38
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
{X} Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
{ } Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to _________
Commission File Number 001-13460
COASTAL PHYSICIAN GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1379244
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2828 CROASDAILE DRIVE, DURHAM, NC 27705
Address of principal executive offices) (Zip Code)
(919) 383-0355
(Registrant's telephone number including area code)
NONE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
{X} Yes { } No
As of October 31, 1998 there were outstanding 37,790,345 shares
of common stock, par value $.01 per share.
COASTAL PHYSICIAN GROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December
31, 1997 and September 30, 1998 (Unaudited)
Unaudited Consolidated Statements of
Operations
Unaudited Consolidated Condensed
Statements of Cash Flows
Notes to Consolidated Financial Statements
(Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 4. - Matters Voted Upon by Shareholders
Item 5. - Other Information
Item 6. - Exhibits and Reports on Form 8-K
SIGNATURES
COASTAL PHYSICIAN GROUP, INC.
Consolidated Balance Sheets
(In thousands, except per share data)
September December
30, 31,
1998 1997
Assets (unaudite
d)
Current assets:
Cash and cash equivalents 7,453 8,921
Marketable securities 2,028 5,735
Trade accounts receivable, net 16,925 23,612
Reserves held by NCFE 6,953 6,396
Accounts receivable, other 5,453 12,684
Receivables from related party 6,169 9,405
Prepaid expenses and other current 6,988 7,923
assets
Total current assets 51,969 74,676
Property and equipment, at cost, less
accumulated depreciation 8,879 10,342
Excess of cost over fair value of net
assets acquired, net 2,314 2,450
Other assets 8,230 8,628
Total assets 71,392 96,096
Liabilities and Shareholders' Equity
(Deficit)
Current liabilities:
Current maturities and other short-term
borrowings 16,793 2,529
Accounts payable 19,107 31,364
Income taxes payable 1,147 1,359
Accrued physicians fees and medical 18,261 31,431
costs
Accrued expenses 10,659 16,142
Total current liabilities 65,967 82,825
Long-term debt, excluding current 74,695 74,698
maturities
Total liabilities 140,662 157,523
Deferred credit on business transferred
net of
note receivable 2,794 ---
Shareholders' deficit:
Preferred stock $.01 par value; shares
authorized 10,000; issued and
outstanding 4
445 and 0, respectively
Common stock $.01 par value; shares
authorized
100,000; shares issued and 377 375
outstanding
37,700 and 37,493, respectively
Additional paid-in capital 162,811 160,374
Common stock warrants 1,582 1,582
Retained earnings (accumulated deficit) (237,065) (223,912)
Accumulated comprehensive income 227 154
Total shareholders' deficit (72,064) (61,427)
Total liabilities and shareholders'
deficit 71,392 96,096
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Three months ended
September 30,
1998 1997
Operating revenue, net 79,392 99,595
Costs and expenses:
Physician and other provider services 63,359 84,903
Medical support services 8,520 8,894
Selling, general and administrative 7,860 19,392
Total costs and expenses 79,739 113,189
Operating loss (347) (13,594)
Other income (expense):
Interest expense (2,708) (2,837)
Interest income 618 83
Other, net (8) (621)
Total other expense (2,098) (3,375)
Loss before income taxes (2,445) (16,969)
Benefit for income taxes --- (1,400)
Net loss (2,445) (15,569)
Basic and diluted loss per share (0.06) (0.64)
Weighted average number of shares
outstanding 37,700 24,415
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Nine months ended
September 30,
1998 1997
Operating revenue, net 245,961 335,805
Costs and expenses:
Physician and other provider services 196,994 267,824
Medical support services 24,892 33,048
Selling, general and administrative 30,549 72,842
Total costs and expenses 252,435 373,714
Operating loss (6,474) (37,909)
Other income (expense):
Interest expense (7,662) (12,591)
Interest income 854 545
Other, net 129 (207)
Total other expense (6,679) (12,253)
Loss before income taxes (13,153) (50,162)
Benefit for income taxes --- (1,400)
Net loss (13,153) (48,762)
Basic and diluted loss per share (0.35) (2.01)
Weighted average number of shares
outstanding 37,637 24,311
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(In thousands)
Nine months ended
September 30,
1998 1997
Net cash provided by (used in)
operating activities (12,154) (2,862)
Cash flows from investing activities:
Sales of marketable securities and
investments, net 930 (816)
Sales (purchases) of property and
equipment, net (991) 456
Divestiture of subsidiaries, net of
cash divested (5,957) 4,890
Net cash provided by (used
in) (6,018) 4,530
investing activities
Cash flows from financing activities:
Repayments of long-term debt (4,037) (92,086)
Borrowings on long-term debt 18,298 75,585
Proceeds from issuance of preferred 2,065 10,000
stock
Proceeds from issuance of common 378 311
stock
Net cash provided by (used
in) 16,704 (6,190)
financing activities
Net increase (decrease)in
cash and cash equivalents (1,468) (4,522)
Cash and cash equivalents at beginning
of period 8,921 10,239
Cash and cash equivalents at end of
period 7,453 5,717
Supplemental disclosures of cash flow
information:
Cash payments (refunds) during
the period for:
Interest 7,655 8,436
Income taxes 212 (4,401)
See accompanying notes to consolidated financial statements.
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying consolidated financial statements of Coastal
Physician Group, Inc. and its subsidiaries (the "Company" or
"Coastal") are unaudited and, in the opinion of management,
include all adjustments which are necessary for a fair
presentation. The unaudited consolidated financial statements
should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. Operating results for the interim periods
presented are not necessarily indicative of the results that may
be expected for the fiscal year ending December 31, 1998.
(2) Comprehensive Income
The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." Statement
130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of this
Statement requires that unrealized gains or losses on the
Company's available-for-sale securities be included in other
comprehensive income, which in prior periods were reported
separately in shareholders' equity. Prior year financial
statements have been reclassified to conform to the requirements
of Statement 130.
The components of comprehensive income, net of related tax, for
the quarter and nine-month periods ended September 30, 1998 and
1997 are as follows:
In thousands of Three months ended Nine months ended
dollars September 30 September 30
1998 1997 1998 1997
Net loss $(2,445) $(15,569) $(13,153) $(48,762)
Unrealized gains
(losses)on securities 80 19 73 (55)
Comprehensive Income $(2,525) $(15,550) $(13,080) $(48,817)
The components of accumulated other comprehensive income, net of
related tax, at September 30, 1998 and December 31, 1997 are as
follows:
In thousands of dollars September December
30,1998 31, 1997
Unrealized gains
(losses)on securities $ 73 $ 18
Accumulated other
comprehensive income $ 227 $ 154
(3) Subsequent events
On October 30, 1998, the Company completed the sale of Health
Enterprises, Inc., ("HEI") whose primary operating subsidiary is
Healthplan Southeast, Inc. ("HPSE"), to Steven M. Scott, M.D.
