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, 1997
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, 1997 there were outstanding 24,384,214
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, 1996 and March 31, 1997 (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 2. Changes in Securities
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
1997 31,
1996
Assets (unaudite
d)
Current assets:
Cash and cash equivalents 21,136 10,239
Marketable securities 4,632 7,020
Trade accounts receivable, net 80,343 87,410
Accounts receivable, other 10,831 11,187
Related party receivable 10,000 ---
Refundable income taxes --- 2,498
Prepaid expenses and other current 9,493 10,923
assets
Total current assets 136,435 129,277
Property and equipment, at cost, less
accumulated depreciation 17,476 19,041
Excess of cost over fair value of net
assets acquired, net 19,283 19,305
Other assets 14,047 14,218
Total assets 187,241 181,841
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities and other short-term
borrowings 80,870 71,130
Accounts payable 43,329 46,307
Income taxes payable 3,693 2,211
Accrued physicians fees and medical 29,936 33,709
costs
Accrued expenses 18,833 20,182
Total current liabilities 176,661 173,539
Long-term debt, excluding current 4,352 4,799
maturities
Total liabilities 181,013 178,338
Shareholders' equity:
Series A convertible preferred stock
$.01 par
value; shares authorized 48; 1 ---
shares issued
and outstanding 46 and 0,
respectively
Series B convertible preferred stock
$.01 par
value; shares authorized 33; --- ---
shares issued
and outstanding 33 and 0,
respectively
Series C convertible preferred stock
$.01 par
value; shares authorized 1,200;
shares 11 ---
issued and outstanding 109 and 0,
respectively
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 244 241
outstanding
24,144 and 24,126, respectively
Additional paid-in capital 157,815 144,070
Common stock warrants 1,518 987
Retained earnings (accumulated deficit) (153,497) (141,931)
Unrealized appreciation of available-
for-sale securities 136 136
Total shareholders' equity 6,228 3,503
Total liabilities and shareholders' 187,241 181,841
equity
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,
1997 1996
Operating revenue, net 124,714 152,734
Costs and expenses:
Physician and other provider services 94,644 113,565
Medical support services 13,341 24,177
Selling, general and administrative 25,029 24,901
Total costs and expenses 133,014 162,643
Operating loss (8,300) (9,909)
Other income (expense):
Interest expense (3,843) (2,103)
Interest income 326 125
Other, net 251 157
Total other expense (3,266) (1,821)
Loss before income taxes (11,566) (11,730)
Benefit for income taxes --- ---
Net loss (11,566) (11,730)
Net loss per share (0.48) (0.49)
Weighted average number of shares
outstanding 24,129 23,791
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,
1997 1996
Net cash used in operating activities (1,599) (10,728)
Cash flows from investing activities:
Sales of marketable securities and
investments, net 2,388 4,873
Purchases of property and equipment, net (115) (782)
Disposition of subsidiaries, net of
cash disposed 900 (322)
Net cash provided by
investing 3,173 3,769
activities
Cash flows from financing activities:
Repayments of long-term debt (522) (1,290)
Borrowings on long-term debt 9,815 19,165
Net proceeds from issuances of common
stock 30 251
Net cash provided by
financing activities 9,323 18,126
Net increase in cash and cash
equivalents 10,897 11,167
Cash and cash equivalents at beginning
of period 10,239 8,147
Cash and cash equivalents at end of
period 21,136 19,314
Supplemental disclosures of cash flow
information:
Cash payments (refunds) during
the period for:
Interest 2,050 1,673
Income taxes (3,979) (12,155)
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
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, 1996. 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, 1997.
(2) CAPITAL STOCK
On June 9, Dr. Steven M. Scott, Coastal's Chief Executive
Officer, a director, and largest shareholder, invested $10
million in cash in the Company and received 1,000,000 shares
of Series C Convertible Preferred Stock. The Series C
Convertible Preferred Stock, subject to approval by the
Company's common stockholders, is convertible into
10,000,000 shares of common stock.
COASTAL PHYSICIAN GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER ENDED MARCH 31, 1997 COMPARED TO THE FIRST
QUARTER ENDED MARCH 31, 1996.
