<PAGE>
Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q/A-8
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1997.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission file number 0-16235
PHP Healthcare Corporation
(Exact name of registrant as specified in its charter)
Delaware 54-1023168
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
11440 Commerce Park Drive, Reston, VA 20191
-------------------------------------------
(Address of principal executive offices)
Registrant's telephone number including area code
(703) 758-3600
--------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check whether the registrant (i) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, par value $.01 per share, outstanding as of January 31, 1997,
11,014,444 shares.
<PAGE>
The undersigned registrant hereby files this Amendment No. 8 (the "Amendment")
for purposes of amending Part I, Items 1 and 2 and Part II, Item 5. The
Amendment is set forth below:
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Report of Independent Accountants 2
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 10
PART II - OTHER INFORMATION 21
SIGNATURES 23
EXHIBIT INDEX
1
<PAGE>
Report of Independent Accountants
To the Board of Directors of PHP Healthcare Corporation:
We have reviewed the Condensed Consolidated Balance Sheet of PHP Healthcare
Corporation and subsidiaries as of January 31, 1997, and the related Condensed
Consolidated Statements of Operations and Cash Flows for the three month and
nine month periods ended January 31, 1997 and 1996. These condensed
consolidated financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the Consolidated Balance Sheet as of April 30, 1996, and the related
Consolidated Statements of Operations, Stockholders' Equity, and Cash Flows for
the year then ended (not presented herein), and in our report dated July 10,
1996, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
Condensed Consolidated Balance Sheet from which it has been derived.
As discussed in note 8 to the condensed consolidated financial statements, the
accompanying Condensed Consolidated Balance Sheets as of April 30, 1996 and
January 31, 1997 and the related Condensed Consolidated Statements of Operations
and Cash Flows for the three month and nine month periods ended January 31, 1997
and 1996, have been restated to reflect revised accounting for certain contract
costs. Additionally, the Company has corrected an error in the calculation of
earnings per share for the three month and nine month periods ended January 31,
1997.
Washington, D.C.
March 31, 1997
2
<PAGE>
PHP HEALTHCARE CORPORATION
Condensed Consolidated Statements of Operations
Three Months and Nine Months ended January 31, 1997 and 1996
(unaudited)
(In thousands, except per share data)
RESTATED
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues................................................. $ 50,843 $52,886 $162,858 $147,934
Direct costs............................................. 42,543 42,305 130,510 119,100
-------- ------- -------- --------
Gross profit........................................ 8,300 10,581 32,348 28,834
General and administrative expenses...................... 8,165 7,039 22,584 20,971
Reserve for Medicaid receivables (note 2)................ 9,822 --- 9,822 ---
Former chairman retirement package (note 4).............. 2,275 --- 2,275 ---
Restructuring charges (note 5)........................... 2,550 --- 2,550 ---
-------- ------- -------- --------
Operating income (loss)............................. (14,512) 3,542 (4,883) 7,863
Other income (expense):
Interest expense............................... (1,360) (979) (4,128) (2,076)
Interest income................................ 470 482 1,679 885
Miscellaneous income (expense)................. (34) (20) (67) 49
Gain on sale of subsidiary stock............... --- 2,247 --- 2,247
Minority interest in earnings of subsidiaries.. (78) --- (316) ---
-------- ------- -------- --------
Earnings (loss) before income taxes................. (15,514) 5,272 (7,715) 8,968
Income tax expense (benefit)............................. (5,865) 1,112 (2,931) 2,554
-------- ------- -------- --------
Net earnings (loss)................................. $ (9,649) $ 4,160 $ (4,784) $ 6,414
======== ======= ======== ========
Net earnings (loss) per share............................ $(0.88) $0.31 $(0.44) $0.48
======== ======= ======== ========
Weighted average number of common and common
equivalent shares outstanding.......................... 11,005 13,603 10,986 13,280
======== ======= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PHP HEALTHCARE CORPORATION
Condensed Consolidated Balance Sheets
As of January 31, 1997 and April 30, 1996
(In thousands, except share data)
RESTATED
<TABLE>
<CAPTION>
January 31, April 30,
1997 1996
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 29,148 $ 48,647
Accounts receivable, net (note 2)........................................ 40,726 38,802
Pharmaceutical and medical supplies...................................... 785 1,039
Receivables from officers................................................ 4,101 3,263
Deferred income taxes.................................................... 2,587 ---
Other current assets..................................................... 6,395 4,048
-------- --------
Total current assets.................................................. 83,742 95,799
Property and equipment, net............................................... 27,595 22,685
Excess of cost over fair value of assets acquired, net of
accumulated amortization of $962 in January and $810 in April............. 2,959 2,942
Deferred income taxes..................................................... 1,321 543
Receivables from officers, net............................................ 1,072 1,072
Other assets.............................................................. 5,440 4,538
-------- --------
$122,129 $127,579
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable - other.............................. 574 545
Accounts payable......................................................... 8,046 9,520
Claims payable - medical services........................................ 4,646 9,154
Accrued salaries and benefits (notes 4 and 5)............................ 15,020 11,228
Deferred income taxes.................................................... 1,322 1,515
Billings in excess of costs.............................................. 1,105 244
-------- --------
Total current liabilities.............................................. 30,713 32,206
Notes payable - other, net of current maturities.......................... 1,486 1,921
Convertible subordinated debentures....................................... 65,986 65,608
Deferred gain on sale of building......................................... 938 1,002
Other liabilities......................................................... 696 519
-------- --------
Total liabilities...................................................... 99,819 101,256
-------- --------
Minority interest......................................................... 862 545
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares authorized, none issued.. --- ---
Common stock, $.01 par value, 25,000,000 shares authorized,
14,272,929 shares issued in January and 14,203,987 shares in April...... 143 142
Additional paid-in-capital............................................... 30,982 30,529
Note receivable from sale of stock....................................... (900) (900)
Retained earnings........................................................ (2,205) 2,579
Treasury stock, 3,258,485 common shares, at cost......................... (6,572) (6,572)
-------- --------
Total stockholders' equity............................................. 21,448 25,778
Contingencies (note 6).................................................... _______ _______
$122,129 $127,579
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PHP HEALTHCARE CORPORATION
Condensed Consolidated Statements of Cash Flows
Three Months and Nine Months Ended January 31, 1997 and 1996
(Unaudited)
(In thousands)
RESTATED
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)....................................... $(9,649) $ 4,160 $ (4,784) $ 6,414
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Gain on sale of subsidiary stock........................ --- (2,247) --- (2,247)
Minority interest in earnings of subsidiaries........... 78 --- 316 ---
Depreciation and amortization........................... 1,136 1,188 3,712 3,235
Increase (decrease) in deferred income taxes............ (3,778) 440 (3,778) 1,882
Other items, net........................................ (21) (21) (64) (61)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net.......... 11,468 (7,776) (1,924) (13,499)
Decrease in pharmaceutical and medical supplies.......... 177 5 254 99
Decrease (increase) in other current assets.............. (687) 431 (2,348) (632)
Increase in other assets................................. (430) (195) (996) (623)
Increase (decrease) in accounts payable.................. (3,499) (1,904) (1,473) 350
Increase (decrease) in claims payable.................... (1,219) (1,794) (4,508) 675
Increase in accrued salaries and benefits................ 1,802 549 3,792 1,999
Increase (decrease) in billings in excess of costs....... 934 (583) 861 188
Increase (decrease) in income taxes payable.............. (2,688) --- 220 ---
Increase (decrease) in other liabilities................. 89 (196) 177 201
------- -------- -------- --------
Net cash used in operating activities................... (6,287) (7,943) (10,543) (2,019)
------- -------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment.................... (2,041) (1,112) (8,166) (2,445)
Sale of subsidiary stock................................. --- 3,000 --- 3,000
------- -------- -------- --------
Net cash provided by (used in) investing activities..... (2,041) 1,888 (8,166) 555
------- -------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible
subordinated debentures................................. --- 65,831 --- 65,831
Net repayments under revolving promissory notes........... --- (17,815) --- (20,546)
Borrowing on notes payable................................ --- --- --- 1,918
Repayments on notes payable............................... (138) (3,732) (406) (5,329)
Receivables from officers................................. 3 (81) (838) (259)
Proceeds from exercise of stock options................... 97 216 454 328
------- -------- -------- --------
Net cash provided by (used in) financing activities..... (38) 44,419 (790) 41,943
------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents.... (8,366) 38,364 (19,499) 40,479
Cash and cash equivalents, beginning of period............. 37,514 3,293 48,647 1,178
------- -------- -------- --------
Cash and cash equivalents, end of period................... $29,148 $ 41,657 $ 29,148 $ 41,657
======= ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
PHP HEALTHCARE CORPORATION
Notes to Condensed Consolidated Financial Statements
January 31, 1997
(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,
1996 and 1995 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. Certain amounts in
the fiscal year 1996 condensed consolidated financial statements have been
reclassified to conform with the fiscal year 1997 presentation.
(b) New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Stock-Based Compensation". As permitted by the
Standard, the Company does not intend to adopt the provisions for recognizing
compensation expense for grants to employees of stock, stock options, and other
equity instruments based on a new fair value method. Accordingly, this Standard
is not expected to have any impact on amounts recorded in the Company's
consolidated financial statements. However, beginning with fiscal year 1997,
the Standard will require the Company to disclose additional information in the
footnotes to its annual consolidated financial statements, including pro forma
net income and earnings per share under the new fair value method.
