<PAGE>
Securities and Exchange Commission
Washington, DC 20549
-----------------
FORM 10-Q/A-1
(Mark One)
__
/X/ Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
--
Exchange Act of 1934
For the quarterly period ended January 31, 1998.
___
/__/ Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number 0-16235
PHP HEALTHCARE CORPORATION
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 54-1023168
________________________________________________________________________________
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
11440 COMMERCE PARK DRIVE, RESTON, VA 20191
________________________________________________________________________________
(Address of principal executive offices)
Registrant's telephone number including area code
(703) 758-3600
________________________________________________________________________________
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (i) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share, outstanding as of January 31, 1998,
11,486,532 shares.
<PAGE>
INDEX
The undersigned registrant hereby files this Amendment No. 1 (the "Amendment")
for the purpose of amending and restating in its entirety the registrant's
Quarterly Report on Form 10-Q for the period ended January 31, 1998. The
Amendment is set forth below.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Report of Independent Accountants 2
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
Management's Discussion and Analysis of Results of Operations
and Financial Condition 17
PART II - OTHER INFORMATION 29
SIGNATURES 30
EXHIBIT INDEX 31
</TABLE>
1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of PHP Healthcare Corporation:
We have reviewed the Condensed Consolidated Balance Sheet of PHP Healthcare
Corporation and subsidiaries as of January 31, 1998, and the related Condensed
Consolidated Statements of Operations and Cash Flows for the three month and
nine month periods ended January 31, 1998 and 1997. These condensed
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the Consolidated Balance Sheet as of April 30, 1997, and the related
Consolidated Statements of Operations, Stockholders' Equity, and Cash Flows for
the year then ended (not presented herein), and in our report dated July 25,
1997, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
Condensed Consolidated Balance Sheet as of April 30, 1997, is fairly stated, in
all material respects, in relation to the Consolidated Balance Sheet from which
it has been derived.
As discussed in note 12 to the consolidated financial statements, the
accompanying Condensed Consolidated Balance Sheets as of April 30, 1997 and
January 31, 1998 and the related Condensed Consolidated Statements of Operations
and Cash Flow for the three month and nine month periods ended January 31, 1998
and 1997, have been restated to reflect revised accounting for certain contract
costs and certain long-term real estate leases.
Coopers & Lybrand, L.L.P.
Washington, D.C.
March 17, 1998
2
<PAGE>
PHP HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESTATED
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.......................................................... $139,433 $ 50,843 $250,928 $162,858
Medical costs..................................................... 123,010 42,543 212,585 130,510
-------- -------- -------- --------
Gross profit................................................. 16,423 8,300 38,343 32,348
General and administrative expenses............................... 9,392 8,165 24,122 22,584
Reserve for Medicaid receivables (note 3)......................... --- 9,822 --- 9,822
Former chairman retirement package (note 9)....................... --- 2,275 --- 2,275
Restructuring charges (note 10)................................... --- 2,550 --- 2,550
-------- -------- -------- --------
Operating income (loss)...................................... 7,031 (14,512) 14,221 (4,883)
Other income (expense):
Interest expense........................................ (3,948) (1,360) (7,353) (4,128)
Interest income......................................... 426 470 1,084 1,679
Miscellaneous expense................................... (167) (34) (751) (67)
Minority interest in (earnings) losses of subsidiaries.. 184 (78) (338) (316)
-------- -------- -------- --------
Earnings (loss) before income taxes and extraordinary
item...................................................... 3,526 (15,514) 6,863 (7,715)
Income tax expense (benefit)...................................... 1,234 (5,865) 2,401 (2,931)
-------- -------- -------- --------
Earnings (loss) before extraordinary item.................... 2,292 (9,649) 4,462 (4,784)
Extraordinary item, net of tax - loss on early extinguishment
of debt (note 7)............................................... (6,029) --- (6,029) ---
-------- -------- -------- --------
Net loss..................................................... (3,737) (9,649) (1,567) (4,784)
Deemed dividend................................................... (583) --- (583) ---
-------- -------- -------- --------
Net loss available to common shareholders.................... $ (4,320) $ (9,649) $ (2,150) $ (4,784)
======== ======== ======== ========
</TABLE>
(continued)
See accompanying notes to condensed consolidated financial statements.
See Accountants Review Report.
3
<PAGE>
PHP HEALTHCARE COROPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESTATED
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings (loss) per share (note 2):
Earnings (loss) before extraordinary item and deemed
dividend........................................... $ 0.20 $ (0.88) $ 0.39 $ (0.44)
Deemed dividend....................................... (0.05) --- (0.05) ---
------- ------- ------- -------
Earnings (loss) before extraordinary item......... 0.15 (0.88) 0.34 (0.44)
Extraordinary item.................................... (0.52) --- (0.53) ---
------- ------- ------- -------
Net loss........................................... $ (0.37) $ (0.88) $ (0.19) $ (0.44)
======= ======= ======= =======
Basic weighted average number of common shares
outstanding........................................... 11,527 11,005 11,498 10,986
======= ======= ======= =======
Diluted earnings (loss) per share (note 2):
Earnings (loss) before extraordinary item and deemed
dividend........................................... $ 0.16 $ (0.88) $ 0.32 $ (0.44)
Deemed dividend....................................... (0.04) --- (0.04) ---
------- ------- ------- -------
Earnings (loss) before extraordinary item.......... 0.12 (0.88) 0.28 (0.44)
Extraordinary item.................................... (0.42) --- (0.43) ---
------- ------- ------- -------
Net loss........................................... $ (0.30) $ (0.88) $ (0.15) $ (0.44)
======= ======= ======= =======
Diluted weighted average number of common and
common equivalent shares outstanding................... 14,266 11,005 13,951 10,986
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
See Accountants Review Report.
4
<PAGE>
PHP HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 1998 AND APRIL 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
RESTATED
<TABLE>
<CAPTION>
JANUARY 31, APRIL 30,
1998 1997
----------- ----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................................... $ 24,101 $ 15,765
Accounts receivable, net (note 3).................................................. 58,818 45,800
Pharmaceutical and medical supplies................................................ 2,103 1,460
Receivables from officers.......................................................... 3,117 4,442
Income tax receivable.............................................................. 628 882
Deferred income taxes.............................................................. 3,322 3,322
Other current assets............................................................... 4,730 4,273
-------- --------
Total current assets............................................................. 96,819 75,944
Property and equipment, net (notes 4 and 8)......................................... 74,696 58,444
Excess of cost over fair value of assets acquired, net of accumulated amortization
of $2,352 in January and $1,201 in April (note 4)................................ 71,320 7,275
Receivables from officers........................................................... 507 1,202
Note receivable..................................................................... 2,000 ---
Other assets........................................................................ 6,851 5,508
-------- --------
$252,193 $148,373
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank (note 5)...................................................... $ --- $ 9,200
Current maturities of notes payable - other........................................ 1,804 1,716
Finance lease obligation.......................................................... 357 ---
Accounts payable................................................................... 11,101 12,036
Claims payable - medical services.................................................. 30,725 8,739
Accrued salaries and benefits...................................................... 17,289 13,219
Deferred revenue................................................................... 2,877 1,068
-------- --------
Total current liabilities......................................................... 64,153 45,978
Notes payable - other, net of current maturities.................................... 5,029 3,964
Finance lease obligation............................................................ 17,632 ---
Convertible subordinated debentures................................................. 66,419 66,032
Deferred income taxes............................................................... 407 1,274
Deferred gain on sale of building................................................... 852 916
Other liabilities................................................................... 891 759
-------- --------
Total liabilities................................................................. 155,383 118,923
-------- --------
Minority interest (note 8).......................................................... 1,099 4,303
-------- --------
Stockholders' equity:
Preferred stock, $1,000 par value, 10,000,000 shares authorized,
70,000 issued in January and none issued in April (note 6)....................... 64,283 ---
Common stock, $.01 par value, 100,000,000 shares authorized, 14,835,017
shares issued in January and 14,369,849 shares issued in April................... 148 144
Additional paid-in capital (notes 5 and 6)......................................... 44,772 33,946
Note receivable from sale of stock................................................. (900) (900)
Retained earnings.................................................................. (3,621) (1,471)
Treasury stock, 3,348,485 common shares in January and 3,258,485
common shares in April, at cost.................................................. (8,971) (6,572)
-------- --------
Total stockholders' equity....................................................... 95,711 25,147
Contingencies (note 11)............................................................. -------- --------
$252,193 $148,373
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
See Accountants Review Report.
