SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) MARCH 27,
1998(March 18, 1998)
COASTAL PHYSICIAN GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 001-13460 56-1379244
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
2828 CROASDAILE DRIVE, DURHAM, NC 27705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (919)383-0355
N/A
(Former name or former address, if changed since last report)
ITEM 2. - ACQUISITION OR DISPOSITION OF ASSETS
On March 18, 1998, Coastal Physician Group, Inc. (the "Company")
completed the sale of Doctors Health Plan, Inc.("Doctors Health
Plan") to DHP Holdings, LLC (the "Purchaser"). The Purchaser is a
privately held limited liability company which is controlled by
Steven M. Scott, M.D., the Chairman and Chief Executive Officer
of the Company. The Purchaser acquired all of the outstanding
stock of Doctors Health Plan in a transaction which is effective
as of January 1, 1998 for financial reporting purposes.
Doctors Health Plan is a commercial Health Maintenance
Organization licensed to operate in the State of North Carolina
and certain counties in South Carolina with approximately 41,000
members. Doctors Health Plan experienced substantial growth in
membership in 1997 and reported revenues of $32,872,000 for 1997,
but also reported losses of $11,125,000 for the 1997 calendar
year in its annual statement filed with the North Carolina
Department of Insurance. In addition, Doctors Health Plan
reported a loss of $994,000 on revenues of $5,045,000 for January
1998 in its monthly statement filed with the North Carolina
Department of Insurance. As a result of these losses, the Company
was required to make significant capital contributions to Doctors
Health Plan in 1997 and in 1998 prior to its sale, and the
Company anticipated that substantial additional capital
contributions would be required during the balance of 1998.
Doctors Health Plan was the subject of a Market Practices
Examination as of October 22, 1997 conducted by representatives
of the North Carolina Department of Insurance that was finalized
in February 1998. The examination disclosed 51 regulatory
violations and resulted in a fine of $500,000 and the requirement
that Doctors Health Plan make an additional capital deposit of
One Million Dollars with the North Carolina Commissioner of
Insurance. The obligation to pay the fine has been deferred by
the North Carolina Commissoner of Insurance and will be the
responsibility of Doctors Health Plan and the Purchaser after
closing.
After a thorough review of the operations of Doctors Health Plan
and the anticipated funding that would likely be required in the
balance of 1998, the Company determined that the best course of
action was to divest the asset. The Company retained the
investment banking firm of Advest, Inc. to advise the Company, to
assist in completing the sale and to render a fairness opinion
regarding the financial aspects of the transaction. The purchase
price was determined by negotiation between the Company and
Purchaser, and Advest, Inc. advised the Company on the fairness
of financial aspects of the transaction.
The North Carolina Commissioner of Insurance issued an order
dated March 11, 1998 exempting the transfer from the provisions
of North Carolina law that pertain to acquisition of control of a
domestic insurer. This order required the Company to complete the
transaction within thirty days and to convert to equity a
$1,100,000 loan made by the Company to Doctors Health Plan on
March 2, 1998.
Immediately prior to the transaction the Company made an
additional equity contribution required by regulatory authorities
in the amount of Nine Hundred Ninety-Three Thousand Five Hundred
Thirty-Two Dollars ($993,532) to Doctors Health Plan. The
Purchase Price of Five Million ($5,000,000) was increased to Five
Million Nine Hundred Ninety Three Thousand Five Hundred Thirty-
Two Dollars ($5,993,532) to take into account this equity
contribution. This Purchase Price was paid Nine Hundred Ninety-
three Thousand Five Hundred Thirty-Two Dollars ($993,532) in
cash, with the balance paid pursuant to a Five Million Dollar
($5,000,000) promissory note (the "Note") due and payable by
March 28, 1998. If the Note is not paid by March 28, 1998, the
Note will bear interest after March 28, 1998 at the rate of
twelve percent (12%) per annum until paid. If the Note is not
paid in full within the earlier of (i) ninety (90) days from
March 18, 1998 or (ii) forty-five (45) days after the Company
gives Purchaser notice that it intends to accept a Strike Price
(as defined below), Purchaser has agreed to provide collateral to
secure the Note.
