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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1998, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number : 0-16235
PHP HEALTHCARE CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 54-1023168
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11440 COMMERCE PARK DRIVE
RESTON, VIRGINIA 20191
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(Address of principal office) (zip code)
Registrant's Telephone Number, Including Area Code: (703) 758-3600
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
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Common Stock, $0.01 par value New York Stock Exchange
with associated Preferred Stock
Purchase Rights
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant (based on the closing price of such stock as reported on July 31,
1998 through the New York Stock Exchange) was approximately $34 million.
There were 11,547,343 shares of common stock, $0.01 par value per share,
outstanding as of July 31, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement, which is expected
to be filed with the Securities and Exchange Commission within 120 days after
the end of the registrant's fiscal year, are incorporated by reference into Part
III, Items 10, 11, 12 and 13 of this report.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 16
Item 3. Legal Proceedings....................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders..................................... 17
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters................ 19
Item 6. Selected Financial Data................................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 22
Item 8. Financial Statements and Supplementary Data............................................. 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 28
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 28
Item 11. Executive Compensation.................................................................. 28
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 29
Item 13. Certain Relationships and Related Transactions.......................................... 29
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................ 29
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FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
For this purpose, any statements contained herein that are not statements of
historical fact, including without limitation, certain statements under "Item 1.
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere herein regarding
industry prospects and the Company's results of operations or financial
position, may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the caption "Business-Risk Factors," among others,
could cause actual results to differ materially from those indicated by forward-
looking statements made herein and presented elsewhere by management from time
to time. Such forward-looking statements represent management's current
expectations and are inherently uncertain. Investors are warned that actual
results may differ from management's expectations.
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PART I
ITEM 1. BUSINESS
PHP Healthcare Corporation ("PHP" or the "Company") was organized as a
Delaware corporation in 1986 and succeeded to the business of a predecessor
corporation by merger in March 1986. The predecessor of PHP Healthcare
Corporation was originally organized under Delaware law in 1976 and
reincorporated under Missouri law in 1981. (Unless the context requires
otherwise, the terms "Company" and "PHP" include PHP Healthcare Corporation, its
subsidiaries and its predecessor corporation.)
COMPANY OVERVIEW
A medical management company, PHP manages medical risk through the
acceptance of global capitation arrangements with HMOs and other health care
payors. The Company also offers a range of management services to the physician
groups and hospitals that participate in provider-based networks developed by
PHP. Because health care is a local service, PHP's managed delivery systems are
tailored to the needs of individual communities and patient populations.
Operating primarily in New Jersey, the District of Columbia and Virginia, PHP
has more than 10,000 physicians employed or under contract and responsibility
for more than 300,000 covered lives.
PHP was originally founded as a company focusing on the provision of health
care services to government agencies. PHP historically was comprised of two
divisions: the Commercial Managed Care Division and the Government Managed Care
Division. The Commercial Managed Care Division serviced the needs of third
party payors, self-insured employers and providers through its integrated health
care delivery networks and included the operations of its Medicaid health
maintenance organizations ("HMOs"), D.C. Chartered Health Plan, Inc. ("CHP") and
Virginia Chartered Health Plan, Inc. ("VACHP"). The operations of its Government
Managed Care Division included the management of hospitals (both acute care and
psychiatric), skilled nursing facilities, staffing services, outpatient surgery,
and primary care settings.
The Government Managed Care Division represented 99% of total revenue in
1992. It was at this time that the Company began applying the knowledge,
expertise and skills which it had acquired in managing health care providers for
government agencies to the commercial managed care market. As a result of this
shift in emphasis, revenues from operations that had previously been reported as
the Government Managed Care Division now represent LESS THAN 10% of total
revenue based on results for the quarter ended April 30, 1998. Therefore, the
Company no longer presents the Government Managed Care Division as a separate
line of the business.
The Company derives its revenues from globally capitated long-term
contracts with health maintenance organizations, premiums from two Medicaid
programs, fee for service billings for care provided directly to patients, as
well as cost plus fee, percentage of revenue or percentage of savings
arrangements. Global capitation arrangements now represent more than half of the
Company's revenues, through contracts held by PHP's wholly-owned subsidiary,
Pinnacle Health Enterprises (PHE). Under these arrangements, the Company,
through its network of associated providers, is responsible for the majority of
covered health care services to enrollees and contracts with hospitals and other
healthcare providers for the balance of the covered services. Because the
Company is obligated to provide medical services for fixed fees under globally
capitated arrangements, PHP's profitability may vary, based on the ability of
the Company and its associated providers to control the costs of the health care
provided in return for such fixed fees.
Revenues for the Company's two Medicaid HMOs take the form of monthly
premiums for the Medicaid enrollees that have either chosen or been assigned to
one of these plans. Premiums are set through contracts with the Medicaid
departments and typically run for two or three years with cost of living
escalations. Under these contracts, PHP is responsible for the delivery of
health care to enrollees and contracts with hospitals and other health care
providers for the balance of the covered services. Because the Company is
obligated to provide medical services for fixed premiums, PHP's profitability
may vary based on the ability of the Company and its contracted providers to
control the cost of the health care providers in return for such premiums.
In its markets, PHP affiliates with physicians, hospitals and other
providers who are seeking the expertise and resources necessary to function
effectively in health care markets which are evolving from fee-for-service to
managed care payor systems. Although the Company is centered around the
organization and management of primary care physicians, it is becoming
increasingly important for the Company to create networks of associated
providers such as hospitals, specialists, ancillary services, and pharmacies.
The Company manages the operation of these networks by centralizing
administrative
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functions and providing operating information systems to coordinate and
integrate the delivery of health care through clinical protocols, utilization
review, outcomes measurement and financial reporting. When the Company organizes
primary care physicians and creates networks of associated providers, it offers
medical group practices and independent physicians a range of affiliation
models. These affiliations include the acquisition of physician practice assets,
equity participation in the Company or affiliation on a contractual basis. The
Company also has typically entered into long-term contracts with the affiliated
hospitals and other ancillary providers which are part of its networks.
Despite widespread consolidation in the hospital and physician communities,
the markets in which the Company is operating remain highly fragmented. In most
markets, integrated heath care delivery networks do not exist and the
operational aspects of health care delivery often lack the centralized
management and scale efficiencies enjoyed by large, well-managed service
businesses. In addition, the physician community generally does not have access
to capital or the integrated information systems that are necessary to
effectively enter into risk sharing arrangements and to provide financial and
clinical information desired by payors. Likewise, hospitals generally do not
have such integrated information systems and are generally unwilling to assume
risk for utilization they do not control. The environment has become
increasingly complex for both physicians and hospitals with growing control by
payors over practice patterns and patient flows. The cost pressures payors are
experiencing are causing them to seek greater operational efficiencies and look
for organizations that can accept financial risk for the delivery of health
care. This desire by payors to share financial risk with providers has
increased the need for management, information systems, capital and scale.
RECENT EVENTS
Net Losses; Liquidity Issues. As more fully discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations", the
Company incurred net losses of $47.6 million in 1998, of $4.0 million in 1997,
of $4.0 million in 1995 and of $9.3 million in 1994.
As a result of the decline in the Company's financial performance over the
last few years, it is currently exploring alternatives for maintaining adequate
liquidity. Under the terms and conditions of its credit facility, the Company is
currently permitted to borrow up to $80 million. As of the date of this report,
the Company has utilized the full amount of the credit facility in the form of
$77 million in advances and $3 million in outstanding letters of credit.
Additionally, as of April 30, 1998, as a result of the net loss in 1998 the
Company was not in compliance with certain provisions of its credit facility.
The Company is in discussions with its lender to waive current non compliance
and to amend existing financial covenants to avoid expected future non
compliance. The Company also plans to negotiate with its lender either to
increase its borrowing capacity under its existing credit facility or enter into
a new credit facility with increased borrowing capacity, or to pursue
alternative financing sources. There can be no assurance that the Company will
succeed in its attempt to increase its existing credit facility or obtain a new
credit facility or obtain alternative financing sources, on satisfactory terms.
The Company expects additional improvements to liquidity through: (i)
continued vigorous pursuit of outstanding receivables including the Medicaid
claim with the D.C. Department of Human Services ("DCDHS" or "Department") and
Maryland Department of Public Safety and Correctional Services, (ii) the sale of
non strategic business operations and other assets, and (iii) cost reductions
from the elimination of inefficient practice sites and redundant administrative
activities.
Revision of Financial Statements. In June, 1998, the Company announced
revised 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. As a
result, the fiscal year 1995 financial statements have been restated to reduce
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 results in the reduction of fiscal year 1996
revenues and direct costs by approximately $900,000 and $915,000, respectively.
Immaterial adjustments to revenue were also recorded in fiscal year 1997.
The Company also then announced revised accounting treatment for a 17-year
lease of primary care facilities. Beginning in August 1997, the Company
accounted for this lease as an operating lease. The Company has restated
previously issued interim financial statements to account for this lease as a
financing rather than an operating lease as a result of the Company's continuing
involvement with the lessor. The effect of this restatement on net earnings and
per share amounts for the nine months ended January 31, 1998 was immaterial.
There is no effect on years prior to 1998.
Stock Repurchase Plan. On April 28, 1998, the Company announced that its
Board of Directors authorized the repurchase of up to 3 million shares of Common
Stock at prevailing prices at the discretion of Company management from time to
time on the open market, through block purchases, or in privately negotiated
transactions. As of April 30, 1998, the Company had repurchased 149,800 common
shares at a cost of $2.6 million. From May 1, 1998 through July 27, 1998, the
Company repurchased an additional 1,643,000 common shares at a cost of $21.8
million, including 1,000,000 common shares purchased from the Company's former
chairman at a cost of $16.8 million. PHP also announced that
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its Board authorized management to explore the possibility of repurchasing some
or all of PHP's Series B Convertible Preferred Stock through privately
negotiated transactions, from time to time and at management's discretion. From
June 3 through June 11, 1998, the Company repurchased 25,320 shares of the
Series B Convertible Preferred Stock at a cost of $28.7 million.
The number of additional shares to be purchased and the timing of the
repurchases will depend upon the availability of funds, the price of the Common
Stock, general market conditions, and other factors. There is no guarantee as
to the exact number of shares to be repurchased, and the Company may discontinue
repurchases at any time. Any repurchase of shares in the market will be funded
through the Company's available cash and any borrowings under the Company's
credit facility. Any shares repurchased may be held by a subsidiary or as
treasury stock and may be available for reissuance in connection with the
Company's stock option plans, conversions of existing convertible securities, or
for other corporate purposes.
Dilutive Effect of Series B Preferred Stock. As of July 31, 1998, of the
70,000 shares of Series B Convertible Preferred Stock originally issued (or
reserved for issuance upon the exercise of warrants), 25,320 preferred shares
had been repurchased by a subsidiary of the Company, 7,095 preferred shares had
been converted into 1,275,653 shares of common stock, and 37,585 preferred
shares remained issued and outstanding. The outstanding Series B Preferred
shares have an aggregate liquidation preference of $37.6 million and are
convertible into common stock at a floating conversion price equal to the lowest
trading price of the common stock for the 22 trading days immediately preceding
the conversion date, less a discount of up to 9%. Based on the current
conversion price of $0.93 per share (equal to the 22-day low trading price of
$1.00 less a 6.25% discount) the 37,585 outstanding shares of Series B Preferred
Stock could be converted into up to approximately 40.4 million shares of common
stock, subject to certain limitations.
On July 29, 1998, the Company suspended conversion of the Series B
Preferred Stock into common shares. The Company suspended conversion in part
because the registration statement that was filed covering common shares to be
issued upon conversion did not provide for enough common shares in light of the
Company's current stock market price of less than $4.00 per share. In addition,
as holders of Preferred Stock are limited in the number of shares that may be
converted by the requirement that no such holder shall, following conversion,
own more than 4.9% of the outstanding common stock of the Company, the Company
is reviewing such holders' compliance with this requirement and other legal
requirements. The current market price was such that conversion of the
outstanding preferred shares would potentially result in approximately 85% of
the holders exceeding the 4.9% limitation.
Changes in Strategic Focus. The Company has decided to narrow its
strategic focus and concentrate on its globally capitated contracts in New
Jersey, its Medicaid HMOs in the District of Columbia and Virginia, and its
employer-based managed care operations. In implementing that decision, the
Company recently announced that it was discontinuing its correctional care line
of business and would discontinue other government contract activities as
current contracts expire. The Company also announced its withdrawal as a
minority partner from three physician practice management joint ventures
established over the past three years - Connecticut Health Enterprises, L.L.C.,
Georgia Health Enterprise, L.L.C., and LAMMICO Practice Management, L.L.C. As a
result of the exit from these activities, the Company recorded reserves and
charges of $12 million for the year ended April 30, 1998.
Agreement with John Kluge. The Company has entered into an agreement with
John W. Kluge permitting Mr. Kluge to acquire up to an additional 575,000 shares
of common stock. The prior approval of the Company's Board was required so that
Mr. Kluge could acquire beneficial ownership of more than 15% of the Company's
outstanding common stock without becoming (i) an "Acquiring Person" under the
terms of the Company's shareholder rights plan, or (ii) an "interested
stockholder" under Section 203 of the Delaware General Corporation Law. Under
the agreement, Mr. Kluge agreed that all shares of common stock acquired by him
or his affiliates or associates after the date of the agreement would be voted,
at the holder's option, either (i) in accordance with the recommendation of the
Board of Directors of the Company, or (ii) pro rata in the same manner and
proportion as the votes cast by other stockholders.
INDUSTRY
The Health Care Financing Administration estimates that national health
care spending now exceeds $1 trillion, with physicians controlling more than 80%
of the overall expenditures. The American Medical Association reports more than
693,000 physicians are actively involved in patient care in the United States,
with a growing number participating in multi-specialty or single-specialty
groups. Expenditures directly attributable to physicians are estimated at $200
billion.
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Concerns over the cost of health care have resulted in the increasing
prominence of managed care. As markets evolve from traditional fee-for-service
medicine to managed care, HMOs and health care providers confront market
pressures to provide high quality health care in a cost-effective manner.
Employer groups have begun to bargain collectively in an effort to reduce
premiums and to bring about greater accountability of HMOs and providers with
respect to accessibility, choice of provider, quality of care and outcome
management and other indicators of consumer satisfaction. The focus on cost-
containment and outcome management has placed small to mid-sized physician
groups and solo practices at a disadvantage because they typically have higher
operating costs and little purchasing power with suppliers, they often lack the
capital to purchase new technologies that can improve quality and reduce costs,
and they do not have the cost accounting and quality management networks
necessary for entry into sophisticated risk-sharing contracts with payors.
Industry experts expect that the medical delivery system may evolve into a
system where the primary care physician manages and directs health care
expenditures. As a result of these developments, primary care physicians have
increasingly become the conduit for the delivery of medical care by acting as
"case managers" and directing referrals to certain specialists, hospitals,
alternate-site facilities and diagnostic facilities. By contracting directly
with payors, organizations that control primary care physicians are able to
reduce the cost of delivering medical services.
As a result of the trends toward increased HMO enrollment and physician
membership in group medical practices, health care providers have sought to
reorganize themselves into health care delivery networks that are better suited
to the managed care environment. Physician groups and Independent Practice
Associations (IPAs) are joining with hospitals, pharmacies and other
institutional providers in various ways to create vertically integrated delivery
networks that provide medical and hospital services ranging from community-based
primary medical care to specialized inpatient services. These health care
delivery networks agree with HMOs to provide hospital and medical services to
enrollees pursuant to full risk contracts. Under these contracts, providers
assume the obligation to provide both the professional and institutional
components of covered health care services to the HMO enrollees.
The Company believes many physicians are concluding that in order to
compete effectively in such an emerging environment, they must obtain control
over the delivery and financial impact of a broader range of health care
services through global capitation. To this end, groups of independent
physicians and medium to large medical groups are taking steps to assume
responsibility and risk for health care services that they do not provide, such
as hospitalization. Physicians and other providers are increasingly abandoning
traditional private practice in favor of affiliations with larger organizations,
such as the Company, that offer skilled and innovative management, sophisticated
information systems and capital resources. Many payors and their intermediaries,
including governmental entities and HMOs, are increasingly looking to outside
providers of physician and hospital services to develop and maintain quality
outcomes, management programs and patient care data. While the acceptance of
greater responsibility and risk provides the opportunity to retain and enhance
market share and operate at a higher level of profitability, medical groups and
independent physicians are concluding that the acceptance of global capitation
carries with it significant requirements for infrastructure, information
systems, capital, network resources and financial and medical management. As a
result, providers and payors are increasingly turning to organizations such as
the Company to provide the resources necessary to function effectively in a
managed care environment.
STRATEGY
The Company's strategy is to meet the needs of a changing health care
market by developing and managing integrated health care delivery networks which
the Company believes enables it to deliver high quality, cost effective medical
services in a managed care environment. In essence, the Company serves as an
outsourcing option for both payors and providers who do not possess the network
management skills, capital and independence to develop and manage an integrated
health care delivery network. The key elements of this strategy include: (i)
focusing on global capitation; (ii) creating and developing fully integrated
health care delivery networks; (iii) utilizing information systems to enhance
cost effectiveness and clinical outcomes; (iv) focusing on primary care
physicians who represent the initial point of access into an integrated health
care delivery network; (v) designing patient oriented programs; and (vi)
developing new markets through selective acquisitions and joint ventures.
Focusing on Global Capitation. The Company designs physician and hospital
networks in a particular local market to meet the needs of HMOs and other
managed care payors in specified service areas that are looking to globally
capitate providers. The Company identifies and recruits primary and specialty
care physicians and integrates such physicians with hospitals into a network
that provides comprehensive medical coverage to enrollees. The Company seeks to
benefit from the movement among employers and payors to reduce health care costs
and the trend toward global capitation. The Company
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believes that its network structure and management techniques enable it to
effectively contain costs and negotiate favorable global capitation and risk-
sharing arrangements through implementation of information networks, utilization
and quality management networks, referral procedures, risk management programs,
and assistance with physician credentialing and contracting with payors.
Creating and Developing Fully Integrated Health Care Delivery Networks. The
Company designs and develops provider networks and physician practice management
capabilities centered around the primary care provider. Each multi-specialty
provider network is designed to meet the specific medical needs of a targeted
community. The Company believes that these networks can (i) provide physicians
and hospitals with greater access to managed care contracts by facilitating
contractual relationships with multiple HMOs, (ii) establish a single point of
entry into an integrated heath care delivery network for HMOs and other payors,
and (iii) offer patients a comprehensive range of medical care in convenient
locations through primary and specialty providers conveniently located in target
markets.
Utilizing Information Systems. The Company's information systems enable
physicians, nurses, hospitals, insurance companies, administrators and others
involved in patient care to share information on a timely basis without
duplication. Information is collected on all aspects of each patient encounter
within the integrated health care delivery network, including measures
reflecting clinical outcomes, access, service availability, cost-efficiency, and
patient satisfaction. Physicians are directly assisted in the exam room with an
automated patient record that is electronically updated with progress notes and
other data, such as laboratory results. An outcomes tracking system provides
information on patient satisfaction, patient health status and ambulatory care
and hospital outcomes. The utilization review/case management system provides
critical information regarding the need for referrals and the management of high
cost episodes of care. Finally, a data warehouse/repository provides physicians
with a longitudinal medical record, containing complete medical records of all
patients. It provides administrators with complete clinical and financial
records of each encounter of every member of the integrated health care delivery
network, which allows both fixed and ad hoc reporting capabilities for comparing
physician performance within the network, as well as "benchmark" comparisons of
financial and clinical performance of the integrated health care delivery
network to other health care plans.
Focusing on Primary Care Physicians. The Company's strategy is to acquire
or to affiliate (on an exclusive basis where appropriate) with primary care
physicians which the Company believes are increasingly the principal
determinants of the location of patient care and the amount and degree of
ancillary services, including referrals to specialists. The primary care
physician represents the initial point of access into a fully integrated health
care delivery network in which, in many cases, the primary care physician is
capable of providing similar levels of quality of care for significantly less
cost than specialist providers. PHP's integrated health care delivery networks
are based on a foundation of primary care physicians and related care-givers who
are employed, managed by, or contracted with the Company, and who deliver care
primarily at Company-owned or managed primary care facilities and offices. These
centers generally provide laboratory, radiology and pharmacy services in
addition to primary care physician and nursing services. Purchasing, billing,
payroll and all administrative functions are performed and managed by
experienced executive and administrative personnel, freeing physicians and other
care-givers to devote their time to patient care.
Designing Patient Oriented Programs. PHP's integrated health care delivery
networks are constructed with the recognition that the need and demand for
costly health care services are, to a large degree, generated by the decisions
and actions of patients. PHP has the ability to manage patient-oriented
educational programs. Disease-specific offerings, wellness training, prevention
programs, decision assist programs, after hours nurse triage and other
components are all integrated into the network. The result is an integrated
health care delivery network that empowers patients to become knowledgeable and
active participants who, in partnership with their providers, optimize decisions
affecting resource utilization, as well as individual health and productivity.
Develop New Markets. The Company's growth strategy is based on actively
developing existing and new markets, and making selective acquisitions and joint
ventures in such markets. The Company develops existing markets by: (i)
capturing additional revenues from existing practices as patients migrate from
traditional fee-for-service plans to capitated managed care programs, (ii)
adding new physicians to existing networks and (iii) contracting with payors to
expand the number of capitated lives within existing physician practices. In
addition, the Company grows by developing new physician and hospital networks in
identified markets to serve managed care organizations, self-insured employers,
health care providers and provider networks and government agencies through
selected acquisitions and joint ventures and by serving as an integrator.
OPERATIONS
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Through fiscal 1993, PHP operated almost exclusively as a provider of
health care services to federal, state and local government agencies. During the
past five fiscal years, however, the Company has invested significant resources
to refocus its business from that of a government contractor to that of a full
service managed care company. Because the revenues from what had historically
been reported separately as the Government Management Care Division are now
immaterial in relationship to total revenues, the Company no longer reports
these amounts separately. The following is a description of the major operations
of the Company.
Health Insurance Plan of New Jersey, Inc. On July 24, 1997, the Company
announced a strategic alliance with Health Insurance Plan of New Jersey, Inc.
("HIP") through its subsidiary, Pinnacle Health Enterprises, L.L.C. ("PHE").
Effective October 31, 1997, the Company completed the acquisition of 18 health
care centers and related assets from HIP of New Jersey, Inc., a New Jersey not-
for-profit health maintenance organization for approximately $84 million
including transaction costs. In connection with the acquisition, the Company
entered into a Health Services Agreement with HIP, pursuant to which PHP
arranges for the provision of health care services for more than 190,000 HIP
members on a capitated basis. In addition to arranging for medical care, the
Company has also been delegated the responsibility for certain administrative
functions, including provider relations, utilization management and claims
payment. The Health Services Agreement has a 20-year term and may be renewed for
successive 5-year periods. This agreement also permits HIP to buy out the
agreement after December 31, 2000 and prior to December 31, 2003, at a price
equal to the greater of (i) the unamortized purchase price paid by the Company,
or (ii) the value of the agreement through the end of the initial 20-year term.
The capitation payments made by HIP to the Company under the Health Services
Agreement are calculated as a percentage of the premiums collected by HIP. The
applicable percentage of premiums the Company receives from HIP decreases
gradually over the first five years of the agreement and remains fixed for the
last 15 years of the agreement. Based upon HIP's current premium rates and
enrollment, the Company is currently receiving capitation payments and other
revenues of approximately $28 million per month from HIP.
Blue Cross and Blue Shield of New Jersey. In December 1996, the Company,
through PHE, entered into an agreement to purchase from Blue Cross and Blue
Shield of New Jersey, Inc. ("BCBSNJ") ten primary care facilities located
throughout New Jersey. The closing of this transaction occurred on February 28,
1997. These health centers, along with the 18 health centers purchased from HIP
of New Jersey, serve as the cornerstone of a provider sponsored integrated
health care delivery network operated on a non-exclusive basis for BCBSNJ, HIP
of New Jersey, and other third party payors, including HMOs.
The ten health centers referred to above have been sold to a real estate
investment trust and are being leased by PHP. In addition, the physicians
employed at the health centers are employed by a professional medical group
affiliated with PHP. Also, PHP and BCBSNJ entered into a network provider
agreement pursuant to which PHP arranges for the provision of certain health
care services to approximately 25,000 enrolled BCBSNJ beneficiaries through
global capitation based on market rates, with certain guarantees.
D.C. Chartered Health Plan, Inc. Through its wholly-owned subsidiary, D.C.
Chartered Health Plan, Inc., a licensed HMO in the District of Columbia ("CHP"),
the Company provides health care services to Medicaid beneficiaries in the
District of Columbia. CHP currently provides health care services to
approximately 21,000 beneficiaries receiving assistance under the Aid to
Families with Dependent Children (AFDC) program and approximately 700 commercial
employees and their dependents. Under its current contract with the DCDHS, the
Company is entitled to payment for its services on a capitated-rate-per-enrollee
basis.
Each member enrolled in CHP is assigned a primary care physician. CHP has
over 1,100 physicians under contract, including 215 primary care physicians
(eight of whom exclusively support CHP). CHP's members receive prescriptions,
health education, nutrition counseling, transportation to and from appointments,
and, when necessary, referrals to specialists and hospital services. Following
CHP's acquisition by PHP, the Company installed key elements of its integrated
health care delivery network to support the health plan, including network
development, utilization review and quality assurance services. As PHP's
integrated health care delivery networks continued to evolve, additional
capabilities have been implemented at CHP, including the Company's information
systems. In March 1995, PHP opened a primary care health center in the District
of Columbia. In December 1997, a second primary care health center opened. The
Chartered Family Health Centers ("Health Centers") are modeled on PHP's
integrated health care delivery networks. CHP also contracts with nine D.C.
hospitals which are included in the network. The Health Centers have full-time
staffs of board certified family, pediatric, obstetrics/gynecology and internal
medicine physicians. CHP's staff also includes nurses, radiology and laboratory
technicians, pharmacists and medical assistants.
CHP's business strategy lies in its fundamental commitment to promoting
access and emphasizing prevention and health
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maintenance, as well as treatment. CHP focuses on increasing access to its
services by (i) improving knowledge and awareness of benefits, (ii) providing
extensive wellness and preventative health care services, and (iii) directly
providing transportation to and from health care appointments. Management
believes that this commitment enhances CHP's ability to control cost, and
improves accountability within the network.
Through July 1997, CHP was reimbursed under a provider agreement with the
Department, whereby CHP received a monthly fixed, per capita fee divided between
a risk and non-risk portion for services provided to AFDC and AFDC-related
Medicaid enrollees. Under the agreement, the capitated fee was allocated to a
non-risk portion covering physician, outpatient, and other services and a risk
portion covering inpatient hospital services. At the end of each contract
period, for the non-risk portion, CHP provided an accounting of its costs and
services to enable the Department to determine the final amount due to CHP or
the Department under the agreement. The non-risk portion of the capitation fee
could not exceed the federal fee-for-service upper payment limit for covered
Medicaid services. CHP assumed full financial risk for inpatient hospital
services and assumed all gains or losses from the provision of such services.
The agreement required CHP to maintain an escrow account in an amount based on
its estimated expenditures, which the Department could use to recover capitation
payments and the cost of care for enrollees in the event of a default. The
Department reserved the right to terminate the agreement if a default occurred.
The agreement was subject to annual renewals.
Prior to April 1996, the terms of the Company's contracts with DCDHS
provided that the final settlements would be on a non-risk basis, calculated in
part on a cost-based methodology. However, in April 1996, the United States
Congress enacted legislation which required these contracts to be settled
retroactively on a capitated rate-per-enrollee or "risk" basis for the period
October 1, 1991 through October 1, 1999. Following enactment of this
legislation, the Company entered into negotiations with the District of Columbia
in an attempt to agree on the retroactive amounts due for the 1992 through 1994
contract periods. The Company and the District of Columbia were unable to agree
on the capitation rates to be applied to the Company's contract during this
period. The Company claimed that it was entitled to approximately $37.5 million
in additional capitation payments, based on the capitation rates set by
actuaries for the Department and the Health Care Financing Administration and
actually paid by the District of Columbia to other managed care organizations
during fiscal 1994. The District of Columbia, however, took the position that
the Company was entitled to use capitation rates based upon a retroactive cost
study completed in 1996. In February 1997, the Company and the District of
Columbia agreed to settle the outstanding claims related to the 1992 and 1994
contract periods for $18.9 million. Although the settlement agreement was signed
by representatives of the Company and the Commission on Health Care Finance, the
District of Columbia's Chief Financial Officer ("DCCFO") has refused to approve
the payment. Instead, the DCCFO offered the Company $6.2 million, which is
substantially less than the amount to which the Company believes it is entitled.
As a result of the impasse, for the third quarter of fiscal 1997, the Company
determined to recognize reserves of $9.8 million against its receivables from
the District of Columbia, principally related to services provided during the
1992 to 1994 contract periods. Additionally, the Company has amounts due under
contract periods subsequent to 1994. The Company has filed a claim with the
District aggregating $62 million for all amounts due from the District of
Columbia. The Company intends to pursue vigorously all remedies available to it
in connection with this matter, including litigation. However there can be no
assurance that such remedies will be successful.
Medicaid beneficiaries in the District of Columbia are required to enroll
in an approved managed care plan, one of which is CHP. Those beneficiaries who
do not voluntarily select a managed care plan will be assigned to a default
plan. CHP has entered into a contract with the District of Columbia, effective
May 1, 1998, under which CHP will be designated as the default plan for one-
seventh of the Medicaid beneficiaries who do not voluntarily select a plan. At
this point, it is not possible to estimate how many enrollees will be assigned
to CHP.
Virginia Chartered Health Plan, Inc. Virginia Chartered Health Plan, Inc.
("VACHP") is a joint venture owned 70% by the Company and 30% by University
Health Services, Inc., an affiliate of the Medical College of Virginia. VACHP
is a licensed HMO in the Commonwealth of Virginia and currently provides health
care services under various contracts to approximately 14,500 enrolled Medicaid
beneficiaries in the Richmond and Tidewater areas of Virginia. PHP began
operating VACHP in October of 1995. Effective January 31, 1996, PHP completed
the sale of a 30% interest in VACHP to University Health Services for $3
million. By joining with University Health Services, the Medical College of
Virginia hospitals and other network hospitals, PHP provides its HMO
beneficiaries with high quality, cost-effective services. VACHP is modeled
after CHP and is supported by management services of PHP and CHP to capitalize
on their experience, management networks, data information services and other
resources. In addition, the Company has completed an extensive provider network
agreement to utilize Medical College of Virginia hospitals and more than 1,200
staff physicians in patient care and medical management. VACHP was originally
capitalized by PHP in October of 1995 for $3.7 million. Total capitalization
following the sale to University Health Services remains at $3.7 million.
