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 SEPTEMBER 30, 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 October 31, 1996 there were outstanding 23,880,239
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 at December 31,
1995 and September 30, 1996 (Unaudited)
Unaudited Consolidated Statements of
Operations
Unaudited Consolidated Condensed
Statements 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 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES
COASTAL PHYSICIAN GROUP, INC.
Consolidated Balance Sheets
(In thousands, except per share data)
September December
30, 31,
1996 1995
(unaudited)
Assets
Current assets:
Cash and cash equivalents 11,205 8,147
Marketable securities 9,227 9,303
Trade accounts receivable, net 111,320 149,891
Accounts receivable, other 15,282 11,315
Notes receivable from shareholders - 1,879
Refundable income taxes - 12,804
Prepaid expenses and other current 8,015 3,882
assets
Deferred income taxes 4,285 4,265
Total current assets 159,334 201,486
Property and equipment, at cost, less
accumulated depreciation 21,901 33,441
Excess of cost over fair value of net
assets acquired, net 36,833 53,836
Deferred income taxes 2,357 2,244
Other assets 17,841 22,050
Total assets 238,266 313,057
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities and other short-
term 83,236 5,210
borrowings
Accounts payable 24,783 19,600
Accrued physicians fees and medical 30,843 38,468
costs
Accrued expenses 24,081 26,138
Total current liabilities 162,943 89,416
Long-term debt, excluding current 3,064 77,270
maturities
Total liabilities 166,007 166,686
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 23,880 and
23,754, respectively 239 238
Additional paid-in capital 142,386 142,345
Common stock warrants 987 -
Retained earnings (accumulated (71,419) 3,626
deficit)
Unrealized appreciation of available-
for-sale securities 66 162
Total shareholders' equity 72,259 146,371
Total liabilities and
shareholders' 238,266 313,057
equity
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Three months ended
September 30,
1996 1995
Operating revenue, net:
Operating revenue, net 106,681 128,845
Operating revenue, net-divested and
to be 31,124 81,144
divested entities (5)
Total operating revenue, net 137,805 209,989
Costs and expenses:
Physician and other provider services 89,189 96,195
Medical support services 13,513 15,588
Professional and consulting fees 5,318 3,073
Other selling, general and 24,462 15,394
administrative
Costs and expenses-divested and to
be 36,780 82,086
divested entities (5)
Total costs and expenses 169,262 212,336
Gain on divested assets, net 1,780 -
Operating loss (29,677) (2,347)
Other income (expense):
Proxy and related litigation costs (5,472) -
Interest expense (2,474) (2,449)
Interest income 175 104
Amortization of debt issuance costs (1,788) (323)
Other, net (567) 102
Total other expense (10,126) (2,566)
Loss before income taxes and
extraordinary (39,803) (4,913)
item
Provision (benefit) for income taxes 516 (1,474)
Loss before extraordinary item (40,319) (3,439)
Extraordinary item-gain on pooled
portion
of south Florida divestiture, net of 1,864 -
income taxes of $647 (5)
Net loss (38,455) (3,439)
Net loss per common share:
Loss before extraordinary item (1.69) (0.15)
Extraordinary gain 0.08 -
Net loss (1.61) (0.15)
Weighted average number of shares
outstanding 23,862 23,691
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Nine months ended
September 30,
1996 1995
Operating revenue, net:
Operating revenue, net 344,021 395,619
Operating revenue, net-divested and
to be 92,556 233,571
divested entities (5)
Total operating revenue, net 436,577 629,190
Costs and expenses:
Physician and other provider services 281,202 285,381
Medical support services 42,050 50,710
Professional and consulting fees 11,071 7,623
Other selling, general and 62,808 49,005
administrative
Costs and expenses-divested and to
be 103,208 239,845
divested entities (5)
Total costs and expenses 500,339 632,564
Gain on divested assets, net 1,780 -
Operating loss (61,982) (3,374)
Other income (expense):
Proxy and related litigation costs (5,472) -
Interest expense (6,573) (5,500)
Interest income 377 571
Amortization of debt issuance costs (2,516) (571)
Other, net (226) (1,931)
Total other expense (14,410) (7,431)
Loss before income taxes and
extraordinary (76,392) (10,805)
item
Provision (benefit) for income taxes 516 (3,241)
Loss before extraordinary item (76,908) (7,564)
Extraordinary item-gain on pooled
portion
of south Florida divestiture, net of 1,864 -
income taxes of $647 (5)
Net loss (75,044) (7,564)
Net loss per common share:
Loss before extraordinary item (3.23) (0.32)
Extraordinary gain 0.08 -
Net loss (3.15) (0.32)
Weighted average number of shares
outstanding 23,832 23,630
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(In thousands)
Nine months ended
September 30,
1996 1995
Net cash used in operating activities (25,295) (20,682)
Cash flows from investing activities:
Sales of marketable securities and
investments, net 4,795 3,788
Sales (purchases) of property and
equipment, net 4,147 (19,225)
Acquisition of subsidiaries, net of
cash acquired - (42,183)
Disposition of subsidiaries, net of
cash disposed 17,593 -
Net cash provided by (used
in)investing activities 26,535 (57,620)
Cash flows from financing activities:
Repayments of long-term debt (41,673) (1,933)
Borrowings on long-term debt 45,819 68,590
Cash payments for debt issue costs (3,048) -
Net proceeds from issuances of common
stock 720 1,342
Net cash provided by
financing activities 1,818 67,999
Net increase (decrease)in
cash and cash equivalents 3,058 (10,303)