(the "Purchaser"). The Purchaser is the Chief Executive Officer
and the largest shareholder of the Company. The Purchaser
acquired all of the outstanding stock of HEI in a transaction
which was effective as of October 1, 1998 for financial reporting
purposes. The Net Proceeds of $15 million were used to decrease
debt.
For the three months and nine months ended September 30, 1998
HPSE's revenues and operating losses included in the Company's
consolidated results of operations were:
Amounts in Three months Nine months
thousands ended ended
September 30, September 30,
1998 1998
Net revenues $ 27,235 $ 82,815
Operating losses (2,611) (5,182)
In March 1998, the Company received regulatory approval of the
sale of Doctor's Health Plan ("DHP") to DHP Holdings LLC., an
entity that is controlled by Dr. Scott. Under terms of the
agreement, 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. For accounting purposes, the
Company did not treat the transaction as a sale because of the
purchaser's affiliation with the Company. Further, for accounting
purposes, the Company did not consider the transaction to be
completed until the note receivable was collected. The difference
between the sales proceeds of $5,993,000 and the Company's basis
of negative $1,801,000 is shown on the Consolidated Balance Sheet
as of September 30, 1998 as a Deferred credit, net of the note
receivable of $5,000,000.
On October 30, 1998, the note receivable was collected. The
proceeds were used to decrease debt. In the fourth quarter of
1998, shareholders' equity will be increased by $7,794,000
accounted for as a capital contribution by the purchaser.
(4) Recently Issued Accounting Pronouncements
Issue 97-2 of the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board (FASB) titled "Application
of FASB Statement No. 94 and APB Opinion 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual
Management Arrangements" applies to contractual management
relationships between a physician practice management company
(PPM) and physician practices where the PPM does not own a
majority of the outstanding voting equity of the physician
practice. The absence of majority ownership may be because
certain states' laws prohibit that ownership or because the PPM
has elected not to own those equity instruments.
The Company is continuing to evaluate the impact of Issue 97-2 on
the accounting for its contractual management relationships.
(5) Reclassifications
Certain reclassifications have been made to the unaudited
consolidated statements of operations for the three months ended
September 30, 1997 and the nine months ended September 30, 1997
to conform to the 1998 presentation for the same periods. Such
reclassifications had no impact on the net loss for the periods
presented.
COASTAL PHYSICIAN GROUP, INC.
Management's Discussion and Analysis Of
Financial Condition and Results of Operations
INTRODUCTION
The following discussion provides an assessment of the Company's
results of operations, liquidity and capital resources, and
trends and uncertainties and should be read in conjunction with
the consolidated financial statements of the Company and notes
thereto included elsewhere in this document.
During 1998, the Company completed its divestiture strategy which
focuses the Company's future operations on emergency medicine
practice management, government services and medical billing and
collections. The Company completed the divestitures of its
primary care clinics, certain non-hospital based contracting and
management operations and its Health Maintenance Organizations
("HMO"). The last HMO, Healthplan Southeast ("HPSE"), was sold
effective October 1, 1998 and, therefore, its operations are
included in the Company's consolidated results of operations for
the three months and nine months ended September 30, 1998. In the
following discussions, divestitures and divested entities refer
to the divestitures completed since the first quarter of 1997 as
follows:
Divested Entities
Subsidiary Type of operations Date Sold
Various clinics Primary care May 1997
Better Health Plan, Inc. Medicaid HMO August 1997
Coastal Physician Services of
South Florida, Inc. Clinic management November 1997
Integrated Provider Networks,
Inc. Primary care November 1997
Practice Solutions, Inc. Clinic billing November 1997
Sunlife OB/GYN Services of
Broward County, Inc. Clinic management November 1997
Doctors Health Plan, Inc. HMO March 1998
RESULTS OF OPERATIONS
Third Quarter Ended September 30, 1998 Compared to the Third
Quarter Ended September 30, 1997.
Net operating revenue ("operating revenue") decreased by
$20,203,000, or 20.3%, for the third quarter of 1998 to
$79,392,000 from $99,595,000 in the third quarter of 1997. The
decrease in operating revenue due to divestitures completed since
the first quarter of 1997 for which prior periods' results were
not restated was approximately $21,166,000, or 21.3%, of the 1997
third quarter revenues.
Operating revenue not related to divested entities or to HPSE
decreased approximately $1,990,000, or 3.7%, in the third quarter
of 1998 from the comparable revenue in the third quarter of 1997.
This decline was primarily the result of a decline in revenues
from the emergency services group of approximately $2,699,000
primarily due to contract terminations. This decline was
partially offset by an increase in revenue of the billing and
collection operations of approximately $956,000. Revenue from
other operations not related to divested entities or to HPSE
decreased approximately $247,000.
Operating revenue for HPSE increased by $2,953,000, or 12.2%, to
$27,235,000 in the three months ended September 30, 1998 from its
comparable revenues of $24,282,000 in the three months ended
September 30, 1997, due primarily to growth in the number of
enrollees.
Operating expenses decreased $33,450,000, or 29.6%, to
$79,739,000 in the third quarter of 1998 from $113,189,000 in the
third quarter of 1997. The decrease in operating expenses due to
divestitures completed, as detailed above, for which prior
periods' results were not restated was approximately $26,691,000,
or 23.7%, of the 1997 third quarter operating expenses.
Costs and expenses not related to divested entities or HPSE
decreased approximately $11,479,000, or 18.4%, in the third
quarter of 1998 from the comparable expenses in the third quarter
of 1997. A decrease in physician and other provider services not
related to divested entities or HPSE represented $5,721,000 of
this decrease and was primarily due to decreases in the number of
contracts within the emergency services group. Medical support
services not related to divested entities or HPSE increased by
$575,000 due primarily to increased expenses of $1,131,000 in the
billing and collection activities resulting from an increased
number of visits processed offset by a decrease of approximately
$556,000 primarily due to decreases in the number of contracts
within the emergency services group. Selling, general and
administrative expenses not related to divested entities or HPSE
decreased $6,333,000 due to decreases in the number of contracts
within the emergency services group, lower corporate medical
malpractice insurance premiums and reductions in corporate
overhead. The Company also received a credit for program fees of
approximately $765,000 relating to its accounts receivable sales
and subservicing programs. This credit is described in the
discussion below relating to interest expense.
HPSE's expenses increased by $4,720,000, or 18.8%, of its
comparable 1997 third quarter operating expenses. This increase
was due primarily to an increase in physician and other provider
services of $4,239,000 associated with the growth in the number
of enrollees in HPSE and overall increased medical costs.
