<PAGE>
Securities and Exchange Commission
Washington, DC 20549
-----------------
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 31, 1998.
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission file number 0-16235
PHP HEALTHCARE CORPORATION
_______________________________________________________________________________
(Exact name of registrant as specified in its charter)
DELAWARE 54-1023168
________________________________________________________________________________
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
11440 COMMERCE PARK DRIVE, RESTON, VIRGINIA 20191
________________________________________________________________________________
(Address of principal executive offices)
Registrant's telephone number including area code
(703) 758-3600
________________________________________________________________________________
________________________________________________________________________________
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (i) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share, outstanding as of July 31, 1998,
11,697,173 shares.
<PAGE>
PHP HEALTHCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Condensed Consolidated Statements of Operations 1
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of Results of
Operations and Financial Condition 14
PART II - OTHER INFORMATION 19
SIGNATURES 21
EXHIBIT INDEX 22
</TABLE>
i
<PAGE>
PHP HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended July 31, 1998 and 1997
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
-----------------------
1998 1997
--------- --------
<S> <C> <C>
Revenues........................................................................... $131,500 $55,742
Medical costs...................................................................... 124,925 43,699
--------- --------
Gross profit..................................................................... 6,575 12,043
General and administrative expenses................................................ 20,887 8,822
--------- --------
Operating income (loss).......................................................... (14,312) 3,221
Other income (expense):
Interest expense.............................................................. (4,060) (1,492)
Interest income............................................................... 378 279
Miscellaneous expense......................................................... (156) (186)
Minority interest in earnings of subsidiaries................................. (68) (214)
--------- --------
Earnings (loss) before income taxes.............................................. (18,218) 1,608
Income tax expense................................................................. --- 563
--------- --------
Net earnings (loss).............................................................. (18,218) 1,045
Preferred Stock Dividends:
Dividend on purchase of Preferred Stock.......................................... (4,809) ---
Deemed dividend.................................................................. (1,192) ---
--------- --------
Preferred stock dividends..................................................... (6,001) ---
--------- --------
Net earnings (loss) available to common shareholders............................. $(24,219) $ 1,045
--------- --------
Basic earnings (loss) per share (note 1):
Earnings (loss) before preferred stock dividends................................. $ (1.57) $ 0.09
Preferred stock dividends........................................................ (0.51) ---
--------- --------
Net earnings (loss)................................................................ $ (2.08) $ 0.09
--------- --------
Basic weighted average number of common shares outstanding......................... 11,636 11,410
--------- --------
Diluted earnings (loss) per share (note 1):
Earnings (loss) before preferred stock dividends................................. $ (1.57) $ 0.08
Preferred stock dividends........................................................ (0.51) ---
--------- --------
Net earnings (loss)................................................................ $ (2.08) $ 0.08
--------- --------
Diluted weighted average number of common and common equivalent
shares outstanding............................................................... 11,636 13,773
--------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
PHP HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1998 AND APRIL 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 31, April 30,
1998 1998
--------- --------
ASSETS (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................................... $ 2,569 $ 5,702
Accounts receivable, net (note 3)....................................................... 69,864 70,400
Pharmaceutical and medical supplies..................................................... 1,517 1,487
Receivables from officers............................................................... 7,086 3,189
Other current assets.................................................................... 4,874 2,655
-------- --------
Total current assets................................................................... 85,910 83,433
Property and equipment, net.............................................................. 86,795 88,070
Intangible assets, net of accumulated amortization of $3,275 in July and
$2,361 in April....................................................................... 56,941 57,426
Excess of cost over fair value of assets acquired, net of accumulated
amortization of $490 in July and $424 in April........................................ 4,136 4,202
Deferred income taxes.................................................................... 11,447 11,447
Receivables from officers................................................................ 528 517
Note receivable.......................................................................... 2,000 2,000
Other assets............................................................................. 6,805 6,485
-------- --------
$254,562 $253,580
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank (note 4).......................................................... $ 77,000 $ ---
Current maturities of notes payable--other.............................................. 3,029 2,552
Current maturities of finance lease obligation.......................................... 382 370
Accounts payable........................................................................ 14,422 19,957
Claims payable--medical services........................................................ 67,405 65,923
Accrued salaries and benefits........................................................... 14,214 17,206
Deferred revenue........................................................................ 443 519
-------- --------
Total current liabilities.............................................................. 176,895 106,527
Notes payable--other, net of current maturities.......................................... 6,840 7,345
Finance lease obligation, net of current maturities...................................... 17,434 17,535
Convertible subordinated debentures...................................................... 66,677 66,548
Other liabilities........................................................................ 3,313 3,364
-------- --------
Total liabilities...................................................................... 271,159 201,319
-------- --------
Minority interest........................................................................ 622 554
-------- --------
Stockholders' equity/(deficit):
Preferred stock, $1,000 par value, 10,000,000 shares authorized, 62,905
issued in July and 70,000 in April..................................................... 60,975 66,500
Common stock, $.01 par value, 100,000,000 shares authorized, 16,958,458
shares issued in July and 15,678,305 shares issued in April............................ 170 156
Additional paid-in capital.............................................................. 58,738 49,480
Note receivable from sale of stock...................................................... (900) (900)
Accumulated deficit..................................................................... (73,294) (49,075)
Treasury stock, 25,320 preferred shares in July and none in April, at cost.............. (26,586) ---
Treasury stock, 5,261,285 common shares in July and 3,618,285 common shares
in April, at cost...................................................................... (36,322) (14,454)
-------- --------
Total stockholders' equity/(deficit)................................................... (17,219) 51,707
Contingencies (note 5 and 6).............................................................
