United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _________.
COMMISSION FILE NUMBER 001-13460
COASTAL PHYSICIAN GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1379244
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2828 CROASDAILE DRIVE, DURHAM, NC 27705
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(Address of principal executive offices) (Zip Code)
(919) 383-0355
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $0.01 per share
Preferred Share Purchase Rights
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant at February 28, 1999 was $7,219,000. The aggregate market value was
computed by reference to the closing price as of that date. (For purposes of
calculating this amount only, all directors, executive officers and greater than
10% shareholders of the Registrant are treated as affiliates.)
The number of shares outstanding of the Registrant's common stock as of
February 28, 1999 was 37,831,197.
DOCUMENTS INCORPORATED BY REFERENCE
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ITEM 1. BUSINESS
GENERAL
Coastal Physician Group, Inc., together with its subsidiaries (the
"Company", "Coastal" or the "Registrant"), is a provider of physician management
services to physicians, hospitals, government agencies, managed care
organizations, employers and other health care organizations nationwide. The
Company provides services in more than 400 settings to physicians, hospitals and
governmental entities.
Founded in 1977 to assist hospitals in staffing their emergency
departments, the Company expanded in the years 1991 to 1995 to provide
hospital-based physician contract services, as well as physician business
management services such as practice management, billing and collection. In
addition, the Company acquired two health maintenance organizations ("HMOs") and
developed another HMO. In 1993 and 1994, the Company, through a series of
acquisitions and expansion efforts, added fee-for-service and capitated clinic
networks in New Jersey, Maryland, North Carolina and Florida.
Beginning in the fourth quarter of 1995 and continuing through 1998, the
Company divested all of its non-core health care operations, as detailed below.
These divestitures, with the exception of the south Florida capitated primary
care clinics which were divested in the fourth quarter of 1995, were made
pursuant to the plan approved by the Board of Directors in July 1996 to focus on
improving the Company's operations in the areas of physician contract services
and physician business management services.
As of December 31, 1998, the Company's ongoing businesses included
providing physicians to staff hospital emergency departments, providing billing
and collection services for emergency department physicians and physician
groups, as well as contract services to a number of government agencies. These
operations comprise the Company's core businesses.
PRINCIPAL SERVICES
A discussion of the principal services provided by the Company, the methods
by which it provides such services and the market for each service is set forth
below.
PHYSICIAN CONTRACT SERVICES
Under contracts principally with hospitals and government agencies, the
Company identifies and recruits physicians as candidates for admission to a
client's medical staff and coordinates the on-going scheduling of independent
contractor physicians who provide clinical coverage in designated areas. While
the Company also provides obstetrics, gynecology and pediatrics physician
contract services, the provision
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of contract management services to hospital emergency departments represents the
Company's principal hospital-based service.
To fulfill its obligations to clients, the Company obtains the services of
physicians who, as independent contractors, agree to provide the necessary
clinical coverage. The Company maintains a proprietary data base of physicians
who might be available as independent contractors in particular specialties and
locations. To carry out contract management services such as the contracting of
physicians, staffing and administration, the Company's local and regional
offices are generally staffed with a manager, often a consulting medical
officer. These personnel are supported by a centralized administrative staff
consisting of recruiters, credentialers and staffing coordinators.
Emergency Medicine Practice Management Services
The Company contracts, in most cases, to provide all necessary physician
coverage for hospital emergency departments on a 24-hour, 365-day per year
basis. The Company believes that hospitals utilize physician management firms to
help solve problems associated with the administration and management of
hospital emergency departments such as recruitment, scheduling and retention of
emergency medicine physicians, the relief of other hospital physicians from
emergency department coverage, budgetary concerns, risk shifting, changing
patient volumes and the historically extensive use of hospital emergency
departments for routine primary care, particularly at night and on weekends. In
addition to obtaining the services of independent contractor physicians to
provide emergency department coverage, the Company also typically contracts with
the physician whom the hospital selects as the medical director of the emergency
department. The medical director works directly with the hospital medical staff
and administration in such areas as quality assurance, risk management and
departmental accreditation. Net revenue, excluding intersegment revenue, related
to the Company's emergency medicine practice management services activities for
the years ended December 31, 1998, 1997 and 1996 was $164,700,000, $202,174,000
and $276,759,000, respectively, representing 56.0% of the Company's net revenue
in 1998, 47.6% in 1997 and 50.1% in 1996.
Government Services
The Company provides physician contract services to the United States Army,
Navy, Air Force and Coast Guard, the Department of Veterans Affairs, Indian
Health Services and county and state agencies, including those responsible for
correctional facilities. Governmental agencies contract with the Company to
assist such agencies in fulfilling their obligations to provide health care for
active-duty and retired military personnel and their dependents, veterans and
correctional facility inmates. The Company presently has government services
contracts for the operation, staffing and management of emergency, obstetric,
gynecological and other primary care facilities and assists in the
implementation of quality assurance, quality control and risk management
programs which complement medical treatment. Net revenue, excluding intersegment
revenue, from government services contracts recognized in 1998 was $20,185,000,
$23,065,000
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and $38,917,000, respectively, representing 6.9% of the Company's net revenue in
1998, 5.4% in 1997 and 7.0% in 1996. The dollar amount of all such contracts
through the end of the contract terms in 2003, assuming all options are
exercised by the governmental agency (which is within its sole discretion), was
approximately $52,226,000 as of December 31, 1998.
BILLING AND COLLECTION SERVICES
The Company provides a range of billing and collection services to support
independent contractor physicians, independent practices and other health care
practitioners. These services are often provided as part of the Company's
emergency medicine practice management services and are also marketed
independently to unaffiliated providers. The Company provides these services to
over 2,000 physicians in over 150 hospitals in 19 states. Net revenue, excluding
intersegment revenue, related to the Company's billing and collection services
activities for the years ended December 31, 1998, 1997 and 1996 was $16,164,000,
$14,126,000 and $20,636,000, respectively, representing 5.5% of the Company's
net revenue in 1998 and 3.3% in 1997 and 3.7% in 1996.
The Company codes, bills and collects for professional services with
respect to over 3.1 million patient visits annually. Approximately 56% of the
Company's billing and collection operations serve providers with which the
Company's physician contract services group does not have a contract management
relationship.
The Company specializes in providing physician business management services
to physicians in emergency medicine practices. The Company estimates that
approximately 97% of its net billing and collection revenue for 1998 and 1997
(including work for contract management clients and contracted health care
professionals) was derived from emergency medicine billing and collections, as
compared with 87% in 1996. This change is primarily attributable to the
Company's renewed focus on emergency medicine billing with less emphasis on
billing for clinical settings.
HMOS AND DIVESTED BUSINESSES
During 1998, the Company sold its remaining HMOs, Doctors Health Plan, Inc.
and HealthPlan Southeast, Inc. The Company sold Better Health Plan, Inc. in
1997. Net revenue, excluding intersegment revenue, related to the Company's HMOs
for the years ended December 31, 1998, 1997 and 1996 was approximately
$92,823,000, $164,908,000 and $154,745,000, respectively, representing
approximately 31.5%, 38.8% and 28.0% of the Company's consolidated net revenue
for 1998, 1997 and 1996, respectively.
During 1997 and 1996, the Company sold its clinic operations and several
other businesses. Some minor operations of the divested business carried over
into 1998. Net revenue, excluding intersegment revenue, related to the Company's
divested operations for the years ended December 31, 1998, 1997 and 1996 was
$72,000, $20,163,000
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and $60,320,000, respectively, representing approximately 0.1%, 4.7% and 10.9%
of the Company's consolidated net revenue for 1998, 1997 and 1996, respectively.
CONTRACTUAL ARRANGEMENTS AND CUSTOMERS
HOSPITAL CONTRACTS
The Company provides physician contract management services to hospitals
under two separate contractual arrangements: flat-rate contracts and
fee-for-service contracts. Hospitals entering into flat-rate contracts primarily
pay fees to the Company based on the hours of physician coverage provided.
Hospitals entering into fee-for-service contracts agree to authorize the Company
and its contracted health care professionals to bill and collect the
professional component of the charges for medical services rendered by the
Company's contracted health care professionals. Under fee-for-service
arrangements, the Company generally receives directed reimbursement of the
amounts collected and, depending on the hospital's patient volume and payor mix,
may also receive an availability fee from the hospital. Pursuant to
fee-for-service contracts, the Company accepts responsibility for billing and
collection and assumes the risks of non-payment, changes in patient volume or
payor mix and delays attendant to reimbursement through government programs or
third-party payors. All of these factors generally are taken into consideration
by the Company in arriving at contractual arrangements with health care
institutions and professionals. While the term of the Company's service
contracts is generally one to three years, such contracts typically provide for
termination without cause by either party on 60 to 180 days' prior notice.
A significant portion of the Company's net revenue in recent years has been
attributable to fee-for-service billing and collection arrangements. As a result
of increasing public and private sector pressures to restrain health care costs
and to restrict reimbursement rates for medical services, fee-for-service
contracts have developed less favorable cash flow characteristics than
traditional flat-rate contracts, resulting in a need for increased liquidity and
capital resources.
PHYSICIAN CONTRACTS
In its physician contract services businesses, the Company generally
contracts with physicians and certain other health care professionals to provide
services to fulfill the Company's contractual obligations to its clients. The
Company regards its contracted health care professionals as independent
contractors and, therefore, does not withhold income taxes or otherwise treat
such professionals as employees. Professional fees from the Company to the
physicians have historically been calculated on an hourly basis. Some physicians
may receive, in addition to an hourly fee, certain incentive payments based on
activity and performance. Beginning in the fourth quarter of 1997, the Company
has entered into new agreements with certain physicians that provide for the
calculation of professional fees based on the number of Relative Value Units
("RVUs"), as defined by
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the Health Care Finance Administration, billed by the Company for the
professional services rendered.
Under the Company's contracts with its hospital and other health care
clients, the physician is responsible for the provision of professional services
and is required to obtain professional liability insurance with coverage limits
as specified in such contracts. The Company's agreements with physicians
typically have one-year terms (with options on the part of the physicians for
renewal) and can be terminated by the Company at any time under certain
circumstances (including termination of the Company's contract with the health
care facility) or by either party, typically upon 30 to 90 days' prior notice.
GOVERNMENT CONTRACTS
Federal government contracts are usually awarded for a base period ranging
from one month to 24 months with options on the part of the contracting
governmental agency for annual renewal for up to a five year total contract
term. Such renewals are dependent upon annual appropriations, budgetary
constraints, applicable governmental requirements and other factors and are
subject to termination for convenience by the government. If a contract were to
be terminated for convenience, the Company would be reimbursed for its allowable
costs to the date of termination and would be paid a proportionate amount of the
stipulated profits or fees attributable to the work actually performed and, in
certain cases, costs incurred in connection with the termination of the
contract.
GOVERNMENT REGULATION
The businesses in which the Company is engaged are to varying extents
subject to substantial regulation by federal and state governmental authorities.
The regulatory environment in which the Company operates may change
significantly as a result of federal and state health care reform initiatives.
The most significant regulatory requirements applicable to the Company's
businesses are summarized below.
A substantial portion of the Company's net revenue is derived from payments
made by government-sponsored health care programs (primarily Medicare and
Medicaid). In addition, continuing budgetary constraints at both the federal and
state level and the rapidly escalating costs of health care and reimbursement
programs may continue to lead to relatively significant reductions in government
and other third party reimbursements for certain medical charges. Any such
reductions could have a material adverse effect on the Company. These programs
and activities are subject to substantial regulation by the federal and state
governments which are continually reviewing and revising the programs and their
regulations. The Company's operations are subject to periodic audits by
government reimbursement programs to determine the adequacy of coding procedures
and reasonableness of charges. Any determination of material noncompliance with
such regulatory requirements or any change in reimbursement regulations,
policies, practices, interpretations or statutes that places material
limitations on reimbursement amounts or practices could adversely affect the
operations of the Company.
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Business corporations are legally prohibited from providing, or holding
themselves out as providers of, medical care in many states. State laws prohibit
the unlicensed practice of medicine, including the practice of medicine by an
unlicensed corporation or other unlicensed entity. While the Company seeks to
structure its operations to comply with the corporate practice of medicine laws
of each state in which it operates, there can be no assurance that, given
varying and uncertain interpretations of such laws, the Company would be found
to be in compliance with restrictions on the corporate practice of medicine laws
in all states. A determination that the Company is in violation of applicable
restrictions on the practice of medicine in any state in which it operates could
have a material adverse effect on the Company if the Company were unable to
restructure its operations to comply with the requirements of such states.
Many states have statutes or case law that govern the enforceability of
contractual provisions prohibiting or proscribing certain competitive activities
as well as interference with contractual rights and liquidated damages
provisions in contracts. Many states, primarily through regulatory or licensing
boards, also prohibit the splitting or sharing of professional fees between
physicians and non-physicians, non-professional corporations or other entities
not authorized to practice medicine. Several states also have laws prohibiting
referrals by a physician if the physician receives improper remuneration for the
referral, including referrals to facilities or other entities in which the
physician or an affiliate has a financial or ownership interest.
The Florida Board of Medicine has interpreted the fee splitting
prohibitions broadly enough to cover the payment of many percentage-based
management fee arrangements between physicians and physician practice management
companies. This decision has been stayed pending further judicial review. The
Company has contractual arrangements with its independent contractor physicians,
including contracts with physicians in Florida, pursuant to which the Company
receives compensation for its services that is calculated in certain instances
based on percentages of fees billed and collected by physicians. There can be no
assurance that the contractual arrangements of the Company will not require
modification depending upon the outcome of the review of the action of the
Florida Board of Medicine by the Florida courts, or that the Company will be
able to modify such contractual arrangements in Florida or in other states as
needed based upon future judicial interpretations of laws and regulatory
decisions, or upon changes in the laws.
The Company's governmental contracting activities are subject to
substantial regulation by the applicable contracting agencies and federal law
and regulation. Contracts with government agencies are generally complex in
nature and require contractors to comply with exacting technical specifications
and numerous administrative regulations. Substantial penalties can result from
noncompliance with the technical specifications of a contract. Upon failure to
perform or violation of applicable contract or statutory provisions, a
contractor may be barred or suspended from obtaining future contracts for
specified periods of time. The Company is subject to periodic audits and reviews
in the ordinary course of business by appropriate federal government audit and
review agencies, which can result in adjustments to contract costs, including
direct and
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indirect expenses. Under the Truth in Negotiations Act, the federal government
is entitled for three years after final payment on any negotiated fixed-price
contract to examine all of the Company's cost records with respect to such
contract to determine whether the Company used complete, accurate and current
cost and pricing information in preparing bids on that contract or any amendment
thereto. The federal government also has the right for six years after final
payment to adjust a contract price based upon such examination. Section 31 of
the Federal Acquisition Regulation governs the allocation of costs incurred by
the Company in the performance of its government contracts to the extent such
costs are allocable to its government contracts.
The Company believes that its facilities comply in all material respects
with federal, state and local environmental protection regulations and does not
anticipate that its compliance with regulations concerning the packaging,
storage, treatment and transportation of biohazardous material will have a
material impact on the Company's earnings or competitive position.
CORPORATE LIABILITY AND INSURANCE
Each of the Company's physician contract services subsidiaries maintain
professional liability insurance in amounts deemed appropriate by management
based upon historical claims and the nature and risks of the business. There can
be no assurance that a future claim will not exceed the limits of available
insurance or that such coverage will continue to be available. Such insurance
provides coverage, subject to policy limits, in the event the Company's
contracting subsidiary were held liable as a co-defendant in a lawsuit against a
contracted health care professional or hospital client. To the extent health
care professionals were regarded as agents of the Company in the practice of
medicine, the Company could be held vicariously liable for any medical
negligence of such health care professionals. In addition, the Company and its
contracting subsidiaries may be exposed to liability in cases in which the
Company's contracting subsidiary itself was negligent.
In addition, the Company's contracts with hospital clients generally
contain provisions under which the Company's contracting subsidiary agrees to
indemnify the client for losses resulting from the contracting physician's
malpractice up to the limits of such contracting physician's liability insurance
(whether or not such losses are covered by insurance policies) and the client
agrees to indemnify the Company's contracting subsidiary up to the limits of the
client's professional liability insurance for losses resulting from the
negligence of the client or client personnel (whether or not such losses are
covered by insurance policies). In addition, the Company's contracts with the
Department of Defense and the Department of Veterans Affairs generally provide
for the Company's contracting subsidiary to indemnify the government, without
limitation as to amount, for losses incurred under similar circumstances. The
Company's contracting subsidiary requires the contracted physicians to indemnify
the Company's contracting subsidiary for losses related to the performance of
medical services and to obtain professional liability insurance.
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COMPETITION
The businesses in which the Company operates are highly competitive. The
Company has both national and local competitors. The Company also competes with
the more traditional structures of health care delivery systems. Competition in
the industry is based on the scope, quality and cost of services provided. Many
of the Company's actual or potential competitors have substantially greater
financial, personnel and other resources than those of the Company.
EMPLOYEES
At December 31, 1998, the Company had approximately 1,300 employees.
ITEM 2. PROPERTIES
The Company's headquarters is located in Durham, North Carolina, where the
Company subleases, under a sublease effective May 22, 1998, 48,753 square feet
of an office building from American Alliance Realty Company, a corporation
controlled by the Company's Chairman and Chief Executive Officer, Steven M.
Scott, M.D., who is also the largest shareholder of the Company. The sublease
provides for a term through June 30, 2000 and is an amendment of a previous
three year sublease with the same termination date. This space is occupied by
the Company and by Coastal Physician Services, Inc., a subsidiary of the
Company. This lease comprises approximately 70% of the total leasable space in
the building.
Healthcare Business Resources, Inc. ("HBR"), a subsidiary of the Company,
leases and occupies a 51,000 square foot office building in Durham, North
Carolina. The office space, leased from an unrelated third party, is utilized
for billing operations and headquarters for HBR.
The Company leases and partially occupies two additional office buildings,
totaling approximately 52,000 square feet, located in Durham, North Carolina.
The buildings, leased from an unrelated third party, are the headquarters for
Coastal Government Services, Inc., and Medstaff National Medical Staffing, Inc.,
subsidiaries of the Company. A portion of the building, consisting of
approximately 13,000 square feet, is sublet to an unrelated third party.
The Company's operating subsidiaries generally lease office space in
locations in which they do business. Total rent expense for all office space
leased by the Company under noncancelable operating leases was $1,334,000 for
the year ended December 31, 1998.
Further information concerning properties leased from related parties is
disclosed in "Item 13. Certain Relationships and Related Transactions."
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ITEM 3. LEGAL PROCEEDINGS
In October and November 1996, three cases styled Ortiz v. Coastal Physician
Services of Broward County, Inc., et al., Higgins v. Coastal Emergency Services
of Ft. Lauderdale, Inc. et al., and Dukenik v. Coastal Emergency Services of Ft.
Lauderdale, Inc. et al. were filed in the Circuit Court for Palm Beach, Florida
seeking statutory damages for alleged violations of Section 559.79 of the
Florida Consumer Collection Practices Act as a result of invoices mailed for
medical services rendered by contract physicians in emergency medicine for which
the Company provided emergency medicine practice management services. The
invoices contained language indicating various actions that might be pursued in
the event of non-payment, including references to the Attorney General.
Plaintiffs have amended their complaints and are seeking only statutory damages.
Plaintiffs have also filed a motion seeking class certification which is
currently pending before the court. On June 22, 1998, plaintiffs filed a Fourth
Amended Complaint adding Edward Suggs, President and Chief Executive Officer of
HBR and a Director of the Company, Terry Blackwood, formerly Senior Vice
President and Chief Financial Officer of HBR, and Edward Gaines, Senior Vice
President and General Counsel to HBR, as individual defendants in the action.
All of the individual defendants have filed motions to dismiss, which motions
are currently pending before the trial court. The Company believes that it has
several defenses to the lawsuit and intends to vigorously defend the action but
at this stage of the litigation, the exposure to the Company cannot be
determined.
On June 17, 1997, Henry J. Murphy, who was President and Chief Executive
Officer of the Company from November 1, 1996 to February 28, 1997, filed a
lawsuit against the Company alleging that the Company failed to make certain
incentive payments to him under his written employment agreement. The lawsuit
was originally filed in Forsyth County Superior Court and later transferred to
Durham County Superior Court. Under the contract, Mr. Murphy was entitled to
receive certain incentive payments or stock warrants in the event that the
Company either successfully refinanced its bank debt so as to reduce the amount
of debt to certain target levels or sold more than half of its assets or
business. Mr. Murphy is alleging that the Company's transaction with National
Century Financial Enterprises, Inc. constituted a sale of more than half of the
assets of the Company qualifying him to receive certain payments. After some
initial discovery, there has been little activity in this suit for approximately
one year. The Company believes it has several meritorious defenses to the action
and intends to vigorously defend its position, but at this stage of the
litigation, the exposure to the Company cannot be determined.
In June 1997, after HBR closed an office in Whitley City, Kentucky, a
possible overpayment from Medicare to Coastal Physician Services of the Midwest,
Inc., a subsidiary of the Company, was discovered. In August 1997, the Company
voluntarily disclosed the possible overpayment to representatives of the U. S.
Department of Justice ("DOJ"). Since the Company's voluntary disclosure to the
DOJ, the Company has cooperated in DOJ's review and the DOJ has referred the
matter for final resolution to the U. S. Attorney's Offices in Kentucky with
jurisdiction over this matter. The Company's
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counsel was invited by the U.S. Attorney's Offices in Kentucky to fully
participate in their review and has participated in their review and interviews
of current and former Company employees. The Company expects to settle the
matter by repaying approximately $395,000 in 1999 which has been provided for in
its financial statements. Since the DOJ's review has not yet been completed,
there can be no assurance, however, that the overpayment liability will not
exceed the Company's current estimate.
On February 4, 1998, Jacque J. Sokolov, M.D., who previously served as
Chairman of the Company and President of Advanced Health Plans, Inc., a
subsidiary of the Company, filed a Demand for Arbitration with J*A*M*S/ENDISPUTE
in Los Angeles, California alleging various breaches of an Employment Contract
dated November 1994 with the Company. The Company has objected to the conduct of
the arbitration in California and has requested that the arbitration hearings be
held in North Carolina. The Company intends to vigorously defend its position,
but at this stage of the litigation the exposure to the Company cannot be
determined.
On January 8, 1999, Century American Insurance Company and its affiliate,
Century American Casualty Company ("Century"), which had previously provided
professional liability insurance coverage to the Company and to independent
contractor physicians through Medical Group Purchasing Association ("MGPA"),
notified the Company and MGPA that it considered the purchase of professional
liability insurance from an insurer other than Century to constitute a breach of
a Risk Management Agreement between the Company, MGPA and Century. Pursuant to
the terms of the Risk Management Agreement, any dispute was required to be
resolved by binding arbitration, and on February 24, 1999, Century filed a
Complaint in Arbitration with J*A*M*S/ENDISPUTE against the Company and MGPA
seeking damages for the alleged breach and seeking to require the Company and
MGPA to accept insurance written by Century. The Company and MGPA have filed an
Answer to the Complaint, and denied that there was any breach of the Agreement.
It is believed that the discovery and arbitration will be completed in 1999. The
Company believes it has several meritorious defenses to the action and intends
to vigorously defend the action.
The Company and its subsidiaries are involved in various legal proceedings
incidental to their businesses, substantially all of which involve claims
related to the alleged medical malpractice of contracted physicians, contractual
and lease disputes or individual employee relations matters. In the opinion of
the Company's management, no individual item of this litigation or group of
similar items of litigation, taking into account the insurance coverage
available to the Company, is likely to have a materially adverse effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Beginning January 4, 1999, the Company's common stock is quoted on the OTC
Bulletin Board under the symbol "ERDR." Prior to that date, the Company's common
stock was traded on the New York Stock Exchange under the symbol "DR." The
following table shows the range of market prices per share for the Company's
common stock in 1998 and 1997.
1998 1997
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High Low High Low
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First Quarter $1.00 $0.63 $4.63 $1.75
Second Quarter 0.75 0.19 2.63 0.94
Third Quarter 1.44 0.31 2.69 1.38
Fourth Quarter 0.75 0.38 2.19 0.81
As of February 28, 1999, the Company had approximately 6,000 shareholders,
of which approximately 900 were holders of record.
The Company has not paid, nor does it currently intend to pay, cash
dividends on its common stock but, rather, it intends to retain any future
earnings for reinvestment in its business.
On March 3, 1998, Bertram E. Walls, M.D., a Director of the Company, made
an investment of $2.0 million in the Company in exchange for a $2.0 million
convertible debenture due July 1, 1998 bearing interest at 10% per annum. The
debenture, including accrued interest, was convertible, at the holder's option,
into the Company's Common Stock and a new series of Preferred Stock. The
conversion price for the Common Stock was equal to the lower of: (i) the average
closing price of the Common Stock on the New York Stock Exchange for the 10
trading days ending on March 3, 1998, the date of the issuance of the debenture,
or (ii) the average closing price for the 10 trading days ending on June 30,
1998. The conversion price for the Preferred Stock was ten times the conversion
price for the Common Stock. On May 1, 1998, Steven M. Scott, M.D., the Company's
Chief Executive Officer, a Director and largest shareholder acquired the
debenture from Dr. Walls. On June 29, 1998, the debenture was amended to provide
for conversion solely into Series D Convertible Preferred Stock ("Series D
Preferred"). On June 30, 1998, Dr. Scott elected to convert the debenture into
444,974 shares of Series D Preferred. The Series D Preferred is convertible into
10 shares of Common Stock for each share of Preferred Stock only upon approval
by the holders of the Common Stock. This
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transaction was not registered under the Securities Act pursuant to the
exemption provided by Section 4(2) thereof for transactions not involving any
public offering.
On January 21, 1997, the Company authorized 47,500 shares of Series A
Convertible Preferred Stock ("Series A Preferred") and 32,500 shares of Series B
Convertible Preferred Stock ("Series B Preferred"), and on June 3, 1997,
authorized 1,200,000 shares of Series C Convertible Preferred Stock ("Series C
Preferred"), each series with a par value of $0.01 per share. On February 21,
1997, the Company increased the number of authorized shares of Series B
Preferred from 32,500 to 33,000. On October 23, 1997, Dr. Scott converted 46,033
shares of the Company's Series A Preferred Stock into 460,330 shares of the
Company's common stock, 32,739 shares of the Company's Series B Preferred Stock
into 327,930 shares of the Company's common stock and the 1,084,983 shares of
the Company's Series C Preferred Stock into 10,849,830 shares of the Company's
common stock. This transaction was not registered under the Securities Act
pursuant to the exemption provided by Section 4(2) thereof for transactions not
involving any public offering.
In December 1997, the Company issued 1,000,000 shares of common stock to
National Century Financial Enterprises Inc. ("NCFE") in satisfaction of
approximately $1,046,000 in fees related to financing arrangements entered into
between the Company, NCFE and certain of its subsidiaries in June 1997.
Additionally, 200,000 shares of common stock were issued to two of the Company's
vendors in lieu of cash payments for services provided. These transactions were
not registered under the Securities Act pursuant to the exemption provided by
Section 4(2) thereof for transactions not involving any public offering.
On December 31, 1996, the Company agreed to issue 226,690 shares of its
common stock and 32,739 shares of Series B Convertible Preferred Stock to Dr.
Scott in satisfaction of the Company's obligation to reimburse him for certain
proxy solicitation expenses totaling $1,662,278. The Series B Convertible
Preferred Stock shall be convertible into common stock at an initial conversion
rate of ten shares of common stock for each share of Series B Convertible
Preferred Stock, subject to approval by the Company's common shareholders. This
transaction was not registered under the Securities Act pursuant to the
exemption provided by Section 4(2) thereof for transactions not involving any
public offering.
On May 29, 1996, the Company granted warrants to the lenders under its
Senior Credit Facility entitling them to purchase, at par value, up to 1,254,509
shares of common stock. The warrants were granted in connection with an
amendment of the Senior Credit Facility. A portion of the warrants vested
immediately, with the balance subject to cancellation based upon the Company's
compliance with a specified principal repayment schedule. Warrants to purchase
250,902 shares were canceled as a result of $40 million in payments made by the
Company prior to January 2, 1997. Options covering 186,789 shares have been
exercised. The remaining warrants, covering 816,818 shares of common stock, have
vested. This transaction was not registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to the exemption provided by Section
4(2) thereof for transactions not involving any public offering.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Results of Operations:
<S> <C> <C> <C> <C> <C>
Operating revenue, net $294,221 $424,841 $552,109 $810,387 $748,637
Operating income (loss) (11,576) (67,188) (125,029) (68,775) 33,060
Income (loss) from continuing
operations (20,138) (81,981) (147,421) (63,138) 20,668
Income (loss) per share from
continuing operations (0.53) (3.08) (6.18) (2.67) 0.92
Net income (loss) (20,138) (81,981) (145,557) (46,901) 20,668
Net income (loss) per share (0.53) (3.08) (6.10) (1.98) 0.92
Weighted average shares 37,676 26,623 23,844 23,656 22,418
December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
Balance Sheet at Year-End:
Total assets $55,074 $99,531 $181,841 $313,057 $328,980
Short-term debt 433 2,529 71,130 5,210 1,353
Long-term debt 77,109 74,698 4,799 77,270 45,792
Total shareholders' equity /
(deficit) (63,719) (61,427) 3,503 146,371 186,893
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
Over the past three years, the Company has undergone significant changes in
its business that have had a significant adverse financial impact on the
Company. During this period, the Company identified a number of operating units
that were either underperforming or were not deemed critical to the overall
operating strategy. As a result, the Company decided to sell certain operating
units in 1996 and 1997 which lead to significant decreases in net operating
revenues, physician and other provider services costs, and selling, general and
administrative expenses. In addition, the Company experienced a significant
reduction in the number of locations where the emergency medicine practice
management services operation provided physicians. While not all of the lost
locations were profitable, they had a significant impact on net operating
revenues, physician and other provider services costs, and selling, general and
administrative costs. For the past three years, the Company has incurred net
losses. A more detailed review of the results of operations for the last three
years appears below.
1998 COMPARED TO 1997
During 1998, the Company completed its divestiture strategy. This will
allow the Company to focus its future operations on the core businesses of
emergency medicine practice management, government services and medical billing
and collections. The Company refers to these businesses as ongoing businesses.
The last step in completing the divestiture strategy was the sale of two
remaining HMOs. The Company sold Doctors Health Plan, Inc. ("DHP") in March
1998, and Healthplan Southeast ("HPSE") in October 1998. The Company sold Better
Health Plan ("BHP") in August 1997. During 1997, the Company also sold the last
of its clinic operations. The Company refers to the clinic operations and some
smaller related businesses as the divested businesses.
OPERATING REVENUE, NET. Net operating revenue for 1998 was $294.2 million,
representing a decrease of $130.6 million, or 30.7%, from 1997 operating
revenues of $424.8 million. The decreases in operating revenue among the various
businesses were as follows:
1998 1997 Decrease %
-------------------------------------------------
Ongoing businesses $201.3 $239.7 $ (38.4) (16.0)%
HMOs 92.8 164.9 (72.1) (43.7)
Divested operations 0.1 20.2 (20.1) (99.5)
------------------------------------
$294.2 $424.8 $ (130.6) (30.7)%
==================================== ======
14
<PAGE>
The decrease in the revenue of the ongoing businesses was due mostly to net
contract terminations during 1997 and 1998 in the physician contract services
business and the sale of most of the OB/GYN clinic business. In 1998, the
physician contract services business generated approximately $164.7 in revenue,
which was a decrease of approximately $37.5 million, or 18.5%, from
approximately $202.2 million of revenue in 1997. The government services group
accounted for approximately $20.2 million in 1998, which was a decline of
approximately $2.9 million, or 12.6%, from $23.1 million in 1997. These
decreases were partially offset by an increase in revenue of the billing and
collections operations of approximately $2.1 million, or 14.9%, from $14.1
million in 1997 to $16.2 million in 1998 due to growth in the billing contracts
and fees. Revenue of the billing and collections operations excludes
intersegment revenue of approximately $12.7 million in 1998 and approximately
$13.3 million in 1997 representing fees billed to the physician contract
services business. Other miscellaneous revenue decreased by approximately $0.1
million from approximately $0.3 million in 1997 to approximately $0.2 million in
1998.
Revenue from the HMOs declined because the Company sold those businesses
during the year. BHP, which generated approximately $34.9 million of revenue in
1997, was sold in August 1997. DHP, which was sold in March 1998, generated
approximately $10.0 million in 1998 versus $32.7 million of revenue in 1997.
HPSE, which was sold in October 1998, generated revenue in 1998 of approximately
$82.8 million versus approximately $97.3 million in 1997.
PHYSICIAN AND OTHER PROVIDER SERVICES COSTS AND EXPENSES. Physician and
other provider services costs and expenses consist primarily of fees paid to
physicians and other health care providers. Physician and other provider
services costs and expenses decreased by approximately $125.2 million, or 34.9%,
to approximately $234.0 million in 1998 from approximately $359.2 million in
1997. Physician and other provider services costs and expenses decreased as
follows:
1998 1997 Decrease %
--------------------------------------------------
Ongoing businesses $145.5 $186.4 $ (40.9) (21.9)%
HMOs 88.5 160.1 (71.6) (44.7)
Divested operations 0.0 12.7 (12.7) (100.0)
------------------------------------
$234.0 $359.2 $ (125.2) (34.9)%
==================================== ======
These expenses for the ongoing businesses decreased because the number of
contracts in the physician contract services business declined and the Company
sold most of the OB/GYN clinic business. In 1998, physician and other provider
services costs and expenses for the physician contract services group were
approximately $128.7 million. This represented a decrease of $37.4 million, or
22.5%, from $166.1 million in 1997. The government services group's expenses
were approximately
15
<PAGE>
$16.8 million in 1998, representing a decrease of approximately $3.5 million, or
17.2%, from approximately $20.3 million in 1997. The billing and collections
operations did not incur physician and other provider services costs and
expenses.
Physician and other provider services costs and expenses of the HMOs
declined because the Company sold those businesses during the year. BHP, which
reported approximately $30.2 million of these costs and expenses in 1997, was
sold in August 1997. The winding down of BHP's operations resulted in $1.4 of
expenses in 1998. DHP reported approximately $9.0 million of physician and other
provider services costs in 1998 versus expenses of approximately $40.3 million
in 1997. HPSE reported approximately $78.1 million of physician and other
provider services costs in 1998 versus expenses of approximately $89.6 million
in 1997.
MEDICAL SUPPORT SERVICES COSTS AND EXPENSES. Medical support services costs
and expenses include all other direct costs and expenses of practice management
activities, as well as billing, collection and physician business management
services costs and expenses. Medical support services costs and expenses
decreased by $7.3 million, or 17.9%, to $33.4 million in 1998 from $40.7 million
in 1997. Medical support services costs and expenses decreased as follows:
1998 1997 Decrease %
--------------------------------------------------
Ongoing businesses $33.1 $33.9 $(0.8) (2.4)%
HMOs 0.0 0.0 (0.0) (0.0)
Divested operations 0.3 6.8 (6.5) (95.6)
----------------------------------
$33.4 $40.7 $(7.3) (17.9)%
================================== ======
These expenses for the ongoing businesses decreased because the number of
contracts in the physician contract services business declined and the Company
sold most of the OB/GYN clinic business. In 1998, medical support services costs
and expenses for the physician contract services group were approximately $5.7
million. This represented a decrease of $2.3 million, or 28.8%, from $8.0
million in 1997. The government services group's expenses were approximately
$2.3 million in 1998, representing a decrease of approximately $0.4 million, or
14.8%, from approximately $2.7 million in 1997. The billing and collections
group's expenses were approximately $25.1 million in 1998 representing an
increase of approximately $1.9 million, or 8.2%, from approximately $23.2
million in 1997.
