United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2828 CROASDAILE DRIVE, DURHAM, NC 27705
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(Address of principal executive offices) (Zip Code)
(919) 383-0355
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common stock, par value $0.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant at March 31, 1998 was $9,930,900. The aggregate market value was
computed by reference to the closing price as of that date. (For purposes of
calculating this amount only, all directors, executive officers and greater than
10% shareholders of the Registrant are treated as affiliates.)
The number of shares outstanding of the Registrant's common stock as of
February 28, 1998 was 37,493,283.
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
ITEM 1. BUSINESS
GENERAL
Coastal Physician Group, Inc., together with its subsidiaries (the
"Company", "Coastal" or the "Registrant"), is a provider of physician management
services to physicians, hospitals, government agencies, managed care
organizations, employers, and other health care organizations nationwide. The
Company provides services in more than 400 settings to physicians, hospitals and
governmental entities.
Founded in 1977 to assist hospitals in staffing their emergency
departments, the Company expanded in the years 1991 to 1995 to provide
hospital-based physician contract services, as well as physician business
management services such as practice management, billing and collection. In
addition, the Company acquired two health maintenance organizations ("HMOs") and
developed another HMO. In 1993 and 1994, the Company, through a series of
acquisitions and expansion efforts, added fee-for-service and capitated clinic
networks operating in New Jersey, Maryland, North Carolina, and Florida.
Beginning in the fourth quarter of 1995 and continuing in 1996 and
1997, the Company divested certain of its health care operations, as detailed
below. These divestitures, with the exception of the south Florida capitated
primary care clinics which were divested in the fourth quarter of 1995, were
made pursuant to the plan approved by the Board of Directors in July 1996 to
focus on improving the Company's operations in the areas of physician contract
services and physician business management services. The Company continues to
evaluate the performance of all of its business operating units, and also to
evaluate the possible sale of certain operations to increase shareholder value,
reduce debt and provide capital to the Company.
As of December 31, 1997, the Company's operations included providing
physicians to staff hospital emergency departments, operating two HMOs,
providing billing and collection services for emergency room physicians and
physician groups, as well as contract services to a number of government
agencies. As more fully discussed below, the Company's North Carolina based HMO
was sold during the first quarter of 1998.
PRINCIPAL SERVICES
A discussion of the principal services provided by the Company, the
methods by which it provides such services and the market for each service is
set forth below.
PHYSICIAN CONTRACT SERVICES
Under contracts principally with hospitals and government agencies, the
Company identifies and recruits physicians as candidates for admission to a
client's medical staff and coordinates the on-going scheduling of independent
contractor
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physicians who provide clinical coverage in designated areas. While the Company
also provides obstetrics, gynecology and pediatrics physician contract services,
the provision of contract management services to hospital emergency departments
represents the Company's principal hospital-based service.
To fulfill its obligations to clients, the Company obtains the services
of physicians who, as independent contractors, agree to provide the necessary
clinical coverage. The Company maintains a proprietary data base of physicians
who might be available as independent contractors in particular specialties and
locations. To carry out contract management services such as the contracting of
physicians, staffing and administration, the Company's local and regional
offices are generally staffed with a manager, often a consulting medical
officer, and an administrative staff consisting of one or more recruiters,
credentialers and staffing coordinators.
Emergency Department Services
The Company contracts, in most cases, to provide all necessary
physician coverage for hospital emergency departments on a 24-hour, 365-day per
year basis. The Company believes that hospitals utilize physician management
firms to help solve problems associated with the administration and management
of hospital emergency departments such as recruitment, scheduling and retention
of emergency department physicians, the relief of other hospital physicians from
emergency department coverage, budgetary concerns, risk shifting, changing
patient volumes and the historically extensive use of hospital emergency
departments for routine primary care, particularly at night and on weekends. In
addition to obtaining the services of independent contractor physicians to
provide emergency department coverage, the Company also typically employs the
physician whom the hospital selects as the medical director of the emergency
department. The medical director works directly with the hospital medical staff
and administration in such areas as quality assurance, risk management and
departmental accreditation.
Government Services
The Company provides physician contract services to the United States
Army, Navy, Air Force and Coast Guard, the Department of Veterans Affairs,
Indian Health Services and county and state agencies, including those
responsible for correctional facilities. Governmental agencies contract with the
Company to assist such agencies in fulfilling their obligations to provide
health care for active-duty and retired military personnel and their dependents,
veterans and correctional facility inmates. The Company presently has government
services contracts for the operation, staffing and management of emergency,
obstetric, gynecological and other primary care facilities, and assists in the
implementation of quality assurance, quality control and risk management
programs which complement medical treatment. Net revenue from government
services contracts recognized in 1997 was $19,578,000. The dollar amount of all
such contracts through the end of the contract terms, assuming all options are
exercised by the government (which is within its sole discretion), was
approximately $77,900,000 as of December 31, 1997.
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PHYSICIAN BUSINESS MANAGEMENT SERVICES
The Company provides a range of physician business management services,
principally coding, billing and collection services, to support independent
contractor physicians, independent practices and other health care
practitioners. These services are often provided as part of the Company's
physician contract services and are also marketed independently to unaffiliated
providers. The Company provides these services to over 2,000 physicians in over
140 hospitals in 18 states. Net revenue related to the Company's Physician
Business Management Services activities for the years ended December 31, 1997,
1996 and 1995 was $27,424,000, $41,317,000, and $50,975,000, respectively,
representing 7% of the Company's net revenue in all three years.
The Company codes, bills and collects for professional services with
respect to over 3.1 million patient visits annually. Approximately half of the
Company's billing and collection revenue is derived from providers with which
the Company's Physician Contract Services group does not have a contract
management relationship.
The Company specializes in providing physician business management
services to physicians in emergency medicine practices. The Company estimates
that approximately 97% of its net billing and collection revenue for 1997
(including work for contract management clients and contracted health care
professionals) was derived from emergency room billing and collections, as
compared with 87% in 1996 and 70% in 1995. This change is primarily attributable
to the Company's renewed focus on emergency room billing with less emphasis on
billing for clinical settings.
PHYSICIAN CARE NETWORKS
At the end of the fiscal year, the Company's Physician Care Networks
group was comprised of the Company's two HMOs. The Company sold its North
Carolina based HMO, Doctors Health Plan, Inc. in March 1998, as discussed in
more detail below. In addition, the Company is evaluating operational changes to
or a possible sale of its Florida based HMO, as more fully described in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, net revenue related to the Company's Physician Care Networks
services for the years ended December 31, 1997, 1996 and 1995 was $185,209,000,
$215,274,000, and $375,427,000, respectively, representing 43%, 39% and 46%,
respectively, of the Company's net revenue for such years.
In November 1994, the Company acquired Health Enterprises, Inc. and its
wholly-owned subsidiary, HealthPlan Southeast, Inc. ("HPSE"), an independent
practice association ("IPA") model HMO based in Tallahassee, Florida. As of
December 31, 1997, HPSE held contracts with approximately 1,573 employer groups
in north Florida and provided health care for approximately 76,000 individual
members. HPSE's net revenue for the year ended December 31, 1997 was $97,336,000
representing 23% of the Company's net revenue.
On August 9, 1997, the Company sold Better Health Plan, a Prepaid
Health Services Plan located in New York for $7,750,000. Net revenue included in
the year ended December 31, 1997 for Better Health Plan was $34,915,000,
representing 8% of the Company's net revenue.
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Doctors Health Plan, Inc. ("DHP"), an IPA model HMO started by the
Company, received its Certificate of Authority in September 1994 and began
enrolling members in May 1995. DHP offered HMO services in all 100 North
Carolina counties and five counties in South Carolina. As of December 31, 1997,
DHP held contracts with approximately 400 employer groups in North Carolina
serving approximately 32,000 members in small and large employer groups. On
March 18, 1998, the Company sold DHP for a purchase price of approximately
$6,000,000. Net revenue included in the year ended December 31, 1997 for DHP was
$32,795,000, representing 8% of the Company's net revenue. See "Item 13. Certain
Relationships and Related Transactions."
In a series of transactions, the Company disposed of its remaining
clinical operations during 1997. Effective May 31, 1997, the Company sold
certain assets related to seven primary care clinics. Effective November 1,
1997, the Company sold Integrated Provider Networks, Inc., Practice Solutions,
Inc., Sunlife OB-GYN Services of Broward County, Inc., Ft. Lauderdale Perinatal
Associates, and Physician Access Center. Net revenue included in the year ended
December 31, 1997 for these clinical operations was $18,595,000, representing 4%
of the Company's net revenue. See "Item 13. Certain Relationships and Related
Transactions."
The Company has relatively limited experience with capitated fee
arrangements, the assumption of insurance risks and the ownership of HMOs and
other managed care organizations. Given this limited experience, combined with
increasing pressures to restrain health care expenditures, increased competition
and the inherent uncertainties in insuring health care risks, there can be no
assurances that the capitation arrangements or insurance activities associated
with the operation of HPSE, the Company's remaining HMO, will be profitable.
CONTRACTUAL ARRANGEMENTS AND CUSTOMERS
HOSPITAL CONTRACTS
The Company provides physician contract management services to
hospitals under two separate contractual arrangements: flat-rate contracts and
fee-for-service contracts. Hospitals entering into flat-rate contracts primarily
pay fees to the Company based on the hours of physician coverage provided.
Hospitals entering into fee-for-service contracts agree to authorize the Company
and its contracted health care professionals to bill and collect the
professional component of the charges for medical services rendered by the
Company's contracted health care professionals. Under fee-for-service
arrangements, the Company generally receives directed reimbursement of the
amounts collected and, depending on the hospital's patient volume and payor mix,
may also receive an availability fee from the hospital. Pursuant to
fee-for-service contracts, the Company accepts responsibility for billing and
collection and assumes the risks of non-payment, changes in patient volume or
payor mix and delays attendant to reimbursement through government programs or
third-party payors. All of these factors generally are taken into consideration
by the Company in arriving at contractual arrangements with health care
institutions and professionals. While the term of the Company's service
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contracts is generally one to three years, such contracts typically provide for
termination without cause by either party on 60 to 180 days' prior notice.
A significant portion of the Company's net revenue in recent years has
been attributable to fee-for-service billing and collection arrangements. As a
result of increasing public and private sector pressures to restrain health care
costs and to restrict reimbursement rates for medical services, fee-for-service
contracts have developed less favorable cash flow characteristics than
traditional flat-rate contracts, resulting in a need for increased liquidity and
capital resources.
PHYSICIAN CONTRACTS
In its Physician Contract Services businesses, the Company generally
contracts with physicians and certain other health care professionals to provide
services to fulfill the Company's contractual obligations to its clients. The
Company regards its contracted health care professionals as independent
contractors and, therefore, does not withhold income taxes or otherwise treat
such professionals as employees. Professional fees from the Company to the
physicians have historically been calculated on an hourly basis. Some physicians
may receive, in addition to an hourly fee, certain incentive payments based on
activity and performance. During the fourth quarter of 1997, the Company entered
into new agreements with certain physicians that provide for the calculation of
professional fees based on the number of Relative Value Units (RVUs), as defined
by the Health Care Finance Administration, billed by the Company for the
professional services rendered.
Under the Company's contracts with its hospital and other health care
clients, the physician is responsible for the provision of professional services
and is required to obtain professional liability insurance with coverage limits
as specified in such contracts. The Company's agreements with physicians
typically have one-year terms (with options on the part of the physicians for
renewal) and can be terminated by the Company at any time under certain
circumstances (including termination of the Company's contract with the health
care facility) or by either party, typically upon 30 to 90 days' prior notice.
GOVERNMENT CONTRACTS
Federal government contracts are usually awarded for a base period
ranging from one month to twenty-four months with options on the part of the
contracting governmental agency for annual renewal for up to a five year total
contract term. Such renewals are dependent upon annual appropriations, budgetary
constraints, applicable governmental requirements and other factors and are
subject to termination for convenience by the government. If a contract were to
be terminated for convenience, the Company would be reimbursed for its allowable
costs to the date of termination and would be paid a proportionate amount of the
stipulated profits or fees attributable to the work actually performed and, in
certain cases, costs incurred in connection with the termination of the
contract.
MANAGED CARE CONTRACTS
HPSE has a one-year contract with the State of Florida, which can be
renewed for a one-year period, to provide health care services to employees of
the State of Florida.
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This contract accounts for approximately 40% of HPSE's total enrollment. The
State of Florida can terminate the contract upon HPSE losing its license or
other evidence of default. HPSE's current contract with the State of Florida
expires December 31, 1998 and there can be no assurance that the contract will
be renewed. The termination or non-renewal of this contract with the State of
Florida would have a material adverse effect on both HPSE and the Company.
GOVERNMENT REGULATION
The businesses in which the Company is engaged are to varying extents
subject to substantial regulation by federal and state governmental authorities.
The regulatory environment in which the Company operates may change
significantly as a result of federal and state health care reform initiatives.
The most significant regulatory requirements applicable to the Company's
businesses are summarized below.
A substantial portion of the Company's net revenue is derived from
payments made by government-sponsored health care programs (primarily Medicare
and Medicaid). In addition, continuing budgetary constraints at both the federal
and state level and the rapidly escalating costs of health care and
reimbursement programs may continue to lead to relatively significant reductions
in government and other third party reimbursements for certain medical charges.
Any such reductions could have a material adverse effect on the Company. These
programs and activities are subject to substantial regulation by the federal and
state governments which are continually reviewing and revising the programs and
their regulations. The Company's operations are subject to periodic audits by
government reimbursement programs to determine the adequacy of coding procedures
and reasonableness of charges. Any determination of material noncompliance with
such regulatory requirements or any change in reimbursement regulations,
policies, practices, interpretations or statutes that places material
limitations on reimbursement amounts or practices could adversely affect the
operations of the Company.
Business corporations are legally prohibited from providing, or holding
themselves out as providers of, medical care in many states. State laws prohibit
the unlicensed practice of medicine, including the practice of medicine by an
unlicensed corporation or other unlicensed entity. While the Company seeks to
structure its operations to comply with the corporate practice of medicine laws
of each state in which it operates, there can be no assurance that, given
varying and uncertain interpretations of such laws, the Company would be found
to be in compliance with restrictions on the corporate practice of medicine laws
in all states. A determination that the Company is in violation of applicable
restrictions on the practice of medicine in any state in which it operates could
have a material adverse effect on the Company if the Company were unable to
restructure its operations to comply with the requirements of such states.
Many states have statutes or case law that govern the enforceability of
contractual provisions prohibiting or proscribing certain competitive activities
as well as interference with contractual rights and liquidated damages
provisions in contracts. Many states, primarily through regulatory or licensing
boards, also prohibit the splitting or sharing of
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professional fees between physicians and non-physicians, non-professional
corporations or other entities not authorized to practice medicine. Several
states also have laws prohibiting referrals by a physician if the physician
receives improper remuneration for the referral, including referrals to
facilities or other entities in which the physician or an affiliate has a
financial or ownership interest.
Recently, the Florida Board of Medicine has interpreted the fee
splitting prohibitions broadly enough to cover the payment of many
percentage-based management fee arrangements between physicians and physician
practice management companies. This decision has been stayed pending further
judicial review. The Company has contractual arrangements with its independent
contractor physicians, including contracts in the State of Florida, pursuant to
which the Company receives compensation for its services that is calculated in
certain instances based on percentages of fees billed and collected by
physicians. There can be no assurance that the contractual arrangements of the
Company will not require modification depending upon the outcome of the review
of the action of the Florida Board of Medicine by the Florida courts, or that
the Company will be able to modify such contractual arrangements in Florida or
in other states as needed based upon future judicial interpretations of laws and
regulatory decisions, or upon changes in the laws.
HPSE is licensed and subject to periodic examination by governmental
agencies and is subject to state and federal statutes which extensively regulate
the activities of health plans. HPSE must file periodic reports and is subject
to periodic review by the licensing authorities that regulate health plans. The
loss of a health plan license would require the Company to cease offering health
plan services. To remain licensed, it may be necessary for HPSE to make changes
from time to time in its services, procedures, structures and marketing methods.
Florida requires a health plan to meet minimum capital requirements which
essentially restrict a portion of the health plan's assets to use within its
current operations. In January 1998, HPSE was awarded a one-year accreditation
by the National Committee for Quality Assurance. HPSE is subject to regulatory
review and approval regarding the development of new products and the expansion
of its service area. Each respective application may be subject to federal,
state and county government review.
The Company's governmental contracting activities are subject to
substantial regulation by the applicable contracting agencies and federal law
and regulation. Contracts with government agencies are generally complex in
nature and require contractors to comply with exacting technical specifications
and numerous administrative regulations. Substantial penalties can result from
noncompliance with the technical specifications of a contract. Upon failure to
perform or violation of applicable contract or statutory provisions, a
contractor may be barred or suspended from obtaining future contracts for
specified periods of time. The Company is subject to periodic audits and reviews
in the ordinary course of business by appropriate federal government audit and
review agencies, which can result in adjustments to contract costs, including
direct and indirect expenses. Under the Truth in Negotiations Act, the federal
government is entitled for three years after final payment on any negotiated
fixed-price contract to examine all
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of the Company's cost records with respect to such contract to determine whether
the Company used complete, accurate and current cost and pricing information in
preparing bids on that contract or any amendment thereto. The federal government
also has the right for six years after final payment to adjust a contract price
based upon such examination. Section 31 of the Federal Acquisition Regulations
governs the allocation of costs incurred by the Company in the performance of
its government contracts to the extent such costs are allocable to its
government contracts.
The Company believes that its facilities are in compliance with
federal, state and local environmental protection regulations and does not
anticipate that its compliance with regulations concerning the packaging,
storage, treatment and transportation of biohazardous material will have a
material impact on the Company's earnings or competitive position.
CORPORATE LIABILITY AND INSURANCE
Each of the Company's Physician Contract Services subsidiaries and HPSE
maintain professional liability insurance in amounts deemed appropriate by
management based upon historical claims and the nature and risks of the
business. There can be no assurance that a future claim will not exceed the
limits of available insurance or that such coverage will continue to be
available. Such insurance provides coverage, subject to policy limits, in the
event the Company's contracting subsidiary were held liable as a co-defendant in
a lawsuit against a contracted health care professional or hospital client. To
the extent health care professionals were regarded as agents of the Company in
the practice of medicine, the Company could be held vicariously liable for any
medical negligence of such health care professionals. In addition, the Company
and its contracting subsidiaries may be exposed to liability in cases in which
the Company's contracting subsidiary itself was negligent.
In addition, the Company's contracts with hospital clients generally
contain provisions under which the Company's contracting subsidiary agrees to
indemnify the client for losses resulting from the contracting physician's
malpractice up to the limits of such contracting physician's liability insurance
(whether or not such losses are covered by insurance policies), and the client
agrees to indemnify the Company's contracting subsidiary up to the limits of the
client's professional liability insurance for losses resulting from the
negligence of the client or client personnel (whether or not such losses are
covered by insurance policies). In addition, the Company's contracts with the
Department of Defense and the Department of Veterans Affairs generally provide
for the Company's contracting subsidiary to indemnify the government, without
limitation as to amount, for losses incurred under similar circumstances. The
Company's contracting subsidiary requires the contracted physicians to indemnify
the Company's contracting subsidiary for losses related to the performance of
medical services and to obtain professional liability insurance.
COMPETITION
The businesses in which the Company operates are highly competitive.
The Company has both national and local competitors in its various business
lines. The
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Company also competes with the more traditional structures of health care
delivery systems. Competition in the industry is based on the scope, quality and
cost of services provided. Many of the Company's actual or potential competitors
have substantially greater financial, personnel and other resources than those
of the Company.
EMPLOYEES
At December 31, 1997, the Company had approximately 1,645 employees.
ITEM 2. PROPERTIES
The Company's headquarters are located in Durham, North Carolina, where
the Company subleases under a three year lease effective July 1, 1997, 48,753
square feet of an office building from Century American Insurance Company, a
corporation controlled by the Company's Chairman and Chief Executive Officer,
Steven M. Scott, M.D., who is also the largest shareholder of the Company. This
space is occupied by the Company and by Coastal Physician Services, Inc. Doctors
Health Plan, Inc. which was sold by the Company in March 1998, also leases 9,663
square feet in the building under a separate lease for three years also
effective July 1, 1997. These two leases comprise approximately 90% of the total
leasable space in the building.
Healthcare Business Resources, Inc. (HBR), a subsidiary of the
Company, leases and occupies a 51,000 square foot office building in Durham,
North Carolina. The office space, leased from an unrelated third party, is
utilized for billing operations and headquarters for HBR.
The Company leases and partially occupies two additional office
buildings, totaling approximately 52,000 square feet, located in Durham, North
Carolina. The buildings, leased from an unrelated third party, are the
headquarters for Coastal Government Services, Inc., and Medstaff National
Medical Staffing, Inc., subsidiaries of the Company. A portion of the building,
consisting of approximately 13,000 square feet is sublet to an unrelated third
party.
The Company's operating subsidiaries generally lease office space in
locations in which they do business. Total rent expenses for all office space
leased by the Company under noncancelable operating leases was $1,556,000 for
the year ended December 31, 1997.
Further information concerning properties is disclosed in "Item 13.
Certain Relationships and Related Transactions."
ITEM 3. LEGAL PROCEEDINGS
Following the announcement of the Company's first quarter operating
results on April 27, 1995, four class action lawsuits were commenced by certain
shareholders against the Company and certain of its current and former officers
and directors in the United States District Court for the Middle District of
North Carolina. These lawsuits were consolidated into a single consolidated and
amended complaint styled In re Coastal
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Physician Group, Inc. Securities Litigation, and class certification was
granted. The consolidated, amended complaint sought unspecified damages for
alleged violations of the federal securities laws and common law negligence
related generally to the issuance of allegedly false and misleading statements
about the Company's operations and present and future prospects. This litigation
was settled following a court-ordered mediation in which the Company and its
insurers agreed to contribute $1,000,000 and $7,150,000, respectively, to a
settlement fund to be used to compensate the class members. The final settlement
is subject to Court approval and contingent upon not more than five percent of
the class members opting out of the settlement.
The Company and certain of its current and former officers and
directors have been named defendants in a purported shareholder class action
lawsuit filed on November 20, 1996 in Superior Court in Durham County, North
Carolina, styled Jerry Krim, on his own behalf and on behalf of all others
similarly situated, v. Coastal Physician Group, Inc., Steven M. Scott, M.D.,
Stephen D. Corman and Jonathan E. Kennedy. The complaint alleges that the
defendants committed common law fraud and deceit and made negligent
misrepresentations that induced the plaintiff and other persons to purchase the
stock and seeks unspecified compensatory and punitive damages and costs. On
August 27, 1997, the Court entered an Order denying class certification and the
plaintiffs have appealed this Order. In a companion case, Mead Ann Krim on her
own behalf and on behalf of all others similarly situated v. Coastal Physician
Group, Inc., Steven M. Scott, M.D., Stephen D. Corman and Jonathan E. Kennedy,
the plaintiff spouse of Jerry Krim, filed a similar action on October 20, 1997
in United States District Court for the Middle District of North Carolina. The
Company has filed motions to dismiss that are currently pending. The Company
intends to vigorously defend its position, but at this stage of the litigation,
exposure to the Company cannot be determined.
On June 17, 1997, Henry J. Murphy, who was President and Chief
Executive Officer of the Company from November 1, 1996 to February 28, 1997,
filed a lawsuit against the Company alleging that the Company failed to make
certain incentive payments to him under his written employment agreement. Under
the contract, Mr. Murphy was entitled to receive certain incentive payments or
stock warrants in the event that the Company either successfully refinanced its
bank debt so as to reduce the amount of debt to certain target levels or sold
more than half of its assets or business. Mr. Murphy is alleging that the
Company's transaction with National Century Financial Enterprises, Inc.
constituted a sale of more than half of the assets of the Company qualifying him
to receive certain payments. The Company intends to vigorously defend its
position, but at this stage of the litigation, the exposure to the Company
cannot be determined.
In June 1997, after the Company's subsidiary, Healthcare Business
Resources, Inc. ("HBR"), closed an office in Whitley City, Kentucky, a possible
overpayment from Medicare to Coastal Physician Services of the Midwest, Inc. was
discovered. In August 1997, the Company voluntarily disclosed the possible
overpayment to representatives of the U. S. Department of Justice ("DOJ"). Since
the Company's voluntary disclosure to the DOJ, the Company has cooperated in
DOJ's review and the DOJ has referred the
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matter for final resolution to the U. S. Attorney's Offices in Kentucky with
jurisdiction over this matter. The Company's counsel was invited by the U.S.
Attorney's Offices in Kentucky to fully participate in their review and has
participated in their review and interviews of current and former Company
employees. The Company currently estimates that its liability for the
overpayment, fees and expenses related to the DOJ's review at this time has been
adequately provided for in its financial statements. Since the DOJ's review has
not yet been completed, there can be no assurance, however, that the overpayment
liability will not exceed the Company's current estimate.
In October and November 1996, three cases styled Ortiz v. Coastal
Physician Services of Broward County, Inc., et al., Higgins v. Coastal Emergency
Services of Ft. Lauderdale, Inc. et al., and Dukenik v. Coastal Emergency
Services of Ft. Lauderdale, Inc. et al. were filed in the Circuit Court for Palm
Beach, Florida seeking statutory damages for alleged violations of Section
559.79 of the Florida Consumer Collection Practices Act as a result of invoices
mailed for medical services rendered by contract physicians in emergency
departments for which the Company provided physician staffing services. The
invoices contained language indicating various actions that might be pursued in
the event of non-payment, including references to the Attorney General.
Plaintiffs have amended their complaints and are seeking only statutory damages.
Plaintiffs have also filed a motion seeking class certification which is
currently pending before the court. The Company believes that it has several
defenses and intends to vigorously defend the action but at this stage of the
litigation, the exposure to the Company cannot be determined.
On February 4, 1998, Jacque J. Sokolov, M.D., who previously served as
Chairman of the Company and President of Advanced Health Plans, Inc., a
subsidiary of the Company, filed a Demand for Arbitration with J*A*M*S/ENDISPUTE
in Los Angeles, California alleging various breaches of an Employment Contract
dated November, 1994 with the Company. The Company has objected to the conduct
of the arbitration in California and has requested that the arbitration hearings
be held in North Carolina. The Company intends to vigorously defend its
position, but at this stage of the litigation the exposure to the Company cannot
be determined.
One of the Company's subsidiaries, Coastal Physician Services of the
Southeast, Inc., received information regarding an inquiry by the Office of
Inspector General, U. S. Department of Health and Human Services ("OIG") in
October 1997 at one of the Company's client hospitals. Representatives of the
OIG's Region IV Office were then invited by the Company and visited the
Company's subsidiary, Healthcare Business Resources, Inc., in November 1997.
Since the OIG's visit, the Company has received no further communication from
the OIG.
The Company and its subsidiaries are involved in various legal
proceedings incidental to their businesses, substantially all of which involve
claims related to the alleged medical malpractice of contracted physicians,
contractual and lease disputes or individual employee relations matters. In the
opinion of the Company's management, no individual item of this litigation or
group of similar items of litigation, taking into
11
<PAGE>
account the insurance coverage available to the Company, is likely to have a
materially adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1997.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange
under the symbol "DR." The following table shows the range of market prices per
share for the Company's common stock in 1997 and 1996.
1997 1996
High Low High Low
First Quarter $4.63 $1.75 $ 13.75 $8.88
Second Quarter $2.63 $0.94 $ 8.38 $6.75
Third Quarter $2.69 $1.38 $ 7.25 $4.25
Fourth Quarter $2.19 $0.81 $ 6.00 $2.75
As of February 28, 1998, the Company had approximately 6,000
shareholders, of which approximately 1,000 were holders of record.
The Company has not paid, nor does it currently intend to pay, cash
dividends on its common stock but, rather, it intends to retain any future
earnings for reinvestment in its business.
In December 1997, the Company issued 1,000,000 shares of common stock
to National Century Financial Enterprises Inc. ("NCFE") in satisfaction of
approximately $1,046,000 in fees related to financing arrangements entered into
between the Company, NCFE and certain of its subsidiaries in June 1997.
Additionally, 200,000 shares of common stock were issued to two of the Company's
vendors in lieu of cash payments for services provided. 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.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
Results of Operations:
<S> <C> <C> <C> <C> <C>
Operating revenue, net $ 424,841 $ 552,109 $ 810,387 $748,637 $640,702
Net income (loss) (81,981) (145,557) (46,901) 20,668 24,303
Net income (loss) per share (3.08) (6.10) (1.98) 0.92 1.27
Weighted average shares 26,623 23,844 23,656 22,418 19,135
<CAPTION>
at December 31,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
Balance Sheet at Year-End:
<S> <C> <C> <C> <C> <C>
Total assets $ 96,096 $ 181,841 $ 313,057 $328,980 $255,761
Short-term debt 2,529 71,130 5,210 1,353 7,452
Long-term debt $ 74,698 4,799 77,270 45,792 21,787
Total shareholders' equity /
(deficit) ($ 61,427) 3,503 146,371 186,893 146,600
</TABLE>
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
GENERAL
Over the past three years, the Company has undergone significant changes in its
business that have had a significant adverse financial impact on the Company.
During this period, management identified a number of operating units that were
either underperforming or were not deemed critical to the overall operating
strategy. As a result, management decided to divest certain operating units in
1996 and 1997 and the Company incurred significant decreases in net operating
revenues, physician and other provider services costs, and selling, general and
administrative expenses. In addition, the Company experienced a significant
reduction in the number of locations where the Company's Physician Contract
Services operation provided physicians. While not all of the lost locations were
profitable, these had a significant impact on net operating revenues, physician
and other provider services costs, and selling, general and administrative
costs. For the past three years the Company has incurred net losses. Discussed
below is a more detailed review of the results of operations for the last three
years.
1997 COMPARED TO 1996
Operating Revenue, Net. Net operating revenue for 1997 was $424.8
million representing a decrease of $127.3 million, or 23.1%, from 1996 operating
revenues of $552.1 million. The decrease in operating revenue due to
dispositions completed during 1996 and 1997, for which prior periods' results
were not restated, was approximately $62.8 million. The dispositions completed
in 1996 and 1997 that influence the comparison between years included: (i) the
sale of certain assets of Physicians Planning Group, Inc. ("PPG") in September
1996; (ii) the sale in November 1996 of the HealthNet Medical Group operations
of PPG and MedCost, Inc.; (iii) the sale in May 1997 of seven Florida clinics;
(iv) the sale in August 1997 of Better Health Plan, Inc. ("BHP"), a New York
state prepaid health plan servicing Medicaid enrollees; and (v) the sale
effective in November 1997 of Integrated Provider Networks, Inc. and certain
other physician practice management group assets. These dispositions are
discussed in more detail in Note 3 of "Notes to Consolidated Financial
Statements." In addition to these sales, the Company also sold other immaterial
operations in 1996. The remaining decrease of $64.5 million was primarily due to
contract during 1996 and 1997 that were not offset by the addition of new
contracts in the Company's hospital-based contract management group. The decline
was partially offset by increases in revenue due to growth in the number of
enrollees in the Company's HMOs in North Carolina and Florida, and in BHP before
it was sold.
Physician and Other Provider Services Costs and Expenses. Physician and
other provider services costs and expenses consist primarily of fees paid to
physicians and other health care providers. Physician and other provider
services costs and expenses decreased by $91.3 million, or 20.3%, to $359.2
million in 1997 from $450.5 million in 1996. Of the decrease, approximately
$37.3 million was directly related to those
15
<PAGE>
operations that were disposed of, as discussed above, for which prior periods'
results were not restated. The remaining decrease was attributable to a
reduction in the number of contracts in the Company's hospital-based contract
management group. These decreases were offset by an increase in costs of
approximately $33.2 million related to the growth in the number of enrollees, as
well as higher utilization by participants in the Company's HMO operations in
North Carolina and Florida, and in BHP before it was sold.
Medical Support Services Costs and Expenses. Medical support services
costs and expenses include all other direct costs and expenses of managing
clinics, as well as billing, collection and physician business management
services costs and expenses. Medical support services costs and expenses
decreased by $51.8 million, or 56.0%, to $40.7 million in 1997 from $92.5
million in 1996. The decrease in medical support services costs and expenses
related to disposed operations, as discussed above, for which prior periods'
results were not restated, was approximately $20.2 million. The remaining
decrease in medical support service costs and expenses resulted from the
termination of contracts with the Company's hospital- based contract management
Selling, General and Administrative Costs and Expenses. Selling,
general and administrative costs and expenses decreased by $81.2 million, or
47.2%, to $90.7 million in 1997 from $171.9 million in 1996. The decrease
attributable to disposed operations, as discussed above, for which prior
periods' results were not restated, was approximately $30.1 million. In 1997,
the Company recorded a charge for the impairment of goodwill totaling $4.3
million. See Note 2 of "Notes to Consolidated Financial Statements." The Company
incurred legal and professional fees and related costs associated with the
restructuring of its credit agreements and various litigation matters totaling
$12.9 million in 1997 versus $16.7 million in 1996. The 22.8% decline in
professional fees and related costs resulted from management's efforts to
minimize the costs associated with professional fees after the Company's bank
debt was repaid. In 1997, management also made reductions in personnel, closed
offices in an effort to centralize operations, and sold certain operations as
discussed above. As a result of these efforts, personnel costs were reduced by
33.8% from $72.4 million in 1996 to $47.9 million in 1997.
Gain (Loss) on Divested Assets, Net. In 1997, the Company had a net
loss of $1.5 million on the divested assets, as more fully described in Note 3
of "Notes to Consolidated Financial Statements".
Net Interest Expense. Net interest expense increased by $2.8 million to
$15.5 million in 1997 from $12.8 million in 1996 due primarily to the repayment
of the Company's bank borrowings in June 1997 which were replaced by funds
provided by NCFE as discussed below. The costs associated with the sale of
eligible accounts receivable in 1997, the proceeds of which were used to repay
the bank debt and to fund operations, have been included in selling, general and
administrative expenses.
Other, net. Other, net decreased by $4.7 million from $6.0 million in
1996 to $1.3 million in 1997 due primarily to the inclusion in 1996 of
litigation and proxy costs which were not incurred in 1997.
Benefit (provision) for income taxes. The benefit (provision) for
income taxes decreased by $5.5 million to a benefit of $1.4 million from a
provision of $4.1 million in 1996. This change is due to the reductions in
accrued taxes as a result of continued net operating losses.
16
<PAGE>
Net Loss. Primarily as a result of the foregoing, the Company
experienced a net loss of $82.0 million in 1997 compared to a net loss of $145.6
million in 1996.
1996 COMPARED TO 1995
Operating Revenue, Net. Net operating revenue decreased $258.3 million,
or 31.9%, for 1996 to $552.1 million from $810.4 million for 1995. The decrease
in operating revenue due to dispositions completed during 1995 and 1996, for
which prior periods' results were not restated, was approximately $205.9
million, or 25.4%. This decrease was primarily due to the sale of 47 of the
Company's south Florida clinics on November 30, 1995, (the "Florida sale"). The
remaining decrease was primarily due to higher contract attrition rates in 1996,
less new business development during the second half of 1995 and throughout 1996
in the Company's hospital-based contract management group, lower net collections
per patient visit, and reimbursement regulatory changes experienced by the
Company's billing and accounts receivable management group. The decrease was
partially offset by an increase in revenue due to growth in the number of
enrollees in each of the Company's Health Plans in North Carolina, New York and
Florida.
Physician and Other Provider Services Costs and Expenses. Physician and
other provider services costs and expenses decreased by $153.4 million, or
25.4%, to $450.5 million in 1996 from $603.9 million in 1995. The decrease in
physician and other provider services costs and expenses due to dispositions
completed during 1995 and 1996, for which prior periods' results were not
restated, was approximately $173.2 million, or 28.7%. This decrease is primarily
due to the Florida sale. The remaining decrease was primarily due to higher
contract attrition rates in 1996, less new business development during the
second half of 1995 and throughout 1996 in the Company's hospital-based contract
management group, and reimbursement regulatory changes experienced by the
Company's billing and accounts receivable management group. The decrease was
partially offset by an increase in costs related to terminated contracts and
costs arising from the growth in the number of enrollees in each of the
Company's Health Plans in North Carolina, New York and Florida.
Medical Support Services Costs and Expenses. (previously described
above) Medical support services costs and expenses decreased by $38.6 million,
or 29.4%, to $92.5 million in 1996 from $131.1 million in 1995. The decrease in
medical support services costs and expenses due to dispositions completed during
1995 and 1996, for which prior periods' results were not restated, was
approximately $33.1 million, or 25.2%. This decrease was primarily due to the
Florida sale. The remaining decrease resulted from higher contract attrition
rates in 1996, less new business development during the second half of 1995 and
throughout 1996 in the Company's hospital-based contract management group, and
reimbursement regulatory changes experienced by the Company's billing and
accounts receivable management group.
Selling, General and Administrative Costs and Expenses. Selling,
general and administrative costs and expenses increased by $47.9 million, or
38.6%, to $171.9 in 1996 from $124.0 in 1995. This increase was due primarily to
increased goodwill impairment adjustments, professional fees associated with the
restructuring of the Company's bank credit agreements, increased investments in
information technology,
17
<PAGE>
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, New York and Florida.
Gain (loss) on divested assets, net consisted of the following in 1996:
(i) net gains totaling $36.2 million resulting from the divestiture of
subsidiaries throughout the year, including PPG, a manager of primary care
provider networks located in Maryland, HealthNet, the Company's New Jersey-based
clinic operations, and MedCost, Inc., a managed care entity located in North
Carolina and (ii) $1.6 million of additional gain recorded in 1996 on the
Florida sale which was attributable to those clinics which were originally
acquired and recorded under the purchase method of accounting for business
combinations. See "Item 8. Financial Statements and Supplemental Data" - Note 3
of "Notes to Consolidated Financial Statements". Gain (loss) on divested assets,
net consisted of the following in 1995: a loss of $20.2 million on the Florida
sale which was attributable to those clinics which were originally acquired and
recorded under the purchase method of accounting for business combinations.
Net Interest Expense. Net interest expense increased by $4.7 million to
$12.3 million in 1996 from $7.6 million in 1995 due primarily to the increase of
approximately $3.6 million in amortization expense related to debt issue costs
incurred to restructure the Company's bank credit facilities in May of 1996. The
remaining increase resulted from interest on increased borrowings to fund
operating losses, continuing investments in information technology initiatives,
and the sale of marketable securities resulting in lower interest income. In
addition, net interest expense increased as a result of rate increases charged
under the Company's Bank Credit Agreements. See "Liquidity and Capital
Resources."
Acquisition and Related Expenses. Acquisition and related expenses
include professional fees and other costs related to acquisitions. Acquisition
and related expenses in 1995 were $1.5 million,. Expenses incurred during 1995
related primarily to potential acquisitions which did not materialize. See "Item
8. Financial Statements and Supplemental Data" - Note 3 of "Notes to
Consolidated Financial Statements".
Benefit (Provision) for income taxes. Benefit (provision) for income
taxes changed from a benefit of $17.1 million in 1995 to a provision of $4.1
million in 1996 (a change of $21.2 million) primarily as a result of an increase
in the valuation reserve for the Company's federal and state net operating loss
carry forwards. See "Item 8. Financial Statements and Supplemental Data" - Note
8 of "Notes to Consolidated Financial Statements."
Other, net. Other, net increased by $3.6 million from $2.4 million in
1995 to $6.0 million in 1996, as a result of additional costs incurred in
connection with the restructuring of the Company's bank debt.
Net Loss. The Company experienced a net loss of $145.6 million in 1996
compared to a net loss of $46.9 million in 1995. This change is due primarily to
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements during the periods covered by
the accompanying consolidated financial statements through the sale of certain
accounts
18
<PAGE>
receivable, as more fully discussed below, and the sale of certain of its
subsidiaries. The Company's principal uses of cash have been to support
operating activities and repay bank debt. Net cash used in operating activities
was $25.3 million and $47.1 million in 1997 and 1996, respectively. The
Company's net use of cash to support operating activities resulted primarily
from operating losses, including medical costs of providers, administrative
expenses, legal and professional fees associated with restructuring the
Company's credit facilities, proxy and litigation costs, and information
technology initiatives. Net cash provided by investing activities in 1997 was
$13.2 million which was derived primarily from cash received from the sale of
certain subsidiaries, net of cash disposed of $12.3 million. In 1996, net cash
provided by investing activities amounted to $56.4 million, which resulted
primarily from cash received from the disposition of subsidiaries, net of cash
disposed of $46.2 million. In 1997, the net cash provided by financing
activities was $10.8 million. During 1997, the Company had debt borrowings of
$99.0 million and debt repayments of $97.7 million, for net borrowings of $l.3
million. In addition, the Company received an equity infusion from Steven M.
Scott, M.D., Chief Executive Officer of the Company and the Company's largest
shareholder in the amount of $10.0 million. Net cash provided by financing
activities in 1996 was $7.2 million and consisted primarily of net borrowing
under the Company's bank credit agreements. As a result of the aforementioned,
cash and cash equivalents decreased from $10.2 million at December 31, 1996 to
$8.9 million at December 31, 1997.
The Company's number of days of revenue in average outstanding accounts
receivable for 1996 was 68.9 days. As a result of the sale of a substantial
amount of accounts receivable in 1997, a meaningful comparison is not available
for 1997.
On June 6, 1997, the Company entered into a series of sale and
subservicing agreements (the "Sale Agreements") with various subsidiaries of
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. As a result of the sales of certain
operations of the Company in 1997, the facilities have been reduced to $23
million as of December 31, 1997. The Company entered into amendments to these
facilities, whereby the commitment was extended until July 1, 2000. Another Sale
Agreement creates a facility for the purchase of up to $115 million of
receivables and terminates on June 1, 2000. Pursuant to the Sale Agreement, the
Company pays a program fee ranging from approximately 10.94% 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
$40 million through July 1, 1999. Interest on outstanding amounts under this
line of credit is payable monthly at prime plus 4%. The line of credit is
secured by substantially all of the Company's assets, including pledges of the
common stock of each of its subsidiaries. No borrowings were outstanding under
this facility during 1997.
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 in full outstanding indebtedness to its lenders and the lenders
released all collateral.
19
<PAGE>
Simultaneously, with the NCFE financing transaction, as explained
above, Dr. Scott invested $10 million in cash in the Company and received
1,000,000 shares of a new class of Series C Convertible Preferred Stock ("Series
C Preferred"). In addition, Dr. Scott received 84,983 shares of Series C
Preferred and 240,000 shares of common stock in satisfaction of certain
obligations owed to him by the Company of approximately $1.1 million. The Series
C Preferred Stock was converted into shares of the Company's common stock on a
10 for 1 basis in October 1997.
The Company expects to satisfy its anticipated demands and commitments
for cash in the next twelve months from the amounts available under the various
agreements with NCFE discussed above, as well as a reduction in cash used in
operations. The Company has implemented a management action plan which requires
a continuing review of all aspects of the Company's business units and the
implementation of actions to improve cash flow characteristics, profitability
and contributions to the Company's overall financial and strategic objectives.
Among the key actions being implemented by the Company are changes in the method
of compensating its independent contractor physicians under the Practice
Partners Program(C), centralization of certain administrative tasks, and efforts
to expand its customer base. The primary objectives of these actions are to
generate increased cash flow to repay debt and to improve the Company's
financial results. If the Company is unable to achieve these objectives , it
will likely experience a material decrease in liquidity, thus increasing its
reliance on financing under the revolving line of credit provided by NCFE. In
addition, the Company is dependent upon the continued weekly purchases of
eligible accounts receivable by NCFE under the NPF-XI programs in order to meet
the Company's obligations
OTHER TRENDS AND UNCERTAINTIES
The Company operates in an industry characterized by consolidations and
combinations led by a number of major health care companies. The Company
completed numerous acquisitions during 1994 and 1995 but is now directing its
primary efforts to improvements in its Physician Contract Services group and
related operations. This change in strategy is due to the deterioration in
revenue growth, increases in costs and the associated operating losses incurred
in the Company's clinic and HMO businesses, debt obligations, as well as the
relative rising cost of, and potential limited access to, additional capital.
In late March 1997, the Health Care Financing Administration ("HCFA")
indicated that it will no longer allow companies to obtain group provider
numbers to bill Medicare claims for services rendered by their independent
contractor physicians. The Company has taken steps to individually enroll its
independent contractor physicians and to modify its contractual arrangement with
its independent contractor physicians in order to comply with HCFA's
interpretation of the reimbursement regulations. Efforts by the Company to
individually enroll the independent contractor physicians are dependent upon the
cooperation the Company receives from the independent contractor physician and
the respective provider. To date the Company has not experienced any significant
problems in enrolling the physicians. The Company believes that upon completion
of the re-enrollment process that it will be in compliance with HCFA's
requirements. Because
20
<PAGE>
of the required changes, the Company may incur additional costs; however, the
full financial impact is not known at this time.