-------- --------
$254,562 $253,580
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
PHP HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JULY 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)......................................................................... $(18,218) $ 1,045
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Minority interest in earnings of subsidiaries.......................................... 68 214
Depreciation and amortization.......................................................... 4,009 1,798
Other items, net....................................................................... (21) (21)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net..................................... 536 (5,554)
Decrease (increase) in pharmaceutical and medical supplies.......................... (30) 708
Decrease (increase) in other current assets......................................... 212 (1,990)
Increase in other assets............................................................ (320) (1,527)
Decrease in accounts payable........................................................ (5,536) (1,542)
Increase (decrease) in claims payable............................................... 1,482 (1,311)
Decrease in accrued salaries and benefits........................................... (2,992) (791)
Decrease in deferred revenue........................................................ (76) (23)
Increase in income taxes payable.................................................... --- 563
Increase (decrease) in other liabilities............................................ (30) 70
-------- -------
Net cash used in operating activities........................................... (20,916) (8,361)
-------- -------
Cash flows from investing activities:
Acquisition of property and equipment....................................................... (1,689) (2,034)
Net proceeds from the sale of property and equipment........................................ 64 ---
Additional costs related to acquisition of subsidiaries..................................... (428) ---
-------- -------
Net cash used in investing activities................................................ (2,053) (2,034)
-------- -------
Cash flows from financing activities:
Net proceeds (repayments) under revolving promissory notes.................................. 77,000 (1,000)
Borrowings on notes payable................................................................. --- 1,863
Repayments on notes payable................................................................. (945) (651)
Repayments on finance lease obligations..................................................... (89) ---
Debt issuance cost.......................................................................... (1,514) ---
Receivables from officers................................................................... (3,907) 2,271
Proceeds from exercise of stock options..................................................... 40 1,144
Proceeds from sale of stock................................................................. --- 2,600
Purchase of treasury shares--Series B Convertible Preferred Stock........................... (24,072) ---
Dividend on purchase of Series B Convertible Preferred Stock................................ (4,809) ---
Purchase of treasury shares--Common Stock................................................... (21,868) ---
-------- -------
Net cash provided by financing activities............................................. 19,836 6,227
-------- -------
Net decrease in cash and cash equivalents............................................. (3,133) (4,168)
Cash and cash equivalents, beginning of period............................................... 5,702 15,765
-------- -------
Cash and cash equivalents, end of period..................................................... $ 2,569 $11,597
======== =======
See accompanying notes to condensed consolidated financial statements. (continued)
</TABLE>
3
<PAGE>
PHP HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED JULY 31, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(FOR THE THREE MONTHS ENDED JULY 31, 1998)
<TABLE>
<CAPTION>
Other non-cash activities:
<S> <C>
Notes payable issued for insurance premiums........................................................... $ 917
Deemed dividend, accretion of Preferred Stock discount for beneficial conversion interest............. 1,192
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1998
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
In the opinion of the Company, the interim condensed consolidated financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The interim condensed consolidated
financial statements should be read in conjunction with the Company's April 30,
1998 and 1997 audited consolidated financial statements. The year-end condensed
consolidated balance sheet data was derived from audited consolidated financial
statements but does not include all disclosures required by generally accepted
accounting principles. The interim operating results are not necessarily
indicative of the operating results for the full fiscal year.
(B) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS No. 131"). 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 has been 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 annual 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.
(C) 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
(including any stock options or warrants with a nominal exercise price). 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.