SELLING, GENERAL AND ADMINISTRATIVE COSTS AND EXPENSES. Selling, general
and administrative costs and expenses decreased by $46.1 million, or 56.7%, to
$35.2 million in 1998 from $81.3 million in 1997. Selling, general and
administrative costs and expenses decreased as follows:
1998 1997 Decrease %
--------------------------------------------------
Ongoing businesses $24.7 $49.6 $(24.9) (50.2)%
HMOs 10.5 29.2 (18.7) (64.0)
Divested operations (0.0) 2.5 (2.5) (100.0)
----------------------------------
$35.2 $81.3 $(46.1) (56.7)%
=================================== ======
16
<PAGE>
Selling, general and administrative costs and expenses for the ongoing
businesses decreased because the number of contracts in the physician contract
services business declined and the Company sold most of the OB/GYN business. In
1998, selling, general and administrative costs and expenses for the Physician
Contract group were approximately $19.1 million. This represented a decrease of
$3.1 million, or 14.0%, from $22.2 million in 1997. The government services
group's expenses were approximately $0.2 million in 1998 representing a decrease
of approximately $1.8 million, or 90.0%, from approximately $2.0 million in
1997. The billing and collections group's expenses were approximately $2.1
million in 1998 representing a decrease of approximately $6.1 million, or 74.4%,
from approximately $8.2 million in 1997. The decrease in billing and collections
group's selling, general and administrative costs and expenses resulted
primarily from the expenses associated with the closing of three offices during
1997. Selling, general and administrative costs and expenses for the corporate
group declined to approximately $3.3 million in 1998 representing a decrease of
approximately $13.9 million, or 80.8%, from approximately $17.2 million in 1997.
Effective for the third quarter of 1998, the Company received certain credits
for 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. Approximately $765,000
related to its accounts receivable sales and subservicing programs costs and was
accounted for as a reduction of selling, general and administrative costs and
expenses.
Selling, general and administrative costs and expenses of the HMOs declined
because the Company sold those businesses during the year. BHP, which reported
approximately $8.9 million of these costs and expenses in 1997, was sold in
August 1997. DHP reported approximately $0.7 million of selling, general and
administrative costs and expenses in 1998 versus expenses of approximately $8.2
million in 1997. HPSE reported approximately $9.8 million of selling, general
and administrative costs and expenses in 1998 versus expenses of approximately
$12.1 million in 1997.
GOODWILL IMPAIRMENT. The Company recorded a charge for the impairment of
goodwill totaling $4.3 million during 1997 relating primarily to BHP. No
goodwill impairment charge was required during 1998. See Note 2 of "Notes to
Consolidated Financial Statements."
RELATED PARTY EXPENSE, NET. Related party expenses, net decreased by $3.4
million, or 68.0%, to $1.6 million in 1998 from $5.0 million in 1997. The
decrease is primarily due to an affiliate of the Company being purchased by an
unaffiliated party in May 1998. See Note 12 of "Notes to Consolidated Financial
Statements".
GAIN (LOSS) ON DIVESTED ASSETS, NET. Because the sales of the HMOs in 1998
were to a related party, no gains were recorded. Instead, the amounts that would
have been recorded as gains on divested assets if the sales were to an unrelated
party were
17
<PAGE>
credited directly to additional paid-in capital. In 1997, the Company had a net
loss of $1.5 million on the divested assets, as more fully described in Note 3
of "Notes to Consolidated Financial Statements". In 1998, the Company recorded
adjustments to notes receivable and to the purchase price of certain of those
assets resulting in an additional loss of approximately $1.6 million in 1998.
NET INTEREST EXPENSE. Net interest expense decreased by $6.8 million to
$8.7 million in 1998 from $15.5 million in 1997 due primarily to higher costs in
1997 related to the repayment of the Company's bank borrowings in June 1997
which were replaced by funds provided by NCFE as discussed below. The costs
associated with the sale of eligible accounts receivable in 1998 and 1997, the
proceeds of which were used to repay the bank debt in 1997 and to fund
operations in 1998 and 1997, have been included in selling, general and
administrative expenses.
Effective for the third quarter of 1998, the Company received certain
credits for interest relating to its sales and subservicing agreements with
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. Approximately $1.5 million was accounted for as a
reduction of interest expense.
OTHER, NET. Other expenses decreased by $1.1 million from $1.3 million in
1997 to $0.2 million in 1998 due primarily to litigation expenses and
settlements in 1997.
BENEFIT (PROVISION) FOR INCOME TAXES. The benefit (provision) for income
taxes for 1998 was $0.0 versus a benefit of $1.4 million in 1997. This change is
due to the reductions in accrued taxes as a result of continued net operating
losses.
NET LOSS. Primarily as a result of the foregoing, the Company reported a
net loss of $20.1 million in 1998 compared to a net loss of $82.0 million in
1997.
1997 COMPARED TO 1996
The Company completed divestitures in 1996 and 1997 that influence the
comparison between years including: (i) the sale of certain assets of Physicians
Planning Group, Inc. ("PPG") in September 1996; (ii) the sale in November 1996
of the HealthNet Medical Group operations of PPG and MedCost, Inc.; (iii) the
sale in May 1997 of seven Florida clinics; (iv) the sale in August 1997 of
Better Health Plan, Inc. ("BHP"), a New York state prepaid health plan servicing
Medicaid enrollees; and (v) the sale effective in November 1997 of Integrated
Provider Networks, Inc. and certain other physician practice management group
assets. In order to make these comparisons similar to those the Company made in
comparing 1998 with 1997, the Company refers to the core businesses of emergency
medicine practice management, government services and medical billing and
collections as the ongoing businesses. The HMOs include HPSE, DHP and BHP. The
Company refers to the clinic operations and some smaller related businesses that
were sold as the divested businesses.
OPERATING REVENUE, NET. Net operating revenue for 1997 was $424.8 million
representing a decrease of $127.3 million, or 23.1%, from 1996 operating
revenues of
18
<PAGE>
$552.1 million. The decreases in operating revenue among the various businesses
were as follows:
1997 1996 Decrease %
-------------------------------------------------
Ongoing businesses $239.7 $337.1 $ (97.4) (28.9)%
HMOs 164.9 154.7 10.2 6.6
Divested operations 20.2 60.3 (40.1) (66.5)
------------------------------------
$424.8 $552.1 $(127.3) (23.1)%
==================================== ======
The decrease in the revenue of the ongoing businesses was due mostly to net
contract terminations during 1996 and 1997 in the physician contract services
business. In 1997, the physician contract services business generated
approximately $202.2 in revenue, which was a decrease of approximately $74.7
million, or 27.0%, from approximately $276.8 million of revenue in 1996. The
government services group accounted for approximately $23.1 million in 1997
which was a decline of approximately $15.8 million, or 40.6%, from $38.9 million
in 1996. This decline was also the result of fewer contracts in 1997 as compared
to 1996. The revenue of the billing and collections operations decreased
approximately $6.6 million, or 31.9%, from $20.7 million in 1996 to $14.1
million in 1997 due to decreases in the billing contracts and fees. Other
miscellaneous revenue decreased approximately $0.3 from $0.7 in 1996 to $0.3 in
1997.
Revenue from the HMOs increased due to increases in enrollees in DHP and
HPSE. BHP, which was sold in August 1997, generated approximately $34.9 million
of revenue in part of 1997 versus approximately $47.5 million in 1996. DHP
generated approximately $32.7 million in 1997 versus $9.8 million of revenue in
1996. HPSE generated revenue in 1997 of approximately $97.3 million versus
approximately $89.2 million in 1996. MedCost, Inc. which was sold in November
1996, generated revenue of $8.2 million in 1996.
Revenue from divested operations decreased approximately $40.1 million to
approximately $20.2 million in 1997 from approximately $60.3 million in 1996.
The decrease was primarily attributable to the sales of the clinic operations in
late 1996 and during 1997.
PHYSICIAN AND OTHER PROVIDER SERVICES COSTS AND EXPENSES. Physician and
other provider services costs and expenses consist primarily of fees paid to
physicians and other health care providers. Physician and other provider
services costs and expenses decreased by approximately $91.3 million, or 20.3%,
to approximately $359.2 million in 1997 from approximately $450.5 million in
1996. Physician and other provider services costs and expenses decreased as
follows:
1997 1996 Decrease %
--------------------------------------------------
Ongoing businesses $186.4 $290.1 $(103.7) (35.7)%
HMOs 160.1 127.2 32.9 25.9
Divested operations 12.7 33.2 (20.5) (61.7)
-----------------------------------
$359.2 $450.5 $(91.3) (20.3)%
=================================== ======
19
<PAGE>
These expenses for the ongoing businesses decreased because the number of
contracts in the physician contract services business declined. In 1997,
physician and other provider services costs and expenses for the physician
contract services group were approximately $166.1 million. This represented a
decrease of $88.5 million, or 34.8%, from $254.6 million in 1996. The government
services group's expenses were approximately $20.3 million in 1997 representing
a decrease of approximately $15.2 million, or 42.8%, from approximately $35.5
million in 1996. The billing and collections operations did not incur physician
and other provider services costs and expenses.
Physician and other provider services costs and expenses of the HMOs
increased because of increases in the number of enrollees and associated medical
costs in the plans. BHP, which was sold in August 1997, reported approximately
$30.2 million of these costs and expenses in 1997 as compared to $42.0 million
in 1996. DHP reported approximately $40.3 million of physician and other
provider services costs in 1997 versus expenses of approximately $8.8 million in
1996. HPSE reported approximately $89.6 million of physician and other provider
services costs in 1997 versus expenses of approximately $76.4 million in 1996.
MEDICAL SUPPORT SERVICES COSTS AND EXPENSES. Medical support services costs
and expenses include all other direct costs and expenses of practice management
activities, as well as billing, collection and physician business management
services costs and expenses. Medical support services costs and expenses
decreased by $51.8 million, or 56.0%, to $40.7 million in 1997 from $92.5
million in 1996. Medical support services costs and expenses decreased as
follows:
1997 1996 Decrease %
--------------------------------------------------
Ongoing businesses $33.9 $61.6 $(27.7) (45.0)%
HMOs 0.0 7.4 (7.4) (100.0)
Divested operations 6.8 23.5 (16.7) (71.1)
----------------------------------
$40.7 $92.5 $(51.8) (56.0)%
================================== ======
These expenses for the ongoing businesses decreased because the number of
contracts in each of the businesses declined. In 1997, medical support services
costs and expenses for the physician contract services group were approximately
$8.0 million. This represented a decrease of $5.6 million, or 41.2%, from $13.6
million in 1996. The government services group's expenses were approximately
$2.7 million in 1997 representing a decrease of approximately $3.4 million, or
55.7%, from approximately $6.1 million in 1996. The billing and collections
group's expenses were approximately $23.2 million in 1997 representing a
decrease of approximately $18.7 million, or 44.6%, from approximately $41.9
million in 1996.
SELLING, GENERAL AND ADMINISTRATIVE COSTS AND EXPENSES. Selling, general
and administrative costs and expenses decreased by $55.6 million, or 40.6%, to
$81.3 million
20
<PAGE>
in 1997 from $136.9 million in 1996. Selling, general and administrative costs
and expenses decreased as follows:
1997 1996 Decrease %
--------------------------------------------------
Ongoing businesses $49.6 $ 89.7 $(40.1) (44.7)%
HMOs 29.2 32.8 (3.6) (11.0)
Divested operations 2.5 14.4 (11.9) (82.6)
----------------------------------
$81.3 $136.9 $(55.6) (40.6)%
================================== ======
Selling, general and administrative costs and expenses for the ongoing
businesses decreased partly because the number of contracts in the physician
contract services business declined and the amount the Company expensed for
professional fees decreased. In 1997, selling, general and administrative costs
and expenses for the physician contract services group were approximately $22.2
million. This represented a decrease of $20.6 million, or 48.1%, from $42.8
million in 1996. The government services group's expenses were approximately
$2.0 million in 1997 representing a decrease of approximately $0.8 million, or
28.6%, from approximately $2.8 million in 1996. The billing and collections
group's expenses were approximately $8.2 million in 1997 representing an
increase of approximately $4.3 million, or 110.3%, from approximately $3.9
million in 1996. The increase in billing and collections group's selling,
general and administrative costs and expenses resulted primarily from expenses
associated with the closing of three offices during 1997. Selling, general and
administrative costs and expenses for the corporate group declined to
approximately $17.2 million in 1997 representing a decrease of approximately
$23.0 million, or 57.2%, from approximately $40.2 million in 1996. The Company
closed other offices in 1997 and 1996 and centralized some of the operations
which provided savings in personnel costs of approximately $24.5 million in
1997.
Selling, general and administrative costs and expenses of the HMOs declined
because the Company sold one of those businesses. BHP, which reported
approximately $8.9 million of these costs and expenses in 1997 versus $15.9
million in 1996, was sold in August 1997. DHP reported approximately $8.2
million of selling, general and administrative costs and expenses in 1997 versus
expenses of approximately $5.7 million in 1996. HPSE reported approximately
$12.1 million of selling, general and administrative costs and expenses in 1997
versus expenses of approximately $11.2 million in 1996.
The Company incurred legal and professional fees and related costs
associated with the restructuring of its credit agreements and various
litigation matters totaling $12.9 million in 1997 versus $16.7 million in 1996.
The 22.8% decline in professional fees and related costs resulted from
management's efforts to minimize the costs associated with professional fees
after the Company's bank debt was repaid.
GOODWILL IMPAIRMENT. The Company recorded a charge for the impairment of
goodwill totaling $4.3 million during 1997 relating primarily to BHP. Goodwill
21
<PAGE>
impairment charges recorded in 1996 relate primarily to the divested businesses
as described in Note 2 of "Notes to Consolidated Financial Statements."
RELATED PARTY EXPENSE, NET. Related party expenses, net decreased by $0.3
million, or 5.7%, to $5.0 million in 1997 from $5.3 million in 1996. The
decrease was primarily due to lower lease payments to a related party landlord
during 1997. See Note 12 of "Notes to Consolidated Financial Statements".
GAIN (LOSS) ON DIVESTED ASSETS, NET. In 1997, the Company had a net loss of
$1.5 million on the divested assets, as more fully described in Note 3 of "Notes
to Consolidated Financial Statements". In 1996, Gain (loss) on divested assets,
net consisted of the following: (i) net gains totaling $36.2 million resulting
from the divestiture of subsidiaries throughout the year, including PPG, a
manager of primary care provider networks located in Maryland, HealthNet, the
Company's New Jersey-based clinic operations, and MedCost, Inc., a managed care
entity located in North Carolina and (ii) $1.6 million of additional gain
recorded in 1996 on the Florida sale which was attributable to those clinics
which were originally acquired and recorded under the purchase method of
accounting for business combinations.
NET INTEREST EXPENSE. Net interest expense increased by $2.7 million to
$15.5 million in 1997 from $12.8 million in 1996 due primarily to the repayment
of the bank borrowings in June 1997 which were replaced by funds provided by
NCFE as discussed below. The costs associated with the sale of eligible accounts
receivable in 1997 have been included in selling, general and administrative
expenses. The Company used the proceeds of sale to repay the bank debt and to
fund operations,
OTHER, NET. Other expenses decreased by $4.7 million from $6.0 million in
1996 to $1.3 million in 1997 due primarily to the inclusion in 1996 of
litigation and proxy costs which were not incurred in 1997.
BENEFIT (PROVISION) FOR INCOME TAXES. The benefit (provision) for income
taxes decreased by $5.5 million to a benefit of $1.4 million from a provision of
$4.1 million in 1996. This change is due to the reductions in accrued taxes as a
result of continued net operating losses.
NET LOSS. Primarily as a result of the foregoing, the Company experienced a
net loss of $82.0 million in 1997 compared to a net loss of $145.6 million in
1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements during the periods covered by the
accompanying consolidated financial statements through the sale of certain
existing and future accounts receivable, as more fully discussed below, and the
sale of certain of its subsidiaries. The Company's principal uses of cash have
been to support operating activities and repay debt. Net cash used in operating
activities was $17.2 million and $25.3 million in 1998 and 1997, respectively.
The Company's net use of cash to support operating activities resulted primarily
from operating losses, including medical costs of providers, administrative
expenses, legal and professional fees and information technology initiatives.
Net cash provided by investing activities in 1998 was $5.9 million
22
<PAGE>
which was derived primarily from cash received from divestitures. In 1997, net
cash provided by investing activities was $13.2 million, which resulted
primarily from cash received from the disposition of subsidiaries, net of cash
disposed, of $12.3 million. In 1998, the net cash provided by financing
activities was $2.4 million. During 1998, the Company had net borrowings of $2.3
million. In 1997, the net cash provided by financing activities was $10.8
million. During 1997, the Company had net borrowings of $1.3 million. In
addition, the Company received an equity infusion in 1997 from Steven M. Scott,
M.D., Chief Executive Officer of the Company and the Company's largest
shareholder, in the amount of $10.0 million. As a result of the aforementioned,
cash and cash equivalents decreased from $8.9 million at December 31, 1997 to
$45 thousand at December 31, 1998.
On March 3, 1998, Dr. Bertram E. Walls made an investment of $2.0 million
in the Company in exchange for a $2.0 million convertible debenture due July 1,
1998 bearing interest at 10% per annum. The debenture, including accrued
interest, was convertible, at the holder's option, into the Company's Common
Stock and a new series of Preferred Stock. The conversion price for the Common
Stock was equal to the lower of: (i) the average closing price of the Common
Stock on the New York Stock Exchange for the 10 trading days ending on March 3,
1998, the date of the issuance of the debenture, or (ii) the average closing
price for the 10 trading days ending on June 30, 1998. The conversion price for
the Preferred Stock was ten times the conversion price for the Common Stock. On
May 1, 1998, Dr. Scott acquired the debenture from Dr. Walls. On June 29, 1998,
the debenture was amended to provide for conversion solely into Series D
Convertible Preferred Stock ("Series D Preferred"). On June 30, 1998, Dr. Scott
elected to convert the debenture into 444,974 shares of Series D Preferred. The
Series D Preferred is convertible into 10 shares of Common Stock for each share
of Preferred Stock only upon approval by the holders of the Common Stock.
On June 6, 1997, the Company entered into a series of sale and subservicing
agreements (the "Sale Agreements") with various subsidiaries of NCFE. The Sale
Agreements, as amended, provide for accounts receivable purchase commitments
totaling $165 million for the purchase of the Company's healthcare receivables
with recourse from third party payors that meet specified eligibility
requirements. Certain Sale Agreements create facilities for the purchase of up
to $50 million of receivables and terminate on June 1, 2000. The remaining
availability for purchases on those facilities is approximately $21 million as
of December 31, 1998. Another Sale Agreement creates a facility for the purchase
of up to $115 million of receivables and terminates on June 1, 2000. The
remaining availability for purchases on this facility is approximately $24
million as of December 31, 1998. Pursuant to the Sale Agreement, the Company
pays a program fee ranging from approximately 10.94% to approximately 12.50% per
annum on the outstanding amount of uncollected purchased receivables.
Under a separate loan and security agreement, an affiliate of NCFE has
agreed to provide the Company with a revolving line of credit of up to $32.5
million through July 1, 2000. Interest on outstanding amounts under this line of
credit is payable monthly at prime plus 4%. The line of credit is secured by
substantially all of the Company's assets,
23
<PAGE>
including pledges of the common stock of each of its subsidiaries. The Company
borrowed and repaid $1 million under this facility during 1998. There is no
outstanding balance as of December 31, 1998.
The Company expects to satisfy its anticipated demands and commitments for
cash in the next twelve months from the amounts available under the various
agreements with NCFE discussed above, as well as a reduction in cash used in
operations. The Company continues to review of all aspects of the business units
and implement actions to improve cash flow and profitability. Among the key
actions being implemented by the Company are changes in the method of
compensating the independent contractor physicians under the Practice Partners
Program(C). The Company also centralized certain administrative tasks and is
evaluating ways of expanding its customer base. The primary objectives are to
increase cash flow to continue to repay debt, to improve overall financial
results and improve the Company's stock price. If the Company is unable to
achieve these objectives, it will likely experience a material decrease in
liquidity which would cause the Company to increase its reliance on financing
under the revolving line of credit provided by an affiliate of NCFE. Until the
Company significantly improves cash flow, it will be dependent upon the
continued weekly purchases of eligible accounts receivable by NCFE and the line
of credit provided by an affiliate of NCFE in order to meet its obligations.
OTHER TRENDS AND UNCERTAINTIES
The health care industry has seen numerous consolidations and combinations
led by a number of major health care companies that are now experiencing some
financial difficulties. Many of those companies are embarking on divestiture
programs to eliminate unprofitable operations. The Company completed numerous
acquisitions during 1994 and 1995 and then sold them during the next few years
to direct its efforts to improvements in the physician contract services
business and the billing and collection operations. The Company believes that
this return to its core businesses was necessary because of the losses and cash
requirements of the HMOs and clinic operations, as well as the relative rising
cost of, and potential limited access to, additional capital.
In late March 1997, the Health Care Financing Administration ("HCFA")
indicated that it will no longer allow companies to obtain group provider
numbers to bill Medicare claims for services rendered by their independent
contractor physicians. The Company took steps to individually enroll the
independent contractor physicians and to modify the contractual arrangement with
independent contractor physicians in order to comply with HCFA's interpretation
of the reimbursement regulations. Efforts to individually enroll the independent
contractor physicians depend upon their cooperation. To date, the Company has
not experienced any significant problems in enrolling the physicians. The
Company is making progress toward completing the re-enrollment process in order
to bring the Company into compliance with HCFA's requirements. Because of the
required changes, the Company experienced some slowdowns in
24
<PAGE>
reimbursement and may incur additional costs to complete this process; however,
the full financial impact is not known at this time.
In certain states, the interpretation of laws prohibiting a corporation
from providing medical care may apply to outside staffing services. This affects
the ability to contract directly with a hospital to provide services. In those
states, the Company forms a professional corporation ("PC") or professional
association ("PA") to contract with the hospital. Generally, the PC or PA has a
sole shareholder who is a physician and, in most cases, is a member of the
Company's Board of Directors and/or is a Company shareholder. The PC or PA, as
well as the sole shareholder of the PC or PA, enters into a share transfer
agreement with the Company that allows the Company, among other things, to
change the sole shareholder at the Company's will. The PC or PA also contracts
with the Company via a services agreement for various management services such
as physician scheduling, making disbursements to physicians and vendors, or
providing accounting and tax services, etc. In exchange for these services, the
PC or PA assigns all accounts receivable to the Company. The Company has
evaluated these standardized agreements including their provisions as to the
10-year term of the contractual relationship and termination provisions. Based
on these provisions, as well as the Company's control established through the
share transfer agreements, and the Company's ability to reset the financial
terms of the services agreements at will, the Company believes that these
standardized agreements meet the criteria contained in Emerging Issues Task
Force Consensus 97-2 "Application of APB Opinion No. 16, Business Combinations,
and FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to
Physician Practice Management Entities and Certain Other Entities with
Contractual Arrangements" that require consolidation.
Successful competition in the industry will increasingly require better
information systems to rapidly provide more data and analysis related to the
practice of emergency medicine. The Company continues to evaluate statistical
analysis software, scanning technology and expanded electronic claims submission
and remittance processing to reduce use of paper charts and claims and to speed
up the claims reimbursement process. Increased use of information technology may
result in increased costs as the Company continues to evaluate and implement
technology products available in the market.
After the sale of the last HMO, the Company has attempted to stabilize its
labor force, limit the use of temporary personnel and non-physician independent
contractors and minimize professional fees. Various administrative and support
functions historically provided by the corporate office have been significantly
reduced, eliminated completely or redeployed to the operating companies
requiring those functions. As a result of these reductions, the Company is
dependent upon the retention of certain key employees.
Developments in the health care industry are also expected to impact the
Company's financial performance and operating strategy. These developments
include trends of medical expenses in HMOs and other businesses where the risk
of higher medical costs is assumed, as well as changing levels of utilization in
hospital-based and clinic operations. Additionally, the Company will be subject
to changes in premiums and
25
<PAGE>
levels of reimbursement from payors including HMOs, insurance companies,
Medicare and Medicaid.
Because the Company bills for a large number of emergency medicine visits,
it will always be subject to changes in premiums and levels of reimbursement
from payors including HMOs, insurance companies, Medicare and Medicaid. Efforts
by Medicare and Medicaid to reduce costs, including costs incurred due to
inaccurate or fraudulent billing practices, continue to be an area of exposure
to all organizations that render medical services reimbursed under these
programs. The Company maintains compliance programs and procedures in order to
help discover and address any billing practices that may not comply with
Medicare regulations. However, the Company may undergo audits similar to those
that have been initiated against other healthcare providers and billing
companies. There can be no assurance that the Company's billing procedures, if
subjected to such an audit, would be found to comply with all applicable
regulatory requirements.
The Company voluntarily disclosed to the Department of Justice that a
possible overpayment from Medicare occurred at a contracting site. Since then,
the Company has cooperated in the review by the U.S. Department of Justice. The
final resolution of this matter is pending; but the Company believes a refund of
approximately $395,000 will be required and provided for this in the 1997
financial statements.
In December 1998, the New York Stock Exchange ("NYSE") notified the Company
of their decision to delist the Company because it was not in compliance with
certain of their listing requirements. On January 4, 1999, the Company's common
stock did not open for trading on the NYSE. The common stock is now quoted on
the OTC Bulletin Board under the ticker symbol "ERDR." Nearly all stock
exchanges have minimum listing requirements. At this time, the Company does not
meet those requirements. The Company expects its stock to be quoted on the OTC
Bulletin Board until it meets the requirements of the Nasdaq or the NYSE. The
Company cannot determine the timing of an application for listing on Nasdaq, the
NYSE or another stock exchange at this time.
YEAR 2000 ISSUES
The Company places significant reliance upon information technology for day
to day operations. The Company's reliance on non-Information Technology systems
is not significant. In 1997, the Company began a review of computer applications
and platforms to determine that they are Year 2000 compliant before December 31,
1999. The Company has not completed the review of all applications, but has
reasonable assurance that major applications covering billing and certain
general ledger applications have been reviewed and are Year 2000 compliant. The
balance of the system reviews and modifications are expected to be completed
before experiencing any adverse consequences. The Company plans to complete any
significant reviews, testing and modifications by September 30, 1999. The costs
of the project to date have not been material and the Company does not expect
the estimated costs to complete this project to be material to the Company's
26
<PAGE>
consolidated financial position or the results of operations. Further, the
significant reallocation of resources has not been required to address Year 2000
issues.
The Company relies on a number of outside parties to process claims for
emergency department visits. The outside parties are computer processing and
telecommunications vendors, insurance companies, HMOs and entities that process
claims on behalf of Medicare and state Medicaid programs. A large amount of
claims submitted to payors are transmitted electronically. If electronic
submission of claims is not possible because of Year 2000 issues, the Company
could produce paper claims instead. Processing of paper claims could also delay
reimbursements to the Company.
The Company is monitoring the progress of these outside parties toward Year
2000 compliance. If Year 2000 issues are not properly addressed by entities that
pay for services provided by the Company, including entities under contract with
HCFA, operating results and cash flows could be significantly impacted. If cash
flows are interrupted, the Company would seek to utilize available lines of
credit or other financing sources. There can be no assurances at this time that
the lines of credit or other financing sources would be sufficient if such an
interruption in cash flow occurs. The Company will continue to monitor the
progress of these outside parties through written communications, joint tests of
hardware and software and review of contingency plans.
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 the operations of the
Company's businesses; the possibility that the Company may not be able to
improve operations as planned; the inability to obtain continued and/or
additional necessary working capital financing as needed; and other
important factors discussed above under "Other Trends and Uncertainties"
and disclosed from time to time in the Company's Form 10-K, Form 10-Q and
other periodic reports filed with the Securities and Exchange Commission.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Report of Independent Auditors 29
Consolidated Balance Sheets, December 31, 1998 and 1997 30
Consolidated Statements of Operations, Years ended
December 31, 1998, 1997 and 1996 31
Consolidated Statements of Shareholders' Equity (Deficit)
and Comprehensive Income (Loss), Years ended December
31, 1998, 1997 and 1996 32
Consolidated Statements of Cash Flows, Years ended
December 31, 1998, 1997 and 1996 33
Notes to Consolidated Financial Statements 34
28
<PAGE>
THE BOARD OF DIRECTORS AND SHAREHOLDERS
COASTAL PHYSICIAN GROUP, INC.
We have audited the accompanying consolidated balance sheets of Coastal
Physician Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity (deficit)
and comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 1998. The consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Coastal
Physician Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Raleigh, North Carolina
March 30, 1999
29
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
1998 1997
- -------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 45 $ 8,921
Marketable securities 0 5,735
Trade accounts receivable, net 29,216 26,492
Reserves held by NCFE 5,400 6,396
Accounts receivable, other 686 13,239
Receivables from related party 54 9,405
Prepaid expenses and other current assets 5,411 7,923
- --------------------------------------------------------------------------------------------------------
Total current assets 40,812 78,111
- --------------------------------------------------------------------------------------------------------
Property and equipment, at cost, less accumulated depreciation 7,171 10,342
Excess of cost over fair value of net assets acquired, net 2,248 2,450
Other assets 4,843 8,628
- --------------------------------------------------------------------------------------------------------
Total assets $ 55,074 $ 99,531
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities and other short-term borrowings $ 433 $ 2,529
Accounts payable 22,559 34,244
Payables to related party 1,277 555
Accrued physicians fees and medical costs 9,986 31,431
Accrued expenses and income taxes payable 7,429 17,501
- --------------------------------------------------------------------------------------------------------
Total current liabilities 41,684 86,260
- --------------------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities 77,109 74,698
- --------------------------------------------------------------------------------------------------------
Total liabilities 118,793 160,958
========================================================================================================
Shareholders' equity (deficit):
Preferred stock $.01 par value, authorized 10,000 shares;
445 and 0 issued and outstanding 4 0
Additional paid-in-capital preferred stock 2,061 0
Common stock $.01 par value, authorized 100,000 shares;
issued and outstanding 37,832 and 37,493 shares, respectively 378 375
Additional paid-in-capital common stock 176,197 160,374
Common stock warrants 1,691 1,582
Accumulated deficit (244,050) (223,912)
Accumulated other comprehensive income 0 154
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (63,719) (61,427)
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 55,074 $ 99,531
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenue, net $ 294,221 $ 424,841 $ 552,109
Costs and expenses:
Physician and other provider services 234,038 359,165 450,526
Medical support services 33,374 40,720 92,460
Selling, general and administrative 35,188 81,332 136,912
Goodwill impairment 0 4,343 29,679
Related party expense, net 1,602 5,016 5,312
- ----------------------------------------------------------------------------------------------------
Total costs and expenses 304,202 490,576 714,889
- ----------------------------------------------------------------------------------------------------
Gain(loss) on divested assets, net (including losses
on divestitures to related parties of $1,595, $1,179
and $0 respectively) (1,595) (1,453) 37,751
- ----------------------------------------------------------------------------------------------------
Operating loss (11,576) (67,188) (125,029)
- ----------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (8,675) (15,536) (12,774)
Interest income 116 628 500
Other related party, net 203 15 0
Other, net (206) (1,300) (5,982)
- ----------------------------------------------------------------------------------------------------
Total other expense (8,562) (16,193) (18,256)
- ----------------------------------------------------------------------------------------------------
Loss before income taxes
and extraordinary item (20,138) (83,381) (143,285)
Benefit (provision) for income taxes 0 1,400 (4,136)
- ----------------------------------------------------------------------------------------------------
Loss before extraordinary item (20,138) (81,981) (147,421)
Extraordinary item - gain on pooled portion of
South Florida divestiture, net of income taxes
of $0,$0 and $647 respectively 0 0 1,864
- ----------------------------------------------------------------------------------------------------
Net loss $ (20,138) $ (81,981) $(145,557)
====================================================================================================
Net loss per common share:
Basic and diluted loss per share before
extraordinary item $ (0.53) $ (3.08) $ (6.18)
Extraordinary gain, basic and diluted 0.00 0.00 0.08
- ----------------------------------------------------------------------------------------------------
Net loss $ (0.53) $ (3.08) $ (6.10)
====================================================================================================
Shares used to compute loss per share, basic and diluted 37,676 26,623 23,844
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
Additional
Paid-In
Shares of Capital Shares of Additional Common
Comprehensive Preferred Preferred Preferred Common Common Paid-In Stock
loss Stock Stock Stock Stock Stock Capital Warrants
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 0 $ 0 $ 0 23,754 $ 238 $142,345 $ 0
-------------------------------------------------------------------------------
Shares issued:
Stock options exercised 0 0 0 63 0 425 0
Employee stock purchase plan 0 0 0 82 1 518 0
Payment of proxy contest costs 0 0 0 227 2 678 0
Employee stock compensation awards 0 0 0 0 0 22 0
Stock options vested 0 0 0 0 0 82 0
Comprehensive income (loss)
Net loss (145,557) 0 0 0 0 0 0 0
Other comprehensive income (loss),
net of tax (26) 0 0 0 0 0 0 0
---------
Total comprehensive income (loss) $(145,583)
=========
Issuance of common stock warrants 0 0 0 0 0 0 987
-------------------------------------------------------------------------------
Balance at December 31, 1996 0 0 0 24,126 241 144,070 987
-------------------------------------------------------------------------------
Shares issued:
Employee stock purchase for cash 0 0 0 82 1 98 0
Conversion of preferred stock (1,164) (12) (13,478) 11,638 116 13,371 0
Issuance of stock related to
receivable sales 0 0 0 1,000 10 928 0
Directors' stock compensation 0 0 0 14 0 228 0
Exercise of common stock warrants 0 0 0 187 2 1,245 (1,247)
Payment of proxy contest costs 33 1 982 0 0 0 0
Payment of litigation costs 46 1 1,657 0 0 0 0
Payment of rent costs 1,085 10 10,839 240 3 237 0
Payment of consulting costs 0 0 0 200 2 186 0
Issuance of common stock warrants 0 0 0 0 0 0 1,842
Employee stock compensation awards 0 0 0 6 0 11 0
Comprehensive income (loss)
Net loss (81,981) 0 0 0 0 0 0 0
Other comprehensive income (loss),
net of tax 18 0 0 0 0 0 0 0
---------
Total comprehensive income (loss) $ (81,963)
=========
-------------------------------------------------------------------------------
Balance at December 31, 1997 0 0 0 37,493 375 160,374 1,582
-------------------------------------------------------------------------------
Shares issued:
Employee stock purchase for cash 0 0 0 217 1 93 0
Directors' stock compensation 0 0 0 122 2 226 0
Issuance of stock related to
convertible debenture 445 4 2,061 0 0 0 0
Comprehensive income (loss)
Net loss (20,138) 0 0 0 0 0 0 0
Other comprehensive income (loss),
net of tax 74 0 0 0 0 0 0 0
---------
Total comprehensive income (loss) $ (20,064)
=========
Additional expense related to fair
market value of warrants 0 0 0 0 0 0 109
Gain on sale of divested assets 0 0 0 0 0 15,504 0
-------------------------------------------------------------------------------
Balance at December 31, 1998 445 $ 4 $ 2,061 37,832 $ 378 $176,197 $ 1,691
===============================================================================
Retained Accumulated
Earnings other Total
(Accumulated comprehensive Shareholders'
Deficit) income Equity (Deficit)
- -----------------------------------------------------------------------------------
Balance at December 31, 1995 $ 3,626 $ 162 $146,371
----------------------------------------
Shares issued:
Stock options exercised 0 0 425
Employee stock purchase plan 0 0 519
Payment of proxy contest costs 0 0 680
Employee stock compensation awards 0 0 22
Stock options vested 0 0 82
Comprehensive income (loss)
Net loss (145,557) 0 (145,557)
Other comprehensive income (loss),
net of tax 0 (26) (26)
Total comprehensive income (loss)
Issuance of common stock warrants 0 0 987
----------------------------------------
Balance at December 31, 1996 (141,931) 136 3,503
----------------------------------------
Shares issued:
Employee stock purchase for cash 0 0 99
Conversion of preferred stock 0 0 (3)
Issuance of stock related to
receivable sales 0 0 938
Directors' stock compensation 0 0 228
Exercise of common stock warrants 0 0 0
Payment of proxy contest costs 0 0 983
Payment of litigation costs 0 0 1,658
Payment of rent costs 0 0 11,089
Payment of consulting costs 0 0 188
Issuance of common stock warrants 0 0 1,842
Employee stock compensation awards 0 0 11
Comprehensive income (loss)
Net loss (81,981) 0 (81,981)
Other comprehensive income (loss),
net of tax 0 18 18
Total comprehensive income (loss)
----------------------------------------
Balance at December 31, 1997 (223,912) 154 (61,427)
----------------------------------------
Shares issued:
Employee stock purchase for cash 0 0 94
Directors' stock compensation 0 0 228
Issuance of stock related to
convertible debenture 0 0 2,065
Comprehensive income (loss)
Net loss (20,138) 0 (20,138)
Other comprehensive income (loss),
net of tax 0 74 74
Total comprehensive income (loss)
Additional expense related to fair
market value of warrants 0 0 109
Gain on sale of divested assets 0 (228) 15,276
----------------------------------------
Balance at December 31, 1998 $(244,050) $ 0 $(63,719)
========================================
</TABLE>
See accompanying notes to consolidated financial statements
32
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating actitivites:
<S> <C> <C> <C>
Net loss $ (20,138) $ (81,981) $ (145,557)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 3,023 5,510 7,157
Amortization 411 760 3,049
Noncash interest expense 0 0 12
Extraordinary gain 0 0 (2,511)
Gain on sale of purchased portion of south Florida
divestiture 0 0 (1,579)
(Gain) loss on disposition of subsidiaries 0 1,453 (36,172)
Loss on disposal of fixed assets, net 137 2,211 1,709
(Gain) loss on sale of marketable securities and investments (576) 576 (288)
Goodwill impairment loss 0 4,343 29,679
Write-down of related party receivables 1,595 0 0
Deferred income taxes 0 0 6,407
Other 0 0 124
Change in assets and liabilities,
net of effects from acquisitions and dispositions:
Trade accounts receivable, net (2,725) 53,401 59,730
Reserves held by NCFE 996 (6,396) 0
Accounts receivable, notes receivable and other 8,841 (14,007) (1,001)
Receivables from related party 8,478 8,850 0
Refundable income taxes 0 2,498 10,306
Prepaid expenses and other current assets 2,395 6,076 (2,322)
Other assets 1,286 3,959 2,188
Accounts payable, accrued expenses and
income taxes payable (17,848) (10,279) 26,668
Accrued physicians fees and medical costs (3,083) (2,278) (4,653)
- ---------------------------------------------------------------------------------------------------------------
Total adjustments 2,930 56,677 98,503
- ---------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (17,208) $ (25,304) $ (47,054)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of marketable securities and investments, net $ (42) $ (5,577) $ (2,973)
Proceeds from sale of marketable securities and investments 0 5,574 8,210
Proceeds from maturity of marketable securities and investments 752 2,507 1,853
Proceeds (purchases) of property and equipment, net (1,399) (1,543) 3,074
Disposition of subsidiaries, net of cash sold 6,612 12,261 46,189
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 5,923 13,222 56,353
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings (Repayments) of debt 2,315 1,298 (5,186)
Cash payments for debt issue costs 0 (633) (3,048)
Net proceeds from issuances of preferred stock 0 10,000 0
Net proceeds from issuances of common stock 94 99 1,027
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,409 10,764 (7,207)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,876) (1,318) 2,092
Cash and cash equivalents at beginning of year 8,921 10,239 8,147
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 45 $ 8,921 $ 10,239
===============================================================================================================
Supplemental disclosures of cash flow information:
Cash payments (refunds) during the period for:
Interest $ 8,673 $ 9,360 $ 9,327
Income taxes $ 180 $ 2,479 $ (15,477)
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General
Coastal Physician Group, Inc. (the "Company" or "Coastal") is a physician
management company which provides a broad range of health care and
administrative services to physicians, hospitals, government agencies, managed
care programs and other health care organizations. Such services consist
primarily of the provision of physician coverage to hospital and government
facility clients, and the provision of billing and collection services to
various health care practitioners. The Company also operated two health
maintenance organizations ("HMOs") which were sold in March and October 1998.