As a result of the expected future costs and investments required to
enable the Company's New York and North Carolina HMOs to become profitable, the
Company sold these operations effective August 1997 and March 1998,
respectively. In addition, the Company is examining a number of operational
changes to its Florida HMO, that are designed to improve its profitability in
1998. These changes could include the termination of unprofitable contracts and
renegotiation with providers on reimbursement rates. The Company is also
exploring the possible sale of HPSE. If the operational changes are not achieved
and the Company is unable to sell HPSE, it is likely that additional cash
investment in HPSE will be required in order to maintain its statutory net
worth. Additional investments in HPSE would have to come from NCFE's line of
credit.
The Company believes successful competition in the health care industry
will increasingly require sophisticated information systems to rapidly provide a
broad range of data related to both clinical and financial aspects of medical
practice. The Company is continuing to evaluate its use of information
technology which may result in increased costs.
The Company's focus on its internal operations has resulted in senior
management changes in its contract management and managed care operations. In
addition to personnel changes in its operating companies, the Company
significantly reduced staffing at its Durham corporate office during 1997 to
approximately 35 employees from over 65 at the beginning of 1997 and over 200 at
the beginning of 1996. Various administrative and support functions historically
provided by the corporate office have been significantly reduced, eliminated
completely or redeployed to the operating companies requiring those functions.
As a result of these reductions, the Company is dependent upon the retention of
key employees.
Developments in the health care industry in general are also expected
to impact the Company's financial performance and operating strategy. These
developments include trends of medical expenses in HMOs and other businesses
where the risk of higher medical costs is assumed, as well as changing levels of
utilization in hospital-based and clinic operations. Additionally, the Company
will be subject to changes in premiums and levels of reimbursement from payors
including HMOs, insurance companies, Medicare and Medicaid.
Continued efforts by Medicare and Medicaid to reduce costs, including
costs that are incurred due to inaccurate or fraudulent billing practices,
continues to be an area of exposure to all organizations that render medical
services that are reimbursed under these programs. In addition, the Company
maintains compliance programs and procedures in order to help discover and
address any billing practices that may not comply with Medicare regulations.
However, the Company continues to be exposed to audits similar to those that
have been initiated against other healthcare providers, and there can be no
assurance that the Company's billing procedures upon such an audit would be
found to comply with all applicable regulatory requirements.
The Company has voluntarily disclosed to the Department of Justice that
a possible overpayment from Medicare occurred. Since the Company's voluntary
disclosure, the company has cooperated in the review by the Department of
Justice. The
21
<PAGE>
final resolution of this matter is pending; however, management believes that it
has made adequate provisions for the Company's liability in this matter.
The Company has been notified by the NYSE that it is not currently in
compliance with certain listing requirements of the New York Stock Exchange.
Management is in discussions with representatives of the New York Stock Exchange
concerning the listing requirements but cannot, at this time, assess the outcome
of these discussions on the Company or its stock.
YEAR 2000 ISSUES
The Company places significant reliance upon various computer systems
in order to run its day to day operations.. The Company has begun a review of
its computer applications and platforms to determine that they are "Year 2000"
compliant before December 31, 1999. While this review has not been completed,
major applications covering billing and certain general ledger applications have
been reviewed and are "Year 2000" compliant. The balance of the system reviews
and modifications, if any are required, are expected to be completed before the
Company would experience any adverse consequences. The costs of the project to
date and the estimated costs to complete it by the year 2000, are not expected
to be, nor have they been, material to the Company's consolidated financial
position or the results of operations. The Company believes that Year 2000
issues, if not properly addressed by entities that pay for services provided by
the Company, would have a significant impact upon the operating results of the
Company. The Company believes that its computer systems, upon completion of the
systems reviews and modifications; if any are required, will not be adversely
impacted.
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 businesses;
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; potential delisting of the Company's
common stock by the New York Stock Exchange; and other important
factors discussed above under "Other Trends and Uncertainties" and
disclosed from time to time in the Company's Form 10-K, Form 10-Q and
other Securities and Exchange Commission filings.
22
<PAGE>
Item 8. Financial Statements and Supplemental Data
Report of Independent Auditors 24
Consolidated Balance Sheets, December 31, 1997 and 1996 25
Consolidated Statements of Operations, Years ended
December 31, 1997, 1996 and 1995 26
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 1997, 1996, and 1995 27
Consolidated Statements of Cash Flows, Years ended
December 31, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements 29
23
<PAGE>
THE BOARD OF DIRECTORS AND SHAREHOLDERS
COASTAL PHYSICIAN GROUP, INC.
We have audited the accompanying consolidated balance sheets of Coastal
Physician Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December 31,
1997. The consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Coastal
Physician Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
June 3, 1998
24
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1997 1996
- ----------------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 8,921 $ 10,239
Marketable securities 5,735 7,020
Trade accounts receivable, net 23,612 87,410
Reserves held by NCFE 6,396 --
Accounts receivable, other 12,684 11,187
Receivables from related party 9,405 --
Refundable income taxes -- 2,498
Prepaid expenses and other current assets 7,923 10,923
- ----------------------------------------------------------------------------------------------
Total current assets 74,676 129,277
- ----------------------------------------------------------------------------------------------
Property and equipment, at cost, less accumulated depreciation 10,342 19,041
Excess of cost over fair value of net assets acquired, net 2,450 19,305
Other assets 8,628 14,218
- ----------------------------------------------------------------------------------------------
Total assets $ 96,096 $ 181,841
==============================================================================================
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current maturities and other short-term borrowings $ 2,529 $ 71,130
Accounts payable 31,364 46,307
Accrued physicians fees and medical costs 31,431 33,709
Accrued expenses 16,142 20,182
Income taxes payable 1,359 2,211
- ----------------------------------------------------------------------------------------------
Total current liabilities 82,825 173,539
- ----------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities 74,698 4,799
- ----------------------------------------------------------------------------------------------
Total liabilities 157,523 178,338
- ----------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
Shareholders' equity (deficit):
Preferred stock $.01 par value, authorized 10,000 shares;
none issued and outstanding -- --
Common stock $.01 par value, authorized 100,000 shares;
issued and outstanding 37,493 and 24,126 shares, respectively 375 241
Additional paid-in-capital 160,374 144,070
Common stock warrants 1,582 987
Accumulated deficit (223,912) (141,931)
Unrealized appreciation of available-for-sale securities 154 136
- ----------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (61,427) 3,503
- ----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 96,096 $ 181,841
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue, net $ 424,841 $ 552,109 $ 810,387
Costs and expenses:
Physician and other provider services 359,165 450,526 603,881
Medical support services 40,720 92,460 131,097
Selling, general and administrative 90,691 171,903 123,989
- -------------------------------------------------------------------------------------------------
Total costs and expenses 490,576 714,889 858,967
- -------------------------------------------------------------------------------------------------
Gain(loss) on divested assets, net (1,453) 37,751 (20,195)
- -------------------------------------------------------------------------------------------------
Operating loss (67,188) (125,029) (68,775)
- -------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (15,536) (12,774) (8,261)
Interest income 628 500 671
Acquisition and related expenses -- -- (1,535)
Other, net (1,285) (5,982) (2,374)
- -------------------------------------------------------------------------------------------------
Total other expense (16,193) (18,256) (11,499)
- -------------------------------------------------------------------------------------------------
Loss before income taxes
and extraordinary item (83,381) (143,285) (80,274)
Benefit (provision) for income taxes 1,400 (4,136) 17,136
- -------------------------------------------------------------------------------------------------
Loss before extraordinary item (81,981) (147,421) (63,138)
Extraordinary item - gain on pooled portion of
South Florida divestiture, net of income taxes
of $0,$647 and $9,796 for the years ended
December 31, 1997, 1996, and 1995, respectively -- 1,864 16,237
- -------------------------------------------------------------------------------------------------
Net loss $ (81,981) $(145,557) $ (46,901)
=================================================================================================
Net loss per common share:
Basic and diluted loss per share before
extraordinary item $ (3.08) (6.18) (2.67)
Extraordinary gain, basic and diluted -- 0.08 0.69
- -------------------------------------------------------------------------------------------------
Net loss $ (3.08) (6.10) $ (1.98)
=================================================================================================
Shares used to compute loss per share, basic and diluted 26,623 23,844 23,656
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Additional
Paid-In
Shares of Capital Shares of Additional
Preferred Preferred Preferred Common Common Paid-In
Stock Stock Stock Stock Stock Capital
=================================================================================================================
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- $ -- $ -- 23,418 $234 $136,550
- -----------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- --
Shares issued:
Stock options exercised -- -- -- 149 2 1,593
In connection with business
combinations -- -- -- 117 1 3,139
Employee stock purchase plan -- -- -- 70 1 1,063
Unrealized appreciation of available-
for-sale securities, net of tax -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 -- -- -- 23,754 238 142,345
- -----------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- --
Shares issued:
Stock options exercised -- -- -- 63 -- 425
Employee stock purchase plan -- -- -- 82 1 518
Payment of proxy contest costs -- -- -- 227 2 678
Issuance of common stock warrants -- -- -- -- -- --
Employee stock compensation awards -- -- -- -- -- 22
Stock options vested -- -- -- -- -- 82
Unrealized appreciation of available-
for-sale securities, net of tax -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- -- -- 24,126 241 144,070
- -----------------------------------------------------------------------------------------------------------------
Net loss -- -- -- -- -- --
Shares issued:
Employee stock purchase for cash -- -- -- 82 1 98
Conversion of preferred stock (1,164) (12) (13,478) 11,638 116 13,371
Issuance of stock related to receivable sales -- -- -- 1,000 10 928
Directors' stock compensation -- -- -- 14 -- 228
Exercise of common stock warrants -- -- -- 187 2 1,245
Payment of proxy contest costs 33 1 982 -- -- --
Payment of litigation costs 46 1 1,657 -- -- --
Payment of rent costs 1,085 10 10,839 240 3 237
Payment of consulting costs -- -- -- 200 2 186
Issuance of common stock warrants -- -- -- -- -- --
Employee stock compensation awards -- -- -- 6 -- 11
Unrealized appreciation of available-
for-sale securities, net of tax -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- $ -- $ -- 37,493 $375 $160,374
=================================================================================================================
<CAPTION>
Unrealized
Appreciation
Retained (Depreciation)
Common Earnings of Available Total
Stock (Accumulated for-Sale Shareholders'
Warrants Deficit) Securities Equity (Deficit)
==========================================================================================================
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $ -- $ 50,527 $ (418) $ 186,893
- ----------------------------------------------------------------------------------------------------------
Net loss -- (46,901) -- (46,901)
Shares issued:
Stock options exercised -- -- -- 1,595
In connection with business
combinations -- -- -- 3,140
Employee stock purchase plan -- -- -- 1,064
Unrealized appreciation of available-
for-sale securities, net of tax -- -- 580 580
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,626 162 146,371 146,371
- ----------------------------------------------------------------------------------------------------------
Net loss -- (145,557) -- (145,557)
Shares issued:
Stock options exercised -- -- -- 425
Employee stock purchase plan -- -- -- 519
Payment of proxy contest costs -- -- -- 680
Issuance of common stock warrants 987 -- -- 987
Employee stock compensation awards -- -- -- 22
Stock options vested -- -- -- 82
Unrealized appreciation of available-
for-sale securities, net of tax -- -- (26) (26)
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 987 (141,931) 136 3,503
- ----------------------------------------------------------------------------------------------------------
Net loss -- (81,981) -- (81,981)
Shares issued:
Employee stock purchase for cash -- -- -- 99
Conversion of preferred stock -- -- -- (3)
Issuance of stock related to receivable sales -- -- -- 938
Directors' stock compensation -- -- -- 228
Exercise of common stock warrants (1,247) -- -- --
Payment of proxy contest costs -- -- -- 983
Payment of litigation costs -- -- -- 1,658
Payment of rent costs -- -- -- 11,089
Payment of consulting costs -- -- -- 188
Issuance of common stock warrants 1,842 -- -- 1,842
Employee stock compensation awards -- -- -- 11
Unrealized appreciation of available-
for-sale securities, net of tax -- -- 18 18
- ----------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 1,582 $(223,912) $ 154 $ (61,427)
==========================================================================================================
</TABLE>
27
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Cash flows from operating actitivites:
<S> <C> <C> <C>
Net loss $(81,981) $(145,557) (46,901)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 5,510 7,157 7,062
Amortization 760 3,049 4,274
Noncash interest expense -- 12 48
Extraordinary gain -- (2,511) (26,033)
(Gain) loss on sale of purchased portion of south Florida
divestiture -- (1,579) 16,943
(Gain) loss on disposition of subsidiaries 1,453 (36,172) --
Loss on disposal of fixed assets, net 2,211 1,709 966
(Gain) loss on sale of marketable securities an 576 (288) --
Goodwill impairment loss 4,343 29,679 20,648
Deferred income taxes -- 6,407 2,272
Other -- 124 263
Change in assets and liabilities,
net of effects from acquisitions and dispositions:
Trade accounts receivable, net 56,281 59,730 (8,819)
Reserves held by NCFE (6,396) -- --
Accounts receivable, notes receivable and other (5,157) (1,001) (5,528)
Refundable income taxes 2,498 10,306 (4,227)
Prepaid expenses and other current assets 6,076 (2,322) 3,156
Other assets 3,959 2,188 (1,366)
Accounts payable, accrued expenses and
income taxes payable (13,159) 26,668 (6,532)
Accrued physicians fees and medical costs (2,278) (4,653) 8,650
- -----------------------------------------------------------------------------------------------------------
Total adjustments 56,677 98,503 11,777
- -----------------------------------------------------------------------------------------------------------
Net cash used in operating activities $(25,304) $ (47,054) $(35,124)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of marketable securities and investments, net (5,577) (2,973) (4,605)
Proceeds from sale of marketable securities and investments 5,574 8,210 12,472
Proceeds from maturity of marketable securities and investments 2,507 1,853 --
Proceeds (purchases) of property and equipment, net (1,543) 3,074 (19,846)
Acquisition of subsidiaries, net of cash acquired -- -- (43,788)
Disposition of subsidiaries, net of cash sold 12,261 46,189 48,275
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 13,222 56,353 (7,492)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayments of debt (97,691) (76,610) (36,846)
Borrowings 98,989 71,424 69,995
Cash payments for debt issue costs (633) (3,048) --
Net proceeds from issuances of preferred stock 10,000 -- --
Net proceeds from issuances of common stock 99 1,027 2,661
Repayment of shareholder loans -- -- 667
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 10,764 (7,207) 36,477
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,318) 2,092 (6,139)
Cash and cash equivalents at beginning of year 10,239 8,147 14,286
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,921 $ 10,239 $ 8,147
===========================================================================================================
Supplemental disclosures of cash flow information:
Cash payments (refunds) during the period for:
Interest $ 9,360 $ 9,327 $ 7,699
Income taxes $ 2,479 $ (15,477) $ (2,925)
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General
Coastal Physician Group, Inc. (the "Company" or "Coastal") is a
physician management company which provides a broad range of health care and
administrative services to physicians hospitals, government agencies, managed
care programs and other health care organizations. Such services consist
primarily of the provision of physician coverage to hospital and government
facility clients, the provision of billing and collection services to various
health care practitioners, and the operation of two health maintenance
organizations ("HMOs"), one of which, Doctors Health Plan was sold in March 1998
(See Note 17, Subsequent Events) The Company operates on a nationwide basis.
B. Principles of Consolidation and Basis of Presentation
The consolidated financial statements of the Company include the
accounts of Coastal and its wholly-owned subsidiary companies. All significant
intercompany balances and transactions have been eliminated in consolidation.
C. Cash and Cash Equivalents and Regulatory Requirements
Cash in excess of daily requirements invested in short-term investments
with maturities of three months or less are considered to be cash equivalents
for financial statement purposes.
The Company's HMOs are required to maintain certain levels of
restricted deposits to satisfy certain regulatory requirements. These deposits
(included in Other assets in the accompanying consolidated balances sheets)
totaled approximately $2,157,000 and $5,968,000 as of December 31, 1997 and 1996
respectively. In addition, the Company's HMOs are required to maintain certain
net worth levels which restrict the transfer of funds between companies.
At December 31, 1997, the Company's Doctors Health Plan ("DHP") a
subsidiary was not in compliance with the statutory net worth requirements.
Subsequent to year-end investments were made by Coastal and the buyer of DHP in
order to bring its statutory net worth into compliance.
D. Marketable Securities
Under Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," securities are
classified either as held-to-maturity, available-for-sale, or trading.
Securities classified as held-to-maturity are carried at amortized cost of
$3,334,000 and $1,208,000 at December 31, 1997 and 1996, respectively and
primarily consisted of state and political subdivision securities, U.S.
Government securities and municipal bonds. Securities classified as
available-for-sale are carried at fair values of $2,546,000 and $6,017,000 at
December 31, 1997 and
29
<PAGE>
1996, respectively, and primarily consisted of equity securities. Unrealized
gains and losses on such securities are carried as a separate component of
shareholders' equity (deficit). Realized investment gains and losses are
computed using specific costs of securities sold. Held-to-maturity securities
included in other assets on the accompanying consolidated balance sheets
amounted to $145,000 and $205,000 at December 31, 1997 and 1996, respectively.
E. Accounts Receivable
In June 1997, the Company and certain of its subsidiaries entered into
a number of Sale and Subservicing Agreements with National Century Financial
Enterprises, Inc. ("NCFE") and its affiliates, whereby certain eligible accounts
receivable were sold to NCFE (See Note 7). Eligible trade accounts receivable
are comprised primarily of amounts due from hospitals under flat rate contracts
and amounts due under fee-for-service contracts from patients,
government-sponsored health care programs and other third party payors such as
insurance companies and self-insured employers. Ineligible receivables are
comprised primarily of amounts billed to individuals not covered by insurance
and certain other minor fee-for-service receivables deemed to be ineligible by
NCFE and are not sold. These receivables are geographically dispersed throughout
the United States.
Accounts receivable due under fee-for-service contracts include an
allowance for contractual adjustments and uncollectibles which is charged to
operations based on evaluation of potential losses. Contractual adjustments
result from the differences between the physician rates for physician services
performed and amounts allowed by government-sponsored health care programs,
insurance companies and other payors for such services. Uncollectibles represent
receivables considered unrecoverable. The allowance considered necessary to
cover contractual adjustments and uncollectibles is based on an analysis of
current and past due accounts, collection experience in relation to amounts
billed and other relevant information. Although the Company believes amounts
provided are adequate, the ultimate amounts uncollectible could be in excess of
the amounts provided.
F. Depreciation
Depreciation of property and equipment is computed on the straight-line
method over the estimated useful lives of the assets as follows:
Buildings 31 1/2 years
Leasehold improvement 5 years
Furniture and equipment 3 to 10 years
Automobiles 3 years
G. Excess of Cost Over Fair Value of Net Assets Acquired
The assets and liabilities of acquired entities accounted for under the
purchase method of accounting are adjusted to their estimated fair values as of
the acquisition dates. The amounts recorded as excess of cost over fair value of
net assets acquired ("goodwill") represents amounts paid that exceed estimated
fair values assigned to the
30
<PAGE>
assets and liabilities of each acquired business. Such amounts are being
amortized on a straight-line basis over periods ranging from five to forty years
(1996 and 1995) and five to twenty years (1997) depending on the specific
circumstances of each acquisition. Accumulated amortization of goodwill was
$1,504,000 and $3,581,000 at December 31, 1997 and 1996 respectively.
During the fourth quarter of 1995, the Company elected early adoption
of Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets to Be Disposed Of." Prior to the early
adoption of SFAS 121, the Company accounted for both identifiable and
unidentifiable intangible assets that were acquired in accordance with APB
Opinion No. 17 ("APB 17"), "Intangible Assets". Under the provisions of APB 17,
management periodically evaluates the carrying value and remaining amortization
periods of unamortized amounts based on an analysis of estimated undiscounted
operating earnings from the operations of each specific business. In addition,
management considers any events and circumstances occurring during the year
which might have an impact on such carrying value or remaining amortization
periods. No such events or circumstances indicating impairment were identified
prior to 1995.
Upon early adoption of SFAS 121, management performed an evaluation of
the carrying value and remaining amortization periods of unamortized amounts. In
connection with the ongoing application of SFAS 121, management performs such an
evaluation whenever events or changes in circumstances occur which indicate such
carrying values may not be recoverable. With the exception of the matters
related to goodwill impairment discussed in Note 2, no such events or changes in
circumstances were identified during 1997, 1996, or 1995.
H. Revenue and Medical Cost Recognition
Contractual arrangements with hospitals are primarily (a) flat rate
contracts whereby the Company receives fees from hospitals based on hours of
physician coverage provided and (b) fee-for-service contracts whereby the
Company bills and collects the charges for medical services rendered by the
Company's contracted health care professionals and assumes the financial risks
related to patient volume, payor mix, reimbursement rates, and collection.
The Company recognizes capitation revenue from employers and prepaid
managed care plans that contract with the Company for the delivery of health
care services on a monthly basis. This capitation revenue is at the
contractually agreed-upon per-member, per-month rates.
Premium revenue for prepaid healthcare is recognized as earned on a pro
rata basis over the contract period.
Costs of medical services are recorded as expenses in the period in
which they are incurred. Accrued medical claims are based upon costs incurred
for services rendered prior to the balance sheet date. Incurred but not reported
medical claims are estimated by the Company based on trends, experience and
judgment. The ultimate amount of such claims may differ from amounts provided
and such adjustment will be reflected in the period in which such differences
become apparent. Losses on contracts for fully insured
31
<PAGE>
coverage are accrued when management determines that it is probable that the
costs of providing medical care will exceed the premiums received.
I. Presentation of Expenses
Physician and other provider services costs and expenses are comprised
primarily of fees paid to physicians and other healthcare providers and include
medical supplies and pharmaceutical expenses in the clinic operations.
Medical support services costs and expenses include all the direct
costs and expenses of managing clinics, as well as billing, collection and
physician business management services costs and expenses.
Selling, general, and administrative costs and expenses include all
other operating expenses.
J. Per Share Data
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 simplifies the standards for computing earnings per share
and is effective for financial statements for both interim and annual periods
ending after December 15, 1997. The Company has adopted SFAS 128, as of December
31,1997, and has restated all prior periods presented to conform with the
requirements of SFAS 128. Basic earnings (loss) per common share available to
common shareholders are based on the weighted average number of common shares
outstanding. Diluted earnings (loss) per common share available to common
shareholders are based on the weighted average number of common shares
outstanding and the dilutive potential common shares, such as dilutive stock
options and warrants. The computation of diluted net loss per share of common
stock was antidilutive in each of the periods presented; therefore the amounts
reported for basic and diluted are the same.
K. Stock-based Compensation
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock-based compensation plans. No compensation cost has been
recognized for its fixed stock option plans and its stock purchase plan since
the options were granted at the stock's then current market value. In addition,
no pro forma disclosure of net income and earnings per share, in accordance with
Statement of Financial Accounting Standards No. 123, has been provided due to
the immaterial effect of the amount of stock-based compensation expense.
L. Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and the accompanying notes. Actual results could differ
from those estimates.
32
<PAGE>
M. Reclassifications
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform to the 1997 and 1996 presentation. Such
reclassifications had no impact on net loss or shareholders' equity (deficit) as
previously reported.
N. Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The Company is in the process of
evaluating the specific requirements of SFAS 130.
In June 1997, the FASB issued Statement of Financial Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for the way in which public business
enterprises report information about operating segments in annual financial
statements and interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. Management is evaluating the specific
requirements of SFAS 131.
2. GOODWILL IMPAIRMENT
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", 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 an
impairment loss recognized in the second quarter of 1997 of $4,200,000 for
Better Health Plan, Inc. ("BHP"). In addition, the Company recognized an
impairment loss of $143,000 in the fourth quarter of 1997.
The $4,200,000 impairment loss is in addition to impairment losses
totaling $13,562,000 recorded in 1996. The primary reason for the additional
impairment loss recorded in the second quarter of 1997 was the decline in the
estimated amount at which BHP assets could be sold.
During 1996, the Company recognized a goodwill impairment loss
(included in Selling, general and administrative costs and expenses in the
accompanying consolidated statements of operations) of $29,679,000 related to
goodwill associated with (i) certain long-lived assets of entities identified
for sale by the Company and (ii) certain acquired operations.
Advanced Health Plans, Inc. - The primary underlying factor
contributing to the decision to reevaluate the carrying value of goodwill
associated with Advanced Health Plans, Inc. ("AHP") 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
33
<PAGE>
continuing role with AHP. The reevaluation resulted in a $6,611,000 write-off of
AHP's goodwill balance in 1996.
Coastal Physician Services , Inc. - The primary underlying factor
contributing to the decision to reevaluate the carrying value of goodwill
associated with certain acquired operations of Coastal Physician Services, Inc.
("CPS") was the termination of a significant number of contracts. The
reevaluation resulted in a $2,989,000 write-off of goodwill in 1996 and $143,000
in 1997. 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 both AHP and CPS 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.
During the fourth quarter of 1995, the Company recognized a goodwill
impairment loss (included in Selling, general and administrative costs and
expenses in the accompanying consolidated statements of operations) of
$20,648,000 related to certain of its acquired operations . Such operations
included HealthNet Corp., a New Jersey-based clinic operation acquired in 1994
("HealthNet"), the clinics in south Florida, acquired at various dates,
remaining after the divestiture described in Note 3 ("south Florida clinics"),
and Medi/Tab Consulting Co., Inc., a New York-based billing operation acquired
in 1992 ("Medi/Tab"). The impairment loss was primarily the result of current
period, as well as historical and projected, operating and cash flow losses,
which resulted in strategic and operational reviews of these businesses and an
evaluation of the respective goodwill carrying values for possible impairment.
The following is a summary by entity of the primary reasons for the operating
losses as well as the resulting goodwill write-downs.
HealthNet - The underlying factors contributing to the decline in
financial results were changes in the marketplace (increased managed care
penetration in New Jersey relating to both the commercial market and the workers
compensation market) and the fact that the HealthNet clinics are not primary
care oriented. This resulted in declines in patient volume and average
reimbursements to HealthNet's primarily fee-for-service revenue base. The
evaluation resulted in a $12,588,000 write-down of HealthNet's goodwill balance
in the fourth quarter of 1995.
South Florida Clinics - The underlying factors contributing to the
decline in financial results included changes in the marketplace, as well as the
Company's decision to divest the bulk of its south Florida primary care clinic
operations (as discussed in Note 3), thus limiting the remaining clinics'
ability to participate in managed care contracts as part of a larger network.
The evaluation resulted in a $7,388,000 write-down of the remaining south
Florida clinics' goodwill balance in the fourth quarter of 1995.
Medi/Tab - The primary underlying factor contributing to the decline in
financial results was increased competitiveness in Medi/Tab's marketplace
resulting in a significant deterioration in its client base and decreasing
margins. The evaluation resulted in a $672,000 write-down of Medi/Tab's goodwill
balance in the fourth quarter of 1995. On March 15, 1996, the Company
consummated the sale of all of the outstanding common
34
<PAGE>
stock of Medi/Tab. Such divestiture did not have a material effect on 1996
results of operations.
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 each specific operation 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 projections 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.
3. SIGNIFICANT TRANSACTIONS
A substantial portion of the Company's consolidated operations consists
of entities acquired in a succession of acquisitions during the period from
January 1993 through November 1995. Additionally, the Company consummated a
number of significant divestitures from November 1995 through December 1997. The
following is a summary of certain accounting aspects of such acquisitions and
divestitures, as well as a description of the more significant transactions.
Certain of the Company's acquisitions were accounted for under the
purchase method of accounting ("purchases"). Under this method, the assets and
liabilities of the acquired entity were recorded at their estimated fair market
values at the date of acquisition, any excess of the purchase price over the
respective fair market value was accounted for as goodwill, and the results of
operations of the acquired company are included in the Company's consolidated
financial statements from the respective date of acquisition. The remaining
acquisitions were accounted for under the pooling-of-interests method of
accounting ("poolings"). Under this method, the assets and liabilities of the
combined entity are recorded at their respective book values, and the Company's
consolidated financial statements are restated for all periods presented to
include the results of operations of the acquired entity.
A. South Florida
Original Acquisitions
The Company's south Florida primary care clinic operations resulted
from a series of acquisitions during the period from July 1993 through November
1995. Certain of such acquisitions were accounted for as purchases, while the
remainder were accounted for as poolings.
South Florida purchases consisted primarily of the July 1993
acquisition of Gold Star Medical Group ("Gold Star"), a network comprised of 13
primary care clinics. The initial purchase price for Gold Star was $12,000,000,
with additional consideration to be payable if certain criteria were met. In
June 1994 the Gold Star agreement was modified whereby the Company issued an
additional 400,000 shares of its common stock (increasing goodwill by
$11,220,000) and providing for additional consideration to be payable if certain
criteria were met. Additional consideration was paid in July 1995 (a combination
of cash and common stock) under the modified agreement, resulting in $1,000,000
of additional goodwill. In addition to Gold Star, south Florida purchases
35
<PAGE>
included a number of less significant acquisitions, which are included in the
aggregate information under Other Acquisitions below.
South Florida poolings consisted of the February 1994 acquisition of
Health Management Associates of America, Inc. and Medical Management Associates,
Inc. ("HMA/MMA") and the June 1994 acquisition of Southeast Health Systems, Inc.
and Medical Associates Systems, P.A. ("SHS/MAS"). HMA/MMA and SHS/MAS together
operated a network of 21 primary care clinics. The Company issued 2,301,000
shares of its common stock in exchange for all of the outstanding shares of the
companies comprising HMA/MMA and 1,088,000 shares of its common stock in
exchange for all of the outstanding shares of the companies comprising SHS/MAS.
1995 Divestiture
On November 30, 1995 the Company sold 47 of its south Florida clinics
for $51,300,000 in gross cash proceeds, subject to $3,000,000 held in escrow
(included in prepaid expenses and other current assets on the accompanying
consolidated balance sheets). The divested entities included both a portion
originally accounted for as purchases (the "purchased portion") and a portion
originally accounted for as poolings (the "pooled portion"). The purchased
portion consisted primarily of Gold Star, as well as certain (but not all) of
the less significant south Florida purchases; the pooled portion consisted of
HMA/MMA and SHS/MAS.
In 1995, the Company realized (on an aggregate basis) a gain on
disposal, before applicable income taxes, of approximately $5,840,000, income
tax expense on the transaction of $6,540,000, and a loss on the disposal on an
after-tax basis of $700,000. The relationship of income tax expense on the
transaction to the pre-tax gain is due to the add back of nondeductible goodwill
related to the purchased portion.
1996 Settlement
During the third quarter of 1996, the Company received additional gross
cash proceeds of $2,800,000 as an adjustment to the original sale price. 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 realized an
additional gain of $1,290,000 resulting from other non-cash post-closing balance
sheet settlements.
Because the disposal occurred within two years following acquisition of
the entities comprising the pooled portion, the component of the total gain
applicable to the pooled portion, less applicable income tax expense, is
required to be classified as an extraordinary item in the accompanying
consolidated statements of operations. The loss on the purchased portion, gross
of applicable income taxes, has been included in Gain (loss) on divested assets,
net in the accompanying consolidated statements of operations. In determining
the breakdown of the transaction for purposes of disclosing the gain (loss) on
the sale of the respective portions, proceeds have been allocated based upon the
relative fair market values of the respective entities. The accounting bases for
the respective portions were based on a specific identification of the entities
comprising each portion. Provisions and transaction-related expenses which could
not be specifically identified with either the purchased or pooled portion were
allocated on a basis consistent with the allocation of proceeds. The direction
and magnitude of the net impact
36
<PAGE>
of the respective portions (loss on purchased portion, gain on pooled portion)
is due to the allocation of a majority of the proceeds to the pooled portion and
the higher accounting basis which results under the purchase method.
B. Physicians Planning Group/Healthcare Automation Acquisition
In August 1994, the Company issued 857,000 shares of its common stock
in exchange for all of the outstanding shares of Physicians Planning Group, Inc.
("PPG"), a manager of primary care provider networks, and Healthcare Automation,
Inc. ("HCA"), a billing services and network management company. This
acquisition was accounted for as an immaterial pooling without restatement of
prior results of operations. 1996 Divestiture
Effective September 30, 1996, the Company sold certain assets of PPG
and the common stock of HCA. The Company realized a net gain on the sale of PPG
and HCA (included in Gain (loss) on divested assets, net in the accompanying
statements of operations), of approximately $15,692,000 before applicable income
taxes. Income tax expense on the transaction totaled $1,163,000, resulting in a
gain on an after tax basis of $14,529,000.
C. Health Enterprises Acquisition
In November 1994, the Company issued 2,097,000 shares of its common
stock in exchange for all the outstanding shares of Health Enterprises, Inc.
("HEI"), an acquisition accounted for as a pooling. HEI's wholly-owned
subsidiary, HealthPlan Southeast, Inc., an independent practice association
("IPA") model HMO, had over 66,000 members enrolled and insured approximately
1,350 employer groups in north Florida as of December 31, 1996.
D. Better Health Plan Acquisition
On May 5, 1995, the Company acquired (and accounted for as a purchase)
Better Health Plan, Inc. ("BHP"), a Medicaid managed care entity. Incorporated
on February 4, 1993, BHP provided prepaid health care to approximately 40,000
Medicaid recipients in five counties in New York State as of December 31, 1996.
The initial purchase price was $19,700,000 in cash and $2,400,000 in loan
repayments to shareholders and banks. Goodwill totaling $25,200,000 was
originally recorded in connection with the acquisition. The Company recorded an
impairment loss of $13,562,000 during 1996 relating to this goodwill balance.
Pro forma results of operations assuming this purchase had taken place at the
beginning of 1995 have been included in the aggregate pro forma information
under Other Acquisitions below. See Note 10 regarding the settlement of a
contingent earnout payment in connection with the acquisition of BHP.
1997 Divestiture
On August 19, 1997, the Company sold certain assets of Better Health
Plan, Inc. to the New York State Catholic Health Plan, Inc. for approximately
$7,750,000 in cash. Due to the $4,200,000 goodwill impairment adjustment
recorded in the second quarter of 1997, the loss was minimal. Certain assets of
BHP were retained in order to satisfy
37
<PAGE>
certain liabilities. As of December 31, 1997 the amount of assets and
liabilities were approximately equal.
E. Other Acquisitions
In addition to the above described acquisitions, Coastal made a number
of less significant acquisitions in 1995 and 1994. No acquisitions were made
during 1997 or 1996. Such acquisitions consisted of (in 1995) 18 practices, two
hospital-based contract management firms, a practice management company and a
physician search company and (in 1994) 31 physician practices, a billing
company, a consulting company and a physician placement company. Aggregate
consideration for these other acquisitions was (in 1995) $25,861,000 (consisting
of $23,566,000 in cash and $2,295,000 in the Company's common stock) and (in
1994) $20,898,000 (consisting of $10,045,000 in cash and $10,853,000 in the
Company's common stock). These acquisitions were all accounted for as purchases.
The following unaudited pro forma results of operations (on an aggregate basis
for all of these acquisitions and BHP) assume all purchases occurred as of the
beginning of the respective periods presented after giving effect to certain
adjustments, including the amortization of the excess of cost over the fair
value of net assets acquired, increased interest expense on acquisition debt and
related income tax effects.
Year ended December 31, 1995
(In thousands, except per share data)
Operating revenue, net $ 825,282
---------
Loss before extraordinary item (64,339)
Extraordinary gain 16,237
---------
Net loss $ (48,102)
=========
Loss per share:
Loss before extraordinary item $ (2.72)
Extraordinary gain .69
---------
Net loss $ (2.03)
=========
F. Divestitures of Certain Practice Management Services and Clinics
On December 31, 1997, the Company and certain subsidiaries of the
Company closed a transaction pursuant to which the Company sold to Scott Medical
Group, LLC ("Scott Medical") the following assets: (i) all of the issued and
outstanding stock of Integrated Provider Networks, Inc., a North Carolina
corporation ("IPN") which provides practice and physician management services to
professional corporations; (ii) all of the issued and outstanding stock of
Practice Solutions, Inc., a North Carolina corporation ("PSI") which provides
billing services to freestanding physician practices and clinics, including
those under management by IPN; (iii) all of the issued and outstanding stock of
Sunlife OB-GYN Services of Broward County, Inc., a Florida corporation
("Sunlife"); (iv) substantially all of the assets of Ft. Lauderdale Perinatal
Associates, which operates
38
<PAGE>
two physician clinics located in Plantation, Florida, and Physician Access
Center, which operates a clinic in San Francisco, California (collectively the
"Additional Clinics"); and (v) certain accounts receivable of Sunlife (the
"Sunlife Receivables") which had previously been sold to NPF-XI, Inc. pursuant
to a series of receivables securitizations and other financing arrangements
between the Company and subsidiaries of National Century Financial Enterprises,
Inc. Scott Medical 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 (See Note 11 Related Party Transactions). The purchase price was
$10,100,000, paid $5,000,000 in cash at the closing with the balance paid with a
short term promissory note in the principal amount of $5,000,000 (the "IPN Note)
and a receivable from the purchaser in the amount of $100,000, both of which
were paid in full in January 1998. The purchase price was reduced by
approximately $192,000 due to an increase in the liabilities of IPN (including
Prim Med, Inc., its wholly owned subsidiary) and PSI from the liabilities as
shown on their September 30, 1997 balance sheets. The loss on the sale was
approximately $1.2 million. The purchase price may be further reduced if the
actual collections of the outstanding accounts receivable of IPN, Prim Med, Inc.
and the professional corporations under management by IPN totaling $2.4 million,
varies five percent from the value of said receivables as agreed upon by the
parties. Management believes that it has made adequate provision for any
adjustments which may occur.
In addition, Scott Medical gave a promissory note (the "Receivables
Purchase Note") as the consideration for Scott Medical's purchase of the Sunlife
Receivables. The principal amount of the Receivables Purchase Note is
$1,000,727, the book value of the Sunlife Receivables. The Receivables Purchase
Note is subject to adjustment if the actual collections with respect to the
Sunlife Receivables varies five percent from the principal amount of the
Receivables Purchase Note. Management believes that it has made adequate
provision for any adjustments which may occur. The Receivables Purchase Note
bears interest at the applicable federal rate, payable quarterly, with all
principal and accrued but unpaid interest payable in full on October 31, 1998.
The Company sold certain assets related to seven primary care clinics
operated by the Company (the "South Florida Clinics") and the billed medical
accounts receivable from two additional Clinics previously managed by IPN (the
"Clinic Receivables") to Scott Medical. Subsequent to that sale of assets, IPN
and PSI provided billing services and some management services to the South
Florida Clinics for Scott Medical. Subsequent to the May 31, 1997 closing, IPN
advanced certain expenses for the benefit of Scott Medical with respect to these
clinics. As part of the December 31, 1997 closing referred to above, Scott
Medical assumed all the obligations of a lease which was leased by CHG
Properties, Inc. for use by IPN and PSI as administrative and billing offices
from a subsidiary of the Company at 3000 Croasdaile Drive, Durham, North
Carolina. The landlord at 3000 Croasdaile Drive is Chateau Limited Liability
Company ("Chateau"), a privately held limited liability company which is
controlled by Steven M. Scott, M.D. The estimated balance of the gross lease
payments that were due under the Chateau lease after October 31, 1997 is
$2,778,056. The parties negotiated a release fee for the Chateau lease of
$750,000. This amount was credited against the amount Scott Medical owes the
Company relating to the purchase of the South Florida clinics in May of 1997,
such that
39
<PAGE>
the net amount owed to the Company and/or affiliates by Scott Medical is
$1,618,235. At the closing of the December 31, 1997 transaction, Scott Medical
delivered a promissory note in the principal amount of $810,283 payable to an
affiliate of the Company bearing interest at the applicable federal rate with
interest payable quarterly and the entire balance due in one (1) year.
G. HealthNet Divestiture
Effective November 30, 1996 the Company sold certain assets of the
HealthNet Medical group operations of Physicians Planning Group, Inc.
("HealthNet"), the Company's New Jersey-based clinic operations, for
approximately $10,500,000 in cash. HealthNet consisted of nine primary care
sites in New Jersey and New York. The Company realized a gain of approximately
$8,300,000 which is included in Gain (loss) on divested assets, net in the
accompanying statements of operations.
H. MedCost Divestiture
Effective November 22, 1996 MedCost, Inc., one of the Company's managed
care entities, was sold for approximately $15,000,000 in gross cash proceeds
from the transaction and recorded a gain of approximately $12,200,000 which is
included in Gain (loss) on divested assets, net in the accompanying statements
of operations.
4. TRADE ACCOUNTS RECEIVABLE AND OPERATING REVENUE
Trade accounts receivable, net, consisted of the following:
As of December 31,
Dollars in thousands
1997 1996
-------- ---------
Gross trade receivables $ 36,477 $ 184,579
-------- ---------
Less allowance for contractual adjustments and
uncollectibles (12,865) (97,169)
-------- ---------
Trade accounts receivable, net $ 23,612 $ 87,410
======== =========
Operating revenues, net consisted of the following:
For the years ended December 31,
Dollars in thousands
1997 1996 1995
--------- --------- -----------
Gross non-capitated revenue $ 451,596 $ 692,665 $ 962,118
Gross capitated revenue 163,533 145,105 101,420
--------- --------- -----------
Total gross revenue 615,129 837,770 1,063,538
Less contractual adjustments and
uncollectibles (190,288) (285,661) (253,151)
--------- --------- -----------
Operating revenue, net $ 424,841 $ 552,109 $ 810,387
========= ========= ===========
In June 1997, the Company and certain of its subsidiaries entered into a Sale
and Subservicing agreement with NCFE, whereby certain eligible accounts
receivable and
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<PAGE>
rights to future receivables were sold. The transaction is more fully discussed
in Note 7. Receivables and rights to future receivables sold were purchased at
their approximate book value, and therefore no gain or loss was recorded on the
sale. Gains or losses may be recognized in future periods, depending upon cash
collections. The cash received for the rights to future receivables was recorded
under long-term debt in the accompanying consolidated balance sheets.
5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has very limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
interest rate risks.
On March 31, 1995, the Company entered into a fixed interest rate hedge
contract with a financial institution. Under the terms of the contract, the
Company pays a fixed rate of 8.45% on a notional amount of $6,600,000, which
amortizes quarterly by $235,714 beginning July 3, 1995. In return, the financial
institution pays the Company a floating rate of interest calculated using the
three-month LIBOR plus 1.125%. The contract expires on March 31, 2002. The
difference between the amounts paid and the amounts received are recognized as
adjustments to interest expense.
6. PROPERTY AND EQUIPMENT
The cost, accumulated depreciation, and book value of property and
equipment are summarized as follows:
December 31,
(In Thousands) 1997 1996
---- ----
Land 2,511 2,511
Buildings 3,184 3,184
Leasehold improvements 3,088 6,009
Construction in progress 206 675
Furniture and equipment 20,892 27,198
Automobiles 198 259
-------- --------
Total $30,079 39,836
Less accumulated depreciation (19,737) (20,795)
-------- --------
Net property and equipment $ 10,342 $ 19,041
======== ========
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<PAGE>
7. BORROWINGS
Long-term debt consisted of the following:
December 31,
------------
(In Thousands) 1997 1996
-------- --------
Borrowing under reducing revolving credit $ -- $ 43,069
facility
Borrowing under overline facility -- 24,813
Funds received from NCFE 72,018 --
Term note payable in monthly installments through
November 1998 bearing interest at 8.25% 1,489 3,286
Obligations under capital leases 3,022 2,900
Term note payable in quarterly installments
through 1999 bearing interest at 8.0% 611 935
Other 87 926
-------- --------
Total 77,227 75,929
Less current maturities (2,529) (71,130)
======== ========
Long term portion $ 74,698 $ 4,799
======== ========
During 1994, the Company obtained an extension of its Senior Credit
Facility with its bank lenders whereby the Company could borrow up to
$200,000,000, consisting of a $50,000,000 3-year revolving credit facility to be
used for working capital purposes ("Working Capital Facility") and a
$150,000,000 7-year reducing revolving credit facility ("Acquisition Facility")
to be used for acquisitions.
The Senior Credit Facility contained covenants that, among other
things, required the Company to maintain certain financial ratios and imposed
certain limitations and prohibitions on the Company with respect to additional
indebtedness, mergers or acquisitions, liens and encumbrances, dispositions of
assets, transactions with related parties, investments and the payment of
dividends.
On June 30, 1995, the Company was deemed to be in violation of certain
covenants of the Senior Credit Facility. The Company and its bank lenders
entered into a number of amendments and agreements over the period August 10,
1995 until June 10, 1997 when the bank debt was repaid in full. During this
period the Company at various times was in violation of certain of the covenants
of the Senior Credit Facility and was required to pay interest at the default
rate, as defined in the Senior Credit Facility. In addition, during this period
the Company was required to pay to the bank lenders certain net proceeds
received in connection with the sale of certain operations. In 1996, the Company
also granted common stock purchase warrants to the lenders entitling them to
purchase at par value up to 1,254,509 shares of its common stock. A portion of
the warrants vested immediately, with the balance subject to cancellation based
upon the Company's compliance with a specified repayment schedule. Warrants to
purchase 250,902 shares were canceled as a result of $40 million in payments
made by the Company prior to January 2, 1997. Warrants covering 186,789 shares
have been exercised. The remaining warrants, covering 816,818 shares, have
vested.
