UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
{X} Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended MARCH 31, 1996
OR
{ } Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 001-13460
COASTAL PHYSICIAN GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1379244
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2828 CROASDAILE DRIVE, DURHAM, NC 27705
(Address of principal executive offices) (Zip Code)
(919) 383-0355
(Registrant's telephone number including area code)
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
{ } Yes {X} No
As of April 30, 1996 there were outstanding 23,835,665 shares of
common stock, par value $.01 per share.
COASTAL PHYSICIAN GROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
Unaudited Consolidated Statements of Operations
Unaudited Consolidated Condensed Statement
of Cash Flows
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
COASTAL PHYSICIAN GROUP, INC.
Consolidated Balance Sheets
(In thousands of U.S. dollars, except per share data)
March 31, December
1996 31,
1995
(unaudite
d)
Assets
Current assets:
Cash and cash equivalents 19,314 8,147
Marketable securities 8,476 9,303
Trade accounts receivable, net 150,779 149,891
Accounts receivable, other 17,638 11,315
Notes receivable from shareholders 1,791 1,879
Refundable income taxes 664 12,804
Prepaid expenses and other current 5,759 3,882
assets
Deferred income taxes 4,265 4,265
Total current assets 208,686 201,486
Property and equipment, at cost, less
accumulated depreciation 32,008 33,441
Excess of cost over fair value of net
assets acquired, net 53,188 53,836
Deferred income taxes 2,327 2,244
Other assets 19,013 22,050
Total assets 315,222 313,057
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities and other short-term
borrowings 6,594 5,210
Accounts payable 19,588 19,600
Accrued physicians fees and medical 37,100 38,468
costs
Accrued expenses 23,220 26,138
Total current liabilities 86,502 89,416
Long-term debt, excluding current 93,773 77,270
maturities
Total liabilities 180,275 166,686
Shareholders' equity:
Preferred stock $.01 par value; shares
authorized 10,000; none issued or
outstanding --- ---
Common stock $.01 par value; shares
authorized 100,000; shares issued
and outstanding 23,712 and
23,754, respectively 238 238
Additional paid-in capital 142,618 142,345
Retained earnings (accumulated deficit) (8,104) 3,626
Unrealized appreciation of available-
for-sale securities 195 162
Total shareholders' equity 134,947 146,371
Total liabilities and shareholders'
equity 315,222 313,057
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
Unaudited Consolidated Statements of Operations
(In thousands of U.S. dollars, except per share data)
Three months ended
March 31,
1996 1995
Operating revenue, net 152,734 207,859
Costs and expenses:
Physician and other provider services 113,565 144,164
Medical support services 24,177 30,979
Selling, general and administrative 24,901 21,336
Total costs and expenses 162,643 196,479
Operating income (loss) (9,909) 11,380
Other income (expense):
Interest expense (2,103) (1,165)
Interest income 125 193
Other, net 157 21
Total other expense (1,821) (951)
Income (loss) before income taxes (11,730) 10,429
Provision for income taxes --- 4,062
Net income (loss) (11,730) 6,367
Net income (loss) per share (0.49) 0.27
Weighted average number of shares
outstanding 23,791 23,539
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(In thousands of U.S. dollars)
Three months ended
March 31,
1996 1995
Net cash (used in) provided by
operating activities (10,728) 4,868
Cash flows from investing activities:
Sales (purchases) of marketable
securities and investments, net 4,873 (1,511)
Purchases of property and equipment, (782) (11,659)
net
Acquisition of subsidiaries, net of
cash acquired --- (12,412)
Disposition of subsidiaries, net of
cash disposed (322) ---
Net cash provided by (used
in)investing activities 3,769 (25,582)
Cash flows from financing activities:
Repayments of long-term debt (1,290) (676)
Borrowings on long-term debt 19,165 18,478
Net proceeds from issuances of common
stock 251 636
Net cash provided by
financing activities 18,126 18,438
Net increase (decrease) in
cash and cash equivalents 11,167 (2,276)
Cash and cash equivalents at beginning
of period 8,147 14,286
Cash and cash equivalents at end of
period 19,314 12,010
Supplemental disclosures of cash flow
information:
Cash payments (refunds) during
the period for:
Interest 1,673 1,210
Income taxes (12,155) (4,235)
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements of Coastal
Physician Group, Inc. (the "Company") are unaudited and, in the
opinion of management, include all adjustments, consisting of
only normal recurring adjustments, which are necessary for a fair
presentation. The unaudited consolidated financial statements
should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995. Operating results for the interim periods
presented are not necessarily indicative of the results that may
be expected for the fiscal year ending December 31, 1996.