For a period of twelve (12) months from the closing, the Company
has the right to market and sell Doctors Health Plan to potential
third party purchasers. If the Company locates a third party
purchaser during the twelve(12) month period who is willing to
purchase Doctors Health Plan at a price that exceeds the Strike
Price, then Coastal may elect to have the sale take place. If the
Company elects to sell to the third party, the Purchaser has the
right to either (i) pay to the Company an amount equal to the
amount that would have been received by the Company as a result
of the sale to the third party or (ii) agree to consummate a
closing and sale to the third party purchaser. The Strike Price
is a price that will yield net proceeds of the sale (after
payment of the costs to market and sell to a third party) in an
amount equal to the Purchaser's net investment in Doctors Health
Plan plus a twelve percent (12%) annualized return on the net
investment. Purchaser's net investment shall be equal to
Purchaser's purchase price plus Purchaser's contributions to
Doctors Health Plan plus Purchaser's out-of-pocket costs to
acquire, finance and operate Doctors Health Plan minus any
distributions or dividends Purchaser receives from Doctors Health
Plan.
If the Company enters into a definitive agreement to sell Doctors
Heath Plan at a price greater than the Strike Price before the
earlier of (i) April 17, 1998 or (ii) the date the Purchaser has
contributed Two Million Dollars ($2,000,000) to Doctors Health
Plan, the net proceeds (after payment of marketing expenses of
the sale to the third party) of the sale will be divided between
Purchaser and the Company. In such event, Purchaser will receive
an amount equal to Purchaser's net investment plus a twelve
percent (12%) annualized return on the net investment, and the
Company will receive the balance of the net proceeds. If the sale
is subsequent to the earlier of the above events, the Purchaser
will be entitled to receive from net proceeds (after payment of
marketing expenses of the sale to the third party) the greater of
(i) Purchaser's net investment plus a twelve percent (12%)
annualized return on such amounts or (ii) an amount equal to
Purchaser's net investment plus fifty percent (50%) of the
difference between (x) the amount of the net proceeds less the
Company's investment banker fees and expenses in selling Doctors
Health Plan to the Purchaser minus (y) the Purchaser's net
investment. In all potential sales to third party purchasers, the
Purchaser has the right to retain ownership of Doctors Health
Plan and pay the Company an amount equal to the amount the
Company would have received as a result of the sale to the third
party.
As part of the transaction, the Company agreed to continue to
offer the employees of the Company and its affiliates the option
to use Doctors Health Plan under the Company's health benefits
program for one year following the closing and to not offer
employees an option to use any other health maintenance
organization, preferred provider organization or similar health
plan during that one year period in the State of North Carolina
or in any area of South Carolina where Doctors Health Plan is
licensed.
As part of the transaction, the Company agreed to a partial
release of its non-compete agreement with Steven M. Scott, M.D.
This partial release allows Steven M. Scott, M.D. and his
affiliates to operate health maintenance organizations and
similar organizations in all areas, other than those areas in
Florida and Georgia where the Company and/or its affiliates
operate health maintenance organizations. In addition, the
Company agreed that for a one year period following the closing
date, neither the Company or its subsidiaries will engage in the
business of providing health maintenance organization or similar
services in the State of North Carolina and those service areas
in the State of South Carolina served by Doctors Health Plan.
ITEM 5. - OTHER EVENTS
I. On March 9, 1998, the Company entered into a definitive
written Stipulation of Settlement with counsel for the plaintiffs
in the matter of In re Coastal Physician Group, Inc. Securities
Litigation, Case No. 1:95CV00306, a class action lawsuit filed in
the United States District Court for the Middle District of North
Carolina. Named as Defendants in the suit in addition to the
Company, were Steve M. Scott, M.D., David W. Singley and David H.
Fater (collectively "Individual Defendants"). Dr. Scott is the
Chairman, President and Chief Executive Officer of the Company.
Mr. Singley and Mr. Fater are former officers of the Company.
The case arises out of a consolidation of four actions against
the Company and certain former officers of the Company filed in
April 1995. The Third Consolidated Amended Class Action Complaint
filed on April 11, 1997 alleged claims for violations of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by the Securities and Exchange Commission, as well as
common law negligent misrepresentations. The Company and the
individual Defendants denied and continue to deny any liability
to Plaintiffs or to the Class, and have asserted defenses to the
claims.