Cash and cash equivalents at beginning
of period 8,147 14,286
Cash and cash equivalents at end of
period 11,205 3,983
Supplemental disclosures of cash flow
information:
Cash payments (refunds) during
the period for:
Interest 7,131 4,690
Income taxes (14,665) (1,429)
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Coastal Physician Group, Inc. (the "Company") has
established a Shareholder Value Committee comprised of non-
management directors to consider and recommend to the Board
of Directors the best available means for enhancing
shareholder value. The Company has also retained the
investment banking firm of Smith Barney, Inc. to assist in
evaluating alternatives for maximizing shareholder value,
including the possible sale of the entire Company and other
strategic and financial transactions. The accompanying
financial statements reflect certain divestitures that have
occurred, or are planned, in accordance with the Company's
strategic plan. The Company is continuing efforts to
revitalize its core businesses, meet debt repayment
obligations, and resolve certain pending litigation. These
matters are more fully addressed in the following footnotes
and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements of the
Company are unaudited and, in the opinion of management,
include all 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 presently intends to
renew claims-made coverage 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
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 September 30, 1996, the
Company had approximately $3,400,000 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.
(3) LITIGATION
The Company is a defendant in certain lawsuits filed by
certain shareholders with respect to representations
concerning the Company's operations and prospects. These
lawsuits have been consolidated, and class certification has
been granted, subject to reexamination depending on the
development of the record and the evidence. 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, related to its operations prior to being acquired
by the Company, 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.
Simultaneously with the initiation of a proxy contest in
July 1996, Steven M. Scott, M.D. ("Dr. Scott") and Bertram
E. Walls, M.D., directors and shareholders of the Company,
commenced, on their own behalf and derivatively on behalf of
the Company, an action against the Company and Joseph G.
Piemont ("Mr. Piemont"), the Company's Chief Executive
Officer and President (until he terminated his employment
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
agreement on October 21, 1996), Jacque J. Sokolov M.D. ("Dr.
Sokolov"), Chairman of the Board of Directors and the Chief
Executive Officer of Advanced Health Plans, Inc. ("AHP"), a
subsidiary of the Company, and Stephen D. Corman ("Mr.
Corman"), a director and the Company's Chief Financial
Officer (until his resignation from his position with the
Company on November 6, 1996). The plaintiffs alleged, among
other things, that certain members of the Board breached
their fiduciary duties and wasted corporate assets by
removing Dr. Scott from his position as President and Chief
Executive Officer of the Company and by approving the
Company's entry into an employment agreement with Mr.
Piemont. The Company filed an answer and counterclaims in
response to the action. The counterclaims alleged, among
other things, that Dr. Scott breached his fiduciary duties
to the Company and engaged in a scheme to tortiously
interfere with and damage the Company's business.
On October 21, 1996, Mr. Piemont notified the Company of the
termination of his employment agreement. The Company has
retained counsel to advise the Board of Directors respecting
the Company's obligations, if any, under Mr. Piemont's
employment agreement in light of the termination notice
received from Mr. Piemont and the fact that the validity of
the agreement itself is being challenged in the pending
litigation initiated by Drs. Scott and Walls. On November
6, 1996, the plaintiffs and Mr. Corman entered into a
settlement agreement which, subject to court approval, would
result in the dismissal of all claims against Mr. Corman in
conjunction with his resignation as an officer and director.
Because the settlement agreement, among other things,
obligates the Company to pay severance and consulting fees
to Mr. Corman, it was presented to and approved by the Board
of Directors.
To date, the Company estimates that it has incurred costs of
approximately $2.2 million in connection with this pending
litigation. The Company currently does not expect to incur
substantial additional costs in defending this action or in
pursuing its counterclaims. However, the Company
anticipates that any settlements that may be reached between
the plaintiffs and the remaining individual defendants may,
subject to approval by the Board of Directors, result in
additional costs to the Company in amounts not presently
determinable.
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In addition, as of September 30, 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.
(4) CREDIT FACILITIES
Through May 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.
Effective May 31, 1996, the Company entered into new credit
agreements which restructured the existing Acquisition and
Working Capital facilities and which provide the Company up
to $40,000,000 of additional borrowing availability, subject
to certain limitations, 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 (collectively, the
"Credit Facilities") 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 Credit Facilities are due on July 1, 1997.