(2) COMMITMENTS AND CONTINGENCIES
The Company procures professional liability insurance coverage on
behalf of its operating subsidiaries on a claims-made basis. The
insurance contracts specify that coverage is available only
during the term of each insurance contract. Management of the
Company intends to renew the existing claims-made policies
annually and expects to be able to obtain such coverage. When
coverage is not renewed, the subsidiary companies purchase an
extended reporting period endorsement to provide professional
liability coverage for losses incurred prior to, but reported
subsequent to, the termination of the claims-made policies.
The Company and its independent contractor physicians obtain
their professional liability insurance coverages from various
insurance carriers. Several insurance carriers who underwrote
certain portions of these coverages from 1986 to 1992 have
announced a moratorium on the payment of claims or have
established plans to pay claims in the future based on formal
plans of arrangement. As of March 31, 1996, the Company had
approximately $2,800,000 in receivables relating to certain
claims for which reimbursement is still pending and anticipates
that substantially all of these amounts will be collected in full
from the carriers. The Company includes these receivables in
other assets in the accompanying consolidated balance sheets.
The Company is a defendant in certain lawsuits by certain
shareholders with respect to representations concerning the
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Company's operations and prospects. The Company believes these
lawsuits are without merit, intends to vigorously defend its
position, and does not expect such litigation to have a material
adverse effect on the Company's financial position or results of
operations.
An operating subsidiary of the Company is a defendant in a
lawsuit regarding billings to and collections from certain
Federal government insurance programs. The Company and its
counsel are reviewing this lawsuit and, at this time, exposure to
the Company is indeterminable.
In addition, as of March 31, 1996, certain of the Company's
operating subsidiaries were defendants in various malpractice and
other lawsuits. Management believes that these lawsuits should
not result in judgments which, after consideration of
professional liability and general insurance coverage, would have
a material adverse effect on the Company's financial position or
results of operations.
(3) SENIOR CREDIT FACILITY
During the first quarter of 1996, the Company had a senior credit
facility ( the "Senior Credit Facility") with a group of
commercial lenders pursuant to which the Company could borrow
(prior to the restructuring described below) up to $161,750,000,
consisting of a $50,000,000 three-year revolving credit facility
to be used for working capital purposes (the "Working Capital
Facility") and a $111,750,000 seven-year reducing revolving
credit facility to be used for acquisitions (the "Acquisition
Facility"). Borrowings outstanding as of March 31, 1996 under
these facilities were $45,875,000 and $36,625,000, respectively.
As of March 31, 1996, due primarily to the operating loss
generated for the three months ended December 31, 1995, the
Company was in violation of certain financial covenants under the
Senior Credit Facility. A number of temporary waivers of default
and any resulting events of default have been received by the
Company, the latest through May 31, 1996. On May 29, 1996, the
Company entered into new credit agreements which restructured the
existing Acquisition and Working Capital facilities and provide
the Company up to $40,000,000 of additional borrowing
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
availability under a new facility (the "Overline Facility").