Corporate Health Centers. The Company has introduced key elements of its
integrated health care delivery network to
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self-insured employers through its contracts to deliver employer-sponsored
health care at primary care facilities developed and operated by PHP. The
Company's corporate health center contracts generally provide for PHP to design,
construct, equip and operate the centers. The Company operates two family
practice centers in the Tampa/Clearwater, Florida service area for GTE
Corporation ("GTE"), and one family health venture for Bethlehem Steel
Corporation ("Bethlehem") near its Pennsylvania headquarters, and one family
health center for Northwestern Steel & Wire Company ("Northwestern") in
Sterling, Illinois. In all three locations, PHP also developed outside provider
networks of medical and surgical specialists to complement the primary care
services offered in the centers. PHP also provides occupational healthcare
services for Chrysler Corporation employees under contracts with two assembly
facilities. The Company's corporate health center contracts provide for payment
based on a cost-reimbursement-plus-fixed-fee, or fixed-rate per labor hour basis
and generally contain terms ranging from three to five years. The GTE and
Bethlehem contracts are in the process of being renewed, and there is no
guarantee that the Company will be successful in maintaining these contracts.
Joint Ventures. Beginning in 1995, the Company pursued a strategy of
establishing and managing integrated health care delivery networks through
alliances with physicians, hospitals and other providers. From 1995 through
1997, three such joint ventures were established and managed by the Company in
Connecticut, Georgia and Louisiana. However, in connection with the Company's
recent determination to refocus its business, the Company has discontinued these
activities.
In 1995, Connecticut Health Enterprises, L.L.C. ("CHE") was originally
formed as a joint venture among the Company, St. Vincent's Health Services,
Inc., and the Daughters of Charity National Health System, Inc. and later was
expanded to include Stamford Health Systems, Inc. This enterprise was not
developing market share as quickly as the original business plan projected.
Consequently, in January 1998, the Company and the local market joint venture
partners agreed that the Company would terminate its involvement with CHE and
allow local management to assume responsibility for the enterprise, consistent
with the intentions of the original business plan, but at an accelerated time
frame. The value of the Company's 30% ownership interest in CHE remains under
negotiation, and will be resolved through a formal arbitration process.
In 1996, Georgia Health Enterprise, L.L.C. ("GHE") was formed as a joint
venture between the Company and St. Mary's Health Care System, Inc. In 1997,
LAMMICO Practice Management, L.L.C., was formed as a joint venture between the
Company and Louisiana Medical Mutual Insurance Company. In 1998, the Company
transferred its interest in GHE to St. Mary's and the management agreement
between GHE and the Company was terminated. Also in 1998, the Company decided
to turn over management of LAMMICO Practice Management, L.L.C. to the local
partner and this transition will be completed in 1999.
Government Contracts. Although it no longer represents a significant
portion of the Company's revenues, PHP still provides a wide variety of health
care services under various contracts with government agencies. Under its
government contracts, the managed care resources within the Company are utilized
to operate primary care centers, build integrated delivery networks of providers
and recruit staff and provide various health care professionals. The Company's
government contracts are generally awarded for a base period of less than one
year, have two to four one-year renewals at the option of the government agency
and generally may be modified or terminated for the convenience of the
government agency at any time during the contract. In June 1998, the Company's
contract with the Maryland Department of Public Safety and Correctional Services
was terminated because certain equitable adjustments to the reimbursement rates
related to unilateral changes in contractual services made by the Maryland
Department of Public Safety and Correctional Services were not agreed to. The
Company has decided not to pursue additional correctional care contracts.
LIMITATIONS ON REIMBURSEMENT
A major portion of the Company's revenue is derived from third party
payors, such as governmental programs, private insurance plans and managed care
organizations. In particular, for the year ended April 30, 1998, approximately
15% of the Company's revenue was derived from the Medicaid program, a
cooperative state-federal program for medical assistance to the needy and
approximately 46% of the company's revenue was derived from its new contract
with HIP of New Jersey. Reflecting a trend in the health care industry, third
party payors increasingly are negotiating with health care providers such as the
Company concerning the prices charged for medical services, with the goal of
lowering reimbursement and utilization rates. There can be no assurance that
any future reduction in reimbursement rates would be offset through enhanced
operating efficiencies, or that any such enhancement of operating efficiencies
would occur. Third party payors may also deny reimbursement if they determine
that a treatment was not performed in accordance with the cost-effective
treatment methods established by such payors, was experimental, or for other
reasons. In addition, funding for governmental programs, such as Medicaid, is
under increased scrutiny.
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Congress continues to make cutbacks in the Medicare and Medicaid programs
following its failure to enact a budget reconciliation bill providing for
reductions in the rate of spending increases in the Medicare and Medicaid
programs. These cutbacks, budgetary constraints at both the federal and state
levels, and increasing public and private sector pressures to contain health
care costs are likely to continue to lead to significant reductions in
government and other third party reimbursements for medical charges which could
adversely affect the Company.
GOVERNMENT REGULATION
Regulatory Environment. Virtually all aspects of the health care industry
are subject to extensive federal and state regulation relating to licensure,
conduct of operations, acquisition of existing facilities, additions of new
services, reimbursements for services rendered and prices for services. The
Company has attempted to structure its operations so as to comply with these
regulations. However, there can be no assurance that regulatory authorities
will not challenge the conduct or structure of the Company's operations in the
future. In addition, changes in applicable laws and regulations or new
interpretations of existing laws and regulations could have an adverse effect on
licensure, conduct of operations, acquisition of existing facilities, additions
of new services, reimbursements for services rendered or prices for services.
Also, the failure to maintain or renew any required regulatory approvals or
licenses could prevent the Company from offering existing services or from
obtaining reimbursement.
Because of the uniqueness of the structure of the relationships between the
Company and its affiliated physicians, hospitals and ancillary health care
providers, there can be no assurance that review of the Company's business by
courts or health care, tax, labor or other regulatory authorities will not
result in determinations that could adversely affect the operations of the
Company, or that the health care regulatory environment will not change in a
manner that would restrict the Company's existing operations or limit the
expansion of the Company's business or otherwise adversely affect the Company.
Fraud and Abuse Statute. Anti-fraud and abuse amendments codified under
the Social Security Act of 1935, as amended (the "Fraud and Abuse Statute"),
prohibit certain business practices and relationships that may affect the
provision and cost of health care services reimbursable under the Medicare and
Medicaid programs. These amendments include anti-kickback provisions prohibiting
the solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for the
ordering or providing of Medicare or Medicaid covered services, items or
equipment. The federal courts have held that an arrangement violates the Fraud
and Abuse Statute if one purpose of a transaction which results in the payment
of remuneration (including the distribution of profits) is to induce the
referral of patients covered by the Medicare and Medicaid programs, even if
another purpose of the payment is to compensate an individual for professional
services. Violations of this statute can result in criminal penalties, civil
monetary penalties and exclusion from the Medicare and Medicaid programs. In an
attempt to clarify which arrangements are exempt from program exclusion, civil
sanctions or criminal prosecution under the Fraud and Abuse Statute, the
Department of Health and Human Services published in 1991 a set of "safe harbor"
regulations outlining practices that are deemed not to violate the statute.
Although compliance with one of the safe harbors assures participants that an
arrangement does not violate the statute, failure of an arrangement to fit
within a safe harbor provision does not necessarily mean that arrangement
violates the statute.
Although the Company seeks to arrange its business relationships so as to
comply with these laws, there can be no assurance that regulatory authorities
might not assert a contrary position or that new laws, or the interpretation of
existing laws, might not adversely affect relationships established by the
Company with physicians or other health care providers or result in the
imposition of penalties or sanctions on the Company or its facilities.
Federal and State Anti-Referral Laws. Section 1877 of the Social Security
Act (the "Stark Law") restricts physician referrals to certain providers,
including hospitals, with which they have a financial arrangement. Unless
excepted, a physician may not make a referral of a Medicaid or Medicare patient
to any clinical laboratory services provider with whom he or she has a financial
relationship, and any provider who accepts such a referral may not bill for the
service provided pursuant to the referral. Sanctions for violation of the Stark
Law include civil money penalties and exclusion from the Medicare and Medicaid
programs. Unlike the Fraud and Abuse Statute in which an activity may fall
outside a safe harbor and still not violate the law, a referral under the Stark
Law that does not fall within an exception is strictly prohibited. In August
1993, Congress passed legislation ("Stark II") that, effective January 1, 1995,
expanded the self-referral ban to include a number of health care services
provided by entities with which the physicians may have an ownership interest or
a financial relationship. The laws of some states also prohibit physicians from
splitting fees with non-physicians and prohibit non-physician entities from
practicing medicine. These laws vary from state to state, have been subject to
limited judicial and regulatory interpretation, and are enforced by the courts
and by regulatory authorities with broad discretion. Although the
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Company seeks to structure its operations and arrange its business relationships
so as to comply with these laws, there can be no assurance that the Company's
present or future operations will not be successfully challenged as violating,
or determined to have violated, such laws. Any such result could have an adverse
effect on the Company.
Applicability of Insurance Regulations. The laws in most states also
regulate the business of insurance and the operation of HMOs. Many states also
regulate the establishment and operation of networks of health care providers.
The HMO industry is highly regulated at the state level and is highly
competitive. Although the Company seeks to structure its operations so as to
comply with these laws in the states in which it does business, there can be no
assurance that future interpretations of insurance laws and health care network
laws by the regulatory authorities in these states or in the states into which
the Company may expand will not require licensure or a restructuring of some or
all of the Company's operations or joint ventures. Additionally, the HMO
industry has been subject to numerous legislative initiatives within the past
several years. Certain aspects of health care reform legislation may have
direct or indirect consequences for the HMO industry. There can be no assurance
that developments in any of these areas will not have an adverse effect on the
HMOs in which the Company has ownership interests or other financial
involvement.
State Regulation of HMOs. The Company's Medicaid HMO in the District of
Columbia is subject to the licensure and other regulatory requirements set forth
in the District of Columbia's Health Maintenance Organization Act of 1996 (the
"Act"). The Act became effective on April 9, 1997. Pursuant to the Act, the
Company obtained a full license in December 1997 to operate as an HMO in the
District of Columbia.
Antitrust Laws. The health care industry is receiving increased scrutiny
under antitrust laws as the integration and consolidation of health care
delivery increases and affects competition. The current structure of the
Company's integrated health care delivery networks, and its participants may be
subject to a range of antitrust laws which prohibit anti-competitive conduct,
including price fixing, concerted refusals to deal and division of market. The
Company intends to comply with such state and federal laws as may affect the
development of its integrated health care delivery networks, but there can be no
assurance that a review of the Company's business by courts or regulatory
authorities will not result in a determination that could have an adverse effect
on the Company's operations or require the Company to restructure its
operations.
Federal and State Investigations. As part of the pervasive regulation of
the health care industry by federal and state governments, these governments
have begun intensive investigations and audits of health care providers to
determine whether the providers are overcharging on medical services and
procedures for Medicare and Medicaid patients. Recently, Congress, as part of
the Health Insurance Portability and Accountability Act of 1996, significantly
expanded the funding for such investigations. In cases in which the overcharging
is deemed intentional and meets other criteria, the federal or state government
may seek criminal, civil, or administrative sanctions against health care
providers. This could result in exclusion from the Medicare and Medicaid
programs and, under the reciprocity provisions discussed above, could result in
suspension or debarment from government contracts. Any such exclusion of the
Company could have a material adverse effect upon the Company's business.
In addition, private individuals have been allowed to bring whistleblower
suits, known as qui tam actions, if they believe a provider has committed fraud
in Medicare or Medicaid programs, or in providing medical services under a
government contract. Finally, private medical insurance companies and other
private payors have begun to investigate and audit health care providers. These
private payors have, on occasion, filed RICO and common law actions if they
believe the provider has overcharged or mischarged them for medical services to
covered individuals.
Uncertainty Related to Health Care Reform. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. Although Congress has failed to pass comprehensive
health care reform legislation thus far, there are currently numerous
initiatives on the federal and state levels for comprehensive reforms affecting
the payment for and availability of health care services, including a number of
proposals that would significantly limit reimbursement under Medicare and
Medicaid. It is not clear at this time what proposals, if any, will be adopted
or, if adopted, what effect such proposals would have on the Company's business.
Aspects of certain of these health care proposals, such as cutbacks in the
Medicare and Medicaid programs, containment of health care costs on an interim
basis by means that could include a short-term freeze on prices charged by
health care providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect the Company. There can be no
assurance that currently proposed or future health care legislation or other
changes in the administration or interpretation of governmental health care
programs will not have an adverse effect on the Company or that payments under
governmental programs will remain at levels comparable to present levels or will
be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. Concerns about the potential effects of
the proposed reform measures has contributed to the
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volatility of prices of securities of companies in health care and related
industries, and may similarly affect the price of the Company's Common Stock in
the future.
COMPETITION
The health care industry is highly competitive, and is subject to
continuing changes in the provision of services and the selection and
compensation of providers. Generally, PHP competes with any entity that
contracts with payors for the provision of prepaid health care services, and
also competes with other companies, including Physician Practice Management
companies ("PPMs"), which provide management services to health care providers.
PHP also competes with other companies for acquisition, affiliation, and other
expansion opportunities, with national, regional and local providers and payors.
Certain competitors are significantly larger and better capitalized that PHP,
provide a wider variety of services, have greater experience in operating
integrated healthcare delivery networks, and have longer established
relationships with buyers of such services, than does the Company.
INSURANCE
The Company maintains property, general liability and medical malpractice
insurance in amounts, and with coverages and deductibles, which are deemed
appropriate by management, based upon historical claims, industry standards and
the nature and risks of its business. The cost and availability of such
insurance coverage has varied widely in recent years. While the Company believes
its insurance policies are adequate in amount and coverage for its current
operations, there can be no assurance that the insurance coverage maintained by
the Company will be sufficient to cover all future claims or that such insurance
will continue to be available in adequate amounts or at reasonable cost.
EMPLOYEES
As of July 31, 1998, the Company, including its affiliated professional
entities, employed approximately 3,300 people approximately 2,400 of whom were
employed on a full-time equivalent basis.
RISK FACTORS
In addition to the other information contained in this report, the
following factors should be considered carefully in evaluating the Company and
its business.
HISTORICAL LOSSES
The Company reported net losses of $47.6 million, $4.0 million, $4.0
million and $9.3 million for the fiscal years ended April 30, 1998, 1997, 1995
and 1994, respectively. Although the Company was profitable for the fiscal year
ended April 30, 1996, there can be no assurance that it will operate profitably
in the future, or have earnings or cash flow sufficient to comply with the
financial covenants to which it is subject or to cover its fixed charges. As a
consequence of the loss reported in fiscal 1994, the Company failed to comply
with certain financial covenants under its credit agreement. The Company
obtained waivers for such noncompliance and the Company's bank modified the
applicable financial covenants. As of April 30, 1998, the Company was not in
compliance with certain provisions in its current credit agreement. The
Company is in discussions with its lender to waive current non compliance and to
amend existing financial covenants for the Company to avoid expected future non
compliance. There can be no assurance that the Company will succeed in its
attempt to obtain a waiver of its non compliance with certain provisions in the
credit facility and obtain an amendment of existing financial covenants in the
credit facility. Any failure by the Company to comply with the provisions
contained in its credit agreement (or in any replacement credit facility) could
result in a default under such facility which could have an adverse effect on
the Company's business, financial condition and results of operations.
EFFECT OF SERIES B CONVERTIBLE PREFERRED STOCK
Potential Dilution. The exact number of shares of Common Stock issuable
upon conversion of the Series B Convertible Preferred Stock depends on the
Conversion Price in effect at the time of conversion. Because the Conversion
Price is equal to the lowest reported trade over a specified period of trading
days adjusted for a certain discount, the number of shares of Common Stock
issuable upon conversion will vary inversely with the market price of the
Company's Common Stock. Holders of the Common Stock will be diluted by any
issuances of Common Stock upon conversion of the Series B Convertible Preferred
Stock and may be substantially diluted depending upon the market price of the
Common Stock.
As noted above, the exact number of shares of Common Stock issuable upon
conversion of the Series B Convertible Preferred Stock
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cannot currently be determined but such issuances will vary inversely with the
market price of the Common Stock, and such shares will be issued at a discount
which increases to 9% if Series B Convertible Preferred Stock is held through
December 1, 1998. The current holders of Common Stock will be diluted by
issuances of Common Stock upon conversion of the Series B Convertible Preferred
Stock to an extent that depends on the future market price of the Common Stock,
the timing of conversion of Services B Convertible Preferred Stock and exercise
of the related placement agent warrants, and whether the Company opts to pay
cash in lieu of additional shares of Common Stock upon conversion of Series B
Convertible Preferred Stock. The potential effects of any such dilution on the
existing shareholders of the Company include the significant diminution of the
current shareholders' economic and voting interests in the Company. In addition,
pursuant to the terms of the Series B Convertible Preferred Stock purchase
agreement and depending upon the Conversion Price, the Company may be required
to register additional shares of Common Stock to cover the conversion of the
Series B Convertible Preferred Stock. The registration and sale of such
additional shares of the Common Stock of the Company, or the prospect thereof,
could have a adverse affect on the market price of the Common Stock.
Potential Liquidated Damages Claim. Pursuant to the Preferred Stock
Investment Agreements entered into between the Company and the holders of Series
B Convertible Preferred Stock, the Company agreed to use its best efforts to
have a registration statement declared effective by April 1, 1998. The Preferred
Stock Investment Agreements state that, if the registration statement is not
effective by April 1, 1998, the Company will be required to make cash payment to
the holders equal to 3% of the purchase price for the Series B Preferred Stock
for each 30-day period thereafter until the Registration statement is effective
(pro-rated as to a period of less than 30 days). The registration statement was
declared effective on June 10, 1998. Accordingly, under the terms of the
Preferred Stock Investment Agreements, the Company would be required to pay an
aggregate amount of approximately $2,301,960 to holders of the Series B
Preferred Stock after adjusting for the repurchase of 25,320 shares of Series B
Preferred Stock and the waiver of the penalty by holders of 11,130 shares of the
outstanding Series B Convertible Preferred Stock. Penalty payments totaling
$387,360 covering the period from June 1, 1998 through June 9, 1998, were made
to holders of Preferred Stock as of June 1, 1998 that were not repurchased by
the Company. The Company believes that the liquidated damages provision
constitutes an unenforceable penalty for April and May and intends to challenge
any attempt to enforce the provision. The Company is seeking waivers of this
provision from the holders of the Series B Convertible Preferred Stock. There
can be no assurance that the Company will be successful in obtaining waivers
from the holders of Series B Convertible Preferred Stock or that the Company
will prevail in establishing that the provision is unenforceable. The
enforcement of the liquidated damages provision against the Company could have a
material adverse effect on the Company's financial condition and results of
operations. SEE "--LEGAL PROCEEDINGS."
Suspension of Conversion. As discussed, on July 29, 1998, the Company
suspended conversion of the Series B Preferred Stock into common shares. To the
extent holders of the Series B Preferred Stock assert claims against the Company
for such action, the Company may be subject to litigation expense and potential
damages in the event of an adverse judgment or settlement. Such amounts could
have a material adverse effect on the Company's financial condition and results
of operations.
CAPITATED NATURE OF REVENUE
The Company provides a portion of its services on a capitated basis, and
the Company intends to negotiate additional capitated agreements with managed
care organizations or assume such contracts in connection with its affiliation
with primary care practices. Such contracts, typically referred to as "risk
sharing" or "globally capitated" contracts, are arrangements between the Company
and a managed care organization under which the Company agrees to provide
certain health care services, as required by members of such managed care
organization, in exchange for a fixed fee per member per month. Under these
contracts, the Company bears the risk that the cost of the services it is
required to provide will exceed the fixed fees it is entitled to receive. In
order for such risk sharing and globally capitated contracts to be profitable
for the Company, the Company must effectively manage the utilization rate of
primary care services, specialty physician services, and hospital services
delivered to members of the managed care organization. There can be no assurance
that the Company will receive fees under such risk sharing arrangements which
will permit it to recover the costs of the health care services it will be
required to provide.
DEPENDENCE ON PRIMARY CARE PHYSICIANS
Primary care physicians are a key operating component of the Company's
integrated health care delivery networks. The Company competes for exclusive
primary care physician affiliations with a variety of networks including group
practices, IPAs, HMOs, practice management companies and hospitals. Most primary
care physicians have traditionally practiced independently or in small single
specialty groups. The competitive and operational disadvantages to the physician
of this type of practice structure have compelled many of these physicians to
evaluate alternatives. The process of negotiating these affiliations is often
competitive, complex and time consuming. There can be no assurance that the
Company will continue to be able to identify and secure affiliations with a
sufficient number of primary care physicians to operate its integrated health
care delivery networks effectively.
DEPENDENCE ON CERTAIN RELATIONSHIPS
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The Company derives its revenues principally from three customers, HIP
comprising 46%, the District of Columbia comprising 9%, and Blue Cross/Blue
Shield of New Jersey comprising 8%, of total revenues in fiscal 1998. The
termination or loss of the Health Services Agreement with HIP or the contracts
with the Department or with BCBSNJ would have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
any failure of any such customer to fulfill its obligations to the Company could
have a material adverse effect on the Company's business, financial condition
and results of operation.
RISKS ASSOCIATED WITH CERTAIN RECEIVABLES
The Company's accounts receivable as of April 30, 1998 include gross
amounts due from DCDHS and the United States Department of Health and Human
Services totaling $24.1 million related to the cost settlement for the three-
year contract period ended September 30, 1994, and related to the cost
settlement for the contract period beginning October 1, 1994. In the quarter
ending January 31, 1997, the Company established a reserve of $9.8 million
against its Medicaid receivable from DCDHS, principally relating to services
provided during the period 1992 through 1994, resulting in a net receivable of
$14.3 million. Additionally, the Company's accounts receivable as of April 30,
1998 include gross amounts due from the Maryland Department of Public Safety and
Correctional Services ("MDPSCS") of $5.0 million related to a formal contract
claim. The Company cannot predict when or whether any of the unreserved amounts
will be paid. The failure of the Company to collect such amounts would have a
material adverse effect on the Company's business, financial condition and
results of operations.
LIMITATIONS ON THIRD-PARTY REIMBURSEMENT
A major portion of the Company's revenues is derived from third party
payors, such as governmental programs, private insurance plans and managed care
organizations. In particular, for the year ended April 30, 1998, approximately
15% of the Company's revenues were derived from the Medicaid program, a
cooperative state-federal program for medical assistance to the needy and
approximately 46% of the Company's revenues were derived from its new contract
with HIP of New Jersey. Reflecting a trend in the health care industry, third
party payors increasingly are negotiating with health care providers such as the
Company concerning the prices charged for medical services, with the goal of
lowering reimbursement and utilization rates. There can be no assurance that any
future reduction in reimbursement rates would be offset through enhanced
operating efficiencies, or that any such enhancement of operating efficiencies
would occur. See "Business-Limitations on Reimbursement."
GOVERNMENT REGULATION
Uncertainty Related to Regulatory Environment. Virtually all aspects of the
health care industry are subject to extensive federal and state regulation.
Various federal and state laws, which are interpreted and enforced by courts and
regulatory authorities with broad discretion, regulate the relationships between
the Company and its affiliated physicians, hospitals and ancillary health care
providers. These laws include (i) the anti-fraud and abuse provisions of the
Medicaid and Medicare statutes, which prohibit certain business practices and
relationships that may affect the provision and cost of health care services
reimbursable under the Medicaid and Medicare programs, including the
solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of patients or for the provision of goods or
services; (ii) the anti-kickback provisions of the Social Security Act, which
restrict physician referrals to certain providers, including hospitals, with
which the physician has a financial arrangement; (iii) the laws of some states,
which prohibit physicians from splitting fees with non-physicians and prohibit
non-physician entities from engaging in the practice of medicine; (iv) the laws
of most states, which regulate the business of insurance and the operation of
HMOs; (v) federal antitrust laws, which prohibit anti-competitive conduct,
including price fixing, concerted refusals to deal and division of market; and
(vi) federal and state civil and criminal statutes which prohibit health care
providers from fraudulently or wrongfully overcharging governmental or other
third party payors for health care services. Violations of these laws could
result in substantial civil or criminal penalties, exclusion from the Medicaid
and Medicare programs, and suspension or debarment from obtaining government
contracts. Although the Company seeks to structure its operations and arrange
its business relationships so as to comply with all applicable legal
requirements (including the laws and regulations mentioned above), there can be
no assurance that, upon review of the Company's business, courts or regulatory
authorities might not adopt or assert a contrary position, that the Company's
present or future operations might not be successfully challenged as violating,
or determined to have violated, such legal requirements, or that new laws and
regulations, or the interpretation of existing laws and regulations, might not
require the Company to restructure some or all of its operations or adversely
effect the Company's business relationships. Any such result could have a
material adverse effect on the Company. SEE "BUSINESS-GOVERNMENT REGULATION."
Potential Federal and State Investigations. As part of the pervasive
regulation of the health care industry by federal and state governments, these
governments have begun intensive investigations and audits of health care
providers to determine whether the providers are overcharging on medical
services and procedures for Medicare and Medicaid patients. In cases in
13
<PAGE>
which the overcharging is deemed intentional and meets other criteria, the
federal or state government may seek criminal, civil, or administrative
sanctions against health care providers. This could result in exclusion from the
Medicare and Medicaid programs and could result in suspension or debarment from
government contracts. Any such exclusion, suspension or debarment of the Company
could have a material adverse effect upon the Company's business. SEE "BUSINESS-
GOVERNMENT REGULATION."
Truth in Negotiations Act. Under the Truth in Negotiations Act, the
federal government is entitled for three years after final payment on certain
negotiated contracts or contract modifications to examine all of the Company's
cost records with respect to such contracts to determine whether the Company
furnished complete, accurate, and current cost or pricing data to the government
in connection with the negotiation of the price of the contract or modification.
The federal government also has the right for up to six years after final
payment to seek a downward adjustment to the price of a contract or modification
if it determines that the contractor failed to disclose complete, accurate and
current data.
Uncertainty Relating to Health Care Reform. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. Although Congress has failed to pass comprehensive
health care reform legislation thus far, there are currently numerous
initiatives on the federal and state levels for comprehensive reforms affecting
the payment for and availability of health care services, including a number of
proposals that would significantly limit reimbursement under Medicare and
Medicaid. It is not clear at this time what proposals, if any, will be adopted
or, if adopted, what effect such proposals would have on the Company's business.
There can be no assurance that currently proposed or future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have an adverse effect on the
Company. See "BUSINESS-GOVERNMENT REGULATION."
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS
The Company's management information networks are critical to its ability
to manage care efficiently and to be competitive in the market. The Company
relies on these networks to support practice operations and to facilitate the
management and monitoring of clinical performance. Clinical guidelines, practice
protocols, case management and utilization review networks are all essential to
the Company's ability to secure, and operate profitably under, capitated and
risk sharing contracts. There can be no assurance that the Company will be able
to refine and enhance these networks to keep them current and competitive.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the skill and efforts of its senior
management. The loss of key management personnel or the inability to attract,
retain and motivate sufficient numbers of qualified management personnel could
adversely affect the Company's business.
COMPETITION
The health care industry is highly competitive, and is subject to
continuing changes in the provision of services and the selection and
compensation of providers. Generally, PHP competes with any entity that
contracts with payors for the provision of pre-paid health care services, and
also competes with other companies, including Physician Practice Management
companies ("PPM's"), which provide management services to health care providers.
PHP also competes with other companies for acquisition, affiliation, and other
expansion opportunities, with national, regional and local providers and payors.
Certain competitors are significantly larger and better capitalized than PHP,
provide a wider variety of services, have greater experience in operating
integrated healthcare delivery networks, and have longer established
relationships with buyers of such services, than does the Company.
EXPOSURE TO PROFESSIONAL LIABILITY
Due to the nature of the Company's business, there are asserted from time
to time medical malpractice lawsuits and other claims against the Company, some
of which are currently pending, which subject the Company to the attendant risk
of substantial damage awards. The most significant source of potential liability
in this regard is the negligence of physicians employed or contracted by the
Company. To the extent such physicians are employees of the Company or were
regarded as agents of the Company in the practice of medicine, the Company
would, in most instances, be held liable for their negligence. In addition, the
Company could be found in certain instances to have been negligent in performing
its management services under contractual arrangements, even if no agency
relationship with the physician were found to exist.
14
<PAGE>
In some cases, the Company's contracts with hospitals and third party payors
require the Company to indemnify such other parties for losses resulting from
the negligence of physicians who were employed or managed by or affiliated with
the Company.
The Company maintains professional and general liability insurance on a
claims made basis in amounts deemed appropriate by management, based on
historical claims and the nature and risks of its business. There can be no
assurances, however, that an existing or future claim or claims will not exceed
the limits of available insurance coverage, that any insurer will remain solvent
and able to meet its obligations to provide coverage for any such claim or
claims or that such coverage will continue to be available or available with
sufficient limits and at a reasonable cost to adequately and economically insure
the Company's operations in the future. A judgment against the Company in excess
of such coverage could have a material adverse effect on the Company.
SUBSTANTIAL INDEBTEDNESS
The Company's indebtedness is substantial in relation to its stockholders'
equity. At April 30, 1998, the Company's total long-term debt, net of current
portion, accounted for 63.9% of its total capitalization.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock has experienced a high degree of
volatility. There can be no assurance that such volatility will not continue or
become more pronounced. In addition, recently the stock market has experienced,
and is likely to experience in the future, significant price and volume
fluctuations which have affected the market price of the Common Stock and could
continue to adversely affect the market price of the Common Stock. The Company
believes that factors such as quarterly fluctuations in the financial results of
the Company or its competitors, adverse publicity, changes in general
conditions in the industry, the overall economy and the financial markets could
cause the price of the Common Stock to fluctuate substantially.
CONTROL BY MANAGEMENT AND CERTAIN STOCKHOLDERS
Certain of the Company's executive officers and directors and related
entities currently hold an aggregate of approximately 12.5% of the outstanding
Common Stock (24.7% including shares issuable upon the exercise of options or
the conversion of convertible securities held by such persons and exercisable or
convertible within 60 days) as of July 31, 1998, and may exercise a controlling
influence over the outcome of matters submitted to the Company's stockholders
for approval. Moreover, such executive officers, directors and related entities
collectively may have the power to delay, defer or prevent a change in control
of the Company.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Company's certificate of incorporation, by-laws
and Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of the Company and limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock. These provisions include a classified Board of Directors, the
ability of the Board of Directors to authorize the issuance, without further
stockholder approval, of preferred stock with rights and privileges which could
be senior to the Common Stock, elimination of the stockholders' ability to take
any action without a meeting, and establishment of certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings. In addition,
the Company has distributed preferred stock purchase rights which could cause
substantial dilution to a person or group that attempts to acquire a controlling
interest in the Company. The Company is also subject to Section 203 of the
Delaware General Corporation Law which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an "interested stockholder."
