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Draft 7/28/1997
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1997 OR [ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-16235
PHP HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-1023168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11440 Commerce Park Drive
Reston, Virginia 22091
(Address of principal office) (zip code)
(Registrant's Telephone Number, Including Area Code): (703) 758-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
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Common Stock, $0.01 par value, New York Stock Exchange
with associated Preferred Stock
Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.-------
The aggregate market value of the voting stock held by nonaffiliates of the
registrant (based on the closing price of such stock as reported on June 30,
1997 through the New York Stock Exchange) was approximately $128 MILLION.
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There were 11,474,139 shares of common stock, $0.01 par value per share,
outstanding as of June 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement, which is
expected to be filed with the Securities and Exchange Commission within 120
days after the end of the registrant's fiscal year, are incorporated by
reference into Part III, Items 10, 11, 12 and 13 of this report.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
Item 1. Business..................................................................... 4
Item 2. Properties................................................................... 26
Item 3. Legal Proceedings............................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders.......................... 27
Executive Officers of the Registrant......................................... 27
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters..... 29
Item 6. Selected Financial Data...................................................... 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 31
Item 8. Financial Statements and Supplementary Data.................................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 39
Item 11. Executive Compensation....................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 39
Item 13. Certain Relationships and Related Transactions............................... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 40
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FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
For this purpose, any statements contained herein that are not statements of
historical fact, including without limitation, certain statements under "Item 1.
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere herein regarding
industry prospects and the Company's results of operations or financial
position, may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the caption "Business --Risk Factors," among
others, could cause actual results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere by management
from time to time. Such forward-looking statements represent management's
current expectations and are inherently uncertain. Investors are warned that
actual results may differ from management's expectations.
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PART I
ITEM 1. BUSINESS
PHP Healthcare Corporation was organized as a Delaware corporation in
1986 and succeeded to the business of a predecessor corporation by merger in
March 1986. The predecessor of PHP Healthcare Corporation was originally
organized under Delaware law in 1976 and reincorporated under Missouri law in
1981. (Unless the context requires otherwise, the terms "Company" and "PHP"
include PHP Healthcare Corporation, its subsidiaries and its predecessor
corporation.)
Overview
PHP develops, consolidates and manages integrated health care delivery
networks. Through its networks of affiliated group and independent physician
associations ("IPAs"), physicians, hospitals and ancillary health care
providers, the Company markets and provides primary and specialty health care
services to third party payors, self-insured employers and government
agencies. As of April 30, 1997, PHP operated in 75 markets in 26 states and
was affiliated with approximately 4,000 physicians, including 500 in group
practices and 3,500 through IPA relationships, providing health care resulting
in over two million patient visits per year.
PHP is comprised of two divisions: the Commercial Managed Care Division
and the Government Managed Care Division. The Commercial Managed Care Division
currently services the needs of third party payors, self-insured employers and
providers through its integrated health care delivery networks and includes the
operations of its Medicaid health maintenance organizations ("HMOs"), D.C.
Chartered Health Plan, Inc. ("CHP") and Virginia Chartered Health Plan, Inc.
("VACHP"). The operations of its Government Managed Care Division include the
management of hospitals (both acute care and psychiatric), skilled nursing
facilities, staffing services, outpatient surgery, and primary care settings.
PHP was originally founded as a company focusing on the provision of health
care services to government agencies. In 1992, however, the Company began
applying the knowledge, expertise and skills which it had acquired in managing
health care providers for government agencies to the commercial managed care
market. Since that time, PHP has expanded its Commercial Managed Care revenue
from $1.3 million in 1992, representing 1% of total revenue to $135 million in
1997 representing 58% of total revenue. The Company currently manages 17
integrated health care delivery networks on behalf of insurers, employers and
providers and has an additional two under development. The Company also
manages inpatient and outpatient health care services under 17 government
contracts.
PHP affiliates with physicians, hospitals and other providers who are
seeking the expertise and resources necessary to function effectively in health
care markets which are evolving from fee-for-service to managed care payor
systems. Centered around the organization and management of primary care
physicians, the Company creates a network of associated providers such as
hospitals, specialists, ancillary services, and pharmacies. The Company manages
the operation of the network by centralizing administrative functions and
providing operating information systems to coordinate and integrate the delivery
of heath care through clinical protocols, utilization review, outcomes
measurement and financial reporting. PHP has historically established such
integrated health care delivery networks on behalf of third party payors and
self-insured employers. PHP is compensated for its services in a variety of
methodologies including cost plus fee, percentage of revenue, percentage of
savings, fee-for-service, capitation, or some combination of the foregoing.
In addition, PHP has begun to target less penetrated managed care markets
which have fragmented provider delivery systems by introducing provider
sponsored integrated health care delivery networks which involve equity
participation by certain affiliated providers. Under this arrangement, equity
participation in the network is generally shared among prominent hospitals,
selected physicians and PHP, with PHP retaining the role as the manager of the
integrated health care delivery network. In addition to its standard network
management responsibilities, PHP is also responsible for marketing the network
as a package of
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health care services as well as conducting all contract negotiations between the
network and its customers, such as HMOs, insurers, self-insured employers, and
government agencies. This provider sponsored network structure provides
physicians with the opportunity to operate under a variety of payor arrangements
and provides hospitals additional market share through low capital intensive
affiliation with a sufficient number of networked physicians, while aligning the
incentives of all network participants through equity participation. In
addition to its equity position for its participation and management of the
provider sponsored network, PHP typically receives an ongoing management fee
based on a percentage of revenues.
PHP offers medical group practices and independent physicians a range of
affiliation models. These affiliations include the acquisition of physician
practice assets, equity participation in an enterprise or by affiliation on a
contractual basis. Generally, the Company enters into a long-term practice
management agreement with the affiliated physicians that permits the Company to
manage physician practices while maintaining the clinical independence of the
physicians. The Company also has typically entered into long-term contracts
with the affiliated hospitals and other ancillary providers which are part of
its integrated networks.
Despite widespread consolidation in the hospital and physician communities,
these markets remain highly fragmented. In most markets, integrated heath care
delivery networks do not exist and the operational aspects of health care
delivery often lack the centralized management and scale efficiencies enjoyed by
large, well-managed service businesses. In addition, the physician community
generally does not have access to capital or the integrated information systems
that are necessary to effectively enter into risk sharing arrangements and to
provide financial and clinical information desired by payors. Likewise,
hospitals generally do not have such integrated information systems and are
generally unwilling to assume risk for utilization they do not control. The
environment has become increasingly complex for both physicians and hospitals
with growing control by payors over practice patterns and patient flows and with
cost pressures that cause payors to seek greater operational efficiencies.
Additionally, the desire by payors to share financial risk with physicians and
hospitals has increased the need for management, information systems, capital
and scale.
Industry
The Health Care Financing Administration estimates that national health
care spending in 1995 was in excess of $1 trillion, with physicians controlling
more than 80% of the overall expenditures. The American Medical Association
reports that approximately 565,000 physicians are actively involved in patient
care in the United States, with a growing number participating in
multi-specialty or single-specialty groups. Expenditures directly attributable
to physicians is estimated at $200 billion.
Concerns over the cost of health care have resulted in the increasing
prominence of managed care. As markets evolve from traditional fee-for-service
medicine to managed care, HMOs and health care providers confront market
pressures to provide high quality health care in a cost-effective manner.
Employer groups have begun to bargain collectively in an effort to reduce
premiums and to bring about greater accountability of HMOs and providers with
respect to accessibility, choice of provider, quality of care and outcome
management and other indicators of consumer satisfaction. The focus on
cost-containment and outcome management has placed small to mid-sized physician
groups and solo practices at a disadvantage because they typically have higher
operating costs and little purchasing power with suppliers, they often lack the
capital to purchase new technologies that can improve quality and reduce costs,
and they do not have the cost accounting and quality management networks
necessary for entry into sophisticated risk-sharing contracts with payors.
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Industry experts expect that the medical delivery system may evolve into a
system where the primary care physician manages and directs health care
expenditures. As a result of these developments, primary care physicians have
increasingly become the conduit for the delivery of medical care by acting as
"case managers" and directing referrals to certain specialists, hospitals,
alternate-site facilities and diagnostic facilities. By contracting directly
with payors, organizations that control primary care physicians are able to
reduce the cost of delivering medical services.
As a result of the trends toward increased HMO enrollment and physician
membership in group medical practices, health care providers have sought to
reorganize themselves into health care delivery networks that are better suited
to the managed care environment. Physician groups and IPAs are joining with
hospitals, pharmacies and other institutional providers in various ways to
create vertically integrated delivery networks that provide medical and hospital
services ranging from community-based primary medical care to specialized
inpatient services. These health care delivery networks agree with HMOs to
provide hospital and medical services to enrollees pursuant to full risk
contracts. Under these contracts, providers assume the obligation to provide
both the professional and institutional components of covered health care
services to the HMO enrollees.
The Company believes many physicians are concluding that in order to
compete effectively in such an emerging environment, they must obtain control
over the delivery and financial impact of a broader range of health care
services through global capitation. To this end, groups of independent
physicians and medium to large medical groups are taking steps to assume
responsibility and risk for health care services that they do not provide, such
as hospitalization. Physicians and other providers are increasingly abandoning
traditional private practice in favor of affiliations with larger organizations,
such as the Company, that offer skilled and innovative management, sophisticated
information systems and capital resources. Many payors and their
intermediaries, including governmental entities and HMOs, are increasingly
looking to outside providers of physician and hospital services to develop and
maintain quality outcomes, management programs and patient care data. While the
acceptance of greater responsibility and risk provides the opportunity to retain
and enhance market share and operate at a higher level of profitability, medical
groups and independent physicians are concluding that the acceptance of global
capitation carries with it significant requirements for infrastructure,
information systems, capital, network resources and financial and medical
management. As a result, providers are increasingly turning to organizations
such as the Company to provide the resources necessary to function effectively
in a managed care environment.
Strategy
The Company's strategy is to meet the needs of a changing health care
market by developing and managing integrated health care delivery networks on
behalf of providers, third party payors and self-insured employers which the
Company believes enables it to deliver high quality, cost effective medical
services in a managed care environment. In essence, the Company serves as an
outsourcing option for both payors and providers who do not possess the network
management skills, capital and independence to develop and manage an integrated
health care delivery network. The key elements of this strategy include: (i)
focus on managed care; (ii) create and develop fully integrated health care
delivery networks; (iii) utilize information systems to enhance cost
effectiveness and clinical outcomes; (iv) focus on primary care physicians who
represent the initial point of access into an integrated health care delivery
network; (v) design patient oriented programs; and (vi) develop new markets
through selective acquisitions and joint ventures.
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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 risk-sharing
arrangements through implementation of information networks, utilization and
quality management networks, referral procedures, 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 integrated health care delivery network, 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 integrated health care delivery
network, which allows both fixed and ad hoc reporting capabilities for comparing
physician performance within the network, as well as "benchmark" comparisons of
financial and clinical performance of the integrated health care delivery
network 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 network 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
integrated health care delivery network 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.
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Design Patient Oriented Programs. PHP's integrated health care delivery
networks 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 network. The result is an integrated
health care delivery network 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 networks and
government agencies through selected acquisitions and joint ventures and by
serving as an 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, 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,
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
networks, and (iii) employ and retain executives with experience in the
commercial managed care environment.
In 1993, PHP acquired EastWest Research Corporation, 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 network within a community. A second key
acquisition was the acquisition in September 1993 of Health Cost
Consultants, Inc., 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 including several former executive employees of Fortune
500 companies and large insurance companies. With the addition of these
resources, the Company believes it has acquired the means necessary to integrate
and manage health care providers in networks suitable to meet the needs of
commercial managed care entities as well as third party payors. With this added
expertise, PHP has expanded its commercial business so that, in fiscal 1997, its
commercial business accounted for 58% of total revenues.
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In 1994, PHP established a Company-owned integrated health care delivery
network to provide services to beneficiaries of CHP, the Company's Medicaid
HMO 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 integrated health care delivery network in
Fairfield County, Connecticut. The Company also incorporated VACHP 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 14,500 enrollee members. The Company has modeled VACHP on CHP. VACHP is
supported, pursuant to a management contract, by the corporate services of
CHP which provides the necessary management functions to develop and manage
an integrated health care delivery network for VACHP. In January 1996, the
Company sold a 30% interest in VACHP to University Health Services, Inc., 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 four 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
Care Division and Government Managed Care Division. The Commercial Managed
Care Division currently services the needs of third party payors and
self-insured employers through its integrated health care delivery networks
and includes the operations of its Medicaid HMOs, CHP and VACHP. The
operations of the Government Managed Care Division reflect the Company's
historical roots of providing customized solutions to meet the health care
service needs of government agencies.
Commercial Managed Care
Blue Cross and Blue Shield of New Jersey. In March 1994, PHP entered
into an agreement with Medigroup, Inc., a wholly owned subsidiary of Blue
Cross and Blue Shield of New Jersey, Inc. ("BCBSNJ") to provide ten complete
integrated health care delivery networks for beneficiaries throughout the
State of New Jersey. Under this contract, PHP designed, built and managed ten
family-health-center-based integrated health care delivery networks
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.
In December, 1996, PHP entered into an agreement to purchase from BCBSNJ
ten primary care facilities located throughout New Jersey. Closing on this
transaction occurred on Feburary 28, 1997. The health centers serve as the
cornerstone of a provider sponsored integrated health care delivery network
operated on a non-exclusive basis for BCBSNJ, and other third party payors,
including HMOs. These networks resemble the networks managed by PHP in
Connecticut and Georgia, which align the Company with local hospitals and
physician partners.
Under the purchase agreement, the six centers owned by BCBSNJ were
acquired by a real estate investment trust subsidiary in which PHP owns a
minority interest. These six centers, as well as the
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other four centers leased by BCBSNJ, were leased by PHP. In addition, the
physicians employed at the health centers were employed by a professional
medical group affiliated with PHP. Also, PHP and BCBSNJ entered into a
network provider agreement pursuant to which PHP arranges for the provision
of certain health care services to enrolled BCBSNJ beneficiaries through
global capitation based on market rates. Under the network provider
agreement, BCBSNJ guarantees that the aggregate global capitation payments
from BCBSNJ to PHP will be (i) at least $29 million for the year ending June
30, 1997, (ii) at least $21 million for the year ending June 30, 1998, and
(iii) at least $15 million for the year ending June 30, 1999, subject to
certain adjustments. The health centers currently provide health care
services to approximately 30,000 BCBSNJ beneficiaries.
Connecticut Health Enterprises. In 1995, PHP entered into a venture with
St. Vincent's Health Services, Inc., an affiliate of the Daughters of Charity
National Health System East, Inc. ("Daughters of Charity") to establish and
manage Connecticut Health Enterprises, L.L.C. ("Connecticut Health
Enterprises"), an integrated health care delivery network being established in
Fairfield County, Connecticut. Connecticut Health Enterprises is an alliance of
Fairfield County physicians, PHP, St. Vincent's Medical Center, St. Joseph's
Medical Center, and other hospitals and ancillary providers. Connecticut Health
Enterprises is jointly owned by PHP and St. Vincent's Medical Center, and has
been initially funded with $20 million in capital from the Daughters of Charity.
The agreement grants to PHP the exclusive right to develop and manage integrated
health care delivery networks in all other regions of the state of Connecticut
with St. Vincent's and the Daughters of Charity. PHP has entered into several
third party payor contracts, including with Oxford Health Plan, a national HMO
based in Norwalk, CIGNA and Physician Health Services. The Daughters of Charity
is the largest not-for-profit health network in the United States and is third
only to Columbia/HCA Healthcare Corporation and Tenet Healthcare in the number
of hospital beds it operates.
Connecticut Health Enterprises has recently expanded its network of
participating hospitals, physicians and payors. In January 1997, Connecticut
Health Enterprises entered into a joint venture with Stamford Health Systems,
Inc. to establish and manage Stamford Health Enterprise, L.L.C. ("SHE"), an
integrated health care delivery network in Stamford, Connecticut. SHE will be
jointly owned by Stamford Health Systems, Inc. (70%) and Connecticut Health
Enterprises (30%). In connection with the formation of SHE, Stamford Health
System acquired an interest in Connecticut Health Enterprises, which is jointly
owned by PHP (30%), St. Vincent's (30%), the Daughters of Charity (35%), and
Stamford Health Systems (5%). As a result of these arrangements, Connecticut
Health Enterprises' physician network has grown to more than 375 affiliated
physicians, and its hospital providers will include St. Vincent's Medical
Center, St. Joseph's Medical Center and Stamford Hospital.
Georgia Health Enterprise. On April 17, 1996, PHP executed definitive
agreements with St. Mary's Health Care System, Inc., of Athens, Georgia, and
their subsidiaries and the parties have fully capitalized a $7 million
network for Northeast Georgia. PHP and St. Mary's have formed a limited
liability company called the Georgia Health Enterprise, which develops
markets and manages integrated health care delivery networks to HMOs,
insurers, government agencies and large employers within the region. The
16-county region served by the Georgia Health Enterprise includes a
population of approximately 200,000 spending about $540 million annually on
health care. PHP receives a management fee of 2.5% of gross revenues and
maintain a one-third equity position.
Corporate Health Centers. The Company has introduced key elements of its
integrated health care delivery network 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
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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
45,000 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.
D.C. Chartered Health Plan, Inc. CHP was formed in August 1988
and was acquired by PHP in August 1993. CHP was a pioneer in the
development of managed health care for Medicaid beneficiaries receiving Aid to
Families with Dependent Children ("AFDC"). Currently, approximately 22,000 AFDC
recipients and approximately 1,000 commercial employees and their dependents are
enrolled in CHP. The District of Columbia first started providing
managed care for Medicaid beneficiaries in 1988. CHP 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 50% of whom are CHP members).