Under the terms of the restructured existing Senior Credit
Facility (the "Restructured Facility"), outstanding amounts under
the Working Capital Facility were transferred to the Acquisition
Facility, the Working Capital Facility was canceled and no
additional borrowings are permitted under the Acquisition
Facility. The Restructured Facility and the Overline Facility
require total principal payments of at least $40,000,000 by
January 2, 1997, at which time the availability of additional
working capital borrowings under the Overline Facility declines
to $10,000,000. Outstanding amounts under the Restructured
Facility and the Overline Facility are due on July 1, 1997.
Interest on loans under the Restructured Facility and the
Overline Facility will accrue at the agent bank's prime rate plus
1.5% and 2.0%, respectively, payable monthly in arrears.
The Overline Facility prohibits borrowings for purposes other
than working capital requirements, requires compliance with other
financial covenants and imposes limitations on certain
investments, dispositions of assets, additional indebtedness and
capital expenditures. As collateral for the loans, the Company
has granted a security interest in substantially all of its
assets, including substantially all of its trade accounts
receivable and contract rights, and has provided a guaranty from,
and pledged the common stock of, substantially all of the
Company's subsidiaries. The Company has also granted common
stock purchase warrants to the lenders entitling them to purchase
at par value (over a vesting period) up to 5% of its fully
diluted common stock. A portion of the warrants may be canceled
by repayment of certain loan principal amounts by certain dates.
COASTAL PHYSICIAN GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion provides an assessment of the Company's
results of operations, liquidity and capital resources, and
trends and uncertainties, and should be read in conjunction with
the consolidated financial statements of the Company and notes
thereto included elsewhere in this document.
RESULTS OF OPERATIONS
FIRST QUARTER ENDED MARCH 31, 1996 COMPARED TO THE FIRST QUARTER
ENDED MARCH 31, 1995.
Net operating revenue ("operating revenue") decreased 26.5% for
the first quarter of 1996 to $152,734,000 from $207,859,000 in
the first quarter of 1995. The decrease in operating revenue due
to dispositions completed since the first quarter of 1995 for
which prior periods' results were not restated was approximately
$54,349,000 or 26.1%. This decrease was primarily due to the
sale of 47 of the Company's south Florida clinics on November 30,
1995. The increase in operating revenue due to acquisitions
completed since the first quarter of 1995 for which prior
periods' results were not restated was approximately $11,036,000
or 5.3%. This increase was primarily due to the purchase of
Better Health Plan, Inc. ("BHP") on May 5, 1995. Operating
revenue not related to disposed or acquired entities decreased
approximately $11,812,000 or 5.7%. Higher contract attrition
rates and less new business development in the Company's hospital-
based contract management division were the primary factors in
lower operating revenue in the first quarter of 1996 as compared
to the first quarter of 1995 when disposition and acquisition-
related revenues are excluded.
Operating expenses decreased 17.2% to $162,643,000 in the first
quarter of 1996 from $196,479,000 in the first quarter of 1995.
The net decrease in operating expenses due to dispositions and
acquisitions completed since the first quarter of 1995 for which
prior periods' results were not restated was approximately
$38,746,000 or 19.7%. Operating expenses not related to disposed
or acquired entities increased approximately $4,910,000 or 2.5%.
This increase is primarily a result of increased expenses
associated with the growth in the number of enrollees in each of
the Company's existing health maintenance organizations ("HMO's")
in North Carolina and Florida, increased investments in
information technology, and reduced operating margins in the
hospital-based contract management and billing and collections
business. Higher contract attrition and lower new business
development (as discussed above), and higher physician
compensation expense and the continued adverse trend in
collection experience, contributed to the variance between these
quarters.
The changes in operating revenue and operating expenses described
above resulted in an operating loss of $9,909,000 for the first
quarter of 1996, compared to operating income of $11,380,000 in
the first quarter of 1995.
Other expenses increased 91.5% or $870,000 in the first quarter
of 1996 to $1,821,000 as compared to $951,000 in the first
quarter of 1995. An increase in interest expense of $938,000
was the primary component of the change in other expenses.