RISKS ASSOCIATED WITH "FORWARD-LOOKING" STATEMENTS
This Prospectus contains and incorporates by reference certain statements
that are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Those statements include,
among other things, the discussions of the Company's business strategy and
expectations concerning the Company's market position, future operations,
margins, profitability, liquidity and capital resources. Investors in the Common
Stock offered hereby are
15
<PAGE>
cautioned that reliance on any forward-looking statement involves risk and
uncertainties, and that although the Company believes that the assumptions on
which the forward-looking statements contained herein are reasonable, any of
those assumptions could prove to be inaccurate, and as a result, the forward-
looking statements based on those assumptions also could be incorrect. The
uncertainties in this regard include, but are not limited to, those identified
in the risk factors discussed above. In light of these and other uncertainties,
the inclusion of a forward-looking statement herein should not be regarded as a
representation by the Company that the Company's plans and objectives will be
achieved.
ITEM 2. PROPERTIES
As of July 31, 1998 the Company leased facilities for the provision of
medical services and for its corporate headquarters and other administrative
offices at 35 locations in seven states covering an aggregate of approximately
742,000 square feet of space. The leases expire at various dates from fiscal
years 1999 to 2044. Of this amount, approximately 90,000 square feet is for its
corporate headquarters in Reston, Virginia. All of the clinic facilities are
modern and well maintained. The Company considers these facilities to be
adequate for fulfilling their intended purpose.
In addition to leased facilities, the Company owns eight parcels of real
property on which it has constructed facilities to provide services. These
facilities are located in two states and cover an aggregate of approximately
122,000 square feet. All properties are subject to mortgages related to the
Company's primary credit agreement. See note 4 of Notes to Consolidated
Financial Statements.
The Company owns six buildings, totaling 59,000 square feet, none of which
are currently used to provide healthcare services. Five of these buildings have
been leased for three to five years periods ending in the year 2003. The Company
is actively pursuing tenants and/or buyers for the sixth.
The Company also leases three facilities, totaling 22,000 square feet, that
were formerly used for the provision of medical services. These leases expire in
fiscal years 1999 through 2003. The Company is actively pursuing tenants to
sublease these facilities.
See Note 15(a) of Notes to Consolidated Financial Statements for
information concerning the Company's lease rental obligations.
ITEM 3. LEGAL PROCEEDINGS
A class action lawsuit was filed against the Company and certain current
and former officers and directors of the Company in the United States District
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 Common
Stock between December 11, 1995 and March 10, 1997. 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. In particular, the
suit challenges the Company's recognition of certain revenue and accrual of
certain receivables under the Company's 1994 contract with the Department. The
suit also challenges the Company's accounting for claims payable reserves
relating to its HMO business.
16
<PAGE>
On or about June 23, 1998, plaintiffs filed an amended complaint seeking to
represent all persons who purchased the Company's common stock between July 27,
1995 and May 13, 1998. The amended complaint alleges that the Company also
improperly accounted for expenses and receivables under its contract with BCBSNJ
and improperly accounted for the subsequent acquisition of the BCBSNJ
facilities. Plaintiffs further allege that the Company failed to disclose
adequately its alleged obligation to pay penalties in connection with its
failure to have registered stock by April 1, 1998 under the various Preferred
Stock Investment Agreements and concealed the fact that it had established no
reserves for the penalty. The amended complaint also includes the allegations
in the original complaint concerning the contract with the Department and claims
payable reserve.
Another suit, Richman v. PHP Healthcare Corporation, et al., was filed in Los
Angeles Superior Court seeking relief under Section 10(b) of the Securities
Exchange Act, and under state law, in connection with alleged statements
relating to Chartered Health Plan. The Plaintiff claims to have been damaged in
excess of $800,000. The Company removed the suit to the United States District
Court for the Central District of California, No. 98-2797 SVW. The suit does not
seek class action relief. On July 27, 1998, the Court granted the Company's
motion to dismiss, with leave to file an amended complaint. An amended
complaint was subsequently filed.
The Company intends to vigorously defend the lawsuits. There can be no
assurance that the Company will prevail in either of the suits. Any judgment
entered against the Company in connection with either of the suits could have a
material adverse effect on the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting of stockholders on March 31, 1998, the stockholders of
the Company voted on and approved a resolution to approve the issuance to
holders of the Company's Series B Convertible Preferred Stock of the full number
of shares of Common Stock to which such holders are entitled upon conversion of
the Series B Convertible Preferred Stock. There were 12,026,532 shares of
Common Stock outstanding and entitled to vote at the meeting, of which 7,694,971
shares were present in person or by proxy, 7,261,899 shares were voted in favor
of the proposal, 342,314 shares were voted against the proposal, and 90,758
shares abstained.
17
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names and ages of the Company's executive officers (as
defined by regulations of the Securities and Exchange Commission), the positions
and offices they hold with the Company, their terms as officers and their
business experience. Executive officers are elected by the Board of Directors
and serve at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITIONS OR OFFICES WITHIN THE COMPANY
- ------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Jack M. Mazur................... 56 President and Chief Executive Officer
Michael D. Starr................ 54 Senior Executive Vice President and Treasurer
Robert L. Bowles, Jr............ 58 Executive Vice President
William J. Lubin................ 46 Executive Vice President
Anthony M. Picini............... 43 Executive Vice President and Chief Financial Officer
Frank L. Provato, M.D........... 50 Executive Vice President
Kenneth H. Weixel............... 39 Executive Vice President
</TABLE>
Jack M. Mazur, age 56, has been a director of the Company since 1976 and has
served as President since October 1995. Prior to his election as President, Mr.
Mazur was Chief Executive Officer of the Company's Commercial Managed Care
Division. From August 1989 to October 1995, Mr. Mazur served as Senior Executive
Vice President of the Company, from June 1986 to October 1993 as Secretary of
the Company, and from 1976 through May 1986 as an advisor to the President and
Chairman and as Assistant Secretary of the Company.
Michael D. Starr, age 54, has been employed by the Company in various
financial and operational positions since 1976 and has been a director since
1985. Mr. Starr was Controller of the Company from 1976 to 1981, Vice President,
Finance and Administration from 1981 to 1986, Executive Vice President from
March 1986 to October 1995, and Senior Executive Vice President since October
1995.
Robert L. Bowles, Jr., age 58, joined the Company in August 1993 in connection
with the Company's acquisition of D.C. Chartered Health Plan, Inc. Mr. Bowles is
the founder of D.C. Chartered and has more than 30 years experience in
administration and management of health care services and operations for
corporations and the military.
William J. Lubin, age 46, joined PHP in August 1994 as Senior Vice President
for Managed Care. In late 1994 he assumed the position of Chief Operating
Officer, Commercial Managed Care. In October 1995, he became an Executive Vice
President. Prior to joining PHP, Mr. Lubin held management positions with Aetna
Health Plans, Travelers Insurance Companies, Lincoln National, and Blue Cross
and Blue Shield of Connecticut.
Anthony M. Picini, age 43, has been with the Company since 1989. Previously,
Mr. Picini was with the accounting firm of KPMG Peat Marwick, where he managed
the auditing and accounting of both public and private companies.
Frank L. Provato, M.D., age 50, has been with the Company since 1993. Prior to
joining PHP, he served as Vice President and Corporate Medical Director for GTE
Corporation, where he was responsible for the development of health care cost
management strategies and the implementation of a GTE-sponsored primary care
health center in Tampa, Florida. Dr. Provato has 23 years of diverse background
in clinical medicine, health care administration, occupational health, and
employee benefits administration.
Kenneth H. Weixel, age 39, has been with the Company since 1997. Prior to
joining PHP, he was the Managing Partner of the Western Region Healthcare
Practice for Deloitte & Touche, LLP. In this capacity and while headquartered
on the West Coast, Ken directly served many of the largest and most complex
healthcare companies. Mr. Weixel has more than 18 years of experience in health
care accounting, finance, and mergers and acquisitions.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE
The Company's Common Stock, $.01 par value, is traded on the New York Stock
Exchange under the symbol "PPH." The following table presents, for the periods
indicated, the high and low sale prices per share of Common Stock as reported by
the New York Stock Exchange.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- -------------- ----------- ---------
April 30, 1998
<S> <C> <C>
Fourth Quarter.................. $ 17 15/16 $ 12 3/8
Third Quarter................... 17 3/8 11 9/16
Second Quarter.................. 16 5/8 12 7/16
First Quarter................... 18 3/8 13 1/8
April 30, 1997
Fourth Quarter.................. $ 23 7/8 $ 10 5/8
Third Quarter................... 29 1/2 20 7/8
Second Quarter.................. 31 22 7/8
First Quarter................... 36 20 3/8
</TABLE>
NUMBER OF STOCKHOLDERS
As of July 31, 1998, there were approximately 920 holders of record of the
Company's Common Stock. Based on a review of its nominee account listings, the
Company estimates that there are approximately 5,800 beneficial owners of the
Company's Common Stock.
DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does not
expect to do so in the foreseeable future. The Company intends to retain all
future earnings to fund the operation and expansion of its business. The
Company's bank credit agreement precludes the payment of cash dividends without
the bank's approval.
SALES OF UNREGISTERED SECURITIES
In May 1997, the Company issued 200,000 shares of its Common Stock to a trust
for the benefit of John W. Kluge for consideration of $13.00 per share. The
issuance of the shares was exempt under Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act").
In November 1997, in consideration of the agreement of NationsBank, N.A. to
enter into a new credit agreement with the Company, the Company issued to
NationsBank, N.A. warrants to purchase 500,150 shares of common stock (subject
to certain anti-dilution adjustments), exercisable at no cost at any time on or
before October 31, 2007. The issuance of the warrants was exempt under Section
4(2) of the Securities Act.
In December 1997, the Company issued 70,000 shares of Series B Convertible
Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), to
certain accredited investors at a purchase price of $1,000 per share resulting
in gross proceeds to the Company of $70 million. In connection with the sale of
the Series B Preferred Stock, warrants to purchase 700 shares of Series B
Preferred Stock were also issued to the placement agents and their affiliates.
The issuance of the shares and warrants was exempt under Section 4(2) of the
Securities Act. The shares of Series B Preferred Stock are convertible into
shares of common stock at a conversion price that varies with the price of the
common stock. A detailed description of the Series B Preferred Stock is
incorporated herein by reference to Item 5 of the Company's Current Report on
Form 8-K/A, filed with the Securities and Exchange Commission on May 7, 1998.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to the
Company's consolidated statements of operations and balance sheets is derived
from the Consolidated Financial Statements of the Company as audited by
PricewaterhouseCoopers LLP, independent public accountants, for the years ended
April 30, 1998, April 30, 1997 and April 30, 1996 and by KPMG Peat Marwick LLP,
independent public accountants for the years ended April 30, 1995 and April 30,
1994, and gives retroactive effect to the two-for-one stock split effected in
the form of a 100% stock dividend distributed on November 20, 1995 to
stockholders of record on November 1, 1995. The data presented below should be
read in conjunction with and is qualified by reference to the consolidated
financial statements of the Company and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein. See Items 7 and 8.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
(In Thousands, Except Per Share Amounts)
1994 1995/(1)/ 1996 1997 1998
--------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $148,683 $ 197,251 $ 202,464 $ 232,369 $400,130
Direct costs...................................... 140,397 182,969 162,619 189,477 394,037
-------- ------------- ---------- ---------- --------
Gross profit................................. 8,286 14,282 39,845 42,892 6,093
General and administrative expenses............... 16,936 19,660 27,220 30,846 39,937
Reserve for Medicaid receivables.................. --- --- --- 9,822 ---
Former chairman retirement........................ --- --- --- 2,275 ---
Restructuring charges............................. --- --- --- 2,550 1,500
-------- ------------- ---------- ---------- --------
Operating income (loss)...................... (8,650) (5,378) 12,625 (2,601) (35,344)
Other income (expense):
Interest expense............................. (3,288) (2,209) (3,363) (5,577) (9,735)
Interest income.............................. 186 422 1,448 2,060 1,362
Miscellaneous income (expense)............... (504) 1,015 69 (222) (818)
Gain on sale of subsidiary stock............. --- --- 2,247 --- ---
Minority interest in earnings (losses) of
subsidiaries............................... (213) (159) 212 (196) 206
-------- ------------- ---------- ---------- --------
Earnings (loss) before income taxes and
extraordinary item......................... (12,469) (6,309) 13,238 (6,536) (44,329)
Income tax expense (benefit)...................... (3,135) (2,271) 4,100 (2,487) (8,800)
-------- ------------- ---------- ---------- --------
Earnings (loss) before extraordinary item.... (9,334) (4,038) 9,138 (4,049) (35,529)
Extraordinary item - loss on early
extinguishment of debt.......................... --- --- --- --- (9,275)
-------- ------------- ---------- ---------- --------
Net earnings (loss).......................... (9,334) (4,038) 9,138 (4,049) (44,804)
Deemed dividend................................... --- --- --- --- (2,800)
-------- ------------- ---------- ---------- --------
Net earnings (loss) available to common
shareholders............................... $ (9,334) $ (4,038) $ 9,138 $ (4,049) $(47,604)
======== ============= ========== ========== ========
Net earnings (loss) per common share
Basic....................................... $ (0.93) $ (0.38) $ 0.84 $ (0.37) $ (4.10)
======== ============= ========== ========== ========
Diluted..................................... $ (0.93) $ (0.38) $ 0.68 $ (0.37) $ (4.10)
======== ============= ========== ========== ========
Weighted average number of common shares
Basic....................................... 10,073 10,537 10,855 11,038 11,615
======== ============= ========== ========== ========
Diluted..................................... 10,073 10,537 13,540 11,038 11,615
======== ============= ========== ========== ========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
(In Thousands)
1994 1995 1996 1997 1998
------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA AT PERIOD END:
Working Capital................................... $ 7,736 $ 10,433 $ 63,593 $ 29,966 $(23,094)
Total Assets...................................... 87,111 65,570 127,579 148,373 253,580
Short-term debt................................... 4,589 2,247 545 10,916 2,922
Long-term debt.................................... 39,643 24,454 67,529 69,996 91,428
Stockholders' equity.............................. 17,296 15,339 25,777 25,147 51,707
</TABLE>
_________________
/(1)/ Includes $22 million of non-recurring start-up and construction revenues
and costs related to the Company's BCBSNJ project.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's
consolidated financial statements and related notes thereto included elsewhere
in this report.
The following table sets forth, for the years indicated, certain items in the
Company's Consolidated Statements of Operations expressed as a percentage of
revenues:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues............................................................ 100.0% 100.0% 100.0%
Direct costs........................................................ 98.5 81.5 80.3
----- ----- -----
Gross profit........................................................ 1.5 18.5 19.7
General and administrative expenses................................. 10.0 13.3 13.4
Reserve for Medicaid receivables.................................... --- 4.2 ---
Former chairman retirement package.................................. --- 1.0 ---
Restructuring charges............................................... 0.4 1.1 ---
----- ----- -----
Operating income (loss)............................................. (8.9) (1.1) 6.3
Other income (expense).............................................. (2.2) (1.7) 0.2
----- ----- -----
Earnings (loss) before income taxes and extraordinary item.......... (11.1) (2.8) 6.5
Income tax expense (benefit)........................................ (2.2) (1.1) 2.0
----- ----- -----
Earnings (loss) before extraordinary item........................... (8.9) (1.7) 4.5
Extraordinary item, loss on early
extinguishment of debt............................................ 2.3 --- ---
----- ----- -----
Net earnings (loss)................................................. (11.2) (1.7) 4.5
Deemed dividend..................................................... (0.7) --- ---
----- ----- -----
Net earnings (loss) available to common shareholders................ (11.9) (1.7) 4.5
===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Fiscal Year 1998 Compared to Fiscal Year 1997
The Company's revenues increased by $167.7 million or 72.2% to $400.1 million
in fiscal year 1998 compared to $232.4 million in fiscal year 1997. This
overall net increase in revenues resulted from the following fluctuations in the
Company's lines of business.
In fiscal year 1998, revenues at the Company's wholly owned subsidiary, PHE,
increased $197.0 million. This increase was almost entirely a result of the
Company's new strategic alliance with HIP of New Jersey which commenced
operations November 1, 1997. Under a 20 year exclusive global capitation
agreement, the Company provides and manages health care services for HIP of New
Jersey's 190,000 BCBSNJ members. PHE's other revenues from a similar global
capitation agreement with BCBSNJ and fee-for-service revenues remained
consistent with the prior year. The Company's majority owned subsidiary, VACHP,
experienced a $7.5 million increase in revenues resulting from a 39% increase in
member months from 119,500 in 1997 to 166,100 in 1998. Additionally, revenues
from the Company's corporate health center projects increased $2.4 million
reflective of increased utilization of health care services by the constituent
populations at these health center projects.
These revenue increases were tempered by the following revenue decreases.
Revenues from the Company's government contracts decreased by a net total of
$29.6 million, as follows: (i) a $32.4 million decrease resulting from the
completion of one total managed care correctional facilities project, five
primary care projects, and three mental health projects, on various dates since
the beginning of the prior fiscal year, (ii) a $13.2 million decrease resulting
from the Company's decision, during the third quarter of fiscal year 1997, to
terminate its long-term care line of business, and (iii) a $14.2 million
increase in revenues resulting from the commencement of operations on two
medical staffing projects, three total managed care projects, and one primary
care project, since the beginning of the prior fiscal year. Revenues from the
Company's wholly owned subsidiary, CHP, decreased by $9.9 million reflective of
a 13% decrease in member months from 280,700 in 1997 to 245,300 in 1998 and a
15.1% premium rate reduction effective November 1996.
The Company's gross profit decreased by $36.7 million or 85.8%, to $6.1
million in fiscal year 1998 compared to $42.9 million in fiscal year 1997. As a
percentage of revenue, gross profit decreased to 1.5% for the current year
compared to 18.5% in fiscal year 1997. This decrease includes a $10.7 million
decrease in gross profits at PHE,resulting from a loss of $2.7 million on the
new global
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capitation agreement with HIP of New Jersey which began operations on November
1, 1997 and an increase in medical costs on the BCBSNJ capitation business. A
decrease of $10.5 million in gross profit resulted from the Company's various
strategic integrated system of care ("ISOC") ventures with hospital systems and
physician groups in Connecticut, Georgia, Louisiana, Vietnam, Virginia and New
York. Other than the Vietnam project which is currently in a dormant mode during
this period of financial instability in the Far East, the Company has ceased all
of its other ISOC ventures. During the past twelve months the Company has
determined that the ISOC enterprise activities it has previously undertaken were
not viable business plans.
The Company's wholly owned Medicaid HMO, CHP, provided a $9.2 million decrease
in gross profit resulting from the decrease in revenues discussed above, and an
increase in medical costs.
An additional gross profit decrease of $6.4 million occurred on the Company's
government contracts. This net decrease consists of: (i) a $3.8 million
decrease resulting from the completion of several government projects since the
beginning of the prior fiscal year, as discussed above with respect to a
decrease in revenues, (ii) a $3.2 million decrease, resulting in a loss during
the current year of $2.0 million, on a large total managed care correctional
facilities project, and (iii) an increase of $0.9 million provided by the new
projects which commenced operations since the beginning of the prior fiscal year
as discussed above with respect to an increase in revenues, exclusive of the
project discussed here at item (ii) which was included in the new projects
explanation in the revenue discussion. The aforementioned total managed care
correctional facilities project incurred higher secondary care and staffing
costs during the current year, causing the shift in gross profits. The current
year results also include a $400,000 contract loss provision for this project
which was completed on June 30, 1998.
General and administrative expenses increased 29.5% or $9.1 million to $39.9
million in fiscal year 1998 from $30.8 million in fiscal year 1997. This
increase includes: (1) a $2.3 million increase in general and administrative
expenses associated with the CHP business primarily related to increased
compensation and facility costs, additional information technology consulting
fees, and increased marketing and promotion costs related to the new Medicaid
contract which became effective in May 1998, (2) a $1.3 million increase in
general and administrative expenses associated with the VACHP business primarily
related to the growth in member months, (3) a $2.3 million increase in
consulting, temporary help and business travel expenses primarily associated
with the growth in the Company's business resulting from the HIP of New Jersey
relationship, and (4) a $1.5 million increase in facility, equipment rental and
maintenance costs at the corporate headquarters primarily resulting from an
increase in personnel associated with the growth in the Company's business
resulting from HIP of New Jersey relationship. As a percentage of revenue,
general and administrative expenses decreased to 10.0% for the current year
compared to 13.3% in fiscal year 1997.
During the third quarter of fiscal 1997, the Company recorded a $9.8 million
reserve for Medicaid receivables associated with the Company's Medicaid
operations at CHP in the District of Columbia, principally relating to services
provided during the 1992 to 1994 contract years. This reserve was established
based on new developments in the Company's efforts to resolve these outstanding
matters with the District of Columbia, as more fully discussed in Item 1.
Business -- Operations.
During the third quarter of fiscal 1997, the Company recognized $2.3 million
in expense for the retirement package provided by the Board of Directors to the
Company's Founder, Chairman and Chief Executive Officer, Charles H. Robbins,
upon his retirement from the Company.
During the third quarter of fiscal 1997, the Company incurred restructuring
charges of $2.6 million. Within a broad restructuring effort, this charge
resulted from two specific decisions made by the Board of Directors.
In late November 1996, the Company made the strategic decision to terminate
its long-term care line of business. 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.
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In fiscal year 1998, the Company determined that the previously established
restructuring reserve for the termination of its long-term care line of business
was insufficient to provide for the losses incurred during the exit process on
several of these projects. Consequently, in fiscal year 1998, the Company
recognized an additional $1.5 million in restructuring charges related to the
strategic decision to terminate the long-term care line of business.
Effective January 31, 1997, the Company made the strategic decision to
terminate the Company's facilities development and maintenance function operated
out of the corporate offices through the Company's wholly owned subsidiary,
Sterling Communities Corporation. The elimination of these activities will allow
the Company to concentrate its resources and energy on its core missions. Future
building and facilities management needs will be fulfilled through outsourced
vendor relationships. The Company incurred a restructuring charge of $750,000
for severance and other termination costs associated with the elimination of
this function.
Operating income decreased by $32.7 million from an operating loss of $2.6
million in fiscal 1997 to a $35.3 million operating loss in fiscal 1998.
Operating margin decreased to a loss of 8.8% from a loss of 1.1%. This decrease
primarily results from the losses incurred at PHE, the losses incurred on the
Company's various ISOC ventures, the decrease in gross profits at CHP, the
decrease in gross profits on government contracts, and the increases in general
and administrative expenses at the corporate headquarters, CHP and VACHP.
Interest expense increased 74.6%, or $4.1 million to $9.7 million for fiscal
year 1998 from $5.6 million for fiscal year 1997. The Company incurred higher
interest expense as a result of the temporary debt financing for the HIP of New
Jersey transaction and the accounting treatment required for the former BCBSNJ
primary care facilities that the Company is leasing.
Interest income decreased by $0.7 million from $2.1 million in fiscal year
1997 to $1.4 million in fiscal year 1998. This decrease represents a generally
reduced level of cash available for overnight investment occurring as a routine
aspect of cash management, resulting from the Company experiencing an overall
higher level of indebtedness primarily as a function of the BCBSNJ transaction
in February 1997 and the HIP of New Jersey transaction in November 1997.
The effective income tax rates of 20.0% and 38.0% for fiscal years 1998 and
1997 respectively, represent the combined federal and state income tax rates
adjusted as necessary. The 1998 rate was particularly reduced by the
establishment of a valuation allowance in the amount of $15.0 million against
the Company's deferred tax assets. The valuation allowance was determined based
on certain estimates about the timing and recovery of the Company's deferred tax
assets in light of the Company's operating losses during fiscal years 1998 and
1997.
Earnings (loss) before extraordinary item decreased by $31.5 million or $2.69
per share, to a loss of $35.5 million or $3.06 per share, from a loss of $4.0
million or $0.37 per share based on 11,615,000 and 11,038,000 diluted weighted
average shares outstanding for 1998 and 1997, respectively.
In fiscal year 1998, the Company incurred an extraordinary loss on early
extinguishment of debt of $9.3 million, or $0.80 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 $171,000 in other related
expenses to secure the credit facility. The $9.3 million extraordinary item
represents the complete write-off of these credit facility costs after
recognizing $746,000 as interest expense for the period the borrowings were
outstanding under the facility. There was no income tax provision associated
with the extraordinary item.
In fiscal year 1998, the Company recorded a preferred stock non-cash deemed
dividend of $2.8 million or $0.24 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 an
eleven 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
eleven month period.
Fiscal Year 1997 Compared to Fiscal Year 1996
The Company's revenues increased by $29.9 million or 14.8% to $232.4 million
in fiscal year 1997 compared to $202.5 million for the prior fiscal year.
The largest increase of $46.5 million resulted from the BCBSNJ ISOC project.
Effective July 1, 1996, this business relationship was modified such that the
Company began to provide services under a global capitation arrangement which
significantly increased the revenues the Company earns as well as the scope of
services and resultant cost of service. The second largest increase, or $13.9
million, was provided by the Company's subsidiary, VACHP, a Medicaid HMO
operating in selected markets in the Commonwealth of Virginia. VACHP commenced
operations in November 1995 and therefore was only operating for less than half
the year during fiscal year 1996. In addition, since commencing operations,
VACHP has continually increased its membership enrollment. Revenues also
increased by $8.5 million as a result of the Company's ISOC development,
management and operations related to its strategic ventures, primarily in
Connecticut and Louisiana.
An additional net revenue increase of $1.0 million was provided by the
Company's government contracts. This net increase consists of: (1) a $14.3
million increase resulting from a significant new total managed care
correctional facilities project which commenced operations in July 1996, (2) a
$7.6 million increase resulting from two new ambulatory care projects, one new
mental health project and one new medical staffing project, all of which
commenced operations since the beginning of the prior fiscal year, and (3) a
$1.4 million increase resulting from an increase in the number of inmates and in
the per inmate reimbursement rate on an existing total managed care correctional
facilities
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project, reduced by (4) a decrease of $18.2 million related to the completion of
seven ambulatory care projects, three mental health projects, and one medical
staffing project, and (5) a $4.2 million decrease resulting from the Company's
restructuring decisions in the third quarter of fiscal 1997 which included the
Company's decision to terminate its long-term care line of business effective
December 1, 1996. The results of operations for these projects since December 1,
1996 are presented on the Statement of Operations on the Restructuring Charges
line item.
Along with these revenue increases, the Company's revenue decreased by $11.9
million at CHP, the Company's Medicaid HMO in the District of Columbia. CHP's
revenues decreased due to a decrease in enrollment resulting in a 20.0% decrease
in member months and a 15.1% decrease in the contractual premium rate effective
November 1, 1996.
The Company's gross profit increased by 7.8% or $3.1 million, to $42.9 million
for fiscal year 1997 compared to $39.8 million for the prior year. As a
percentage of revenue, gross profit decreased to 18.5% for the current year
compared to 19.7% in fiscal 1996. Gross profit increased $4.5 million from the
operations of VACHP which was operational a full year in 1997 and less than half
a year in fiscal 1996, as discussed above. The BCBSNJ ISOC operations which
became a global capitation healthcare services contract effective July 1, 1996,
provided a $1.9 million increase in gross profit. Gross profit also increased by
$2.1 million resulting from increased activity in the Company's development,
management, and operations related to its strategic provider-based ISOC
ventures, primarily in Connecticut and Louisiana.
These gross profit increases were reduced by a decrease of $3.6 million
related to the CHP operations resulting from a 20.0% decrease in membership
enrollment and a 15.1% decrease in the premium rate effective November 1, 1996.
An additional gross profit decrease of $1.4 million resulted from the Company's
government contracts, consisting of: (1) a $1.4 million decrease resulting from
the completion of three mental health projects since the beginning of the fiscal
year, (2) a $0.7 million decrease resulting from the re-award of an ambulatory
care project requiring a different scope of services and at a reduced gross
profit rate, (3) a $0.5 million decrease resulting from the completion of two
ambulatory care projects, and (4) a $0.3 million decrease resulting from the
Company's restructuring decisions in the third quarter of fiscal 1997 which
included the Company's decision to terminate its long-term care line of business
effective December 1, 1996, as offset by gross profit increases of (5) $1.2
million resulting from a significant new total managed care correctional
facilities project which commenced operations in July 1996, and (6) an increase
of $0.6 million resulting from the commencement of operations on one new mental
health project.
General and administrative expenses increased 13.5% or $3.6 million to $30.8
million in fiscal 1997 from $27.2 million in fiscal 1996. This increase is
primarily related to: (1) $1.7 million increase for additional general and
administrative expenses associated with the VACHP business which commenced
operations in November 1995, (2) a $1.3 million increase related to increased
personnel and facility expenses at CHP, (3) $0.5 million increase in facility
expenses associated with the expansion of the corporate headquarters space, and
(4) $0.7 million increase in development expenses. As a percentage of revenue,
general and administrative expenses decreased to 13.2% for the current year
compared to 13.4% in fiscal year 1996.
During the third quarter of fiscal 1997, the Company recorded a $9.8 million
reserve for Medicaid receivables associated with the Company's Medicaid
operations at CHP in the District of Columbia, principally relating to services
provided during the 1992 to 1994 contract years. This reserve was established
based on new developments in the Company's efforts to resolve these outstanding
matters with the District of Columbia, as more fully discussed in Item 1.
Business -- Operations.
During the third quarter of fiscal 1997, the Company recognized $2.3 million
in expense for the retirement package provided by the Board of Directors to the
Company's Founder, Chairman and Chief Executive Officer, Charles H. Robbins,
upon his retirement from the Company.
During the third quarter of fiscal 1997, the Company incurred restructuring
charges of $2.6 million. Within a broad restructuring effort, this charge
resulted from two specific decisions made by the Board of Directors.
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<PAGE>
In late November 1996, the Company made the strategic decision to terminate
its long-term care line of business. The Company determined that maintaining
this capability internally was not essential to its success in providing
vertically integrated healthcare services, in whole or in part, through the
Company's ISOC products. In addition, the Company determined that the
relationship between the risk it assumed on these projects and the opportunity
for profit was not adequately balanced. The Company recognized a net loss of
$1.8 million related to the restructuring for the termination of this line of
business.
Effective January 31, 1997, the Company made the strategic decision to
terminate the Company's facilities development and maintenance function operated
out of the corporate offices through the Company's wholly owned subsidiary,
Sterling Communities Corporation. The elimination of these activities will allow
the Company to concentrate its resources and energy on its core missions. Future
building and facilities management needs will be fulfilled through outsourced
vendor relationships. The Company incurred a restructuring charge of $750,000
for severance and other termination costs associated with the elimination of
this function.