The changes in operating revenue and operating expenses described
above resulted in operating loss of $347,000 for the third
quarter of 1998, compared to an operating loss of $13,594,000 for
the third quarter of 1997. Operating loss in the third quarter
of 1998 includes an operating loss of approximately $2,611,000
attributable to HPSE compared to an operating loss of $844,000
for HPSE in the third quarter of 1997.
The Company's operating margin for the third quarter of 1998 was
negative 0.4% as compared to negative 13.6% for the third quarter
of 1997. The Company's operating margin for the third quarter
of 1998, excluding the results of HPSE and divested operations,
was approximately 2.4% compared to a negative 15.2% for the third
quarter of 1997, excluding the results of HPSE and divested
operations.
Effective for the third quarter of 1998, the Company received
certain credits for interest and certain selling, general and
administrative fees relating to its sales and subservicing
agreements with National Century Financial Enterprises, Inc. and
its affiliates ("NCFE"). The credits arose from incentives
negotiated by the Company with NCFE and were earned by the
Company's commitment to complete its divestiture plan with the
sale of its remaining HMO. Interest expense decreased $129,000,
or 4.5%, to $2,708,000 for the three months ended September 30,
1998 from $2,837,000 for the three months ended September
30,1997. The decrease includes the effect of the credits received
from NCFE of approximately $1,468,000 which were accounted for as
a reduction of interest expense. The decrease in interest
expense net of the credits was approximately $1,339,000 and was
due primarily to the higher outstanding amounts in the accounts
receivable sales and subservicing programs.
Interest income increased by $535,000 due primarily to interest
earned on receivables from a related party.
There was no provision for income taxes recorded for the third
quarter of 1998. In the third quarter of 1997, the Company
recorded a $1,400,000 benefit for income taxes based on the
reversal of a prior provision for income taxes given the
continuing operating losses and net operating loss carryforwards
available. The Company expects to record no tax expense or
benefit, other than as a result of potential asset divestitures,
until the Company utilizes federal and state net operating loss
carryforwards ("NOL"). As of September 30, 1998, the Company had
approximately $170,000,000 and $210,000,000 in NOLs for federal
and state purposes, respectively.
Overall, the Company incurred a net loss of $2,445,000 in the
third quarter of 1998 as compared to a net loss of $15,569,000 in
the third quarter of 1997 for the reasons discussed above.
Weighted average shares outstanding increased 54.4% from
24,415,000 shares in the third quarter of 1997 to 37,700,000
shares in the third quarter of 1998, primarily as a result of
shares issued to Dr. Scott during 1997.
Nine Months Ended September 30, 1998 Compared to the Nine Months
Ended September 30, 1997.
Net operating revenue ("operating revenue") decreased by
$89,844,000, or 26.8%, for the nine months ended September 30,
1998 to $245,961,000 from $335,805,000 in the nine months ended
September 30, 1997. The decrease in operating revenue due to
divestitures completed since the first quarter of 1997 for which
prior periods' results were not restated was approximately
$65,098,000, or 19.4%, for the nine months ended September 30,
1997.
Operating revenue not related to divested entities or to HPSE
decreased approximately $36,272,000 or 19.2%, for the nine months
ended September 30, 1998 from the comparable revenue in the nine
months ended September 30, 1997. This decline was primarily the
result of a decline in revenues from the emergency services group
of approximately $35,246,000, which is primarily due to contract
terminations.
Operating revenue for HPSE increased by $11,526,000, or 16.2%, to
$82,815,000 in the nine months ended September 30, 1998 from its
comparable revenues of $71,289,000 in the nine months ended
September 30, 1997, due primarily to growth in the number of
enrollees.
Operating expenses decreased $121,279,000, or 32.5%, to
$252,435,000 in the nine months ended September 30, 1998 from
$373,714,000 in the nine months ended September 30, 1997. The
decrease in operating expenses due to divestitures completed, as
detailed above, for which prior periods' results were not
restated, was approximately $80,773,000, or 21.7%, of the
operating expenses for the nine months ended September 30, 1997.
Costs and expenses not related to divested entities or HPSE
decreased approximately $57,826,000, or 27.2%, in the nine months
ended September 30, 1998 from comparable expenses in the nine
months ended September 30, 1997. Physician and other provider
services not related to divested entities or HPSE decreased by
$33,626,000 and was primarily due to decreases in the number of
contracts within the emergency services group and government
services group. Medical support services not related to divested
entities or HPSE decreased by $2,132,000. This was primarily due
to approximately $3,515,000 of decreases in the number of
contracts within the emergency services group, partially offset
by increased expenses of approximately $1,039,000 in the billing
and collection activities resulting from an increased number of
visits processed. Selling, general and administrative expenses
not related to divested entities or HPSE decreased $22,068,000.
Approximately $8,796,000 of this decrease was due to decreases in
the number of contracts within the emergency services group,
reduced headcount and office closings and lower corporate medical
malpractice insurance premiums. Approximately $5,662,000 was the
result of decreased telecommunication and information technology
costs and approximately $8,448,000 of the decrease arose from
reductions in corporate overhead including reductions in
personnel and the closure of certain billing and collection
offices.
HPSE's expenses increased by $17,320,000, or 24.5%, of its
comparable operating expenses in the nine months ended September
30, 1997. This increase was due primarily to an increase in
physician and other provider services of $15,870,000 associated
with the growth in the number of enrollees in HPSE and overall
increased medical costs.
The changes in operating revenue and operating expenses described
above resulted in an operating loss of $6,474,000 for the nine
months ended September 30, 1998, compared to an operating loss of
$37,909,000 for the nine months ended September 30, 1997. The
operating loss for the nine months ended September 30, 1998
includes an operating loss of approximately $5,181,000
attributable to HPSE compared to operating income of $612,000 for
the nine months ended September 30, 1997.
The Company's operating margin for the nine months ended
September 30, 1998 was a negative 2.6% as compared to negative
11.3% for the nine months ended September 30, 1997. The
Company's operating margin for the nine months ended September
30, 1998, excluding the results of HPSE and divested operations,
was a negative 1.2% compared to a negative 12.4% for the nine
months ended September 30, 1997, excluding the results of HPSE
and divested operations.