5
<PAGE>
PHP HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
RESTATED
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................... $ (3,737) $(9,649) $ (1,567) $ (4,784)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary loss on early extinguishment of debt.................. 6,029 --- 6,029 ---
Minority interest in earnings (losses) of subsidiaries............... (184) 78 338 316
Depreciation and amortization........................................ 3,701 1,136 7,112 3,712
Deferred income taxes................................................ 2,379 (3,778) 2,379 (3,778)
Other items, net..................................................... (21) (21) (9) (64)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net.................... 1,742 11,468 (13,018) (1,924)
Decrease in pharmaceutical and medical supplies.................... 324 177 1,113 254
Decrease (increase) in other current assets........................ 909 (687) 1,226 (2,348)
Decrease (increase) in other assets................................ 252 (430) (1,331) (996)
Decrease in accounts payable....................................... (7,808) (3,499) (9,252) (1,473)
Increase (decrease) in claims payable.............................. 24,645 (1,219) 21,986 (4,508)
Increase in accrued salaries and benefits.......................... 4,764 1,802 2,150 3,792
Increase in deferred revenue....................................... 2,152 934 1,809 861
Decrease in income taxes payable................................... (1,168) (2,688) --- 220
Increase in other liabilities...................................... 21 89 133 177
-------- ------- -------- --------
Net cash provided by (used in) operating activities.............. 34,000 (6,287) 19,098 (10,543)
-------- ------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment.................................. (4,087) (2,041) (8,988) (8,166)
Net proceeds from the sale of property and equipment................... --- --- 2,091 ---
Acquisition of subsidiaries............................................ (28,698) --- (30,332) ---
Disposition of subsidiaries, net of cash conveyed...................... --- --- 16,433 ---
-------- ------- -------- --------
Net cash used in investing activities............................ (32,785) (2,041) (20,796) (8,166)
-------- ------- -------- --------
Cash flows from financing activities:
Net proceeds from Series B Convertible Preferred Stock
offering............................................................. 63,700 --- 63,700 ---
Net repayments under revolving promissory notes........................ (5,462) --- (11,662) ---
Repayments on notes payable to bank.................................... (40,000) --- (40,000) ---
Repayments on notes payable............................................ (711) (138) (2,317) (406)
Repayments on finance lease obligations................................ (83) --- (137) ---
Debt issuance costs.................................................... (3,150) --- (3,150) ---
Receivables from officers.............................................. (95) 3 2,020 (838)
Issuance of shares to directors........................................ --- --- 110 ---
Proceeds from exercise of stock options................................ 106 97 1,270 454
Proceeds from sale of stock............................................ --- --- 2,600 ---
Purchase of treasury shares............................................ (2,400) --- (2,400) ---
-------- ------- -------- --------
Net cash provided by (used in) financing activities.............. 11,905 (38) 10,034 (790)
-------- ------- -------- --------
Net increase (decrease) in cash and cash equivalents............. 13,120 (8,366) 8,336 (19,499)
Cash and cash equivalents, beginning of period.......................... 10,981 37,514 15,765 48,647
-------- ------- -------- --------
Cash and cash equivalents, end of period................................ $ 24,101 $29,148 $ 24,101 $ 29,148
======== ======= ======== ========
</TABLE>
(continued)
See accompanying notes to condensed consolidated financial statements.
See Accountants Review Report.
6
<PAGE>
PHP HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(FOR THE NINE MONTHS ENDED JANUARY 31, 1998)
<TABLE>
<S> <C>
Acquisition of subsidiaries:
Fair value of fixed assets acquired............................................................. $ 15,000
Excess of cost over fair value of assets acquired............................................... 65,463
Other current assets acquired................................................................... 2,568
Liabilities assumed............................................................................. (10,237)
Notes payable issued............................................................................ (42,462)
--------
Cash paid....................................................................................... 30,332
Less cash acquired.............................................................................. ---
--------
Acquisition of subsidiaries, net of cash acquired............................................... $ 30,332
========
Disposition of subsidiaries:
Fair value of assets sold....................................................................... $ 22,076
Note receivable issued.......................................................................... (2,000)
Capital contributions of other shareholders in subsidiaries..................................... (3,542)
--------
Cash received................................................................................... 16,534
Less cash conveyed.............................................................................. (101)
--------
Disposition of subsidiaries, net of cash conveyed............................................... $ 16,433
========
Other non-cash activities:
Warrants issued in connection with credit facility.............................................. $ 6,850
Property and equipment acquired under capital lease............................................. 2,773
Finance lease obligation incurred in connection with real estate lease.......................... 18,126
Notes payable issued for prepaid insurance...................................................... 697
Preferred Stock discount........................................................................ 6,300
Deemed dividend, accretion of Preferred Stock discount.......................................... 583
</TABLE>
See accompanying notes to condensed consolidated financial statements.
See Accountants Review Report.
7
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
In the opinion of the Company, the interim condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The interim condensed consolidated
financial statements should be read in conjunction with the Company's April 30,
1997 and 1996 audited consolidated financial statements. The year-end condensed
consolidated balance sheet data was derived from audited consolidated financial
statements but does not include all disclosures required by generally accepted
accounting principles. The interim operating results are not necessarily
indicative of the operating results for the full fiscal year.
(B) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS No. 131"). Both
standards only require additional disclosure and therefore will not have any
effect on the Company's financial position or results of operations. SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and will be adopted by the Company and reflected in the Company's interim
financial statements effective fiscal year end 1999. SFAS No. 131 changes the
way companies report segment information and requires segments to be determined
based on how management measures performance and makes decisions about
allocating resources. SFAS No. 131 will be adopted by the Company and reflected
in the Company's financial statements effective fiscal year end 1999.
The Emerging Issues Tax Force recently issued EITF Issue No. 97-2,
"Application of APB Opinion No. 16, Business Combinations, and FASB Statement
No. 94, Consolidation of All Majority-Owned Subsidiaries, to Physician Practice
Entities", effective for financial statements for fiscal years ending after
December 15, 1998. At that time this pronouncement will require the Company to
include in consolidation physician practices with which the Company has a
controlling financial interest. Implementation of this pronouncement will not
have a material impact on the Company's financial statements since the Company
already consolidates the applicable physician practices.
(2) EARNINGS PER SHARE
Effective with the financial statements for the current fiscal period ended
January 31, 1998, the Company has adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). It requires companies
to present basic and diluted earnings per share ("EPS"), instead of the primary
and fully diluted EPS that was previously required, for each period presented in
the consolidated financial statements, including restatement of all prior period
per share amounts. Basic EPS is computed by dividing net income from continuing
operations, adjusted for any preferred stock dividends (whether or not paid), by
the weighted average number of common shares outstanding during the period.
Unlike primary EPS, basic EPS excludes the dilutive effect of stock options and
warrants. Diluted EPS is calculated in the same manner as basic EPS, except that
the denominator is increased to include the number of additional common shares
that would have been outstanding assuming the exercise of stock options and
warrants, and conversion of any convertible debt or securities that would have a
dilutive effect on EPS. Additionally, the numerator is adjusted for any changes
in income or loss that would result from the assumed conversion of these
dilutive potential common shares.
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the numerators and denominators used in the calculation
of basic and diluted EPS follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED JANUARY 31, ENDED JANUARY 31,
(In thousands, except per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Earnings (loss) before extraordinary item
and deemed dividend........................ $ 2,292 $(9,649) $ 4,462 $(4,784)
Deemed dividend............................. (583) --- (583) ---
------- ------- ------- -------
Numerator for basic earnings per
share - earning (loss) before
extraordinary item........................ $ 1,709 $(9,649) $ 3,879 $(4,784)
Effect of dilutive securities - net interest
expense related to convertible debt........ 6 --- 18 ---
------- ------- ------- -------
Numerator for diluted earnings (loss)
per share, as adjusted.................... $ 1,715 $(9,649) $ 3,897 $(4,784)
======= ======= ======= =======
Denominator:
Weighted average number of common
shares outstanding......................... 11,527 11,094 11,498 11,075
Shares held in escrow....................... --- (89) --- (89)
------- ------- ------- -------
Denominator for basic earnings (loss)
per share................................. 11,527 11,005 11,498 10,986
Effect of dilutive securities:
Common share equivalents (determined
using the "treasury stock" method)
representing shares issuable upon
exercise of stock options and warrants..... 2,628 --- 2,342 ---
Assumed conversion of convertible debt...... 111 --- 111 ---
------- ------- ------- -------
Denominator for diluted earnings (loss)
per share................................. 14,266 11,005 13,951 10,986
======= ======= ======= =======
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item
and deemed dividend........................ $ 0.20 $ (0.88) $ 0.39 $ (0.44)
Deemed dividend............................. (0.05) --- (0.05) ---
------- ------- ------- -------
Earnings (loss) before extraordinary
item...................................... $ 0.15 $ (0.88) $ 0.34 $ (0.44)
======= ======= ======= =======
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item
and deemed dividend........................ $ 0.16 $ (0.88) $ 0.32 $ (0.44)
Deemed dividend............................. (0.04) --- (0.04) ---
------- ------- ------- -------
Earnings (loss) before extraordinary
item...................................... $ 0.12 $ (0.88) $ 0.28 $ (0.44)
======= ======= ======= =======
</TABLE>
8
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Securities which were outstanding but were not included in the computation
of diluted earnings per share because their effect was antidilutive include: (i)
for the quarter and nine month period ended January 31, 1998, 2.8 million shares
(prior to weighting for the period since issuance) that would have resulted from
the conversion of the Series B Convertible Preferred Stock, (ii) for the
quarters and nine month periods ended January 31, 1998 and 1997, 2.5 million
shares that would have resulted from the conversion of the subordinated
debentures, and (iii) options to purchase 520,900 shares of common stock for the
quarter and nine month period ended January 31, 1998 and options to purchase
189,000 and 181,000 shares of common stock for the quarter and nine month period
ended January 31, 1997. Additionally, because the quarter and nine month period
ended January 31, 1997 results reflect a net loss from continuing operations,
basic and diluted EPS are calculated based on the same weighted average number
of shares outstanding which excludes potential common shares that would result
from outstanding options and warrants.