5
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of the numerators and denominators used in the calculation
of basic and diluted EPS follows:
<TABLE>
<CAPTION>
THREE MONTHS
Ended July 31,
(In thousands, except per share data) 1998 1997
------ ------
<S> <C> <C>
Numerator:
Earnings (loss) before preferred stock dividends............................. $(18,218) $ 1,045
Preferred stock dividends.................................................... (6,001) ---
--------- -------
Numerator for basic earnings (loss) per share............................... $(24,219) $ 1,045
Effect of dilutive securities - net interest expense related to
convertible debt............................................................ --- 6
--------- -------
Numerator for diluted earnings (loss) per share, as adjusted................ $(24,219) $ 1,051
--------- -------
Denominator:
Weighted average number of common shares outstanding......................... 11,636 11,410
--------- -------
Denominator for basic earnings (loss) per share............................. 11,636 11,410
Effect of dilutive securities:
Common share equivalents (determined using the "treasury stock" method)
representing shares issuable upon exercise of stock options and warrants.... --- 2,252
Assumed conversion of convertible debt....................................... --- 111
--------- -------
Denominator for diluted earnings (loss) per share........................... 11,636 13,773
--------- -------
Basic earnings (loss) per share:
Earnings (loss) before preferred stock dividends............................. $ (1.57) $ 0.09
Preferred stock dividends.................................................... (0.51) ---
--------- -------
Earnings (loss)............................................................. $ (2.08) $ 0.09
--------- -------
Diluted earnings (loss) per share:
Earnings (loss) before preferred stock dividends............................. $ (1.57) $ 0.08
Preferred stock dividends.................................................... (0.51) ---
--------- -------
Earnings (loss)............................................................. $ (2.08) $ 0.08
--------- -------
</TABLE>
Securities which were outstanding but were not included in the computation
of diluted earnings per share because their effect was antidilutive based on
their exercise or conversion price compared to the current market price include:
(i) for the quarters ended July 31, 1998 and 1997, 2.5 million shares that would
have resulted from the conversion of the subordinated debentures, and (ii)
options to purchase 651,651 and 189,000 shares of common stock for the quarters
ended July 31, 1998 and 1997, respectively. Also, because results for the
quarter ended July 31, 1998 reflect a net loss from continuing operations,
potential common shares are excluded from the calculation of diluted EPS as
follows: (i) options, 991,546, and (ii) convertible notes, 111,111. In addition,
the 38,285 shares of Series B Convertible Preferred Stock outstanding at
July 31, 1998 would be convertible into 40,620,690 shares of common stock.
(D) RECLASSIFICATIONS
Certain amounts in the 1998 financial statements have been
reclassified to conform with the 1999 presentation.
6
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) FINANCIAL POSITION
The Company has incurred net losses of $24.2 million in the first quarter
ended July 31, 1998, $47.6 million in 1998 and continues to incur losses in the
current fiscal quarter. During the quarter ended July 31, 1998 the Company used
$50.7 million to purchase its own capital stock. The Company has a working
capital deficit of $91.0 million and a total stockholders' deficit of $17.2
million. As of the date of this report, the Company has utilized the full amount
of its $80 million credit facility in the form of $77 million in advances and
$3 million in outstanding letters of credit. As of April 30, 1998 and July 31,
1998, the Company was not in compliance with certain financial and other
covenants in the credit facility, including financial covenants requiring the
Company to maintain its consolidated EBITDA, fixed charge coverage ratio,
leverage ratio, net worth and liquidity ratio above specified minimum levels,
and other negative covenants including the extension of additional loans to
employees. The Company is in discussions with its lender to waive current
noncompliance and to amend existing financial convenants to avoid possible
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.
The Company is seeking additional liquidity through: (i) continued vigorous
pursuit of outstanding receivables including amounts due from the DCDH Medicaid
Claim and the Maryland Department of Public Safety and Correctional Services
Claim, (ii) the sale of non strategic business operations and other assets,
(iii) reductions in workforce and spending, curtailment of certain operations,
and (iv) possible alliances or business combinations with other companies.
Most recently, on September 4, 1998, the Company announced the elimination
of approximately 400 positions in its New Jersey operations. These actions were
part of the Company's operational reengineering efforts to bring the integrated
delivery system staffing levels in line with Medical Group Management
Association (MGMA) industry standards. The Company continues to examine the
underlying tenets of its integrated health care delivery platform to improve the
efficiency of services provided to its members.
Further, in late August 1998, the Company retained financial advisors to
provide consulting services to the Company with respect to its evaluation of
sources and uses of cash flows, restructuring efforts, and alternatives. There
can be no assurance that the Company will be successful in its attempts to
complete the financial restructuring of the Company and return to profitable
operation or realize the results of its efforts to improve liquidity. The
accompanying financial statements have been prepared on the basis that the
Company is a going concern and do not include any adjustments that might result
from the outcome of this uncertainty.
(3) ACCOUNTS RECEIVABLE
(A) MEDICAID SETTLEMENT RECEIVABLE
D.C. Chartered Health Plan, Inc. ("CHP"), a wholly-owned health maintenance
organization, earns substantially all of its revenue as a prepaid Medicaid
contractor with the D.C. Department of Health ("DCDH") (the Medicaid program
was formerly administered by the D.C. Department of Human Services) providing
health care services to Medicaid recipients in the District of Columbia. The
Medicaid program is jointly funded by the District of Columbia and the Federal
Health Care Finance Administration ("HCFA") of the Federal Department of Health
and Human Services ("HHS").
Prior to April 1996, the terms of the Company's contracts with DCDH
provided that the final settlements would be on a non-risk basis, calculated in
part on a cost-based methodology. CHP received interim payments on an estimated
basis with a final settlement occurring at the end of the contract period for
the difference between amounts earned and the interim payments. The final
settlement process with DCDH and HCFA is subject to defined upper payment
limits and requires an audit of CHP's activities. Due, in part, to the unique
nature of these contracts, DCDH has not undergone a final settlement process
for this type of contract. 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 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 DCDH and HCFA
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 on 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 suit for this 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. However
there can be no assurance that such remedies will be successful.