(2) Accounts Receivable
D.C. Chartered Health Plan, Inc. ("CHP"), a wholly-owned health maintenance
organization, earns substantially all of its revenue as a prepaid Medicaid
contractor with the D.C. Department of Human Services (DCDHS) providing health
care services to Medicaid recipients in the District of Columbia. The Medicaid
program is jointly funded by the District of Columbia and the Health Care
Finance Administration (HCFA) of the Department of Health and Human Services
(HHS).
CHP receives interim payments on an estimated basis with a final settlement
occurring at the end of the contract period for the difference between amounts
earned and the interim payments. The final settlement process with DCDHS and
HCFA is subject to defined upper payment limits and requires an audit of CHP's
activities. Due to the unique nature of these contracts, DCDHS has not
undergone a final settlement process for this type of contract.
6
<PAGE>
PHP HEALTHCARE CORPORATION
Notes to Condensed Consolidated Financial Statements (cont'd.)
In April 1996, the U.S. Government enacted a law, the effect of which
requires the Company's contracts with DCDHS to be settled retroactively on a
capitated-rate-per-enrollee basis. Prior to the enactment of the law, the terms
of the contracts provided that the final settlements would be on a non-risk
basis, calculated in part on a cost-based methodology.
The Company believes that 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 $17.6 million and $14.4 million in
receivables recorded at October 31, 1996, and April 30, 1996, 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.
For several years the Company engaged in on-going good faith discussions
and negotiations with the District regarding amounts due for the 1992 and 1994
contract years. That process ultimately resulted in an agreement to settle
these amounts due the Company for $18.9 million. It is now evident to the
Company, however, through recent comments in the local press, that payment has
been blocked. Consequently, in light of the clearly prolonged timeframe to
resolve these issues, the Company has determined to recognize reserves of $9.8
million against its Medicaid receivables from the District of Columbia,
principally relating to services provided during the 1992 to 1994 contract
years. The Company remains committed to pursuing its contractual rights for the
amounts it is due from the District.
(3) Notes Payable - Bank
The Company has extended the term of its primary banking facility, a $12.2
million revolving promissory note, until May 1997. This credit facility,
previously due to expire in November 1996, was extended at principally the same
terms and conditions.
As a result of the several one-time charges against earnings recorded
during the third quarter of fiscal year 1997, the Company was not in compliance
with certain of the various financial covenants in the borrowing agreement with
its primary bank as of January 31, 1997. The Company is in the process of
obtaining a waiver for all conditions of noncompliance. At January 31, 1997,
the Company had no borrowings under the agreement.
7
<PAGE>
PHP HEALTHCARE CORPORATION
Notes to Condensed Consolidated Financial Statements (Cont'd.)
(4) Retirement of Former Chairman
On January 31, 1997, the Company's Founder, Chairman and Chief Executive
Officer, Charles H. Robbins, retired. The Board of Directors provided Mr.
Robbins a retirement agreement that included a one-time $2 million payment and a
payment of $275,000 related to a one-year noncompetition agreement. The
agreement further requires Mr. Robbins to repay (by April 30, 1997) all
outstanding notes receivable and accrued interest due the Company within the
Senior Executive Loan Program and notes receivable related to certain life
insurance policies. Under the agreement, Mr. Robbins has the right (through
April 30, 1997) to require the Company to purchase up to 200,000 shares of his
stock in the Company at the then current market price. The agreement contains
additional clauses which include, among other things, a "standstill" provision
and restrictions on the timing of any dispositions of Mr. Robbins' holdings in
the Company.
For the quarter ended January 31, 1997, the Company recognized $2.275
million in expense related to the retirement agreement.
(5) 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 late November 1996, the Company made the strategic decision to terminate
its long-term care line of business, an unprofitable operation, in the
Government Managed Care Services division. The Company has 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. 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.
8
<PAGE>
PHP HEALTHCARE CORPORATION
NOtes to Condensed Consolidated Financial Statements (Cont'd.)
(6) Contingencies
The Company is a defendant in various legal actions. The principal actions
allege or involve claims under contractual arrangements, employment matters, and
medical malpractice with an estimated possible range of loss between
approximately $115,000 and $1.1 million in excess of insurance coverage. The
Company has not recorded any reserves related to these actions at January 31,
1997. In the opinion of management, after consultation with legal counsel, the
possible additional losses related to these actions, if any, will not result in
any material adverse effect on the Company's consolidated financial position,
results of operations, or cash flows. The Company maintains medical malpractice
insurance coverage which provides for reimbursement of any claim amounts in
excess of $250,000 and $50,000 per incident for government and commercial
business, respectively.
(7) Subsequent Event - Acquisition of New Jersey Family Healthcare Centers
On February 28, 1997, the Company purchased 10 healthcare centers from Blue
Cross and Blue Shield of New Jersey (BCBSNJ) for approximately $35 million cash,
90,000 shares of the Company's treasury stock, and other consideration.
Concurrently, the Company sold the 6 owned health center buildings to a
subsidiary of G&L Realty Corporation for $22.5 million. Based in Beverly Hills,
California, G&L Realty, which is traded on the New York Stock Exchange, is a
healthcare real estate investment trust specializing in medical office buildings
and other healthcare facilities. The Company has a minority interest in the
subsidiary and has entered into 25-year lease commitments for these same
buildings. The Company has also advanced approximately $18 million as a short-
term secured loan to the subsidiary until permanent financing is obtained.
The acquisition will be accounted for using the purchase method of
accounting and accordingly, the purchase price will be allocated to the acquired
tangible and identifiable intangible assets and liabilities based on their
respective fair values. Final accounting for this acquisition is still subject
to various appraisals which must be undertaken to assign values to the tangible
and intangible assets acquired.
(8) Restatement
Upon further review the Company has revised its accounting treatment for two
contracts entered into during fiscal years 1994 and 1995. The two contracts, a
construction contract and a management contract which were with the same party,
were previously combined for purposes of revenue recognition. The Company has
restated previously issued financial statements and related footnote
disclosures to account for these two contracts separately. As a result, the
fiscal year 1995 financial statements have been adjusted to reduce the revenue
recognized by $6.9 million for certain cost overruns related to 1995
construction and start-up activities which would have been recovered
prospectively under the two combined contracts. Furthermore, the Company has
recorded additional contract loss reserves of approximately $915,000 in fiscal
year 1995 resulting from the contracts being accounted for separately. This
revised accounting treatment also resulted in the reduction of fiscal year
1996 revenues and direct cost by approximately $900,000 and $915,000,
respectively. Immaterial adjustments to revenue were also recorded in fiscal
year 1997. The effects of these adjustments on net earnings and per share
amounts as previously reported, were as follows:
9
<PAGE>
PHP HEALTHCARE CORPORATION
Notes to Condensed Consolidated Financial Statements (cont'd.)
Three Months and Nine Months ended January 31, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Nine Months
------------ -----------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net earnings, as previously reported................. $(9,902) $(4,160) $(5,142) $ 6,414
Adjustment, net of tax of $2,807..................... 253 --- 358 ---
------- ------- ------- -------
Net earnings (loss) as adjusted...................... $(9,649) $(4,160) $(4,784) $ 6,414
======= ======= ======= =======
Per Share Amounts:
Basic earnings (loss) per share:
Net earnings as previously reported.................. $ (0.90) $ 0.31 $ 0.47 $ 0.48
Adjustments, net of tax.............................. 0.02 0.00 0.03 0.00
------- ------- ------- -------
Net earnings (loss) as adjusted...................... $ (0.88) $ 0.31 $ (0.44) $ 0.48
======= ======= ======= =======
Fully diluted earnings (loss) per share:
Net earnings as previously reported.................. $ (0.90) $ 0.35 $ (0.47) $ 0.59
Adjustment, net of tax............................... 0.02 0.00 0.03 0.00
------- ------- ------- -------
Net earnings (loss) as adjusted...................... $ (0.88) $ 0.35 $ (0.44) $ 0.59
======= ======= ======= =======
</TABLE>
10
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Upon further review the Company has revised its accounting treatment for
two contracts entered into during fiscal years 1994 and 1995. The two
contracts, a construction contract and a management contract, which were with
the same party, were previously combined for purposes of revenue recognition.
The Company has restated previously issued financial statements to account for
these two contracts separately. Accordingly, the Company has also revised the
following Management's Discussion and Analysis.
GENERAL
In response to the industry shift to manage and integrate the various
components of the health care delivery system, PHP has transformed to a managed
care solutions company. Over the past five years, the Company has altered its
focus from a historic dependence on government contracts to a focus on
commercial managed care markets. Prior to 1993, over 98% of PHP's revenue came
from government-related contracts. PHP's government service contracts required
the Company to manage health care providers in a variety of delivery settings.
In 1992, management realized that the knowledge, expertise and skills which the
Company had acquired in managing health care providers for government agencies
could also be applied to serve the commercial managed care market. At the same
time, management supplemented the Company's existing competencies with
additional skills and capabilities in order to take full advantage of the
opportunities available in commercial managed care. The Company added to
existing capabilities by making several key acquisitions, investing in
information systems and recruiting experienced managed care executives. With
this added expertise, PHP has expanded its commercial business so that, in
fiscal 1996 and 1995, its commercial business accounted for approximately 50% of
PHP's total revenues.
