.
(d) Financial Statement Schedules.
-----------------------------
See Item 14(a)2.
37
<PAGE>
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 29, 1996 By: /s/ Charles H. Robbins
----------------------- --------------------------------
Charles H. Robbins
Chairman of the Board
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 29, 1996
- ---------------------------- -------------
Charles H. Robbins Chief Executive Officer
/s/ Jack M. Mazur Director and President July 29, 1996
- ---------------------------- -------------
Jack M. Mazur
/s/ Michael D. Starr Director July 29, 1996
- ---------------------------- -------------
Michael D. Starr
/s/ George E. Schafer. M.D. Director July 29, 1996
- ---------------------------- -------------
George E. Schafer, M.D.
/s/ Paul T. Cuzmanes Director July 29, 1996
- ---------------------------- -------------
Paul T. Cuzmanes
/s/ Julien J. Lavoie Director July 29, 1996
- ---------------------------- -------------
Julien J. Lavoie
/s/ Donald J. Ruffing Director July 29, 1996
- ---------------------------- -------------
Donald J. Ruffing
38
<PAGE>
/s/ Charles P. Reilly Director July 29, 1996
- ------------------------- -------------
Charles P. Reilly
/s/ Joseph G. Mathews Director July 29, 1996
- ------------------------- -------------
Joseph G. Mathews
/s/ Anthony M. Picini Senior Vice President, July 29, 1996
- ------------------------- Finance, -------------
Anthony M. Picini Chief Financial Officer
Chief Accounting Officer
39
<PAGE>
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, 1996 and 1995, and for the years then ended, as listed in the index on page
30 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 as of April 30, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule for the years ended April 30, 1996 and
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 10, 1996
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PHP Healthcare Corporation:
We have audited consolidated statements of operations, stockholders' equity, and
cash flows of PHP Healthcare Corporation and subsidiaries for the year ended
April 30, 1994. In connection with our audit of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedule for the year ended April 30, 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 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 results of operations and the cash flows
of PHP Healthcare Corporation and subsidiaries for the year 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 Note 1 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
F-2
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
April 30, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 48,647 $ 1,178
Accounts receivable, net (note 2)...................... 46,578 32,559
Pharmaceutical and medical supplies.................... 1,039 1,089
Receivables from officers (note 10).................... 3,263 2,912
Income tax receivable (note 6)......................... 410 592
Other current assets................................... 3,638 2,099
-------- -------
Total current assets................................ 103,575 40,429
Property and equipment, net (note 3)..................... 22,685 23,096
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$810 in 1995 and $960 in 1996 (note 9).................. 2,942 3,092
Deferred income taxes (note 6)........................... 543 1,125
Receivables from officers (note 10)...................... 1,072 885
Other assets (note 10)................................... 4,538 2,523
-------- -------
$135,355 $71,150
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable to banks
(note 4).............................................. $ --- $ 1,368
Current maturities of notes payable - other (note 4)... 545 879
Accounts payable....................................... 9,520 6,405
Claims payable - medical services...................... 9,154 6,000
Accrued salaries and benefits.......................... 11,228 8,129
Deferred income taxes (note 6)......................... 4,322 1,507
Billings in excess of costs............................ 244 719
-------- -------
Total current liabilities........................... 35,013 25,007
Notes payable to banks, net of current maturities
(note 4)................................................ --- 23,280
Notes payable - other, net of current maturities
(note 4)................................................ 1,921 1,174
Convertible subordinated debentures (note 5)............. 65,608 ---
Deferred gain on sale of building (note 9)............... 1,002 1,085
Other liabilities (note 11).............................. 519 272
-------- -------
Total liabilities................................... 104,063 50,818
-------- -------
Minority interest (note 9)............................... 545 4
-------- -------
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, 14,203,987 shares issued in 1996
and 14,146,702 shares issued in 1995................. 142 141
Additional paid-in capital............................ 30,529 29,373
Note receivable from sale of stock (note 7)........... (900) (900)
Retained earnings (deficit)........................... 7,548 (1,570)
Treasury stock, 3,258,485 common shares in 1996
and 3,330,020 common shares in 1995, at cost......... (6,572) (6,716)
-------- -------
Total stockholders' equity....................... 30,747 20,328
Commitments and contingencies (notes 2, 4, 9, 10,
and 11)................................................. -------- -------
$135,355 $71,150
======== =======
</TABLE>
See accompanying notes to consolidated financial states.