Each member enrolled in CHP is assigned a primary care physician. CHP has
over 650 physicians under contract, including 58 primary care physicians
(eight of whom exclusively support CHP). CHP's members receive prescriptions,
health education, nutrition counseling, transportation to and from
appointments, and, when necessary, referrals to specialists and hospital
services. Following CHP's acquisition by PHP, the Company installed key
elements of its integrated health care delivery network to support the health
plan, including network development, utilization review and quality assurance
services. As PHP's integrated health care delivery networks continued to
evolve, additional capabilities have been implemented at CHP, 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
("Health Center") is modeled on PHP's integrated health care delivery network
model. CHP also contracts with nine D.C. hospitals which are included in the
network. The Health Center has a full-time staff of board certified family,
pediatric, obstetrics/gynecology and internal medicine physicians. CHP'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"), CHP 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, CHP must provide an
accounting of its costs and services to enable the Department to determine
the final amount due to CHP or the Department under the agreement. The
non-risk portion of the
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capitation fee may not exceed the federal fee-for-service upper payment limit
for covered Medicaid services. CHP assumes full financial risk for inpatient
hospital services and assumes all gains or losses from the provision of such
services. The agreement requires CHP 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
requires the Company's contracts with the Department to be settled
retroactively on a capitated-rate-per-enrollee basis. Prior to the enactment
of the legislation, 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 covering the period October 1, 1991 through October 1, 1999. As
a result, CHP's non-risk provider agreements will be retroactively
superseded with risk provider agreements. Under a risk provider agreement,
CHP will be paid a monthly capitation amount for all medical services
provided during the retroactive period and in the future.
For several years the Company engaged in on-going good faith discussions
and negotiations with the District regarding the amounts due for the 1992
through 1994 contract periods. In February 1997, that process ultimately
resulted in an agreement to settle these amounts due the Company for $18.9
million. The agreement was signed and approved by two different departments
in the District government, but required approval for payment by the
District's Chief Financial Officer. In early March 1997, through comments in
the local press, the Company learned that the Chief Financial Officer was not
going to approve payment. Consequently, in light of the clearly prolonged
timeframe to resolve the issues surrounding payment of these receivables, and
in particular to receive a formal response from the District providing
substantiation for the denial of payment, the Company has determined to
recognize reserves of $9.8 million against its Medicaid receivables from the
District of Columbia, principally relating to services provided during the
1992 to 1994 contract periods. The Company remains committed to pursuing its
contractual rights for the amounts it is due from the District.
The District of Columbia is mandating Medicaid enrollees into HMOs
effective November 1, 1997. CHP has signed a contract with District of
Columbia to provide managed health care and to be the No. 1 default
contractor under this program. As the No. 1 default provider, two-thirds of
the enrollees will be assigned to CHP, if they do not select CHP or one of
the three other HMOS providing care. On July 29, 1997, the District of
Columbia Financial Advisory Board announced that this contract had been
approved.
CHP's business strategy lies in its fundamental commitment to promoting
access and emphasizing prevention and health maintenance, as well as
treatment. CHP focuses 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 CHP's ability to control cost, and improves
accountability within the network.
Virginia Chartered Health Plan, Inc. PHP began operating VACHP in
October of 1995 in the Richmond and Tidewater areas of Virginia. By joining
with University Health Services, the Medical College of Virginia hospitals
and other network hospitals, PHP provides its HMO beneficiaries with high
quality, cost-effective services. VACHP is modeled after CHP and is
supported by management services of PHP and CHP to capitalize on their
experience, management networks, data information services and other
resources.
Effective January 31, 1996, PHP completed the sale of a 30% interest in
VACHP to University Health Services, an affiliate of Medical College of
Virginia, for $3 million. In addition, the Company has completed an
extensive provider network agreement to utilize Medical College of Virginia
hospitals and staff physicians in patient care and medical management. VACHP
was originally
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capitalized by PHP in October of 1995 for $3.7 million. Total capitalization
following the sale to University Health Services remains at $3.7 million.
Strategic Alliance with HIP of New Jersey. On July 24, 1997, the Company
announced a strategic alliance with HIP of New Jersey. The Company will
acquire the assets of HIP of New Jersey's 18 health care centers and its
ancillary services, such as pharmacy and optical. The Company will provide
and manage health care services for HIP of New Jersey's 200,000 members
through a 20-year exclusive global capitation arrangement. These members will
have access to a consolidated network of more than 3,000 community physicians
and an additional 10 health care centers in the Company's existing network.
The consideration payable for these transactions totals approximately $73
million. The Company intends to finance this transaction through a
combination of debt and equity. Completion of the transaction is subject to,
among other things, receipt of all necessary consents and regulatory
approvals. There can be no assurance that the transaction will be completed.
Government Managed Care Division
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 contracts 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, 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 amount of 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 a fixed unit-price subcontract effective October 1995; the primary
contractor is Sentara Health Systems. The initial contract period was the year
ended in September 1996, with four one year options exercisable at the federal
government's discretion. There are a total of nine facilities under the primary
contract with Sentara; of those, PHP operates five, four of which are owned by
the government and one of which is owned by the Company. Under this
subcontract, PHP provides managed outpatient
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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,
such as PHP, to provide medical staff and management support to military
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 34 Army bases located in over 19 states. PHP also provides physicians,
dentists, pharmacists, nurses, and other technical and health care
professionals to render a variety of health care services under a contract
with the Department of Immigration Health Services ("D.I.H.S."). This
project commenced operations in fiscal year 1997 and PHP is currently
providing staff at 10 of the total 17 D.I.H.S. sites stipulated in the
contract. These types of contracts are generally awarded on a
fixed-rate-labor hour and cost reimbursement plus fee basis.
Mental Health. The Company staffs and manages inpatient and outpatient
psychiatric services for the Army at the William Beaumont Army Medical Center at
Fort Bliss, 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 late November 1996, PHP made the strategic decision to
terminate its long-term care line of business. Effective December 31, 1996, PHP
secured a release from a contract with the Alabama Department of Veteran Affairs
for the management of three skilled and intermediate nursing facilities. PHP
continues to operate a 220 bed skilled and intermediate care facility for
veterans under a contract with the South Carolina Department of Mental Health,
and three 150 bed skilled and intermediate care facilities for veterans under a
contract with the State Veterans Affairs Commission of Mississippi. These
contracts provide for payment based on inpatient beds per day. PHP is obligated
under the South Carolina contract until December 2000, and under the Mississippi
contract for up to another three years.
Total Managed Care. PHP provides specialized comprehensive managed health
care programs for maximum, medium and minimum security correctional 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
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upon which payment is based are average number of inmates per month. This
contract was re-awarded to the Company in July 1991 and was completed June 30,
1997. In July 1996 the Company began operating a similar contract with the
Maryland Department of Corrections with an initial term of one year and two
one-year options.
Government Contract Backlog. As of April 30, 1997 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 $276 million
and $411 million, respectively. There can be no assurance that these contracts
will not be terminated early by the government or that the renewal options under
any of the Company's government contracts will be exercised. The realization of
these potential revenues is dependent upon the ordering by the government entity
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, 1997, approximately 42% of the
Company's revenues were derived from 28 separate contracts and subcontracts
with various government agencies to provide health care to various government
sponsored populations. During the same period, the Company received
approximately 21% 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 during fiscal 1996 by type of revenue
were as follows: unit-price contracts, 72.2%; fixed-price contracts, 22.8%;
fixed-rate-labor hour contracts, 4.3%; and cost-reimbursement-plus-fee
contracts, 0.7%. 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.
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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 or
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. Moreover, pursuant to recent statutes
and regulations, a suspension or debarment from obtaining future federal
contracts will also result in a reciprocal suspension or debarment from
participation in non-procurement federal programs, such as Medicare, Medicaid,
and other federally-funded grant programs. 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 those of the U.S. Government.
Limitations on Reimbursement
A major portion of the Company's revenues is derived from third party
payors, such as governmental programs, private insurance plans and managed care
organizations. In particular, for the year ended April 30, 1997, approximately
20% of the Company's revenues were derived from the Medicaid
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program, a cooperative state-federal program for medical assistance to the
needy. 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 enhanced 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.
Congress continues to make cutbacks in the Medicare and Medicaid programs
following its failure to enact a budget reconciliation bill providing for
reductions in the rate of spending increases in the Medicare and Medicaid
programs. These cutbacks, budgetary constraints at both the federal and state
levels, and increasing public and private sector pressures to contain health
care costs are likely to continue to lead to significant reductions in
government and other third party reimbursements for medical charges which could
adversely affect the Company.
Government Regulation
Regulatory Environment. Virtually all aspects of the health care industry
are subject to extensive federal and state regulation relating to licensure,
conduct of operations, acquisition of existing facilities, additions of new
services, reimbursements for services rendered and prices for services. The
Company has attempted to structure its operations so as to comply with these
regulations. However, there can be no assurance that regulatory authorities
will not challenge the conduct or structure of the Company's operations in the
future. In addition, changes in applicable laws and regulations or new
interpretations of existing laws and regulations could have an adverse effect on
licensure, conduct of operations, acquisition of existing facilities, additions
of new services, reimbursements for services rendered or prices for services.
Also, the failure to maintain or renew any required regulatory approvals or
licenses could prevent the Company from offering existing services or from
obtaining reimbursement.
Because of the uniqueness of the structure of the relationships between the
Company and its affiliated physicians, hospitals and ancillary health care
providers, there can be no assurance that review of the Company's business by
courts or health care, tax, labor or other regulatory authorities will not
result in determinations that could adversely affect the operations of the
Company, or that the health care regulatory environment will not change in a
manner that would restrict the Company's existing operations or limit the
expansion of the Company's business or otherwise adversely affect the Company.
Fraud and Abuse Statute. Anti-fraud and abuse amendments codified under
the Social Security Act of 1935, as amended (the "Fraud and Abuse Statute"),
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. The federal courts have held that an arrangement violates the Fraud
and Abuse Statute if one purpose of a transaction which results in the payment
of remuneration (including the distribution of profits) is to induce the
referral of patients covered by the Medicare and Medicaid programs, even if
another purpose of the payment is to compensate an individual for professional
services. Violations of this statute can result in criminal penalties, civil
monetary penalties and exclusion from the Medicare and Medicaid programs. In an
attempt to clarify which arrangements are exempt from program exclusion, civil
sanctions or criminal
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prosecution under the Fraud and Abuse Statute, the Department of Health and
Human Services published in 1991 a set of "safe harbor" regulations outlining
practices that are deemed not to violate the statute. Although compliance with
one of the safe harbors assures participants that an arrangement does not
violate the statute, failure of an arrangement to fit within a safe harbor
provision does not necessarily mean that arrangement violates the statute.
Although the Company seeks to arrange its business relationships so as to
comply with these laws, there can be no assurance that regulatory authorities
might not assert a contrary position or that new laws, or the interpretation of
existing laws, might not adversely affect relationships established by the
Company with physicians or other health care providers or result in the
imposition of penalties or sanctions on the Company or its facilities.
Federal and State Anti-Referral Laws. 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. Unless
excepted, a physician may not make a referral of a Medicaid or Medicare patient
to any clinical laboratory services provider with whom he or she has a financial
relationship, and any provider who accepts such a referral may not bill for the
service provided pursuant to the referral. Sanctions for violation of the Stark
Law include civil money penalties and exclusion from the Medicare and Medicaid
programs. Unlike the Fraud and Abuse Statute in which an activity may fall
outside a safe harbor and still not violate the law, a referral under the Stark
Law that does not fall within an exception is strictly prohibited. In August
1993, Congress passed legislation ("Stark II") that, effective January 1, 1995,
expanded the self-referral ban to include a number of health care services
provided by entities with which the physicians may have an ownership interest or
a financial relationship. The laws of some states also 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 and 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 successfully challenged as violating, or
determined to have violated, such laws. Any such result could have an adverse
effect on the Company.
Applicability of Insurance Regulations. 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.
The HMO industry is highly regulated at the state level and is highly
competitive. 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 or joint ventures. Additionally, the HMO
industry has been subject to numerous legislative initiatives within the past
several years. Certain aspects of health care reform legislation may have
direct or indirect consequences for the HMO industry. There can be no assurance
that developments in any of these areas will not have an adverse effect on the
HMOs in which the Company has ownership interests or other financial
involvement.
The Company's Medicaid HMO in the District of Columbia is subject to the
licensure and other regulatory requirements set forth in the District of
Columbia's Health Maintenance Organization Act of 1996 (the "Act"). The Act
became effective on April 9, 1997.
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Pursuant to the Act, the Company is required to apply for licensure as an HMO
in the near future. The Company is currently preparing such licensure
application for submission. While the Company expects that its Medicaid HMO
will be granted a license to operate as an HMO in the District of Columbia,
no assurance can be given that such license will be granted or that future
HMO legislation or regulation in the District of Columbia or in other states
will not have an adverse effect on the Company's business, financial
condition or results of operation. The District of Columbia has not adopted
final regulations implementing the Act, and, therefore, no assurance can be
given as to the effect, if any, such regulations may have on the Company's
business or operations. The Company's inability to obtain a license to
operate as an HMO in the District for any reason could have an adverse effect
on the Company.
Antitrust Laws. The health care industry is receiving increased scrutiny
under antitrust laws as the integration and consolidation of health care
delivery increases and affects competition. The current structure of the
Company's integrated health care delivery networks, and its participants may be
subject to a range of antitrust laws which prohibit anti-competitive conduct,
including price fixing, concerted refusals to deal and division of market. The
Company intends to comply with such state and federal laws as may affect the
development of its integrated health care delivery networks, but there can be no
assurance that a review of the Company's business by courts or regulatory
authorities will not result in a determination that could have an adverse effect
on the Company's operations or require the Company to restructure its
operations.
Federal and State Investigations. As part of the pervasive regulation of
the health care industry by federal and state governments, these governments
have begun intensive investigations and audits of health care providers to
determine whether the providers are overcharging on medical services and
procedures for Medicare and Medicaid patients. Recently, Congress, as part of
the Health Insurance Portability and Accountability Act of 1996, significantly
expanded the funding for such investigations. In cases in which the
overcharging is deemed intentional and meets other criteria, the federal or
state government may seek criminal, civil, or administrative sanctions against
health care providers. This could result in exclusion from the Medicare and
Medicaid programs and, under the reciprocity provisions discussed above, could
result in suspension or debarment from government contracts. Any such exclusion
of the Company could have a material adverse effect upon the Company's business.
In addition, private individuals have been allowed to bring whistleblower
suits, known as qui tam actions, if they believe a provider has committed fraud
in Medicare or Medicaid programs, or in providing medical services under a
government contract. Finally, private medical insurance companies and other
private payors have begun to investigate and audit health care providers. These
private payors have, on occasion, filed RICO and common law actions if they
believe the provider has overcharged or mischarged them for medical services to
covered individuals.
Uncertainty Related to Health Care Reform. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. Although Congress has failed to pass
comprehensive health care reform legislation thus far, there are currently
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services, including a
number of proposals that would significantly limit reimbursement under Medicare
and Medicaid. It is not clear at this time what proposals, if any, will be
adopted or, if adopted, what effect such proposals would have on the Company's
business. Aspects of certain of these health care proposals, such as cutbacks
in the Medicare and Medicaid programs, containment of health care costs on an
interim basis by means that could include a short-term freeze on prices charged
by health care providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect the Company. There can be no
assurance that currently proposed or future health care legislation or other
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changes in the administration or interpretation of governmental health care
programs will not have an adverse effect on the Company or that payments under
governmental programs will remain at levels comparable to present levels or will
be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. Concerns about the potential effects
of the proposed reform measures has contributed to the volatility of prices of
securities of companies in health care and related industries, and may
similarly affect the price of the Company's Common Stock in the future.
Competition
The Company has numerous competitors who compete with the Company for
contracts to provide health care services to federal, state and local government
agencies and to employers and others in the private sector. The competition for
a particular contract may consist of national, regional and/or local providers,
depending on the type of health care services involved. A number of these firms
are larger and have greater financial resources and larger technical staffs than
the Company. Federal, state and local government agencies also can be considered
to be in competition with the Company, in that they may provide services of a
similar nature to those provided by the Company. It is not possible to predict
the extent of competition which present or future activities of the Company will
encounter because of changing competitive conditions, government requirements,
government budgeting, technological developments and other factors.
Insurance
The Company maintains property, general liability and medical malpractice
insurance in amounts, and with coverages and deductibles, which are deemed
appropriate by management, based upon historical claims, industry standards
and the nature and risks of its business. The cost and availability of such
insurance coverage has varied widely in recent years. While the Company
believes its insurance policies are adequate in amount and coverage for its
current operations, there can be no assurance that the insurance coverage
maintained by the Company will be sufficient to cover all future claims or
that such insurance will continue to be available in adequate amounts or at
reasonable cost.
Employees
As of June 30, 1997, the Company, including its affiliated professional
entities, employed approximately 3,100 people approximately 2,000 of whom were
employed on a full-time equivalent basis. The Company considers its relations
with its employees to be excellent.
Risk Factors
In addition to the other information contained in this report or
incorporated by reference herein, the following factors should be considered
carefully in evaluating the Company and its business.
