<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1998
REGISTRATION NO. 333-26207
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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PHP HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C>
DELAWARE 54-1023168
(State or other jurisdiction (I.R.S. Employer
of Identification Number)
incorporation or
organization)
</TABLE>
--------------------------
11440 COMMERCE PARK DRIVE
RESTON, VIRGINIA 20191
(703) 758-3600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
BEN ROSENBAUM III
SECRETARY AND GENERAL COUNSEL
11440 COMMERCE PARK DRIVE, RESTON, VIRGINIA 20191
(703) 758-3600
(Name, address, including zip code, and telephone number, including area code,
of registrant's agent for service)
------------------------------
Please send copies of all communications to:
ANDREW P. VARNEY, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
1001 PENNSYLVANIA AVENUE, N.W., SUITE 800
WASHINGTON, D.C. 20004-2505
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of the Registration Statement.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
PROSPECTUS
PHP HEALTHCARE CORPORATION
8,255,639 SHARES OF COMMON STOCK
------------------
This Prospectus relates to 8,255,639 shares of common stock, par value $.01
per share ("Common Stock"), of PHP Healthcare Corporation, a Delaware
corporation ("PHP" or the "Company"), all of which are being sold by the Selling
Stockholders named under "Selling Stockholders." The 8,255,639 shares of Common
Stock being sold by Selling Stockholders include (i) the 45,000 shares (the
"Warrant Shares") which are issuable upon the exercise of an outstanding
Warrant, dated as of November 1, 1992 (the "Warrant"), granted to David E.
Berman (the "Warrantholder") by the Company, (ii) 500,150 shares (the
"NationsBank Shares") issuable to NationsBank, N.A. ("NationsBank") upon
exercise of a Warrant granted to NationsBank (the "NationsBank Warrant"), (iii)
500,000 shares (the "Kluge Shares") held by Chase Manhattan Bank, John W. Kluge
and Stuart Subotnick Trustees U/A DTD 5/30/84 As Amended made by and for John W.
Kluge ("Kluge") and, (iv) 7,210,489 shares issued or issuable upon conversion of
(A) 48,040 shares of Series B Convertible Preferred Stock (the "Series B
Preferred Stock") and (B) 700 shares of Series B Preferred Stock issuable upon
the exercise of warrants granted to the placement agents (the shares referred to
in clauses (A) and (B) together, the "Conversion Shares".) (Although the number
of Conversion Shares is currently indeterminable, the 7,210,489 shares referred
to in this clause (iv) includes 7,073,991 shares issuable based on an assumed
Conversion Price of $6.89, which is 95% of the lowest trading price of the
Company's Common Stock on June 5, 1998 and 136,498 shares that may become
issuable as a result of any future reductions in the Conversion Price).
WARRANT SHARES. The Warrant Shares will be issued by the Company from time
to time as and if the Warrant is exercised. The Warrant was granted on November
1, 1992 (the "Grant Date") and is exercisable for a period of seven years after
the Grant Date. The Warrant entitles the holder to purchase 15,000 Warrant
Shares at an exercise price of $5.75 per share, 15,000 Warrant Shares at an
exercise price of $7.50 per share, and 15,000 Warrant Shares at an exercise
price of $12.00 per share, subject to adjustment in certain circumstances. See
"Plan of Distribution--Warrant Shares."
NATIONSBANK SHARES. The NationsBank Shares will be issued by the Company
from time to time as and if the NationsBank Warrant is exercised. The
NationsBank Warrant was granted on October 31, 1997 and is exercisable at any
time until October 31, 2007. The NationsBank Warrants entitle the holder(s)
thereof to acquire 500,150 NationsBank Shares, subject to adjustment in certain
circumstances. See "Plan of Distribution--NationsBank Shares."
KLUGE SHARES. The Kluge Shares were sold to Chase Manhattan Bank, John W.
Kluge and Stuart Subotnick Trustees U/A DTD 5/30/84 As Amended made by and for
John W. Kluge pursuant to Stock Purchase Agreements dated as of April 28, 1997
between (i) the Company and Kluge, dated as of April 28, 1997, as to 200,000 of
the Kluge Shares and (ii) Charles H. Robbins and Kluge, dated as of May 2, 1997,
as to 300,000 of the Kluge Shares. The Kluge Shares were acquired at a price of
$13.00 per share. The Kluge Shares may be offered by Kluge from time to time by
open market transactions, registered transactions or a combination of such
methods of sale, at fixed prices, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at negotiated prices. See
"Plan of Distribution--Kluge Shares."
CONVERSION SHARES. The Conversion Shares consist of an estimated 7,210,489
shares of Common Stock that may be issued by the Company from time to time upon
the conversion of the Series B Preferred Stock, which was issued in a private
placement completed on December 30, 1997. See "Plan of Distribution--Conversion
Shares." The number of the Conversion Shares offered hereby is an estimate based
upon (i) an assumed Conversion Price of $6.89, which is 95% of the lowest
trading price of the Common Stock on June 5, 1998, (ii) the exercise of the
Convertible Stock Warrants as of the date of their issue and (iii) the
conversion of all outstanding shares of Series B Preferred Stock. This number is
subject to adjustment and could be materially more or less than such estimated
amount depending on factors that cannot be predicted by the Company at this
time, including, without limitation, the future market price of the Common Stock
and the decision of the holders of the Series B Preferred Stock as to when and
in what amounts to convert their shares of Series B Preferred Stock. This
presentation is not intended to constitute a prediction as to future market
price of the Common Stock or when and in what amount holders of the Series B
Preferred Stock will elect to convert their shares. See "Risk Factors--Effect of
Conversion of Series B Preferred Stock" and "Description of Capital
Stock--Series B Preferred Stock."
The Warrant Shares, the NationsBank Shares, the Kluge Shares and the
Conversion Shares are collectively referred to herein as the "Shares."
The Common Stock is traded on the New York Stock Exchange under the symbol
PPH. On June 9, 1998, the closing price of the Common Stock as reported by the
New York Stock Exchange was $8.875 per share.
The Company will not receive any of the proceeds from the sale of shares by
the Selling Stockholders.
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DESCRIPTION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE DATE OF THIS PROSPECTUS IS JUNE 10, 1998.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
may be inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and
at the Commission's Regional Offices located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington D.C. 20549, at prescribed rates. Such materials can also be
inspected at the New York Stock Exchange, 20 Broad Street, New York, New York
10005. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company has filed with the Commission a registration statement on Form
S-3 (such registration statement, together with all amendments and exhibits
thereto, being hereinafter referred to as the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), for the
registration under the Securities Act of the Shares offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. Reference is hereby made to the Registration
Statement for further information with respect to the Company and the securities
offered hereby. Statements contained herein concerning the provisions of
documents filed as exhibits to the Registration Statement are necessarily
summaries of such documents, and each such statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission. Copies of the Registration Statement and the exhibits may be
inspected, without charge, at the offices of the Commission, or obtained at
prescribed rates from the Public Reference Section of the Commission at the
address set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by the Company
pursuant to the Exchange Act are incorporated by reference in this Prospectus
and made a part hereof: the Company's Annual Report on Form 10-K, Form 10-K/A
and Form 10-K/A-2 for the fiscal year ended April 30, 1997, the Company's
Quarterly Reports on Form 10-Q and Form 10-Q/A for the three months ended July
31, 1997, on Form 10-Q and Form 10-Q/A for the three months ended October 31,
1997 and on Form 10-Q and Form 10-Q/A for the three months ended January 31,
1998, the Company's Current Reports on Form 8-K, Form 8-K/A and Form 8-K/A-2,
dated November 17, 1997, January 20, 1998 and June 4, 1998, respectively, the
Company's Current Reports on Form 8-K and 8-K/A, dated January 6, 1998 and May
7, 1998, respectively, the Company's Current Report on Form 8-K, dated April 28,
1998, and the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, filed on July 20, 1992, including
any amendments or reports filed for the purpose of updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to any person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents which have been incorporated by reference in this
Prospectus, other than exhibits to such documents unless such exhibits are
specifically incorporated by reference into the documents so incorporated.
Requests for such copies should be directed to: Anthony M. Picini, Executive
Vice President, PHP Healthcare Corporation, 11440 Commerce Park Drive, Reston,
Virginia 20191, telephone (703) 758-3600.
2
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus and in the
documents incorporated herein by reference, prospective purchasers of the Shares
should carefully consider the factors set forth below before purchasing the
Shares.
EFFECT OF SERIES B PREFERRED STOCK
POTENTIAL DILUTION. The exact number of shares of Common Stock issuable
upon conversion of the Series B Preferred Stock depends on the Conversion Price
in effect at the time of conversion. Because the Conversion Price is equal to
the lowest reported trade over a specified period of trading days adjusted for a
certain discount, the number of shares of Common Stock issuable upon conversion
will vary inversely with the market price of the Company's Common Stock. Holders
of the Common Stock will be diluted by any issuances of Common Stock upon
conversion of the Series B Preferred Stock and may be substantially diluted
depending upon the market price of the Common Stock. See "Description of Capital
Stock--Series B Preferred Stock."
As noted above, the exact number of shares of Common Stock issuable upon
conversion of the Series B Preferred Stock cannot currently be determined but
such issuances will vary inversely with the market price of the Common Stock,
and such shares will be issued at a discount which increases to 9% if Series B
Preferred Stock is held through the last day of the eleventh month after
issuance. The current holders of Common Stock will be diluted by issuances of
Common Stock upon conversion of the Series B Preferred Stock to an extent that
depends on the future market price of the Common Stock, the timing of
conversions of Series B Preferred Stock and exercise of the related placement
agent warrants, and whether the Company opts to pay cash in lieu of additional
shares of Common Stock upon conversion of Series B Preferred Stock. The
potential effects of any such dilution on the existing shareholders of the
Company include the significant diminution of the current shareholders' economic
and voting interests in the Company. In addition, pursuant to the terms of the
Series B Preferred Stock purchase agreement and depending upon the Conversion
Price, the Company may be required to register additional shares of Common Stock
to cover the conversion of the Series B Preferred Stock. The registration and
sale of such additional shares of the Common Stock of the Company, or the
prospect thereof, could have a material adverse affect on the market price of
the Common Stock.
POTENTIAL LIQUIDATED DAMAGES CLAIMS. Pursuant to the Preferred Stock
Investment Agreements entered into between the Company and the holders of Series
B Preferred Stock, the Company agreed to use its best efforts to have this
Registration Statement declared effective by April 1, 1998. The Preferred Stock
Investment Agreements state that, if the Registration Statement is not effective
by April 1, 1998, the Company will be required to make a cash payment to the
holders equal to 3% of the purchase price for the Series B Preferred Stock for
each 30-day period thereafter until the Registration Statement if effective
(pro-rated as to a period of less than 30 days). The Registration Statement was
declared effective on June , 1998. Accordingly, under the terms of the
Preferred Stock Investment Agreements, the Company would be required to pay an
aggregate amount of approximately $ million to holders of the Series B
Preferred Stock. However, the Company believes that the liquidated damages
provision constitutes an unenforceable penalty and intends to challenge any
attempt to enforce the provision. The Company is seeking waivers of this
provision from the holders of the Series B Preferred Stock. There can be no
assurance that the Company will be successful in obtaining waivers from the
holders of Series B Preferred Stock or that the Company will prevail in
establishing that the provision is unenforceable. The enforcement of the
liquidated damages provision against the Company could have a material adverse
effect on the Company's financial condition and results of operations. See
"--Legal Proceedings."
3
<PAGE>
CAPITATED NATURE OF REVENUE
The Company provides a portion of its services on a capitated basis, and the
Company intends to negotiate additional capitated agreements with managed care
organizations or assume such contracts in connection with its affiliation with
primary care practices. Such contracts, typically referred to as "risk sharing"
contracts, are arrangements between the Company and another managed care
organization under which the Company agrees to arrange for the provision of
certain health care services, as required by members of such managed care
organization, in exchange for a fixed fee per member per month. Under these
contracts, the Company bears the risk that the cost of the services it is
required to provide will exceed the fixed fees it is entitled to receive. In
order for such risk sharing contracts to be profitable for the Company, the
Company must effectively manage the utilization rate of primary care services,
specialty physician services, and hospital services delivered to members of the
managed care organization. There can be no assurance that the capitation fees
that the Company will receive will be sufficient to recover the costs of the
health care services it will be required to provide.
DEPENDENCE ON PRIMARY CARE PHYSICIANS
Primary care physicians are a key operating component of the Company's
integrated health care delivery networks. The Company competes for exclusive
primary care physician affiliations with a variety of networks including group
practices, IPAs, HMOs, practice management companies and hospitals. Most primary
care physicians have traditionally practiced independently or in small single
specialty groups. The competitive and operational disadvantages to the physician
of this type of practice structure have compelled many of these physicians to
evaluate alternatives. The process of negotiating these affiliations is
competitive, complex and time-consuming. There can be no assurance that the
Company will continue to be able to identify and secure affiliations with a
sufficient number of primary care physicians to operate its integrated health
care delivery networks effectively.
DEPENDENCE ON CERTAIN RELATIONSHIPS
Effective October 31, 1997, the Company completed the acquisition of 18
health care centers and related assets from HIP of New Jersey, Inc. ("HIP") for
approximately $80 million including transaction costs (the "HIP Transaction").