In February 1998, the Company's former CEO exercised 790,000 options to
purchase common stock by tendering to the Company 250,000 shares of common stock
that he owned.
(3) ACCOUNTS RECEIVABLE
D.C. Chartered Health Plan, Inc. ("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 the Health Care
Finance Administration (HCFA) of the Department of Health and Human Services
(HHS).
CHP receives interim payments on an estimated basis with a final settlement
occurring at the end of the contract period for the difference between amounts
earned and the interim payments. The final settlement process with DCDHS and
HCFA is subject to defined upper payment limits and requires an audit of CHP's
activities. Due, in part, 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 amounts due for the 1992 to 1994
contract years. That process ultimately resulted in an executed agreement to
settle these amounts due the Company for $18.9 million. It became evident to the
Company, however, through comments in the local press, that payment had been
blocked. Consequently, in light of the clearly prolonged timeframe to resolve
these issues, the Company determined in the third quarter ended January 31, 1997
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 years. The Company remains committed to pursuing its
contractual rights for the amounts it is due from the District. No further
resolution or final determination of the amounts due have been forthcoming from
the District.
9
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company believes that a final settlement of these contracts for the
periods 1992 through 1996 under the method prescribed by the new law results in
amounts due the Company in excess of the $14.3 million and $12.0 million in
receivables recorded at January 31, 1998, and April 30, 1997, respectively,
which amounts have been consistently calculated based upon the Company's
conservative interpretation of the methods in effect prior to the enactment of
the new law.
(4) ACQUISITION
Effective October 31, 1997, the Company acquired eighteen primary care
health centers located throughout the state of New Jersey from HIP of New
Jersey, Inc., a New Jersey health maintenance organization ("HIP"). The total
purchase price of approximately $80 million, including transaction costs and
other consideration, was paid through a combination of cash on hand and bank
financing (see Note 5). The Company may be required to pay HIP additional
amounts based upon membership growth during the years 1997 through 2000, up to a
total of $15 million. In conjunction with the purchase agreement, the Company
and HIP entered into a twenty year Health Services Agreement pursuant to which
the Company arranges for the provision of certain health care services to
enrolled HIP beneficiaries and will receive in return global capitation
payments. To enable the Company to provide health care services as promptly as
possible, the Company and HIP also entered into a Network Access and Transition
Agreement, whereby HIP paid the Company $5.4 million to perform various
transition functions such as medical management and administrative services, and
to provide HIP members access to the Company's health care network during the
transition period.
The transaction was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated, on an estimated basis, to the
acquired tangible ($15 million) and identifiable intangible assets and goodwill
($65 million) and assumed liabilities based on their respective estimated fair
market value. The identifiable intangible assets will be amortized on a
straight-line basis over periods up to 20 years.
The following unaudited pro forma financial information for the Company
gives effect to the acquisition as if it had occurred on May 1, 1996. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which actually would have
resulted had the acquisitions occurred on the date indicated, or which may
result in the future. The pro forma results follow (in thousands, except per
share data):
<TABLE>
<CAPTION>
Nine Months ended Nine Months ended
(In thousands, except per share data) January 31, 1998 January 31, 1997
---------------- ----------------
<S> <C> <C>
Revenues......................................... $422,415 $424,553
Earnings (loss) before extraordinary item........ (579) (5,226)
Diluted earnings (loss) before extraordinary item
per common share.............................. $ (.04) $ (.48)
</TABLE>
10
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5) NOTE PAYABLE - BANK
To finance the HIP transaction (see Note 4), pay related expenses and
provide future working capital, the Company obtained a $75 million
collateralized credit facility (the "Credit Agreement") from its primary bank
dated as of October 31, 1997 which superseded the pre-existing primary banking
facility. Under the Credit Agreement, the Company had available up to $75
million in principal amount of senior collateralized financing in the form of
(i) a term facility in the principal amount of $40 million maturing in two years
(the "Term Facility"), and (ii) a revolving credit facility in an aggregate
principal amount of up to $35 million (the "Revolving Facility").
The Credit Agreement provides for certain customary affirmative and
negative covenants and events of default, including, but not limited to,
covenants regarding the Company's capital expenditures, funded debt, intangible
net worth, leverage, working capital, interest coverage and fixed charge
coverage, as well as limitations on other indebtedness, mergers, acquisitions
(and asset sales), other liens and investments. The Credit Agreement is
collateralized by a security interest in substantially all of the Company's
assets.
In connection with the Credit Agreement the Company paid $3.0 million in
fees and issued warrants to its primary bank to acquire 1,421,000 shares of
common stock of the Company at no cost to exercise. Effective October 31, 1997
500,150 of the warrants became immediately exercisable and were recorded as
additional paid-in capital using the market price on that day of $13.69 per
share, for a total of $6.85 million. The remaining 920,850 warrants have been
canceled in accordance with the terms of the warrant agreement because the
entire outstanding borrowings under the Credit Agreement were repaid prior to
January 31, 1998 with the proceeds of the private placement of Series B
Convertible Preferred Stock (see Note 6).
In January 1998, the Credit Agreement was amended to reflect the repayment
of the entire outstanding balance from the proceeds of the private placement of
the Series B Convertible Preferred Stock. The amendment primarily terminated
the Term Facility, decreased the Revolving Facility to $30.0 million and
currently provides for interest, at the Company's selection, at (i) 2.0% above
the Eurodollar rate, or (ii) 1.0% above the higher of the bank prime rate or the
Federal Funds rate plus 0.5%. At January 31, 1998, there are no amounts
outstanding under the Revolving Facility.
(6) PRIVATE PLACEMENT
On December 30, 1997, the Company completed a private placement of 70,000
shares of its Series B Convertible Preferred Stock at a purchase price of $1,000
per share, resulting in gross proceeds to the Company of $70 million. The
proceeds of the offering were used to repay the entire outstanding borrowings
under a senior credit facility and to pay related issuance costs of $6.3
million. The senior credit facility was established to temporarily finance the
Company's acquisition of 18 health centers from HIP (see Notes 3 and 4). The
Company intended to obtain permanent financing through the issuance of debt or
equity securities.
11
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The holders of the Series B Preferred Stock are not entitled to receive
dividends and, except as provided for by law, have no voting rights. The shares
of Series B Preferred Stock are convertible into shares of the Company's common
stock upon the earlier of April 1, 1998 or the date on which the registration
statement relating to the resale of the common stock issuable upon conversion of
the Series B Preferred Stock becomes effective. The shares of Series B Preferred
Stock will automatically convert into common stock on the fifth anniversary of
the date of original issuance to the extent any shares of Series B Preferred
Stock remain outstanding at that time. Each share of Series B Preferred Stock is
convertible into that number of shares of common stock equal to the quotient of
(i) $1,000 divided by (ii) the Conversion Price. Through May 31, 1998, the
Conversion Price will be $25. Thereafter, subject to the maximum Conversion
Price specified below, the Conversion Price will be equal to the lowest trading
price of the common stock for the 22 trading days immediately preceding the
conversion date, less a discount ranging from 5% (beginning June 1, 1998) to 9%
(on or after December 1, 1998). The maximum Conversion Price is the lesser of
(i) $30, (ii) 91% of the average of the daily low trading prices of the common
stock for all trading days in March, 1999, or (iii) 91% of the average of the
daily low trading prices for all trading days in September, 1999; provided,
however, that the maximum Conversion Price shall not be less than $25.