F-3
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended April 30, 1996, 1995 and 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues............................... $203,360 $204,131 $148,683
Direct costs........................... 163,582 182,053 140,397
-------- -------- --------
Gross profit.................... 39,778 22,078 8,286
General and administrative expenses.... 27,173 19,660 16,936
-------- -------- --------
Operating income (loss)......... 12,605 2,418 (8,650)
Other income (expense):
Interest expense................... (3,363) (2,209) (3,288)
Interest income.................... 1,448 422 186
Miscellaneous income (expense)..... 69 1,015 (504)
Gain on sale of subsidiary stock... 2,247 --- ---
Minority interest in (earnings)
losses of subsidiaries............ 212 (159) (213)
-------- -------- --------
Earnings (loss) before income
taxes......................... 13,218 1,487 (12,469)
Income tax expense (benefit)........... 4,100 535 (3,135)
-------- -------- --------
Net earnings (loss)............. $ 9,118 $ 952 $ (9,334)
======== ======== ========
Net earnings (loss) per common share:
Primary............................ $ .68 $ .08 $ (.93)
======== ======== ========
Fully diluted...................... $ .66 $ .08 $ (.92)
======== ======== ========
Weighted average number of common
shares outstanding:
Primary............................ 13,429 11,226 10,085
======== ======== ========
Fully diluted...................... 13,873 11,910 10,117
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended April 30, 1996, 1995 and 1994
(In thousands)
<TABLE>
<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, 1993 14,142 141 27,303 --- 6,812 4,226 (8,523) 25,733
Treasury stock issued in
acquisition --- --- 420 --- --- (236) 477 897
Net loss --- --- --- --- (9,334) --- --- (9,334)
------ ----- ------ ----- ------- ----- ------ -------
Balances at April 30, 1994 14,142 141 27,723 --- (2,522) 3,990 (8,046) 17,296
Shares issued to directors --- --- 60 --- --- (26) 52 112
Exercise of stock options 4 --- 14 --- --- --- --- 14
Treasury stock issued in
acquisition --- --- 1,079 --- --- (434) 875 1,954
Sale of treasury stock --- --- 497 (900) --- (200) 403 ---
Net earnings --- --- --- --- 952 --- --- 952
------ ----- ------ ----- ------- ----- ------ -------
Balances at April 30, 1995 14,146 $ 141 $29,373 $(900) $(1,570) 3,330 $(6,716) $20,328
Shares issued to directors 21 --- 136 --- --- --- --- 136
Exercise of stock options
including related income
tax benefits 37 1 1,020 --- --- (72) 144 1,165
Net earnings --- --- --- --- 9,118 --- --- 9,118
------ ----- ------ ------ ------- ----- ------- -------
Balances at April 30, 1996 14,204 $ 142 $30,529 $(900) $ 7,548 3,258 $(6,572) $30,747
====== ===== ======= ====== ======= ===== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended April 30, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................... $ 9,118 $ 952 $(9,334)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Gain on sale of subsidiary stock............ (2,247) --- ---
Minority interest in earnings (losses) of
subsidiaries............................... (212) 159 213
Depreciation and amortization............... 3,944 3,401 4,158
Increase in deferred income taxes........... 3,955 382 99
Other items, net............................ (83) (378) 650
Changes in operating assets and
liabilities, net of effects from
purchase/sale of subsidiaries:
Increase in accounts receivable, net... (14,019) (7,391) (2,661)
Decrease (increase) in income tax
receivable............................ 182 2,741 (1,185)
Decrease (increase) in pharmaceutical
and medical supplies.................. 50 264 (35)
Decrease (increase) in other current
assets................................ (1,539) (499) 1,706
Increase in other assets............... (2,015) (1,081) (681)
Increase (decrease) in accounts
payable............................... 3,115 (1,539) 1,672
Increase (decrease) in claims payable.. 3,154 (388) 1,523
Increase in accrued salaries and
benefits.............................. 3,199 852 1,815
Increase (decrease) in billings in
excess of costs....................... (475) (1,465) 1,616
Increase (decrease) in other
liabilities........................... 247 63 (25)
------ ------- -------
Net cash provided by (used in)
operating activities................ 6,374 (3,927) (469)
------ ------- -------
Cash flows from investing activities:
Acquisition of property and equipment.......... (3,383) (6,217) (20,769)
Net proceeds from the sale of property and
equipment..................................... --- 14,045 ---
Deposit on acquisition of subsidiary........... --- --- 3,200
Acquisition of subsidiaries, net of cash
acquired (note 9)............................. --- (811) (3,842)
Disposition of subsidiaries, net of cash
conveyed (note 9)............................. --- 10,790 8,992
Sale of subsidiary stock....................... 3,000 --- ---
------ ------- -------
Net cash provided by (used in)
investing activities................. (383) 17,807 (12,419)
------ ------- -------
</TABLE>
(Continued)
F-6
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years Ended April 30, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds (repayments) under revolving
promissory notes.............................. $(20,546) $ 6,590 $ 4,939
Borrowings on notes payable.................... 1,918 751 14,102
Repayments on notes payable.................... (5,607) (20,845) (5,699)
Receivables from officers...................... (538) (1,561) (1,587)
Issuance of treasury stock to
directors..................................... 136 112 ---
Proceeds from the exercise of stock options.... 507 14 ---
Distributions paid to limited partners......... --- (133) (485)
Net proceeds from issuance of
convertible subordinated debentures........... 65,608 --- ---
-------- -------- -------
Net cash provided by (used in)
financing activities..................... 41,478 (15,072) 11,270
-------- -------- -------
Net increase (decrease) in cash and
cash equivalents........................ 47,469 (1,192) (1,618)
Cash and cash equivalents, beginning of year.... 1,178 2,370 3,988
-------- -------- -------
Cash and cash equivalents, end of year.......... $ 48,647 $ 1,178 $ 2,370
======== ======== =======
</TABLE>
<TABLE>
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest...................................... $ 1,876 $ 1,922 $ 3,203
Income taxes.................................. 42 22 5
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 ---
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 30, 1996 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) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) 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
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.