Operating income decreased by $15.2 million from $12.6 million in operating
income in fiscal 1996 to $2.6 million in operating losses in fiscal 1997.
Operating margin decreased to a loss of 1.1% from income of 6.2%. This decrease
is primarily related to the Medicaid receivables reserve, the restructuring
charges, and the retirement expense that was recognized in fiscal 1997.
Interest expense increased 65.8%, or $2.2 million to $5.6 million for fiscal
year 1997 from $3.4 million for fiscal 1996. This increase is primarily a result
of the interest expense the Company incurs on the $69.0 million in convertible
subordinated debentures sold by the Company during fiscal 1996, in December
1995.
Interest income increased by $612,000 from $1,448,000 to $2,060,000 in fiscal
1996 and 1997, respectively. This increase is due to the additional interest
earned on the increase in available cash which resulted from the sale of $69.0
million in convertible subordinated debentures discussed above.
In fiscal 1996, the Company recognized a gain of $2.2 million related to the
sale of a 30% interest in its VACHP subsidiary for $3.0 million in cash.
The effective income tax rates of 38.0% and 31.0% for fiscal years 1997 and
1996, respectively, represent the combined federal and state income tax rates
adjusted as necessary. The gain resulting from the sale of a 30% interest in
VACHP is a non-taxable transaction and therefore no provision for income taxes
was included in the Company's results of operations for fiscal 1996. Exclusive
of this gain, the combined effective income tax rate for fiscal year 1996 would
have been 37.4%.
The Company's results of operations decreased by $13.1 million from net
earnings of $9.1 million to a net loss of $4.0 million for fiscal years 1996 and
1997, respectively, resulting in diluted losses per share of $0.37 in 1997,
compared with diluted earnings per share of $0.66 in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are operations, bank borrowings, and
the issuances of debt and equity securities. The Company has incurred net
losses of $47.6 million in 1998, of $4.0 million in 1997, of $4.0 million in
1995 and of $9.3 million in 1994.
To finance the HIP acquisition, pay related expenses and provide future
working capital, the Company obtained a $75 million secured credit facility from
its primarily lender in October 1997, which superseded the pre-existing primary
banking facility. Under the credit facility, the Company had available up to
$75 million in the form of a term facility for a principal amount of $40 million
maturing in two years and a revolving credit facility for a principal amount of
up to $35 million. The credit facility contained customary affirmative,
negative and financial covenants and was secured by all of the Company's assets.
The credit facility was established to temporarily finance the acquisition as
the Company intended to obtain permanent financing through the issuance of debt
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 gross proceeds to the Company of $70 million. The
proceeds of the offering were used to repay the entire outstanding borrowings
under the credit facility described above and to pay related issuance costs of
$6.95 million.
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 and decreased the revolving facility to $30 million. At April 30,
1998, there were no cash advances outstanding under the revolving facility,
other than $3 million in standby letters of credit outstanding that were issued
for
26
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the account of the Company in connection with certain contract performance
requirements.
On May 26, 1998, the credit facility was amended in its entirety. The amended
three year $80 million facility consists of a $15 million working capital
revolving credit facility which provides for up to $5 million for the issuance
of letters of credit and a $65 million revolving credit facility for the
purchase of the Company's capital stock and for working capital needs. The
advances on the $65 million facility, if any, on January 31, 1999, will be
converted to a term loan payable in nine quarterly installments beginning April
30, 1999. The amended credit facility contains customary affirmative, negative
and financial covenants and is secured by substantially all of the Company's
assets. As of August 12, 1998, the Company had advances of $77 million and $3
million in letters of credit outstanding under this credit facility.
From June 3 through June 11, 1998, the Company repurchased 25,320 shares of
the Series B Preferred Stock at a cost of $28.7 million. In April 1998, the
Board of Directors of the Company authorized the repurchase of up to 3 million
shares of common stock. As of April 30, 1998, the Company had repurchased
149,800 common shares at a cost of $2.6 million. From May 1, 1998 through July
27, 1998, the Company repurchased an additional 1,643,000 common shares at a
cost of $21.8 million, including 1,000,000 common shares purchased from the
Company's former chairman at a cost of $16.8 million.
For the year ended April 30, 1998, $15.9 million in cash was provided by
operations. This represents a $19.5 million improvement in cash provided by
operations compared to $3.6 million used by operations in the prior year. The
primary causes for this improvement were an increase in medical claims payable
reduced by an increase in net loss and an increase in accounts receivable.
Investing activities used $20.5 million in cash during 1998 compared to $40.7
used in 1997. In 1998 the cash used primarily relates to the HIP of New Jersey
acquisition, and acquisitions of property and equipment, reduced by the
disposition of the formerly consolidated REIT.
Financing activities used $5.4 million in cash during 1998 compared with $11.4
million provided by financing activities in 1997. The primary financing
activities in 1998 consist of the proceeds from the Series B Convertible
Preferred Stock Offering, repayments on the Company's credit facility with its
primary bank (particulary associated with the initial HIP of New Jersey
transaction financing), purchases of treasury shares, repayments on other notes
payable, and proceeds from the exercise of options and sales of common shares.
The Company has incurred net losses of $47.6 million in 1998, of $4.0 million
in 1997, of $4.0 million in 1995 and of $9.3 million in 1994.
As a result of the decline in financial performance over the last few years,
the Company is currently exploring alternatives for maintaining adequate
liquidity. Under the terms and conditions of its credit facility, the Company
is currently permitted to borrow up to $80 million. As of the date of this
report, the Company has utilized the full amount of the credit facility in the
form of $77 million in advances and $3 million in outstanding letters of credit.
Additionally, as of April 30, 1998, as a result of the net loss in 1998, the
Company was not in compliance with certain provisions in the credit facility.
The Company is in discussions with its lender to waive current noncompliance
and to amend existing financial covenants to avoid expected future
noncompliance. The Company also plans to negotiate with its lender either to
increase its borrowing capacity under its existing credit facility or enter into
a new credit facility with increased borrowing capacity, or to pursue
alternative financing sources. There can be no assurance that the Company will
succeed in its attempt to increase its existing credit facility or obtain a new
credit facility or obtain alternative financing sources, on satisfactory terms.
The Company expects additional improvements to liquidity through: (i)
continued vigorous pursuit of outstanding receivables including the DCDHS
Medicaid Claim and Maryland Department of Public Safety and Correctional
Services, (ii) the sale of non strategic business operations and other assets,
and (iii) cost reductions from the elimination of inefficient practice sites and
redundant administrative activities.
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IMPACT OF THE YEAR 2000
The Year 2000 issue, which arises in date calculations, is caused by computer
systems using two digits rather than four to define the applicable year. After
December 31, 1999, such systems may recognize "00" as 1900 rather than 2000.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process data
or engage in normal business activities.
After a review of its information systems, the Company has taken steps to
ensure that its internal software and hardware systems will function properly
with respect to dates in the year 2000 and thereafter. As a result of the
review, the Company does not anticipate that it will incur significant operating
expenses or be required to make significant investments in computer systems
improvements to become year 2000 compliant. However, uncertainty exists
concerning the potential costs and effects associated with any year 2000
compliance. Any problems associated with the compliance of the Company, managed
care organizations, government agencies or providers could have a material
adverse effect on the Company's business, results of operations and financial
condition.
In addition, the ability of the Company to offer its services and the ability
of managed care organizations, government agencies or providers that use the
Company's services to access such services are dependent upon the continued
availability of various infrastructure systems, including electric power and
telecommunications. There can be no assurance at this time that these
infrastructure systems will not experience disruptions caused by year 2000
issues. If such disruptions were to occur in the location where the Company's
computer hardware and software is located, or in one or more areas where managed
care organizations, government agencies or providers are located, there can be
no assurance that such disruptions will not have a material adverse effect on
the Company's business, financial condition, results of operations, or business
prospects.
IMPACT OF INFLATION
Inflation is considered in all contract proposals with contract terms in
excess of one year. The consideration of inflationary factors is particularly
important with respect to unit-price, fixed-rate-labor hour, and fixed-price
contracts. Historically, inflation has not had a significant impact on the
operations of the Company. While health care costs nationally are increasing,
the Company's primary exposure relating to this trend has been related to
salaries of health care professionals and costs of pharmaceuticals which the
Company estimates and prices into all of its long term contracts. The Company
may however become involved in future contracts where inflation and increasing
health care costs may be an important factor.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
are listed in the Index to Financial Statements and Financial Statement
Schedules appearing on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated herein by reference
to the text appearing in Part I, Item 1 of this report under the caption
"Executive Officers of the Registrant," and by reference to the Company's
definitive proxy statement, which is expected to be filed with the Securities
and Exchange Commission within 120 days after the close of the Company's fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference
to the information to be set forth under the caption "Executive Compensation" in
the Company's definitive proxy statement, which is expected to be filed with the
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by reference
to the information to be set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Company's definitive proxy
statement, which is expected to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by reference
to the information to be set forth under the caption "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement, which is
expected to be filed with the Securities and Exchange Commission within 120 days
after the close of the Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and financial statement schedules required to be
filed as part of this report are listed in the Index to Consolidated Financial
Statements elsewhere in this report, which list is incorporated herein by
reference.
EXHIBITS
The documents required to be filed as exhibits to this report under Item 601
of Regulation S-K are listed in the Exhibit Index included elsewhere in this
report, which list is incorporated herein by reference.
REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER
The Company filed a Current Report on Form 8-K on April 29, 1998, together
with a press release, which stated that on April 28, 1998, the Board of
Directors of the Company had authorized the repurchase of up to 3 million shares
of common stock.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Reston,
Commonwealth of Virginia, on this 13/th/ day of August, 1998.
PHP HEALTHCARE CORPORATION
(Registrant)
By: /s/ Jack M. Mazur
-----------------
Name: Jack M. Mazur
Title: President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Jack M. Mazur, Anthony M. Picini and Ben Rosenbaum III,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to this report,
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or either of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
30
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION DATE
- ----------------------------------------- --------------------------------------------------- -------------------------
<S> <C> <C>
/s/ Charles P. Reilly Chairman of the Board and Director August 13, 1998
- -----------------------------------------
/s/ Jack M. Mazur President, Chief Executive Officer and Director August 13, 1998
- -----------------------------------------
/s/ Michael D. Starr Senior Executive Vice President, Treasurer August 13, 1998
- ----------------------------------------- and Director
/s/ Anthony M. Picini Executive Vice President and Chief Financial August 13, 1998
- ----------------------------------------- Officer (Chief Accounting Officer)
/s/ William J. Lubin Executive Vice President and Director August 13, 1998
- -----------------------------------------
/s/ Robert L. Bowles, Jr. President, D.C. Chartered Health Plan, Inc., August 13, 1998
- ----------------------------------------- Executive Vice President and Director
/s/ Frank L. Provato, M.D. Executive Vice President, Corporate Medical August 13, 1998
- ----------------------------------------- Director and Director
/s/ Jerry W. Carlton Director August 13, 1998
- -----------------------------------------
/s/ Joseph G. Mathews Director August 13, 1998
- -----------------------------------------
/s/ John J. McDonnell Director August 13, 1998
- -----------------------------------------
/s/ Donald J. Ruffing Director August 13, 1998
- -----------------------------------------
</TABLE>
31
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants.............................................................................. F-2
Consolidated Balance Sheets at April 30, 1998 and 1997......................................................... F-3
Consolidated Statements of Operations for the Years Ended April 30, 1998, 1997 and 1996........................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended April 30, 1998, 1997 and 1996.............. F-5
Consolidated Statements of Cash Flows for the Years Ended April 30, 1998, 1997, and 1996....................... F-6
Notes to Consolidated Financial Statements..................................................................... F-8
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:
Schedule II-Valuation and Qualifying Accounts, Years ended April 30, 1998, 1997 and 1996....................... F-29
</TABLE>
F-1
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS
August 12, 1998
To the Board of Directors
PHP Healthcare Corporation:
In our opinion, the accompanying Consolidated Balance Sheets and the
related Consolidated Statements of Operations, Stockholders' Equity, and Cash
Flows, present fairly, in all material respects, the financial position of PHP
Healthcare Corporation and subsidiaries as of April 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended April 30, 1998, in conformity with generally
accepted accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
F-2
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 1998 and 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................................ $ 5,702 $ 15,765
Accounts receivable, net (note 2)................................................................ 70,400 45,800
Pharmaceutical and medical supplies.............................................................. 1,487 1,460
Receivables from officers (note 14).............................................................. 3,189 4,442
Income tax receivable (note 6)................................................................... --- 882
Other current assets............................................................................. 2,655 4,273
-------- --------
Total current assets........................................................................... 83,433 75,944
Property and equipment, net (note 3).............................................................. 88,070 58,444
Excess of cost over fair value of assets acquired, net of accumulated amortization
of $424 in 1998 and $1,201 in 1997 (note 1)...................................................... 4,202 4,661
Intangible assets, net of accumulated amortization of $2,361 in 1998 and $34 in 1997 (note 1)..... 57,426 2,614
Deferred income taxes (note 6).................................................................... 11,447 ---
Receivables from officers (note 14)............................................................... 517 1,202
Note receivable (note 13)......................................................................... 2,000 ---
Other assets (note 14)............................................................................ 6,485 5,508
-------- --------
$253,580 $148,373
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank (note 4).................................................................... $ --- $ 9,200
Current maturities of notes payable-other (note 4)............................................... 2,552 1,716
Current maturities of finance lease obligation (note 13)......................................... 370 ---
Accounts payable................................................................................. 19,957 12,036
Claims payable-medical services.................................................................. 65,923 8,739
Accrued salaries and benefits.................................................................... 17,206 13,219
Deferred revenue................................................................................. 519 1,068
-------- --------
Total current liabilities...................................................................... 106,527 45,978
Notes payable-other, net of current maturities (note 4)........................................... 7,345 3,964
Finance lease obligation, net of current maturities (note 13)..................................... 17,535 ---
Convertible subordinated debentures (note 5)...................................................... 66,548 66,032
Deferred income taxes (note 6).................................................................... --- 1,274
Other liabilities (note 15)....................................................................... 3,364 1,675
-------- --------
Total liabilities.............................................................................. 201,319 118,923
-------- --------
Minority interest (note 13)....................................................................... 554 4,303
-------- --------
Stockholders' equity (notes 7, 8, 9 and 13):
Preferred stock, $1,000 par value, 10,000,000 shares authorized, 70,000 issued, 66,500
liquidation preference in 1998 and none in 1997................................................. 66,500 ---
Common stock, $.01 par value, 100,000,000 shares authorized, 15,678,305 shares
issued in 1998 and 14,369,849 shares issued in 1997............................................. 156 144
Additional paid-in capital....................................................................... 49,480 33,946
Note receivable from sale of stock............................................................... (900) (900)
Accumulated deficit.............................................................................. (49,075) (1,471)
Treasury stock, 3,618,285 common shares in 1998 and 3,258,485 common shares in 1997, at cost..... (14,454) (6,572)
-------- --------
Total stockholders' equity..................................................................... 51,707 25,147
Commitments and contingencies (notes 2, 4, 7, and 15) _______ _______
$253,580 $148,373
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues........................................................ $400,130 $232,369 $202,464
Direct costs.................................................... 394,037 189,477 162,619
-------- -------- --------
Gross profit.................................................. 6,093 42,892 39,845
General and administrative expenses............................. 39,937 30,846 27,220
Reserve for Medicaid receivables (note 2)....................... --- 9,822 ---
Former chairman retirement package (note 11).................... --- 2,275 ---
Restructuring charges (note 12)................................. 1,500 2,550 ---
-------- -------- --------
Operating income (loss)....................................... (35,344) (2,601) 12,625
Other income (expense):
Interest expense............................................... (9,735) (5,577) (3,363)
Interest income................................................ 1,362 2,060 1,448
Miscellaneous income (expense)................................. (818) (222) 69
Gain on sale of subsidiary stock............................... --- --- 2,247
Minority interest in (earnings) losses of subsidiaries......... 206 (196) 212
-------- -------- --------
Earnings (loss) before income taxes and extraordinary item.... (44,329) (6,536) 13,238
Income tax expense (benefit).................................... (8,800) (2,487) 4,100
-------- -------- --------
Earnings (loss) before extraordinary item..................... (35,529) (4,049) 9,138
Extraordinary item -- loss on early extinguishment of (9,275) --- ---
debt (note 10)................................................. -------- -------- --------
Net earnings (loss)........................................... (44,804) (4,049) 9,138
Deemed dividend................................................. (2,800) --- ---
-------- -------- --------
Net earnings (loss) available to common shareholders.......... $(47,604) $ (4,049) $ 9,138
======== ======== ========
Basic earnings (loss) per share (note 1):
Earnings (loss) before extraordinary item and deemed dividend.. $ (3.06) $ (0.37) $ 0.84
Deemed dividend................................................ (0.24) --- ---
-------- -------- --------
Earnings (loss) before extraordinary item..................... (3.30) (0.37) 0.84
Extraordinary item............................................. (0.80) --- ---
-------- -------- --------
Net earnings (loss)........................................... $ (4.10) $ (0.37) $ 0.84
======== ======== ========
Basic weighted average number of common shares outstanding...... 11,615 11,038 10,855
======== ======== ========
Diluted earnings (loss) per share (note 1):
Earnings (loss) before extraordinary item and deemed dividend.. $ (3.06) $ (0.37) $ 0.68
Deemed dividend................................................ (0.24) --- ---
-------- -------- --------
Earnings (loss) before extraordinary item..................... (3.30) (0.37) 0.68
Extraordinary item............................................. (0.80) --- ---
-------- -------- --------
Net earnings (loss)........................................... $ (4.10) $ (0.37) $ 0.68
======== ======== ========
Diluted weighted average number of common shares outstanding.... 11,615 11,038 13,540
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PHP HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL ADDITIONAL
PAID-IN PAID-IN NOTE
PREFERRED STOCK CAPITAL COMMON STOCK CAPITAL RECEIVABLE
--------------- PREFERRED ------------ COMMON FROM SALE
SHARES AMOUNT STOCK SHARES AMOUNT STOCK OF STOCK
------ ------ ----- ------ ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at April 30, 1995............................ --- $ --- $ --- $ 14,146 $141 $29,373 $ (900)
Shares issued to directors........................... --- --- --- 21 --- 136 ---
Exercise of stock options including related income
tax benefits........................................ --- --- --- 37 1 1,020 ---
Net earnings......................................... --- --- --- --- --- --- ---
-------- -------- --------- --------- ---- ------- ------
Balances at April 30, 1996............................ --- --- --- 14,204 142 30,529 (900)
Exercise of stock options including related income
tax benefits........................................ --- --- --- 76 1 1,018 ---
Shares issued in acquisition......................... --- --- --- 90 1 2,399 ---
Net loss............................................. --- --- --- --- --- --- ---
-------- -------- --------- --------- ---- ------- ------
Balances at April 30, 1997............................ --- --- --- 14,370 144 33,946 (900)
Exercise of stock options including related income
tax benefits...................................... --- --- --- 1,104 10 6,626 ---
Shares received in payment for option exercise....... --- --- --- --- --- --- ---
Shares issued to directors........................... --- --- --- 4 --- 110 ---
Sale of shares....................................... --- --- --- 200 2 2,598 ---
Purchase of shares................................... --- --- --- --- --- --- ---
Common stock warrants issued......................... --- --- --- --- --- 6,850 ---
Sale of Series B Convertible Preferred Stock......... 70 63,700 (650) --- --- --- ---
Amortization of preferred stock discount for
beneficial conversion interest...................... --- 2,800 --- --- --- --- ---
Net loss............................................. --- --- --- --- --- --- ---
-------- -------- --------- --------- ---- ------- ------
Balances at April 30, 1998............................ 70 $ 66,500 $ (650) 15,678 $156 $50,130 $ (900)
======== ======== ========= ========= ==== ======= ======
<CAPTION>
RETAINED TREASURY STOCK TOTAL
EARNINGS -------------- STOCKHOLDERS'
(DEFICIT) SHARES AMOUNT EQUITY
--------- ------ ------ ------
<S> <C> <C> <C> <C>
Balances at April 30, 1995............................ $ (6,560) 3,330 $ (6,716) $ 15,338
Shares issued to directors........................... --- --- --- 136
Exercise of stock options including related income
tax benefits........................................ --- (72) 144 1,165
Net earnings......................................... 9,138 --- --- 9,138
-------- ----- -------- --------
Balances at April 30, 1996............................ 2,578 3,258 (6,572) 25,777
Exercise of stock options including related income
tax benefits........................................ --- --- --- 1,019
Shares issued in acquisition......................... --- --- --- 2,400
Net loss............................................. (4,049) --- --- (4,049)
-------- ----- -------- --------
Balances at April 30, 1997............................ (1,471) 3,258 (6,572) 25,147
Exercise of stock options including related income
tax benefits........................................ --- (130) 263 6,899
Shares received in payment for option exercise....... --- 250 (3,125) (3,125)
Shares issued to directors........................... --- --- --- 110
Sale of shares....................................... --- --- --- 2,600
Purchase of shares................................... --- 240 (5,020) (5,020)
Common stock warrants issued......................... --- --- --- 6,850
Sale of Series B Convertible Preferred Stock......... --- --- --- 63,050
Amortization of preferred stock discount for
beneficial conversion interest...................... --- --- --- 2,800
Net loss............................................. (47,604) --- --- (47,604)
-------- ----- -------- --------
Balances at April 30, 1998............................ $(49,075) 3,618 $(14,454) $ 51,707
======== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PHP HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss)............................................................ $(44,804) $ (4,049) $ 9,138
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Extraordinary loss on early extinguishment of debt............................ 9,275 --- ---
Gain on sale of subsidiary stock.............................................. --- --- (2,247)
Minority interest in earnings (losses) of subsidiaries........................ (206) 196 (212)
Depreciation and amortization................................................. 12,238 5,372 3,944
Provision (benefit) for deferred income taxes................................. (8,800) (2,530) 3,955
Provision for compensatory stock options...................................... 159 1,285 1,639
Other items, net.............................................................. 177 (86) 53
Changes in operating assets and liabilities, net of effects from
purchase/sale of subsidiaries:
Increase in accounts receivable, net......................................... (24,600) (6,029) (13,123)
Decrease (increase) in income tax receivable................................. 283 (471) 182
Decrease in pharmaceutical and medical supplies.............................. 805 209 50
Decrease (increase) in other current assets.................................. 3,883 (395) (1,054)
Increase in other assets..................................................... (556) (1,014) (2,015)
Increase (decrease) in accounts payable...................................... 6,038 2,516 2,199
Increase (decrease) in claims payable........................................ 57,184 (415) 3,154
Increase in accrued salaries and benefits.................................... 3,549 746 1,560
Increase (decrease) in deferred revenue...................................... (549) 824 (475)
Increase in other liabilities................................................ 1,775 239 247
-------- -------- --------
Net cash provided by (used in) operating activities........................ 15,851 (3,602) 6,995
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment.......................................... (10,329) (9,601) (1,950)
Net proceeds from the sale of property and equipment........................... 2,091 --- ---
Acquisition of subsidiaries, (note 13)......................................... (28,703) (31,053) ---
Disposition of subsidiaries, net of cash conveyed (note 13).................... 16,433 --- ---
Sale of subsidiary stock....................................................... --- --- 3,000
-------- -------- --------
Net cash provided by (used in) investing activities........................ (20,508) (40,654) 1,050
-------- -------- --------
Cash flows from financing activities:
Net proceeds from Series B Convertible Preferred Stock Offering................ 63,050 --- ---
Net proceeds (repayments) under revolving promissory notes..................... (23,121) 9,200 (20,546)
Repayments on notes payable to bank............................................ (40,000) --- ---
Repayments on notes payable.................................................... (3,572) (568) (5,607)
Repayments on finance lease obligations........................................ (243) --- ---
Debt issuance cost............................................................. (3,171) --- ---
Receivables from officers...................................................... 1,937 (1,309) (538)
Proceeds from the exercise of stock options.................................... 2,134 489 507
Proceeds from sale of stock.................................................... 2,600 --- ---
Purchase of treasury shares.................................................... (5,020) --- ---
Capital contributions from other shareholders in subsidiaries.................. --- 3,562 ---
Net proceeds from issuance of convertible subordinated debentures.............. --- --- 65,608
-------- -------- --------
Net cash provided by (used in) financing activities........................ (5,406) 11,374 39,424
-------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
(continued)
F-6
<PAGE>
PHP HEALTH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED APRIL 30, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents................... (10,063) (32,882) 47,469
Cash and cash equivalents, beginning of year................................. 15,765 48,647 1,178
-------- -------- -------
Cash and cash equivalents, end of year....................................... $ 5,702 $ 15,765 $48,647
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest................................................................... $ 8,712 $ 4,987 $ 1,876
Income taxes............................................................... 18 586 42
Other non-cash activities:
Finance lease obligation incurred in connection with real estate lease..... $ 18,148 $ --- $ ---
Property and equipment acquired under capital leases....................... 6,262 --- 1,433
Stock warrants issued in connection with credit facility................... 6,850 --- ---
Notes payable issued for insurance premiums................................ 1,527 241 485
Preferred Stock discount................................................... 6,300 --- ---
Deemed dividend, accretion of Preferred Stock discount for beneficial
conversion interest....................................................... 2,800 --- ---
Common Stock tendered as payment for stock option exercise................. 3,125 --- ---
Income tax benefit of stock options exercised.............................. --- 490 558
Compensation associated with stock option exercises and
vested forfeitures........................................................ 1,641 40 101
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Business
PHP Healthcare Corporation and its subsidiaries (the Company) operate in a
single industry providing health care and related support services primarily on
a contractual basis to federal, state and local government agencies, and
commercial entities.
In fiscal 1994, the Company acquired the operations of a health maintenance
organization, D.C. Chartered Health Plan, Inc. (CHP), serving the District of
Columbia Medicaid and Aid for Families with Dependent Children (AFDC) residents.
In November 1995, the Company formed and commenced operating Virginia
Chartered Health Plan, Inc. (VACHP), a Medicaid HMO operating in select markets
in Virginia.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of PHP Healthcare
Corporation and its majority owned subsidiaries. All significant intercompany
account balances and transactions have been eliminated in consolidation.
The Company consolidates the financial statements of affiliated physician
practices owned by nominee shareholders where the Company can change the nominee
shareholder at its own discretion at nominal value. These affiliated practices
perform healthcare services in the Company's facilities under exclusive
contractual arrangements.
(c) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(d) Revenue Recognition
The Company engages in fixed-price, unit-price, cost-reimbursement-plus-fee,
and fixed-rate-labor hour contracts. Revenue on fixed-price contracts and unit-
price contracts is recognized using either the percentage-of-completion method
or as services are performed based on contracted rates. The percentage-of-
completion method measures revenue principally by comparing the cost of services
performed to date with the total estimated cost of services required through
completion applied to the entire estimated contract value. Revenue on cost-
reimbursement-plus-fee contracts is recognized on the basis of direct and
indirect costs incurred during the period plus the fee earned. Revenue on fixed-
rate-labor hour contracts is recognized as services are performed based on
contractual rates.
Billings in excess of costs represents amounts billed in accordance with
contract provisions for which future contract services are to be performed.
Costs to complete estimates are reviewed periodically and revised as required.
Provisions are made for the full amount of anticipated losses, if any, on all
contracts in the period in which they are first determinable.
Costs under cost-reimbursement contracts with the federal government are
subject to government audit upon contract completion. Therefore, all contract
costs, including direct and indirect expenses, are potentially subject to
adjustment prior to final reimbursement. Management believes that adequate
provisions for such adjustments, if any, have been made in the accompanying
consolidated financial statements. All indirect expense recovery rates for
fiscal year 1990 and prior have been approved by the U.S. government.
F-8
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue on prepaid Medicaid HMO contracts is recognized based on premiums
earned during the period in which the HMO is obligated to provide services,
including estimated amounts relating to final settlements upon contract
completion, if applicable.
Revenue on prepaid global capitation healthcare services contracts is
recognized based on premiums earned during the period in which the Company is
obligated to provide services.
Patient service revenue is reported at the estimated net realizable amounts
from patients, third party payors, and others for services rendered primarily
based on contractually determined rates.
The percentages of the Company's revenues derived from individual customers
comprising more than 10% of consolidated revenues were as follows: 46%, zero and
zero for 1998, 1997 and 1996, respectively, from HIP of New Jersey; 11%, 21% and
24% for 1998, 1997 and 1996, respectively from the federal government; 9%, 20%
and 28% for 1998, 1997 and 1996, respectively, from the District of Columbia;
8%, 14% and 10% for 1998, 1997 and 1996, respectively, from Blue Cross/Blue
Shield of New Jersey.
The Company's net accounts and contract settlement receivables related to the
individual customers noted above are $21.5 million, $14.9 million, $7.7 million
and $1.5 million from HIP of New Jersey, the District of Columbia, the federal
government, and Blue Cross/Blue Shield of New Jersey, respectively, at April 30,
1998, and zero, $12.1 million, $5.3 million and $0.5 million at April 30, 1997,
respectively.
(e) Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with original maturities of 3 months or less to be cash
equivalents. Cash equivalents consist of money market accounts, certificates of
deposit and debt instruments amounting to $3.0 million and $13.4 million at
April 30, 1998 and 1997, respectively.
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation on buildings,
furniture and fixtures, and equipment is computed on a straight-line or
accelerated method over estimated useful lives of 3 to 30 years. Leasehold
improvements and equipment under capital lease are amortized using the straight-
line method over the shorter of the lease term or estimated useful lives of the
assets.
Construction in progress consists of all construction related costs, excluding
land acquisition cost, incurred for property under development. Depreciation on
these properties commences when construction is complete and the assets are
placed into service.
(g) Intangible Assets
Intangible assets primarily represent the excess of the purchase price of
acquisitions over the fair value of the net assets acquired. Such excess costs
are being amortized on a straight-line basis over periods of estimated benefit
of 10 to 40 years. The Company assesses the recoverability of goodwill by
determining whether the balance can be recovered through estimated undiscounted
future operating cash flows of the acquired operation. The amount of impairment,
if any, is measured based on projected discounted future operating cash flows.
Intangible assets also represent costs allocated to network agreements,
physician practices and other specifically identifiable assets arising from
business acquisitions. These assets are amortized on a straight-line basis over
their estimated useful lives which range from 3 to 20 years.
F-9
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Precontract Costs and License Acquisition Costs
Recoverable costs directly related to contracts incurred prior to commencement
of services are capitalized as precontract costs and amortized to contract
expense over the estimated period of benefit, generally 1 to 2 years and are
included as other current assets. Direct costs associated with obtaining health
care regulatory licensure are capitalized and amortized over the estimated
period of benefit, not to exceed 5 years, and are included as other assets.