The Company operates on a nationwide basis.
B. Principles of Consolidation and Basis of Presentation
The consolidated financial statements of the Company include the accounts
of Coastal and its wholly-owned subsidiary companies. All significant
intercompany balances and transactions have been eliminated in consolidation. In
certain states, the interpretation of laws prohibiting a corporation from
providing medical care may apply to the Company's business. As necessary, the
Company enters into a service agreement with a professional corporation to
provide management services. These and other related agreements meet the
requirements for consolidation as contained in Emerging Issues Task Force
Consensus 97-2 "Application of APB Opinion No. 16, Business Combinations, and
FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to
Physician Practice Management Entities and Certain Other Entities with
Contractual Arrangements."
C. Cash and Cash Equivalents and Regulatory Requirements
Cash in excess of daily requirements invested in short-term investments
with maturities of three months or less are considered to be cash equivalents
for financial statement purposes.
The Company's HMOs were required to maintain certain levels of restricted
deposits to satisfy certain regulatory requirements. These deposits (included in
Other assets in the accompanying consolidated balances sheets) totaled
approximately $0 and $2,157,000 as of December 31, 1998 and 1997, respectively.
In addition, the Company's HMOs were required to maintain certain net worth
levels which restricted the transfer of funds between companies.
34
<PAGE>
Noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Conversion of debenture and related interest $2,065 $ --- $ ---
Issuance of stock under directors' deferred
compensation plan 228 228 ---
Issuance of stock in lieu of cash for expenses
--- 4,004 ---
Issuance of warrants --- 1,842 987
Conversion of warrants to common stock --- 1,248 ---
Conversion of preferred stock to common stock
--- 13,489 ---
Warrants purchase price adjustment 109 --- ---
Unrealized appreciation of available for sale
securities 74 18 (26)
Disposition of subsidiaries 15,504 --- ---
</TABLE>
D. Marketable Securities
Under Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," securities are classified
either as held-to-maturity, available-for-sale, or trading. Securities
classified as held-to-maturity are carried at amortized cost of $0 and
$3,334,000 at December 31, 1998 and 1997, respectively and primarily consisted
of state and political subdivision securities, U.S. Government securities and
municipal bonds. Securities classified as available-for-sale are carried at fair
values of $0 and $2,546,000 at December 31, 1998 and 1997, respectively, and
primarily consisted of equity securities. Unrealized gains and losses on such
securities are carried as a separate component of shareholders' equity
(deficit). Realized investment gains and losses are computed using specific
costs of securities sold. Held-to-maturity securities included in other assets
on the accompanying consolidated balance sheets amounted to $0 and $145,000 at
December 31, 1998 and 1997, respectively.
E. Accounts Receivable
In June 1997, the Company and certain of its subsidiaries entered into a
number of Sale and Subservicing Agreements with National Century Financial
Enterprises, Inc. ("NCFE") and its affiliates, whereby certain eligible accounts
receivable were sold to NCFE (See Note 8). Eligible trade accounts receivable
are comprised primarily of amounts due from hospitals under flat rate contracts
and amounts due under fee-for-service contracts from patients,
government-sponsored health care programs and other third party payors such as
insurance companies and self-insured employers. Ineligible receivables are
comprised primarily of amounts billed to individuals not covered by insurance
and certain other minor fee-for-service receivables deemed to be ineligible by
35
<PAGE>
NCFE and not sold. These receivables are geographically dispersed throughout the
United States.
Accounts receivable due under fee-for-service contracts include an
allowance for contractual adjustments and uncollectibles which is charged to
operations based on evaluation of potential losses. Contractual adjustments
result from the differences between the physician rates for physician services
performed and amounts allowed by government-sponsored health care programs,
insurance companies and other payors for such services. Uncollectibles represent
receivables considered unrecoverable. The allowance considered necessary to
cover contractual adjustments and uncollectibles is based on an analysis of
current and past due accounts, collection experience in relation to amounts
billed and other relevant information. Although the Company believes amounts
provided are adequate, the ultimate amounts uncollectible could be in excess of
the amounts provided.
F. Depreciation
Depreciation of property and equipment is computed on the straight-line
method over the estimated useful lives of the assets as follows:
Buildings 31 1/2 years
Leasehold improvement 5 years
Furniture and equipment 3 to 10 years
Automobiles 3 years
G. Excess of Cost Over Fair Value of Net Assets Acquired
The assets and liabilities of acquired entities accounted for under the
purchase method of accounting are adjusted to their estimated fair values as of
the acquisition dates. The amounts recorded as excess of cost over fair value of
net assets acquired ("goodwill") represent amounts paid that exceed estimated
fair values assigned to the assets and liabilities of each acquired business.
Such amounts are being amortized on a straight-line basis over periods ranging
from five to forty years (1996 and 1995) and five to twenty years (1998 and
1997) depending on the specific circumstances of each acquisition. Accumulated
amortization of goodwill was $998,000 and $1,504,000 at December 31, 1998 and
1997 respectively.
Under Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of",
management performs an evaluation of the carrying value and remaining
amortization periods of unamortized amounts. In connection with the ongoing
application of SFAS 121, management performs such an evaluation whenever events
or changes in circumstances occur which indicate such carrying values may not be
recoverable. With the exception of the matters related to goodwill impairment
discussed in Note 2, no such events or changes in circumstances were identified
during 1998, 1997 or 1996.
36
<PAGE>
H. Revenue and Medical Cost Recognition
Contractual arrangements with hospitals are primarily (a) flat rate
contracts whereby the Company receives fees from hospitals based on hours of
physician coverage provided and (b) fee-for-service contracts whereby the
Company bills and collects the charges for medical services rendered by the
Company's contracted health care professionals and assumes the financial risks
related to patient volume, payor mix, reimbursement rates, and collection.
The Company recognizes capitation revenue from employers and prepaid
managed care plans that contract with the Company for the delivery of health
care services on a monthly basis. This capitation revenue is at the
contractually agreed-upon per-member, per-month rates.
Premium revenue for prepaid healthcare is recognized as earned on a pro
rata basis over the contract period.
Costs of medical services are recorded as expenses in the period in which
they are incurred. Accrued medical claims are based upon costs incurred for
services rendered prior to the balance sheet date. Incurred but not reported
medical claims are estimated by the Company based on trends, experience and
judgment. The ultimate amount of such claims may differ from amounts provided
and such adjustment will be reflected in the period in which such differences
become apparent. Losses on contracts for fully insured coverage are accrued when
management determines that it is probable that the costs of providing medical
care will exceed the premiums received.
I. Presentation of Expenses
Physician and other provider services costs and expenses are comprised
primarily of fees paid to physicians and other healthcare providers and include
medical supplies and pharmaceutical expenses in the clinic operations.
Medical support services costs and expenses include all the direct costs
and expenses of practice management activities, as well as billing, collection
and physician business management services costs and expenses.
Selling, general, and administrative costs and expenses include all other
operating expenses.
J. Per Share Data
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 simplifies the standards for computing earnings per share and is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. The Company has adopted SFAS 128, as of December
31,1997, and has restated all prior periods presented to conform with the
requirements of SFAS 128. Basic earnings (loss) per common share available to
common shareholders are based on the weighted average number of common shares
outstanding. Diluted earnings (loss) per common share available to common
shareholders are based on
37
<PAGE>
the weighted average number of common shares outstanding and the dilutive
potential common shares, such as dilutive stock options and warrants. The
computation of diluted net loss per share of common stock was antidilutive in
each of the periods presented; therefore the amounts reported for basic and
diluted are the same.
K. Stock-based Compensation
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock-based compensation plans. No compensation cost has been
recognized for its fixed stock option plans and its stock purchase plan since
the options were granted at the stock's then current market value. In addition,
no pro forma disclosure of net income and earnings per share, in accordance with
Statement of Financial Accounting Standards No. 123, has been provided due to
the immaterial effect of the amount of stock-based compensation expense.
L. Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ from those
estimates.
M. Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements to conform to the 1998 presentation. Such reclassifications
had no impact on net loss or shareholders' equity (deficit) as previously
reported.
N. Recent Accounting Pronouncements
Effective January 1, 1998, the Company adopted the FASB's Statements of
Financial Accounting Standards No. 129, "Disclosure of Information About Capital
Structure" ("SFAS 129"), and No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 129 establishes standards for the disclosure of information about
rights and privileges of outstanding securities. SFAS 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income includes
all non-owner changes in equity during a period and is divided into two broad
classifications: net income and other comprehensive income ("OCI"). OCI includes
revenue, expenses, gains and losses that are excluded from earnings under
generally accepted accounting principles. For the Company, OCI consists of
unrealized gains or losses on securities available for sale.
38
<PAGE>
Effective January 1, 1998, the Company adopted the FASB's Statement of
Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. The adoption of SFAS 131 did
not affect results of operations or financial position. See Note 4.
Effective for fiscal quarters and fiscal years beginning after June 15,
1999, the Company will be required to adopt Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 131"). SFAS 131 requires entities to disclose information for
derivative financial instruments, and to recognize all derivatives as assets or
liabilities measured at fair value. The Company does not believe that this
pronouncement will have a material impact on its financial position or results
of operations.
O. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", as amended by Statement of Financial
Accounting Standards No. 119, "Disclosures about Derivative Financial
Instruments and Fair Value of Financial Instruments" requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate fair value. Fair value is
defined as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The Company believes that the carrying value of its financial instruments
(except for long term debt) approximates their fair value due to the short term
maturity of these instruments. The fair value of the Company's long term debt,
after discounting the scheduled payments to maturity, approximates its carrying
balance.
2. GOODWILL IMPAIRMENT
During 1997 and 1996, the Company recognized goodwill impairment losses of
$4,343,000 and $29,679,000, respectively, related to goodwill associated with
(i) certain long-lived assets of entities identified for sale by the Company and
(ii) certain acquired operations. No goodwill impairment losses were recognized
in 1998.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the carrying amount of the long-lived assets and identifiable
intangibles associated with assets specifically identified for sale was compared
to the estimated fair value of the assets, less estimated costs to sell. Fair
value was based on the estimated amount at which the assets could be sold in a
current transaction based on management's
39
<PAGE>
evaluations and discussions with the Company's outside financial advisors.
Reevaluation using this methodology resulted in impairment losses recognized in
the second quarter of 1997 of $4,200,000 and $13,562,000 in 1996 ($6,219,000 in
the third quarter and $7,343,000 in the fourth quarter) for Better Health Plan,
Inc., ("BHP") a New York-based Medicaid managed care entity acquired in 1995,
and $6,517,000 in 1996 ($1,522,000 in the third quarter and $4,995,000 in the
fourth quarter) for the Company's North Carolina clinics acquired at various
dates. The primary reason for the additional impairment loss recorded in 1997
was the decline in the estimated amount at which BHP assets could be sold.
In determining impairment losses applicable to Advanced Health Plans, Inc.
("AHP") and Coastal Physician Services, Inc. ("CPS"), the Company developed its
best estimates of operating cash flows over the remaining business life cycles
of both AHP and CPS based on earnings history, market conditions and assumptions
reflected in internal operating plans and strategies. Future cash flows,
excluding interest charges, were discounted using the Company's weighted average
cost of capital. These estimates reflected that the present values of the future
cash flows were not adequate to recover the existing carrying amounts of
goodwill. Accordingly, the goodwill impairment losses were recognized to adjust
the carrying amounts to estimated fair values.
The primary underlying factor contributing to the decision to reevaluate
the carrying value of goodwill associated with AHP was the uncertainty
associated with the time that AHP's founder and Chief Executive Officer, Dr.
Sokolov, would be able to continue to devote to AHP and his continuing role with
AHP. The reevaluation resulted in a $6,611,000 write-off of AHP's goodwill
balance in the third quarter of 1996. Concurrent with Dr. Sokolov's resignation,
AHP's operations ceased and amounts related to AHP were written off during 1997.
The primary underlying factor contributing to the decision to reevaluate
the carrying value of goodwill associated with certain acquired operations of
CPS was the termination of a significant number of contracts. The reevaluation
resulted in a write-off of goodwill of $143,000 in the fourth quarter of 1997
and $2,989,000 in the fourth quarter of 1996.
3. SIGNIFICANT TRANSACTIONS
A substantial portion of the Company's consolidated operations consisted of
entities acquired in a succession of acquisitions during the period from January
1993 through November 1995. Additionally, the Company consummated a number of
significant divestitures from November 1995 through October 1998. The following
is a summary of certain accounting aspects of such acquisitions and
divestitures, as well as a description of the more significant transactions.
Certain of the Company's acquisitions were accounted for under the purchase
method of accounting ("purchases"). Under this method, the assets and
liabilities of the acquired entity were recorded at their estimated fair market
values at the date of acquisition, any excess of the purchase price over the
respective fair market value was
40
<PAGE>
accounted for as goodwill, and the results of operations of the acquired company
were included in the Company's consolidated financial statements from the
respective date of acquisition. The remaining acquisitions were accounted for
under the pooling-of-interests method of accounting ("poolings"). Under this
method, the assets and liabilities of the combined entity were recorded at their
respective book values, and the Company's consolidated financial statements were
restated for all periods presented to include the results of operations of the
acquired entity.
In October 1998, the Company sold Health Enterprises, Inc. whose primary
operating subsidiary is Healthplan Southeast, Inc. ("HPSE"), to Steven M. Scott,
M.D., Chairman and Chief Executive Officer of the Company. In March 1998, the
Company sold Doctors Health Plan, Inc. to DHP Holdings LLC, an entity controlled
by Dr. Scott. On December 31, 1997, the Company and certain subsidiaries of the
Company closed a transaction pursuant to which the Company sold to Scott Medical
Group, LLC ("Scott Medical") certain clinic assets. See Note 12, "Related Party
Transactions."
On August 19, 1997, the Company sold certain assets of Better Health Plan,
Inc., which was acquired in a purchase transaction in May 1995, to the New York
State Catholic Health Plan, Inc. for approximately $7,750,000 in cash. Due to
the goodwill impairment adjustments of $4,200,000 and $13,562,000 recorded in
1997 and 1996, respectively, the loss on the sale was minimal. Certain assets of
BHP were retained in order to satisfy certain liabilities.
Effective September 30, 1996, the Company sold certain assets of Physicians
Planning Group, Inc. ("PPG"), a manager of primary care provider networks and
the common stock of Healthcare Automation, Inc. ("HCA") a billing services and
network management company. The Company realized a net gain on the sale of PPG
and HCA (included in Gain (loss) on divested assets, net in the accompanying
statements of operations), of approximately $15,692,000 before applicable income
taxes. Income tax expense on the transaction totaled $1,163,000, resulting in a
gain on an after tax basis of $14,529,000.
Effective November 30, 1996, the Company sold certain assets of the
HealthNet Medical group operations of Physicians Planning Group, Inc.
("HealthNet"), the Company's New Jersey-based clinic operations, for
approximately $10,500,000 in cash. HealthNet consisted of nine primary care
sites in New Jersey and New York. The Company realized a gain of approximately
$8,300,000 which is included in Gain (loss) on divested assets, net in the
accompanying statements of operations. In 1995, the Company recognized a
goodwill impairment adjustment related to HealthNet based on its best estimate
of operating cash flows over the remaining business life cycle based on earnings
history, market conditions and assumptions reflected in internal operating plans
and strategies. Future cash flows, excluding interest charges, were discounted
using the Company's weighted average cost of capital. These estimates reflected
that the present value of the future cash flows was not adequate to recover the
existing carrying amount of goodwill. In 1995, HealthNet was not being marketed
and therefore, no estimated amount at which the assets could be sold in a
current transaction based on management's
41
<PAGE>
evaluations and discussions with the Company's outside financial advisors had
been determined.
Effective November 22, 1996 MedCost, Inc., one of the Company's managed
care entities, was sold for approximately $15,000,000 in gross cash proceeds
from the transaction and recorded a gain of approximately $12,200,000 which is
included in Gain (loss) on divested assets, net in the accompanying statements
of operations.
On November 30, 1995 the Company sold 47 of its south Florida clinics for
$51,300,000 in gross cash. During the third quarter of 1996, the Company
received additional gross cash proceeds of $2,800,000 as an adjustment to the
original sale price. These proceeds were based on the settlement of the final
closing date balance sheet and were recorded as a gain on the sale transaction.
The Company realized an additional gain of $1,290,000 resulting from other
non-cash post-closing balance sheet settlements.
Because the disposal occurred within two years following acquisition of the
entities comprising the pooled portion, the component of the total gain
applicable to the pooled portion, less applicable income tax expense, is
required to be classified as an extraordinary item in the accompanying
consolidated statements of operations. The loss on the purchased portion, gross
of applicable income taxes, has been included in Gain (loss) on divested assets,
net in the accompanying consolidated statements of operations. In determining
the breakdown of the transaction for purposes of disclosing the gain (loss) on
the sale of the respective portions, proceeds have been allocated based upon the
relative fair market values of the respective entities. The accounting bases for
the respective portions were based on a specific identification of the entities
comprising each portion. Provisions and transaction-related expenses which could
not be specifically identified with either the purchased or pooled portion were
allocated on a basis consistent with the allocation of proceeds. The direction
and magnitude of the net impact of the respective portions (loss on purchased
portion, gain on pooled portion) is due to the allocation of a majority of the
proceeds to the pooled portion and the higher accounting basis which results
under the purchase method.
4. SEGMENT INFORMATION
During the years ended December 31, 1998, 1997 and 1996, the Company had
five reportable segments: physician contract services, government services,
billing and collection services, HMO's and divested businesses. The physician
contract services group contracts principally with hospitals and government
agencies to identify and recruit physicians as candidates for admission to a
client's medical staff and to coordinate the on-going scheduling of independent
contractor physicians who provide clinical coverage in designated areas. While
the Company also provides obstetrics, gynecology and pediatrics physician
contract services, the provision of contract management services to hospital
emergency departments represents the Company's principal hospital-based service.
The government services segment provides similar services to governmental
agencies such as the Department of Defense and state and local governments. The
billing and collection services provides support to independent contractor
physicians, independent practices and
42
<PAGE>
other health care practitioners. These services are often provided as part of
the Company's physician contract services and are also marketed independently to
unaffiliated providers. The HMO's consisted of two health plans which were
divested during 1998 and one health plan that was divested in 1997. Divested
businesses in 1998 consist of the wrap up of businesses divested prior to 1998.
Divested businesses in 1997 consist of the Company's clinic and other
miscellaneous operations. The Company also has a corporate group included in
"All Other" that provides administrative services to the operating segments.
Information About Segment Profit/Loss and Segment Assets
The Company evaluates performance based on profit or loss from operations
before interest, income taxes, depreciation and amortization. Intersegment
revenues are recorded at amounts similar to revenues from external customers.
Intersegment profits or losses are eliminated in consolidation. Also, the
Company does not allocate certain expenses such as certain professional fees or
certain employee benefits to its segments. The Company's reportable segments are
business units that are responsible for certain quantitative thresholds of
revenue, profits or losses or assets.
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Billing Total
Physician Gov't and Divested Reportable All
(In Thousands) Contracting Services Collections HMO's Segments Segments Other Totals
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from external sources $164,700 $20,185 $16,164 $92,823 $ 72 $293,944 $ 277 $294,221
Intersegment revenues - 36 12,710 - - 12,746 - 12,746
Interest expense 6,065 2,599 - 65 - 8,729 (54) 8,675
Depreciation and amortization 591 55 1,331 1,127 5 3,109 325 3,434
Segment profit (loss) (7,957) (1,791) 1,492 (6,021) (997) (15,274) (4,864) (20,138)
Segment assets 30,781 4,798 11,529 416 2,169 49,693 5,381 55,074
</TABLE>
Reconciliations
- ---------------
The following are reconciliations of reportable segment revenues, profit or
loss and assets to the Company's consolidated totals.
Revenues for the year ended December 31, 1998
Total external revenues for reportable segments $293,944
Intersegment revenues for reportable segments 12,746
Other revenue 277
Elimination of intersegment revenues (12,746)
--------
Total consolidated revenues $294,221
========
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<PAGE>
Profit or Loss for the year ended December 31, 1998
Total loss for reportable segments $(15,274)
Other profit or loss (4,864)
--------
Loss before income taxes and extraordinary item $(20,138)
=========
Assets as of December 31, 1998
Total assets for reportable segments $ 49,693
Other assets 5,381
--------
Total consolidated assets $ 55,074
========
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Billing Total
Physician Gov't and Divested Reportable All
(In Thousands) Contracting Services Collections HMO's Segments Segments Other Totals
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from external sources $202,174 $23,065 $14,126 $164,908 $20,163 $424,436 $405 $424,841
Intersegment revenues - 621 13,298 - - 13,919 22 13,941
Interest expense 4,893 575 2 51 110 5,631 9,905 15,536
Depreciation and amortization 1,173 133 1,957 1,320 809 5,392 878 6,270
Segment profit (loss) (17,187) (2,098) (4,178) (28,759) (3,467) (55,689) (27,692) (83,381)
Segment assets 29,223 2,078 13,088 39,263 10,937 94,589 4,942 99,531
</TABLE>
Reconciliations
- ---------------
The following are reconciliations of reportable segment revenues, profit or
loss and assets to the Company's consolidated totals.
Revenues for the year ended December 31, 1997
Total external revenues for reportable segments $424,436
Intersegment revenues for reportable segments 13,919
Other revenue 405
Elimination of intersegment revenues (13,919)
--------
Total consolidated revenues $424,841
========
Profit or Loss for the year ended December 31, 1997
Total loss for reportable segments $(55,689)
Other profit or loss (27,692)
--------
Loss before income taxes and extraordinary item $(83,381)
========
Assets as of December 31, 1997
Total assets for reportable segments $ 94,589
Other assets 4,942
--------
Total consolidated assets $ 99,531
========
44
<PAGE>
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Billing Total
Physician Gov't and Divested Reportable All
(In Thousands) Contracting Services Collections HMO's Segments Segments Other Totals
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue from external sources $276,759 $38,917 $20,636 $154,745 $60,320 $551,377 $732 $552,109
Intersegment revenues - 991 20,681 - 317 21,989 294 22,283
Interest expense 455 - 5 7 132 599 12,175 12,774
Depreciation and amortization 1,667 161 1,867 2,292 2,824 8,811 1,395 10,206
Segment profit (loss) (63,055) (11,895) (11,506) (15,819) (10,395) (112,670) (30,615) (143,285)
Segment assets 73,157 10,708 17,968 43,960 22,132 167,925 13,916 181,841
</TABLE>
Reconciliations
- ---------------
The following are reconciliations of reportable segment revenues,
profit or loss and assets to the Company's consolidated totals.
Revenues for the year ended December 31, 1996
Total external revenues for reportable segments $ 551,377
Intersegment revenues for reportable segments 21,989
Other revenue 732
Elimination of intersegment revenues (21,989)
---------
Total consolidated revenues $ 552,109
=========
Profit or Loss for the year ended December 31, 1996
Total loss for reportable segments $(112,670)
Other profit or loss (30,615)
---------
Loss before income taxes and extraordinary item $(143,285)
=========
Assets as of December 31, 1996
Total assets for reportable segments $ 167,925
Other assets 13,916
---------
Total consolidated assets $ 181,841
=========
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<PAGE>
5. TRADE ACCOUNTS RECEIVABLE AND OPERATING REVENUE
Trade accounts receivable, net, consisted of the following:
As of December 31,
(In thousands) 1998 1997
---- ----
Gross trade receivables $31,460 $39,357
Less allowance for contractual adjustments and
uncollectibles (2,244) (12,865)
------- --------
Trade accounts receivable, net $29,216 $ 26,492
======= ========
Operating revenues, net consisted of the following:
For the years ended December 31,
(In thousands) 1998 1997 1996
---- ---- ----
Gross non-capitated revenue $ 381,161 $ 451,596 $ 692,665
Gross capitated revenue 92,370 163,533 145,105
--------- --------- ---------
Total gross revenue 473,531 615,129 837,770
Less contractual adjustments and
uncollectibles (179,310) (190,288) (285,661)
--------- --------- ---------
Operating revenue, net $ 294,221 $ 424,841 $ 552,109
========= ========= =========
In June 1997, the Company and certain of its subsidiaries entered into a
Sale and Subservicing agreement with NCFE, whereby certain eligible accounts
receivable and rights to future receivables were sold. The transaction is more
fully discussed in Note 8. Receivables and rights to future receivables sold are
purchased at their approximate book value and, therefore, no gain or loss was
recorded on the sale. The cash received for the rights to future receivables was
recorded as long-term debt in the accompanying consolidated balance sheets.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has very limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
interest rate risks.
On March 31, 1995, the Company entered into a fixed interest rate hedge
contract with a financial institution. Under the terms of the contract, the
Company pays a fixed rate of 8.45% on a notional amount of $6,600,000, which
amortizes quarterly by $235,714 beginning July 3, 1995. In return, the financial
institution pays the Company a floating rate of interest calculated using the
three-month LIBOR plus 1.125%. The contract expires on March 31, 2002. The
difference between the amounts paid and the amounts received are recognized as
adjustments to interest expense.
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<PAGE>
7. PROPERTY AND EQUIPMENT
The cost, accumulated depreciation, and book value of property and
equipment are summarized as follows:
December 31,
(In Thousands) 1998 1997
-------- --------
Land $ 2,375 $ 2,511
Buildings 3,184 3,184
Leasehold improvements 2,350 3,088
Construction in progress 112 206
Furniture and equipment 17,033 20,892
Automobiles 143 198
-------- --------
Total 25,197 30,079
Less accumulated depreciation (18,026) (19,737)
-------- --------
Net property and equipment $ 7,171 $ 10,342
======== ========
8. BORROWINGS
Long-term debt consisted of the following:
December 31,
------------
(In Thousands) 1998 1997
-------- --------
Funds received from NCFE:
NPF-XI, base rate of 10.94% $ 47,036 $ 69,111
NPF-VI, base rate of 12.5% 23,315
NPF-WL, base rate of 12.5% 3,817 2,907
---------------------
Total funds from NCFE 74,168 72,018
Term note payable in monthly installments through
November 1998 bearing interest at 8.25% -- 1,489
Obligations under capital leases 3,231 3,022
Other 143 698
---------------------
Total 77,542 77,227
Less current maturities (433) (2,529)
---------------------
Long term portion $ 77,109 $ 74,698
=====================
On June 6, 1997, the Company entered into a series of sale and subservicing
agreements (the "Sale Agreements") with various subsidiaries of NCFE. The Sale
Agreements, as amended, provide for accounts receivable purchase commitments
totaling $165 million for the purchase of the Company's healthcare receivables
with recourse from third party payors that meet specified eligibility
requirements. Certain Sale Agreements were amended during 1998 to provide for
the purchase of up to $50 million of receivables from $23 million at December
31, 1997 and to extend their termination date to June 1,
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<PAGE>
2000 from July 1, 1998. The remaining availability for purchases on those
facilities is approximately $21 million as of December 31, 1998. Another Sale
Agreement creates a facility for the purchase of up to $115 million of
receivables and terminates on June 1, 2000. The remaining availability for
purchases on this facility is approximately $24 million as of December 31, 1998.
Pursuant to the Sale Agreements, the Company pays program fees ranging from
approximately 10.94% to approximately 12.5% per annum on the outstanding amount
of uncollected purchased receivables.
Pursuant to a separate loan and security agreement, an affiliate of NCFE
has agreed to provide the Company with a revolving line of credit of up to $32.5
million through July 1, 2000. Interest on outstanding amounts under this line of
credit is payable monthly at prime plus 4%. The availability under the line of
credit was reduced from $40 million on October 30, 1998, by an amount equal to
one-half, or $7.5 million, of the net proceeds received in connection with the
sale of HPSE. During 1998, the expiration date of the line of credit was
extended from June 15, 1999 to July 1, 2000. The line of credit is secured by
substantially all of the assets of Coastal Physician Group, Inc., including
pledges of the common stock of each of its subsidiaries.
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.
Approximately $1.5 million was accounted for as a reduction of interest expense.
Approximately $0.8 million related to its accounts receivable sales and
subservicing programs costs and was accounted for as a reduction of selling,
general and administrative costs and expenses.
As of December 31, 1998, the Company had received funds from NCFE totaling
approximately $74.2 million for which repayment has been waived until June 1,
2000, provided the Company remains in compliance with the terms and conditions
of its various agreements with NCFE. The Company remains dependent upon NCFE to
continue to purchase eligible accounts receivable and to provide funds pursuant
to the $32.5 million revolving line of credit described above in order to fund
its operations.
The assets represented by the obligations under capital leases shown above
consist primarily of one building having a cost basis of $3,041,000 and
accumulated depreciation of $746,000 and $650,000 as of December 31, 1998 and
1997, respectively.
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The following is a schedule of maturities of long-term debt and minimum
lease payments under capital leases as of December 31, 1998 (in thousands):
Long term debt Capital leases Total
-------------- -------------- -------
1999 $ 64 $ 496 $ 560
2000 74,172 514 74,686
2001 4 488 492
2002 5 3,392 3,397
2003 5 --- 5
Thereafter 61 --- 61
-------------- -------------- -------
Totals $74,311 $4,890 79,201
============== ==============
Less amount representing interest on capital leases 1,659
-------
77,542
Less current maturities 433
-------
$77,109
=======
9. INCOME TAXES
Benefit (provision) for income taxes consisted of the following:
Years Ended December 31,
------------------------------------
(In Thousands) 1998 1997 1996
--------- ---------- ----------
Current:
Federal $ --- $1,400 $4,452
State --- --- (2,181)
Deferred:
Federal --- --- (5,638)
State --- --- (769)
--------- ---------- ----------
Benefit (provision) for income taxes
$ --- $1,400 $(4,136)
========= ========= ==========
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The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are as follows:
(In Thousands) Years Ended December 31,
---------------------
1998 1997
-------- --------
Deferred tax assets:
Net operating loss carry forward $ 77,863 $ 81,306
Reserve for liabilities 1,711 4,066
Depreciation of property and equipment 356 218
Other 2,473 2,427
-------- --------
Total gross deferred tax assets 82,403 $ 88,017
Less valuation allowance (81,407) (86,333)
-------- --------
Net deferred tax assets $ 996 $ 1,684
======== ========
Deferred tax liabilities:
Deferred revenue and prepaid expenses $ 996 $ 1,684
======== ========
Total gross deferred tax liabilities $ 996 $ 1,684
======== ========
Net deferred tax assets $ -- $ --
======== ========
The valuation reserve for the year ended December 31, 1998 decreased by
$4,926,000 due to a decrease of approximately $13,431,000 primarily due to loss
carryforwards allocated to the buyers of subsidiaries sold during the year
partially offset by an increase of approximately $8,505,000 due primarily to
current year loss carryforwards. The net change in the total valuation reserve
for the year ended December 31, 1997 was an increase of $31,999,000. Due to the
recent history of losses by the Company, it is the view of management that a
valuation reserve is necessary for the net deferred assets of the Company.
As of December 31, 1998 the Company had federal loss carryforwards of
approximately $178,000,000. In addition, as of December 31, 1998, the Company
had state loss carryforwards of approximately $248,000,000. These net operating
loss carryforwards expire at various dates to 2014. As of December 31, 1998,
approximately $5,000,000 of the Company's federal loss carryforward is subject
to an annual limitation and $173,000,000 is not presently subject to any
limitations.
The Company experienced a change in ownership within the meaning of Section
382 of the Internal Revenue Code during July 1996. A change in ownership occurs
when there is a more than 50% change in ownership, computed using 5% or more
shareholders, over a period of time not to exceed 3 years. As of December 31,
1998, the Company's cumulative ownership change since July 1996 was
approximately 32%. Should future ownership cause a more that 50% cumulative
change, the Company's ability to use federal and state loss carryforwards could
be subject to significant limitation.
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A reconciliation of the benefit (provision) for income taxes to the amount
computed by applying the 34% statutory federal income tax rate is as follows:
Years Ended December 31,
1998 1997 1996
------ ------ ------
"Expected" benefit (provision) 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
effect 5.3% 8.1% (1.5)%
Nondeductible purchased goodwill 0.4% 6.9% (7.7)%
Change in valuation reserve (40.8%) (46.5)% (28.2)%
Other 1.1% (0.8)% 0.5%
------ ------ ------
"Actual" benefit (provision) 0.0% 1.7% (2.9%)
====== ====== ======
10. CAPITAL STOCK
In 1996, the Company granted common stock purchase warrants to certain
lenders entitling them to purchase at par value up to 1,254,509 shares of its
common stock. A portion of the warrants vested immediately, with the balance
subject to cancellation based upon the Company's compliance with a specified
repayment schedule. Warrants to purchase 250,902 shares were canceled as a
result of $40 million in payments made by the Company prior to January 2, 1997.
Warrants covering 186,789 shares have been exercised. The remaining warrants,
covering 816,818 shares, have vested and are exercisable through May 2001.
On January 20, 1995, the Board of Directors adopted a Shareholder Rights
Plan, under which the Company distributed a dividend of one Preferred Share
Purchase Right (a "Right") for each outstanding share of the Company's common
stock. Each Right becomes exercisable upon the occurrence of certain events for
one one-hundredth of a share of Junior Participating Cumulative Preferred Stock,
par value $.01 per share, at a purchase price of $120 subject to modification.