Interest on loans under the Restructured Facility and the
Overline Facility accrue at the agent bank's prime rate plus
1.5% and 2.0%, respectively, payable quarterly and monthly
in arrears, respectively. Borrowings outstanding on the
Restructured Facility and the Overline Facility as of
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
September 30, 1996 were $69,273,000 and $8,117,000,
respectively.
The Overline Facility prohibits borrowings for purposes
other than working capital requirements, requires compliance
with 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 trade accounts receivable and
contract rights and the common stock of substantially all of
its subsidiaries, and has provided a guaranty from
substantially all of the Company's subsidiaries secured by
the assets of the guarantor 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, of which
10% had vested as of September 30, 1996. A portion of the
remaining warrants may be canceled by repayment of certain
loan principal amounts by certain dates.
(5) DIVESTITURE PROGRAM
In July 1996, following a study of alternatives available to
the Company, the Board of Directors approved a comprehensive
strategic and financial plan to refocus on its core
operations and to divest certain operating units to address
its debt service requirements and improve the enterprise
value of the Company. The Company has since sold certain
assets and identified other assets as non-core assets that
the Company has determined to sell. The Company intends to
sell all non-core assets, and therefore the operating
results of these entities, and the entities divested, have
been shown separately on the accompanying statements of
operations.
Effective September 30, 1996, the Company sold certain
assets of Physicians Planning Group, Inc. ("PPG") and the
common stock of HealthCare Automation, Inc. ("HCA"), its
Maryland capitated clinic operations. Additional assets to
be divested have been specifically identified as the
Company's clinical operations in Florida, New Jersey and
North Carolina, its Preferred Provider Organization (PPO) in
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
North Carolina, its New York-based prepaid health services
plan for Medicaid recipients, and an anesthesia billing
company in North Carolina. As of November 13, 1996, the
Company had signed definitive agreements to divest its New
Jersey-based clinic operations and its North Carolina PPO.
Divestiture activities related to the other assets
identified above are actively in process.
MARYLAND DIVESTITURE
The Company realized a net gain on the sale of PPG and HCA
(included in Gain on divested assets, net in the
accompanying statements of operations), of approximately
$15,342,000 before applicable income taxes. Income tax
expense on the transaction totaled $1,163,000, resulting in
a gain on an after-tax basis of $14,137,000.
SOUTH FLORIDA DIVESTITURE
In the third quarter of 1996, the Company received
additional gross cash proceeds of $2,800,000 as an
adjustment to the original sale price for the sale of 47 of
its south Florida clinics on November 30, 1996. These
proceeds were based on the settlement of the final closing
date balance sheet and were recorded as a gain on the sale
transaction. The Company also realized a gain of $1,290,000
resulting from other non-cash post-closing balance sheet
settlements. Because the disposition occurred within two
years following acquisition of the entities which were
originally accounted for under the pooling-of-interests
method of accounting for business combinations, the
component of the gain applicable to the pooled entities
sold, less applicable income tax expense, is classified as
an extraordinary item in the accompanying consolidated
statements of operations. The gain on the sale of the
entities originally accounted for under the purchase method
of accounting for business combinations, gross of applicable
income taxes, is included in Gain on divested assets, net,
in the accompanying statements of operations.
GOODWILL IMPAIRMENT
During the third quarter of 1996, the Company recognized an
impairment loss (included in Gain on divested assets, net,
in the accompanying statements of operations) of $15,141,000
related to goodwill associated with (i) certain long-lived
assets of entities identified for sale by the Company and
(ii) certain acquired operations.
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PENDING ASSET DISPOSITIONS - In conjunction with the
Company's efforts to sell certain operating units to address
its debt service requirements and improve the enterprise
value of the Company, the carrying amount of the long-lived
assets and identifiable intangibles associated with assets
specifically identified for sale was compared to the
estimated fair value of the assets, less estimated costs to
sell. Fair value was based on the estimated amount at which
the assets could be sold in a current transaction based on
management's evaluations and discussions with the Company's
outside financial advisors. This reevaluation resulted in
impairment losses recognized in the third quarter of 1996 of
$6,200,000 for Better Health Plan, Inc., a New York-based
Medicaid managed care entity acquired in 1995, $1,500,000
for the Company's North Carolina clinics, acquired at
various dates, and $800,000 for the remaining south Florida
clinics, also acquired at various dates.