Net operating revenue ("operating revenue") decreased 18.3%
for the first quarter of 1997 to $124,714,000 from
$152,734,000 in the first quarter of 1996. The decrease in
operating revenue due to dispositions completed since the
first quarter of 1996 for which prior periods' results were
not restated was approximately $14,461,000 or 9.4%. This
decrease was primarily due to the sale of certain assets of
Physicians Planning Group, Inc. ("PPG") and the common stock
of Healthcare Automation, Inc. ("HCA") effective September
30, 1996, the sale of MedCost, Inc. ("MedCost") effective
November 22, 1996 as well as the sale of the HealthNet
Medical Group division of Physicians Planning Group, Inc.
("HealthNet") effective November 30, 1996. Operating
revenue not related to disposed entities decreased
approximately $13,559,000 or 8.9%. Contract attrition and
less new business development throughout 1996 in the
Company's hospital-based contract management division were
significant factors that reduced operating revenue in the
first quarter of 1997 as compared to the first quarter of
1996 when disposition-related revenues are excluded. These
declines in operating revenue were partially offset by
increased operating revenue associated with the growth in
the number of enrollees in each of the Company's health
plans in New York, North Carolina and Florida. This decline
in operating revenue is likely to continue during 1997 given
the Company's strategy to divest of certain non-core assets
that the Company has identified.
Operating expenses decreased 18.2% to $133,014,000 in the
first quarter of 1997 from $162,643,000 in the first quarter
of 1996. The decrease in operating expenses due to
dispositions completed since the first quarter of 1996 for
which prior periods' results were not restated was
approximately $13,453,000 or 8.3%. This decrease was
primarily due to the sale of certain assets mentioned above.
Operating expenses not related to disposed entities
decreased approximately $16,176,000 or 9.9%. This change
was a function of decreases due to contract attrition and
lower new business development throughout 1996 (as discussed
above), offset by increased expenses associated with the
growth in the number of enrollees in each of the Company's
health plans in New York, North Carolina and Florida, and
increased investments in information technology.
The changes in operating revenue and operating expenses
described above resulted in an operating loss of $8,300,000
for the first quarter of 1997, compared to an operating loss
of $9,909,000 for the first quarter of 1996. In addition to
the factors noted above, contributing to the operating loss
was the increase in physician compensation expense as a
percentage of net revenues in the Company's hospital-based
contract management division.
The Company experienced similar operating margins during the
first three months of 1997 compared to the first three
months of 1996. The operating margin for the three months
ended March 31, 1997 was negative 6.7% versus a negative
6.5% for the same period in the prior year. These operating
margins are expected to improve to the extent the Company
achieves the objectives of its comprehensive strategic and
financial plan.
Other expenses increased $1,445,000, or 79.4%, for the first
quarter of 1997 to $3,266,000 from $1,821,000 in the first
quarter of 1996. The increase is primarily due to an
increase in interest expense resulting primarily from
additional borrowings required to fund operating losses, as
well as higher interest rates paid on the increased
borrowings.
There was no provision for income taxes recorded for the
first quarter of 1997 or 1996. The Company expects to
record no tax expense or benefit, other than as a result of
potential asset dispositions, until the Company returns to
profitability in the future.
Overall, the Company incurred a net loss of $11,566,000 in
the first quarter of 1997 as compared to a net loss of
$11,730,000 in the first quarter of 1996 for the reasons
discussed above.
Weighted average shares outstanding increased 0.1% from
23,791,000 shares in the first quarter of 1996 to 24,129,000
shares in the second quarter of 1996, primarily as a result
of shares issued to Dr. Scott in satisfaction of the
Company's obligation to reimburse him for certain proxy
solicitation expenses, as well as shares issued in
connection with Company's employee stock purchase plan.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three months
ended March 31, 1997 was $1,599,000 as compared to
$10,728,000 for the three months ended March 31, 1996. The
net loss for the three months ended March 31, 1997 was
$11,566,000 as compared to a net loss of $11,730,000 for the
same period in 1996. The decline in the net cash used in
operating activities is primarily due to a decline in the
accounts receivable balances, due in part to both increased
collection efforts and increased valuation reserves.