HIP is a New Jersey not-for-profit health maintenance organization. In
connection with the acquisition, the Company also entered into a Health Services
Agreement with HIP. Pursuant to the Health Services Agreement, PHP will arrange
for the provision of health care services for more than 200,000 HIP members over
the next 20 years on a capitated basis, with the capitation payments calculated
as a percentage of the premiums collected by HIP. The percentage of premiums
will decrease gradually over the first five years of the contract and will
remain fixed for the last 15 years of the agreement. Based upon HIP's current
premium rates and enrollment, the Company is currently receiving capitation
payments and other revenues of approximately $30 million per month. In addition
to arranging for medical care, the Company will also be delegated the
responsibility for certain administrative functions, including provider
relations, utilization management and claims payment. The Health Services
Agreement has a 20-year term and may be renewed for successive 5-year periods.
This agreement also permits HIP to buy out the contract after December 31, 2000
and prior to December 31, 2003, at a price equal to the greater of (i) the
unamortized purchase price paid by the Company or (ii) the value of the
agreement through the end of the initial 20-year term. For the year ended April
30, 1997 and for the nine months ended January 31, 1998, on a pro forma basis
after giving effect to the HIP Transactions, approximately 60% and 61.0%,
respectively, of the Company's revenues and an even greater percentage of gross
profits would be derived from the HIP relationship. The termination of the
Health Service Agreement would have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the Company has two contracts, one with the District of
Columbia Department of Human Services ("DCDHS") (concerning the Company's
Medicaid HMO in the District of Columbia) and one with the Medigroup, Inc., a
wholly owned subsidiary of BCBSNJ (related to the provision of health care
4
<PAGE>
services to BCBSNJ beneficiaries under a global capitation arrangement) which,
for the year ended April 30, 1997 and for the nine months ended January 31,
1998, accounted for 33.5% and 20.7%, respectively, of the Company's revenues,
and an even greater percentage of the Company's gross profits. On a pro forma
basis after giving effect to the HIP Transaction, for the year ended April 30,
1997 and for the nine months ended January 31, 1998, these two contracts
accounted for 13.4% and 12.3%, respectively, of the Company's revenues. The
DCDHS contract and the BCBSNJ contract individually accounted for 19.8% and
13.7%, respectively, of the Company's revenues in fiscal 1997 and 10.8% and
9.9%, respectively, of the Company's revenues for the nine months ended January
31, 1998. On a pro forma basis after giving effect to the HIP Transaction, the
DCDHS contract and the BCBSNJ contract individually accounted for 7.9% and 5.5%,
respectively, of the Company's revenues for fiscal 1997, and accounted for 6.4%
and 5.9%, respectively, of the Company's revenues for the nine months ended
January 31, 1998. The loss of either the DCDHS contract or the BCBSNJ contract
would have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH THE DCDHS RECEIVABLE
The Company's accounts receivable as of January 31, 1998 include gross
amounts due from DCDHS and the United States Department of Health and Human
Services totalling $24.1 million related to the cost settlement for the
three-year contract period ended September 30, 1994, and related to the cost
settlement for the contract period beginning October 1, 1994. In the quarter
ending January 31, 1997, the Company established a reserve of $9.8 million
against its Medicaid receivable from DCDHS, principally relating to services
provided during the period 1992 through 1994, resulting in a net receivable of
$14.3 million. The Company cannot predict when or whether any of the unreserved
amounts will be paid. The failure of the Company to collect such amounts would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Prior to April 1996, the terms of the Company's contracts with DCDHS
provided that the final settlements would be on a non-risk basis, calculated in
part on a cost-based methodology. However, in April 1996, the United States
Congress enacted legislation which required these contracts to be settled
retroactively on a capitated rate-per-enrollee or "risk" basis for the period
October 1, 1991 through October 1, 1999. Following the enactment of this
legislation, the Company entered into negotiations with the District of Columbia
in an attempt to agree on the retroactive amounts due for the 1992 through 1994
contract periods. The Company and the District of Columbia were unable to agree
on the capitation rates to be applied to the Company's contract during this
period. The Company claimed that it was entitled to approximately $37.5 million
in additional capitation payments, based on the capitation rates set by
actuaries for DCDHS and the Health Care Financing Administration and actually
paid by the District of Columbia to other managed care organizations during
fiscal 1994. The District of Columbia, however, took the position that the
Company was entitled to use capitation rates based upon a retroactive cost study
completed in 1996. In February 1997, the Company and the District of Columbia
agreed to settle outstanding claims related to the 1992 to 1994 contract periods
for $18.9 million. Although the settlement agreement was signed by
representatives of the Company and the Commission on Health Care Finance, the
District of Columbia's Chief Financial Officer ("DCCFO") has refused to approve
the payment. Instead, the DCCFO offered the Company $6.2 million, which is
substantially less than the amount to which the Company believes it is entitled.
As a result of the impasse, for the third quarter of fiscal 1997, the Company
determined to recognize reserves of $9.8 million against its receivables from
the District of Columbia, principally related to services provided during the
1992 to 1994 contract periods. The Company intends to pursue vigorously all
remedies available to it in connection with this matter, including litigation.
However there can be no assurance that such remedies will be successful. The
Company does not believe the ultimate resolution of this matter will have a
material adverse effect on the Company's business, financial condition or
results of operations.
5
<PAGE>
LIMITATIONS ON THIRD PARTY REIMBURSEMENT
A major portion of the Company's revenues is derived from governmental
programs. In particular, for the year ended April 30, 1997 and the nine months
ended January 31, 1998, approximately 26.5% and 17.7%, respectively, of the
Company's revenues (10.6% and 10.5%, respectively, on a pro forma basis after
giving effect to the HIP Transaction) were derived from the Medicaid program, a
cooperative state-federal program for medical assistance to the needy.
Reflecting a trend in the health care industry, third party payors increasingly
are negotiating with health care providers such as the Company concerning the
prices charged for medical services, with the goal of lowering reimbursement and
utilization rates. There can be no assurance that any future reduction in
reimbursement rates would be offset through enhanced operating efficiencies, or
that any such enhancement of operating efficiencies would occur. Third party
payors may also deny reimbursement if they determine that a treatment was not
performed in accordance with the cost-effective treatment methods established by
such payors, was experimental, or for other reasons.
Congress continues to make cutbacks in the Medicare and Medicaid programs
providing for reductions in the rate of spending increases in the Medicare and
Medicaid programs. These cutbacks, budgetary constraints at both the federal and
state levels, and increasing public and private sector pressures to contain
health care costs are likely to continue to lead to significant reductions in
government and other third party reimbursements for medical charges which could
adversely affect the Company.
GOVERNMENT REGULATION
UNCERTAINTY RELATED TO REGULATORY ENVIRONMENT.
Virtually all aspects of the health care industry are subject to extensive
federal and state regulation. Various federal and state laws, which are
interpreted and enforced by courts and regulatory authorities with broad
discretion, regulate the relationships between the Company and its affiliated
physicians, hospitals and ancillary health care providers. These laws include
(i) the anti-fraud and abuse provisions of the Medicaid and Medicare statutes,
which prohibit certain business practices and relationships that may affect the
provision and cost of health care services reimbursable under the Medicaid and
Medicare programs, including the solicitation, payment, receipt or offering of
any direct or indirect remuneration for the referral of patients or for the
provision of goods or services; (ii) the anti-kickback provisions of the Social
Security Act, which restrict physician referrals to certain providers, including
hospitals, with which the physician has a financial arrangement; (iii) the laws
of some states, which prohibit physicians from splitting fees with
non-physicians and prohibit non-physician entities from engaging in the practice
of medicine; (iv) the laws of most states, which regulate the business of
insurance and the operation of HMOs; (v) federal antitrust laws, which prohibit
anti-competitive conduct, including price fixing, concerted refusals to deal and
division of market; and (vi) federal and state civil and criminal statutes which
prohibit health care providers from fraudulently or wrongfully overcharging
governmental or other third party payors for health care services. Violations of
these laws could result in substantial civil or criminal penalties, exclusion
from the Medicaid and Medicare programs, and suspension or debarment from
obtaining government contracts. Although the Company seeks to structure its
operations and arrange its business relationships so as to comply with all
applicable legal requirements (including the laws and regulations mentioned
above), there can be no assurance that, upon review of the Company's business,
courts or regulatory authorities might not adopt or assert a contrary position,
that the Company's present or future operations might not be successfully
challenged as violating, or determined to have violated, such legal
requirements, or that new laws and regulations, or the interpretation of
existing laws and regulations, might not require the Company to restructure some
or all of its operations or adversely effect the Company's business
relationships. Any such result could have a material adverse effect on the
Company.
6
<PAGE>
POTENTIAL FEDERAL AND STATE INVESTIGATIONS.
As part of the pervasive regulation of the health care industry by federal
and state governments, these governments have begun intensive investigations and
audits of health care providers to determine whether the providers are
overcharging for medical services and procedures for Medicare and Medicaid
patients. In cases in which the overcharging is deemed intentional and meets
other criteria, the federal or state government may seek criminal, civil, or
administrative sanctions against health care providers. This could result in
exclusion from the Medicare and Medicaid programs and could result in suspension
or debarment from government contracts. Any such exclusion, suspension or
debarment of the Company could have a material adverse effect upon the Company's
business.
TRUTH IN NEGOTIATIONS ACT.
Under the Truth in Negotiations Act, the federal government is entitled for
three years after final payment on certain negotiated contracts or contract
modifications to examine all of the Company's cost records with respect to such
contracts to determine whether the Company furnished complete, accurate, and
current cost or pricing data to the government in connection with the
negotiation of the price of the contract or modification. The federal government
also has the right for up to six years after final payment to seek a downward
adjustment to the price of a contract or modification if it determines that the
contractor failed to disclose complete, accurate and current data.
UNCERTAINTY RELATING TO HEALTH CARE REFORM.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation thus far, there are
currently numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of health care services,
including a number of proposals that would significantly limit reimbursement
under Medicare and Medicaid. It is not clear at this time what proposals, if
any, will be adopted or, if adopted, what effect such proposals would have on
the Company's business. There can be no assurance that currently proposed or
future health care legislation or other changes in the administration or
interpretation of governmental health care programs will not have an adverse
effect on the Company.
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems are critical to its ability to
manage care efficiently and to be competitive in the market. The Company relies
on these systems to support practice operations and to facilitate the management
and monitoring of clinical performance. Clinical guidelines, practice protocols,
case management and utilization review systems are all essential to the
Company's ability to secure, and operate profitably under, capitated and
shared-risk contracts. There can be no assurance that the Company will be able
to refine and enhance these systems to keep them current and competitive.
LEGAL PROCEEDINGS
A class action lawsuit was filed against the Company and certain current and
former officers and directors of the Company in the United States District Court
for the Central District of California on March 9, 1998, Civil Action No.
98-1658, on behalf of all persons who purchased or otherwise acquired the
Company's common stock between December 11, 1995 and March 10, 1997. The
Complaint alleges that the Company issued false and misleading financial
statements and press releases concerning the Company's income and earnings,
including the results of the Company's wholly owned HMO subsidiary, Chartered
Health Plan. Another suit, Richman v. PHP Healthcare Corporation, et al., was
filed in Los Angeles Superior Court seeking relief under Section 10(b) of the
Securities Exchange Act, and under state law, in connection with alleged
statements relating to Chartered Health Plan. The Plaintiff claims to have
7
<PAGE>
been damaged in excess of $800,000. The suit has been removed to federal court,
though the Company has not been served with a Complaint. The suit does not seek
class action relief. The Company intends to vigorously defend the lawsuits if
and when it is served with the Complaints. There can be no assurance that the
Company will prevail in either of the suits. Any judgment entered against the
Company in connection with either of the suits could have a material adverse
effect on the Company's financial condition.
HISTORICAL LOSSES
The Company reported net losses of $4.0 million, $4.0 million, $9.3 million
and $3.8 million for the fiscal years ended April 30, 1997, 1995, 1994 and 1993,
respectively. Additionally, for the nine months ended January 31, 1998, the
Company reported a net loss of $1.6 million, which included an extraordinary
charge of $6.0 million. Although the Company was profitable for the fiscal year
ended April 30, 1996, there can be no assurance that it will operate profitably
in the future, or have earnings or cash flow sufficient to comply with the
financial covenants to which it is subject or to cover its fixed charges. As a
consequence of the losses reported in certain prior periods, the Company failed
to comply with certain financial covenants under its then existing credit
agreement. The Company obtained waivers for such noncompliance and the Company's
bank modified the applicable financial covenants. As of January 31, 1998, the
Company was in compliance with all the financial covenants in its then current
credit agreement. In the future, any failure by the Company to comply with the
financial covenants contained in its credit agreement (or in any replacement
credit facility) could result in a default under such facility which could have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON GOVERNMENT CONTRACTS
Contracts with various federal, state and local government agencies
(excluding agreements concerning the Company's Medicaid HMO in the District of
Columbia) accounted for approximately 41.9% and 20.1% of the Company's revenues
for the year ended April 30, 1997 and the nine months ended January 31, 1998,
respectively (16.7% and 12.0%, respectively, on a pro forma basis after giving
effect to the HIP Transaction). Revenues from contracts and subcontracts with
the United States Department of Defense accounted for approximately 20.6% and
11.6% of the Company's revenues for the year ended April 30, 1997 and the nine
months ended January 31, 1998, respectively (8.2% and 6.9%, respectively, on a
pro forma basis after giving effect to the HIP Transaction). These contracts are
obtained primarily through the competitive bidding process as governed by
applicable federal and state statutes and regulations, and generally may be
modified or terminated for the convenience of the government agency at any time
during the term of the contract. Contracts are generally awarded for a base
period of less than one year and corresponding with the government agency's
fiscal year, have two-to-four one-year renewals at the option of the government
agency, and are subject to appropriation of funds annually by the appropriate
legislative body. There is, therefore, no assurance that the Company will be
able to retain its contracts or, if retained, that all of such contracts will be
fully funded.