Revenue on prepaid Medicaid HMO contracts is recognized based on premiums
earned, including estimated amounts relating to final settlements upon contract
completion, if applicable.
F-8
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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: 24%, 33%,
and 49% for 1996, 1995, and 1994, respectively, from the federal government;
28%, 22% and 15% for 1996, 1995 and 1994, respectively, from the District of
Columbia; 10%, 17% and none for 1996, 1995, and 1994, 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 $6.1 million, $19.1 million, and $8.5
million from the federal government, the District of Columbia, and Blue
Cross/Blue Shield of New Jersey, respectively, at April 30, 1996.
(e) 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,
certificates of deposit and debt instruments amounting to $46.0 million and
$100,000 at April 30, 1996 and 1995, respectively.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation on buildings,
furniture and fixtures, 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.
(g) 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 ($569,000 and zero in 1995 and 1996, 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
operating cash flows of the acquired operation. The amount of impairment, if
any, is measured based on projected discounted future operating cash flows.
(h) Precontract Costs and License Acquisition 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. Direct costs associated with obtaining
health care regulatory licensure are capitalized and amortized over the
estimated period of benefit, not to exceed 5 years, and are included as other
assets.
(i) 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
F-9
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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.
(j) 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.
(k) Sales of Subsidiary Stock
Gains or losses related to the sales of stock by a subsidiary are included
in the statements of operations.
(l) Additional paid-in Capital
The Company realizes a tax benefit from the exercise of certain stock
options. This benefit results in a decrease in current income taxes payable and
an increase in additional paid-in capital.
(m) 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.
(n) 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.
(o) Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial statements
have been reclassified to conform with the 1996 presentation.
F-10
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
(2) Accounts Receivable
Accounts receivable, net includes the following at April 30 (in thousands):
Contract receivables: 1996 1995
---- ----
<S> <C> <C>
Billed:
Contracts in process.................... $10,844 $ 9,027
Final billings on completed contracts... --- 260
Contract claim.......................... --- 1,900
------- -------
10,844 11,187
------- -------
Unbilled:
Incurred costs and accrued profits...... 19,842 11,876
Retainages.............................. 468 485
------- -------
20,310 12,361
------- -------
Contract settlement........................... 14,397 9,916
------- -------
Total contract receivables........... 45,551 33,464
Patient service receivables................... 276 385
Other receivables............................. 945 748
------- -------
Total................................ 46,772 34,597
Less allowance for doubtful accounts receivable.. (194) (2,038)
------- -------
Accounts receivable, net............. $46,578 $32,559
======= =======
</TABLE>
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, 1995, were fully reserved pending further actions by the Board
of Contract Appeals. In September 1995, the Company reached a settlement with
the Department of the Army in the amount of $300,000. Accordingly, the $1.9
million of billed accounts receivable and the related reserve were removed from
the financial statements and the Company recognized $300,000 of revenue in
fiscal year 1996.
Substantially all net receivables are expected to be collected within one
year.
Contract Settlement Receivable
CHP, a wholly-owned health maintenance organization, earns substantially all
of its revenue as a prepaid Medicaid contractor with the D.C. Department of
Human Services (DCDHS) providing health care services to Medicaid recipients in
the District of Columbia. The Medicaid program is jointly funded by the
District of Columbia and Health Care Finance Administration (HCFA) of the
Department of Health and Human Services (HHS).
CHP receives interim payments on an estimated basis with a final settlement
occurring at the end of the contract period for the difference between amounts
earned and the interim payments. The final settlement process with DCDHS and
HCFA is subject to defined upper payment limits and requires an audit of CHP's
activities. Due to the unique nature of these contracts, DCDHS has not
undergone a final settlement process for this type of contract.
In April 1996, the U.S. Government enacted a law, the effect of which requires
the Company's contracts with DCDHS to be settled retroactively on a capitated-
rate-per-enrollee basis. Prior to the enactment of the law, the terms of the
contracts provided that the final settlements would be on a non-risk basis,
calculated in part on a cost-based methodology.
The Company believes that the final settlement of these contracts under the
method prescribed by the new law may result in payments to the Company
materially in excess of the $14.4 million and $9.9 million in receivables
recorded at April 30, 1996 and 1995, respectively, which amounts have been
consistently estimated based upon the Company's conservative interpretation of
amounts due under the methods in effect prior to the enactment of the new law.