Under the Shareholder Rights Plan, 500,000 shares of Junior Participating
Cumulative Preferred Stock have been reserved for issuance. The Rights currently
are not exercisable. Pursuant to an amendment to the Shareholder Rights Plan
(effective June 3, 1997), the Rights will become exercisable only if a person or
group acquires beneficial ownership of 20% or more of the Company's outstanding
shares of common stock, or in the case of a group consisting of Dr. Scott and
his associates and affiliates (the "Scott Group"), more than 55% of the
Company's outstanding shares of common stock. Prior to December 27, 1996, the
Rights were exercisable when a person or group acquired beneficial ownership of
15% or more of the Company's outstanding shares of common stock, or in the case
of the Scott Group, 33.2% or more. The Rights, which expire on February 3, 2005,
are redeemable in whole, but not in part, at the Company's option at any time
for the price of $.01 per Right.
On January 21, 1997, the Company authorized 47,500 shares of Series A
Convertible Preferred Stock ("Series A Preferred") and 32,500 shares of Series B
Convertible Preferred Stock ("Series B Preferred"), and on June 3, 1997,
authorized 1,200,000 shares of Series C Convertible Preferred Stock ("Series C
Preferred"), each
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series with a par value of $0.01 per share. On February 21, 1997, the Company
increased the number of authorized shares of Series B Preferred from 32,500 to
33,000. Following the Trigger Date (as defined below), shares of the Series A
Preferred, the Series B Preferred, and the Series C Preferred are convertible
into common stock at an initial conversion rate of ten shares of common stock
for each share of Series A Preferred, Series B Preferred, or Series C Preferred.
The Trigger Date means the date on which the conversion feature of each series
of preferred stock is approved by the Company's common shareholders. On January
21, 1997, the Company reserved 800,000 shares of common stock for issuance upon
conversion of the Series A Preferred and Series B Preferred, and on June 3,
1997, reserved 12,000,000 shares of Common stock for issuance upon conversion of
the Series C Preferred. The conversion feature was approved at the Company's
annual meeting of shareholders on August 29, 1997.
On October 23, 1997, Dr. Scott converted 46,033 shares of the Company's
Series A Preferred Stock into 460,330 shares of the Company's common stock,
32,739 shares of the Company's Series B Preferred Stock into 327,930 shares of
the Company's common stock and the 1,084,983 shares of the Company's Series C
Preferred Stock into 10,849,830 shares of the Company's common stock.
On December 30, 1997, the Company issued 1,000,000 shares of common stock
(valued at approximately $938,000 at the time of issuance) to NCFE to satisfy
fees of $1,046,000 owed to NCFE in connection with the closing of the June 6,
1997 Sale and Subservicing Agreements as discussed in Note 8. In addition, the
Company issued 200,000 shares of common stock to vendors in lieu of cash
payments for services rendered in December 1997.
In December 1998, the New York Stock Exchange notified the Company that it
did not meet its continuing listing standards and, therefore, would delist its
common stock. In January 1999, the Company's stock was quoted on the OTC
Bulletin Board under the symbol ERDR.
For additional capital stock transactions with related parties, see Note
12.
11. COMMITMENTS AND CONTINGENCIES
The Company procures professional liability insurance coverage on behalf of
its operating subsidiaries on a claims-made basis. The insurance contracts
specify that coverage is available only during the term of each insurance
contract. Management of the Company intends to renew the existing claims-made
policies annually and expects to be able to obtain such coverage. When coverage
is not renewed, the subsidiary companies purchase an extended reporting period
endorsement to provide professional liability coverage for losses incurred prior
to, but reported subsequent to, the termination of the claims-made policies.
The Company and each of its independent contractor physicians obtain their
professional liability insurance coverages on their own behalf from various
insurance carriers. Several insurance carriers who underwrote certain portions
of these coverages
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from 1986 to 1992 have announced a moratorium on the payment of claims or have
established plans to pay claims in the future based on formal plans of
arrangement. The Company has receivables of approximately $2,974,000 at December
31, 1998 (included in other assets in the accompanying consolidated balance
sheets) related to certain claims for which reimbursement is still pending.
Management continues to evaluate the collectibility of these amounts through
communication with the various companies and regulators. At this time,
management believes that this amount is collectable.
The Company and certain independent contractor physicians are defendants in
various medical malpractice lawsuits arising under the 1990 policy year for
medical malpractice insurance. The primary layers of medical malpractice
insurance for that policy year have been exhausted, and pending and unasserted
claims for that policy year are covered by a reinstatement insurance policy,
with coverage that varies somewhat from the primary coverage. Under the
reinstatement insurance, the Company must advance the costs of defense and
settlement of claims and seek reimbursement from the insurers. Insurers
responsible for 70% of the reinstatement insurance are in receivership or
liquidation status and are not paying claims currently.
In August 1995, the Company entered into an agreement with a data
processing service provider pursuant to which the Company agreed to purchase
approximately $58,000,000 in services through 2005. In August 1997, the Company
reached an agreement to terminate the contract effective September 30, 1997 and
pay approximately $4.4 million for prior services rendered and to obtain a
release from the contract. In June 1997, the Company entered into an agreement
with an alternative provider of data processing services. The agreement is for a
period of two years, ending in June 1999. Under terms of the agreement, the
Company is obligated for monthly fees based upon usage, with a minimum monthly
fee of $50,900.
The Company entered into a long-term contract for telecommunications
services which initially obligated the Company to purchase approximately
$39,500,000 in services through 2005. In December 1997, the Company and the
service provider entered into a revised agreement that provides for the Company
to use the service provider as the exclusive voice and data long distance
provider. The agreement expires on December 31, 2002 and provides for financial
penalties should the Company terminate the agreement prior to that date, without
cause. Under terms of the agreement the Company is obligated to pay a monthly
fee that is adjusted based upon usage by the Company.
The Company leases and occupies two office buildings, totaling
approximately 52,000 square feet, located in Durham, North Carolina. The lease
requires the Company to lease the properties until it purchases the properties
no later than June 30, 2002. The purchase price ranges from $5,342,000 to
$6,131,000 depending upon the date of purchase. The lessor has the option of
requiring the Company to purchase the properties upon 75 days' notice,
subsequent to January 1, 1998. No notice has been received.
The Company leases an additional building in Durham, North Carolina that
contains approximately 21,600 square feet of space. The lease requires the
Company to purchase the leased property, prior to the termination of the lease
on June 30, 2002. The
53
<PAGE>
purchase price ranges from $3,142,000 to $3,606,000 depending upon the date of
purchase. The lessor has the option of requiring the Company to purchase the
property upon 75 days' notice, subsequent to January 1, 1998. No notice has been
received.
In October and November 1996, three cases styled Ortiz v. Coastal Physician
Services of Broward County, Inc., et al., Higgins v. Coastal Emergency Services
of Ft. Lauderdale, Inc. et al., and Dukenik v. Coastal Emergency Services of Ft.
Lauderdale, Inc. et al. were filed in the Circuit Court for Palm Beach, Florida
seeking statutory damages for alleged violations of Section 559.79 of the
Florida Consumer Collection Practices Act as a result of invoices mailed for
medical services rendered by contract physicians in emergency departments for
which the Company provided physician contract services. The invoices contained
language indicating various actions that might be pursued in the event of
non-payment, including references to the Attorney General. Plaintiffs have
amended their complaints and are seeking only statutory damages. Plaintiffs have
also filed a motion seeking class certification which is currently pending
before the court. On June 22, 1998, plaintiffs filed a Fourth Amended Complaint
adding Edward Suggs, President and Chief Executive Officer of HBR and a Director
of the Company, Terry Blackwood, formerly Senior Vice President and Chief
Financial Officer of HBR, and Edward Gaines, Senior Vice President and General
Counsel to HBR, as individual defendants in the action. All of the individual
defendants have filed motions to dismiss, which motions are currently pending
before the trial court. The Company believes that it has several defenses to the
lawsuit and intends to vigorously defend the action but at this stage of the
litigation, the exposure to the Company cannot be determined.
On June 17, 1997, Henry J. Murphy, who was President and Chief Executive
Officer of the Company from November 1, 1996 to February 28, 1997, filed a
lawsuit against the Company alleging that the Company failed to make certain
incentive payments to him under his written employment agreement. Under the
contract, Mr. Murphy was entitled to receive certain incentive payments or stock
warrants in the event that the Company either successfully refinanced its bank
debt so as to reduce the amount of debt to certain target levels or sold more
than half of its assets or business. Mr. Murphy is alleging that the Company's
transaction with National Century Financial Enterprises, Inc. constituted a sale
of more than half of the assets of the Company qualifying him to receive certain
payments. After some initial discovery, there has been little activity in this
suit for approximately one year. The Company believes it has several meritorious
defenses to the action and intends to vigorously defend its position, but at
this stage of the litigation, the exposure to the Company cannot be determined.
In June 1997, after the Company's subsidiary, Healthcare Business
Resources, Inc. ("HBR"), closed an office in Whitley City, Kentucky, a possible
overpayment from Medicare to Coastal Physician Services of the Midwest, Inc. was
discovered. In August 1997, the Company voluntarily disclosed the possible
overpayment to representatives of the U. S. Department of Justice ("DOJ"). Since
the Company's voluntary disclosure to the DOJ, the Company has cooperated in
DOJ's review and the DOJ has referred the matter for final resolution to the U.
S. Attorney's Offices in Kentucky with jurisdiction
54
<PAGE>
over this matter. The Company's counsel was invited by the U.S. Attorney's
Offices in Kentucky to fully participate in their review and has participated in
their review and interviews of current and former Company employees. The Company
expects to settle the matter by repaying approximately $395,000 in 1999 which
has been provided for in its financial statements. Since the DOJ's review has
not yet been completed, there can be no assurance, however, that the overpayment
liability will not exceed the Company's current estimate.
On February 4, 1998, Jacque J. Sokolov, M.D., who previously served as
Chairman of the Company and President of Advanced Health Plans, Inc., a
subsidiary of the Company, filed a Demand for Arbitration with J*A*M*S/ENDISPUTE
in Los Angeles, California alleging various breaches of an Employment Contract
dated November, 1994 with the Company. The Company has objected to the conduct
of the arbitration in California and has requested that the arbitration hearings
be held in North Carolina. The Company intends to vigorously defend its
position, but at this stage of the litigation the exposure to the Company cannot
be determined.
On January 8, 1999, Century American Insurance Company and its affiliate,
Century American Casualty Company ("Century"), which had previously provided
professional liability insurance coverage to the Company and to independent
contractor physicians through Medical Group Purchasing Association ("MGPA"),
notified the Company and MGPA that it considered the purchase of professional
liability insurance from an insurer other than Century to constitute a breach of
a Risk Management Agreement between the Company, MGPA and Century. Pursuant to
the terms of the Risk Management Agreement, any dispute was required to be
resolved by binding arbitration, and on February 24, 1999, Century filed a
Complaint in Arbitration with J*A*M*S/ENDISPUTE against the Company and MGPA
seeking damages for the alleged breach and seeking to require the Company and
MGPA to accept insurance written by Century. The Company and MGPA have filed an
Answer to the Complaint, and denied that there was any breach of the Agreement.
It is believed that the discovery and arbitration will be completed in 1999. The
Company believes it has several meritorious defenses to the action and intends
to vigorously defend the action, but, at this stage of the arbitration, any
exposure to the Company cannot be determined.
The Company and its subsidiaries are involved in various legal proceedings
incidental to their businesses, substantially all of which involve claims
related to the alleged medical malpractice of contracted physicians, contractual
and lease disputes or individual employee relations matters. In the opinion of
the Company's management, no individual item of this litigation or group of
similar items of litigation, taking into account the insurance coverage
available to the Company, is likely to have a materially adverse effect on the
Company's financial position or results of operations.
12. RELATED PARTY TRANSACTIONS
Included as related party expenses, net, or other related party, net in the
accompanying Statements of Operations are the following transactions. The
Company
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<PAGE>
engaged in transactions with American Alliance Holding Company and certain of
its affiliates ("Alliance"), which included Century American Insurance Company
("Century Insurance") until Century Insurance was sold by Alliance to a
purchaser unaffiliated with the Company in May 1998. Dr. Scott is the beneficial
owner of all of the outstanding shares of Common Stock of Alliance. Amounts paid
by the Company to these entities, including amounts paid to Century Insurance
through May 1998, net of amounts received, were net receipts of $6,978,000 for
the year ended December 31, 1998 and net payments of $4,186,000 and $5,135,000
for the years ended December 31, 1997 and 1996, respectively. These transactions
and relationships are described below.
The Company and certain of its subsidiaries sublease office space in
Durham, North Carolina, consisting of approximately 59,000 square feet in a
building owned by American Alliance Realty Company ("Alliance") and leased to
Century Insurance. During the years ended December 31, 1998, 1997 and 1996, the
Company paid approximately $676,000, $562,000 and $960,000, respectively, under
these sublease agreements. The Company, Alliance and Century Insurance are all
liable to the holder of a first mortgage on the property for the total rentals
specified in the prime lease. However, the Company has an agreement of indemnity
from Alliance with respect to the total rentals, and Alliance has an agreement
of indemnity from Century Insurance. The prime lease commenced in August 1988
and has a fifteen-year term requiring minimum lease payments of approximately
$788,000 per year for years one through five, $959,000 per year for years six
through ten and $1,166,000 per year for years eleven through fifteen.
The Company leased office space from corporations controlled by Dr. Scott
and paid rent to such corporations during 1998, 1997, and 1996 of $33,000,
$286,000 and $1,513,000, respectively. As discussed below, the Company entered
into a termination of the remaining lease obligations for certain office space
under lease through 2002.
As of December 31, 1997, the Company held several unsecured promissory
notes bearing interest at rates from 5.84% to 12% per annum in the aggregate
amount of $8,003,000, as well as several other receivables in the amount of
$1,402,000 from Scott Medical LLC. The promissory notes and other receivables
arose in connection with the acquisition of Integrated Provider Networks, Inc.
("IPN"), Practice Solutions, Inc. ("PSI"), Sunlife, the South Florida Clinics,
the Additional Clinics, the Sunlife Receivables and the Clinic Receivables by
Scott Medical LLC in May and December, 1997, as discussed in Note 3. In
accordance with the terms of the notes, the principal amounts of the notes and
accrued interest were decreased during 1998 by approximately $937,000 due to
lower than expected collections on the related accounts receivable.
Additionally, in accordance with the terms of the purchase agreement, the
purchase price for the sale of IPN was adjusted in 1998 by approximately
$658,000 as a result of lower than expected collections on the related accounts
receivable.
On March 3, 1998, Bertram E. Walls, M.D., a Director of the Company, made
an investment of $2.0 million in the Company in exchange for a $2.0 million
convertible debenture due July 1, 1998 bearing interest at 10% per annum. The
debenture, including accrued interest, was convertible, at the holder's option,
into the Company's Common
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<PAGE>
Stock and a new series of Preferred Stock. The conversion price for the Common
Stock was equal to the lower of: (i) the average closing price of the Common
Stock on the New York Stock Exchange for the 10 trading days ending on March 3,
1998, the date of the issuance of the debenture, or (ii) the average closing
price for the 10 trading days ending on June 30, 1998. The conversion price for
the Preferred Stock was ten times the conversion price for the Common Stock. On
May 1, 1998, Dr. Scott acquired the debenture from Dr. Walls. On June 29, 1998,
the debenture was amended to provide for conversion solely into Series D
Convertible Preferred Stock ("Series D Preferred"). On June 30, 1998, Dr. Scott
elected to convert the debenture into 444,974 shares of Series D Preferred. The
Series D Preferred is convertible into 10 shares of Common Stock for each share
of Preferred Stock only upon approval by the holders of the Common Stock.
Dividends on Series D are payable as and when declared by the Board of
Directors. The dividends payable for each share of Series D Preferred is equal
to the dividends paid on the number of shares of common stock into which the
share of Series D Preferred is then convertible. No dividends may be paid or
declared on Series D Preferred unless dividends are also paid and declared on
common stock. Upon a liquidation, dissolution or winding up of the Company, each
share of Series D Preferred is entitled to a liquidation preference of $4.75 per
share prior to payment of any amounts with respect to the common stock.
On March 18, 1998, Coastal Physician Group, Inc. (the "Company") completed
the sale of Doctors Health Plan, Inc. ("Doctors Health Plan") to DHP Holdings,
LLC (the "Purchaser") for a price of $5,993,532. The Purchaser is a privately
held limited liability company controlled by Dr. Scott. The Purchaser acquired
all of the outstanding stock of Doctors Health Plan in the transaction. Because
the sale was to a significant shareholder, $7,619,000, representing the
difference in the sales price and the negative equity of the subsidiary, was
recorded as a contribution to capital. For a period of 12 months from the
closing, the Company had the right to market and sell Doctors Health Plan to
potential third party purchasers. No third party purchasers were identified
prior to March 18, 1999.
On October 30, 1998, the Company completed the sale of Health Enterprises,
Inc., whose primary operating subsidiary is Healthplan Southeast, Inc. ("HPSE"),
to Dr. Scott. Dr. Scott acquired all of the outstanding stock of HPSE in a
transaction which is effective as of October 1, 1998 for financial reporting
purposes. The Purchase Price of $15 million was used to decrease debt. Because
the sale was to a significant shareholder, $7,885,000, representing the
difference in the sales price and the equity of the subsidiary, was recorded as
a contribution to capital. For a period of 12 months from the closing, the
Company has the right to market and sell HPSE to potential third party
purchasers.
In January 1997, pursuant to a reimbursement agreement dated December 31,
1996 between the Company and Dr. Scott, the Company issued 226,690 shares of
common stock and 32,739 shares of Series B Preferred to Dr. Scott in
satisfaction of the Company's obligation to reimburse certain proxy solicitation
expenses incurred by Dr. Scott.
On January 21, 1997, the Company, Dr. Scott, and Dr. Walls entered into a
dismissal agreement with respect to certain litigation whereby the Company, with
court approval, agreed to reimburse Dr. Scott and Dr. Walls for legal fees and
expenses
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incurred by them in the litigation by issuing shares of Series A Preferred to
Dr. Scott and Dr. Walls in satisfaction of the Company's obligation. The Company
has issued a total of 46,033 shares of Series A Preferred Stock in payment of
the aggregate amount of fees and expenses incurred by Dr. Scott and Dr. Walls.
Simultaneous with the NCFE transaction, as explained in Note 8, Dr. Scott
invested $10 million in cash in the Company and received 1,000,000 shares of
Series C Preferred Stock. The Series C Preferred Stock subject to approval by
the Company's common stockholders, is convertible into 10,000,000 shares of
common stock. In addition, Dr. Scott received 84,983 shares of Series C
Preferred Stock and 240,000 shares of common stock in satisfaction of certain
obligations owed to him by the Company of approximately $1.1 million. After
approval at the Company's annual meeting in August 1997, the Series C Preferred
Stock was converted into 10,000,000 shares of common stock.
13. OPERATING LEASES
The Company leases office space (see Note 12) and equipment under
noncancelable operating leases which have terms of one to five years remaining
at December 31, 1998. Rent expense related to noncancelable office space and
equipment leases amounted to $2,146,000, $9,963,000 and $15,614,000 for the
years ended December 31, 1998, 1997, and 1996, respectively.
Future minimum lease payments required under noncancelable operating leases
as of December 31, 1998, are as follows: 1999 - $2,416,000, 2000 - $1,966,000,
2001 - $1,101,000; 2002 - $345,000; and 2003 - $0.
14. STOCK OPTIONS AND STOCK COMPENSATION
At December 31, 1998, the Company had four stock-based compensation plans,
which are described below. The Company continues to apply APB Opinion 25 and
related Interpretations in accounting for its plans. No compensation cost has
been recognized for its three fixed stock option plans and its stock purchase
plan since options were issued at the stocks' then current market value. The
Company did not adopt the new fair value based method of accounting for stock
compensation plans. Under FASB 123, companies that do not adopt the fair value
based method of accounting for stock compensation plans and continue to follow
the provisions of APB Opinion 25, are required to make pro forma disclosures of
net income and earnings per share as if they had adopted the fair value
accounting method. Had compensation cost for the Company's four stock-based
compensation plans been determined on the fair value at the grant dates for
awards under those plans consistent with the method of FASB Statement 123, there
would have been no material effect on the Company's net loss and loss per share
for the years ended December 31, 1998, 1997 and 1996.
The Company adopted, on May 8, 1991, an incentive stock option plan
primarily for selected key employees. Under the plan, options may be granted at
not less than the
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fair market value of the stock at the date of grant. Options are exercisable at
various times from the date of grant, as determined by the Compensation
Committee of the Board of Directors (the "committee"), and expire after ten
years from the date of grant. The Company has authorized 4,000,000 shares of
common stock for grants of options under the incentive stock option plan. In
1987, the Company adopted a non-qualified stock option plan that allows for
options to be granted at not less than 90% of the estimated fair market value of
the stock at the date of grant. These options are exercisable at various times,
as determined by the committee, and expire after ten years from the date of
grant. The Company has authorized 4,000,000 shares of common stock for grants of
options under the non-qualified stock option plan. Included in these
non-qualified stock options (although not a part of the 1987 non-qualified stock
option plan) were options held by HEI directors and officers which became fully
vested and were converted into options to acquire 169,000 shares of the
Company's common stock upon consummation of the merger. The exercise price of
the converted options ranged from $1.09 per share to $2.73 per share. All of the
converted options were exercised as of December 31, 1996. In 1994, the Company
adopted a stock option plan for its independent directors. Under this plan,
non-qualified stock options ("NSOs") may be granted at not less than the fair
market value of the stock at the date of grant to directors who are not employed
by the Company. The NSOs are exercisable after one year from the date of grant
and expire after ten years from the date of grant. The Company has authorized
500,000 shares of common stock for grants of NSOs under this stock option plan.
On October 25, 1995, the Company approved the issuance of replacement stock
options in lieu of unexercised stock options previously granted to certain
employees under the 1991 incentive stock option plan and the 1987 non-qualified
stock option plan between January 1, 1994 and April 30, 1995. Under the
replacement option procedure, such unexercised options could be replaced, at the
election of the optionee, on a two existing for one replacement option basis.
The exercise price of the replacement options was $13.88 per share, the closing
NYSE price on November 17, 1995. The exercise dates and vesting periods of the
replacement options remained the same as provided for in the original grants.
Under an employee stock purchase plan adopted in 1994, the Company is
authorized to issue up to 1,000,000 shares of common stock to its full-time
employees and part-time employees working 20 or more hours a week, all of whom
are eligible to participate after six months of service. Under the terms of the
plan, employees can choose to have from 1% to 10% of their annual base earnings
withheld to purchase the Company's common stock. The purchase price of the stock
is 90 percent of the lesser of the market price of the common stock as of the
first or last day of each quarter. If no such price is reported for that day,
the market price of the last preceding day for which such price is reported is
used. Under the Plan, the Company sold 217,000 shares, 82,000 shares and 82,000
shares to employees in 1998, 1997 and 1996, respectively.
The Company may issue stock to nonemployees for services rendered. The
value of the stock issued is based on the publicly quoted closing price of the
Company's stock at a specified date or the average closing price during a short
period surrounding a date as specified by the Board of Directors. The date
specified is typically the grant date or date of authorization of issuance by
the Board of Directors. The number of shares issued may be determined by the
estimated fair value of the services rendered or the number of shares may be
determined by agreement between the Company and the nonemployee.
59
<PAGE>
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1998, 1997, and 1996, and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Fixed Options (000) Price (000) Price (000) Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 2,095 $21.95 2,014 $ 25.60 3,145 $ 26.31
Granted 4 0.75 626 1.96 475 9.90
Exercised --- --- --- --- (63) 2.86
Forfeited (1,095) 30.39 (545) 12.46 (1,543) 23.23
-----------------------------------------------------------------------------------
Outstanding at end of year 1,004 12.68 2,095 $ 21.95 2,014 $ 25.60
===================================================================================
Options exercisable at year-end 497 $23.61 827 $ 31.46 786 $ 22.60
Weighted-average fair value of options granted
during the year $ 0.75 $ 1.96 $ 2.70
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Avg. Avg. Number Avg.
Outstanding at Remaining Exercise Exercisable at Exercise
12/31/98 Contractual Life Price 12/31/98 Price
Range of Exercise (000) (000)
<S> <C> <C> <C> <C> <C>
$ 0.75 to 5.25 512 8.38 $1.99 5 $5.25
11.50 to 13.88 113 5.40 13.25 113 13.25
14.00 to 25.75 216 5.65 23.79 216 23.79
26.75 to 30.25 129 5.25 29.89 129 29.89
34.50 to 41.80 34 5.54 35.58 34 35.58
- -------------------------------------------------------------------------------------------------------------
$1.50 to 41.80 1,004 6.96 $12.68 497 $23.61
</TABLE>
15. RETIREMENT PLAN
The Company has a qualified contributory savings plan as allowed under
Section 401(k) of the Internal Revenue Code. The plan permits participant
contributions and, until September 1998, required a minimum contribution from
the Company based on the participant's contribution. Participants may elect to
defer up to 12% of their annual compensation by contributing the deferred
60
<PAGE>
amounts to the plan. The Company made contributions of $431,000, $760,000, and
$1,265,000 to the plan during the years ended December 31, 1998, 1997 and 1996,
respectively.
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of the unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended December 31, 1998 Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenue, net $87,877 $78,692 $ 79,392 $48,260
Operating loss (2,659) (3,468) (347) (5,102)
Loss before income taxes (4,593) (6,115) (2,445) (6,985)
Net loss (4,593) (6,115) (2,445) (6,985)
Basic and diluted loss per share (0.12) (0.16) (0.06) (0.19)
Weighted average number of shares
outstanding 37,516 37,665 37,700 37,791
First Second Third Fourth
Year ended December 31, 1997 Quarter Quarter Quarter Quarter
------- ------- ------- -------
Operating revenue, net $124,714 $111,496 $ 99,595 $89,036
Operating loss (8,300) (16,015) (13,594) (29,279)
Loss before income taxes and
extraordinary item (11,566) (21,627) (16,969) (33,219)
Net loss (11,566) (21,627) (15,569) (33,219)
Basic and diluted loss per share (0.48) (0.89) (0.64) (0.99)
Weighted average number of shares
outstanding 24,129 24,385 24,415 33,483
</TABLE>
61
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company and executive officers of
subsidiaries of the Company who have significant policy-making authority:
Name Age Position
- --------------------------------------------------------------------------------
Steven M. Scott, M.D. 51 Chairman of the Board, President
and Chief Executive Officer
Bertram E. Walls, M.D. 47 Director
Eugene F. Dauchert, Jr. 45 Director, Secretary, Executive Vice
President
Edward L. Suggs, Jr. 47 Director, President and Chief
Executive Officer, Healthcare
Business Resources, Inc.
Charles E. Potter (1) 55 Director
Sherman M. Podolsky, M.D. 48 Director, President, Coastal
Physician Services of South
Florida, Inc.
W. Randall Dickerson 45 Executive Vice President and Chief
Financial Officer
- -------------------------
(1) Member of the Audit Committee and Compensation Committee of the Board of
Directors.
Dr. Scott has been a director of the Company since its formation in 1977.
Until he resigned from the position on December 1, 1994, Dr. Scott also served
as Chairman of the Board of Directors and from 1977 to May 29, 1996, Dr. Scott
served as President and Chief Executive Officer of the Company. Dr. Scott was
re-elected Chairman of the Board of Directors on January 14, 1997, and
re-appointed President and Chief Executive Officer
62
<PAGE>
of the Company on March 1, 1997. Dr. Scott has obstetrics and gynecology
practice experience and clinical and administrative emergency medicine
experience. He is board-certified in obstetrics and gynecology and is a member
of the clinical faculty at Duke University Medical Center. Dr. Scott received
his undergraduate degree and medical education from Indiana University. Dr.
Scott completed his residency in the Department of Obstetrics and Gynecology at
Duke University Medical Center.
Dr. Walls, a director since 1991, is President and Chief Executive Officer
of Doctors Health Plan, Inc., a former subsidiary of the Company. The Company
sold Doctors Health Plan, Inc. on March 18, 1998. Dr. Walls also served as
President of Coastal Physician Contract Services Group, Inc. from January
through December 1994. Effective January 1, 1995, Dr. Walls became the President
and Chief Executive Officer of Century American Insurance Company ("Century
Insurance"). From 1992 to 1993, Dr. Walls was the President of Sunlife OB/GYN
Services, Inc., a subsidiary of the Company, as well as its Chief Medical
Officer from 1991 to 1993. He is board certified in obstetrics and gynecology
and is a member of the clinical faculty at Duke University Medical Center. Dr.
Walls received a B.S. degree in Science from North Carolina A&T State University
and his medical degree from Duke University. He completed his residency in
obstetrics and gynecology at Duke University Medical Center. In addition, Dr.
Walls holds an MBA degree from the Duke Fuqua School of Business.
Mr. Dauchert, a director since October 1996, became Executive Vice
President in July 1997. He has also served as President and Chief Executive
Officer of Coastal Physician Networks, Inc. ("CPN"), a subsidiary of the
Company, since January 1, 1996. Prior to that, Mr. Dauchert served as President
of Integrated Provider Networks, Inc., a subsidiary of CPN. Prior to joining the
Company, Mr. Dauchert was a partner in the law firm of Moore & Van Allen, PLLC
where he focused his practice on health care, corporate and tax matters for 16
years. Mr. Dauchert received a B.A. from the University of North Carolina at
Chapel Hill and a J.D. degree with honors from the University of North Carolina
School of Law. He is a member of the North Carolina and American Bar
Associations, and is active in numerous health care sections of those
organizations.
Mr. Suggs, a director since March 1997, has been with Healthcare Business
Resources, Inc., a subsidiary of the Company, since 1986 and its President since
1987. Mr. Suggs previously served as a director of the Company from 1989 to
1994. Previously, Mr. Suggs was Assistant Controller of Oxford Development
Company, a real estate development firm, and a tax manager for the accounting
firm of Ernst & Young LLP. He received a B.S. degree in Accounting from the
University of North Carolina at Charlotte. Mr. Suggs is a member of the American
Institute of Certified Public Accountants, the North Carolina Association of
Certified Public Accountants and the Healthcare Financial Management
Association.
Mr. Potter, a director of the Company since April 1997, is President of The
Potter Financial Group, an independent financial planning firm in central North
Carolina and a Principal in The Potter Financial Advisory Group, LLC, a
Registered Investment Advisory firm. He graduated from St. Peters College in
Jersey City, NJ with a BS degree in Marketing in 1966. He has been in the
financial services industry since 1966. He holds
63
<PAGE>
four professional designations: (CLU) Chartered Life Underwriter, (ChFC)
Chartered Financial Consultant from the American College, Bryn Mawr, PA, (RFC)
Registered Financial Consultant from the International Association of Registered
Financial Consultants and (AEP) Accredited Estate Planner from the National
Association of Estate Planning Councils. He is also a member of the Association
for Advanced Life Underwriters and a Qualifying and Life Member of the Million
Dollar Round Table, an international sales organization.
Dr. Podolsky became a director on January 1, 1998, and is President of
Coastal Physician Services of South Florida Inc., a subsidiary of the Company.
Dr. Podolsky has also served as Senior Vice President of Medical and Corporate
Affairs and Senior Medical Officer for Coastal Emergency Services of Ft.
Lauderdale, Inc., a subsidiary of the Company, since 1991. He is a member of the
American College of Emergency Physicians. He received his medical education from
Chicago Medical School and completed his Emergency Medicine Residency at the
University of California, San Francisco and is a member of the American College
of Emergency Physicians. Prior to joining the Company, Dr. Podolsky held the
position of Chairman of Emergency Medicine at Albert Einstein Medical Center in
Philadelphia and also served on the faculty of UCLA and Stanford University.
Mr. Dickerson became Chief Financial Officer on September 21, 1998. He
previously served as Interim Chief Financial Officer from March 17, 1997 until
September 1, 1997. He joined the Company in 1993 and has served as Chief
Financial Officer of Healthcare Business Resources, Inc., a subsidiary of the
Company, as Corporate Controller and as Corporate Treasurer. Prior to joining
the Company, Mr. Dickerson was a partner with the accounting firm of Ernst &
Young LLP. He is a certified public accountant and a graduate of the University
of South Carolina.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of
the common stock, to file initial reports of ownership and reports of changes in
ownership of the common stock with the Securities and Exchange Commission (The
"Commission"). Officers, directors, and greater than ten percent shareholders
are required by Commission regulations to furnish the Company with copies of all
Section 16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of
such reports received by the Company and written representations from certain
reporting persons that no other reports were required for those persons during
1998, all Section 16(a) filing requirements applicable to the Company's
officers, directors, and greater than ten percent shareholders were complied
with.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation received by all individuals
serving as the President and Chief Executive Officer of the Company during 1998,
its four other most highly compensated executive officers who were serving as
executive officers at December 31, 1998 (collectively, the "Named Executive
Officers"), for services rendered to the Company or its subsidiaries during the
years ended December 31, 1998, 1997 and 1996, as applicable:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
---------------------------------- Awards
Other Annual Securities All Other
Salary Bonus Compensation(1) Underlying Compensation
Name and Principal Position Year ($) ($) ($) Options/SARs(#) ($) (2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Scott, M.D. (3) 1998 400,000 -- -- -- 5,416
Chairman of the Board, 1997 400,000 -- -- -- 4,290
President and Chief 1996 333,333 -- 12,806 -- 5,296
Executive Officer of the
Company
Eugene F. Dauchert, Jr. 1998 190,000 -- -- -- 3,645
Director and Executive Vice 1997 160,000 54,745 -- 100,000 4,405
President 1996 160,000 8,500 -- -- 4,481
Edward L. Suggs, Jr. 1998 228,462 -- -- -- 4,342
Director, President and 1997 213,654 50,769 -- 100,000 4,049
Chief Executive Officer, 1996 190,000 -- -- -- 2,442
Healthcare Business
Resources, Inc. (3)
Sherman M. Podolsky, M.D. 1998 242,430 28,800 -- -- 4,411
Director, President, Coastal 1997 176,667 50,000 -- -- 3,563
Physician Services of South 1996 92,030 9,000 -- -- 3,303
Florida, Inc. (4)
W. Randall Dickerson 1998 154,734 -- -- -- 273
Executive Vice President and 1997 126,182 80,000 -- -- 97
Chief Financial Officer 1996 113,431 -- -- -- 108
</TABLE>
- -----------------
(1) Reflects imputed income for personal use of the Company's aircraft.
(2) Includes for 1998: (i) contributions made under the Company's 401(k) plan of
$3,400, $3,263, $3,750 and $3,750 for Dr. Scott, Mr. Dauchert, Mr. Suggs and Dr.
Podolsky, respectively, and (ii) premiums paid for group life insurance policies
of $2,016, $383, $661, $592, and $273 for Dr. Scott, Mr. Dauchert, Mr. Suggs,
Dr. Podolsky, and Mr. Dickerson, respectively.
65
<PAGE>
(3) Healthcare Business Resources, Inc. is a subsidiary of the Company.
(4) Coastal Physician Services of South Florida, Inc. is a subsidiary of the
Company.
AGGREGATED OPTION/SAR EXERCISES AND OPTION/SAR VALUES
The following table provides certain information concerning the number of
securities underlying unexercised options held by each of the Named Executive
Officers and the value of such officers' unexercised options at December 31,
1998:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
Unexercised at Fiscal Year-End (1)
Number of Securities
--------------------
Name Exercisable Unexercisable
- --------------------------------------------------------------------------
Steven M. Scott, M.D. 32,117 100,000
Eugene F. Dauchert, Jr. 3,883 170,000
Edward L. Suggs, Jr. 82,976 171,316
Sherman M. Podolsky, M.D. 23,939 50,000
W. Randall Dickerson 5,012 20,000
- -----------------------
(1) No unexercised options were in the money at fiscal year-end.
COMPENSATION OF DIRECTORS
Each director who is not an officer or employee of the Company (an
"Independent Director") receives $20,000 annually for serving as a director plus
$1,200 for each meeting of the Board of Directors attended. The respective Chair
of the Audit and Compensation Committees receive an additional $1,200 annually
for services rendered in that capacity. At each director's election,
compensation may be paid either currently, in cash, or deferred and paid in cash
or in shares of common stock at the distribution date of the deferred
compensation. Pursuant to the Company's 1994 Independent Directors' Stock Option
Plan, an Independent Director who is elected to the Board of Directors
automatically receives an option to purchase 3,000 shares of common stock and
any Independent Director who continues to serve as a director following an
annual meeting of shareholders automatically receives an option for 1,000 shares
of common stock. The respective Chair of the Audit and Compensation Committees
automatically receive an additional option to purchase 2,000 shares of common
stock as of the first committee meeting following an annual meeting of
shareholders. The exercise price of these options
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<PAGE>
is the fair market value of the underlying shares on the date of grant. The
options become exercisable one year from the date of grant and have a ten year
term.