The class members consist of all persons who purchased the common
stock of the Company during the period from August 11, 1994
through and including April 27, 1995, excluding the Defendants;
members of the families of the Individual Defendants; any person
or entity in which any Defendant has a controlling interest; any
subsidiary or affiliate of the Company; the directors, officers,
employees and controlling persons of the Company or any
subsidiary or affiliate of the Company; and the legal
representatives, heirs, executors, ancestors and assigns of any
excluded person or entity.
The settlement was negotiated through the services of a mediator
appointed by the Court. The Company and the Individual Defendants
did not admit or concede any liability with regard to the merits
of the claims asserted, but concluded that it was desirable to
settle in order to avoid the expenses, inconvenience and
distraction of further legal proceedings. The settlement requires
the funding of $8,150,000 into an Escrow Account pending final
court approval of the Stipulation of Settlement. The Escrow
Account has been fully funded as of this date. The Company's
insurers funded $7,150,000 and the Company funded the balance of
the Escrow Account.
II. Pursuant to a letter to the Company dated January 19, 1998,
Deborah L. Redd ("Redd") resigned as a member of the Board of
Directors of the Company and as an officer of several of the
Company's subsidiaries, effective as of February 18, 1998. Redd
indicated in her letter to the Company that her resignation was
based on her desire to permanently reside in Maryland and reduce
her traveling.
ITEM 7. - FINANCIAL STATEMENTS AND EXHIBITS
(a) NOT APPLICABLE.
(b) THE PRO FORMA FINANCIAL INFORMATION REQUIRED IS ATTACHED
HERETO.
(c) NOT APPLICABLE.
COASTAL PHYSICIAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION
The following unaudited condensed consolidated pro forma balance
sheet as of September 30, 1997, and the unaudited condensed
consolidated pro forma statements of operations for the nine
month period ended September 30, 1997 and the year ended December
31, 1996 have been prepared to give effect to the sale of certain
assets of DHP. The adjustments to the unaudited condensed
consolidated pro forma balance sheet have been prepared as if the
transaction was consummated on September 30, 1997, while the
adjustments to the unaudited condensed consolidated pro forma
statements of operations have been prepared as if the transaction
was consummated as of the beginning of the respective periods
presented. The unaudited condensed consolidated pro forma
financial information has been adjusted to reflect the effect of
the pro forma adjustments described in the accompanying notes and
is not necessarily indicative of the consolidated financial
position or results of operations had the sale transaction
actually been effected as of the assumed dates. The unaudited
condensed consolidated pro forma financial information should be
read in conjunction with the Company's unaudited condensed
consolidated financial statements and notes thereto as of
September 30, 1997 and for the nine months then ended included in
the Company's Quarterly Report on Form 10-Q filed on November 21,
1997.
COASTAL PHYSICIAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
September 30, 1997
(IN THOUSANDS)
PRO FORMA
HISTORIC ADJUSTMEN PRO
AL TS FORMA
ASSETS
Current assets:
Cash and cash equivalents 5,717 (1,980) (a) 3,737
Marketable securities 7,723 (5,240) (a) 2,483
Trade accounts receivable, net 33,916 63 (a) 33,979
Accounts receivable, other 14,302 4,577 (a,b 18,879
,c)
Other current assets 11,783 (65) (a) 11,718
Total current assets 73,441 (2,645) 70,796
Property and equipment, at
cost, 12,236 (422) (a) 11,814
less accumulated
depreciation
Excess of cost over fair value
of 8,408 (1,012) (a) 8,408
net assets acquired,
net
Other assets 11,716 10,704
Total assets 105,801 (4,079) 101,722
LIABILITIES AND SHAREHOLDERS'
EQUITY
(DEFICIT)
Current liabilities:
Current maturities and other
short-term borrowings 2,481 2,481
Accounts payable 33,765 942 (a,c 34,707
)
Deferred revenue 53,379 53,379
Accrued expenses 18,141 (300) (a) 17,841
Accrued physician fees
and medical costs 24,253 (7,071) (a) 17,182
Total current liabilities 132,019 (6,429) 125,590
Long-term debt, excluding
current maturities 3,215 3,215
Total liabilities 135,234 (6,429) 128,805
Shareholders' equity (deficit):
Preferred stock 12 12
Common stock 244 244
Additional paid-in capital 158,095 158,095
Common stock warrants 2,828 2,828
Accumulated deficit (190,693 2,350 (d) (188,34
) 3)
Unrealized appreciation of
available-for-sale 81 81
securities
Total shareholders'
equity (29,433) 2,350 (27,083
(deficit) )
Total liabilities and
share- 105,801 (4,079) 101,722
holders' equity
(deficit)
COASTAL PHYSICIAN GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA BALANCE SHEET
September 30, 1997
DETAILS OF PRO FORMA ADJUSTMENTS
(a) To record the disposition of the assets and liabilities of
DHP.