The number of shares that any holder of Series B Preferred Stock may
convert in any calendar month is limited according to a sliding scale percentage
of such holder's shares of Series B Preferred Stock determined by reference to
the highest of the daily low trading prices during such month.
<TABLE>
<CAPTION>
Highest of daily low trading Percentage convertible
prices during month during such month
------------------- -----------------
<S> <C>
$25.00 or less 20%
$25.01 to $27.00 25%
$27.01 to $29.00 30%
$29.01 to $31.00 35%
$31.01 to $33.00 40%
$33.01 to $35.00 45%
$35.01 to $37.00 50%
$37.01 or more 100%
</TABLE>
The number of shares which may be converted in any calendar month also
includes the number of shares which might have been but were not converted
during earlier calendar months.
If at any time the Conversion Price falls below $25, upon conversion of any
Series B Preferred Stock, the Company may, in lieu of the issuance of common
stock, make a payment in cash in an amount equal to the value of the common
stock based upon the high trading price of the common stock on the conversion
date.
12
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The shares of Series B Preferred Stock will not be convertible into more
than 2,300,000 shares of common stock (approximately 19.9% of the number of
shares of common stock outstanding on October 31, 1997) (the "NYSE Cap") without
obtaining shareholder approval in accordance with New York Stock Exchange
listing requirements. If such shareholder approval is not obtained by May 31,
1998, the Company will be required to redeem, at a price equal to 110% of the
liquidation preference of such shares, the smallest number of shares of Series B
Preferred Stock which is sufficient, in the Company's reasonable judgment, such
that following such redemption, conversion of the remaining shares of Series B
Preferred Stock would not constitute a breach of the Company's obligations under
the New York Stock Exchange Rules.
The Company has agreed to register the shares of common stock issuable upon
conversion of the Series B Preferred Stock for resale under the Securities Act
of 1933 by April 1, 1998.
Each purchaser of the Series B Preferred Stock has agreed not to offer or
sell on any trading day, on a net basis, more than the following number of
shares of common stock: the greater of (i) 10% of the average daily trading
volume of the common stock for the five previous trading days, (ii) 10,000
shares, or (iii) 10% of the trading volume of the common stock on the day of
such sale. In addition, the purchasers of the Series B Preferred Stock and
their affiliates have agreed not to engage in any short sales, swaps, purchasing
of puts, or other hedging activities involving the common stock to hedge their
investment in the Series B Preferred Stock; however, any purchaser may write
call options if the call exercise price is greater than the lesser of (i) the
effective Conversion Price on the day that the call is written or (ii) the
closing price of the common stock on the day prior to the day that the call is
written. These hedging restrictions do not apply to certain short sales within
three days of conversion where the shares issuable upon conversion are used to
cover the short sale.
The Company intends to seek the approval of its stockholders to the
issuance of common stock issuable upon conversion of the Series B Preferred
Stock in accordance with its listing agreement with the New York Stock Exchange.
It is presently expected that such approval will be sought at a special meeting
of stockholders to be held March 31, 1998, solely for that purpose.
(7) EXTRAORDINARY ITEM - LOSS ON EARLY EXTINGUISHMENT OF DEBT
On December 30, 1997, the Company repaid $65.0 million to its primary bank
which represented the then entire outstanding balance of notes payable to the
bank under the Credit Agreement (see Note 4). The Company repaid the bank with
the proceeds from the private placement of Series B Convertible Preferred Stock
(see Note 6).
The early extinguishment of this debt resulted in an extraordinary charge
of $6.0 million for the period ended January 31, 1998, consisting of: (i) $6.85
million in cost for the 500,150 common stock warrants issued to the bank at an
exercise price of zero, (ii) $3.0 million in cash fees paid to the bank, (iii)
$150,000 in legal and other fees incurred related to the Credit Agreement, (iv)
reduced by $725,000 in interest expense that was recognized during the period
the debt was outstanding resulting from amortization of the above cost items,
and (v) net of $3.246 million in income tax benefit.
13
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) SALE OF OWNERSHIP INTEREST IN NEW JERSEY PRIMARY CARE FACILITIES
On February 28, 1997, the Company and a real estate investment trust
subsidiary in which the Company owned a minority interest (the "REIT"), acquired
certain primary care facilities located throughout the state of New Jersey which
were formerly operated by Blue Cross Blue Shield of New Jersey, Inc. ("BCBSNJ").
Concurrent with the agreement to purchase the primary care facilities, the
Company and BCBSNJ replaced an existing operating agreement with a network
services agreement. The total purchase price related to these agreements,
including transaction costs and other consideration, was approximately $44.7
million, of which $22.3 million was paid by the REIT. In conjunction with the
REIT's acquisition of the primary care facilities, the Company made a $0.9
million capital contribution to the REIT and advanced the REIT an additional $18
million, consisting of $16 million in short-term loans and $2 million in long-
term secured loans, until permanent financing could be obtained. Since the
Company provided substantially all of the funds at closing, in concert with
certain ownership risk provisions of the lease agreements between the Company
and the REIT, the Company had consolidated the operations of the REIT since
February 1997.
On August 15, 1997, the REIT obtained permanent financing and repaid its
loans to the Company. In addition, the REIT's parent company, G&L Realty
Corporation, purchased the Company's ownership interest in the REIT and the
Company provided a new $2.0 million long-term loan to G&L Realty Corporation.
In conjunction with these transactions, the Company committed to a 17-year
operating lease. Accordingly, since the Company has sold its interest in the
subsidiary and its loans have been repaid, the operations of the REIT have not
been consolidated since August 15, 1997. However, since there remains an element
of continuing involvement by the Company with the lessor beyond a routine
leasing relationship, the new lease is accounted for as a financing (see Note
12). This continuing involvement is in the form of the new $2.0 million
long-term loan against which the borrower may offset past due lease payments and
any related interest amounts.
Scheduled principal payments on finance lease obligations by fiscal year
are as follows (in thousands): $222 in 1998, $370 in 1999, $421 in 2000, $478 in
2001, $544 in 2002, and $16,091 thereafter.
(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. The
agreement further required Mr. Robbins to repay (by April 30, 1997) all
outstanding notes receivable and accrued interest due the Company within the
Senior Executive Loan Program and notes receivable related to certain life
insurance policies. All outstanding amounts have subsequently been repaid.
Under the agreement, Mr. Robbins had the right (through April 30, 1997) to
require the Company to purchase up to 200,000 shares of his stock in the Company
at the then current market price. This right expired and was not exercised by
Mr. Robbins. 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 quarter ended January 31, 1997, the Company recognized $2.275
million in expense related to the 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.
14
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In late November 1996, the Company made the strategic decision to terminate
its long-term care line of business, an unprofitable operation, in the
Government Managed Care Services division. 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. Ongoing building and facilities management
needs are being 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) CONTINGENCIES
The Company is a defendant in various legal actions. The principal actions
allege or involve claims under contractual arrangements, employment matters, and
medical malpractice with an estimated possible range of loss between
approximately $50,000 and $250,000. 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 January 31, 1998.
The Company maintains medical malpractice insurance coverage which provides
for reimbursement of any claim amounts in excess of $250,000 per incident on
Government Managed Care Division projects and $50,000 per incident on Commercial
Managed Care Division projects.
The Company understands on the basis of a published news report that a
class action lawsuit was filed against the Company and certain current and
former officers and directors of the Company in the United States Distric Court
for the Central District of California on March 9, 1998, Civil Action No. 98-
1658, on behalf of all persons who purchased or otherwise acquired the Company's
common stock between December 11, 1995 and March 10, 1997. According to the
report, the Complaint alleges that the Company issued false and misleading
financial statements and press releases concerning the Company's income and
earnings, including the results of the Company's wholly-owned HMO subsidiary,
Chartered Health Plan. The Company has not seen a copy of the Complaint, but
intends to vigorously defend the lawsuit if and when it is served with the
Complaint.
15
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) RESTATEMENT
Upon further review the Company has revised its accounting treatment for
two contracts entered into during fiscal years 1994 and 1995. The two contracts,
a construction contract and a management contract, which were with the same
party, were previously combined for purposes of revenue recognition. The Company
has restated previously issued financial statements and related footnote
disclosures to account for these two contracts separately. As a result, the
fiscal year 1995 financial statements have been adjusted to reduce the revenue
recognized by $6.9 million for certain cost overruns related to 1995
construction and start-up activities which would have been recovered
prospectively under the two combined contracts. Furthermore, the Company has
recorded additional contract loss reserves of approximately $915,000 in fiscal
year 1995 resulting from the contracts being accounted for separately. This
revised accounting treatment also resulted in the reduction of fiscal year 1996
revenues and direct cost by approximately $900,000 and $915,000, respectively.