On June 6, 1997, the Company entered into a series of sale and
subservicing agreements (the "Sale Agreements") with various subsidiaries of
NCFE. The Sale
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<PAGE>
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. As a result of the sales of certain
operations of the Company in 1997, the facilities have been reduced to $23
million as of December 31, 1997. The Company entered into amendments to these
facilities, whereby the commitment was extended until July 1, 2000. Another Sale
Agreement creates a facility for the purchase of up to $115 million of
receivables and terminates on June 1, 2000. Pursuant to the Sale Agreement, the
Company pays a program fee ranging from approximately 10.9% to approximately
12.5% 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
$40 million through July 1, 1999. Interest on outstanding amounts under this
line of credit is payable monthly at prime plus 4%. The availability under the
line of credit is reduced, at the option of NCFE, in an amount equal to one-half
of the net proceeds received in connection with the sale of specified assets,
but not below $15 million. The line of credit expires June 15, 1999. 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 the restructured Senior Credit Facility with
its bank lenders which terminated on that date. All collateral held by the
lenders under those facilities was released. As of December 31, 1997, the
Company had received funds from NCFE totaling approximately $72.5 million for
which repayment has been waived until July 1, 1999, provided the Company remains
in compliance with the terms and conditions of its various agreements with NCFE.
The Company remains dependent upon NCFE to continue to purchase eligible
accounts receivable and to provide funds pursuant to the $40 million revolving
line of credit described above in order to fund its operations.
The assets represented by the obligations under capital leases shown
above consist primarily of one building having a cost basis of $3,041,000 and
accumulated depreciation of $650,000 and $553,000 as of December 31, 1997 and
1996, respectively.
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<PAGE>
The following is a schedule of maturities of long-term debt and minimum
lease payments under capital leases as of December 31, 1997 (in thousands):
Long term debt Capital leases Total
1998 $ 2,103 $ 434 $ 2,537
1999 72,022 452 72,474
2000 4 470 474
2001 4 488 492
2002 5 249 254
Thereafter 66 3,023 3,089
------- ----- -------
Totals $74,204 $5,116 $79,320
======= ====== =======
Less amount representing interest on capital leases
2,093
77,227
-------
Less current maturities 2,529
=======
$74,698
=======
8. INCOME TAXES
Benefit (provision) for income taxes consisted of the following:
Years Ended December 31,
(In Thousands) 1997 1996 1995
---- ---- ----
Current:
Federal $1,400 $ 4,452 $17,976
State -- (2,181) 1,432
Deferred:
Federal -- (5,638) (973)
State -- (769) (1,299)
====== ======= =======
Benefit (provision) for income
taxes $1,400 $(4,136) $17,136
====== ======= =======
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities are as follows:
(In Thousands) Years Ended December 31,
-----------------------
1997 1996
-------- --------
Deferred tax assets:
Net Operating loss carry forward $ 81,306 $ 37,235
Reserve for liabilities 4,066 15,988
Depreciation of property and equipment 218 (39)
Other 2,427 4,167
-------- --------
Total gross deferred tax assets $ 88,017 $ 57,429
Less valuation allowance (86,333) (54,334)
-------- --------
Net deferred tax assets $ 1,684 $ 3,056
Deferred tax liabilities:
Deferred revenue and prepaid expenses $ 1,684 $ 2,376
State income taxes -- 162
Other -- 557
-------- --------
Total gross deferred tax liabilities 1,684 3,056
-------- --------
Net deferred tax assets $ -- $ --
======== ========
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<PAGE>
The valuation reserve for deferred tax assets as of December 31, 1995
was $2,887,000. The net change in the total valuation reserve for the years
ended December 31, 1997 and 1996 was an increase of $31,999,000 and $51,447,000,
respectively. Due to the recent history of losses by the Company, it is the view
of management that a valuation reserve is necessary for the net deferred assets
of the Company.
As of December 31, 1997 the Company had federal loss carryforwards of
approximately $186,000,000. In addition, as of December 31, 1997, the Company
had state loss carryforwards of approximately $256,000,000. These net operating
loss carryforwards expire at various dates to 2013. As of December 31, 1997,
approximately $14,000,000 of the company's federal loss carryforward is subject
to an annual limitation of $8,400,000, and $172,000,000 is not presently subject
to any limitations. The federal and state loss carryforwards will be reduced by
approximately $16,000,000 and $19,000,000, respectively, as a result of the sale
of Doctors Health Plan in 1998 (See Note 17).
The Company experienced a change in ownership within the meaning of
Section 382 of the Internal Revenue Code during July 1996. A change in ownership
occurs when there is a more than 50% change in ownership, computed using 5% or
more shareholders, over a period of time not to exceed 3 years. As of December
31, 1997, the Company's cumulative ownership change since July 1996 was
approximately 28%. Should future ownership cause a more that 50% cumulative
change, the Company's ability to use federal and state loss carryforwards could
be subject to significant limitation.
A reconciliation of the benefit (provision) for income taxes to the
amount computed by applying the 34% statutory federal income tax rate is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
"Expected benefit" (provision) 34.0% 34.0% 34.0%
State income taxes, net of federal income tax effect 8.1 (1.5) 0.1
Nondeductible purchased goodwill 6.9 (7.7) (13.5)
Change in valuation reserve (46.5) (28.2) --
Other (0.8) 0.5 0.7
----- ----- -----
"Actual" benefit (provision) 1.7% (2.9%) 21.3%
===== ===== =====
</TABLE>
9. CAPITAL STOCK
On January 20, 1995, the Board of Directors adopted a Shareholder
Rights Plan, under which the Company distributed a dividend of one Preferred
Share Purchase Right (a "Right") for each outstanding share of the Company's
common stock. Each Right becomes exercisable upon the occurrence of certain
events for one one-hundredth of a share of Junior Participating Cumulative
Preferred Stock, par value $.01 per share, at a purchase price of $120 subject
to modification. Under the Shareholder Rights Plan, 500,000 shares of Junior
Participating Cumulative Preferred Stock have been reserved for issuance. The
Rights currently are not exercisable. Pursuant to an amendment to the
Shareholder Rights Plan (effective June 3, 1997), the Rights will become
exercisable only if a person or group acquires beneficial ownership of 20% or
more of the Company's outstanding shares of common stock, or in the case of a
group consisting of Dr. Scott and his associates and affiliates (the "Scott
Group"), more than 55% of the Company's outstanding shares of common stock.
Prior to December 27, 1996, the Rights were exercisable when a person or group
acquired beneficial ownership of 15% or more of the Company's outstanding shares
of common stock, or in the case of the Scott Group, 33.2%
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<PAGE>
or more. The Rights, which expire on February 3, 2005, are redeemable in whole,
but not in part, at the Company's option at any time for the price of $.01 per
Right.
On January 21, 1997, the Company authorized 47,500 shares of Series A
Convertible Preferred Stock ("Series A Preferred") and 32,500 shares of Series B
Convertible Preferred Stock ("Series B Preferred"), and on June 3, 1997,
authorized 1,200,000 shares of Series C Convertible Preferred Stock ("Series C
Preferred"), each series with a par value of $0.01 per share. On February 21,
1997, the Company increased the number of authorized shares of Series B
Preferred from 32,500 to 33,000. Following the Trigger Date (as defined below),
shares of the Series A Preferred, the Series B Preferred, and the Series C
Preferred are convertible into common stock at an initial conversion rate of ten
shares of common stock for each share of Series A Preferred, Series B Preferred,
or Series C Preferred. The Trigger Date means the date on which the conversion
feature of each series of preferred stock is approved by the Company's common
shareholders. On January 21, 1997, the Company reserved 800,000 shares of common
stock for issuance upon conversion of the Series A Preferred and Series B
Preferred, and on June 3, 1997, reserved 12,000,000 shares of Common stock for
issuance upon conversion of the Series C Preferred. The conversion feature was
approved at the Company's annual meeting of shareholders on August 29, 1997.
On October 23, 1997, Dr. Steven M. Scott, Coastal's Chief Executive
Officer, a director and largest shareholder, converted 46,033 shares of the
Company's Series A Preferred Stock into 460,330 shares of the Company's common
stock, 32,739 shares of the Company's Series B Preferred Stock into 327,930
shares of the Company's common stock and the 1,084,983 shares of the Company's
Series C Preferred Stock into 10,849,830 shares of the Company's common stock.
On December 30, 1997, the Company issued 1,000,000 shares of common
stock (valued at approximately $938,000 at the time of issuance) to NCFE to
satisfy fees of $1,046,000 owed to NCFE in connection with the closing of the
June 6, 1997 Sale and Subservicing Agreements as discussed in Note 7. In
addition, the Company issued 200,000 shares of common stock to vendors in lieu
of cash payments for services rendered in December 1997.
For additional capital stock transactions with related parties, see
Note 11.
10. COMMITMENTS AND CONTINGENCIES
The Company procures professional liability insurance coverage on
behalf of its operating subsidiaries on a claims-made basis. The insurance
contracts specify that coverage is available only during the term of each
insurance contract. Management of the Company intends to renew the existing
claims-made policies annually and expects to be able to obtain such coverage.
When coverage is not renewed, the subsidiary companies purchase an extended
reporting period endorsement to provide professional liability coverage for
losses incurred prior to, but reported subsequent to, the termination of the
claims-made policies.
The Company and each of its independent contractor physicians obtain
their professional liability insurance coverages on their own behalf 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
46
<PAGE>
established plans to pay claims in the future based on formal plans of
arrangement. The Company has receivables of approximately $3,243,000 at December
31, 1997 (included in other assets in the accompanying consolidated balance
sheets) related to certain claims for which reimbursement is still pending.
Management believes that this amount is collectable.
The Company and certain independent contractor physicians are
defendants in various medical malpractice lawsuits arising under the 1990 policy
year for medical malpractice insurance. The primary layers of medical
malpractice insurance for that policy year have been exhausted, and pending and
unasserted claims for that policy year are covered by a reinstatement insurance
policy, with coverage that varies somewhat from the primary coverage. Under the
reinstatement insurance, the Company must advance the costs of defense and
settlement of claims and seek reimbursement from the insurers. Insurers
responsible for 70% of the reinstatement insurance are in receivership or
liquidation status and are not paying claims currently.
In August 1995, the Company entered into an agreement with a data
processing service provider pursuant to which the Company agreed to purchase
approximately $58,000,000 in services through 2005. In August 1997, the Company
reached an agreement to terminate the contract effective September 30, 1997 and
pay approximately $4.4 million for prior services rendered and to obtain a
release from the contract. In June 1997, the Company entered into an agreement
with an alternative provider of data processing services. The agreement is for a
period of two years, ending in June 1999. Under terms of the agreement, the
Company is obligated for monthly fees based upon usage, with a minimum monthly
fee of $50,900.
The Company entered into a long-term contract for telecommunications
services which initially obligated the Company to purchase approximately
$39,500,000 in services through 2005. In December 1997, the Company and the
service provider entered into a revised agreement that provides for the Company
to use the service provider as the exclusive voice and data long distance
provider. The agreement expires on December 31, 2002 and provides for financial
penalties should the Company terminate the agreement prior to that date, without
cause. Under terms of the agreement the Company is obligated to pay a monthly
fee that is adjusted based upon usage by the Company.
The Company leases and occupies two office buildings, totaling
approximately 52,000 square feet, located in Durham, North Carolina. The lease
requires the Company to lease the properties until it purchases the properties
no later than June 30, 2002. The purchase price ranges from $5,342,000 to
$6,131,000 depending upon the date of purchase. The lessor has the option of
requiring the Company to purchase the properties upon 75 days' notice,
subsequent to January 1, 1998.
The Company leases an additional building in Durham, North Carolina
that contains approximately 21,600 square feet of space. The lease requires the
Company to purchase the leased property, prior to the termination of the lease
on June 30, 2002. The purchase price ranges from $3,142,000 to $3,606,000
depending upon the date of purchase. The lessor has the option of requiring the
Company to purchase the properties upon 75 days' notice, subsequent to January
1, 1998.
Following the announcement of the Company's first quarter operating
results on April 27, 1995, four class action lawsuits were commenced by certain
shareholders
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<PAGE>
against the Company and certain of its current and former officers and directors
in the United States District Court for the Middle District of North Carolina.
These lawsuits were consolidated into a single consolidated and amended
complaint styled In re Coastal Physician Group, Inc. Securities Litigation, and
class certification was granted. The consolidated, amended complaint sought
unspecified damages for alleged violations of the federal securities laws and
common law negligence related generally to the issuance of allegedly false and
misleading statements about the Company's operations and present and future
prospects. This litigation was settled following a court ordered mediation in
which the Company and its insurers agreed to contribute $8,150,000 to a
settlement fund to be used to compensate the class members. The Company's
contribution to the settlement was $1,000,000 and was paid in February 1998. The
final settlement is subject to Court approval and is contingent upon not more
than five percent of the class members opting out of the settlement.
The Company and certain of its current and former officers and
directors have been named defendants in a purported shareholder class action
lawsuit that was filed in North Carolina state court. On August 27, 1997, the
Court entered an Order denying class certification and the plaintiffs have
appealed this order. In a companion case, a similar action was filed in United
States District Court for the Middle District of North Carolina alleging common
law fraud and negligent misrepresentation against the Company. The Company has
filed motions to dismiss that are currently pending. The Company intends to
vigorously defend its position, but at this stage of the litigation, exposure to
the Company cannot be determined.
On October 31, 1996, three cases were filed in the Circuit Court for
Palm Beach, Florida seeking statutory damages for alleged violations of Section
559.79 of the Florida Consumer Collection Practices Act statute as a result of
invoices mailed for medical services rendered by contract physicians in
emergency departments for which the Company provided physician staffing
services. Plaintiffs have amended their complaints and are seeking only
statutory damages. Plaintiffs have also filed a motion seeking class
certification which is currently pending before the court. The Company believes
that it has several defenses and intends to vigorously defend the action. At
this stage of the litigation, exposure to the Company cannot be determined;
however, it is possible that there could be liability in excess of insurance
coverage available to the Company.
The Company has voluntarily disclosed to the Department of Justice that
a possible overpayment from Medicare occurred. Since the Company's voluntary
disclosure, the company has cooperated in the review by the Department of
Justice. The final resolution of this matter is pending; however, management
believes that it has made adequate provisions for the Company's liability in
this matter.
On February 4, 1998, Jacques J. Sokolov, M.D., who previously served as
Chairman of the Company and President of Advanced Health Plans, Inc., a
subsidiary of the Company, filed a Demand for Arbitration alleging various
breaches of his employment contract dated November, 1994 with the Company. The
Company has objected to the conduct of the arbitration in California and has
requested that the arbitration hearings be held in North Carolina. The Company
intends to vigorously defend its position, but at this stage of the litigation,
exposure to the Company cannot be determined.
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<PAGE>
On June 17, 1997, Henry J. Murphy, who was President and Chief
Executive Officer of the Company from November 1, 1996 to February 28, 1997,
filed a lawsuit against the Company alleging that the Company has failed to make
certain incentive payments to him under his prior written employment agreement.
The Company intends to vigorously defend its position, but at this stage of the
litigation, exposure to the Company cannot be determined.
The Company and its subsidiaries are involved in various legal
proceedings incidental to their businesses, substantially all of which involve
claims related to the alleged medical malpractice of contracted physicians,
contractual and lease disputes or individual employee relations matters. In the
opinion of the Company's management, no individual item of litigation or group
of similar items of litigation, taking into account the insurance coverage
available to the Company, is likely to have a materially adverse effect on the
Company's financial position or results of operations.
The Company has been notified by the New York Stock Exchange ("NYSE")
that it is not currently in compliance with certain listing requirements of the
NYSE. Management is in discussions with representatives of the New York Stock
Exchange concerning the listing requirements but cannot, at this time, assess
the outcome of these discussions on the Company or its stock.
11. RELATED PARTY TRANSACTIONS
The Company engages in transactions with American Alliance Holding
Company and its affiliates ("Alliance"), Century American Insurance Company
("Century Insurance") and Quality Management Consultants, Inc., and affiliates
thereof. Coastal's principal shareholder is the sole shareholder of Alliance.
Amounts paid by the Company to these entities, net of amounts received, were
$4,186,000, $5,135,000, and $3,371,000 for the years ended December 31, 1997,
1996, and 1995, respectively.
The Company and certain of its subsidiaries sublease office space in
Durham, North Carolina, consisting of approximately 59,000 square feet, from
Alliance under sublease agreements. The building is owned by American Alliance
Real Estate Corporation which leases the building to Century Insurance. During
the years ended December 31, 1997 and 1996, the Company paid Century Insurance
approximately $562,000 and $960,000, respectively, under these sublease
agreements. The Company, American Alliance Holding Company and Century Insurance
are all liable to the holder of a first mortgage on the property for the total
rentals specified in the prime lease; however, the Company has an agreement of
indemnity from American Alliance Holding Company, and American Alliance Holding
Company has an agreement of indemnity from Century Insurance. The prime lease
commenced in August 1988 and has a fifteen-year term requiring minimum lease
payments of approximately $788,000 per year for years one through five, $959,000
per year for years six through ten and $1,166,000 per year for years eleven
through fifteen.
In addition, on March 31, 1995, the Company purchased an airplane from
Alliance Aviation, Inc., a wholly-owned subsidiary of Alliance. The purchase
price was $6,600,000, based upon a third-party appraisal performed on March 6,
1995. The airplane was sold to an unrelated third party on May 9, 1996 for
$6,200,000.
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<PAGE>
The Company leased office space from corporations controlled by the
principal shareholder of Coastal. Rent paid during 1997, 1996, and 1995 was
$286,000, $1,513,000, and $517,000, respectively. As discussed in Notes 3 and
11, the Company entered into a termination of the remaining lease obligations
for certain office space under lease through 2002.
The Company holds several unsecured promissory notes bearing interest
at rates from 5.84% to 12% per annum in the aggregate amount of $8,003,000, as
well as several other receivables in the amount of $1,402,000 as of December 31,
1997 from Scott Medical LLC. The promissory notes and other receivables arose in
connection with the acquisition of IPN, PSI, Sunlife, the South Florida Clinics,
the Additional Clinics, the Sunlife Receivables and the Clinic Receivables by
Scott Medical LLC in May and December, 1997 as discussed in Note 3. In January
1998, the Company received $5,000,000 from Scott Medical LLC in full payment of
the IPN Note and $100,000 in connection with the purchase of IPN.
The Company holds unsecured notes receivable bearing interest at rates
ranging from 8.5% to 10% (prime plus 1.5%) from shareholders totaling
$1,963,000, $1,651,000 and $1,879,000 at December 31, 1997, 1996 and 1995,
respectively. The Company has recorded an allowance of $1,963,000, $1,651,000
and $1,879,000 against the note receivable balances at December 31, 1997, 1996
and 1995, respectively, pending the result of current litigation.
In January 1997, pursuant to a reimbursement agreement dated December
31, 1996 between the Company and Dr. Steven M. Scott, Coastal's Chief Executive
Officer, a director and largest shareholder, the Company issued 226,690 shares
of common stock and 32,739 shares of Series B Preferred to Dr. Scott in
satisfaction of the Company's obligation to reimburse certain proxy solicitation
expenses incurred by Dr. Scott.
On January 21, 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 incurred by them in the
litigation by issuing shares of 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 Stock in payment of the aggregate amount of
fees and expenses incurred by Dr. Scott and Dr. Walls.
Simultaneous with the NCFE transaction, as explained in Note 7, Dr.
Scott invested $10 million in cash in the Company and received 1,000,000 shares
of Series C Preferred Stock. The Series C Preferred Stock subject to approval by
the Company's common stockholders, is convertible into 10,000,000 shares of
common stock. In addition, Dr. Scott received 84,983 shares of Series C
Preferred Stock and 240,000 shares of common stock in satisfaction of certain
obligations owed to him by the Company of approximately $1.1 million. After
approval at the Company's annual meeting in August 1997, the Series C Preferred
Stock was converted into 10,000,000 shares of common stock.
On March 3, 1998, Dr. Walls made an investment of $2.0 million in the
Company in exchange for a $2.0 million convertible debenture due July 3, 1998
bearing interest at 10% per annum. The debenture is convertible at maturity into
shares of common and preferred stock. The debenture is convertible at the
holder's option into the Company's
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<PAGE>
common stock at a conversion rate equal to the lower of the 10 trading days
average closing price of the Company's stock as of the date of the issuance of
the debenture or the average closing price for the 10 trading days prior to the
maturity date of the debenture. The conversion price for the preferred shares is
ten times the conversion price for the common stock. The number of common shares
that can be acquired upon conversion of the debenture cannot exceed 1% of the
common stock of the Company outstanding on the conversion date. The balance is
convertible into a new series of preferred stock that is convertible into 10
shares of common stock for each share of preferred stock. If issued, the
preferred stock would be convertible only upon approval of the Company's
shareholders.
On May 1, 1998, the debenture was assigned to Dr. Scott. Dr. Scott has
agreed not to demand payment on the debenture until 1999, but is able to seek
conversion of the debenture in accordance with the terms set forth above.
12. OPERATING LEASES
The Company leases office space (see Note 11) and equipment under
noncancelable operating leases which have terms of one to five years remaining
at December 31, 1997. Rent expense related to noncancelable office space and
equipment leases amounted to $9,963,000, $15,614,000, and $16,800,000, for the
years ended December 31, 1997, 1996, and 1995, respectively.
Future minimum lease payments required under noncancelable operating
leases as of December 31, 1997, are as follows: 1998 - $3,664,000; 1999 -
$3,284,000, 2000 - $2,730,000, 2001 - $1,359,000; 2002 - $391,000 and thereafter
not material.
13. STOCK OPTIONS AND STOCK COMPENSATION
At December 31, 1997, the Company had four stock-based compensation
plans, which are described below. The Company continues to apply APB Opinion 25
and related Interpretations in accounting for its plans. No compensation cost
has been recognized for its three fixed stock option plans and its stock
purchase plan since options were issued at the stocks' then current market
value. The Company did not adopt the new fair value based method of accounting
for stock compensation plans. Under FASB 123, companies that do not adopt the
fair value based method of accounting for stock compensation plans and continue
to follow the provisions of APB Opinion 25, are required to make pro forma
disclosures of net income and earnings per share as if they had adopted the fair
value accounting method. Had compensation cost for the Company's four
stock-based compensation plans been determined on the fair value at the grant
dates for awards under those plans consistent with the method of FASB Statement
123, there would have been no material effect on the Company's net loss and loss
per share for the years ended December 31, 1997, 1996 and 1995.
The Company adopted, on May 8, 1991, an incentive stock option plan
primarily for selected key employees. Under the plan, options may be granted at
not less than the fair market value of the stock at the date of grant. Options
are exercisable at various times from the date of grant, as determined by the
Compensation Committee of the Board of Directors (the "committee"), and expire
after ten years from the date of grant. The Company has authorized 4,000,000
shares of common stock for grants of options under
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<PAGE>
the incentive stock option plan. In 1987, the Company adopted a non-qualified
stock option plan that allows for options to be granted at not less than 90% of
the estimated fair market value of the stock at the date of grant. These options
are exercisable at various times, as determined by the committee, and expire
after ten years from the date of grant. The Company has authorized 4,000,000
shares of common stock for grants of options under the non-qualified stock
option plan. Included in these non-qualified stock options (although not a part
of the 1987 non-qualified stock option plan) were options held by HEI directors
and officers which became fully vested and were converted into options to
acquire 169,000 shares of the Company's common stock upon consummation of the
merger. The exercise price of the converted options ranged from $1.09 per share
to $2.73 per share. All of the converted options were exercised as of December
31, 1996. In 1994, the Company adopted a stock option plan for its independent
directors. Under this plan, non-qualified stock options ("NSOs") may be granted
at not less than the fair market value of the stock at the date of grant to
directors who are not employed by the Company. The NSOs are exercisable after
one year from the date of grant and expire after ten years from the date of
grant. The Company has authorized 500,000 shares of common stock for grants of
NSOs under this stock option plan.
On October 25, 1995, the Company approved the issuance of replacement
stock options in lieu of unexercised stock options previously granted to certain
employees under the 1991 incentive stock option plan and the 1987 non-qualified
stock option plan between January 1, 1994 and April 30, 1995. Under the
replacement option procedure, such unexercised options could be replaced, at the
election of the optionee, on a two existing for one replacement option basis.
The exercise price of the replacement options was $13.88 per share, the closing
NYSE price on November 17, 1995. The exercise dates and vesting periods of the
replacement options remained the same as provided for in the original grants.
Under an employee stock purchase plan adopted in 1994, the Company is
authorized to issue up to 1,000,000 shares of common stock to its full-time
employees and part-time employees working 20 or more hours a week, all of whom
are eligible to participate after six months of service. Under the terms of the
plan, employees can choose to have from 1% to 10% of their annual base earnings
withheld to purchase the Company's common stock. The purchase price of the stock
is 90 percent of the lesser of the market price of the common stock as of the
first or last day of each quarter. If no such price is reported for that day,
the market price of the last preceding day for which such price is reported is
used. Under the Plan, the Company sold 82,000 shares, 83,000 shares and 71,000
shares to employees in 1997, 1996 and 1995, respectively.
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<PAGE>
A summary of the status of the Company's three fixed stock option plans
as of December 31, 1995, 1996, and 1997, and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Fixed Options (000) Price (000) Price (000) Price
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 2,593 $ 28.67 3,145 $ 26.31 2,014 $ 25.60
Granted 1,710 21.98 475 9.90 626 1.96
Exercised (149) 3.86 (63) 2.86 -- --
Reduction due to reprice in 1995 (462) 27.28 -- -- -- --
Forfeited (547) 27.24 (1,543) 23.23 (545) 12.46
---------------------------------------------------------------
Outstanding at end of year 3,145 $ 26.31 2,014 $ 25.60 2,095 $ 21.95
---------------------------------------------------------------
Options exercisable at year-end 368 $ 23.99 786 $ 22.60 827 $ 31.46
Weighted-average fair value of options
granted during the year $ 9.60 $ 2.70 $ 1.96
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
Number
Number of Weighted-Avg. Exercisable
Outstanding at Remaining Weighted-Avg. at 12/31/97 Weighted-Avg.
12/31/97 (000) Contractual Life Exercise Price (000) Exercise Price
Range of Exercise
<S> <C> <C> <C> <C> <C>
$ 1.50 to 5.25 631 9.44 1.99 $ 5 $ 5.25
11.50 to 13.88 154 6.67 13.32 55 12.54
14.00 to 25.75 243 6.59 23.34 64 17.50
26.75 to 30.75 630 6.69 30.47 426 30.50
34.00 to 43.82 437 6.78 40.65 277 40.37
- -----------------------------------------------------------------------------------------------------------
$ 1.50 to 43.82 2,095 7.52 21.95 $ 827 $ 31.46
</TABLE>
14. RETIREMENT PLAN
The Company has a qualified contributory savings plan as allowed under
Section 401(k) of the Internal Revenue Code. The plan permits participant
contributions and requires a minimum contribution from the Company based on the
participant's contribution. Participants may elect to defer up to 12% of their
annual compensation by contributing the deferred amounts to the plan. The
Company made contributions of
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<PAGE>
$760,000, $1,265,000 and $1,492,000 to the plan during the years ended December
31, 1997, 1996 and 1995, respectively.
15. REVENUES FROM A MAJOR CUSTOMER
Certain subsidiaries of the Company (which were divested in 1995 as
discussed in Note 3) provided health care services subject to affiliated
provider agreements with entities affiliated with one HMO. For the years ended
December 31, 1997, 1996 and 1995, approximately 0%, 0%, and 24%, respectively,
of the Company's revenues were derived from such agreements. As of December 31,
1997 and 1996, the Company had no receivables from this HMO.
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of the unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended December 31, 1997 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Operating revenue, net $ 124,714 $ 111,496 $ 99,595 $ 89,036
Operating loss (8,300) (16,015) (12,896) (29,977)
Loss before income taxes and
extraordinary item (11,566) (21,627) (16,969) (33,219)
Net loss (11,566) (21,627) (15,569) (33,219)
Loss per share before income taxes and
extraordinary item (0.48) (0.89) (0.70) (0.99)
Net loss per share (0.48) (0.89) (0.64) (0.99)
Weighted average number of shares
outstanding 24,129 24,385 24,415 33,483
<CAPTION>
First Second Third Fourth
Year ended December 31, 1996 Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Operating revenue, net 152,734 146,038 137,805 115,532
Operating loss (9,909) (22,398) (29,677) (63,045)
Loss before income taxes and
extraordinary item (11,730) (24,860) (40,319) (70,512)
Net loss (11,730) (24,860) (38,455) (70,512)
Loss per share before income taxes and
extraordinary item (0.49) (1.04) (1.69) (2.95)
Net loss per share (0.49) (1.04) (1.61) (2.95)
Weighted average number of shares
outstanding 23,791 23,839 23,862 23,883
</TABLE>
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<PAGE>
17. SUBSEQUENT EVENTS
In March 1998, the Company announced the sale of Doctor's Health Plan
to DHP Holdings LLC., an entity that is controlled by Dr. Steven M. Scott, Chief
Executive of Coastal Physician Group, Inc. for a purchase price of $5,993,000.
Under terms of the sale, the Company received cash of $993,000 and a note in the
amount of $5,000,000, bearing interest 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 the Purchaser notice that it intends to accept a Strike Price, the
note is to be secured by collateral acceptable to the Board of Directors. 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.
In April 1998, the Company entered into an agreement with NCFE to
replace NPF-WL which was to expire on July 1, 1998 with a Sale and Subservicing
Agreement that is under similar terms and conditions as NPF-WL. The new
agreement expires July 1, 2000 and provides a commitment to purchase eligible
accounts receivable up to $13 million.
In May 1998, the Company entered into an agreement with NCFE to extend
until June 15, 1999 and increase the availability to $40 million under a line of
credit. This line of credit is secured by substantially all of the Company's
assets and the stock of its subsidiaries.
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company and executive officers of
subsidiaries of the Company who have significant policy-making authority:
Name Age Position
- --------------------------------------------------------------------------------
Steven M. Scott, M.D. 50 Chairman of the Board, President
and Chief Executive Officer
Charles F. Kuoni, III 46 Executive Vice President, Chief
Financial Officer and Treasurer
Mitchell W. Berger (1)(2) 42 Director
Charles E. Potter (1)(2) 54 Director
Bertram E. Walls, M.D. 46 Director
Eugene F. Dauchert, Jr. 44 Director, Secretary, Executive Vice
President
Edward L. Suggs, Jr. 46 Director, President and Chief
Executive Officer, Healthcare Business Resources, Inc.
Sherman M. Podolsky, M.D. 47 Director, President, Coastal
Physician Services of South Florida, Inc.
- -------------------------
(1) Member of the Audit Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
Dr. Scott has been a director of the Company since its formation in
1977. Until he resigned from the position on December 1, 1994, Dr. Scott also
served as Chairman of the Board of Directors and from 1977 to May 29, 1996, Dr.
Scott served as President and
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<PAGE>
Chief Executive Officer of the Company. Dr. Scott was re-elected Chairman of the
Board of Directors on January 14, 1997, and re-appointed President and Chief
Executive Officer of the Company on March 1, 1997. Dr. Scott has obstetrics and
gynecology practice experience and clinical and administrative emergency
department experience. He is board-certified in obstetrics and gynecology and is
a member of the clinical faculty at Duke University Medical Center. Dr. Scott
received his undergraduate degree and medical education from Indiana University.
Dr. Scott completed his residency in the Department of Obstetrics and Gynecology
at Duke University Medical Center.
Mr. Kuoni became Chief Financial Officer on September 15, 1997. Prior
to that, Mr. Kuoni was a consultant to the Company, assisting management in
developing its strategic business plan, refinancing the Company and implementing
operational changes. For the period August 1994 to June 1996, Mr. Kuoni served
as President of Travelmasters, Inc., a privately-held travel management company.
From February 1990 until August 1994, Mr. Kuoni held a number of positions with
the consulting firm of Buccino & Associates, Inc. His most recent position was
that of Vice President and Engagement Manager. Mr. Kuoni received his Bachelor's
degree in Accounting from Texas Christian University and his Master's degree
from Northwestern University's Kellogg School of Management. Mr. Kuoni is a
Certified Public Accountant and is a member of the American Institute of
Certified Public Accountants and the Illinois Society of Certified Public
Accountants.
Mr. Berger has been a director of the Company since September 1996. He
is the President and Founder of Berger, Davis & Singerman, a law firm with
offices located in Fort Lauderdale, Miami, and Tallahassee, Florida. Mr. Berger
currently serves on the Board of Governors of the Nova University School of
Business and was a Commissioner on the Florida Environmental Regulation
Commission from 1991 to 1997. Mr. Berger was recently appointed by the Governor,
and approved by the Florida Senate, to serve on the Board of the South Florida
Water Management District and has been a member of the Board of the Student Loan
Marketing Association (Sallie Mae) since 1994.
Dr. Walls, a director since 1991, became President and Chief Executive
Officer of Doctors Health Plan, Inc., a subsidiary of the Company, in February
1998. On March 18, 1998, the Company sold Doctors Health Plan, Inc. Dr. Walls
also served as President of Coastal Physician Contract Services Group, Inc. from
January through December 1994. Effective January 1, 1995, Dr. Walls became the
President and Chief Executive Officer of Century American Insurance Company
("Century Insurance"). From 1992 to 1993, Dr. Walls was the President of Sunlife
OB/GYN Services, Inc., a subsidiary of the Company, as well as its Chief Medical
Officer from 1991 to 1993. From 1981 through 1990, Dr. Walls was in the private
practice of obstetrics and gynecology with Valley Women's Center, P.A. in
Fayetteville, North Carolina. He is board certified in obstetrics and gynecology
and is a member of the clinical faculty at Duke University Medical Center. Dr.
Walls received a B.S. degree in Science from North Carolina A&T State University
and his medical degree from Duke University. He completed his residency in
obstetrics and gynecology at Duke University Medical Center. In addition, Dr.
Walls holds an MBA degree from the Duke Fuqua School of Business.
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<PAGE>
Mr. Potter, a director of the Company since April 1997, is President of
The Potter Financial Group, a small independent financial planning firm in
central North Carolina and a Principal in The Potter Financial Advisory Group,
LLC, a Registered Investment Advisory firm. He graduated from St. Peters College
in Jersey City, NJ with a BS degree in Marketing in 1966. He has been in the
financial services industry since 1966. He holds four professional designations:
(CLU) Chartered Life Underwriter, (ChFC) Chartered Financial Consultant from the
American College, Bryn Mawr, PA, (RFC) Registered Financial Consultant from the
International Association of Registered Financial Consultants and (AEP)
Accredited Estate Planner from the National Association of Estate Planning
Councils. He is also a member of the Association for Advanced Life Underwriters
and a Qualifying and Life Member of the Million Dollar Round Table, an
international sales organization.
Mr. Dauchert, a director since October 1996, became Executive Vice
President in July 1997. He has also served as President and Chief Executive
Officer of Coastal Physician Networks, Inc. ("CPN"), a subsidiary of the
Company, since January 1, 1996. Prior to that, Mr. Dauchert served as President
of Integrated Provider Networks, Inc., a subsidiary of CPN. Prior to joining the
Company, Mr. Dauchert was a partner in the law firm of Moore & Van Allen, PLLC
where he focused his practice on health care, corporate and tax matters for 16
years. Mr. Dauchert received a B.A. from the University of North Carolina at
Chapel Hill and a J.D. degree with honors from the University of North Carolina
School of Law. He is a member of the North Carolina and American Bar
Associations, and is active in numerous health care sections of those
organizations.
Mr. Suggs, a director since March 1997, has been with Healthcare
Business Resources, Inc., a subsidiary of the Company, since 1986 and its
President since 1987. Mr. Suggs previously served as a director of the Company
from 1989 to 1994. Previously, Mr. Suggs was Assistant Controller of Oxford
Development Company, a real estate development firm, and a tax manager for the
accounting firm of Ernst & Young LLP. He received a B.S. degree in Accounting
from the University of North Carolina at Charlotte. Mr. Suggs is a member of the
American Institute of Certified Public Accountants, the North Carolina
Association of Certified Public Accountants and the Healthcare Financial
Management Association.
Dr. Podolsky became a director on January 1, 1998, and is President of
Coastal Physician Services of South Florida Inc., a subsidiary of the Company.
Dr. Podolsky has also served as Senior Vice President of Medical and Corporate
Affairs and Senior Medical Officer for Coastal Emergency Services of Ft.
Lauderdale, Inc., a subsidiary of the Company, since 1991. He is a member of the
American College of Emergency Physicians. He received his medical education from
Chicago Medical School and completed his Emergency Medicine Residency at the
University of California, San Francisco and is a member of the American College
of Emergency Physicians. Prior to joining the Company, Dr. Podolsky held the
position of Chairman of Emergency Medicine at Albert Einstein Medical Center in
Philadelphia and also served on the faculty of UCLA and Stanford University.
58
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
the common stock, to file initial reports of ownership and reports of changes in
ownership of the common stock with the Securities and Exchange Commission (The
"Commission"). Officers, directors, and greater than ten percent shareholders
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of
such reports received by the Company and written representations from certain
reporting persons that no other reports were required for those persons during
1997, all Section 16(a) filing requirements applicable to the Company's
officers, directors, and greater than ten percent shareholders were complied
with.
59
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation received by all
individuals serving as the President and Chief Executive Officer of the Company
during 1997, its four other most highly compensated executive officers who were
serving as executive officers at December 31, 1997, and one additional
individual who was one of the four most highly compensated executive officers
during 1997 but was not an executive officer at December 31, 1997 (collectively,
the "Named Executive Officers"), for services rendered to the Company or its
subsidiaries during the years ended December 31, 1997, 1996 and 1995, as
applicable:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Awards
-------------------
Other Annual Securities All Other
Salary Bonus Compensation(1) Underlying Compensation
Name and Principal Position Year ($) ($) ($) Options/SARs(#) ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Scott, M.D. (3) 1997 400,000 -- -- -- 4,290
Chairman of the Board, 1996 333,333 -- 12,806 -- 5,296
President and Chief 1995 333,333 -- 51,492 103,529 165,818
Executive Officer of the
Company
Jacque J. Sokolov, M.D. 1997 233,333 -- -- -- 2,817
Former Vice Chairman of the 1996 400,000 400,000 -- -- 5,464
Board of the Company 1995 400,000 150,000 -- 3,883 4,215
and Chief Executive
Officer, Advanced Health
Plans, Inc. (4)
Deborah L. Redd 1997 228,154 63,563 -- 100,000 4,167
Former Director and President, 1996 237,519 35,000 -- 20,000 3,538
Coastal Managed Healthcare, Inc. 1995 47,163 -- -- -- 70
Eugene F. Dauchert, Jr. 1997 160,000 54,745 -- 100,000 4,405
Director and Executive Vice 1996 160,000 8,500 -- -- 4,481
President 1995 160,000 -- -- 48,883 3,918
Edward L. Suggs, Jr. 1997 213,654 50,769 -- 100,000 4,049
Director, President and 1996 190,000 -- -- -- 2,442
Chief Executive Officer, 1995 188,539 -- -- 40,000 3,754
Healthcare Business
Resources, Inc. (5)
</TABLE>
(1) No unexercised options were in the money at fiscal year-end.
60
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Other Annual Securities All Other
Salary Bonus Compensation(1) Underlying Compensation
Name and Principal Position Year ($) ($) ($) Options/SARs(#) ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Henry J. Murphy(3) 1997 60,000 100,000 -- -- 725
Former President and 1996 69,130 -- -- 100,000(6) --
Chief Executive Officer
Raymond A. Spillman 1997 123,077 34,473 -- -- 960
Former Senior Vice 1996 66,847 10,000 -- -- 240
President and General Counsel
</TABLE>
- -----------------
(1) Reflects imputed income for personal use of the Company's aircraft.
(2) Includes for 1997: (i) contributions made under the Company's 401(k) plan of
$3,200, $2,400, $3,398, $3,563 and $3,563 for Dr. Scott, Dr. Sokolov, Ms. Redd,
Mr. Dauchert and Mr. Suggs, respectively, and (ii) premiums paid for term life
insurance policies of $1,090, $417, $769, $842, $487, $725 and $960 for Dr.
Scott, Dr. Sokolov, Ms. Redd, Mr. Dauchert, Mr. Suggs, Mr. Murphy and Mr.
Spillman, respectively.
(3) Mr. Murphy served as President and Chief Executive Officer of the Company
from October 24, 1996 to March 1, 1997. Dr. Scott served as President and Chief
Executive Officer of the Company from March 1, 1997 to December 31, 1997. See
"Employment and Certain Other Agreements" below.
(4) Advanced Health Plans, Inc. is a subsidiary of the Company.
(5) Healthcare Business Resources, Inc. is a subsidiary of the Company.
(6) Mr. Murphy was granted 100,000 stock appreciation rights ("SARs") on
November 1, 1996. 12,000 SARs vested on each of November 1, 1996, December 1,
1996, January 1, 1997, February 1, 1997 and February 28, 1997. Due to the
termination of Mr. Murphy's employment on March 1, 1997, the 20,000 SARs
scheduled to vest on March 31, 1997, and an additional 20,000 SARs scheduled to
vest on April 30, 1997, had Mr. Murphy's employment extended through these
dates, were forfeited.
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<PAGE>
STOCK OPTION AND SAR GRANTS
The following table provides certain information with respect to stock
options and SARs granted during 1997 to the Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percent of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation for
Underlying Granted to Exercise Option Term
Options/SARs Employees in or Base Expiration -----------
Name Granted(#) Fiscal Year(%) Price($/Sh) Date 5%($) 10%($)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deborah L. Redd 100,000 6.3 2.00 April 6,2007 81,500 243,200
Eugene F. Dauchert, Jr. 100,000 6.3 2.00 April 6,2007 81,500 243,200
Edward L. Suggs, Jr. 100,000 6.3 2.00 April 6,2007 81,500 243,200
</TABLE>
- -----------------
(1) Options vest and become fully exercisable on April 7, 2000.
AGGREGATED OPTION/SAR EXERCISES AND OPTION/SAR VALUES
The following table provides certain information concerning the number
of securities underlying unexercised options held by each of the Named Executive
Officers and the value of such officers' unexercised options at December 31,
1997:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
Unexercised at Fiscal Year-End
Number of Securities
--------------------
Name Exercisable Unexercisable
- --------------------------------------------------------------
Steven M. Scott, M.D. 2,392 129,725
Jacque J. Sokolov, M.D. 363,000 543,883
Deborah L. Redd -- 120,000
Edward L. Suggs, Jr. 22,976 231,316
Eugene F. Dauchert, Jr. -- 173,883
62
<PAGE>
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of the Company (an
"Independent Director") receives $20,000 annually for serving as a director plus
$1,200 for each meeting of the Board of Directors attended. The respective Chair
of the Audit and Compensation Committees receive an additional $1,200 annually
for services rendered in that capacity. At each director's election,
compensation may be paid either currently, in cash, or deferred and paid in cash
or in shares of common stock at the distribution date of the deferred
compensation. Pursuant to the Company's 1994 Independent Directors' Stock Option
Plan, an Independent Director who is elected to the Board of Directors
automatically receives an option to purchase 3,000 shares of common stock and
any Independent Director who continues to serve as a director following an
annual meeting of shareholders automatically receives an option for 1,000 shares
of common stock. The respective Chair of the Audit and Compensation Committees
automatically receive an additional option to purchase 2,000 shares of common
stock as of the first committee meeting following an annual meeting of
shareholders. The exercise price of these options is the fair market value of
the underlying shares on the date of grant. The options become exercisable one
year from the date of grant and have a ten year term.
EMPLOYMENT AND CERTAIN OTHER AGREEMENTS
Steven M. Scott, M.D.
In April 1991, Dr. Scott and the Company entered into a five-year
employment agreement that renews automatically each year, unless either party
gives notice of non-renewable, and terminates in any event when Dr. Scott
reaches age 70. The employment agreement provides for an annual base salary of
$400,000, which is to be reviewed annually by, and can be increased at the
discretion of, the Compensation Committee. Dr. Scott is also entitled to
incentive compensation in an amount determined at the discretion of the
Compensation Committee, based on its consideration of the Company's financial
results, the development, implementation and attainment of strategic business
planning goals and objectives, increases in the Company's revenues and operating
profits, and other factors deemed relevant by the Compensation Committee in
evaluating Dr. Scott's performance. Although not a requirement, the target for
Dr. Scott's incentive compensation is two percent of the Company's earnings
before interest and taxes, not to exceed his annual base salary. In addition,
the Compensation Committee may grant Dr. Scott discretionary bonuses from time
to time.
In its discretion, the Compensation Committee may award any incentive
or discretionary bonus compensation payable to Dr. Scott as an immediately
payable cash payment, a deferred cash payment or in non-qualified stock options.
A range of valuation for any such options will be established by the
Compensation Committee using the Black-Scholes or binomial pricing model, or
other recognized pricing model, or using the assumptions and specifications
adopted by the Securities and Exchange Commission (the "Commission") which
govern the disclosure of executive compensation in proxy statements and other
Commission filings. Any such options will expire after the earlier to
63
<PAGE>
occur of the tenth anniversary of the termination of Dr. Scott's employment, the
date of Dr. Scott's 70th birthday or the expiration of the maximum term of such
options set forth in the stock option plan pursuant to which such options are
granted.