Government Regulation
Regulatory Environment. Virtually all aspects of the health care industry
are subject to extensive federal and state regulation. Various federal and
state laws, which are interpreted and enforced by courts
20
<PAGE>
and regulatory authorities with broad discretion, regulate the relationships
between the Company and its affiliated physicians, hospitals and ancillary
health care providers. These laws include (i) the anti-fraud and abuse
provisions of the Medicaid and Medicare statutes, which prohibit certain
business practices and relationships that may affect the provision and cost of
health care services reimbursable under the Medicaid and Medicare programs,
including the solicitation, payment, receipt or offering of any direct or
indirect remuneration for the referral of patients or for the provision of goods
or services; (ii) the anti-kickback provisions of the Social Security Act, which
restrict physician referrals to certain providers, including hospitals, with
which the physician has a financial arrangement; (iii) the laws of some states,
which prohibit physicians from splitting fees with non-physicians and prohibit
non-physician entities from engaging in the practice of medicine; (iv) the laws
of most states, which regulate the business of insurance and the operation of
HMOs; (v) federal antitrust laws, which prohibit anti-competitive conduct,
including price fixing, concerted refusals to deal and division of market; and
(vi) federal and state civil and criminal statutes which prohibit health care
providers from fraudulently or wrongfully overcharging governmental or other
third party payors for health care services. Violations of these laws could
result in substantial civil or criminal penalties, exclusion from the Medicaid
and Medicare programs, and suspension or debarment from obtaining government
contracts. Although the Company seeks to structure its operations and arrange
its business relationships so as to comply with all applicable legal
requirements (including the laws and regulations mentioned above), there can be
no assurance that, upon review of the Company's business, courts or regulatory
authorities might not adopt or assert a contrary position, that the Company's
present or future operations might not be successfully challenged as violating,
or determined to have violated, such legal requirements, or that new laws and
regulations, or the interpretation or existing laws and regulations, might not
require the Company to restructure some or all of its operations or adversely
effect the Company's business relationships. Any such result could have a
material adverse effect on the Company. See "Business--Government Regulation."
Federal and State Investigations. As part of the pervasive regulation of
the health care industry by federal and state governments, these governments
have begun intensive investigations and audits of health care providers to
determine whether the providers are overcharging on medical services and
procedures for Medicare and Medicaid patients. In cases in which the
overcharging is deemed intentional and meets other criteria, the federal or
state government may seek criminal, civil, or administrative sanctions against
health care providers. This could result in exclusion from the Medicare and
Medicaid programs and could result in suspension or debarment from government
contracts. Any such exclusion, suspension or debarment of the Company could
have a material adverse effect upon the Company's business. See
"Business--Government Regulation."
Uncertainty Relating to Health Care Reform. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. Although Congress has failed to pass
comprehensive health care reform legislation thus far, there are currently
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services, including a
number of proposals that would significantly limit reimbursement under Medicare
and Medicaid. It is not clear at this time what proposals, if any, will be
adopted or, if adopted, what effect such proposals would have on the Company's
business. There can be no assurance that currently proposed or future health
care legislation or other changes in the administration or interpretation of
governmental health care programs will not have an adverse effect on the
Company. See "Business--Government Regulation."
21
<PAGE>
Dependence on Certain Contracts
For the year ended April 30, 1997, 33.5% of the Company's revenues, and an
even greater percentage of the Company's gross profits, were derived from two
contracts. These contracts are with the DCDHS (concerning the Company's
Medicaid HMO in the District of Columbia) and with Medigroup, Inc., a wholly
owned subsidiary of BCBSNJ (related to the provision of health care services
to BCBSNJ beneficiaries under a global capitation arrangement), and accounted
for 19.8% and 13.7%, respectively, of the Company's revenues in fiscal 1997.
The loss of either of these contracts would have an adverse effect on the
Company's business, financial condition and results of operations.
The Company's accounts receivable as of April 30, 1997 include amounts due
from the DCDHS and the United States Department of Health and Human Services as
follows: approximately $10 million related to cost settlements for the
three-year contract period ended September 30, 1994, and the contract period
beginning October 1, 1994. The Company cannot predict when or whether these
amounts will be paid. The failure of the Company to collect these amounts
would have an adverse effect on the Company's business, financial condition
and results of operations.
For several years the Company engaged in on-going good faith discussions
and negotiations with the District regarding the amounts due for the 1992
through 1994 contract periods. In February 1997, that process ultimately
resulted in an agreement to settle these amounts due the Company for $18.9
million. The agreement was signed and approved by two different departments
in the District government, but required approval for payment by the
District's Chief Financial Officer. In early March 1997, through comments in
the local press, the Company learned that the Chief Financial Officer was not
going to approve payment. Consequently, in light of the clearly prolonged
timeframe to resolve the issues surrounding payment of these receivables, and
in particular to recieve a formal response from the District providing
substantiation for the denial of payment, the Company has determined to
recognize reserves of $9.8 million against its Medicaid receivables from the
District of Columbia, principally relating to services provided during the
1992 to 1994 contract periods. The Company remains committed to pursuing its
contractual rights for the amounts it is due from the District.
Capitated Nature of Revenue
The Company provides a portion of its services on a capitated basis, and
the Company intends to negotiate additional capitated agreements with managed
care organizations or assume such contracts in connection with its affiliation
with primary care practices. Such contracts, typically referred to as "risk
sharing" contracts, are arrangements between the Company and a managed care
organization under which the Company agrees to provide certain health care
services, as required by members of such managed care organization, in exchange
for a fixed fee per member per month. Under these contracts, the Company bears
the risk that the cost of the services it is required to provide will exceed the
fixed fees it is entitled to receive. In order for such risk sharing contracts
to be profitable for the Company, the Company must effectively manage the
utilization rate of primary care services, specialty physician services, and
hospital services delivered to members of the managed care organization. There
can be no assurance that the Company will receive fees under such risk sharing
arrangements which will permit it to recover the costs of the health care
services it will be required to provide.
22
<PAGE>
Dependence on Primary Care Physicians
Primary care physicians are a key operating component of the Company's
integrated health care delivery networks. The Company competes for exclusive
primary care physician affiliations with a variety of networks including group
practices, IPAs, HMOs, practice management companies and hospitals. Most
primary care physicians have traditionally practiced independently or in small
single specialty groups. The competitive and operational disadvantages to the
physician of this type of practice structure have compelled many of these
physicians to evaluate alternatives. The process of negotiating these
affiliations is often competitive, complex and time consuming. There can be no
assurance that the Company will continue to be able to identify and secure
affiliations with a sufficient number of primary care physicians to operate its
integrated health care delivery networks effectively.
Limitations on Reimbursement
A major portion of the Company's revenues is derived from third party
payors, such as governmental programs, private insurance plans and managed care
organizations. In particular, for the year ended April 30, 1997, approximately
20% of the Company's revenues were derived from the Medicaid program, a
cooperative state-federal program for medical assistance to the needy.
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 enhanced operating efficiencies, or
that any such enhancement of operating efficiencies would occur. See
"Business--Limitations on Reimbursement."
Management Information Systems
The Company's management information networks are critical to its ability
to manage care efficiently and to be competitive in the market. The Company
relies on these networks to support practice operations and to facilitate the
management and monitoring of clinical performance. Clinical guidelines,
practice protocols, case management and utilization review networks are all
essential to the Company's ability to secure, and operate profitably under,
capitated and risk sharing contracts. There can be no assurance that the
Company will be able to refine and enhance these networks to keep them current
and competitive.
Dependence on Government Contracts
Contracts with various federal, state and local government agencies
(excluding agreements concerning the Company's Medicaid HMO in the District of
Columbia) account for approximately 42% of the Company's revenues. These
contracts are obtained primarily through the competitive bidding process as
governed by applicable federal and state statutes and regulations, and generally
may be modified or terminated for the convenience of the government agency at
any time during the term of the contract. Contracts are generally awarded for a
base period of less than one year and corresponding with the government agency's
fiscal year, have 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.
23
<PAGE>
Such protests could result in the rebidding, delay or loss of contracts. In
addition, contracts with government agencies are generally complex in nature and
subject contractors to extensive regulation under federal, state and local law.
For example, government contractors are subject to audits which can result in
adjustments to contract costs and fees.
The Company believes that it has complied in all material respects with
applicable government regulations. 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. Moreover, pursuant to recent statutes
and regulations, a suspension or debarment from obtaining future federal
contracts will also result in a reciprocal suspension or debarment from
participation in non-procurement federal programs, such as Medicare, Medicaid,
and other federally-funded grant programs. Any such suspension or debarment of
the Company could have a material adverse effect upon the Company's business.
Dependence on Key Personnel
The Company is highly dependent on the skill and efforts of its senior
management. The loss of key management personnel or the inability to attract,
retain and motivate sufficient numbers of qualified management personnel could
adversely affect the Company's business.
Competition
The managed care industry is highly competitive and is subject to
continuing changes in how services are provided and how providers are selected
and paid. Increased enrollment in prepaid health care plans due to health care
reform or for other reasons, increased participation by physicians in group
practices and other factors may attract new entrants into the managed care
industry and result in increased competition for the Company. Certain of the
Company's competitors are significantly larger, have access to substantially
greater financial, management and other resources, provide a wider variety of
services, have greater experience in providing health care management services
and may have longer established relationships with payors than the Company.
There can be no assurance that the Company will be able to compete effectively,
that additional competitors will not enter the market, or that such competition
will not make it more difficult to develop, consolidate and manage integrated
health care delivery networks on terms beneficial to the Company.
Exposure to Professional Liability
Due to the nature of the Company's business, there are asserted from time
to time medical malpractice lawsuits and other claims against the Company, some
of which are currently pending, which subject the Company to the attendant risk
of substantial damage awards. The most significant source of potential
liability in this regard is the negligence of physicians employed or contracted
by the Company. To the extent such physicians are employees of the Company or
were regarded as agents of the Company in the practice of medicine, the Company
would, in most instances, be held liable for their negligence. In addition, the
Company could be found in certain instances to have been negligent in performing
its management services under contractual arrangements, even if no agency
relationship with the physician were found to exist. In some cases, the
Company's contracts with hospitals and third party payors require the Company to
indemnify such other parties for losses resulting from the negligence of
physicians who were employed or managed by or affiliated with the Company.
24
<PAGE>
The Company maintains professional and general liability insurance on a
claims made basis in amounts deemed appropriate by management, based on
historical claims and the nature and risks of its business. There can be no
assurances, however, that an existing or future claim or claims will not exceed
the limits of available insurance coverage, that any insurer will remain solvent
and able to meet its obligations to provide coverage for any such claim or
claims or that such coverage will continue to be available or available with
sufficient limits and at a reasonable cost to adequately and economically insure
the Company's operations in the future. A judgment against the Company in
excess of such coverage could have a material adverse effect on the Company.
Historical Losses
The Company reported net losses of $4.1 million, $9.3 million and $3.8
million for the fiscal years ended April 30, 1997, 1994 and 1993,
respectively. Although the Company was profitable for the fiscal years ended
April 30, 1996 and 1995, there can be no assurance that it will operate
profitably in the future, or have earnings or cash flow sufficient to comply
with the financial covenants to which it is subject or to cover its fixed
charges. As a consequence of the losses reported in fiscal 1993 and 1994,
the Company failed to comply with certain financial covenants under its
credit agreement. The Company obtained waivers for such noncompliance and the
Company's bank modified the applicable financial covenants. In the future,
any failure by the Company to comply with the financial covenants contained
in its credit agreement (or in any replacement credit facility) could result
in a default under such facility which could have an adverse effect on the
Company's business, financial condition and results of operations.
Substantial Indebtedness
The Company's indebtedness is substantial in relation to its stockholders'
equity. At April 30, 1997, the Company's total long-term debt, net of current
portion, accounted for 69.9% of its total capitalization.
Possible Volatility of Stock Price
The market price of the Common Stock has experienced a high degree of
volatility. There can be no assurance that such volatility will not continue or
become more pronounced. In addition, recently the stock market has experienced,
and is likely to experience in the future, significant price and volume
fluctuations which could adversely affect the market price of the Common Stock
without regard to the operating performance of the Company. The Company
believes that factors such as quarterly fluctuations in the financial results of
the Company or its competitors and changes in general conditions in the
industry, the overall economy and the financial markets could cause the price of
the Common Stock to fluctuate substantially.
Control by Management and Certain Stockholders
Certain of the Company's executive officers and directors and related
entities currently hold an aggregate of approximately 15.0% of the outstanding
Common Stock (24.9% including shares issuable upon the exercise of options or
the conversion of convertible securities held by such persons and exercisable
or convertible within 60 days) and may exercise a controlling influence over
the outcome of matters submitted to the Company's stockholders for approval.
Moreover, such executive officers, directors and related entities collectively
may have the power to delay, defer or prevent a change in control of the
Company.
25
<PAGE>
Anti-Takeover Effect of Delaware Law and Charter and By-law Provisions
Certain provisions of the Company's certificate of incorporation, by-laws
and Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of the Company and limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock. These provisions include a classified Board of Directors, the
ability of the Board of Directors to authorize the issuance, without further
stockholder approval, of preferred stock with rights and privileges which could
be senior to the Common Stock, elimination of the stockholders' ability to take
any action without a meeting, and establishment of certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings. In addition,
the Company has distributed preferred stock purchase rights which could cause
substantial dilution to a person or group that attempts to acquire a controlling
interest in the Company. The Company is also subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an "interested stockholder."
ITEM 2. PROPERTIES
As of June 30, 1997 the Company leased facilities for the provision of
medical services and for its corporate headquarters and other administrative
offices at 25 locations in nine states covering an aggregate of approximately
396,000 square feet of space. The leases expire at various dates from fiscal
years 1998 to 2008.
In addition to leased facilities, the Company owns eight parcels of real
property on which it has constructed facilities to provide contracted services.
These facilities are located in three states and cover an aggregate of
approximately 101,000 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.
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 11(c) of
Notes to the Consolidated Financial Statements.
The Company owns a 19,000 square foot building in San Diego, California and
an 8,500 square foot building in Omaha, Nebraska, neither of which is currently
needed to provide healthcare services. These buildings have been leased for
three to five year periods ending in the year 2000.
The Company owns four buildings, totaling 38,000 square feet, that were
formerly used by the Company to operate healthcare services contracts with the
federal government. Those contracts have been completed and the Company is
actively pursuing tenants or buyers for these properties.
26
<PAGE>
The Company also leases three facilities, totaling 25,000 square feet, that
were formerly used by the Company to operate healthcare services contracts with
the federal government. These leases expire in September 1997 and January 1998.
See Note 13(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,
although there can be no assurance to this effect. See Note 13(c) of Notes to
the Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders of the Company
during the quarter ended April 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages of the Company's executive officers
(as defined by regulations of the Securities and Exchange Commission), the
positions and offices they hold with the Company, their terms as officers and
their business experience. Executive officers are elected by the Board of
Directors and serve at the discretion of the Board.
<TABLE>
<CAPTION>
Name Age Positions or Offices Withh the Company
- ---------------------------- ----- ----------------------------------------------------
<S> <C> <C>
Jack M. Mazur............... 55 President and Chief Executive Officer
Michael D. Starr............ 53 Senior Executive Vice President, Treasurer, and
Chief Executive Officer, Government Managed Care
Division
Robert L. Bowles, Jr. ...... 57 President, D.C. Chartered Health Plan
William J. Lubin............ 45 Executive Vice President and Chief Executive
Officer, Commercial Managed Care Division
Frank L. Provato, M.D. ..... 49 Executive Vice President, and Corporate Medical
Director
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
Anthony M. Picini........... 42 Executive Vice President and Chief Financial Officer
</TABLE>
Jack M. Mazur, age 55, has been a director of the Company since 1976 and has
served as President since October 1995. Prior to his election as President, Mr.
Mazur was Chief Executive Officer of the Company's Commercial Managed Care
Division. From August 1989 to October 1995, Mr. Mazur served as Senior Executive
Vice President of the Company, from June 1986 to October 1993 as Secretary of
the Company, and from 1976 through May 1986 as an advisor to the President and
Chairman and as Assistant Secretary of the Company.
Michael D. Starr, age 53, has been employed by the Company in various
financial and operational positions since 1976 and has been a director since
1985. Mr. Starr was Controller of the Company from 1976 to 1981, Vice President,
Finance and Administration from 1981 to 1986, and has been Executive Vice
President since March 1986 and Chief Executive Officer of the Government Managed
Care Division since October 1995.
Robert L. Bowles, Jr., age 57, joined the Company in August 1993 in
connection with the Company's acquisition of D.C. Chartered Health Plan, Inc.
Mr. Bowles is the founder of D.C. Chartered and has more than 30 years
experience in administration and management of health care services and
operations for corporations and the military.
William J. Lubin, age 45, 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 the Commercial Managed Care Division. Prior to joining
PHP, Mr. Lubin held management position with Aetna Health Plans, Travelers
Insurance Companies, Lincoln National, and Blue Cross and Blue Shield of
Connecticut.
Frank L. Provato, M.D., age 49, has been with the Company since 1993.
Prior to joining PHP, he served as Vice President and Corporate Medical Director
for GTE Corporation, where he was responsible for the development of health care
cost management strategies and the implementation of a GTE-sponsored primary
care health center in Tampa, Florida. Dr. Provato has 23 years of diverse
background in clinical medicine, health care administration, occupational
health, and employee benefits administration.
Anthony M. Picini, age 42, has been with the Company since 1989. Previously,
Mr. Picini was with the accounting firm of KPMG Peat Marwick, where he managed
the auditing and accounting of both public and private companies.
28
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICE
The Company's Common Stock, $.01 par value, is traded on the New York Stock
Exchange under the symbol "PPH." The following table presents, for the periods
indicated, the high and low sale prices per share of Common Stock as reported by
the New York Stock Exchange.
Quarter Ended High Low
---------------------------------------- --------- ---------
April 30, 1997
Fourth Quarter........................ $23 7/8 $10 5/8
Third Quarter......................... 29 1/2 20 7/8
Second Quarter........................ 31 22 7/8
First Quarter......................... 36 20 3/8
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
NUMBER OF STOCKHOLDERS
As of June 30, 1997, 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 that there are approximately 4,700 beneficial owners of the
Company's Common Stock.
DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not expect to do so in the foreseeable future. The Company intends to retain all
future earnings to fund the operation and expansion of its business. The
Company's bank credit agreement precludes the payment of cash dividends without
the bank's approval.
SALES OF UNREGISTERED SECURITIES
In December 1996, the Company issued 90,000 shares of its Common Stock to
Medigroup of New Jersey, Inc. ("MGI") in consideration of MGI's providing the
Company with access to MGI's network and providing claims payment services
under the BCBSNJ Network Agreement. The issuance of the shares was exempt
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act").