EMPLOYMENT AND CERTAIN OTHER AGREEMENTS
Steven M. Scott, M.D.
In April 1991, Dr. Scott and the Company entered into a five-year
employment agreement that renews automatically each year, unless either party
gives notice of non-renewable, and terminates in any event when Dr. Scott
reaches age 70. The employment agreement provides for an annual base salary of
$400,000, which is to be reviewed annually by, and can be increased at the
discretion of, the Compensation Committee. Dr. Scott is also entitled to
incentive compensation in an amount determined at the discretion of the
Compensation Committee, based on its consideration of the Company's financial
results, the development, implementation and attainment of strategic business
planning goals and objectives, increases in the Company's revenues and operating
profits, and other factors deemed relevant by the Compensation Committee in
evaluating Dr. Scott's performance. Although not a requirement, the target for
Dr. Scott's incentive compensation is two percent of the Company's earnings
before interest and taxes, not to exceed his annual base salary. In addition,
the Compensation Committee may grant Dr. Scott discretionary bonuses from time
to time.
In its discretion, the Compensation Committee may award any incentive or
discretionary bonus compensation payable to Dr. Scott as an immediately payable
cash payment, a deferred cash payment or in non-qualified stock options. A range
of valuation for any such options will be established by the Compensation
Committee using the Black-Scholes or binomial pricing model, or other recognized
pricing model, or using the assumptions and specifications adopted by the
Securities and Exchange Commission (the "Commission") which govern the
disclosure of executive compensation in proxy statements and other Commission
filings. Any such options will expire after the earlier to occur of the tenth
anniversary of the termination of Dr. Scott's employment, the date of Dr.
Scott's 70th birthday or the expiration of the maximum term of such options set
forth in the stock option plan pursuant to which such options are granted.
In the event of Dr. Scott's disability prior to the age of 70, he would be
entitled to base compensation, incentive compensation and bonus compensation for
twelve months. The bonus compensation would equal the average of the bonus
compensation paid or payable to Dr. Scott during the thirty-six months preceding
the disability. The incentive compensation would equal the greater of (i) the
average of the incentive compensation paid or payable to Dr. Scott during the
thirty-six months preceding the disability or (ii) an amount equal to (x) 50% of
Dr. Scott's base salary for any year in which the Company's revenues and
operating profits increased 12% over the prior year, (y) 75% of Dr. Scott's base
salary if the Company's annual revenues and operating profits increased 17% over
the prior year or (z) 100% of Dr. Scott's base salary if the Company's annual
revenues and operating profits increased 22% over the prior year. If the
disability is continuous for a period of twelve consecutive months, Dr. Scott
would be entitled to receive 75% of his
67
<PAGE>
base salary and the averages of both incentive compensation and bonus
compensation paid or payable during the thirty-six months preceding the
disability, which amount shall be increased by five percent annually. In the
event of Dr. Scott's death prior to the age of 70, his surviving spouse (or his
estate in the event of her death or remarriage) would be entitled to receive for
ten years an amount equal to Dr. Scott's base salary and the average of both
incentive compensation and bonus compensation paid or payable during the
thirty-six months preceding his death, which amount shall be increased by five
percent annually.
If the Company terminates Dr. Scott without cause, Dr. Scott would be
entitled to receive for the remainder of the then existing five-year term of the
agreement his base salary and the averages of both incentive compensation and
bonus compensation paid or payable during the thirty-six months preceding
termination, which amount shall be increased by five percent annually. In the
event that Dr. Scott terminates his employment agreement as a result of the
Company's material breach thereof, which breach remains uncured for 60 days
after written notice, Dr. Scott would be entitled to receive compensation equal
to that payable to him upon termination by the Company without cause.
In order to facilitate the December 31, 1997 purchase by Scott Medical
Group, LLC (see "Item 13. Certain Relationships and Related Transactions."), the
Company entered into a partial release of the non-compete agreements pursuant to
the employment agreement between Dr. Scott and the Company. The release allows
Scott Medical Group, LLC and any other Scott entity to own, manage, operate or
otherwise provide physician practice and management services to physician and
clinic practices.
In order to facilitate the purchase by Dr. Scott of DHP and HPSE in 1998
(see "Item 13. Certain Relationships and Related Transactions."), the Company
entered into a partial release of the non-compete agreements pursuant to the
employment agreement between Dr. Scott and the Company. The release allows Dr.
Scott and any other Scott entity to own, manage, operate or otherwise provide
services to HMOs. Dr. Scott and any other Scott entity are 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.
Eugene F. Dauchert, Jr.
On July 1, 1997, Mr. Dauchert entered into a restated and amended
employment agreement pursuant to which Mr. Dauchert serves as Executive Vice
President and Chief Administrative Officer of the Company. The initial term of
the Agreement was from July 1, 1997 through June 30, 1998. Thereafter, the
Agreement continues until and unless terminated by either party. The agreement
provides for an annual increase in base salary of 7.5% on July 1 unless other
terms are agreed upon between the parties. Under the agreement, Mr. Dauchert
received an annual base salary of $180,000 in 1998, and was eligible for certain
incentive or performance bonuses based upon the achievement of
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<PAGE>
certain cash flow goals during the second fiscal quarter of 1998, and for
certain other incentive or divestiture bonuses based upon the successful
divestiture of certain operating subsidiaries. Certain of these subsidiaries
were divested in 1998, and Mr. Dauchert was entitled to a divestiture bonus of
$56,387.
Effective January 1, 1999, Mr. Dauchert entered into an amended employment
agreement which provided for the divestiture bonus and the increase in base
salary for the period July 1, 1998 through December 31, 1998 to be deferred
until January 1, 1999 and paid during the first six months of 1999. The
amendment deferred the annual increase in base salary from July 1, 1999 to
January 1, 2000 and provides for certain incentive bonuses as follows: (i) an
incentive bonus payable based upon significant mergers, acquisitions,
divestitures, recoveries or refinancings being successfully completed, (ii) a
bonus equal to 2.5% of base salary per quarter based upon the net profitability
of the Company, (iii) a discretionary bonus of up to 15% of annual base salary,
and (iv) an aggregate cap on all bonuses during any on year equal to 40% of base
salary.
The employment agreement continues to impose certain confidentiality
obligations on Mr. Dauchert and contains a covenant not to compete with the
Company or its affiliates for a specified time in the event of a termination of
the agreement.
Edward L. Suggs, Jr.
On March 1, 1997, Mr. Suggs entered into an employment agreement with
Healthcare Business Resources, Inc. ("HBR"), a subsidiary of the Company. The
initial term of the agreement is from March 1, 1997 through February 29, 2000.
Under the agreement, Mr. Suggs serves as the President and Chief Executive
Officer of HBR and on the Board of the Company. Mr. Suggs receives an annual
base salary of $220,000, subject to annual review and adjustment as of each
March 1 during the term of the agreement. As an initial signing bonus, the
Company released Mr. Suggs from any claim to the then outstanding indebtedness
of approximately $16,000 evidenced by a promissory note in the original face
amount of $25,000. Mr. Suggs will be eligible for up to $20,000 each quarter in
performance bonuses, based upon the financial performance of HBR and other
factors, which may include the discretion of HBR or the Company. The employment
agreement imposes certain confidentiality obligations upon Mr. Suggs and
contains a covenant not to compete with HBR or its affiliates or solicit its
employees for a specified period of time.
Sherman M. Podolsky, M.D.
On January 1, 1998, Dr. Podolsky entered into an employment agreement with
Coastal Physician Services of South Florida, Inc. ("CPS of South Florida"), a
subsidiary of the Company. The initial term of the agreement is from January 1,
1998 through December 31, 2000. Under the agreement, Dr. Podolsky serves as the
President and Chief Executive Officer of CPS of South Florida. Dr. Podolsky
receives an annual base salary of $240,000, subject to annual review and
adjustment as of each January 1 during the term of the agreement. Dr. Podolsky
will be eligible for incentive bonuses based upon
69
<PAGE>
certain cash improvement target quotas and other factors which are established
by the President of Coastal Physician Services, Inc. The employment agreement
imposes certain confidentiality obligations upon Dr. Podolsky and contains a
covenant not to compete with CPS of South Florida or its affiliates or solicit
its employees for a specified period of time.
W. Randall Dickerson
In March 1999, Mr. Dickerson entered into an employment agreement with the
Company pursuant to which Mr. Dickerson will serve as an Executive Vice
President and Chief Financial Officer of the Company. The initial term of the
agreement is November 1, 1998 through October 31, 1999. Under the agreement, Mr.
Dickerson receives an annual base salary of $180,000 and will be eligible for an
incentive bonus based upon certain performance goals. The employment agreement
imposes certain confidentiality obligations upon Mr. Dickerson and contains a
covenant not to compete with the Company or its affiliates or solicit its
employees for a specified period of time.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Except as indicated under "Security Ownership of Management," there are no
shareholders known to the Company to be the beneficial owners of more than five
percent of the Company's common stock as of December 31, 1998.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's common stock as of December 31, 1999 by:
(i) each director of the Company; (ii) each Named Executive Officer; and (iii)
all current directors and executive officers of the Company as a group. Except
as otherwise indicated, each shareholder named has sole voting and investment
power with respect to such shareholder's securities.
<TABLE>
<CAPTION>
Percent of
Name and Address(1) Amount and Nature Percent of Total Voting
Title of Class of Beneficial Owner of Beneficial Ownership Class(2) Power (2) (3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock Steven M. Scott, M.D. 18,301,260(4) 48.4% 43.3%
Series D Convertible Steven M. Scott, M.D. 444,974 100.0% 10.5%
Preferred Stock
Common Stock Bertram E. Walls, M.D. 1,390,453(5) 3.7% 3.3%
Common Stock Edward L. Suggs, Jr. 104,075(6) * *
Common Stock Charles E. Potter 75,324(7) * *
Common Stock Sherman M. Podolsky, M.D. 69,415(8) * *
Common Stock Eugene F. Dauchert, Jr. 8,883(9) * *
Common Stock W. Randall Dickerson 5,012(10) * *
Shares owned by all
directors and executive
officers as a group
(7 persons):
Common Stock 19,809,322(11) 52.4% 46.9%
Series D Convertible 444,974 100.0% 10.5%
Preferred Stock
- ------------------------
</TABLE>
(1) The address for all persons listed below is c/o Coastal Physician Group,
Inc., 2828 Croasdaile Drive, Durham, NC 27705.
(2) An asterisk (*) indicates less than one percent.
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(3) Each share of the Company's outstanding Preferred Stock is entitled to cast
ten votes per share on any matter submitted to a vote at an annual or special
meeting of shareholders, except proposals pertaining to the conversion of the
Preferred Stock. This column presents the percentage of aggregate voting power
held, assuming the preferred stock is entitled to vote on all matters submitted
to a vote of the Company's security holders.
(4) Includes 6,249,977 held by Scott Medical Partners LLC, 1,703,344 shares held
by American Alliance Holding Company, 1,500,000 held by Doctors Health Plan,
Inc. and 119,143 shares held by S and W Limited Partnership, entities that are
controlled by Dr. Scott. Dr. Scott disclaims beneficial ownership of shares held
by Doctors Health Plan, Inc. Also includes 535,766 shares held by a partnership,
the partners of which are Dr. Scott and certain trusts established for the
benefit of Dr. Scott's children. Dr. Scott has sole investment power with
respect to these shares, but has sole voting power with respect to only 390,666
shares. Voting power with respect to the remaining 145,100 shares is held by Dr.
Walls, as trustee of the trusts. Also includes 15,600 shares held by Mrs. Scott
as to which Dr. Scott disclaims beneficial ownership. Also includes 32,117
shares subject to presently exercisable options. Dr. Scott disclaims beneficial
ownership of the shares held by American Alliance Holding Company. The remaining
8,145,323 shares are held by Dr. Scott directly.
(5) Includes 145,100 shares with respect to which Dr. Walls has voting power and
Dr. Scott has investment power. Such shares also are included under the
beneficial ownership of Dr. Scott. Also includes 1,171,695 shares held by
certain trusts established for the benefit of Dr. Scott's children with respect
to which Dr. Walls, as trustee, holds voting and investment power. Includes
2,000 shares owned directly by Dr. Walls, 6,000 shares subject to presently
exercisable stock options and 65,658 shares reserved for issuance under the
Deferred Compensation Plan.
(6) Includes 82,976 shares subject to presently exercisable stock options and
265 shares owned by Mr. Suggs' wife. Mr. Suggs disclaims beneficial ownership of
the shares held by his wife.
(7) Includes 4,000 shares subject to presently exercisable stock options and
71,324 shares reserved for issuance under the Deferred Compensation Plan.
(8) Includes 23,939 shares subject to presently exercisable stock options.
(9) Includes 3,883 shares subject to presently exercisable stock options.
(10) Includes 5,012 shares subject to presently exercisable stock options.
(11) Includes 157,927 shares subject to presently exercisable stock options and
136,982 shares reserved for issuance under the Deferred Compensation Plan.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company engaged in transactions with American Alliance Holding Company
and certain of its affiliates ("Alliance"), which included Century American
Insurance Company ("Century Insurance") until Century Insurance was sold by
Alliance to a purchaser unaffiliated with the Company in May 1998. Dr. Scott is
the beneficial owner of all of the outstanding shares of Common Stock of
Alliance. Amounts paid by the Company to these entities, including amounts paid
to Century Insurance through May 1998, net of amounts received, were net
receipts of $6,978,000 for the year ended December 31, 1998 and net payments of
$4,186,000 and $5,135,000 for the years ended December 31, 1997 and 1996,
respectively. These transactions and relationships are described below.
On January 1, 1998, the Company and Medical Group Purchasing Association
("MGPA") entered into a Risk Management Agreement with Century Insurance
pursuant to which Century Insurance agrees to provide, and the Company and MGPA
agree to purchase, insurance policies providing professional liability insurance
for the Company and the physicians and other medical and clinical providers
under contract with the Company. The initial term of the agreement is four years
and the agreement thereafter automatically renews for additional one year terms
unless either party gives notice of non-renewal by July 1 of the year preceding
the renewal term. The Company and MGPA have the ability to "opt out" of coverage
under the policy in the event that a competitive policy is located at a price
less than 85% of the quoted premium from Century Insurance for coverage on
substantially the same terms and conditions. The policy may also be canceled by
the Company and MGPA by giving notice by July 1 of a policy year and paying a
termination fee equal to 10 percent of the insurance premium in effect if
terminated in year two, 7.5 percent if terminated during year 3 and 5 percent if
terminated thereafter.
Effective December 31, 1998, the Company and the MGPA elected to "opt out"
of coverage under the policy and agreed to purchase insurance policies from an
unaffiliated company to provide professional liability insurance for the Company
and the physicians and other medical and clinical providers under contract with
the Company. The terms and conditions of the coverage are the same as has
historically been provided to the Company and MGPA by Century Insurance in the
past. The premium for the coverage is based on the underwriting criteria and
loss experience of the account.
The Company and certain of its subsidiaries sublease office space in
Durham, North Carolina, consisting of approximately 59,000 square feet in a
building owned by American Alliance Realty Company ("Alliance") and leased to
Century Insurance. During the year ended December 31, 1998, the Company paid
approximately $676,000 under these sublease agreements. The Company, Alliance
and Century Insurance are all liable to the holder of a first mortgage on the
property for the total rentals specified in the prime lease. However, the
Company has an agreement of indemnity from Alliance with respect to the total
rentals, and Alliance has an agreement of indemnity from Century Insurance. The
prime lease commenced in August 1988 and has a fifteen-year term requiring
minimum lease payments of approximately $788,000 per year for years one
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<PAGE>
through five, $959,000 per year for years six through ten and $1,166,000 per
year for years eleven through fifteen.
The Company leased office space from corporations controlled by Dr. Scott
and paid rent to such corporations during 1998 of $33,000. As discussed below,
the Company entered into a termination of the remaining lease obligations for
certain office space under lease through 2002.
Effective May 31, 1997, the Company sold certain assets related to seven
primary care clinics operated by the Company (the "May Clinic Sale") to Scott
Medical Group LLC ("Scott Medical"). Scott Medical is a privately held limited
liability company which is controlled by Dr. Scott. The purchase price for the
assets of the seven clinics was $388,657 paid pursuant to a promissory note due
May 31, 1998, with interest at 12% per annum which was paid in full. In
addition, Scott Medical gave a promissory note in the amount of $803,088 for
certain other assets, primarily accounts receivable, related to two other clinic
locations previously sold to unrelated third parties. This note was also due May
31, 1998 with interest at 10% per annum. On June 2, 1998, Scott Medical paid
principal and interest of $252,591 of the balance due under the note. As a
result of lower than expected collections on the accounts receivable sold, the
principal amount of the note was reduced by $571,252 leaving a balance of $2,208
at December 31, 1998. Interest was recalculated based on the adjusted principal
amount.
On December 31, 1997, the Company and certain of its subsidiaries closed on
a transaction (the "IPN Sale") pursuant to which the Company sold to Scott
Medical the following assets: (i) all of the issued and outstanding stock of
Integrated Provider Networks, Inc., a North Carolina corporation ("IPN") which
provides practice and physician management services to professional
corporations; (ii) all of the issued and outstanding stock of Practice
Solutions, Inc., a North Carolina corporation ("PSI") which provides billing
services to freestanding physician practices and clinics, including those under
management by IPN; (iii) all of the issued and outstanding stock of Sunlife
OB-GYN Services of Broward County, Inc., a Florida corporation ("Sunlife"); (iv)
substantially all of the assets of Ft. Lauderdale Perinatal Associates, which
operates two physician clinics located in Plantation, Florida and Fort
Lauderdale, Florida, and Physician Access Center, which operates a clinic in San
Francisco, California (collectively the "Clinics"); and (v) certain accounts
receivable of Sunlife (the "Sunlife Receivables") which had previously been sold
to NPF-XI, Inc. pursuant to a series of receivables securitizations and other
financing arrangements between the Company and subsidiaries of NCFE.
As part of the IPN Sale, Scott Medical assumed all of the lease obligations
of a subsidiary of the Company to Chateau Limited Liability Company ("Chateau"),
a privately held limited liability company which is controlled by Dr. Scott. The
estimated balance of the gross lease payments that were due under the Chateau
lease after October 31, 1997 is $2,778,056. The parties negotiated a release fee
for the Chateau lease of $750,000 which was credited against the amount Scott
Medical owes the Company for expenses advanced with respect to the May Clinic
Sale such that the net balance owed
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<PAGE>
was $810,283, which was to be repaid pursuant to the terms of a promissory note
due December 31, 1998, plus interest at an annual rate of 5.84%.
In addition, Scott Medical gave a promissory note (the "Receivables
Purchase Note") as the consideration for Scott Medical's purchase of the Sunlife
Receivables. The principal amount of the Receivables Purchase Note was
$1,000,727, the book value of the Sunlife Receivables. The Receivables Purchase
Note provided for interest at 5.68% through October 31, 1998 and 10.94%
thereafter, payable quarterly, with all principal and accrued but unpaid
interest payable in full on October 31, 1998. The Receivables Purchase Note was
subject to adjustment if the actual collections with respect to the Sunlife
Receivables varied five percent from the principal amount of the Receivables
Purchase Note. The resulting adjustment retroactively reduced the principal
amount of the note by $687,857 to $312,870 upon which interest was recalculated.
The IPN Sale transaction was negotiated between the parties to be effective
as of November 1, 1997. The purchase price was $10,100,000, paid $5,000,000 in
cash at the closing with the balance paid with a short term promissory note in
the principal amount of $5,000,000 and a receivable from the purchaser in the
amount of $100,000, both of which were paid in full in January 1998. Pursuant to
the terms of the Agreement, the purchase price was reduced by approximately
$192,000 due to an increase in the liabilities of IPN (including Prim Med, Inc.,
its wholly owned subsidiary) and PSI from the liabilities as shown on their
September 30, 1997 balance sheets. During the period from November 1, 1997 to
December 31, 1997, the Company operated the subsidiaries and advanced expenses
for such operations. The advances totaled $1,302,016. Pursuant to the terms of
the purchase agreement, $150,000 was paid in cash and the balance added to the
Receivables Purchase Note. Effective December 31, 1998, the purchase price was
further reduced by $657,558 based upon the actual collections of the outstanding
accounts receivable of IPN, Prim Med, Inc. and the professional corporations
under management by IPN as agreed upon by the parties.
On March 18, 1998, the Company completed the sale of DHP to DHP Holdings,
LLC (the "Purchaser") for a price of $5,993,532. The Purchaser is a privately
held limited liability company controlled by Dr. Scott. The Purchaser acquired
all of the outstanding stock of Doctors Health Plan in the transaction.
After a thorough review of the operations of DHP and the anticipated
funding that would likely be required in the balance of 1998, the Company
determined that the best course of action was to divest the asset. The Company
retained the investment banking firm of Advest, Inc. to advise the Company, to
assist in completing the sale and to render a fairness opinion regarding the
financial aspects of the transaction. The purchase price was determined by
negotiation between the Company and Purchaser, and Advest, Inc. advised the
Company on the fairness of financial aspects of the transaction.
The North Carolina Commissioner of Insurance issued an order dated March
11, 1998 exempting the transfer from the provisions of North Carolina law that
pertain to acquisition of control of a domestic insurer. This order required the
Company to complete
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the transaction within thirty days and to convert to equity a $1,100,000 loan
made by the Company to Doctors Health Plan on March 2, 1998.
Immediately prior to the closing of the sale of Doctors Health Plan, the
Company made an additional equity contribution required by regulatory
authorities in the amount of $993,532 to Doctors Health Plan. As a result, the
purchase price of $5,000,000 was increased to $5,993,532 to take into account
this equity contribution. The purchase price was paid $993,532 in cash, with the
balance paid pursuant to a $5,000,000 promissory note (the "DHP Note") due and
payable by March 28, 1998. The DHP Note bears interest after March 28, 1998 at
the rate of 12% per annum until paid. The original DHP Note provided that if it
was not paid in full within the earlier of (i) 90 days from March 18, 1998 or
(ii) 45 days after the Company gave Purchaser notice that it intended to accept
a Strike Price (as defined below), the Purchaser agreed to provide collateral to
secure the DHP Note. On June 7, 1998, the Board approved an amendment to the DHP
Note providing for an extension of the due date until June 8, 2001, quarterly
interest payments and principal payments of $1,000,000 on June 8, 1999,
$1,000,000 on June 8, 2000, and the balance on June 8, 2001. The Purchaser
entered into a Pledge Agreement with the Company dated June 8, 1998, pledging
all of the issued and outstanding stock of Alliance as security for the
repayment of the amended DHP Note. Effective October 30, 1998, proceeds from
repayment of the principal amount of the DHP note and accrued interest of
$396,164 were used to reduce debt and all collateral was released.
For a period of 12 months from the closing, the Company had the right to
market and sell Doctors Health Plan to potential third party purchasers. No
third party purchasers were identified prior to March 18, 1999.
As part of the transaction, the Company agreed to a partial release of its
non-compete agreement with Dr. Scott . This partial release allows Dr. Scott to
operate health maintenance organizations and similar organizations in all areas,
other than those areas in Florida and Georgia where the Company and/or its
affiliates operate health maintenance organizations. In addition, the Company
agreed that for a one year period following the closing date, the Company will
not engage in the business of providing health maintenance organization or
similar services in the State of North Carolina and those service areas in the
State of South Carolina served by Doctors Health Plan.
On March 3, 1998, Dr. Walls made an investment of $2.0 million in the
Company in exchange for a $2.0 million convertible debenture due July 1, 1998
bearing interest at 10% per annum. The debenture, including accrued interest,
was convertible, at the holder's option, into the Company's Common Stock and a
new series of Preferred Stock. The conversion price for the Common Stock was
equal to the lower of: (i) the average closing price of the Common Stock on the
New York Stock Exchange for the 10 trading days ending on March 3, 1998, the
date of the issuance of the debenture, or (ii) the average closing price for the
10 trading days ending on June 30, 1998. The conversion price for the Preferred
Stock was ten times the conversion price for the Common Stock. On May 1, 1998,
Dr. Scott acquired the debenture from Dr. Walls. On June 29, 1998, the debenture
was amended to provide for conversion solely into Series D Convertible Preferred
Stock ("Series D Preferred"). On June 30, 1998, Dr. Scott elected to convert the
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debenture into 444,974 shares of Series D Preferred. The Series D Preferred is
convertible into 10 shares of Common Stock for each share of Preferred Stock
only upon approval by the holders of the Common Stock.
On October 30, 1998, the Company completed the sale of Health Enterprises,
Inc., whose primary operating subsidiary is Healthplan Southeast, Inc. ("HPSE"),
to Dr. Scott. Dr. Scott acquired all of the outstanding stock of HPSE in a
transaction which is effective as of October 1, 1998 for financial reporting
purposes. The Purchase Price of $15 million was used to decrease debt.
HPSE is an HMO licensed to operate in the State of Florida with
approximately 80,000 members. For the nine months ended September 30, 1998,
Health Enterprises, Inc., 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 Solomon Smith Barney 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 Dr. Scott.
The Florida Department of Insurance issued a consent granting approval of
the Purchaser's acquisition of the outstanding voting securities of HPSE.
For a period of twelve (12) months from the closing, the Company has the
right to market and sell HPSE to potential third party purchasers. If the
Company located a third party purchaser before December 31, 1998 who was willing
to purchase HPSE at a price that exceeded the Strike Price, then Coastal may
have elected to have the sale take place. If the Company elected to sell to the
third party, Dr. Scott had 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. If the Company entered into a definitive agreement to
sell HPSE at a price greater than the Strike Price before December 31, 1998, the
net proceeds (after payment of marketing expenses of the sale to the third
party) of the sale would have been remitted to the Company. No third party
purchaser was located prior to December 31, 1998.
If the Company enters into a definitive agreement to sell HPSE at a price
greater than the Strike Price after December 31, 1998 but before October 30,
1999, the net proceeds (after payment of marketing expenses of the sale to the
third party) of the sale will be divided between Dr. Scott and the Company. 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 Dr.
Scott's net investment in HPSE plus a twelve percent
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(12%) annualized return on the net investment. Dr. Scott's net investment shall
be equal to his purchase price plus his contributions to HPSE plus his
out-of-pocket costs to acquire, finance and operate HPSE minus any distributions
or dividends Dr. Scott receives from HPSE. In either such event, Dr. Scott will
receive an amount equal to his net investment plus a twelve percent (12%)
annualized return on the net investment, and the Company will receive the
balance of the net proceeds. If the sale is subsequent to the earlier of the
above events, Dr. Scott will be entitled to receive from net proceeds (after
payment of marketing expenses of the sale to the third party) the greater of (i)
his net investment plus a twelve percent (12%) annualized return on such amounts
or (ii) an amount equal to his 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 HPSE to the Dr. Scott minus (y)
his net investment. In all potential sales to third party purchasers, the Dr.
Scott has the right to retain ownership of HPSE 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 Dr. Scott. See "Item 11. Executive Compensation."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE NUMBER
(A) 1. FINANCIAL STATEMENTS: IN THIS FORM 10-K
Report of Independent Auditors.................................... 29
Consolidated Balance Sheets, December 31, 1998 and 1997 .......... 30
Consolidated Statements of Operations, Years Ended December 31,
1998, 1997 and 1996............................................... 31
Consolidated Statements of Shareholders' Equity (Deficit) and
Comprehensive Income (Loss), Years Ended December 31,
1998, 1997 and 1996............................................... 32
Consolidated Statements of Cash Flows, Years Ended
December 31, 1998, 1997 and 1996.................................. 33
Notes to Consolidated Financial Statements........................ 34
PAGE NUMBER
2. FINANCIAL STATEMENT SCHEDULES IN THIS FORM 10-K
Report of Independent Auditors.................................... S-1
Schedule II--Valuation and Qualifying Accounts.................... S-2
3. EXHIBITS
The exhibits which are filed with this Form 10-K are set forth in the
Exhibit Index, which immediately precedes the exhibits to this report.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter for the
period covered by this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 1999
COASTAL PHYSICIAN GROUP, INC.
By: /S/ Steven M. Scott, M.D.
-------------------------------------
Steven M. Scott, M.D.
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------------------------------------------------------------------------
<S> <C> <C>
/S/ Steven M. Scott, M.D. Chairman of the Board of Directors, April 15, 1999
- ------------------------------ President and Chief Executive Officer
Steven M. Scott, M.D.
/S/ W. Randall Dickerson Executive Vice President, April 15, 1999
- ------------------------------ Chief Financial Officer and Chief
W. Randall Dickerson Accounting Officer
/S/ Bertram E. Walls, M.D. Director April 15, 1999
- ------------------------------
Bertram E. Walls, M.D.
/S/ Eugene F. Dauchert, Jr. Director April 15, 1999
- ------------------------------
Eugene F. Dauchert, Jr.
/S/ Edward L. Suggs, Jr. Director April 15, 1999
- ------------------------------
Edward L. Suggs, Jr.
/S/ Sherman M. Podolsky, M.D. Director April 15, 1999
- ------------------------------
Sherman M. Podolsky, M.D.
/S/ Charles E. Potter Director April 15, 1999
- ------------------------------
Charles E. Potter
</TABLE>
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Report of Independent Auditors
The Board of Directors and Shareholders
Coastal Physician Group, Inc.:
Under the date of March 30, 1999, we reported on the consolidated balance sheets
of Coastal Physician Group, Inc. and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity (deficit) and comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 1998, as contained in the 1998
annual report to shareholders. These consolidated financial statements and our
report thereon are incorporated by reference in the annual report on Form 10-K
for the year 1998. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedule as listed in the accompanying index. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Raleigh, North Carolina
March 30, 1999
S-1
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998 $ 12,865 $ 179,310 $76,573 $ 266,504 $ 2,244
Allowance for contractual
adjustments and uncollectibles
Year ended December 31, 1997 $ 97,169 $ 190,288 $56,079 $ 330,671 $ 12,865
Allowance for contractual
adjustments and uncollectibles
Year ended December 31, 1996 $ 97,932 $ 285,661 --- $ 286,424 $ 97,169
Allowance for contractual
adjustments and uncollectibles
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 Asset Purchase Agreement between Physicians Planning Group, Inc.,:
HealthNet Medical Group of New Jersey, P.A.; HealthNet Medical
Services of New Your, P.C.; Coastal Physician Networks, Inc.; Coastal
Physician Group, Inc. and Valley Care Corporation Dated October 29,
1996 (1)
2.2 Asset Purchase Agreement by and among New York State Catholic Health
Plan, Inc. d/b/a Fidelis Care New York, a New York not-for-profit
corporation, Coastal Physician Group, Inc., a Delaware corporation and
Better Health Plan, Inc., a New York corporation and a wholly-owned
subsidiary of Coastal Physician Group, Inc. Dated August 8, 1997 (2)
2.3 Stock Purchase by and Among Coastal Physician Networks, Inc. Coastal
Physician Group of Florida, Inc. and Scott Medical Group, Inc. Dated
May 31, 1997 (3)
2.4 Agreement By And Among Coastal Physician Group, Inc., Coastal
Physician Networks, Inc., Coastal Physician Services Of The West, Inc.
And Coastal Physician Services Of South Florida, Inc. and Scott
Medical Group LLC. Dated December 31, 1997 (4)
2.5 Stock Purchase Agreement As Of January 1, 1998 By And Among Coastal
Physician Group, Inc., Coastal Managed Healthcare, Inc., and DHP
Holdings, LLC (3)
4.1 Amendment to Rights Agreement dated as of December 27, 1996, between
Coastal Physician Group, Inc. and First Union National Bank of North
Carolina (5)
4.1(a) Amendment to Rights Agreement dated as of May 12, 1997, between
Coastal Physician Group, Inc. and First Union National Bank of North
Carolina (6)
4.1(b) Amendment to Rights Agreement dated as of June 3, 1997, between
Coastal Physician Group, Inc. and First Union National Bank of North
Carolina (6)
4.2 Certificate Of Designations, Preferences and Rights of Series D
Convertible Preferred Stock Of Coastal Physician Group, Inc. Dated
August 13,1998 (10)
4.3 Form of Warrant to Purchase Common Stock at $.01 Per Share (9)
10.1 Employment Agreement By and Between Coastal Physician Group, Inc., and
Steven M. Scott, M.D. Dated April 1, 1991 (8)
10.1(a) Partial Release Of Non-Compete Provisions Of Employment Agreement
Between Steven M. Scott, M.D. And Coastal Physician Group, Inc. Dated
December 31, 1997 (3)
10.1(b) Partial Release Of Non-Compete Provisions Of Employment Agreement
Between Steven M. Scott, M.D. And Coastal Physician Group, Inc. Dated
March 18, 1998 (3)
10.2 Sample Amended and Restated Services Agreement and Sample Stock
Transfer Restriction Agreement between the Company and a Professional
Corporation or Professional Association
<PAGE>
10.3 Restated and Amended Employment By and Between Coastal Physician
Group, Inc., and Eugene F. Dauchert, Jr. Dated January 15, 1997 (7)
10.3(a) Amended And Restated Employment Between Coastal Physician Group, Inc.
and Eugene F. Dauchert, Jr. Dated July 1, 1997 (3)
10.3(b) First Amendment to Employment Between Coastal Physician Group, Inc.
and Eugene F. Dauchert, Jr. Dated January 1, 1999
10.4 Employment Agreement By and Between Healthcare Business Resources,
Inc., and Edward L. Suggs, Jr. Dated March 1, 1997 (7)
10.5 Employment Agreement Between Coastal Physician Services Of South
Florida, Inc. and Sherman Podolsky, M.D. (3)
10.6 Sale and Subservicing Agreement by and among Coastal Receivables LLC,
as Seller, Coastal Physician Group, Inc. as subservicer, NPF-XI, Inc.
as Purchaser, and National Premier Financial Services, Inc. as
Servicer. Dated June 6, 1997 (11)
10.7 Form of Sale and Subservicing Agreement by and among HealthPlan
Southeast, Incorporated, Better Health Plan, Inc., Coastal Government
Services, Inc. Coastal Correctional Healthcare, Inc. and Integrated
Provider Networks, Inc. as Sellers and Subservicers, NPF-WL, Inc., as
Purchaser, and National Premier Financial Services, Inc. as Servicer.
Dated June 6, 1997 (11)
10.7(a) First Amended and Restated Sale and Subservicing Agreement dated as of
April 1, 1998 by and among Coastal Correctional Healthcare, Inc., NPF
VI, Inc., and National Premier Financial Services, Inc., as Servicer.
10.7(b) First Amended and Restated Sale and Subservicing Agreement dated as of
April 1, 1998 by and among Coastal Government Services, Inc., NPF VI,
Inc., and National Premier Financial Services, Inc., as Servicer.
10.21 Loan and Security Agreement by and among Coastal Physician Group, Inc.
and NPF X, Inc. Dated June 6, 1997 (11)
10.22 Pledge Agreement, Dated June 6, 1997 (11)
10.23 Employment Agreement By and Between Coastal Physician Group, Inc. And
W. Randall Dickerson dated November 1, 1998.
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule
- ------------------------------------
(1) Incorporated by reference to the Form 8-K for the event dated November
30, 1996, filed by the Company on December 16, 1996. (File No.
001-13460)
(2) Incorporated by reference to the Form 8-K for the event dated August
19, 1997, filed by the Company on September 3, 1997. (File No.
001-13460)
(3) Incorporated by reference to the December 31, 1997 Form 10-K filed by
the Company on June 5, 1998. (File No. 001-13460)
<PAGE>
(4) Incorporated by reference to the Form 8-K for the event dated January
15, 1998, filed by the Company on February 3, 1998. (File No.