Under the competitive bidding process, unsuccessful bidders may protest the
award of a contract to another bidder in accordance with a government appeals
process if they believe the award was improper. Such protests could result in
the rebidding, delay or loss of contracts. In addition, contracts with
government agencies are generally complex in nature and subject contractors to
extensive regulation under federal, state and local law. For example, government
contractors are subject to audits which can result in adjustments to contract
costs and fees.
The Company believes that it has complied in all material respects with
applicable government regulations. In certain circumstances in which a
contractor has not complied with the terms of a contract or with regulations or
statutes, the contractor may be debarred or suspended from obtaining future
contracts for a specified period of time. Moreover, pursuant to recent statutes
and regulations, a suspension or debarment from obtaining future federal
contracts will also result in a reciprocal suspension or debarment
8
<PAGE>
from participation in non-procurement federal programs, such as Medicare,
Medicaid, and other federally-funded grant programs. Any such suspension or
debarment of the Company could have a material adverse effect upon the Company's
business.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on the skill and efforts of its senior
management. The loss of key management personnel or the inability to attract,
retain and motivate sufficient numbers of qualified management personnel could
adversely affect the Company's business.
COMPETITION
The managed care industry is highly competitive and is subject to continuing
changes in how services are provided and how providers are selected and paid.
Increased enrollment in prepaid health care plans due to health care reform or
for other reasons, increased participation by physicians in group practices and
other factors may attract new entrants into the managed care industry and result
in increased competition for the Company. Certain of the Company's competitors
are significantly larger, have substantially greater financial resources and may
have longer established relationships with payors than the Company. There can be
no assurance that the Company will be able to compete effectively, that
additional competitors will not enter the market, or that such competition will
not make it more difficult to develop, consolidate and manage integrated health
care delivery networks on terms beneficial to the Company.
EXPOSURE TO PROFESSIONAL LIABILITY
Due to the nature of the Company's business, there are asserted from time to
time medical malpractice lawsuits and other claims against the Company, some of
which are currently pending, which subjects the Company to the attendant risk of
substantial damage awards. The most significant source of potential liability in
this regard is the negligence of physicians employed or contracted by the
Company. To the extent such physicians are employees of the Company or were
regarded as agents of the Company in the practice of medicine, the Company
would, in most instances, be held liable for their negligence. In addition, the
Company could be found in certain instances to have been negligent in performing
its management services under contractual arrangements, even if no agency
relationship with the physician were found to exist. In some cases, the
Company's contracts with hospitals and third party payors require the Company to
indemnify such other parties for losses resulting from the negligence of
physicians who were employed or managed by or affiliated with the Company.
The Company maintains professional and general liability insurance on a
claims made basis in amounts deemed appropriate by management, based on
historical claims and the nature and risks of its business. There can be no
assurances, however, that an existing or future claim or claims will not exceed
the limits of available insurance coverage, that any insurer will remain solvent
and able to meet its obligations to provide coverage for any such claim or
claims or that such coverage will continue to be available or available with
sufficient limits and at a reasonable cost to adequately and economically insure
the Company's operations in the future. A judgment against the Company in excess
of such coverage could have a material adverse effect on the Company.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has experienced a high degree of
volatility. There can be no assurance that such volatility will not continue or
become more pronounced. In addition, recently the stock market has experienced,
and is likely to experience in the future, significant price and volume
fluctuations which could adversely affect the market price of the Common Stock
without regard to the operating performance of the Company. The Company believes
that factors such as uncertainty regarding the potential dilutive effect of the
Series B Preferred Stock, quarterly fluctuations in the financial results of the
9
<PAGE>
Company or its competitors and general conditions in the industry, the overall
economy and the financial markets could cause the price of the Common Stock to
fluctuate substantially.
CONTROL BY MANAGEMENT AND CERTAIN STOCKHOLDERS
As of June 9, 1998, certain of the Company's executive officers and
directors and related entities currently hold an aggregate of approximately
13.2% of the outstanding Common Stock (25.8% including shares issuable upon the
exercise of options or the conversion of convertible securities held by such
persons and exercisable or convertible within 60 days) and may exercise a
controlling influence over the outcome of matters submitted to the Company's
stockholders for approval. As a result, such executive officers, directors and
related entities collectively may have the power to delay, defer or prevent a
change in control of the Company.
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Company's certificate of incorporation, by-laws
and Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of the Company and limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock. These provisions include a classified Board of Directors, the
ability of the Board of Directors to authorize the issuance, without further
stockholder approval, of preferred stock with rights and privileges which could
be senior to the Common Stock, elimination of the stockholders' ability to take
any action without a meeting, and establishment of certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings. In addition,
the Company has distributed preferred stock purchase rights which could cause
substantial dilution to a person or group that attempts to acquire a controlling
interest in the Company. The Company is also subject to Section 203 of the
Delaware General Corporation Laws which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an "interested
stockholder." See "Description of Capital Stock."
RISKS ASSOCIATED WITH "FORWARD-LOOKING" STATEMENTS
This Prospectus contains and incorporates by reference certain statements
that are "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Those statements include,
among other things, the discussions of the Company's business strategy and
expectations concerning the Company's market position, future operations,
margins, profitability, liquidity and capital resources. Investors in the Common
Stock offered hereby are cautioned that reliance on any forward-looking
statement involves risks and uncertainties, and that although the Company
believes that the assumptions on which the forward-looking statements contained
herein are based are reasonable, any of those assumptions could prove to be
inaccurate, and as a result, the forward-looking statements based on those
assumptions also could be incorrect. The uncertainties in this regard include,
but are not limited to, those identified in the risk factors discussed above. In
light of these and other uncertainties, the inclusion of a forward-looking
statement herein should not be regarded as a representation by the Company that
the Company's plans and objectives will be achieved.
10
<PAGE>
THE COMPANY
GENERAL
PHP develops, consolidates and manages integrated health care delivery
networks. Through its networks of affiliated group and independent practice
association physicians, hospitals and ancillary health care providers, the
Company markets and provides primary and specialty health care services to third
party payors, self-insured employers and government agencies. As of January 31,
1998, PHP was operating 100 healthcare projects in 31 states and was affiliated
with over 7,500 physicians through network, employment and a variety of other
arrangements, providing health care resulting in over two million patient visits
per year.
PHP was organized as a Delaware corporation in January 1986 and succeeded to
the business of a predecessor corporation by merger in March 1986. The Company's
corporate headquarters is located at 11440 Commerce Park Drive, Reston,
Virginia, 20191, and its telephone number at that address is (703) 758-3600.
Unless the context otherwise requires, all references herein to the "Company"
include PHP and its subsidiaries.
RECENT EVENTS
REVISION OF FINANCIAL STATEMENTS. 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. As a result, the
fiscal year 1995 financial statements have been restated to reduce revenue
recognized by $6.9 million for certain cost overruns related to 1995
construction and start-up activities which would have been recovered
prospectively under the two combined contracts. Furthermore, the Company has
recorded additional contract loss reserves of approximately $915,000 in fiscal
year 1995 resulting from the contracts being accounted for separately. This
revised accounting treatment also resulted in the reduction of fiscal year 1996
revenues and direct costs by approximately $900,000 and $915,000, respectively.
Immaterial adjustments to revenue were also recorded in fiscal year 1997.
The Company has also revised its accounting treatment for a 17-year lease of
primary care facilities. Beginning in August 1997, the Company accounted for
this lease as an operating lease. The Company has restated previously issued
interim financial statements to account for this lease as a financing rather
than an operating lease as a result of the Company's continuing involvement with
the lessor. The effect of this restatement on net earnings and per share amounts
for the nine months ended January 31, 1998 was immaterial. There is no effect on
years prior to 1998.
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<PAGE>
The effects of these restatements on net earnings and per share amounts as
previously reported are presented below. Per share amounts have been restated to
reflect the provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JANUARY 31, YEAR ENDED APRIL 30,
------------------ -------------------------------
1998 1997 1996 1995
------------------ --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings (loss), as previously reported.................. $ (2,150) $ (4,088) $ 9,118 $ 952
Adjustment, net of income taxes of $24 in 1997 and $2,807 in
1995....................................................... 0 39 20 (4,990)
------- --------- --------- ---------
Net earnings (loss) as adjusted.............................. $ (2,150) $ (4,049) $ 9,138 $ (4,038)
------- --------- --------- ---------
------- --------- --------- ---------
Per Share Amounts:
Basic earnings (loss) per share:
Net earnings (loss) as previously reported................... $ (0.19) $ (0.37) $ 0.84 $ 0.09
Adjustment, net of tax....................................... 0.00 0.00 0.00 (0.47)
------- --------- --------- ---------
Net earnings (loss) as adjusted.............................. $ (0.19) $ (0.37) $ 0.84 $ (0.38)
------- --------- --------- ---------
------- --------- --------- ---------
Diluted earnings (loss) per share:
Net earnings (loss) as previously reported................... $ (0.15) $ (0.37) 0.68 0.09
Adjustment, net of tax....................................... 0.00 0.00 0.00 (0.47)
------- --------- --------- ---------
Net earnings (loss) as adjusted.............................. $ (0.15) $ (0.37) $ 0.68 $ (0.38)
------- --------- --------- ---------
------- --------- --------- ---------
</TABLE>
STOCK REPURCHASE PLAN. On April 28, 1998, the Company announced that its
Board of Directors authorized the repurchase of up to 3 million shares of Common
Stock at prevailing prices at the discretion of Company management from time to
time on the open market, through block purchases, or in privately negotiated
transactions. PHP also announced that its Board authorized management to explore
the possibility of repurchasing some or all of PHP's Series B Preferred Stock
through privately negotiated transactions, from time to time and at management's
discretion. As part of the repurchase plan, the Company entered into an
agreement on April 30, 1998 with its former chairman, Charles H. Robbins, to
repurchase 1 million shares held by the Robbins family for $16.75 per share. As
of June 9, 1998, the Company had repurchased approximately 1,403,500 shares of
Common Stock and 21,960 shares of Series B Preferred Stock at a total cost of
approximately $46.9 million.
The number of additional shares to be purchased and the timing of the
repurchases will depend upon the availability of funds, the price of the Common
Stock, general market conditions, and other factors. There is no guarantee as to
the exact number of shares to be repurchased, and the Company may discontinue
repurchases at any time. Any repurchase of shares in the market will be funded
through the Company's available cash and borrowings under the Company's credit
facility. Any shares repurchased may be held by a subsidiary or as treasury
stock and may be available for reissuance in connection with the Company's stock
option plans, conversions of existing convertible securities, or for other
corporate purposes.
NEW CREDIT FACILITY. In May 1998, the Company entered an Amended and
Restated Credit Agreement with NationsBank, N.A. (the "Credit Agreement")
pursuant to which the lenders have made available to the Company up to
$80,000,000 principal amount of senior secured financing in the form of two
tranches of revolving credit facilities: one in an aggregate principal amount of
$15,000,000 (the "Tranche A Revolving Facility"), the other in an aggregate
principal amount of $65,000,000 (the "Tranche B Revolving Facility"). The
amounts available under the Credit Agreement may be used for working capital and
to finance other corporate purposes of the Company. In addition, the Tranche B
Revolving Facility may be used to repurchase capital stock of the Company.
12
<PAGE>
On January 31, 1999, the amounts outstanding under the Tranche B Revolving
Facility will convert into a term loan with nine equal quarterly repayments
beginning on April 30, 1999 and the principal amount available thereafter under
the Tranche B Revolving Facility will be reduced by such outstanding amounts. On
May 15, 2001 (the "Termination Date"), the Company will be required to repay the
principal amounts outstanding under the Tranche A Revolving Facility and the
Tranche B Revolving Facility.
All amounts outstanding under the Credit Agreement will bear interest at the
Alternative Base Rate or the Eurodollar Rate (as defined in the Credit
Agreement), plus the Applicable Margin (as defined in the Credit Agreement)
based on the type of loan. The Alternative Base Rate is defined (i) for the
period through November 30, 1998, as 1.5% for advances subject to the Altenative
Base Rate and 2.5% for advances subject to the Eurodollar Rate, and (ii)
thereafter, as a percentage determined by reference to the Leverage Ratio (as
defined in the Credit Agreement) and advance type, ranging from 0.25% to 2%.