F-11
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Because the settlement under the method prescribed by the new law will
require further discussions with the District of Columbia, which discussion have
not yet been completed, the amount of any such settlement in excess of recorded
amounts is not presently determinable.
Additionally, at April 30, 1996, $4.0 million of billed amounts receivable
for interim enrollment payments due April 1, 1996 were outstanding. This amount
was received on May 3, 1996.
(3) Property and Equipment
Property and equipment consist of the following at April 30 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land......................................... $ 3,969 $ 3,969
Buildings.................................... 9,227 9,202
Leasehold improvements....................... 7,644 6,612
Equipment.................................... 13,363 12,277
Furniture and fixtures....................... 4,236 3,914
Vehicles..................................... 182 125
Construction in progress..................... --- 7
-------- --------
38,621 36,106
Less accumulated depreciation and
amortization................................ (15,936) (13,010)
-------- --------
Property and equipment, net................ $ 22,685 $ 23,096
======== ========
</TABLE>
As of April 30, 1996 and 1995, $1,056,000 in furniture and fixtures and
related accumulated depreciation of $627,000 and $415,000, respectively, were
obligated under capital leases.
Depreciation and amortization expense for property and equipment totaled
$3.7 million, $3.1 million and $3.6 million for the years ended April 30, 1996,
1995 and 1994, respectively.
(4) Notes Payable
(a) Notes Payable to Banks
The notes payable to banks consist of the following at April 30 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Term note of $15 million collateralized by all assets,
interest due monthly at 1% above bank prime, principal
due in quarterly installments of $342,000 with final
payment due in April 1998, repaid in full December
1995 (note 5)........................................... $ --- $ 4,102
Revolving promissory note, collateralized by all
assets, with a maximum credit line of $22 million in
1995 and $12.2 million in 1996, interest due monthly
at 1% above bank prime, due November 1996, repaid in
full December 1995 (note 5)............................. --- 20,546
----- -------
Total notes payable to banks..................... --- 24,648
Less current maturities...................... --- (1,368)
----- -------
Notes payable to banks, net of current
maturities...................................... $ --- $23,280
===== =======
</TABLE>
The Company repaid $7 million on its term note during fiscal 1995 with part
of the proceeds from 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.
F-12
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 $1.1 million
and $2.2 million at April 30, 1996 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.
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.
(b) Notes Payable - Other
The notes payable - other consists of the following at April 30 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Various collateralized term notes of $591,000 in 1995,interest from 6% to 12.7%
with various payments due August 1997, repaid in full December 1995 (note 5)..... $ --- $ 393
Collateralized term note of $1.4 million, interest at 10.5%, monthly payments of
principle and interest of $31,000, due October 2000............................. 1,321 ---
Insurance notes of $246,000 in 1995, monthly payments of principal and
interest, interest from 7.3% to 7.6% due November 1995.......................... --- 166
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... 645 935
Convertible promissory notes of $500,000, interest due annually on April 30 at 7%,
convertible into common stock at $4.50 per share commencing September 1995,
due September 1999 (notes 7(b) and 9(a))........................................ 500 500
Promissory notes of $417,000, interest at 7%, monthly payments due August
1995 (note 9(a))................................................................ --- 59
------ ------
Total notes payable - other...................................................... 2,466 2,053
Less current maturities.................................................. (545) (879)
------ ------
Notes payable - other, net of current maturities........................... $1,921 $1,174
====== ======
</TABLE>
Scheduled maturities of notes payable-other at April 30, 1996 are as
follows (in thousands): $545 in 1997, $584 in 1998, $326 in 1999, $832 in 2000,
and $179 in 2001.
The Company's weighted average interest rate on short-term borrowings
outstanding at April 30, 1996 and 1995 was 7.0% and 8.7%, respectively.
(5) Convertible Subordinated Debentures
On December 18, 1995, the Company completed the sale of $69 million in
convertible subordinated debentures due December 15, 2002. The Company received
$65.4 million in net proceeds after commissions and other offering costs. The
Company used a portion of the proceeds to repay all existing bank debt and
several other notes payable. The debentures bear interest at a rate of 6.5%,
payable on June 15 and December 15, and are convertible into PHP common stock at
a conversion price of $27.25 per share.
F-13
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The debentures are redeemable at the option of the Company, in whole or in
part, at the redemption prices set forth in the indenture, together with accrued
interest, except that no redemption may be made prior to December 17, 1998.
Upon a repurchase event, each holder of debentures shall have the right, at the
holder's option, to require the Company to repurchase such holder's debenture at
a purchase price equal to 100% of the principal amount thereof, plus accrued
interest. The debentures are unsecured obligations of the Company and are
subordinated to all present and future senior indebtedness of the Company.