Borrowings on long-term debt for the three months ended
March 31, 1997 was $9,815,000 as compared to $19,165,000 for
the three months ended March 31, 1996. The borrowings
during the first quarter of 1997 consisted of advances
received under the Company's previous credit agreements and
occurred prior to the Company's default under its Credit
Facilities noted below.
On May 29, 1996, the Company entered into credit agreements
which restructured its existing credit facilities and
provided the Company with up to $40 million of additional
borrowing availability. The facilities required total
principal payments of at least $40 million by January 2,
1997, which were made by the Company, at which time the
availability of borrowings under the facilities declined to
$10 million. The facilities also required an amendment to
be finalized by January 15, 1997 which would have
established financial covenants for the period subsequent to
February 1997. This amendment did not occur by January 15,
1997 and therefore outstanding amounts, originally due on
July 1, 1997, became due on February 28, 1997. From
February 28, 1997 through June 10, 1997, the Company was in
default on these obligations, but accelerated payment was
not required by the lenders. From May 29, 1996 through June
10, 1997, interest on loans under the facilities accrued at
rates ranging from 1.5% to 4.5% over a designated prime
rate. Borrowings outstanding under these facilities as of
March 31, 1997 were $77.6 million.
On June 6, 1997, the Company entered into a series of sale
and subservicing agreements (the "Sale Agreements") with
various subsidiaries of National Century Financial
Enterprises, Inc. ("NCFE"). The Sale Agreements provide for
accounts receivable purchase commitments totaling $151
million for the purchase of the Company's healthcare
receivables from third party payors that meet specified
eligibility requirements. Certain Sale Agreements create
facilities for the purchase of up to $36 million of
receivables and terminate on July 1, 1998. Another Sale
Agreement creates a facility for the purchase of up to $115
million of receivables and terminates on June 1, 2000.
After taking into account required reserves and
administrative fees, the maximum amount of funding available
under the Sale Agreements at any one time is approximately
$125 million. Pursuant to the Sale Agreement, the Company
pays a program fee ranging from approximately 10.97% to
approximately 12.50% per annum on the outstanding amount of
uncollected purchased receivables.
Pursuant to a separate loan and security agreement, an
affiliate of NCFE has agreed to provide the Company with a
revolving line of credit of up to $15 million. Interest on
outstanding amounts under this line of credit is payable
monthly at prime plus 4%. The availability under the line
of credit declines based on the Company's receipt of net
proceeds in excess of $10 million from the sale of specified
assets, and the line of credit expires June 15, 1998. The
line of credit is secured by substantially all of the assets
of Coastal Physician Group, Inc., including pledges of the
common stock of each of its subsidiaries.
On June 10, 1997, the Company used proceeds of approximately
$82 million from sales of its existing receivables and
rights to future receivables to repay outstanding balances
under its previous credit facilities which terminated on
that date. All collateral held by the lenders under those
facilities was released. After repayment, the Company had
access to approximately $40 million of cash from potential
additional sales of its existing receivables and rights to
future receivables and borrowing availability under the line
of credit.
On June 9, Dr. Steven M. Scott, Coastal's Chief Executive
Officer, a director, and largest shareholder, invested $10
million in cash in the Company and received 1,000,000 shares
of Series C Convertible Preferred Stock. The Series C
Convertible Preferred Stock, subject to approval by the
Company's common stockholders, is convertible into
10,000,000 shares of common stock.
The Company expects to satisfy its anticipated demands and
commitments for cash in the next twelve months from the
additional cash received from the sale of stock discussed
above, amounts available under the various agreements with
NCFE discussed above, the sale of certain non-core assets
that the Company has identified, as well as a reduction in
cash used in operations.
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
operational efforts; the possibility of poor accounts
receivable generation, 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; 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 2. - Changes in Securities
In January 1997, pursuant to a reimbursement agreement dated
December 31, 1996 between the Company and Dr. Scott, the
Company issued 226,690 shares of common stock and 32,739
shares of Series B Convertible Preferred Stock ("Series B
Preferred") to Dr. Scott in satisfaction of the Company's
obligation to reimburse him for certain proxy solicitation
expenses totaling $1,662,278.