Effective for the third quarter of 1998, the Company received
certain credits for interest and certain selling, general and
administrative fees relating to its sales and subservicing
agreements with National Century Financial Enterprises, Inc. and
its affiliates ("NCFE"). The credits arose from incentives
negotiated by the Company with NCFE and were earned by the
Company's commitment to complete its divestiture plan with the
sale of its remaining HMO. Interest expense decreased $4,929,000,
or 39.1%, to $7,662,000 for the nine months ended September 30,
1998 from $12,591,000 for the nine months ended September
30,1997. The decrease includes credits received from NCFE of
approximately $1,468,000 which were accounted for as a reduction
of interest expense. The remaining decrease in interest expense
of $3,461,000 was due primarily to a change in the Company's debt
structure and lower interest rates in 1998.
There was no provision for income taxes recorded for the nine
months ended September 30, 1998. In the nine months ended
September 30, 1997, the Company recorded a $1,400,000 benefit
for income taxes based on the reversal of a prior provision for
income taxes given the continuing operating losses and net
operating loss carryforwards available. The Company expects to
record no tax expense or benefit, other than as a result of
potential asset divestitures, until the Company utilizes federal
and state net operating loss carryforwards ("NOL"). As of
September 30, 1998, the Company has approximately $170,000,000
and $210,000,000 in NOLs for federal and state purposes,
respectively.
Overall, the Company incurred a net loss of $13,153,000 in the
nine months ended September 30, 1998 as compared to a net loss of
$48,762,000 in the nine months ended September 30, 1997 for the
reasons discussed above.
Weighted average shares outstanding increased 54.8% from
24,311,000 shares in the nine months ended September 30, 1997 to
37,637,000 shares in the nine months ended September 30, 1998,
primarily as a result of shares issued to Dr. Scott during 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the nine months ended
September 30, 1998 was $12,154,000 arising from the net loss of
$13,153,000 adjusted for $5,000,000 of non-cash items,
$15,000,000 of cash provided by accounts receivable related items
offset by $19,000,000 cash used to reduce accounts payable and
accrued expenses.
On October 30, 1998, the Company completed the sale of Health
Enterprises, Inc., whose primary operating subsidiary is HPSE, to
Dr. Scott (the "Purchaser"). The Purchaser acquired all of the
outstanding stock of HPSE in a transaction which was effective as
of October 1, 1998 for financial reporting purposes. The Net
Proceeds of $15 million were used to decrease debt.
Also, on October 30, 1998, the Company received $5,000,000 for
payment in full of a note receivable from DHP Holdings, Inc.
arising from the sale of Doctors Healthplan, Inc. The Company
used the proceeds to decrease debt.
The Company's strategic business plan provides for improving the
profitability of its core businesses, reducing contract attrition
rates and cutting overhead costs. The Company has taken the
following actions in accordance with that plan.
Coastal Physician Services, Inc. ("CPS") and its operating
subsidiaries continue to implement the Practice Partners Program
which is designed to better match the payments made to
independent contractor physicians to the revenue generated by the
independent contractors. Marketing activities have been increased
which management believes may lead to moderate growth in new
contracts in 1999, but no significant growth is anticipated in
the fourth quarter of 1998.
Healthcare Business Resources, Inc. ("HBR") continues to
introduce the "T-Chart" system to its clients. The "T-Chart"
system affords the physicians a better method of documenting
medical treatment, while helping HBR streamline the process of
coding and billing. Management believes that the use of the T-
Chart system will reduce processing costs.
Although these actions are expected to have a positive effect on
the Company's financial performance, there can be no assurances
that these actions will be successful or that improved financial
results will be achieved without additional revenue, margin
improvements and cost reductions.
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.
During the second quarter of 1998, the Company was been advised
by the New York Stock Exchange ("NYSE") that it was not in
compliance with certain of the NYSE's continued listing criteria.
Management of the Company has had discussions with, and furnished
current and projected financial information to, representatives
of the NYSE concerning this matter. The NYSE also advised the
Company that it will review on a quarterly basis the Company's
financial performance in relation to its projected business plan,
and that continued listing in the future may be dependent on such
financial performance.
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. This review has not been completed, but major applications
covering billing and certain general ledger applications have
been reviewed and are Year 2000 compliant. The balance of the
systems reviews and modifications, if any are required, are
expected to be completed before the Company would experience any
adverse consequences.
The Company believes that its computer systems, upon completion
of the systems reviews and modifications, if any are required,
will not be adversely impacted. 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 is also working with its major suppliers of computer
and telecommunications services to determine their state of
readiness. The Company is dependent upon those suppliers for
ensuring that their operating system software and related
software products, including communications software, will be
Year 2000 compliant.
The Company believes that Year 2000 issues, if not properly
addressed by commercial insurance companies and other entities
that process medical claims for Medicare, Medicaid and CHAMPUS
that reimburse the Company for medical services, would have a
significant impact upon the operating results of the Company.
If the Company's computer and telecommunications services were
not available for an extended period of time or if claims were
not timely reimbursed by payors, the Company's cash flow could be
severely impacted. At this time, the Company believes that the
major suppliers of computer and telecommunications services will
be Year 2000 compliant prior to December 31, 1999. The Company
will continue to monitor progress by commercial insurance
companies and other entities that process medical claims for
Medicare, Medicaid and CHAMPUS.
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 the level and timing
of improvements in operating results and cash flow; the
possibility of poor accounts receivable generation, collection
and/or reimbursement experience; the possibility of increased
medical expenses due to increased utilization; the possibility
that the Company may not be able to improve operations or execute
its strategy as planned; and other important factors disclosed
from time to time in the Company's Form 10-K, Form 10-Q and other
Securities and Exchange Commission filings.
PART II - OTHER INFORMATION
Item 4. - Matters Voted Upon By Shareholders
The Annual Meeting of Shareholders of the Company was held on
August 14, 1998. At such meeting the following members were
elected to the Board of Directors.
Number of Shares Voted
For Abstain
Steven M. Scott, M.D. 34,098,327 290,629
Bertram E. Walls, M.D. 34,084,738 301,216
Sherman M. Podolsky, M.D. 34,097,738 288,718
The following directors' terms of office continued after the
meeting:
Eugene F. Dauchert, Jr. Edward L. Suggs, Jr.
Charles E. Potter Mark J. Pastin
The vote taken on the proposal to amend the Company's Amended and
Restated Certificate of Incorporation was as follows:
For 23,419,634 Against 650,774 Abstain 15,190
The vote taken on the proposal to approve the appointment of KPMG
Peat Marwick LLP, as the Company's independent certified public
accountants for the Corporation for the fiscal year ending
December 31, 1998 was as follows:
For 34,217,111 Against 129,939 Abstain 13,906
Item 5. - Other Information
Divestiture of Assets
On October 30, 1998, the Company completed the sale of Health
Enterprises, Inc. ("HEI"), whose primary operating subsidiary is
Healthplan Southeast ("HPSE"), to Dr. Scott (the "Purchaser").