In May 1997, the Company issued 200,000 shares of its Common Stock to a
trust for the benefit of John W. Kluge for consideration of $13.00 per share.
The issuance of the shares was exempt under Section 4(2) of the Securities Act.
29
<PAGE>
ITEM 6. SELECTED 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, for the years
ended April 30, 1997, April 30, 1996 and April 30, 1995 and by KPMG Peat
Marwick LLP, independent public accountants for the years ended April 30,
1994 and April 30, 1993, and gives retroactive effect to the two-for-one
stock split effected in the form of a 100% stock dividend distributed on
November 20, 1995 to stockholders 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 statements of the Company and the
notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included herein. See Items 7 and 8.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995(1) 1996 1997
---------- ---------- ---------- ---------- ----------
Statement of Operations Data:
Revenues............................................. $ 126,025 $ 148,683 $ 204,131 $ 203,360 $ 232,307
Direct costs......................................... 116,840 140,397 182,053 163,582 189,477
---------- ---------- ---------- ---------- ----------
Gross profit................ ...................... 9,186 8,286 22,078 39,778 42,830
General and administrative expenses.................. 13,201 16,936 19,660 27,173 30,846
Reserve for Medicaid receivables..................... -- -- -- -- 9,822
Former chairman retirement........................... -- -- -- -- 2,275
Restructuring charges................................ -- -- -- -- 2,550
---------- ---------- ---------- ---------- ----------
Operating income (loss)............................. (4,015) (8,650) 2,418 12,605 (2,663)
Other income (expense):
Interest expense.................................... (1,071) (3,288) (2,209) (3,363) (5,577)
Interest income..................................... 74 186 422 1,448 2,060
Miscellaneous income (expense)...................... (325) (504) 1,015 69 (222)
Gain on sale of subsidiary stock.................... -- -- -- 2,247 --
Minority interest in earnings (losses) of
subsidiaries....................................... (225) (213) (159) 212 (196)
---------- ---------- ---------- ---------- ----------
Earnings(loss) before income taxes.................. (5,562) (12,469) 1,487 13,218 (6,598)
Income tax expense (benefit)......................... (1,806) (3,135) 535 4,100 (2,510)
---------- ---------- ---------- ---------- ----------
Net earnings (loss)................................. $ (3,756) $ (9,334) $ 952 $ 9,118 $ (4,088)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net earnings (loss) per common share
Primary............................................. $ (0.38) $ (0.93) $ 0.08 $ 0.68 $ (0.37)
---------- ---------- ---------- ---------- ----------
Fully diluted....................................... $ (0.38) $ (0.92) $ 0.08 $ 0.66 $ (0.37)
---------- ---------- ---------- ---------- ----------
Weighted average number of common shares outstanding:
Primary............................................. 9,996 10,085 11,226 13,429 11,038
---------- ---------- ---------- ---------- ----------
Fully diluted....................................... 9,996 10,117 11,910 13,873 11,038
---------- ---------- ---------- ---------- ----------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
AT APRIL 30,
(IN THOUSANDS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
Balance Sheet Data:
Working Capital............................................. $ 20,753 $ 7,736 $ 15,422 $ 68,562 $ 27,183
Total Assets................................................ 73,821 87,111 71,150 135,355 153,304
Short-term debt............................................. 4,283 4,589 2,247 545 10,916
Long-term debt.............................................. 28,888 39,643 24,454 67,529 69,996
Stockholders' equity........................................ 25,733 17,296 20,328 30,747 30,078
</TABLE>
- ------------------------
(1) Includes $30 million of non-recurring start-up and construction revenues and
costs related to the Company's BCBSNJ project.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated financial statements and related notes thereto included elsewhere
in this report.
GENERAL
Over the past four 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 networks and recruiting
experienced managed care executives.
Revenues from the Commercial Managed Care Division have grown, in part as a
result of acquisitions, to $134.9 million or 58.1% of total revenues in 1997
from $1.3 million or 1% of total revenues in 1992. Operations in this division
consist of the Company's integrated health care delivery networks applied in
whole or in part to: (i) the Company's HMOs in the District of Columbia and
Virginia, primarily serving the government assisted Medicaid population, (ii)
the Company's statewide ISOC in New Jersey which contracts to provide services
with HMOs and insurance companies, and (iii) family health centers which are
operated on a contract basis for large employers. Also, 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"), formed Connecticut Health Enterprises, L.L.C. ("Connecticut Health
Enterprises"), a limited liability company, for the purpose of developing a
provider sponsored integrated health care delivery network in Fairfield County,
Connecticut. Connecticut Health Enterprises commenced operations in April 1996
and functions as an alliance between PHP, St. Vincent's, Fairfield County
physicians and other hospitals and ancillary providers. These systems of health
care are marketed to insurers, HMOs, and government agencies, which contract for
a total health
31
<PAGE>
care delivery system. In April 1996, the Company also agreed to form Georgia
Health Enterprise, L.L.C., a limited liability company, with St. Mary's
Health Care System, Inc., of Athens Georgia, for the purpose of developing a
provider service network in Athens, Georgia. The Company is compensated for
its commercial managed health care services in a variety of methodologies,
including cost plus fee, percentage of revenue, percentage of savings,
fee-for-service, capitation, or some combination of the foregoing.
Revenues from the Government Managed Care Division have decreased slightly
from a peak of $116.4 million in 1992 to $97.4 million in 1997. 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
$232.3 million in 1997. Gross profit margins increased to 18% and 19% in 1997
and 1996, respectively, after having decreased to 6% and 7% in 1994 and 1993,
respectively. The Company incurred a net loss of $4.1 million in 1997 after
earning net income of $9.1 million and $952,000 in 1996 and 1995,
respectively. The 1997 loss resulted from a $9.8 million reserve for Medicaid
receivables, $2.6 million in restructuring charges, and a $2.3 million charge
related to the retirement of the Company's former chairman. In 1994 and 1993
the Company incurred losses of $9.3 million and $3.8 million, respectively,
due to a decrease in gross profits resulting from some significant
nonrecurring events including certain contract receivable write-offs,
increased corporate staff costs and increased commercial business development
costs.
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,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Revenues................................. 100.0% 100.0% 100.0%
Direct costs............................. 81.6 80.4 89.2
--------- --------- ---------
Gross Profit............................. 18.3 19.6 10.8
General and administrative expenses...... 13.2 13.4 9.6
Reserve for Medicaid receivables......... 4.2 -- --
Former chairman retirement package....... 1.0 -- --
Restructuring charges.................... 1.1 -- --
--------- --------- ---------
Operating income (loss).................. (1.1) 6.2 1.2
Other income (expense)................... (1.7) 0.3 (0.5)
--------- --------- ---------
Earnings (loss) before income taxes...... (2.8) 6.5 0.7
Income tax expense (benefit)............. (1.1) 2.0 0.2
--------- --------- ---------
Net earnings (loss)...................... (1.7) 4.5 0.5
--------- --------- ---------
--------- --------- ---------
</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,
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995(1)
--------------------- --------------------- ---------------------
32
<PAGE>
<CAPTION>
REVENUES % REVENUES % REVENUES %
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Division
Government.................. $ 97,400 41.9 $ 96,424 47.4 $101,455 49.7
Commercial.................. 134,907 58.1 106,936 52.6 102,220 50.1
Other....................... -- -- -- -- 456 0.2
---------- --------- ---------- --------- ---------- ---------
TOTAL..................... $232,307 100.0 $ 203,360 100.0 $204,131 100.0
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</TABLE>
- ------------------------
(1) Includes $30 million of non-recurring start-up and construction revenues
related to the Company's BCBSNJ project.
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared to Fiscal Year 1996
The Company's revenues increased by $28.9 million or 14.2% to $232.3 million
in fiscal year 1997 compared to $203.4 million for the prior fiscal year. This
increase is due to a significant increase in the Commercial Managed Care
Division and a slight increase in the Government Managed Care Division.
The Commercial Managed Care Division revenues increased by $28 million or
26.2% to $134.9 million in fiscal year 1997 compared to $106.9 million in
1996. This net increase is the result of several increases and a decrease.
The largest increase in Commercial Managed Care Division revenue resulted
from the BCBSNJ ISOC project. Effective July 1, 1996, this business
relationship was modified such that the Company began to provide services
under a global capitation arrangement which significantly increased the
revenues the Company earns as well as the scope of services and resultant
cost of service. The second largest increase was provided by the Company's
subsidiary, Virginia Chartered Health Plan, Inc. ("VACHP"), a Medicaid HMO
operating in selected markets in the Commonwealth of Virginia. VACHP
commenced operations in November 1995 and therefore was only operating for
less than half the year during fiscal year 1996. In addition, since
commencing operations, VACHP has continually increased its membership
enrollment. Commercial Managed Care Division revenues also increased as a
result of the Company's ISOC development, management and operations related
to its strategic ventures, primarily in Connecticut.
These Commercial Managed Care Division increases were offset by a decrease
in revenues at CHP, the Company's Medicaid HMO in the District of Columbia.
CHP's revenues decreased due to a gradual decrease in enrollment from
approximately 26,000 members at the end of fiscal year 1996 down to
approximately 21,000 members at the end of fiscal 1997. In addition, CHP's
revenues decreased because effective November 1, 1996, the contractual premium
rate was reduced.
The Government Managed Care Division revenues increased by $1.0 million or
1.0% to $97.4 million in fiscal 1997 compared to $96.4 million in 1996. This net
increase is the result of (1) a significant new total managed care correctional
facilities project which commenced operations in July 1996, (2) two new
ambulatory care projects , one new mental health project and one new medical
staffing project, all of which commenced operations since the beginning of the
prior fiscal year, and (3) an increase in the number of inmates and in the per
inmate reimbursement rate on an existing total managed care correctional
facilities project.
33
<PAGE>
These revenue increases were almost entirely offset by
decreases related to the completion of seven ambulatory care projects, three
mental health projects, and one medical staffing project. The Government Managed
Care Division revenues also decreased as a result of the Company's restructuring
decisions in the third quarter of fiscal 1997 which included the Company's
decision to terminate its long-term care line of business in the Government
Managed Care Division effective December 1, 1996. The results of
operations for these projects since December 1, 1996 are presented
on the Statement of Operations on the Restructuring Charges line
item.
The Company's gross profit increased by 7.7% or $3 million, to
$42.8 million for fiscal year 1997 compared to $39.8 million for
the prior year. As a percentage of revenue, gross profit decreased
to 18.4% for the current year compared to 19.6% in fiscal 1996.
Gross profit increased in the Commercial Managed Care Division and
decreased in the Government Managed Care Division.
The Commercial Managed Care Division gross profit increase
resulted from: (1) the operations of VACHP which was operational a
full year in 1997 and less than half a year in fiscal 1996, as
discussed above, (2) the operations of the BCBSNJ ISOC, which
became a global capitation healthcare services contract effective
July 1, 1996, and (3) increased activity in the Company's
development, management, and operations related to its strategic
provider-based ISOC ventures, primarily in Connecticut. These
gross profit increases were reduced by a decrease from the CHP
operations resulting from a decrease in membership enrollment and a
decrease in the premium rate.
The Government Managed Care Division gross profit decreased
due to the completion of several projects as described above,
partially offset by increases from the commencement of operations
on new projects as described above.
General and administrative expenses increased 13.5% or
$3.6 million to $30.8 million in fiscal 1997 from $27.2 million in
fiscal 1996. This increase is primarily related to the Company's
Commercial Managed Care Division business and is due to:
(1) additional general and administrative expenses associated with
the VACHP business which commenced operations in November 1995,
(2) increased personnel and facility expenses at CHP, (3) increased
facility expenses associated with the expansion of the corporate
headquarters space, and (4) increased Commercial Managed Care
Division development expenses. As a percentage of revenue, general
and administrative expenses decreased to 13.2% for the current year
compared to 13.4% in fiscal year 1996.
During the third quarter of fiscal 1997, the Company recorded
a $9.8 million reserve for Medicaid receivables associated with the
Company's Medicaid operations at CHP in the District of Columbia,
principally relating to services provided during the 1992 to 1994
contract years. For several years the Company engaged in ongoing
good faith discussions and negotiations with the District regarding
these amounts. During February 1997, that process ultimately
resulted in an agreement to settle these receivables due the
Company for an amount significantly in excess of what the Company
had recorded. Subsequently, however, it became evident to the
Company, through recent comments in the local press, that payment
has been blocked. The Company remains committed to pursuing its
contractual rights for the amounts it is due from the District.
However, in light of the clearly prolonged timeframe to resolve
these issues, the Company determined to recognize this reserve.
During the third quarter of fiscal 1997, the Company
recognized $2.3 million in expense for the retirement package
provided by the Board of Directors to the Company's Founder,
Chairman and Chief Executive Officer, Charles H. Robbins, upon his
retirement from the Company.
34
<PAGE>
During the third quarter of fiscal 1997, the Company incurred
restructuring charges of $2.6 million. Within a broad
restructuring effort, this charge resulted from two specific
decisions made by the Board of Directors.
In late November 1996, the Company made the strategic decision
to terminate its long-term care line of business in the Government
Managed Care Division. The Company determined that maintaining
this capability internally was not essential to its success in
providing vertically integrated healthcare services, in whole or in
part, through the Company's ISOC products. In addition, the
Company determined that the relationship between the risk it
assumed on these projects and the opportunity for profit was not
adequately balanced. The Company recognized a net loss of
$1.8 million related to the restructuring for the termination of
this line of business.
Effective January 31, 1997, the Company made the strategic
decision to terminate the Company's facilities development and
maintenance function operated out of the corporate offices through
the Company's wholly owned subsidiary, Sterling Communities
Corporation. The elimination of these activities will allow the
Company to concentrate its resources and energy on its core
missions. Future building and facilities management needs will be
fulfilled through outsourced vendor relationships. The Company
incurred a restructuring charge of $750,000 for severance and other
termination costs associated with the elimination of this function.
Operating income decreased by $15.3 million from $12.6 million
in operating income in fiscal 1996 to $2.7 million in operating
losses in fiscal 1997. Operating margin decreased to a loss of
1.1% from income of 6.2%. This decrease is primarily related to the
Medicaid receivables reserve, the restructuring charges, and the
retirement expense that was recognized in fiscal 1997.
Interest expense increased 65.8%, or $2.2 million to
$5.6 million for fiscal year 1997 from $3.4 million for fiscal
1996. This increase is primarily a result of the interest expense
the Company incurs on the $69.0 million in convertible
subordinated debentures sold by the Company during fiscal 1996, in
December 1995.
Interest income increased by $612,000 from $1,448,000 to
$2,060,000 in fiscal 1996 and 1997, respectively. This increase is
due to the additional interest earned on the increase in available
cash which resulted from the sale of $69.0 million in convertible
subordinated debentures discussed above.
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
$3.0 million in cash.
The effective income tax rates of 38.0% and 31.0% for fiscal
years 1997 and 1996, 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 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
fiscal year 1996 would have been 37.4%.
The Company's results of operations decreased by $13.2 million
from net earnings of $9.1 million to a net loss of $4.1 million for
fiscal years 1996 and 1997, respectively, resulting in primary
losses per share of $0.37 in 1997 ($0.37 fully diluted), compared
with primary earnings per share of $0.68 ($0.66 fully diluted) in
fiscal 1996.
Fiscal Year 1996 Compared to Fiscal Year 1995
35
<PAGE>
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 Care Division and a decrease in
the Government Managed Care Division. The fiscal 1995 Commercial
Managed Care Division revenues included $30.0 million of
non-recurring construction and pre-operational revenue on the
BCBSNJ project.
Exclusive of the non-recurring construction and pre-operational
revenue earned on the BCBSNJ project in fiscal year 1995,
Commercial Managed Care 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 in Commercial
Managed Care Division revenue was due to an increase in operational
revenue on the BCBSNJ 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 Care Division revenue was provided by CHP, and
resulted from an expanded enrollment and a new contract at a higher
premium rate. Additional revenue increases resulted from: (1)
revenue earned during fiscal 1996 for network development efforts
related to strategic ventures in Connecticut, Georgia, and other
markets, (2) revenue resulting from the commencement of operations
in November 1995 at VACHP, (3) increased utilization at two
existing integrated health care delivery network 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 integrated health care delivery
network project for a large employer in January 1995.
In addition to the Commercial Managed Care Division revenue
decrease related to the construction and pre-operational phases of
the BCBSNJ 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 integrated health care delivery
network project for a large employer which became operational in
January 1995.
Government Managed Care 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 Care Division as well as an
increase in the Government Managed Care Division.
The Commercial Managed Care Division gross profit increase was
primarily attributable to an expanded enrollment and a new contract
at a higher premium rate at CHP. A gross profit
36
<PAGE>
increase also resulted from the commencement of activity on the operating
portion of the BCBSNJ project in January 1995, and the commencement of
operations in December 1995 at VACHP. These Commercial Managed
Care Division gross profit increases were tempered by a decrease resulting
from the sale of the remaining two outpatient surgery centers in September
1994.
The Government Managed Care 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 Care 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 care initiatives and is due to: (1)
increased general and administrative expenses associated with D.C.
Chartered 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 in December
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 VACHP 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%.
37
<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.
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 is using the
remaining amount to fund expansion of its Commercial Managed Care
Division.
For the year ended April 30, 1997, $4.4 million in cash was used by
operating activities. This represents a decrease in cash provided
by operations of $10.8 million compared with the $6.4 million
provided by operations in the prior year. The primary cause of
this decrease in cash provided by operations was a $13.2 million
decrease in earnings from $9.1 million in net earnings in 1996 to a
net loss of $4.1 million in 1997.
The Company's number of days revenue in average outstanding
receivables was 66 days in 1997 and 57 days in 1996. This increase
results from an increase in accounts receivable related to certain
Commercial Managed Care Division ISOC business ventures, and a new receivable
related to a large total managed care correctional facilities project in the
Government Managed Care Division.