<TABLE>
<CAPTION>
(6) Income Taxes
Income tax expense (benefit) consists of the following at April 30 (in thousands):
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
1996:
Federal...................................................... $ --- $ 3,400 $ 3,400
State........................................................ --- 700 700
--------- -------- ---------
$ --- $ 4,100 $ 4,100
========= ======== =========
1995:
Federal...................................................... $ (270) $ 752 $ 482
State........................................................ (30) 83 53
--------- -------- ---------
$ (300) $ 835 $ 535
========= ======== =========
1994:
Federal...................................................... $ (2,911) $ 90 $ (2,821)
State........................................................ (323) 9 (314)
---------- -------- ----------
$ (3,234) $ 99 $ (3,135)
========== ======== ==========
</TABLE>
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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)...................... $ 4,494 $ 506 $ (4,239)
Increase (decrease) in income tax resulting from:
State income tax expense (benefit), net of federal
income taxes............................................... 434 69 (496)
Non-taxable gain on sale of stock in subsidiary.............. (853) --- ---
Non-deductible subsidiary losses (excluded earnings)..... --- (205) 113
Amortization of excess cost over fair value of
assets acquired......................................... 64 196 49
Non-deductible items related to sale of subsidiary....... --- 1,489 ---
Change in the valuation allowance allocated to
income tax expense...................................... --- (1,707) 1,515
Other.................................................... (39) 187 (77)
--------- -------- ---------
$ 4,100 $ 535 $ (3,135)
========= ======== =========
Effective income tax rate.................................. 31.0% 36.0% (25.1%)
========= ======== =========
</TABLE>
F-14
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at April 30,
1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to differing recognition methods...... $ 746 $ 560
Property and equipment, principally due to difference in depreciation...... 349 823
Land and building, due to valuation methods................................ 230 793
Accrued employee benefits.................................................. 1,616 1,092
Accrued contract and sublease losses....................................... 270 295
State and federal net operating loss and contribution carryforwards........ 2,725 1,722
Alternative minimum tax credit carryforwards............................... 361 400
------- ------
Total gross deferred tax assets.......................................... 6,297 5,685
Less valuation allowance................................................... --- ---
------- ------
Net deferred tax assets.................................................. $ 6,297 $5,685
------- ------
Deferred tax liabilities:
Accounts receivable, principally due to differing recognition methods...... $ 9,334 $5,503
Property and equipment, principally due to difference in depreciation...... 35 414
Precontract costs.......................................................... 688 73
Deferred lease obligations................................................. 19 77
------- ------
Total deferred tax liabilities........................................... $10,076 $6,067
------- ------
Net deferred income tax liability........................................ $ 3,779 $ 382
======= ======
</TABLE>
The valuation allowance for deferred tax assets was zero as of April 30, 1996
and 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 resulting
from the inability to carryback certain subsidiary losses. Accordingly, there
was a corresponding increase in net deferred tax assets during fiscal year 1995.
As of April 30, 1996, the Company has federal and state net operating loss
carryforwards of approximately $5.0 million, available to offset future federal
and state taxable income, expiring principally in fiscal years 2008 and 2009.
Certain of these carryforwards have annual dollar limits. In addition, the
Company has alternative minimum tax credit carryforwards of approximately
$360,000 which are available to reduce future federal regular income taxes, if
any, over an indefinite period.
(7) Capital Stock
(a) Stock Split
On October 16, 1995, the Board of Directors of the Company declared a two-
for-one split of its Common Stock payable on November 20, 1995. This was
effected in the form of a 100 percent stock dividend of 7,073,351 shares to
shareholders on record as of November 1, 1995. Stockholders' equity has been
restated to give retroactive recognition to the stock split for all periods
presented by reclassifying from additional paid-in-capital to common stock the
par value of the additional shares arising from the split. In addition, for all
periods presented, all references in the consolidated financial statements and
footnotes thereto to number of shares, earnings per share amounts, weighted
average shares outstanding, as well as stock option, stock warrant and related
price information have been restated to give retroactive effect to the two-for-
one stock split effected on November 20, 1995.
(b) Note Receivable
On September 29, 1994, the Company sold 200,000 shares of treasury stock at
$4.50 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. The note receivable is collateralized by a pledge and escrow of
300,000 shares of the Company's common stock and by convertible notes payable of
$500,000 by the Company to the same parties.
F-15
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(c) Additional Paid-In-Capital and Treasury Stock
In August 1993, the Company issued 236,048 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 132,370 shares of the stock at $4.375 per share on August 31,
1995. The Company recognized additional paid-in-capital of $173,736, equal to
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 380,000 shares of treasury stock in
exchange for the minority interests in Paragon and issued 54,286 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 88,572 shares of the Company's treasury stock,
which are held in escrow (note 10(d)).
(d) 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 $42.50,
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, 1995, and 1996, 10,905,254 and 10,945,502 rights are
outstanding, respectively.