The Purchaser acquired all of the outstanding stock of HEI in a
transaction which was effective as of October 1, 1998 for
financial reporting purposes. The Purchase Price of $15 million
was used to decrease debt.
HPSE is a Health Maintenance Organization licensed to operate in
the State of Florida with approximately 77,000 members. For the
nine months ended September 30, 1998, HEI reported unaudited
consolidated revenues of approximately $82,815,000 and net losses
of approximately $5,181,000 million. As a result of these
losses, the Company was required to make significant capital
contributions to HPSE in 1998 prior to its sale, and the Company
anticipated that substantial additional capital contributions
would be required during the balance of 1998.
The Company retained the investment banking firm of Salomon Smith
Barney, Inc. to advise the Company, to assist in completing the
sale and to render a fairness opinion regarding the financial
aspects of the transaction. After a thorough review of the
operations of HPSE 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 purchase
price was determined by negotiation between the Company and the
Purchaser.
The Florida Department of Insurance issued a Consent Order
granting approval of the Purchaser's acquisition of the
outstanding voting securities of HEI.
For a period of 12 months from the closing, the Company has the
right to market HEI to potential third party purchasers. If the
Company or the Purchaser locates a third party purchaser before
October 31, 1999, who is willing to purchase HEI at a price that
exceeds the Strike Price, then Coastal may elect to have the sale
take place. If the Company elects to have the sale take place 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
HEI 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 HEI
plus Purchaser's out-of-pocket costs to acquire, finance and
operate HEI minus any distributions or dividends Purchaser
receives from HEI.
If the sale takes place pursuant to a letter of intent, term
sheet or definitive agreement entered into on or before December
31, 1998, the proceeds of the sale in excess of the Strike Price
will be remitted to the Company. If the sale takes place pursuant
to a letter of intent, term sheet or definitive agreement entered
into after December 31, 1998, the Purchaser will be entitled to
receive from net proceeds (after payment of marketing expenses of
the sale to the third party) the greater of (i) Purchaser's net
investment plus a twelve percent (12%) annualized return on such
amounts or (ii) an amount equal to Purchaser's net investment
plus fifty percent (50%) of the difference between (x) the amount
of the net proceeds less the Company's investment banker fees and
expenses in selling HEI to the Purchaser minus (y) the
Purchaser's net investment, and the Company would be entitled to
receive the balance of the proceeds. In all potential sales to
third party purchasers, the Purchaser has the right to retain
ownership of HEI 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 a partial
release of its non-compete agreement with Steven M. Scott, M.D.
This partial release allows Steven M. Scott, M.D. and his
affiliates to operate health maintenance organizations and
similar organizations.
FINANCIAL STATEMENTS AND EXHIBITS
a. Not applicable.
b. The pro forma financial information required is included
herein.
c. Not applicable.
Item 6. - Exhibits and Reports on Form 8-K
Exhibit
Number Description
2.1 Stock Purchase Agreement dated October 30, 1998, between
Coastal Physician Group, Inc. and HEI Holdings, LLC. with
Exhibit B - Partial Release of Non-Compete Provisions of
Employment Agreement between Steven M. Scott, M.D. and
Coastal Physician Group, Inc.
Reports on Form 8-K - None.
COASTAL PHYSICIAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION
The following unaudited condensed consolidated pro forma balance
sheet as of September 30, 1998, and the unaudited condensed
consolidated pro forma statements of operations for the nine
month period ended September 30, 1998 and the year ended December
31, 1997 have been prepared to give effect to the sale of certain
assets of Health Enterprises, Inc. ("HEI"). The adjustments to
the unaudited condensed consolidated pro forma balance sheet have
been prepared as if the transaction was consummated on September
30, 1998, while the adjustments to the unaudited condensed
consolidated pro forma statements of operations have been
prepared as if the transaction was consummated as of the
beginning of the respective periods presented. The unaudited
condensed consolidated pro forma financial information has been
adjusted to reflect the effect of the pro forma adjustments
described in the accompanying notes and is not necessarily
indicative of the consolidated financial position or results of
operations had the sale transaction actually been effected as of
the assumed dates. The unaudited condensed consolidated pro
forma financial information should be read in conjunction with
the Company's unaudited condensed consolidated financial
statements and notes thereto as of September 30, 1998 and for the
nine months then ended included in the Company's Quarterly Report
in this Form 10-Q.
COASTAL PHYSICIAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
September 30, 1998
(IN THOUSANDS)
PRO FORMA
HISTORIC ADJUSTMEN PRO
AL TS FORMA
ASSETS
Current assets:
(a,b
Cash and cash equivalents 7,453 (9,330) ,d) (1,877)
Marketable securities 2,028 (2,028) (a)
Trade accounts receivable, net 16,925 (1,452) (a) 15,473
Reserves held by NCFE 6,953 6,953
Accounts receivable, other 5,453 (1,258) (a) 4,195
Receivables from related 6,169 6,169
party
Prepaid expenses and other
current assets 6,988 (142) (a) 6,846
Total current assets 51,969 (14,210) 37,759
Property and equipment, at
cost, 8,879 (1,055) (a) 7,824
less accumulated
depreciation
Excess of cost over fair value
of 2,314 2,314
net assets acquired,
net
Other assets 8,230 (1,281) (a) 6,949
Total assets 71,392 (16,546) 54,846
LIABILITIES AND SHAREHOLDERS'
EQUITY
(DEFICIT)
Current liabilities:
Current maturities and other
short-term borrowings 16,793 16,793
Accounts payable 19,107 (203) (a) 18,904
Income taxes payable 1,147 1,147
Accrued physician fees
and medical costs 18,261 (9,168) (a) 9,093
Accrued expenses 10,659 (593) (a) 10,066
Total current liabilities 65,967 (9,964) 56,003
Long-term debt, excluding
current maturities 74,695 (15,000) (d) 59,695
Total liabilities 140,662 (24,964) 115,698
Deferred credit on business
transferred, net of note
receivable 2,794 2,794
Shareholders' deficit:
Preferred stock $.01 par
value; shares authorized
10,000; issued and outstanding
445 and 0 respectively 4 4
Common stock $.01 par value;
shares authorized 100,000;
shares issued and outstanding
37,700 and 37,493, 377 377
respectively
Additional paid-in capital 162,811 8,635 (c) 171,446
Common stock warrants 1,582 1,582
Retained earnings (accumulated
deficit) (237,065 (237,06
) 5)
Accumulated comprehensive 227 (217) (a) 10
income
Total shareholders'
deficit (72,064) 8,418 (63,646
(deficit) )
Total liabilities and
share- 71,392 (16,546) 54,846
holders deficit
COASTAL PHYSICIAN GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA BALANCE SHEET
September 30, 1998
DETAILS OF PRO FORMA ADJUSTMENTS
(a) To record the disposition of the assets and liabilities of
HEI.