Investing activities used $40.7 million in cash during 1997
compared to $400,000 used in 1996. In 1997, the cash used relates
primarily to the purchase of certain health centers from BCBSNJ on
February 28, 1997. The cash used during 1996 was due to
acquisitions of property and equipment reduced by proceeds from the
sale of stock in a subsidiary.
Financing activities provided $8.6 million in 1997 compared to
$41.5 million provided by financing activities during 1996. 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 of the then outstanding
bank debt. The cash provided by financing activities in the
current year relates to borrowings on a revolving promissory note due in
August 1997.
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, other than the completion of the HIP transaction, which
will require additional financing. The Company intends to finance the
consideration payable in connection with the HIP transaction through a
combination of bank borrowings and the public or private issuance of debt or
equity securities, the availability of which will depend on market conditions
and other factors. In addition, there may be 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. There can be no assurance that the additional
financing required to complete the HIP transaction or take advantage of
further expansion opportunities will be available to the Company on acceptable
terms or at all.
38
<PAGE>
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 may however become
involved in future contracts where inflation and increasing health
care costs may be an important factor.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data
of the Company are listed in the Index to Financial Statements and
Financial Statement Schedules appearing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated
herein by reference to the text appearing in Part I, Item 1 of this
report under the caption "Executive Officers of the Registrant,"
and by reference to the Company's definitive proxy statement, which
is expected to be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated
herein by reference to the information to be set forth under the
caption "Executive Compensation" in the Company's definitive proxy
statement, which is expected to be filed with the Securities and
Exchange Commission within 120 days after the close of the
Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item 12 is incorporated
herein by reference to the information to be set forth under the
caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive proxy statement, which is
expected to be filed with the Securities and Exchange Commission
within 120 days after the close of the Company's fiscal year.
39
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated
herein by reference to the information to be set forth under the
caption "Certain Relationships and Related Transactions" in the
Company's definitive proxy statement, which is expected to be filed
with the Securities and Exchange Commission within 120 days after
the close of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedules
required to be filed as part of this report are listed in the Index
to Consolidated Financial Statements elsewhere in this report,
which list is incorporated herein by reference.
EXHIBITS
The documents required to be filed as exhibits to this report
under Item 601 of Regulation S-K are listed in the Exhibit Index
included elsewhere in this report, which list is incorporated
herein by reference.
REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER
The Company did not file any reports on Form 8-K during the
quarter ended April 30, 1997.
40
<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, in the Town of
Reston, Commonwealth of Virginia, on this 28th day of July, 1997.
PHP HEALTHCARE CORPORATION
(Registrant)
By: /s/ Jack M. Mazur
------------------------------------
Name: Jack M. Mazur
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose
signature appears below constitutes and appoints Jack M. Mazur,
Anthony M. Picini and Ben Rosenbaum III, and each of them, as his
true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to
this report, and to file the same with all exhibits thereto, and
other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of
them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
41
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Name Position Date
/s/ Jack M. Mazur President, Chief Executive July 28, 1997
- --------------------------- Officer and Director
Jack M. Mazur
/s/ Michael D. Starr Senior Executive Vice July 28, 1997
- --------------------------- President and Director
Michael D. Starr
/s/ Anthony M. Picini Executive Vice President and July 28, 1997
- --------------------------- Chief Financial Officer
Anthony M. Picini (Chief Accounting Officer)
/s/ William J. Lubin Executive Vice President and July 28, 1997
- --------------------------- Director
William J. Lubin
/s/ Robert L. Bowles, Jr. President, D.C. Chartered July 28, 1997
- --------------------------- Health Plan, Inc. and
Robert L. Bowles, Jr. Director
/s/ Frank L. Provato, M.D. Executive Vice President, July 28, 1997
- --------------------------- Corporate Medical Director,
Frank L. Provato, M.D. and Director
/s/ George E. Schafer, M.D.
- --------------------------- Director July 28, 1997
George E. Schafer, M.D.
/s/ Paul T. Cuzmanes
- --------------------------- Director July 28, 1997
Paul T. Cuzmanes
- --------------------------- Director July 28, 1997
Joseph G. Mathews
- --------------------------- Chairman of the Board July 28, 1997
Charles P. Reilly and Director
/s/ Donald J. Ruffing
- --------------------------- Director July 28, 1997
Donald J. Ruffing
- --------------------------- Director July 28, 1997
John J. McDonnell
- --------------------------- Director July 28, 1997
Jerry W. Carlton
42
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Consolidated Financial Statements:
- ---------------------------------
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets at April 30, 1997 and 1996..................................................... F-4
Consolidated Statements of Operations for the Years Ended April 30, 1997,
1996 and 1995............................................................................................ F-6
Consolidated Statements of Stockholders' Equity for the Years Ended
April 30, 1997, 1996 and 1995............................................................................ F-7
Consolidated Statements of Cash Flows for the Years Ended
April 30, 1997, 1996, and 1995........................................................................... F-8
Notes to Consolidated Financial Statements................................................................. F-10
Consolidated Financial Statement Schedule:
- -----------------------------------------
Schedule II - Valuation and Qualifying Accounts,
Years ended April 30, 1997, 1996 and 1995................................................................ F-22
</TABLE>
F-1
<PAGE>
DRAFT 07/28/97 7:30 PM
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 listed
in the index on page F-1 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 audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of PHP Healthcare Corporation and subsidiaries as of April 30, 1997 and 1996,
and the consolidated results of their operations and their cash flows for
each of the three years in the period ended April 30, 1997, in conformity
with generally accepted accounting principles. In addition, in our opinion,
the financial statement schedule referred to above, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Washington, D.C.
July 25, 1997
F-2
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 15,765 $ 48,647
Accounts receivable, net (note 2)....................................................... 45,800 46,578
Pharmaceutical and medical supplies..................................................... 1,460 1,039
Receivables from officers (note 12)..................................................... 4,442 3,263
Income tax receivable (note 6).......................................................... 882 410
Deferred income taxes (note 6).......................................................... 539 --
Other current assets.................................................................... 4,273 3,638
---------- ----------
Total current assets.................................................................. 73,161 103,575
Property and equipment, net (note 3)...................................................... 58,444 22,685
Intangible assets, net of accumulated amortization of $1,236 in 1997 and $991 in 1996
(note 1)................................................................................ 14,989 2,942
Deferred income taxes (note 6)............................................................ -- 543
Receivables from officers (note 12)....................................................... 1,202 1,072
Other assets (note 12).................................................................... 5,508 4,538
---------- ----------
$ 153,304 $ 135,355
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank (note 4)........................................................... $ 9,200 $ --
Current maturities of notes payable--other (note 4)..................................... 1,716 545
Accounts payable........................................................................ 12,036 9,520
Claims payable--medical services........................................................ 8,739 9,154
Accrued salaries and benefits........................................................... 13,219 11,228
Deferred income taxes (note 6).......................................................... -- 4,322
Billings in excess of costs............................................................. 1,068 244
---------- ----------
Total current liabilities............................................................. 45,978 35,013
Notes payable--other, net of current maturities (note 4).................................. 3,964 1,921
Convertible subordinated debentures (note 5).............................................. 66,032 65,608
Deferred income taxes (note 6)............................................................ 1,274 --
Deferred gain on sale of building (note 11)............................................... 916 1,002
Other liabilities (note 13)............................................................... 759 519
---------- ----------
Total liabilities..................................................................... 118,923 104,063
---------- ----------
Minority interest (note 11)............................................................... 4,303 545
---------- ----------
Stockholders' equity (notes 7, 8, 11 and 12):
Preferred stock, $.01 par value, 500,000 shares authorized, none issued................. -- --
Common stock, $.01 par value, 25,000,000 shares authorized, 14,369,849 shares issued
in 1997 and 14,203,987 shares issued in 1996.......................................... 144 142
Additional paid-in capital.............................................................. 33,946 30,529
Note receivable from sale of stock (note 7)............................................. (900) (900)
Retained earnings....................................................................... 3,460 7,548
Treasury stock, 3,258,485 common shares in 1997 and 1996, at cost....................... (6,572) (6,572)
---------- ----------
Total stockholders' equity............................................................ 30,078 30,747
Commitments and contingencies (notes 2, 4, 11,12 and 13)..................................
---------- ----------
$ 153,304 $ 135,355
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended April 30, 1997, 1996, and 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues..................................................................... $ 232,307 $ 203,360 $ 204,131
Direct costs................................................................. 189,477 163,582 182,053
---------- ---------- ----------
Gross profit............................................................. 42,830 39,778 22,078
General and administrative expenses.......................................... 30,846 27,173 19,660
Reserve for Medicaid receivables (note 2).................................... 9,822 -- --
Former chairman retirement package (note 9).................................. 2,275 -- --
Restructuring charges (note 10).............................................. 2,550 -- --
---------- ---------- ----------
Operating income (loss).................................................. (2,663) 12,605 2,418
Other income (expense):
Interest expense........................................................... (5,577) (3,363) (2,209)
Interest income............................................................ 2,060 1,448 422
Miscellaneous income (expense)............................................. (222) 69 1,015
Gain on sale of subsidiary stock........................................... -- 2,247 --
Minority interest in (earnings) losses of subsidiaries..................... (196) 212 (159)
---------- ---------- ----------
Earnings (loss) before income taxes...................................... (6,598) 13,218 1,487
Income tax expense (benefit)................................................. (2,510) 4,100 535
---------- ---------- ----------
Net earnings (loss)...................................................... $ (4,088) $ 9,118 $ 952
---------- ---------- ----------
---------- ---------- ----------
Net earnings (loss) per common share:
Primary.................................................................... $ (.37) $ .68 $ .08
---------- ---------- ----------
---------- ---------- ----------
Fully diluted.............................................................. $ (.37) $ .66 $ .08
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares outstanding:
Primary.................................................................... 11,038 13,429 11,226
---------- ---------- ----------
---------- ---------- ----------
Fully diluted.............................................................. 11,038 13,873 11,910
---------- ---------- ----------
---------- ---------- ----------
</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, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK NOTE
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,
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
Exercise of stock
options including
related income tax
benefits............. 76 1 1,018 -- -- -- -- 1,019
Shares issued in
acquisition.......... 90 1 2,399 -- -- -- -- 2,400
Net loss............... -- -- -- -- (4,088) -- -- (4,088)
------ ------ ---------- ----- -------- ------ ------- -------------
Balances at April 30,
1997................... 14,370 $144 $33,946 $(900) $ 3,460 3,258 $(6,572) $30,078
------ ------ ---------- ----- -------- ------ ------- -------------
------ ------ ---------- ----- -------- ------ ------- -------------
</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, 1997, 1996, and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).............................................................. $ (4,088) $ 9,118 $ 952
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......................... 196 (212) 159
Depreciation and amortization.................................................. 5,372 3,944 3,401
Increase (decrease) in deferred income taxes................................... (3,044) 3,955 382
Other items, net............................................................... (86) (83) (378)
Changes in operating assets and liabilities, net of effects from purchase/sale
of subsidiaries:
Increase in accounts receivable, net......................................... (5,967) (14,019) (7,391)
Decrease (increase) in income tax receivable................................. (471) 182 2,741
Decrease in pharmaceutical and medical supplies.............................. 209 50 264
Increase in other current assets............................................. (636) (1,539) (499)
Increase in other assets..................................................... (1,014) (2,015) (1,081)
Increase (decrease) in accounts payable...................................... 2,516 3,115 (1,539)
Increase (decrease) in claims payable........................................ (415) 3,154 (388)
Increase in accrued salaries and benefits.................................... 1,991 3,199 852
Increase (decrease) in billings in excess of costs........................... 824 (475) (1,465)
Increase in other liabilities................................................ 240 247 63
--------- --------- ---------
Net cash provided by (used in) operating activities........................ (4,373) 6,374 (3,927)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment............................................ (9,601) (3,383) (6,217)
Net proceeds from the sale of property and equipment............................. -- -- 14,045
Acquisition of subsidiaries, net of cash acquired (note 11)...................... (31,053) -- (811)
Disposition of subsidiaries, net of cash conveyed (note 11)...................... -- -- 10,790
Sale of subsidiary stock......................................................... -- 3,000 --
--------- --------- ---------
Net cash provided by (used in) investing activities............................ (40,654) (383) 17,807
--------- --------- ---------
</TABLE>
(Continued)
F-6
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years Ended April 30, 1997, 1996, and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds (repayments) under revolving promissory notes..................... $ 9,200 $ (20,546) $ 6,590
Borrowings on notes payable.................................................... 241 1,918 751
Repayments on notes payable.................................................... (568) (5,607) (20,845)
Receivables from officers...................................................... (1,309) (538) (1,561)
Issuance of treasury stock to directors........................................ -- 136 112
Proceeds from the exercise of stock options.................................... 1,019 507 14
Capital contributions from other shareholders in subsidiaries.................. 3,562 -- --
Distributions paid to limited partners......................................... -- -- (133)
Net proceeds from issuance of convertible subordinated debentures.............. -- 65,608 --
--------- ---------- ---------
Net cash provided by (used in) financing activities.......................... 12,145 41,478 (15,072)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents....................... (32,882) 47,469 (1,192)
Cash and cash equivalents, beginning of year..................................... 48,647 1,178 2,370
--------- ---------- ---------
Cash and cash equivalents, end of year........................................... $ 15,765 $ 48,647 $ 1,178
--------- ---------- ---------
--------- ---------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest..................................................................... $ 4,987 $ 1,876 $ 1,922
Income taxes................................................................. 586 42 22
Supplemental disclosure of non-cash investing and financing activities (note 11):
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, 1997, 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.
In November 1995, the Company formed and commenced operating Virginia
Chartered Health Plan, Inc. (VACHP), a Medicaid HMO operating in select
markets in Virginia.
(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.
F-8
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue on prepaid Medicaid HMO contracts is recognized based on premiums
earned during the period in which the HMO is obligated to provide services,
including estimated amounts relating to final settlements upon contract
completion, if applicable.
Revenue on prepaid global capitation healthcare services contracts is
recognized based on premiums earned during the period in which the Company is
obligated to provide services.
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:
21%, 24% and 33% for 1997, 1996 and 1995, respectively, from the federal
government; 20%, 28% and 22% for 1997, 1996 and 1995, respectively, from the
District of Columbia; 14%, 10% and 17% for 1997, 1996 and 1995, respectively,
from Blue Cross/Blue Shield of New Jersey.
The Company's net accounts and contract settlement receivables related to
the individual customers noted above are $5.3 million, $12.1 million, and
$0.5 million from the federal government, the District of Columbia, and Blue
Cross/Blue Shield of New Jersey, respectively, at April 30, 1997, and
$6.1 million, $19.1 million, and $8.5 million at April 30, 1996, respectively.
(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 $13.4 million and
$46.0 million at April 30, 1997 and 1996, 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) Intangible Assets
Intangible assets primarily represent the excess of the purchase price of
acquisitions over the fair value of the net assets acquired. Such excess
costs are being amortized on a straight-line basis over periods of estimated
benefit of 10 to 40 years. The Company assesses the recoverability of
goodwill 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. Intangible assets also represent costs allocated
to network agreements, physician practices and other specifically
identifiable assets arising from business acquisitions. These assets are
amortized on a straight-line basis over their estimated useful lives which
range from 3 to 25 years.
F-9
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. 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 per common share is computed by dividing net earnings 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. Loss per common share is
computed excluding common share equivalents because they are antidilutive. The
convertible debt is computed using the "if converted" method.
(2) ACCOUNTS RECEIVABLE
Accounts receivable, net includes the following at April 30 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Contract receivables:
Billed:
Contracts in process....................................................... $ 9,087 $ 10,844
Final billings on completed contracts...................................... 168 --
--------- ---------
9,255 10,844
--------- ---------
Unbilled:
Incurred costs and accrued profits.......................................... 23,596 19,842
Retainages.................................................................. 468 468
--------- ---------
24,064 20,310
--------- ---------
Contract settlement........................................................ 21,841 14,397
Less reserve for Medicaid receivable....................................... (9,822) --
--------- ---------
12,019 14,397
--------- ---------
</TABLE>
F-10
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C>
Total contract receivables............................................... 45,338 45,551
Patient service receivables................................................... 226 276
Other receivables............................................................. 423 945
--------- ---------
Total.................................................................... 45,987 46,772
Less allowance for doubtful accounts receivable............................... (187) (194)
--------- ---------
Accounts receivable, net................................................. $ 45,800 $ 46,578
--------- ---------
--------- ---------
Substantially all net receivables are expected to be collected within one year.
</TABLE>
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 received. 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.
For several years the Company engaged in on-going good faith discussions
and negotiations with the District regarding the amounts due for the 1992
through 1994 contract periods. In February 1997, that process ultimately
resulted in an agreement to settle these amounts due the Company for $18.9
million. The agreement was signed and approved by two different departments
in the District government, but required approval for payment by the
District's Chief Financial Officer. In early March 1997, through comments in
the local press, the Company learned that the Chief Financial Officer was not
going to approve payment. Consequently, in light of the clearly prolonged
timeframe to resolve the issues surrounding payment of these receivables, and
in particular to receive a formal response from the District providing
substantiation for the denial of payment, the Company recognized reserves of
$9.8 million against its Medicaid receivables from the District of Columbia,
principally relating to services provided during the 1992 to 1994 contract
periods. The Company remains committed to pursuing its contractual rights for
the amounts it is due from the District.