(i) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company provides a valuation allowance against net deferred
tax assets if, based on the available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
(j) Health Care Services Expense and Claims Payable
Medical health care services expense includes claims paid and payable and
capitation payments paid to certain providers. Claims payable are estimated
based on actuarial evaluations of providers' claims submitted and include
provisions for incurred but not reported claims. Health care services expense is
included as direct costs.
(k) Sales of Subsidiary Stock
Gains or losses related to the sales of stock by a subsidiary are included in
the statements of operations.
(l) Treasury Stock
The Company uses the cost method of accounting for treasury stock. Issuances
of treasury stock are relieved from treasury at the then weighted average cost
per share. The difference between the issuance value of the shares and the
weighted average cost per share is recorded in additional paid-in-capital.
(m) Earnings (Loss) Per Common Share
The Company computes earnings (loss) per common share using Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
Basic EPS is computed by dividing net earnings 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. 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
earnings or loss that would result from the assumed conversion of these dilutive
potential common shares.
F-10
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the numerators and denominators used in the calculation of
basic and diluted EPS for periods ended April 30 follows:
<TABLE>
<CAPTION>
(In thousands, except per share data) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator:
Earnings (loss) before extraordinary item and deemed dividend..... $(35,529) $(4,049) $ 9,138
Deemed dividend................................................... (2,800) --- ---
-------- ------- -------
Numerator for basic earnings per share - earnings (loss) before
extraordinary item.............................................. $(38,329) $(4,049) $ 9,138
Effect of dilutive securities - net interest expense related to
convertible debt................................................. 22 --- 22
-------- ------- -------
Numerator for diluted earnings (loss) per share, as adjusted..... $(38,307) $(4,049) $ 9,160
======== ======= =======
Denominator:
Weighted average number of common shares outstanding.............. 11,615 11,038 10,944
Shares held in escrow............................................. --- --- (89)
-------- ------- -------
Denominator for basic earnings (loss) per share.................. 11,615 11,038 10,855
Effect of dilutive securities:
Common share equivalents (determined using the "treasury
stock" method) representing shares issuable upon exercise of
stock options and warrants....................................... --- --- 2,574
Assumed conversion of convertible debt............................ --- --- 111
-------- ------- -------
Denominator for diluted earnings (loss) per share................ 11,615 11,038 13,540
======== ======= =======
Basic earnings (loss) per share:
Earnings (loss) before extraordinary item and deemed dividend..... $ (3.06) $ (0.37) $ 0.84
Deemed dividend................................................... (0.24) --- ---
-------- ------- -------
Earnings (loss) before extraordinary item........................ $ (3.30) $ (0.37) $ 0.84
======== ======= =======
Diluted earnings (loss) per share:
Earnings (loss) before extraordinary item and deemed dividend..... $ (3.06) $ (0.37) $ 0.68
Deemed dividend................................................... (0.24) --- ---
-------- ------- -------
Earnings (loss) before extraordinary item........................ $ (3.30) $ (0.37) $ 0.68
======== ======= =======
</TABLE>
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 period ended April 30, 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 periods ended April 30, 1998
and 1997, 2.5 million shares that would have resulted from the conversion of the
subordinated debentures, and (iii) options to purchase 490,150 shares of common
stock for the period ended April 30, 1998 and options to purchase 190,000 shares
of common stock for the period ended April 30, 1997. Additionally, because the
periods ended April 30, 1998 and 1997 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.
(n) Reclassifications
Certain amounts and disclosure items in the 1997 and 1996 consolidated
financial statements have been reclassified to conform with the 1998
presentation.
F-11
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(o) 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").
These standards 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 Accounting Standards Executive Committee recently issued Statement of
Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities". This
SOP provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start-up activities and organization
costs to be expensed as incurred, and it is effective for financial statements
for fiscal years beginning after December 15, 1998. SOP 98-5 will be adopted by
the Company and reflected in the Company's financial statements effective fiscal
year end 2000. Adoption of this SOP in the current fiscal year would result in
an additional before tax charge of $2.3 million.
(2) ACCOUNTS RECEIVABLE
(a) Components
Accounts receivable, net includes the following at April 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Contract receivables:
Billed:
Contracts in process............................................................... $15,119 $ 9,087
Final billings on completed contracts.............................................. --- 168
------- -------
15,119 9,255
------- -------
Unbilled:
Incurred costs and accrued profits................................................. 34,539 23,596
Retainages......................................................................... 468 468
------- -------
35,007 24,064
------- -------
Contract settlements................................................................. 29,791 21,841
Less reserve for Medicaid receivable................................................. (9,822) (9,822)
------- -------
19,969 12,019
------- -------
Total contract receivables........................................................... 70,095 45,338
Patient service receivables......................................................... 146 226
Other receivables................................................................... 762 423
------- -------
Total................................................................................ 71,003 45,987
Less allowance for doubtful accounts receivable..................................... (603) (187)
------- -------
Accounts receivable, net............................................................. $70,400 $45,800
======= =======
</TABLE>
Substantially all net receivables are expected to be collected within one
year
F-12
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
(b) Medicaid Settlement Receivable
CHP, a wholly-owned health maintenance organization, earns substantially all
of its revenue as a prepaid Medicaid contractor with the D.C. Department of
Human Services (DCDHS) providing health care services to Medicaid recipients in
the District of Columbia. The Medicaid program is jointly funded by the District
of Columbia and Health Care Finance Administration (HCFA) of the Department of
Health and Human Services (HHS).
CHP receives interim payments on an estimated basis with a final settlement
occurring at the end of the contract period for the difference between amounts
earned and the interim payments received. The final settlement process with
DCDHS and HCFA is subject to defined upper payment limits and requires an audit
of CHP's activities. Due to the unique nature of these contracts, DCDHS has not
undergone a final settlement process for this type of contract.
In April 1996, the U.S. Government enacted a law, the effect of which requires
the Company's contracts with DCDHS to be settled retroactively on a capitated-
rate-per-enrollee basis. Prior to the enactment of the law, the terms of the
contracts provided that the final settlements would be on a non-risk basis,
calculated in part on a cost-based methodology.
For several years the Company engaged in on-going good faith discussions and
negotiations with the District regarding the amounts due for the 1992 through
1994 contract periods. In February 1997, that process ultimately resulted in an
agreement to settle these amounts due the Company for $18.9 million. The
agreement was signed and approved by two different departments in the District
government, but the District of Columbia's Chief Financial Officer has refused
to approve the payment. Instead , the Chief Financial Officer offered the
Company $6.2 million, which is substantially less than the Company believes it
is entitled. As a result of the impasse, the Company recognized reserves of $9.8
million against its Medicaid receivables from the District of Columbia,
principally relating to services provided during the 1992 to 1994 contract
periods. Additionally, the Company has amounts due under contract periods
subsequent to 1994. The Company has filed a claim with the District aggregating
$62 million for all amounts due from the District of Columbia. The Company
remains committed to pursuing its contractual rights for the amounts it is due
from the District.
The Company believes that the final settlement of these contracts under the
method prescribed by the new law may result in payments to the Company
in excess of the $14.9 million and $12.0 million in receivables recorded at
April 30, 1998 and 1997, respectively, which amounts have been consistently
estimated based on the Company's conservative interpretation of amounts due
based on the methods in effect prior to the enactment of the new law.
(c) Maryland Department of Public Safety and Correctional Services Contract
Claim
In June 1996, the Company began providing health care services to inmates at
various facilities for the Maryland Department of Public Safety and Correctional
Services ("MDPSCS") under a three year fixed price per inmate contract. The
contract provided for the MDPSCS to be able to make unilateral changes to the
scope of services to be provided under the contract but required the MDPSCS to
negotiate with the Company an associated change in contract price. Throughout
the course of the contract term the MDPSCS mandated various material
modifications to the contract services. The Company provided several proposals
to adjust the contract price as a result of these modifications to the scope of
contract services and undertook numerous efforts to meet and negotiate these
issues with the MDPSCS. The Company's efforts were unsuccessful, as the MDPSCS
denied that they had required increases to the scope of services under the
original contract terms.
Consequently, the Company informed the MDPSCS in May 1998 that it could not
continue to provide the increased level of services during the third and final
contract year beginning July 1, 1998, without a substantial increase in the
contract price. Further, the Company filed a formal contract claim with the
MDPSCS in May 1997, most recently amended in June 1998, in the amount of $9.1
million. As of April 30, 1998, the Company's accounts receivable includes $5.0
million related to this claim.
In conjunction with the Company's statements requiring the contract price to
be amended for the changes in the level of services, the MDPSCS has terminated
the contract for cause, claiming that the Company repudiated the contract.
F-13
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
The Company and the MDPSCS are currently in negotiations to resolve this
matter.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at April 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land................................................................................. $ 4,307 $ 9,491
Buildings............................................................................ 11,342 25,597
Leasehold improvements............................................................... 32,409 13,385
Equipment............................................................................ 34,514 20,509
Furniture and fixtures............................................................... 6,630 4,958
Vehicles............................................................................. 386 228
Construction in progress............................................................. --- 126
Real estate lease obligation......................................................... 18,148 ---
-------- --------
107,736 74,294
Less accumulated depreciation and amortization....................................... (19,666) (15,850)
-------- --------
Property and equipment, net.......................................................... $ 88,070 $ 58,444
======== ========
</TABLE>
As of April 30, 1998 and 1997, $0.5 million and $1.1 million in furniture and
fixtures and related accumulated depreciation of $0.3 million and $0.8 million,
respectively, were financed by capital leases. As of April 30, 1998 and 1997,
$7.5 million and $3.5 million, in equipment and related accumulated depreciation
of $1.3 million and $0.1 million, respectively, were financed by capital leases.
Depreciation and amortization expense for property and equipment totaled $8.2
million, $4.6 million and $3.7 million for the years ended April 30, 1998, 1997
and 1996, respectively.
(4) NOTES PAYABLE
(a) Note Payable to Bank
To finance the HIP transaction (see Note 13(c)), 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 provided 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 was 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 were canceled in
F-14
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
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 7).
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 provided
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 April 30, 1998, there were no cash borrowings outstanding under
the Revolving Facility.
The Revolving Facility contains a letter of credit facility whereby the bank
will issue for the account of the Company, irrevocable stand-by letters of
credit in connection with certain contract performance requirements. The amount
of outstanding stand-by letters of credit reduces the amount of funds available
under the Revolving Facility. The Company had issued stand-by letters of credit
amounting to approximately $3.0 million and $3.0 million at April 30, 1998 and
1997, respectively. The Revolving Facility functions similar to a line of credit
with daily advances and repayments. Accordingly, Revolving Facility activity is
presented as a net amount in the consolidated statements of cash flows.
On May 26, 1998, the Credit Agreement was amended again in its entirety. The
new three year $80 million Credit Agreement consists of a $15 million working
capital revolving credit facility which provides for up to $5 million for the
issuance of letters of credit and a $65 million revolving credit facility for
the purchase of the Company's capital stock (common shares and Series B
Preferred Shares) and for working capital needs. The advances on the $65
million facility, if any, on January 31, 1999, will be converted to a term loan
repayable in nine quarterly installments beginning April 30, 1999. Interest on
both facilities is, at the Company's selection, at (i) 2.5% above the Eurodollar
rate, or (ii) 1.5% above the higher of the bank prime rate or the Federal Funds
rate plus .5%, through November 30, 1998. The Credit Agreement contains
provisions whereby the interest rate may decrease based on the Company's
leverage ratio measured quarterly.
The agreement includes customary affirmative and negative covenants and events
of default. It is collateralized by a security interest in substantially all of
the Company's assets.
As of April 30, 1998, the Company was not in compliance with certain
provisions of the Credit Agreement. The Company is currently involved in
discussions with its primary bank to waive current noncompliance and to amend
existing financial covenants to avoid expected future noncompliance.
As of August 12, 1998, the Company had advances of $77 million, principally to
repurchase Common and Preferred Stock and $3 million in letters of credits
outstanding under this Credit Agreement.
(b) Notes Payable-Other
The notes payable-other consists of the following at April 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Various collateralized term notes, interest at 9.95% and 10.5%, monthly
payments of principal and interest of $62,000, due between December 1999 and June 2002...... $3,191 $1,079
Insurance notes, monthly payments of principal and interest of $106,000,
interest at 4.8%, due July 1998............................................................. 314 218
Obligations under capital leases, for certain equipment and fixtures, monthly payments of
principal and interest of $215,000, interest from 4.1% to 9.3%, due between May 1998 5,892 3,883
and January 2003............................................................................
Convertible promissory notes of $500,000, interest due annually on April 30 at 7%,
convertible into common stock at $4.50 per share commencing September 1995, due
September 1999.............................................................................. 500 500
------- -------
Total notes payable-other.................................................................... 9,897 5,680
Less current maturities...................................................................... (2,552) (1,716)
------- -------
Notes payable-other, net of current maturities............................................... $ 7,345 $ 3,964
======= =======
</TABLE>
F-15
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
Scheduled maturities of notes payable-other at April 30, 1998 are as follows
(in thousands): $2,552 in 1999, $2,888 in 2000, $1,801 in 2001, $639 in 2002,
and $2,017 in 2003.
The Company's weighted average interest rate on short-term borrowings
outstanding at April 30, 1998 and 1997 was 8.4% and 7.2%, respectively.
(5) CONVERTIBLE SUBORDINATED DEBENTURES
On December 18, 1995, the Company completed the sale of $69 million in
convertible subordinated debentures due December 15, 2002. The Company received
$65.4 million in net proceeds after commissions and other offering costs. The
Company used a portion of the proceeds to repay all existing bank debt and
several other notes payable. The debentures bear interest at a rate of 6.5%,
payable on June 15 and December 15, and are convertible into PHP common stock at
a conversion price of $27.25 per share.
The debentures are redeemable at the option of the Company, in whole or in
part, at the redemption prices set forth in the indenture, together with accrued
interest, except that no redemption may be made prior to December 17, 1998. Upon
a repurchase event, each holder of debentures shall have the right, at the
holder's option, to require the Company to repurchase such holder's debenture at
a purchase price equal to 100% of the principal amount thereof, plus accrued
interest. The debentures are unsecured obligations of the Company and are
subordinated to all present and future senior indebtedness of the Company.
(6) INCOME TAXES
Income tax expense (benefit) consists of the following at April 30 (in
thousands):
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
1998:
Federal............................................................. $ --- $(7,700) $(7,700)
State............................................................... --- (1,100) (1,100)
--------- ------- -------
$ --- $(8,800) $(8,800)
========= ======= =======
1997:
Federal............................................................. $ --- $(2,227) $(2,227)
State............................................................... --- (260) (260)
--------- ------- -------
$ --- $(2,487) $(2,487)
========= ======= =======
1996:
Federal............................................................. $ --- $ 3,400 $ 3,400
State............................................................... --- 700 700
--------- ------- -------
$ --- $ 4,100 $ 4,100
========= ======= =======
</TABLE>
F-16
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
Income tax expense (benefit) differs from the amounts computed by applying the
U.S. federal income tax rate of 34 percent to earnings (loss) before income
taxes as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)........................... $(15,072) $(2,227) $4,494
Increase (decrease) in income tax resulting from:
State income tax expense (benefit), net of federal income taxes.... (2,048) (259) 434
Non-taxable gain on sale of stock in subsidiary.................... --- --- (853)
Amortization of excess cost over fair value of assets acquired..... 153 51 64
Change in the valuation allowance.................................. 7,212 --- ---
Other.............................................................. 955 (52) (39)
-------- ------- ------
$ (8,800) $(2,487) $4,100
======== ======= ======
Effective income tax rate........................................... 20.0% 38.0% 31.0%
======== ======= ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at April 30,
1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to differing recognition methods............. $ 3,347 $ 1,208
Property and equipment, principally due to difference in depreciation............. 589 396
Land and building, due to valuation methods....................................... 35 230
Accrued employee benefits......................................................... 1,566 2,263
Accrued contract and sublease losses.............................................. 542 237
Amortization of intangible assets................................................. 164 ---
State and federal net operating loss and contribution carryforwards............... 32,197 5,330
Alternative minimum tax credit carryforwards...................................... 361 361
------- -------
Total gross deferred tax assets.................................................. 38,801 10,025
Less valuation allowance.......................................................... 15,000 ---
------- -------
Net deferred tax assets.......................................................... $23,801 $10,025
------- -------
Deferred tax liabilities:
Accounts receivable, principally due to differing recognition methods............. 11,205 4,906
Property and equipment, principally due to difference in depreciation............. 299 45
Precontract costs................................................................. 837 3,008
Deferred lease obligations........................................................ 13 18
------- -------
Total deferred tax liabilities................................................... $12,354 $ 7,977
------- -------
Net deferred income tax asset.................................................... $11,447 $ 2,048
======= =======
</TABLE>
The Company establishes valuation allowances in accordance with the provisions
of FASB Statement No. 109, "Accounting for Income Taxes". The valuation
allowance as of April 30, 1998 and 1997 was $15 million and zero, respectively.
Although realization is not assured, management believes that the net deferred
tax asset will be realized. The Company has tax planning strategies to prevent
the tax net operating loss carryforwards from expiring unused.
As of April 30, 1998, the Company has federal and state net operating loss
carryforwards of approximately $82 million, to offset future federal and state
taxable income, expiring principally in fiscal years 2008 through 2013. Certain
of these carryforwards have annual dollar limits. In addition, the Company has
alternative minimum tax credit carryforwards of approximately $360,000 that are
available to reduce future federal regular income taxes, if any, over an
indefinite period. Approximately $11.5 million of the Company's net operating
loss carryforwards related to stock options. The tax benefit of $4.5 million
related to stock options will be credited to stockholder's equity when realized.
F-17
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
(7) 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 $6.95
million. The senior credit facility was established to temporarily finance the
Company's acquisition of 18 health centers from HIP (see Notes 4 and 13(c)). The
Company intended to obtain permanent financing through the issuance of debt or
equity securities.
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.
HIGHEST OF DAILY LOW TRADING PERCENTAGE CONVERTIBLE
PRICES DURING MONTH DURING SUCH MONTH
------------------- -----------------
$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%
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.
F-18
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
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.
On March 31, 1998, a Special Meeting of Stockholders was held at which the
common stockholders approved the issuance of common stock upon conversion of the
Series B Preferred Stock in accordance with the Company's listing agreement with
the New York Stock Exchange. If such stockholder approval had not been obtained
by May 31, 1998, the Company would have been 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 would have been sufficient, in the
Company's reasonable judgment, such that following such redemption, conversion
of the remaining shares of Series B Preferred Stock would not have constituted a
breach of the Company's obligations under the New York Stock Exchange listing
requirements, with respect to the conversion of Series B Preferred Stock into
common shares exceeding 19.9% of the number of shares of common stock
outstanding at October 31, 1997.
In fiscal year 1998, the Company recorded a Preferred Stock non-cash deemed
dividend of $2.8 million or $0.24 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 an
eleven month period from 5% to a maximum of 9% by December 1998. This discount
is being recognized notably as a non-cash deemed dividend over the applicable
eleven month period.
From June 3 through June 11, 1998, the Company repurchased 25,320 shares of
the Series B Preferred Stock at a cost of $28.7 million.
Beginning June 1, 1998, through July 29, 1998, a total of 7,095 shares of
Series B Preferred Stock were converted into 1,275,653 shares of common stock.
Pursuant to the Preferred Stock Investment Agreements entered into between
the Company and the holders of Series B Convertible Preferred Stock, the Company
agreed to use its best efforts to have a registration statement declared
effective by April 1, 1998. The Preferred Stock Investment Agreements state
that, if the registration statement is not effective by April 1, 1998, the
Company will be required to make cash payment to the holders equal to 3% of the
purchase price for the Series B Preferred Stock for each 30-day period
thereafter until the Registration statement is effective (pro-rated as to a
period of less than 30 days). The registration statement was declared effective
on June 10, 1998. Accordingly, under the terms of the Preferred Stock Investment
Agreements, the Company would be required to pay an aggregate amount of
approximately $2,301,960 ($957,000 through April 30, 1998) to holders of the
Series B Preferred Stock after adjusting for the repurchase of 25,320 shares of
Series B Preferred Stock and the waiver of the penalty by holders of 11,130
shares of the outstanding Series B Convertible Preferred Stock. Penalty payments
totaling $387,360 covering the period from June 1, 1998 through June 9, 1998,
were made to holders of Preferred Stock as of June 1, 1998 that were not
repurchased by the Company. The Company believes that the liquidated damages
provision constitutes an unenforceable penalty for April and May and intends to
challenge any attempt to enforce the provision. The Company is seeking waivers
of this provision from the holders of the Series B Convertible Preferred Stock.
There can be no assurance that the Company will be successful in obtaining
waivers from the holders of Series B Convertible Preferred Stock or that the
Company will prevail in establishing that the provision is unenforceable. The
enforcement of the liquidated damages provision against the Company could have a
material adverse effect on the Company's financial condition and results of
operations.
On July 29, 1998, the Company suspended conversion of the Series B Preferred
Stock into common shares. The Company suspended conversion in part because the
registration statement that was filed covering common shares to be issued upon
conversion did not provide for enough common shares in light of the Company's
current stock market price of less than $4.00 per share. In addition, as holders
of the Preferred Stock are limited in the number of shares that may be converted
by the requirement that no such holder shall, following conversion, own more
than 4.9% of the outstanding common stock of the Company, the Company is
reviewing such holders' compliance with this requirement and other legal
requirements. The current market price was such that conversion of the
outstanding preferred shares would potentially result in approximately 85% of
the holders exceeding the 4.9% limitation.
(8) CAPITAL STOCK
(a) Stock Split
On October 16, 1995, the Board of Directors of the Company declared a two-for-
one split of its Common Stock payable on November 20, 1995. This was effected in
the form of a 100 percent stock dividend of 7,073,351 shares to stockholders of
record as of November 1, 1995. Stockholders' equity has been restated to give
retroactive recognition to the stock split for all periods presented by
reclassifying from additional paid-in-capital to common stock the par value of
the additional shares arising from the split. In addition, for all periods
presented, all references in the consolidated financial statements and footnotes
thereto to number of shares, earnings per share amounts, weighted average shares
outstanding, as well as stock option, stock warrant and related price
information have been restated to give retroactive effect to the two-for-one
stock split effected on November 20, 1995.
F-19
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
(b) Note Receivable
On September 29, 1994, the Company sold 200,000 shares of treasury stock at
$4.50 per share for a note receivable in the amount of $900,000 to a financial
advisory services firm in which the managing director is also a director of the
Company. The note receivable is collateralized by a pledge and escrow of 300,000
shares of the Company's common stock and by convertible notes payable of
$500,000 by the Company to the same parties.
(c) Stock Rights
On April 10, 1992, the Board of Directors of the Company declared a dividend
distribution of one preferred stock purchase right (the Rights) for each share
of common stock outstanding at April 20, 1992 or issued thereafter. The Board of
Directors also designated and reserved 50,000 shares of preferred stock as
"Series A Junior Preferred Stock". Each Right when exercisable, entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series A Junior Participating Preferred Stock, at an exercise price of $42.50,
subject to adjustment. The Rights will become exercisable after public
announcement that, without consent of a majority of disinterested members of the
Board of Directors, a third party has acquired or obtained beneficial ownership
of 15% or more of the outstanding Common Shares or 10 business days after
commencement or public announcement of an offer of such an event. The Rights,
which do not have voting rights, expire in April 2002, and may be redeemed in
whole by the Company at $.01 per Right at any time prior to their expiration or
the acquisition by a third party of 15% or more of the Company's Common Stock.
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power is sold, provision shall be made so that each holder of a Right shall have
the right to receive, upon exercise thereof at the then current exercise price,
that number of shares of common stock of the surviving company which at the time
of such transaction would have a market value of two times the exercise price of
the Right. At April 30, 1998 and 1997, 12,060,020 and 11,111,364 rights are
outstanding, respectively.
(d) Directors' Retainer Plan
Commencing on May 1, 1993, and thereafter for any fiscal quarter, each
Director of the Company may elect to have the full amount of his retainer paid
in the form of common shares of the Company under this plan. The number of
shares issued is calculated based on the then current market value of the stock.
The Board of Directors of the Company has authorized 100,000 common shares for
issuance under this plan. In July 1998, August 1997, April 1996 and October
1994, the Company issued 260 shares, 4,539 shares, 20,449 shares and 25,778
shares, respectively, to the Board of Directors, pursuant to the Directors'
Plan.
(e) Sale of Stock
On May 2, 1997, the Company sold 200,000 shares of stock at $13.00 per share
to an investor in a private transaction.
(f) Stock Repurchase Plan
In April 1998, the Board of Directors of the Company authorized the repurchase
of up to 3.0 million shares of common stock. As of April 30, 1998, the Company
had repurchased 149,800 common shares at a cost of $2.6 million. From May 1,
1998 through August 12, 1998, the Company repurchased an additional 1,643,000
common shares at a cost of $21.8 million, which includes 1,000,000 common shares
purchased from the Company's former chairman at a cost of $16.8 million.
(9) STOCK OPTIONS AND WARRANTS
The Company is authorized to grant options and other stock-based awards
under its Amended and Restated PHP Healthcare Corporation 1986 Stock Option
Plan (the "1986 Plan") and its PHP Healthcare Corporation Amended and Restated
1996 Incentive Plan (the "1996 Plan", collectively, the "1986 Plan" and the
"1996 Plan," the "Stock Plans").
F-20
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
The Stock Plans provided for the granting of options to purchase a maximum
of 1,500,000 shares of the Company's stock to eligible employees and officers of
the Company. In November 1994, the shareholders approved an increase in the
maximum to 3,500,000 shares. The Stock Plans provides for the granting of
options which qualify as incentive stock options as well as non-qualified stock
options. All incentive stock options granted under the Stock Plans must have an
exercise price of not less than 100% of the fair market value of the common
stock on the date of grant, and non-qualified stock options must have an
exercise price of not less than 60% of the fair market value of the common stock
on the date of grant. All options granted prior to April 30, 1991, under the
Stock Plans, may be exercised no earlier than two years from the date of grant.
All options granted since April 30, 1991, are exercisable ratably on an annual
basis over two to five years from the date of grant. Options are canceled 90
days after termination of employment if not exercised.
The following is a summary of activity in 1996, 1997 and 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PRICE AMOUNT EXERCISE PRICE
------ ----- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding at April 30, 1995..................... 2,844,300 $ 1.95-11.25 $12,453,131 $ 4.38
Options granted in 1996.................................. 267,000 9.25-27.25 3,977,375 14.90
Options exercised in 1996................................ (108,372) 1.95-11.25 (506,196) 4.67
Options canceled in 1996................................. (15,378) 3.04-11.25 (83,745) 5.45
---------- ------------ ----------- ------
Options outstanding at April 30, 1996..................... 2,987,550 3.00-27.25 15,840,565 5.30
Options granted in 1997.................................. 400,084 11.63-35.00 10,290,648 25.72
Options exercised in 1997................................ (75,862) 3.03-10.50 (504,013) 6.64
Options canceled in 1997................................. (24,676) 3.04-34.13 (442,970) 17.95
---------- ------------ ----------- ------
Options outstanding at April 30, 1997..................... 3,287,096 3.00-35.00 25,184,230 7.66
Options granted in 1998.................................. 299,500 13.56-17.81 5,141,719 17.17
Options exercised in 1998................................ (1,053,917) 3.04-11.25 (4,615,283) 4.38
Options canceled in 1998................................. (219,114) 3.04-31.13 (5,822,827) 26.57
---------- ------------ ----------- ------
Options outstanding at April 30, 1998..................... 2,313,565 $ 3.00-31.00 $19,887,839 $ 8.60
---------- ------------ ----------- ------
Options exercisable at April 30, 1998..................... 1,804,802 $ 5.81
========== ======
</TABLE>
On June 10, 1994, the Stock Option Committee of the Board of Directors
adopted a resolution whereby each holder of outstanding stock options under the
Plan was allowed to surrender outstanding stock options on or before September
15, 1994, in return for an equal number of options with an exercise price equal
to 60% of the fair market value of the Company's common stock on June 10, 1994.
The new options vest ratably in one-third increments over three years and expire
in ten years. A total of 1,315,700 options were surrendered and canceled with a
corresponding issuance of new options with a grant price of $3.04 under the
provisions of this resolution.
F-21
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
The Company has also granted options outside of the Stock Plans. The following
is a summary of stock option activity outside of the Stock Plans in 1996, 1997
and 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PRICE AMOUNT EXERCISE PRICE
------ ----- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding at April 30, 1995....................... 497,858 $3.80-5.50 $2,284,611 $4.59
Options granted in 1996.................................... --- --- --- ---
Options exercised in 1996.................................. --- --- --- ---
Options canceled in 1996................................... --- --- --- ---
-------- ---------- ---------- -----
Options outstanding at April 30, 1996....................... 497,858 3.80-5.50 2,284,611 4.59
Options granted in 1997.................................... --- --- --- ---
Options exercised in 1997.................................. --- --- --- ---
Options canceled in 1997................................... --- --- --- ---
-------- ---------- ---------- -----
Options outstanding at April 30, 1997....................... 497,858 3.80-5.50 2,284,611 4.59
Options granted in 1998.................................... --- --- --- ---
Options exercised in 1998.................................. (180,000) 4.50-5.50 (860,000) 4.78
Options canceled in 1998................................... --- --- --- ---
-------- ---------- ---------- -----
Options outstanding at April 30, 1998....................... 317,858 $3.80-5.50 $1,424,611 $4.48
-------- ---------- ---------- -----
Options exercisable at April 30, 1998....................... 317,858 $4.48
======== =====
</TABLE>
The following table summarizes information concerning options outstanding
within the Stock Plans at April 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- ------------------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 4/30/98 TERM (YEARS) EXERCISE PRICE AT 4/30/98 EXERCISE PRICE
- --------------- ------- ------------ -------------- ------- -------------
<S> <C> <C> <C> <C> <C>
$ 1.95 - 3.04 707,768 6.1 $ 3.04 707,768 $ 3.04
4.06 - 5.94 921,211 6.4 5.50 921,212 5.50
6.50 - 11.63 148,936 7.3 10.50 77,268 10.47
13.56 - 17.81 272,000 9.3 17.10 --- ---
21.75 - 25.00 202,650 8.3 23.57 60,594 23.52
27.25 - 35.00 61,000 7.8 27.50 37,960 27.35
--------- --- ------ --------- ------
$ 1.95 - 35.00 2,313,565 6.9 $ 8.60 1,804,802 $ 5.81
========= === ====== ========= ======
</TABLE>
The following table summarizes information concerning options outstanding
outside of the Stock Plans at April 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ----------------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTYED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 4/30/98 TERM (YEARS) EXERCISE PRICE AT 4/30/98 EXERCISE PRICE
- --------------- ------- ------------ ------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.80 - 5.50 317,858 5.9 $4.48 317,858 $4.48
======= === ===== ======= =====
</TABLE>
F-22
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
APRIL 30, 1998, 1997 AND 1996
To the extent any options are granted at an exercise price less than the
fair market value at the date of the grant, the Company records compensation
expense equal to the difference in such prices ratably over the applicable
vesting period. The Company recorded compensation expense of $0.2 million, $1.3
million, and $1.6 million in 1998, 1997, and 1996, respectively, in the
consolidated statement of operations relating to options.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-
Based Compensation." Accordingly, no compensation cost has been recognized for
the stock option plan, except as required by Accounting Principles Board Opinion
No. 25 (APB No. 25) "Accounting for Stock Issued to Employees", as noted above.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards in 1998, 1997 and 1996 consistent
with the provisions of SFAS No. 123, the Company's net earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> C>
Net earnings (loss)-as reported (000's)............................. $(47,604) $(4,049) $9,138
Net earnings (loss)-pro forma (000's)............................... $(48,672) $(4,960) $9,014
Earnings (loss) per share-as reported............................... $ (4.10) $ (0.37) $ .68
Earnings (loss) per share-pro forma................................. $ (4.19) $ (0.45) $ .67
</TABLE>
The weighted average fair value per share of options granted during fiscal
years 1998, 1997 and 1996 was $12.04, $14.73, and $7.00 respectively. The fair
value of each option grant is estimated on the date of grant, based on the
market price of the stock on that date which is also the option grant price
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> C>
Dividend Yield........................................................... 0% 0% 0%
Expected Volatility...................................................... 73% 60% 60%
Risk-free Interest Rate.................................................. 5.07% 6.03% 6.03%
Expected Lives........................................................... 5 years 5 years 5 years
</TABLE>
In conjunction with the acquisition of EastWest Research Corporation on
November 1, 1992, the Company issued 20,000 stock warrants at $5.75 per share,
20,000 stock warrants at $7.50 per share, and 20,000 stock warrants at $12.00
per share. In December 1994, 25% of these warrants were canceled. The 45,000
remaining warrants are all currently exercisable and expire seven years from the
date of issuance. The value assigned to these warrants was immaterial.