The Credit Agreement provides for certain customary affirmative and negative
covenants and events of default, including, but not limited to, covenants
regarding the Company's capital expenditures, tangible net worth, EBITDA,
leverage ratio, fixed charge ratio and minimum liquidity ratio, as well as
limitations on other indebtedness, mergers, acquisitions and assets sales, other
liens, investments and issuance of capital stock other than for cash. The
Company's obligations under the Credit Agreement have been guaranteed by certain
of the Company's subsidiaries. As security for the obligations of the Company
and such subsidiaries under the Credit Agreement and the Security Guaranty, the
banks have been granted a security interest in substantially all the assets
owned or hereafter acquired by the Company and such subsidiaries.
Under the Credit Agreement, the Company is required to make mandatory
prepayments quarterly consisting of a portion of the Excess Cash Flow and a
portion of any Net Cash Proceeds (as defined in the Credit Agreement) resulting
from the sale of assets, issuance of debt or equity securities, insurance
recoveries, or collection of past due claims. In addition, voluntary prepayments
are permitted, in whole or in part, with prior notice but without premium or
penalty for advances subject to the Alternative Base Rate or upon the expiration
date of each advance subject to the Eurodollar Rate having an unexpired interest
period.
USE OF PROCEEDS
The Company will not receive any proceeds from the sales of the Shares. See
"Selling Stockholders" for a list of those persons receiving proceeds from the
sale of the Shares.
13
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of Preferred
Stock, par value $.01 per share, of which 50,000 have been designated as Series
A Junior Participating Preferred Stock and 80,800 have been designated as Series
B Preferred Stock. Certain Preferred Stock Purchase Rights were distributed
pursuant to a dividend distribution declared April 10, 1992, and the Series A
Junior Participating Preferred Stock was reserved for issuance upon exercise of
such rights. As of June 9, 1998, 10,901,527 shares of Common Stock were
outstanding and held by approximately 950 shareholders of record and 48,040
shares of Series B Preferred Stock were outstanding and held by approximately 50
holders of record.
COMMON STOCK
Subject to the prior rights of any shares of Preferred Stock which may be
issued in the future, the holders of the Common Stock are entitled to receive
dividends as and when declared by the Board of Directors out of funds legally
available for dividends, and, in the event of liquidation, dissolution or
winding up of the Company, to share ratably in all assets remaining after
payment of liabilities. The holders of the Common Stock are entitled to one vote
for each share of Common Stock held of record on all matters submitted to a vote
of shareholders. Since holders of Common Stock do not have cumulative voting
rights, holders of more than 50% of the outstanding shares of Common Stock
present and voting at an annual meeting at which a quorum is present can elect
all the directors of the Company to be elected at such meeting. The holders of
Common Stock have no preemptive rights or conversion rights and are not subject
to further calls or assessments by the Company. There are no redemption or
sinking fund provisions applicable to the Common Stock.
The Transfer Agent for the Company's Common Stock is The Bank of New York.
PREFERRED STOCK
The Board of Directors is authorized to issue shares of Preferred Stock from
time to time in one or more classes or series and to fix by resolution or
resolutions (without further stockholder action) the voting rights, if any, and
the designations, preferences and relative, participating, optional and other
special rights, and the qualifications, limitations and restrictions thereof,
including, without limitation, the dividend rights, conversion rights, rights
and terms of redemption (including sinking fund provisions) and liquidation
rights of each such class or series. In addition, the Board of Directors is
empowered to determine the number of shares constituting each class and series
of Preferred Stock and, subject to compliance with applicable law, to increase
or decrease the number of shares of each such class or series. The Board of
Directors may, without shareholder approval, issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of holders
of Common Stock.
SERIES A PREFERRED STOCK PURCHASE RIGHTS
The description of certain Preferred Stock Purchase Rights distributed
pursuant to a dividend distribution declared by the Company's Board of Directors
on April 10, 1992, and of the shares of Series A Junior Participating Preferred
Stock reserved for issuance upon exercise of such Rights, is incorporated by
reference to Item 1 of the Company's Form 8-A, dated April 10, 1992, filed with
the Securities and Exchange Commission on April 13, 1992.
The Preferred Stock Purchase Rights have certain anti-takeover effects. The
Rights will cause substantial dilution to a person or group that attempts to
acquire the Company without conditioning the offer on a substantial number of
the Rights being acquired. The Rights should not interfere with any merger or
other business combination approved by the Board of Directors since the Rights
may be redeemed by the Company.
14
<PAGE>
SERIES B PREFERRED STOCK
The following description of the Series B Preferred Stock is qualified in
its entirety by reference to the Certificate of Designations and the Preferred
Stock Investment Agreements, copies of which are exhibits to the Registration
Statement of which this Prospectus is a part.
DIVIDENDS. The holders of the Series B Preferred Stock are not entitled to
receive dividends.
VOTING RIGHTS. The holders of Series B Preferred Stock have no voting
rights, except (i) as to whether a consolidation or merger of the Company or a
sale of substantially all of the Company's assets is deemed a liquidation or
(ii) as provided by law.
LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or
winding up of the Company, either voluntary or involuntary, the holders of the
Series B Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any assets of the Company to the holders of the Common
Stock or any other class or series of shares except any class or series which is
entitled to priority over the Series B Preferred Stock, the amount of $1,000 per
share plus any amounts accrued but unpaid under Section 1.4(b)(iv) of the
Preferred Stock Agreement (the "Liquidation Preference"). A consolidation or
merger of the Company with or into any other corporation or corporations, or a
sale of all or substantially all of the assets of the Company, shall, at the
option of the holders of the Series B Preferred Stock, be deemed a liquidation,
dissolution or winding up of the Company if the shares of stock of the Company
(along with all derivative securities) outstanding immediately prior to such
transaction represent immediately after such transaction less than a majority of
the voting power of the surviving corporation (or of the acquirer of the
Company's assets in the case of a sale of assets). Such option may be exercised
by the vote or written consent of holders of a majority of the Series B
Preferred Stock at any time within thirty calendar days after written notice of
the essential terms of such transaction shall have been given to the holders of
the Series B Preferred Stock. Such notice shall be given by the Company
immediately following determination of such essential terms. If such option is
exercised, the holders of the Series B Preferred Stock shall be entitled to
receive, in cash, immediately upon the occurrence of such transaction, an amount
per share equal to the Liquidation Preference. This provision shall not apply to
a business combination in which substantially all the Common Stock of the
Company is converted into or exchanged for voting common stock of the
corporation surviving such business combination, if (i) such common stock of the
surviving corporation is listed and traded on the NASDAQ National Market or the
New York Stock Exchange, and (ii) the Board of Directors of the Company
determines in good faith that the conversion rights and other rights and
preferences of the Series B Preferred Stock are preserved and not rendered of
less value by the terms of such business combination.
CONVERSION. The shares of Series B Preferred Stock are convertible into
shares of the Company's common stock upon the earlier of April 1, 1998 or the
date on which the registration statement relating to the resale of the Common
Stock issuable upon conversion of the Series B Preferred Stock becomes
effective. The shares of Series B Preferred Stock will automatically convert
into common stock on the fifth anniversary of the date of original issuance to
the extent any shares of Series B Preferred Stock remain outstanding at that
time. Each share of Series B Preferred Stock is convertible into that number of
shares of common stock equal to the quotient of (i) $1,000 divided by (ii) the
Conversion Price. Through May 31, 1998, the Conversion Price will be $25.
Thereafter, subject to the maximum Conversion Price specified below, the
Conversion Price will be equal to the lowest trading price of the common stock
for the 22 trading days immediately preceding the conversion date, less a
discount ranging from 5% (beginning June 1, 1998) to 9% (on or after December 1,
1998). The maximum Conversion Price is the lesser of (i) $30, (ii) 91% of the
average of the daily low trading prices of the common stock for all trading days
in March, 1999, and (iii) 91% of the average of the daily low trading prices for
all trading days in September, 1999; PROVIDED, HOWEVER, that the maximum
Conversion Price shall not be less than $25 (the "Conversion Cap").
15
<PAGE>
The number of shares that any holder of Series B Preferred Stock may convert
in any calendar month is limited according to a sliding scale percentage of such
holder's shares of Series B Preferred Stock determined by reference to the
highest of the daily low trading prices during such month.
<TABLE>
<CAPTION>
HIGHEST OF DAILY LOW TRADING PERCENTAGE CONVERTIBLE
PRICES DURING MONTH DURING SUCH MONTH
- ---------------------------------------------- ----------------------------------------------
<S> <C>
$25.00 or less.................... 20%
$25.01 to $27.00.................. 25%
$27.01 to $29.00.................. 30%
$29.01 to $31.00.................. 35%
$31.01 to $33.00.................. 40%
$33.01 to $35.00.................. 45%
$35.01 to $37.00.................. 50%
$37.01 or more.................... 100%
</TABLE>
The number of shares which may be converted in any calendar month also
includes the number of shares which might have been but were not converted
during earlier calendar months.
The Certificate of Designations provides that shares of Series B Preferred
Stock shall not be converted into Common Stock if following such conversion the
holder thereof together with affiliates of such holder would be the beneficial
owners (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended) of 4.9% or more of the Common Stock of the Company.
If at any time the Conversion Price falls below $25, upon conversion of any
Series B Preferred Stock, the Company may, in lieu of the issuance of common
stock, make a payment in cash in an amount equal to the value of the common
stock based upon the high trading price of the common stock on the conversion
date.
The Company agreed to register the shares of common stock issuable upon
conversion of the Series B Preferred Stock for resale under the Securities Act
of 1933 by April 1, 1998. The Preferred Stock Investment Agreements state that,
if the Registration Statement was not effective by April 1, 1998, the Company
would be required to make a cash payment to the holders equal to 3% of the
purchase price for the Series B Preferred Stock for each 30-day period
thereafter until the Registration Statement is effective (pro-rated as to a
period of less than 30 days). The Registration Statement was declared effective
on June , 1998. Accordingly, under the terms of the Preferred Stock Investment
Agreements, the Company would be required to pay an aggregate amount of
approximately $ million to holders of the Series B Preferred Stock. However,
the Company believes that the liquidated damages provision constitutes an
unenforceable penalty and intends to challenge any attempt to enforce the
provision. The Company is seeking waivers of this provision from the holders of
the Series B Preferred Stock. There can be no assurance that the Company will be
successful in obtaining waivers from the holders of Series B Preferred Stock or
that the Company will prevail in establishing that the provision is
unenforceable. The enforcement of the liquidated damages provision against the
Company could have a material adverse effect on the Company's financial
condition and results of operations.
Each purchaser of the Series B Preferred Stock has agreed not to offer or
sell on any trading day, on a net basis, more than the following number of
shares of common stock: the greater of (i) 10% of the average daily trading
volume of the common stock for the five previous trading days, (ii) 10,000
shares, or (iii) 10% of the trading volume of the common stock on the day of
such sale. In addition, the purchasers of the Series B Preferred Stock and their
affiliates have agreed not to engage in any short sales, swaps, purchasing of
puts, or other hedging activities involving the common stock to hedge their
investment in the Series B Preferred Stock; however, any purchaser may write
call options if the call exercise price is greater than the lesser of (i) the
effective Conversion Price on the day that the call is written or (ii) the
closing price of the common stock on the day prior to the day that the call is
written. These hedging restrictions do
16
<PAGE>
not apply to certain short sales within three days of conversion where the
shares issuable upon conversion are used to cover the short sale.
SERIES B PREFERRED STOCK WARRANTS
In connection with the Private Placement, certain designees of the Placement
Agents received in aggregate 700 Preferred Stock Warrants, which may be
exercised at a purchase price of $1,000 per share to acquire 700 shares of
Series B Preferred Stock. See "--Series B Preferred Stock" for the rights and
preferences of the Series B Preferred Stock. The Preferred Stock Warrants expire
in December 1999 and contain customary anitdilution provisions that provide for
adjustments in the event of stock splits, stock dividends and similar
developments.
NATIONSBANK WARRANTS
The following description of the NationsBank Warrants is qualified in its
entirety by reference to the full text of the Warrant Agreement, a copy of which
is an exhibit to the Registration Statement.
SHARES AVAILABLE FOR ISSUANCE. The maximum number of Shares that may be
issued pursuant to exercise of the NationsBank Warrant, subject to certain
adjustments described below, is 500,150.
EXERCISABILITY. The NationsBank Warrants are exercisable at any time or
from time to time until October 31, 2007. Each of the 500,150 NationsBank
Warrants entitle the holder thereof to purchase one Share at no cost.
ADJUSTMENT OF SHARES ISSUABLE UPON EXERCISE OF THE NATIONSBANK
WARRANTS. The number of Shares issuable upon the exercise of each NationsBank
Warrant is subject to appropriate adjustment to reflect any stock dividends,
subdivision of Shares, combination of Shares or reclassification of Shares. The
number of Shares issuable upon the exercise of each NationsBank Warrant is also
subject to certain adjustments in the event the Company issues Shares, or
options, warrants or other rights to purchase Shares at a price lower than the
then current market value of the Shares.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE AND BY-LAWS
The Company's Restated Certificate of Incorporation (the "Certificate")
provides that the Board of Directors consists of three classes of directors
serving for staggered three-year terms. As a result, one-third of the Company's
Board of Directors will be elected each year. The classified board provision
could prevent a party who acquires control of a majority of the outstanding
voting stock of the Company from obtaining control of the Board of Directors
until the second annual stockholders meeting following the date the acquirer
obtains the controlling interest. Subject to the rights of holders of Preferred
Stock of the Company, any vacancy on the Board of Directors may be filled only
by the remaining directors then in office.