Immaterial adjustments to revenue were also recorded in fiscal year 1997. The
effect of these adjustments on net earnings and per share amounts as previously
reported, were as follows:
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1998 AND 1997:
<TABLE>
<CAPTION>
Three Months NINE MONTHS
------------ -----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings, as previously reported................. $(4,320) $(9,902) $(2,150) $(5,142)
Adjustment, net of tax............................... --- 253 --- 358
------- ------- ------- -------
Net earnings (loss) as adjusted...................... $(4,320) $(9,649) $(2,150) $(4,784)
======= ======= ======= =======
Per Share Amounts:
Basic earnings (loss) per share:
Net earnings as previously reported.................. $ (0.37) $ (0.90) $ (0.19) $ (0.47)
Adjustments, net of tax.............................. 0.00 0.02 0.00 0.03
------- ------- ------- -------
Net earnings (loss) as adjusted...................... $ (0.37) $ (0.88) $ (0.19) $ (0.44)
======= ======= ======= =======
Fully diluted earnings (loss) per share:
Net earnings as previously reported.................. $ (0.30) $ (0.90) $ (0.15) $ (0.47)
Adjustment, net of tax............................... 0.00 0.02 0.00 0.03
------- ------- ------- -------
Net earnings (loss) as adjusted...................... $ (0.30) $ (0.88) $ (0.15) $ (0.44)
======= ======= ======= =======
</TABLE>
The Company has also revised its accounting treatment for the 17 year lease
of the primary care facilities discussed in Note 8 above. In August 1997, the
Company no longer consolidated the REIT and accounted for the lease as an
operating lease. The Company has restated previously issued interim financial
statements and related footnote disclosures to account for this lease as a
financing, instead of as an operating lease, as a result of the Company's
continuing involvement with the lessor. This continuing involvement is in the
form of a $2.0 million long-term loan against which the borrower may offset past
due lease payments and any related interest amounts. Accordingly, in August 1997
as restated in the January 31, 1998 quarterly financial statements, property and
equipment was increased by $18.1 million with a corresponding increase to
finance lease obligation. Depreciation expense and finance lease obligation
principal payments were subsequently reflected as reductions to these initial
transaction amounts. The effect of this restatement on net earnings and per
share amounts for the periods ended January 31, 1998, was immaterial.
16
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Upon further review the Company has revised its accounting treatment for
two contracts entered into during fiscal years 1994 and 1995. The two contracts,
a construction contract and a management contract, which were with the same
party, were previously combined for purposes of revenue recognition. The Company
has restated previously issued financial statements to account for these two
contracts separately. Accordingly, the Company has also revised the following
Management's Discussion and Analysis.
The Company has also revised its accounting treatment for a 17 year lease
of primary care facilities. Beginning in August 1997 the Company accounted for
the lease as an operating lease. The Company has restated previously issued
interim financial statements to account for this lease as a financing.
Accordingly, the Company has also revised the following Management's Discussion
and Analysis.
GENERAL
Over the past four years, the Company has altered its focus from a historic
dependence on government contracts to a focus on commercial managed care
markets. Prior to 1993, over 98% of PHP's revenue came from government-related
contracts. PHP's government service contracts required the Company to manage
health care providers in a variety of delivery settings. In 1992, management
realized that the knowledge, expertise and skills which the Company had acquired
in managing health care providers for government agencies could also be applied
to serve the commercial managed care market. At the same time, management
supplemented the Company's existing competencies with additional skills and
capabilities in order to take full advantage of the opportunities available in
commercial managed care. The Company added to existing capabilities by making
several key acquisitions, investing in information systems and recruiting
experienced managed care executives.
Revenue from the Commercial Managed Care Division has 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 Integrated System of Care ("ISOC") in New Jersey which
contracts to provide services with HMOs and insurance companies, (iii) family
health centers which are operated on a contract basis for large employers, and
(iv) the Company's participation in Connecticut Health Enterprises ("CHE"), a
provider sponsored integrated health care delivery network in Fairfield County,
which functions as an alliance between PHP, St. Vincent's Hospital, Fairfield
County physicians, and other hospitals and ancillary providers, and is marketed
as a total health care delivery system to insurers, HMOs, and government
agencies. The Company is compensated for its commercial managed health care
services in a variety of methodologies, including capitation, cost plus fee,
percentage of revenue, percentage of savings, fee-for-service, or some
combination of the foregoing.
In January 1998, the Company terminated its involvement with CHE. This
ISOC was not developing market share as quickly as the original business plan
projected which caused concern among the local market joint venture partners.
Consequently, the Company and the local market joint venture partners concurred
to allow local management to assume responsibility for the enterprise at this
time, consistent with the intentions of the original business plan, but at an
accelerated timeframe. The value of the Company's 30% ownership interest in CHE
remains under negotiation.
Effective October 31, 1997, the Company completed the acquisition of 18
health centers and related assets from HIP of New Jersey, Inc. ("HIP") for
approximately $80 million (including related costs). HIP is a New Jersey not-
for-profit health maintenance organization. In connection with the transaction,
the Company also entered into a Health Services Agreement with HIP pursuant to
which the Company will arrange for the provision of health care services for
approximately 200,000 HIP members over the next 20 years on an exclusive,
globally capitated basis.
To finance the transaction, pay related expenses and provide future working
capital, the Company obtained a $75 million secured credit facility from its
primary bank. The credit facility was in the form of (i) a term facility in the
principal amount of $40 million maturing in two years and (ii) a revolving
credit facility in the principal amount of $35 million.
On December 30, 1997, the Company completed a private placement of 70,000
shares of its Series B Convertible Preferred Stock at a purchase price of $1,000
per share, resulting in proceeds to
17
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
the Company of $70.0 million. The proceeds of the offering were used to repay
outstanding borrowings under the secured credit facility, and to pay related
issuance costs of $6.3 million.
Revenue from the Government Managed Care Division 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, 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 revenue 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 in 1996 and a net loss of $4.0 million in
1995.
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. The 1995 loss
resulted from a $8.0 million charge ($4.8 million after tax) related to costs in
excess of cash receipts under a certain contract. 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 periods indicated, certain items in
the Company's Condensed Consolidated Statements of Operations expressed as a
percentage of revenue:
<TABLE>
<CAPTION>
Three Months Nine Months
ended January 31, ended January 31,
----------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues............................................. 100.0% 100.0% 100.0% 100.0%
Medical costs........................................ 88.2 83.7 84.7 80.1
----- ----- ----- -----
Gross profit......................................... 11.8 16.3 15.3 19.9
General and administrative expenses.................. 6.7 16.1 9.6 13.9
Reserve for Medicaid receivables..................... --- 19.3 --- 6.0
Former chairman retirement package................... --- 4.5 --- 1.4
Restructuring charges................................ --- 5.0 --- 1.6
----- ----- ----- -----
Operating income (loss).............................. 5.1 (28.6) 5.7 (3.0)
Other expense........................................ (2.6) (1.9) (3.0) (1.7)
----- ----- ----- -----
Earnings (loss) before income taxes, and
extraordinary item................................ 2.5 (30.5) 2.7 (4.7)
Income tax expense (benefit)......................... 0.9 (11.5) 1.0 (1.8)
----- ----- ----- -----
Earnings (loss) before extraordinary item............ 1.6 (19.0) 1.7 (2.9)
Extraordinary item, net of tax - loss on early
extinguishment of debt............................ (4.3) --- (2.4) ---
----- ----- ----- -----
Net loss............................................. (2.7) (19.0) (0.7) (2.9)
Deemed dividend...................................... (0.4) --- (0.2) ---
----- ----- ----- -----
Net loss available to common shareholders............ (3.1)% (19.0)% (0.9)% (2.9)%
===== ===== ===== =====
</TABLE>
18
<PAGE>
PHP HEALTHCARE CORPORATION
RESULTS OF OPERATIONS
THE THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO
---------------------------------------------------
THE THREE MONTHS ENDED JANUARY 31, 1997
---------------------------------------
The following table indicates revenue by the Company's divisions and the
related percentage of total revenue:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1997
---------------- ----------------
Revenue % of Revenue % of
Division: (000's) Total (000's) Total
- --------- ------- ----- ------- -----
<S> <C> <C> <C> <C>
Commercial Managed Care $123,364 88.5 $28,033 55.1
Government Managed Care 16,069 11.5 22,810 44.9
-------- ----- ------- -----
Total $139,433 100.0 $50,843 100.0
======== ===== ======= =====
</TABLE>
The Company's revenue more than doubled, increasing by 174.2% or $88.6
million to $139.4 million for the quarter ended January 31, 1998 compared to
$50.8 million for the prior year quarter. This increase in revenue was the
result of an increase in the Commercial Managed Care Division offset by a
decrease in the Government Managed Care Division.