(b) To record a receivable for $5.0 million Promissory Note
payable within 10 days from the closing date.
(c) To record the additional March capital infusion, applied to
the purchase price.
(d) To record the retained earnings impact of the sale.
COASTAL PHYSICIAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
HISTORICA ADJUSTMENT PRO
L S FORMA
Operating revenue, net 335,805 (21,708) (a) 314,097
Costs and expenses:
Physician and other provider 267,824 (21,522) (a) 246,302
services
Medical support services 33,048 (88) (a) 32,960
Selling, general and 72,144 (5,379) (a, 66,765
administrative
Total costs and expenses 373,016 (26,989) 346,027
Operating loss (37,211) 5,281 (31,930
)
Other income (expense):
Interest income (expense), net (8,614) (8,614)
Other, net (4,337) (86) (a) (4,423)
Total other expense (12,951) 5,195 (13,037
)
Loss before income taxes (50,162) --- (44,967
)
Benefit for income taxes (1,400) (1,400)
Net loss (48,762) 5,195 (43,567
)
Net loss per share (2.01) (1.79)
Weighted average number of shares
outstanding 24,311 24,311
COASTAL PHYSICIAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
HISTORIC ADJUSTMEN PRO
AL TS FORMA
Operating revenue, net 552,109 (9,787) (a) 542,322
Costs and expenses:
Physician and other provider 450,526 (8,759) (a) 441,767
services
Medical support services 92,460 (73) (a) 92,387
Selling, general and administrative 171,903 (5,658) (a) 166,245
Total costs and expenses 714,889 (14,490) 700,399
Gain on divested assets, net 37,751 37,751
Operating loss (125,029 4,703 (120,32
) 6)
Other income (expense):
Interest income (expense), net (12,274) --- (12,274
)
Other, net (5,982) --- (5,982)
Total other expense (18,256) --- (18,256
)
Loss before income taxes and
extraordinary item (143,285 4,703 (138,58
) 2)
Income tax provision (4,136) (4,136)
Loss before extraordinary item (147,421 4,703 (142,71
) 8)
Extraordinary item - gain on
pooled
portion of south Florida 1,864 1,864
divestiture,
net of income taxes of 647
Net loss (145,557 4,703 (140,85
) 4)
Loss per common share:
Loss before extraordinary item (6.18) (5.99)
Extraordinary gain 0.08 0.08
Net loss (6.10) (5.91)
Weighted average number of shares
outstanding 23,844 23,844
COASTAL PHYSICIAN GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND THE YEAR ENDED DECEMBER 31, 1996
DETAILS OF PRO FORMA ADJUSTMENTS
(a) To record the direct reduction in operating revenue, net,
costs and expenses and other income/expense directly related
to DHP for the periods presented.
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: March 27, 1998 By: /S/ STEVEN M. SCOTT, M.D.
Steven M. Scott, M.D.
President and Chief
Executive Officer
Date: March 27, 1998 By: /S/ CHARLES F. KUONI, III
Charles F. Kuoni, III
Executive Vice President
and Chief Financial
Officer
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: March 27, 1998 By:
Steven M. Scott, M.D.
President and Chief
Executive Officer
Date: March 26, 1998 By:
Charles F. Kuoni, III
Executive Vice President
and Chief Financial
Officer