In January 1997, the Company, Dr. Scott, and Dr. Bertram E.
Walls, a director, entered into a dismissal agreement with
respect to certain litigation whereby the Company, with
court approval, agreed to reimburse Dr. Scott and Dr. Walls
for legal fees and expenses totaling $1,657,208 incurred by
them in the litigation by issuing shares of Series A
Convertible Preferred Stock ("Series A Preferred") to Dr.
Scott and Dr. Walls in satisfaction of the Company's
obligation. The Company has issued a total of 46,033 shares
of Series A Preferred in payment of the aggregate amount of
fees and expenses incurred by Dr. Scott and Dr. Walls.
The Series A Preferred and Series B Preferred will become
convertible into common stock at an initial conversion rate
of ten shares of common stock for each share of Series A
Preferred or Series B Preferred, subject to approval by the
Company's common shareholders.
These transactions were not registered under the Securities
Act pursuant to the exemption provided by Section 4(2)
thereof for transactions not involving any public offering.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter for
which this report is filed:
1. On February 5, 1997, the Company filed a report on Form
8-K dated January 21, 1997, filing under Item 5 thereof.
The report disclosed that pursuant to a reimbursement
agreement dated December 31, 1996 between the Company and
Dr. Scott, the Company issued 226,690 shares of common stock
and 32,739 shares of Series B Convertible Preferred Stock to
Dr. Scott in satisfaction of the Company's obligation to
reimburse Dr. Scott for certain proxy solicitation expenses.
In addition, the report disclosed that the Company, Dr.
Scott, Bertram E. Walls, M.D., a Director, and Joseph G.
Piemont, the former President and Chief Operating Officer of
the Company, entered into a Release and Settlement Agreement
on January 21, 1997 with respect to the litigation styled
Steven M. Scott, M.D. and Bertram E. Walls, M.D. on their
own behalf and on behalf of Coastal Physician Group, Inc. v.
Jacque Jenning Sokolov, Joseph G. Piemont, Stephen D. Corman
and Coastal Physician Group, Inc. The report also disclosed
that the Company, Dr. Scott and Dr. Walls entered into a
Dismissal Agreement as of January 21, 1997, with respect to
the lawsuit mentioned above. Under the Dismissal Agreement,
Dr. Scott and Dr. Walls, as plaintiffs, agreed to file a
dismissal without prejudice of all remaining claims asserted
by them in the litigation, and the Company agreed to file a
dismissal without prejudice of all claims asserted by the
Company against Dr. Scott in the litigation. In addition,
under the Dismissal Agreement, the Company agreed to
reimburse Dr. Scott and Dr. Walls for legal fees and
expenses incurred by them in the litigation. The Company,
Dr. Scott and Dr. Walls, with the approval of the court,
agreed that reimbursement would be made by issuing shares of
Series A Convertible Preferred Stock to Dr. Scott and Dr.
Walls in satisfaction of the Company's obligation.
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 13, 1997 By: /S/W. RANDALL DICKERSON
W. Randall Dickerson
Executive Vice President
and Chief Financial
Officer
Date: June 13, 1997 By: /S/MARY ANNE Z. WINGERT
Mary Anne Z. Wingert
Vice President, Corporate
Controller and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING BALANCE SHEET AS OF MARCH 31, 1997 AND STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 21,136,000
<SECURITIES> 4,632,000
<RECEIVABLES> 91,174,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 136,435,000
<PP&E> 17,476,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 187,241,000
<CURRENT-LIABILITIES> 80,870,000
<BONDS> 0
0
0
<COMMON> 244,000
<OTHER-SE> 5,984,000
<TOTAL-LIABILITY-AND-EQUITY> 187,241,000
<SALES> 124,714,000
<TOTAL-REVENUES> 124,714,000
<CGS> 0
<TOTAL-COSTS> 133,014,000
<OTHER-EXPENSES> (577,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,843,000
<INCOME-PRETAX> (11,566,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,566,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,566,000)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> 0
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