Revenues from the Commercial Managed Care Services division have grown, in
part as a result of acquisitions, to $106.1 million or 52.4% of total revenues
in 1996 from $1.3 million or 1% of total revenues in 1992. Operations in this
division consist of the Company's integrated system of care ("ISOC") applied in
whole or in part to: (i) the Company's project with Blue Cross Blue Shield
("BCBSNJ") to operate ten ISOCs in the State of New Jersey, (ii) family health
centers which are operated on a contract basis for large employers, and (iii)
the Company's HMOs in the District of Columbia and Virginia, primarily serving
the government assisted Medicaid population. In these operations, the Company
undertakes to provide specified health care benefits to the participating
populations. Also, in November 1995, PHP and St. Vincent's Health Services
Corporation ("St. Vincent's"), an affiliate of the Daughters of Charity National
Health System East, Inc. (the "Daughters of Charity-East"), formed Connecticut
Health Enterprises, L.L.C. ("CHE"), a limited liability company for the purpose
of developing an ISOC in Fairfield County, Connecticut. The CHE ISOC commenced
operations in April 1996 and functions as an alliance between PHP, St.
Vincent's, Fairfield County physicians and other hospitals and ancillary
providers. This system of health care is marketed to insurers, HMOs, and
government agencies, which contract for a total health care delivery system.
The Company is compensated for its Commercial Managed Care Services through a
combination of capitation fees, management fees, cost reimbursements, incentive
fees related to cost savings and profits from equity participation.
Revenues from the Government Managed Care Services division have decreased
slightly to $96.4 million in 1996 from a peak of $116.4 million in 1992.
Operations in this division consist of health care services provided to
government agencies across a diverse scope of service groups including
ambulatory care, medical staffing, mental health, long-term care, and total
managed care. The Company generally performs these services under unit-price,
fixed-price, cost-reimbursement-plus-fee, and fixed-rate-labor hour contracts.
11
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
The Company's revenues have increased to $202.5 million in 1996 from $118.0
million in 1992. Gross profit margins increased to 20% and 11% in 1996 and
1995, respectively, after having decreased to 6% and 7% in 1994 and 1993,
respectively.
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:
Three Months Nine Months
ended January 31, ended January 31,
------------------- -------------------
1997 1996 1997 1996
--------- -------- --------- --------
Revenues............................. 100.0% 100.0% 100.0% 100.0%
Direct costs......................... 83.7 80.0 80.1 80.5
----- ----- ----- -----
Gross profit......................... 16.3 20.0 19.9 19.5
General and administrative expenses.. 16.1 13.3 13.9 14.2
Reserve for Medicaid receivables..... 19.3 --- 6.0 ---
Former chairman retirement package... 4.5 --- 1.4 ---
Restructuring charges................ 5.0 --- 1.6 ---
----- ----- ----- -----
Operating income (loss).............. (28.6) 6.7 (3.0) 5.3
Other income (expense)............... (1.9) 3.3 (1.7) 0.7
----- ----- ----- -----
Earnings (loss) before income taxes.. (30.5) 10.0 (4.7) 6.0
Income tax expense (benefit)......... (11.5) 2.1 (1.8) 1.7
----- ----- ----- -----
Net earnings (loss).................. (19.0) 7.9 (2.9) 4.3
===== ===== ===== =====
12
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
RESULTS OF OPERATIONS
The Three Months Ended January 31, 1997 Compared To
----------------------------------------------------
The Three Months Ended January 31, 1996
---------------------------------------
The following table indicates revenue by the Company's service divisions
and the related percentage of total revenue:
January 31, 1997 January 31, 1996
---------------- ----------------
Revenue % of Revenue % of
Division (000's) Total (000's) Total
- -------- ------- ----- ------- -----
Government Managed Care Services $22,810 44.9 $24,403 46.1
Commercial Managed Care Services 28,033 55.1 28,483 53.9
------- ----- ------- -----
Total $50,843 100.0 $52,886 100.0
======= ===== ======= =====
The Company's revenue decreased by 4.0% or $2.1 million to $50.8 million
for the quarter ended January 31, 1997 compared to $52.9 million for the prior
year quarter. This decrease in revenues was the result of decreases in both
the Government Managed Care Services division and the Commercial Managed Care
Services division.
The Commercial Managed Care Services division revenue decreased by $0.5
million or 1.8%, to $28.0 million for the quarter ended January 31, 1997,
compared to $28.5 million for the quarter ended January 31, 1996. This overall
decrease results from a decrease in enrollment at D.C. Chartered Health Plan,
Inc. ("CHP"), the Company's wholly-owned HMO in the District of Columbia, and no
current receivable being recorded during the third quarter pending resolution of
the issues with the District. CHP believes it is due amounts for enrollees not
yet paid for, fee for service billings and a payment rate reduction not
actuarially certified. Management believes the Company is due significant
payments relating to these non-recorded receivables. The revenue decrease at
CHP was almost entirely offset by two sources of revenue increases. The first
revenue increase was due to increased enrollment at Virginia Chartered Health
Plan, Inc. ("VACHP"), the Company's majority owned Medicaid HMO operating in
selected markets in the Commonwealth of Virginia, which commenced operations in
November 1995. The second revenue increase resulted from revenue earned during
the current quarter for ISOC development, management and operations related to
strategic ventures, primarily in Connecticut.
Government Managed Care Services division revenue decreased by $1.6 million
or 6.6% to $22.8 million for the quarter ended January 31, 1997, compared to
$24.4 million for the quarter ended January 31, 1996. This net decrease in
revenues is the result of: (1) the completion of seven ambulatory care projects,
two mental health projects, and one medical staffing project on various dates
since the prior year third quarter, and (2) a revenue decrease resulting from
the Company's decision to terminate its long-term care line of business. These
revenue decreases were offset by
13
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
increases due to: (1) one new total managed care correctional facilities
project, two new ambulatory care projects, and one new mental health project,
which commenced operations on various dates since the prior year third quarter,
and (2) an increase in the number of inmates and in the per inmate reimbursement
rate at an existing total managed care correctional facilities project.
The Company's gross profit decreased by 21.7% or $2.3 million, to $8.3
million for the quarter ended January 31, 1997, compared to $10.6 million for
the prior year third quarter. As a percentage of revenue, gross profit
decreased to 16.3% for the current year third quarter compared to 20.0% for the
same period in the prior year. Gross profit decreased in both the Commercial
Managed Care Services division and the Government Managed Care Services
division.
The Commercial Managed Care Services division gross profit decrease
resulted from CHP operations discussed above and moving costs associated with
the Company's utilization management firm, including leasehold writeoffs. This
decrease was partially offset by an increase in VACHP operations and the ISOC
strategic ventures, for the same reasons cited above as causing a net decrease
in revenues.
The Government Managed Care Services division gross profit decreased due to
the completion of certain projects as described above and related completion
costs, partially offset by increases due to the commencement of operations on
new projects as described above.
General and administrative expenses increased $1.2 million to $8.2 million
for the quarter ended January 31, 1997 from $7.0 million for the prior year
third quarter. The increase is due to increased salary costs at the corporate
headquarters resulting from additional personnel related to the Company's
Commercial Managed Care ISOC initiatives, and the associated office space and
sundry cost items that accompany an increase in personnel. Additionally, during
the third quarter, the Company incurred incremental costs associated with the
New Jersey ISOC. General and administrative expenses also increased as a result
of the VACHP business, which commenced operations in November 1995. As a
percentage of revenue, general and administrative expenses increased to 16.2%
for the current year third quarter compared to 13.3% during the prior year
period.
During the third quarter ended January 31, 1997, the Company recorded a
$9.8 million reserve for Medicaid receivables associated with the Company's
Medicaid operations at CHP in the District of Columbia, principally relating to
services provided during the 1992 to 1994 contract years. For several years the
Company engaged in on-going good faith discussions and negotiations with the
District regarding these amounts. During February 1997, that process ultimately
resulted in an agreement to settle these receivables due the Company for an
amount significantly in excess of what the Company had recorded. Subsequently,
however, it became evident to the Company, through recent comments in the local
press, that payment has been blocked. The Company remains committed to pursuing
its contractual rights for the amounts it is due from the District. However, in
light of the clearly prolonged timeframe to resolve these issues, the Company
has determined to recognize this reserve.
14
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
During the third quarter ended January 31, 1997, the Company recognized
$2.275 million in expense for a retirement package provided to the Company's
Founder, Chairman and Chief Executive Officer, Charles H. Robbins.
During the third quarter ended January 31, 1997, the Company incurred
restructuring charges of $2.55 million. Within a broad restructuring effort,
this charge resulted from two specific decisions made by the Board of Directors.
In late November 1996, the Company made the strategic decision to terminate
its long-term care line of business in the Government Managed Care Services
division. The Company determined that maintaining this capability internally
was not essential to its success in providing vertically integrated healthcare
services, in whole or in part, through the Company's ISOC products. In
addition, the Company did not feel that the relationship between the risk it
assumed on these projects and the opportunity for profit was adequately
balanced. The Company has 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.