Commercial Managed Care Division revenue increased more than fourfold, or
$95.3 million, to $123.4 million for the quarter ended January 31, 1998,
compared to $28.0 million for the prior year third quarter. The majority of
this net increase, $91.7 million, is attributable to the Company's wholly owned
subsidiary, Pinnacle Health Enterprises, L.L.C. ("PHE") which operates in the
state of New Jersey. PHE's revenue increased because of $86.1 million in new
revenue resulting from operations related to the recently concluded HIP
transaction and a $5.6 million increase in the existing operational revenue with
Blue Cross Blue Shield of New Jersey, Inc. ("BCBSNJ") resulting from a change in
that business relationship wherein on March 1, 1997, PHP began to provide
globally capitated services. Another increase in revenue of $2.1 million was
provided by Virginia Chartered Health Plan, Inc. ("VACHP"), the Company's
majority owned Medicaid HMO in Virginia, resulting from a 44% increase in member
months compared with the prior year quarter. Revenue also increased by $1.5
million due to increased software sales at the Company's wholly owned
subsidiary, Health Cost Consultants ("HCC"), resulting from the release of a
windows-based version of HCC's primary software product.
Government Managed Care Division revenue decreased by $6.7 million or
29.4%, to $16.1 million for the quarter ended January 31, 1998, compared to
$22.8 million for the prior year third quarter. The majority of this net
decrease, in the amount of $8.4 million, resulted from the completion of one
total managed care correctional facilities project, three ambulatory care
projects and two mental health projects on various dates since the beginning of
the prior year third quarter. A further decrease in revenues of $2.2 million is
due to the Company's decision during the third quarter of fiscal 1997 to
terminate its long-term care line of business. These revenue decreases were
partially offset by a $1.8 million increase in revenue on a medical staffing
project resulting from an increase in the scope of services being provided, a
$1.1 million increase in revenue on a total managed care correctional facilities
project resulting from an increase in the scope of services being provided, and
a $1.0 million
19
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
increase in revenue resulting from one medical staffing and two total managed
care projects which commenced operations since the beginning of the prior year
third quarter.
The Company's gross profit increased by $8.1 million, to $16.4 million for
the quarter ended January 31, 1998, compared to $8.3 million for the prior year
third quarter. As a percentage of revenue, gross profit decreased to 11.8% for
the current year third quarter compared to 16.3% for the same period in the
prior year. This decrease in gross profit as a percentage of revenue is a
result of the growth in revenue from the HIP acquisition which has a lower gross
profit as a percentage of revenue. Gross profit increased in the Commercial
Managed Care Division and decreased in the Government Managed Care
Division.
The Commercial Managed Care Division gross profit increased by $9.6
million, from $6.4 million during the prior year quarter ended January 31, 1997,
compared to $16.0 million for the current year third quarter. The majority of
this net increase, $9.6 million, resulted from an increase in operations at PHE,
as discussed above. An additional gross profit increase of $1.4 million
resulted from the increase in software sales at HCC, related to the new windows-
based software version.
The Government Managed Care Division gross profit decreased by $1.5
million, from $1.9 million during the prior year quarter ended January 31, 1997,
compared to $0.4 million for the current year third quarter. The majority of
this net decrease, in the amount of $0.7 million, resulted from the completion
of several projects detailed above. An additional $0.6 million of the net
decrease resulted from an increase in secondary care costs at one total managed
care correctional facilities project.
General and administrative expenses increased by $1.2 million to $9.4
million for the quarter ended January 31, 1998 from $8.2 million for the prior
year third quarter. As a percentage of revenue, general and administrative
expenses decreased to 6.7% for the current year third quarter compared to 16.2%
during the prior year third quarter. This decrease in general and
administrative expenses as a percentage of revenue is a result of the growth in
revenue from the HIP acquisition which did not require a corresponding increase
in general and administrative expenses. This $1.2 million increase in general
and administrative expenses is reflective of the significant growth in the
Company's business since the prior year third quarter.
During the third quarter ended January 31, 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 on-going 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 comments in the local press,
that payment had 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. No further resolution or final
determination of the amounts due have been forthcoming from the District.
20
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
During the third quarter ended January 31, 1997, the Company recognized
$2.275 million in expense for a retirement package provided to the Company's
Founder, Chairman and Chief Executive Officer, Charles H. Robbins, upon his
retirement from the Company.
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 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 allows
the Company to concentrate its resources and energy on its core missions.
Ongoing building and facilities management needs are being 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 increased by $21.5 million to $7.0 million for the quarter
ended January 31, 1998, from an operating loss of $14.5 million for the prior
year third quarter. Operating margin increased to 5.1% from a loss of 28.6%.
Operating income increased primarily due to the net gross profit increase and
the one-time charges incurred during the prior year third quarter as discussed
above.
Interest expense increased by $2.5 million, to $3.9 million for the quarter
ended January 31, 1998, from $1.4 million for the quarter ended January 31,
1997. The increase is due to the interest expense incurred on the amounts
outstanding under the credit facility entered into to finance the HIP
transaction. As described in the footnotes to the financial statements and in
the "Liquidity and Capital Resources" section, that debt was repaid during the
third quarter ended January 31, 1998 with the proceeds from the sale of the
Series B Convertible Preferred Stock.
Interest income decreased by $44,000, to $426,000 for the quarter ended
January 31, 1998 from $470,000 for the quarter ended January 31, 1997.
The effective income tax rates of 35.0% in the third quarter of fiscal 1998
and 37.8% in the third quarter of fiscal 1997 represent the combined federal and
state income tax rates adjusted as necessary.
21
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Earnings before extraordinary item increased by $11.9 million or $1.04 per
share, to $2.3 million or $0.16 per share, from a loss of $9.6 million or $0.88
per share based on 14,266,000 and 11,005,000 diluted weighted average shares
outstanding for the quarters ended January 31, 1998 and 1997, respectively.
During the third quarter ended January 31, 1998, the Company incurred an
extraordinary loss on early extinguishment of debt of $6.0 million, or $0.42 per
share on a diluted basis. This extraordinary loss resulted from the repayment
of the entire outstanding borrowings under a credit facility which was used to
finance the Company's October 31, 1997 transaction with HIP. This credit
facility was repaid with the $63.7 million in net proceeds resulting from the
Company's December 1997 private placement of 70,000 shares of its Series B
Convertible Preferred Stock. The Company incurred $3.0 million in cash bank
fees, $6.85 million in non-cash fees related to stock warrants issued to the
bank, and $150,000 in other related expenses to secure the credit facility. The
$6.0 million extraordinary item represents the complete write-off of these
credit facility costs after recognizing $725,000 as interest expense for the
period borrowings that were outstanding under the facility, and after $3.246
million in income tax effect.
During the third quarter ended January 31, 1998, the Company recorded a
preferred stock non-cash deemed dividend of $583,000 or $0.04 per share on a
diluted basis. This dividend results from a provision in the Series B
Convertible Preferred Stock whereby the conversion price is determined by
applying a discount which increases over a twelve month period from 5% to a
maximum of 9% by December 1998. This discount is being recognized ratably as a
non-cash deemed dividend over the applicable twelve month period. For the
current quarterly period, $583,000 represents one month of accretion of the
discount.
RESULTS OF OPERATIONS
THE NINE MONTHS ENDED JANUARY 31, 1998 COMPARED TO
--------------------------------------------------
THE NINE MONTHS ENDED JANUARY 31, 1997
--------------------------------------
The following table indicates revenues by the Company's divisions and the
related percentage of total revenues:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1997
---------------- ----------------
Revenues % of Revenues % of
Division: (000's) Total (000's) Total
- --------- ------- ----- ------- -----
<S> <C> <C> <C> <C>
Commercial Managed Care $200,425 79.9 $ 87,503 53.7
Government Managed Care 50,503 20.1 75,355 46.3
-------- ----- -------- -----
Total $250,928 100.0 $162,858 100.0
======== ===== ======== =====
</TABLE>
22
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
The Company's revenue increased by 54.1% or $88.1 million to $250.9 million
for the nine months ended January 31, 1998 compared to $162.8 million for the
prior year period. This increase in revenue was the result of an increase in the
Commercial Managed Care Division offset by a decrease in the Government Managed
Care Division.