(b) To record the proceeds from sale of $15.0 million.
(c) To record the difference in net book value and the net
proceeds accounted for as a capital contribution and credited
directly to additional paid-in-capital.
(d) To record the reduction of obligations to NCFE.
COASTAL PHYSICIAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
HISTORICA ADJUSTMENT PRO
L S FORMA
Operating revenue, net 245,961 (82,815) (a) 163,146
Costs and expenses:
Physician and other provider 196,994 (78,155) (a) 118,839
services
Medical support services 24,892 24,892
Selling, general and 30,549 (9,842) (a) 20,707
administrative
Total costs and expenses 252,435 (87,997) 164,438
Operating loss (6,474) 5,182 (1,292)
Other income (expense):
Interest expense (7,662) (7,662)
Interest income 854 854
Other, net 129 129
Total other expense (6,679) (6,679)
Loss before income taxes (13,153) 5,182 (7,971)
Benefit for income taxes ---
Net loss (13,153) 5,182 (7,971)
Basic and diluted loss per share (0.35) (0.21)
Weighted average number of shares
outstanding 37,637 37,637
COASTAL PHYSICIAN GROUP, INC.
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
HISTORIC ADJUSTMEN PRO
AL TS FORMA
Operating revenue, net 424,841 (97,336) (a) 327,505
Costs and expenses:
Physician and other provider 359,165 (89,550) (a) 269,615
services
Medical support services 40,720
Selling, general and administrative 90,691 (11,867) (a) 78,824
Total costs and expenses 490,576 (101,417) 389,159
Loss on divested assets, net (1,453) (1,453)
Operating loss (67,188) 4,081 (63,107
)
Other income (expense):
Interest expense (15,536) (15,536
)
Interest income 628 628
Other, net (1,285) (1,285)
Total other expense (16,193) (16,193
)
Loss before income taxes and
extraordinary item (83,381) 4,081 (79,300
)
Benefit for income taxes 1,400 1,400
Net loss (81,981) 4,081 (77,900
)
Basic and diluted loss per share (3.08) (2.93)
Shares used to compute loss per
share, basic and diluted 26,623 26,623
COASTAL PHYSICIAN GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND THE YEAR ENDED DECEMBER 31, 1997
DETAILS OF PRO FORMA ADJUSTMENTS
(a) To record the direct reduction in operating revenue, net,
costs and expenses and other income/expense directly related
to HEI for the periods presented.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
COASTAL PHYSICIAN GROUP, INC.
(Registrant)
Date: November 16, 1998 By: /S/STEVEN M. SCOTT, M.D.
Steven M. Scott, M.D.
President and Chief
Executive Officer
Date: November 16, 1998 By: /S/W. RANDALL DICKERSON
W. Randall Dickerson
Executive Vice President
and Chief Financial Officer
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and
entered into as of October ___, 1998 by and among COASTAL
PHYSICIAN GROUP, INC., a Delaware Corporation ("Coastal" or the
"Seller") and STEVEN M. SCOTT, M.D. ("Purchaser").
W I T N E S S E T H:
WHEREAS, the Seller owns all of the issued and outstanding
stock of Health Enterprises, Inc., a Florida corporation ("HEI"),
and HEI owns all of the issued and outstanding stock of (i)
Healthplan Southeast, Inc., a Florida corporation licensed as a
health maintenance organization under the laws of the State of
Florida ("HPSE"), (ii) Health Management Southeast, Inc. a
Florida corporation which has entered into a Management Services
Agreement to provide management services to HPSE ("HMS"), and
(iii) Medical Data Solutions, Inc., a Florida corporation ("MDS";
HEI, HPSE, HMS and MDS are sometimes collectively referred to as
the "Company" or the "Companies");
WHEREAS, Steven M. Scott, M.D. and his affiliates own the
majority interest of Seller and all of the ownership interests of
Purchaser, and in order to effectively acquire the balance of the
ownership interests of the Companies, concurrently with the
execution and delivery of this Agreement, the Seller is selling
and the Purchaser is purchasing all of the issued and outstanding
stock of HEI (the "HEI 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 HEI 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 the Seller and the
Seller is selling, assigning and transferring to the Purchaser,
the HEI Stock, which is all of the issued and outstanding capital
stock of HEI.
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 October 30, 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 October 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 $15,000,000. The Purchaser will pay the Purchase Price at
Closing in cash or immediately available funds. 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 the
Companies with respect to any taxable period, 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 the Companies 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 THE SELLER
In order to induce the Purchaser to enter into this Agree
ment and the transactions contemplated hereby, the Seller hereby
represents and warrants to the Purchaser as follows:
Section 2.1 Corporate Organization and Authority. The
Seller 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 proper
ties, 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 the Seller in connection with this Agreement will
constitute, the Seller's legal, valid and binding obligations,
enforceable against the Seller in accordance with their respec
tive terms.
The Seller, 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 the Seller pursuant to this
Agreement.
Each of the Companies 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.
Section 2.2 Title to Stock. Except as disclosed on
Schedule 2.2, (i) the Seller is the true and lawful beneficial
and record owner of all the HEI Stock and has good and marketable
title thereto, free and clear of claims, pledges, liens, security
interests, charges or other encumbrances, and (ii) HEI is the
true and lawful beneficial and record owner of all the issued and
outstanding stock of HPSE, HMS and MDS, and HEI 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, the Seller has full right and power and authority to sell,
transfer and deliver the HEI Stock. Upon delivery of the HEI
Stock as contemplated in this Agreement, the Seller will transfer
to the Purchaser valid and marketable title thereto including all
voting and other rights to the HEI Stock free and clear of all
claims, pledges, liens, security interests, charges, or other
encumbrances.
Section 2.3 Financial Statements. The audited financial
statements for HPSE for the year ended December 31, 1997, and all
financial statements filed with the State of Florida Department
of Insurance (the "DOI") since December 31, 1997 for HPSE, which
have been prepared on the statutory basis of accounting, and the
unaudited financial statements of the Company for the year-to-
date period ended September 30, 1998, prepared in accordance with
GAAP (except for the lack of footnotes and year end adjustments),
are attached hereto as Exhibit A. Since the date of the financial
statements, management believes that the Companies have incurred
continuing substantial operating losses. Additional matters
regarding the Companies and their financial statements are
disclosed on Schedule 2.14. Other than as set forth above and as
disclosed on Schedule 2.14, the Seller make no representations
regarding the financial condition, business or affairs of the
Companies.