In the event of Dr. Scott's disability prior to the age of 70, he would
be entitled to base compensation, incentive compensation and bonus compensation
for twelve months. The bonus compensation would equal the average of the bonus
compensation paid or payable to Dr. Scott during the thirty-six months preceding
the disability. The incentive compensation would equal the greater of (i) the
average of the incentive compensation paid or payable to Dr. Scott during the
thirty-six months preceding the disability or (ii) an amount equal to (x) 50% of
Dr. Scott's base salary for any year in which the Company's revenues and
operating profits increased 12% over the prior year, (y) 75% of Dr. Scott's base
salary if the Company's annual revenues and operating profits increased 17% over
the prior year or (z) 100% of Dr. Scott's base salary if the Company's annual
revenues and operating profits increased 22% over the prior year. If the
disability is continuous for a period of twelve consecutive months, Dr. Scott
would be entitled to receive 75% of his base salary and the averages of both
incentive compensation and bonus compensation paid or payable during the
thirty-six months preceding the disability, which amount shall be increased by
five percent annually. In the event of Dr. Scott's death prior to the age of 70,
his surviving spouse (or his estate in the event of her death or remarriage)
would be entitled to receive for ten years an amount equal to Dr. Scott's base
salary and the average of both incentive compensation and bonus compensation
paid or payable during the thirty-six months preceding his death, which amount
shall be increased by five percent annually.
If the Company terminates Dr. Scott without cause, Dr. Scott would be
entitled to receive for the remainder of the then existing five-year term of the
agreement his base salary and the averages of both incentive compensation and
bonus compensation paid or payable during the thirty-six months preceding
termination, which amount shall be increased by five percent annually. In the
event that Dr. Scott terminates his employment agreement as a result of the
Company's material breach thereof, which breach remains uncured for 60 days
after written notice, Dr. Scott would be entitled to receive compensation equal
to that payable to him upon termination by the Company without cause.
In order to facilitate the December 31, 1997 purchase by Scott Medical
Group, LLC (see "Item 13. Certain Relationships and Related Transactions."), the
Company entered into a partial release of the non-compete agreements pursuant to
the employment agreement between Dr. Scott and the Company. The release allows
Scott Medical Group, LLC and any other Scott entity to own, manage, operate or
otherwise provide physician practice and management services to physician and
clinic practices.
Jacque J. Sokolov, M.D.
In connection with its acquisition of Advanced Health Plans, Inc. in
November of 1994, the Company entered into an employment agreement with Dr.
Sokolov. During the five year term of the agreement, the Company was obligated
to use its best efforts to
64
<PAGE>
cause Dr. Sokolov to be elected Chairman or Vice Chairman of the Board of
Directors. In addition to serving as Chairman or Vice Chairman, Dr. Sokolov was
to serve in other appropriate management positions with the Company or its
subsidiaries and report directly to the Chief Executive Officer. Dr. Sokolov's
base salary under the agreement was $400,000 per year. He also was entitled to
receive incentive cash compensation in the amount of not less than $150,000 per
year. In addition, in the event the compensation paid to Dr. Sokolov by third
parties for speaking and specified consulting engagements was less than $450,000
per year, Dr. Sokolov was to receive from the Company the difference between the
amount actually paid as a result of such engagements and $450,000. The
employment agreement imposes certain confidentiality obligations upon Dr.
Sokolov and contains a covenant not to compete with the Company or solicit its
employees for a specified period of time. The agreement was terminable by either
party upon 90 days' notice. If Dr. Sokolov was terminated without cause, he is
entitled to receive an ongoing payment of his base salary, minimum incentive
bonus and speaking and consulting guarantees for the remainder of the unexpired
term. Effective January 18, 1998, Dr. Sokolov resigned as a member of the Board
of Directors and as an officer of the Company, pursuant to a letter to the
Company dated January 18, 1998. Dr. Sokolov indicated in a letter to the Company
that he was resigning due to the fact that he would be commencing an arbitration
against the Company related to his employment agreement.
Deborah L. Redd
In September 1996, Ms. Redd entered into an employment agreement with
the Company pursuant to which she became employed as President of Coastal's
Managed Care group, as well as President of Coastal Managed Healthcare, Inc.
("CMH") and an officer of Health Enterprises, Inc. ("HEI"), HealthPlan
Southeast, Inc. ("HPSE") and served on the Board of Directors of HEI, HPSE,
Better Health Plan, Inc. ("BHP") and Doctors Health Plan, Inc. ("DHP"). The
effective date of the agreement was September 1, 1996 with an initial term
through September 30, 1998. Under the agreement, Ms. Redd was entitled to
receive a base salary of $234,000 per year through August 31, 1997, which was
subject to annual review and adjustment as of September 1 of each year during
the term of employment. Ms. Redd was eligible for performance bonuses based upon
certain performance criteria up to a maximum of $90,000 per year. Effective
February 19, 1998, Ms Redd submitted her resignation from all positions held at
the Company, including the Company's Board of Directors. The employment
agreement imposes certain confidentiality obligations upon Ms. Redd and contains
a covenant not to compete with the Company or solicit its employees for a
specified period of time.
Edward L. Suggs, Jr.
On March 1, 1997, Mr. Suggs entered into an employment agreement with
Healthcare Business Resources, Inc. ("HBR"), a subsidiary of the Company. The
initial term of the agreement is from March 1, 1997 through February 29, 2000.
Under the agreement, Mr. Suggs will serve as the President and Chief Executive
Officer of HBR and shall serve on the Board of the Company. Mr. Suggs will
receive an annual base salary of $220,000, subject to annual review and
adjustment as of each March 1 during the term of the agreement. As an initial
signing bonus, the Company released Mr. Suggs
65
<PAGE>
from any claim to the then outstanding indebtedness of approximately $16,000
evidenced by a promissory note in the original face amount of $25,000. Mr. Suggs
will be eligible for up to $20,000 each quarter in performance bonuses, based
upon the financial performance of HBR and other factors, which may include the
discretion of HBR or the Company. The employment agreement imposes certain
confidentiality obligations upon Mr. Suggs and contains a covenant not to
compete with HBR or its affiliates or solicit its employees for a specified
period of time.
Eugene F. Dauchert, Jr.
On July 1, 1997, Mr. Dauchert entered into a restated and amended
employment agreement with the Company pursuant to which Mr. Dauchert will serve
as an Executive Vice President and Chief Administrative Officer of the Company.
The effective date of the agreement was September 1, 1996 and terminates on June
30, 1998. After June 30, 1998, the term may be extended on a month to month
basis. Mr. Dauchert will receive an annual base salary of $180,000 and will be
eligible for an incentive or performance bonus subject to his continued
employment through June 30, 1998 and the achievement by the Company, of
specified cash flow goals for the second fiscal quarter of 1998. Mr. Dauchert is
also eligible for certain divestiture bonuses as described below. Mr. Dauchert
received a divestiture bonus, based upon the sale of the HealthNet Medical Group
operations of Physician Planning Group, Inc., of approximately $35,000 and a
divestiture bonus of 0.5% of net proceeds as defined by the agreement based on
the sale or divestiture of Integrated Provider Networks, Inc., Practice
Solutions, Inc., and certain remaining clinics in south Florida. The employment
agreement imposes certain confidentiality obligations upon Mr. Dauchert and
contains a covenant not to compete with the Company or its affiliates or solicit
its employees for a specified period of time.
Henry J. Murphy
In November of 1996, Mr. Murphy entered into an employment agreement
with the Company pursuant to which Mr. Murphy became employed as President and
Chief Executive Officer of the Company. The effective date of the agreement was
November 1, 1996, with an initial term that ended on February 28, 1997. The
agreement was not renewed. Under the agreement, Mr. Murphy received a base
salary of $30,000 per month. Mr. Murphy received a $100,000 signing bonus upon
the execution of the agreement. In addition, pursuant to the agreement, Mr.
Murphy became entitled to receive additional compensation in the form of either
stock appreciation rights (SARs), a debt restructure fee, or a business
combination transaction fee. Mr. Murphy had the right to receive an amount equal
to any appreciation occurring from and after November 1,1996 in up to 100,000
shares of the Company's common stock. As of the date of his termination, 60,000
of Mr. Murphy's SARs had vested and 40,000 were forfeited. Mr. Murphy had the
right to exercise the SARs which had vested at any time and from time to time
during the two-year period beginning March 1, 1997 and ending February 28, 1999.
At any time on or before 60 days after the termination of his employment
agreement, Mr. Murphy had the right to make an election to retain the SARs or to
forfeit them and be eligible instead to receive either the debt restructure fee
or the business combination transaction fee.
66
<PAGE>
On June 17, 1997, Mr. Murphy filed a lawsuit against the Company
alleging that the Company has failed to make certain incentive payments to him
under his prior written employment agreement. Mr. Murphy is alleging that the
Company's transaction with National Century Financial Enterprises, Inc.
constitutes a sale of more than half of the assets of the Company qualifying him
to receive certain payments. The Company intends to vigorously defend its
position and at this stage of the litigation, exposure to the Company cannot be
determined.
Upon presentation in accordance with Company policies, the Company
reimbursed Mr. Murphy for all reasonable and necessary travel and living
expenses and other disbursements incurred by Mr. Murphy on behalf of the Company
in the performance of his duties under his employment agreement. These travel
and living expenses included Mr. Murphy's weekly plane trips to and from his
home in Atlanta, Georgia, and daily meal and living expenses in Durham, North
Carolina, and other locations to which Mr. Murphy traveled on company business.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Berger and John P. Mahoney, M.D. were elected to serve as members
of the Compensation Committee on December 3, 1996. Dr. Mahoney resigned from the
Board of Directors effective December 31, 1997. Mr. Potter became a member of
the Committee in April 1997. Neither Mr. Berger nor Mr. Potter have ever served
as an officer or employee of the Company or any of its subsidiaries. Dr. Mahoney
served as President and Chief Executive Officer of HealthPlan Southeast, Inc., a
subsidiary of the Company, from December 1994 through December 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Except as indicated under "Security Ownership of Management," the
following are the only shareholders known to the Company to be the beneficial
owners of more than five percent of the Company's common stock as of February
28, 1998:
Name and Address Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Common Stock
- --------------------------------------------------------------------------------
Heartland Advisors, Inc......................4,644,200(1) 12.39%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
(1) Includes 4,160,900 shares with respect to which the shareholder has voting
and investment power and 483,300 shares with respect to which the shareholder
has investment power only.
67
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of February 28, 1998 by:
(i) each director of the Company; (ii) each Named Executive Officer; and (iii)
all current directors and executive officers of the Company as a group. Except
as otherwise indicated, each shareholder named has sole voting and investment
power with respect to such shareholder's securities.
<TABLE>
<CAPTION>
Name and Address(1) Amount and Nature Percent of
Title of Class of Beneficial Owner of Beneficial Ownership Class(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock Steven M. Scott, M.D. 18,146,792(3) 48.4%
Common Stock Bertram E. Walls, M.D. 1,457,238(4) 3.9%
Common Stock Edward L. Suggs, Jr. 44,075(5) *
Common Stock Sherman M. Podolsky, M.D. 41,630(6) *
Common Stock Charles E. Potter 37,632(7) *
Common Stock Deborah L. Redd 400 *
Common Stock Eugene F. Dauchert, Jr. -- *
Common Stock Mitchell W. Berger -- *
Common Stock Henry J. Murphy -- *
Common Stock Raymond A. Spillman -- *
Shares of Common Stock
owned by all directors and
executive officers as a group
(10 persons) 19,570,275(8) 52.2%
</TABLE>
(1) Except as otherwise indicated, the address for all persons listed below is
c/o Coastal Physician Group, Inc., 2828 Croasdaile Drive, Durham, NC 27705.
(2) An asterisk (*) indicates less than one percent.
(3) Includes 6,249,977 shares held by Scott Medical Partners, LLC, of which
voting power is held by Dr. and Mrs. Scott. Also includes 535,766 shares
held by a partnership, the partners of which are Dr. Scott and certain
trusts established for the benefit of Dr. Scott's children. Dr. Scott has
sole investment power with respect to these shares, but has sole voting
power with respect to only 390,666 shares. Voting power with respect to the
remaining 145,100 shares is held by Dr. Walls, as trustee of the trusts.
Also includes 10,000 shares held by Mrs. Scott which Dr. Scott disclaims
beneficial ownership and 2,392 shares subject to a presentable exercisable
option.. Also includes 1,703,334 shares held by Century
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<PAGE>
Insurance over which Dr. Scott may be deemed to share voting and investment
power. Dr. Scott disclaims beneficial ownership of the shares held by
Century Insurance. The remaining 9,645,323 shares are held directly by Dr.
Scott. Dr. Scott's address is 17020 Brookwood Drive, Boca Raton, Florida
33496.
(4) Includes 145,100 shares with respect to which Dr. Walls has voting power
and Dr. Scott has investment power. Such shares also are included under the
beneficial ownership of Dr. Scott. Also includes 1,171,695 shares held by
certain trusts established for the benefit of Dr. Scott's children with
respect to which Dr. Walls, as trustee, holds voting and investment power.
Includes 119,143 shares held by S&W Limited Partnership for which voting
and investment power is held by Dr. Walls. Includes 5,000 shares subject to
exercisable stock options and 14,300 shares reserved for issuance under the
Deferred Compensation Plan.
(5) Includes 22,976 shares subject to presently exercisable stock options and
265 shares owned by Mr. Suggs' wife. Mr. Suggs disclaims beneficial
ownership of the shares held by his wife.
(6) Includes 27,532 shares subject to exercisable stock options.
(7) Includes 3,000 shares subject to presently exercisable stock options and
23,630 shares reserved for issuance under the Deferred Compensation Plan.
(8) Includes 55,808 shares subject to presently exercisable stock options and
36,330 shares reserved for issuance under the Deferred Compensation Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into various transactions and has continuing
relationships with American Alliance Holding Company and certain of its
affiliates ("Alliance"), including Century American Insurance Company ("Century
Insurance") Dr. Scott is the beneficial owner of all of the outstanding shares
of common stock of Alliance. These transactions and relationships are described
below.
The Company engages in transactions with American Alliance Holding
Company and its affiliates ("Alliance"), Century Insurance and Quality
Management Consultants, Inc., and affiliates thereof. Amounts paid by the
Company to these entities, net of amounts received, were $4,186,000 $5,135,000,
and $3,371,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
On January 1, 1998, the Company entered into a Risk Management
Agreement with Century Insurance and Medical Group Purchasing Association
("MGPA") pursuant to which Century Insurance agrees to provide, and the Company
and MGPA agree to purchase, insurance policies providing professional liability
insurance for the Company and the physicians and other medical and clinical
providers under contract with the Company. The initial term of the agreement is
four years and the agreement thereafter automatically renews for additional one
year terms unless either party gives notice of non-renewable by July 1 of the
year preceding the renewal term. The terms and
69
<PAGE>
conditions of the coverage are the same as has historically been provided to the
Company and MGPA in the past. The premium for the coverage is based on the
underwriting criteria and loss experience of the account. The agreement contains
a profit-sharing mechanism rewarding the insureds if the loss experience exceeds
expectations. The Company and MGPA have the ability to "opt out" of coverage
under the policy in the event that a competitive policy is located at a price
less than 85% of the quoted premium from Century Insurance. The policy may also
be canceled by the Company and MGPA by giving notice by July 1 of a policy year
and paying a termination fee equal to 10 percent of the insurance premium in
effect if terminated in year two, 7.5 percent if terminated during year 3 and 5
percent if terminated thereafter.
The Company and certain of its subsidiaries sublease office space in
Durham, North Carolina, consisting of approximately 59,000 square feet, from
Alliance under sublease agreements. The building is owned by American Alliance
Real Estate Corporation which leases the building to Century Insurance. During
the years ended December 31, 1997 and 1996, the Company paid Century Insurance
approximately $562,000 and $960,000, respectively, under these sublease
agreements. The Company, American Alliance Holding Company and Century Insurance
are all liable to the holder of a first mortgage on the property for the total
rentals specified in the prime lease. However, the Company has an agreement of
indemnity from American Alliance Holding Company with respect to the total
rentals,, and American Alliance Holding Company has an agreement of indemnity
from Century Insurance. The prime lease commenced in August 1988 and has a
fifteen-year term requiring minimum lease payments of approximately $788,000 per
year for years one through five, $959,000 per year for years six through ten and
$1,166,000 per year for years eleven through fifteen.
The Company leased office space from corporations controlled by Dr.
Scott and paid rent to such corporations during 1997, 1996, and 1995 of
$286,000, $1,513,000, and $517,000, respectively. As discussed below, the
Company entered into a termination of the remaining lease obligations for
certain office space under lease through 2002.
On January 21, 1997, the Company authorized 47,500 shares of Series A
Convertible Preferred Stock ("Series A Preferred") and 32,500 shares of Series B
Convertible Preferred Stock ("Series B Preferred"), and on June 3, 1997,
authorized 1,200,000 shares of Series C Convertible Preferred Stock ("Series C
Preferred"), each series with a par value of $0.01 per share. On February 21,
1997, the Company increased the number of authorized shares of Series B
Preferred from 32,500 to 33,000. The Company reserved 800,000 shares of common
stock for issuance upon conversion of the Series A Preferred and Series B
Preferred and 12,000,000 shares of common stock for issuance upon conversion of
the Series C Preferred.
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 Preferred to Dr. Scott in
satisfaction of the Company's obligation to reimburse certain proxy solicitation
expenses incurred by Dr. Scott.
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Also in January 1997, the Company, Dr. Scott and Dr. Walls 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 incurred by them in the litigation by issuing shares of 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 Stock in payment of the aggregate amount of fees and expenses incurred
by Dr. Scott and Dr. Walls.
Simultaneously. with the National Century Financing transaction, as
explained in Note 7 of "Notes to Consolidated Financial Statements", Dr. Scott
invested $10 million in cash in the Company and received 1,000,000 shares of
Series C Preferred. The Series C Preferred, subject to approval by the Company's
common stockholders, is convertible into 10,000,000 shares of common stock. In
addition, Dr. Scott received 84,983 shares of Series C Preferred and 240,000
shares of common stock in satisfaction of certain obligations owed to him by the
Company of approximately $1.1 million.
Following the Company's annual stockholders meeting at which the
stockholders approved the confidentiality of the Series A Preferred, the Series
B Preferred, and the Series C Preferred, outstanding shares of the Series A
Preferred, the Series B Preferred, and the Series C Preferred were converted in
October 1997 into common stock at a conversion rate of ten shares of common
stock for each share of Series A Preferred, Series B Preferred, and Series C
Preferred.
On December 31, 1997, the Company and certain of its subsidiaries
closed on a transaction pursuant to which the Company sold to Scott Medical
Group LLC ("Scott Medical") the following assets: (i) all of the issued and
outstanding stock of Integrated Provider Networks, Inc., a North Carolina
corporation ("IPN") which provides practice and physician management services to
professional corporations; (ii) all of the issued and outstanding stock of
Practice Solutions, Inc., a North Carolina corporation ("PSI") which provides
billing services to freestanding physician practices and clinics, including
those under management by IPN; (iii) all of the issued and outstanding stock of
Sunlife OB-GYN Services of Broward County, Inc., a Florida corporation
("Sunlife"); (iv) substantially all of the assets of Ft. Lauderdale Perinatal
Associates, which operates two physician clinics located in Plantation, Florida
and Fort Lauderdale, Florida, and Physician Access Center, which operates a
clinic in San Francisco, California (collectively the "Clinics"); and (v)
certain accounts receivable of Sunlife (the "Sunlife Receivables") which had
previously been sold to NPF-XI, Inc. pursuant to a series of receivables
securitizations and other financing arrangements between the Company and
subsidiaries of National Century Financial Enterprises, Inc. (collectively, the
Clinic and Receivable sale"). Scott Medical is a privately held limited
liability company which is controlled by Dr. Scott. The December 31, 1997
transactions were adjusted between the parties so as to be effective as of
November 1, 1997. The purchase price was $10,100,000, paid $5,000,000 in cash at
the closing with the balance paid with a short term promissory note in the
principal amount of $5,000,000 and a receivable from the purchaser in the amount
of $100,000, both of which were paid in full in January 1998. The purchase price
was reduced by approximately $192,000 due to an increase in the
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<PAGE>
liabilities of IPN (including Prim Med, Inc., its wholly owned subsidiary) and
PSI from the liabilities as shown on their September 30, 1997 balance sheets.
The purchase price may be further reduced if the actual collections of the
outstanding accounts receivable of IPN, Prim Med, Inc. and the professional
corporations under management by IPN varies five percent from the value of said
receivables as agreed upon by the parties.
In addition, Scott Medical gave a promissory note (the "Receivables
Purchase Note") as the consideration for Scott Medical's purchase of the Sunlife
Receivables. The principal amount of the Receivables Purchase Note is
$1,000,727, the book value of the Sunlife Receivables. The Receivables Purchase
Note is subject to adjustment if the actual collections with respect to the
Sunlife Receivables varies five percent from the principal amount of the
Receivables Purchase Note. The Receivables Purchase Note bears interest at the
applicable federal rate, payable quarterly, with all principal and accrued but
unpaid interest payable in full on October 31, 1998.
Effective May 31, 1997, the Company sold certain assets related to
seven primary care clinics operated by the Company to Scott Medical. Subsequent
to that sale of assets, IPN and PSI provided billing services and some
management services to the seven clinics for Scott Medical. After the May 31,
1997 closing, IPN advanced certain expenses for the benefit of Scott Medical
with respect to these clinics so that the net owed to Coastal by Scott Medical
is $2,368,235. The amount owed by Scott Medical pursuant to the purchase of the
May clinics is subject to final verification by both parties. As part of the
Clinic and Receivable Sale , Scott Medical assumed all of the lease obligations
of a subsidiary of the Company Chateau Limited Liability Company ("Chateau"), a
privately held limited liability company which is controlled by Dr. Scott. The
estimated balance of the gross lease payments that were due under the Chateau
lease after October 31, 1997 is $2,778,056. The parties negotiated a release fee
for the Chateau lease of $750,000. This amount will be credited against the
amount Scott Medical owes the Company relating to the purchase of the clinics in
May 1997, such that the net amount owed to the Company by Scott Medical is
$1,618,235. At the closing of the Clinic and Receivable Sale Scott Medical
delivered a promissory note in the principal amount of $810,283 payable to a
subsidiary of the Company bearing interest at the applicable federal rate with
interest payable quarterly and the entire balance due in one (1) year.
For a period of twelve (12) months from the December 31, 1997 closing
of the Clinic and Receivable Sale, the company has a call option (the "Call
Option") on the assets sold whereby the Company may repurchase from Scott
Medical the entirety (but not less than the entirety) of the assets purchased on
December 31, 1997 by Scott Medical. If the Company exercises the Call Option,
the Company will pay Scott Medical a purchase price equal to Scott Medical's
investment in the assets with a twelve percent (12%) annualized return. If,
during the twelve (12) month period the Call Option is in effect, Scott Medical
receives a bona fide offer to purchase the assets from a third party purchaser
other than the Company, Scott Medical is required to notify the Company of such
offer and the Company has thirty (30) days from such notification in which to
determine whether to exercise its Call Option. If the third party offer is for a
purchase price less than the purchase price computed pursuant to the Call Option
or upon more favorable terms than the Call Option, the Company shall have the
right to exercise its
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<PAGE>
Call Option, but only upon the more favorable terms and conditions of the third
party offer. During the 12 month Call Option period, the Company has the right
to market the assets subject to the Call Option to potential third party
purchasers.
As part of the Clinic and Receivable Sale the Company agreed that it
would not provide Comprehensive Services (as defined below) to physicians and
clinic practices, whether primary or specialty care practices and whether
free-standing or hospital-based, in the locations and during the time periods
set forth in the Restricted Periods (as defined below). However, nothing in this
non-compete covenant would impair the Company's right or ability (i) to exercise
the Call Option or (ii) to continue to provide Comprehensive Services to any
medical practice which is currently receiving services from the Company. For
purposes of the non-compete, "Comprehensive Services" shall mean owning,
managing, operating or otherwise providing physician management services (i)
which involve as a principal component the provision of site-based medical
support personnel, site-based administrative support personnel, medical and
office supplies, inventory and facilities, or (ii) pursuant to which the Company
or its undertakes substantial responsibility for the overall operation of the
medical practice. For the purposes of the non-compete covenant, the "Restricted
Period" means (i) with respect to the counties of Wake, Durham and Orange, North
Carolina and with respect to any area within a fifty (50) mile radius of any
Clinic or within a fifty (50) mile radius of any medical practice owned by IPN
or Sunlife on the closing date, a period of two (2) years from the closing date
and thereafter until the Company terminates the Restricted Period at any time
following the second anniversary of the closing date by giving ninety (90) days
prior written notice to Scott Medical; and (ii) with respect to the rest of the
United States, a period of one (1) year from the closing date, provided that the
Company may, with (80) days prior written notice, terminate the Restricted
Period with respect to the rest of the United States prior to the first
anniversary of the closing date.
In order to facilitate the Clinic and Receivables Sale to Scott
Medical, the Company also entered into a partial release of the non-compete
agreements under the Employment Agreement between Dr. Scott and the Company. The
release allows Scott Medical and any other Scott entity to own, manage, operate
or otherwise provide physician practice and management services to physician and
clinic practices.
The Company had received prior expressions of interest from third
parties regarding the purchase of IPN, a substantial portion of the assets sold
in the Clinic and Receivables Sale. The sale of IPN to Scott Medical was on
financial terms comparable to these third party offers. The Company was able to
sell IPN to Scott Medical without the possibility of disruption of the clinics
managed by IPN, which was a concern in any possible sale to other parties. The
Company received a fairness opinion relating to the financial aspects of the
purchase of IPN, a substantial portion of the assets sold in the Clinic December
31, 1997 transaction.
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") for a price of $5,993,000. The Purchaser was a
privately held
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<PAGE>
limited liability company controlled by Dr. Scott. The Purchaser acquired all of
the outstanding stock of Doctors Health Plan in the transaction,
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 $32,734,000 in
1997, but also reported losses of $15,702,000 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
$1,000,000 with the North Carolina Commissioner of Insurance. The obligation to
pay the fine has been deferred by the North Carolina Commissioner 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 closing of the sale of Doctors Health Plan,
transaction the Company made an additional equity contribution required by
regulatory authorities in the amount of $993,532 to Doctors Health Plan. As a
result the purchase price of $5,000,000 was increased to $5,993,532 to take into
account this equity contribution. The purchase price was paid $993,532 in cash,
with the balance paid pursuant to a $5,000,000 promissory note (the "DHP Note")
due and payable by March 28, 1998. The DHP Note bears interest after March 28,
1998 at the rate of twelve percent (12%) per annum until paid. If the DHP Note
is not paid in full within the earlier of (i) ninety (90) days from
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<PAGE>
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). The
purchaser has agreed to provide collateral to secure the DHP 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 is equal to the Purchaser's
purchase price plus the 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 $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 the Purchaser and the
Company. In such event, Purchaser will receive an amount equal to the
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) the Purchaser's net investment
plus a twelve percent (12%) annualized return on such amounts or (ii) an amount
equal to the 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 Dr. Scott . This partial release allows Dr. Scott
to operate health
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<PAGE>
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, the Company will not 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.
For the year ended December 31, 1997, the Company paid approximately
$236,000 to Berger, Davis & Singerman, a law firm of which Mr. Berger has been a
partner since 1985. Berger, Davis & Singerman also provides legal services to
Dr. Scott and business entities controlled by Dr. Scott.
Prior to his employment by the Company as Chief Financial Officer, Mr.
Kuoni served as a consultant to the Company. Consulting fees and expenses paid
to Mr. Kuoni during the year ended December 31, 1997 amounted to approximately
$228,000. The Company also paid temporary housing expenses incurred by Mr. Kuoni
on behalf of the Company in the performance of his duties under his consulting
agreement.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE NUMBER
(A) 1. FINANCIAL STATEMENTS: IN THIS FORM 10-K
Report of Independent Auditors............................. 24
Consolidated Balance Sheets, December 31, 1997 and 1996 ... 25
Consolidated Statements of Operations, Years Ended
December 31, 1997, 1996 and 1995........................... 26
Consolidated Statements of Shareholders' Equity (Deficit),
Years Ended December 31, 1997, 1996 and 1995............... 27
Consolidated Statements of Cash Flows, Years Ended
December 31, 1997, 1996 and 1995........................... 28
Notes to Consolidated Financial Statements................. 29
PAGE NUMBER
2. FINANCIAL STATEMENT SCHEDULES IN THIS FORM 10-K
Report of Independent Auditors............................. S-1
Schedule II--Valuation and Qualifying Accounts............. S-2
3. EXHIBITS
The exhibits which are filed with this Form 10-K are set forth in the
Exhibit Index, which immediately precedes the exhibits to this report.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter for the period
covered by this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 5, 1998
COASTAL PHYSICIAN GROUP, INC.
By: /S/ Steven M. Scott, M.D.
-------------------------------------
Steven M. Scott, M.D.
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Title Date
<S> <C> <C>
/S/ Steven M. Scott, M.D. Chairman of the Board of Directors June 5, 1998
- ------------------------------ President and Chief Executive Officer
Steven M. Scott, M.D.
/S/ Charles F. Kuoni, III Executive Vice President June 5, 1998
- ------------------------------ Chief Financial Officer and
Charles F. Kuoni, III Chief Accounting Officer
/S/ Edward L. Suggs, Jr. Director June 5, 1998
- ------------------------------
Edward L. Suggs, Jr.
/S/ Eugene F. Dauchert, Jr. Director June 5, 1998
- ------------------------------
Eugene F. Dauchert, Jr.
/S/ Mitchell W. Berger Director June 5, 1998
- ------------------------------
Mitchell W. Berger
/S/ Bertram E. Walls, M.D. Director June 5, 1998
- ------------------------------
Bertram E. Walls, M.D.
/S/ Sherman M. Podolsky, M.D. Director June 5, 1998
- ------------------------------
Sherman M. Podolsky, M.D.
/S/ Charles E. Potter Director June 5, 1998
- ------------------------------
Charles E. Potter
</TABLE>
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Report of Independent Auditors
The Board of Directors and Shareholders
Coastal Physician Group, Inc.:
Under the date of, June 3, 1998, we reported on the consolidated balance sheets
of Coastal Physician Group, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1997, as contained in the 1997 annual report to shareholders.
These consolidated financial statements and our report thereon are incorporated
by reference in the annual report on Form 10-K for the year 1997. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick, LLP
Raleigh, North Carolina
June 3, 1998
S-1
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997 $ 97,169 $ 190,288 $56,079 $ 330,671 $ 12,865
Allowance for contractual
adjustments and uncollectibles
Year ended December 31, 1996 97,932 285,661 --- 286,424 97,169
Allowance for contractual
adjustments and uncollectibles
Year ended December 31, 1995 93,631 253,151 --- 248,850 97,932
Allowance for contractual
adjustments and uncollectibles
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2.1 Asset Purchase Agreement between Physicians Planning Group, Inc.,:
HealthNet Medical Group of New Jersey, P.A.; HealthNet Medical Services
of New Your, P.C.; Coastal Physician Networks, Inc.; Coastal Physician
Group, Inc. and Valley Care Corporation Dated October 29, 1996 (1)
2.2 Asset Purchase Agreement by and among New York State Catholic Health
Plan, Inc. d/b/a Fidelis Care New York, a New York not-for-profit
corporation, Coastal Physician Group, Inc., a Delaware corporation and
Better Health Plan, Inc., a New York corporation and a wholly-owned
subsidiary of Coastal Physician Group, Inc. Dated: August 8, 1997 (10)
2.3 Stock Purchase by and Among Coastal Physician Networks, Inc. Coastal
Physician Group of Florida, Inc. and Scott Medical Group, Inc. Dated
May 31, 1997
2.4 Agreement By And Among Coastal Physician Group, Inc., Coastal Physician
Networks, Inc., Coastal Physician Services Of The West, Inc. And
Coastal Physician Services Of South Florida, Inc. and Scott Medical
Group LLC. Dated December 31, 1997 (11)
2.5 Stock Purchase Agreement As Of January 1, 1998 By And Among Coastal
Physician Group, Inc., Coastal Managed Healthcare, Inc., and DHP
Holdings, LLC
4.1 Amendment to Rights Agreement dated as of December 27, 1996, between
Coastal Physician Group, Inc. and First Union National Bank of North
Carolina (9)
4.1(a) Amendment to Rights Agreement dated as of May 12, 1997, between Coastal
Physician Group, Inc. and First Union National Bank of North Carolina
(13)
4.1(b) Amendment to Rights Agreement dated as of June 3, 1997, between Coastal
Physician Group, Inc. and First Union National Bank of North Carolina
(13)
4.2 Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock of Coastal Physician Group, Inc. Dated
January 21, 1997 (4)
4.3 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of Coastal Physician Group, Inc. Dated
January 21, 1997 (4)
4.3(a) Amendment of Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock of Coastal Physician Group, Inc.
Dated January 30, 1997 (4)
4.4 Certificate Of Designation Of Coastal Physician Group, Inc. Designating
The Rights And Preferences Of The Series C Convertible Preferred Stock
Of Coastal Physician Group, Inc. Dated June 3, 1997.
<PAGE>
Exhibit
Number Description
- ------ -----------
10.1 Employment Agreement By and Between Coastal Physician Group, Inc., and
Steven M. Scott, M.D. Dated April 1, 1991 (2)
10.1(a) Partial Release Of Non-Compete Provisions Of Employment Agreement
Between Steven M. Scott, M.D. And Coastal Physician Group, Inc. Dated
December 31, 1997
10.1(b) Partial Release Of Non-Compete Provisions Of Employment Agreement
Between Steven M. Scott, M.D. And Coastal Physician Group, Inc. Dated
March 18__, 1998
10.2 Employment Agreement By and Between Coastal Physician Group, Inc., and
Jacque J. Sokolov, M.D. Dated November 30, 1994 (3)
10.2(a) Amendment to Dr. Sokolov's Employment Agreement dated November 30, 1995
(4)
10.3 Separation Agreement and Mutual Release By and Between Coastal
Physician Services, Inc., Performance Partners, Inc. and John G. Ball
Dated March 10, 1997 (5)
10.4 Third Amendment and Limited Waiver to Credit Agreement, Dated as of May
29, 1996 (5)
10.5(a) Secured Overline Credit Agreement Dated as of May 29, 1996 (5)
10.5(b) Form of Warrant to Purchase Common Stock at $.01 Per Share (5)
10.5(c) Security Agreement, Dated as of May 29, 1996 (5)
10.5(d) Amended and Restated Pledge Agreement, Dated as of May 29, 1996 (5)
10.5(e) Form of Amended and Restated Subsidiaries Pledge Agreement, Dated as of
May 29, 1996 (5)
10.5(f) Form of Amended and Restated Guaranty Agreement, Dated as of May 29,
1996 (5)
<PAGE>
Exhibit
Number Description
- ------ -----------
10.5(g) Form of Subsidiaries Security Agreement, Dated as of May 29, 1996 (5)
10.6 Employment Agreement By and Between Coastal Physician Group, Inc., and
Joseph G. Piemont Dated June 1, 1996 (6)
10.7 Employment Agreement By and Between Coastal Physician Group, Inc., and
Deborah L. Redd Dated September 1, 1996 (4)
10.8 Employment Agreement By and Between Coastal Physician Group, Inc. and
Henry J. Murphy Dated November 1, 1996 (4)
10.9 Release and Settlement Agreement By and Between Steven M. Scott, M.D.,
Bertram E. Walls, M.D., M.B.A., and Coastal Physician Group, Inc. on
the one hand and Stephen D. Corman on the other hand, Dated November 6,
1996 (4)
10.10 Reimbursement Agreement By and Between Coastal Physician Group, Inc.
and Steven M. Scott, M.D., Dated December 31, 1996 (4)
10.11 Restated and Amended Employment By and Between Coastal Physician Group,
Inc., and Eugene F. Dauchert, Jr. Dated January 15, 1997 (4)
10.13(a) Amended And Restated Employment Between Coastal Physician Group, Inc.
and Eugene F. Dauchert, Jr. Dated July 1, 1997
10.14 Release and Settlement Agreement By and Between Steven M. Scott, M.D.,
Bertram E. Walls, M.D., M.B.A., and Coastal Physician Group, Inc. on
the one hand and Joseph G. Piemont on the other hand, Dated January 21,
1997 (4)
10.15 Coastal Physician Group, Inc. Settlement Agreement Dated January 21,
1997 (4)
10.16 Employment Agreement By and Between Healthcare Business Resources,
Inc., and Edward L. Suggs, Jr. Dated March 1, 1997 (4)
10.17 Employment Agreement by and between Coastal Physician Group, Inc. and
Charles F. Kuoni, III
10.18 Employment Agreement Between Coastal Physician Services Of South
Florida, Inc. and Sherman Podolsky, M.D.
10.19 Sale and Subservicing Agreement by and among Coastal Receivables LLC,
as Seller, Coastal Physician Group, Inc. as subservicer, NPF-XI, Inc.
as Purchaser, and National Premier Financial Services, Inc. as
Servicer. Dated June 6, 1997 (12)
10.20 Form of Sale and Subservicing Agreement by and among HealthPlan
Southeast, Incorporated, Better Health Plan, Inc., Coastal Government
Services, Inc. Coastal Correctional Healthcare, Inc. and Integrated
Provider Networks, Inc. as Sellers and Subservicers, NPF-WL, Inc., as
Purchaser, and National Premier Financial Services, Inc. as Servicer.
Dated June 6, 1997 (12)
10.21 Loan and Security Agreement by and among Coastal Physician Group, Inc.
and NPF X, Inc. Dated June 6, 1997 (12)
<PAGE>
Exhibit
Number Description
- ------ -----------
10.22 Pledge Agreement, Dated June 6, 1997 (12)
10.23 Pledge Agreement by and between BHP Acquisition Company, Inc. and NPF
X, Inc. Dated June 6, 1997 (12)
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
- ---------------
(1) Incorporated by reference to the Form 8-K for the event dated November 30,
1996, filed by the Company on December 16, 1996. (File No. 001-13460)
(2) Incorporated by reference to the S-1 registration statement, as amended,
filed by the Company on June 20, 1991. (File No. 33-40490)
(3) Incorporated by referenced to the post-effective amendment number 1 to the
Form S-3 registration statement filed by the Company on February 23, 1995.
(File No. 33-86434)
(4) Incorporated by reference to the December 31, 1996 Form 10-K filed by the
Company on June 15, 1997. (File No. 001-13460)
(5) Incorporated by reference to the Form 8-K for the event dated May 31, 1996,
filed by the Company on June 17, 1996. (File No. 001-13460)
(6) Incorporated by reference to the June 30, 1996 Form 10-Q filed by the
Company on July 14, 1996. (File No. 001-13460)
(7) Incorporated by reference to the Form 8-K for the event dated July 9, 1996,
filed by the Company on July 19, 1996. (File No. 001-13460)
(8) Incorporated by reference to the Form 8-K for the event dated July 26,
1996, filed by the Company on July 29, 1996. (File No. 001-13460)
(9) Incorporated by reference to the Form 8-A/A for the event dated December
27, 1996, filed by the Company on December 30, 1996. (File No. 001-13460)
(10) Incorporated by reference to the Form 8-K for the event dated August 19,
1997, filed by the Company on September 3, 1997. (File No. 001-13460)
(11) Incorporated by reference to the Form 8-K for the event dated January 15,
1998, filed by the Company on February __3, 1998. (File No. 001-13460)
(12) Incorporated by reference to the Form 8-K for the event dated June 10,
1997, filed by the Company on June 25, 1997. (File No. 001-13460)
(13) Incorporated by reference to the Form 8-A/A for the event dated May 12,
1997, filed by the Company on June 24, 1997. (File No. 001-13460)
<PAGE>
DIRECTORS
Steven M. Scott, M.D.
Chairman of the Board,
President & Chief Executive Officer
Edward L. Suggs Jr., CPA
President and Chief Executive
Officer, Healthcare Business
Resources, Inc.*
Eugene F. Dauchert, Jr.
Secretary and Executive Vice President
Mitchell W. Berger+
Partner, Berger & Davis
Bertram E. Walls, M.D.
President and Chief Executive
Officer, Century American
Insurance Company, Inc.
Charles E. Potter +
President and Chief Executive
Officer, The Potter Financial Group
Sherman M. Podolsky, M.D.
President, Coastal Physician Services
of South Florida, Inc.*
+ Member of Audit and
Compensation Committees
OFFICERS
Steven M. Scott, M.D.
Chairman of the Board,
President & Chief Executive Officer
Charles F. Kuoni, III
Executive Vice President,
Treasurer and Chief Financial Officer
Edward L. Suggs Jr., CPA
President and Chief Executive Officer, Healthcare Business
Resources, Inc.*
Eugene F. Dauchert, Jr.
Secretary and Executive Vice President
Bertram E. Walls, M.D.
President and Chief Executive
Officer, Doctors Health Plan, Inc.
Sherman M. Podolsky, M.D.
President, Coastal Physician Services
of South Florida, Inc.*
Lewis D. Sanders
Chief Executive Officer,
Coastal Government Services, Inc.*
* A subsidiary of Coastal
Physician Group, Inc.
CORPORATE INFORMATION
LEGAL COUNSEL
Moore & Van Allen, PLLC
Charlotte, NC
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Raleigh, NC
REGISTRAR AND TRANSFER AGENT
First Union National Bank
Shareholder Administration
230 South Tryon Street, 10th Floor
Charlotte, NC 28288-1154
800-829-8432
FORM 10-K
A copy of the Coastal Physician Group 1997 Form 10-K as filed with the
Securities and Exchange Commission is available to any stockholder upon written
request to:
Investor Relations Department
2828 Croasdaile Drive
Post Office Box 15309
Durham, NC 27704
STOCK INFORMATION
Coastal Physician Group Common
Stock trades on the New York
Exchange under the symbol "DR"
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") made as of the ____ day of
______, 1997 by and among COASTAL PHYSICIAN NETWORKS, INC., a North Carolina
corporation ("CPN"), COASTAL PHYSICIAN GROUP OF FLORIDA, INC., a Florida
corporation ("CPG") (collectively, CPN and CPG may be referred to as "Sellers"),
and SCOTT MEDICAL GROUP LLC, a North Carolina limited liability
company("Purchaser").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, CPN owns all of the issued and outstanding stock (the "Valley
Women's Center Stock") of Valley Women's Center, Inc. ("Valley Women's Center");
and
WHEREAS, CPG owns all of the issued and outstanding stock (the "CPG Clinic
Stock") of Minor Emergency Center of North Broward, Inc. ("Minor Emergency"),
Lehigh Medical Associates, Inc. ("Lehigh"), Springs Pediatrics, Inc.
("Springs"), and Plantation Pediatrics, Inc. ("Plantation")(collectively, Minor
Emergency, Lehigh, Springs, and Plantation may be referred to as the "CPG
Clinics," and, together with the Valley Women's Center, the "Clinics;" and the
Valley Women's Center Stock and the CPG Clinic Stock may be referred to
collectively as the "Stock"); and
WHEREAS, the parties hereto have reached an understanding pursuant to which
the Sellers will sell and the Purchaser will purchase all of the Stock, all
pursuant to the terms and conditions more fully set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I
---------
PURCHASE AND SALE OF STOCK
--------------------------
Section 1.1 Purchase and Sale of the Stock. Subject to the terms and
conditions contained herein, the Purchaser agrees to purchase from the Sellers
and the Sellers agree to sell, assign and transfer to the Purchaser on the
Closing Date provided for in Section 1.2 hereof, the Stock, which is all of the
issued and outstanding capital stock of Valley Women's Center and the CPG
Clinics.
Section 1.2 Closing Date. The closing date (the "Closing Date") shall be on
a date mutually acceptable to the parties and shall be effective as of May 31,
1997 (the "Effective Date"). The parties will use their best efforts to satisfy
all conditions precedent referred to in this Agreement by the Closing Date. The
closing of this transaction (the "Closing") shall be held at the offices of
Moore & Van Allen, PLLC, 2200 West Main Street, Suite 800, Durham, North
Carolina 27705, or such other place as the parties may agree.
<PAGE>
Section 1.3 Purchase Price. This Agreement is being executed in conjunction
with two Asset Purchase Agreements of even date through which four direct or
indirect subsidiaries of Coastal Physician Group, Inc. ("Coastal"), including
Sellers, Integrated Provider Networks, Inc. and Sunlife OB/GYN Services of
Broward County, Inc. (the "Combined Sellers"), will sell the stock and/or assets
of the seven clinics listed in Section 1.5 (the "Combined Clinics") to three
related entities, including Purchaser, Mebane Medical Center of North Carolina
LLC and Women's & Children's Centers of Florida LLC (the "Combined Purchasers").