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 $12.0 million and $14.4 million in receivables
recorded at April 30, 1997 and 1996, respectively, which amounts have been
consistently estimated based on the Company's conservative interpretation of
amounts due based on the methods in effect prior to the enactment of the new
law.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at April 30 (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Land..................................................... $ 9,491 $ 3,969
Buildings................................................ 25,597 9,227
Leasehold improvements................................... 13,385 7,644
Equipment................................................ 20,509 13,363
F-11
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<S> <C> <C>
Furniture and fixtures................................... 4,958 4,236
Vehicles................................................. 228 182
Construction in progress................................. 126 --
--------- ---------
74,294 38,621
Less accumulated depreciation and amortization........... (15,850) (15,936)
--------- ---------
Property and equipment, net.............................. $ 58,444 $ 22,685
--------- ---------
--------- ---------
</TABLE>
As of April 30, 1997 and 1996, $1.1 million in furniture and fixtures and
related accumulated depreciation of $787,000 and $627,000, respectively, were
financed by capital leases. As of April 30, 1997, $3.5 million in equipment and
related accumulated depreciation of $148,000 were financed by capital leases.
Depreciation and amortization expense for property and equipment totaled
$4.6 million, $3.7 million and $3.1 million for the years ended April 30, 1997,
1996 and 1995, respectively.
(4) NOTES PAYABLE
(a) Note Payable to Bank
The note payable to bank at April 30, 1997 is a revolving promissory note
due August 28, 1997, collateralized by all of the Company's assets, with a
maximum credit line of $12.2 million, and interest due monthly at 1.5% above
LIBOR.
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 $3.0 million
and $1.1 million at April 30, 1997 and 1996, 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, as amended, 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>
1997 1996
--------- ---------
<S> <C> <C>
Collateralized term note of $1.4 million, interest at 10.5%, monthly payments
of principal and interest of $31,000, due October 2000....................................... $ 1,079 $ 1,321
Insurance note of $242,000, monthly payments of principal and interest of
$25,000, interest at 5.4%, due January 1998.................................................. 218 --
Obligations under capital leases, for certain equipment and fixtures, monthly
payments of principal and interest of $58,000, interest from 4.1% to 8.4%,
due February 2001............................................................................ 3,883 645
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 11(a)).................................................... 500 500
--------- ---------
Total notes payable--other..................................................................... 5,680 2,466
Less current maturities.................................................................. (1,716) (545)
--------- ---------
Notes payable--other, net of current maturities............................................ $ 3,964 $ 1,921
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Scheduled maturities of notes payable-other at April 30, 1997 are as follows
(in thousands): $1,716 in 1998, $1,183 in 1999, $1,763 in 2000, $1,018 in 2001,
and none in 2002.
The Company's weighted average interest rate on short-term borrowings
outstanding at April 30, 1997 and 1996 was 7.2% and 7.0%, 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.
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.
(6) INCOME TAXES
Income tax expense (benefit) consists of the following at April 30 (in
thousands):
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- --------- ---------
<S> <C> <C> <C>
1997:
Federal........................................ $ -- $ (2,250) $ (2,250)
State.......................................... -- (260) (260)
----- --------- ---------
$ -- $ (2,510) $ (2,510)
----- --------- ---------
----- --------- ---------
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
----- --------- ---------
----- --------- ---------
</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>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)........................................... $ (2,243) $ 4,494 $ 506
Increase (decrease) in income tax resulting from:
State income tax expense (benefit), net of federal
income taxes.................................................................... (261) 434 69
Non-taxable gain on sale of stock in subsidiary................................... -- (853) --
Amortization of excess cost over fair value of
assets acquired................................................................. 51 64 196
Non-deductible items related to sale of subsidiary................................ -- -- 1,489
F-13
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Change in the valuation allowance allocated to
income tax expense.............................................................. -- -- (1,707)
Other............................................................................ (57) (39) (18)
--------- --------- ---------
$ (2,510) $ 4,100 $ 535
--------- --------- ---------
--------- --------- ---------
Effective income tax rate......................................................... 38.0% 31.0% 36.0%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at April 30,
1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to differing recognition methods........................ $ 1,208 $ 746
Property and equipment, principally due to difference in depreciation........................ 396 349
Land and building, due to valuation methods.................................................. 230 230
Accrued employee benefits.................................................................... 2,263 1,616
Accrued contract and sublease losses......................................................... 237 270
State and federal net operating loss and contribution carryforwards.......................... 2,773 2,725
Alternative minimum tax credit carryforwards................................................. 361 361
--------- ---------
Total gross deferred tax assets............................................................ 7,468 6,297
Less valuation allowance..................................................................... -- --
--------- ---------
Net deferred tax assets.................................................................... $ 7,468 $ 6,297
--------- ---------
Deferred tax liabilities:
Accounts receivable, principally due to differing recognition methods...................... $ 5,132 $ 9,334
Property and equipment, principally due to difference in depreciation...................... 45 35
Precontract costs.......................................................................... 3,008 688
Deferred lease obligations................................................................. 18 19
--------- ---------
Total deferred tax liabilities........................................................... $ 8,203 $ 10,076
--------- ---------
Net deferred income tax liability........................................................ $ 735 $ 3,779
--------- ---------
--------- ---------
</TABLE>
The valuation allowance for deferred tax assets was zero as of April 30,
1997 and 1996.
As of April 30, 1997, the Company has federal and state net operating
loss carryforwards of approximately $7.5 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.
F-14
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
(c) Treasury Stock
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. In December 1996, 88,572 additional shares of the Company's treasury
stock which had been issued as future consideration in the J.P. Cole &
Associates acquisition were released from escrow (note 12(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, 1997, and 1996, 11,111,364 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.
(f) Subsequent Event--Sale of Stock
On May 2, 1997, the Company sold 200,000 shares of stock at $13 per share to
an investor in a private transaction.
(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
F-15
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The following is a summary of activity of the stock option plan in 1995,
1996 and 1997:
<TABLE>
<CAPTION>
Weighted
Average
SHARES PRICE AMOUNT Exercise Price
---------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Options outstanding at April 30, 1994........................... 1,494,800 $ 1.95-11.25 $ 12,936,975 $ 8.65
Options granted in 1995....................................... 2,697,200 3.04-5.94 11,793,908 4.37
Options exercised in 1995..................................... 5,000 2.875 14,375 2.88
Options canceled in 1995...................................... 1,342,700 3.04-11.25 12,263,377 9.13
---------- ------------- ------------- --------------
Options outstanding at April 30, 1995........................... 2,844,300 1.95-11.25 12,453,131 4.38
Options granted in 1996....................................... 267,000 9.25-27.25 3,977,375 14.90
Options exercised in 1996..................................... 108,372 1.95-11.25 506,196 4.67
Options canceled in 1996...................................... 15,378 3.04-11.25 83,745 5.45
---------- ------------- ------------- --------------
Options outstanding at April 30, 1996........................... 2,987,550 3.00-27.25 15,840,565 5.30
Options granted in 1997....................................... 380,084 11.63-35.00 9,810,648 25.81
Options exercised in 1997..................................... 75,862 3.03-10.50 504,013 6.64
Options canceled in 1997...................................... 24,676 3.04-34.13 442,970 17.95
---------- ------------- ------------- --------------
Options outstanding at April 30, 1997........................... 3,267,096 $ 3.00-35.00 $ 24,704,230 $ 7.56
---------- ------------- ------------- --------------
---------- ------------- ------------- --------------
Options exercisable at April 30, 1997........................... 1,835,496 $ 4.76
---------- --------------
---------- --------------
</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 was 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 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Weighted
Average
SHARES PRICE AMOUNT Exercise Price
--------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Options outstanding at April 30, 1994.................................. 85,000 $ 3.80-5.50 $ 426,750 $5.02
Options granted in 1995.............................................. 324,286 4.50 1,459,287 4.50
Options exercised in 1995............................................ -- -- -- --
Options canceled in 1995............................................. -- -- -- --
--------- ----------- ------------ --------------
Options outstanding at April 30, 1995.................................. 409,286 3.80-5.50 1,886,037 4.61
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 4.61
Options granted in 1997.............................................. -- -- -- --
Options exercised in 1997............................................ -- -- -- --
Options canceled in 1997............................................. -- -- -- --
--------- ----------- ------------ --------------
Options outstanding at April 30, 1997.................................. 409,286 $ 3.80-5.50 $ 1,886,037 $4.61
--------- --------------
--------- --------------
Options exercisable at April 30, 1997.................................. 409,286 $4.61
--------- --------------
--------- --------------
</TABLE>
F-16
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $1.3 million, $1.0
million and $1.1 million in 1997, 1996, and 1995, respectively, in the
consolidated statement of operations relating to options.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been
recognized for the stock option plan, except as required by Accounting
Principles Board Opinion No. 25 (APB No. 25) "Accounting for Stock Issued to
Employees", as noted above. Had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant date for
awards in 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net earnings per share would have been reduced to the pro forma
amounts indicated below:
1997 1996
---- ----
Net earnings (loss) - as reported (000's)........... $(4,088) $9,118
Net earnings (loss) - pro forma (000's)............. $(4,999) $8,995
Earnings (loss) per share - as reported............. $ (.37) $ .68
Earnings (loss) per share - pro forma............... $ (.45) $ .67
The weighted average fair value per share of options granted during
fiscal years 1997 and 1996 was $14.73 and $7.00, respectively. The fair value
of each option grant is estimated on the date of grant, based on the market
price of the stock on that date which is also the option grant price using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:
Dividend Yield...................................... 0% 0%
Expected volatility................................. 60% 60%
Risk-free Interest Rate............................. 6.03% 6.03%
Expected Lives...................................... 5 years 5 years
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, 1997 is 45,000.
(9) RETIREMENT OF FORMER CHAIRMAN
On January 31, 1997, the Company's Founder, Chairman and Chief Executive
Officer, Charles H. Robbins, retired. The Board of Directors provided Mr.
Robbins a retirement agreement that included a one-time $2 million payment and a
payment of $275,000 related to a one-year noncompetition agreement. In
connection with the agreement, on May 2, 1997, Mr. Robbins repaid all
outstanding notes receivable and accrued interest due the Company under the
Senior Executive Loan Program and notes receivable related to certain life
insurance policies. The agreement contains additional clauses which include,
among other things, a "standstill" provision and restrictions on the timing of
any dispositions of Mr. Robbins' holdings in the Company. For the year ended
April 30, 1997, the Company recognized $2.275 million in expense related to this
retirement agreement.
(10) RESTRUCTURING CHARGES
During the third quarter ended January 31, 1997, the Company incurred
restructuring charges of $2.55 million. Within a broad restructuring effort,
this charge resulted from two specific decisions made by the Board of Directors.
In November 1996, the Company made the strategic decision to terminate its
long-term care line of business, resulting in restructuring charges of $1.8
million.
Effective January 31, 1997, the Company made the strategic decision to
terminate the Company's facilities development and maintenance function operated
out of the corporate offices through the Company's wholly-owned subsidiary,
Sterling Communities Corporation. Future buildings and facilities management
needs will be fulfilled through outsourced vendor relationships. The Company
incurred a restructuring charge of $750,000 for severance and other termination
costs associated with the elimination of this function.
(11) 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.
F-17
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) Sale of Surgery Centers
Effective September 30, 1994, the Company sold 100% of its interest in two
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) Sale of Office Building
In July 1994, the Company, through a wholly owned subsidiary, sold an
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 mortgage notes of approximately $9.4 million.
(d) 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 was
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.
(e) Acquisition of Primary Care Facilities and Related Network Services
Agreement
On February 28, 1997, the Company and a real estate investment trust
subsidiary in which the Company owns a minority interest (the REIT), acquired
certain primary care facilities located throughout New Jersey formerly
operated by Blue Cross and Blue Shield of New Jersey, Inc. (BCBSNJ). The
total purchase price, including transaction costs and other consideration,
was approximately $44.7 million, of which $22.3 million was paid by the REIT
and the balance of the other consideration was provided by the Company in the
form of $8.8 million in cash, $7.7 million in other non-cash consideration,
$3.5 million in new lease financing, and 90,000 shares of the Company's
common stock. In addition, in connection with the transaction, the Company
made a $0.9 million capital contribution to the REIT and advanced the REIT an
additional $18 million, including $16 million in short-term loans and $2
million in long-term secured loans until permanent financing is obtained.
Since the Company funded substantially all of the funds at closing, in
concert with certain ownership risk provisions of the lease agreements, the
Company has consolidated the operations of the REIT since February 1997. The
Company's portion of the cash consideration paid to BCBSNJ and the amounts
contributed or advanced to the REIT were obtained from a combination of cash
on hand, equipment lease financing, and borrowings on its bank line of credit.
This acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the acquired
tangible ($32.6 million) and identifiable intangible ($4.4 million) assets
and assumed liabilities based on their respective fair market values. The
identifiable intangible assets are being amortized on a straight-line basis
over periods ranging from 3 to 25 years. The excess cost over the
estimated fair market value of the acquired net assets of approximately
$7.7 million is being amortized on a straight line basis over 25 years.
On February 28, 1997, the Company and BCBSNJ replaced an existing
operating agreement with a network services agreement effective July 1, 1996,
pursuant to which the Company provides certain health care services to
enrolled BCBSNJ beneficiaries through global capitation. As a result of the
new agreement, BCBSNJ paid the Company global capitation from July 1, 1996
amounting to $9,977,000 of additional revenue for the period July 1, 1996
through February 28, 1997, recorded in the fourth quarter of fiscal 1997.
Also, under the network services agreement, the Company was responsible for
all costs associated with global capitation services for the period July 1,
1996 through February 1997 resulting in incremental costs of 10,018,000,
recorded in the fourth quarter of fiscal 1997. Accordingly, the results of
operations under the network services agreement are included in the
consolidated financial statements from July 1, 1996.
If these transactions occurred on May 1, 1995 or 1996, the effect on the
Company's results of operations and net earnings would have been immaterial.
Unaudited pro forma consolidated revenues of the Company would have been
approximately $235 million and $212 million for the years ended April 30,
1997 and 1996, respectively.
F-18
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(f) Supplemental Disclosure of Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
1997 1996 1995
--------- ----- ---------
<S> <C> <C> <C>
Acquisition of subsidiaries
Fair value of assets acquired...................................................... $ 36,977 -- $ 1,343
Excess of cost over fair value of assets acquired.................................. 7,762 -- 2,439
Other non-cash consideration....................................................... (7,745) -- --
Notes payable issued............................................................... (3,541) -- (1,017)
Value of stock and guarantee issued................................................ (2,400) -- (1,954)
---------- ------- ---------
Cash paid.......................................................................... 31,053 -- 811
Less cash acquired................................................................. -- -- --
---------- ------- ---------
Acquisition of subsidiaries, net of cash acquired.................................. $ 31,053 -- $ 811
---------- ------- ---------
---------- ------- ---------
Disposition of subsidiaries
Fair value of assets sold.......................................................... -- -- $ 5,964
Write-off of excess of cost over fair value of assets.............................. -- -- 11,130
Liabilities assumed by purchaser................................................... -- -- (5,721)
---------- ------- ---------
Cash received...................................................................... -- -- 11,373
Less cash conveyed................................................................. -- -- (583)
---------- ------- ---------
Disposition of subsidiaries, net of cash........................................... -- -- $ 10,790
---------- ------- ---------
---------- ------- ---------
</TABLE>
(12) RELATED-PARTY TRANSACTIONS
(a) Legal and Financial Advisory Services
During 1997, 1996, and 1995, legal services were provided by law firms in
which one director of the Company is a partner. During the years ended April 30,
1997, 1996, and 1995, total billings approximated $321,000, $300,000, and
$257,000, respectively, all of which was expensed in the consolidated statements
of operations. At April 30, 1997, 1996, and 1995 amounts due the law firms
approximated $112,000, $19,000, and $142,000, respectively.
In 1997, 1996, and 1995, financial advisory services were provided the
Company by a firm in which the managing general partner was a director of the
Company, and became Chairman of the Company on February 1, 1997. In addition,
the two partners in the firm were also employees of the Company from September
1994 to September 1995. During 1997, 1996 and 1995, total billings approximated
$233,000, $211,000, and $86,000, respectively. At April 30, 1997, 1996, and
1995, the amounts due the firm were none, $11,000, and none, respectively.
(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, 1997 and 1996, a total
of $4.4 and $3.3 million, respectively, was outstanding (including accrued
interest) to five officers under the Program. The current outstanding amounts
have been renewed and are now due March 1998. On May 2, 1997, one loan in the
amount of $1.6 million, including accrued interest, was repaid in full.
(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, 1997 and 1996, the amounts outstanding were
$742,000 and $807,000, respectively.
F-19
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 elimination of this reserve is included in
miscellaneous income in fiscal year 1995. The promissory notes total $1.2 and
$1.1 million at April 30, 1997 and 1996, respectively. On May 2, 1997, one note
in the amount of $745,000, including accrued interest, was repaid in full.
(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 were held in escrow until December 1996 subject to certain
performance conditions. Additionally, options to purchase 54,286 shares of
common stock were immediately exercisable and options to purchase 88,572 shares
of common stock which were subject to certain performance conditions became
exercisable in December 1996.
(13) 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, 1997, 1996 and 1995 was approximately $7.2
million, $4.9 million, and $4.3 million, respectively.
Future minimum rental payments under noncancelable operating leases at April
30, 1997, are as follows: $6.9 million in 1998, $5.9 million in 1999, $5.5
million in 2000, $5.1 million in 2001, $4.3 million in 2002, and $18.7 million
thereafter.
At April 30, 1997 and 1996, deferred lease obligations of $680,000 and
$458,000, 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 11(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 year ended April 30, 1995, total
rental income from operating leases of $450,000 is included in revenues.
The Company also sublets office space at other facilities. These leases
expire on various dates over the next four 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.
F-20
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 due under 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 $200,000. The Company does not believe that it has a material,
estimable and probable liability related to these various legal actions and
therefore has not recorded any reserves at April 30, 1997.
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.
(14) 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, 1997, 1996 and 1995 were $476,000, $327,000
and $187,000, respectively.