The Company experienced an operating loss of $14.5 million in the current
year third quarter, a decrease of $18.0 million as compared to operating income
of $3.5 million in the prior year third quarter. Operating margin decreased to
a loss of 28.6% compared to earnings of 6.7%. This decrease primarily resulted
from the one-time charges against earnings discussed above for the Medicaid
reserve, the Chairman's retirement package, and the restructuring charges.
Operating income also decreased due to the gross profit decreases in both the
Commercial Managed Care and Government Managed Care Services divisions and the
increased general and administrative expenses, as discussed above.
Interest expense increased by $381,000, to $1,360,000 for the quarter ended
January 31, 1997, from $979,000 for the quarter ended January 31, 1996. This
increase in interest expense is due to the increase in the Company's long term
debt resulting from the issuance of $69.0 million in convertible subordinated
debentures in December 1995.
15
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
Interest income remained consistent, decreasing by $12,000, to $470,000 for
the quarter ended January 31, 1997 from $482,000 for the quarter ended January
31, 1996.
The effective income tax rates of 37.8% in the third quarter of fiscal 1997
and 21.1% in the third quarter of fiscal 1996 represent the combined federal and
state income tax rates adjusted as necessary. The gain resulting from the sale
of a 30% interest in Virginia Chartered Health Plan, Inc. to University Health
Services, is a non-taxable transaction and therefore no provision for income
taxes was included in the Company's results of operations for the quarter ended
January 31, 1996. Exclusive of this gain, the combined effective income tax
rate for the quarter would have been 36.8%.
Net earnings decreased by $13.8 million, to a loss of $9.6 million or $0.88
per share based on 11,005,322 weighted average shares oustanding, from net
earnings of $4.2 million or $0.31 per share based on 13,602,746 weighted average
shares and equivalent shares outstanding, for the quarters ended January 31,
1997 and 1996, respectively. The accounting guidelines prohibit inclusion of
the common share equivalents in the per share calculation during periods when a
net loss has occurred. If the common share equivalents were included in the
current period per share calculation, the loss per share would be $0.70.
RESULTS OF OPERATIONS
The Nine Months Ended January 31, 1997 Compared To
--------------------------------------------------
The Nine Months Ended January 31, 1996
--------------------------------------
The following table indicates revenues by the Company's service divisions
and the related percentage of total revenues:
January 31, 1997 January 31, 1996
----------------- -----------------
Revenues % of Revenues % of
Division (000's) Total (000's) Total
- -------- --------- ----- --------- -----
Government Managed Care Services $ 75,355 46.3 $ 72,507 49.0
Commercial Managed Care Services 87,503 53.7 75,427 51.0
-------- ----- -------- -----
Total $162,858 100.0 $147,934 100.0
======== ===== ======== =====
The Company's revenues increased by 10.1% or $15.0 million to $162.9
million for the nine months ended January 31, 1997 compared to $147.9 million
for the prior year nine month period. This overall increase results from an
increase in both the Commercial Managed Care Services division and the
Government Managed Care Services division.
16
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
Commercial Managed Care Services division revenues increased by $12.1
million or 16.0%, to $87.5 million for the nine months ended January 31, 1997,
compared with $75.4 million for the nine months ended January 31, 1996. The
largest increase was provided by the Company's subsidiary, Virginia Chartered
Health Plan, Inc. ("VACHP"), a Medicaid HMO operating in selected markets in the
Commonwealth of Virginia. VACHP commenced operations in November 1995, and
therefore, it was not fully operational during the prior year nine month period.
Commercial Managed Care Services division revenue also increased due to revenue
earned during the current quarter for ISOC development, management and
operations related to strategic ventures in Connecticut and other markets.
Additionally, revenues earned from the Company's BCBSNJ ISOC project increased
due to greater utilization by the constituent population of the ten ISOCs being
managed and operated by the Company. These Commercial Managed Care Services
division revenue increases were offset by a decrease in CHP revenue related to a
decrease in enrollment and no receivables being recorded in the third quarter
pending resolution of the issues with the District. CHP believes it is due
amounts for enrollees not yet paid for, fee for service billings and a payment
rate reduction not actuarially certified. Management believes the Company is
due significant payments relating to these non-recorded receivables.
Additionally, decreases resulted from the non-recurrence of construction
revenues earned during the prior year nine month period related to the
completion of the tenth and final BCBSNJ ISOC health center which opened in
September 1995.
Government Managed Care Services division revenues increased by $2.9
million or 3.9% to $75.4 million for the nine months ended January 31, 1997
compared to $72.5 million for the nine month period ended January 31, 1996.
This increase in revenues is the result of: (1) a new total managed care
correctional facilities project, three new ambulatory care projects, and one new
mental health project which commenced operations on various dates since the
prior year nine month period, and (2) an increase in the number of inmates and
in the per inmate reimbursement rate at an existing total managed care
correctional facilities project. These revenue increases were offset by
decreases resulting from the completion of nine ambulatory care projects, two
mental health projects and one medical staffing project since the prior year
nine month period.
The Company's gross profit increased by 12.2% or $3.5 million, to $32.3
million for the nine months ended January 31, 1997 compared with $28.8 million
during the prior year period. As a percentage of revenue, gross profit
increased to 19.9% for the current nine month period compared to 19.5% during
the prior year. This gross profit improvement resulted from an increase in the
Commercial Managed Care Services division, offset by a slight decrease in the
Government Managed Care Services division.
The Commercial Managed Care Services division gross profit increase was
primarily attributable to: (1) the gross profit earned by VACHP, which was not
fully operational during the prior year nine month period, (2) increased
activity for ISOC development, management and operations related to strategic
ventures in Connecticut and other markets, and (3) increased gross profit earned
from the BCBSNJ ISOC project resulting from greater utilization by the
constituent population of the ten ISOCs being managed and operated by the
Company. These increases were offset by a decrease in revenue related to CHP
operations discussed above.
17
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
The Government Managed Care Services division gross profit net decrease is
the result of several increases and decreases. The decreases are attributable
to: (1) decreases due to the completion of certain projects as described above,
(2) the $300,000 settlement of the Company's outstanding claim with the
Department of the Army related to a former PRIMUS project during the prior year
second quarter, and (3) a decrease in revenue at one mental health project
resulting from a decrease in the scope of service when the contract was renewed
near the end of fiscal year 1996. These decreases were offset by increases
resulting from: (1) the commencement of operations on new projects as described
above, and (2) an increase in the number of inmates and the per inmate
reimbursement rate at an existing total managed care correctional facilities
project.
General and administrative expenses increased 7.7% or $1.6 million, to
$22.6 million for the nine months ended January 31, 1997, from $21.0 million for
the same period in the prior year. The increase is due to increased salary costs
at the corporate headquarters resulting from additional personnel related to the
Company's Commercial Managed Care ISOC initiatives, and the associated office
space and sundry cost items that accompany an increase in personnel. General and
administrative expenses also increased as a result of the VACHP business which
commenced operations in November 1995. As a percentage of revenue, general
and administrative expenses decreased to 13.9% for the current year nine month
period compared to 14.2% during the prior year nine month period.
During the third quarter ended January 31, 1997, the Company recorded a
$9.8 million reserve for Medicaid receivables associated with the Company's
Medicaid operations at CHP in the District of Columbia, principally relating to
services provided during the 1992 to 1994 contract years. For several years the
Company engaged in on-going good faith discussions and negotiations with the
District regarding these amounts. During February 1997, that process ultimately
resulted in an agreement to settle these receivables due the Company for an
amount significantly in excess of what the Company had recorded. Subsequently,
however, it became evident to the Company, through recent comments in the local
press, that payment has been blocked. The Company remains committed to pursuing
its contractual rights for the amounts it is due from the District. However, in
light of the clearly prolonged timeframe to resolve these issues, the Company
has determined to recognize this reserve.
During the period ended January 31, 1997, the Company recognized $2.275
million in expense for a retirement package provided to the Company's Founder,
Chairman and Chief Executive Officer, Charles H. Robbins.
During the nine months ended January 31, 1997, the Company incurred
restructuring charges of $2.55 million. Within a broad restructuring effort,
this charge resulted from two specific decisions made by the Board of Directors.
18
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
In late November 1996, the Company made the strategic decision to terminate
its long-term care line of business in the Government Managed Care Services
division. The Company determined that maintaining this capability internally
was not essential to its success in providing vertically integrated healthcare
services, in whole or in part, through the Company's ISOC products. In
addition, the Company did not feel that the relationship between the risk it
assumed on these projects and the opportunity for profit was adequately
balanced. The Company has recognized a net loss of $1.8 million related to the
restructuring for the termination of this line of business.
Effective January 31, 1997, the Board of Directors made the strategic
decision to terminate the Company's facilities development and maintenance
function operated out of the corporate offices through the Company's wholly
owned subsidiary, Sterling Communities Corporation. The elimination of these
activities will allow the Company to concentrate its resources and energy on its
core missions. 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.