The aggregate purchase price to be paid to the Combined Sellers for the Combined
Clinics (the "Purchase Price") shall be an amount equal to the greater of fifty
thousand dollars ($50,000.00) or the Appraised Value (as defined below). Within
thirty (30) days of the Closing Date, the parties shall have an appraisal of the
Combined Clinics performed by an independent third party appraiser (the
"Appraiser"). If the total net fair market value of the Combined Clinics
according to the Appraiser (the "Appraised Value") is in excess of $50,000.00,
the Purchase Price shall be the Appraised Value.
Section 1.4 Payment of Purchase Price. Fifty thousand dollars ($50,000.00)
shall be paid by the Combined Purchasers at Closing in cash or other immediately
available funds. If the Appraised Value is greater than $50,000.00, then the
balance shall be paid to the Combined Sellers by the Combined Purchasers in the
form of a promissory note payable over one year, with an annualized interest
rate of twelve percent (12%).
Section 1.5 Allocation of Purchase Price. The Combined Sellers and the
Combined Purchasers agree to allocate the Purchase Price among the following
seven Combined Clinics in accordance with the Appraised Value after receiving
the appraisal described in Section 1.3: Valley Women's Center, Inc., Lehigh
Medical Associates, Inc., Springs Pediatrics, Inc., Plantation Pediatrics, Inc.,
Minor Emergency Center of North Broward, Inc., Mebane Medical Center (assets),
and Women & Children's Center (assets). The parties hereto agree to use such
allocation for the purpose of preparing tax returns and reports.
ARTICLE II
----------
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO
----------------------------------------------
VALLEY WOMEN'S CENTER
---------------------
In order to induce the Purchaser to enter into this Agreement and the
transactions contemplated hereby, CPN hereby represents and warrants to the
Purchaser as follows:
Section 2.1 Corporate Organization and Authority. CPN is a corporation duly
organized, validly existing and in good standing under the laws of the State of
North Carolina, with full corporate power and authority to conduct its business
as now conducted, own its assets, own or lease and operate its properties, and
enter into and perform its obligations under this Agreement. This Agreement
constitutes, and all assignments, agreements and other instruments and documents
to be executed and delivered by CPN will constitute, CPN's legal, valid and
binding obligations, enforceable against CPN in accordance with their respective
terms.
CPN, by all appropriate corporate action, has duly authorized the execution
and delivery of this Agreement, the documents of transfer and assignment
contemplated hereby in consummation
<PAGE>
of all the transactions contemplated herein and the performance of all
obligations of CPN pursuant to this Agreement.
Section 2.2 Title to Stock of Valley Women's Center. CPN is the true and
lawful beneficial and record owner of all the stock of the Valley Women's Center
Stock and has good and marketable title thereto, free and clear of mortgages,
pledges, liens, security interests or other encumbrances (other than a pledge of
the Valley Women's Center Stock to First Union National Bank, as agent for the
lenders, that will be released at closing). Subject to obtaining such release,
which CPN agrees to use its best efforts to obtain, CPN has full right and power
and authority to sell, transfer and deliver such Valley Women's Center Stock,
and upon delivery of such Valley Women's Center Stock, and upon delivery of the
certificate or certificates therefor as contemplated in this Agreement, CPN will
transfer to the Purchaser valid and marketable title thereto including all
voting and other rights to such Valley Women's Center Stock, free and clear of
all claims, liens, charges, encumbrances and equities whatsoever. The failure by
Seller to obtain the release of First Union National Bank ("FUNB"), as agent for
that certain bank group with loans outstanding to Coastal (the "Lenders"), shall
not constitute a default hereunder by Seller.
Section 2.3 Financial Statements. The financial statements of Valley
Women's Center attached hereto as Schedule 2.3 accurately and completely reflect
the assets and liabilities of Valley Women's Center as of the date of such
financial statements. Since the date of the financial statements, there have
been no changes in the assets, liabilities, financial condition, business or
affairs of Valley Women's Center which would, in the aggregate, have a material
adverse effect on Valley Women's Center, its assets, liabilities or financial
condition.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES WITH RESPECT TO CPG CLINICS
----------------------------------------------------------
In order to induce the Purchaser to enter into this Agreement and the
transactions contemplated hereby, the CPG hereby represents and warrants to the
Purchaser as follows:
Section 3.1 Corporate Organization and Authority. CPG is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Florida, with full corporate power and authority to conduct its business as now
conducted, own its assets, own or lease and operate its properties, and enter
into and perform its obligations under this Agreement. This Agreement
constitutes, and all assignments, agreements and other instruments and documents
to be executed and delivered by CPG will constitute CPG's legal, valid and
binding obligations, enforceable against CPG in accordance with their respective
terms.
CPG, by all appropriate corporate action has duly authorized the execution
and delivery of this Agreement, the documents of transfer and assignment
contemplated hereby in consummation of all the transactions contemplated herein
and the performance of all obligations of CPG pursuant to this Agreement.
Section 3.2 Title to CPG Clinic Stock. CPG is the true and lawful
beneficial and record owner of all the stock of the CPG Clinic Stock and has
good and marketable title thereto, free and clear of mortgages, pledges, liens,
security interests or other encumbrances (other than a pledge
<PAGE>
of the CPG Clinic Stock to FUNB, as agent for the Lenders, that will be released
at closing). Subject to obtaining such release, which CPG agrees to use its best
efforts to obtain, CPG has full right and power and authority to sell, transfer
and deliver such CPG Clinic Stock, and upon delivery of such CPG Clinic Stock,
and upon delivery of the certificate or certificates therefor as contemplated in
this Agreement, CPG will transfer to the Purchaser valid and marketable title
thereto, including all voting and other rights to such CPG Clinic Stock, free
and clear of all claims, liens, charges, encumbrances and equities whatsoever.
Section 3.3 Financial Statements. The financial statements of the CPG
Clinics attached hereto as Schedule 3.3 accurately and completely reflect the
assets and liabilities of the CPG Clinics as of the date of such financial
statements. Since the date of the financial statements, there have been no
changes in the assets, liabilities, financial condition, business or affairs of
the CPG Clinics which would, in the aggregate, have a material adverse effect on
the CPG Clinics, their assets, liabilities or financial condition.
ARTICLE IV
----------
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
In order to induce the Sellers to enter into this Agreement and the
transactions contemplated hereby, Purchaser hereby represents and warrants to
Seller as follows:
Section 4.1 Company Organization and Authority. Purchaser is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of North Carolina, with full power and authority to
conduct its business as now conducted, own its assets, own or lease and operate
its properties, and enter into and perform its obligations under this Agreement.
This Agreement constitutes, and all agreements and other instruments and
documents to be executed and delivered by Purchaser will constitute Purchaser's
legal, valid and binding obligations, enforceable against Purchaser in
accordance with their respective terms.
Purchaser, by all appropriate limited liability company action, has duly
authorized the execution and delivery of this Agreement, the documents of
transfer and assignment contemplated hereby in consummation of all the
transactions contemplated herein and the performance of all obligations of
Purchaser pursuant to this Agreement.
ARTICLE V
---------
COVENANTS AND AGREEMENTS OF SELLERS AND PURCHASER
-------------------------------------------------
Section 5.1 Assignment of Real Property Leases. To the extent that any
leases of office or other space occupied by the Clinics have been entered into
in the name of Coastal, or any affiliates of Coastal, such leases shall be
assigned to the appropriate Clinic or Purchaser at Closing. Purchaser shall use
their its efforts to obtain any required consents to or approvals for assignment
of the leases to the appropriate Clinic or Purchaser, and Sellers agrees to
fully cooperate in having the leases assigned. If such consents or approvals are
obtained, the leases shall be assigned to the Clinics or Purchaser and the
Clinics and Purchaser shall, jointly and severally, indemnify and hold harmless
Coastal, the Sellers and any affiliate of the Sellers, against and in respect of
any and all claims arising under or out of said leases after the Closing Date.
In the event consents or approvals
<PAGE>
are not obtained with respect to any lease, Coastal or its affiliate will remain
as the tenant on such lease and the Clinic will continue to use and occupy the
space in the manner in which the space is now used and occupied through the term
of the lease and the Clinics or Purchaser will pay to or on behalf of Coastal or
its affiliate all rent and other sums due under such lease.
Section 5.2 Management Contract. On or before the Closing Date, Purchaser
and Coastal, or an entity related to or controlled by Coastal, including but not
limited to CPG or IPN, shall enter into a management services agreement (the
"Management Services Agreement"), whereby Coastal shall provide management
services for the Clinics in return for a management fee equal to eight percent
(8%) of the defined revenues of the Clinics. The Management Services Agreement
shall be terminable by either party upon thirty (30) days written notice.
Section 5.3 Failure to Pay-off Lenders. In the event that Coastal's current
debt to the Lenders is not repaid in full on or before June 30, 1997, then the
transactions described in this Agreement and the related transactions
contemplated in the two Asset Purchase Agreements discussed in Section 1.3
herein shall be automatically rescinded, retroactive to the Effective Date. In
the event such a rescission occurs, Coastal or the Combined Sellers shall repay
to the Combined Purchasers the $50,000 payment called for under Section 1.4, and
the Combined Purchasers and the Combined Sellers shall take all actions
(including the payment of monies) necessary to restore the relative positions of
the Combined Sellers and the Combined Purchasers to the respective positions
they would be in if the transactions contemplated herein and those transactions
discussed in Section 1.3 never occurred. The parties agree to promptly execute
and deliver any contracts, instruments and documents and take such further
action as are necessary to effect such rescission.
Section 5.4 Call Option.
(a) Coastal will retain for a period of twelve (12) months from the date of
Closing a call option (the "Call Option") on the Combined Clinics, whereby
Coastal or an affiliate of Coastal may repurchase all (but not less than all,
except as provided in Subsection (b) below) of the Combined Clinics from the
Combined Purchasers. In the event Coastal notifies the Combined Purchasers of
its intention to exercise this option, Coastal will repay the Combined
Purchasers their Investment (as defined below) in the Combined Clinics together
with a twelve percent (12%) annualized return on such Investment. The Combined
Purchasers' Investment in the Combined Clinics shall equal the sum of the
Purchase Price and any capital contributed or loaned to the Combined Clinics'
operations during the period of Combined Purchasers' ownership. Upon receipt of
notice of Coastal's intention to exercise its Call Option, the Combined
Purchasers shall repay to the Combined Clinics, on or before the date of closing
of the re-sale, any distributions received by the Combined Purchasers from the
Combined Clinics, whether received in the form of dividends, distributions or
proceeds from loans or sale of assets. The Combined Purchasers shall also cause
the release of any liens and encumbrances incurred against any of the Combined
Clinics during the period of Purchaser's ownership thereof. The parties agree to
execute any and all agreements or other documents necessary to effect the
repurchase under the Call Option.
(b) If within twelve (12) months from the Closing Date, Purchaser is
presented with a bona fide offer to purchase one or more of the Combined Clinics
by a third party purchaser other than Coastal, Purchaser shall notify Coastal in
writing of its the existence of such an offer. From the date such notification
is received, Coastal shall have thirty (30) days (the "Notification Period") in
which to determine whether to exercise its Call Option under this section,
provided that the Notification Period shall in no way extend the twelve month
period during which the Call Option is in effect. In the event Coastal does not
elect to exercise its Call Option within the Notification Period, Purchaser may
sell any or all of the Combined Clinics that were a part of the bona fide offer
of which Coastal was notified to such third party purchaser making such an
offer. The Call Option shall remain in effect with respect to any remaining of
the Combined Clinics for the balance of the original twelve month period, and,
if exercised, the Purchaser's Investment required to be paid by Coastal shall be
that applicable to such remaining of the Combined Clinics.
Section 5.5 Marketing of Clinics. For a period of twelve (12) months from
the date of Closing, Coastal shall have a right to market, in its discretion,
any or all of the Clinics to potential third party purchasers ("Potential
Purchasers"). Purchaser agrees to cooperate with Coastal in such marketing
activities and to provide access and information in regard to the Clinics to
Coastal or Potential Purchasers as reasonably requested.
Section 5.6 Lehigh Clinic Provisions. The parties hereto acknowledge that
CPG has signed a term sheet dated March 11, 1997 as of March 14, 1997 (the "Term
Sheet) with a third party purchaser, Leonard Edelman, M.D. ("Edelman") and
negotiations have taken place concerning the sale of Lehigh to Edelman.
Purchaser hereby agrees to assume any and all obligations or liabilities of
Coastal or CPG under the Term Sheet and to indemnify and hold harmless Coastal
and CPG from any loss or damages resulting from any claims, litigation, actions,
suits, proceedings, judgments, counsel fees, costs and expenses related to the
Term Sheet or any other binding written or oral agreements between CPG and
Edelman relating to the sale of Lehigh to Edelman.
Section 5.7 Insurance. Sellers and each Clinic shall bear the risk of loss
from fire or other casualty through the Effective Date. In the event of any fire
or casualty through the Effective Date causing any material loss of a Clinic's
assets, Purchaser shall have the right to terminate this Agreement and all of
Purchaser's obligations hereunder.
Section 5.8 Professional Liability Provisions. The Purchaser shall obtain
professional liability coverage for the physicians and providers who are
employees, agents or independent contractors of all Clinics subsequent to the
Effective Date, with limits of no less than those limits which exist as of the
Effective Date. Purchaser shall maintain, in full force and effect and
uninterrupted, such professional liability coverage for a period of one (1) year
following the Effective Date. Such professional liability insurance shall at all
times name Sellers (as necessary and appropriate), as an additional named
insured party and shall require the insurance company to provide at least thirty
(30) days written notice to Sellers of any reduction, modification or
termination of such coverage. The Sellers shall be responsible for professional
liability insurance coverage with respect to their respective Clinics through
the Effective Date. The Sellers may, but shall have no obligation to, purchase
an extended reporting endorsement or "tail" insurance for the
<PAGE>
professional liability coverage if each respective Seller, in its sole
discretion, shall deem such to be in its best interest. Each respective Seller
represents that it is not currently aware of any threatened or pending claims,
suits or litigation with respect to their respective Clinic or any of the
physicians or employees of their respective Clinic. The Purchaser and the
Clinics shall indemnify and hold harmless the Seller from any and all costs,
claims and expenses, including without limitation, reasonable attorneys fees
arising out of accidents or claims made by patients of the respective Clinics
against the Sellers, the Clinic or any or their physicians occurring subsequent
to the Effective Date.
Section 5.9 Employee Benefits. For a transition period of up to 30 days,
each respective Seller will continue to provide those employee benefits which it
is lawfully able to provide to those employees of the respective Clinics which
remain employees of the respective Clinics subsequent to the Effective Date;
provided, Purchaser shall reimburse each respective Seller for all costs and
expenses of providing said benefits.
ARTICLE VI
----------
CONDITIONS TO OBLIGATIONS OF PURCHASER
--------------------------------------
The obligations of the Purchaser to consummate the transactions provided
for herein on the Closing Date are subject to the fulfillment of the following
conditions:
Section 6.1 Representations and Warranties. The representations and
warranties of the Sellers herein contained shall be true in all material
respects on and as of the Closing Date with the same force and effect as if made
on and as of such date and the covenants of the Sellers set forth herein shall
have been complied with to the Closing Date, and a certificate to such effect
shall be executed and delivered to the Purchaser by the Sellers as of the
Closing Date.
Section 6.2 Stock Certificates. The Purchaser shall have duly endorsed
stock transfer powers. The Sellers will deliver duly endorsed certificate(s)
representing the Stock upon receipt of the certificates from FUNB.
Section 6.3 Consents and Approvals. The Sellers shall have obtained all
consents and approvals, including without limitation, all consents and approvals
required by any lender, required for the transfer of the Purchased Assets by the
Sellers to the Purchaser.
Section 6.4 Closing of Related Transactions. The two Asset Purchase
Agreements referred to in Section 1.3 and a Receivables Purchase Agreement of
even date shall be executed in conjunction with this Agreement, and the sales of
the other Combined Clinics and the Receivables contemplated therein shall close
contemporaneously with the sale of the Clinics contemplated herein.
Section 6.5 Sellers' Documents. The Sellers shall have caused to be
delivered to Purchaser, at or before the Closing, the following:
<PAGE>
(a) Good Standing Certificates. Good standing certificates issued by the
appropriate official of the states of incorporation of the Sellers and the
Clinics.
(b) Articles of Incorporation and Bylaws. The Sellers and the Clinics shall
have delivered to Purchaser a true and complete copy of their Articles of
Incorporation and Bylaws.
(c) Corporate Resolutions. True and correct copies of resolutions of the
shareholders and board of directors of the Sellers authorizing the execution,
delivery and performance of this Agreement and the transactions contemplated
hereby.
(d) Assignment of Real Estate Lease. An Assignment of real property leases
as provided in Section 5.1.
Section 6.6 Other Assurances. The Sellers and each Clinic shall have
delivered to the Purchaser such other and further certificates, assurances and
documents as Purchaser may reasonably request in order to evidence the accuracy
of the representations and warranties made pursuant to Article II, Article III,
the performance of covenants and agreements to be performed pursuant to Article
V at or prior to the Closing, and the fulfillment of the conditions to
Purchaser's obligations.
Section 6.7 FUNB and Lenders. At or prior to Closing, Sellers shall provide
a written release from FUNB, as agent for the Lenders, of the Clinics in a form
satisfactory to Purchaser. In addition, FUNB, as agent for the Lenders, shall
also provide at Closing a UCC-3 Termination Statement for any outstanding
Financing Statement on record against any of the Clinics in any jurisdiction.
Purchaser, to its satisfaction and in its discretion, must be satisfied that,
after Closing, the Clinics will have no liability or obligation to FUNB or the
Lenders and FUNB and the Lenders will have no lien on the Stock or the assets,
rights, or interests of the Clinics.
ARTICLE VII
-----------
CONDITIONS TO OBLIGATIONS OF SELLERS
------------------------------------
The obligations of the Sellers to consummate the transactions provided for
herein on the Closing Date are subject to the fulfillment of the following
conditions on the Closing Date:
Section 7.1 Representations and Warranties. The representations and
warranties of the Purchaser herein contained shall be true in all material
respects on and as of the Closing Date with the same force and effect as if made
on and as of such date, and the covenants of the Purchaser set forth herein
shall have been complied with to the Closing Date.
Section 7.2 Payment of Purchase Price. The Purchaser shall have paid the
Purchase Price in the manner described in Sections 1.3 and 1.4 hereof.
Section 7.3 Closing of Related Transactions. The two Asset Purchase
Agreements referred to in Section 1.3 and a Receivables Purchase Agreement of
even date shall be executed in conjunction with this Agreement, and the sales of
the other Combined Clinics and the Receivables contemplated therein shall close
contemporaneously with the sale of the Clinics as contemplated herein.
<PAGE>
Section 7.4 Purchaser's Documents. The Purchaser shall have performed and
complied, in all material respects with its covenants and agreements made herein
to be performed by or complied with by it on or prior to the Closing Date.
Purchaser shall have caused to be delivered to Sellers, at or before the
Closing, the following:
(a) Articles of Organization and Operating Agreement. Purchaser shall have
delivered to Sellers a true and complete copy of its Articles of Organization
and Operating Agreement.
(b) Company Resolutions. True and complete copies of resolutions of the
managers of Purchaser authorizing the execution, delivery and performance of
this Agreement and the transactions contemplated hereby.
Section 7.5 Other Assurances. The Purchaser shall have delivered to the
Sellers such other and further certificates, assurances and documents as Sellers
may reasonably request in order to evidence the accuracy of the representations
and warranties made pursuant to Article IV, the performance of covenants and
agreements to be performed pursuant to Article V at or prior to the Closing, and
the fulfillment of the conditions to Sellers' obligations.
ARTICLE VIII
------------
INDEMNIFICATION
---------------
In addition to the indemnities included elsewhere in this Agreement, the
parties hereto agree to indemnify and hold each other harmless as follows:
Section 8.1 Indemnification by the Sellers. The Sellers agrees to indemnify
and hold the Purchaser harmless at all times after the date of this Agreement
from, against and in respect of:
(a) Any and all loss, liability, damage or deficiency resulting from any
misrepresentation, breach of warranty or nonfulfillment of any covenants or
agreements on the part of the Sellers contained herein or in any certificate or
document furnished by the Sellers pursuant hereto and any loss or damage
resulting from any claims, litigation, actions, suits, proceedings, judgments,
counsel fees, costs and expenses incident to such misrepresentation, breach or
nonfulfillment;
(b) Any obligation or liability, contingent or otherwise, of the Sellers in
respect of any profit derived from the sale of the Stock pursuant to this
Agreement;
(c) Any liability or obligation, whether assessed or unassessed, of Clinics
for federal, state or local taxes owed and due through the Closing Date
(provided that for local ad valorem taxes, such taxes shall not be considered
due for purposes of this subsection until the last date upon which such taxes
can be paid without penalty);
(d) Any liability or obligation for the preparation or filing of any tax
returns to be filed through the Closing Date and the payment of any taxes, or
charges or levies in the nature of a tax, assessed or imposed upon Clinics'
business or property that are required to be paid through the
<PAGE>
Closing Date (Sellers shall assume all liabilities for filing and the
correctness of returns filed and payment of all taxes reported or to be reported
through the Closing Date).
(e) All liabilities incurred by Sellers arising out of or in connection
with the operation of the Valley Women's Center and the CPG Clinics through the
Closing Date, provided that, within twenty-four (24) months following the
Closing Date, Purchaser provides written notice to the Sellers, pursuant to
which Purchaser asserts a claim, stating with particularity all material facts
relating to such claim.
Section 8.2 Indemnification by the Purchaser. The Purchaser agree to
indemnify and hold the Sellers harmless at all times after the date of this
Agreement from and against any and all loss, liability, damage or deficiency
resulting from (i) any misrepresentation, breach of warranty or nonfulfillment
of any covenants or agreements on the part of the Purchaser contained herein or
in any certificate or document furnished by the Purchaser pursuant hereto and
any loss or damage resulting from any claims, litigation, actions, suits,
proceedings, judgments, counsel fees, costs and expenses incident to such
misrepresentation, breach or nonfulfillment; and (ii) all liabilities arising
out of or in connection with the operation of the Clinics by the Purchaser
subsequent to the Closing Date.
Section 8.3 Third Party Claims. Should any claim be made by a person not a
party to this Agreement with respect to any matter to which the foregoing
indemnity relates, the party against whom such claim is asserted (the
"Indemnified Party"), within a reasonable period of time, shall give written
notice to the other party (the "Indemnifying Party") of any such claim, and the
Indemnifying Party shall thereafter defend or settle any such claim, at its sole
expense, on its own behalf and with counsel of its selection. In such defense or
settlement of any claims, the Indemnified Party shall cooperate with the
Indemnifying Party to the maximum extent reasonably possible. Any payment
resulting from such defense or settlement, together with the total expense
thereof, shall be binding on Sellers and Purchaser for the purpose of this
Article VIII.
Section 8.4 Settlement. Notwithstanding the foregoing, should any claim be
made by a person not a party to this Agreement with respect to any matter to
which the foregoing indemnity relates, the Indemnified Party, on not less than
thirty (30) days' notice to the Indemnifying Party, may make settlement of such
claim, and such settlement shall be binding on the Indemnifying Party and the
Indemnified Party for the purposes of this Article VIII; provided, however, that
if within said thirty (30) day period the Indemnifying Party shall have
requested the Indemnified Party not to settle such claim and to deny such claim
at the expense of the Indemnifying Party, the Indemnified Party will promptly
comply and the Indemnifying Party shall have the right to defense on its own
behalf with counsel of its selection. Any payment or settlement resulting from
such contest, together with the total expense thereof, shall be binding on
Sellers and Purchaser for the purposes of this Article VIII.
ARTICLE IX
----------
BROKERAGE
---------
The Sellers and the Purchaser represent and warrant to the other that the
negotiations relative to this Agreement have been carried on by the Sellers
directly with the Purchaser and by the
<PAGE>
Purchaser directly with the Sellers, without the intervention of any person. The
Sellers shall indemnify the Purchaser and the Purchaser shall indemnify the
Sellers and hold the other party or parties harmless against and in respect of
any claim for brokerage or other commissions relative to this Agreement, or to
the transactions contemplated hereby, and also in respect of all expenses of any
character incurred by the Purchaser, on the one hand, and by the Sellers and any
of the Clinics, on the other hand, in connection with this Agreement or such
transactions, arising out of any claim for any such brokerage or other
commissions alleged to be due as a result of the actions or conduct of the
indemnifying party.
ARTICLE X
---------
FURTHER ASSURANCES;
-------------------
ACCESS AND INFORMATION
----------------------
Section 10.1 Further Assurances. The Sellers and Purchaser all hereby
covenant and agree that at any time and from time to time they will promptly
execute and deliver to the others such further instruments and documents and
take such further action as the parties may from time to time reasonably request
in order to further carry out the intent and purpose of this Agreement.
Section 10.2 Access and Information. Through the Closing Date, the Sellers
shall cause the Clinics to give Purchaser and its agents, attorneys, accountants
and representatives full access, during normal working hours of the Clinics to
each of the Clinics' properties, affairs, books, records, contracts and
documents, including, without limitation, all contracts, leases, evidence of
indebtedness and audit work papers of the internal auditors of the Clinics, as
Purchaser may reasonably request; provided, however, that until the Closing,
Purchaser shall not disclose and shall cause its agents, attorneys, accountants
and representatives not to disclose to any other party any confidential data or
information secured from the Clinics, and, if the Closing does not occur as
herein provided, Purchaser will promptly return to the Clinics, at Purchaser's
expense, all books, records and other documents and papers obtained from the
Clinics and all copies thereof.
ARTICLE XI
----------
NATURE AND SURVIVAL OF REPRESENTATIONS
--------------------------------------
All statements contained in any certificate or other instrument delivered
by or on behalf of the Sellers pursuant hereto, or in connection with the
transactions contemplated hereby, shall be deemed representations and warranties
by the Sellers hereunder. All representations, warranties, and agreements made
by the Sellers in this Agreement, or pursuant hereto, except as otherwise
expressly stated, shall survive the Closing and any investigation at any time
made by or on behalf of the Sellers as follows:
(a) The representations, warranties and covenants regarding title to the
Stock, contained in Sections 2.2 and 3.2 hereof, shall survive forever;
(b) All other representations, warranties, and covenants made hereunder
shall be effective for a period of eighteen (18) months following the Effective
Date.
<PAGE>
ARTICLE XII
-----------
MISCELLANEOUS
-------------
Section 12.1 Third Party Beneficiary. Coastal, its successors and assigns
are intended to be direct third-party beneficiaries of the covenants contained
in this Agreement and may enforce the same in their own name, as applicable.
Section 12.2 Notices; Addresses. All notices, requests, demands, and other
communications hereunder shall be in writing, and shall be deemed to have been
duly given if delivered or mailed, first class postage prepaid, addressed as
follows:
CPN: Coastal Physician Networks, Inc.
2828 Croasdaile Drive
Durham, North Carolina 27704
Attention: President
CPG: Coastal Physician Group of Florida, Inc.
2828 Croasdaile Drive
Durham, North Carolina 27704
Attention: President
PURCHASER: Scott Medical Group LLC
2828 Croasdaile Drive
Durham, North Carolina 27704
Attention: Manager
Section 12.3 Expenses. The parties hereto shall pay all of their own
expenses relating to the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of their respective legal counsel and
financial advisors.
Section 12.4 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 12.5 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction, shall as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 12.6 Assigns. This Agreement shall be binding upon and inure to the
benefit of any and all successors, assigns, or other successors in interest of
the Purchaser, Coastal and Sellers.
<PAGE>
Section 12.7 Public Announcement. Prior to Closing, no party will make any
public announcements with respect to this transaction without the approval of
the other parties, except as otherwise required by law, by the Securities
Exchange Commission, or that are recommended by legal counsel. In any
announcements after Closing, all parties agree to avoid any disparagement of
another party.
Section 12.8 Remedies. In the event that any party defaults or fails to
perform any of the conditions or obligations of such party under this Agreement
or any other agreement, document or instrument executed in connection with this
Agreement, or in the event that any such party's representations or warranties
contained herein or in any such other agreement, document or instrument are not
true and correct as of the date hereof and as of the Closing, the other parties
shall be entitled to exercise any and all rights and remedies available to them
by or pursuant to this Agreement or at law or in equity.
Section 12.9 Captions. The captions and headings set forth in this
Agreement are for convenience of reference only and shall not be construed as a
part of this Agreement.
Section 12.9 Merger Clause. This Agreement contains the final, complete and
exclusive statement of the agreement between the parties with respect to the
transactions contemplated herein and all prior or contemporaneous written or
oral agreements with respect to the subject matter hereof are merged herein.
Section 12.10 Amendments. No change, amendment, qualification or
cancellation hereof shall be effective unless in writing and executed by all of
the parties hereto by their duly authorized officers.
Section 12.11 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina.
(Signature Page Follows)
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement under
seal as of the date first above written.
COASTAL PHYSICIAN NETWORKS, INC.
By:
--------------------------------
Its:
-------------------------------
ATTEST:
By:
--------------------------
Secretary
[Corporate Seal]
COASTAL PHYSICIAN GROUP
OF FLORIDA, INC.
By:
--------------------------------
Its:
-------------------------------
By:
--------------------------
Secretary
[Corporate Seal]
SCOTT MEDICAL GROUP LLC
By: (SEAL)
--------------------------------
Steven M. Scott, M.D., Manager
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as
of January 1, 1998 by and among COASTAL PHYSICIAN GROUP, INC., a Delaware
Corporation ("Coastal"), COASTAL MANAGED HEALTHCARE, INC., a North Carolina
corporation ("CMH" or the "Seller") and DHP HOLDINGS, LLC, a North Carolina
limited liability company ("Purchaser").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, CMH owns all of the issued and outstanding stock of Doctors Health
Plan, Inc., a North Carolina corporation ("DHP"); and
WHEREAS, concurrently with the execution and delivery of this Agreement,
CMH is selling and the Purchaser is purchasing all of the issued and outstanding
stock of DHP (the "DHP Stock"), all pursuant to the terms and conditions more
fully set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE
Section 1.1 Purchase and Sale of DHP Stock. Subject to the terms and
conditions contained herein, at a Closing taking place concurrently with the
execution and delivery of this Agreement, the Purchaser is purchasing from CMH
and CMH is selling, assigning and transferring to the Purchaser, the DHP Stock
which is all of the issued and outstanding capital stock of DHP.
Section 1.2 Closing Date. The closing of this transaction (the "Closing")
shall be held at the offices of Moore & Van Allen, PLLC, 2200 West Main Street,
Suite 800, Durham, North Carolina 27705, or such other place as the parties may
agree on or before March 4, 1998 or such other time as the parties may agree;
provided, the transactions contemplated herein shall be effective as of 12:01
a.m. on January 1, 1998 (the "Effective Date").
Section 1.3 Purchase Price and Payment of Purchase Price. The purchase
price, subject to adjustments described below, to be paid by Purchaser (the
"Purchase Price") will be an amount equal to $5,000,000. The Purchaser will pay
the Purchase Price at Closing in cash or immediately available funds; provided,
however, Purchaser shall have the right to elect to pay the Purchase Price in
the form of a promissory note in the amount of $5,000,000 (the "Note") due and
payable within ten (10) days from the Closing Date. The Promissory Note will
bear interest after default at the per annum rate of twelve percent (12%) until
paid. In addition, in the event the Note is not paid in full within the earlier
of ninety (90) days from the date hereof or forty-five days after Coastal gives
Purchaser notice under Section 5.6 that it intends to accept a price below the
Strike Price (as defined in Section 5.6), Purchaser agrees to provide collateral
to secure the Note that is determined to be adequate by the Board of Directors
of Coastal, and Purchaser agrees to execute and deliver any security agreements,
deeds of trust, pledge agreements, financing statements and other documentation
necessary to evidence or perfect a security interest in such collateral. The
form of Note is attached hereto as Exhibit A. Seller may be entitled to receive
additional amounts under Section 5.6, which amounts shall be treated as an
adjustment to the Purchase Price.
Section 1.4 Post Effective Date Cooperation. The parties acknowledge that
after the Effective Date, cash may be received by one party but belong to
another party and/or trade payables may be paid by one party yet be the
responsibility of another party. The parties agree to cooperate to reconcile in
a timely manner all post Effective Date transactions. Upon such reconciliation,
any party owing money to another party shall pay the amount owed within thirty
(30) days of said reconciliation.
Section 1.5 Responsibility for Tax Liability. Seller shall be responsible
for and shall indemnify Purchaser from, against and in respect of any liability
for taxes imposed on DHP with respect to any taxable period,
<PAGE>
or portion thereof, ending on or prior to or which includes the date immediately
prior to the Effective Date (including any liability under Section 1.1502-6 of
the Treasury Regulations or similar provisions of state law). Purchaser shall be
responsible for and shall indemnify Seller from, against and in respect of any
liability for taxes imposed on DHP with respect to any taxable period, or
portion thereof, for which Seller is not liable to Purchaser pursuant to the
terms of the immediately preceding sentence (other than any liability under
Section 1.1502-6 of the Treasury Regulations or similar provision of state law).
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CMH AND COASTAL
In order to induce the Purchaser to enter into this Agreement and the
transactions contemplated hereby, CMH and Coastal hereby represent and warrant
to the Purchaser as follows:
Section 2.1 Corporate Organization and Authority. CMH is a corporation duly
organized, validly existing and in good standing under the laws of the State of
North Carolina, with full corporate power and authority to conduct its business
as now conducted, own its assets, own or lease and operate its properties, and
enter into and perform its obligations under this Agreement. This Agreement
constitutes, and all assignments, agreements and other instruments and documents
to be executed and delivered by CMH in connection with this Agreement will
constitute, CMH's legal, valid and binding obligations, enforceable against CMH
in accordance with their respective terms.
CMH, by all appropriate corporate action, has duly authorized the execution
and delivery of this Agreement, the documents of transfer and assignment
contemplated hereby in consummation of all the transactions contemplated herein
and the performance of all obligations of CMH pursuant to this Agreement.
Section 2.2 Title to Stock of DHP. Except as disclosed on Schedule 2.2, CMH
is the true and lawful beneficial and record owner of all the DHP Stock and has
good and marketable title thereto, free and clear of claims, pledges, liens,
security interests, charges or other encumbrances. Subject to obtaining all
required consents disclosed on Schedule 2.14, CMH has full right and power and
authority to sell, transfer and deliver the DHP Stock. Upon delivery of the DHP
Stock as contemplated in this Agreement, CMH will transfer to the Purchaser
valid and marketable title thereto including all voting and other rights to the
DHP Stock free and clear of all claims, pledges, liens, security interests,
charges, or other encumbrances.
Section 2.3 Financial Statements. The unaudited financial statements of DHP
are attached hereto as Exhibit C and have been prepared by management. Since the
date of the financial statements, management believes that DHP has incurred
continuing substantial operating losses. DHP has been cited by the North
Carolina Department of Insurance ("NCDOI") for numerous violations of
regulations with respect to its operations and has been notified that a fine
which is likely to be substantial will be levied and will be payable by DHP. As
a result of the operational losses of DHP prior to the closing, management
believes that DHP does not have the statutory minimum capital and surplus
required by the laws of the State of North Carolina or the NCDOI in order to
maintain its license to operate a health maintenance organization in good
standing. Management believes that substantial capital infusions will be
required to be made to DHP in order to pay the fine levied by the NCDOI,
maintain statutory minimum capital and surplus, fund ongoing operating losses
and meet other capital requirements that will be imposed on DHP by the NCDOI as
a condition to continuing operations. DHP has experienced significant employee
attrition and turnover over the past twelve to eighteen months, including the
resignation of the President and Chief Executive Officer in January, 1998. In
addition, other officers and directors have resigned. Additional matters
regarding DHP and its financial statements are disclosed on Schedule 2.14. Other
than as set forth above and as disclosed on Schedule 2.14, Coastal and CMH make
no representations regarding the financial condition, business or affairs of
DHP.
Section 2.4 No Subsidiaries. DHP does not own, either directly or
indirectly, or have any investment in, own, or otherwise control, any
corporation or other entity, or is a party to any partnership agreement, joint
venture, or similar agreement.
Section 2.5 Other Business Names. Other than as disclosed on Schedule 2.5,
DHP and its predecessors and any companies acquired by or merged into them have
not used any other business names.
2
<PAGE>
Section 2.6 Sites. Except as disclosed on Schedule 2.14, DHP has complied
in all material respects with all municipal, state and federal statutes,
ordinances, rules and regulations applicable to its respective business,
included but not limited to, zoning, building, environmental and occupational,
safety and health regulations.
Section 2.7 Leases. Schedule 2.7 contains an accurate and complete list of
all space leases with respect to space leased by DHP. Other than as disclosed on
Schedule 2.7, DHP is not in default under any lease or subject to obtaining
necessary consents nor will they be in default as a result of the execution of
this Agreement or closing of the transactions contemplated hereby.
Section 2.8 Tangible Personal Property. Schedule 2.8 contains an accurate
and complete list of all equipment leases and equipment leased by DHP. DHP is
not in default under any such equipment leases and is not aware of any fact
which, with notice and/or passage of time, would constitute such a default.
Section 2.9 Intangible Personal Properties; Computer Programs. DHP has set
forth a list of any and all franchises or licenses, any registered trademarks,
trademark applications, service marks, copyrights, trade names, formulations,
customer lists and computer programs held or used by DHP on Schedule 2.9. Other
than as set forth on Schedule 2.14, neither Coastal, CMH or DHP have received
written notice of any claims or demands with respect to such items of intangible
personal property and, to Coastal's, CMH's and DHP's best knowledge, there are
no claims or demands against CMH or DHP with respect to any of such items of
intangible personal property. No proceedings have been instituted, or are
pending against Coastal, CMH or DHP, or to the knowledge of Coastal, CMH or DHP,
have been threatened against CMH or DHP to challenge the rights of CMH or DHP
with respect to any such assets. Neither CMH or DHP have received written notice
of any claims or demands relating to their right to use all trade names, trade
secrets, patient records and patient lists which they have used or which they
are now using in connection with their respective businesses. Each of CMH or DHP
have the unrestricted right to use, free from any rights or claims of others,
all trade names, trade secrets, patient records and patient lists which they
have used or which they are now using in connection with their respective
businesses.
Section 2.10 Assets. Except as set forth on Schedule 2.10, as of the
Closing Date each of CMH and DHP have good and marketable title in and to all of
their respective assets, which property is free and clear of any security
interests, consignments, liens, judgments, encumbrances, restrictions, or claims
of any kind, other than as expressly provided in this Agreement.
Section 2.11 Current Employees and Employment Practices. All employees of
DHP (other than those listed on the attached Schedule 2.11(a) as having
employment agreements) are employees at will who may be terminated by DHP at any
time, with or without cause, with no obligation to make any payment other than
salary and wages through the date of termination, plus any notice period, and
severance payments in accordance with DHP's standard corporate policy. Except as
described on Schedule 2.11(b), no employment discrimination or unfair labor
practice, charge or complaint against DHP has been filed, nor to the knowledge
of CMH or DHP, threatened to be filed with any court, agency or other entity
having jurisdiction over DHP. Other than as disclosed on Schedule 2.11(b), to
the knowledge of CMH and DHP, DHP has not been threatened by any former employee
with any suit alleging wrongful termination or other discriminatory wrongful or
tortuous conduct in connection with the employment relationship. Schedule
2.11(a) attached hereto and made a part hereof lists all employment agreements
of DHP. None of the employees of DHP are represented by any labor organization,
nor to the knowledge of CMH or DHP is there currently any union organizing
activities with respect to such employees, nor has there been any such
organizing activity within the past three years. DHP has not engaged in any
collective bargaining or similar agreement with any labor organization.
Section 2.12 ERISA. All "employee benefit plans," as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), maintained or contributed to by DHP are in compliance with all
applicable provisions of ERISA and the Internal Revenue Code of 1986, as
amended, (the "Code"), and DHP does not have any liabilities or obligations with
respect to any such employee benefit plan, whether or not accrued, contingent or
otherwise, except for instances of noncompliance or liabilities or obligations
that would not, individually or in the aggregate, have a material adverse effect
on the business of DHP. Other than as specified in any employment agreements
listed in Schedule 2.11(a), no employee of DHP will be entitled to any
3
<PAGE>
additional benefits or any acceleration of the time of payment or vesting of any
benefits under any employee incentive or benefit plan, program or arrangement as
a result of the transactions contemplated by this Agreement, either alone or in
combination with another event. DHP does not separately maintain any plans or
other compensation arrangements which provide deferred or incentive compensation
or severance benefits.
Section 2.13 Insurance. DHP shall deliver prior to closing copies of the
originals of any and all insurance policies which DHP has in effect covering
itself or its employees, officers or directors, including error and omissions
policies. DHP has had general liability insurance and errors and omissions
liability insurance policies in full force and effect from the date DHP was
formed through the Closing Date as part of the coverage afforded under a policy
written to Coastal. The insurance coverage from Allianz Life Insurance Company
of North America for coverage related to insolvency of DHP was scheduled for
renewal on January 1, 1998, but the NCDOI has held up the issuance of the policy
due to the department's efforts to have certain policy language modified.
Section 2.14 Compliance with Applicable Laws. Except as set forth in
Section 2.3 and on Schedule 2.14, DHP is in compliance in all material respects
with all federal, state, county and municipal laws, ordinances, regulations,
judgments, orders or decrees applicable to the conduct of its business or to the
assets owned, used, or occupied by DHP, and has not received notice or advice to
the contrary. Except as set forth on Schedule 2.14, neither this Agreement nor
the consummation of the transactions contemplated herein will (a) violate an
order, writ, injunction, statute, rule or regulation applicable to DHP or (b)
require the consent, approval, authorization or permission of, or the filing
with or the notification of any federal, state or local government agency.
Section 2.15 Environmental and Medical Waste Compliance.
(a) DHP is not in violation of any federal, state or local laws, statutes,
codes, ordinances, rules, regulations, permits or orders relating to or
addressing the environment, health, medical waste or safety (collectively,
"Environmental Laws"), which shall include, but not be limited to, the use,
handling or disposal of or the record keeping, notification and recording
requirements respecting any pollutant, hazardous substance, radioactive
substance, toxic substance, solid waste, hazardous waste, medical waste,
radioactive waste, special waste, petroleum or petroleum derived substance or
waste, asbestos, or any hazardous or toxic constituent thereof (collectively
"Hazardous Substances") or work place or worker safety and health, nor have they
received any written notices alleging that they are in violation of any such
Environmental Laws; nor are they subject to any administrative or judicial
proceeding alleging any violation of any such Environmental Laws, federal, state
or local laws, statutes, codes, ordinances, rules, regulations, permits relating
to the environment, health, medical waste or safety.
(b) There is no pending lawsuit or administrative proceeding or, to CMH's
or DHP's knowledge, threatened claim alleging that DHP is liable under any
Environmental Law, including, without limitation, any Environmental Law related
to the on-site or off-site disposal of Hazardous Substances. DHP has not
received written notice from any person, including but not limited to any
federal, state, or local governmental agency, alleging that DHP is liable under
any applicable Environmental Law, including without limitation, any
Environmental Law related to the on-site or off-site disposal of Hazardous
Substances.
(c) To CMH's and DHP's knowledge, there have been no releases, spills or
discharges of Hazardous Substances on or underneath any of the real property
leased by DHP and DHP has not disposed of Hazardous Substances on, at or under
such properties.
Section 2.16 Taxes. No assessments or additional tax liabilities (including
all federal, state and local taxes, charges, penalties and interest) have been
proposed or to the best of CMH and DHP's knowledge threatened against DHP or any
of its assets, and, except as disclosed on Schedule 2.16, none of Coastal, CMH
or DHP has executed any waiver of the statute of limitations on the assessment
or collection of such tax liabilities. There are no federal, state or local tax
liens upon any of DHP's assets other than inchoate liens for taxes not yet due
and payable. There are no past, pending or to CMH or DHP's knowledge, threatened
audits against DHP, except that Coastal is subject to a federal income tax
examination for 1992 through and including 1996 (DHP was not operating and was
not part of the consolidated returns of Coastal for 1992 and 1993). Except as
set forth on Schedule 2.16, all tax returns for DHP have been timely filed and
are complete and accurate. All returns, declarations, reports, estimates,
4
<PAGE>
information returns and statements ("Returns") required to be filed under any
federal, state, local or foreign authority by Coastal, CMH, DHP or the
affiliated, combined or unitary group of which any such corporation is or was a
member have been filed and were in all material respects (and, as to Returns not
yet due and filed on the date hereof, will be) true, complete, correct and filed
on a timely basis. All taxes due and owing or required to be withheld or
collected by CMH and DHP have been fully paid and CMH and DHP have adequate
reserves to pay all taxes not yet due, including any taxes resulting from the
transactions contemplated hereunder. Coastal has included DHP as a member of its
consolidated group for federal income tax purposes for all taxable years in
which DHP was properly so includible and will include DHP as a member of its
consolidated group for the taxable period beginning January 1, 1998 and ending
on the Closing Date.