AHP - The primary underlying factor contributing to the
decision to reevaluate the carrying value of AHP's goodwill
was the uncertainty associated with the time that AHP's
founder and Chief Executive Officer, Dr. Sokolov, may be
able to continue to devote to AHP, and his continuing role
with AHP. Dr. Sokolov is also the Company's Chairman of the
Board. Dr. Sokolov is considered critical to the continued
operations of AHP, and the Company believes that without his
full-time involvement the operations and cash flows of AHP
could decline. The reevaluation resulted in a $6,600,000
write-off of AHP's goodwill balance in the third quarter of
1996. In determining the amount of the impairment loss, the
Company developed its best estimate of operating cash flows
over the remaining business life cycle of AHP based on
earnings history, market conditions and assumptions
reflected in internal operating plans and strategies.
Future cash flows, excluding interest charges, were
discounted using the Company's weighted average cost of
capital. These estimates reflected that the present value
of the future cash flows was not adequate to recover the
existing carrying amount of goodwill. Accordingly, the
goodwill impairment loss was recognized to adjust the
carrying amount to estimated fair value.
COASTAL PHYSICIAN GROUP, INC.
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
INTRODUCTION
In July 1996, following a study of alternatives available to
the Company, the Board of Directors approved a comprehensive
strategic and financial plan to refocus on its core
operations and to divest certain operating units to address
its debt service requirements and improve the enterprise
value of the Company. The Company has since sold certain
assets and identified other assets as non-core assets that
the Company has determined to sell. The Company intends to
sell all non-core assets, and therefore the operating
results of these entities, and the entities divested, have
been shown separately on the accompanying statements of
operations.
The differences shown on the accompanying statements of
operations, relating to the divested and to be divested
entities (for both operating revenue, net, and costs and
expenses), for the three months ended September 30, 1996
versus the three months ended September 30, 1995, and for
the nine months ended September 30, 1996 versus the nine
months ended September 30, 1995, are due primarily to the
divestiture of 47 of the Company's south Florida clinics on
November 30, 1995.
The following discussion relates to the Company's results of
operations, excluding the divested and to be divested
entities, 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 report.
RESULTS OF OPERATIONS
Third Quarter Ended September 30, 1996 Compared to the Third
Quarter Ended September 30, 1995.
Net operating revenue ("operating revenue"), excluding the
operations of the divested and to be divested entities,
decreased $22,164,000, or 17.2%, for the third quarter of
1996 to $106,681,000 from $128,845,000 in the third quarter
of 1995. Higher contract attrition rates throughout 1996 and
less new business development during both the second half of
1995 and the first three quarters of 1996 in the Company's
hospital-based contract management division, as well as
lower net collections per patient visit and reimbursement
regulatory changes experienced by the Company's billing and
accounts receivable management division, were the primary
factors for the decline.
Operating expenses, excluding the operations of the divested
and to be divested entities, increased $2,232,000, or
1.7%, to $132,482,000 in the third quarter of 1996 from
$130,250,000 in the third quarter of 1995. The increase was
due primarily to increased investments in information
technology and telecommunications, the write-off of notes
receivable, and the increased operating expenses associated
with the growth in the number of enrollees in the Company's
health plans in North Carolina and New York. These
increased operating expenses were partially offset by a
reduction in operating expenses due to higher contract
attrition rates throughout 1996 and lower new business
development during both the second half of 1995 and the
first three quarters of 1996 in the Company's hospital-based
contract management division.
Effective September 30, 1996 the Company sold certain assets
of Physicians Planning Group, Inc. ("PPG") and the common
stock of HealthCare Automation, Inc. ("HCA"), its Maryland
capitated clinic operations. The Company realized a net
gain of $15,342,000 on the sale. In addition, the Company
realized an additional gain, before taxes, of $4,090,000
during the third quarter of 1996, on the sale of 47 of the
Company's south Florida clinics on November 30, 1995, due to
post-closing settlements. The Company also recorded
impairment losses related to its goodwill balance for
Advanced Health Plans, Inc. ("AHP"), a California-based
healthcare consulting firm, Better Health Plan, Inc.
("BHP"), a New York-based Medicaid managed care entity, and
several clinics in North Carolina and Florida (See Note 5 of
Notes to Consolidated Financial Statements). The gain on
the sale of PPG, the goodwill impairment losses, and the
portion of the gain relating to the south Florida clinics
acquired under the purchase method of accounting for
business combinations, have been disclosed in the
accompanying statements of operations as Gain on divested
assets, net.
The changes in operating revenue and operating expenses,
excluding the operations of the divested and to be divested
entities, resulted in an operating loss of $25,801,000 for
the third quarter of 1996, compared to an operating loss of
$1,405,000 in the third quarter of 1995. In addition to the
factors noted above, contributing to the higher operating
loss was the increase in physician compensation expense as a
percentage of operating revenue in the Company's hospital-
based contract management division.
Other expenses increased $7,560,000, from $2,566,000 for the
third quarter of 1995 to $10,126,000 for the third quarter
of 1996. The primary reason for this increase was the
addition of $5,472,000 for proxy and related litigation
costs during the third quarter of 1996. In addition,
amortization of debt issuance costs increased $1,465,000.