001-13460)
(5) Incorporated by reference to the Form 8-A/A for the event dated
December 27, 1996, filed by the Company on December 30, 1996. (File
No. 001-13460)
(6) Incorporated by reference to the Form 8-A/A for the event dated May
12, 1997, filed by the Company on June 24, 1997. (File No. 001-13460)
(7) Incorporated by reference to the December 31, 1996 Form 10-K filed by
the Company on June 15, 1997. (File No. 001-13460)
(8) Incorporated by reference to the S-1 registration statement, as
amended, filed by the Company on June 20, 1991. (File No. 33-40490)
(9) Incorporated by reference to the Form 8-K for the event dated May 31,
1996, filed by the Company on June 17, 1996. (File No. 001-13460)
(10) Incorporated by reference to the June 30, 1998 Form 10-Q filed by the
Company on August 13, 1998. (File No. 001-13460)
(11) Incorporated by reference to the Form 8-K for the event dated June 10,
1997, filed by the Company on June 25, 1997. (File No. 001-13460)
AMENDED AND RESTATED SERVICE AGREEMENT
THIS AMENDED AND RESTATED SERVICE AGREEMENT dated as of ______________,
199__, by and between COASTAL PHYSICIANS SERVICES OF THE SOUTHEAST, INC., a
North Carolina corporation ("Management Company"), and HALIFAX EMERGENCY
PHYSICIAN ASSOCIATES, P.C., a Virginia professional corporation ("Professional
Corporation").
RECITALS:
WHEREAS, Professional Corporation and Management Company have entered into
a Service Agreement, as amended from time to time, pursuant to which Management
Company is performing certain management functions to permit Professional
Corporation to be exclusively responsible for the professional and medical
aspects of providing medical services to patients (the "Service Agreement"); and
WHEREAS, Professional Corporation and Management Company acknowledge and
desire that this Agreement shall amend, restate and replace the Service
Agreement and shall constitute the exclusive contractual arrangement between the
parties regarding the matters hereinafter set forth; and
WHEREAS, Professional Corporation and Management Company mutually desire to
continue their contractual relationship under and subject to the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties agree as follows:
ARTICLE I
RELATIONSHIP OF THE PARTIES
---------------------------
1.1 Independent Relationship. Professional Corporation and Management
Company shall in all respects hereunder carry out their respective duties and
obligations and perform as independent contractors. The provisions of this
Agreement shall not create a partnership, joint venture, agency or employment
relationship between the parties. Management Company shall have no authority to
direct or control any medical, professional, or ethical aspects of the practice
of medicine by Professional Corporation or any physicians associated or
affiliated with Professional Corporation.
1.2 Patient Referrals. The parties agree that the benefits to Professional
Corporation hereunder do not require, are not payment for, and are not in any
way contingent upon the admission, referral or any other arrangement for the
provision of any item or service offered by Management Company to any patient.
<PAGE>
1.3 Term of Agreement. This Agreement shall commence on the date executed
(the "Effective Date"), shall continue for a period of ten (10) years following
the Effective Date, and shall automatically renew indefinitely for successive
one (1) year terms thereafter unless terminated in accordance with the
provisions set forth below.
ARTICLE II
SERVICES TO BE PROVIDED BY MANAGEMENT COMPANY
---------------------------------------------
2.1 Performance of Management Functions. Management Company shall provide
or arrange for the services set forth in this Article and shall be compensated
for such services as set forth in this Agreement. Management Company is hereby
expressly authorized to perform its services hereunder in whatever manner it
deems reasonably appropriate to meet the business needs of Professional
Corporation, including, without limitation, performance of some or all of the
functions and duties hereunder at locations other than the principal place of
business or office of Professional Corporation. Professional Corporation shall
assist Management Company in efficiently managing the day-to-day operations of
the Professional Corporation in a businesslike manner.
2.2 Audits and Statements. Management Company shall prepare annual
financial statements for the operations of the Professional Corporation and, if
appropriate, shall cause the financial statements to be audited by a certified
public accountant of good standing selected by Management Company. If
Professional Corporation desires an audit of the financial statements provided
by Management Company hereunder, Professional Corporation may obtain such an
audit at its own expense. Management Company shall prepare monthly unaudited
financial statements containing a balance sheet and statements of income and
cash flow from Professional Corporation's operations, which shall be prepared
and made available to Professional Corporation within thirty (30) days after the
close of each calendar month.
2.3 Management Services and Administration.
2.3.1 Professional Corporation hereby appoints Management Company as
its sole and exclusive manager and administrator of all day-to-day business
functions. Professional Corporation agrees that the purpose and intent of
this Amended and Restated Service Agreement is to relieve the Professional
Corporation to the maximum extent possible of the administrative,
accounting, personnel and business aspects of the practice of medicine,
with Management Company assuming responsibility and being given all
necessary authority to perform these functions. Management Company agrees
that Professional Corporation will be responsible for all medical functions
relating to clinical services provided. Management Company will have no
authority, directly or indirectly, to perform, and will not perform, any
medical function.
2.3.2 Upon Professional Corporation's request, Management Company
shall, on behalf of Professional Corporation, bill patients and collect the
professional fees for medical services rendered by Professional Corporation
or its physicians. Such billing and collection shall be governed by the
following provisions:
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(a) If Management Company is to do the billing and collection of
professional fees, Management Company may contract with separate billing or
collection companies for the performance of this function, including
companies that may be related to or affiliated with Management Company.
Professional Corporation hereby appoints Management Company, or its
designee, for the term hereof to be its true and lawful attorney-in-fact,
for the following purposes: (i) to bill patients in Professional
Corporation's name and on its behalf for all professional and other
services rendered by Professional Corporation or any of its employees or
physicians; (ii) to collect accounts receivable resulting from such billing
in Professional Corporation's name and on its behalf; (iii) to receive
payments from patients, hospitals, insurance companies, health care plans,
Medicare, Medicaid and all other third party payors; (iv) to take
possession of and endorse in the name of Professional Corporation (and/or
in the name of physician, such payment intended as payment of a physician's
bill) any notes, checks, money orders, insurance payments and other
instruments received in payment of accounts receivable; (v) to initiate the
institution of legal proceedings in the name of Professional Corporation,
with its approval, to collect any accounts and monies owed to the
Professional Corporation; and (vi) to enforce the rights of Professional
Corporation as creditors under any contract or in connection with the
rendering of any service, and to contest adjustments and denials by
governmental agencies (or its fiscal intermediaries) as third-party payors.
(b) If Professional Corporation arranges for the billing and
collection of professional fees, it shall require the billing company
selected by it to perform all functions set forth in (i) through (vi) of
paragraph (a) above, and to remit the full amounts of such collections,
minus billing company's fees, to Management Company so that Management
Company can perform the other services set forth herein.
(c) All costs of billing and collection shall be an expense of
Professional Corporation.
2.3.3 Management Company shall design, supervise and maintain custody
of all business-related and financial files and records relating to the
operation of the Professional Corporation, including, but not limited to,
accounting, billing, patient records, and collection records. Patient
medical records and charts, to the extent such are not under the control of
a hospital or similar institutional health care provider, or which are
legally the responsibility of the Professional Corporation under state law
or regulations, shall at all times be and remain the property of
Professional Corporation, the hospital or the patient, as required under
applicable state law, and shall be maintained so that such records are
readily accessible for patient care. The management of all files and
records shall comply with applicable state and federal statutes. Management
Company shall preserve the confidentiality of patient medical records and
use information contained in such records only for the limited purpose
necessary to perform the services set forth herein; provided, however, in
no event shall a breach of said confidentiality be deemed a default under
this Agreement.
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2.3.4 Management Company shall provide the data necessary for
Professional Corporation to prepare its annual income tax returns and
financial statements, and shall arrange for the preparation of same.
Management Company shall make timely payment on behalf of Professional
Corporation of any federal, state or local income, franchise, social
security, unemployment or withholding taxes owed by the Professional
Corporation.
2.3.5 Management Company shall negotiate and administer all managed
care contracts on behalf of Professional Corporation.
2.3.6 Management Company shall, upon Professional Corporation's
request, arrange for legal and accounting services related to Professional
Corporation's operations traditionally used or required in the ordinary
course of business, including services required to enforce any physician
contract or other contract containing restrictive covenants. Professional
Corporation shall be solely responsible for the payments for such services.
2.3.7 Management Company shall provide advice and assistance to
Professional Corporation in connection with Professional Corporation's
procurement, management and administration of professional liability
insurance for Professional Corporation. Such services shall include,
without limitation, assisting with and arranging for the collection of
premiums for such insurance, assisting Professional Corporation with, and
monitoring the performance of, and making recommendations concerning, its
actuarial consultants, claims management functions, specialized legal
services and other insurance management services as deemed appropriate in
connection with such professional liability insurance programs; provided,
however, Management Company shall not be responsible for any claims, losses
or judgments against Professional Corporation or its physicians, agents or
employees, whether or not covered by insurance.
2.3.8 In the event Professional Corporation shall employ any
personnel, Management Company shall assist Professional Corporation with
its personnel administration and shall provide consulting services to
Professional Corporation in connection with personnel selection and all
other aspects of personnel administration, as requested. Management Company
shall provide for the administration of fringe benefit programs, if any,
which Professional Corporation may, from time to time, determine to provide
to its employees to the extent such programs may exist or may be applicable
to any employees of Professional Corporation. Such benefit programs may
include life insurance, health insurance, education leave, professional
dues, vacation allowances, disability insurance, pension or profit sharing
plans, and other fringe benefits. It is understood that consulting services
in the area of personnel shall apply only to employees of Professional
Corporation.
4
<PAGE>
2.3.9 Management Company shall provide consulting services and assist
with the financial administration and data processing functions of
Professional Corporation. The following financial accounting and data
processing services shall be provided:
(a) Billing, collecting and auditing of fees and accounts as set forth
in Section 2.3.2 herein;
(b) Data processing services in connection with financial planning,
management and administration;
(c) Preparing and, where required, filing of all financial and
statistical reports, reports required by governmental authorities and tax
returns; and
(d) Monitoring, and making recommendations concerning outside
accounting and legal services which may be required by and provided to
Professional Corporation.
2.3.10 Management Company shall monitor and consult with and advise
Professional Corporation on its communications systems, including
telephonic, courier or delivery services, and all other aspects of
comprehensive communications systems between and among the Professional
Corporation, its clients and other third parties;
2.3.11 Management Company shall provide advice and assistance to
Professional Corporation and related entities with respect to recruiting
independent contractor physicians and related medical or other personnel
(hereinafter referred to as "Support Personnel"). Such services shall
include, without limitation, performance of the following services on
behalf of Professional Corporation:
(a) Preparing and sending mass mailing recruitment literature and
materials;
(b) Accepting and reviewing applications of prospective independent
contractor physicians and Support Personnel;
(c) Reviewing and verifying references and D.E.A. numbers of
prospective physicians and/or Support Personnel;
(d) Reviewing, verifying and assisting, as appropriate, Professional
Corporation in obtaining licenses or certificates and generally complying
with all licensing statutes and requirements with respect to prospective
physicians and/or Support Personnel;
(e) Preparing and reviewing all necessary tax forms and related
information applicable to prospective physicians and/or Support Personnel;
(f) Interviewing prospective physicians and/or Support Personnel;
5
<PAGE>
(g) Assisting in scheduling meetings between hospitals and/or medical
facilities and prospective physicians and/or Support Personnel as may be
necessary or required by such hospitals and/or medical facilities;
(h) Negotiating and preparing documents as may be necessary to
establish appropriate contractual relationships between (i) physicians
and/or Support Personnel and/or (ii) Professional Corporation and/or any
entities related thereto; and
(i) Performing any and all other services relating to and arising out
of the recruitment of physicians and/or Support Personnel.
2.3.12 Management Company shall provide advice and assistance to
Professional Corporation with respect to establishing the credentials of
physicians and/or Support Personnel provided to hospitals and/or medical
facilities by Professional Corporation. Such services shall include,
without limitation, performance of the following services on behalf of
Professional Corporation;
(a) Preparing and submitting all necessary documents relating to or
required by such hospitals and/or medical facilities with respect to
establishing such credentials and for securing hospital privileges; and
(b) Performing any and all other services related to and arising out
of establishing the credentials of such physicians and/or Support
Personnel, as may reasonably be requested by Professional Corporation.
(c) Assisting Professional Corporation in recruiting and hiring
administrative support personnel and recruiting employees of Professional
Corporation.
2.4 Director. Management Company may designate one or more of its employees
who shall be the principal business contact for Professional Corporation and who
shall have principal responsibility for the obligations of Management Company
with respect to the management and administration of all of the day-to-day
business functions of Professional Corporation.
2.5 Compliance with Applicable Laws. Management Company shall comply with
all applicable federal, state and local laws, regulations and restrictions in
the conduct of its obligations under this Agreement.
ARTICLE III
OBLIGATIONS OF PROFESSIONAL CORPORATION
---------------------------------------
3.1 Professional Services. Professional Corporation and any physician
affiliated with it shall provide professional services to patients in compliance
at all times with ethical standards, laws and regulations applying to the
medical profession. Professional Corporation shall be responsible for ensuring
that each physician contracted by or associated with it to provide
6
<PAGE>
medical care to patients is duly licensed and has met all other regulatory and
legal requirements and qualifications to enable such physician to practice
medicine in the state in which the services are rendered. In the event that any
disciplinary actions or medical malpractice actions are initiated against
Professional Corporation, it shall immediately inform the Management Company and
the appropriate malpractice insurance carrier.
3.2 Medical Practice. Only Professional Corporation shall be engaged in the
practice of medicine and Management Company shall not be considered to be
responsible for any medical practice responsibilities or duties. Professional
Corporation shall comply with all applicable local rules, ordinances and all
standards of medical care applicable to it. It is expressly acknowledged by the
parties that the medical practice or practices conducted by the Professional
Corporation shall be conducted solely by physicians contracted or associated
with Professional Corporation.
3.3 Physicians. Professional Corporation shall be responsible for
contracting with physicians to provide services to meet the contractual
obligations of Professional Corporation to hospitals and other healthcare
organizations or providers with whom it has contracted. Professional
Corporation, and not Management Company, shall have responsibility for any
clinical evaluation of the professional services rendered by the physicians.
Professional Corporation shall be responsible for the payment of such
Physicians' contract fees, and Management Company is expressly authorized to
make such payments in the name of and on behalf of Professional Corporation.
3.4 Professional Dues and Education Expenses. All physicians associated
with Professional Corporation shall be responsible for the payment of all
licensure fees, membership dues in professional organizations, and all costs
associated with continuing professional education. Neither Management Company
nor Professional Corporation shall be responsible for any licensure fees, any
dues or membership fees for membership in professional associations (other than
its own), or for the cost or expenses associated with any continuing
professional education for such physicians.
3.5 Professional Insurance Eligibility. Professional Corporation shall
cooperate in the obtaining and maintaining of professional liability insurance
for itself and any physicians associated with it. Neither Management Company nor
Professional Corporation shall be responsible for the cost of any premiums for
such coverage for any physician.
3.6 Quality Assurance. Professional Corporation shall have sole
responsibility for all Quality Assurance compliance matters imposed on it by any
state law or regulatory authority.
ARTICLE IV
RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES
--------------------------------------------
4.1 Restrictive Covenants by Professional Corporation. For a period of time
equal to the duration of this Agreement, but in any event not less than one (1)
year, following termination of this Agreement, Professional Corporation shall
not establish, operate or provide or contract to
7
<PAGE>
provide, directly or indirectly, professional medical services at any hospital,
medical office, clinic or other medical services at any hospital, medical
office, clinic or other health care facility which services are substantially
similar to those provided by Professional Corporation during the term of this
Agreement within the States in which Professional Corporation has operated
during the term hereof.
4.2 Enforcement. Professional Corporation acknowledges and agrees that
since a remedy at law for any breach or attempted breach of the provisions of
this Article shall be inadequate, either party shall be entitled to specific
performance and injunctive or other equitable relief in case of any such breach
or attempted breach, in addition to whatever other remedies may exist by law.
All parties hereto also waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief. If any provision of this Article relating to the restrictive period,
scope of activity restricted and/or the territory described therein shall be
declared by a court of competent jurisdiction to exceed the maximum time period,
scope of activity restricted or geographical area such court deems reasonable
and enforceable under applicable law, the time period, scope of activity
restricted and/or area of restriction held reasonable and enforceable by the
court shall thereafter be the restrictive period, scope of activity restricted
and/or the territory applicable to the restrictive covenant provisions in this
Article. The invalidity or non-enforceability of this Article in any respect
shall not affect the validity or enforceability of the remainder of this Article
or of any other provisions of this Agreement.
4.3 Consideration and Liquidated Damages. Professional Corporation
acknowledges that the covenants set forth in this Article are supported by the
covenants to be performed by Management Company herein. Therefore, in the event
of any breach of the provisions of this Article by Professional Corporation, it
shall pay to Management Company liquidated damages in an amount equal to five
(5) times the annual management fees paid during the previous full calendar
year, or five (5) times the annualized management fees for the current calendar
year, whichever is greater.
ARTICLE V
FINANCIAL ARRANGEMENTS
----------------------
5.1 Definitions. The following terms used herein shall have the meanings
specified below.
(a) "Accounts" shall mean all rights of Professional Corporation to
payment for patient services rendered in the ordinary course of business at
the Hospitals by Professional Corporation or its employees or contractors,
and for goods sold in connection with such patient services, including, but
not limited to, (i) Medicare patient receivables, (ii) Champus/Champva
patient receivables, (iii) Medicaid or other governmental patient
receivables, (iv) Blue Cross/Blue Shield patient receivables, (v)
non-contract patient receivables due from commercial insurance companies,
(vi) contract patient receivables due from health maintenance
organizations, employers prepaid plans, exclusive provider organizations,
preferred provider organizations and other managed
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<PAGE>
care programs, and (vii) private patient receivables representing balances
due from patients for deductibles, coinsurance or co-payments.
(b) "Government Accounts" shall mean any Account which constitutes:
(i) a Medicare patient receivable; (ii) a Champus/Champva patient
receivable, (iii) a Medicaid patient receivable, or (iv) any other
governmental patient receivable, except that with respect to subclauses
(i), (ii) and (iii) above, deductibles and co-payments owed by program
beneficiaries shall not be deemed to be a "government account."
(c) "Hospital Accounts" shall mean any Accounts payable to
Professional Corporation by a Hospital or other healthcare facility whose
agreement with Professional Corporation is within the scope of this
Agreement and shall include, without limitation, any payments denominated
as a subsidy or availability fee.
5.2 Assignment of Revenues. Management Company shall be compensated for its
services to be provided pursuant to the terms of this Agreement as follows:
(a) In consideration of the services to be provided hereunder, and the
assumption of the specific liabilities of Professional Corporation as set
forth below, Professional Corporation does hereby transfer, assign, sell
and convey to Management Company on the date hereof, and on each day
thereafter during the term of this Agreement, all of its existing Accounts
(other than Government Accounts) and any other accounts receivable, and any
and all proceeds thereof, and all other rights to payments from any source
and any and all other revenues (hereinafter collectively "Revenues") to be
paid and delivered to Management Company as and when such Revenues are
collected in accordance with the procedures set forth herein and further
hereby constitutes and appoints Management Company as its agent and
attorney in fact for the purpose of collecting and receiving any and all
Revenues payable to Professional Corporation from any source whatsoever,
including, but not limited to, all payments from managed care
organizations, health maintenance organizations, or other capitation based
revenues, fees from patients, hospitals, worker's compensation, or any
other fees payable to or collectible by Professional Corporation as a
result of professional medical services rendered by physicians under
contract with Professional Corporation, and all other fees and revenues
payable to Professional Corporation.
(b) Power of Attorney. Except as otherwise provided by law with
respect to Government Accounts, Professional Corporation does hereby
irrevocably make, constitute and appoint Management Company and any of its
officers or designees its true and lawful attorney-in-fact, with full power
and authority to do any and all acts necessary or proper to carry out the
intent to this Agreement, including, without limitation, the right, power
and authority (i) to enforce all rights of Professional Corporation under
and pursuant to any agreements constituting, giving rise to or with respect
to the Accounts, all for the sole benefit of Management Company; (ii) to
enter into and perform such arrangements as may be reasonably necessary in
order to carry out the terms, covenants and conditions of this Agreement
that are required to be observed or performed by
9
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Professional Corporation; (iii) to endorse the name of Professional
Corporation on any and all instruments, notes, drafts, checks or other
negotiable instruments or commercial paper which may be payable to or to
the order of Professional Corporation or endorsed over to Professional
Corporation and to endorse the same to be made payable to the order of
Management Company in furtherance of the assignment provided herein; and
(iv) to execute such other and further documents as may be reasonably
necessary or desirable as determined by Management Company in order to
effectuate the assignment of the Accounts and the Revenues, and
Professional Corporation hereby ratifies and confirms all actions taken by
Management Company as such attorney-in-fact or its substitutes by virtue of
this power of attorney, which power is coupled with an interest and is
irrevocable until the termination of this Agreement and the payment in full
of all amounts provided hereunder.
(c) Collection of Accounts. Professional Corporation hereby covenants
and agrees to cooperate fully with Management Company to instruct all
Account Debtors to remit all payments in respect of Accounts (other than
Government Accounts) directly to the appropriate addresses designated by
Management Company. Any such payments will be endorsed by Management
Company pursuant to the power of attorney granted in subsection (b) above
and deposited into Management Company's account. Professional Corporation
agrees to deliver to Management Company all payments on such Accounts that
Professional Corporation may receive directly, duly endorsed in favor of
Management Company, not later than the business day immediately following
the receipt thereof.
(d) Government Accounts. All checks, cash and other instruments
representing payments or proceeds of Government Accounts shall be mailed to
the Professional Corporation at an address specified by Management Company.
Professional Corporation hereby covenants and agrees, from and after the
date hereof, to either (i) deliver to the Management Company all such
checks, cash and other instruments representing payments or proceeds of
Government Accounts, or (ii) place such proceeds into a depository account
and, immediately upon collection of funds in respect of such checks, cash
and other instruments, to cause such funds to be transferred to the
Management Company or deposited in a bank account specified by Management
Company not later than the Business Day immediately following the date of
receipt of such funds. Professional Corporation hereby authorizes
Management Company, and shall instruct the applicable banks, to sweep any
account used by Professional Corporation as a depository of such funds no
more frequently than once every Business Day and to transfer such funds as
directed by Management Company.
5.3 Assumption and Payment of Liabilities of Professional Corporation by
Management Company. In consideration of the assignment of Revenues set forth
above, Management Company hereby agrees to assume and pay as and when same
becomes due, in a commercially reasonable manner, all operating and
non-operating expenses incurred in the operation and conduct of business by the
Professional Corporation from and after the date hereof, including, without
limitation, direct costs of Medical Directors employed by Professional
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Corporation, contractual payments to physicians, all billing and collection
costs, and all other expenses necessary to the operation of Professional
Corporation; provided, however, the obligations assumed under this Agreement
specifically exclude, and Management Company shall have no obligation whatsoever
for the payment of, any of the following liabilities or obligations: (1) any
liability or obligation arising out of or resulting from any claim, suit, action
at law, judgment, settlement or liability relating to, caused by, or resulting
from any act or omission of any physician or the Professional Corporation
related to the delivery or performance of any professional medical services, or
the defense thereof, whether or not covered by any policy of professional
liability or other insurance; (2) any liability or obligation arising out of or
resulting from any claim, suit, action at law, judgment, settlement or liability
resulting from any act or omission by the Professional Corporation, its
employees, officers, directors, representatives or agents, or any act, event,
incident, occurrence, omission, state of facts or circumstances, audit,
arrangement or other matter occurring or in existence prior to the date hereof,
even if such liability does not accrue or is not known by the parties until
after the date hereof; (3) any indemnification obligation of Professional
Corporation to Management Company under Article VIII; or (4) any liability
incurred prior to the date hereof for the payment of any local, state or federal
income or other tax or fees, any social security, unemployment or withholding
taxes, any penalties, assessments, interest, or any ad valorem or similar
property taxes or any intangibles taxes, or any other liability related to the
payment or non-payment of any taxes.
5.4 Payments to Management Company. In consideration for the services to be
performed by Management Company hereunder, Management Company shall be entitled
to retain for its own benefit all monies, if any, which exceed the expenses to
be paid on behalf of Professional Corporation under Section 5.3 above. In the
event such expenses exceed the amounts collected by Management Company under
Section 5.2 above, Management Company shall be solely responsible for any such
deficiency.
5.5 Termination of Agreement. In the event that this Agreement is
terminated by either party, Management Company shall continue to perform its
obligations hereunder until the date of termination, and shall within a
reasonable time following the date of termination deliver to Professional
Corporation any and all records and other matters belonging to Professional
Corporation, and following the date of termination shall have no further
obligation to bill for any services rendered by or on behalf of Professional
Corporation, but shall continue, during the next one hundred eighty (180) days,
to collect and receive any and all Revenues paid on account of services rendered
prior to the termination date.
ARTICLE VI
RECORDS
-------
6.1 Patient Records. Upon termination of this Agreement, Professional
Corporation shall retain all patient medical records maintained by Professional
Corporation or Management Company in the name of Professional Corporation.
Professional Corporation shall, at its option, be entitled to retain copies of
financial and accounting records relating to all services performed by
Professional Corporation.
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6.2 Records Owned by Management Company. All records relating in any way to
the operation of Professional Corporation which are not the property of
Professional Corporation under the provisions of this Agreement, shall at all
times be the property of Management Company.
6.3 Access to Records. During the terms of this Agreement, and thereafter,
Professional Corporation or its designee shall have reasonable access during
normal business hours to its financial records in the custody or under the
control of Management Company, including, but not limited to, records of
collections, expenses and disbursements as kept by Management Company in
performing its obligations under this Agreement.
ARTICLE VII
INSURANCE AND INDEMNITY
-----------------------
7.1 Insurance to be Maintained by Professional Corporation. Throughout the
term of this Agreement, Professional Corporation shall maintain comprehensive
professional liability insurance with limits of not less than $1,000,000 per
claim and with aggregate policy limits of not less than $3,000,000 per annum.
Such insurance policy and limits shall be in addition to any liability insurance
applicable to any physician associated with Professional Corporation.
Professional Corporation shall be responsible for all liabilities in excess of
the limits of such policies. The Professional Corporation agrees to participate
in any state sponsored joint underwriting association or excess liability risk
pool to the extent that such may reduce the ultimate liability exposure of the
Professional Corporation or any physicians, or as may otherwise be agreed
between the parties.
7.2 Insurance to be Maintained by Management Company. Throughout the term
of this Agreement, Management Company shall maintain a policy of professional
liability insurance with limits of not less than $1,000,000 per claimant with
aggregate policy limits of not less than $3,000,000 per annum covering it in the
event that it should be named in a civil action arising out of any professional
services provided by Professional Corporation or by any physician associated
with Professional Corporation.
7.3 Indemnification.
(a) Professional Corporation shall indemnify, hold harmless and defend
Management Company, its officers, directors and employees, from and against
any and all liability, loss, damage, claim, causes of action, and expenses
(including reasonable attorneys' fees), whether or not covered by
insurance, caused or asserted to have been caused, directly or indirectly,
by or as a result of the performance of medical services or any other acts
or omissions by Professional Corporation and its shareholders, agents,
employees and subcontractors (other than Management Company) during the
term hereof.
(b) Management Company shall indemnify, hold harmless and defend
Professional Corporation, its officers, directors and employees, from and
against any and
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all liability, loss, damage, claim, causes of action, and expenses
(including reasonable attorneys' fees), caused or asserted to have been
caused, directly or indirectly, by or as a result of the performance of
services hereunder or any other acts or omissions by Management Company and
its shareholders, agents, employees and contractors (other than
Professional Corporation) during the term of this Agreement.
ARTICLE VIII
TERM AND TERMINATION
--------------------
8.1 Termination by Professional Corporation. Professional Corporation may
terminate this Agreement as follows:
(a) In the event of a filing of a petition in voluntary bankruptcy or
an assignment for the benefit of creditors by Management Company, or upon
other action taken or suffered, voluntarily or involuntarily, under any
federal or state law for the benefit of debtors by Management Company,
except for the filing of a petition in involuntary bankruptcy against
Management Company or Parent which is dismissed within sixty (60) days
thereafter, Professional Corporation may give notice of the immediate
termination of this Agreement.
(b) In the event (i) Management Company shall materially default in
the performance of any duty or obligation imposed upon it by this Agreement
and such default shall continue for a period of sixty (60) days after
written notice thereof has been given to Management Company by Professional
Corporation (or if not reasonably curable within such 60 day period and if
Management Company is proceeding reasonably diligently and in good faith
and such default is curable, up to 90 days); or (ii) Management Company
shall fail to remit expenses of Professional Corporation due as provided
hereunder and such failure to remit shall continue for fifteen (15) days
after written notice thereof, Professional Corporation may terminate this
Agreement.
8.2 Termination by Management Company. Management Company may terminate
this Agreement as follows:
(a) In the event of a filing of a petition in voluntary bankruptcy or
an assignment for the benefit of creditors by Professional Corporation, or
upon other action taken or suffered, voluntarily or involuntarily, under
any federal or state law for the benefit of debtors by Professional
Corporation, except for the filing of a petition in involuntary bankruptcy
against Professional Corporation which is dismissed within sixty (60) days
thereafter, Management Company may give notice of the immediate termination
of this Agreement.
(b) In the event Professional Corporation shall materially default in
the performance of any duty or obligation imposed upon it by this
Agreement, and such default shall continue for a period of sixty (60) days
after written notice thereof has been given to Professional Corporation by
Management Company (or if not reasonably curable
13
<PAGE>
within such sixty (60) day period and if Professional Corporation is
proceeding diligently and in good faith and such default is curable, up to
90 days), Management Company may terminate this Agreement.
(c) Management Company may cancel this Agreement without cause upon
sixty (60) days written notice to Professional Corporation and Shareholder.
ARTICLE IX
GENERAL PROVISIONS
------------------
9.1 Assignment. Management Company shall have the right to assign its
rights hereunder to any person, firm or corporation. Professional Corporation
shall have the right to assign its rights and obligations hereunder only with
the written consent of Management Company. In addition, Professional Corporation
agrees that it will not undertake or initiate any other action that would be
substantially equivalent to an assignment, including, but not limited to,
entering into any agreement, contract, plan or transaction, or series of
transactions to sell a significant portion of its assets, to enter into any plan
of reorganization pursuant to which the ownership of Professional Corporation
would be materially changed or altered, or to issue any new shares of stock to
any individual or other entity legally qualified to hold such stock, without the
prior express written consent of Management Company.
9.2 Whole Agreement; Modification. There are no other agreements or
understandings, written or oral, between the parties regarding this Agreement,
other than as set forth herein. This Agreement shall not be modified or amended
except b a written document executed by both parties to this Agreement.
9.3 Notices. All notices required or permitted by this Agreement shall be
in writing and shall be addressed as follows:
To Management Company: COASTAL PHYSICIANS SERVICES OF THE
SOUTHEAST, INC.
2828 Croasdaile Drive
Durham, North Carolina 27705
Attn: President
To Professional Corporation: HALIFAX EMERGENCY PHYSICIAN
ASSOCIATES, P.C.
2828 Croasdaile Drive
Durham, North Carolina 27705
Attn: President
or to such other address as either party shall notify the other.
9.4 Binding on Successors. This Agreement shall be binding upon the parties
hereto, and their successors, assigns, heirs and beneficiaries.
14
<PAGE>
9.5 Waiver of Provisions. Any waiver of any terms and conditions hereof
must be in writing, and signed by the parties hereto. The waiver of any of the
terms and conditions of this Agreement shall not be construed as a waiver of any
other terms and conditions hereof.
9.6 Governing Law. The validity, interpretation and performance of this
Agreement shall be governed by and construed in accordance with the laws of the
state in which Professional Corporation is incorporated and doing business. The
parties acknowledge that Management Company is not authorized or qualified to
engage in any activity which may be construed or deemed to constitute the
practice of medicine.
9.7 Severability. The provisions of this Agreement shall be deemed
severable and if any portion shall be held invalid, illegal or unenforceable for
any reason, the remainder of this Agreement shall be effective and binding upon
the parties.
9.8 Additional Documents. Each of the parties hereto agrees to execute any
document or documents that may be requested from time to time by the other party
to implement or complete such party's obligations pursuant to this Agreement.
9.9 Attorneys' Fees. If legal action is commenced by either party to
enforce or defend its rights under this Agreement, the prevailing party in such
action shall be entitled to recover its costs and reasonable attorneys' fees in
addition to any other relief granted.
9.10 Time is of the Essence. Time is hereby expressly declared to be of the
essence in this Agreement.
9.11 Contract Modifications for Prospective Legal Events. In the event any
state or federal laws or regulations, now existing or enacted or promulgated
after the effective date of this Agreement, are interpreted by judicial
decision, a regulatory agency or legal counsel in such a manner as to indicate
that the structure of this Agreement may be in violation of such laws or
regulations, Professional Corporation and Management Company shall amend this
Agreement as necessary. To the maximum extent possible, any such amendment shall
preserve the underlying economic and financial arrangements between Professional
Corporation and Management Company.
9.12 Remedies Cumulative. No remedy set forth in this Agreement or
otherwise conferred upon or reserved to any party shall be considered exclusive
of any other remedy available to any party, but the same shall be distinct,
separate and cumulative and may be exercised from time to time as often as
occasion may arise or as may be deemed expedient.
9.13 No Obligation to Third Parties. None of the obligations and duties of
Management Company or Professional Corporation under this Agreement shall in any
way or in any manner be deemed to create any obligation of Management Company or
of Professional Corporation to, or any rights in, any person or entity not a
party to this Agreement.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
PROFESSIONAL CORPORATION:
HALIFAX EMERGENCY PHYSICIAN
ASSOCIATES, P.C.,
By: ___________________________________
Steven M. Scott, M.D., President
ATTEST:
By: _________________________
_______________ Secretary
[CORPORATE SEAL]
MANAGEMENT COMPANY
COASTAL PHYSICIANS SERVICES OF THE
SOUTHEAST, INC.
By: ___________________________________
______ President
ATTEST:
By: _________________________
_______________ Secretary
[CORPORATE SEAL]
16
<PAGE>
STOCK TRANSFER RESTRICTION AGREEMENT
AMONG
HALIFAX EMERGENCY PHYSICIAN ASSOCIATES, P.C.,
AND
STEVEN M. SCOTT, M.D.
__________ ____, 199_
<PAGE>
TABLE OF CONTENTS
Page
----
1. Restrictions On Shares......................................................2
2. Automatic Transfer of Shares in Certain Events..............................3
3. Other Matters...............................................................5
4. Restrictions on Certificates................................................5
5. Notices.....................................................................5
6. Successors..................................................................6
7. Additional Stockholders.....................................................6
8. Third Party Beneficiary.....................................................6
9. Governing Law...............................................................7
10. Complete Agreement.........................................................7
11. Captions...................................................................7
12. Modification...............................................................7
13. Arbitration................................................................7
14. Confidentiality............................................................7
15. Counterparts...............................................................7
i
<PAGE>
STOCK TRANSFER RESTRICTION AGREEMENT
------------------------------------
THIS AGREEMENT made as of the ____ day of ____________ 199_, by and among
HALIFAX EMERGENCY PHYSICIAN ASSOCIATES, P.C., a Virginia professional
corporation (the "Corporation"), COASTAL PHYSICIANS SERVICES OF THE SOUTHEAST,
INC., a North Carolina corporation (the "Management Company"), and STEVEN M.
SCOTT, M.D. (the "Stockholder").
W I T N E S S E T H:
--------------------
WHEREAS, the Stockholder is the owner and record holder of all of the
issued and outstanding shares of $____ par value common stock of the
Corporation; and
WHEREAS, the Corporation and the Stockholder believe that it is in their
best interest and the best interests of the Corporation to restrict the
transferability of the stock in the Corporation; and
WHEREAS, Corporation is a party to a Amended and Restated Service Agreement
with Management Company of even date herewith (the "Service Agreement") pursuant
to which Management Company has an interest in assuring continuity in the
management of Corporation;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties covenant and agree as follows:
1. Restrictions On Shares. Except as otherwise provided herein, the
Stockholder shall not sell, assign, transfer, gift, pledge, hypothecate,
encumber or otherwise dispose of, whether voluntarily, involuntarily, by
operation of law or otherwise, any shares of the stock of the Corporation which
the Stockholder now owns or may hereafter acquire (the "Stock"). In addition,
the Stockholder shall not cause the Corporation to authorize, approve or declare
any dividend or other distribution with respect to the Stock.