(e) 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 100,000 common shares for
issuance under this plan. In April 1996 and October 1994, the Company issued
20,449 shares and 25,778 shares, respectively, 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
1,500,000 shares of the Company's stock to eligible employees and officers of
the Company. In November 1994, the shareholders approved an increase in the
maximum to 3,500,000 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 two to five years from
the date of grant. Options are canceled 90 days after termination of employment
if not exercised.
F-16
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The following is a summary of activity of the stock option plan in 1994, 1995
and 1996:
<TABLE>
<CAPTION>
Shares Price Amount
--------- ----------- -----------
<S> <C> <C> <C>
Options outstanding at April 30, 1993.... 1,474,900 1.95-11.25 12,964,149
Options granted in 1994............... 34,000 3.00 102,000
Options exercised in 1994............. --- --- ---
Options canceled in 1994.............. 14,100 6.50-11.25 129,175
--------- ----------- -----------
Options outstanding at April 30, 1994.... 1,494,800 1.95-11.25 12,936,986
Options granted in 1995............... 2,697,200 3.04-5.94 11,784,408
Options exercised in 1995............. 5,000 2.875 14,375
Options canceled in 1995.............. 1,342,700 3.04-11.25 12,263,377
--------- ----------- -----------
Options outstanding at April 30, 1995.... 2,844,300 1.95-11.25 12,443,642
Options granted in 1996............... 265,000 9.25-27.25 3,932,625
Options exercised in 1996............. 108,371 1.95-11.25 506,196
Options canceled in 1996.............. 15,379 3.04-11.25 83,757
--------- ----------- -----------
Options outstanding at April 30, 1996.... 2,985,550 $3.00-27.25 $15,786,314
========= =========== ===========
Options exercisable at April 30, 1996.... 917,784
=========
</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 1,315,700 options were surrendered and canceled with a
corresponding issuance of new options with a grant price of $3.04 under the
provisions of this resolution.
The Company has also granted options outside of the Plan. The following is a
summary of stock option activity outside of the Plan in 1994, 1995 and 1996:
<TABLE>
<CAPTION>
Shares Price Amount
------- ---------- ----------
<S> <C> <C> <C>
Options outstanding at April 30, 1993.. 85,000 3.80-5.50 426,750
Options granted in 1994............. --- --- ---
Options exercised in 1994........... --- --- ---
Options canceled in 1994............ --- --- ---
------- ---------- ----------
Options outstanding at April 30, 1994.. 85,000 3.80-5.50 426,750
Options granted in 1995............. 324,286 4.50 1,459,287
Options exercised in 1995........... --- --- ---
Options canceled in 1995............ --- --- ---
------- ---------- ----------
Options outstanding at April 30, 1995.. 409,286 3.80-5.50 1,886,037
Options granted in 1996............. --- --- ---
Options exercised in 1996........... --- --- ---
Options canceled in 1996............ --- --- ---
------- ---------- ----------
Options outstanding at April 30, 1996.. 409,286 $3.80-5.50 $1,886,037
======= ========== ==========
Options exercisable at April 30, 1996... 382,144
=======
</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 $1,015,000,
$1,065,000 and $207,000 in 1996, 1995, and 1994, respectively, in the
consolidated statement of operations relating to options.
F-17
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
In conjunction with the acquisition of EastWest Research Corporation on
November 1, 1992, the Company issued 20,000 stock warrants at $5.75 per share,
20,000 stock warrants at $7.50 per share, and 20,000 stock warrants at $12.00
per share. In December 1994, 25% of these warrants were canceled. The 45,000
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, 1996 is 22,500.
(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 380,000 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
$4.50 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, 1994 or 1993, 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 236,048 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(c). 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
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,
F-18
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 $160.5 million for the year ended April 30, 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) Sale of Partial Interest in Health Maintenance Organization
On January 31, 1996, Virginia Chartered Health Plan, Inc. ("VACHP"), a wholly
owned subsidiary of the Company, sold a 30% interest to University Health
Services, Inc. ("UHS"), an affiliate of the Medical College of Virginia, for
$3.0 million in cash. The Company recognized a gain of $2.2 million related to
this sale, which is presented separately in the consolidated statement of
operations for the year ended April 30, 1996. Since this was a sale of
previously unissued VACHP shares the resulting gain is not taxable and
accordingly, no corresponding provision for income taxes has been recognized.
In conjunction with the sale of stock, VACHP entered into a five-year Network
Agreement with UHS for inpatient services. The sale of stock agreement provides
that at the termination of the five-year Network Agreement, if not renewed or
terminated due to breach, UHS may put or VACHP may call the shares purchased at
the then fair market value.