The Company experienced an operating loss of $4.9 million in the current
year nine month period, a decrease of $12.8 million as compared to operating
income of $7.9 million for the nine months ended January 31, 1996. Operating
margin decreased to a loss of 3.0% compared to earnings of 5.3%. This decrease
primarily resulted from the one-time charges against earnings discussed above
for the Medicaid reserve, the Chairman's retirement package, and the
restructuring charges. Operating income also decreased due to the increased
general and administrative expenses, as discussed above, offset by the increased
gross profit margins.
Interest expense increased by $2.0 million to $4.1 million for the nine
months ended January 31, 1997, from $2.1 million for the prior year nine month
period. This increase in interest expense is due to the increase in the
Company's long term debt resulting from the issuance of $69.0 million in
convertible subordinated debentures in December 1995.
Interest income increased by $794,000 to $1,679,000 for the nine months
ended January 31, 1997, from $885,000 for the prior year nine month period.
This increase is due to the interest earned on the increased cash and cash
equivalents currently available to the Company resulting from the issuance of
$69.0 million in convertible subordinated debentures in December 1995.
19
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
The effective income tax rates of 38.0% for the nine months ended January
31, 1997 and 28.5% for the nine months ended January 31, 1996 represent the
combined federal and state income tax rates adjusted as necessary. The gain
resulting from the sale of a 30% interest in VACHP to University Health
Services, Inc., is a non-taxable transaction and therefore no provision for
income taxes was included in the Company's results of operations for the nine
months ended January 31, 1996. Exclusive of this gain, combined effective income
tax rate for the period ended January 31, 1996 would have been 38.0%.
Net earnings decreased by $11.2 million, to a loss of $4.8 million or $0.44
per share based on 10,985,794 weighted average shares outstanding, from net
earnings of $6.4 million or $0.48 per share based on 13,280,459 weighted average
shares and equivalent shares outstanding, for the nine months ended January 31,
1997, and 1996, respectively. The accounting guidelines prohibit the inclusion
of the common share equivalents in the per share calculation during periods when
a net loss has occurred. If common share equivalents were included in the
current period per share calculation, the loss per share would be $0.34.
LIQUIDITY AND CAPITAL RESOURCES
Typically, the Company's principal sources of funds are operations and bank
borrowings. In December 1995, however, the Company issued $69.0 million of
convertible subordinated debentures resulting in net proceeds of $65.8 million.
The Company used these proceeds to extinguish all outstanding bank debt and will
use the remaining amount to fund expansion of its Commercial Managed Care
Services division.
During the nine months ended January 31, 1997, operations used $10.5
million in cash. This represents a $8.5 million change from the $2.0 million
used in operations in the prior year nine month period. This decrease in cash
provided by operations is primarily due to a net loss of $5.1 million, delayed
payments from BCBSNJ, and a decrease in claims payable of $4.5 million in the
current year nine month period.
The $5.1 million loss is primarily the result of the reserve recorded for
the Medicaid receivables associated with the Company's Medicaid operations at
CHP in the District of Columbia, and additional expenses associated with the
retirement of the Company's Founder, Chairman and Chief Executive Officer and
the Company's restructuring activities in the nine months ended January 31,
1997.
On February 28, 1997, upon closing the BCBSNJ health center purchase, the
Company received over $7.7 million of delayed payments from BCBSNJ principally
relating to the period before January 31, 1997.
The decrease in claims payable is attributable to an improved payment cycle
and the decrease in enrollment at CHP, partially offset by an increase in
enrollment at VACHP.
20
<PAGE>
PHP HEALTHCARE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
The Company's number of days revenue in average outstanding receivables was
72 days for the nine months ended January 31, 1997 compared to 51 days for the
prior year nine month period. This increase is due to the difference between the
payment and revenue processes on the BCBSNJ project, increased receivables
related to the Company's commercial ISOC ventures, and a change in the mix of
government contracts such that there are now fewer prepaid contracts.
Investing activities used $8.2 million in cash during the nine months ended
January 31, 1997, compared to $555,000 provided during the nine months ended
January 31, 1996. These uses of cash for investing activities are entirely due
to the acquisition of property and equipment. The increase during the current
fiscal period is primarily related to investments made for one new and one
expanded ambulatory care clinic in the Government Managed Care Services
division, and to certain infrastructure investments the Company has made related
to its Commercial Managed Care health enterprise ventures. During the prior
year nine month period, the cash provided was due to the sale of a minority
interest in a subsidiary, reduced by the acquisition of property and equipment.
Financing activities used $790,000 in cash during the nine months ended
January 31, 1997, compared to $41.9 million provided by financing activities
during the nine months ended January 31, 1996. The current nine month use of
cash is principally due to advances made to officers. In December 1995, the
Company sold $69.0 million of convertible subordinated debentures resulting in
net proceeds of $65.8 million. With these proceeds, the Company completely
repaid all outstanding bank debt in the prior year nine month period.
The Company believes that the current cash and cash equivalents,
anticipated cash flow generated by operations and its borrowing capabilities
will be sufficient for known future capital needs of the Company. There may be,
however, further expansion opportunities which require additional external
financing and the Company may, from time to time, consider obtaining such funds
through the public and private issuance of equity or debt securities.
21
<PAGE>
PHP HEALTHCARE CORPORATION
PART II - OTHER INFORMATION
- ------- -----------------
Item 5. Other Information
On February 28, 1997, the Company and a real estate investment trust subsidiary
in which the Company owns a minority interest (the "REIT") acquired ten primary
care facilities located throughout New Jersey formerly operated by Blue Cross
and Blue Shield of New Jersey, Inc. ("BCBSNJ"). The ten health centers were
originally designed, built and managed by the Company under a management
agreement with BCBSNJ. Under the management agreement, the Company recruited
physicians and other center staff, developed an integrated referral network of
medical and surgical specialists, and designed the utilization, case management
and quality assurance systems for the health centers.
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 Company's common stock. In addition, in connection with the transaction,
the Company made a $0.9 million capital contribution to the REIT and advanced
the REIT an additional $18 million, including $16 million in short-term loans
and $2 million in long-term secured loans until permanent financing is obtained.
Since the Company funded substantially all of the funds at closing, in concert
with certain ownership risk provisions of the lease agreements, the Company has
consolidated the operations of the REIT since February 1997. The Company's
portion of the cash consideration paid to BCBSNJ and the amounts contributed or
advanced to the REIT were obtained from a combination of cash on hand, equipment
lease financing, and borrowings on its bank line of credit.
The Company will use the health centers as the cornerstone of a provider
sponsored integrated health care delivery network to be operated on a non-
exclusive basis for BCBSNJ, and other third party payors, including HMOs. The
integrated health care delivery network will operate under the name Pinnacle
Health Enterprises and resemble other provider service networks managed by the
Company in Connecticut and Georgia, which align the Company with local hospital
and physician partners.
In addition, the physicians previously employed at the health centers are now
employed by a professional medical group affiliated with the Company. Concurrent
with the purchase agreement the Company and BCBSNJ entered into a network
services agreement pursuant to which the Company provides certain health care
services to enrolled BCBSNJ beneficiaries through global capitation based on
market rates. Under the network services agreement, BCBSNJ has guaranteed
certain global capitation payments to the Company over a three year period.
22
<PAGE>
The following documents are included in this report:
(a) Financial statements of the business acquired.
- - Health Center Operations of Blue Cross Blue and Shield of New Jersey, Inc.
financial statements as of and for the year ended December 31, 1996, together
with Report of Independent Public Accountants.
(b) Pro forma financial information.
The following pro forma financial information is required by Article 11 of
Regulation S-X.
- - PHP Healthcare Corporation Pro Forma Consolidated Balance Sheet as of
January 31, 1997, which reflects the acquisition of the Health Center Operations
as of that date (unaudited).
- - PHP Healthcare Corporation Pro Forma Combined Statements of Operations for
the Nine Months ended January 31, 1997 (unaudited).
- - PHP Healthcare Corporation Pro Forma Combined Statements of Operations for
the Year ended April 30, 1996 (unaudited).
- - PHP Healthcare Corporation Notes to Pro Forma Combined Financial Statements
for the Year ended April 30, 1996 (unaudited) and the Nine Months ended January
31, 1997 (unaudited).
23
<PAGE>
PHP HEALTHCARE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
PHP HEALTHCARE CORPORATION
--------------------------
(Registrant)
By: /s/ Anthony M. Picini
--------------------------------
ANTHONY M. PICINI
Executive Vice President and
Chief Financial Officer
Date: June 3, 1998
-----------------------
24
<PAGE>
HEALTH CENTER OPERATIONS OF
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC.