(15) SUBSEQUENT EVENT
On July 24, 1997, the Company announced a strategic alliance with HIP
Health Plan of New Jersey. The Company will acquire the assets of HIP Health
Plan of New Jersey's 18 health care centers and its ancillary services, such
as pharmacy and optical. The Company will provide and manage healthcare
services for HIP Health Plan of New Jersey's 200,000 members through a
20-year exclusive global capitation arrangement. These members will have
access to a consolidated network of more than 3,000 community physicians and
an additional 10 health care centers in the Company's existing network. The
consideration payable for these transactions totals approximately $73
million. The Company intends to finance this transaction through a
combination of debt and equity.
F-21
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1997, 1996, AND 1995
<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, 1997
Allowance for doubtful accounts
(deducted from accounts
receivable)........................ $194,025 $ -- $ -- $ 6,580 $ 187,445
Allowance for Medicaid receivables... -- 9,822,025(c) -- -- 9,822,025
------------ ------------- ---------- ------------ -------------
$194,025 $ 9,822,025 $ -- $ 6,580 $ 10,009,470
------------ ------------- ---------- ------------ -------------
------------ ------------- ---------- ------------ -------------
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(b) --
------------ ------------- ---------- ------------ -------------
$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
------------ ------------- ---------- ------------ -------------
------------ ------------- ---------- ------------ -------------
</TABLE>
(a) Represents allowance for doubtful accounts receivable for two ambulatory
surgery centers sold during fiscal year 1995.
(b) Claim was settled in September 1995 for $300,000 and the allowance and
related receivable were charged off.
(c) Represents allowance for Medicaid receivables due from the District of
Columbia for the 1992 to 1994 contract years.
F-22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company. (13)
3.2 Bylaws of the Company.
4.1 Rights Agreement between the Company and Riggs National Bank, N.A., as Rights Agent, dated as of
April 10, 1992. (7)
10.2 Credit Agreement by and between the Company and NationsBank of Virginia, N.A., dated effective
March 8, 1994. (10)
10.2A Second Amendment to Amended and Restated Credit Agreement by and between the Company and NationsBank
of Virginia, N.A., dated effective April 26, 1995. (10)
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)
* 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)
10.10.1 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)
* 10.12A PHP Healthcare Corporation 1996 Incentive Plan, filed as Annex A to the Company's 1996
Definitive Proxy Statement and incorporated herein by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
* 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]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.15 Provider Agreement between the District of Columbia Department of Human Services and D.C. Chartered
Health Plan, Inc. dated September 24, 1991. (10)
10.16 District of Columbia Medicaid Managed Care Program, Provider Agreement dated September 15, 1994 by
and between the Department of Human Services and D.C. Chartered Health Plan, Inc. (11)
* 10.17 Employment Agreement dated September 29, 1994 by and between the Company and John. P. Cole. (12)
[Exhibit 8]
* 10.28 Employment Agreement dated August 1, 1994 by and between the Company and Charles P. Reilly. (12)
[Exhibit 6]
11 Statement re Computation of Per Share Earnings.
21 List of Subsidiaries.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
</TABLE>
- ------------------------
(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.
<PAGE>
(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 10-K Report (File No. 0-16235) for
the period ended April 30, 1995, which is incorporated herein by reference.
(12) 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.
(13) Indicates an exhibit to the Company's 10-Q Report (File No. 0-16235) for
the period ended January 31, 1997, which is incorporated herein by
reference.
* Indicates a management contract or compensatory plan or arrangement
required to be filed as an exhibit hereto.
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
PHP HEALTHCARE CORPORATION
(AS OF APRIL 26, 1997)
ARTICLE I. OFFICES
The principal office of the corporation in the State of
Delaware shall be located at 1209 Orange Street, Wilmington,
Delaware, County of New Castle. The corporation may have
such other offices, either within or without the State of
Delaware, as the Board of Directors may designate or as the
business of the corporation may require from time to time.
The registered office of the corporation required by
the General Corporation Law of Delaware to be maintained in
the State of Delaware may be, but need not be, identical
with the principal office in the State of Delaware, and the
address of the registered office may be changed from time to
time by the Board of Directors.
ARTICLE II. SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of
the shareholders shall be held each year on such date and at
such time as shall be determined by the Board of Directors
for the purpose of electing Directors and for the
transaction of such other business as may come before the
meeting.
Section 2. Special Meetings. A special meeting of
the shareholders may be called by the Chief Executive
Officer and President or by the Board of Directors for any
purpose or purposes.
Section 3. Place of Meeting. The Board of
Directors may designate any place, either within or without
the State of Delaware, as the place of meeting for any
annual meeting of the shareholders or for any special
meeting of the shareholders called by the Board of
Directors, except that a meeting called expressly for the
purpose of removal of directors shall be held at the
registered office or principal business office of the
corporation in the State of Delaware or in the city or
county of the State of Delaware in which the principal
business office of the corporation is located. A waiver of
notice signed by all shareholders entitled to vote at a
meeting may designate any place, either within or without
the State of Delaware, as the place for the holding of such
meeting unless such meeting is called expressly for the
purpose of removal of directors,
<PAGE>
in which event the place for the holding of such meeting
shall be at the registered office or principal business
office of the corporation in the State of Delaware or in the
city or country of the State of Delaware in which the
principal business office of the corporation is located. If
no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the registered office
of the corporation in the State of Delaware.
Section 4. Notice of Meeting. Written notice
stating the place, day and hour of the meeting and the
purpose or purposes for which the meeting is called, shall,
unless otherwise allowed or prescribed by statute, be
delivered not less than ten or more than sixty days before
the date of the meeting, either personally or by mail, or at
the direction of the Chief Executive Officer and President
or the Secretary, or the persons calling the meeting, to
each shareholder of record entitled to vote at such meeting.
If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail, addressed to the
shareholder at his address as it appears on the records of
the corporation, with postage thereon prepaid.
Section 5. Meetings, How Convened. Every meeting,
for whatever purpose, of the shareholders in the corporation
shall be convened by the Chairman of the Board, the Chief
Executive Officer and President, the Secretary or other
officer or any of the persons calling the meeting by notice
given as herein provided.
Section 6. Closing Transfer - Books; Record Date.
The Board of Directors shall have power to close the
transfer books of the corporation for a period not exceeding
sixty days preceding the date of any meeting of
shareholders, or the date of payment of any meeting of
shareholders, or the date of payment of any dividend, or the
date of the allotment of shareholders' rights, or the date
when any change or conversion or exchange of shares shall go
into effect; provided, however, that in lieu of closing the
stock transfer books, the Board of Directors may fix in
advance a date, not exceeding sixty days preceding the date
of any meeting of shareholders, or the date for the payment
of any dividend, or the date for the allotment of rights, or
the date when any change or conversion or exchange of shares
shall go into effect, as a record date for the determination
of the shareholders entitled to notice of, and to vote at,
the meeting and any adjournment thereof, or to receive
payment of the dividend, or to the allotment of rights, or
to exercise the rights in respect of the change, conversion
or exchange of shares. In such case, only the shareholders
who are shareholders of record on the date of closing the
transfer books, or on the record date so fixed, shall be
entitled to notice of, and to vote at, the meeting and any
adjournment thereof, or to receive payment of the dividend,
or to receive the allotment of rights, or to exercise the
rights, as the case may be, notwithstanding any transfer of
any shares on the books of the corporation after the date of
closing of the transfer books or the record date fixed as
aforesaid. If the Board of Directors does not close the
transfer books or set a record date, only the shareholders
who are shareholders of record at the close of business on
the twentieth day preceding the date of the meeting shall be
entitled to notice of, and to vote at, the meeting, and any
adjournment of the meeting; except that, if prior to the
meeting written waivers of notice of the meeting are signed
and delivered to the corporation by all of the shareholders
of record at the time the meeting is convened, only the
shareholders who are shareholders of record at the time the
meeting is convened shall be entitled to vote at the
meeting, and any adjournment of the meeting.
-2-
<PAGE>
Section 7. Voting Lists. The officer having charge
of the stock transfer books for shares of the corporation
shall make, at least 10 days before each meeting of the
shareholders, a complete list of the shareholders entitled
to vote at such meeting, arranged in alphabetical order,
with the address of and the number of shares held by each,
which list, for a period of 10 days prior to such meeting
shall be kept on file at the registered office of the
corporation and shall be subject to inspection by any
shareholder at any time during usual business hours. Such
list shall also be produced and kept open at the time and
place of the meeting and shall be subject to the inspection
of any shareholder during the whole time of the meeting.
The original share ledger or transfer books, or a duplicate
thereof kept in the State of Delaware, shall be prima facie
evidence as to who are the shareholders entitled to examine
such list or share ledger or transfer book or to vote at any
meeting of the shareholders.
Section 8. Quorum. A majority of the outstanding
shares of the corporation entitled to vote, represented in
person or by proxy, shall constitute a quorum at any meeting
of shareholders. If less than a quorum is present, those
present may adjourn the meeting to a specified date not
longer than ninety days after such adjournment, and no
notice need be given of such adjournment to shareholders not
present at the meeting. Every decision of a majority of
such quorum shall be valid as a corporate act unless a
different vote is required by law, the Articles of
Incorporation or the By-Laws of the corporation.
Section 9. Proxies. At all meetings of
shareholders, a shareholder may vote in person or by proxy
executed in writing by the shareholder or by his duly
authorized attorney in fact. Such proxy shall be filed with
the Secretary of the corporation before or at the time of
the meeting. No proxy shall be valid after eleven months
from the date of its execution, unless otherwise provided in
the proxy. A duly executed proxy shall be irrevocable only
if it states that it is irrevocable and if, and only so long
as, it is coupled with an interest sufficient in law to
support an irrevocable power of attorney. The interest with
which it is coupled need not be an interest in the shares
themselves. If any instrument of proxy designates two or
more persons to act as proxy, in the absence of any
provisions in the proxy to the contrary, the persons
designated may represent and vote the shares in accordance
with the vote or consent of the majority of the persons
names as proxies. If only one such proxy is present, the
proxy may vote all of the shares, and all the shares
standing in the name of the principal or principals for whom
such proxy acts shall be deemed represented for the purpose
of obtaining a quorum. The foregoing provisions shall apply
to the voting of shares by proxies for any two or more
administrators, executors, trustees or other fiduciaries,
unless an instrument or order of court appointing them
otherwise directs.
Section 10. Voting of Shares. Each outstanding
share entitled to vote shall be entitled to one vote upon
each matter submitted to a vote at a meeting of the
shareholders.
Section 11. Voting of Shares by Certain Holders.
Shares standing in the name of another corporation may be
voted by such officer, agent or proxy as the by-laws of such
corporation may prescribe, or, in the absence of such
provision, as the Board of Directors of such corporation may
determine.
-3-
<PAGE>
Shares standing in the name of a deceased person may be
voted by his administrator or executor, either in person or
by proxy. Shares standing in the name of a guardian,
curator, or trustee may be voted by such fiduciary, either
in person or by proxy, but no guardian, curator, or trustee
shall be entitled to vote shares held by him without a
transfer of such shares into his name.
Shares standing in the name of a receiver may be voted
by such receiver, and shares held by or under the control of
a receiver may be voted by such receiver without the
transfer thereof into his name if authority so to do be
contained in an appropriate order of the court by which such
receiver was appointed.
A shareholder whose shares are pledged shall be
entitled to vote such shares until the shares have been
transferred into the name of the pledges, and thereafter the
pledges shall be entitled to vote the shares so transferred.
Neither shares of its own stock held by the
corporation, nor those held by another corporation if a
majority of the shares entitled to vote for the election of
directors of such other corporation are owned beneficially
and of record (and not in trust) by this corporation, shall
be voted at any meeting or counted in determining the total
number of outstanding shares at any given time.
Section 12. Shareholders' Right to Examine Books and
Records. This corporation shall keep correct and complete
books and records of account, including the amount of its
assets and liabilities, minutes of the proceedings of its
shareholders and Board of Directors, and the names and
places of residence of its officers; and it shall keep at
its registered office or principal place of business in this
state, or at the office of its transfer agent in this state,
if any, books and records in which shall be recorded the
number of shares subscribed, the names of the owners of the
shares, then numbers owned by them respectively, the amount
of shares paid, and by whom, and the transfer of such shares
with the date of transfer. Each shareholder may, during
normal business hours, have access to the books of the
corporation, to examine the same under such regulations as
may be prescribed by these By-Laws.
Section 13. Notice of Stockholder Proposals. (a) At
an annual meeting of the stockholders, only such business
shall be conducted, and only such proposals shall be acted
upon, as shall have been brought before the annual meeting
(i) by, or at the direction of, the Board of Directors or
(ii) by any stockholder of record of the Corporation who
complies with the notice procedures set forth in this
Section 13 of these Bylaws. For a proposal to be properly
brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing
to the Secretary of the corporation. To be timely, a
stockholder's notice must be delivered to, or mailed and
received at, the principal executive offices of the
corporation not less than sixty (60) days nor more than
ninety (90) days prior to the scheduled annual meeting,
regardless of any postponements, deferrals or adjournments
of that meeting to a later date; provided, however, that if
less than seventy (70) days' notice or prior public
disclosure of the date of the scheduled annual meeting is
given or made, notice by the stockholder to be timely
-4-
<PAGE>
must be so delivered or received not later than the close of
business on the tenth (10th) day following the earlier of
the day on which such notice of the date of the scheduled
annual meeting was mailed or the day on which such public
disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder
proposes to bring before the annual meeting (i) a brief
description of the proposal desired to be brought before the
annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and address, as they
appear on the corporation's books, of the stockholders
proposing such business and any other stockholders known by
such stockholder to be supporting such proposal, (iii) the
class and number of shares of the corporation's stock which
are beneficially owned by the stockholder on the date of
such stockholder notice and by any other stockholders known
by such stockholder to be supporting such proposal on the
date of such stockholder notice, and (iv) any financial
interest of the stockholder in such proposal.
(b) If the presiding officer determines that a
stockholder proposal was not made in accordance with the
terms of this Section 13, he shall so declare at the annual
meeting and any such proposal shall not be acted upon at the
annual meeting.
(c) This provision shall not prevent the consideration
and approval or disapproval at the annual meeting of reports
of officers, directors and committees of the Board of
Directors, but, in connection with such reports, no business
shall be acted upon at such annual meeting unless stated,
filed and received as herein provided.
Section 14. Director Nominations. Nominations for
the election of directors may be made by the Board of
Directors or a nominating committee appointed by the Board
of Directors or by any stockholder entitled to vote in the
election of directors generally. However, any stockholder
entitled to vote in the election of directors generally may
nominate one or more persons for election as directors at a
meeting only if written notice of such stockholder's intent
to make such nomination or nominations has been given,
either by personal delivery or by United States mail,
postage prepaid, to the Secretary of the corporation not
later than (i) with respect to an election to be held at an
annual meeting of stockholders, ninety (90) days prior to
the anniversary date of the immediately preceding annual
meeting, and (ii) with respect to an election to be held at
a special meeting of stockholders for the election of
directors, the close of business on the tenth (10th) day
following the date on which notice of such meeting is first
given to stockholders. Each such notice shall set forth:
(a) the name and address of the stockholder who intends to
make the nomination and of the person or persons to be
nominated; (b) a representation that the stockholder is a
holder of record of stock of the corporation entitled to
vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such
other information regarding nominee proposed by such
stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the
Securities and Exchange Commission as then in effect; and
(e) the consent of each nominee to serve as a director of
the corporation if so elected. The presiding officer of the
meeting may refuse to
-5-
<PAGE>
acknowledge the nomination of any person not made in
compliance with the foregoing procedure.
ARTICLE III. BOARD OF DIRECTORS
Section 1. General Powers. The property and
business of the corporation shall be controlled and managed
by its Board of Directors.
Section 2. Number, Term and Qualification. The
initial number of directors of the corporation shall be
seven (7). Thereafter, the number of directors shall be
fixed from time to time by resolution of the Board of
Directors. Directors need not be residents of the State of
Delaware or shareholders of the corporation.
Section 3. Regular Meetings. A regular meeting of
the Board of Directors shall be held without other notice
than this By-Law immediately after, and at the same place
as, the annual meeting of shareholders. The Board of
Directors may provide, by resolution, the time and place,
either within or without the State of Delaware, for the
holding of additional regular meetings without other notice
than such resolution.
Section 4. Special Meetings. Special Meetings of
the Board of Directors may be called by or at the request of
the Chief Executive Officer and President or any two
directors. The person or persons authorized to call special
meetings of the Board of Directors may fix any place, either
within or without the State of Delaware, as the place for
holding any special meeting of the Board of Directors called
by them.
Section 5. Notice. Notice of any special meeting
shall be given to each director at least (a) twelve (12)
hours before the meeting if given by telephone or if
delivered at his residence or usual place of business by
telex, telecopy, telegraph, or similar means or (b) two (2)
days before the meeting if delivered by mail to the
director's residence or usual place of business. Such
notice shall be deemed to be delivered when deposited in the
United States mail so addressed, with postage prepaid, or
when transmitted if sent by telex, telecopy, telegraph or
similar means. The attendance of a director at a meeting
shall constitute a waiver of notice of such meeting, except
where a director attends a meeting for the express purpose
of objecting to the transaction of any business because the
meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
Section 6. Quorum. A majority of the full Board of
Directors shall constitute a quorum for the transaction of
business, but if less than a majority are present at a
meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice. Members
of the Board of Directors may participate in a meeting of
the Board of Directors, whether regular or special, by means
of conference, telephone or similar communications equipment
whereby all persons participating in the meeting can hear
each other, and participation in a meeting in this manner
shall constitute presence in person at the meeting.
-6-
<PAGE>
Section 7. Manner of Acting. The act of a majority
of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors, unless
the act of a different number is required by statute, the
Articles of Incorporation or these By-Laws.
Section 8. Chairman of the Board. The Board of
Directors may elect a Chairman of Board. The Chairman of
the Board shall preside at all meetings of the Board of
Directors. The Chairman of the Board shall perform such
other duties as may be prescribed by the Board of Directors
from time to time.