The Company has 9,919,200 authorized and unissued shares of Preferred Stock.
The Certificate grants the Board of Directors broad power to establish the
designations, powers, preferences and rights of any series of Preferred Stock.
Such stock could be used by the Board of Directors for defensive purposes,
including its issuance or sale to third parties or use in recapitalization
transactions.
In order for a stockholder to nominate a candidate for director, under the
Company's By-laws, timely notice of the nomination must be given to the Company
in advance of the meeting. Such notice must be given in respect to an election
to be held at an annual meeting of stockholders not less than 90 days before the
anniversary of the immediately preceding annual meeting, and must be given in
respect to an election to be held at a special meeting of stockholders within 10
days after the notice of the meeting is given to stockholders. The stockholder
filing the notice of nomination must describe various matters regarding the
nominee, including such information as name, address, occupation and shares
held.
17
<PAGE>
In order for a stockholder to bring other business before an annual
stockholder meeting, timely notice must be received by the Company not less than
60 days nor more than 90 days before the meeting (but if the Company gives less
than 70 days notice of the meeting, then such notice must be received within 10
days after the notice of the meeting is mailed or other public disclosure of the
meeting is made). Such notice must include a description of the proposed
business, the reasons therefore, and other specified matters.
Under the By-laws, special meetings of stockholders may be called only by
the Board of Directors or the President of the Company, and may not be called by
stockholders. In addition, the Certificate provides that any action required or
permitted to be taken by the stockholders of the Company at an annual or special
meeting of stockholders must be effected at a duly called meeting and may not be
taken or effected by a written consent of the stockholders in lieu thereof.
The By-laws may be amended by the Board of Directors or by affirmative vote
of the holders of two-thirds of the stock issued and outstanding and entitled to
vote thereon. Certain provisions of the Certificate, including provisions
concerning the classified Board of Directors and the ability of stockholders to
take action only at an annual or special meeting of stockholders, may only be
amended by the affirmative vote of the holders of two-thirds of the stock issued
and outstanding and entitled to vote thereon. The foregoing summary is qualified
in its entirety by reference to the full text of the Company's Certificate and
By-laws.
These provisions are designed in part to make it more difficult and
time-consuming to obtain majority control of the Board of Directors of the
Company or otherwise to bring a matter before stockholders without the Board's
consent, and thus reduce the vulnerability of the Company to an unsolicited
takeover proposal. These provisions are designed to enable the Company to
develop its business in a manner which will foster its long-term growth, with
the threat of a takeover not deemed by the Board to be in the best interest of
the Company and its stockholders and the potential disruption entailed by such a
threat reduced to the extent practicable. On the other hand, these provisions
may have an adverse effect on the ability of stockholders to influence the
governance of the Company and the possibility of stockholders receiving a
premium above market price for their securities from a potential acquiror who is
unfriendly to management.
DELAWARE GENERAL CORPORATION LAW SECTION 203
As a corporation organized under the laws of the State of Delaware, the
Company is subject to Section 203 of the Delaware General Corporation Law which
restricts certain business combinations between the Company and an "interested
stockholder" (in general, a stockholder owning 15% or more of the Company's
outstanding voting stock) or its affiliates or associates for a period of three
years following the date on which the stockholder becomes an "interested
stockholder." The restrictions do not apply if (i) prior to an interested
stockholder becoming such, the Board of Directors approves either the business
combination or the transaction in which the stockholder becomes an interested
stockholder (ii) upon consummation of the transaction in which any person
becomes an interested stockholder, such interested stockholder owns at least 85%
of the voting stock of the Company outstanding at the time the transaction
commences (excluding shares owned by certain employee stock ownership plans and
persons who are both directors and officers of the Company) or (iii) on or
subsequent to the date an interested stockholder becomes such, the business
combination is both approved by the Board of Directors and authorized at an
annual or special meeting of the Company's stockholders, not by written consent,
by the affirmative vote of at least 66 2/3% of the outstanding voting stock not
owned by the interested stockholders.
18
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of June 9, 1998, with
respect to the beneficial ownership of Common Stock by (i) each person known to
the Company to be the beneficial owner of more than 5% of its outstanding shares
of Common Stock, (ii) each director of the Company, (iii) the chief executive
officers of the Company and (iv) all directors and exectuvie officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS NUMBER OF SHARES OUTSTANDING(1)
- ---------------------------------------------------------------------------- ----------------- ---------------
<S> <C> <C>
John W. Kluge (2)........................................................... 1,500,000 13.8%
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, NJ 07073
Jack M. Mazur............................................................... 1,269,356(3) 10.9%
11440 Commerce Park Drive
Reston, Virginia 20191
Shamrock Investments (4).................................................... 1,046,419(5) 9.2%
Charles P. Reilly
Michael E. Gallagher
2049 Century Park East, Suite 3330
Los Angeles, CA 90067
Bosko Djordjevic and Elizabeth
Keck Djordjevic, Trustee (6)................................................ 800,000 7.3%
505 S. Beverly Drive, Suite 215
Beverly Hills, CA 90212
Drakefield Corporation...................................................... 870,827 (7)(8 7.4%
c/oWaterton Management
10000 Santa Monica Boulevard, 5th Floor
Los Angeles, California 90067
AG Ramius Partners, L.L.C................................................... 798,258 (7)(9 6.8%
757 Third Avenue
New York, NY 10017
Scepter Holdings, Inc. ..................................................... 725,689 (7 (10 6.2%
301 Commerce Street, Suite 2975
Fort Worth, Texas 76102
Ziff Asset Management, L.P.................................................. 725,689(7) 6.2%
c/o PBK Holdings, Inc.
156 Greenwich Avenue, Suite 2A
Greenwich, Connecticut 06830
Strome Susskind (7 (11
Investment Management LP ................................................... 725,688 6.2%
100 Wilshire Boulevard, 15th Floor
Santa Monica, CA 90401
Stockwell Corporation S.A................................................... 580,551 (7 (12 5.1%
c/o Waterton Management
10000 Santa Monica Boulevard, 5th Floor
Los Angeles, California 90067
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
Michael D. Starr............................................................ 425,852 (13 3.8%
11440 Commerce Park Drive
Reston, Virginia 20191
John P. Cole................................................................ 400,000 3.7%
11440 Commerce Park Drive
Reston, Virginia 20191
Robert L. Bowles, Jr. ...................................................... 157,011 (14 1.4%
820 First Street, N.E., Suite LL100
Washington, D. C. 20002-4205
Frank L. Provato, M.D. ..................................................... 122,916 (15 1.1%
11440 Commerce Park Drive
Reston, Virginia 20191
William J. Lubin............................................................ 113,333 (16 1.0%
11440 Commerce Park Drive
Reston, Virginia 20191
Joseph G. Mathews........................................................... 15,094 *
3510 Highway O
Wright City, MO 63390
Donald J. Ruffing........................................................... 8,503 *
11104 Woodlawn Boulevard
Upper Marlboro, MD 20772
Jerry W. Carlton............................................................ 7,140 *
610 Newport Center Drive, Suite 1700
Newport Beach, CA 92660
John J. McDonnell........................................................... 0 *
11440 Commerce Park Drive
Reston, VA 20191
All directors and executive officers as a group (13 persons)................ 3,286,860 25.8%
</TABLE>
- ------------------------
* Represents less than 1% of the shares of the Company's outstanding stock.
(1) Based upon 10,901,527 shares of Common Stock outstanding as of June 9,
1998. For purposes of computing the percentage of outstanding shares held
by each person or group of persons named in the table, any shares as to
which such person or group has the right to acquire within 60 days after
such date are deemed to be outstanding, but such shares are not deemed to
be outstanding for the purpose of computing the percentage ownership of any
other person.
(2) According to Amendment No. 1 to Schedule 13D filed by John W. Kluge on June
2, 1998.
(3) Includes 720,000 shares which Mr. Mazur could acquire upon the exercise of
options granted by the Company. Also includes 512,014 shares owned by
VACHR, Inc., a corporation owned by Mr. Mazur's spouse, Lynn Mazur, and
other family members, and 30,000 shares owned by the J&J Investment
Partnership, a partnership wholly owned by members of Mr. Mazur's family.
Mr. Mazur disclaims beneficial ownership of the shares owned by Lynn Mazur
(through VACHR, Inc.) and J&J Investment Partnership.
(4) According to the Schedule 13D filed On October 11, 1994 and amended on
October 11, 1997, the persons listed constitute a group within the meaning
of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
20
<PAGE>
(5) Includes 200,000 shares owned by Shamrock Investments, 187,730 shares owned
by Mr. Reilly, 172,220 shares owned by Mr. Gallagher, 22,500 shares which
Shamrock Investments could acquire upon the exercise of options granted by
the Company, 231,596 shares which Mr. Reilly could acquire upon the
exercise of options granted by the Company, 121,262 shares which Mr.
Gallagher could acquire upon the exercise of options granted by the
Company, 59,963 shares which Mr. Reilly could acquire upon conversion of a
promissory note of the Company, 6,173 shares which Mr. Reilly could acquire
upon conversion of a promissory note of the Company issued to Shamrock
Investments, and 44,975 shares which Mr. Gallagher could acquire upon
conversion of a promissory note of the Company.
(6) According to Amendment No. 1 to the Schedule 13D of Bosko Djordjevic and
Elizabeth Keck-Djordjevic, as trustee, filed on September 15, 1995.
(7) Represents an estimate of the number of shares of Common Stock issuable
upon conversion of shares of Series B Convertible Preferred Stock at an
assumed conversion price of $6.89 per share, which is 95% of the lowest
trading price of the Common Stock on June 5, 1998. The actual number of
shares of Common Stock issuable upon conversion of the Series B Preferred
depends upon the Conversion Price, which cannot be predicted by the Company
at this time. The number of shares that any holder of Series B Preferred
Stock may convert in any calendar month is limited according to a sliding
scale percentage of such holder's shares of Series B Preferred Stock
determined by reference to the highest of the daily trading prices during
such month. In addition, shares of Series B Preferred Stock may not be
converted into Common Stock if following such conversion the holder
thereof, together with affiliates of such holder would be beneficial owner
of 4.9% or more of the Common Stock. See "Description of Capital
Stock--Series B Preferred Stock." For purposes of the table above,
beneficial ownership by holders of Series B Preferred Stock has been
calculated without regard to the foregoing limitations.
(8) Waterton Management, L.L.C. ("Waterton") is the investment manager for
Drakefield Corporation. Waterton also acts as investment manager for
Stockwell Corporation, S.A., which may be deemed to own 580,551 shares of
Common Stock based on an assumed conversion price of $6.89 per share of
Series B Preferred Stock owned by Stockwell Corporation, S.A. Drakefield
Corporation is not affiliated with Stockwell Corporation, S.A. Waterton
disclaims beneficial ownership of any shares held by Drakefield Corporation
or Stockwell Corporation, S.A.
(9) AG Ramius Partners, L.L.C. ("AG Ramius"), a registered investment adviser,
acts pursuant to contract as discretionary investment adviser for several
Selling Stockholders, holding voting and dispositive powers with respect to
securities acquired for their accounts. In such capacity, AG Ramius may be
considered a beneficial owner of shares of Common Stock that such Selling
Stockholders have the right to acquire through conversion of 5,500 Series B
Preferred Stock beneficially owned by such Selling Stockholders. The amount
shown does not necessarily reflect certain limitations as to the maximum
number of shares of Common Stock issuable to any stockholder and its
affiliates. Moreover, the amount does not reflect shares of Common Stock
issuable on conversion of (a) an aggregate of 1,500 shares of Series B
Preferred Stock held by certain Selling Stockholders whose accounts are
managed on a discretionary basis by Angelo, Gordon & Co., L.P., a
registered investment adviser that is one of the members of AG Ramius or
(b) 2,000 shares of Series B Preferred Stock held by Ramius Capital Group,
L.L.C., the other member of AG Ramius.
(10) Includes 471,698 shares (4.1%) beneficially owned by Q Funding, L.P. and
253,991 shares (2.3%) beneficially owned by R(2) Investments, LDC. Scepter
Holdings, Inc. is the general partner of the investment manager for each of
Q Funding, L.P. and R(2) Investments, LDC.
(11) Includes (i) 246,734 shares (2.2%) beneficially owned by Strome, Susskind
Hedgecap, L.P., (ii) 239,477 shares (2.1%) beneficially owned by Strome
Offshore Limited, (iii) 195,936 shares (1.8%) beneficially owned by Strome
Partners, L.P., and (iv) 43,541 shares (0.4%) beneficially owned by Strome
Hedgecap Limited.
21
<PAGE>
(12) Waterton Management, L.L.C. is the investment manager for Stockwell
Corporation, S.A. Waterton also acts as investment manager for Drakefield
Corporation, which may be deemed to own 870,827 shares of Common Stock
based on an assumed conversion price of $6.89 per share of Series B
Preferred Stock owned by Drakefield Corporation. Drakefield Corporation is
not affiliated with Stockwell Corporation, S.A. Waterton disclaims
beneficial ownership of any shares held by Drakefield Corporation or
Stockwell Corporation, S.A.