Section 2.4 Subsidiaries. HEI owns all of the issued and
outstanding shares of HPSE, HMS and MDS. Other than HPSE, HMS
and MDS, HEI 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. The Companies and
their predecessors and any companies acquired by or merged into
them have not used any business names other than "Healthplan
Southeast" and "Discovery Healthplan."
Section 2.6 Compliance with Laws Applicable to Sites.
The Companies have 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 the Companies. Other than as disclosed on Schedule
2.7, the Companies are 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 the Companies. The Companies are not in
default under any such equipment leases and neither the Seller
nor the Companies is 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. Set forth on Schedule 2.9 is a list of any and all
franchises or licenses, any registered trademarks, trademark
applications, service marks, copyrights, trade names and computer
programs held or used by the Companies. Other than as set forth
on Schedule 2.14, neither the Seller nor the Companies has
received written notice of any claims or demands with respect to
such items of intangible personal property and, to the Seller's
and the Companies' best knowledge, there are no claims or demands
against the any of such parties respect to any of such items of
intangible personal property. No proceedings have been
instituted, or are pending against the Seller or the Companies,
or to the knowledge of the Seller and the Companies, have been
threatened against the Seller or the Companies to challenge the
rights of the Seller or the Companies with respect to any such
assets. The Companies have not 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. The Companies 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 the Companies 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.
The Companies are obligated to pay employees of the Companies
under certain circumstances pursuant to the "stay bonus" plan
described on Schedule 2.11(a). Other than the bonus plan
described on Schedule 2.11(a), all employees of the Companies are
employees at will who may be terminated by the respective
employers 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 such employer's standard corporate policy.
Except as described on Schedule 2.11(b), no employment
discrimination or unfair labor practice, charge or complaint
against the Companies has been filed, nor to the knowledge of the
Seller or the Companies, threatened to be filed with any court,
agency or other entity having jurisdiction over the Companies.
Other than as disclosed on Schedule 2.11(b), to the knowledge of
the Seller and the Companies, the Companies have 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 the Companies. None of the employees of the
Companies are represented by any labor organization, nor to the
knowledge of the Seller or the Companies 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. The Companies have 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 the Companies are in compliance with all
applicable provisions of ERISA and the Internal Revenue Code of
1986, as amended, (the "Code"), and the Companies do 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 the Companies.
No employee of the Companies will be entitled to any 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. The Companies do not separately maintain any
plans or other compensation arrangements which provide deferred
or incentive compensation or severance benefits.
Section 2.13 Insurance. The Companies shall deliver prior
to closing copies of the originals of any and all insurance
policies which any of the Companies have in effect covering
itself or its employees, officers or directors, including error
and omissions policies. The Companies have had general liability
insurance and HPSE has had errors and omissions liability
insurance policies in full force and effect from the date HEI was
acquired by the Seller through the Closing Date as part of the
coverage afforded under a policy written to Coastal.
Section 2.14 Compliance with Applicable Laws. Except as
set forth on Schedule 2.14, the Companies are 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 the Companies, and neither the
Seller nor the Companies has 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 the Companies 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) The Companies are 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 the Seller's or the Companies' knowledge,
threatened claim alleging that the Companies are liable under any
Environmental Law, including, without limitation, any
Environmental Law related to the on-site or off-site disposal of
Hazardous Substances. The Companies have not received written
notice from any person, including but not limited to any federal,
state, or local governmental agency, alleging that the Companies
are 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 the Seller's and the Companies' knowledge, there
have been no releases, spills or discharges of Hazardous
Substances on or underneath any of the real property leased by
the Companies and the Companies have 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 the Seller's and the Companies' knowledge threatened
against the Companies or any of their assets, and, except as
disclosed on Schedule 2.16, none of the Seller nor the Companies
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 the Companies'
assets other than inchoate liens for taxes not yet due and
payable. There are no past, pending or to the Seller's and the
Companies' knowledge, threatened audits against the Companies,
except that the Seller is subject to a federal income tax
examination for 1992 through and including 1996. Except as set
forth on Schedule 2.16, all tax returns for the Companies have
been timely filed and are complete and accurate. All returns,
declarations, reports, estimates, information returns and
statements ("Returns") required to be filed under any federal,
state, local or foreign authority by the Seller or the Companies
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 the Seller and the Companies have been fully paid
and the Seller or the Companies have adequate reserves to pay all
taxes not yet due, including any taxes resulting from the
transactions contemplated hereunder. The Seller has included the
Companies as members of its consolidated group for federal income
tax purposes for all taxable years in which the Companies were
properly so includable and will include the Companies as members
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 the Seller or any members of its consolidated group, the
Seller 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 the Companies
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 the Companies, or any affiliate of the
Seller 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 the Companies an amount of
the "consolidated section 382 limitation" of the Coastal
"consolidated group" equal to $50,000 per year. 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 the Seller or the Companies
which materially affect the ability of the Seller to perform
under this Agreement.
Section 2.18 Jurisdictions Doing Business. Florida is the
only jurisdiction in which the Companies have done business.
"Healthplan Southeast" and "Discovery Healthplan" are the only
trade names or other names they have used in that jurisdiction.
Each of the Companies is duly qualified or registered to do
business as a foreign corporation and is 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
(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 the
Companies; notwithstanding the foregoing, the Seller shall be
liable if the 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 the Companies
and meet with representatives of the Companies 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 of the
Companies. Purchaser acknowledges that it has had full and
complete access to all of the books, records and assets of the
Companies and has had the opportunity to personally inspect the
assets, operations and talk with the personnel employed by the
Companies 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 the Companies) as Purchaser deems
adequate, including that described above.
The Purchaser is the Chairman, Chief Executive Officer,
President and majority shareholder of the Seller and, as such, is
aware of and has had access to all financial and operational
information concerning the Companies.
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 BINDING 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.
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 the Companies or
equipment leases for equipment used by the Companies are not
currently in the name of the Companies, 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 or any affiliates of the Seller 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 the Companies shall be
transferred to Purchaser or the Companies 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 the Seller,
including use of hardware and related software, through the end
of 1999 for no charge other than reimbursement of out of pocket
costs, including telecommunications expenses. The out-of-pocket
costs shall be billed by the Seller to Purchaser monthly, and
Purchaser shall timely pay said invoices. The Seller shall not
be obligated to provide any special programming or support
services to Purchaser in connection with Purchaser's use of these
systems. The Seller shall not be obligated to continue to use
the present accounting systems through 1999 and the Seller 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, the Seller 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 the Seller shall assist Purchaser in the
transition to another system.
In consideration of the aforesaid, Purchaser will assist 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 December 31, 1998, the employees of the Companies
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 the Companies 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 the assets of the Companies,
Purchaser shall have the right to terminate this Agreement and
all of Purchaser's obligations hereunder. Upon such termination,
the Seller 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.