(g) Supplemental Disclosure of Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Acquisition of subsidiaries
Fair value of assets acquired.......................... $ 1,343 $ 7,597
Excess of cost over fair value of assets acquired...... 2,439 4,900
Liabilities assumed including seller financed
long-term debt....................................... --- (6,725)
Notes payable issued................................... (1,017) ---
Value of stock and guarantee issued.................... (1,954) (897)
------- -------
Cash paid.............................................. 811 4,875
Less cash acquired..................................... --- (1,033)
------- -------
Acquisition of subsidiaries, net of cash acquired...... $ 811 $ 3,842
======= =======
Disposition of subsidiaries
Fair value of assets sold.............................. $ 5,964 $ 9,886
Write-off of excess of cost over fair value of assets.. 11,130 4,114
Liabilities assumed by purchaser....................... (5,721) (4,670)
------- -------
Cash received.......................................... 11,373 9,330
Less cash conveyed..................................... (583) (338)
------- -------
Disposition of subsidiaries, net of cash............... $10,790 $ 8,992
======= =======
</TABLE>
F-19
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(10) Related-Party Transactions
(a) Legal and Financial Advisory Services
During 1996, 1995, and 1994, legal services were provided by law firms in
which one director of the Company is a partner. During the years ended April
30, 1996, 1995, and 1994 total billings approximated $300,000, $257,000, and
$315,000, respectively, all of which was expensed in the consolidated statements
of operations. At April 30, 1996, 1995, and 1994 amounts due the law firms
approximated $19,000, $142,000, and $200,000, respectively.
In 1996, 1995, and 1994, 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 1996, 1995 and 1994, total billings approximated $200,000, $86,000, and
$10,000, respectively. At April 30, 1996, 1995, and 1994, no amounts were due
the firm.
(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 three
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. As of April 30, 1996 and 1995, a total
of $3.3 and $2.9 million, respectively, was outstanding (including accrued
interest) to two directors/officers under the Program. The current outstanding
amounts are due March 1997.
(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 April 1998 to July 2000. The notes
bear interest at 8.5%. The notes are collateralized by the officer's stock in
the Company. As of April 30, 1996 and 1995, the amounts outstanding were
$807,000 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, 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
$1,072,000 and $885,000 at April 30, 1996 and 1995, respectively.
(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, 142,858 shares of the Company's common stock, and options to purchase
142,858 shares of the Company's common stock at $4.50 per share. Under the
terms of the purchase agreement, 88,572 shares of the 142,858 shares of the
common stock issued are held in escrow subject to forfeiture absent the
achievement of certain performance conditions. Additionally, options to
purchase 54,286 shares of common stock are immediately exercisable and options
to purchase 88,572 shares of common stock are exercisable subject to achievement
of certain performance conditions.
F-20
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(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, 1996, 1995 and 1994 was approximately $4.9
million, $4.3 million, and $3.1 million, respectively.
Future minimum rental payments under noncancelable operating leases at April
30, 1996, are as follows: $5.6 million in 1997, $4.2 million in 1998, $2.8
million in 1999, $2.5 million in 2000, $2.0 million in 2001, and $14.2 million
thereafter.
At April 30, 1996 and 1995, deferred lease obligations of $458,000 and
$272,000, respectively, presented as other long-term liabilities in the
financial statements, 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 in the building which it owned to third
parties (see note 9(c)). 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, 1995 and 1994,
total rental income from operating leases of $450,000 and $2.2 million,
respectively, are included as revenues. Additionally, income from lease
terminations of $1.0 million is included as revenue for the year ended April 30,
1994.
The Company also sublets office space at other facilities. These leases
expire on various dates over the next five years and provide for increased real
estate taxes and building operating costs through annual adjustments.
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 commenced in August 1995 for a
period 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 zero and
approximately $1.5 million in excess of insurance coverage. The Company has not
recorded any reserves related to these actions at April 30, 1996. 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 on government service division projects and
$50,000 per incident on commercial service division projects.
(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, 1996, 1995 and 1994 were $327,000, $187,000,
and $235,000, respectively.
F-21
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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, 1996, 1995, and
1994 was $1.9 million, $2.4 million, and $2.6 million, respectively.
F-22
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1996, 1995, and 1994
<TABLE>
<CAPTION>
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, 1996
- -------------------------
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 138,495 $ 55,530 $ --- $ --- $ 194,025
Claim allowance 1,900,000 --- --- 1,900,000(d) ---
---------- ----------- -------- ----------- ----------
$2,038,495 $ 55,530 $ --- $1,900,000 $ 194,025
========== =========== ======== =========== ==========
Year Ended April 30, 1995
- -------------------------
Allowance for doubtful
accounts (deducted from
accounts receivable) $ 186,170 $ 38,132 $ --- $ 85,807(a) $ 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(b) $ 189,432(c) $ 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
========== =========== ======== =========== ==========
</TABLE>
(a) Represents allowance for doubtful accounts receivable for two ambulatory
surgery centers sold during fiscal year 1995.
(b) Represents allowance for doubtful accounts receivable for a subsidiary
acquired during fiscal year 1994.
(c) $84,037 represents allowance for three ambulatory surgery centers sold
during fiscal year 1993, and $105,395 represents charge-off of uncollectible
receivables.
(d) Claim was settled in September 1995 for $300,000 and the allowance and
related receivable were charged off.