The Company believes that a final settlement of these contracts for the
periods 1992 through 1996 under the method prescribed by the new law results in
amounts due the Company in excess of the $15.2 million and $14.9 million in
receivables recorded at July 31, 1998, and April 30, 1998, respectively, which
amounts have been consistently calculated based upon the Company's conservative
interpretation of the methods in effect prior to the enactment of the new law.
7
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(B) 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 one year fixed price per inmate
contract which included two one year option periods. 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. On August 28, 1998, the Company filed a consolidated compliant with the
Maryland State Board of Contract Appeals, appealing the MDPSCS denials of the
Company's claims. As of April 30, 1998 and July 31, 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. Based on the termination for cause the MDPSCS has also withheld
payment for services during the last two months of performance totaling $2.6
million.
The Company and the MDPSCS are currently in negotiations to resolve this
matter.
(4) NOTE PAYABLE - BANK
On May 26, 1998, the Company's Credit Agreement with its primary bank was
amended 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 Credit Agreement 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 Credit Agreement. The Company had issued stand-by letters of credit
amounting to approximately $3.0 million and $3.0 million at July 31, 1998 and
April 30, 1998, respectively. The Credit Agreement functions similar to a line
of credit with daily advances and repayments. Accordingly, Credit Agreement
activity is presented as a net amount in the consolidated statements of cash
flows.
8
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Credit 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 July 31, 1998 and April 30, 1998, the Company was not in compliance
with certain financial and other covenants in the credit facility, including
financial covenants requiring the Company to maintain its EBITDA, fixed charge
coverage ratio, leverage ratio, net worth and liquidity ratio above specified
minimum levels, and other negative covenants including the extension of
additional loans to employees. As a result of this noncompliance, the Bank has
the right to give notice to the Company that all notes and interest thereon are
due and payable. Consequently, the Company has presented the outstanding
borrowings as a current liability, although the Bank has not given such notice.
In addition, as a result of this noncompliance, the interest rate on all
existing advances increased by 2% and no new Eurodollar rate advances are
available. The Company is currently involved in discussions with its primary
bank to waive current noncompliance and to amend existing financial covenants to
avoid possible future noncompliance.
As of September 14, 1998, the Company had advances of $77 million,
principally to purchase Common and Preferred Stock treasury shares, and $3
million in letters of credit outstanding under this Credit Agreement.
(5) PRIVATE PLACEMENT
On December 30, 1997, the Company completed a private placement of 70,000
shares of its Series B Convertible Preferred Stock ("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 used to finance the HIP of
New Jersey transaction and to pay related issuance costs of $6.95 million.
The holders of the Preferred Stock are not entitled to receive dividends
and, except as provided for by law, have no voting rights. The shares of
Preferred Stock are convertible into shares of the Company's common stock. The
shares of Preferred Stock will automatically convert into common stock on the
fifth anniversary of the date of original issuance to the extent any shares of
Preferred Stock remain outstanding at that time. Each share of 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. Subject to a maximum
Conversion Price, the Conversion Price is 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).
9
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
If at any time the Conversion Price falls below $25, upon conversion of any
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.
Each purchaser of the 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 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 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
Preferred Stock in accordance with the Company's listing agreement with the New
York Stock Exchange.
In the first quarter of fiscal year 1999 the Company recorded preferred
stock dividends of $6.0 million or $0.51 per share on a diluted basis. This
dividend consists of: (i) a $1.2 million non-cash deemed dividend resulting 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, recognized as a non-cash
deemed dividend over the applicable eleven month period, and (ii) $4.8 million,
which represents the excess of the purchase price over the carrying value of the
25,320 preferred shares purchased by a subsidiary of the Company.
10
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
From June 3 through June 11, 1998, a subsidiary of the Company purchased
25,320 shares of the Preferred Stock at a cost of $28.9 million. The excess of
the purchase price over the carrying value of the preferred stock of $4.8
million has been recognized as a dividend to the preferred shareholders, as
discussed above.
Beginning June 1, 1998, through July 29, 1998, a total of 7,095 shares of
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 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
Preferred Stock for each 30-day period thereafter until the registration
statement is effective (pro-rated as to the 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 Preferred Stock after adjusting for
the repurchase of 25,320 shares of Preferred Stock and the waiver of the penalty
by holders of 11,130 shares of the outstanding Preferred Stock. Penalty
payments totaling $387,360 covering the period from June 1, 1998 through June 9,
1998, were made in July 1998 and recognized as interest expense, 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 has sought waivers of this provision from
the holders of the Preferred Stock. There can be no assurance that the Company
will be successful in obtaining waivers from the holders of 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 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
then current stock price. 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, beneficially own more than 4.9% of the
outstanding common stock of the Company.