Except as may be required by the Internal Revenue Service (or state taxing
authority) to clearly reflect the income or loss of Coastal or any members of
its consolidated group, Coastal will not take any action or fail to take any
action that could have the effect of reducing the amount of any net operating
loss or other tax attribute attributable to DHP pursuant to the Code or any
similar law of any other taxing jurisdiction, including, without limitation, the
filing of any amended return or the reattribution of any net operating losses or
similar items from DHP, or any affiliate of Coastal under Treas. Reg. Section
1.1502-20 or any similar law of any other taxing jurisdiction. If the Coastal
"consolidated group" is subject to a "consolidated section 382 limitation" as a
result of transactions prior to those contemplated in this Agreement, Coastal
will file an election under Treas. Reg. Section 1.1502-95T(c) apportioning to
DHP an amount of the "consolidated section 382 limitation" of the Coastal
"consolidated group" equal to the lesser of (a) the sum of (i) the product of
the "consolidated section 382 limitation" of the Coastal "consolidated group"
and the DHP Percentage (as defined herein) plus (ii) the net operating loss
incurred for tax purposes by the Coastal consolidated group subsequent to the
event triggering the consolidated section 382 limitation multiplied by the DHP
Percentage (as defined herein) multiplied by the long term tax-exempt rate in
effect as of the Closing Date, and (b) the Purchase Price multiplied by the
long-term tax-exempt rate in effect as of Closing Date. The " DHP Percentage"
shall mean Ten Percent (10%) multiplied by a fraction, the numerator or which is
the Purchase Price (as adjusted pursuant to this Agreement) and the denominator
of which is $8,714,000. Such election will be timely and properly filed under
Treas. Reg. Section 1.1502-95T(e). For purposes of this Section 2.16, the term
"net operating loss" shall have the meaning ascribed to such term in section 172
of the Code, and the terms "consolidated section 382 limitation" and
"consolidated group" shall have the meaning ascribed to such terms in the
Treasury Regulations to Section 1502 of the Code.
Section 2.17 Litigation. Except as set forth on Schedule 2.17, there are no
actions, suits or proceedings pending or to their knowledge threatened against
CMH or DHP which materially affect the ability of CMH to perform under this
Agreement.
Section 2.18 Jurisdictions Doing Business. Attached hereto as Schedule 2.18
is a complete list of all jurisdictions in which DHP has done business as well
as any and all trade names or other names they have used in those jurisdictions.
DHP is duly qualified or registered to do business as a foreign corporation and
are in good standing in each jurisdiction in which the character of the business
conducted by it or the location of the properties owned or leased by it makes
such qualification necessary and where the failure to so qualify would have a
material adverse effect upon its respective business.
ARTICLE III
LIMITATIONS ON REPRESENTATIONS AND WARRANTIES
Section 3.1 Limitation on Representations and Warranties. The Seller shall
not be deemed to have made to Purchaser any representation or warranty other
than those expressly made by the Seller in Article II hereof. Without limiting
the generality of the foregoing, and notwithstanding any otherwise express
representations and warranties made by the Seller in Article II hereof, Seller
makes no representation or warranty to Purchaser with respect to:
(a) any projections, estimates, or budgets heretofore delivered to or made
available to Purchaser of future revenues, expenses or expenditures or future
results of operations; or
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(b) except as expressly covered by a representation and warranty contained
in Article II hereof, any other information or documents (financial or
otherwise) made available to Purchaser or its counsel, accountants or advisors
with respect to DHP; notwithstanding the foregoing, the Seller shall be liable
if Seller has knowingly furnished any other information or documents to
Purchaser which is materially incomplete or materially false.
Section 3.2 Due Diligence Investigation. Purchaser acknowledges that:
(a) it has had the opportunity to visit with DHP and meet with
representatives of DHP to discuss the business and the assets, liabilities,
financial condition, cash flow and operations of the business; and
(b) all materials and information requested by Purchaser have been provided
to Purchaser to Purchaser's reasonable satisfaction.
Purchaser acknowledges that it has made its own independent examination,
investigation, analysis and evaluation DHP. Purchaser acknowledges that it has
had full and complete access to all of the books, records and assets of Seller
and has had the opportunity to personally inspect the assets, operations and
talk with the personnel employed by DHP to the extent it has desired to do so
with respect to this transaction.
Purchaser acknowledges that it has undertaken such due diligence (including
a review of the assets, liabilities, books, records and contracts of DHP) as
Purchaser deems adequate, including that described above.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
In order to induce the Seller to enter into this Agreement and the
transactions contemplated hereby, Purchaser hereby represents and warrants to
Seller as follows:
Section 4.1 Company Organization and Authority. Purchaser is a limited
liability company, validly existing and in good standing under the laws of the
State of North Carolina, with full power and authority to conduct its business
as now conducted, own its assets, own or lease and operate its properties, and
enter into and perform its obligations under this Agreement. This Agreement
constitutes, and all agreements and other instruments and documents to be
executed and delivered by Purchaser will constitute, Purchaser's legal, valid
and binding obligations, enforceable against Purchaser in accordance with their
respective terms.
Purchaser, by all appropriate limited liability company action, has duly
authorized the execution and delivery of this Agreement, the documents of
transfer and assignment contemplated hereby and consummation of all the
transactions contemplated herein and the performance of all obligations of
Purchaser pursuant to this Agreement.
ARTICLE V
COVENANTS AND AGREEMENTS OF SELLER AND PURCHASER
Section 5.1 Assignment of Leases. To the extent any real estate leases for
facilities utilized by DHP or equipment leases for equipment used by DHP are not
currently in the name of DHP, at the Closing such leases shall be assigned to
and assumed by Purchaser, and the Seller and Purchaser agree to cooperate to
obtain releases of the Seller, Coastal or any affiliates of Coastal for
liability in connection with such leases. All rent and any pass through expenses
payable by the tenant under any such leases shall be prorated as of the
Effective Date between the Seller and Purchaser. Security deposits on all real
estate and equipment leases shall remain on deposit pursuant to the leases and,
to the extent not currently held in the name of DHP shall be transferred to
Purchaser or DHP at Closing. Any expenses chargeable to the tenant or lessee
under such leases (such as taxes, insurance and maintenance) shall be prorated
as of the Effective Date and adjusted between the Purchaser and the Seller.
Section 5.2 Accounting Services; Cooperation of Parties. Purchaser shall be
entitled to continue to have access to and utilize the accounting and general
ledger systems of Coastal including use of hardware and related software through
the end of 1998 for no charge other than reimbursement of out of pocket costs,
including
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telecommunications expenses. The out-of-pocket costs shall be billed by Coastal
to Purchaser monthly, and Purchaser shall timely pay said invoices. Coastal
shall not be obligated to provide any special programming or support services to
Purchaser in connection with Purchaser's use of these systems. Coastal shall not
be obligated to continue to use the present accounting systems through 1998 and
Coastal will not be in breach of this Agreement if it discontinues use of the
present systems or modifies them so as to make continued access and utilization
by Purchaser impractical; provided, in such event, Coastal shall provide
Purchaser with at least ninety (90) days advance notice of any change in its
present systems which will make continued access and utilization by Purchaser
impractical and Coastal shall assist Purchaser in the transition to another
system.
In consideration of the aforesaid, Purchaser will assist Coastal and the
Seller in the production of information for the preparation of financial
statements and tax returns of the Seller.
Section 5.3 Employees. For a transition period through and including March
31, 1998, the employees of DHP will continue to participate in all Coastal
sponsored benefit plans in which they participated immediately prior to the
Closing, and will be paid through the Coastal master payroll services. The
Purchaser will offer employment to all current employees of DHP at their current
rate of pay, although Purchaser shall not be obligated to employ any such
persons for any specific length of time. Purchaser will be obligated to pay to
Coastal all direct costs of the payroll (salary, bonus, overtime, shift
differential) paid by Coastal during the transition period, plus 17.5% to cover
the cost of employee benefits and payroll processing and benefit administration.
The Purchaser shall remit these amounts to Coastal immediately prior to each
payroll period.
Section 5.4 Insurance. The Seller shall bear the risk of loss from fire or
other casualty through the Closing Date. In the event of any fire or casualty
through the Closing Date causing any material loss of DHP's assets, Purchaser
shall have the right to terminate this Agreement and all of Purchaser's
obligations hereunder. Upon such termination, CMH will reimburse Purchaser for
Purchaser's actual out-of-pocket expenses (up to a maximum of $50,000) in
connection with the negotiation and preparation of this Agreement and in
connection with advice relating to the transactions contemplated hereby,
provided that Purchaser shall provide reasonable documentation of such expenses.
Coastal will exercise reasonable efforts to cause the businesses being
purchased by Purchaser to be covered under Coastal's insurance policies through
March 31, 1998 with respect to (i) general liability insurance and (ii) fire and
casualty insurance. Coastal will bill Purchaser for the incremental cost of such
insurance and Purchaser shall promptly pay such costs. Such insurance shall be
subject to such terms, conditions, limitations and exclusions as Coastal's
insurers may impose.
Section 5.5 Reserved.
Section 5.6 Marketing of DHP. For a period of twelve (12) months following
the Closing, Coastal shall have the right to market DHP for sale. During this
period, Purchaser agrees that it will not do anything to impede the right of
Coastal to market DHP; provided that Purchaser may bring in minority investors
to DHP so long as Steven M. Scott, M.D. or his affiliates continue to retain
control of DHP, and further provided that this sentence shall not require
Purchaser to maintain any particular level of funding of DHP operations or
prevent Purchaser from selling DHP for a price less than the Strike Price
(defined below) during the period when Coastal has a right to market DHP.
Following the Closing, the parties agree to undertake an effort to market DHP
for sale to a third party purchaser. The timing and logistics of such a sale
shall be discussed and agreed to by the parties. Coastal has previously entered
into an agreement with Advest, Inc. contemplating the marketing and sale of DHP
following the Closing. Purchaser agrees to give Coastal and its representatives
(including investment bankers, accountants and legal counsel) full and complete
access to the books, records, facilities and personnel of DHP and full
cooperation that in either case is necessary or appropriate to market DHP for
sale. Such access shall also be granted to potential purchasers for due
diligence purposes (subject to the execution of appropriate and customary
confidentiality agreements). In the event that Coastal or Purchaser locates a
third party purchaser for DHP during this period at a price that exceeds the
Strike Price, then Coastal may elect to have the sale take place; provided that
if the Note is outstanding Coastal may elect to sell for a price below the
Strike Price if either (i) the offer to purchase is made ninety (90) days or
more after the date hereof and Purchaser has defaulted in its obligation to
secure the Note by posting adequate collateral in accordance with Section 1.3 or
(ii) the offer to purchase is made within ninety (90) days of the date hereof,
Coastal has given notice to the Purchaser it intends to accept the
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offer, and Purchaser fails to pay the Note in full or post adequate collateral
in accordance with Section 1.3 by the earlier of (x) forty-five (45) days after
such notice or (y) ninety (90) days after the date hereof. If Coastal elects to
sell, Purchaser shall have the right to pay an amount to Coastal that equals the
amount that would have been received by Coastal hereunder as a result of a sale
to such third party purchaser or to agree to consummate a closing and sale to
such third party purchaser. If Purchaser elects to pay such amount to Coastal,
the right to market under this Section 5.6 shall terminate upon such payment. In
addition, if a definitive agreement with a third party purchaser is not entered
into within the twelve (12) month period, the right to market under this Section
5.6 shall terminate.
The following definitions shall apply for purposes of this Section 5.6:
(i) "Purchaser's Base Cost" shall be an amount equal to (i) the
purchase price Purchaser paid for the DHP Stock pursuant to this Agreement
plus (ii) Purchaser's out-of-pocket costs relating to the acquisition and
financing of the DHP Stock and the operations of the business being
acquired, including interest and finance fees relating thereto plus (iii)
any additional capital contributed to DHP after March 1, 1998 and any
additional capital contributed to finance the operation of DHP, minus (iv)
the amount of any distributions in the nature of dividends, redemption of
capital stock or similar payments made to shareholders of DHP.
(ii) "Purchaser's Total Cost" shall be an amount equal to Purchaser's
Base Cost plus an amount calculated to be a twelve percent (12%) per annum
return on the contributions, payments or costs that make up the Purchaser's
Base Cost, taking into account any reduction in the outstanding amount as a
result of the receipt of distributions, dividends or net proceeds by
Purchaser.
(iii) "Seller's Selling Expenses" shall be an amount equal to the
investment banker fees and expenses paid by Seller or Coastal in connection
with the sale of the DHP Stock to Purchaser.
(iv) "Marketing Expenses" shall be the out-of-pocket costs and
expenses of Coastal and Purchaser incurred or reasonably expected to be
incurred in connection with the sale of DHP to a third party purchaser (or
incurred in preparing for such sale), including without limitation
investment banker fees and expenses.
(v) "Strike Price" shall be an amount equal to Purchaser's Total Cost
plus Marketing Expenses.
Upon a sale to a third party, the parties agree to distribute the proceeds
of sale as follows:
(i) If the third party purchaser is located and a definitive agreement
entered into before the earlier of (A) the date thirty days from the date
of closing or (B) the date by which Purchaser has contributed at least
$2,000,000 to the capital of DHP, then all Marketing Expenses shall be
paid, Purchaser's Total Cost shall be paid to Purchaser, and all remaining
proceeds of the sale shall be paid to Coastal.
(ii) For all sales, Marketing Expenses shall first be paid or
reimbursed. The remaining proceeds shall be paid as follows:
(A) Purchaser shall be entitled to receive the greater of (A)
Purchaser's Total Cost or (B) the amount equal to Purchaser's Base
Cost plus fifty percent (50%) of the difference between (x) the amount
of the remaining proceeds less Seller's Selling Expenses minus (y)
Purchaser's Base Cost.
(B) Any portion of the sales proceeds not paid as Marketing
Expenses or paid to Purchaser under (A) above shall be paid to
Coastal.
In the event that the Note is not paid in full at the time of the sale or
if any cash advances or loans made by Coastal or CMH subsequent to February 1,
1998 remain outstanding, the outstanding amounts of such obligations (including
accrued but unpaid interest thereon) shall be paid directly to Coastal at
closing out of the proceeds Purchaser would otherwise receive. If the Note is
outstanding at the time of the sale and the sale is for less than the Strike
Price,
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then the proceeds of the sale shall be paid in the following order to the extent
available: All Marketing Expenses shall be paid, then the Note shall be paid in
full, then any remaining portion of shall be applied to Purchaser's Total Cost.
If there is income tax liability to Purchaser arising from the receipt by
Seller or Coastal of the amounts Seller and/or Coastal are is entitled to
receive under this Section, Coastal agrees to indemnify and hold harmless
Purchaser from any such income tax liability (grossed up to account for the tax
liabilities associated with such indemnification).
The parties acknowledge that any subsequent transfer of DHP Stock or
substantially all of its assets will require the consent and approval of the
NCDOI and the South Carolina Department of Insurance.
Section 5.7 Financial Information. For a period of twelve (12) months
following the Closing, or so long as Coastal has the right to market DHP,
Purchaser shall cause DHP to deliver monthly financial statements and reports to
Coastal and shall provide such other information concerning the financial
condition, business operations and prospects of DHP as Coastal may reasonably
request.
Section 5.8 Release of Scott from Non-Compete. As part of the Closing,
Coastal and Dr. Steven M. Scott agree to enter into the Partial Release of
Non-Compete Agreement attached hereto as Exhibit B.
Section 5.9 Non-Compete Agreement of Coastal. In consideration of the
transactions provided for in this Agreement, Coastal and Seller agree that
during the one year period following the Closing Date (as defined below),
neither they nor any of their subsidiaries will engage in the business of
providing health maintenance organization or similar services in (i) the State
of North Carolina and (ii) those service areas in the State of South Carolina
served by DHP as of the Effective Date.
Section 5.10 Use of DHP. Coastal and its affiliates currently offer their
employees the option of using DHP for the employees' health plan. Coastal and
its affiliates agree to continue to offer DHP as an option to their employees
and as part of their employer sponsored health insurance for one (1) year
following the Closing. Coastal and its affiliates further agree not to offer to
their employees any other health maintenance organization, preferred provider
organization or similar organizations in (i) the State of North Carolina and
(ii) those service areas in the State of South Carolina served by DHP for a
period of one (1) year following the Closing.
Section 5.11 Payment of Fines and Penalties. In the event the NCDOI or
South Carolina Department of Insurance or other regulatory authorities levy any
fines or penalties on DHP for operations prior to the Closing Date other than
the fine disclosed in Schedule 2.14, Seller will pay such fines and penalties
and indemnify and hold harmless Purchaser and DHP against any such fines and
penalties.
ARTICLE VI
DELIVERIES OF SELLER AT CLOSING
The Seller shall deliver the following at the Closing:
Section 6.1 Stock Certificates. CMH will deliver to the Purchaser duly
endorsed stock transfer powers and certificate(s) with respect to the DHP Stock.
Section 6.2 Consents and Approvals. CMH shall have obtained all consents
and approvals required for the transfer of the DHP Stock to the Purchaser.
Section 6.3 Seller's Documents. The Seller shall have caused to be
delivered to Purchaser, at the Closing, the following:
(a) Good Standing Certificates. Good standing certificates issued by the
appropriate official of the states of incorporation of DHP and CMH;
(b) Articles of Incorporation and Bylaws. DHP shall have delivered to
Purchaser a true and complete copy of its Articles of Incorporation and Bylaws;
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(c) Corporate Resolutions. True and correct copies of resolutions of the
board of directors of CMH authorizing the execution, delivery and performance of
this Agreement and the transactions contemplated hereby; and
(d) Assignment of Leases. Assignments of leases as provided in Section 5.1.
Section 6.4 Other Assurances. The Seller shall have delivered to the
Purchaser such other and further certificates, assurances and documents as
Purchaser may reasonably request in order to evidence the accuracy of the
representations and warranties made pursuant to Articles II, the performance of
covenants and agreements to be performed pursuant to Article V at or prior to
the Closing, and the fulfillment of the conditions to Purchaser's obligations.
ARTICLE VII
DELIVERIES OF PURCHASER AT CLOSING
The Purchaser shall deliver the following at Closing:
Section 7.1 Payment of Purchase Price. The Purchaser shall have paid the
Purchase Price in the manner described in Section 1.3 hereof. If the Purchaser
elects to pay the Purchase Price by assumption of debt in an amount equal to the
Purchase Price, the Purchaser shall provide a written release from the
lender(s), releasing Coastal and all affiliates from the debt in the amount of
the Purchase Price.
Section 7.2 Purchaser's Documents. Purchaser shall have caused to be
delivered to Seller, at or before the Closing, the following:
(a) Good Standing Certificate. Purchaser shall have delivered to Seller a
good standing certificate issued by the State in which Purchaser is organized.
(b) Company Resolutions. True and complete copies of resolutions of the
Board of Directors of the Purchaser authorizing the execution, delivery and
performance of this Agreement and the transactions contemplated hereby.
Section 7.3 Other Assurances. The Purchaser shall have delivered to the
Seller such other and further certificates, assurances and documents as Seller
may reasonably request in order to evidence the accuracy of the representations
and warranties made pursuant to Article IV, and, the performance of covenants
and agreements to be performed pursuant to Article V at or prior to the Closing,
and the fulfillment of the conditions to Seller's obligations.
ARTICLE VIII
INDEMNIFICATION
In addition to the indemnities included elsewhere in this Agreement, the
parties hereto agree to indemnify and hold each other harmless as follows:
Section 8.1 Indemnification by the Seller. The Seller agrees to indemnify
and hold the Purchaser harmless at all times after the date of this Agreement
from, against and in respect of:
(a) Any and all loss, liability, damage or deficiency resulting from any
misrepresentation, breach of warranty or nonfulfillment of any covenants or
agreements on the part of the Seller contained herein or in any certificate or
document furnished by the Seller pursuant hereto and any loss or damage
resulting from any claims, litigation, actions, suits, proceedings, judgments,
counsel fees, costs and expenses incident to such misrepresentation, breach or
nonfulfillment;
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(b) Any fines and penalties levied on DHP for operations prior to the
Closing Date by the North Carolina or South Carolina Department of Insurance or
other regulatory authorities other than the fine disclosed in Schedule 2.14;
(c) Any tax or other obligation or liability, contingent or otherwise, of
the Seller in respect of the sale or any profit derived from the sale of the DHP
Stock;
provided, however, that the indemnification obligations of Seller shall be
limited to the amount of the Purchase Price.
Section 8.2 Indemnification by the Purchaser. The Purchaser agrees to
indemnify and hold the Seller harmless at all times after the date of this
Agreement from and against any and all loss, liability, damage or deficiency
resulting from (i) any misrepresentation, breach of warranty or nonfulfillment
of any covenants or agreements on the part of the Purchaser contained herein or
in any certificate or document furnished by the Purchaser pursuant hereto and
any loss or damage resulting from any claims, litigation, actions, suits,
proceedings, judgments, counsel fees, costs and expenses incident to such
misrepresentation, breach or nonfulfillment; and (ii) all liabilities arising
out of or in connection with the operation of DHP subsequent to the Effective
Date.
Section 8.3 Third Party Claims. Should any claim be made by a person not a
party to this Agreement with respect to any matter to which the foregoing
indemnity relates, the party against whom such claim is asserted (the
"Indemnified Party"), within a reasonable period of time, shall give written
notice to the other party (the "Indemnifying Party") of any such claim, and the
Indemnifying Party shall thereafter defend or settle any such claim, at its sole
expense, on its own behalf and with counsel of its selection. In such defense or
settlement of any claims, the Indemnified Party shall cooperate with the
Indemnifying Party to the maximum extent reasonably possible. Any payment
resulting from such defense or settlement, together with the total expense
thereof, shall be binding on Seller and Purchaser for the purpose of this
Article VIII.
Section 8.4 Settlement. Notwithstanding the foregoing, should any claim be
made by a person not a party to this Agreement with respect to any matter to
which the foregoing indemnity relates, the Indemnified Party, on not less than
thirty (30) days' notice to the Indemnifying Party, may make settlement of such
claim, and such settlement shall be binding on the Indemnifying Party and the
Indemnified Party for the purposes of this Article VIII; provided, however, that
if within said thirty (30) day period the Indemnifying Party shall have
requested the Indemnified Party not to settle such claim and to deny such claim
at the expense of the Indemnifying Party, the Indemnified Party will promptly
comply and the Indemnifying Party shall have the right to defense on its own
behalf with counsel of its selection. Any payment or settlement resulting from
such claim, together with the total expense thereof, shall be binding on Seller
and Purchaser for the purposes of this Article VIII.
Section 8.5 Mediation/Arbitration. In the event of any claim or dispute
between the parties arising out of this Agreement, the parties agree to resolve
any such dispute or disagreement by submitting such dispute first to mediation
and second to arbitration pursuant to the following procedures:
(a) Mediation. The parties shall mediate any dispute or disagreement upon
the written demand of any party with the mediator appointed by the Judicial
Arbitration & Mediation Services, Inc. ("JAMS") or another party upon mutual
agreement of all parties in disagreement, pursuant to the following terms and
conditions.
(1) Best Efforts. The parties agree to use their best efforts to
resolve their dispute by mediation before proceeding to binding arbitration.
(2) Hearings, Scheduling and Parties Present. After the mediator has
been appointed, the parties shall promptly agree upon a date and time for the
initial conference with the mediator, but no later than thirty (30) days after
the date the mediator was selected. The location of the mediation shall be in
Durham, North Carolina. The parties understand and agree that, besides counsel,
a representative from each side with full settlement authority shall be present
at all mediation conferences unless excused by the mediator. Each party may have
other representatives, agents or witnesses present at the mediation to respond
to questions, contribute
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information and participate in the mediation. The number of additional parties
may be agreed upon in advance with the assistance and advice of the mediator.
(3) Discovery. In the event that a party has a substantial need for
information in the possession of another party to prepare for the mediation
conference, the parties shall use their best efforts to agree upon the procedure
for expeditious exchange of information and, if required, the mediator shall
assist in such efforts.
(4) Position Papers. Each party shall deliver to the mediator and each
party to the mediation a concise written summary of its position together with
any appropriate documents supporting such position no later than seven (7) days
before the scheduled mediation session, including a proposed solution to the
matters in controversy.
(5) Mediator's Role. Once familiar with the issues involved in the
mediation, the mediator shall, if requested by both of the parties, give an
opinion of the probable outcome of the case and a range of settlement value and
trial value if the case were litigated. The mediator shall, in the absence of
instructions from the parties to the contrary, give recommendations regarding
the possible settlement terms and conditions. The opinions and recommendations
of the mediator are not binding on the parties.
(6) Fees and Costs. The fees and costs of the mediation shall conform
to the then current fee schedule of JAMS. Fees and costs of the mediation shall
be borne equally by Purchaser and the Seller and each party shall pay its own
professional fees and costs.
(7) Confidentiality of Proceedings. The mediation shall be considered
settlement negotiations for the purpose of all state and federal rules and laws
protecting disclosures made during such conferences from later discovery or use
in evidence. The mediation shall be confidential and no stenographic or other
written records shall be made except the memorialized settlement record. All
conduct, promises, offers, views, opinions or statements, whether oral or
written, by any party, the party's agent, employee, or representative are
confidential and, where appropriate, considered work product and privileged and
the same shall not be subject to discovery or voluntary disclosure or admissible
for any purpose, including impeachment in litigation between the parties,
provided, however, that evidence otherwise subject to discovery or admissible is
not excluded from discovery or admission in evidence as a result of the same
being used in connection with the mediation.
(8) Termination of the Mediation. The mediation shall continue until
the matter is resolved or the mediator makes a good faith finding that all
settlement possibilities have been exhausted and there is no reasonable
likelihood of resolution through mediation.
(b) Binding Arbitration. After attempting to resolve the dispute in good
faith through mediation, the parties shall, upon written request of either or
all parties, submit any dispute or disagreement to binding arbitration by JAMS
in accordance with the foregoing rules and procedures regarding mediation
specified above in paragraph (a), with the following exceptions:
(1) Selection of the Arbitrator. The arbitrator shall be selected by
JAMS and a single arbitrator shall conduct the arbitration.
(2) Position Papers. Each party shall be entitled to submit a reply to
the other party's position paper to the arbitrator.
(3) Arbitrator's Role. The decision of the arbitrator shall be final
and binding on the parties, and shall be enforceable under the Uniform
Arbitration Act of the state in which the arbitration is conducted and the terms
of that Act shall apply.
(4) Fees and Costs. The arbitrator shall be allowed, in his or her
discretion, to require the losing party to pay the reasonable attorney's fees
and costs of the prevailing party provided the arbitrator finds that the
assessment of such fees and costs serves substantial justice; such fees and
costs shall not otherwise be awardable
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in any mediation between the parties The award of the arbitrator, including the
assessment of reasonable attorney's fees and costs, if any, shall bear interest
at the legal rate until the date when the awarded fees and costs, if any, are
paid in full.
(c) Except where specifically modified above, all other terms and
procedures specified for the mediation in paragraph (a) shall apply in the
arbitration.
Section 8.6 Adjustment to the Purchase Price. For all tax purposes, any
payment by Purchaser or Seller under this Agreement will be an adjustment to the
Purchase Price.
ARTICLE IX
BROKERAGE
The Seller and the Purchaser represent and warrant to the other that the
negotiations relative to this Agreement have been carried on by the Seller
directly with the Purchaser and by the Purchaser directly with the Seller,
without the intervention of any person other than Advest, Inc.; Coastal and the
Seller shall be responsible for compensating Advest, Inc. and shall indemnify
and hold Purchaser harmless from and against all such obligations to Advest,
Inc. The Seller shall indemnify the Purchaser and the Purchaser shall indemnify
the Seller and hold the other party or parties harmless against and in respect
of any claim for brokerage or other commissions relative to this Agreement
(other than the aforesaid Advest, Inc. compensation), or to the transactions
contemplated hereby, and also in respect of all expenses of any character
incurred by the Purchaser, on the one hand, and by the Seller, on the other
hand, in connection with this Agreement or such transactions, arising out of any
claim for any such brokerage or other commissions alleged to be due as a result
of the actions or conduct of the indemnifying party.
ARTICLE X
FURTHER ASSURANCES; ACCESS AND INFORMATION; CONDITIONS PRECEDENT
Section 10.1 Further Assurances. The Seller and Purchaser all hereby
covenant and agree that at any time and from time to time they will promptly
execute and deliver to the others such further instruments and documents and
take such further action as the parties may from time to time reasonably request
in order to further carry out the intent and purpose of this Agreement.
Section 10.2 Access and Information. Purchaser and its agents, attorneys,
accountants and representatives have had full access to the respective
properties, affairs, books, records, contracts and documents of DHP, including,
without limitation, all contracts, leases, evidence of indebtedness and audit
work papers of the internal auditors of the respective businesses, as Purchaser
has reasonably requested. Until the Closing, Purchaser shall not disclose and
shall cause its agents, attorneys, accountants and representatives not to
disclose to any other party any confidential data or information secured, and,
if the Closing does not occur as herein provided, Purchaser will promptly return
at Purchaser's expense, all books, records and other documents and papers
obtained and all copies thereof.
Section 10.3 Conditions Precedent. The obligations of the Seller and
Purchaser to consummate the transactions contemplated by this Agreement are
subject to the following conditions precedent:
(a) approval of the transactions contemplated by this Agreement by the
NCDOI and South Carolina Department of Insurance;
(b) approval of the material terms of this Agreement by the Board of
Directors of Coastal;
(c) the obtaining of financing satisfactory to Purchaser to consummate the
transactions contemplated under this Agreement; and
(d) completion and approval by the Seller and Purchaser of all Exhibits and
Schedules to this Agreement.
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ARTICLE XI
NATURE AND SURVIVAL OF REPRESENTATIONS
All representations, warranties, and agreements made by the Seller in this
Agreement, except as otherwise expressly stated, shall survive the Closing and
any investigation at any time made by or on behalf of the Seller as follows:
(a) The representations, warranties and covenants contained in Sections
2.1, 2.2 and 5.11 hereof shall survive forever;
(b) The representations, warranties and covenants contained in Section 2.16
hereof shall survive for a period of six months following the expiration of the
relevant statue of limitations;
(c) The representation, warranties and covenants relating to all
liabilities retained by Seller or not specifically assumed by Purchaser shall
survive forever; and
(d) All other representations, warranties, and covenants made hereunder by
Seller shall be effective for a period of twelve (12) months following the
Closing Date. Within said twelve month period, Purchaser must provide written
notice to the Seller of the breach of any representation, warranty or covenant,
pursuant to which Purchaser asserts a claim stating with particularity all
material facts then known to Purchaser relating to such claim.
ARTICLE XII
MISCELLANEOUS
Section 12.1 Third Party Beneficiary. Coastal, its successors and assigns
and Steven M. Scott, M.D., his successors and assigns, are intended to be direct
third-party beneficiaries of the covenants contained in this Agreement and may
enforce the same in their own respective name, as applicable.
Section 12.2 Notices; Addresses. All notices, requests, demands, and other
communications hereunder shall be in writing, and shall be deemed to have been
duly given if delivered or mailed, first class postage prepaid, addressed as
follows:
COASTAL: Coastal Physician Group, Inc.
2828 Croasdaile Drive
Durham, North Carolina 27704
Attention: President
CMH: Coastal Managed Healthcare, Inc.
2828 Croasdaile Drive
Durham, North Carolina 27704
Attention: President
PURCHASER: DHP Holdings, LLC
2828 Croasdaile Drive
Durham, North Carolina 27704
Attention: Steven M. Scott, M.D., President
Section 12.3 Expenses. Except as otherwise provided herein, the parties
hereto shall pay all of their own expenses relating to the transactions
contemplated by this Agreement, including, without limitation, the fees and
expenses of their respective legal counsel and financial advisors.
Section 12.4 Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
14
<PAGE>
Section 12.5 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction, shall as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 12.6 Assigns/Assignments. This Agreement shall be binding upon and
inure to the benefit of the parties hereto any and all successors, assigns, or
other successors in interest of the Purchaser, Coastal and the Seller. Neither
the Seller nor the Purchaser shall be entitled to assign this Agreement or any
rights hereunder without the written consent of the other party.
Section 12.7 Public Announcement. Prior to Closing, no party will make any
public announcements with respect to this transaction without the approval of
the other parties, except as otherwise required by law, by the Securities and
Exchange Commission, or that are recommended by legal counsel.
Section 12.8 Confidentiality. Except to the extent the parties agree or are
required by law to make information public pursuant to Section 12.7, the parties
agree to keep the terms of this Agreement confidential and not to disclose the
contents of this Agreement to any party other than employees of a party who
agree to maintain such confidentiality and the professional advisors and
representatives of the parties.
Section 12.9 Remedies. In the event that any party defaults or fails to
perform any of the conditions or obligations of such party under this Agreement
or any other agreement, document or instrument executed in connection with this
Agreement, or in the event that any such party's representations or warranties
contained herein or in any such other agreement, document or instrument are not
true and correct as of the date hereof and as of the Closing, the other parties
shall be entitled to exercise any and all rights and remedies available to them
by or pursuant to this Agreement or at law or in equity.
Section 12.10 Captions. The captions and headings set forth in this
Agreement are for convenience of reference only and shall not be construed as a
part of this Agreement.
Section 12.11 Merger Clause. This Agreement contains the final, complete
and exclusive statement of the agreement between the parties with respect to the
transactions contemplated herein and all prior or contemporaneous written or
oral agreements with respect to the subject matter hereof are merged herein.
Section 12.12 Amendments. No change, amendment, qualification or
cancellation hereof shall be effective unless in writing and executed by all of
the parties hereto by their duly authorized officers.
Section 12.13 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina.
15
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
_____ day of March, 1998, effective as of January 1, 1998.
COASTAL MANAGED HEALTHCARE, INC.
By:
--------------------------------
Its:
-------------------------------
ATTEST:
By:
--------------------------
Secretary
[Corporate Seal]
COASTAL PHYSICIAN GROUP, INC.
By:
--------------------------------
Its:
-------------------------------
ATTEST:
By:
--------------------------
Secretary
[Corporate Seal]
DHP HOLDINGS, LLC
By:
--------------------------------
Manager
16
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$5,000,000.00 March ___, 1998
FOR VALUE RECEIVED, DHP HOLDINGS, LLC, a North Carolina limited liability
company, (the "Borrower") hereby promises to pay to the order of COASTAL MANAGED
HEALTHCARE, INC., a North Carolina corporation (the "Lender"), at such place or
places as the Lender may designate the principal sum of FIVE MILLION and
NO/DOLLARS ($5,000,000.00). The full principal amount shall be payable in full
on or before the date ten days after the date hereof (the "Due Date") and shall
accrue no interest so long as the full balance is paid by the Due Date. If the
full balance is not paid by the Due Date, any unpaid portion of the balance
shall bear interest from the Due Date at the per annum rate of twelve percent
(12%).
The principal balance of this Note is given as partial payment of the
purchase price for the purchase of stock of Doctors Health Plan, Inc. by
Borrower from Lender and is issued in accordance with Section 1.3 of the Stock
Purchase Agreement by and between Borrower, Coastal Physician Group, Inc. and
the Lender (the "Purchase Agreement").
This Note may be prepaid in whole or in part at any time without penalty or
premium.
Upon the occurrence of any of the following events (each a "default"):
c. failure to pay any principal or interest under this Note as the
same becomes due;
d. the filing of a voluntary petition by the Borrower seeking the
protection of the bankruptcy court under any chapter or section of the
Bankruptcy Code, as amended, or any state insolvency laws, by the Borrower,
or if the Borrower has an involuntary petition filed against it under any
chapter or section of the Bankruptcy Code, as amended, or any state
insolvency laws, and such petition is not dismissed within sixty (60) days
of its filing; or
e. by the order of a court of competent jurisdiction, a trustee or
receiver of a material portion of the assets of the Borrower shall be
appointed and such order shall not be discharged or dismissed within sixty
(60) days;
then in any such event the holder may without further notice, declare the
remainder of the principal sum due. Failure to exercise this option shall not
constitute a waiver of the right to exercise the same at any other time.
Upon default the holder of this Note may employ an attorney to enforce the
holder's rights and remedies and the maker and any principal, surety, guarantor
and endorser of this Note hereby agree to pay to the holder reasonable
attorney's fees plus all other reasonable expenses incurred by the holder in
exercising any of the holder's rights and remedies upon default.
All parties to this Note, including the Borrower and any surety, endorser
or guarantor hereby waive protest, presentment, notice of dishonor, and notice
of acceleration of maturity and agree to continue to remain bound for the
payment of principal, interest and all other sums due under this Note
notwithstanding any change or changes by way of release, surrender, exchange,
modification or substitution of any security for this Note or by way of any
extension or extensions of time for the payment of principal and interest; and
all such parties waive all and every kind of notice of such change or changes
and agree that the same may be made without notice or consent of any of them.
This Note shall be governed and construed in accordance with the laws of
the State of North Carolina.
<PAGE>
IN TESTIMONY WHEREOF, the Borrower has signed, sealed and delivered this
Note as of the date first above written.
DHP HOLDINGS, LLC
By: (SEAL)
--------------------------------
Manager
18
<PAGE>
EXHIBIT B
Partial Release of Non-Compete Provisions of Employment Agreement
between Steven M. Scott, M.D.
and
Coastal Physician Group, Inc.
This Partial Release of Non-Compete Provisions of Employment Agreement is
made and entered into this the ____ day of ____________, 1998, by and between
Steven M. Scott, M.D. ("Scott") and Coastal Physician Group, Inc. ("Coastal").
Scott and Coastal are parties to an Employment Agreement dated April 1,
1991, ("Agreement") pursuant to which Scott is employed by Coastal as its
President and Chief Executive Officer; and
The Agreement contains certain provisions restricting Scott's activities
that are in competition with Coastal or its subsidiaries; and
An affiliate of Scott, Coastal and certain of its subsidiaries, have
entered into an agreement dated the date hereof (the "Purchase Agreement")
pursuant to which such affiliate of Scott, known as DHP Holdings, LLC, will
purchase the stock of Doctors Health Plan, Inc. ("DHP"); and
The parties are desirous of amending the Agreement in order that the
ownership, operation and potential expansion of DHP into certain areas by Scott
or any of his affiliates shall not be deemed to be a violation of the
non-competition or any other provisions of the Agreement.
NOW, THEREFORE, in consideration of the purchase of the stock of DHP
referred to above, the parties agree as follows:
1. Partial Release of Non-Compete Provisions. Notwithstanding the
non-compete or any other provisions of the Agreement, and notwithstanding any
provisions of any other agreement between Scott or any of his affiliates other
than Coastal or its subsidiaries (collectively, the "Scott Entities") and
Coastal or any of its subsidiaries (collectively, the "Coastal Entities"),
a. except as provided in c. below, the Scott Entities may hereafter
enter into the business of owning, managing, operating or otherwise providing
services to health maintenance organizations, preferred provider organizations
or similar organizations (collectively "HMOs");
b. except as provided in c. below, the Scott Entities shall be
permitted to increase and expand their ownership, management, and operation of
HMOs, including without limitation creating start up locations or acquiring
additional HMOs in any geographic location; and
c. notwithstanding the foregoing, so long as Coastal and/or its
affiliates operate HMOs in the States of Florida and Georgia, the Scott Entities
shall not manage, operate, own or provide any services to any HMO in any
counties in which such HMOs operated by Coastal and/or its affiliates provide
services or any county contiguous to such counties.
For so long as the Coastal Entities' non-compete agreement pursuant to
Section 5.9 of the Purchase Agreement remains in effect, the Scott Entities
shall not be required to first offer the Coastal Entities any opportunities
which the Scott Entities may have to increase or expand their ownership,
management or operation of, or other business relationships with HMOs (other
than opportunities in the counties in Florida and Georgia in which Coastal
and/or its affiliates operate HMOs and contiguous counties, which the Scott
Entities are prohibited from pursuing). Upon expiration of the Coastal Entities'
non-compete agreement in accordance with Section 5.9 of the Purchase Agreement,
if any opportunities to own, operate, manage or otherwise provide services to
HMOs are made available to Scott or any of the other Scott Entities by reason of
Scott's position as an officer, employee, director or
<PAGE>
shareholder of Coastal, then Scott shall first make reasonable efforts to
determine whether Coastal desires to avail itself of such opportunity. If
Coastal informs Scott that it intends to avail itself of such opportunity, then
Scott and the other Scott Entities shall not pursue such opportunity or enter
into any transaction with respect to such opportunity unless and until Coastal
shall advise Scott that no Coastal Entity has any further interest in pursuing
such opportunity.
2. Ratification of Remainder of Agreement. Except as specifically modified
herein, the remaining terms of the Agreement are hereby specifically ratified
and confirmed in all respects.
IN WITNESS WHEREOF, the parties have executed this agreement as of the day
and year first above written.
COASTAL PHYSICIAN GROUP, INC.
By:
--------------------------------
Title:
-----------------------------
-----------------------------------
Steven M. Scott, M.D.
2
<PAGE>
EXHIBIT C
Financial Statements for Doctors Health Plan, Inc.
<PAGE>
SCHEDULE 2.5
------------
Other Business Names
None
<PAGE>
SCHEDULE 2.7
------------
RENTAL LEASES
Sublease Agreement by and between DHP as "Subtenant" and Sea-Land Service, Inc.
as "Sublandlord" dated December 5, 1997 for the Charlotte sales office for the
period from December 20, 1997 through June 30, 2001, a copy of which has been
previously delivered to Purchaser.
Sublease Agreement by and between DHP as "Subtenant" and Century American
Insurance Company as "Sublandlord" dated July 1, 1997 for the period July 1,
1997 through June 30, 2000 for administrative offices at 2828 Croasdaile Drive,
Durham, North Carolina, a copy of which has been previously delivered to
Purchaser.
<PAGE>
SCHEDULE 2.8
------------
EQUIPMENT LEASES
<PAGE>
SCHEDULE 2.9
------------
Intangible Personal Property
Certificate of Authority pursuant to N.C. Gen. State. Chapter 58, Article
67 to operate a North Carolina Health Maintenance Organization.
South Carolina license to operate a health maintenance organization.
<PAGE>
SCHEDULE 2.10
-------------
Liens on Assets
None
<PAGE>
SCHEDULE 2.11(A)
----------------
Written Employment Agreements
None
<PAGE>
SCHEDULE 2.11(B)
----------------
List of Employment Claims and Suits
None
<PAGE>
SCHEDULE 2.14
-------------
Non-Compliance with Applicable Laws
-----------------------------------
(i) Commissioner's Summary Order of the North Carolina Department of
Insurance dated February 6, 1997, effective February 7, 1997, (ii) Additional
Instructions effective February 26, 1997 to the February 7, 1997 Commissioner's
Summary Order, and (iii) Revocation of February 7, 1997 List of Transactions
Expressly Approved, Amendment to February 7, 1997 Commissioner's Summary Order
and Additional Instructions to February 7, 1997 Commissioner's Summary Order,
effective January 21, 1998, copies of which have previously been furnished to
Purchaser.
Report on Market Practices Examination of Doctors Health Plan, Inc. by
Representatives of the North Carolina Department of Insurance as of October 22,
1997 and letter relating thereto dated December 23, 1997, copies of which have
previously been furnished to Purchaser. The report requires DHP to submit a
Statement of Corrective Actions to the Department of Insurance.
The capital of DHP is less than the amount required by statute per the
statutory financial statements filed on March 2, 1998 prepared as of December
31, 1997. Purchaser will be required to invest additional capital into DHP in
order to be in compliance with the minimum capital and surplus statutory
requirements.
Proposed Consent Decree presented to representatives of DHP and Coastal on
February 27, 1998 by the North Carolina Department of Insurance providing for a
$500,000 fine and requiring additional capital infusions.
Consents/Approvals Required
---------------------------
Approval of the North Carolina Department of Insurance.
Approval of the South Carolina Department of Insurance.
<PAGE>
SCHEDULE 2.16
-------------
Delinquent Tax Returns
Coastal, on behalf of DHP, has consented to an extension of the statute of
limitations through December, 1999 for federal income tax returns for DHP for
1992, 1993, 1994, 1995 and 1996.
<PAGE>
SCHEDULE 2.17
-------------
Litigation
None
<PAGE>
SCHEDULE 2.18
-------------
Jurisdictions in which business conducted
North Carolina
South Carolina
PARTIAL RELEASE OF NON-COMPETE PROVISIONS OF EMPLOYMENT AGREEMENT
BETWEEN STEVEN M. SCOTT, M.D.
AND
COASTAL PHYSICIAN GROUP, INC.
This Partial Release of Non-Compete Provisions of Employment Agreement is
made and entered into this the 31st day of December, 1997, by and between Steven
M. Scott. M.D. ("Scott") and Coastal Physician Group, Inc. ("Coastal").
Scott and Coastal are parties to an Employment Agreement dated April 1,
1991, ("Agreement") pursuant to which Scott is employed by Coastal as its
President and Chief Executive Officer; and
The Agreement contains certain provisions restricting Scott's activities
that are in competition with Coastal or its subsidiaries; and
An affiliate of Scott, and Coastal and certain of its subsidiaries, have
entered into an agreement dated the date hereof (the "Purchase Agreement")
pursuant to which such affiliate of Scott known as Scott Medical Partners, LLC
will purchase (i) the stock of three operating subsidiaries of Coastal,
Integrated Provider Networks, Inc., Provider Solutions, Inc. and Sunlife OB/GYN
Services of Broward County, Inc., and (ii) the operating assets of Ft.