The Seller will exercise reasonable efforts to cause the
businesses being purchased by Purchaser to be covered under
Seller's insurance policies through December 31, 1998 with
respect to (i) general liability insurance and (ii) fire and
casualty insurance. The Seller 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 the Seller's insurers
may impose.
Section 5.5 Reserved.
Section 5.6 Marketing of the Companies. For a period of
twelve (12) months following the Closing, the Seller shall have
the right to market the Companies for sale. During this period,
Purchaser agrees that it will not do anything to impede the right
of Coastal to market the Companies; provided that Purchaser may
bring in investors owning up to fifty percent (50%) of the
Companies, so long as such investors are notified of the terms of
this Section 5.6 and agree to be bound thereby; and further
provided that this sentence shall not require Purchaser to
maintain any particular level of funding of the Companies
operations or prevent Purchaser from selling the Companies for a
price less than the Strike Price (defined below) during the
period when Coastal has a right to market the Companies.
Following the Closing, the parties agree to undertake an effort
to market the Companies for sale to a third party purchaser. The
timing and logistics of such a sale shall be discussed and agreed
to by the parties. Purchaser agrees to give the Seller and its
representatives (including investment bankers, accountants and
legal counsel) full and complete access to the books, records,
facilities and personnel of the Companies and full cooperation
that in either case is necessary or appropriate to market the
Companies 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 the Seller or Purchaser locates a
third party purchaser for the Companies during this period at a
price that exceeds the Strike Price, then the Seller may elect to
have the sale take place. If the Seller elects to sell,
Purchaser shall have the right to pay an amount to the Seller
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 the Seller,
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 HEI Stock
pursuant to this Agreement plus (ii) Purchaser's out-of-
pocket costs relating to the acquisition and financing of
the HEI Stock and the operations of the business being
acquired, including interest and finance fees relating
thereto plus (iii) any additional capital contributed to the
Companies by Purchaser after the Effective Date and any
additional capital contributed to finance the operation of
the Companies, minus (iv) the amount of any distributions in
the nature of dividends, redemption of capital stock or
similar payments made to shareholders of HEI.
(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 any and all
expenses paid by Seller relating to the sale to Purchaser
hereunder.
(iv) "Marketing Expenses" shall be the out-of-pocket
costs and expenses of the Seller and Purchaser incurred or
reasonably expected to be incurred in connection with the
sale of the Companies 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) For all sales, Marketing Expenses shall first be
paid or reimbursed. The remaining proceeds shall be paid as
follows:
(A) For any sale made pursuant to a letter of
intent, term sheet or purchase agreement entered into
on or prior to December 31, 1998, Purchaser shall be
entitled to receive Purchaser's Total Cost. For any
sale made pursuant to a purchase agreement entered into
after December 31, 1998, 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 the Seller.
If there is income tax liability to Purchaser arising from
the receipt by the Seller of the amounts Seller is entitled to
receive under this Section, the Seller 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 HPSE
or substantially all of its assets will require the consent and
approval of the DOI.
Section 5.7 Financial Information. For a period of
twelve (12) months following the Closing, or so long as the
Seller has the right to market the Companies, Purchaser shall
cause the Companies to deliver monthly financial statements and
reports to the Seller and shall provide such other information
concerning the financial condition, business operations and
prospects of the Companies as the Seller may reasonably request.
Section 5.8 Release of Scott from Non-Compete. As part
of the Closing, the Seller and Dr. Steven M. Scott agree to enter
into the Partial Release of Non-Compete Agreement attached hereto
as Exhibit B.
ARTICLE VI
DELIVERIES OF SELLER AT CLOSING
The Seller shall deliver the following at the Closing:
Section 6.1 Stock Certificates. The Seller will deliver
to the Purchaser duly endorsed stock transfer powers and
certificate(s) with respect to the HEI Stock.
Section 6.2 Consents and Approvals. The Seller shall
have obtained all consents and approvals required for the
transfer of the HEI 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 the Seller and the Companies;
(b) Articles of Incorporation and Bylaws. Each of the
Companies shall have delivered to Purchaser a true and complete
copy of its Articles of Incorporation and Bylaws;
(c) Corporate Resolutions. True and correct copies of
resolutions of the board of directors of the Seller 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 or other obligations of the Seller or
its affiliates in an amount equal to the Purchase Price, the
Purchaser shall provide a written release from the lender(s)
releasing the Seller 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 or Managers 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;
(b) Any fines and penalties levied on HPSE for operations
prior to the Closing Date by the Florida Department of Insurance
or other regulatory authorities (not including any capital
contributions which Purchaser has agreed to be responsible for);
(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 HEI Stock;
provided, however, that the indemnification obligations of the
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 misrepresenta
tion, breach or nonfulfillment; and (ii) all liabilities arising
out of or in connection with the operations of the Companies
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 Agree
ment 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 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 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 Salomon Smith Barney and Ascendant Capital,
Inc.; the Seller shall be responsible for compensating Salomon
Smith Barney and Ascendant Capital, Inc. and shall indemnify and
hold Purchaser harmless from and against all such obligations to
Salomon Smith Barney and Ascendant Capital, 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 Salomon
Smith Barney and Ascendant Capital, 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 the Companies, 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 DOI;
(b) approval of the material terms of this Agreement by the
Board of Directors of the Seller;
(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.
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 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:
SELLER: Coastal Physician Group, Inc.
2828 Croasdaile Drive
Durham, North Carolina 27704
Attention: President
PURCHASER: Steven M. Scott, M.D.
2828 Croasdaile Drive
Durham, North Carolina 27704
Section 12.2 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 12.3 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 12.4 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 12.5 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 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 12.6 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 12.7 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 12.8 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 Agree
ment, 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 12.10 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 12.11 Amendments. No change, amendment, qualifica
tion or cancellation hereof shall be effective unless in writing
and executed by all of the parties hereto by their duly autho
rized officers.
Section 12.12 Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of North Carolina.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement as of the _____ day of October, 1998, effective as of
October 1, 1998.
SELLER:
COASTAL PHYSICIAN GROUP, INC.
By:
Its:
ATTEST:
By:______________________________
Secretary
[Corporate Seal]
PURCHASER:
Steven M. Scott, M.D.
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 October, 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
Scott, Coastal and certain of its subsidiaries, have entered
into an agreement dated the date hereof (the "Purchase
Agreement") pursuant to which Scott will purchase the stock of
Health Enterprises, Inc. ("HEI"); and
The parties are desirous of amending the Agreement in order
that the ownership, operation and potential expansion of HEI 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 HEI 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. 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. 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.
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; provided
that 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.
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