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
[ARTHUR ANDERSEN LLP LOGO APPEARS HERE]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Blue Cross and Blue Shield of New Jersey, Inc.:
We have audited the accompanying statement of assets and liabilities of the
Health Center Operations of Blue Cross Blue and Shield of New Jersey, Inc. (an
operating segment of Blue Cross and Blue Shield of New Jersey, Inc.) as of
December 31, 1996, and the related statement of operations for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, the accompanying financial
statements present the carved-out portion of Blue Cross and Blue Shield of New
Jersey, Inc.'s assets and liabilities and results of operations, referred to as
the Health Center Operations, and may not necessarily be indicative of the
financial position or results of operations that would have existed if the
Health Center Operations had been operated as an unaffiliated company. Certain
expenses are the result of allocations of total expenses incurred by Blue Cross
and Blue Shield of New Jersey, Inc.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Health Center Operations of
Blue Cross and Blue Shield of New Jersey, Inc. as of December 31, 1996, and the
results of its operations for the year then ended in conformity with generally
accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Roseland, New Jersey
May 15, 1997
25
<PAGE>
HEALTH CENTER OPERATIONS OF
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
------
Current assets:
Accounts receivable.................................... $ 650,000
Inventories............................................ 686,619
Prepaid expenses and other............................. 57,183
-----------
Total current assets................................... 1,393,802
Property and equipment:
Equipment.............................................. 6,843,634
Leasehold improvements................................. 5,229,359
Land................................................... 6,072,907
Building............................................... 12,234,282
-----------
30,380,182
Less accumulated depreciation and amortization......... (4,453,724)
-----------
Property and equipment, net............................ 25,926,458
Deposits................................................. 165,960
-----------
Total assets............................................. $27,486,220
===========
LIABILITIES
-----------
Obligations under capital lease, current portion......... $1,270,000
Obligations under capital lease, net of current portion.. 2,223,000
Commitments and Contingencies (Note 4)
ASSETS IN EXCESS OF LIABILITIES
-------------------------------
Assets in excess of liabilities.......................... 23,993,220
------------
Total liabilities and assets in excess of liabilities.... $27,486,220
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
26
<PAGE>
HEALTH CENTER OPERATIONS OF
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
Revenues:
Capitation............................................ $ 3,666,058
Fee for service....................................... 4,499,906
-----------
Total Revenues........................................ 8,165,964
-----------
Expenses:
Physician expenses.................................... 6,380,275
Center operating expenses............................. 13,973,647
Facility costs........................................ 3,974,464
Other................................................. 1,061,766
-----------
Total Expenses........................................ 25,390,152
-----------
Net loss................................................ $(17,224,188)
=============
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
27
<PAGE>
HEALTH CENTER OPERATIONS OF
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC.
NOTES TO FINANCIAL STATEMENTS
1) DESCRIPTION OF OPERATIONS INCLUDED IN THE ACCOMPANYING FINANCIAL STATEMENTS
On February 28, 1997, PHP Healthcare Corporation ("PHP") acquired certain assets
and assumed certain liabilities from Blue Cross and Blue Shield of New Jersey's
Health Center operations. The accompanying statement of assets and liabilities
and statement of operations present the carved-out portion of the Health Center
Operations. This carved-out portion is herein referred to as the "Health Center
Operations" (the "HCO"). Concurrent with the purchase, PHP and BCBSNJ entered
into a network services agreement pursuant to which PHP provides certain health
care services to enrolled BCBSNJ beneficiaries through global capitation. Under
the network services agreement, BCBSNJ has guaranteed certain global capitation
payments to PHP over a three year period. However, the effects of the network
services agreement are not included in the statement of operations. These assets
and liabilities and results of operations may not necessarily be indicative of
the financial position or results of operations that would have existed if the
Health Center Operations had been operated as an unaffiliated company. Certain
expenses are the result of allocations of total expenses incurred by Blue Cross
and Blue Shield of New Jersey.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recognition of Revenue
- ----------------------
(a) Capitation Revenues
Primary care capitation revenues are recorded as revenue in the month for which
the covered member is entitled to primary care service. Capitation revenue from
a related party accounted for approximately 100% of total capitation revenues in
1996.
(b) Fee for Service Revenues
Fee for service revenues are recorded in the month for which the services are
provided.
Inventories
- ------------
Inventories, consisting principally of pharmaceuticals and medical supplies held
for resale, are stated at the lower of cost or net realizable value. Cost is
determined by specific identification.
Property and Equipment
- -----------------------
Property and equipment are stated at cost. Major additions and improvements are
capitalized, while minor replacements, and maintenance and repairs that do not
increase the useful lives of the property are expensed as incurred. Depreciation
and amortization are provided using the straight-line method over the estimated
useful lives of the related assets, ranging from five to thirty
28
<PAGE>
HEALTH CENTER OPERATONS OF
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
- ------------
The HCO's financial statements have been presented on a carved-out basis. BCBSNJ
has not allocated any income tax benefit to the HCO for 1996.
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 at the date of the
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3) EMPLOYEE BENEFIT AND HEALTH PLAN
Savings and Investment Plan
- ---------------------------
The physicians, together with other Blue Cross and Blue Shield of New Jersey
subsidiaries, participate in a qualified defined contribution savings plan
covering substantially all full-time employees as allowed under Section 401(k)
of the Internal Revenue Code. All physicians with six months of service are
eligible for membership. Total expenses allocated for participating physicians
in the health centers was approximately $96,000 in 1996.
Pension and Retirement Plan
- ---------------------------
Substantially all the health center physicians, together with employees of other
Blue Cross and Blue Shield of New Jersey subsidiaries are covered under a
pension plan which provides benefits based upon employee compensation and years
of service. The costs allocated to the HCO were approximately $289,000 for 1996.
(4) COMMITMENTS AND CONTINGENCIES
Leases
- ------
The HCO has leases for health center space and equipment that exprie on various
dates over the next eight years. The health center leases provide for increased
real estate taxes and building operating costs through annual adjustments. Total
rental expenses for leases for the year was approximately $2.4 million.
Future minimum rental payments under noncancelable leases at December 31, 1996,
are as follows: $1.4 million in 1997, $1.4 million in 1998, $1.4 million in
1999, $1.4 million in 2000, $1.4 million in 2001, and $4.4 million thereafter.
29
<PAGE>
HEALTH CENTER OPERATIONS OF
BLUE CROSS AND BLUE SHIELD OF NEW JERSEY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) RELATED PARTY TRANSACTIONS
Overhead costs of approximately $135,000 were allocated to the HCO by PHP for
the year ended December 31, 1996.
30
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENTS
On February 28, 1997, PHP Healthcare Corporation (the "Company") acquired ten
health care centers ("HCO") from Blue Cross and Blue Shield of New Jersey
("BCBSNJ"). This transaction was accounted for as a purchase. Concurrently, six
of the health care center buildings were directly purchased by GL/PHP, LLC, an
80.5% owned subsidiary of G&L Realty, a NYSE listed Real Estate Investment
Trust. The remaining ownership of 19.5% is owned by the Company. Since PHP
funded substantially all of the funds at closing, in concert with certain
ownership risk provisions of the lease agreements, the Company will consolidate
GL/PHP, LLC. Additionally, in conjunction with the purchase agreement, the
Company and BCBSNJ entered into a network services agreement pursuant to which
the Company provides certain health care services to enrolled BCBSNJ
beneficiaries through global capitation payments to the Company over a three-
year period.
The Pro Forma Combined Statement of Operations for the year ended April 30, 1996
and the nine months ended January 31, 1997, and the Pro Forma Combined Balance
Sheet of the Company as of January 31, 1997, give effect to the acquisition of
the HCO and the formation and consolidation of GL/PHP, LLC which were completed
on February 28, 1997. The adjustments related to the Pro Forma Combined
Statement of Operations assume the acquisition of the HCO, the formation and
related consolidation of GL/PHP, LLC and the effects of the network services
agreement were consummated effective May 1, 1995.
The Pro Forma financial information is not necessarily indicative of the results
of operations which would have been attained had the acquisition been
consummated on the date indicated or that which may be attained in the future.
The Pro Forma financial information should be read in conjunction with the
historical consolidated financial statements of PHP and the HCO.
31
<PAGE>
PRO FORMA COMBINED BALANCE SHEET
AS OF JANUARY 31, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Actual
------
GL/PHP Pro Forma Pro Forma
PHP HCO LLC Subtotal Adjustments Combined
--------- -------- ------- --------- --------------- ----------
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 29,148 $4,400 $ 33,548 $ (11,294)/(1)/ $ 22,254
Accounts receivable, net........................ 40,726 $ 650 41,376 (7,280)/(2)(1)/ 34,096
Pharmaceutical and medical supplies............. 785 630 1,415 1,415
Receivables from officers....................... 4,101 4,101 4,101
Deferred income taxes........................... 2,587 2,587 2,587
Other current assets............................ 6,395 166 6,561 6,561
-------- ------- ------ -------- ---------- --------
Total current assets......................... 83,742 1,446 4,400 89,588 (18,574) 71,014
Property and equipment, net....................... 27,595 25,552 53,147 5,228/(3)/ 58,375
Intangible assets................................. 2,959 2,959 4,588/(4)/ 7,547
Deferred income taxes............................. 1,321 1,321 1,321
Receivables from officers, net.................... 1,072 1,072 1,072
Other assets...................................... 5,440 108 5,548 5,548
-------- ------- ------ -------- ---------- --------
$122,129 $27,106 $4,400 $153,635 $ (8,758) $144,877
======== ======= ====== ======== ========== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Current maturities of notes payable - other..... 574 574 9,200/(1)/ 9,774
Accounts payable................................ 8,046 8,046 1,115/(1)/ 9,161
Claims payable - medical services............... 4,646 4,646 2,891/(5)/ 7,537
Accrued salaries and benefits................... 15,020 15,020 15,020
Deferred income taxes........................... 1,322 1,322 1,322
Billings in excess of costs..................... 1,105 1,105 1,105
-------- ------- ------ -------- ---------- --------
Total current liabilities.................... 30,713 30,713 13,206 43,919
Notes payable - other, net of current liabilities. 1,486 3,506 4,992 94/(1)/ 5,086
Convertible subordinated debentures............... 65,986 65,986 65,986
Deferred gain on sale of building................. 938 938 938
Other liabilities................................. 696 696 696
-------- ------- ------ -------- ---------- --------
Total liabilities............................ 99,819 3,506 103,325 13,300 116,625
-------- ------- ------ -------- ---------- --------
Assets in excess of liabilities................... 23,600 23,600 (23,600)
Minority interest................................. 862 862 3,542/(6)/ 4,404
-------- ------- ------ -------- ---------- --------
Stockholders' equity:
Preferred stock, $.01 par value, 500,000
shares authorized, none issued............... --- ---
Common stock, $.01 par value, 25,000,000
shares authorized, 14,272,929 shares in 143
January...................................... 143 4,400 4,543 (4,400)/(6)/
Additional paid-in capital...................... 30,982 30,982 2,400/(7)/ 33,382
Note receivable from sale of stock.............. (900) (900) (900)
Retained earnings............................... (2,205) (2,205) (2,205)
Treasury stock, 3,258,485 common shares
at cost...................................... (6,572) (6,572) (6,572)
-------- ------- ------ -------- ---------- --------
Total stockholders equity....................... 21,448 4,400 25,848 (2,000) 23,848
-------- ------- ------ -------- ---------- --------
Contingencies..................................... $122,129 $27,106 $4,400 $153,635 $ (8,758) $144,877
======== ======= ======= ======== ========== ========
</TABLE>
The accompanying notes are an integral part of this statement.