(13) Includes 290,000 shares which Mr. Starr presently could acquire upon the
exercise of options granted by the Company.
(14) Includes 53,333 shares which Mr. Bowles presently could acquire upon the
exercise of options granted by the Company.
(15) Includes 101,666 shares which Dr. Provato presently could acquire upon the
exercise of options granted by the Company.
(16) Represents the shares which Mr. Lubin presently could acquire upon the
exercise of options granted by the Company.
SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company, as
of June 9, 1998, regarding the beneficial ownership of Common Stock by the
Selling Stockholders. Because the Selling Stockholders may sell all, some or
none of their shares, no estimate can be made of the number of shares held by
any Selling Stockholder after the completion of this offering. If, however, each
of the Selling Stockholders were to sell all of the shares offered hereby, then
each Selling Stockholder would beneficially own less than one percent of the
shares of Common Stock outstanding. Other than NationsBank, which has been the
Company's principal lender, none of the Selling Stockholders has had a material
relationship with the Company or any of its predecessors or affiliates within
the past three years.
<TABLE>
<CAPTION>
SHARES OF NUMBER OF
COMMON STOCK SHARES BEING
BENEFICIALLY OWNED OFFERED
--------------------- ------------
<S> <C> <C> <C>
NAME NUMBER PERCENT
- ----------------------------------------------------------------------------- ---------- ---------
Chase Manhattan Bank, John W. Kluge and Stuart Subotnick Trustees U/A DTD
5/30/84 As Amended made by and for John W. Kluge........................... 1,500,000 13.8% 500,000
Drakefield Corporation (1)(2)................................................ 870,827 7.4% 870,827
AG Ramius Partners, L.L.C. (1)(3)............................................ 798,258 6.8% 798,258
Scepter Holdings, Inc. (1)(4)................................................ 725,689 6.2% 725,689
Ziff Asset Management, L.P. (1).............................................. 725,689 6.2% 725,689
Strome Susskind Investment Management LP (1)(5).............................. 725,688 6.2% 725,688
Stockwell Corporation, S.A. (1)(6)........................................... 580,551 5.1% 580,551
NationsBank.................................................................. 500,150 4.4% 500,150
Q Funding, L.P. (1).......................................................... 471,698 4.1% 471,698
Southbrook International Investments, Ltd. (1)............................... 435,413 3.8% 435,413
Baldwin Enterprises, Inc. (1)................................................ 319,303 2.8% 319,303
Ramius Capital Group, L.L.C. (1)............................................. 290,275 2.6% 290,275
The Tail Wind Fund Ltd. (1).................................................. 290,275 2.6% 290,275
Ramius Fund, Ltd. (1)........................................................ 261,248 2.3% 261,248
R(2) Investments, LDC (1).................................................... 253,991 2.3% 253,991
Strome, Susskind Hedgecap, L. P. (1)......................................... 246,734 2.2% 246,734
Strome Offshore Limited (1).................................................. 239,477 2.1% 239,477
Saybrook Fund I, L.P. (1).................................................... 231,494 2.1% 231,494
Strome Partners, L.P. (1).................................................... 195,936 1.8% 195,936
Leonardo, L.P. (1)........................................................... 174,165 1.6% 174,165
Lawrence K. Fleischman (1)(7)................................................ 155,729 1.4% 155,729
AGR Halifax Fund, Ltd. (1)................................................... 145,137 1.3% 145,137
Kodiak Opportunity, L.P. (1)................................................. 119,738 1.1% 119,738
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
SHARES OF NUMBER OF
COMMON STOCK SHARES BEING
BENEFICIALLY OWNED OFFERED
--------------------- ------------
NAME NUMBER PERCENT
- ----------------------------------------------------------------------------- ---------- ---------
<S> <C> <C> <C>
Raphael, L.P. (1)............................................................ 116,110 1.1% 116,110
Kodiak Opportunity, Offshore, Ltd. (1)....................................... 97,968 0.9% 97,968
Alexander L. and Linda S. Cappello (1)....................................... 75,471 0.7% 75,471
Fortune Fund Ltd.--Seeker 3 (1).............................................. 72,568 0.7% 72,568
Crisotomo B. Garcia (IRA) (1)................................................ 72,568 0.7% 72,568
JMG Capital Partners, L.P. (1)............................................... 72,568 0.7% 72,568
Triton Capital Investments, Ltd. (1)......................................... 72,568 0.7% 72,568
Licap Partners (1)........................................................... 58,055 0.5% 58,055
Gerard K. Cappello (1)....................................................... 50,362 0.5% 50,362
David E. Berman.............................................................. 45,000 0.4% 45,000
Strome Hedgecap Limited (1).................................................. 43,541 0.4% 43,541
Trust Company of America (1)................................................. 43,541 0.4% 43,541
Peter J. Cocoziello (1)...................................................... 37,010 0.3% 37,010
Anvil Investment Partners, L.P. (1).......................................... 36,284 0.3% 36,284
Fayerweather Associates (1).................................................. 36,284 0.3% 36,284
RSP VI Limited Partnership (1)............................................... 36,284 0.3% 36,284
Steven Amos (1).............................................................. 29,027 0.3% 29,027
Laredo Capital Partners (1).................................................. 29,027 0.3% 29,027
Paul Rajewski (1)............................................................ 29,027 0.3% 29,027
Capital Vision Group, Inc. Profit Sharing Plan (1)........................... 14,513 0.1% 14,513
Lawrence Kaplan (1).......................................................... 14,513 0.1% 14,513
Stanley Kaplan (1)........................................................... 14,513 0.1% 14,513
Theodore Meisel (1).......................................................... 14,513 0.1% 14,513
OK Associates Pension Trust (1).............................................. 14,513 0.1% 14,513
Pelain Partners (1).......................................................... 14,513 0.1% 14,513
Alfred Romano (1)............................................................ 14,513 0.1% 14,513
Jeffrey C. Ullman, Trustee Jeffrey C. Ullman Living Trust (1)................ 14,513 0.1% 14,513
Loretta Hirsh Shine (1)...................................................... 8,708 0.1% 8,708
Robert Deutschman (1)........................................................ 7,692 0.1% 7,692
Jonathan Thomas (1).......................................................... 7,692 0.1% 7,692
Jonathan Rosenthal (1)....................................................... 7,547 0.1% 7,547
Jon Schotz (1)............................................................... 7,547 0.1% 7,547
Jerry Kaplan (1)............................................................. 7,256 0.1% 7,256
Leslie D. Michelson (1)...................................................... 7,256 0.1% 7,256
NY-DBL Diamond Group (1)..................................................... 7,256 0.1% 7,256
Lisa G. Shine (1)............................................................ 4,354 0.0% 4,354
</TABLE>
- ------------------------
(1) Such beneficial ownership represents an estimate of the number of shares of
Common Stock issuable upon the conversion of shares of Series B Preferred
Stock beneficially owned by such person, assuming (i) a conversion price of
$6.89, which is 95% of the lowest trading price of the Common Stock on June
5, 1998 and (ii) each of the Series B Preferred Stock Warrants is exercised
as of the date of issuance. The actual number of shares of Common Stock
issued upon the conversion of the Series B Preferred Stock depends upon the
Conversion Price, which cannot be predicted by the Company at this time.
After May 31, 1998, the Conversion Price, subject to the maximum Conversion
Price, will be equal to the lowest trading price of the Common Stock for the
22 trading days immediately preceding the conversion date, less a discount
ranging from 5% to 9%. The number of shares that any holder of Series B
Preferred Stock may convert in any calendar month is limited according to a
sliding scale percentage of such holder's shares of Series B Preferred Stock
determined by reference to the highest of the daily trading prices during
such month. In addition, shares of Series B Preferred Stock may not be
converted into Common Stock if following such conversion the holder thereof,
together with affiliates of such holder would be beneficial owner of 4.9% or
more of the Common Stock. See "Description of Capital Stock--Series B
Preferred Stock." For purposes of the table above, beneficial
23
<PAGE>
ownership by holders of Series B Preferred Stock has been calculated without
regard to the foregoing limitations.
(2) Waterton Management, L.L.C. ("Waterton") is the investment manager for
Drakefield Corporation. Waterton also acts as investment manager for
Stockwell Corporation, S.A., which may be deemed to own 580,551 shares of
Common Stock based on an assumed conversion price of $6.89 per share of
Series B Preferred Stock owned by Stockwell Corporation, S.A. Drakefield
Corporation is not affiliated with Stockwell Corporation, S.A. Waterton
disclaims beneficial ownership of any shares held by Drakefield Corporation
or Stockwell Corporation, S.A.
(3) AG Ramius Partners, L.L.C. ("AG Ramius"), a registered investment adviser,
acts pursuant to contract as discretionary investment adviser for several
Selling Stockholders, holding voting and dispositive powers with respect to
securities acquired for their accounts. In such capacity, AG Ramius may be
considered a beneficial owner of shares of Common Stock that such Selling
Stockholders have the right to acquire through conversion of 5,500 Series B
Preferred Stock beneficially owned by such Selling Stockholders. The amount
shown does not necessarily reflect certain limitations as to the maximum
number of shares of Common Stock issuable to any stockholder and its
affiliates. Moreover, the amount does not reflect shares of Common Stock
issuable on conversion of (a) an aggregate of 1,500 shares of Series B
Preferred Stock held by certain Selling Stockholders whose accounts are
managed on a discretionary basis by Angelo, Gordon & Co., L.P., a registered
investment adviser that is one of the members of AG Ramius or (b) 2,000
shares of Series B Preferred Stock held by Ramius Capital Group, L.L.C., the
other member of AG Ramius.
(4) Includes 471,698 shares (4.1%) beneficially owned by Q Funding, L.P. and
253,991 shares (2.3%) beneficially owned by R(2) Investments, LDC. Scepter
Holdings, Inc. is the general partner of the investment manager for each of
Q Funding, L.P. and R(2) Investments, LDC.
(5) Includes (i) 246,734 shares (2.1%) beneficially owned by Strome, Susskind
Hedgecap, L.P., (ii) 239,477 shares (2.2%) beneficially owned by Strome
Offshore Limited, (iii) 195,936 shares (1.8%) beneficially owned by Strome
Partners, L.P., and (iv) 43,541 shares (0.4%) beneficially owned by Strome
Hedgecap Limited.
(6) Waterton is the investment manager for Stockwell Corporation, S.A. Waterton
also acts as investment manager for Drakefield Corporation, which may be
deemed to own 870,827 shares of Common Stock based on an assumed conversion
price of $7.60 per share of Series B Preferred Stock owned by Drakefield
Corporation. Drakefield Corporation is not affiliated with Stockwell
Corporation, S.A. Waterton disclaims beneficial ownership of any shares held
by Drakefield Corporation or Stockwell Corporation, S.A.
(7) Includes (i) 58,055 shares (0.5%) beneficially owned by Licap Partners, a
partnership of which Mr. Fleischman is a general partner, (ii) 29,027 shares
(0.3%) beneficially owned by Laredo Capital partners, a partnership of which
Mr. Fleischman is a general partner, (iii) 14,513 shares (0.1%) beneficially
owned by Capital Vision Group, Inc. Profit Sharing Plan, of which Mr.
Fleischman is the sole beneficiary, (iv) 14,513 shares (0.1%) beneficially
owned by Pelain Partners, a partnership of which Mr. Fleischman is a general
partner, (v) 7,256 shares (0.1%) beneficially owned by NY-DBL Diamond Group,
a partnership of which Mr. Fleischman is a general partner and (vi) 32,365
shares (0.3%) held by Mr. Fleischman individually.
24
<PAGE>
PLAN OF DISTRIBUTION
WARRANT SHARES
The Warrant Shares may be offered and sold from time to time by or for the
account of the Warrantholder. The decision to offer and sell the Warrant Shares,
and the timing and amount of any offers or sales that are made, is and will be
within the sole discretion of the Warrantholder. Any Warrant Shares may be
offered for sale by the Warrantholder on the New York Stock Exchange, or
otherwise, at prices and on terms then obtainable, at fixed prices then
prevailing at the time of sale, or in negotiated transactions at negotiated
prices, or otherwise. The Warrant Shares offered hereby may be offered in any
manner permitted by law, other than an underwritten public offering, including
through brokers, dealers or agents, and directly to one or more purchasers.
Sales of the Warrant Shares may involve: (a) block transactions in which the
broker or dealer so engaged will attempt to sell the Warrant Shares as an agent,
but may position and resell a portion of the block as principal to facilitate
the transactions; (b) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions; or (d) transactions in which the broker solicits
purchasers. To the extent required, this Prospectus may be amended and
supplemented from time to time to describe a specific plan of distribution. In
connection with such transactions, broker-dealers or other financial
institutions may engage in short sales of the Common Stock, to the extent
permitted by law, in the course of hedging the positions they assume with the
Warrantholder. The Warrantholder may also pledge the Warrant Shares to a
broker-dealer or other financial institution, and, upon a default, such
broker-dealer or other financial institution, may effect sales of the pledged
Warrant Shares pursuant to this Prospectus (as supplemented or amended or
reflect such transaction). In addition, any Warrant Shares that qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
Prospectus. Brokers or dealers engaged to sell the Warrant Shares will receive
compensation from the Warrantholder in the form of commissions or discounts in
amounts to be negotiated immediately prior to the sale. Any gain realized by
such brokers or dealers on the sale of the Warrantholder Shares which they
purchase as a principal may be deemed to be compensation to the brokers or
dealers in addition to any commissions they will receive from the Warrantholder.