The increase in amortization of debt issuance costs resulted
from the costs incurred by the Company to restructure its
credit facilities in May 1996. These costs will be fully
amortized by July 1997.
A net provision for income taxes totaling $516,000 was
recorded for the third quarter of 1996, as compared to a
benefit of $1,474,000 for the third quarter of 1995. The
net provision was recorded as a result of the gain on the
sale of PPG and HCA. The Company expects to record no
additional tax expense or benefit, other than due to future
divestitures, until the Company begins to operate profitably
in the future.
Overall, the Company incurred a net loss of $38,455,000 in
the third quarter of 1996 as compared to a net loss of
$3,439,000 in the third quarter of 1995 for the reasons
discussed above.
Weighted average shares outstanding increased 0.7% from
23,691,000 shares in the third quarter of 1995 to 23,862,000
shares in the third quarter of 1996, primarily as a result
of shares issued in connection with the exercise of stock
options and the Company's employee stock purchase plan.
Nine Months Ended September 30, 1996 Compared to the Nine
Months Ended September 30, 1995.
Net operating revenue, excluding the operations of the
divested and to be divested entities, decreased $51,598,000,
or 13.0%, for the nine months ended September 30, 1996 to
$344,021,000 from $395,619,000 for the nine months ended
September 30, 1995. Higher contract attrition rates
throughout 1996 and less new business development during the
second half of 1995 and the first three quarters of 1996 in
the Company's hospital-based contract management division,
as well as lower net collections per patient visit and
reimbursement regulatory changes experienced by the
Company's billing and accounts receivable management
division, were the primary factors for the decline.
Operating expenses, excluding the operations of the divested
and to be divested entities, increased $4,412,000, or 1.1%,
to $397,131,000 for the nine months ended September 30, 1996
from $392,719,000 for the nine months ended September 30,
1995. The increase was due primarily to increased
investments in information technology, the write-off of
notes receivable, and increased expenses associated with the
growth in the number of enrollees in each of the Company's
health plans in North Carolina and New York. These
increased operating expenses were partially offset by a
reduction in operating expenses due to higher contract
attrition rates throughout 1996 and lower new business
development during both the second half of 1995 and the
first three quarters of 1996 in the Company's hospital-based
contract management division.
Effective September 30, 1996, the Company sold certain
assets of PPG and the common stock of HCA, its Maryland
capitated clinic operations. The Company realized a net
gain of $15,342,000 on the sale. In addition, the Company
realized an additional gain, before taxes, of $4,090,000
during the third quarter of 1996, on the sale of 47 of the
Company's south Florida clinics on November 30, 1995, due to
post-closing settlements. The Company also recorded
impairment losses related to its goodwill balance for AHP,
BHP, and several clinics in North Carolina and Florida (See
Note 5 of Notes to Consolidated Financial Statements). The
gain on the sale of PPG, the goodwill impairment losses, and
the portion of the gain relating to the south Florida
clinics acquired under the purchase method of accounting for
business combinations, have been disclosed in the
accompanying statements of operations as Gain on divested
assets, net.
The changes in operating revenue and operating expenses,
excluding the operations of the divested and to be divested
entities, resulted in an operating loss of $53,110,000 for
the nine months ended September 30, 1996, compared to
operating income of $2,900,000 for the nine months ended
September 30, 1995. In addition to the factors noted above,
contributing to the operating loss was the increase in
physician compensation expense as a percentage of operating
revenue in the Company's hospital-based contract management
division.
Other expenses increased $6,979,000, from $7,431,000 for the
nine months ended September 30, 1995 to $14,410,000 for the
nine months ended September 30, 1996. The primary reason for
this increase was the addition of $5,472,000 for proxy and
related litigation costs during the first nine months of
1996. In addition, interest expense increased $1,073,000 and
amortization expense relating to debt issuance costs
increased $1,945,000. The increase in interest expense
resulted primarily from additional borrowings required to
fund operating activities, while the increase in
amortization expense related to debt issuance costs resulted
from the costs incurred by the Company to restructure its
credit facilities in May 1996. These debt issue costs will
be fully amortized by July 1997. These increases were
offset by a decline in other, net expenses of $1,705,000
primarily due to the absence of acquisition and related
expenses in 1996.
A provision for income taxes totaling $516,000 was recorded
for the nine months ended September 30, 1996, as compared to
a benefit of $3,241,000 for the nine months ended September
30, 1995. The provision was recorded as a result of the gain
on the sale of PPG and HCA. The Company expects to record
no tax expense or benefit, other than due to future
divestitures, until the Company begins to operate profitably
in the future.
Overall, the Company incurred a net loss of $75,044,000 for
the nine months ended September 30, 1996 compared to a net
loss of $7,564,000 for the nine months ended September 30,
1995 for the reasons discussed above.