Increased interest expense reflects additional borrowings at
higher average interest rates required primarily to fund
operating activities. Borrowings for operating activities were
at higher levels during the first quarter of 1996 compared to the
same period in 1995 due primarily to operating losses.
The provision for income taxes decreased to $0 for the first
quarter of 1996 from an expense of $4,062,000 for the first
quarter of 1995. The Company expects to record no tax expense or
benefit until the Company recognizes profits in the future.
Overall, the Company incurred a net loss of $11,730,000 in the
first quarter of 1996 as compared to net income of $6,367,000 in
the first quarter of 1995 for the reasons discussed above.
Weighted average shares outstanding increased 1.1% from
23,539,000 shares in the first quarter of 1995 to 23,791,000
shares in the first quarter of 1996 primarily as a result of
shares issued in connection with the exercise of stock options.
LIQUIDITY AND CAPITAL RESOURCES
Compared to the prior year period, the Company has significantly
increased its borrowings under the Senior Credit Facility. As of
March 31, 1996 borrowings under the Working Capital Facility were
$45,875,000 compared to borrowings of $28,500,000 as of March 31,
1995. This increase resulted primarily from borrowings to fund
operating activities during the period between the two dates.
Net cash used in operating activities for the three months ended
March 31, 1996 was $10,728,000 as compared to net cash provided
by operating activities for the three months ended March 31, 1995
of $4,868,000. Operating losses, increases in days in accounts
receivable and required capital to fund the Company's start-up
HMO and prepaid health services plan ("PHSP") in North Carolina
and New York have contributed to the negative operating cash flow
for the three months ended March 31, 1996. Borrowings under the
Acquisition Facility also increased significantly from
$27,457,000 as of March 31, 1995 to $36,625,000 as of March 31,
1996. The largest component of this increase resulted from
borrowings to purchase BHP on May 5, 1995, and other purchases,
net of paydowns resulting from the divestiture of certain south
Florida clinic operations on November 30, 1995.
The Company expects to satisfy its anticipated demands and
commitments for cash in the next twelve months from amounts
available under its Overline Facility, other means described
below and cash generated from operations. The Company is
implementing a management action plan and has entered into a
contract with a specialized unit of Price Waterhouse LLP to
assist the Company in implementing the plan under which named
representatives of Price Waterhouse LLP have been designated as
plan managers. The plan managers have broad authority to
implement the plan and affect operation of the Company's
businesses, and report directly to a special committee composed
of the independent members of the Board of Directors. The
management action plan requires review of all aspects of the
Company's business units (beginning with the contract management
and billing operations) and the implementation of actions to
improve cash flow characteristics, profitability and
contributions to the Company's overall financial and strategic
objectives. The primary objectives of these actions are to
generate increased cash flow to repay debt and to improve the
Company's financial results. If the Company is unable to achieve
these objectives, it will likely experience a material decrease
in liquidity, thus increasing its reliance on financing under the
Overline Facility and decreasing the likelihood of cancellation
of part of the warrants.
In addition to restructuring its credit facilities and
implementation of a management action plan, the Company recently
engaged an investment banker to assist in the exploration of
potential strategic alternatives for optimizing equity value,
providing additional liquidity, meeting debt repayment
obligations under the Restructured Facility and Overline Facility
on January 2, 1997 and refinancing of the Restructured Facility
and Overline Facility before July 1997. The investment banker,
the plan manager, as well as other outside consultants, are
expected to advise the Company as to possible actions that could
include the sale, divestiture or spin off of subsidiaries or
operating divisions, the pursuit of asset-based or other new debt
financing, potential equity offerings, or some combination of
such alternatives. Management currently anticipates that it will
be necessary to sell certain of the Company's assets in order to
repay the $40,000,000 due under the Restructured Facility and
Overline Facility on January 2, 1997.