Brokers or dealers engaged by the Warrantholder may arrange for other brokers or
dealers to participate. Such broker or dealer and any other participating broker
or dealer may be deemed to be "underwriters" within the meaning of the
Securities Act and any discounts or commissions received by them or any profit
on the resale of shares by them may be deemed to be underwriting discounts and
commissions thereunder.
The Company will bear all expenses in connection with the registration of
the Warrant Shares being offered and sold by the Warrantholder.
The Company has advised the Warrantholder that, unless granted an exemption
by the Commission from Regulation M under the Exchange Act, or unless otherwise
permitted under Regulation M, the Warrantholder cannot engage in any
stabilization activity in connection with the Company's securities and cannot
bid for or purchase any securities of the Company or attempt to induce any
person to purchase any of the Company's securities other than as permitted by
the Exchange Act. In addition, the Company will make copies of this Prospectus
available to the Warrantholder and the Warrantholder will furnish each broker or
dealer engaged by the Warrantholder and each other participating broker or
dealer the number of copies of this Prospectus required by such broker or
dealer.
KLUGE SHARES
The Kluge Shares may be offered and sold from time to time by or for the
account of Kluge or by pledgees, donees, transferees or other successors in
interest. The decision to offer and sell the Kluge Shares, and the timing and
amount of any offers or sales that are made, is and will be within the sole
discretion of Kluge. Any Kluge Shares may be offered for sale by Kluge on the
New York Stock Exchange, or otherwise, at prices and on terms then obtainable,
at fixed prices then prevailing at the time of sale, or in
25
<PAGE>
negotiated transactions at negotiated prices, or otherwise. The Kluge Shares
offered hereby may be offered in any manner permitted by law, other than an
underwritten public offering, including through brokers, dealers or agents, and
directly to one or more purchasers. Sales of the Kluge Shares may involve: (a)
block transactions in which the broker or dealer so engaged will attempt to sell
the Kluge Shares as an agent, but may position and resell a portion of the block
as principal to facilitate the transactions; (b) purchases by a broker or dealer
as principal and resale by such broker or dealer for its account pursuant to
this Prospectus; (c) ordinary brokerage transactions; or (d) transactions in
which the broker solicits purchasers. To the extent required, this Prospectus
may be amended and supplemented from time to time to describe a specific plan of
distribution. In connection with such transactions, broker-dealers or other
financial institutions may engage in short sales of the Common Stock, to the
extent permitted by law, in the course of hedging the positions they assume with
Kluge. Kluge may also pledge Shares to a broker-dealer or other financial
institution, and, upon a default, such broker-dealer or other financial
institution, may effect sales of the pledged Shares pursuant to this Prospectus
(as supplemented or amended to reflect such transaction). In addition, any
Shares that qualify for sale pursuant to Rule 144 may be sold under Rule 144
rather than pursuant to this Prospectus. Brokers or dealers engaged to sell the
Kluge Shares will receive compensation from Kluge in the form of commissions or
discounts in amounts to be negotiated immediately prior to the sale. Any gain
realized by such brokers or dealers on the sale of the Kluge Shares which they
purchase as a principal may be deemed to be compensation to the brokers or
dealers in addition to any commissions they will receive from Kluge. Brokers or
dealers engaged by Kluge may arrange for other brokers or dealers to
participate. Any broker or dealer to be utilized by Kluge will be selected by
Kluge. Such broker or dealer and any other participating broker or dealer may be
deemed to be "underwriters" within the meaning of the Securities Act and any
discounts or commissions received by them or any profit on the resale of shares
by them may be deemed to be underwriting discounts and commissions thereunder.
The Company will bear all expenses in connection with the registration of
the Kluge Shares being offered and sold by Kluge.
The Company has agreed to indemnify Kluge and certain other persons against
certain liabilities, including certain liabilities under the Securities Act.
The Company has advised Kluge that, unless granted an exemption by the
Commission from Regulation M under the Exchange Act, or unless otherwise
permitted under Regulation M, Kluge cannot engage in any stabilization activity
in connection with the Company's securities and cannot bid for or purchase any
securities of the Company or attempt to induce any person to purchase any of the
Company's securities other than as permitted by the Exchange Act. In addition,
the Company will make copies of this Prospectus available to Kluge and Kluge
will furnish each broker or dealer engaged by Kluge and each other participating
broker or dealer the number of copies of this Prospectus required by such broker
or dealer.
NATIONSBANK SHARES
The NationsBank Shares may be offered and sold from time to time by or for
the account of NationsBank. The decision to offer and sell the NationsBank
Shares, and the timing and amount of any offers or sales that are made, is and
will be within the sole discretion of NationsBank. Any NationsBank Shares may be
offered for sale by NationsBank on the New York Stock Exchange, or otherwise, at
prices and on terms then obtainable, at fixed prices then prevailing at the time
of sale, or in negotiated transactions at negotiated prices, or otherwise. The
NationsBank Shares offered hereby may be offered in any manner permitted by law,
other than an underwritten public offering, including through brokers, dealers
or agents, and directly to one or more purchasers. Sales of the NationsBank
Shares may involve: (a) block transactions in which the broker or dealer so
engaged will attempt to sell the NationsBank Shares as an agent, but may
position and resell a portion of the block as principal to facilitate the
transactions; (b) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account
26
<PAGE>
pursuant to this Prospectus; (c) ordinary brokerage transactions; or (d)
transactions in which the broker solicits purchasers. To the extent required,
this Prospectus may be amended and supplemented from time to time to describe a
specific plan of distribution. In connection with such transactions,
broker-dealers or other financial institutions may engage in short sales of the
Common Stock, to the extent permitted by law, in the course of hedging the
positions they assume with NationsBank. NationsBank may also pledge the
NationsBank Shares to a broker-dealer or other financial institution, and, upon
a default, such broker-dealer or other financial institution, may effect sales
of the pledged NationsBank Shares pursuant to this Prospectus (as supplemented
or amended or reflect such transaction). In addition, any NationsBank Shares
that qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather
than pursuant to this Prospectus. Brokers or dealers engaged to sell the
NationsBank Shares will receive compensation from NationsBank in the form of
commissions or discounts in amounts to be negotiated immediately prior to the
sale. Any gain realized by such brokers or dealers on the sale of the
NationsBank Shares which they purchase as a principal may be deemed to be
compensation to the brokers or dealers in addition to any commissions they will
receive from NationsBank. Brokers or dealers engaged by NationsBank may arrange
for other brokers or dealers to participate. Such broker or dealer and any other
participating broker or dealer may be deemed to be "underwriters" within the
meaning of the Securities Act and any discounts or commissions received by them
or any profit on the resale of shares by them may be deemed to be underwriting
discounts and commissions thereunder.
The Company will bear all expenses in connection with the registration of
the NationsBank Shares being offered and sold by NationsBank.
The Company has advised NationsBank that, unless granted an exemption by the
Commission from Regulation M under the Exchange Act, or unless otherwise
permitted under Regulation M, NationsBank cannot engage in any stabilization
activity in connection with the Company's securities and cannot bid for or
purchase any securities of the Company or attempt to induce any person to
purchase any of the Company's securities other than as permitted by the Exchange
Act. In addition, the Company will make copies of this Prospectus available to
NationsBank and NationsBank will furnish each broker or dealer engaged by
NationsBank and each other participating broker or dealer the number of copies
of this Prospectus required by such broker or dealer.
CONVERSION SHARES
The Conversion Shares may be offered and sold from time to time by or for
the account of the holders of the Series B Preferred Stock or by pledgees,
donees, transferees or other successors in interest. The Company has agreed to
use its best efforts to keep this Prospectus effective until December 30, 1999.
The decision to offer and sell the Conversion Shares, and the timing and amount
of any offers or sales that are made, is and will be (subject the limitation set
forth below) within the sole discretion of the holders of the Series B Preferred
Stock. Any of the Conversion Shares may be offered for sale on the New York
Stock Exchange, or otherwise, through brokers' transactions at prices then
prevailing at the time of sale, at prices related to such prevailing prices, at
varying prices determined at the time of sale or at negotiated or fixed prices.
Sales of the Conversion Shares may involve: (a) block transactions in which the
broker or dealer so engaged will attempt to sell the Conversion Shares as an
agent, but may position and resell a portion of the block as principal to
facilitate the transactions; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(c) ordinary brokerage transactions; (d) transactions in which the broker
solicits purchasers; or (e) through the writing of options (whether such options
are listed on an options exchange or otherwise) on, or settlement of short sales
of, the Common Stock.
Pursuant to Preferred Stock Investment Agreement, each purchaser of the
Series B Preferred Stock has agreed to refrain from offering or selling publicly
on any trading day on the NYSE or on the principal exchange on which the Common
Stock is traded an amount of Common Stock equal to the greater of (i) 10% of the
average daily trading volume of the Common Stock for the five trading days
immediately
27
<PAGE>
prior to such sale as reported by the NYSE or by such principal exchange, (ii)
10,000 shares of Common Stock or (iii) 10% of the trading volume of the Common
Stock on the day of such sale as reported by the NYSE or by such principal
exchange. In addition, the purchasers of the Series B Preferred Stock and their
affiliates have agreed not to engage in any short sales, swaps, purchasing of
puts, or other hedging activities involving the common stock to hedge their
investment in the Series B Preferred Stock; however, any purchaser may write
call options if the call exercise price is greater than the lesser of (i) the
effective Conversion Price on the day that the call is written or (ii) the
closing price of the common stock on the day prior to the day that the call is
written. These hedging restrictions do not apply to (i) transactions not
solicited or directed by a purchaser of the Series B Preferred Stock and in
which such purchaser has no beneficial interest made on behalf of third-party
clients who are not holders of Series B Preferred Stock or (ii) certain short
sales within three days of conversion in amounts not greater than the number of
shares issuable upon conversion where the shares issuable upon conversion are
used to cover the short sale. To the extent required this Prospectus may be
amended and supplemented from time to time to describe a specific plan of
distribution.
Brokers or dealers engaged by any holder of Series B Preferred Stock may
receive compensation from such holders in the form of commission or discounts in
amounts to be negotiated immediately prior to the sale. Any gain realized by
such brokers or dealers on the sale of the Conversion Shares that they purchase
as a principal may be deemed to be compensation to the brokers or dealers in
addition to any commissions they will receive from such holders of the Series B
Preferred Stock. Brokers or dealers engaged by any holder of the Series B
Preferred Stock may arrange for other brokers or dealers to participate. Such
broker or dealer and any other participating broker or dealer may be deemed to
be "underwriters" within the meaning of the Securities Act and any discounts or
commissions received by them or any profit on the resale of shares by them may
be deemed to be underwriting discounts and commissions thereunder.
Under the securities laws of certain states, the Common Stock may be sold in
such states only through registered or licensed brokers or dealers. In addition,
in certain states, the Common Stock may not be sold unless the Common Stock has
been registered or qualified for sale in such state or pursuant to an exemption
from registration or qualification.
The Company will bear all expenses in connection with the registration of
the Conversion Shares.
The Company has advised the holders of the Series B Preferred Stock that,
unless granted an exemption by the Commission from Regulation M under the
Exchange Act, or unless otherwise permitted under Regulation M, the holders of
the Series B Preferred Stock cannot engage in any stabilization activity in
connection with the Company's securities and cannot bid for or purchase any
securities other than as permitted by the Exchange Act. In addition, the Company
will make copies of this Prospectus available the holders of the Series B
Preferred Stock who will furnish each broker or dealer engaged by any such
holder and other participating broker or dealer the number of copies of this
Prospectus required by such broker or dealer.
28
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Shares offered hereby will be passed
upon for the Company by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), Washington, D.C. 20004.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated balance sheets as of April 30, 1997 and 1996, and the
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended April 30, 1997, incorporated by
reference in this Prospectus and in the Registration Statement from the
Company's 1997 Form 10-K/A2 have been incorporated by reference herein in
reliance on the report, which includes an explanatory paragraph regarding the
restatement of previously issued financial statements to reflect revised
accounting for certain contract costs, of Coopers & Lybrand L.L.P., independent
accountants, given upon the authority of that firm as experts in accounting and
auditing. With respect to the unaudited interim financial information as of July
31, 1997, October 31, 1997, and January 31, 1998 and for the three-month,
six-month and nine-month periods then ended, incorporated by reference in this
Prospectus and Registration Statement, the independent accountants have reported
that they have applied limited procedures in accordance with professional
standards for a review of such information. However, their separate reports,
which include an explanatory paragraph regarding the restatement of previously
issued financial statements to reflect revised accounting for certain contract
costs and certain long-term real estate leases, included in the Company's
quarterly reports on Form 10-Q, as amended, for the quarters ended July 31,
1997, October 31, 1997 and January 31, 1998, and incorporated by reference
herein, state that they did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. The independent accountants are not subject to
the liability provisions of Section 11 of the Securities Act of 1933 for their
reports on unaudited interim financial information because that report is not a
"report" or "part" of the Prospectus or Registration Statement prepared or
certified by the independent accountants within the meaning of Sections 7 and 11
of the Securities Act.