<PAGE>
2. Automatic Transfer of Shares in Certain Events.
(a) By execution of this Agreement, the Stockholder hereby agrees that
all of the shares of Stock of the Corporation held by the Stockholder (or any
heir, executor, administrator, personal representative, estate, testamentary
beneficiary, donee, trustee in bankruptcy, successor or assignee of the
Stockholder) shall be transferred, or deemed transferred, to the Designated
Transferee (defined below) without further action by the Stockholder upon the
occurrence of any of the following events (each a "Transfer Event"):
(i) the date of death of the Stockholder;
(ii) the date the Stockholder is determined by a court of
competent jurisdiction to be incompetent, or permanently disabled so
as to be unable to render any professional services on behalf of the
Corporation;
(iii) the date the Stockholder becomes disqualified under
applicable law to be a shareholder of the Corporation;
(iv) the date upon which any of the shares of Stock held by the
Stockholder are transferred or attempted to be transferred
voluntarily, involuntarily by operation of law or otherwise to any
person;
(v) the date of filing any petition for or other document causing
or intended to cause a judicial, administrative, voluntary or
involuntary dissolution of the Corporation; or
(vi) the date of receipt by the Corporation of written transfer
instructions by Management Company.
(b) Transfer of Stock. Upon the occurrence of a Transfer Event with
respect to the Stockholder, subject to the terms set forth below, all of the
Stock of the Corporation held by the Stockholder or his successors and assigns
shall be immediately transferred, or deemed transferred, to the Designated
Transferee without further action by the Stockholder:
(i) The purchase price for the Stock transferred to the
Designated Transferee pursuant to this Section 2 shall be the greater
of one dollar ($1.00) or the stated par value of the Stock
(ii) Payment of the purchase price for the Stock shall be made to
the Stockholder in cash or by certified or cashiers check. The time
for payment of
2
<PAGE>
the purchase price for the Stock hereunder shall be at 10:00 a.m. on
the first business day following receipt by the Designated Transferee
of notice of such Transfer Event (provided, however, that in the
absence of such notice, the Designated Transferee shall, upon becoming
aware of any such Transfer Event, promptly notify the Stockholder, the
Corporation and Management Company of such Transfer Event and tender
to the Stockholder the purchase price for the Stock). The Designated
Transferee shall tender the purchase price at the principal office of
the Corporation.
(iii) Notwithstanding anything to the contrary herein, upon the
occurrence of a Transfer Event, the Stock will be immediately
transferred, or deemed transferred, to the Designated Transferee
effective upon the date of such Transfer Event irrespective of the
date of payment for such Stock.
(c) Definition. For purposes of this Agreement, "Designated
Transferee" shall mean that individual who is designated by Management Company.
(d) Deposit and Custody of Stock. Management Company hereby
acknowledges receipt of stock certificate no. 01 (the "Certificate") of the
Corporation, said Certificate evidencing 1,000.00 shares of the Stock of the
Corporation respectively, deposited by the Stockholder upon execution hereof
duly endorsed in blank. Management Company agrees to hold said Certificate for
the benefit of the Designated Transferee. Upon the occurrence of a Transfer
Event, Management Company shall endorse the Certificate to the Clerk of the
Corporation for cancellation by the Clerk, registration of the shares
represented thereby in the name of the Designated Transferee on the books of the
Corporation, and issuance of a new certificate in the name of the Designated
Transferee.
(e) Deliveries by Designated Transferee. Notwithstanding anything
herein to the contrary, release by Management Company of a Certificate to the
Clerk of the Corporation shall be contingent on Management Company's prior or
concurrent receipt of:
(i) a stock transfer power executed by the Stockholder covering
the Stock transferred to the Designated Transferee;
(ii) issuance by the Corporation of a new stock certificate
evidencing the Designated Transferee's ownership of the Stock in the
Corporation; and
3
<PAGE>
(iii) a copy of this Agreement duly executed by the Designated
Transferee substituting the Designated Transferee for the Stockholder
hereunder.
3. Other Matters.
(a) Upon the occurrence of a Transfer Event, the Stockholder shall be
disqualified as a stockholder of the Corporation, and shall immediately resign,
as President and as any other officer of the Corporation.
(b) After occurrence of a Transfer Event, the Stockholder, and any
person who acquires the Stock, other than the Designated Transferee, shall
neither have nor exercise any right or privilege as a stockholder of the
Corporation, including any right to receive any unallocated or undistributed
dividend.
4. Restrictions on Certificates. Upon the execution of this Agreement, the
Stockholders shall surrender their certificates representing shares of the Stock
subject to this Agreement to the Corporation for the purpose of placing notice
of the restrictions on transfer occasioned by this Agreement substantially as
follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF A
STOCK TRANSFER RESTRICTION AGREEMENT (A COPY OF WHICH IS ON FILE WITH THE
CORPORATION AND AVAILABLE WITHOUT CHARGE), AND NO TRANSFER OF THE SHARES
REPRESENTED HEREBY OR OF SHARES ISSUED IN EXCHANGE THEREFOR SHALL BE VALID
OR EFFECTIVE UNTIL THE TERMS AND CONDITIONS OF SUCH AGREEMENT SHALL HAVE
BEEN FULFILLED.
After such notice has been placed on such certificate, it shall be returned
to the Stockholder. All Stock which is subject to this Agreement and which is
issued to the Stockholder after the date of this Agreement shall bear the same
notice.
5. Notices. All notices, requests, consents and other communications
hereunder shall be in writing, shall be addressed to the receiving party's
address set forth below or to such other address as a party may designate by
notice hereunder, and shall be either (i) delivered by hand, (ii) telexed,
telecopied or made by facsimile transmission, (iii) sent by overnight courier,
or (iv) sent by certified or registered mail, return receipt requested, postage
prepaid.
4
<PAGE>
If to Corporation: HALIFAX EMERGENCY PHYSICIAN ASSOCIATES, P.C.,
2828 Croasdaile Drive
Durham, North Carolina 27705
If to Stockholder Steven M. Scott, M.D.
2828 Croasdaile Drive
Durham, North Carolina 27705
If to Management Company: COASTAL PHYSICIANS SERVICES OF THE
SOUTHEAST, INC.
2828 Croasdaile Drive
Durham, North Carolina 27705
All notices, requests, consents and other communications hereunder shall be
deemed to have been given either (i) if by hand, at the time of the delivery
thereof to the receiving party at the address of such party set forth above,
(ii) if telexed, telecopied or made by facsimile transmission, at the time that
receipt thereof has been acknowledged by electronic confirmation or otherwise,
(iii) if sent by overnight courier, on the next day following the day such
mailing is made (or in the case that such mailing is made on Saturday, on the
immediately following Monday), or (iv) if sent by certified or registered mail,
on the 3rd day following the time of such mailing thereof to such address (or in
the case that such 3rd day is a Sunday, on the immediately following Monday).
6. Successors. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, and their authorized successors or assigns. The
rights of any party hereunder may not be assigned without the consent of the
remaining parties hereto.
7. Additional Stockholders. Each holder of any of the capital stock of the
Corporation or any rights to acquire capital stock of the Corporation, including
any holder of any warrant, option or other security convertible into or
exchangeable for capital stock of the Corporation, shall execute a counterpart
of this Agreement acknowledging that the restrictions contained herein shall
apply to such stock or rights to acquire stock in the Corporation.
8. Third Party Beneficiary. The parties hereto acknowledge that the
Designated Transferee, if and when he or she becomes a Designated Transferee,
shall have standing to enforce the provisions of this Agreement.
5
<PAGE>
9. Governing Law. This Agreement, the rights and obligations hereunder, and
any claims or disputes relating thereto, shall be governed by and construed in
accordance with the laws of the state in which Corporation is incorporated and
doing business.
10. Complete Agreement. All understandings and agreements heretofore had
between the parties hereto with respect to the transactions contemplated hereby
are merged into this Agreement, and this Agreement reflects all the
understandings of the parties with respect to such transactions.
11. Captions. The section titles or captions in this Agreement are for
convenience of reference only. They shall not be considered to be a part of this
Agreement, and they in no way define, limit, extend or describe the scope or
intent of any provision hereof.
12. Modification. This Agreement cannot be modified, extended or amended
except by written agreement signed by all of the parties hereto.
13. Arbitration. Any dispute regarding the meaning and interpretation of
this Agreement shall be submitted to arbitration. The parties hereto agree that
all disputes arising under this Agreement shall be settled by arbitration in
accordance with the rules of the American Arbitration Association in the state
in which Corporation is incorporated and doing business (the "Association") then
in effect, before a single arbitrator chosen by mutual agreement of the parties
or, if the parties are unable to agree on an arbitrator, by the Association. A
determination of the dispute by the arbitrator shall be final and binding on the
parties to the extent provided by law. The cost of the arbitration, other than
attorney's fees and consultancy fees, shall be borne equally by the parties.
14. Confidentiality. The existence and the terms and conditions of this
Agreement are confidential and shall not be disclosed to any third party by any
party to this Agreement without the prior written consent of all other parties
to this Agreement.
15. Counterparts. This Agreement may be executed in two or more
counterparts and each counterpart, when so executed and delivered shall
constitute a complete and original instrument, and it shall not be necessary
when making proof of this Agreement or any counterpart thereto to produce or
account for any other counterparts.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed
instrument on the date first written above.
CORPORATION:
HALIFAX EMERGENCY PHYSICIAN
ASSOCIATES, P.C.,
By: ___________________________________
Steven M. Scott, M.D., President
MANAGEMENT COMPANY:
COASTAL PHYSICIANS SERVICES OF THE
SOUTHEAST, INC.
By: ___________________________________
, ______ President
STOCKHOLDER:
By: ___________________________________
Steven M. Scott, M.D.,
Individually
STATE OF NORTH CAROLINA FIRST AMENDMENT
TO
COUNTY OF DURHAM EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is made and
entered into effective the 1st day of January, 1999 by and between COASTAL
PHYSICIAN GROUP, INC. ("the "Employer" or "Coastal"), a Delaware corporation
with its principal place of business in Durham, North Carolina, and EUGENE F.
DAUCHERT, JR. ("Employee"), a resident of Durham, North Carolina.
W I T N E S S E T H
-------------------
WHEREAS, Employer and Employee have previously entered into an employment
agreement dated July 1, 1997 (the "Agreement") under which Employee is currently
employed by Employer; and
WHEREAS, Employer and Employee also desire to substantially and materially
modify the existing terms of employment of Employee to, among other matters,
increase his Base Salary, modify the Incentive Bonus structure, and provide for
payment of earned divestiture bonuses;
NOW, THEREFORE, in consideration of the terms and conditions set forth in
this Amendment, the parties hereby agree that the Agreement is hereby modified
as follows:
1. Replacement of Exhibit A. Exhibit A, Compensation, attached to the
Agreement is hereby replaced by the Exhibit A dated January 1, 1999 and attached
to this Amendment.
2. This Amendment shall be an amendment and modification to the Agreement
and shall become part of the Agreement and employment arrangement between
Employee and Employer from and after the date of this Amendment. All capitalized
terms not defined herein shall have the same meaning as set forth in the
Agreement. Any conflict between terms of this Amendment and the Agreement will
be resolved in favor of this Amendment. Except as amended herein, all terms of
the Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
COASTAL PHYSICIAN GROUP, INC.
By:______________________________
Its:_____________________________
____________________________(SEAL)
Eugene F. Dauchert
<PAGE>
EXHIBIT A
---------
COMPENSATION
------------
January 1, 1999
1. Base Salary. For services provided as an employee of Employer, Employee shall
receive, beginning July 1, 1998, a base salary of $193,500 per annum (the "Base
Salary") payable in accordance with Employer's current payroll practices. The
Base Salary shall be subject to annual review and adjustment as of each January
1, commencing January 1, 2000 (or such other times as may be determined by
Employer), but if renewed by agreement of Employer and Employee, the Base Salary
shall increase by seven and one-half percent (7.5%) or by such other amount as
the parties may agree on to bring Employee's Base Salary in line with other
senior executives (this provision shall not create any right or obligation of
Employer or Employee to extend the term of this Agreement or to prevent Employer
and Employee from extending upon such terms and conditions as they determine by
mutual agreement). Employee has been paid from July 1, 1998 through December 31,
1998 on the basis of an annual salary of $180,000 and so was underpaid $6,750,
which amount shall be paid to Employee at the rate of $1,350 per month for five
months beginning January, 1999 and continuing through May, 1999. These amounts
shall be added to and paid with the payouts of deferred earned divestiture
bonuses described Section 2 below.
2. Earned Divestiture Bonuses. Under Section 3 of the Exhibit A which this
Exhibit A replaces, Employee was entitled to earn certain divestiture bonuses.
Employer acknowledges that Employee earned divestiture bonuses in the aggregate
amount of $56,387 which have not been paid, calculated as follows:
<TABLE>
<CAPTION>
Transaction Applicable
Asset Consideration Percentage Bonus
----- ------------- ---------- -----
<S> <C> <C> <C>
South Florida Clinics, Valley, Mebane $ 438,654 1.0% $ 4,387
Cumberland Pediatrics 150,000 1.0% 1,500
IPN, PSI 10,100,000 0.5% 50,500
--------
$56,387
</TABLE>
Employer has paid Employee $27,000 of the divestiture bonus from funds received
from a settlement of a legal matter. The balance of $29,387 shall be paid in
five equal monthly installments of $5,877.40 beginning January, 1999 and
continuing through May, 1999. This amount shall be combined with the payment of
installments of deferred base compensation under Section 1 (for a total monthly
payment of $7,227.40 per month during the five month period).
3. Incentive Bonus. Employee acknowledges that no incentive bonuses were earned
under Section 2 of the prior Exhibit A. For 1999, Employee shall be entitled to
an incentive or performance bonus (the "Incentive Bonus") of up to forty percent
(40%) of annual Base Salary, based on the following:
(a) Employee must be employed by Employer at the time the event described
below occurs and at December 31, 1999 unless employment is terminated (i) by
Employer without
<PAGE>
cause under Section 12(a), (ii) by death or disability of Employee under Section
12(d) where such death or disability occurs within the last four months of the
calendar year, or (iii) by Employee because of a material breach by Employer as
provided in section 12(e).
(b) Employee's Incentive Bonus shall be based on the following criteria,
subject to a cap of 40% of annual Base Salary as previously indicated:
(i) 10% of Base Salary shall be earned upon the closing of a
transaction providing a complete or partial replacement of the Company's
existing securitization financing program with a new bank loan, credit
facility, securitization or financing program, an equity infusion or
recapitalization of the Company and its subsidiaries, or an additional
capital or financing for the Company in addition to the existing facility.
(ii) 0.5% of the "Transaction Consideration" paid shall be earned upon
the closing of a transaction involving any significant merger, acquisition
or divestiture of or by the Company or any of its subsidiaries
("significant" shall be understood to include any transaction, or series of
transactions that are related, involving purchase consideration or
valuation greater than $10,000,000 or a target company with gross
annualized revenues in excess of $25,000,000). The "Transaction
Consideration" shall be understood to mean the consideration paid or
calculated for purposes of compensating the Company's investment bankers on
a percentage basis as such term, or its equivalent, is used in the
agreement between the Company and its investment bankers retained for such
transaction.
(iii) 2.5% of Base Salary for each calendar quarter in which Employer
and its consolidated subsidiaries achieve a net profit (after all financing
expenses) as reflected on the regularly prepared financial statements of
Employer.
(iv) One percent (1%) of any amounts recovered after January 1, 1999
by Employer or any of its subsidiaries for any disputed claims, unpaid
amounts owed, recoveries from bankruptcies, reorganizations, creditor
arrangements or similar insolvency proceedings, recoveries from litigation
or claim settlements; provided, however, this provision shall not apply to
any matter in which Employee shall become a material witness.
(v) up to 15% of Base Salary as determined solely in the discretion of
Employer's Chief Executive Officer.
4. Stock Options or Awards. Employee shall be eligible for stock options and
awards available to other senior management of Employer and its affiliates from
time to time. This subsection shall not be a guarantee of any awards or options,
and Employee recognizes that the awarding of such compensation is governed by
plans adopted by the Board of Directors of Employer from time to time.
2
FIRST AMENDED AND RESTATED
--------------------------
SALE AND SUBSERVICING AGREEMENT
-------------------------------
This First Amended and Restated Sale and Subservicing Agreement (the "Sale
and Subservicing Agreement"), dated as of April 1, 1998 by and among Coastal
Correctional Healthcare, Inc., a North Carolina corporation, as Seller (as such,
together with its successors and permitted assigns, the "Seller") and as
Subservicer hereunder (as such, together with its successors and permitted
assigns, the "Subservicer"), NPF IV, Inc., an Ohio corporation, as Purchaser (as
such, together with its successors and permitted assigns, the "Purchaser"), and
National Premier Financial Services, Inc., an Ohio corporation, as Servicer (as
such, together with its successors and permitted assigns, the "Servicer").
WITNESSETH:
-----------
WHEREAS, the Seller, the Servicer and NPF-WL, Inc., an Ohio corporation,
entered into that certain Sale and Subservicing Agreement dated as of April 18,
1997 (the "Original Sale and Subservicing Agreement") pursuant to which the
Seller sold and was obligated to sell certain healthcare accounts receivable to
NPF-WL, Inc. among other obligations and pursuant to which the Servicer provides
certain servicing obligations with respect to such healthcare accounts
receivable;
WHEREAS, NPF-WL, Inc., the Purchaser and the Servicer entered into that
certain Assignment and Assumption Agreement dated as of April 1, 1998 (the
"Assignment Agreement") pursuant to which NPF-WL, Inc. assigned, transferred,
conveyed and set over to the Purchaser all of its right, title and interest in,
to and under the Original Sale and Subservicing Agreement, all ancillary
agreements executed with respect thereto and all healthcare accounts receivable
previously purchased by NPF-WL, Inc. from the Seller, subject to all the
conditions and terms set forth in the Assignment Agreement, the terms and
conditions set forth in the Original Sale and Subservicing Agreement and all
ancillary agreements executed with respect thereto; and
WHEREAS, the Purchaser, as assignee, the Seller and the Servicer each now
desire to amend the Original Sale and Subservicing Agreement in its entirety by
entering into this Sale and Subservicing Agreement.
NOW THEREFORE, intended to be legally bound, the parties hereby agree as
follows:
<PAGE>
SALE AND SUBSERVICING AGREEMENT
Dated as of April 1, 1998
by and among
COASTAL CORRECTIONAL HEALTHCARE, INC.,
as Seller and as Subservicer,
NPF VI, INC.,
as Purchaser,
and
NATIONAL PREMIER FINANCIAL SERVICES, INC.,
as Servicer
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS ................................................... 2
Section 1.1 Certain Defined Terms ...................................... 2
Section 1.2 Other Terms ................................................ 12
ARTICLE II PURCHASE AND SALE; ESTABLISHMENT OF ACCOUNTS ................. 12
Section 2.1 Purchase and Sale .......................................... 12
Section 2.2 Conveyance of Receivables .................................. 12
Section 2.3 Establishment of Accounts; Conveyance of Interests
Therein; Investment ........................................ 14
Section 2.4 Grant of Security Interest ................................. 15
Section 2.5 Further Action Evidencing Purchases ........................ 15
Section 2.6 Eligible Receivables ....................................... 16
Section 2.7 Offsets .................................................... 16
Section 2.8 Administrative Fee ......................................... 16
Section 2.9 Assignment of Agreement .................................... 17
ARTICLE III CONDITIONS OF PURCHASES ..................................... 17
Section 3.1 Conditions Precedent to Effectiveness of
Agreement .................................................. 17
Section 3.2 Conditions Precedent to All Purchases ...................... 18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLER ................. 19
Section 4.1 Representations and Warranties as to the Seller............ 19
Section 4.2 Representations and Warranties of the Seller as to
Purchased Receivables ...................................... 23
Section 4.3 Repurchase Obligations ..................................... 25
ARTICLE V GENERAL COVENANTS OF THE SELLER ............................... 26
Section 5.1 Affirmative Covenants of the Seller ........................ 26
Section 5.2 Reporting Requirements of the Seller ....................... 27
Section 5.3 Negative Covenants of the Seller ........................... 27
ARTICLE VI ACCOUNTS ADMINISTRATION ...................................... 28
Section 6.1 Collection Account ......................................... 28
Section 6.2 Determinations of the Servicer ............................. 29
Section 6.3 Distributions from Accounts ................................ 29
Section 6.4 Allocation of Moneys following Termination Date............ 30
Section 6.5 Accounting ................................................. 30
ARTICLE VII APPOINTMENT OF THE SUBSERVICER AND SUCCESSOR SERVICER ....... 30
Section 7.1 Appointment of the Subservicer ............................. 30
Section 7.2 Additional Subservicers .................................... 31
Section 7.3 Duties and Responsibilities of the Subservicer.............. 31
Section 7.4 Authorization of the Servicer .............................. 33
Section 7.5 Subservicing Fee; Subservicing Expenses .................... 34
Section 7.6 Annual Statement as to Compliance .......................... 34
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Section 7.7 Transfer of Servicing Between Subservicer and
Servicer ................................................... 34
Section 7.8 Subservicer Not to Resign .................................. 35
Section 7.9 Appointment of the Successor Subservicer ................... 35
Section 7.10 Duties of the Subservicer to the Successor
Servicer .................................................. 35
Section 7.11 Effect of Termination or Resignation ...................... 36
ARTICLE VIII EVENTS OF SELLER DEFAULT ................................... 36
Section 8.1 Events of Seller Default ................................... 36
ARTICLE IX INDEMNIFICATION .............................................. 38
Section 9.1 Indemnities by the Seller .................................. 38
Section 9.2 Section 9.2 Security Interest .............................. 39
ARTICLE X MISCELLANEOUS ................................................. 39
Section 10.1 Notices, Etc .............................................. 39
Section 10.2 Remedies .................................................. 40
Section 10.3 Binding Effect; Assignability ............................. 40
Section 10.4 Costs, Expenses and Taxes ................................. 40
Section 10.5 No Proceedings ............................................ 41
Section 10.6 Amendments; Waivers; Consents ............................. 41
Section 10.7 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY
TRIAL ..................................................... 41
Section 10.8 Execution in Counterparts; Severability ................... 42
Schedule 1 Ineligible Medicaid States
Schedule 2 Ineligible Blue Cross/Blue Shield Plans
Schedule 3 Seller's Payor and Provider Numbers
Schedule 4 List of Names Under Which Seller is Doing Business
and Addresses at Which Seller is Doing Business
Exhibit A Form of Notice to Payors
Exhibit B Form of Lockbox Account Agreement
Exhibit C Form of Purchase Assignment
Exhibit D Form of Officer's Certificate for the Seller
Exhibit E Form of Opinion of Counsel for the Seller
Exhibit F Form of Repurchase Assignment
Exhibit G Form of Section 6.2 Determination of the Servicer
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SALE AND SUBSERVICING AGREEMENT (the "Agreement"), dated as of April
1, 1998, by and among COASTAL CORRECTIONAL HEALTHCARE, INC., a North Carolina
corporation, as Seller (as such, together with its successors and permitted
assigns, the "Seller") and as Subservicer hereunder (as such, together with its
successors and permitted assigns, the "Subservicer"), NPF VI, INC., an Ohio
corporation, as Purchaser (as such, together with its successors and permitted
assigns, the "Purchaser"), and NATIONAL PREMIER FINANCIAL SERVICES, INC., an
Ohio corporation, as Servicer (as such, together with its successors and
permitted assigns, the "Servicer").
WITNESSETH:
WHEREAS, the Seller desires to sell certain health care receivables
originated by the Seller;
WHEREAS, the Purchaser is a special purpose corporation formed for the
purpose of purchasing certain health care receivables and funding such purchases
with the proceeds from the issuance of promissory notes;
WHEREAS, the Seller and the Purchaser intend that the Purchaser will
purchase certain health care receivables from the Seller from time to time;
WHEREAS, the Purchaser has appointed the Servicer to perform certain
servicing, administrative and collection functions in respect of the receivables
purchased by the Purchaser under this Agreement (the "Purchased Receivables");
WHEREAS, in order to effectuate the purposes of this Agreement, the
Purchaser and the Servicer desire that the Subservicer be appointed to perform
certain servicing, administrative and collection functions in respect of the
Purchased Receivables;
WHEREAS, the Seller has been requested and is willing to act as the
Subservicer; and
WHEREAS, the Seller acknowledges and consents to the Purchaser's
anticipated assignment to an affiliate of all its right, title, interest and
obligations with respect to this Agreement.
NOW, THEREFORE, the parties agree as follows:
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ARTICLE I
DEFINITIONS
Section 3.1 Certain Defined Terms.
As used in this Agreement, the following terms shall have the
following meanings:
"Accreditation" means certification by the JCAHO that a facility fully
complies with the standards set by the JCAHO for operation of such facility.
"Additional Subservicer" has the meaning specified in Section 9.2.
"Additional Subservicing Agreement" has the meaning specified in
Section 9.2.
"Adverse Claim" means any claim of ownership or any lien, security
interest or other charge or encumbrance, or other type of preferential
arrangement having the effect of a lien or security interest.
"Administrative Fee" means, as of any Purchase Date, an amount equal
to 8.5% of the Net Value of Purchased Receivables purchased on such Purchase
Date, deposited, for subservicing expenses, with the Servicer, reimbursable,
from time to time, in whole or in part, to the Seller in its capacity as
Subservicer by payment of the Subservicing Fee.
"Affiliate" means, as to any Person, any other Person that, directly
or indirectly, is in control of, is controlled by, or is under common control
with, such Person within the meaning of control under Section 15 of the
Securities Act of 1933.
"Base Rate" means, as of any Purchase Date, a percentage equal to
12.5% per annum.
"Billed Amount" means, with respect to any Receivable the amount
billed to the related Payor with respect thereto prior to the application of any
Contractual Allowance.
"Billing Date" means the earlier of (a) the date on which the claim
with respect to a Receivable was submitted to the related Payor; (b) 14 days
from the Discharge Date; or (c) 14 days from the Service Date if Discharge Date
is inapplicable.
"Blue Cross/Blue Shield Contract" means any and all agreements
currently in force between the Seller and any Blue Cross/Blue Shield plan.
"Business Day" means any day of the year other than a Saturday, Sunday
or any day on which banks are required, or authorized, by law to close in the
State of Ohio or the State of New York.
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"CHAMPUS" means the Civilian Health and Medical Program of the
Uniformed Service, a program of medical benefits covering retirees and
dependents of a member or a former member of a uniformed service, provided,
financed and supervised by the United States Department of Defense established
by 10 USC ss. 1071 et seq.
"CHAMPUS Receivable" means a Receivable payable pursuant to CHAMPUS.
"CHAMPUS Regulations" means collectively, all regulation of the
Civilian Health and Medical Program of the Uniformed Services including (a) all
federal statutes (whether set forth in 10 USC 1071 or elsewhere) affecting
CHAMPUS; and (b) all applicable provisions of all rules, regulations (including
32 CFR 199), manuals, orders, and administrative, reimbursement and other
guidelines of all Governmental Authorities (including, without limitation, HHS,
the Department of Defense, the Department of Transportation, the Assistant
Secretary of Defense (Health Affairs), and the Office of CHAMPUS, or any Person
or entity succeeding to the functions of any of the foregoing) promulgated
pursuant to or in connection with any of the foregoing (whether or not having
the force of law), in each case as may be amended, supplemented or otherwise
modified from time to time.
"Closing Date" means April 1, 1998.
"Collection Account" means the trust account maintained with the
Trustee described in Section 4.3(c).
"Collections" means, with respect to any Receivable, all cash
collections and other cash proceeds of such Receivable.
"Commercial Lockbox Account" has the meaning specified in Section
4.3(a).
"Concentration Limits" means: the following expressed as a percentage
or Dollar amount of the aggregate Net Value of the Purchased Receivables then
outstanding:
(a) Receivables payable by Blue Cross and Blue Shield Payors - 20%;
(b) Receivables for which any one commercial insurer or HMO, PPO or
other similar managed care program or Provider Payor is Payor
during the time such Payor has a long-term rating of A or better
but less than AA from D&P or if such Payor is not rated by D&P,
then which has a long-term rating of A or better but less than AA
from S&P - 8%; and
(c) Receivables payable by all commercial insurance Payors, HMO, PPO
or other similar managed care program Payors and Provider Payors
which are unrated or which have a long-term rating of below A
from D&P or, if unrated by D&P, which have long-term ratings
below A from S&P - 1%.
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"Contract" means an agreement (or agreements), pursuant to, or under
which, a Payor shall be obligated to pay for services rendered or merchandise
sold to patients of the Seller from time to time.
"Contractual Allowance" means an amount verified by the Servicer in
accordance with historical liquidation experience (actual collections received
on the Billed Amount within 180 days of the Billing Date) and current
reimbursement schedules by Payor Class by which the amount of charges billed to
any Payor are to be adjusted to reflect the entitled reimbursement pursuant to
any contract or other arrangement between such Payor and the Seller.
"Credit Deficiency" has the meaning specified in Section 8.2(d).
"Current Net Value Amount" has the meaning specified in Section
8.2(c).
"Debt" of any Person means (a) indebtedness of such Person for
borrowed money, (b) obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments, (c) obligations of such Person to pay the
deferred purchase price of property or services, (d) obligations of such Person
as lessee under leases which have been or should be, in accordance with
generally accepted accounting principles, recorded as capital leases, (e)
obligations secured by any lien or other charge upon property or assets owned by
such Person, even though such Person has not assumed or become liable for the
payment of such obligations, (f) obligations of such Person under direct or
indirect guaranties in respect of, and obligations (contingent or otherwise) to
purchase or otherwise acquire, or otherwise to assure a creditor against loss in
respect of, indebtedness or obligations of others of the kinds referred to in
clauses (a) through (e) above, and (g) liabilities in respect of unfunded vested
benefits under plans covered by Title IV of the Employee Retirement Income
Security Act of 1974, as amended.
"Defaulted Receivable" means a Receivable as to which, on any
Determination Date (a) any part of the Net Value thereof remains unpaid for more
than 180 days from the Billing Date for such Receivable; or (b) the Payor
thereof has taken any action, or suffered any event to occur, of the type
described in Section 10.1(c); or (c) the Servicer or the Subservicer otherwise
deems any part of the Net Value thereof to be uncollectible.
"Determination Date" means the Business Day preceding the Purchase
Date of each week.
"Discharge Date" means, with respect to any Receivable, the date of
discharge by a Seller of the related patient, in the case of an in-patient and
the Billing Date, in the case of an out-patient and a Receivable originated by a
nursing home.
"Dollar" and "$" means lawful money of the United States of America.
"DRG Code" means the Diagnosis Related Group code assigned by HCFA.
"D&P" means Duff & Phelps Credit Rating Co., its successors and
assigns.
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"Eligible Payor" means a Payor which is
(a) (i) a commercial insurance company, organized under the laws of
any jurisdiction in the United States, having its principal
office in the United States; (ii) a Blue Cross/Blue Shield plan
other than those listed on Schedule 2; (iii) during such time as
the Seller is the Subservicer hereunder, (A) Medicare, (B)
Medicaid plans other than those administered by the states listed
on Schedule 1, or (C) CHAMPUS; (iv) a HMO, PPO or other similar
managed care program, each organized under the laws of any
jurisdiction in the United States, having its principal office in
the United States; or (v) a Provider Payor provided that a
Provider Payor shall not be an Eligible Payor without the consent
of the Servicer;
(b) not an Affiliate of any of the parties hereto;
(c) in the case of (a) (i) (ii), (iv) and (v) above, in receipt of a
letter substantially in the form of Exhibit A hereto; and
(d) not subject to bankruptcy or insolvency proceedings at the time
of sale of the Receivable to the Purchaser.
"Eligible Receivable" means, at any time, a Receivable as to which the
representations and warranties of Section 6.2 are true and correct in all
respects at the time of Purchase.
"Eligible Receivable Amount" means, with respect to any Eligible
Receivable, an amount equal to its Billed Amount after giving effect to any
Contractual Allowance with respect to such Eligible Receivable.
"Equity Account" means the trust account of the Purchaser maintained
with the Trustee titled "Equity Account".
"Event of Seller Default" has the meaning specified in Section 10.1.
"Governmental Authority" means the United States of America, federal,
any state, local or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions thereof or pertaining thereto.
"Governmental Consents" has the meaning specified in Section 6.1(h).
"HCFA" means the Health Care Financing Administration, an agency of
the HHS charged with administering and regulating, inter alia, certain aspects
of Medicaid and Medicare.
"Health Facility License" means a license issued by a state health
agency or similar agency or body certifying that the facility has been inspected
and found to comply with applicable laws for operating such a health facility.
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"HHS" means the Department of Health and Human Services, an agency of
the Federal Government of the United States.
"HMO" means a health maintenance organization.
"Indemnified Amounts" has the meaning specified in Section 11.1(a).
"Indemnified Party" has the meaning specified in Section 11.1(a).
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended.
"Investment Income" means income of any nature from the investment or
deposit of funds in the Seller Credit Reserve Account or Offset Reserve Account
or any other reserve or account required hereunder.
"JCAHO" means the Joint Commission for Accreditation of Health Care
Organizations.
"Lockbox Account" has the meaning specified in Section 4.3(a).
"Lockbox Account Agreement" means an agreement among the Servicer and
a depository institution satisfactory to the Purchaser with respect to the
Commercial Lockbox Account and among the Seller, the Servicer and a depository
institution satisfactory to the Purchaser with respect to the Medicare Lockbox
Account, in each case (a) providing that all Collections therein shall be
remitted directly by such depository institution to the Collection Account
within one Business Day of receipt and (b) otherwise satisfactory to the
Purchaser.
"Medicaid" means the medical assistance program established by Title
XIX of the Social Security Act (42 USC ss. 1396 et seq.) and any statutes
succeeding thereto.
"Medicaid Certification" means certification of a facility by HCFA or
a state agency or entity under contract with HCFA that the facility fully
complies with all the conditions of participation set forth in Medicaid
Regulations.
"Medicaid Provider Agreement" means an agreement entered into between
a federal or state agency or other such entity administering the Medicaid
program and a health care facility under which the health care facility agrees
to provide services or merchandise for Medicaid patients in accordance with the
terms of the agreement and Medicaid Regulations.
"Medicaid Receivable" means a Receivable payable pursuant to a
Medicaid Provider Agreement.
"Medicaid Regulations" means, collectively, (a) all federal statutes
(whether set forth in Title XIX of the Social Security Act or elsewhere)
affecting Medicaid; (b) all state statutes and plans for medical assistance
enacted in connection with such statutes and federal rules and regulations
promulgated pursuant to or in connection with such statutes; and (c) all
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applicable provisions of all rules, regulations, manuals, orders and
administrative, reimbursement and other guidelines of all Governmental
Authorities (including, without limitation, HHS, HCFA, the office of the
Inspector General for HHS, or any Person succeeding to the functions of any of
the foregoing) promulgated pursuant to or in connection with any of the
foregoing (whether or not having the force of law), in each case as may be
amended, supplemented or otherwise modified from time to time.
"Medicare" means the health insurance program for the aged and
disabled established by Title XVIII of the Social Security Act (42 USC ss. 1395
et seq.) and any statutes succeeding thereto.
"Medicare Certification" means certification of a facility by HCFA or
a state agency or entity under contract with HCFA that the facility fully
complies with all the conditions of participation set forth in Medicare
Regulations.
"Medicare Lockbox Account" has the meaning specified in Section
4.3(a).
"Medicare/Medicaid Offset" means, with respect to Medicare Receivables
and Medicaid Receivables, an offset against payment thereof, which has occurred
due to a Medicare or Medicaid settlement.
"Medicare Provider Agreement" means an agreement entered into between
a federal or state agency or other such entity administering the Medicare
program and a health care facility under which the health care facility agrees
to provide services or merchandise for Medicare patients in accordance with the
terms of the agreement and Medicare Regulations.
"Medicare Receivable" means a Receivable payable pursuant to a
Medicare Provider Agreement.
"Medicare Regulations" means, collectively, (a) all federal statutes
(whether set forth in Title XVIII of the Social Security Act or elsewhere)
affecting Medicare; and (b) all applicable provisions of all rules, regulations,
manuals, orders and administrative, reimbursement and other guidelines of all
Governmental Authorities (including, without limitation, HHS, HCFA, the Office
of the Inspector General for HHS, or any Person succeeding to the functions of
any of the foregoing) promulgated pursuant to or in connection with the
foregoing (whether or not having the force of law), as each may be amended,
supplemented or otherwise modified from time to time.
"Net Administrative Fee" means, as of any Purchase Date, an amount
equal to the Administrative Fee minus the Subservicing Fee for such Purchase
Date (but not less than zero).
"Net Subservicing Fee" means, as of any Purchase Date, an amount equal
to the Subservicing Fee minus the Administrative Fee for such Purchase Date (but
not less than zero).