32
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED APRIL 30, 1996 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
------
GL/PHP Pro Forma Pro Forma
PHP HCO LLC Subtotal Adjustments Combined
--------- --------- ------ --------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................................... $202,464 $ 9,400 $ $211,864 $ (294)/(8)/ $211,570
408/(10)/
Direct costs.................................. 162,619 23,952 186,571 (2,530)/(9)/ 180,625
-------- -------- ------ -------- (3,820)/(11)/ --------
(226)/(12)/
222/(13)/
---------
Gross profit................................ 39,845 (14,552) 25,293 5,652 30,945
General and administrative expenses........... 27,220 27,220 27,220
-------- -------- ------ -------- --------- --------
Operating income (loss)..................... 12,625 (14,552) (1,927) 5,652 3,725
Other income (expense):
Interest expense........................... (3,363) (3,363) (1,132)/(14)/ (4,495)
Interest income............................ 1,448 1,448 1,448
Miscellaneous income (expense)............. 69 69 69
Gain on sale of subsidiary stock........... 2,247 2,247 2,247
Minority interest in earnings of
subsidiaries............................ 212 212 212
-------- -------- ------ -------- --------- --------
Earnings (loss) before income taxes........ 13,238 (14,552) (1,314) 4,520 3,206
Income tax expense (benefit).................. 4,100 4,100 (3,106) 994
-------- -------- ------ -------- --------- --------
Net earnings (loss)..................... $ 9,138 $(14,552) $ --- $ (5,414) $ 7,626 $ 2,212
======== ======== ====== ======== ========= ========
Net earnings (loss) per share:
Primary..................................... $.68 $0.16
======== ========
Diluted..................................... $.66 $0.16
======== ========
Weighted average number of common
and common equivalent shares outstanding:
Primary..................................... 13,429 13,429
======== ========
Diluted..................................... 13,873 13,873
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
33
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
Pro Forma Combined Statements of Operations
For the Nine Months ended January 31, 1997
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Actual
------
Pro
GL/PHP Pro Forma Forma
PHP HCO LLC Subtotal Adjustments Combined
--- --- --- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $162,358 $ 7,287 $ $170,145 $ 12,231(8) $182,376
306(10)
Direct costs................................... 130,510 20,723 151,233 (1,898)(9) 151,036
-------- -------- ------- -------- --------
1,691(11)
(412)(12)
166(13)
--------
Gross profit.............................. 32,348 (13,436) 18,912 12,428 31,340
General and administrative expenses............ 22,584 22,584 22,584
Reserve for Medicaid receivables (note 2)...... 9,822 9,822 9,822
Former chairman retirement package (note 4).... 2,275 2,275 2,275
Restructuring charges (note 5)................. 2,550 2,550 2,550
-------- -------- ------- -------- -------- --------
Operating income (loss)................... (4,883) (13,436) (18,319) 12,428 (5,891)
Other income (expense):
Interest expense........................ (4,128) (4,128) (850)(14) (4,978)
Interest income......................... 1,679 1,679 1,679
Miscellaneous income (expense).......... (67) (67) (67)
Minority interest in earnings of
subsidiaries......................... (316) (316) (316)
-------- -------- ------- -------- -------- --------
Earnings (loss) before income taxes....... (7,715) (13,436) (21,151) 11,578 (9,573)
Income tax expense (benefit)................... (2,931) (2,931) (707) (3,638)
-------- -------- ------- -------- -------- --------
Net earnings (loss)....................... $ (4,784) $(13,436) $ --- $(18,220) $12,285 $(5,935)
========= ========= ========= ========= ======= ========
Net earnings (loss) per share.................. $ (0.44) $ (0.54)
========== ========
Weighted average number of common
and common equivalent shares outstanding....... 10,986 11,076
========== ========
</TABLE>
The accompanying notes are an integral part of this statement.
34
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1996 (UNAUDITED) AND
THE NINE MONTHS ENDED JANUARY 31, 1997
1) CASH PAID AND DEBT INCURRED
The pro forma adjustment to cash and notes payable represents cash on hand of
$11.3 million used in the acquisition. Cash in the amount of $31.1 million
($22.3 from the REIT and $8.8 million from the Company) was included as part of
the purchase price. The pro forma adjustment of $11.3 million is not of: a) $9.2
million in notes payable (with an interest rate of 9.2%) which represents a draw
against the Company's bank line of credit; b) $1.1 million of accounts payable
representing the accrual of acquisition costs incurred; c) $6.6 million of
accounts receivable due and credited at closing and d) $2.9 million of claims
payable for claims incurred and not yet paid. The $9.2 million in notes payable
(with an interest rate of 9.25%) represents a draw against the Company's bank
line of credit. The $1.1 million of accounts payable represents the accrual of
acquisition costs incurred. Additionally, $7.3 million was due to PHP for
accounts receivable which were credited at closing.
2) ACCOUNTS RECEIVABLE
The pro forma adjustment to accounts receivable represents payments on amounts
due to PHP net of acquired accounts receivables.
3) PROPERTY AND EQUIPMENT
The pro forma adjustment to property and equipment represents the increase in
estimated fair value of the acquired property and equipment.
4) INTANGIBLE ASSETS
The pro forma adjustment to intangible assets represents the addition resulting
from the excess of the purchase price paid in the acquisition over the fair
market value of the tangible net assets acquired. The allocations of intangible
assets to the network agreement, physician contracts, assembled workforce, and
goodwill are based on current estimates. Such amounts may ultimately be modified
based upon valuation which will be obtained. In Management's opinion the
preliminary valuation is not expected to materially differ from the final
valuation. The Company used a blended amortization period of 20 years based on
industry practice.
5) CLAIMS PAYABLE
The pro forma adjustment to claims payable represents the estimated incurred but
not reported claims costs for services provided under the global capitation
network services agreement.
6) REIT PARTICIPATION
The pro forma adjustment to equity reclassifies G&L Realty's equity in GL/PHP,
LLC of $3.5 million to minority interest and eliminates the Company's equity in
GL/PHP, LLC of $900,000.
7) STOCK ISSUANCE
The pro forma adjustment to additional paid-in-capital represents the value of
the shares issued by PHP to BCBSNJ in conjunction with the acquisition.
35
<PAGE>
PHP HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1996 (UNAUDITED) AND
THE NINE MONTHS ENDED JANUARY 31, 1997 (CONTINUED)
8) GLOBAL CAPITATION
In conjunction with the purchase agreement the Company and BCBSNJ entered into a
network services agreement pursuant to which the Company provides certain health
care services to enrolled BCBSNJ beneficiaries through global capitation payment
to the Company over a three year period. The effects of this new contractual
arrangement is being added while the revenue recorded under the Company's prior
contract as well as the HCO's prior capitation revenue are being eliminated.
Revenues of approximately $31.2 million and $26.7 million are being added under
the new global capitation arrangement for the nine months ended January 31, 1997
and the year ended April 30, 1996, respectively. The significantly larger
adjustment in revenue for the nine months ended January 31, 1997 compared to the
year ended April 30, 1996 is due to the increased enrollment (approximately
256,000 and 220,000 member months, respectively). Prior contract and capitation
revenues of approximately $19 million and $27 million are being eliminated for
the nine months ended January 31, 1997 and the year ended April 30, 1996,
respectively.
9) DIRECT COSTS
The pro forma adjustment to direct costs represents elimination of HCO rental
expense amounts which were paid to its parent.
10) DEPRECIATION EXPENSE
The pro forma adjustment to direct costs represents the increase in depreciation
of fixed assets recorded in conjunction with the acquisition.