Weighted average shares outstanding increased 0.9% from
23,630,000 shares for the nine months ended September 30,
1995 to 23,832,000 shares for the nine months ended
September 30, 1996, primarily as a result of shares issued
in connection with both the exercise of stock options and
the Company's employee stock purchase plan.
LIQUIDITY AND CAPITAL RESOURCES
Effective May 31, 1996, the Company entered into new credit
agreements which restructured its existing Acquisition and
Working Capital facilities and provided the Company up to
$40,000,000 of additional borrowing availability, subject to
certain limitations, 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 (collectively the "Credit
Facilities") 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 Credit Facilities 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 quarterly and
monthly in arrears, respectively. Borrowings outstanding on
the Restructured Facility and the Overline Facility as of
September 30, 1996 were $69,273,000 and $8,117,000,
respectively.
The Overline Facility prohibits borrowings for purposes
other than working capital requirements, requires compliance
with 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 trade accounts receivable and
contract rights and the common stock of substantially all of
its subsidiaries, and has provided a guaranty from
substantially all of the Company's subsidiaries secured by
the assets of the guarantor 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, of which
10% had vested as of September 30, 1996. A portion of the
remaining warrants may be canceled by repayment of certain
loan principal amounts by certain dates.
Net cash used in operating activities for the nine months
ended September 30, 1996 was $25,295,000 as compared to net
cash used in operating activities for the nine months ended
September 30, 1995 of $20,682,000. The net loss of
$75,044,000 for the nine months ended September 30, 1996 was
the primary reason for the significant increase in the use
of cash.
On March 19, 1996, the Board of Directors approved the
implementation of a management action plan, as subsequently
modified from time to time (the "Management Action Plan"),
that provides for (i) a continuing review of all aspects of
the Company's operations and business units and (ii) the
implementation of actions to improve the cash flow and
financial results of the Company as a whole and to improve
the contribution of each business unit to the Company's
overall financial and strategic objectives. On July 8,
1996, pursuant to the Management Action Plan, and following
a study of alternatives available to the Company, the Board
of Directors approved a comprehensive strategic and
financial plan (the "Strategic and Financial Plan," which
together with the Management Action Plan, comprises the
"Comprehensive Business Plan") to maximize shareholder
value.
The Company is required to make principal repayments under
the Credit Facilities of $40 million by January 2, 1997.
The Comprehensive Business Plan provides for the divestiture
of certain assets to generate the funds required to retire
bank indebtedness. The Company sold certain assets of PPG
and the common stock of HCA effective September 30, 1996,
from which approximately $13.8 million in cash proceeds were
used to reduce bank indebtedness. In addition, as of
November 13, 1996 the Company had signed definitive
agreements to sell certain assets of two other subsidiaries
of the Company, from which approximately $20 million in net
cash proceeds are expected to be available to further reduce
bank indebtedness. By continuing its divestiture program,
the Company expects to achieve the required $40 million
reduction in indebtedness by January 2, 1997. While the
Company has identified specific non-core assets that it has
decided to sell, the Company has also engaged the investment
banking firm of Smith Barney, Inc. as the Company's lead
financial advisor to assist Coastal in evaluating a possible
sale of the entire Company.
The Company currently anticipates that through the continued
execution of its asset divestiture program, it will be able
to reduce the outstanding principal amount under its Credit
Facilities by $40 million by January 2, 1997. Even if the
Company satisfies this debt reduction obligation, the
Company's available borrowings under the Overline Facility
will be reduced to $10 million on January 2, 1997. These
available borrowings, together with cash anticipated to be
generated from operations and further divestitures, may not
be adequate to satisfy the Company's anticipated demands and
commitments for cash over the next twelve months unless the
Company is able to achieve other objectives of the
Comprehensive Business Plan. If the Company is unable to
achieve these objectives, the Company would be required to
seek alternative sources of financing. There can be no
assurance that alternative sources of financing would be
available, or that, if available, such financing could be
obtained on terms favorable to the Company.
TRENDS AND UNCERTAINTIES
The Company experienced a decline in operating revenue for
the first nine months of 1996 as compared to the first nine
months of 1995 when excluding revenues related to recent
dispositions and acquisitions. The decline was primarily
attributable to higher contract attrition rates during 1996
and lower new business development during both the second
half of 1995 and the first three quarters of 1996 in the
hospital-based contract management division, as well as
lower net collections per patient visit and reimbursement
regulatory changes experienced by the Company's billing and
accounts receivable management division in 1996. As a
result, the Company's accounts receivable balance has
declined, reflecting both the decline in the number of
contracts and the effect of the Company's aggressive
collection efforts. The accounts receivable of the hospital-
based contract management division represent a large part of
the Company's borrowing base. If this balance continues to
decline and the Company is unable to reduce bank debt
proportionately, the Company will likely experience a
reduction in borrowing availability under the Overline
Facility.