Commercial Managed Care Division revenue more than doubled, increasing by
$112.9 million or 129.0%, to $200.4 million for the nine months ended January
31, 1998, compared to $87.5 million for the same period during the prior year.
The majority of this net increase, $105.9 million, is attributable to the
Company's wholly owned subsidiary, PHE, which operates in the state of New
Jersey. This increase is the result of $85.6 million in new operational revenue
and $5.4 million in transition revenue related to the recently concluded HIP
transaction, and a $15.0 million increase in the existing operational revenue
with BCBSNJ resulting from a change in that business relationship wherein on
March 1, 1997, PHP began to provide globally capitated services. VACHP's
revenue increased by $6.6 million resulting from a 53% increase in member months
compared with the same period in the prior year. Additional revenue increases
totaling $8.4 million occurred as follows: (i) a $5.3 million increase in
revenue from the Company's ISOC development, management, and operations related
to its strategic ventures in Connecticut, Louisiana and Georgia, (ii) a $2.0
million increase in revenue resulting from a growth in activity at the Company's
various employer health centers under management for Bethlehem Steel, GTE, and
Northwestern Steel and Wire, and (iii) a $1.1 million increase in sales at the
Company's wholly owned subsidiary, HCC, resulting from the release of a windows
based version of its primary software product.
These Commercial Managed Care Division revenue increases were partially
offset by a decrease in revenue at Chartered Health Plan, Inc. ("CHP"), the
Company's wholly owned Medicaid HMO in the District of Columbia. CHP's revenue
decreased by $7.8 million resulting from a 12.5% decrease in member months
compared with the same period in the prior year and a 14.6% reduction in the
contractual premium rate effective November 1, 1996.
Government Managed Care Division revenue decreased by $24.9 million or
33.0%, to $50.5 million for the nine months ended January 31, 1998, compared to
$75.4 million for the prior year nine month period. The majority of this net
decrease, or $24.5 million, resulted from the completion of five ambulatory care
projects, three mental health projects and one total managed care correctional
facilities project on various dates since the beginning of the prior year nine
month period. A further decrease in revenue of $13.2 million is due to the
Company's decision during the third quarter of fiscal 1997 to terminate its
long-term care line of business. These revenue decreases were partially offset
by a $4.9 million increase in revenue on one total managed care correctional
facilities project resulting from an increase in the scope of services being
provided, and a $1.9 million increase in revenue attributable to an increase in
the scope of services and/or an increase in volume at four ambulatory care
projects and one medical staffing project. In addition, a $3.6 million increase
is due to one medical staffing project which commenced operations since the
beginning of the prior year nine month period, and a $2.6 million increase is
due to one ambulatory care project, one medical staffing project, one mental
health project, and two total managed care projects which commenced operations
since the beginning of the prior year nine month period.
23
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
The Company's gross profit increased by 18.6% or $6.0 million, to $38.3
million for the nine months ended January 31, 1998, compared to $32.3 million
for the prior year period. As a percentage of revenue, gross profit decreased to
15.3% for the current nine month period compared to 19.9% during the prior year.
This decrease in gross profit as a percentage of revenue is a result of the
growth in revenue from the HIP acquisition which has a lower gross profit as a
percentage of revenue. Gross profit increased in the Commercial Managed Care
Division and decreased in the Government Managed Care Division.
The Commercial Managed Care Division gross profit increased by $10.4
million or 37.7%, from $25.2 million during the nine months ended January 31,
1997, compared to $35.6 million for the current year nine month period. The most
significant cause of this increase, in the amount of $11.3 million, resulted
from the operations and transition activities related to the recently concluded
HIP transaction and additional operating revenues with BCBSNJ, as discussed
above. For the nine month period ended January 31, 1998, gross profit also
increased by $1.3 million compared to the prior year as a result of the
Company's new business venture to establish a state-wide ISOC in Louisiana for a
large physician organization. Offsetting these increases was a decrease of $3.4
million at CHP resulting from the reduction in member months and contractual
premium rate.
The Government Managed Care Division gross profit decreased by $4.5 million
or 62.5%, from $7.2 million during the prior year nine months ended January 31,
1997, compared to $2.7 million for the current year nine month period. The
majority of this net decrease, in the amount of $3.5 million, resulted from the
completion of several projects detailed above. An additional decrease of $1.4
million resulted from an increase in secondary care costs at a total managed
care correctional facilities project. Gross profit also decreased by $0.4
million as a result of the Company's decision to terminate its long-term care
line of business during the prior year third quarter. These decreases were
offset by an increase of $0.5 million in gross profit related to one new
ambulatory care project and two new medical staffing projects which commenced
operations since the beginning of the prior year nine month period.
General and administrative expenses increased by $1.5 million to $24.1
million for the nine months ended January 31, 1998 from $22.6 million for the
same period in the prior year. As a percentage of revenue, general and
administrative expenses decreased to 9.6% for the current year nine month period
compared to 13.9% during the prior year. This decrease in general and
administrative expenses as a percentage of revenue is a result of growth in
revenue from the HIP acquisition which did not require a corresponding increase
in general and administrative expenses. This $1.5 million increase in general
and administrative expenses is reflective of the significant growth in the
Company's business since the prior year period.
During the period ended January 31, 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 on-going 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 comments in the local press, that
payment had been blocked. The Company remains committed to pursuing its
24
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
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. No further resolution or final
determination of the amounts due have been forthcoming from the District.
During the period ended January 31, 1997, the Company recognized $2.275
million in expense for a retirement package provided to the Company's Founder,
Chairman and Chief Executive Officer, Charles H. Robbins, upon his retirement
from the Company.
During the nine months 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 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 Board of Directors 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. Ongoing building and facilities management needs are being
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 increased by $19.7 million to $14.2 million for the nine
months ended January 31, 1998, from an operating loss of $5.5 million for the
prior year period. Operating margin increased to 5.7% from a loss of 3.0%.
Operating income increased primarily due to the net gross profit increase and
the one-time charges incurred in the prior year third quarter, as discussed
above.
Interest expense increased by $3.3 million, to $7.4 million for the nine
months ended January 31, 1998, from $4.1 million for the nine months ended
January 31, 1997. The increase is due to the interest expense incurred on the
amounts outstanding under the credit facility entered into to finance the HIP
transaction. As described in the footnotes to the financial statements and in
the "Liquidity and Capital Resources" section, that debt was repaid during the
third quarter ended January 31, 1998 with the proceeds from the sale of the
Series B Convertible Preferred Stock.
Interest income decreased by $0.6 million to $1.1 million for the nine
months ended January 31, 1998 from $1.7 million for the nine months ended
January 31, 1997. This decrease is due to a decrease in cash available for
short-term investment as a result of the BCBSNJ health center acquisition
completed in February 1997.
25
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
The effective income tax rates of 35.0% for the nine months ended January
31, 1998 and 38.0% for the nine months ended January 31, 1997 represent the
combined federal and state income tax rates adjusted as necessary.
Earnings before extraordinary item increased by $9.3 million or $0.76 per
share, to $4.5 million or $0.32 per share, from a loss of $4.8 million or $0.44
per share based on 13,951,000 and 10,986,000 diluted weighted average shares
outstanding for the nine months ended January 31, 1998 and 1997,
respectively.
During the nine months ended January 31, 1998, the Company incurred an
extraordinary loss on early extinguishment of debt of $6.0 million, or $0.43 per
share on a diluted basis. This extraordinary loss resulted from the repayment
of the entire outstanding borrowings under a credit facility which was used to
finance the Company's October 31, 1997 transaction with HIP. This credit
facility was repaid with the $63.7 million in net proceeds resulting from the
Company's December 1997, private placement of 70,000 shares of its Series B
Convertible Preferred Stock. The Company incurred $3.0 million in cash bank
fees, $6.85 million in non-cash fees related to stock warrants issued to the
bank, and $150,000 in other related expenses to secure the credit facility. The
$6.0 million extraordinary item represents the complete write-off of these
credit facility costs after recognizing $725,000 as interest expense for the
period borrowings that were outstanding under the facility, and after $3.246
million in income tax effect.
During the nine months ended January 31, 1998, the Company recorded a
preferred stock non-cash deemed dividend of $583,000 or $0.04 per share on a
diluted basis. This dividend results from a provision in the Series B
Convertible Preferred Stock whereby the conversion price is determined by
applying a discount which increases over a twelve month period from 5% to a
maximum of 9% by December 1998. This discount is being recognized ratably as a
non-cash deemed dividend over the applicable twelve month period. For the
current quarterly period, $583,000 represents one month of accretion of the
discount.