(10) 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 7).
The early extinguishment of this debt resulted in an extraordinary charge
of $9.3 million for the year ended April 30, 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)
$171,000 in legal and other fees incurred related to the Credit Agreement, (iv)
reduced by $746,000 in interest expense that was recognized during the period
the debt was outstanding resulting from amortization of the above cost items,
and (v) no associated income tax benefit.
F-23
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998, 1997 and 1996
(11) 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 $2 million payment and a payment
of $275,000 related to a one-year noncompetition agreement. In connection with
the agreement, on May 2, 1997, Mr. Robbins repaid all outstanding notes
receivable and accrued interest due the Company under the Senior Executive Loan
Program and notes receivable related to certain life insurance policies. The
agreement contained additional clauses which include, among other things, a
"standstill" provision and restrictions on the timing of any dispositions of Mr.
Robbins' holdings in the Company. For the year ended April 30, 1997, the Company
recognized $2.275 million in expense related to this retirement agreement.
(12) RESTRUCTURING CHARGES
During the third quarter ended January 31, 1997, the Company incurred
restructuring charges of $2.55 million. Within a broad restructuring effort,
this charge resulted from two specific decisions made by the Board of Directors.
In November 1996, the Company made the strategic decision to terminate its
long-term care line of business, resulting in restructuring charges of $1.8
million.
Effective January 31, 1997, the Company made the strategic decision to
terminate the Company's facilities development and maintenance function operated
out of the corporate offices through the Company's wholly-owned subsidiary,
Sterling Communities Corporation. Future buildings and facilities management
needs will be fulfilled through outsourced vendor relationships. The Company
incurred a restructuring charge of $750,000 for severance and other termination
costs associated with the elimination of this function.
In fiscal year 1998, the Company determined that the previously established
restructuring reserve for the termination of its long-term care line of business
was insufficient to provide for the losses incurred during the exit process on
several of these projects. Consequently, in fiscal year 1998, the Company
recognized an additional $1.5 million in restructuring charges related to the
strategic decision to terminate the long-term care line of business.
(13) ACQUISITION, DEVELOPMENT, AND SALE OF SUBSIDIARIES
(a) Sale of Partial Interest in Health Maintenance Organization
On January 31, 1996, Virginia Chartered Health Plan, Inc. (VACHP), a wholly
owned subsidiary of the Company, sold a 30% interest to University Health
Services, Inc. (UHS), an affiliate of the Medical College of Virginia, for $3.0
million in cash. The Company recognized a gain of $2.2 million related to this
sale, which is presented separately in the consolidated statement of operations
for the year ended April 30, 1996. Since this was a sale of previously unissued
VACHP shares the resulting gain is not taxable and accordingly, no corresponding
provision for income taxes was recognized. In conjunction with the sale of
stock, VACHP entered into a five-year Network Agreement with UHS for inpatient
services. The sale of stock agreement provides that at the termination of the
five-year Network Agreement, if not renewed or terminated due to breach, UHS may
put or VACHP may call the shares purchased at the then fair market value.
(b) Acquisition of Primary Care Facilities and Related Network Services
Agreement
On February 28, 1997, the Company and a real estate investment trust
subsidiary in which the Company owned a minority interest (the REIT), acquired
certain primary care facilities located throughout New Jersey formerly operated
by Blue Cross and Blue Shield of New Jersey, Inc. (BCBSNJ). The total purchase
price, including transaction costs and other consideration, was approximately
$37.0 million, of which $22.3 million was paid by the REIT and the balance of
the other consideration was provided by the Company in the form of $8.8 million
in cash, $3.5 million in new lease financing, and 90,000 shares of the
F-24
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998, 1997 and 1996
Company's common stock. In addition, in connection with the transaction, the
Company made a $0.9 million capital contribution to the REIT and advanced the
REIT an additional $18 million, including $16 million in short-term loans and $2
million in long-term secured loans until permanent financing could be obtained.
Since the Company funded substantially all of the funds at closing, in concert
with certain ownership risk provisions in the lease agreements, the Company has
consolidated the operations of the REIT since February 1997. The Company's
portion of the cash consideration paid to BCBSNJ and the amounts contributed or
advanced to the REIT were obtained from a combination of cash on hand, equipment
lease financing, and borrowings on its bank line of credit.
In December 1997, as part of a provision in the transaction agreements, the
Company purchased the 90,000 common shares from BCBSNJ for $2.4 million.
This acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the acquired tangible ($32.6
million) and identifiable intangible ($2.6 million) assets and assumed
liabilities based on their respective fair market values. The identifiable
intangible assets are being amortized on a straight-line basis over periods
ranging from 3 to 20 years. The excess cost over the estimated fair market value
of the acquired net assets of approximately $1.8 million is being amortized on a
straight line basis over 25 years.
On February 28, 1997, the Company and BCBSNJ replaced an existing operating
agreement with a network services agreement effective July 1, 1996, pursuant to
which the Company provides certain health care services to enrolled BCBSNJ
beneficiaries through global capitation. As a result of the new agreement,
BCBSNJ paid the Company global capitation from July 1, 1996 amounting to
$9,977,000 of additional revenue for the period July 1, 1996 through February
28, 1997, recorded in the fourth quarter of fiscal 1997. Also, under the network
services agreement, the Company was responsible for all costs associated with
global capitation services for the period July 1, 1996 through February 28, 1997
resulting in incremental costs of $10,018,000, recorded in the fourth quarter of
fiscal 1997. Accordingly, the results of operations under the network services
agreement are included in the consolidated financial statements from July 1,
1996.
If these transactions had occurred on May 1, 1995 or 1996, the effect on the
Company's results of operations and net earnings would have been immaterial.
Unaudited pro forma consolidated revenues of the Company would have been
approximately $235 million and $212 million for the years ended April 30, 1997
and 1996, respectively.
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 sold its interest in the subsidiary and its loans
were repaid, the operations of the REIT were not consolidated after August 15,
1997.
However, as a result of the Company's continuing involvement with the lessor
in the form of a $2.0 million long-term loan, reflected as note receivable,
against which the borrower may offset past due lease payments and any related
interest amounts, the Company has accounted for the new lease as a financing.
Accordingly, in August 1997, property and equipment was increased by $18.1
million with a corresponding increase to finance lease obligation. The lease
term ends February 28, 2014, and gross future lease payments are as follows:
$2.7 million in 1999, $2.7 million in 2000, $2.7 million 2001, $2.7 million in
2002, $2.7 million in 2003, and $28.8 million thereafter.
(c) Acquisition of Primary Care Facilities and Related Health Services
Agreement
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 $84 million, including transaction costs and other
consideration, was paid through a combination of cash on hand and bank financing
(see Note 4). 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
F-25
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998, 1997 and 1996
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 to the acquired tangible ($27
million) and identifiable intangible assets ($57 million) and assumed
liabilities based on their respective estimated fair market values. The
identifiable intangible assets will be amortized on a straight-line basis over
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>
YEAR ENDED YEAR ENDED
April 30, 1998 APRIL 30, 1997
------------------ ------------------
<S> <C> <C>
Revenues........................................................................ $571,617 $582,039
Earnings (loss) before extraordinary item....................................... (43,285) (4,161)
Diluted earnings (loss) before extraordinary item per common share.............. $ (3.73) $ (0.38)
</TABLE>
(d) Supplemental Disclosure of Noncash Investing and Financing Activities
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
Acquisition of subsidiaries
Fair value of property and equipment acquired...................... $ 27,228 $32,525 ---
Indentifiable intangible assets.................................... 57,140 2,648 ---
Excess of cost over fair value of assets acquired.................. --- 1,821 ---
Other current assets acquired...................................... 2,059 --- ---
Liabilities assumed................................................ (3,803) --- ---
Notes payable issued............................................... (53,921) (3,541) ---
Value of stock and guarantee issued................................ --- (2,400) ---
-------- ------- -----------------
Cash paid.......................................................... 28,703 31,053 ---
Less cash acquired................................................. --- --- ---
-------- ------- -----------------
Acquisition of subsidiaries, net of cash acquired.................. $ 28,703 $31,053 ---
======== ======= =================
Disposition of subsidiaries
Fair value of assets sold.......................................... $ 22,076 --- ---
Note receivable issued............................................. (2,000) --- ---
Capital contribution of other shareholders in subsidiaries......... (3,542) --- ---
-------- ------- -----------------
Cash received...................................................... 16,534 --- ---
Less cash conveyed................................................. (101) --- ---
-------- ------- -----------------
Disposition of subsidiaries, net of cash........................... $ 16,433 --- ---
======== ======= =================
</TABLE>
(14) RELATED-PARTY TRANSACTIONS
(a) Legal and Financial Advisory Services
A director of the Company whose term expired in November 1997, is a partner in
a law firm that provided legal services to the Company during 1998, 1997, and
1996. For the years ended April 30, 1998, 1997, and 1996, total billings
approximated $263,000, $321,000, and $300,000, respectively, all of which was
expensed in the consolidated statements of operations. At April 30, 1998, 1997,
and 1996 amounts due the law firm approximated $42,000, $112,000, and $19,000,
respectively.
F-26
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998, 1997 and 1996
In 1998, 1997, and 1996, financial advisory services were provided the Company
by a firm in which the managing general partner was a director of the Company,
and became Chairman of the Company on February 1, 1997. In addition, the two
partners in the firm were also employees of the Company from September 1994 to
September 1995. During 1998, 1997 and 1996, total billings approximated none,
$233,000, and $211,000, respectively. At April 30, 1998, 1997, and 1996, the
amounts due the firm were none, none, and $11,000, respectively.
(b) Senior Executive Loan Program
On November 5, 1992, the Board of Directors approved a Senior Executive Loan
Program (the Program). Loans made pursuant to this Program may not exceed three
and one-half times the executive's annual salary. The loans are to be repaid in
one year and bear interest at two percent above the Company's short-term
borrowing rate. The loans are collateralized by Company stock owned by the
senior executive or a second position in stock previously pledged provided there
remains sufficient equity in the stock. As of April 30, 1998 and 1997, a total
of $3.2 and $4.4 million, respectively, was outstanding (including accrued
interest) to four officers under the Program. The current outstanding amounts
have been renewed and are now due March 1999.
(c) Other Notes and Advances
The Company has advanced amounts to an officer of a subsidiary of the Company
in the form of promissory notes due from April 1998 to July 2000. The notes bear
interest at 8.5%. The notes are collateralized by the officer's stock in the
Company. As of April 30, 1998 and 1997, the amounts outstanding were $644,000
and $724,000, respectively, and are reflected as other assets.
In accordance with the Board of Directors' approval, the Company makes premium
payments relating to certain insurance policies on behalf of certain officers of
the Company. These advances are owed to the Company and are collateralized by
assignment of the underlying cash surrender value and related death benefit.
The promissory notes total $0.5 and $1.2 million at April 30, 1998 and 1997,
respectively.
(15) COMMITMENTS AND CONTINGENCIES
(a) Leases as Lessee
The Company has several noncancelable operating leases, principally for office
space and equipment, that expire on various dates over the next fifteen years.
The office leases provide for increased real estate taxes and building operating
costs through annual adjustments. Total rental expense for operating leases for
the years ended April 30, 1998, 1997 and 1996 was approximately $12.9 million,
$6.7 million and $4.9 million, respectively.
Future minimum rental payments under noncancelable operating leases at April
30, 1998, are as follows: $11.0 million in 1999, $12.4 million in 2000, $11.7
million in 2001, $10.2 million in 2002, $8.6 million in 2003, and $32.8 million
thereafter.
At April 30, 1998 and 1997, deferred lease obligations of $857,000 and
$680,000, respectively, presented as other long-term liabilities in the
financial statements, represent the excess of rent expense, recorded on a
straight-line basis, over the cash payments required under certain leases.
(b) Leases as Lessor
The Company sublets office space at various facilities. These leases expire on
various dates over the next four years and provide for increased real estate
taxes and building operating costs through annual adjustments.
F-27
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
April 30, 1998, 1997 and 1996
(c) Legal Proceedings
A class action lawsuit was filed against the Company and certain current and
former officers and directors of the Company in the United States District 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 Common Stock
between December 11, 1995 and March 10, 1997. 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 suit also
challenges the Company's accounting for claims payable reserves relating to its
HMO business.
On or about June 23, 1998, plaintiffs filed an amended complaint seeking to
represent all persons who purchased the Company's common stock between July 27,
1995 and May 13, 1998. The amended complaint alleges that the Company also
improperly accounted for expenses and receivables under its contract with BCBSNJ
and improperly accounted for the subsequent acquisition of the BCBSNJ
facilities. Plaintiffs further allege that the Company failed to disclose
adequately its alleged obligation to pay penalties in connection with its
failure to have registered stock by April 1, 1998 under the various Preferred
Stock Investment Agreements and concealed the fact that it had established no
reserves for the penalty. The amended complaint also includes the allegations
in the original complaint concerning the receivables and claims payable reserve.
Another suit, Richman v. PHP Healthcare Corporation, et al., was filed in Los
Angeles Superior Court seeking relief under Section 10(b) of the Securities
Exchange Act, and under state law, in connection with alleged statements
relating to Chartered Health Plan. The Plaintiff claims to have been damaged in
excess of $800,000. The Company removed the suit to the United States District
Court for the Central District of California, No. 98-2797 SVW. The suit does not
seek class action relief. On July 27, 1998, the Court granted the Company's
motion to dismiss, with leave to file an amended complaint. An amended complaint
was subsequently filed.
The Company intends to vigorously defend the lawsuits. There can be no
assurance that the Company will prevail in either of the suits. Any judgment
entered against the Company in connection with either of the suits could have a
material adverse effect on the Company's financial condition.
The Company is a defendant in various other legal actions. The principal
actions allege or involve claims under contractual arrangements, employment
matters and medical malpractice with an estimated possible range of loss between
zero and approximately $200,000. The Company does not believe that it has a
material, estimable and probable liability related to these various legal
actions and therefore has not recorded any reserves at April 30, 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 service division projects and $50,000 per incident on commercial
service division projects.
(16) EMPLOYEE BENEFIT PLAN
The Company has a qualified defined contribution savings plan covering
substantially all full-time employees as allowed under Section 401(k) of the
Internal Revenue Code. The plan permits participant contributions and requires a
minimum contribution from the Company, which vests over two years, based on
participants' contribution. Participants may elect to defer up to 12% of their
annual compensation by contributing to the plan. Total expenses related to this
plan for the years ended April 30, 1998, 1997 and 1996 were $879,000, $476,000
and $327,000, respectively.
F-28
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED APRIL 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
--------- ----------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER RECEIVABLE AT END
OF YEAR EXPENSES ACCOUNTS CHARGE-OFFS OF YEAR
----------- ------------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED APRIL 30, 1998
Allowance for doubtful accounts (deducted
from accounts receivable)................ $ 187,445 $ 472,516 $ $ 57,291 $ 602,670
---
Allowance for Medicaid receivables........ 9,822,025 --- --- --- 9,822,025
Deferred tax asset valuation allowance.... --- 15,000,000 --- --- 15,000,000
----------- ----------- -------- ---------- -----------
$10,009,470 $15,472,516 $ --- $ 57,291 $25,424,695
=========== =========== ======== ========== ===========
YEAR ENDED APRIL 30, 1997
Allowance for doubtful accounts (deducted
from accounts receivable)................ $ 194,025 $ --- $ --- 6,580 $ 187,445
Allowance for Medicaid receivables........ --- 9,822,025(B) --- --- 9,822,025
----------- ----------- -------- ---------- -----------
$ 194,025 $9,822,025 $ --- $ 6,850 $10,009,470
=========== ========== ======== ========== ===========
YEAR ENDED APRIL 30, 1996
Allowance for doubtful accounts (deducted
from accounts receivable)................ $ 138,495 $ 55,530 $ --- $ --- $ 194,025
Claim allowance........................... 1,900,000 --- --- 1,900,000(A) ---
----------- ---------- -------- ----------- -----------
$ 2,038,495 $ 55,530 $ --- $1,900,000 $ 194,025
=========== ========== ======== ========== ===========
</TABLE>
_________________
(A) Claim was settled in September 1995 for $300,000 and the allowance and
related receivable were charged off.
(B) Represents allowance for Medicaid receivables due from the District of
Columbia for the 1992 to 1994 contract years.
F-29
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Location
- ----------- ----------- --------
<S> <C> <C>
3.1 Amended and Restated Certificate of Filed as Exhibit 3.1 to the Company's Form
Incorporation of PHP Healthcare Corporation 10-Q for the quarter ended October 31, 1997, and
incorporated herein by reference.
3.2 Amended and Restated Bylaws of PHP Healthcare Filed as Exhibit 3.2 to the Company's Form 10-K
Corporation for the year ended April 30, 1997, and
incorporated herein by reference.
3.3 Certificate of Designations of Series B Filed as Exhibit 3.1 to the Company's Form 8-K
Convertible Preferred Stock filed January 6, 1998, and incorporated herein
by reference.
4.1 Indenture dated as of December 15, 1995 for 6 1/2 Filed as Exhibit 4.1 to Amendment No.1 to the
% Convertible Subordinated Debentures due 2002 Company's Form 8-K filed January 11, 1996, and
incorporated herein by reference.
4.2 Warrant Certificate of David Berman to purchase Filed as Exhibit 4.3 to the Company's Form S-3
Common Stock of PHP Healthcare Corporation, dated (File No. 333-26207) filed on April 30, 1997,
as of November 1, 1992 and incorporated herein by reference.
4.3 Warrant Certificate of NationsBank, N.A. to Filed herewith.
purchase Common Stock of PHP Healthcare
Corporation, dated as of October 31, 1997
4.4 Warrant Agreement dated as of October 31, 1997 Filed as Exhibit 4.1 to the Company's Form 8-K
between PHP Healthcare Corporation and First Trust filed November 17, 1997, and incorporated herein
of New York, N.A. by reference.
4.5 Rights Agreement between the Company and Riggs Filed as Exhibit 4.1 to the Company's Form 8-K
National Bank, N.A., as Rights Agent, dated as of filed April 10, 1992 and incorporated herein by
April 10, 1992 reference.
4.6 Form of Preferred Stock Investment Agreement, Filed as Exhibit 4.1 to the Company's Form 8-K
dated as of December 23, 1997 between PHP filed January 6, 1998, and incorporated herein
Healthcare Corporation and certain accredited by reference.
investors
4.7 Form of Series B Preferred Stock Purchase Warrant Filed as Exhibit 4.8 to Amendment No.2 to the
Company's Form S-3 (File No. 333-26207) on June
5, 1998, and incorporated herein by reference.
4.8 Specimen form of certificate representing shares Filed as Exhibit 4.8 to Amendment No.2 to the
of the Company's Series B Convertible Preferred Company's Form S-3 (File No. 333-26207) on June
Stock 5, 1998, and incorporated herein by reference.
4.9 Specimen form of certificate representing shares Filed as Exhibit 7.1 to Amendment No.1 to the
of the Company's Common Stock Company's Form 8-A filed on August 11, 1992, and
incorporated herein by reference.
</TABLE>
(continued)
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX (CONTINUED)
<TABLE>
<S> <C> <C>
10.1 Amended and Restated Credit Agreement, dated May Filed as Exhibit 10.1 to Amendment No.2 to the
26, 1998, among PHP Healthcare Corporation as Company's Registration Statement on Form S-3
Borrower and the Initial Lenders and Initial (File No. 333-26207) filed on June 5, 1998, and
Issuing Bank named herein as Initial Lenders and incorporated herein by reference.
Initial Issuing Bank and NationsBank, N.A. as
Administrative Agent
10.2 Amended and Restated Security Agreement, dated as Filed as Exhibit 10.2 to Amendment No.2 to the
of May 26, 1998, from PHP Healthcare Corporation, Company's Registration Statement on Form S-3
the Other Grantors referred to herein and the (File No. 333-26207) filed on June 5, 1998, and
Additional Grantors referred to herein as grantors incorporated herein by reference.
to NationsBank, N.A. as Administrative Agent
10.3 Amended and Restated Subsidiary Guaranty, dated as Filed as Exhibit 10.3 to Amendment No. 2 to the
of May 26, 1998, from each of the Subsidiaries of Company's Registration Statement on Form S-3
PHP Healthcare Corporation listed on the signature (File No. 333-26207) filed on June 5, 1998, and
pages hereof and the Additional Subsidiary incorporated herein by reference.
Guarantors referred to herein as Guarantors in
favor of the Secured Parties referred to in the
Amended and Restated Credit Agreement referred to
herein
10.4 Form of Indemnification Agreements between PHP Filed as Exhibit 10.3 to the Company's Form 10-K
Healthcare Corporation and each of Charles H. for the year ended April 30, 1989, and
Robbins, Michael D. Starr, George E. Schafer, incorporated herein by reference.
M.D., Jack M. Mazur, Stephen I. Frates, Ronald J.
Raben, David M. Thomas, Julien J. Lavoie, Paul T.
Cuzmanes, George B. Randolph, Charles P. Reilly
and Donald J. Ruffing
*10.5 Form of "Split Dollar Agreement" entered into Filed as Exhibit 10.4 to the Company's Form 10-K
between PHP Healthcare Corporation and each of for the year ended April 30, 1993, and
Charles H. Robbins, Jack M. Mazur and Michael D. incorporated herein by reference.
Starr
*10.6 Terms of Senior Executive Loan Program adopted by Filed as Exhibit 10.5 to the Company's Form 10-K
the Board of Directors November 5, 1992 for the year ended April 30, 1993, and
incorporated herein by reference.
10.7 Articles of Merger of PHP Healthcare Corporation Filed as Exhibit 10.8 to the Company's
and PHP Corporation Registration Statement on Form S-18
(Registration No. 33-9372, effective November
20, 1986), and incorporated herein by reference.
10.8 Lease Agreement between PHP Healthcare Corporation Filed as Exhibit 10.10.1 to the Company's Form
and Commerce Park Development Corporation dated 10-K for the year ended April 30, 1994, and
May 5, 1993 (relating to current executive offices incorporated herein by reference.
of the Company at 11440 Commerce Park Drive,
Reston, Virginia)
10.9 Amendment No. 1 to Lease Agreement dated July 14, Filed as Exhibit 10.10.1A to the Company's Form
1994 10-K for the year ended April 30, 1994, and
incorporated herein by reference.
</TABLE>
(continued)
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX (CONTINUED)
<TABLE>
<S> <C> <C>
*10.10 Employment Agreements dated May 1, 1992 by and Filed as Exhibit 10.11 to the Company's Form
between the Company and each of Charles H. 10-K for the year ended April 30, 1994, and
Robbins, Jack M. Mazur and Michael D. Starr incorporated herein by reference.
*10.11 Amended and Restated PHP Healthcare Corporation Filed as Exhibit 10.12 to the Company's Form
1986 Stock Option Plan, as amended 10-K for the year ended April 30, 1994, and
incorporated herein by reference.
*10.12 PHP Healthcare Corporation Amended and Restated Filed as Annex B to the Company's 1997
1996 Incentive Plan Definitive Proxy Statement and incorporated
herein by reference.
*10.13 Stock Option Agreement by and between the Company Filed as Exhibit 10.21 to the Company's Form
and Julien J. Lavoie, dated as of November 26, 1990 10-K for the year ended April 30, 1991, and
incorporated herein by reference.
*10.14 Stock Option Agreement by and between the Company Filed as Exhibit 10.22 to the Company's Form
and Anthony M. Picini, dated as of December 4, 1990 10-K for the year ended April 30, 1991, and
incorporated herein by reference.
10.15 Provider Agreement between the District of Filed as Exhibit 10.15 to the Company's Form
Columbia Department of Human Services and D.C. 10-K for the year ended April 30, 1994, and
Chartered Health Plan, Inc. dated September 24, incorporated herein by reference.
1991
10.16 District of Columbia Medicaid Managed Care Filed as Exhibit 10.26 to the Company's Form
Program, Provider Agreement dated September 15, 10-K for the year ended April 30, 1995, and
1994 by and between the Department of Human incorporated herein by reference.
Services and D.C. Chartered Health Plan, Inc.
*10.17 Employment Agreement dated September 29, 1994 by Filed as Exhibit 8 to the Company's 8-K filed
and between the Company and John P. Cole October 20, 1994 and incorporated herein by
reference.
10.18 Health Services Agreement between Pinnacle Health Filed as Exhibit 10.2 to the Company's Form 10-Q
Enterprises, L.L.C. and HIP of New Jersey, Inc., for the quarter ended October 31, 1997, and
dated as of July 24, 1997 incorporated herein by reference.
10.19 Amendment No. 1 to Health Services Agreement Filed as Exhibit 10.3 to the Company's Form 10-Q
between Pinnacle Health Enterprises, L.L.C. and for the quarter ended October 31, 1997, and
HIP of New Jersey, Inc., dated October 31, 1997 incorporated herein by reference.
*10.20 Employment Agreement dated August 1, 1994 by and Filed as Exhibit 6 to the Company's Form 8-K
between the Company and Charles P. Reilly filed October 20, 1994 and incorporated herein
by reference.
*10.21 Employment Agreement between PHP Healthcare Filed herewith.
Corporation and Jack M. Mazur, dated July 24, 1998
10.22 Stockholder Voting Agreement dated as of July 31, Filed herewith.
1998 by and among the Company, John W. Kluge and
Chase Manhattan Bank and John W. Kluge Trustees
U/A dated May 30, 1984 As Amended by and for John
W. Kluge
21 List of Subsidiaries Filed herewith.
</TABLE>
(continued)
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX (CONTINUED)
<TABLE>
<S> <C> <C>
23 Consent of Independent Accountants Filed herewith.
27 Financial Data Schedule Filed herewith.
</TABLE>
<PAGE>
EXHIBIT 4.3
THESE WARRANTS AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER
APPLICABLE STATE SECURITIES LAWS. THESE WARRANTS AND SUCH SECURITIES MAY BE
OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY IN COMPLIANCE WITH THE
REQUIREMENTS OF SUCH ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS AND SUBJECT
TO THE PROVISIONS OF THIS WARRANT CERTIFICATE.
WARRANTS TO PURCHASE COMMON STOCK
OF PHP HEALTHCARE CORPORATION
No. 1 Certificate for 500,150 Warrants
This certifies that NationsBank, N.A., or registered assigns, is the
registered holder of the number of Warrants set forth above. Each Warrant
entitles the holder thereof (a "Holder"), subject to the provisions contained
herein and in the Warrant Agreement referred to below, to purchase from PHP
Healthcare Corporation, a Delaware corporation (the "Company"), one share of
Common Stock, par value $0.01 per share, of the Company the "Common Stock"), at
the exercise price (the "Exercise Price") of zero ($0.00) per share. This
Warrant Certificate shall terminate and become void as of the close of business
on October 31, 2007 (the "Expiration Date"); provided, however, that this
-------- -------
Warrant Certificate may terminate and become void prior to the Expiration Date
in the event of certain Merger Transactions (as defined below).
This Warrant Certificate is issued under and in accordance with the
Warrant Agreement, dated as of October 31, 1997 (the "Warrant Agreement"),
between the Company and First Trust of New York, National Association, warrant
agent (the "Warrant Agent", which term includes any successor Warrant Agent
under the Warrant Agreement), and is subject to the terms and provisions
contained in the Warrant Agreement, to all of which terms and provisions the
Holder of this Warrant Certificate consents by acceptance hereof. The Warrant
Agreement is hereby incorporated herein by reference and made a part hereof.
Reference is hereby made to the Warrant Agreement for a full statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Warrant Agent and the Holders of the Warrants.
<PAGE>
As provided in the Warrant Agreement and subject to the terms and
conditions therein set forth, the Warrants shall be exercisable at any time or
from time to time on or after October 31, 1997.
In the event of a Merger Transaction, the Holder hereof will be entitled
to receive shares of stock or other securities or other property (including any
money) as it would have received had the Holder exercised its Warrants
immediately prior to such Merger Transaction or, if applicable, the record date
thereof.
The number of shares of Common Stock issuable upon the exercise of each
Warrant are subject to adjustment as provided in the Warrant Agreement.
All shares of Common Stock issuable by the Company upon the exercise of
Warrants shall, upon such issue, be duly and validly issued and fully paid and
non-assessable.
In order to exercise a Warrant, the registered holder hereof must
surrender this Warrant Certificate at the office of the Warrant Agent, with the
Exercise Subscription Form on the reverse hereof duly executed by the Holder
hereof, with signature guaranteed as therein specified.