Many of the terminated contracts in the hospital-based
contract management division over the past nine months were
unprofitable. In addition to terminating many unprofitable
contracts, this division has renegotiated a number of other
contracts to provide a fair profit margin going forward.
These initiatives are expected, over time, to result in
improvements in operating results and cash flow.
The Company believes successful competition in the health
care industry requires information systems to rapidly
provide a broad range of data related to both clinical and
financial aspects of medical practice. The Company has
committed to substantial investments over the next ten years
in information technology related to clinical management
information systems, computerized billing operations, and
its own internal financial reporting systems. The Company
is currently re-evaluating its needs and its ability to
fulfill these commitments.
The Company experienced a decline in operating margins
during the first nine months of 1996 compared to the first
nine months of 1995. The operating margin for the nine
months ended September 30, 1996 was negative 14.2% versus a
negative 0.5% for the same period in the prior year. These
operating margins are expected to improve if the Company
achieves the objectives of the Comprehensive Business Plan.
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
efforts and resources to improvements in existing
operations, the execution of certain divestitures to meet
debt obligations, as well as a possible sale of the entire
Company. This strategy is being pursued 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 principal
payment requirements of the Credit Facilities.
Coastal's management team is pursuing and evaluating all
strategic alternatives to maximize shareholder value. There
can be no assurance that these efforts will lead to any
proposed transaction, or that any proposed transaction,
which would be subject to approval of the Board of
Directors, would be consummated.
Forward-looking Information or Statements: Except for
statements of historical fact, statements made herein are
forward-looking in nature and are inherently subject to
uncertainties. The actual results of the Company may differ
materially from those reflected in the forward-looking
statements based on a number of important risk factors,
including, but not limited to: receipt of sufficient
proceeds from divested assets, and the timing of any
divestitures; the level and timing of improvements in the
operations of the Company's core businesses; the possibility
of poor accounts receivable collection and/or reimbursement
experience; the possibility of increased medical expenses
due to increased utilization; the possibility that the
Company may not be able to improve operations or execute its
divestiture strategy as planned; the inability to obtain
continued and/or additional necessary working capital
financing as needed; and other important factors disclosed
from time to time in the Company's Form 10-K, Form 10-Q and
other Securities and Exchange Commission filings.
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings
In July 1996, Drs. Steven M. Scott ("Dr. Scott") and Bertram
E. Walls, directors and shareholders of the Company,
commenced, on their own behalf and derivatively on behalf of
the Company, an action against the Company and Joseph G.
Piemont ("Mr. Piemont"), the Company's Chief Executive
Officer and President (until he terminated his employment
agreement on October 21, 1996), Jacque J. Sokolov M.D. ("Dr.
Sokolov"), Chairman of the Board of Directors and the Chief
Executive Officer of Advanced Health Plans, Inc., a
subsidiary of the Company, and Stephen D. Corman ("Mr.
Corman"), a director and the Company's Chief Financial
Officer (until his resignation from his position with the
Company on November 6, 1996). The plaintiffs alleged, among
other things, that certain members of the Board breached
their fiduciary duties and wasted corporate assets by
removing Dr. Scott from his position as President and Chief
Executive Officer of the Company and by approving the
Company's entry into an employment agreement with Mr.
Piemont. The Company filed an answer and counterclaims in
response to the action. The counterclaims alleged, among
other things, that Dr. Scott breached his fiduciary duties
to the Company and engaged in a scheme to tortiously
interfere with and damage the Company's business.
On October 21, 1996, Mr. Piemont notified the Company of the
termination of his employment agreement. The Company has
retained counsel to advise the Board of Directors respecting
the Company's obligations, if any, under Mr. Piemont's
employment agreement in light of the termination notice
received from Mr. Piemont and the fact that the validity of
the agreement itself is being challenged in the pending
litigation initiated by Drs. Scott and Walls. On November
6, 1996, the plaintiffs and Mr. Corman entered into a
settlement agreement which, subject to court approval, would
result in the dismissal of all claims against Mr. Corman in
conjunction with his resignation as an officer and director.
Because the settlement agreement, among other things,
obligates the Company to pay severance and consulting fees
to Mr. Corman, it was presented to and approved by the Board
of Directors.
To date, the Company estimates that it has incurred costs of
approximately $2.2 million in connection with this pending
litigation. The Company currently does not expect to incur
substantial additional costs in defending this action or in
pursuing its counterclaims. However, the Company
anticipates that any settlements that may be reached between
the plaintiffs and the remaining individual defendants may,
subject to approval by the Board of Directors, result in
additional costs to the Company in amounts not presently
determinable.
Item 4. - Submission of Matters to a Vote of Security
Holders
The Annual Meeting of Shareholders of the Company was held
on September 27, 1996. At such meeting the following
members were nominated for election to the Board of
Directors:
NUMBER OF SHARES VOTED
FOR WITHHOLD
Norman H. Chenven, M.D.* 20,414,101 130,888
Mitchell W. Berger* 10,825,791 118,421
Henry J. Murphy* 10,825,799 118,413
Robert V. Hatcher 9,588,002 130,888
Joseph G. Piemont 9,587,113 130,888
* - Members elected to the Board of Directors.