On September 4, 1998, the Company resumed conversion of the Preferred
Stock, subject to the applicable terms and conditions. The Company has
determined that, based on the current conversion price, approximately 33,000 of
the 38,000 outstanding Preferred Stock shares are held by holders who would,
upon conversion, exceed the 4.9% limitation, discussed above. Accordingly, under
existing circumstances the holders of these shares are currently not eligible to
convert.
11
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) CONTINGENCIES
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 allegations in
the original complaint concerning the receivables and claims payable reserve.
On August 10, 1998, the plaintiffs moved for certification of the
purported class. On September 11, 1998, the Company filed an opposition to the
motion. In addition, on August 12, 1998, the Company moved to dismiss the
amended complaint. Both motions are still pending. The Company can provide no
assurances regarding the outcome of either motion.
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 repeating many of the allegations set forth in the
purported class action lawsuit. The Company has since filed a motion to dismiss
the amended complaint. The Company can provide no assurances regarding the
outcome of the motion.
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.
On August 17, 1998, a derivative action was filed in Delaware Chancery
Court against seven current and former management directors. The action
purports to be premised on two claims of alleged mismanagement and breach of
fiduciary duty. Plaintiffs allege that the defendants sought to entrench
themselves by using corporate assets to repurchase common stock from the former
Chairman (and co-defendant), misrepresented their intentions to use the proceeds
of the preferred stock offering to effect the repurchase, and engaged in other
breaches of duty with respect to the issuance and repurchase of the preferred
stock. Plaintiffs also allege that the defendants exposed the Company to
securities fraud claims by engaging in the accounting practices that are the
subject of class action litigation previously disclosed by the Company. A
response to the complaint in the derivative action is due September 22, 1998.
12
<PAGE>
PHP HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $250,000. The Company does not believe that it has a
material, estimable and probable liability related to these various legal
actions and therefore has not recorded any reserves at July 31, 1998.
The Company maintains medical malpractice insurance coverage which provides
for reimbursement of any claim amounts in excess of $250,000 per incident.
13
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
Condensed Consolidated Financial Statements and the notes thereto included
elsewhere in this report.
OVERVIEW
The Company incurred substantial losses for the year ended April 30, 1998
and for the quarter ended July 31, 1998, and continues to incur losses in the
current fiscal quarter. As a result of these losses and the repurchase of
substantial amounts of capital stock, (i) the Company has experienced a
significant reduction in capital and liquidity, and (ii) the Company is not in
compliance with certain financial and other covenants under its bank credit
agreement and all amounts outstanding thereunder are subject to acceleration at
the bank's discretion.
In late August, 1998, the Company retained financial advisors to provide
consulting services to the Company with respect to its evaluation of sources and
uses of cash flows and restructuring efforts and alternatives. There can be no
assurance that the Company will be successful in its attempt to complete the
financial restructuring of the Company and return to profitable operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
the Company's Condensed Consolidated Statements of Operations expressed as a
percentage of revenue:
<TABLE>
<CAPTION>
Three Months
Ended July 31,
---------------------
1998 1997
---------------------
<S> <C> <C>
Revenues......................................................... 100.0% 100.0%
Medical costs.................................................... 95.0 78.4
----- -----
Gross profit..................................................... 5.0 21.6
General and administrative expenses.............................. 15.9 15.8
----- -----
Operating income (loss).......................................... (10.9) 5.8
Other expense.................................................... (3.0) (2.9)
----- -----
Earnings (loss) before income taxes.............................. (13.9) 2.9
Income tax expense............................................... --- 1.0
----- -----
Net earnings (loss).............................................. (13.9) 1.9
Preferred stock dividends........................................ (4.6) ---
----- -----
Net earnings (loss) available to common shareholders............. (18.5)% 1.9%
----- -----
</TABLE>
THE THREE MONTHS ENDED JULY 31, 1998 COMPARED TO
-------------------------------------------------
THE THREE MONTHS ENDED JULY 31, 1997
------------------------------------
The Company's revenues more than doubled, increasing by $75.8 million, to
$131.5 million in the first quarter of fiscal year 1999, compared to $55.7
million in the prior year.
In fiscal year 1999, revenues at the Company's wholly owned subsidiary,
PHE, increased by $85.1 million. This increase is a result of the Company's new
global capitation agreement to provide and manage healthcare services for HIP of
New Jersey's 190,000 members, which commenced operations on November 1, 1997.
PHE's other revenues from a similar arrangement with BCBSNJ and fee-for-service
revenues remained consistent with the prior year period. The Company's majority
owned subsidiary, VACHP, provided a $0.8 million increase in revenues resulting
from a 5% increase in member months and rate increases of 4.4% and 6.7%
effective July 1, 1997 and 1998, respectively.