11) EXPANDED SERVICE COSTS
As described in note (8) the direct cost adjustments were similarly impacted by
the costs associated with providing additional health care services under the
network services agreement to a differing member base. The effects of this new
contractual arrangement is being added while the costs recorded under the
Company's prior contract are being eliminated. Claims expense of approximately
$11.6 million and $9.6 million are being added under the new expanded health
care services arrangement for the nine months ended January 31, 1997 and the
year ended April 30, 1996, respectively. The significantly larger adjustment in
claims for the nine months ended January 31, 1997, compared to the year ended
April 30, 1996 is due to the increased enrollment (approximately 256,000 and
220,000 member months, respectively). Prior contract expenses of approximately
$10 million and $13.4 million are being eliminated for the nine months ended
January 31, 1997 and the year ended April 30, 1996, respectively.
12) NONRECURRING COSTS
The pro forma adjustment to direct costs represents the elimination of certain
nonrecurring costs related to allocations charged by the parent company for data
processing and other administrative services. Also included in this adjustment
is the processing and other administrative services.
36
<PAGE>
13) AMORTIZATION EXPENSE
The pro forma adjustment to direct costs represents the increase in amortization
of intangible assets recorded in conjunction with the acquisition using an
estimated blended 20-year amortization period.
14) INTEREST EXPENSE
The pro forma adjustment to interest expense represents the interest expense on
additional debt necessary to complete the acquisition.
15) ELIMINATION OF COSTS
There are cost reductions in connection with the acquisition which are not
reflected in the pro forma financials. The Company has eliminated that if these
costs reductions were included, the reduction to health center expenses would be
approximately $1.8 million and $2.4 million for the nine months ended January
31, 1997 and the year ended April 30, 1996, respectively.
Exhibit Item Page
- ------- ---- ----
15.1 Letter of Coopers & Lybrand L.L.P. regarding Unaudited 17
Interim Financial
37
<PAGE>
PHP HEALTHCARE CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Item Page
- ------- ---- ----
<S> <C> <C>
10.1* Health Center Purchase Agreement
11.0 Statement re: Computation of per share earnings for the three months 26
and nine months ended January 31, 1997 and 1996
15.1 Letter of Coopers & Lybrand, L.L.P. regarding Unaudited Interim 28
Financial Statements
27 Financial Data Schedule
99.1* Press Release dated March 5, 1997
</TABLE>
- ----------------
* Document filed as exhibit to Amendment No.5 to the Company's Form 10-Q for the
Quarter ended January 31, 1997 (File No. 0-16235), bearing same exhibit
number, which is incorporated herein by reference.
<PAGE>
PHP HEALTHCARE CORPORATION
EXHIBIT 11
Statement Re: Computation of per Share Earnings
Three Months and Nine Months ended
January 31, 1997 and 1996
RESTATED
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ended January 31, ENDED JANUARY 31,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Primary Earnings Per Share
- --------------------------
Primary
Net earnings (loss)............................ $(9,649,000) $ 4,160,000 $(4,784,000) $ 6,414,000
=========== =========== =========== ===========
Weighted average number of common
shares outstanding.............................. 11,093,894 10,949,439 11,074,366 10,930,272
Add common share equivalents (determined
using the "treasury stock method") repre-
senting shares issuable upon exercise of
stock options and warrants...................... 2,673,721 2,741,879 2,746,838 2,438,759
Shares held in escrow............................. (88,572) (88,572) (88,572) (88,572)
----------- ----------- ----------- -----------
Weighted average number of shares used
in calculation of primary earnings per
share........................................... 13,679,043 13,602,746 13,732,632 13,280,459
=========== =========== =========== ===========
Primary earnings (loss) per common share.......... $ (0.71) $ 0.31 $ (0.35) $ 0.48
=========== =========== =========== ===========
WHEN A LOSS OCCURS, COMMON SHARE EQUIVALENTS
ARE EXCLUDED FROM THE CALCULATION OF EARNINGS
PER SHARE BECAUSE THEY ARE ANTIDILUTIVE.
Primary - without common share equivalents
Net earnings (loss)............................ $(9,649,000) $ 4,160,000 $(4,784,000) $ 6,414,000
=========== =========== =========== ===========
Weighted average number of common
shares outstanding.............................. 11,093,894 10,949,439 11,074,366 10,930,272
Shares held in escrow............................. (88,572) (88,572) (88,572) (88,572)
----------- ----------- ----------- -----------
Weighted average number of shares used
in calculation of primary earnings per
share without common share equivalents.......... 11,005,322 11,860,867 10,985,794 10,841,700
=========== =========== =========== ===========
Primary earnings (loss) per common share
without common share equivalents................ $ (0.88) $ 0.35 $ (0.44) $ 0.59
=========== =========== =========== ===========
</TABLE>
(Continued on next page)
1
<PAGE>
PHP HEALTHCARE CORPORATION
EXHIBIT 11
Statement Re: Computation of per Share Earnings
Three Months and Nine Months ended
January 31, 1997 And 1996
RESTATED
(Continued from previous page)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ended January 31, ENDED JANUARY 31,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fully Diluted Earnings Per Share
- --------------------------------
Fully diluted
Net earnings (loss)............................ $(9,649,000) $ 4,160,000 $(4,784,000) $ 6,414,000
Net interest expense related to
convertible debt............................ 5,000 357,000 16,000 362,000
----------- ----------- ----------- -----------
Net earnings (loss) as adjusted................ $(9,644,000) $ 4,517,000 $(4,768,000) $ 6,776,000
=========== =========== =========== ===========
Weighted average number of common
shares outstanding.............................. 11,093,894 10,949,439 11,074,366 10,930,272
Add common share equivalents (determined
using the "treasury stock" method) repre-
senting shares issuable upon exercise of
stock options, warrants, and convertible........
notes payable................................... 2,673,721 2,848,082 2,746,838 2,867,806
Assumed conversion of convertible debt............ 111,111 1,353,111 111,111 525,111
Shares held in escrow............................. (88,572) (88,572) (88,572) (88,572)
----------- ----------- ----------- -----------
Weighted average number of shares used
in calculation of fully diluted earnings
per share....................................... 13,790,154 15,062,060 13,843,743 14,234,617
=========== =========== =========== ===========
Fully diluted earnings (loss) per common share.... $(0.70) $0.30 $0.34 $0.48
=========== =========== =========== ===========
WHEN A LOSS OCCURS, COMMON SHARE EQUIVALENTS
ARE EXCLUDED FROM THE CALCULATION OF EARNINGS
PER SHARE BECAUSE THEY ARE ANTIDILUTIVE.
Fully diluted - without common share equivalents
Net earnings (loss)........................... $(9,649,000) $ 4,160,000 $(4,784,000) $ 6,414,000
=========== =========== =========== ===========
Weighted average number of common
shares outstanding.............................. 11,093,894 10,949,439 11,074,366 10,930,272
Shares held in escrow............................. (88,572) (88,572) (88,572) (88,572)
----------- ----------- ----------- -----------
Weighted average number of shares used
in calculation of fully diluted earnings
per share without common share equivalents...... 11,005,322 11,860,867 10,985,794 10,841,700
=========== =========== =========== ===========
Fully diluted earnings (loss) per common share
without common share equivalents................ $(0.88) $0.35 $(0.44) $0.59
=========== =========== =========== ===========
</TABLE>
2
<PAGE>
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: PHP Healthcare Corporation, Registrations on Form S-3 and on Form S-8
We are aware that our report, which includes an explanatory paragraph regarding
the restatement of previously issued financial statements to reflect revised
accounting for certain contracts costs and reflect the correction of an error
in the calculation of earnings per share for the three and nine month periods
ended January 31, 1997, dated March 31, 1997 on our review of interim financial
information of PHP Healthcare Corporation and consolidated subsidiaries as of
January 31, 1997 and for the three month and nine month periods ended January
31, 1997 and 1996, and included in the Company's quarterly report on Form 10-Q,
as amended, for the quarter then ended, is incorporated by reference in
Registration Statement (No. 333-01011) on Form S-3 and in Registration
Statement (No. 333-41577, 333-26403 and 333-47093) on Form S-8. Pursuant to
Rule 436(c) under the Securities Act of 1933, this report should not be
considered a part of the prospectus and registration statement prepared or
certified by us within the meaning of Section 7 and 11 of that Act.
Washington, D.C.
June 2, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR PHP HEALTHCARE CORPORATION AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000803568
<NAME> PHP HEALTHCARE CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 29,148
<SECURITIES> 0
<RECEIVABLES> 40,897
<ALLOWANCES> 171
<INVENTORY> 785
<CURRENT-ASSETS> 83,742
<PP&E> 44,104
<DEPRECIATION> 16,509
<TOTAL-ASSETS> 122,129
<CURRENT-LIABILITIES> 30,713
<BONDS> 65,986
0
0
<COMMON> 143
<OTHER-SE> 21,305
<TOTAL-LIABILITY-AND-EQUITY> 122,129
<SALES> 0
<TOTAL-REVENUES> 162,858
<CGS> 0
<TOTAL-COSTS> 130,510
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,128
<INCOME-PRETAX> (7,715)
<INCOME-TAX> (2,931)
<INCOME-CONTINUING> (4,784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,784)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