Lauderdale Perinatal Associates with office locations in Plantation, Florida and
Ft. Lauderdale, Florida and the Physician Access Center in San Francisco,
California, all of which assets are owned by subsidiaries of Coastal (and all of
the foregoing, together with certain previous acquisitions by Scott's affiliate
involving clinical and physician practice operations in North Carolina and
Florida, are hereafter referred to as the "Clinic Acquisitions"); and
The parties are desirous of amending the Agreement in order that the
ownership, operation and potential expansion of the Clinic Acquisitions by Scott
or any of his affiliates shall not be deemed to be a violation of the
non-competition or any other provisions of the Agreement.
NOW, THEREFORE, in consideration of the purchase of the stock and assets of
Coastal's subsidiaries referred to above as the Clinic Acquisitions, the parties
agree as follows:
1. Partial Release of Non-Compete Provisions. Notwithstanding the
non-compete or any other provisions of the Agreement, and notwithstanding any
provisions of any other agreement between Scott or any of his affiliates other
than Coastal or its subsidiaries (collectively, the "Scott Entities") and
Coastal or any of its subsidiaries (collectively, the "Coastal Entities"),
a. the Scott Entities may hereafter enter into the business of owning,
managing, operating or otherwise providing physician practice management
services to physician and clinic practices, whether primary or specialty care
practices and whether free-standing or hospital-based (collectively, "Medical
Practices"), whether such Medical Practices are Clinic Acquisitions or
otherwise. The right of the Scott Entities to engage in the foregoing with
respect
<PAGE>
to Medical Practices shall include, without limitation, the ability to provide
management administrative, staffing, financial, billing, collecting, business
and other similar services to Medical Practices, and to recruit and hire
personnel necessary for the orderly and efficient operation of Medical Practices
and generally to do all things necessary or appropriate with respect to the
Medical Practices; and
b. the Scott Entities shall be permitted to increase and expand their
ownership, management, operation or other physician management services to
Medical Practices, including without limitation creating start up locations or
acquiring additional Medical Practices in any geographic location; provided,
however, the Scott Entities shall not engage in the foregoing with respect to
any Medical Practices (except for the Clinic Acquisitions and natural extensions
thereof) if such Medical Practices would reasonably be expected to directly
compete with a clinic or medical practice which currently is owned by a Coastal
Entity or currently is managed, operated or serviced by a Coastal Entity
pursuant to a contractual arrangement.
For so long as the Coastal Entities' non-compete agreement pursuant to
Section 6.12 of the Purchase Agreement remains in effect, the Scott Entities
shall not be required to first offer the Coastal Entities any opportunities
which the Scott Entities may have to increase or expand their ownership,
management or operation of, or other business relationships with, Medical
Practices. Upon expiration of the Coastal Entities' non-compete agreement in
accordance with Section 6.12 of the Purchase Agreement, if any opportunities to
own, operate, manage or otherwise provide physician management services to
Medical Practices (other than Medical Practices which, at such time, are owned,
managed, operated or otherwise serviced by any of the Scott Entities) are made
available to Scott or any of the other Scott Entities by reason of Scott's
position as an officer, employee, director or shareholder of Coastal, then Scott
shall first make reasonable efforts to determine whether Coastal desires to
avail itself of such opportunity. If Coastal informs Scott that it intends to
avail itself of such opportunity, then Scott and the other Scott Entities shall
not pursue such opportunity or enter into any transaction with respect to such
opportunity unless and until Coastal shall advise Scott that no Coastal Entity
has any further interest in pursuing such opportunity.
In the event that a Scott Entity desires to make a proposal with respect to
any Medical Practice that is currently owned, operated, managed or otherwise
serviced by a Coastal Entity pursuant to a contractual arrangement to provide
billing or staffing services, then Scott shall first obtain the written
acknowledgment from Coastal or other involved Coastal Entity that it no longer
desires to continue the relationship or does not intend to make a proposal for
such Medical Practice. In the event there shall be any conflict or question as
to the appropriateness of the senior management of Coastal or such other Coastal
Entity to make such a decision, then the decision shall be made by the
independent members of the Board of Directors of Coastal at a duly held meeting
of such Board.
2. Ratification of Remainder of Agreement. Except as specifically modified
herein, the remaining terms of the Agreement are hereby specifically ratified
and confirmed in all respects.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement as of the day
and year first above written.
COASTAL PHYSICIAN GROUP, INC.
By:
--------------------------------
Title:
-----------------------------
-----------------------------------
Steven M. Scott, M.D.
3
PARTIAL RELEASE OF NON-COMPETE PROVISIONS OF EMPLOYMENT AGREEMENT
BETWEEN STEVEN M. SCOTT, M.D.
AND
COASTAL PHYSICIAN GROUP, INC.
This Partial Release of Non-Compete Provisions of Employment Agreement is
made and entered into this the ____ day of March, 1998, by and between Steven M.
Scott, M.D. ("Scott") and Coastal Physician Group, Inc. ("Coastal").
Scott and Coastal are parties to an Employment Agreement dated April 1,
1991, ("Agreement") pursuant to which Scott is employed by Coastal as its
President and Chief Executive Officer; and
The Agreement contains certain provisions restricting Scott's activities
that are in competition with Coastal or its subsidiaries; and
An affiliate of Scott, Coastal and certain of its subsidiaries, have
entered into an agreement dated the date hereof (the "Purchase Agreement")
pursuant to which such affiliate of Scott, known as DHP Holdings, LLC, will
purchase the stock of Doctors Health Plan, Inc. ("DHP"); and
The parties are desirous of amending the Agreement in order that the
ownership, operation and potential expansion of DHP into certain areas by Scott
or any of his affiliates shall not be deemed to be a violation of the
non-competition or any other provisions of the Agreement.
NOW, THEREFORE, in consideration of the purchase of the stock of DHP
referred to above, the parties agree as follows:
1. Partial Release of Non-Compete Provisions. Notwithstanding the
non-compete or any other provisions of the Agreement, and notwithstanding any
provisions of any other agreement between Scott or any of his affiliates other
than Coastal or its subsidiaries (collectively, the "Scott Entities") and
Coastal or any of its subsidiaries (collectively, the "Coastal Entities"),
a. except as provided in c. below, the Scott Entities may hereafter
enter into the business of owning, managing, operating or otherwise providing
services to health maintenance organizations, preferred provider organizations
or similar organizations (collectively "HMOs");
b. except as provided in c. below, the Scott Entities shall be
permitted to increase and expand their ownership, management, and operation of
HMOs, including without limitation creating start up locations or acquiring
additional HMOs in any geographic location; and
<PAGE>
c. notwithstanding the foregoing, so long as Coastal and/or its
affiliates operate HMOs in the States of Florida and Georgia, the Scott Entities
shall not manage, operate, own or provide any services to any HMO in any
counties in which such HMOs operated by Coastal and/or its affiliates provide
services or any county contiguous to such counties.
For so long as the Coastal Entities' non-compete agreement pursuant to
Section 5.9 of the Purchase Agreement remains in effect, the Scott Entities
shall not be required to first offer the Coastal Entities any opportunities
which the Scott Entities may have to increase or expand their ownership,
management or operation of, or other business relationships with HMOs (other
than opportunities in the counties in Florida and Georgia in which Coastal
and/or its affiliates operate HMOs and contiguous counties, which the Scott
Entities are prohibited from pursuing). Upon expiration of the Coastal Entities'
non-compete agreement in accordance with Section 5.9 of the Purchase Agreement,
if any opportunities to own, operate, manage or otherwise provide services to
HMOs are made available to Scott or any of the other Scott Entities by reason of
Scott's position as an officer, employee, director or shareholder of Coastal,
then Scott shall first make reasonable efforts to determine whether Coastal
desires to avail itself of such opportunity. If Coastal informs Scott that it
intends to avail itself of such opportunity, then Scott and the other Scott
Entities shall not pursue such opportunity or enter into any transaction with
respect to such opportunity unless and until Coastal shall advise Scott that no
Coastal Entity has any further interest in pursuing such opportunity.
2. Ratification of Remainder of Agreement. Except as specifically modified
herein, the remaining terms of the Agreement are hereby specifically ratified
and confirmed in all respects.
IN WITNESS WHEREOF, the parties have executed this agreement as of the day
and year first above written.
COASTAL PHYSICIAN GROUP, INC.
By:
--------------------------------
Title:
-----------------------------
-----------------------------------
Steven M. Scott, M.D.
2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
the 1st day of July, 1997 (the "Effective Date") by and between COASTAL
PHYSICIAN GROUP, INC. (the "Employer" or "Coastal"), a Delaware corporation with
its principal place of business in Durham, North Carolina and EUGENE F.
DAUCHERT, JR. ("Employee"), a resident of Durham, North Carolina.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Employee is currently an employee of Employer pursuant to a
Restated and Amended Employment Agreement dated as of January 15, 1997, the term
of which has been extended on a month-to-month basis since the expiration of its
initial term on April 30, 1997; and
WHEREAS, Employer and Employee desire to substantially and materially
modify the existing terms of employment of Employee in order to, among other
matters, provide for an extended term of employment and to provide for different
and additional duties and other matters; and
WHEREAS, subject to the terms and conditions hereinafter provided, Employer
desires to restate and amend the existing employment arrangement and to employ
Employee, and Employee desires to accept such employment, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the employment of Employee and the
compensation to be paid by Employer to Employee, and the covenants set forth
herein, Employee hereby accepts employment hereunder subject to the terms and
conditions stated below, including the agreement of Employee not to enter into
certain competitive activities with the Employer, as follows:
1. Employment. Employer hereby employs Employee, and Employee hereby
accepts such employment, subject to the terms and conditions stated herein. This
Agreement shall amend, restate and supersede the existing employment agreements
and arrangements applicable to Employee, including without limitation the
Restated and Amended Employment Agreement dated January 15, 1997.
2. Term. This Agreement shall commence effective as of July 1, 1997 (the
"Effective Date") and shall continue through and including June 30, 1998 (the
"Initial Term"), unless this Agreement is (a) otherwise terminated in accordance
with the provisions contained herein, or (b) extended by mutual agreement of
Employer and Employee. After the Initial Term, this Agreement may be renewed or
extended upon mutual agreement of the parties. If the parties do not agree to an
extension on other terms, then this Agreement shall automatically renew on a
month-to-month basis until either Employer or Employee gives at least thirty
(30) days notice that it or he will not extend the term past the end of the
following calendar month.
3. Duties. Employee shall perform the following duties pursuant to this
Agreement:
<PAGE>
(a) Employee shall serve as an Executive Vice President and Chief
Administrative Officer of Employer. Employee is currently serving and will
continue to serve on the Board of Directors of Employer. Employee may be removed
at anytime from any board seat as deemed appropriate by the shareholders of
Employer, and such removal shall not be considered a breach by the Employer of
this Agreement. Removal of Employee from the office of Executive Vice President
and Chief Administrative Officer shall be considered a material breach of the
terms of this Agreement by Employer.
(b) As the Chief Administrative Officer of Employer, Employee shall be
principally responsible for the administrative and operational affairs of
Employer and shall coordinate and supervise the legal affairs of the Employer,
reporting to the Chief Executive Officer of Employer. In addition Employee shall
be available to assist Employer and its related entities in connection with the
management and operation of their respective businesses. Employee shall perform
all duties and responsibilities normally associated with his officer and
director positions and shall carry out such other duties and responsibilities
and as otherwise may be reasonably assigned to Employee by the Chief Executive
Officer of Employer. Employee shall continue to serve as President and Chief
Executive Officer of Coastal Provider Networks, Inc. and shall be principally
responsible for managing the operation and/or sale of that business unit.
Without limiting the generality of the foregoing Employer shall
have the following specific duties and responsibilities during the third and
fourth fiscal quarters of 1997:
(i) Third Quarter. During the third fiscal quarter of 1997 (July
1, 1997 to September 30. 1997), Employee shall:
A. Work with Hassenger Management Strategies, Inc., Charles F.
Kuoni III, Ltd., and Bradford C. Walker (the "Consultants"), who have
been engaged by Coastal, to develop a transition plan;
B. Work with the Consultants to develop a corporate group
reduction plan to reduce expenses and functions of Employer as the
holding company for its various subsidiaries;
C. Develop cash management and reporting systems needed in
connection with the financing being provided by affiliates of National
Century Financial Enterprises, Inc.;
D. Continue to provide oversight of the operations of Integrated
Provider Networks, Inc. and Practice Solutions, Inc. and their
affiliates;
E. Oversee and direct the divestiture of Better Health Plan, Inc.
if approved by the Board of Directors of Employer;
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F. Oversee and direct the divestiture, closure or retention of
other business units as appropriate;
G. Participate with the Consultants and other senior management
of the Company in the development of the 1998 budget and cash flow
projections and strategies.
(ii) Fourth Quarter. During the fourth fiscal quarter of 1997
(October 1, 1997 to December 31, 1997), Employee shall:
A. Continue and complete matters described in (i) above,
including completion of the transition plan and the corporate group
reduction plan;
B. Develop specific cash management and operating improvements
plans for specific significant business units ("SBUs");
C. Develop and implement incentive compensation programs for SBU
leaders;
D. Working with the Chief Financial Officer, review and recommend
financial and management reporting systems for Employer and the SBUs;
E. Develop and implement a real estate/facilities management
plan;
F. Develop a corporate compliance plan for all subsidiaries and
holding companies of Coastal, similar to that currently in place at
Healthcare Business Resources, Inc.
(c) Employee shall at all times abide and observe Employer's policies
and procedures as are in effect from time to time. Employee acknowledges that
Employer is an equal opportunity employer and that Employer's established policy
is not to discriminate on the basis of age, marital status, race, color, sex,
religion or national origin, or to violate any federal or state
anti-discrimination law. Employee shall be responsible for carrying out and
implementing the foregoing policy throughout the operations and activities of
Employer.
4. Compensation. For the services provided by Employee as an employee of
Employer, Employer shall pay Employee the annual base salary (the "Base Salary")
and other compensation identified on Exhibit A.
5. Additional Benefits. Commencing on or about the Effective Date, and
thereafter during the Initial Term of this Agreement, Employee shall be entitled
to and Employer shall provide to Employee all employment benefits which are
generally provided to senior executive officers of Employer. In addition,
Employer will provide Employee an office and administrative support appropriate
to Employee's position, and Employer will pay the cost of continuing legal
education required to maintain the law license of Employee and provide
reimbursement of usual and customary dues and license fees consistent with other
senior management.
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<PAGE>
6. Devotion of Time. During the term of this Agreement, Employee shall
devote his full time and attention to the business of Employer and its
affiliates in a manner and to an extent commensurate with the commitment of
other executive officers of Employer, to fulfill his duties and responsibilities
under the Agreement and to advance the business interests and good reputation of
Employer and the direct and indirect subsidiaries of Employer.
7. Confidentiality and Non-Disclosure. Employee acknowledges that, during
this employment, he will gain access to, or possession or knowledge of, numerous
trade secrets, confidential information, other valuable properties not generally
available to the public and proprietary information, including but not limited
to, hospital and healthcare facility client lists, client files and records,
lists of potential clients, prospects or targets, and/or other market and
marketing data and plans, price books, promotional devices and methods, business
methods, manuals and plans, business and sales techniques, strategic plans,
computer programs, hospital and physician contracts, and research and
development (hereinafter referred to collectively as "Confidential
Information"). Employee acknowledges that such Confidential Information is
unique and a valuable asset which is owned solely by Employer (or affiliates of
Employer) and is to be used only for Employer's or its affiliates' (other than
any natural persons) benefit. Employee shall not, during or after the term of
this Agreement, disclose, divulge, reveal, transfer, reproduce, sell, capitalize
upon or take advantage of such Confidential Information and, in addition,
Employee shall exercise all reasonable efforts and precautions to protect
against such Confidential Information from misappropriation, misuse, disclosure,
breach of confidentiality, or other conduct or action inconsistent with
Employer's rights; provided, however, that Confidential Information may be
disclosed to the extent (i) required by law or court order or (ii) generally
available to the public other than by unauthorized disclosure. Upon termination
of this Agreement, Employee shall return immediately to Employer all of
Employer's (or its affiliates) property (including, without limitation,
Confidential Information) in Employee's possession or control. Any materials,
manuals, documents or records developed, written, edited or designed by Employee
while employed by Employer are the exclusive property of Employer.
8. Covenant Not To Compete. Employee will, as a result of this employment,
be responsible for the executive management and direction of substantial
business resources and assets of Employer and its affiliates and will develop
additional contacts and relationships with numerous individuals, executives,
companies, insurers, providers and health maintenance organizations which are
also involved in the managed healthcare business. Such individuals and
organizations will have business and contractual relationships with Employer or
its affiliates that will be a valuable asset thereof. Employee therefore agrees
as follows:
(a) Employee agrees that for a period of six (6) months after
termination of this Agreement, Employee will not become employed by, own,
operate, manage, or provide consulting services to any business that provides
the same type of services as Employer currently provides in the states where
Employer is providing services as of the date of termination of this Agreement.
(b) Employee agrees for a period of twelve (12) months after
termination of this Agreement, not to solicit any hospital, clinic, healthcare
facility or other client having a
4
<PAGE>
contractual or business relationship with Employer or of any subsidiary of
Employer, or of any prospect or potential client to which a marketing proposal
or presentation was made within six (6) months of termination, and of which
Employee was aware, involving the provision of healthcare services, which
solicitation would be for the purpose of providing healthcare or healthcare
related services.
(c) Employee further agrees to refrain for a period of twelve (12)
months following the termination of this Agreement, from any activity of any
nature intended or reasonably calculated to result in the termination or
cancellation of any contractual or business arrangement between the Employer or
any subsidiary of Employer, and any insurer, client, facility or other business
or entity.
(d) Employee agrees to notify any entity or organization of which he
is a director, significant shareholder (or other equity owner), manager, general
partner, executive officer or as to which he is otherwise a controlling party or
over whom he exerts significant influence (an "Affiliate") of the provisions of
Sections 7, 8 and 9 of this Agreement, and Employee agrees that he will not
cause or permit such Affiliate to engage in any activity that would be
prohibited for Employee personally under this Agreement.
(e) Nothing in this Agreement shall prevent Employee from making
passive investments in third parties so long as such investments do not require
Employee to perform any services in connection with any such investments in such
third parties.
9. Solicitation of Other Employees.
(a) Employee agrees that he shall not, for a period of twelve (12)
months after the termination of this Agreement, solicit or seek to influence,
either directly or indirectly, any employee or any physician or healthcare
provider under contract with Employer at any time during Employee's employment
by Employer or any of its subsidiaries or affiliates, to enter into any
employment agreement, independent contractor arrangement, or any other
contractual arrangement whereby such individual would perform services for
compensation, either directly or indirectly, for any person, firm, corporation
or other entity or business that provides products or services in competition
with Employer or any of its subsidiaries or affiliates.
(b) Employee further agrees that neither he nor any Affiliate shall,
for a period of twelve (12) months after the termination of this Agreement,
hire, employ, enter into any employment agreement, independent contractor
arrangement, or any other contractual arrangement whereby a "Coastal Employee"
(as defined below) would perform services for compensation for Employee or such
entity. For the purposes hereof, "Coastal Employee" shall mean any person who
has been employed by Coastal or any or its direct or indirect subsidiaries at
any time during the six (6) month period immediately preceding the termination
of this Agreement.
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<PAGE>
10. Breach and Remedies.
(a) Employee acknowledges that the breach or threatened breach of any
of the covenants set forth in Sections 7, 8 or 9 may result in immediate and
irreparable injury to Employer or its affiliates. Accordingly, Employee agrees
the provisions of Sections 7, 8 and 9 shall inure to the benefit of and may be
enforced by Employer or any if its affiliates. In addition to any rights or
remedies available to Employer for a breach by Employee of Sections 7, 8 or 9,
Employer and its affiliates shall be entitled to injunctive relief to enforce
the obligations of Employee contained in such Sections. Nothing herein shall be
construed as prohibiting Employer or its affiliates from pursuing any other
legal or equitable remedies that may be available to it for any such breach or
threatened breach, including the recovery of damages from Employee.
(b) The periods of time provided for in Sections 7, 8 or 9 shall be
extended by any period of violation or periods of time required to resolve by
arbitration, not to exceed 45 days, any dispute regarding the provisions
thereof.
(c) Employee hereby acknowledges that the covenants set forth in
Sections 7, 8 and 9 are reasonable in all respects and are necessary to protect
the legitimate business interests of Employer and its affiliates. In the event
that any of the provisions of this Agreement are found to be unenforceable or
void (either in whole or in part), then the offending portion shall be construed
as valid and enforceable only to the extent permitted by law and the balance of
this Agreement will remain in full force and effect. It is the intention of
parties to restrict the activities of Employee only to the extent necessary to
protect the legitimate business interests of Employer, its subsidiaries and/or
affiliates, and not to deprive Employee of the right or ability to earn a
livelihood.
11. Vacation and Sick Leave. All earned, accrued and unused vacation and
any unused sick pay, upon termination, will be governed by Employer's then
current policies.
12. Termination. This Agreement may be terminated as follows:
(a) Employer may terminate this Agreement without cause at any time
upon thirty (30) days' prior written notice to Employee, and Employee may
terminate this Agreement without cause at any time upon sixty (60) days' prior
written notice to Employer. This thirty or sixty day period (as applicable) is
hereafter referred to as the "Notice Period." In the event of such termination,
Employee, if requested by Employer, shall continue to perform his obligations
and duties under this Agreement and assist with the transition of duties to a
new employee during the Notice Period. Employer, at its option, may notify
Employee at any time during the Notice Period that no further services are to be
performed. In the event that this Agreement is terminated without cause by
either party, the covenants set forth in Sections 7, 8 and 9 shall continue in
effect, and the applicable start date for the periods of time in Sections 7, 8
or 9 shall be the later of the date that notice of termination is given or the
last date upon which services are performed.
6
<PAGE>
(b) Upon expiration of the Initial Term or any extended term
(including month to month extensions) of this Agreement without renewal or
extension or if this Agreement is terminated without cause by Employer at any
time during the term hereof, Employer shall pay Employee an amount equal to
one-half of the annual Base Salary then in effect (see Exhibit A), all to be
paid out in equal installments over the six (6) months following the date of
termination, beginning thirty (30) days from the date of termination.
(c) This Agreement may be terminated by Employer at any time for cause
upon written notice to Employee, which notice shall specify the reason for
termination. For purposes of this Subsection 12(c), cause shall include, but
shall not be limited to, the following: fraud; dishonesty; substantial and
continuous nonperformance of assigned duties; failure to comply with a material
written policy of Employer; failure by Employee to perform or meet objective and
measurable standards; unlawful activities for which Employee is indicted or
convicted in a jurisdiction of the United States; and material breach of this
Agreement.
(d) This Agreement shall terminate upon the death or total and
permanent disability of Employee. In the event that this Agreement terminates
due to Employee's death or total and permanent disability, Employer shall pay
upon such termination to Employee, Employee's Base Salary accrued through the
date of Employee's death or the date he becomes totally and permanently
disabled, as the case may be. Permanent disability for purposes of this
Agreement shall mean the inability to perform the functions of Employee's
position for a continuous period of six (6) months.
(e) This Agreement may be terminated by Employee upon a material
breach of the terms of this Agreement by Employer, and if this Agreement is
terminated at any time during the term hereof by Employer under this subsection,
then Employer shall pay Employee an amount equal to one-half of the annual Base
Salary then in effect (see Exhibit A), all to be paid out in equal installments
over the six (6) months following the date of termination, beginning thirty (30)
days from the date of termination.
(f) Except as expressly set forth herein, all of Employer's
obligations for compensation or other benefits shall terminate upon the
effective date of the termination of this Agreement.
13. Compliance With Securities Laws. Employee agrees to comply with all
applicable federal and state securities laws and with all applicable policies of
Employer concerning the buying and selling of stock of Employer by employees to
the extent such policies do not restrict Employee's express rights under this
Agreement.
14. Entire Agreement. This Agreement contains the entire understanding
between the parties and supersedes and cancels any prior oral and written
understanding and/or agreements between them respecting the subject matter of
this Agreement. This Agreement may be amended or modified only in writing signed
by both parties.
15. Severability. If any provision, term, condition, or clause of this
Agreement or the application thereof shall be invalid or unenforceable to any
extent, the remainder of this
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<PAGE>
Agreement shall not be affected thereby and shall be enforced to the greatest
extent permitted by law.
16. Governing Law. This Agreement is made and entered into in the State of
North Carolina and is to be construed in accordance with and take effect under
the laws of the State of North Carolina without regard to principles of
conflicts of laws.
17. Assignment. No party shall have any right to assign, mortgage, pledge,
hypothecate or encumber this Agreement in whole or in part, or any benefit or
any right accruing hereunder, without in any such case first obtaining the prior
written consent of the other party hereto, except that Employer may assign this
Agreement to one of its affiliates or wholly-owned subsidiaries, provided that
in the event of such an assignment, Employer shall remain primarily responsible
for its obligations hereunder. All rights hereunder are personal to the Employee
and shall cease upon the termination of this Agreement unless otherwise stated
herein; provided, however, that the provisions hereof shall inure to the benefit
of the personal representatives, heirs and legatees of Employee.
18. Notice. Any notice, or other written communication to be given pursuant
to this Agreement for whatever reason shall be deemed duly given and received
(a) if delivered personally, from the date of delivery, or (b) by certified
mail, postage pre-paid, return receipt requested, three (3) days after the date
of mailing, addressed: in the case of Employer, to its principal office and
marked "Attention: President," and in the case of Employee, to his last known
permanent address according to the books and records of Employer.
19. Miscellaneous. Any protection, benefits, rights or other provisions
given to Employer in this Agreement shall also be deemed to apply to, protect
and inure to the benefit of Employer's affiliates and subsidiaries. All rights
of Employer expressed in this Agreement are in addition to any rights available
under the common law or other legal principles. Section or paragraph titles or
captions contained in this Agreement are inserted only as a matter of
convenience and for reference and in no way define, limit, extend or describe
the scope of this Agreement or the intent of any provision hereof. All pronouns
and any variation thereof shall be deemed to refer to the masculine, feminine,
neuter, singular or plural as the identity of person or persons, firm or firms,
corporation or corporations, and as context may require.
8
<PAGE>
IN WITNESS WHEREOF, the parties sign and seal below, effective the date
first written in this Agreement.
EMPLOYEE:
(SEAL)
--------------------------------------
Eugene F. Dauchert, Jr.
EMPLOYER:
COASTAL PHYSICIAN GROUP, INC.
By:
-----------------------------------
Steven M. Scott, President and
Chief Executive Officer
ATTEST:
By:
--------------------------
Assistant Secretary
[CORPORATE SEAL]
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<PAGE>
EXHIBIT A
---------
COMPENSATION
------------
1. Base Salary. For services provided as an employee of Employer, Employee shall
receive, beginning on the Effective Date, a base salary of $180,000 per annum
(the "Base Salary") payable in accordance with Employer's current payroll
practices; provided that during the Initial Term, the Base Salary will be paid
monthly at a rate of $160,000 per annum with $10,000 (one-half of the balance)
paid December 31, 1997 and $10,000 (one-half of the balance) paid June 30, 1998.
The Base Salary shall be subject to annual review and adjustment as of each July
1 during the term of this Agreement (or such other times as may be determined by
Employer), but if renewed by agreement of Employer and Employee for the period
from July 1, 1998 through June 30, 1999, the Base Salary shall be expected to
increase by seven and one-half percent (7.5%) or by an amount intended to bring
Employee's Base Salary in line with other senior executives (this provision
shall not create any right or obligation of Employer or Employee to extend the
term of this Agreement or to prevent Employer and Employee from extending upon
such terms and conditions as they determine by mutual agreement).
2. Incentive Bonus. Employee shall be entitled to an incentive or performance
bonus (the "Incentive Bonus") equal to $90,000 (one-half of annual base pay),
based on the following:
(a) Employee must be employed by Employer on June 30, 1998 unless
Employee's employment has been terminated (i) by Employer without cause under
Section 12(a), (ii) by death or disability of Employee under Section 12(d) where
such death or disability occurs within the last four months of the Initial Term
or (iii) by Employee because of a material breach by Employer as provided in
Section 12(e);
(b) Employer and its consolidated subsidiaries must have achieved a
positive Consolidated Cash Flow for the second fiscal quarter of 1998. For
purposes of this Agreement, the following definitions and calculations shall
apply:
(i) "Consolidated Cash Flow" for any period shall mean the sum of (A)
Consolidated Net Income (or minus Consolidated Net Loss) for that period of
Coastal and its subsidiaries, (B) provisions for taxes based on income or
profit that reduced that Consolidated Net Income (or increased that
Consolidated Net Loss) for that period, and (C) depreciation and
amortization expenses and other noncash items that reduced that
Consolidated Net Income (or increased that Consolidated Net Loss) for that
period.
(ii) "Consolidated Net Income" or "Consolidated Net Loss" for any
period means the consolidated net income or net loss of Coastal and its
subsidiaries, excluding intercompany items and after deductions for
minority interests, as determined in accordance with generally accepted
accounting principles; provided that there shall be excluded
<PAGE>
(A) gain or loss resulting from the sale, conversion or other
disposition of capital assets (i.e, assets other than current assets),
(C) any gain or loss resulting from the write-up or write-down of
any assets, and
(D) any other gains or losses of any non-operating, non-recurring
or extraordinary nature.
(c) Calculations of Consolidated Cash Flow shall be made as promptly as is
reasonable after the end of the Initial Term by the independent public
accountants of Employer.
(d) If earned, the Incentive Bonus may be paid by the Employer either (i)
in cash or (ii) so long as Employer has common stock traded on a national
securities exchange, in the form of registered common stock of Employer that may
be freely traded (subject to trading blackouts that apply to Employee because of
his position as a director and officer of Employer) on a national securities
exchange, with the number of shares to be equal to 90,000 divided by the closing
price of such stock on June 30, 1998 (or the last trading day prior to June 30,
1998 if June 30, 1998 is not a trading date), provided that the Employer shall
issue cash in lieu of any fractional shares. In the event the Employer elects to
pay in stock but does not have registered common stock available to pay the
Incentive Bonus, then Employer shall pay one-third of the Incentive Bonus
($30,000) in cash and shall issue to Employee unregistered shares of common
stock of Employer for the balance, with the number of shares to be equal to
60,000 divided by the closing price of such stock on June 30, 1998 (or the last
trading day prior to June 30, 1998 if June 30, 1998 is not a trading date),
provided that the Employer shall issue cash in lieu of any fractional shares. In
the event the Employer issues unregistered shares, Employee understands that
such shares will be issued by Employer in a private placement pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the "Act"). Employee
warrants and represents to Employer that he is acquiring the shares for his own
account for investment purposes and without a view to distributing them to
subsequent purchasers, and Employee understands that legends will be placed on
the certificates evidencing the shares restricting their transfer or other
disposition without registration under the Act or the availability of an
exemption from registration under the Act.
3. Divestiture Bonus. The Restated and Amended Employment Agreement which this
Agreement replaces provides for a Divestiture Bonus (in Section 8 of the
Restated and Amended Employment Agreement). The only remaining assets to which
the Divestiture Bonus applies as of the date of this Agreement are Integrated
Provider Networks, Inc. ("IPN") and Practice Solutions, Inc. ("PSI"). Employee
shall be entitled to any unpaid Divestiture Bonus for assets disposed of prior
to the date of this Agreement, such Divestiture Bonuses to be paid in accordance
with the terms of the Restated and Amended Employment Agreement. In addition,
upon sale or divestiture of IPN and/or PSI during the term of this Agreement or
within ninety (90) days of the termination of Employee's employment under this
Agreement unless employment is terminated by Employer for cause, Employee shall
be entitled to receive a Divestiture Bonus equal to 0.5% of the Net Proceeds, as
hereinafter defined. The Divestiture Bonus shall be earned upon Employer's
receipt of the sales proceeds from a sale or divestiture. For purposes of this
paragraph, Net Proceeds shall have the same meaning as the term
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<PAGE>
"Transaction Consideration" set forth in the engagement letter with Advest, Inc.
dated November 22, 1996 (or the equivalent term if another investment banker is
engaged). Payment of any Divestiture Bonus will be made in two equal monthly
installments commencing within thirty days of the receipt of the Net Proceeds by
Coastal for the company for which the Divestiture Bonus is earned.
4. Stock Options or Awards. Employee shall be eligible for stock options and
awards available to other senior management of Employer and its affiliates from
time to time. This subsection shall not be a guarantee of any awards or options,
and Employee recognizes that the awarding of such compensation is governed by
plans adopted by the Board of Directors of Employer from time to time.
3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as
of the 15th day of September, 1997 (the "Effective Date") by and between COASTAL
PHYSICIAN GROUP, INC. (the "Employer" or "Coastal"), a Delaware corporation with
its principal place of business in Durham, North Carolina and CHARLES F. KUONI,
III ("Employee"), a resident of Durham, North Carolina.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, subject to the terms and conditions hereinafter provided, Employer
desires to directly employ Employee for a term described below, and Employee
desires to accept such employment, on the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the employment of Employee and the
compensation to be paid by Employer to Employee, and the covenants set forth
herein, Employee hereby accepts employment hereunder subject to the terms and
conditions stated below, including the agreement of Employee not to enter into
certain competitive activities with the Employer, as follows:
1. Employment. Employer hereby employs Employee, and Employee hereby
accepts such employment, subject to the terms and conditions stated herein.
2. Term. This Agreement shall commence effective as of September 15, 1997
(the "Effective Date") and shall continue through and including August 31, 1999
(the "Initial Term"), unless this Agreement is (a) otherwise terminated in
accordance with the provisions contained herein, or (b) extended by mutual
agreement of Employer and Employee. After the Initial Term, this Agreement may
be renewed or extended upon mutual agreement of the parties. If the parties do
not agree to an extension on other terms, then this Agreement shall
automatically renew on a month-to-month basis until either Employer or Employee
gives at least thirty (30) days notice that it or he will not extend the term
past the end of the following calendar month.
3. Duties. Employee shall perform the following duties pursuant to this
Agreement:
(a) Employee shall serve as an Executive Vice President and the Chief
Financial Officer ("CFO") of Employer.
(b) As the CFO Employee shall be principally responsible for the
financial affairs of Employer, reporting to the Chief Executive Officer of
Employer. In addition Employee shall be available to assist Employer and its
related entities in connection with the management and operation of their
respective businesses. Employee shall perform all duties and responsibilities
normally associated with his officer position and shall carry out such other
duties and responsibilities, not inconsistent with the responsibilities of his
office, as otherwise may be reasonably assigned to Employee by the Chief
Executive Officer of Employer.
<PAGE>
(c) Employee shall at all times abide and observe Employer's policies
and procedures as are in effect from time to time. Employee acknowledges that
Employer is an equal opportunity employer and that Employer's established policy
is not to discriminate on the basis of age, marital status, race, color, sex,
religion or national origin, or to violate any federal or state
anti-discrimination law. Employee shall be responsible for carrying out and
implementing the foregoing policy throughout the operations and activities of
Employer.
4. Compensation. For the services provided by Employee as an employee of
Employer, Employer shall pay Employee the annual base salary (the "Base Salary")
and other compensation identified on Exhibit A. In addition, Employer will
reimburse Employee for all reasonable out-of-pocket expenses incurred in
performing duties during the term of this Agreement, including normal and usual
relocation expenses incurred in relocating Employee and his family to North
Carolina.
5. Additional Benefits. Commencing on or about the Effective Date, and
thereafter during the term of this Agreement, Employee shall be entitled to and
Employer shall provide to Employee all employment benefits which are generally
provided to senior executive officers of Employer. In addition, Employer will
provide Employee an office and administrative support appropriate to Employee's
position, and Employer will provide reimbursement of usual and customary dues
and license fees consistent with other senior management.
6. Devotion of Time. During the term of this Agreement, Employee shall
devote his best efforts and normal business time and attention (excluding sick
leave and vacation) to the business of Employer and its affiliates in a manner
and to an extent commensurate with the commitment of other executive officers of
Employer, to fulfill his duties and responsibilities under the Agreement and to
advance the business interests and good reputation of Employer and the direct
and indirect subsidiaries of Employer.
7. Confidentiality and Non-Disclosure. Employee acknowledges that, during
this employment, he will gain access to, or possession or knowledge of, numerous
trade secrets, confidential information, other valuable properties not generally
available to the public and proprietary information, including but not limited
to, hospital and healthcare facility client lists, client files and records,
lists of potential clients, prospects or targets, and/or other market and
marketing data and plans, price books, promotional devices and methods, business
methods, manuals and plans, business and sales techniques, strategic plans,
computer programs, hospital and physician contracts, and research and
development (hereinafter referred to collectively as "Confidential
Information"). Employee acknowledges that such Confidential Information is
unique and a valuable asset which is owned solely by Employer (or affiliates of
Employer) and is to be used only for Employer's or its affiliates' (other than
any natural persons) benefit. Employee shall not, during or after the term of
this Agreement, disclose, divulge, reveal, transfer, reproduce, sell, capitalize
upon or take advantage of such Confidential Information and, in addition,
Employee shall exercise all reasonable efforts and precautions to protect
against such Confidential Information from misappropriation, misuse, disclosure,
breach of confidentiality, or other conduct or action inconsistent with
Employer's rights; provided, however, that Confidential Information may be
disclosed to the extent (i) required by law or court order or (ii) generally
available to the public other than by unauthorized disclosure. Upon termination
of this
2
<PAGE>
Agreement, Employee shall return immediately to Employer all of Employer's (or
its affiliates) property (including, without limitation, Confidential
Information) in Employee's possession or control. Any materials, manuals,
documents or records developed, written, edited or designed by Employee while
employed by Employer are the exclusive property of Employer.
8. Covenant Not To Compete. Employee will, as a result of this employment,
be responsible for the executive management and direction of substantial
business resources and assets of Employer and its affiliates and will develop
additional contacts and relationships with numerous individuals, executives,
companies, insurers, providers and health maintenance organizations which are
also involved in the managed healthcare business. Such individuals and
organizations will have business and contractual relationships with Employer or
its affiliates that will be a valuable asset thereof. In consideration of the
Signing Bonus, the grant of options and the incentive bonuses granted to
Employee under this Agreement, Employee agrees as follows:
(a) Employee agrees that for a period of six (6) months after
termination of this Agreement, Employee will not become employed by, own,
operate, manage, or provide consulting services to any business that provides
the same type of services as Employer currently provides in the states where
Employer is providing services as of the date of termination of this Agreement.
(b) Employee agrees for a period of twelve (12) months after
termination of this Agreement, not to solicit any hospital, clinic, healthcare
facility or other client having a contractual or business relationship with
Employer or any subsidiary of Employer at the time of termination, or of any
prospect or potential client to which a marketing proposal or presentation was
made within six (6) months of termination, and of which Employee was aware,
involving the provision of healthcare services, which solicitation would be for
the purpose of providing healthcare or healthcare related services.
(c) Employee further agrees to refrain for a period of twelve (12)
months following the termination of this Agreement, from any activity of any
nature intended or reasonably calculated to result in the termination or
cancellation of any contractual or business arrangement between the Employer or
any subsidiary of Employer, and any insurer, client, facility or other business
or entity.
(d) Employee agrees to notify any entity or organization of which he
is a director, significant shareholder (or other equity owner), manager, general
partner, executive officer or as to which he is otherwise a controlling party or
over whom he exerts significant influence (an "Affiliate") of the provisions of
Sections 7, 8 and 9 of this Agreement, and Employee agrees that he will not
cause or permit such Affiliate to engage in any activity that would be
prohibited for Employee personally under this Agreement.
(e) Nothing in this Agreement shall prevent Employee from making
passive investments in third parties so long as such investments do not require
Employee to perform any services in connection with any such investments in such
third parties.
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9. Solicitation of Other Employees.
(a) Employee agrees that he shall not, for a period of twelve (12)
months after the termination of this Agreement, solicit or seek to influence,
either directly or indirectly, any employee or any physician or healthcare
provider under contract with Employer or any of its subsidiaries or affiliates
at the time of termination of this Agreement, to enter into any employment
agreement, independent contractor arrangement, or any other contractual
arrangement whereby such individual would perform services for compensation,
either directly or indirectly, for any person, firm, corporation or other entity
or business that provides products or services in competition with Employer or
any of its subsidiaries or affiliates.
(b) Employee further agrees that neither he nor any Affiliate shall,
for a period of twelve (12) months after the termination of this Agreement,
hire, employ, enter into any employment agreement, independent contractor
arrangement, or any other contractual arrangement whereby a "Coastal Employee"
(as defined below) would perform services for compensation for Employee or such
entity. For the purposes hereof, "Coastal Employee" shall mean any person who
has been employed by Coastal or any or its direct or indirect subsidiaries at
any time during the six (6) month period immediately preceding the termination
of this Agreement.
10. Breach and Remedies.
(a) Employee acknowledges that the breach or threatened breach of any
of the covenants set forth in Sections 7, 8 or 9 may result in immediate and
irreparable injury to Employer or its affiliates. Accordingly, Employee agrees
the provisions of Sections 7, 8 and 9 shall inure to the benefit of and may be
enforced by Employer or any if its affiliates. In addition to any rights or
remedies available to Employer for a breach by Employee of Sections 7, 8 or 9,
Employer and its affiliates shall be entitled to injunctive relief to enforce
the obligations of Employee contained in such Sections. Nothing herein shall be
construed as prohibiting Employer or its affiliates from pursuing any other
legal or equitable remedies that may be available to it for any such breach or
threatened breach, including the recovery of damages from Employee.
(b) The periods of time provided for in Sections 7, 8 or 9 shall be
extended by any period of violation or periods of time required to resolve by
arbitration, not to exceed 45 days, any dispute regarding the provisions
thereof, whichever period is lesser.
(c) Employee hereby acknowledges that the covenants set forth in
Sections 7, 8 and 9 are reasonable in all respects and are necessary to protect
the legitimate business interests of Employer and its affiliates. In the event
that any of the provisions of this Agreement are found to be unenforceable or
void (either in whole or in part), then the offending portion shall be construed
as valid and enforceable only to the extent permitted by law and the balance of
this Agreement will remain in full force and effect. It is the intention of
parties to restrict the activities of Employee only to the extent necessary to
protect the legitimate business interests of Employer, its subsidiaries and/or
affiliates, and not to deprive Employee of the right or ability to earn a
livelihood.
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11. Vacation and Sick Leave. All earned, accrued and unused vacation and
any unused sick pay, upon termination, will be governed by Employer's then
current policies.
12. Termination. This Agreement may be terminated as follows:
(a) Employer may terminate this Agreement without cause at any time
upon ninety (90) days' prior written notice to Employee, and Employee may
terminate this Agreement without cause at any time upon ninety (90) days' prior
written notice to Employer. This ninety day period is hereafter referred to as
the "Notice Period." In the event of such termination, Employee, if requested by
Employer, shall continue to perform his obligations and duties under this
Agreement and assist with the transition of duties to a new employee during the
Notice Period. Employer, at its option, may notify Employee at any time during
the Notice Period that no further services are to be performed, but Employer
shall continue to pay Employee's Base Salary (as defined on Exhibit A through
the end of the Notice Period. In the event that this Agreement is terminated
without cause by either party, the covenants set forth in Sections 7, 8 and 9
shall continue in effect, and the applicable start date for the periods of time
in Sections 7, 8 or 9 shall be the later of the date that notice of termination
is given or the last date upon which services are performed.
(b) This Agreement may be terminated by Employer at any time for cause
upon written notice to Employee, which notice shall specify the reason for
termination. For purposes of this Subsection 12(b), cause shall include, but
shall not be limited to, the following: fraud; dishonesty; substantial and
continuous nonperformance of assigned duties after Employer has provided
Employee with written notice of non-compliance and at least thirty (30) days
thereafter to cure; failure to comply with a material written policy of Employer
after Employer has provided Employee with written notice of non-compliance and
at least thirty (30) days thereafter to cure; failure by Employee to perform or
meet objective and measurable standards of which Employee has been notified in
advance in writing; criminal activities for which Employee is indicted or
convicted in a jurisdiction of the United States; and material breach of this
Agreement provided that Employer has provided Employee with written notice of
breach and at least thirty (30) days thereafter to cure.
(c) This Agreement shall terminate upon the death or total and
permanent disability of Employee. In the event that this Agreement terminates
due to Employee's death or total and permanent disability, Employer shall pay
upon such termination to Employee, Employee's Base Salary accrued through the
date of Employee's death or the date he becomes totally and permanently
disabled, as the case may be. Permanent disability for purposes of this
Agreement shall mean the inability to perform the functions of Employee's
position for a continuous period of six (6) months.
(d) Except as expressly set forth herein, all of Employer's
obligations for compensation or other benefits shall terminate upon the
effective date of the termination of this Agreement. In consideration of the
Signing Bonus provided for in Exhibit A, Employee agrees that he is not entitled
to any severance payment upon termination other than severance pay per
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Employer's general severance policy that is based on years of service (and
payment of Base Salary and benefits through the end of the Notice Period).