In addition to the revenue increases discussed above, the Company
experienced the following revenue decreases. Revenues from the Company's
various strategic integrated system of care ("ISOC") ventures with hospital
systems and physician groups in Connecticut, Georgia and Louisiana
decreased by $6.5 million reflective of the Company's decision during late
fiscal year 1998 to cease these types of ISOC enterprise activities because the
business plans were no longer considered viable. Revenues from the Company's
government contracts decreased by a net total of $3.5 million, as follows: (i) a
$4.9 million decrease resulting from the completion of two total managed care
correctional facilities projects since the beginning of the prior fiscal year
first quarter, (ii) a $2.2 million decrease resulting from the completion of
14
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
one primary care project since the beginning of the prior year first quarter,
and (iii) a $3.8 million increase in revenue resulting from the commencement of
operations on two medical staffing projects, and one total managed care project,
since the beginning of the prior year first quarter. In addition, revenues from
the Company's wholly owned subsidiary, CHP, decreased by $0.8 million as a
result of the new Medicaid contract which became effective May 1, 1998. Under
the new contract, CHP receives capitation payments for five age categories
compared with two age categories under the previous contract. This change in
age categories has resulted in a lower weighted average reimbursement rate to
CHP. Additionally, CHP's revenues decreased due to a 3.7% decrease in member
months.
The Company's gross profit decreased by $5.4 million from $12.0
million in the prior year first quarter to $6.6 million in the current year
quarter. As a percentage of revenue, gross profit decreased to 5.0% for the
current first quarter compared to 21.6% in the prior year period. This decrease
includes a $0.5 million decrease in gross profit at PHE. This decrease is a
result of the new global 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 coupled with a decrease in enrollment. A $2.6 million
decrease in gross profit occurred at CHP, resulting from an increase in medical
costs and a decrease in revenues as discussed above. Gross profit from the
Company's various ISOC ventures with hospital systems and physician groups
decreased by $2.3 million consistent with the Company's cessation of these
business activities. An additional gross profit decrease of $0.5 million was
provided by the Company's wholly owned case management and utilization review
subsidiary business, Health Cost Consultants, resulting from increased product
development costs.
The Company's government contracts produced an increase in gross profit of
$0.5 million. This increase is a result of new projects which operate at higher
gross margin levels than the completed projects which operated at an
approximately break-even level, as referred to above in the revenue discussion.
General and administrative expenses more than doubled, increasing by $12.1
million to $20.9 million in the first quarter of fiscal year 1999 from $8.8
million in the prior year period. This increase includes: (1) a $1.8 million
increase in personnel costs at the corporate office resulting from a decrease in
the direct charging of personnel costs to specific business activities,
especially the Company's various former ISOC business ventures, (2) a $7.9
million increase in general and administrative costs associated with the PHE
business resulting from the new HIP of New Jersey global capitation agreement,
(3) a $1.2 million increase in facility costs, computer leasing, consulting
fees, office temporaries and business travel incurred at the corporate office,
and (4) a $0.6 million increase associated with the CHP business, primarily
related to increased marketing and promotion costs related to the new Medicaid
contract which became effective in May 1998, and additional information
technology consulting fees. As a percentage of revenue, general and
administrative expenses decreased to 9.9% for the current year first quarter
compared to 13.7% in the prior year.
Operating income decreased by $17.5 million to a loss of $14.3 million from
income of $3.2 million in the prior year first quarter. Operating margin
decreased to a loss of 10.9% from earnings of 5.8%. This decrease primarily
results from the losses incurred at PHE, the decrease in gross profits at CHP
and from the Company's ISOC business ventures, and the increases in general and
administrative expenses at the corporate headquarters, PHE and CHP.
15
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Interest expense more than doubled, increasing by $2.6 million to $4.1
million from $1.5 million in the first quarter of fiscal year 1998. The Company
incurred more interest expense due to a large increase in the Company's
outstanding debt resulting from preferred stock repurchases, common stock
repurchases, and the HIP of New Jersey transaction. The current period interest
expense includes $0.4 million that was paid to the Preferred Stockholders as a
penalty covering the period June 1, 1998 to June 9, 1998, before the
registration statement became effective (see footnote 5 in notes to the
financial statements).
The lack of an income tax benefit in the current fiscal period is
reflective of a $6.4 million valuation allowance against the Company's deferred
tax assets based on estimates about the recovery of these assets in light of the
Company's current losses and losses during fiscal years 1998 and 1997. The
effective income tax rate of 35.0% in the first quarter of fiscal year 1998
represented the estimated combined federal and state income tax rates adjusted
as necessary.
Net earnings (loss) decreased by $19.2 million or $1.57 per share, to a
loss of $18.2 million or $1.57 per share compared to earnings of $1.0 million or
$0.08 per share, based on 11,636 and 13,773 diluted weighted average shares
outstanding for the first quarter of fiscal year 1999 and 1998, respectively.
In the first quarter of fiscal year 1999 the Company recorded preferred
stock dividends of $6.0 million or $0.51 per share on a diluted basis. This
dividend consists of: (i) a $1.2 million non-cash deemed dividend resulting 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, recognized as a non-cash
deemed dividend over the applicable eleven month period, and (ii) $4.8 million,
which represents the excess of the purchase price over the carrying value of the
25,320 preferred shares purchased by the Company.