F-23
<PAGE>
EXHIBIT INDEX
No. Item
----- ----
11 Statement re: Computation of Per Share Earnings
21 List of Subsidiaries
23 Consent of Independent Accountants - Years ended April 30,
1996 and 1995
23A Consent of Independent Auditors - Year ended April 30, 1994
27 Financial Data Schedule
<PAGE>
Exhibit 11
PHP HEALTHCARE CORPORATION
Statement Re: Computation of per Share Earnings
For the Years Ended April 30,
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Primary Earnings
Net earnings (loss).................. $(9,334,000) $ 952,000 $ 9,118,000
=========== =========== ===========
Weighted average number of common
shares outstanding................ 10,072,936 10,588,790 10,943,530
Add common share equivalents
(determined using the "treasury
stock" method) representing shares
issuable upon exercise of stock
options and warrants............... 12,466 688,644 2,573,762
Shares held in escrow................ --- (51,668) (88,572)
----------- ----------- -----------
Weighted average number of shares
used in calculation of primary
income per share.................... 10,085,402 11,225,766 13,428,720
=========== =========== ===========
Net earnings (loss) per common share. $ (.93) $0.08 $.68
=========== =========== ===========
Fully Diluted Earnings
Net earnings (loss).................. $(9,334,000) $ 952,000 $ 9,118,000
Net interest expense related to
dilutive convertible debt........... --- 13,000 22,000
----------- ----------- -----------
Net earnings (loss) as adjusted...... $(9,334,000) $ 965,000 $ 9,140,000
=========== =========== ===========
Weighted average number of common
shares outstanding................ 10,072,936 10,588,790 10,943,530
Add common share equivalents
(determined using the "treasury
stock" method) representing
shares issuable upon exercise of
stock options and warrants ...... 43,706 1,307,972 2,906,487
Assumed conversion of dilutive
convertible debt.................... --- 64,816 111,111
Shares held in escrow................ --- (51,668) (88,572)
----------- ----------- -----------
Weighted average number of shares
used in calculation of primary
income per share.................... 10,116,642 11,909,910 13,872,556
=========== =========== ===========
Net earnings (loss) per common share $ (.92) $0.08 $.66
=========== =========== ===========
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION DOING BUSINESS AS
- ------------------- ------------- -----------------
<S> <C> <C>
Primary Care Corporation Missouri N/A
Primary Care Associates Partnership PrimeCare
Sterling Communities Corporation Delaware N/A
PHP Travel, Ltd. Virginia N/A
Health Cost Consultants, Inc. Virginia N/A
D.C. Chartered Health Plan, Inc. District of N/A
Columbia
Virginia Chartered Health Plan,
Inc. Virginia N/A
PHP NJ MSO, Inc. Delaware N/A
PHP/CHE, Inc. Delaware N/A
PHP/IHS, Inc. Delaware N/A
PHP/GHE, Inc. Delaware N/A
</TABLE>
<PAGE>
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 and the registration statement (No. 333-01011)
on Form S-3 of PHP Healthcare Corporation of our report dated July 10,
1996, on our audits of the consolidated financial statements and financial
statement schedule of PHP Healthcare Corporation and subsidiaries as of
April 30, 1996 and 1995, and for the two years ended April 30, 1996, which
report is included in this annual report on Form 10-K of PHP Healthcare
Corporation.
Coopers & Lybrand L.L.P.
Washington, D.C.
July 26, 1996
<PAGE>
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 and the registration statement (No. 333-01011)
on Form S-3 of PHP Healthcare Corporation of our report dated September 12,
1994, relating to the consolidated statements of operations and cash flows
and related financial statement schedule of PHP Healthcare Corporation and
subsidiaries for the year ended April 30, 1994 which report appears in the
April 30, 1996 annual report on Form 10-K of PHP Healthcare Corporation.
Our report refers to a change in the method of accounting for income taxes.
KPMG Peat Marwick LLP
Washington, D.C.
July 26, 1996
<TABLE> <S> <C>
<PAGE>
<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-30-1996
<PERIOD-START> MAY-01-1995
<PERIOD-END> APR-30-1996
<CASH> 48,647
<SECURITIES> 0
<RECEIVABLES> 46,772
<ALLOWANCES> 194
<INVENTORY> 0
<CURRENT-ASSETS> 103,575
<PP&E> 38,621
<DEPRECIATION> 15,936
<TOTAL-ASSETS> 135,355
<CURRENT-LIABILITIES> 35,013
<BONDS> 67,529
0
0
<COMMON> 142
<OTHER-SE> 37,177
<TOTAL-LIABILITY-AND-EQUITY> 135,355
<SALES> 0
<TOTAL-REVENUES> 203,360
<CGS> 0
<TOTAL-COSTS> 163,582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,363
<INCOME-PRETAX> 13,218
<INCOME-TAX> 4,100
<INCOME-CONTINUING> 9,118
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,118
<EPS-PRIMARY> .68
<EPS-DILUTED> .66
</TABLE>