26
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended January 31, 1998, operations provided $19.1
million in cash. This represents a $29.6 million increase in cash provided by
operations when compared with the $10.5 million used by operations during the
prior year nine month period.
This increase in cash provided by operations is primarily due to: (i) an
increase in net earnings before extraordinary item of $9.0 million, (ii) a $26.5
million comparative increase in cash related to claims payable - medical
services resulting from the commencement of the new HIP business in November
1997, (iii) a $6.2 million comparative increase in cash related to deferred
income taxes resulting from the timing and deductibility of certain aspects of
the Company's operating results, (iv) a $3.6 million comparative increase in
cash related to a decrease in other current assets, and (v) a $3.3 million
comparative increase in cash related to an increase in depreciation and
amortization expense. These increases were reduced by comparative decreases in
cash related to an $11.7 million increase in accounts receivable and a $7.8
million decrease in accounts payable.
At April 30, 1997 and January 31, 1998, the Company had accounts receivable
from the District of Columbia amounting to $12.0 million and $14.3 million,
respectively, related to its Medicaid services contract. The receivable has
increased since April 30, 1997 primarily resulting from delayed payment for
newborn enrollees.
Investing activities used $20.8 million in cash during the nine months
ended January 31, 1998, compared to a use of $8.2 million during the prior year
period, an increase in cash used by investing activities of $12.6 million. The
current period includes $30.3 million in cash used for the HIP acquisition. The
current period also includes $16.4 million in cash provided by the Company's
disposition of its interest in the REIT, which purchased the primary care
facilities in New Jersey from BCBSNJ, and the REIT's repayment of notes payable
due the Company. In addition, during the current period, the Company purchased
$9.0 million in property and equipment and received $2.1 million upon the sale
of certain items of property and equipment.
Financing activities provided $10.0 million in cash during the nine months
ended January 31, 1998, compared to $0.8 million used during the prior year
period, an increase in cash provided by financing activities of $10.8 million.
The current year period includes: (i) net proceeds of $63.7 million from the
sale of the Series B Convertible Preferred Stock, (ii) $40.0 million in bank
term note repayments, (iii) $11.7 million in net revolving promissory note
repayments, (iv) $3.1 million paid for debt issuance costs, (v) $2.6 million
resulting from the sale of stock to a private investor, (vi) $2.4 million used
to purchase treasury shares in connection with the BCBSNJ transaction completed
in February 1997, (vii) $2.3 million in routine repayments on various notes
payable, (viii) $2.0 million in net repayments of receivables from officers,
primarily related to the repayment of amounts outstanding by the former CEO, and
(ix) $1.3 million in proceeds from the exercise of stock options.
27
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
To finance the HIP transaction (see Note 4), pay related expenses and
provide future working capital, the Company obtained a $75 million
collateralized credit facility (the "Credit Agreement") from its primary bank
dated as of October 31, 1997, which superseded the pre-existing primary banking
facility. Under the Credit Agreement, the Company had available up to $75
million in principal amount of senior collateralized financing in the form of
(i) a term facility in the principal amount of $40 million maturing in two years
(the "Term Facility"), and (ii) a revolving credit facility in an aggregate
principal amount of up to $35 million (the "Revolving Facility"). See Note 5
for a complete description of the terms and conditions associated with this
Credit Agreement.
The Credit Agreement was intended to provide temporary financing until the
Company obtained permanent financing through the issuance of debt securities or
equity securities.
On December 30, 1997, the Company completed a private placement of 70,000
shares of its Series B Convertible Preferred Stock at a purchase price of $1,000
per share, resulting in net proceeds to the Company of $63.7 million. See Note
6 for a complete description of the terms and conditions associated with this
preferred stock placement. The proceeds of the offering were used to repay all
outstanding borrowings under the Credit Agreement. Upon repayment of the
outstanding borrowings under the Credit Agreement, the Company has available a
$30 million revolving promissory note for working capital and other Company
purposes.
The Company believes that the current cash and cash equivalents,
anticipated cash flow generated by operations, and its borrowing capabilities
under the $30 million revolving promissory note in the Credit Agreement will be
sufficient for known future capital needs of the Company. 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.
28
<PAGE>
PHP HEALTHCARE CORPORATION
PART II - OTHER INFORMATION
- ------- -----------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
As previously reported in the Company's Current Report on Form 8-K filed
on January 6, 1998, which is incorporated herein by reference, on December 30,
1997, the Company completed a private placement of 70,000 shares of its Series B
Convertible Preferred Stock at a purchase price of $1,000 per share resulting in
proceeds to the Company of $70.0 million. The Company also issued warrants to
acquire 700 shares of its Series B Convertible Preferred Stock to the placement
agents. The issuance of the preferred stock and the warrants are exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
As previously reported on the Company's Form 10-Q for the quarterly period
ended October 31, 1997, which is incorporated herein by reference, the Company's
annual meeting of shareholders was held on November 3, 1997.
PART II - OTHER INFORMATION (CONTINUED)
- ------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) The documents required to be filed as exhibits to this report under
Item 601 of Regulations S-K are listed in the Exhibit Index
included elsewhere in this report, which list is incorporated
herein by reference.
(b) Reports on Form 8-K filed during the three month period ended
January 31, 1998:
(1) Acquisition of 18 health centers and related assets from HIP
of New Jersey, Inc. ("HIP") and related agreements, filed
November 17, 1997.
(2) Private placement of Series B Convertible Preferred Stock and
related agreements, filed January 6, 1998.
(3) Form 8-K/A to the 8-K dated as of November 17, 1997:
Repayment of outstanding borrowings using net proceeds from
sale of Series B Convertible Preferred Stock, and historical
and pro forma financial information required in connection
with the HIP transaction, filed January 20, 1998.
29
<PAGE>
PHP HEALTHCARE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
PHP HEALTHCARE CORPORATION
--------------------------
(Registrant)
By: /s/ Anthony M. Picini
----------------------
ANTHONY M. PICINI
Executive Vice President and
Chief Financial Officer
Date: June 3, 1998
30
<PAGE>
PHP HEALTHCARE CORPORATION
EXHIBIT INDEX
Exhibit Item Page
- ------- ---- ----
15.1 Letter of Coopers & Lybrand, L.L.P. regarding unaudited
interim financial statements 32
27 Financial Data Schedule 33
<PAGE>
PHD HEALTHCARE CORPORATION
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: PHP Healthcare Corporation, Registrations on Form S-3 and on Form S-8
We are aware that our report, which includes an explanatory paragraph regarding
the restatement of previously issued financial statements to reflect revised
accounting for certain contract costs and certain long-term real estate leases,
dated March 17, 1998, on our review of interim financial information of PHP
Healthcare Corporation and consolidated subsidiaries as of January 31, 1998 and
for the three month and nine month periods ended January 31, 1998 and 1997, and
included in the Company's quarterly report on Form 10-Q, as amended, for the
quarter ended January 31, 1998, is incorporated by reference in Registration
Statement (No. 333-01011) on Form S-3 and in Registration Statements (Nos. 333-
41577, 333-26403, and 333-47093) on Form S-8. Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
prospectus and registration statement prepared or certified by us within the
meaning of Section 7 and 11 of that Act.
Coopers & Lybrand, L.L.P.
Washington, D.C.
June 2, 1998
<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> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 24,101
<SECURITIES> 0
<RECEIVABLES> 58,955
<ALLOWANCES> 137
<INVENTORY> 2,103
<CURRENT-ASSETS> 96,819
<PP&E> 93,025
<DEPRECIATION> 18,329
<TOTAL-ASSETS> 252,193
<CURRENT-LIABILITIES> 64,153
<BONDS> 66,419
64,283
0
<COMMON> 148
<OTHER-SE> 31,280
<TOTAL-LIABILITY-AND-EQUITY> 252,193
<SALES> 0
<TOTAL-REVENUES> 250,928
<CGS> 0
<TOTAL-COSTS> 212,585
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,353
<INCOME-PRETAX> 6,863
<INCOME-TAX> 2,401
<INCOME-CONTINUING> 4,462
<DISCONTINUED> 0
<EXTRAORDINARY> 6,029
<CHANGES> 0
<NET-INCOME> (2,150)
<EPS-PRIMARY> (0.19)<F1>
<EPS-DILUTED> (0.15)<F2>
<FN>
<F1>EPS - Basic per SFAS No. 128, from net loss. Basic EPS from continuing
operations: $0.34.
<F2>EPS - Diluted per SFAS No. 128, from net loss. Diluted EPS from continuing
operations: $0.28.
</FN>
</TABLE>