16
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are bank borrowings, issuances of
debt and equity securities, and operations. The Company has incurred losses of
$19.4 million in the first quarter of fiscal year 1999, $47.6 million in fiscal
year 1998, $4.0 million in fiscal year 1997, $4.0 million in fiscal year 1995,
and $9.3 million in fiscal year 1994.
In May 1998 the Company entered into an amended and restated credit
facility with its primary bank. The new $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 credit facility contains customary affirmative,
negative and financial covenants and is collateralized by substantially all of
the Company's assets. As of September 14, 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 $28.9 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 $21.9 million, including 1,000,000 common shares purchased from the
Company's former chairman at a cost of $16.8 million.
For the quarter ended July 31, 1998, $20.9 million in cash was used by
operations. This represents $12.5 million more used by operations than the $8.4
million used by operations in the prior year first quarter. This increase in
cash used by operations is primarily due to a loss of $18.2 million in the
current year period and a $5.5 million decrease in accounts payable.
Investing activities used approximately $2.0 million in cash during both
the periods ended July 31, 1998 and 1997, respectively. These investing
activities consisted mostly of acquisitions of property and equipment.
Financing activities provided $19.8 million in cash during the period ended
July 31, 1998, compared to $6.2 million provided during the same period in the
prior year. The primary financing activities during the current period consist
of proceeds from borrowings on the Company's primary bank credit agreement of
$77.0 million, reduced by $28.9 million for purchases of preferred stock
treasury shares and $21.9 million of purchases of common stock treasury shares.
17
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
As noted above, the Company has incurred net losses of $24.2 million in the
first quarter ended July 31, 1998, $47.6 million in 1998, and continues to incur
losses in the current fiscal quarter. During the quarter ended July 31, 1998,
the Company used $50.7 million to purchase it own capital stock. The Company
has a working capital deficit of $91.0 million and a total stockholders' equity
deficit of $17.2 million. As of the date of this report, the Company has
utilized the full amount of its $80 million primary credit facility in the form
of $77 million in advances and $3 million in outstanding letters of credit.
Additionally, as of April 30, 1998 and July 31, 1998, the Company was not in
compliance with certain financial and other covenants in the credit facility,
including financial covenants requiring the Company to maintain its consolidated
EBITDA, fixed charge coverage ratio, leverage ratio, net worth, and liquidity
ratio above specified minimum levels, and other negative covenants related to
the extension of additional loans to employees. The Company is in discussions
with its lender to waive current noncompliance and to amend existing financial
convenants to avoid possible 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.
As discussed under the caption "Risk Factors--Dependence on Certain
Relationships" in the Company's Annual Report on Form 10-K, the Company's
ability to maintain and improve its liquidity position is substantially
dependent on certain major relationships, including its relationship with HIP
of New Jersey, Inc., which now accounts for over 70% of the Company's revenues.
Any failure by HIP of New Jersey or such other parties to fulfill their
financial obligations to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's ability to raise capital through the sale of equity will also
depend on the continued existence of an active trading market for its common
stock. Although the Company is currently not in compliance with certain of the
criteria necessary for continued listing on the NYSE, the NYSE has not taken any
action to delist the Company's common stock.
The Company is seeking additional liquidity through: (i) continued
vigorous pursuit of outstanding receivables including amounts due from the DCDH
Medicaid Claim and the Maryland Department of Public Safety and Correctional
Services Claim, (ii) the sale of non strategic business operations and other
assets, (iii) reductions in workforce and spending, curtailment of certain
operations, and (iv) possible alliances or business combinations with other
companies.
Most recently, on September 4, 1998, the Company announced the elimination
of approximately 400 positions in its New Jersey operations. These actions were
part of the Company's operational reengineering efforts to bring the integrated
delivery system staffing levels in line with Medical Group Management
Association (MGMA) industry standards. The Company continues to examine the
underlying tenets of its integrated health care delivery platform to improve the
efficiency of services provided to its members.
There can be no assurance that the Company will succeed in its attempt to
increase its existing credit facility, obtain a new credit facility, or achieve
additional liquidity through these other efforts. If the Company determines that
it is or will be unable to increase its existing credit facility or obtain a new
credit facility or alternative financing, the Company will consider all of the
alternatives described above, and all other business, financial and
restructuring alternatives available to it at that time.
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.
The Company has completed a review of its information systems and is
taking steps to ensure that its internal software and hardware systems will
function properly with respect to dates in the Year 2000 and thereafter. To
date, the review and related remedial measures have cost the Company
approximately $1.0 million paid to outside vendors, exclusive of the efforts by
its own employees. As a result of the review and the steps taken, the Company
anticipates that additional outlays to outside vendors required to make computer
system improvements to become Year 2000 compliant will be approximately $1.0
million. The Company has developed a contingency plan in the event compliance is
not achieved.
Uncertainty exists concerning the potential costs and effects associated
with any Year 2000 compliance. Any problems associated with the compliance of
the Company or others with whom the Company conducts business, including
managed care organizations, government agencies and providers, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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.