The Company shall pay all taxes and other governmental charges that may
be imposed on the Company or on the Warrants or on any securities deliverable
upon exercise of Warrants. The Company shall not be required, however, to pay
any tax or other charge imposed in connection with any transfer involved in the
issue of any certificate for shares of Common Stock or other securities
underlying the Warrants or payment of cash to any person other than the Holder
of a Warrant Certificate surrendered upon the exercise or purchase of a Warrant,
and in case of such transfer or payment, the Warrant Agent and the Company shall
not be required to issue any stock certificate or pay any cash until such tax or
other charge has been paid or it has been established to the Company's
satisfaction that no such tax or other charge is due.
This Warrant Certificate and all rights hereunder are transferable by
the registered holder hereof, in whole or in part, on the register of the
Company, upon surrender of this Warrant Certificate for registration of transfer
at the office of the Warrant Agent maintained for such purpose in the City of
New York, duly endorsed by, or accompanied by a written instrument of transfer
in form satisfactory to the Company and the Warrant Agent duly executed by, the
Holder hereof or his attorney duly authorized in writing, with signature
guaranteed as specified in the attached Form of Assignment. Upon any partial
transfer, the Company will issue and deliver to such holder a new Warrant
Certificate or Certificates with respect to any portion not so transferred.
<PAGE>
No service charge shall be made for any registration of transfer or
exchange of the Warrant Certificates, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection therewith.
Each taker and holder of this Warrant Certificate by taking or holding
the same, consents and agrees that this Warrant Certificate when duly endorsed
in blank shall be deemed negotiable and that when this Warrant Certificate shall
have been so endorsed, the holder hereof may be treated by the Company, the
Warrant Agent, and all other persons dealing with this Warrant Certificate as
the absolute owner hereof for any purpose and as the person entitled to exercise
the rights represented hereby, or to the transfer hereof on the register of the
Company maintained by the Warrant Agent, any notice to the contrary
notwithstanding, but until such transfer on such register, the Company and the
Warrant Agent may treat the registered Holder hereof as the owner for all
purposes.
This Warrant Certificate and the Warrant Agreement are subject to
amendment as provided in the Warrant Agreement.
All terms used in this Warrant Certificate that are defined in the
Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
Copies of the Warrant Agreement are on file at the office of the Warrant
Agent and may be obtained by writing to the Warrant Agent at the following
address: First Trust of New York, National Association, 100 Wall Street, Suite
1600, New York, NY 10005, Attention: Frank J. Gillhaus.
3
<PAGE>
This Warrant Certificate shall not be valid for any purpose until it
shall have been countersigned by the Warrant Agent.
Dated: October 31, 1997
PHP HEALTH CARE CORPORATION
By: /s/ Anthony M. Picini
-----------------------------------
Name: Anthony M. Picini
Title: Executive Vice President and
Chief Financial Officer
Countersigned:
FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION
By:
-------------------------------------
Name:
Title:
4
<PAGE>
This Warrant Certificate shall not be valid for any purpose until it
shall have been countersigned by the Warrant Agent.
Dated: October 31, 1997
PHP HEALTH CARE CORPORATION
By:
-----------------------------------
Name:
Title:
Countersigned:
FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION
By: /s/ Frank J. Gillhaus
-------------------------------------
Name: Frank J. Gillhaus
Title: Vice President
5
<PAGE>
FORM OF REVERSE OF WARRANT CERTIFICATE
EXERCISE SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
to: PHP HEALTHCARE CORPORATION
The Undersigned irrevocably exercises ____________ of the Warrants for
the purchase of one share (subject to adjustment) of Common Stock, par value
$0.01 per share, of PHP Healthcare Corporation, for the Warrants represented by
the Warrant Certificate, on the terms and conditions specified in the Warrant
Certificate and the Warrant Agreement therin referred to, surrenders this
Warrant Certificate and all right, title and interest therein to PHP Healthcare
Corporation and directs that the shares of Common Stock deliverable upon the
exercise of such Warrants be registered or placed in the name and at the address
specified below and delivered thereto.
Date:----------- --, 199_
/1/
-----------------------------------
(Signature of Owner)
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
------------------------------------
_____________
/1/ The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, and must be guaranteed by a financial
institution satisfactory to the Warrant Agent.
6
<PAGE>
Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
Any unexercised Warrants evidenced by the within Warrant Certificate to be
issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
7
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED the undersigned registered holder of the within
Warrant Certificate hereby sells, assigns, and transfers unto the Assignee(s)
named below (including the undersigned with respect to any Warrants constituting
a part of the Warrants evidenced by the within Warrant Certificate not being
assigned hereby) all of the right of the undersigned under the within Warrant
Certificate, with respect to the number of Warrants set forth below:
<TABLE>
<CAPTION>
SOCIAL SECURITY
OR OTHER
IDENTIFYING
NAMES OF NUMBER OF NUMBER OF
ASSIGNEES ADDRESS ASSIGNEE(S) WARRANTS
- --------- ------- --------------- ---------
<S> <C> <C> <C>
</TABLE>
<PAGE>
and does hereby irrevocably constitute and appoint ____________________________
the undersigned's attorney to make such transfer on the books of ______________
______________ maintained for that purpose, with full power of substitution in
the premises.
Date: _________ __, 199__
______________________________________/2/
(Signature of Owner)
______________________________________
(Street Address)
______________________________________
(City) (State) (Zip Code)
Signature Guaranteed By:
______________________________________
____________
/2/ The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatever, and must be guaranteed by a financial
institution satisfactory to the Warrant Agent.
8
<PAGE>
EXHIBIT 10.21
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Amended and Restated
Agreement") is made and entered into as of the 24th day of July, 1998, by and
between PHP Healthcare Corporation, a Delaware corporation (the "Company"), and
Jack M. Mazur, an individual (the "Executive") (hereinafter collectively
referred to as the "Parties").
WHEREAS, the Executive and the Company entered into an employment
agreement dated as of May 1, 1992 ("Employment Agreement");
WHEREAS, the Company continues to desire to employ the Executive as
its Chief Executive Officer and the Executive continues to desire to serve the
Company as its Chief Executive Officer;
WHEREAS, the Company and the Executive desire to amend and restate the
Employment Agreement as set forth herein:
NOW, THEREFORE, in consideration of the foregoing, the mutual promises
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties, intending to be
legally bound, agree as follows:
1. Term. Subject to the provisions for termination set forth in
----
Section 8, the initial term of employment under this Amended and Restated
Agreement shall be for a period of three (3) years commencing on the date hereof
and shall be automatically extended for additional one (1) year periods, unless
one of the Parties shall give written notice to the other on or before the date
which is fifteen (15) months prior to the expiration of the current term of the
Amended and Restated Agreement of such Party's election not to so extend this
Amended and Restated Agreement.
2. Employment. (a) The Executive shall be employed as the Chief
----------
Executive Officer of the Company or in such other senior executive capacity as
may be mutually agreed to in writing by the Parties. The Executive shall
perform the duties, undertake the responsibilities and exercise the authority
customarily performed, undertaken and exercised by persons situated in a similar
executive capacity. He shall also promote, by entertainment or otherwise, the
business of the Company. The Executive shall report to the Board of Directors
of the Company (the "Board"). All other officers of the Company shall report to
the Executive or such person(s) as the Executive designates from time to time.
-1-
<PAGE>
(b) Excluding periods of vacation and sick leave to which the Executive is
entitled, the Executive agrees to devote reasonable attention and time during
the usual business hours to the business and affairs of the Company to the
extent necessary to discharge the responsibilities assigned to the Executive
hereunder. Subject to the foregoing, the Executive may (i) serve on corporate,
trade group, civic or charitable boards or committees, (ii) manage his personal,
financial and legal affairs, (iii) deliver lectures, fulfill speaking
engagements or teach at educational institutions or programs, and (iv) invest
personally in any business in a private capacity where no actual conflict of
interest exists between such investment and the business of the Company.
3. Base Salary. The Company agrees to pay or cause to be paid to the
-----------
Executive during the term of this Amended and Restated Agreement a base salary
at the rate of $675,000 per annum or such larger amount as the Board may from
time to time determine (hereinafter referred to as the "Base Salary"). Such
Base Salary shall be payable in accordance with the Company's customary
practices applicable to its senior executives. Such rate of salary, or
increased rate of salary, if any, as the case may be, shall be reviewed at least
annually by the Board and may be further increased (but not decreased) in such
amounts as the Board in its discretion may decide.
4. Employee Benefits. The Executive shall be entitled to participate
-----------------
in all employee benefit plans, practices and programs maintained by the Company
and made available to employees generally including, without limitation all
pension, retirement, profit sharing, savings, medical, hospitalization,
disability, dental, life or travel accident insurance benefit plans. The
Executive's participation in such plans, practices and programs shall be on the
same basis and terms as are applicable to senior executives of the Company
generally. The Executive shall receive service credit under any such plans,
practices and programs for the entire term of his employment with the Company
since March 1, 1976.
5. Executive Benefits. The Executive shall be entitled to
------------------
participate in all executive benefit or incentive compensation plans now
maintained or hereafter established by the Company for the purpose of providing
compensation and/or benefits to executives of the Company including, but not
limited to, the Company's 1986 Stock Option Plan, the Company's 401(k) Plan, the
Company's Earnings Growth Incentive Plan and the Company's Stock Appreciation
Incentive Plan, the 1996 Incentive Plan, and any supplemental retirement, salary
continuation, stock option, deferred compensation, supplemental medical or life
insurance or other bonus or incentive compensation plans. Unless otherwise
provided herein, or in the terms of such executive benefit or incentive
compensation plans, the Executive's participation in such plans shall be on the
same basis and terms as other similarly situated executives of the Company, but
in no event on a basis less favorable in terms of benefit levels or reward
opportunities applicable to the Executive as in effect on the date hereof. No
additional compensation provided under
-2-
<PAGE>
any of such plans shall be deemed to modify or otherwise affect the terms of
this Amended and Restated Agreement or any of the Executive's entitlements
hereunder. The Executive shall receive service credit under any such plans,
practices and programs for the entire term of his employment with the Company
since March 1, 1976.
6. Other Benefits.
--------------
(a) Fringe Benefits and Perquisites. The Executive shall be entitled
-------------------------------
to receive all fringe benefits and perquisites (including, without limitation,
those fringe benefits and perquisites listed in this Section 6) generally made
available by the Company to its executives.
(1) Tax Preparation and Estate Planning Assistance. The Company
----------------------------------------------
shall provide, at its cost, tax preparation and estate planning assistance for
the Executive, to be furnished by such advisors as chosen by the Executive, up
to a maximum of $25,000 per year.
(2) Limousine. The Company shall provide, at its cost, a
---------
chauffeured limousine for the Executive for his personal use outside of the
local Washington D.C. area.
(3) Airplane. The Company shall provide, at its cost, an
--------
airplane for the Executive's use, up to a maximum cost of $40,000 per year for
such use.
(4) Club Dues. The Company shall provide the Executive with an
---------
allowance of $10,000 per year for the dues and other annual membership costs of
The City Club and the Avenel Country Club (separate and apart from incidental
and ordinary business reimbursements associated with the business use of such
facilities).
(5) Medical Examination. The Company shall provide, at its
-------------------
cost, a medical examination for the Executive on an annual basis at a medical
clinic selected by the Executive.
(6) Life Insurance. The Company shall provide (i) at its cost,
--------------
supplemental multi-year, renewable term life insurance coverage for the
Executive in the amount of $3.0 million (substantially similar to that provided
by Phoenix Home Life Insurance Co. Policy No. 2719663) and (ii) loans to fund
the premiums on split dollar life insurance coverage for the Executive in the
amount of $5.0 million (substantially similar to that provided by Phoenix Home
Life Insurance Co. Policy No. 2579828).
(b) Expenses. The Executive shall be entitled to receive prompt
--------
reimbursement of all expenses reasonably incurred by him in connection with the
-3-
<PAGE>
performance of his duties hereunder or for promoting, pursuing or otherwise
furthering the business or interests of the Company.
(c) Office and Facilities. Consistent with his senior executive
---------------------
status hereunder, the Executive shall be provided with an appropriate office at
the Company's executive offices and such other place as may be mutually agreed
upon by the Parties and with an executive assistant selected by the Executive to
provide organizational, writing, analytical, secretarial and other support
services.
7. Vacation and Sick Leave. At such reasonable times as the Board
-----------------------
shall in its discretion permit, the Executive shall be entitled, without loss of
pay, to absent himself voluntarily from the performance of his employment under
this Amended and Restated Agreement, provided that:
(a) The Executive shall be entitled to annual vacation in accordance
with the policies as periodically established by the Board for similarly
situated executives of the Company, which shall in no event be less than four
weeks per year.
(b) In addition to the aforesaid paid vacations, the Executive shall
be entitled, without loss of pay, to absent himself voluntarily from the
performance of his employment for such additional periods of time and for such
valid and legitimate reasons as the Board in its discretion may determine.
Further, the Board shall be entitled to grant to the Executive a leave or leaves
of absence with or without pay at such time or times and upon such terms and
conditions as the Board in its discretion may determine.
(c) The Executive shall be entitled to sick leave (without loss of
pay) in accordance with the Company's policies as in effect from time to time.
8. Termination. The Executive's employment hereunder may be terminated
-----------
under the following circumstances:
(a) Disability. The Company may terminate the Executive's employment
----------
after having established the Executive's Disability. For purposes of this
Amended and Restated Agreement, "Disability" means a physical or mental
infirmity which impairs the Executive's ability to substantially perform his
duties under this Amended and Restated Agreement which continues for a period of
at least twelve (12) consecutive months. A determination of Disability shall be
made by a physician satisfactory to both the Executive and the Company, which
physician's determination as to Disability shall be made within 10 days of the
request therefor and shall be binding on all parties; provided, however, that if
-------- -------
the Executive and the Company do not agree on a physician, the Executive and the
Company shall each select a physician and these two together shall select a
third physician, which third physician's determination as to
-4-
<PAGE>
Disability shall be binding on all parties. The Executive shall be entitled to
the compensation and benefits provided for under this Amended and Restated
Agreement for any period during the term of this Agreement and prior to the
establishment of the Executive's Disability during which the Executive is unable
to work due to a physical or mental infirmity. Notwithstanding anything
contained in this Amended and Restated Agreement to the contrary, until the
Termination Date specified in a Notice of Termination (as each term is
hereinafter defined) relating to the Executive's Disability, the Executive shall
be entitled to return to his position with the Company as set forth in this
Amended and Restated Agreement in which event no Disability of the Executive
will be deemed to have occurred.
(b) Cause. The Company may terminate the Executive's employment for
-----
"Cause." The Company shall be deemed to have terminated the Executive's
employment for "Cause" in the event that the Executive's employment is
terminated for any of the following reasons: the Executive (i) willfully and
continually failed to substantially perform his duties with the Company (other
than a failure resulting from the Executive's incapacity due to physical or
mental illness or from the Executive's assignment of duties that would
constitute "Good Reason" as hereinafter defined) which failure continued for a
period of at least thirty (30) days after a written notice of demand for
substantial performance has been delivered to the Executive specifying the
manner in which the Executive has failed to substantially perform, (ii)
willfully engaged in conduct which is demonstrably and materially injurious to
the Company or an affiliate thereof, monetarily or otherwise or (iii) was
convicted of, or entered a plea of guilty or nolo contendere to, a felony;
provided, however, that no termination of the Executive under clause (i) or (ii)
- --------- -------
shall occur until (x) there shall have been delivered to the Executive a copy of
the written resolution adopted by two thirds of the Board (excluding Executive
for purposes of determining this approval) in good faith at a duly called
meeting thereof setting forth that the Executive was guilty of the conduct set
forth in any such clause and specifying the particulars thereof in detail and
(y) the Executive shall have been provided an opportunity to be heard by the
Board at such meeting with 45 days' advance written notice thereof, and,
provided, further, that no act or failure to act shall be considered willful
- --------- -------
unless done or omitted to be done in bad faith and without reasonable belief
that the action or omission was in the best interests of the Company.
Notwithstanding anything contained in this Amended and Restated Agreement to the
contrary, no failure to perform by the Executive after Notice of Termination is
given by the Company shall constitute Cause for purposes of this Amended and
Restated Agreement.
(c) (1) Good Reason. The Executive may terminate his employment for
-----------
"Good Reason." For purposes of this Amended and Restated Agreement, Good Reason
shall mean the occurrence of any of the events or conditions described in
Subsections (i) through (ix) hereof:
-5-
<PAGE>
(i) following a Change in Control (as defined):
(A) a change in the Executive's status, title, position
or responsibilities (including reporting responsibilities) which,
in the Executive's reasonable judgment, does not represent a
promotion from his status, title, position or responsibilities as
in effect immediately prior thereto; the assignment to the
Executive of any duties or responsibilities which, in the
Executive's reasonable judgment, are inconsistent with such
status, title, position or responsibilities; or any removal of the
Executive from or failure to reappoint or reelect him to any of
such positions, except in connection with the termination of his
employment for Disability, Cause, as a result of his death or by
the Executive other than for Good Reason;
(B) a reduction in the Executive's Base Salary or any
failure to pay the Executive any compensation or benefits to which
he is entitled within five (5) days of the date due;
(C) a failure by the Company to increase the Executive's
Base Salary at least annually at a percentage of Base Salary no
less than the average percentage increases (other than increases
resulting from the Executive's promotion) granted to the Executive
during the three most recent full years ended prior to a Change in
Control (or such lesser number of full years during which the
Executive was employed);
(D) the Company's requiring the Executive to be based at
any place outside a 30-mile radius from Reston, Virginia, except
for reasonably required travel on the Company's business which is
not materially greater than such travel requirements prior to the
Change in Control;
(E) the failure by the Company to (1) continue in effect
(without reduction in benefit level and/or reward opportunities)
any material compensation or benefit plan in which the Executive
was participating at the time of the Change in Control, including,
but not limited to, the Company's 1986 Stock Option Plan, the
Company's 401(k) Plan, the Company's Earnings Growth Incentive
Plan, and the Company's Stock Appreciation Incentive Plan, or (2)
provide the Executive with compensation and benefits at least
equal (in terms of benefit levels and/or reward opportunities) to
those provided for under each employee benefit plan, program and
practice as in effect
-6-
<PAGE>
immediately prior to the Change in Control (or as in effect
following the Change in Control, if greater).
(F) the insolvency or the filing (by any party,
including the Company) of a petition for bankruptcy, of the
Company;
(G) any material breach by the Company of any provision
of this Amended and Restated Agreement;
(H) any purported termination of the Executive's
employment for Cause by the Company which does not comply with the
terms of Section 8 of this Amended and Restated Agreement; or
(I) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any successor or assign of the
Company to assume and agree to perform this Amended and Restated
Agreement, as contemplated in Section 14 hereof;
(ii) the nature of Executive's duties or the scope of Executive's
responsibilities (including reporting responsibilities) is materially
modified by the Company without Executive's written consent where such
material modification constitutes a demotion of Executive or a substantial
reduction in Executive's responsibilities; or any removal of the Executive
from or failure to reappoint or reelect him to any positions held by
Executive as of the date first written above, except in connection with the
termination of his employment for Disability, Cause, as a result of his
death or by the Executive other than for Good Reason;
(iii) a reduction in the Executive's Base Salary;
(iv) the Company's requiring the Executive to be based at any
place outside a 30-mile radius from Reston, Virginia, except for reasonably
required travel on the Company's business;
(v) any material breach by the Company of any provision of this
Amended and Restated Agreement that has not been cured within thirty (30)
days following receipt by the Company of written notice thereof from the
Executive specifically identifying such material breach; or
(vi) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms of Section 8 of
this Amended and Restated Agreement.
-7-
<PAGE>
(2) The Executive's right to terminate his employment pursuant to this
Section 8(c) shall not be affected by his incapacity due to physical or mental
illness if such incapacity occurs after the event or condition giving rise to
Executive's right to terminate his employment pursuant to this Section 8(c).
(d) Voluntary Termination. The Executive may voluntarily terminate his
---------------------
employment hereunder at any time. If the Executive voluntarily terminates his
employment for any reason or without reason during the 60-day period which
commences on the date which is six (6) months following the date of a Change in
Control, it shall be referred to as a "Limited Period Termination."
(e) For purposes of this Amended and Restated Agreement, a
"Change in Control" shall mean any of the following events:
(1) An acquisition (other than directly from the Company or pursuant
to options granted under this Plan or otherwise by the Company) of any voting
securities of the Company ("Voting Securities") by any "Person" (as the term
person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) immediately after which such
Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of twenty percent (20%) or more of the combined voting
power of the Company's then outstanding Voting Securities; provided, however,
-------- -------
that Beneficial Ownership of not more than thirty-five percent (35%) of the
combined voting power of the Company's outstanding Voting Securities by Jack M.
Mazur shall not constitute a Change in Control; provided, further, however, in
-------- ------- -------
determining whether a Change in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as defined below) shall not
constitute an acquisition which would cause a Change in Control. (A "Non-
Control Acquisition" shall mean an acquisition by (A) an employee benefit plan
(or a trust forming a part thereof) maintained by (i) the Company or (ii) any
corporation or other Person of which a majority of its voting power or its
equity securities of equity interest is owned directly or indirectly by the
Company (a "Company Subsidiary"), (B) the Company or any Company Subsidiary, or
(C) any Person in connection with a "Non-Control Transaction" (as defined
below);
(2) The individuals who, as of October 1, 1996, are members of the
Board of Directors (the "Incumbent Board"), cease for any reason to constitute
at least two-thirds of the Board of Directors; provided, however, that if the
-------- -------
election, or nomination for election by the Company's stockholders, of any new
director was approved by a vote of at least two-thirds of the Incumbent Board,
such new director shall, for purposes of the Plan, be considered as a member of
the Incumbent Board; provided, further, however, that no individual shall be
-------- -------
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual
-8-
<PAGE>
or threatened "Election Contest" (as described in Rule 14a-11 promulgated under
the Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board of Directors (a "Proxy
Contest") including by reason of any agreement intended to avoid or settle any
Election Contest or Proxy Contest; or
(3) the consummation of:
(A) A merger, consolidation or reorganization involving the
Company, unless
(i) the stockholders of the Company immediately before
such merger, consolidation or reorganization own, directly or
indirectly, immediately following such merger, consolidation or
reorganization, at least a majority of the combined voting power
of the outstanding voting securities of the corporation resulting
from merger or consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their
ownership of the Voting Securities immediately before such
merger, consolidation or reorganization,
(ii) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board of
directors of the Surviving Corporation, or a corporation
beneficially directly or indirectly owning a majority of the
Voting Securities of the Surviving Corporation,
(iii) no Person (other than the Company or any Company
Subsidiary, any employee benefit plan (or any trust apart
thereof) maintained by the Company, the Surviving Corporation or
any Company's Subsidiary, or any Person who, immediately prior to
such merger, consolidation or reorganization had Beneficial
Ownership of twenty percent (20%) or more of the then outstanding
Voting Securities) has Beneficial Ownership of twenty percent
(20%) or more of the combined voting power of the Surviving
Corporation's then outstanding Voting Securities, and
(iv) a transaction described in clauses (i) through
(iii) shall herein be referred to as a "Non-Control Transaction";
-9-
<PAGE>
(B) A complete liquidation or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other
than a transfer to a Company Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not
be deemed to occur solely because any person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities outstanding, increases the
proportional number of shares beneficially owned by the Subject Person;
provided, however, that if a Change in Control would occur (but for the
- -------- -------
operation of this sentence) as a result of the acquisition of Voting Securities
by the Company, and after such share acquisition by the Company, the Subject
Person becomes the Beneficial Owner of any additional Voting Securities which
increases the percentage of the then outstanding Voting Securities beneficially
owned by the Subject Person, then a Change in Control shall occur.
(4) Notwithstanding anything contained in this Amended and Restated
Agreement to the contrary, if the Executive's employment is terminated during
the term of this Amended and Restated Agreement and the Executive reasonably
demonstrates that such termination (i) was at the request of a third party who
has indicated an intention or taken steps reasonably calculated to effect a
Change in Control and who effectuates a Change in Control (a "Third Party") or
(ii) otherwise occurred in connection with, or in anticipation of, a Change in
Control which actually occurs, then for all purposes of this Agreement, the date
of a Change in Control with respect to the Executive shall mean the date
immediately prior to the date of such termination of the Executive's employment.
(f) Notice of Termination. Any purported termination by the Company
---------------------
or by the Executive shall be communicated by written Notice of Termination to
the other. For purposes of this Amended and Restated Agreement, a "Notice of
Termination" shall mean a notice which indicates the specific termination
provision in this Amended and Restated Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated. For
purposes of this Amended and Restated Agreement, no such purported termination
of employment shall be effective without such Notice of Termination.
(g) Termination Date, Etc. "Termination Date" shall mean in the case
----------------------
of the Executive's death, his date of death, or in all other cases, the date
specified in the Notice of Termination subject to the following:
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<PAGE>
(1) If the Executive's employment is terminated by the Company for
Cause or due to Disability, the date specified in the Notice of Termination
shall be at least thirty (30) days from the date the Notice of Termination is
given to the Executive, provided that in the case of Disability the Executive
shall not have returned to the full-time performance of his duties during such
period of at least thirty (30) days; and
(2) If the Executive's employment is terminated for Good Reason or is
a Limited Period Termination, the date specified in the Notice of Termination
shall not be more than sixty (60) days from the date the Notice of Termination
is given to the Company.
9. Compensation Upon Termination. Upon termination of the Executive's
-----------------------------
employment during the term of this Amended and Restated Agreement (including any
extensions thereof), the Executive shall be entitled to the following benefits:
(a) If the Executive's employment is terminated by the Company for
Cause or Disability or by the Executive (other than for Good Reason or a Limited
Period Termination), or by reason of the Executive's death, the Company shall
pay the Executive all amounts earned or accrued hereunder through the
Termination Date but not paid as of the Termination Date, including (i) Base
Salary, (ii) reimbursement for any and all monies advanced or expenses incurred
in connection with the Executive's employment for reasonable and necessary
expenses incurred by the Executive on behalf of the Company for the period
ending on the Termination Date, (iii) vacation pay, (iv) any bonuses or
incentive compensation and (v) any previous compensation which the Executive has
previously deferred (including any interest earned or credited thereon)
(collectively, "Accrued Compensation"). In addition to the foregoing, if the
Executive's employment is terminated by the Company for Disability or by reason
of the Executive's death, the Company shall pay to the Executive or his
beneficiaries (i) an amount equal to the bonus and incentive award(s) that the
Executive would have been entitled to receive in respect of the fiscal year in
which the Executive's Termination Date occurs had he continued in employment
until the end of such fiscal year, calculated as if all performance targets and
goals (if applicable) had been fully met by the Company and by the Executive, as
applicable, for such year, multiplied by a fraction the numerator of which is
the number of days in such fiscal year through the Termination Date and the
denominator of which is 365 (a "Pro Rata Bonus") plus (ii) a severance payment
equal to the Executive's Base Salary at the rate in effect immediately prior to
the termination of the Executive's employment. The Executive's entitlement to
any other compensation or benefits shall be determined in accordance with the
Company's employee benefit plans and other applicable programs and practices
then in effect.
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<PAGE>
(b) If the Executive's employment by the Company shall be terminated
(1) by the Company other than for Cause, death or Disability, (2) by the
Executive for Good Reason, or (3) by the Executive as a Limited Period
Termination, then the Executive shall be entitled to the benefits provided
below:
(i) the Company shall pay the Executive all Accrued
Compensation and a Pro Rata Bonus;
(ii) the Company shall pay the Executive as severance
pay and in lieu of any further salary for periods subsequent to
the Termination Date, in a single payment an amount in cash equal
to three (3) times the sum of (A) the Executive's Base Salary at
the highest rate in effect at any time within the ninety (90)
day period ending on the date the Notice of Termination is given
(or if the Executive's employment is terminated after a Change in
Control, the Executive's Base Salary immediately prior to the
Change in Control, if greater) and (B) the "Bonus Amount." The
term "Bonus Amount" shall mean the greatest amount of the cash
awards received by the Executive during any of the three fiscal
years immediately preceding the Termination Date under the 1996
Incentive Plan and any other plan of the Company; provided,
--------
however, that if the Executive's employment is terminated before
-------
a cash award under the Company's Earnings Growth Incentive Plan
may be made in respect of 1998, the Bonus Amount shall be fifty
percent (50%) of the Executive's Base Salary;
(iii) for a period of thirty-six (36) months following
such termination, the Company shall at its expense continue on
behalf of the Executive and his dependents and beneficiaries the
life insurance, disability, medical, dental and hospitalization
benefits which were being provided to the Executive at the time
Notice of Termination is given (or, if the Executive is
terminated following a Change in Control, the benefits provided
to the Executive at the time of the Change in Control, if
greater). The benefits provided in this Section 9 (b) (iii)
shall be no less favorable to the Executive, in terms of amounts
and deductibles and costs to him, than the coverage provided the
Executive under the plans providing such benefits at the time
Notice of Termination is given (or, if the Executive is
terminated following a Change in Control, at the time of the
Change in Control if more favorable to the Executive). The
Company's obligation hereunder with respect to the foregoing
benefits shall be limited to the extent that the Executive
obtains any such benefits
-12-
<PAGE>
pursuant to a subsequent employer's benefit plans, in which case
the Company may reduce the coverage of any benefits it is
required to provide the Executive hereunder as long as the
aggregate coverage of the combined benefit plans is no less
favorable to the Executive, in terms of amounts and deductibles
and costs to him, than the coverage required to be provided
hereunder. This Subsection (iii) shall not be interpreted so as
to limit any benefits to which the Executive or his dependents
may be entitled under any of the Company's employee benefit
plans, programs or practices following the Executive's
termination of employment, including, without limitation, retiree
medical and life insurance benefits;
(iv) for a period of thirty-six (36) months following
such termination, the Company shall at its expense continue to
provide the Executive with all of the fringe benefits and
perquisites provided in Sections 6(a) and (c) hereof; provided,
--------
however, that the benefits described in Section 6(c) shall not
-------
include an office in or physical access to the Company's offices
and will cease upon the acceptance by the Executive of a position
with another employer;
(v) the Company shall pay in a single payment an amount
in cash equal to the excess of (A) the actuarial equivalent of
the aggregate retirement benefit the Executive would have been
entitled to receive under the Company's retirement plans had (x)
the Executive remained employed by the Company for an additional
three (3) complete years of credited service, (y) his annual
compensation during such period been equal to his Base Salary (at
the rate used for purposes of Section 9(b)(ii)) and the Bonus
Amount, and (z) he been fully (100%) vested in his benefit under
each such retirement plan, over (B) the actuarial equivalent of
the aggregate retirement benefit the Executive is actually
entitled to receive under such retirement plans. For purposes of
this Subsection (iv), "actuarial equivalent" shall be determined
in accordance with the actuarial assumptions used for the
calculation of benefits under the Company's retirement plans as
applied prior to the Termination Date in accordance with such
plans' past practices (but shall in any event take into account
the value of any subsidized early retirement benefit); and
(vi) (A) all restrictions on any outstanding award
(including restricted stock and performance stock awards) granted
to the Executive shall lapse and such awards shall become fully
(100%)
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<PAGE>
vested immediately, assuming all performance targets and goals
(if applicable) had been fully met by the Company and by the
Executive, as applicable, for such year, and all stock options
and stock appreciation rights granted to the Executive shall
become fully (100%) vested and shall become immediately
exercisable and (B) the Executive shall have the right to require
the Company to purchase, for cash, any shares of unrestricted
stock or shares purchased upon the exercise of any options, at a
price equal to the fair market value of such shares on the date
of purchase by the Company.