TRENDS AND UNCERTAINTIES
The Company experienced revenue declines in the first quarter of
1996 as compared to the first quarter of 1995 when excluding
revenues related to recent dispositions and acquisitions. The
primary reasons behind this trend include higher contract
attrition and lower new business development in the hospital-
based contract management division. In response to these issues,
the Company has recently reorganized the management team in this
division.
The Company experienced lower operating margins during the first
quarter of 1996 compared to the first quarter of 1995. The
operating margin for the quarter ended March 31, 1996 was
negative 6.5% versus a positive 5.5% for the same period in the
prior year. These lower operating margins were primarily due to
increased allowances for contractual adjustments and
uncollectibles and higher physician compensation expenses as
compared to revenues in the hospital-based contract management
division.
The Company operates in an industry characterized by
consolidation and combination led by a number of major health
care companies. The Company completed numerous acquisitions
during 1994 and 1995, but is now directing its primary efforts to
improvements in existing operations with reduced activity
relating to potential acquisitions. This change in strategy is
due to the deterioration in revenue growth, increases in costs
and the associated operating losses incurred in the Company's
traditional lines of business, as well as the relative rising
cost of, and potential limited access to, capital necessary for
acquisitions.
The Company is continuing to incur substantial expansion and
operating costs in its start-up health plans in North Carolina
and New York and in its established HMO in north Florida.
Profitable future results for these entities are largely
dependent on successful regulatory approval for expansion into
new markets. These approval processes, which are the domain of
the respective state (and in some cases, local) regulators, can
increasingly be characterized as evolving and difficult to
precisely predict. This raises the prospect of potential delays
in obtaining the desired approvals on a timely basis. The
Company will continue to closely monitor developments in this
area.
The Company believes successful competition in the health care
industry will increasingly require sophisticated information
systems to rapidly provide a broad range of data related to both
clinical and financial aspects of medical practice. The Company
has consequently committed to substantial costs over the next ten
years in information technology related to clinical management
information systems, computerized billing operations, and its own
internal financial reporting systems.
If the Company is unable to return to profitability and increase
cash flow in the near term, it is possible that the Company may
become unwilling or unable to continue to sustain the losses from
its start-up managed care operations and provider network
development in North Carolina, to continue to fund its
significant investments in information technology, or to provide
the working capital necessary to support growth in revenues in
any of its existing lines of business. The impairment of the
Company's ability to continue these initiatives could limit the
Company's ability to realize its strategic and financial goals,
as well as lead to pursuit of possible divestiture of managed
care or other selected assets. As mentioned above, the Company
recently engaged an investment banker to assist in the
exploration of such potential actions.
Developments in the health care industry in general are also
expected to impact the Company's financial performance and
operating strategy. These developments include trends of medical
expenses in HMOs and other businesses where the risk of higher
medical costs is assumed, as well as changing levels of
utilization in hospital-based and clinic operations.
Additionally, the Company will continue to monitor proposed
changes in premiums and levels of reimbursement from payors
including HMOs, insurance companies, Medicare and Medicaid.
The Company will seek to continue to serve as a leading health
care delivery system integrator in targeted markets. The Company
believes that the organization of physicians in various
arrangements ranging from independent contractors in emergency
departments to employees in the Company's clinics is the correct
strategy as providers shift to a more influential role in the
country's health care delivery system.
PART II - OTHER INFORMATION
ITEM 6. - Exhibits and Reports on Form 8-K
(a)Exhibits - None
(b)Reports on Form 8-K- None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COASTAL PHYSICIAN GROUP, INC.
(Registrant)
Date: June 10, 1996 By: /S/STEPHEN D. CORMAN
Stephen D. Corman
Director, Executive Vice
President and Chief
Financial Officer
Date: June 10, 1996 By: /S/TIMOTHY W. TROST
Timothy W. Trost
Vice President, Corporate
Controller and Chief
Accounting Officer
<TABLE> <S> <C>
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEET AS OF MARCH 31, 1996 AND STATEMENT OF OPERATIONS FOR
THE THREE MONTH PERIOD ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-END> MAR-31-1996
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