The consolidated financial statements of HIP of New Jersey, Inc. and
Subsidiary as of and for the years ended December 31, 1996, 1995 and 1994,
incorporated by reference in this Prospectus and Registration Statement from the
Company's Current Report on Form 8-K/A, have been audited by Ernst & Young LLP,
independent auditors as set forth in their reports incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
29
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... 2
Incorporation of Certain Documents by
Reference..................................... 2
Risk Factors................................... 3
The Company.................................... 11
Use of Proceeds................................ 13
Description of Capital Stock................... 14
Security Ownership of Certain Beneficial Owners
and Management................................ 19
Selling Stockholders........................... 22
Plan of Distribution........................... 25
Legal Matters.................................. 29
Independent Accountants........................ 29
</TABLE>
PHP HEALTHCARE CORPORATION
8,255,639 SHARES
OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
JUNE 10, 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Stock being registered. All amounts are estimates except the
registration fee.
<TABLE>
<S> <C>
Commission Registration Fee.................................... $25,918.03
Printing and engraving expenses................................ 8,000.00
Legal fees and expenses........................................ 150,000.00
Accounting fees and expenses................................... 100,000.00
Miscellaneous.................................................. 10,000.00
----------
Total...................................................... $293,918.03
----------
----------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL") empowers a corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceedings, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section
145, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith; that indemnification provided for by
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; that indemnification provided for by Section
145 shall, unless otherwise provided when authorized or ratified, continue as to
a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of such persons' heirs, executors and administrators; and
empowers the corporation to purchase and maintain insurance on
II-1
<PAGE>
behalf of a director or officer of the corporation against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under Section 145.
Article IX of the Company's By-laws provides that the Company shall
indemnify its directors and officers to the fullest extent authorized by the
DGCL.
Section 102(b)(7) of DGCL provides that a certificate of incorporation may
contain a provision eliminating or limiting the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director provided that such provision shall not eliminate or
limit the liability of a director (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit. Article X of the Company's
Certificate of Incorporation limits the liability of directors to the fullest
extent permitted by Section 102(b)(7).
ITEM 16. EXHIBITS.
The following exhibits are filed herewith or incorporated by reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
*4.2 Stock Purchase Agreement by and between PHP Healthcare Corporation and David E. Berman and Mary Ellen
Michael-Fleming dated as of November 1, 1992.
*4.3 Warrant to Purchase Shares of Common Stock of PHP Healthcare Corporation dated as of November 1, 1992.
4.4 Specimen form of the Company's Common Stock certificate (incorporated by reference from Exhibit 7.1 to
the Company's Form 8-A, Amendment 1, filed with the Securities and Exchange Commission on August 11,
1992).
***4.5 Specimen form of the Company's Series B Convertible Preferred Stock
4.6 Certificate of Designations of Series B Convertible Preferred Stock (incorporated by reference from
Exhibit 3.1 to the Company's Form 8-K, filed with the Securities and Exchange Commission on January 6,
1998).
4.7 Form of Preferred Stock Investment Agreement (incorporated by reference from Exhibit 4.1 to the
Company's Form 8-K, field with the Securities and Exchange Commission on January 6, 1998).
***4.8 Form of Series B Preferred Stock Purchase Warrant
4.9 Warrant Agreement dated as of October 31, 1997 between PHP Healthcare Corporation and First Trust of
New York, N.A., Warrant Agent (incorporated by reference from Exhibit 4.1 to the Company's Form 8-K,
filed with the Securities and Exchange Commission on November 17, 1997).
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.
***10.1 Amended and Restated Credit Agreement, dated May 26, 1998, among PHP Healthcare Corporation as Borrower
and The Initial Lenders and Initial Issuing Bank Named Herein as Initial Lenders and Initial Issuing
Bank and NationsBank, N.A. as Collateral Agent and Administrative Agent.
***10.2 Amended and Restated Security Agreement, dated as of May 26, 1998, from PHP Healthcare Corporation, The
Other Grantors Referred to Herein and The Additional Grantors Referred to Herein as Grantors to
NationsBank, N.A. as Administrative Agent.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.3 Amended and Restated Subsidiary Guaranty, dated as of May 26, 1998, from Each of the Subsidiaries of
PHP Healthcare Corporation Listed on the Signature Pages Hereof and The Additional Subsidiary
Guarantors Referred to Herein as Guarantors in favor of The Secured Parties Referred to in The Amended
and Restated Credit Agreement Referred to Herein.
***15.1 Letter of Coopers & Lybrand L.L.P. re: unaudited interim financial information
***23.1 Consent of Coopers & Lybrand L.L.P.
***23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1).
***23.3 Consent of Ernst and Young L.L.P.
**24.1 Power of Attorney (included on signature page).
</TABLE>
* Previously filed with Form S-3 on April 30, 1997
** Previously filed with Amendment No. 1 to Form S-3 on February 27, 1998.
*** Previously filed with Amendment No. 2 to Form S-3 on June 5, 1998.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements of filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Reston, Commonwealth of Virginia, on this 10th day of
June, 1998.
PHP HEALTHCARE CORPORATION
(Registrant)
By: /s/ ANTHONY M. PICINI
-----------------------------------
Name: Anthony M. Picini
Title: Executive Vice President
and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, the Registration
Statement has been signed below by the following persons in the capacities
indicated on this 10th day of June, 1998.
<TABLE>
<C> <S> <C>
*
- ------------------------------------------- Chairman of the Board
Charles P. Reilly
* President and Director
- ------------------------------------------- (principal executive officer)
Jack M. Mazur
* Senior Executive Vice President
- ------------------------------------------- and Director
Michael D. Starr
* Executive Vice President and
- ------------------------------------------- Chief Financial Officer
Anthony M. Picini (principal accounting officer)
* President, D.C. Chartered
- ------------------------------------------- Health Plan, and Director
Robert L. Bowles, Jr.
* Executive Vice President and
- ------------------------------------------- Director
William J. Lubin
* Executive Vice President,
- ------------------------------------------- Corporate Medical Director,
Frank L. Provato, M.D. and Director
*
- ------------------------------------------- Director
Joseph G. Mathews
*
- ------------------------------------------- Director
Donald J. Ruffing
*
- ------------------------------------------- Director
John J. McDonnell
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S> <C>
*
- ------------------------------------------- Director
Jerry W. Carlton
</TABLE>
*By: /s/ ANTHONY M. PICINI Attorney-in-Fact
-------------------------
Anthony M. Picini
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
- ---------- --------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
*4.2 Stock Purchase Agreement by and between PHP Healthcare Corporation and David E. Berman and
Mary Ellen Michael-Fleming dated as of November 1, 1992.
*4.3 Warrant to Purchase Shares of Common Stock of PHP Healthcare Corporation dated as of November
1, 1992.
4.4 Specimen form of the Company's Common Stock certificate (incorporated by reference from
Exhibit 7.1 to the Company's Form 8-A, Amendment 1, filed with the Securities and Exchange
Commission on August 11, 1992).
***4.5 Specimen form of the Company's Series B Convertible Preferred Stock
4.6 Certificate of Designations of Series B Convertible Preferred Stock (incorporated by
reference from Exhibit 3.1 to the Company's Form 8-K, field with the Securities and Exchange
Commission on January 6, 1998).
4.7 Form of Preferred Stock Investment Agreement (incorporated by reference from Exhibit 4.1 to
the Company's Form 8-K, filed with the Securities and Exchange Commission on January 6,
1998).
***4.8 Form of Series B Preferred Stock Purchase Warrant
4.9 Warrant Agreement dated as of October 31, 1997 between PHP Healthcare Corporation and First
Trust of New York, N.A., Warrant Agent (incorporated by reference from Exhibit 4.1 to the
Company's Form 8-K, filed with the Securities and Exchange Commission on November 17, 1997).
5.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson.
***10.1 Amended and Restated Credit Agreement, dated May 26, 1998, among PHP Healthcare Corporation
as Borrower and The Initial Lenders and Initial Issuing Bank Named Herein as Initial Lenders
and Initial Issuing Bank and NationsBank, N.A. as Collateral Agent and Administrative Agent
***10.2 Amended and Restated Security Agreement, dated as of May 26, 1998, from PHP Healthcare
Corporation. The Other Grantors Referred to Herein and The Additional Grantors Referred to
Herein as Grantors to NationsBank, N.A. as Administrative Agent
***10.3 Amended and Restated Subsidiary Guaranty, dated as of May 26, 1998, from Each of the
Subsidiaries of PHP Healthcare Corporation Listed on the Signature Pages Hereof and The
Additional Subsidiary Guarantors Referred to Herein as Guarantors in favor of The Secured
Parties Referred to in The Amended and Restated Credit Agreement Referred to Herein
***15.1 Letter of Coopers & Lybrand L.L.P. re: unaudited interim financial information.
***23.1 Consent of Coopers & Lybrand L.L.P.
***23.2 Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1).
***23.3 Consent of Ernst and Young L.L.P.
**24.1 Power of Attorney (included on signature page).
</TABLE>
- ------------------------
* Previously filed with Form S-3 on April 30, 1997
** Previously filed with Amendment No. 1 to Form S-3 on February 27, 1998.
*** Previously filed with Amendment No. 2 to Form S-3 on June 5, 1998.
<PAGE>
EXHIBIT 5.1
JUNE 10, 1998
202-639-7032
PHP Healthcare Corporation
11440 Commerce Park Drive, Suite 300
Reston, Virginia 20091
Dear Gentleman:
We are acting as counsel to PHP Healthcare Corporation, a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933 (the "Act"), pursuant to a Registration Statement on Form
S-3 (the "Registration Statement"), of the sale of 8,255,639 shares of common
stock, par value $.01 per share, of the Company ("Common Stock"), including (i)
45,000 shares of Common Stock (the "Warrant Shares") issuable upon the exercise
of an outstanding Warrant, dated as of November 1, 1992, issued by the Company
(the "Warrant"), (ii) 500,150 shares of Common Stock (the "NationsBank Shares")
issuable to NationsBank, N.A. ("NationsBank") upon exercise of a warrant granted
to NationsBank (the "NationsBank Warrant"), (iii) 500,000 shares (the "Kluge
Shares") held by Chase Manhattan Bank, John W. Kluge and Stuart Subotnick
Trustees U/A DTD 5/30/84 As Amended made by and for John W. Kluge and (iv)
7,210,489 shares of Common Stock (the "Conversion Shares") issuable upon the
conversion of the Company's Series B Convertible Preferred Stock, par value $.01
(the "Series B Preferred Stock"). With your permission, all assumptions and
statements of reliance herein have been made without any independent
investigation or verification on our part except to the extent otherwise
expressely stated, and we express no opinion with respect to the subject matter
or accuracy of such assumptions or items relied upon.
In connection with this opinion, we have (i) investigated such questions of
law, (ii) examined originals or certified, conformed or reproduced copies of
such agreements, instruments, documents and records of the Company and its
subsidiaries, such certificates of public officials and such other and (iii)
received such information from officers and representatives of the Company and
its subsidiaries and others as we have deemed necessary or appropriate for the
purposes of this opinion.
In all such examinations, we have assumed the legal capacity of all natural
persons executing documents, documents (other than the capacity of officers of
the Company executing documents in such capacity), the genuineness of all
signatures, the authenticity of original and certified documents and the
conformity to original or certified documents of all copies submitted to us as
conformed or reproduction copies. As to various questions of fact relevant to
the opinions expressed herein, we have relied upon, and assume the accuracy of,
representations and warranties contained in documents, certificates and oral or
written statements and other information of or from officers and representatives
of the Company, its subsidiaries and others and assume compliance on the part of
all parties to the documents with their covenants and agreements contained
therein.
Based upon the foregoing, and subject to the limitations, qualifications and
assumptions set forth herein, we are of the opinion that:
1. The Warrant Shares have been duly authorized, and, when issued upon
exercise of the Warrant in accordance with the terms hereof, will be validly
issued, fully paid and non-assessable.
2. The NationsBank Shares have been duly authorized, and, when issued
upon exercise of the NationsBank Warrant in accordance with the terms
thereof, will be validly issued, fully paid and non-assessable.
3. The Kluge Shares have been duly authorized and validly issued and
are fully paid and non-assessable.
<PAGE>
4. The Conversion Shares have been duly authorized, and, when issued
upon conversion of the Series B Preferred Stock in accordance with the terms
thereof, will be validly issued, fully paid and non-assessable.
The opinions expressed herein are limited to the General Corporation Law of
the State of Delaware. We assume no obligation to supplement this letter if any
applicable laws change after the date hereof or if we become aware of any facts
that might change the opinions expressed herein after the date hereof.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement and to the references to this firm under the caption
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
In giving this consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act.
Very truly yours,
FRIED, FRANK, HARRIS, SHRIVER, &
JACOBSON
By: /s/ ANDREW P. VARNEY
Andrew P. Varney