13. Compliance With Securities Laws. Employee agrees to comply with all
applicable federal and state securities laws and with all applicable policies of
Employer concerning the buying and selling of stock of Employer by employees.
14. Entire Agreement. This Agreement contains the entire understanding
between the parties and supersedes and cancels any prior oral and written
understanding and/or agreements between them respecting the subject matter of
this Agreement. This Agreement may be amended or modified only in writing signed
by both parties.
15. Severability. If any provision, term, condition, or clause of this
Agreement or the application thereof shall be invalid or unenforceable to any
extent, the remainder of this Agreement shall not be affected thereby and shall
be enforced to the greatest extent permitted by law.
16. Governing Law. This Agreement is made and entered into in the State of
North Carolina and is to be construed in accordance with and take effect under
the laws of the State of North Carolina without regard to principles of
conflicts of laws.
17. Assignment. No party shall have any right to assign, mortgage, pledge,
hypothecate or encumber this Agreement in whole or in part, or any benefit or
any right accruing hereunder, without in any such case first obtaining the prior
written consent of the other party hereto, except that Employer may assign this
Agreement to one of its affiliates or wholly-owned subsidiaries, provided that
in the event of such an assignment, Employer shall remain primarily responsible
for its obligations hereunder. All rights hereunder are personal to the Employee
and shall cease upon the termination of this Agreement unless otherwise stated
herein; provided, however, that the provisions hereof shall inure to the benefit
of the personal representatives, heirs and legatees of Employee.
18. Notice. Any notice, or other written communication to be given pursuant
to this Agreement for whatever reason shall be deemed duly given and received
(a) if delivered personally, from the date of delivery, or (b) by certified
mail, postage pre-paid, return receipt requested, three (3) days after the date
of mailing, addressed: in the case of Employer, to its principal office and
marked "Attention: President," and in the case of Employee, to his last known
permanent address according to the books and records of Employer.
19. Arbitration. Any differences, claims or matters in dispute arising
between the parties hereto out of this Agreement shall be submitted by the
parties to arbitration as mutually agreed upon. Article 45A of Chapter 1 of the
General Statutes of North Carolina shall apply to such arbitration. In the event
the parties cannot agree upon the means of submission to arbitration, they
thereby agree that any controversy or claim arising out of or relating to this
Agreement or the breach thereof shall be submitted by them in Durham, North
Carolina, to arbitration by the American Arbitration Association or its
successor; and the determination of the American Arbitration Association or its
successors shall be final and absolute. The arbitrator
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shall be governed by the duly promulgated rules and regulations of the American
Arbitration Association or its successor, and the pertinent provisions of the
laws of the State of North Carolina relating to arbitration. The decision of the
arbitrator may be entered as a judgment in any court of the State of North
Carolina or elsewhere. The parties further agree that any differences, claims,
or matters in dispute arising between the parties hereto shall be governed by
the laws of the State of North Carolina.
20. Miscellaneous. Any protection, benefits, rights or other provisions
given to Employer in this Agreement shall also be deemed to apply to, protect
and inure to the benefit of Employer's affiliates and subsidiaries. All rights
of Employer expressed in this Agreement are in addition to any rights available
under the common law or other legal principles. Section or paragraph titles or
captions contained in this Agreement are inserted only as a matter of
convenience and for reference and in no way define, limit, extend or describe
the scope of this Agreement or the intent of any provision hereof. All pronouns
and any variation thereof shall be deemed to refer to the masculine, feminine,
neuter, singular or plural as the identity of person or persons, firm or firms,
corporation or corporations, and as context may require.
IN WITNESS WHEREOF, the parties sign and seal below, effective the date
first written in this Agreement.
EMPLOYEE:
(SEAL)
--------------------------------------
Charles F. Kuoni, III
EMPLOYER:
COASTAL PHYSICIAN GROUP, INC.
By:
-----------------------------------
Steven M. Scott, President and
Chief Executive Officer
ATTEST:
By:
--------------------------
Assistant Secretary
[CORPORATE SEAL]
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EXHIBIT A
---------
COMPENSATION
------------
1. Signing Bonus. Employee shall receive a signing bonus (the "Signing
Bonus") of Fifty Thousand and No/100 Dollars ($50,000), payable upon the
relocation of Employee's family to North Carolina. Employer and Employee
acknowledge that Employee has previously received a bonus of $50,000 paid to
Employee as a consultant prior to the execution of this Agreement and the
commencement of Employee's employment with Employer.
2. Base Salary. For services provided as an employee of Employer, Employee
shall receive, beginning on the Effective Date, a base salary of $200,000 per
annum (the "Base Salary") payable in accordance with Employer's current payroll
practices. The Base Salary shall be subject to annual review and adjustment as
of each August 1 during the term of this Agreement (or such other times as may
be determined by Employer, but the annual review and adjustment shall occur no
less than once per calendar year).
3. Options. As an inducement essential to Employee entering into this
Agreement, Employer shall recommend that the Compensation Committee issue to
Employee options (the "Options") for one hundred thousand (100,000) shares of
the Employer's common stock (the "Stock"), with an exercise price based on the
market price of the Employer's common stock on the date this Agreement is
executed, or the next preceding trading day is such date is not a trading day.
The Options shall vest over three (3) years, with 33,333 shares vesting on the
first anniversary date of the signing of this Agreement (the "Anniversary
Date"), 33,333 shares vesting on the second Anniversary Date, and 33,334 shares
vesting on the third Anniversary Date; provided that on each such Anniversary
Date, the above Options shall only vest if Employee is a full-time time employee
of Employer on such Anniversary Date.
Employer understands that if the Options are exercised the Stock issued
will be issued by Employer in a private placement pursuant to Section 4(2) of
the Securities Act of 1933, as amended (the "Act"). Employee warrants and
represents to Employer that he is acquiring the Stock for his own account for
investment purposes and without a view to distributing them to subsequent
purchasers. Employee understands that legends will be placed on the certificates
evidencing the Stock restricting their transfer or other disposition without
registration under the Act or the availability of an exemption from registration
under the Act.
4. Incentive Bonus. Employee shall be entitled to an incentive or
performance bonus (the "Incentive Bonus") of up to $80,000 per annum (forty
percent of annual Base Salary), based on cash flow, audit and timely SEC
reporting, as well as the following:
(a) Employee must be employed by Employer at the end of the fiscal quarter
for which the Incentive Bonus is calculated;
(b) Employer and its consolidated subsidiaries must have achieved a
positive Consolidated Cash Flow for the fiscal quarter(s) for which the
Incentive Bonus is calculated. For purposes of this Agreement, the following
definitions and calculations shall apply:
<PAGE>
(i) "Consolidated Cash Flow" for any period shall mean the sum of (A)
Consolidated Net Income (or minus Consolidated Net Loss) for that period of
Coastal and its subsidiaries, (B) provisions for taxes based on income or
profit that reduced that Consolidated Net Income (or increased that
Consolidated Net Loss) for that period, and (C) depreciation and
amortization expenses and other noncash items that reduced that
Consolidated Net Income (or increased that Consolidated Net Loss) for that
period.
(ii) "Consolidated Net Income" or "Consolidated Net Loss" for any period
means the consolidated net income or net loss of Coastal and its
subsidiaries, excluding intercompany items and after deductions for
minority interests, as determined in accordance with generally accepted
accounting principles; provided that there shall be excluded
(A) gain or loss resulting from the sale, conversion or other
disposition of capital assets (i.e, assets other than current assets),
(C) any gain or loss resulting from the write-up or write-down of any
assets, and
(D) any other gains or losses of any non-operating, non-recurring or
extraordinary nature.
(c) Calculations of Consolidated Cash Flow shall be made as promptly as is
reasonable after the end of the relevant fiscal quarter by the independent
public accountants of Employer.
(d) If earned, the Incentive Bonus may be paid by the Employer either (i)
in cash or (ii) so long as Employer has common stock traded on a national
securities exchange, in the form of registered common stock of Employer that may
be freely traded (subject to trading blackouts that apply to Employee because of
his position as an officer of Employer) on a national securities exchange, with
the number of shares to be equal to the dollar amount of the Incentive Bonus
divided by the closing price of such stock on the last trading day of the fiscal
quarter for which the Incentive Bonus is earned, provided that the Employer
shall issue cash in lieu of any fractional shares. In the event the Employer
elects to pay in stock but does not have registered common stock available to
pay the Incentive Bonus, then Employer shall pay one-half of the Incentive Bonus
in cash and shall issue to Employee unregistered shares of common stock of
Employer for the balance, with the number of shares to be equal to one half of
the dollar amount of the Incentive Bonus divided by the closing price of such
stock on the last trading day of the fiscal quarter, provided that the Employer
shall issue cash in lieu of any fractional shares. In the event the Employer
issues unregistered shares, Employee understands that such shares will be issued
by Employer in a private placement pursuant to Section 4(2) of the Securities
Act of 1933, as amended (the "Act"). Employee warrants and represents to
Employer that he is acquiring the shares for his own account for investment
purposes and without a view to distributing them to subsequent purchasers, and
Employee understands that legends will be placed on the certificates evidencing
the shares restricting their transfer or other disposition without registration
under the Act or the availability of an exemption from registration under the
Act.
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5. Stock Options or Awards. Employee shall be eligible for stock options
and awards available to other senior management of Employer and its affiliates
from time to time. This subsection shall not be a guarantee of any awards or
options, and Employee recognizes that the awarding of such compensation is
governed by plans adopted by the Board of Directors of Employer from time to
time.
3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
the 1st day of January, 1998 (the "Effective Date") by and between COASTAL
PHYSICIAN SERVICES OF SOUTH FLORIDA, INC., (the "Employer" or "Coastal"), a
Florida corporation, and SHERMAN PODOLSKY, M.D. ("Employee").
W I T N E S S E T H:
WHEREAS, Employee is currently employed by Coastal Physician Services of
South Florida, Inc. and Coastal Physician Services of the Southeast, Inc., which
are affiliates of Employer, pursuant to an Employment Agreement dated as of
April 2, 1997, which will be terminated in connection with the execution of this
Agreement;
WHEREAS, subject to the terms and conditions hereinafter provided, Employer
desires to employ Employee, and Employee desires to accept such employment, on
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the employment of Employee and the
compensation to be paid by Employer to Employee, and the covenants set forth
herein, Employee hereby accepts employment hereunder subject to the terms and
conditions stated below, including the agreement of Employee not to enter into
certain competitive activities with the Employer, as follows:
1. Employment. Employer hereby employs Employee, and Employee hereby
accepts such employment, subject to the terms and conditions stated herein. This
Agreement shall amend, restate and supersede any existing employment agreements
and arrangements applicable to Employee, including the agreement dated April 2,
1997 with affiliates of Employer.
2. Term. This Agreement shall commence effective as of January 1, 1998 (the
"Effective Date") and shall continue through and including December 31, 2000
(the "Initial Term"), unless this Agreement is (a) otherwise terminated in
accordance with the provisions contained herein, or (b) extended by mutual
agreement of Employer and Employee. After the Initial Term, this Agreement shall
automatically renew on a year-to-year basis until terminated in accordance with
Section 12 of this Agreement.
3. Duties. Employee shall perform the following duties pursuant to this
Agreement:
(a) Employee shall serve as President and Chief Executive Officer of
Employer. Employee is currently serving and will continue to serve on the Board
of Directors of Employer (the "Board of Directors"). Employee may be removed at
anytime from any board seat as deemed appropriate by the shareholders of
Employer, and such removal shall not be considered a breach by the Employer of
this Agreement. Removal of Employee from the office of President shall be
considered a material breach of the terms of this Agreement by Employer.
<PAGE>
(b) As the President and Chief Executive Officer of Employer, Employee
shall be principally responsible for all operational affairs of Employer,
reporting to the Board of Directors. Employee shall perform all duties and
responsibilities normally associated with his officer and director positions and
shall carry out such other duties and responsibilities and as otherwise may be
reasonably assigned to Employee by the Board of Directors.
(c) Employee shall at all times abide and observe Employer's policies
and procedures as are in effect from time to time. Employee acknowledges that
Employer is an equal opportunity employer and that Employer's established policy
is not to discriminate on the basis of age, marital status, race, color, sex,
religion or national origin, or to violate any federal or state
anti-discrimination law. Employee shall be responsible for carrying out and
implementing the foregoing policy throughout the operations and activities of
Employer.
4. Compensation. For the services provided by Employee as an employee of
Employer, Employer shall pay Employee the annual base salary (the "Base Salary")
and other compensation identified on Exhibit A.
5. Additional Benefits. During the term of this Agreement, Employee shall
be entitled to and Employer shall provide to Employee, at no cost to Employee,
all employment benefits which are generally provided to senior executive
officers of Employer and its affiliates, including without limitation the
following:
(a) Comprehensive major medical, dental and other health insurance
covering Employee's medical expenses and the medical expenses of his spouse and
children;
(b) Disability insurance with no more than a ninety (90) day
elimination period providing for payment to age 65 in the event that Employee
becomes unable to perform his responsibilities hereunder. Employer agrees to pay
Employee's compensation in accordance with Employer's usual policy throughout
any elimination period;
(c) Term life insurance in the amount of Five Hundred Thousand Dollars
($500,000.00);
(d) Usual and customary sick leave benefits in accordance with
Employer's standard policy for senior level executives;
(e) A total of four (4) weeks per year vacation and two (2) weeks of
continuing medical education;
(f) Eligibility to participate in the 401(k) Plan maintained by
Coastal Physician Group, Inc. ("CPG") for the benefit of its employees as well
as in any other tax qualified or unqualified retirement program maintained by
Employer or CPG for the benefit of its employees on the same basis as the senior
executive officers of Employer are entitled to participate therein; and
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(g) Five Thousand and no/100's Dollars ($5,000.00) per year allowance
for dues, licenses, professional associations and CME expenses.
6. Devotion of Time. During the term of this Agreement, Employee shall
devote all necessary time and attention to the business of Employer and its
affiliates in a manner and to an extent commensurate with the commitment of
other executive officers of Employer, to fulfill his duties and responsibilities
under the Agreement and to advance the business interests and good reputation of
Employer and the direct and indirect subsidiaries of Employer. Employee may
provide medical consulting services consistent with those Employee is currently
providing to Scott Medical Group, LLC, so long as (i) the provision of such
services do not interfere with the rendering of services under this Agreement,
and (ii) such services relate to the provision of clinic services and such
services are not in any way connected with the rendering of emergency department
staffing services.
7. Confidentiality and Non-Disclosure. Employee acknowledges that, during
this employment, he will gain access to, or possession or knowledge of, numerous
trade secrets, confidential information, other valuable properties not generally
available to the public and proprietary information, including but not limited
to, hospital and healthcare facility client lists, client files and records,
lists of potential clients, prospects or targets, and/or other market and
marketing data and plans, price books, promotional devices and methods, business
methods, manuals and plans, business and sales techniques, strategic plans,
computer programs, hospital and physician contracts, and research and
development (hereinafter referred to collectively as "Confidential
Information"). Employee acknowledges that such Confidential Information is
unique and a valuable asset which is owned solely by Employer (or affiliates of
Employer) and is to be used only for Employer's or its affiliates' (other than
any natural persons) benefit. Employee shall not, during or after the term of
this Agreement, disclose, divulge, reveal, transfer, reproduce, sell, capitalize
upon or take advantage of such Confidential Information and, in addition,
Employee shall exercise all reasonable efforts and precautions to protect
against such Confidential Information from misappropriation, misuse, disclosure,
breach of confidentiality, or other conduct or action inconsistent with
Employer's rights; provided, however, that Confidential Information may be
disclosed to the extent (i) required by law or court order or (ii) generally
available to the public other than by unauthorized disclosure. Upon termination
of this Agreement, Employee shall return immediately to Employer all of
Employer's (or its affiliates) property (including, without limitation,
Confidential Information) in Employee's possession or control. Any materials,
manuals, documents or records developed, written, edited or designed by Employee
while employed by Employer are the exclusive property of Employer.
8. Covenant Not To Compete. Employee will, as a result of this employment,
be responsible for the executive management and direction of substantial
business resources and assets of Employer and its affiliates and will develop
additional contacts and relationships with numerous individuals, executives,
companies, insurers, providers and health maintenance organizations which are
also involved in the managed healthcare business. Such individuals and
organizations will have business and contractual relationships with Employer or
its affiliates that will be a valuable asset thereof. Employee therefore agrees
as follows:
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(a) Employee agrees that for a period of twelve (12) months after
termination of this Agreement, Employee will not become employed by, own,
operate, manage, or provide consulting services to any business that provides
the same type of physician management services as Employer currently provides to
emergency departments in the State of Florida.
(b) Employee agrees for a period of twelve (12) months after
termination of this Agreement, not to solicit any hospital, clinic, healthcare
facility or other client having a contractual or business relationship with
Employer or of any subsidiary of Employer, or of any prospect or potential
client to which a marketing proposal or presentation was made within six (6)
months of termination, and of which Employee was aware, involving the provision
of physician management services for emergency departments, which solicitation
would be for the purpose of providing physician management services for
emergency departments.
(c) Employee further agrees to refrain for a period of twelve (12)
months following the termination of this Agreement, from any activity of any
nature intended or reasonably calculated to result in the termination or
cancellation of any contractual or business arrangement between the Employer or
any subsidiary of Employer, and any insurer, client, facility or other business
or entity.
(d) Employee agrees to notify any entity or organization of which he
is a director, significant shareholder (or other equity owner), manager, general
partner, executive officer or as to which he is otherwise a controlling party or
over whom he exerts significant influence (an "Affiliate") of the provisions of
Sections 7, 8 and 9 of this Agreement, and Employee agrees that he will not
cause or permit such Affiliate to engage in any activity that would be
prohibited for Employee personally under this Agreement.
(e) Nothing in this Agreement shall prevent Employee, either during
the term hereof or after termination, from (i) making passive investments in
third parties so long as such investments do not require Employee to perform any
services in connection with any such investments in such third parties, (ii)
providing consulting services to Scott Medical Group, LLC of the type and nature
that Employee currently provides to Scott Medical Group, LLC so long as the
provision of such services is in accordance with the restrictions in Section 6,
or (iii) providing clinical medical services, including working as an emergency
department physician.
9. Solicitation of Other Employees.
(a) Employee agrees that he shall not, for a period of twelve (12)
months after the termination of this Agreement, solicit or seek to influence,
either directly or indirectly, any employee or any physician or healthcare
provider under contract with Employer at any time during Employee's employment
by Employer or any of its subsidiaries or affiliates, to enter into any
employment agreement, independent contractor arrangement, or any other
contractual arrangement whereby such individual would perform services for
compensation, either directly or indirectly, for any person, firm, corporation
or other entity or business that provides products or services in competition
with Employer or any of its subsidiaries or affiliates.
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(b) Employee further agrees that neither he nor any Affiliate shall,
for a period of twelve (12) months after the termination of this Agreement,
hire, employ, enter into any employment agreement, independent contractor
arrangement, or any other contractual arrangement whereby a "Coastal Employee"
(as defined below) would perform services for compensation for Employee or such
entity. For the purposes hereof, "Coastal Employee" shall mean any person who
has been employed by Coastal or any or its direct or indirect subsidiaries at
any time during the six (6) month period immediately preceding the termination
of this Agreement.
10. Breach and Remedies.
(a) Employee acknowledges that the breach or threatened breach of any
of the covenants set forth in Sections 7, 8 or 9 may result in immediate and
irreparable injury to Employer or its affiliates. Accordingly, Employee agrees
the provisions of Sections 7, 8 and 9 shall inure to the benefit of and may be
enforced by Employer or any if its affiliates. In addition to any rights or
remedies available to Employer for a breach by Employee of Sections 7, 8 or 9,
Employer and its affiliates shall be entitled to injunctive relief to enforce
the obligations of Employee contained in such Sections. Nothing herein shall be
construed as prohibiting Employer or its affiliates from pursuing any other
legal or equitable remedies that may be available to it for any such breach or
threatened breach, including the recovery of damages from Employee.
(b) The periods of time provided for in Sections 7, 8 or 9 shall be
extended by any period of violation or periods of time, not to exceed 45 days,
required to resolve by arbitration any dispute regarding the provisions thereof.
(c) Employee hereby acknowledges that the covenants set forth in
Sections 7, 8 and 9 are reasonable in all respects and are necessary to protect
the legitimate business interests of Employer and its affiliates. In the event
that any of the provisions of this Agreement are found to be unenforceable or
void (either in whole or in part), then the offending portion shall be construed
as valid and enforceable only to the extent permitted by law and the balance of
this Agreement will remain in full force and effect. It is the intention of
parties to restrict the activities of Employee only to the extent necessary to
protect the legitimate business interests of Employer, its subsidiaries and/or
affiliates, and not to deprive Employee of the right or ability to earn a
livelihood.
(d) The covenants and restrictions contained in Sections 8 and 9 shall
terminate in the event Employer or CPG files a voluntary petition in bankruptcy,
has an involuntary petition filed against it which is not dismissed within sixty
(60) days of filing, makes a general assignment for the benefit of creditors, or
consents to the appointment of a receiver for all or substantially all of its
assets.
11. Vacation and Sick Leave. All earned, accrued and unused vacation and
any unused sick pay, upon termination, will be governed by Employer's then
current policies.
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12. Termination. This Agreement may be terminated as follows:
(a) Employer may terminate this Agreement without cause at any time
upon ninety (90) days' prior written notice to Employee, and Employee may
terminate this Agreement without cause at any time upon ninety (90) days' prior
written notice to Employer. This ninety day period is hereafter referred to as
the "Notice Period." In the event of such termination, Employee, if requested by
Employer, shall continue to perform his obligations and duties under this
Agreement and assist with the transition of duties to a new employee during the
Notice Period. Employer, at its option, may notify Employee at any time during
the Notice Period that no further services are to be performed. In the event
that this Agreement is terminated without cause by either party, the covenants
set forth in Sections 7, 8 and 9 shall continue in effect, and the applicable
start date for the periods of time in Sections 7, 8 or 9 shall be the later of
the date that notice of termination is given or the last date upon which
services are performed.
(b) If this Agreement is terminated without cause by Employer at any
time during the term hereof, Employer shall pay Employee regular compensation
during the Notice Period as provided in subsection (a), plus an amount (the
"Severance Benefit") equal to three fourths of the annual Base Salary then in
effect (see Exhibit A), all to be paid out in equal installments over the nine
(9) months following the date of expiration of the Notice Period, beginning
thirty (30) days from the date of expiration of the Notice Period (so that there
will be a total equal to the annual Base Salary paid during the three months of
the Notice Period as salary plus the nine months following the Notice Period).
(c) This Agreement may be terminated by Employer at any time for cause
upon written notice to Employee, which notice shall specify the reason for
termination. For purposes of this Subsection 12(c), cause shall consist of the
following: fraud; material and meaningful dishonesty; substantial and continuous
nonperformance of material assigned duties; failure to comply with a material
written policy of Employer; failure by Employee to perform or meet objective and
measurable standards agreed upon by Employer and Employee; unlawful activities
for which Employee is convicted in a jurisdiction of the United States; and
material and meaningful breach of this Agreement.
(d) This Agreement shall terminate upon the death or total and
permanent disability of Employee. In the event that this Agreement terminates
due to Employee's death or total and permanent disability, Employer shall pay
upon such termination to Employee, Employee's Base Salary accrued through the
date of Employee's death or the date he becomes totally and permanently
disabled, as the case may be. Permanent disability for purposes of this
Agreement shall mean the inability to perform the functions of Employee's
position for a continuous period of six (6) months.
(e) This Agreement may be terminated by Employee upon a material
breach of the terms of this Agreement by Employer, and if this Agreement is
terminated at any time during the term hereof by Employee under this subsection,
then Employer shall pay Employee an amount equal to the annual Base Salary then
in effect (see Exhibit A), all to be paid out in equal installments over the
twelve (12) months following the date of termination, beginning thirty (30) days
from the date of termination.
6
<PAGE>
(f) Except as expressly set forth herein, all of Employer's
obligations for compensation or other benefits shall terminate upon the
effective date of the termination of this Agreement.
(g) Upon termination of employment, Employee agrees to resign as a
director of CPG and as an officer and director of Employer and any affiliates of
Employer and CPG. In that regard, Employee agrees to execute and deliver to
Moore & Van Allen, PLLC, as escrow agent, an undated resignation letter with
respect to CPG, which escrow agent is authorized to date and deliver to CPG upon
receipt of notice from Employer that Employee's employment has terminated.
13. Dispute Resolution. The parties shall attempt in good faith to settle
any dispute or controversy arising under, out of, or in connection with or in
relation to this Agreement, or any amendment hereof, or the breach hereof, by
negotiation and mutual agreement; provided that if the parties are not able to
agree within a reasonable period of time, then any such dispute or disagreement
shall be resolved by submitting such dispute first to mediation and second to
arbitration in Broward County or such other location within or outside the State
of Florida as may be agreed on by the parties. Either party may make written
demand for mediation, in which case the parties shall mediate the dispute or
disagreement with the mediator appointed by the Judicial Arbitration & Mediation
Services, Inc. ("JAMS") or another party upon mutual agreement of Employer and
Employee. Fees and costs of the mediation shall be borne equally by the parties
and each party shall pay its own professional fees and costs. If the dispute or
disagreement is not settled by mediation within a reasonable period of time,
then either party may demand arbitration, in which case the dispute or
disagreement shall be arbitrated in accordance with rules and procedures
established by JAMS. The arbitrator shall be allowed, in his or her discretion,
to require the losing party to pay the reasonable attorney's fees and costs of
the prevailing party. Any award rendered by the arbitrator shall be final and
binding upon each of the parties and judgment thereof may be entered in any
court having jurisdiction thereof. The costs of the arbitrator shall be borne
equally by both parties.
14. Compliance With Securities Laws. Employee agrees to comply with all
applicable federal and state securities laws and with all applicable policies of
Employer concerning the buying and selling of stock of Employer by employees to
the extent such policies do not restrict Employee's express rights under this
Agreement.
15. Entire Agreement. This Agreement contains the entire understanding
between the parties and supersedes and cancels any prior oral and written
understanding and/or agreements between them respecting the subject matter of
this Agreement. This Agreement may be amended or modified only in writing signed
by both parties.
16. Severability. If any provision, term, condition, or clause of this
Agreement or the application thereof shall be invalid or unenforceable to any
extent, the remainder of this Agreement shall not be affected thereby and shall
be enforced to the greatest extent permitted by law.
7
<PAGE>
17. Governing Law. This Agreement is made and entered into in the State of
Florida and is to be construed in accordance with and take effect under the laws
of the State of Florida without regard to principles of conflicts of laws.
18. Assignment. No party shall have any right to assign, mortgage, pledge,
hypothecate or encumber this Agreement in whole or in part, or any benefit or
any right accruing hereunder, without in any such case first obtaining the prior
written consent of the other party hereto, except that Employer may assign this
Agreement to one of its affiliates or wholly-owned subsidiaries, provided that
in the event of such an assignment, Employer shall remain primarily responsible
for its obligations hereunder and the obligations of Employer shall be binding
upon any successor-in-interest. Employee acknowledges that Employer and its
affiliates which are direct or indirect wholly-owned subsidiaries of Coastal
Physician Group, Inc. may restructure their corporate structure in South
Florida, and as a result, Employer may be merged into or with one or more such
affiliates, and Employer and Employee agree that this Agreement shall be binding
upon and inure to the benefit of any successor entity. All rights hereunder are
personal to the Employee and shall cease upon the termination of this Agreement
unless otherwise stated herein; provided, however, that the provisions hereof
shall inure to the benefit of the personal representatives, heirs and legatees
of Employee.
19. Notice. Any notice, or other written communication to be given pursuant
to this Agreement for whatever reason shall be deemed duly given and received
(a) if delivered personally, from the date of delivery, or (b) by certified
mail, postage pre-paid, return receipt requested, three (3) days after the date
of mailing, addressed: in the case of Employer, to 2828 Croasdaile Drive,
Durham, North Carolina 27705 and marked "Attention: Steven M. Scott, M.D.," and
in the case of Employee, to his last known permanent address according to the
books and records of Employer.
20. Miscellaneous. Any protection, benefits, rights or other provisions
given to Employer in this Agreement shall also be deemed to apply to, protect
and inure to the benefit of Employer's affiliates and subsidiaries. All rights
of Employer expressed in this Agreement are in addition to any rights available
under the common law or other legal principles. Section or paragraph titles or
captions contained in this Agreement are inserted only as a matter of
convenience and for reference and in no way define, limit, extend or describe
the scope of this Agreement or the intent of any provision hereof. All pronouns
and any variation thereof shall be deemed to refer to the masculine, feminine,
neuter, singular or plural as the identity of person or persons, firm or firms,
corporation or corporations, and as context may require.
8
<PAGE>
IN WITNESS WHEREOF, the parties sign and seal below, effective the date
first written in this Agreement.
EMPLOYEE:
(SEAL)
--------------------------------------
Sherman Podolsky, M.D.
EMPLOYER:
COASTAL PHYSICIAN SERVICES OF
SOUTH FLORIDA, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
ATTEST:
By:
-------------------------
Assistant Secretary
[CORPORATE SEAL]
9
<PAGE>
EXHIBIT A
---------
COMPENSATION
------------
1. Base Salary. For services provided as an employee of Employer, Employee
shall receive, beginning on the Effective Date, a base salary of $240,000 per
annum (the "Base Salary") payable in accordance with Employer's current payroll
practices. The Base Salary shall be subject to annual review and adjustment as
of each January 1 during the term of this Agreement (or such other times as may
be determined by Employer). Upon any annual review and adjustment, the minimum
increase in the Base Salary shall be equal to the Base Salary in effect for the
previous year multiplied by one-half of the percentage increase (if any) in the
Consumer Price Index (the "Index") for All Items, All Groups published by the
United States Department of Labor, Bureau of labor Statistics for the one year
period ending on the last day of November preceding the adjustment date. If
publication of the Index is discontinued or computation of the Index materially
altered, Employer and Employee shall use a comparable index computed and
published by an agency of the United States or a responsible financial
periodical of recognized authority.
2. Incentive Bonus. Employee shall be eligible for bonuses to be determined
from time to time, which shall include but not be limited to bonuses under the
1997-1998 Cash Improvement Incentive Program outlined in the memorandum of
September 10, 1997 from Steven M. Scott, M.D. and Steven Newell, a copy of which
is attached as Exhibit B; provided that the target quotas shall be established
by the President of Coastal Physician Services, Inc.
3. Stock Options or Awards. Employee shall be eligible for stock options
and awards available to other senior management of Employer and its affiliates
from time to time. This subsection shall not be a guarantee of any awards or
options, and Employee recognizes that the awarding of such compensation is
governed by plans adopted by the Board of Directors of Employer from time to
time.
03/18/98
COASTAL PHYSICIAN GROUP, INC. SUBSIDIARIES
AT 12-31-97
Advanced Health Plans, Inc.
BHP Acquisition Company, Inc.
Better Health Plan, Inc.
Birth Centers of America, Inc.
Birth Centers of Florida, Inc.
CHG Properties, Inc.
Coastal Correctional Healthcare, Inc.
Coastal Emergency Services of Dade County, Inc.
Coastal Emergency Services of Ft. Lauderdale, Inc.
Coastal Emergency Services of Hollywood, Inc.
Coastal Emergency Services of Orlando, Inc.
Coastal Government Services Management Group, Inc.
Coastal Government Services, Inc.
Coastal Managed Healthcare, Inc.
Coastal Medical Management Services, Inc.
Coastal Physician Group of Florida, Inc.
Coastal Physician Group, Inc.
Coastal Physician Networks, Inc.
Coastal Physician Services of Orlando, Inc.
Coastal Physician Services of South Florida, Inc.
Coastal Physician Services of the Midwest, Inc.
Coastal Physician Services of the Southeast, Inc.
Coastal Physician Services of the West, Inc.
Coastal Physician Services, Inc.
Coastal Physicians Services of Broward County, Inc.
Coastal Practice Services of the Northeast, Inc.
Coastal Receivables LLC
Coastal SPC Member Corp.
Doctors Health Plan, Inc.
FirstCollect, Inc.
Health Enterprises, Inc.
Health Management Southeast, Inc.
Healthcare Business Resources, Inc.
Healthplan Southeast, Incorporated
Medical Data Solutions, Inc.
Medstaff National Medical Staffing, Inc.
Pediatric Consultants of Broward County, Inc.
Physicians Planning Group, Inc.
Premier Credentialing Resources, Inc.
Signum Primary Care, Inc.
Specialty Services Group, Inc.
Sunlife OB/GYN Services of Hollywood, Florida, Inc.
Sunlife OB/GYN Services of Maryland, Inc.
CERTIFICATE OF DESIGNATION
OF
COASTAL PHYSICIAN GROUP, INC.
I, Eugene F. Dauchert, Jr., Secretary of Coastal Physician Group, Inc., a
Delaware corporation, do hereby certify as of the date of this Certificate, that
the resolutions attached hereto as Exhibit A designating the rights and
preferences of the Series C Convertible Preferred Stock of Coastal Physician
Group, Inc. were duly adopted on June 3, 1997 by the Board of Directors of
Coastal Physician Group, Inc. and that such resolutions have not been amended or
revoked.
Witness my hand and seal of the Corporation this 4th day of June, 1997.
-----------------------------------
Eugene F. Dauchert, Jr.
Secretary
<PAGE>
EXHIBIT A
---------
COASTAL PHYSICIAN GROUP, INC.
RESOLUTIONS DESIGNATING
SERIES C CONVERTIBLE PREFERRED STOCK
WHEREAS, the Board of Directors, pursuant to the authority conferred upon
the Board of Directors by the Amended and Restated Certificate of Incorporation
of the Company, and pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, desires to adopt resolutions providing
for the designation, preferences and relative, participating, optional or other
rights, and the qualifications, limitations or restrictions thereof, of the
Series C Convertible Preferred Stock;
NOW, THEREFORE, BE IT RESOLVED, that pursuant to the authority granted to
and vested in the Board of Directors of the Company in accordance with the
provisions of the Amended and Restated Certificate of Incorporation, the Board
of Directors hereby creates a series of convertible preferred stock, with a par
value of $0.01 per share, of the Company and hereby states the designation and
number of shares, and fixes the relative rights, preferences and limitation
thereof (in addition to the provisions in the Amended and Restated Certificate
of Incorporation that are applicable to the preferred stock of all series) as
follows:
Series C Convertible Preferred Stock
Section 1. Designation and Amount. The shares of such series shall be
designated as Series C Convertible Preferred Stock, with a par value of $0.01
per share (the "Series C Convertible Preferred Stock"), and the number of shares
constituting such series shall be one million two hundred thousand (1,200,000).
Section 2. Dividends. The holders of shares of Series C Convertible
Preferred Stock shall be entitled to receive dividends, when, as and if declared
by the Board of Directors or a duly authorized committee thereof, out of funds
legally available for the payment of dividends. The amount of dividends payable
in respect of each share of Series C Convertible Preferred Stock shall be equal
to the result obtained by multiplying (a) the number of shares (including
fractions) of the Company's Common Stock, $0.01 par value per share (the "Common
Stock"), into which such share of Series C Convertible Preferred Stock is then
convertible in accordance with Section 4 hereof (whether or not the Trigger Date
(as defined in Section 4K hereof) has yet occurred) by (b) the amount of
dividends declared and paid on each share of the Common Stock. No dividend shall
be paid or declared on any share of the Common Stock, unless a dividend, payable
in the same consideration and manner, is simultaneously paid or declared, as the
case may be, on each share of Series C Convertible Preferred Stock in an amount
determined as set forth above nor shall any dividend be paid or declared on any
share of Series C Convertible Preferred Stock unless a dividend, payable in the
same consideration and manner, is simultaneously paid or declared, as the case
may be, on each share of the Common Stock, in each case without preference or
priority of any kind. For purposes of this Section 2, the term "dividends" shall
include any pro rata distribution by the Company of cash, property, securities
(including, but not limited to, rights, warrants or options) or
2
<PAGE>
other property or assets to the holders of the Common Stock, whether or not paid
out of capital, surplus or earnings.
Section 3. Liquidation Preferences. Upon any liquidation, dissolution or
winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior to the Series C Convertible Preferred Stock
unless, prior thereto, the holders of shares of Series C Convertible Preferred
Stock shall have received an amount equal to $10.00 per share. Following the
payment of the full amount of such liquidation preference, no additional
distributions shall be made to the holders of shares of Series C Convertible
Preferred Stock. If, upon any liquidation, dissolution or winding up of the
Company, the assets of the Company, or proceeds thereof, distributable among the
holders of shares of Series C Convertible Preferred Stock or any capital stock
ranking on a par with the Series C Convertible Preferred Stock upon liquidation,
dissolution or winding up of the Company, shall be insufficient to pay in full
the preferential amounts to which such stock would be entitled, then such
assets, or the proceeds thereof, shall be distributable among such holders
ratably in accordance with the respective amounts which would be payable on such
shares if all amounts payable thereon were payable in full.
Section 4. Conversion Rights, Antidilution Provisions.
A. Following the Trigger Date (as defined in subparagraph K of this Section
4), shares of the Series C Convertible Preferred Stock shall be convertible, in
whole or in part, at the option of either the holder or the Company, into Common
Stock, at any time or from time to time, subject to the following terms and
conditions. The Series C Convertible Preferred Stock shall not be convertible
into any shares of Common Stock unless and until the Trigger Date has occurred.
B. Following the Trigger Date, the shares of the Series C Convertible
Preferred Stock shall be convertible at the principal executive offices of the
Company, and at such other office or offices, if any, as the Board of Directors
may designate, into fully paid and nonassessable shares of Common Stock of the
Company, at an initial conversion rate of ten (10) shares of Common Stock for
each share of Series C Convertible Preferred Stock, subject to adjustment as
described in this Section 4.
C. In order to convert shares of the Series C Convertible Preferred Stock
into Common Stock, the holder thereof shall surrender, after the Trigger Date,
at any office hereinabove mentioned the certificate or certificates therefor,
duly endorsed or assigned to the Company or in blank, and give written notice to
the Company at such office that such holder elects to convert such shares.
Shares of the Series C Convertible Preferred Stock shall be deemed to have been
converted immediately prior to the close of business on the day of the surrender
of such shares for conversion in accordance with the foregoing provisions, and
the person or persons entitled to receive the Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such Common Stock at such time. As promptly as practicable on or after the
conversion date, the Company shall issue and shall deliver at such office a
certificate or certificates for the number of full shares of Common Stock
issuable upon such conversion, together with payment in lieu of any fraction of
a share, as hereinafter provided, to the person or persons entitled to receive
the same.
3
<PAGE>
D. At any time after the Trigger Date the Company, by written notice to any
or all holders of the Series C Convertible Preferred Stock, may require such
holder or holders to convert, in whole or in part, the Series C Convertible
Preferred Stock into Common Stock. Within thirty days after the receipt of such
written notice, the holder or holders thereof shall cause that number of shares
of Series C Convertible Preferred Stock as specified in such written notice to
be converted into Common Stock in the manner described in, and subject to the
provisions of, subparagraph C of this Section 4.
E. If at any time the Company shall subdivide or combine its outstanding
shares of Common Stock into a different number of shares of Common Stock, each
share of Series C Convertible Preferred Stock shall thereafter be convertible
into the same number of shares of Common Stock to which the holder of such
shares of Series C Convertible Preferred Stock would thereafter have been
entitled had such shares of Series C Convertible Preferred Stock been converted
into Common Stock immediately prior to the effective date of such subdivision or
combination.
F. If there occurs any capital reorganization or any reclassification of
the capital stock of the Company or consolidation or merger of the Company with
or into another corporation or entity, each share of Series C Convertible
Preferred Stock shall thereafter be convertible into, in lieu of Common Stock,
the same kind and amounts of securities or other assets, or both, which were
issuable or distributable to the holders of shares of outstanding Common Stock
of the Company upon such reorganization, reclassification, consolidation or
merger in respect of that number of shares of Common Stock into which such share
of Series C Convertible Preferred Stock would have been converted had such share
of Series C Convertible Preferred Stock been converted into Common Stock
immediately prior to such reorganization, reclassification, consolidation or
merger.
G. Upon any event described in subparagraphs E and F of this Section 4, the
Company shall promptly mail to each holder of Series C Convertible Preferred
Stock a notice which shall describe such event and the change in the number of
shares or other assets or securities issuable upon the conversion of Series C
Convertible Preferred Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
H. The Company shall at all times reserve and keep available, free from
pre-emptive rights, out of its authorized but unissued Common Stock, for the
purpose of effecting the conversion of the Series C Convertible Preferred Stock,
the full number of shares of Common Stock then issuable upon the conversion of
all shares of Series C Convertible Preferred Stock then outstanding and shall
take all such action and obtain all such permits or orders as may be necessary
to enable the Company lawfully to issue such Common Stock upon such conversion.
I. No fractional shares of Common Stock shall be issued upon conversion,
but, instead of any fraction of a share which would otherwise be issuable, the
Company shall pay a cash adjustment in respect of such fraction.
J. The Company will pay any and all taxes (excluding federal, state and
local income taxes) that may be payable in respect of the issue or delivery of
shares of Common Stock upon conversion of the Series C Convertible Preferred
Stock pursuant hereto. The Company shall not, however, be required to pay any
tax which may be payable in respect of any transfer involved in the
4
<PAGE>
issue and delivery of shares of Common Stock in a name other than that in which
the shares of Series C Convertible Preferred Stock so converted were registered,
and no such issue or delivery shall be made unless and until the person
requiring such issue has paid to the Company the amount of any such tax, or has
established to the satisfaction of the Company that such tax has been paid.
K. As used herein, the term "Trigger Date" means the date of the
certification of the vote of stockholders of the Company held at any annual or
special meeting of stockholders of the Company at which a quorum is present and
at which the issuance of Common Stock upon conversion of the Series C
Convertible Preferred Stock is approved by the holders of a majority of the
shares of Common Stock voted at such meeting, provided that the total vote cast
on the proposal represents over 50% in interest of all securities entitled to
vote on the proposal.
Section 5. No Redemption. The Series C Convertible Preferred Stock shall
not be redeemable.
Section 6. Voting Rights. The holders of the Series C Convertible Preferred
Stock shall be entitled to that number of votes per share of Series C
Convertible Preferred Stock equal to the number of shares of Common Stock into
which such share of Series C Convertible Preferred Stock is then convertible in
accordance with Section 4 hereof (whether or not the Trigger Date has yet
occurred) at all meetings of stockholders of the Company; provided that shares
of the Series C Convertible Preferred Stock shall not be entitled to vote on the
approval of the issuance of Common Stock upon conversion of the Series C
Convertible Preferred Stock referred to in subparagraph K of Section 4.
Section 7. Exchange. Certificates representing shares of the Series C
Convertible Preferred Stock and, if converted in accordance with the terms and
conditions hereof, after conversion thereof into Common Stock, certificates
representing such shares, shall be exchangeable, at the option of the holder,
for a new certificate or certificates of the same or different denominations
representing in the aggregate the same number of shares of Series C Convertible
Preferred Stock or shares of Common Stock, as the case may be.
Section 8. Shares to be Retired. All shares of Series C Convertible
Preferred Stock which are converted into Common Stock shall revert to the status
of authorized but unissued shares of preferred stock of the Company but shall
not thereafter be reissued as shares of Series C Convertible Preferred Stock.
RESOLVED FURTHER, that, the Chief Executive Officer, the Chief Financial
Officer and each other Senior Officer of the Company (each an "Authorized
Officer") and the Secretary are hereby authorized and directed, for and on
behalf of the Company, to file promptly with the Secretary of State of Delaware
the Certificate of Designation, Preferences and rights of the Series C
Convertible Preferred Stock (the "Certificate");
RESOLVED FURTHER, that, simultaneously with the filing of the Certificate
with the Secretary of the State of Delaware, there is hereby reserved and set
aside out of the Company's authorized but unissued Common Stock 12,000,000
shares of Common Stock for issuance upon conversion of the Series C Convertible
Preferred Stock.
5
<PAGE>
RESOLVED FURTHER, that all prior resolutions adopted by the Board of
Directors in April and May 1997 relating to the designation of the Company's
Series C Convertible Preferred Stock are hereby rescinded.
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Coastal Physian Group, Inc. for the 12 months ended
December 31, 1997, and is qualified in its entirety by reference to such
financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,921
<SECURITIES> 5,735
<RECEIVABLES> 23,612
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,676
<PP&E> 10,342
<DEPRECIATION> 0
<TOTAL-ASSETS> 96,096
<CURRENT-LIABILITIES> 82,825
<BONDS> 0
0
0
<COMMON> 375
<OTHER-SE> 61,802
<TOTAL-LIABILITY-AND-EQUITY> 96,096
<SALES> 424,841
<TOTAL-REVENUES> 424,841
<CGS> 490,576
<TOTAL-COSTS> 489,123
<OTHER-EXPENSES> 15,536
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,285
<INCOME-PRETAX> (83,381)
<INCOME-TAX> (1,400)
<INCOME-CONTINUING> (81,981)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (81,981)
<EPS-PRIMARY> (3.08)
<EPS-DILUTED> (3.08)
</TABLE>