(vii) If the Executive's employment by the Company
shall be terminated by the Executive for Good Reason, or by the
Executive as a Limited Period Termination, for a period not to
exceed six (6) months from the Executive's Termination Date, the
Company shall at its expense provide the Executive with (A) a
telephone number assigned to the Executive at the Company's
offices, telephone mail and a secretary to answer the telephone;
provided, however, such benefits described in this Subsection
-------- -------
9(b)(vii) shall not include an office in or physical access to
the Company's offices and will cease upon the acceptance by the
Executive of a position with another employer, and (B) at the
Executive's option, the services of an employment
search/outplacement agency selected by the Executive for a period
not to exceed six (6) months.
(c) The amounts provided for in Sections 9(a) and 9(b)(i), (ii) and
(iv) shall be paid within five (5) days after the Executive's Termination Date.
(d) The Executive shall not be required to mitigate the amount of any
payment, benefit or other Company obligation provided for in this Amended and
Restated Agreement by seeking other employment or otherwise and no such payment,
benefit or other Company obligation shall be offset or reduced by the amount of
any compensation or benefits provided to the Executive in any subsequent
employment.
10. Excise Tax Payments
-------------------
(a) In the event that any payment or benefit (within the meaning of
Section 280G(b) (2) of the Internal Revenue Code of 1986, as amended (the
"Code")), to the Executive or for his benefit paid or payable or distributed or
distributable pursuant to the terms of this Amended and Restated Agreement or
otherwise in connection with, or arising out of, his employment with the Company
or a change in ownership or effective control of the Company or of a substantial
portion of its assets (a "Payment" or
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<PAGE>
"Payments"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties are incurred by the Executive with respect to
such excise tax (such excise tax, together with any such interest and penalties,
are hereinafter collectively referred to as the "Excise Tax"), then the
Executive will be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Executive of all taxes
(including any interest or penalties, other than interest and penalties imposed
by reason of the Executive's failure to file timely a tax return or pay taxes
shown due on his return, imposed with respect to such taxes and the Excise Tax),
including any Excise Tax imposed upon the Gross-Up Payment, the Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon
the Payments.
(b) An initial determination as to whether a Gross-Up Payment is
required pursuant to this Amended and Restated Agreement and the amount of such
Gross-Up Payment shall be made at the Company's expense by an accounting firm
selected by the Company and reasonably acceptable to the Executive which is
designated as one of the five largest accounting firms in the United States (the
"Accounting Firm"). The Accounting Firm shall provide its determination (the
"Determination"), together with detailed supporting calculations and
documentation to the Company and the Executive within five days of the
Termination Date if applicable, or such other time as requested by the Company
or by the Executive (provided the Executive reasonably believes that any of the
Payments may be subject to the Excise Tax) and if the Accounting Firm determines
that no Excise Tax is payable by the Executive with respect to a Payment or
Payments, it shall furnish the Executive with an opinion reasonably acceptable
to the Executive that no Excise Tax will be imposed with respect to any such
Payment or Payments. Within ten days of the delivery of the Determination to
the Executive, the Executive shall have the right to dispute the Determination
(the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this
Paragraph 10(b) shall be paid by the Company to the Executive within five days
of the receipt of the Accounting Firm's determination. The existence of the
Dispute shall not in any way affect the Executive's right to receive the Gross-
Up Payment in accordance with the Determination. If there is no Dispute, the
Determination shall be binding, final and conclusive upon the Company and the
Executive subject to the application of Paragraph 10(c) below.
(c) As a result of the uncertainty in the application of Sections 4999
and 280G of the Code, it is possible that a Gross-Up Payment (or a portion
thereof) will be paid which should not have been paid (an "Excess Payment") or a
Gross-Up Payment (or a portion thereof) which should have been paid will not
have been paid (an "Underpayment"). An Underpayment shall be deemed to have
occurred (i) upon notice (formal or informal) to the Executive from any
governmental taxing authority that the Executive's tax liability (whether in
respect of the Executive's current taxable year or in respect of any prior
taxable year) may be increased by reason of the imposition of the Excise Tax on
a Payment or Payments with respect to which the Company has failed to
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<PAGE>
make a sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii)
by reason of determination by the Company (which shall include the position
taken by the Company, together with its consolidated group, on its federal
income tax return) or (iv) upon the resolution of the Dispute to the Executive's
satisfaction. If an Underpayment occurs, the Executive shall promptly notify the
Company and the Company shall promptly, but in any event, at least five days
prior to the date on which the applicable government taxing authority has
requested payment, pay to the Executive an additional Gross-Up Payment equal to
the amount of the Underpayment plus any interest and penalties (other than
interest and penalties imposed by reason of the Executive's failure to file
timely a tax return or pay taxes shown due on the Executive's return) imposed on
the Underpayment. An Excess Payment shall be deemed to have occurred upon a
"Final Determination" (as hereinafter defined) that the Excise Tax shall not be
imposed upon a Payment or Payments (or portion thereof) with respect to which
the Executive had previously received a Gross-Up Payment. A "Final
Determination" shall be deemed to have occurred when the Executive has received
from the applicable government taxing authority a refund of taxes or other
reduction in the Executive's tax liability by reason of the Excise Payment and
upon either (x) the date a determination is made by, or an agreement is entered
into with, the applicable governmental taxing authority which finally and
conclusively binds the Executive and such taxing authority, or in the event that
a claim is brought before a court of competent jurisdiction, the date upon which
a final determination has been made by such court and either all appeals have
been taken and finally resolved or the time for all appeals has expired or (y)
the statute of limitations with respect to the Executive's applicable tax return
has expired. If an Excess Payment is determined to have been made, the amount of
the Excess Payment shall be treated as a loan by the Company to the Executive
and the Executive shall pay to the Company on demand (but not less than 10 days
after the determination of such Excess Payment and written notice has been
delivered to the Executive) the amount of the Excess Payment plus interest at an
annual rate equal to the Applicable Federal Rate provided for in Section 1274(d)
of the Code from the date the Gross-Up Payment (to which the Excess Payment
relates) was paid to the Executive until the date of repayment to the Company.
(d) Notwithstanding anything contained in this Amended and Restated
Agreement to the contrary, in the event that, according to the Determination, an
Excise Tax will be imposed on any Payment or Payments, the company shall pay to
the applicable government taxing authorities as Excise Tax withholding, the
amount of the Excise Tax that the Company has actually withheld from the Payment
or Payments.
11. Unauthorized Disclosure. The Executive shall not make any
-----------------------
Unauthorized Disclosure. For purposes of this Amended and Restated Agreement,
"Unauthorized Disclosure" shall mean disclosure by the Executive without the
consent of the Board to any person, other than an employee of the Company or a
person to whom disclosure is reasonably necessary or appropriate in connection
with the performance by
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<PAGE>
the Executive of his duties as an executive of the Company or as may be legally
required, of any confidential information obtained by the Executive while in the
employ of the Company (including, but not limited to, any confidential
information with respect to any of the Company's customers or methods of
distribution) the disclosure of which he knows or has reason to believe will be
materially injurious to the Company; provided, however, that such term shall not
-------- -------
include the use or disclosure by the Executive, without consent, of any
information known generally to the public (other than as a result of disclosure
by him in violation of this Section 11) or any information not otherwise
considered confidential by a reasonable person engaged in the same business as
that conducted by the Company.
12. Indemnification.
---------------
(a) General. The Company agrees that if the Executive is made a party
-------
or threatened to be made a party to any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "Proceeding"), by reason of
the fact that the Executive is or was a director or officer of the Company or
any subsidiary thereof or is or was serving at the request of the Company or any
subsidiary thereof as a director, officer, member, employee or agent of another
corporation or a partnership, joint venture, trust or other enterprise,
including, without limitation, service with respect to employees benefit plans,
whether or not the basis of such Proceeding is alleged action in an official
capacity as a director, officer, member, employee or agent while serving as a
director, officer, member, employee or agent, the Executive shall be indemnified
and held harmless by the Company to the fullest extent authorized by Virginia
law, as the same exists or may hereafter be amended, against all Expenses (as
hereinafter defined) incurred or suffered by the Executive in connection
therewith, and such indemnification shall continue as to the Executive even if
the Executive has ceased to be an officer, director, or agent, or is no longer
employed by the Company and shall inure to the benefit of his heirs, executors
and administrators; provided, however, that the Executive shall not be so
-------- -------
indemnified for any Proceeding which shall have been adjudicated to have arisen
out of or been based upon his willful misconduct, bad faith, gross negligence or
reckless disregard of duty or his failure to act in good faith in the reasonable
belief that his action was in the best interests of the Company.
(b) Expenses. As used in this Amended and Restated Agreement, the
--------
term "Expenses" shall include, without limitation, damages, losses, judgments,
liabilities, fines, penalties, excise taxes, settlements, and costs, attorneys'
fees, accountants' investigations, and any expenses of establishing a right to
indemnification under this Amended and Restated Agreement.
-17-
<PAGE>
(c) Enforcement. If a claim or request under this Amended and
-----------
Restated Agreement is not paid by the Company or on its behalf, within thirty
(30) days after a written claim or request has been received by the Company, the
Executive may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim or request and if successful in whole or in part,
the Executive shall be entitled to be paid also the expenses of prosecuting such
suit. All obligations for indemnification hereunder shall be subject to, and
paid in accordance with, applicable Virginia law.
(d) Partial Indemnification. If the Executive is entitled under any
-----------------------
provision of this Amended and Restated Agreement to indemnification by the
Company for some or a portion of any Expenses, but not, however, for the total
amount thereof, the Company shall nevertheless indemnify the Executive for the
portion of such Expenses to which Executive is entitled.
(e) Advances of Expenses. Expenses incurred by the Executive in
--------------------
connection with any Proceeding shall be paid by the Company in advance upon
request of the Executive that the Company pay such Expenses and upon the
Executive's delivery of an undertaking to reimburse the Company for Expenses
with respect to which the Executive is not entitled to indemnification.
(f) Notice of Claim. The Executive shall give to the Company notice
---------------
of any claim made against him for which indemnification will or could be sought
under this Amended and Restated Agreement, but the failure of the Executive to
give such notice shall not relieve the Company of any liability the Company may
have to the Executive except to the extent that the Company is prejudiced
thereby. In addition, the Executive shall give the Company such information and
cooperation as it may reasonably require and as shall be within the Executive's
power and at such time and places as are convenient for the Executive.
(g) Defense of Claim. With respect to any Proceeding as to which the
----------------
Executive notifies the Company of the commencement thereof;
(1) The Company will be entitled to participate therein at its
own expense; and
(2) Except as otherwise provided below, to the extent that it
may wish, the Company will be entitled to assume the defense thereof, with
counsel reasonably satisfactory to the Executive. The Executive also shall have
the right to employ his own counsel in such action, suit or proceeding if he
reasonably concludes that failure to do so would involve a conflict of interest
between the Company and the
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<PAGE>
Executive, and under such circumstances the fees and expenses of such counsel
shall be at the expense of the Company.
(3) The Company shall not be liable to indemnify the Executive
under this Amended and Restated Agreement for any amounts paid in settlement of
any action or claim effected without its written consent. The Company shall not
settle any action or claim in any manner which would not include a full and
unconditional release of the Executive without the Executive's prior written
consent. Neither the Company nor the Executive will unreasonably withhold or
delay their consent to any proposed settlement.
(h) Non-exclusivity. The right to indemnification and the payment of
---------------
Expenses incurred in defending a Proceeding in advance of its final disposition
conferred in this Amended and Restated Agreement shall not be exclusive of any
other right which the Executive may have or hereafter may acquire under any
statute, provision of the declaration of trust or certificate of incorporation
or by-laws of the Company or any subsidiary, agreement, vote of shareholders or
disinterested directors or otherwise.
13. Successors and Assigns.
----------------------
(a) This Amended and Restated Agreement shall be binding upon and
shall inure to the benefit of the Company, its successors and assigns and the
Company shall require any successor or assign to expressly assume and agree to
perform this Amended and Restated Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession or
assignment had taken place. The term "the Company" as used herein shall include
such successors and assigns. The term "successors and assigns" as used herein
shall mean a corporation or other entity acquiring all or substantially all the
assets and business of the Company (including this Amended and Restated
Agreement) whether by operation of law or otherwise.
(b) Neither this Amended and Restated Agreement nor any right or
interest hereunder shall be assignable or transferable by the Executive, his
beneficiaries or legal representatives, except by will or by the laws of descent
and distribution. This Amended and Restated Agreement shall inure to the
benefit of and be enforceable by the Executive's legal personal representative.
14. Fees and Expenses. The Company shall pay all legal fees and
-----------------
related expenses (including the costs of experts, evidence and counsel) incurred
by the Executive as they become due as a result of (i) the Company and the
Executive entering into this Amended and Restated Agreement, (ii) the
Executive's termination of
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<PAGE>
employment (including all such fees and expenses, if any, incurred in contesting
or disputing any such termination of employment), (iii) the Executive's hearing
before the Board as contemplated in Section 8(b) of this Amended and Restated
Agreement, or (iv) the Executive's seeking to obtain or enforce any right or
benefit provided by this Amended and Restated Agreement (including, without
limitation, any such fees and expenses incurred in connection with (x) the
Dispute and (y) the Gross-Up Payment, whether as a result of any applicable
government taxing authority, proceeding, audit or otherwise) or by any other
plan or arrangement maintained by the Company under which the Executive is or
may be entitled to receive benefits.
15. Notice. For the purposes of this Amended and Restated Agreement,
------
notices and all other communications provided for in the Amended and Restated
Agreement (including the Notice of Termination) shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses last given by each party to the other, provided that all notices to
the Company shall be directed to the attention of the Board with a copy to the
Secretary of the Company. All notices and communications shall be deemed to
have been received on the date of delivery thereof or on the third business day
after the mailing thereof, except that notice of change of address shall be
effective only upon receipt.
16. Non-exclusivity of Rights. Nothing in this Amended and Restated
-------------------------
Agreement shall prevent or limit the Executive's continuing or future
participation in any benefit, bonus, incentive or other plan or program provided
by the Company or any of its subsidiaries and for which the Executive may
qualify, nor shall anything herein limit or reduce such rights as the Executive
may have under any other agreements with the Company or any of its subsidiaries.
Amounts which are vested benefits or which the Executive is otherwise entitled
to receive under any plan or program of the Company or any of its subsidiaries
shall be payable in accordance with such plan or program, except as explicitly
modified by this Amended and Restated Agreement.
17. Settlement of Claims. The Company's obligation to make the
--------------------
payments provided for in this Amended and Restated Agreement and otherwise to
perform its obligations hereunder shall not be affected by any circumstances,
including, without limitation, any set-off, counterclaim, recoupment, defense or
other right which the Company may have against the Executive or others.
18. Survival. The agreements and obligations of the Company and the
--------
Executive made in Sections 9, 10, 11, 12, 14, 18, and 19 of this Amended and
Restated Agreement shall survive the expiration or termination of this Amended
and Restated Agreement.
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<PAGE>
19. Federal Income Tax Withholding. The Company may withhold from
------------------------------
any benefits payable under this Amended and Restated Agreement all federal,
state, city or other taxes as shall be required pursuant to any law or
governmental regulation or ruling.
20. Miscellaneous. No provision of this Amended and Restated
-------------
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by the Executive and the
Company. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Amended and Restated Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time. No agreement or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Amended and
Restated Agreement.
21. Governing Law. This Amended and Restated Agreement shall be
-------------
governed by and construed and enforced in accordance with the laws of the
Commonwealth of Virginia, without giving effect to the conflict of law
principles thereof.
22. Jurisdiction and Venue. Each of the parties to this Amended and
----------------------
Restated Agreement hereby (i) consents to personal jurisdiction in any suit,
claim, action or proceeding relating to or arising under this Amended and
Restated Agreement which is brought in any local or federal court in the
Commonwealth of Virginia, (ii) consents to service of process upon such party in
the manner set forth in Section 16 hereof, and (iii) waives any objection such
party may have to venue in any such Virginia court or to any claim that any such
Virginia court is an inconvenient forum.
23. Public Announcements. Neither the Company nor the Executive
--------------------
shall make any public statements, including, without limitations, any press
releases, with respect to this Amended and Restated Agreement and the
transactions contemplated hereby without the prior written consent of the other
party (which consent may not be unreasonably withheld), except as may be
required by law.
24. Severability. The provisions of this Amended and Restated
------------
Agreement shall be deemed severable and the invalidity or unenforceability of
any provision shall not affect the validity or enforceability of the other
provisions hereof.
25. Entire Agreement. This Amended and Restated Agreement constitutes
----------------
the entire agreement between the parties hereto and supersedes all prior
agreements, if any, understandings and arrangements, oral or written, between
the parties
-21-
<PAGE>
hereto with respect to the subject matter hereof, including, without limitation,
the Employment Agreement dated May 1, 1992 between the Company and the
Executive.
-22-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Amended and Restated
Agreement to be executed by its duly authorized officer and the Executive has
executed this Amended and Restated Agreement as of the day and year first above
written.
PHP HEALTHCARE CORPORATION
By: /s/ Donald J. Ruffing
--------------------------------
Name: Donald J. Ruffing
Title: On behalf of the
Compensation Committee
JACK M. MAZUR
/s/ Jack M. Mazur
-----------------------------------
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<PAGE>
EXHIBIT 10.22
STOCKHOLDER VOTING AGREEMENT
Stockholder Voting Agreement (the "Agreement") dated as of July 31, 1998,
by and among John W. Kluge ("Kluge"), Chase Manhattan Bank, and John W. Kluge
Trustees U/A Dated May 30, 1984 As Amended By and For John W. Kluge (the
"Trust"), and PHP Healthcare Corporation, a Delaware corporation (the
"Company").
WHEREAS, the Trust beneficially owns 1,625,000 shares of common stock, $.01
par value per share, of the Company ("Common Stock");
WHEREAS, the Trust desires to acquire up to an additional 575,000 shares of
Common Stock; and
WHEREAS, as a condition to permitting the Trust to acquire additional
shares of Common Stock, the Company requires that Kluge and the Trust
(collectively, the "Kluge Parties") enter into this Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
TERM
1.1. Term. The term of this Agreement (the "Term") shall commence on the
----
date hereof and continue until the Kluge Parties beneficially own less than five
percent (5%) of the outstanding Common Stock of the Company.
ARTICLE II
REPRESENTATIONS
---------------
2.1. Representations of the Company. The Company hereby represents and
------------------------------
warrants to the Kluge Parties that (i) the Company has the full legal right,
power and authority to enter into and perform this Agreement, (ii) the execution
and delivery of this Agreement by the Company, and the consummation by it of the
transactions contemplated herein, have been duly authorized by the Company,
(iii) this Agreement constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except to
the extent that any applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws or general equitable principles may affect the
enforceability thereof, and (iv) subject to the execution and delivery of this
Agreement by the Kluge Parties, the Board of Directors of the Company has
approved the acquisition by the Kluge Parties of an additional 575,000 shares of
Common Stock for purposes of Section 203 of the Delaware General Corporation Law
and the Rights Agreement, dated as of April 10, 1992, by and between the Company
and Riggs National Bank, N.A., as rights agent.
<PAGE>
2.2. Representations of the Kluge Parties. The Kluge Parties hereby
------------------------------------
represent and warrant to the Company that (i) the Kluge Parties have the full
legal right, power and authority to enter into and perform this Agreement, (ii)
the execution and delivery of this Agreement by the Kluge Parties, and the
consummation by them of transactions contemplated herein, have been duly
authorized by the Kluge Parties, (iii) this Agreement constitutes the legal,
valid and binding obligation of the Kluge Parties enforceable against the Kluge
Parties in accordance with its terms, except to the extent that any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws or
general equitable principles may affect the enforceability thereof, (iv) on the
date hereof, the Kluge Parties beneficially own only 1,625,000 shares of Common
Stock, and neither Kluge, the Trust nor any of their affiliates or associates
beneficially owns any other securities of any of the Company, or rights or
interests in any such securities, (v) none of the Kluge Parties has any
agreements, arrangements or understandings with any person regarding any
possible stockholder proposal or proxy solicitation with respect to the Company,
or with regard to the acquisition or voting of any securities of the Company,
and (vi) the Kluge Parties have made all filings required to be made under the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder and the information contained in such filings does not contain any
material misstatement or omit to make any statement that in light of the
circumstances in which they were made true and correct in all material respects.
ARTICLE III
VOTING; RESTRICTIONS ON TRANSFERS
---------------------------------
3.1. Voting of Common Stock. The Kluge Parties agree that at each meeting
----------------------
of stockholders of the Company and in any action by written consent of the
stockholders of the Company, the Kluge Parties shall vote or execute consents in
respect of, or cause to be voted or cause consents to be executed in respect of,
all of the shares of Common Stock, or any other voting securities of the Company
beneficially owned by the Kluge Parties or their affiliates or associates as
follows:
(a) all shares of Common Stock beneficially owned by the Kluge Parties
or their affiliates or associates and acquired on or after the date of this
Agreement shall be voted, at their option, either (i) in accordance with the
recommendation of the Board of Directors of the Company or (ii) pro rata in the
same manner and proportion that votes (or consents, as the case may be) of the
stockholders of the Company (other than the Kluge Parties) have been cast; and
(b) after the earlier of (A) Mr. Kluge's death or incapacity or (B)
the date Mr. Kluge ceases to be a trustee and beneficiary of the Trust, the
Kluge Parties shall vote or cause all shares of Common Stock beneficially owned
by the Kluge Parties or their affiliates or associates (whether acquired before,
on or after the date hereof) to be voted, at their option, either (i) in
accordance with the recommendation of the Board of Directors of the Company, or
(ii) pro rata in the same manner and proportion that votes (or consents, as the
case may be) of the stockholders of the Company (other than the Kluge Parties)
have been cast.
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<PAGE>
The Kluge Parties will ensure that they and their affiliates or associates are
present, in person or by proxy, at all meetings of stockholders of the Company
so that all voting securities beneficially owned by the Kluge Parties or their
affiliates or associates shall be counted for purposes of determining the
presence of a quorum at such meeting.
3.2. Irrevocable Proxy. In the event a Kluge Party shall fail to comply
-----------------
with the provisions of Section 3.1 hereof as determined by the Company in its
sole discretion, such Kluge Party agrees that such failure shall result, without
any further action by such Kluge Party, in the irrevocable appointment of the
Chief Executive Officer of the Company, until termination of this Agreement, as
such Kluge Party's attorney-in-fact and proxy pursuant to the provisions of
Section 212(e) of the General Corporation Law of the State of Delaware, with
full power of substitution, to vote, and otherwise act (by written consent or
otherwise) with respect to the shares of Common Stock which such Kluge Party is
entitled to vote at any meeting of stockholders of the Company (whether annual
or special and whether or not an adjourned or postponed meeting) or consent in
lieu of any such meeting or otherwise, in the manner specified in Section 3.1
hereof. THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE AND COUPLED WITH AN
INTEREST. Each Kluge Party hereby revokes all other proxies and powers of
attorney with respect to the shares of Common Stock which such Kluge Party may
have heretofore appointed or granted, and no subsequent proxy or power of
attorney shall be given or written consent executed (and if given or executed,
shall not be effective) by such Kluge Party with respect thereto. All authority
herein conferred or agreed to be conferred shall survive the death or incapacity
of each Kluge Party and any obligation of a Kluge Party under this Agreement
shall be binding upon the heirs, personal representatives and successors of such
Kluge Party.
3.3. Restrictions on Transfer. The Kluge Parties shall not, directly or
------------------------
indirectly, sell, lend, transfer or otherwise dispose of any of their shares of
Common Stock of the Company (or agree to do so) to any person which, to their
knowledge and after taking into account such sale, would result in the
transferee beneficially owning more than five percent (5%) of the Company's
outstanding Common Stock; provided, however, that the Kluge Parties may sell,
lend, transfer or otherwise dispose of shares of Common Stock in any brokerage
transaction in which the identity of the buyer is unknown or to any Permitted
Transferee (as defined below) that agrees to be bound by the terms of this
Agreement pursuant to a written instrument in form and substance acceptable to
the Company. For purposes of this Agreement, the term "Permitted Transferee"
means (i) John W. Kluge or Stuart Subotnick, any member of their immediate
families and any issue of Kluge or Mr. Subotnick or any such member; (ii) a
trust solely for the benefit of the individuals referred to in clause (i); (iii)
the guardian or conservator of any of the individuals referred to in clause (i);
(iv) the estate of any of the individuals referred to in clause (i); and (v) and
a corporation, partnership, limited liability company or other entity all of the
outstanding securities of which are owned by any of the persons referred to in
clauses (i), (ii), (iii) or (iv).
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<PAGE>
ARTICLE IV
MISCELLANEOUS
-------------
4.1. Governing Law. This Agreement shall be governed and construed in
-------------
accordance with the laws of the State of New York without regard to its rules of
conflict of laws.
4.2. Successors and Assigns. Except as otherwise provided herein, the
----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the Parties.
4.3. Entire Agreement; Amendment. This Agreement constitutes the full and
---------------------------
entire understanding and agreement between the Parties with regard to the
subjects related to herein, and neither the Kluge Parties nor the Company shall
be liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein. Except as
expressly provided herein, neither this Agreement nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment, waiver,
discharge or termination is sought.
4.4. Notices. Any notice or other communication in connection with this
-------
Agreement shall be made in writing and served by personal delivery (including,
without limitation, courier, Federal Express or other overnight messenger
service), or mailed by United States certified mail, postage prepaid, return
receipt requested, addressed as follows:
If to the Company, to:
PHP Healthcare Corporation.
11440 Commerce Park Drive, Suite 300
Reston, Virginia 20191
Attention: Jack M. Mazur
President and Chief Executive Officer
With copies to:
PHP Healthcare Corporation.
11440 Commerce Park Drive, Suite 300
Reston, Virginia 20191
Attention: Ben Rosenbaum
General Counsel
and
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<PAGE>
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Avenue, N.W.
Suite 800
Washington, DC 20004-2505
Attention: Richard A. Steinwurtzel, Esq.
If to the Kluge Parties, to:
John W. Kluge
215 East 67th Street
New York, NY
and
c/o John W. Kluge
215 East 67th Street
New York, NY
With copies to:
Metromedia Company
One Meadowlands Plaza
E. Rutherford, NJ 07073
Attention: General Counsel
and
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: James M. Dubin, Esq.
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Parties
notice in the manner herein set forth.
4.5. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be enforceable against the Parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
-5-
<PAGE>
4.6. Severability. The invalidity or unenforceability of any provision of
------------
this Agreement shall not affect the validity or enforceability of any other
provision hereof.
4.7. Expenses. The Kluge Parties and the Company shall each bear their
--------
own expenses with respect to this Agreement and the transactions contemplated
hereby.
4.8. Construction. The headings of the Articles, Sections and paragraphs
------------
of this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to effect the construction hereof. As used
in this Agreement (i) "hereof", "hereunder", "herein" and words of like impact
------ --------- ------
shall be deemed to refer to this Agreement in its entirety and not just a
particular section of this agreement, (ii) "beneficially own" shall have the
----------------
meaning of such term within Rule 13d-3 (as such rule is currently in effect)
under the Exchange Act, (iii) "affiliate" and "associate" shall each have the
--------- ---------
meaning of such terms within Rule 12b-2 (as such rule is currently in effect)
under the Exchange Act.
4.9. Further Assurances. The Parties agree to use their reasonable
------------------
efforts to effectuate this Agreement and the transactions contemplated hereby.
-6-
<PAGE>
IN WITNESS WHEREOF, each of the Parties hereto caused this Agreement to be
executed on its behalf as of the date first above written.
PHP HEALTHCARE CORPORATION
By: /s/ Jack M. Mazur
-----------------------------
Name: Jack M. Mazur
Title: President and Chief Executive Officer
CHASE MANHATTAN BANK & JOHN W.
KLUGE TRUSTEES U/A DTD 5/30/84 AS
AMENDED BY AND FOR JOHN W. KLUGE
By: /s/ John W. Kluge
-----------------------------
Name: John W. Kluge
Title:
/s/ John W. Kluge
-----------------------------------------
JOHN W. KLUGE
-7-
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
EXHIBIT 21
----------
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION DOING BUSINESS AS
- ------------------ ------------- -----------------
<S> <C> <C>
Health Cost Consultants, Inc........................................ Virginia N/A
D.C. Chartered Health Plan, Inc..................................... District of Columbia N/A
Virginia Chartered Health Plan, Inc................................. Virginia N/A
PHP NJ MSO, Inc..................................................... Delaware N/A
Pinnacle Health Enterprises, L.L.C.................................. Delaware N/A
</TABLE>
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Exhibit 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
August 12, 1998
To the Board of Directors
PHP Healthcare Corporation
We consent to the incorporation by reference in the registration statement
(No. 33-41577) on Form S-8 and the registration statement (No. 333-01011) on
Form S-3 of PHP Healthcare Corporation of our report dated August 12, 1998 on
our audits of the consolidated financial statements and financial statement
schedule of PHP Healthcare Corporation and subsidiaries as of April 30, 1998 and
1997, and for the years ended April 30, 1998, 1997 and 1996, which report is
included in this annual report on Form 10-K.
PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for PHP Healthcare Corporation and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000803568
<NAME> PHP HEALTHCARE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 5,702
<SECURITIES> 0
<RECEIVABLES> 80,825
<ALLOWANCES> 10,425
<INVENTORY> 1,487
<CURRENT-ASSETS> 83,433
<PP&E> 107,736
<DEPRECIATION> 19,666
<TOTAL-ASSETS> 253,580
<CURRENT-LIABILITIES> 106,527
<BONDS> 66,548
0
0
<COMMON> 156
<OTHER-SE> 51,707
<TOTAL-LIABILITY-AND-EQUITY> 253,580
<SALES> 0
<TOTAL-REVENUES> 400,130
<CGS> 0
<TOTAL-COSTS> 394,037
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,735
<INCOME-PRETAX> (47,129)
<INCOME-TAX> (8,800)
<INCOME-CONTINUING> (38,329)
<DISCONTINUED> 0
<EXTRAORDINARY> (9,275)
<CHANGES> 0
<NET-INCOME> (47,604)
<EPS-PRIMARY> (4.10)
<EPS-DILUTED> (4.10)
</TABLE>