Section 9. Action Without a Meeting. Any action
that may be taken at a meeting of the Board of Directors may
be taken without a meeting if consents in writing, setting
forth the action so taken, are signed by all of the
directors. Such written consent or consents shall be filed
by the Secretary with the minutes of the proceedings of the
Board of Directors, and shall have the same force and effect
as unanimous vote of such directors.
Section 10. Resignations. Any director may resign
at any time by giving written notice to the Board of
Directors, the Chief Executive Officer and President or the
Secretary of the corporation. Written notice shall be
delivered by certified or registered mail, with postage
thereon prepaid and a return receipt requested. Such
resignation shall take effect at the date of the receipt of
such notice which date of receipt shall be deemed to be the
date indicated upon the registered or certified mail return
receipt, or at any later time specified therein; unless
otherwise specified, acceptance of such resignation shall
not be necessary to make it effective.
Section 11. Removal. Any director or directors may
be removed, with or without cause, at a meeting of the
shareholders called expressly for that purpose. The entire
Board of Directors may be removed by a vote of the holders
of a majority of shares then entitled to vote at an election
of directors. If less than the entire board is to be
removed, no one of the directors may be removed if the votes
cast against the director's removal would be sufficient to
elect the director if then cumulatively voted at an election
of the entire Board of Directors, or, there being classes of
directors, at an election of the class of directors of which
the director is part.
Section 12. Compensation. By resolution of the
Board of Directors, each director may be paid his expenses,
if any, of attendance at each meeting of the Board of
Directors, and may be paid a stated salary as director of a
fixed sum for attendance at each meeting of the Board of
Directors or both. No such payment shall preclude any
director from serving the corporation in any other capacity
and receiving compensation therefor.
Section 13. Presumption of Assent. A director of the
corporation who is present at a meeting of the Board of
Directors at which action on any corporate matter is taken
shall be presumed to have assented to the action taken
unless his dissent shall be entered in the minutes of the
meeting or unless he shall file his written dissent to such
action with the person acting as Secretary of the meeting
before the adjournment thereof or shall forward such dissent
by registered mail to the Secretary of the corporation
immediately after the adjournment of the meeting. Such
right to dissent shall not apply to a director who voted in
favor of such action.
-7-
<PAGE>
Section 14. Executive Committee. The Board of Directors,
by resolution adopted by a majority of the board, may
designate two or more directors to constitute an executive
committee, which committee shall have and exercise all of
the authority of the Board of Directors in the management of
the corporation.
ARTICLE IV. OFFICERS
Section 1. Number. The officers of the corporation
shall be a Chief Executive Officer and President, one or
more Vice-Presidents (the number thereof to be determined by
the Board of Directors), a Secretary, an Assistant
Secretary, and a Treasurer, each of whom shall be elected by
the Board of Directors. Such other officers and assistant
officers as may be deemed necessary may be elected or
appointed by the Board of Directors. Any two or more
offices may be held by the same person.
Section 2. Election and Term of Office. The officers of
the corporation to be elected by the Board of Directors
shall be elected annually by the Board of Directors at the
first meeting of the Board of Directors held after each
annual meeting of the shareholders. If the election of
officers shall not be held at such meeting, such election
shall be held as soon thereafter as conveniently may be
arranged. Each officer shall hold office until his
successor shall have been duly elected and shall have
qualified or until his death or until he shall resign or
shall have been removed in the manner hereinafter provided.
Section 3. Removal. Any officer or agent elected or
appointed by the Board of Directors may be removed by the
Board of Directors whenever in its judgment the best
interest of the corporation will be served thereby, but such
removal shall be without prejudice to the contract rights,
if any, of the person so removed. Election or appointment
of an officer or agent shall not of itself create contract
rights.
Section 4. Resignations. Any officer may resign at any
time by giving written notice to the Board of Directors, the
Chief Executive Officer and President or the Secretary of
the corporation. Written notice shall be delivered by
certified or registered mail, with postage thereon prepaid
and a return receipt requested. Such resignation shall take
effect at the date of the receipt of such notice which date
of receipt shall be deemed to be the date indicated upon the
registered or certified mail return receipt, or at any later
time specified therein; unless otherwise specified herein,
the acceptance of such resignation shall not be necessary to
make it effective.
Section 5. Vacancies. A vacancy in any office because
of death, incapacity, resignation, removal, disqualification
or otherwise, may be filled by the Board of Directors for
the unexpired portion of the term.
Section 6. The Chief Executive Officer and President.
The Chief Executive Officer and President shall be the
principal executive officer of the corporation and shall in
general supervise and control all of the business and
affairs of the corporation. In the absence of the Chairman
of the Board, whether due to resignation, incapacity or any
other cause, the Chief Executive Officer and President shall
preside at all meetings of the Board of Directors. The
-8-
<PAGE>
Chief Executive Officer and President shall preside at such
meetings only so long as the Chairman of the Board remains
absent, or until the Board of Directors elects a new
Chairman of the Board. The Chief Executive Officer and
President may sign, with the Secretary or any other proper
officer of the corporation thereunto authorized by the Board
of Directors, certificates for shares of the corporation,
any deeds, mortgages, bonds, contracts, or other instruments
which the Board of Directors has authorized to be executed,
except in cases where the signing and execution thereof
shall be expressly delegated by the Board of Directors or by
these By-Laws to some other officer or agent of the
corporation, or shall be required by law to be otherwise
signed or executed. The Chief Executive Officer and
President may vote in person or by proxy shares in other
corporations standing in the name of the corporation. The
Chief Executive Officer and President shall in general
perform all duties as may be prescribed by the Board of
Directors from time to time.
Section 7. The Vice-President. In the absence of
the Chief Executive Officer and President, whether due to
resignation, incapacity or any other cause, or in the event
of the Chief Executive Officer and President's death,
inability or refusal to act, the Vice-President (or in the
event there be more than one Vice-President, the
Vice-Presidents in the order designated at the time of their
election, or in the absence of any designation, then in the
order of their election) shall perform the duties of the
Chief Executive Officer and President, and when so acting,
shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer and President.
The Vice-President shall exercise such powers only so long
as the Chief Executive Officer and President remains absent
or incapacitated, or until the Board of Directors elects a
new Chief Executive Officer and President. Any
Vice-President may sign, with the Secretary, the Assistant
Secretary, Treasurer or an Assistant Treasurer, certificates
for shares of the corporation; and shall perform such of the
duties as from time to time may be assigned to him by the
Chief Executive Officer and President or by the Board of
Directors.
Section 8. The Secretary. The Secretary shall (a)
keep the minutes of the proceedings of the shareholders and
of the Board of Directors in one or more books provided for
that purpose; (b) see that all notices are duly given in
accordance with the provisions of these By-Laws or as
required by law; (c) be custodian of the corporate records
and of the seal of the corporation and see that the seal of
the corporation is affixed to all documents the execution of
which on behalf of the corporation under its seal is duly
authorized; (d) keep a register of the post office address
of each shareholder which shall be furnished to the
Secretary by such shareholder; (e) sign with the Chief
Executive Officer and President, or Vice-President,
certificates for shares of the corporation, the issuance of
which shall have been authorized by resolution of the Board
of Directors; (f) have general charge of the stock transfer
books of the corporation; and (g) in general perform all
duties incident to the office of Secretary and such other
duties as from time to time may be assigned to the Secretary
by the Chief Executive Officer and President or by the Board
of Directors.
Section 9. The Assistant Secretary. In the absence
of the Secretary, whether due to resignation, incapacity or
any other cause, or in the event of the Secretary's death,
inability or refusal to act, the Assistant Secretary shall
perform the duties of the Secretary, and when so
-9-
<PAGE>
acting, shall have all the powers of and be subject to all
the restrictions upon the Secretary. The Assistant
Secretary shall exercise such powers only so long as the
secretary remains absent or incapacitated, or until the
Board of Directors elects a new Secretary. The Assistant
Secretary also shall perform such other duties as from time
to time may be assigned to him by the Chief Executive
Officer and President or the Board of Directors.
Section 10. The Treasurer. The Treasurer shall:
(a) have charge and custody of and be responsible for all
funds and securities of the corporation; (b) receive and
give receipts for moneys due and payable to the corporation
from any source whatsoever, and deposit all such moneys in
the name of the corporation in such banks, trust companies
or other depositories as shall be selected in accordance
with the provisions of Article V of these By-Laws; and (c)
in general perform all of the duties incident to the office
of Treasurer and such other duties as from time to time may
be assigned to the Treasurer by the Chief Executive Officer
and President or by the Board of Directors. If required by
the Board of Directors, the Treasurer shall give a bond for
the faithful discharge of the Treasurer's duties in such sum
and with such surety or sureties as the Board of Directors
shall determine.
Section 11. Salaries. The salaries of the officers
shall be fixed from time to time by the Board of Directors
and no officers shall be prevented from receiving such
salary by reason of the fact that the officer is also a
director of the corporation and participated in determining
and voting upon the salary.
ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The Board of Directors may
authorize any officer or officers, agent or agents, to enter
into any contract or execute and deliver any instrument in
the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on
behalf of the corporation and no evidences of indebtedness
shall be issued in its name unless authorized by a
resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
Section 3. Checks, Drafts, etc. All checks, drafts
or other orders for the payment of money, notes or other
evidences of indebtedness issued in the name of the
corporation, shall be signed in such manner as shall from
time to time be determined by resolution of the Board of
Directors.
Section 4. Deposits. All funds of the corporation
not otherwise employed shall be deposited from time to time
to the credit of the corporation in such banks, trust
companies or other depositories as the Board of Directors
may select.
-10-
<PAGE>
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. Certificates for Shares. Certificates
representing shares of the corporation shall be in such form
as shall be determined by the Board of Directors.
The shares of the corporation represented by
certificates shall be signed by the Chief Executive Officer
and President or a Vice-President, and by the Secretary or
an Assistant Secretary or the Treasurer or an Assistant
Treasurer of such corporation and sealed with the seal of
the corporation. Such seal may be facsimile, engraved or
printed. If such certificate is countersigned by a transfer
agent or registrar other than the corporation or its
employee, any other signature on the certificate may be
facsimile, engraved or printed. All certificates for shares
shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares
represented thereby are issued, with the number of shares
and date of issue, shall be entered on the stock transfer
books of the corporation. All certificates surrendered to
the corporation for transfer shall be canceled, and no new
certificate shall be issued until the former certificate for
a like number of shares shall have been surrendered and
canceled, except that in case of a lost, destroyed or
mutilated certificate a new one may be issued therefor upon
such terms and indemnity to the corporation as the Board of
Directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares
of the corporation shall be made only on the stock transfer
books of the corporation by the holder of record therefor or
by his legal representative, or by his attorney thereunto
authorized by power of attorney duly executed and filed with
the Secretary of the corporation, and on surrender for
cancellation of the certificate for such shares. The person
in whose name shares stand on the books of the corporation
shall be deemed by the corporation to be the owner thereof
for all purposes.
ARTICLE VII. FISCAL YEAR
The fiscal year of the corporation shall begin on the
1st day of May and end on the last day of April in each
year.
ARTICLE VIII. DIVIDENDS
The Board of Directors may, from time to time, declare
and the corporation may pay dividends on its outstanding
shares in the manner, and upon the terms and conditions
provided by law and the Articles of Incorporation of the
corporation.
ARTICLE IX. INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS
The corporation shall indemnify any person who is, or
was, a director, officer, employer or agent of the
corporation to the fullest extent permitted by law, except
that the corporation may, but need not, purchase indemnity
insurance.
-11-
<PAGE>
ARTICLE X. CORPORATE SEAL
The Board of Directors shall provide a corporate seal
in the form affixed hereto.
ARTICLE XI. WAIVER OF NOTICE
Whenever any notice is required to be given to any
shareholder or director of the corporation under the
provisions of these By-Laws or of the Articles of
Incorporation or of the General Corporation Law of Delaware,
a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of
such notice.
ARTICLE XII. AMENDMENTS
These By-Laws may be altered, amended or replaced and
new By-Laws adopted by action of a majority of the directors
at any regular or special meeting of the directors. These
By-Laws may also be altered, amended or replaced and new
By-Laws adopted by the affirmative vote of the holders of
two-thirds of the stock issued and outstanding and entitled
to vote thereon.
-12-
<PAGE>
EXHIBIT 11
Statement Re: Computation of per Share Earnings
For the Years ended April 30,
<TABLE>
<CAPTION>
1997 1996 1995
------- --------- ----------
PRIMARY EARNINGS PER SHARE <C> <C> <C>
- -------------------------
<S>
Primary
Net earnings (loss)...................... $(4,088,000) $ 9,118,000 $ 952,000
------------ ------------ -----------
Weighted average number of common shares
outstanding.............................. 11,038,176 10,943,530 10,588,790
Add common share equivalents (determined
using the treasury stock method)
representing shares issuable upon
exercise of stock options and
warrants................................ 2,671,721 2,573,762 688,644
Shares held in escrow...................... -- (88,572) (51,668)
-------------- ------------ ------------
Weighted average number of shares used
in cal-culation of primary earnings per
share................................... 13,709,897 13,428,720 11,225,766
-------------- ------------ ------------
Primary earnings (loss) per common
share................................... $ (0.30) $ 0.68 $ 0.08
-------------- ------------ ------------
When a loss occurs, common share
equivalents are excluded from the
calculation of earnings per share
because they are antidilutive.
Primary--without common share equivalents
Net earnings (loss).................... $(4,088,000) $ 9,118,000 $ 952,000
--------------- ------------- -------------
Weighted average number of common shares
outstanding............................ 11,038,176 10,943,530 $ 10,588,790
Shares held in escrow.................... -- (88,572) (51,668)
--------------- ------------ -------------
Weighted average number of shares used
in calculation of primary earnings
per share without common share
equivalent............................ 11,038,176 10,854,958 10,537,122
---------------- -------------- ------------
Primary earnings (loss) per common share
without common share equivalents....... $ (0.37) $ 0.84 $ 0.09
---------------- ------------- ------------
</TABLE>
48
<PAGE>
EXHIBIT 11
Statement Re: Computation of per Share Earnings
For the Years ended April 30,
<TABLE>
<CAPTION>
1997 1996 1995
FULLY DILUTED EARNINGS PER SHARE ------------- ------------ -------------
- --------------------------------- <C> <C> <C>
<S>
Fully diluted
Net earnings (loss).................... $(4,088,000) $ 9,118,000 $ 952,000
Net interest expense related to
convertible debt...................... 22,000 22,000 13,000
------------- -------------- ---------------
Net earnings (loss) as adjusted.......... $(4,066,000) $ 9,140,000 $ 965,000
------------- ------------ ----------------
------------- ------------ ----------------
Weighted average number of commons
shares outstanding..................... 11,038,176 10,943,530 $ 10,588,790
Add common share equivalents (determined
using the treasury stock methods)
representing shares issuable upon
exercise of stock options, warrants,
and convertible notes payable.......... 2,671,721 2,906,487 1,307,972
Assumed conversion of convertible debt... 111,111 111,111 64,816
Shares held in escrow.................... -- (88,572) (51,668)
------------- ------------ -------------
Weighted average number of shares used
in calculation of fully diluted
earnings per share..................... 13,821,008 13,872,556 11,909,910
------------- ------------ -------------
Primary earnings (loss) per common share. $ (0.29) $ 0.66 $ 0.08
------------- ------------ -------------
When a loss occurs, common share
equivalents are excluded from the
calculation of earnings per share
because they are antidilutive.
Fully diluted--without common share
equivalents Net earnings (loss)........ $(4,088,000) $ 9,118,000 $ 952,000
------------- ------------ ------------
Weighted average number of common
shares outstanding..................... 11,038,176 10,943,530 10,588,790
Shares held in escrow.................... -- (88,572) (51,668)
------------- ------------ -------------
Weighted average number of shares used in
calculation of primary earnings per
share without common share equivalents. 11,038,176 10,854,958 10,537,122
-------------- ------------ -------------
Fully diluted earnings (loss) per
common share without common
share equivalents...................... $ (0.37) $ 0.84 $ 0.09
-------------- ----------- -------------
</TABLE>
49
<PAGE>
DRAFT 7/28/97
-------------
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION DOING BUSINESS AS
- ----------------- -------------- -----------------
<S> <C> <C>
Sterling Communities Corporation Delaware N/A
Health Cost Consultants, Inc. Virginia N/A
D.C. Chartered Health Plan, Inc. District of Columbia N/A
Virginia Chartered Health Plan, Inc. Virginia N/A
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
Pinnacle Health Enterprises, L.L.C. Delaware N/A
GL/PHP, L.L.C. Delaware N/A
</TABLE>
50
<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 25, 1997, on
our audits of the consolidated financial statements and financial statement
schedule of PHP Healthcare Corporation and subsidiaries as of April 30, 1997
and 1996, and for the years ended April 30, 1997, 1996 and 1995, which report
is included in this annual report on Form 10-K.
Coopers & Lybrand L.L.P.
Washington, D.C.
July 25, 1997
51
<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-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 15,765
<SECURITIES> 0
<RECEIVABLES> 55,809
<ALLOWANCES> 10,009
<INVENTORY> 0
<CURRENT-ASSETS> 73,161
<PP&E> 74,380
<DEPRECIATION> 15,936
<TOTAL-ASSETS> 153,304
<CURRENT-LIABILITIES> 45,978
<BONDS> 69,996
0
0
<COMMON> 144
<OTHER-SE> 29,934
<TOTAL-LIABILITY-AND-EQUITY> 153,304
<SALES> 0
<TOTAL-REVENUES> 232,307
<CGS> 0
<TOTAL-COSTS> 189,477
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,577
<INCOME-PRETAX> (6,598)
<INCOME-TAX> (2,510)
<INCOME-CONTINUING> (4,088)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,088)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
</TABLE>