The following director's terms of office continued after the
meeting:
Jacque J. Sokolov, M.D.
Steven M. Scott, M.D.
Bertram E. Walls, M.D.
Stephen D. Corman
John P. Mahoney, M.D.
John A. Hemingway
On October 24, 1996, Dr. Chenven resigned as a member of the
Board of Directors and was replaced by Mr. Eugene F.
Dauchert, Jr. on October 29, 1996. On November 6, 1996, Mr.
Corman resigned as a member of the Board of Directors and
has not yet been replaced. On November 8, 1996, Mr.
Hemingway resigned as a member of the Board of Directors and
has not yet been replaced.
There were three other proposals voted upon at the Annual
Meeting. A summary of these proposals and the votes cast
are as follows:
NUMBER OF SHARES VOTED
FOR AGAINST ABSTAIN
1. To adopt the Board's
resolution regarding the
Corporation's Comprehensive
Business Plan 9,727,274 10,824,116 111,712
2. To adopt Steven M. Scott
M.D.'s proposal to establish
a maximize shareholder value
committee of independent non-
management directors 10,935,487 9,616,221 111,395
3. To adopt the proposal to
ratify the appointment of
KPMG Peat Marwick LLP as the
Company's independent certi-
fied public accountants for
the fiscal year ending
December 31, 1996 20,193,829 201,687
267,586
Item 5. - Other Information
The Board of Directors announced on October 24, 1996 that it
had appointed Henry J. Murphy, a Board member, as interim
President and Chief Executive Officer, replacing Joseph G.
Piemont, who provided the Company with a notice of
termination of employment, effective October 21, 1996. A
committee led by the Company's Chairman, Jacque J. Sokolov,
M.D. and Steven M. Scott, M.D., a Board member, has been
formed to search for a new, permanent President and Chief
Executive Officer.
On November 6, 1996, the Company announced that Stephen D.
Corman, the Company's Chief Financial Officer and member of
its Board of Directors since 1991, had resigned as an
officer and director. His resignation was related to a
settlement between the plaintiffs and Mr. Corman in a
lawsuit against the Company, Mr. Corman and others initiated
in July 1996 by Steven M. Scott, M.D. and Bertram E. Walls,
M.D., both of whom are directors and shareholders of the
Company. The Company named Timothy W. Trost to serve as
Chief Financial Officer following Mr. Corman's resignation.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter for
which this report is filed:
1. On July 19, 1996, the Company filed a report on Form 8-K
dated July 9, 1996, filing under Item 5 thereof. The report
disclosed that on July 9, 1996, Drs. Steven M. Scott and
Bertram E. Walls filed, on their own behalf, and
derivatively on behalf of the Company, an action against the
Company and Dr. Jacque J. Sokolov and Messrs. Joseph G.
Piemont and Stephen D. Corman. The plaintiffs alleged,
among other things, that certain members of the Board of
Directors breached their fiduciary duties and wasted
corporate assets by removing Dr. Scott from his position as
President and Chief Executive Officer of the Company and by
approving the entry by the Company into an employment
agreement with Mr. Piemont.
2. On July 29, 1996, the Company filed a report on Form 8-K
dated July 29, 1996, filing under Item 5 thereof. The
report disclosed that on July 29, 1996, the Company filed an
answer and counterclaims in response to the action brought
by Drs. Scott and Walls referred to in 1. above. The
counterclaims alleged, among other things, that Dr. Scott
breached his fiduciary duties to the Company and engaged in
a scheme to tortiously interfere with and damage the
business of the Company.
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: November 14, 1996 By: /S/TIMOTHY W. TROST
Timothy W. Trost
Executive Vice President
and Chief Financial
Officer
Date: November 14, 1996 By: /S/W. RANDALL DICKERSON
W. Randall Dickerson
Vice President, Corporate
Controller and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,205,000
<SECURITIES> 9,227,000
<RECEIVABLES> 111,320,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 159,334,000
<PP&E> 21,901,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 238,266,000
<CURRENT-LIABILITIES> 162,943,000
<BONDS> 0
0
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<COMMON> 239,000
<OTHER-SE> 72,020,000
<TOTAL-LIABILITY-AND-EQUITY> 238,266,000
<SALES> 436,577,000
<TOTAL-REVENUES> 438,357,000
<CGS> 0
<TOTAL-COSTS> 500,339,000
<OTHER-EXPENSES> 7,837,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,573,000
<INCOME-PRETAX> (76,392,000)
<INCOME-TAX> 516,000
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 1,864,000
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<NET-INCOME> (75,044,000)
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