The costs of the project and the date on which the plans to complete the
necessary Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those plans. Specific factors that might cause
such material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes, the ability of the Company's significant suppliers,
customers and others with whom it conducts business, including managed care
organizations, government agencies and providers, to identify and resolve their
own Year 2000 issues and similar uncertainties.
18
<PAGE>
PHP HEALTHCARE CORPORATION
PART II - OTHER INFORMATION
- ------- -----------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
The description of certain pending legal proceedings contained in Item 3 of
the Company's Annual Report on Form 10-K for the year ended April 30, 1998 is
incorporated herein by reference. There were no material developments in these
legal proceedings previously described, other than the developments described
below:
Class Action. On August 10, 1998, the plaintiffs moved for certification
of the purported class. On September 11, 1998, the Company filed an opposition
to the motion. In addition, on August 12, 1998, the Company moved to dismiss
the amended complaint. Both motions are still pending. The Company can provide
no assurances regarding the outcome of either motion.
Richman v. PHP Healthcare Corporation, et al. An amended complaint was
subsequently filed repeating many of the allegations set forth in the purported
class action lawsuit. The Company has since filed a motion to dismiss the
amended complaint. The Company can provide no assurances regarding the outcome
of the motion.
On August 17, 1998, a derivative action was filed in Delaware Chancery
Court against seven current and former management directors. The action
purports to be premised on two claims of alleged mismanagement and breach of
fiduciary duty. Plaintiffs allege that the defendants sought to entrench
themselves by using corporate assets to repurchase common stock from the former
Chairman (and co-defendant), misrepresented their intentions to use the proceeds
of the preferred stock offering to effect the repurchase, and engaged in other
breaches of duty with respect to the issuance and repurchase of the preferred
stock. Plaintiffs also allege that the defendants exposed the Company to
securities fraud claims by engaging in the accounting practices that are the
subject of class action litigation previously disclosed by the Company. A
response to the complaint in the derivative action is due September 22, 1998.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None.
Item 3. DEFAULTS UNDER SENIOR SECURITIES
--------------------------------
The Company was in violation of certain financial and other covenants in
its bank credit facility during the quarter ended July 31, 1998 and as of
July 31, 1998, including financial covenants requiring the Company to maintain
its consolidated EBITDA, fixed charge coverage ratio, leverage ratio, net worth
and liquidity ratio above specified minimum levels, and other negative covenants
including the extension of additional loans to employees. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
From July 29 through September 3, 1998, the Company temporarily suspended
conversions of its Series B Preferred Stock into common stock in order to
evaluate the then existing market conditions and related considerations. See
Note 5 of the Notes of Condensed Consolidated Financial Statements included
elsewhere in this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-----------------
None.
19
<PAGE>
PHP HEALTHCARE CORPORATION
PART II - OTHER INFORMATION (CONTINUED)
- ------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) The documents required to be filed as exhibits to this report under
Item 601 of Regulations S-K are listed in the Exhibit Index included
elsewhere in this report, which list is incorporated herein by
reference.
(b) Reports on Form 8-K filed during the three month period ended July 31,
1998:
On May 7, 1998, the Company filed a current report on Form 8-K/A
amending and restating Item 5 of the Form 8-K filed on January 6, 1998
relating to the Company's Series B Preferred Stock.
On June 4, 1998, the Company filed a current report on Form 8-K/A-2
amending and restating Item 7 of the Form 8-K filed on November 17,
1997. This report included (i) pro forma combined financial
statements of the Company for year ended April 30, 1997 and the six
months ended October 31, 1997, and (ii) interim financial statements
and additional information of HIP of New Jersey, Inc. and subsidiary
as of and for the nine month period ended September 30, 1997.
20
<PAGE>
PHP HEALTHCARE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
PHP HEALTHCARE CORPORATION
--------------------------
(Registrant)
By: /s/ Anthony M. Picini
----------------------
ANTHONY M. PICINI
Executive Vice President and
Chief Financial Officer
Date: September 18, 1998
21
<PAGE>
PHP HEALTHCARE CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Item Page
- --------- -------------------------------------------------------------------------------------- --------
<S> <C> <C>
27 Financial Data Schedule 23
</TABLE>
22
<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> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 2,569
<SECURITIES> 0
<RECEIVABLES> 70,471
<ALLOWANCES> 607
<INVENTORY> 1,517
<CURRENT-ASSETS> 85,910
<PP&E> 109,357
<DEPRECIATION> 22,562
<TOTAL-ASSETS> 254,562
<CURRENT-LIABILITIES> 176,895
<BONDS> 66,677
60,975
0
<COMMON> 170
<OTHER-SE> (78,364)
<TOTAL-LIABILITY-AND-EQUITY> 254,562
<SALES> 0
<TOTAL-REVENUES> 131,500
<CGS> 0
<TOTAL-COSTS> 124,925
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,060
<INCOME-PRETAX> (24,219)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,219)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,219)
<EPS-PRIMARY> (2.08)
<EPS-DILUTED> (2.08)
</TABLE>