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"Net Value" of any Receivable at any time means an amount (not less
than zero) equal to (a)(i) the Eligible Receivable Amount multiplied by (ii)
0.97; minus (b) all payments received from the Payor with respect thereto;
provided, that if the Servicer makes a determination that all payments by the
Payor with respect to such Receivable have been made, the Net Value shall be
zero, and provided, further, that for purposes of calculations under Article VI,
the Net Value of a Defaulted Receivable shall be zero and no deductions in Net
Value will be made until such time as the Servicer has received Collections with
respect to a Purchased Receivable and processed the related Remittance Advice.
"Officers' Certificate" means a certificate signed by two persons, one
of whom shall (a) hold the office of the Chairman of the Board, President, Vice
President or Treasurer and (b) the second of whom shall hold (i) any of the
offices described in the preceding clause (a) or (ii) the office of Assistant
Treasurer, Secretary or Assistant Secretary.
"Offset Reserve Account" means the trust account maintained with the
Trustee as specified in Section 4.3(b)
"Other Sellers" has the meaning specified in Section 4.7.
"Paid Receivable" means, as of any Determination Date, a Purchased
Receivable as to which a payment by the Payor with respect to such Receivable
has been received.
"Paid Receivables Amount" has the meaning specified in Section 8.2(b).
"Payor" means, with respect to any Receivable, the Person primarily
obligated to make payments in respect thereto.
"Payor Class" means, with respect to any Payor, one of the following:
(a) commercial insurance Payors; (b) Medicare Payors; (c) Medicaid Payors; (d)
Blue Cross/Blue Shield Payors; (e) CHAMPUS Payors; (f) HMO and PPO Payors; and
(g) Provider Payors.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, voluntary association, joint
venture, a government or any agency or political subdivision thereof, or any
other entity of whatever nature.
"PPO" means a preferred provider organization.
"Principal Amortization Event" means an event under any loan agreement
or indenture following which the funding of the Purchaser to be utilized in
purchasing Receivables hereunder may be terminated.
"Prior Net Value Amount" has the meaning specified in Section 8.2(a).
"Program Fee" means, (a) as of the first Purchase Date in any month,
an amount determined by the Servicer, equal to (i) 1/12 of the annualized Base
Rate multiplied by (ii) the aggregate Net Value of all Purchased Receivables
including (A) Defaulted Receivables (net of recoveries) and (B) those
Receivables to be purchased on such Purchase Date; and (b) as of any
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subsequent Purchase Date in any month, an amount determined by the Servicer,
equal to (i) 7/360 of the annualized Base Rate multiplied by (ii) any increase
in the aggregate Net Value of all Purchased Receivables since such first
Purchase Date including (A) Defaulted Receivables (net of recoveries) and (B)
those Receivables to be purchased on such Purchase Date.
"Provider Payor" means any medical services provider reimbursed by an
HMO, PPO or managed care program, commercial insurer, Medicare, Medicaid, or
CHAMPUS organized under the laws of any jurisdiction in the United States,
having its principal office in the United States.
"Purchase" means a purchase by the Purchaser of Eligible Receivables
from the Seller pursuant to Section 4.2.
"Purchase Account" means the trust account of the Purchaser maintained
with the Trustee titled "NPF VI - Purchase Account."
"Purchase Assignment" means the assignment of Purchased Receivables
entered into between the Seller and the Purchaser on the initial Purchase Date
and any subsequent Purchase Date upon Purchaser's request substantially in the
form of Exhibit C.
"Purchase Commitment" means an amount not to exceed $6,000,000.
"Purchase Date" means the Closing Date and thereafter, Tuesday of each
week or the preceding Business Day if such day is not a Business Day.
"Purchase Notice" means a notice in a form acceptable to the
Purchaser, which enables the Purchaser to identify all Eligible Receivables
owned on such date by the Seller, and the Required Information with respect
thereto, segregated by Payor Class.
"Purchase Price" has the meaning specified in Section 4.2(b).
"Purchased Receivable" means any Receivable which has been purchased
by the Purchaser hereunder, including a Rejected Receivable prior to its
repurchase. Notwithstanding anything to the contrary herein, Purchased
Receivable shall only refer to a Receivable (or part thereof) payable by the
primary Payor thereof.
"Purchaser" means NPF VI, Inc., an Ohio corporation, together with its
successors and assigns.
"Receivable" means (a) an account receivable billed to a Payor arising
from the provision of health care services (and any services or sales ancillary
thereto) by the Seller including the right to payment of any interest or finance
charges and other obligations of such Payor with respect thereto;
(b) all security interests or liens and property subject thereto from
time to time purporting to secure payment by the Payor;
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(c) all guarantees, indemnities and warranties and proceeds thereof,
proceeds of insurance policies, UCC financing statements and other agreements or
arrangements of whatever character from time to time supporting or securing
payment of such Receivable;
(d) all Collections with respect to any of the foregoing;
(e) all Records with respect to any of the foregoing; and
(f) all proceeds of any of the foregoing.
"Records" means all Contracts and other documents, books, records and
other information (including, without limitation, computer programs, tapes,
disks, punch cards, data processing software and related property and rights)
prepared and maintained by the Seller or the Subservicer with respect to
Receivables (including Purchased Receivables) and the related Payors.
"Rejected Amount" has the meaning specified in Section 8.2(e).
"Rejected Receivable" has the meaning specified in Section 6.3.
"Related Documents" means each Purchase Assignment, the Lockbox
Account Agreement and all documents required to be delivered thereunder and
under this Agreement.
"Remittance Advice" means, in respect of a Receivable, written
confirmation received by the Servicer from the Subservicer or the related Payor
of the amount paid on a patient specific Receivable.
"Required Information" means, with respect to a Receivable, (a) the
Payor, (b) the DRG Code, if applicable, (c) the Eligible Receivable Amount, (d)
the Billing Date, (e) the patient account number and (f) the Discharge Date, if
applicable.
"S & P" means Standard & Poor's Corporation, and its successors and
assigns.
"Seller" means Coastal Correctional Healthcare, Inc., a North Carolina
corporation, together with its successors and assigns.
"Seller Credit Reserve Account" means the trust account maintained
with the Trustee as specified in Section 4.3(b).
"Service Date" means the date on which services are rendered to the
applicable patient or health care facility with respect to a particular
Receivable.
"Servicer" means National Premier Financial Services, Inc., an Ohio
corporation, or any Person designated as the successor Servicer, and its
successors and assigns, from time to time.
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"Servicing Officer" means any officer of the Subservicer involved in,
or responsible for, the administration and servicing of the Purchased
Receivables whose name appears on an Officer's Certificate listing servicing
officers furnished to the Purchaser and the Servicer by the Subservicer, as
amended, from time to time.
"Servicing Records" means all documents, books, records and other
information (including, without limitation, computer programs, tapes, disks,
punch cards, data processing software and related property and rights) prepared
and maintained by the Subservicer or the Servicer with respect to the Purchased
Receivables and the related Payors.
"Specified Credit Reserve Balance" means, with respect to the Seller
in the Seller Credit Reserve Account, as of any Purchase Date, an amount equal
to 6.50% of the Net Value of Purchased Receivables including (a) Defaulted
Receivables (net of recoveries) and (b) those Receivables to be purchased on
such Purchase Date.
"Specified Offset Reserve Balance" means, with respect to the Seller
in the Offset Reserve Account, as of any Purchase Date, an amount equal to the
greater of (a) 2.0% of the Net Value of Purchased Receivables including (i)
Defaulted Receivables (net of recoveries) and (ii) those Receivables to be
purchased on such Purchase Date; and (b) 1.5 times the most recent year's
aggregate audited Medicare and Medicaid cost report liabilities for the Seller.
"Subservicer" means the Seller, or any Person designated as
Subservicer, from time to time, hereunder.
"Subservicing Fee" has the meaning specified in Section 9.5.
"Subservicing Officer" means any officer of the Subservicer involved
in, or responsible for, the administration and servicing of the Purchased
Receivables whose name appears on an Officer's Certificate listing servicing
officers furnished to the Servicer by the Subservicer, as amended, from time to
time.
"Subsidiary" means, as to any Person, any corporation or other entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other Persons performing similar
functions are at the time directly or indirectly owned by such Person.
"Termination Date" means the earlier of (a) June 1, 2000 or (b) the
date of declaration or automatic occurrence of the Termination Date pursuant to
Section 10.1.
"Trustee" means Bankers Trust Company, a national banking association,
or any successor Trustee appointed by the Purchaser.
"UCC" means the Uniform Commercial Code as from time to time in effect
in the state of the location of the Seller's chief executive office.
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Section 3.2 Other Terms.
All accounting terms not specifically defined herein shall be
construed in accordance with generally accepted accounting principles. All terms
used in Article 9 of the UCC, and not specifically defined herein, are used
herein as defined in such Article 9.
ARTICLE II
PURCHASE AND SALE; ESTABLISHMENT OF ACCOUNTS
Section 4.1 Purchase and Sale.
The Seller does hereby agree to sell, transfer, assign, set over and
convey to the Purchaser, without recourse, all right, title and interest of the
Seller in and to the Purchased Receivables sold pursuant to this Agreement and
the Purchaser does hereby agree to purchase Eligible Receivables pursuant to the
terms of this Agreement; provided, that with respect to each Purchased
Receivable which is a Medicare Receivable, a Medicaid Receivable or a CHAMPUS
Receivable, the Seller, as Subservicer hereunder, shall retain all rights of
collection with respect to such Receivable.
Section 4.2 Conveyance of Receivables.
(a) No later than 2:00 p.m. on the fifth Business Day prior to each
Purchase Date, the Seller shall deliver, or cause to be delivered, to the
Servicer a Purchase Notice. In the event that the Seller does not provide such
notification, the Purchaser will have no obligation to purchase any Eligible
Receivable on such Purchase Date. Upon receipt of a Purchase Notice, the
Servicer, in its sole discretion, as agent for the Purchaser, shall determine
which, if any, of the Eligible Receivables specified therein the Purchaser shall
purchase. In the event the Servicer determines (the determination of the
Servicer being conclusive in this regard) that any Receivables identified on
such notice are not Eligible Receivables, such Receivables shall not be eligible
for sale on such Purchase Date. On each Purchase Date, following its selection,
if any, of Eligible Receivables, the Servicer will determine the Purchase Price
in accordance with the subsection (b) hereof. The Seller shall be obligated to
execute and deliver to the Purchaser a Purchase Assignment with respect to
Purchased Receivables as of the initial Purchase Date and thereafter upon the
written request of the Purchaser. Notwithstanding the foregoing, the Purchaser
shall have no obligation to purchase Receivables from the Seller to the extent
the aggregate Net Value of all Purchased Receivables (including Defaulted
Receivables to the extent recoveries have not been made with respect to such
Defaulted Receivables) is in excess of the Purchase Commitment.
(b) The Purchase Price with respect to Purchased Receivables purchased
on any Purchase Date shall be an amount (not less than zero) equal to (i) the
aggregate Net Values of such Purchased Receivables; minus (ii) the sum of (A)
the Program Fee as of such Purchase Date; (B) the amount, if any, by which the
amount in the Seller Credit Reserve Account
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deposited hereunder (net of withdrawals required hereunder) is less than the
Specified Credit Reserve Balance as of such Purchase Date (which amount will be
the full Specified Credit Reserve Balance on the initial Purchase Date); and (C)
the amount, if any, by which the amount in the Offset Reserve Account deposited
hereunder (net of withdrawals required hereunder) is less than the Specified
Offset Reserve Balance as of such Purchase Date (which amount will be the full
Specified Offset Reserve Balance on the initial Purchase Date) and (D) the Net
Administrative Fee due to the Servicer. Following delivery of a duly executed
Purchase Assignment, subject to the satisfaction of the conditions set forth in
Section 5.2, the Purchaser shall, by withdrawal from the Purchase Account, (w)
pay to the Seller the Purchase Price for all Purchased Receivables purchased on
such Purchase Date, (x) deposit the Program Fee in the Equity Account, (y) make
a deposit in the amount set forth in (B) above, if any, in the Seller Credit
Reserve Account, and (z) make a deposit in the amount set forth in (C) above, if
any, in the Offset Reserve Account and pay to the Servicer the Net
Administrative Fee. Payment of such Purchase Price shall be made by the
Servicer, as agent for the Purchaser, causing the Trustee to effect such
payment. In the event the Purchase Price is zero on any Purchase Date, the
Purchaser shall only be required to make deposits specified in (w), (x), (y),
and (z) above in an amount equal to the Net Value of such Purchased Receivables
as of such Purchase Date, with priority being given in the foregoing order. In
the event the Net Value of such Purchased Receivables purchased on that Purchase
Date is less than the Program Fee (including where no Receivables are purchased
on the relevant Purchase Date), to the extent funds deposited hereunder (net of
withdrawals required hereunder) are sufficient, the Servicer shall cause the
Trustee to withdraw the difference from the Seller Credit Reserve Account to the
extent of amounts in excess of the Specified Credit Reserve Balance on such
Purchase Date and deposit it in the Equity Account.
(c) Following payment of the Purchase Price on any Purchase Date,
ownership of each Purchased Receivable will be vested in the Purchaser. The
Seller shall not take any action inconsistent with such ownership and shall not
claim any ownership interest in any Purchased Receivable. The Seller shall
indicate in its Records that ownership of each Purchased Receivable is held by
the Purchaser. In addition, the Seller shall respond to any inquiries with
respect to ownership of a Purchased Receivable by stating that it is no longer
the owner of such Purchased Receivable and that ownership of such Purchased
Receivable is held by the Purchaser. Documents (other than medical records,
which shall be retained by the Seller) relating to the Purchased Receivables
shall be held in trust by the Seller and the Subservicer, for the benefit of the
Purchaser as the owner thereof, and possession of any Required Information or
incident relating to the Purchased Receivables so retained is for the sole
purpose of facilitating the servicing of the Purchased Receivables. Such
retention and possession is at the will of the Purchaser and in a custodial
capacity for the benefit of the Purchaser only. To further evidence such sale,
at the request of the Purchaser, the Seller shall (i) mark conspicuously each
invoice evidencing each Purchased Receivable with a legend, acceptable to the
Purchaser, evidencing that the Purchaser has purchased all right and title
thereto and interest therein as provided in this Agreement; (ii) mark its master
data processing records evidencing such Purchased Receivables with such legend;
and (iii) send notification to Payors as to the transfer of such interest in the
Purchased Receivables.
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Section 4.3 Establishment of Accounts; Conveyance of Interests
Therein; Investment.
(a) Lockbox Account. Prior to the execution and delivery of this
Agreement, the Seller shall (i) establish and maintain at the Seller's expense
(A) an account in the name of the Seller with a depository institution
satisfactory to the Purchaser (the "Medicare Lockbox Account") into which all
Collections in respect of Medicaid, Medicare and CHAMPUS Receivables shall be
deposited and (B) an account in the name of the Servicer into which all
Collections from Eligible Payors in respect of other Receivables shall be
deposited (the "Commercial Lockbox Account"); provided that neither the Seller
nor the Servicer shall be permitted to withdraw any amounts from the Commercial
Lockbox Account or change the procedures under the Lockbox Account Agreement
except in the case of an assignment by the Purchaser of its interests herein
under Section 12.3. The Medicare Lockbox Account and the Commercial Lockbox
Account are referred to collectively in this Agreement as the "Lockbox Account")
and (ii) enter into the Lockbox Account Agreement. The provisions of the Lockbox
Account Agreement described in the definition thereof may not be amended without
the consent of the Trustee. The Seller hereby agrees to direct each Payor of an
Eligible Receivable to remit all payments with respect to such Receivable for
deposit in the Commercial Lockbox Account (other than the Payors of Medicaid,
Medicare and CHAMPUS Receivables which shall be directed to remit all payments
with respect to such Receivables for deposit in the Medicare Lockbox Account) by
delivering to such Payor a notice attached as Exhibit A hereto. The Seller
further agrees not to change such directive to Payors without the prior written
consent of the Purchaser and the Servicer. The Seller agrees not to terminate
the Medicare Lockbox Account Agreement without first providing the Purchaser and
the Servicer with written notice at least 30 days prior to the effective date of
such termination. The Seller acknowledges that payments deposited in the
Medicare Lockbox Account will be swept from the Medicare Lockbox Account to the
Collection Account on a daily basis. The Seller hereby agrees not to change or
direct the custodian thereof to modify such sweep order without first providing
the Purchaser and the Servicer with written notice at least 30 days prior to the
effective date of such change in sweep order. In the event the Seller terminates
the Medicare Lockbox Account, changes the sweep order with respect to the
Medicare Lockbox Account or the Payors receive any instruction whatsoever from
the Seller indicating that Collections with respect to the Eligible Receivables
should be sent to any location other than the Lockbox Account, the Seller hereby
acknowledges and agrees that such actions would be an express violation of this
Agreement, would cause irreparable harm to the Purchaser for which there would
be no adequate remedy at law, and agrees and consents to grant the Purchaser
specific performance of the terms and provisions of this Agreement. The
custodian of the Lockbox Account may rely upon the terms and restrictions set
for in subsection 4.3(a).
(b) Seller Credit Reserve Account; Offset Reserve Account. The
Purchaser has established and shall maintain trust accounts with the corporate
trust department of the Trustee titled "NPF VI Seller Credit Reserve Account"
(the "Seller Credit Reserve Account") and "NPF VI - Offset Reserve Account" (the
"Offset Reserve Account").
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(c) Collection Account. The Purchaser has established and shall
maintain a trust account with the corporate trust department of the Trustee
titled "NPF VI - Collection Account" (the "Collection Account").
(d) The Seller does hereby sell, transfer, assign, set over and convey
to the Purchaser all right, title and interest of the Seller in and to (i) all
amounts deposited, from time to time, in the Seller Credit Reserve Account and
the Offset Reserve Account and (ii) subject to the provisions of Article VI
hereunder, all amounts deposited, from time to time, in the Lockbox Account and
the Collection Account. Any Collections in respect of Purchased Receivables held
by the Seller or the Subservicer pending transfer to the Collection Account as
provided in this Agreement, shall be held by the Seller in trust for the benefit
of the Purchaser until such amounts are deposited into the Collection Account or
the Lockbox Account. In the event Collections in respect of Purchased
Receivables held by the Seller (whether in the Lockbox Account or otherwise)
shall not be remitted to the Collection Account on the day of receipt or the
following Business Day if the day of receipt is not a Business Day in addition
to its other remedies hereunder, the Purchaser shall be entitled to receive a
late charge (which shall be in addition to the Program Fee) equal to 12% per
annum or the maximum rate legally permitted if less than such rate, calculated
as of the first Business Day of such delinquency.
(e) Notwithstanding anything to the contrary herein, the Seller may,
but shall not be obligated to, make a deposit at any time in the Seller Credit
Reserve Account or the Offset Reserve Account. Further, the Seller is not
entitled to, nor shall the Seller have any interest in, Investment Income.
Section 4.4 Grant of Security Interest.
It is the intention of the parties hereto that each payment by the
Purchaser to the Seller with respect to Purchased Receivables to be made
hereunder shall constitute part of the purchase and sale of such Purchased
Receivables and not a loan. In the event, however, that a court of competent
jurisdiction were to hold that the transaction evidenced hereby constitutes a
loan and not a purchase and sale, it is the intention of the parties hereto that
this Agreement shall constitute a security agreement under the UCC and any other
applicable law, and that the Seller shall be deemed to have granted to the
Purchaser a first priority perfected security interest in all of the Seller's
right, title and interest in, to and under the Purchased Receivables; all
payments of principal of or interest on such Purchased Receivables; all amounts
on deposit from time to time in the Seller Credit Reserve Account, the Offset
Reserve Account; and all amounts on deposit with respect to Purchased
Receivables from time to time in the Lockbox Account and the Collection Account,
all other rights relating to and payments made in respect of this Agreement, and
all proceeds of any of the foregoing.
Section 4.5 Further Action Evidencing Purchases.
(a) The Seller agrees that, from time to time, at its expense, it will
promptly execute and deliver all further instruments and documents, and take all
further action, that may be necessary or appropriate, or that the Purchaser may
reasonably request, in order to perfect, protect or more fully evidence the
transfer of ownership of the Purchased Receivables or to
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enable the Purchaser to exercise or enforce any of its rights hereunder or under
any Purchase Assignment. Without limiting the generality of the foregoing, the
Seller will, upon the request of the Purchaser, execute and file such financing
or continuation statements, or amendments thereto or assignments thereof, and
such other instruments or notices, as may be necessary or appropriate, or as the
Purchaser may request.
(b) The Seller hereby authorizes the Purchaser to file one or more
financing or continuation statements, and amendments thereto and assignments
thereof, relating to all or any of the Purchased Receivables and Collections
with respect thereto without the signature of the Seller.
Section 4.6 Eligible Receivables.
All determinations of the Servicer under this Agreement including,
without limitation, whether Receivables are Eligible Receivables and the
Eligible Receivable Amounts, shall be conclusive.
Section 4.7 Offsets.
The parties acknowledge that the Purchaser and the Servicer have
entered into a series of agreements in substantially the form as this Agreement
with other sellers of Receivables ("Other Sellers") and that the Offset Reserve
Account has been established to provide liquidity to the Purchaser with respect
to Rejected Receivables, whether such Receivables were sold to the Purchaser by
the Seller or by Other Sellers. In the event of an offset with respect to a
Receivable purchased by the Purchaser from the Seller or an Other Seller and
such Rejected Receivable is not repurchased by such Seller or Other Seller in
the manner set forth in Section 6.3 herein, the Servicer will cause the Trustee
to withdraw the Net Value of such Rejected Receivable from the Offset Reserve
Account and deposit it in the Purchase Account. In the event such Receivable was
sold to the Purchaser by an Other Seller, the Purchaser agrees to enforce the
Other Seller's obligation to repurchase such Receivable under the terms of its
agreement with such Other Seller and to cause the amount of such repurchase by
the Other Seller to be deposited in the Offset Reserve Account. The Servicer
will maintain a detailed accounting record of all deposits and withdrawals from
the Offset Reserve Account including whether a withdrawal was made with respect
to a Medicare/Medicaid Offset on a Receivable sold to the Purchaser by the
Seller or an Other Seller. For purposes of calculating whether the amount in the
Offset Reserve Account deposited by the Servicer on behalf of the Seller (net of
withdrawals required hereunder with respect to the Seller) is equal to the
Specified Offset Reserve Balance, only withdrawals with respect to a Rejected
Receivable sold to the Purchaser by the Seller will be deemed to be with respect
to the Seller.
Section 4.8 Administrative Fee.
On each Purchase Date, the Seller shall deposit with the Servicer an
amount equal to the Administrative Fee. The Subservicer acknowledges that such
amount may be offset by the Subservicing Fee pursuant to Section 9.5. Payment of
the Net Administrative Fee may be made
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by application of amounts otherwise payable to the Seller (including the
Purchase Price to the extent allocable to the Seller).
Section 4.9 Assignment of Agreement.
The Seller does hereby agree, acknowledge and consent to the
assignment by the Purchaser of all of the Purchaser's right, title, interest and
obligations with respect to this Agreement. The Seller does hereby further agree
to execute and deliver to the Purchaser all documents and amendments presented
to the Seller by the Purchaser in order to effectuate the assignment by the
Purchaser in furtherance of this Section 4.9 consistent with the terms and
provisions of this Agreement.
ARTICLE III
CONDITIONS OF PURCHASES
Section 5.1 Conditions Precedent to Effectiveness of Agreement.
The effectiveness of this Agreement is subject to the condition
precedent that the Purchaser and the Servicer shall have received on or before
the Closing Date the following, in form and substance satisfactory to the
Purchaser and the Servicer:
(a) With respect to the Seller:
(i) the certificate or articles of incorporation of the Seller
certified, as of a date no more than ten days prior to the Closing Date, by
the Secretary of State of its state of incorporation;
(ii) a Good Standing Certificate, dated no more than ten days prior to
the Closing Date, from the respective Secretary of State of its state of
incorporation and each state in which the Seller is required to qualify to
do business;
(iii) a certificate of the Secretary or Assistant Secretary of the
Seller (on which certificate the Servicer and the Purchaser may
conclusively rely until such time as the Servicer shall receive from the
Seller a revised certificate meeting the requirements of this subsection)
certifying as of the Closing Date: (A) the names and true signatures of the
officers authorized on its behalf to sign this Agreement and the Related
Documents, (B) a copy of the Seller's by-laws or code of regulations, and
(C) a copy of the resolutions of the board of directors of the Seller
approving this Agreement, the Related Documents and the transactions
contemplated thereby;
(iv) an Officer's Certificate in the form of Exhibit D hereto;
(v) certified copies of Requests for Information or Copies (Form
UCC-11) (or a similar search report certified by a party acceptable to the
Purchaser), dated a date no
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more than ten days prior to the Closing Date listing all effective
financing statements which name the Seller (under its present name and any
previous name) as debtor, together with copies of such financing
statements, and searches of applicable federal and state court and agency
dockets and lien records showing all judgment liens affecting the Seller or
the Eligible Receivables and tax liens; and
(vi) acknowledgment copies of proper financing statements (Form
UCC-3), if any, necessary to release all security interests and other
rights of any Person in Purchased Receivables previously granted by the
Seller including, without limitation, all such releases specified by the
Seller prior to the date hereof;
(b) Consents required by, or of, any Person or Governmental Authority,
if any, to the closing of the transactions contemplated hereby, in form and
substance satisfactory to the Purchaser;
(c) Acknowledgment copies of proper financing statements (Form UCC-1),
duly filed, in respect of Purchased Receivables, naming the Seller as the
assignor and the Purchaser as the assignee or other, similar instruments or
documents, as may be necessary or, in the opinion of the Purchaser or the
Servicer, desirable under the UCC of all appropriate jurisdictions or any
comparable law to perfect the Purchaser's ownership interests in all Purchased
Receivables in which an interest may be assigned hereunder;
(d) Fully executed copies of the Lockbox Account Agreement;
(e) The favorable opinion of counsel to the Seller substantially in
the form attached hereto as Exhibit E;
(f) Such other approvals, opinions, documents and instruments, as the
Purchaser or the Servicer may reasonably request;
(g) The Seller shall have paid such closing costs as have previously
been agreed with the Purchaser; and
(h) The Seller shall have sent each Eligible Payor a notice
substantially in the form of Exhibit A.
Section 5.2 Conditions Precedent to All Purchases.
Each Purchase (including the initial Purchase) from the Seller by the
Purchaser shall be subject to the further conditions precedent that:
(a) The representations and warranties of the Seller set forth in
Sections 6.1 and 6.2 are true and correct on and as of such date, before and
after giving effect to such Purchase and to the application of the proceeds
therefrom, as though made on and as of such date;
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(b) No event has occurred, or would result from such Purchase or from
the application of the proceeds therefrom, which constitutes an Event of Seller
Default or would constitute an Event of Seller Default, but for the requirement
that notice be given or time elapse or both;
(c) The Seller is in compliance with each of its covenants set forth
herein;
(d) The Termination Date shall not have occurred;
(e) Each Receivable submitted by the Seller for purchase is an
Eligible Receivable; and
(f) The Seller shall have taken such other action, including delivery
of approvals, opinions or documents to the Purchaser, as the Purchaser may
reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLER
Section 6.1 Representations and Warranties as to the Seller.
The Seller (in its capacities as Seller and Subservicer hereunder)
represents and warrants to the Purchaser and the Servicer, as of the date hereof
and on each subsequent Purchase Date, as follows:
(a) The Seller is a corporation duly organized, validly existing and
in good standing under the laws of its state of incorporation and is duly
qualified to do business, and is in good standing in each jurisdiction in which
the nature of its business requires it to be so qualified;
(b) The Seller has the power and authority to own and convey all of
its properties and assets and to execute and deliver, this Agreement and the
Related Documents and to perform the transactions contemplated hereby and
thereby;
(c) The execution, delivery and performance by the Seller of this
Agreement and the Related Documents, and the transactions contemplated thereby,
(i) have been duly authorized by all necessary corporate or other action on the
part of the Seller, (ii) do not contravene or cause the Seller to be in default
under (A) the Seller's certificate or articles of incorporation or by-laws or
code of regulations, (B) any contractual restriction contained in any indenture,
loan or credit agreement, lease, mortgage, security agreement, bond, note, or
other agreement or instrument binding on or affecting the Seller or its property
or (C) any law, rule, regulation, order, writ, judgment, award, injunction, or
decree applicable to, binding on or affecting the Seller or its property and
(iii) do not result in or require the creation of any Adverse Claim upon or with
respect to any of the property of the Seller (other than in favor of the
Purchaser as contemplated hereunder);
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(d) This Agreement and the Related Documents have each been duly
executed and delivered on behalf of the Seller and each is the legal, valid and
binding obligation of the Seller enforceable against the Seller in accordance
with its terms;
(e) No consent of, or other action by, and no notice to or filing
with, any Governmental Authority or any other party, is required for the due
execution, delivery and performance by the Seller of this Agreement or any of
the Related Documents or for the perfection of or the exercise by the Purchaser
or the Servicer of any of their rights or remedies thereunder;
(f) There is no pending or threatened action, suit or proceeding, of a
material nature against or affecting the Seller, its officers or directors, or
the property of the Seller, in any court or tribunal, or before any arbitrator
of any kind or before or by any Governmental Authority (i) asserting the
invalidity of this Agreement or any of the Related Documents, (ii) seeking to
prevent the sale and assignment of any Receivable or the consummation of any of
the transactions contemplated thereby, (iii) seeking any determination or ruling
that might materially and adversely affect (A) the performance by the Seller or
the Subservicer of its obligations under this Agreement or any of the Related
Documents, (B) the validity or enforceability of this Agreement or any of the
Related Documents, (C) the Receivables or the Contracts or (D) the federal
income tax attributes of the Purchases, or (iv) asserting a claim for payment of
money in excess of $50,000 (other than such judgments or orders in respect of
which adequate insurance is maintained by the Seller for the payment thereof);
(g) No injunction, bankruptcy petition, writ, restraining order or
other order of any material nature adverse to the Seller or the conduct of its
business or which is inconsistent with the due consummation of the transactions
contemplated by this Agreement has been issued by or filed with a Governmental
Authority;
(h) The Seller has complied in all material respects with all
applicable laws, rules, regulations, and orders with respect to it, its business
and properties and all Receivables and related Contracts (including without
limitation, all applicable environmental, health and safety requirements) and
all restrictions contained in any indenture, loan or credit agreement, mortgage,
security agreement, bond, note, or other agreement or instrument binding on or
affecting the Seller or its property, and has and maintains all permits,
licenses, authorizations, registrations, approvals and consents of Governmental
Authorities, and all certificates of need for the construction or expansion of
or investment in health care facilities, all Health Facility Licenses,
Accreditations, Medicaid Certifications and Medicare Certifications necessary
for the activities and business of the Seller and each of its Subsidiaries as
currently conducted and as proposed to be conducted, the ownership, use,
operation and maintenance by each of them of its properties, facilities and
assets and the performance by the Seller of this Agreement and the related
Documents (hereinafter referred to collectively as "Governmental Consents");
(i) Without limiting the generality of the prior representation: (A)
each Health Facility License, Medicaid Certification, Medicare Certification,
Medicaid Provider Agreement, Medicare Provider Agreement and each of the Blue
Cross/Blue Shield Contracts of
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the Seller and each of its Subsidiaries is in full force and effect and has not
been amended or otherwise modified, rescinded or revoked or assigned, (B) the
Seller and each Subsidiary is in compliance with the requirements of Medicaid,
Medicare, CHAMPUS and related programs, and the Blue Cross/Blue Shield
Contracts, and (C) no condition exists or event has occurred which, in itself or
with the giving of notice or lapse of time or both, would result in the
suspension, revocation, impairment, forfeiture, non-renewal of any Governmental
Consent applicable to the Seller or any other health care facility owned or
operated by the Seller or any of its Subsidiaries, or such facility's
participation in any Medicaid, Medicare, CHAMPUS or other similar program, or of
any Blue Cross/Blue Shield Contracts and there is no claim that any such
Governmental Consent, participation or contract is not in full force and effect;
(j) The Seller has filed on a timely basis all tax returns (federal,
state, and local) required to be filed and has paid or made adequate provisions
for the payment of all taxes, assessments, and other governmental charges due
from the Seller;
(k) The primary business of the Seller is the provision of health care
services and/or equipment. The Payors' related provider numbers set forth on
Schedule 3 have been issued to the Seller and Schedule 3 is a true and complete
list of all provider numbers assigned by Payors to the Seller or its
Subsidiaries;
(l) The Seller is not required to prepare and submit Medicaid and
Medicare cost reports of each facility and of the home office of the Seller (A)
as to Medicaid, to the state agency, or other HCFA-designated agents or agents
of such state agency, charged with such responsibility or (B) as to Medicare, to
the Medicare intermediary or other HCFA-designated agents charged with such
responsibility. In the event the Seller is required to prepare and submit
Medicaid and Medicare cost reports to the appropriate agencies, the Seller
hereby represents and warrants that it will prepare and submit such reports to
such agencies on a timely basis and notify the Purchaser and the Servicer of
such requirement;
(m) All information heretofore or hereafter furnished by or on behalf
of the Seller to the Servicer or the Purchaser in connection with this Agreement
or any transaction contemplated hereby is and will be true and complete in all
material respects and does not and will not omit to state a material fact
necessary to make the statements contained therein not misleading;
(n) With respect to the Seller or any of its Subsidiaries, there has
occurred no event which has or is reasonably likely to have a material adverse
effect on the Seller's financial condition, business or operations, including
its ability to perform its obligations under this Agreement;
(o) The Seller is solvent and will not become insolvent after giving
effect to the transactions contemplated by this Agreement; the Seller has not
incurred Debts beyond its ability to pay; the Seller, after giving effect to the
transactions contemplated by this Agreement, will have an adequate amount of
capital to conduct its business in the foreseeable future; and the sales of
Purchased Receivables hereunder are made in good faith and without intent to
hinder, delay or defraud present or future creditors of the Seller;
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(p) The consolidated balance sheets of the Seller's indirect parent,
Coastal Physician Group, Inc., and its consolidated Subsidiaries as at December
31, 1995, and the related statements of income and shareholders' equity of
Coastal Physician Group, Inc. and its consolidated Subsidiaries of the fiscal
year then ended, prepared by KPMG Pear Marwick, independent certified public
accountant(s), copies of which have been furnished to the Purchaser and
Servicer, fairly present the consolidated financial condition, business and
operations of Coastal Physician Group, Inc. and its consolidated Subsidiaries as
at such date and the consolidated results of the operations of Coastal Physician
Group, Inc. and its consolidated Subsidiaries for the period ended on such date,
all in accordance with generally accepted accounting principles consistently
applied;
(q) The Medicare Lockbox Account and the Commercial Lockbox Account
are the only lockbox accounts maintained by the Seller and each Payor of an
Eligible Receivable has been directed upon its receipt of the notice attached as
Exhibit A hereto, which notice was mailed on the Closing Date, and is required
to, remit all payments with respect to such Receivable for deposit in the
Commercial Lockbox Account (other than the Payors of Medicaid, Medicare and
CHAMPUS Receivables which have been directed to remit all payments with respect
to such Receivables for deposit in the Medicare Lockbox Account);
(r) The principal place of business and chief executive office of the
Seller are located at the address of the Seller set forth under its signature
below and there are now no, and during the past four months there have not been,
any other locations where the Seller is located (as that term is used in the
UCC) or keeps Records except as set forth in the designated space beneath its
signature line in this Agreement;
(s) The legal name of the Seller is as set forth at the beginning of
this Agreement and except as set forth in the designated space beneath its
signature line in this Agreement the Seller has not changed its name in the last
six years, and during such period, the Seller did not use, nor does the Seller
now use any tradenames, fictitious names, assumed names or "doing business as"
names;
(t) The Receivables of the Seller have been and will continue to be
adjusted to reflect reimbursement policies of the Payors with respect thereto;
in particular, the Eligible Receivable Amounts of Receivables relating to such
Payors do not and shall not exceed amounts the Seller is entitled to receive
under any capitation arrangement, fee schedule, discount formula, cost-based
reimbursement, or other adjustment or limitation to the usual charges of the
Seller;
(u) No Payor of an Eligible Receivable being sold on any Purchase Date
has any claim of a material nature against or affecting the Seller or the
property of the Seller;
(v) The Seller has not done and shall not do anything to impede or
interfere with the collection by the Purchaser of the Purchased Receivables and
shall not amend, waive or otherwise permit or agree to any deviation from the
terms or conditions of any Purchased Receivable or any related Contract;
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(w) The Seller has made and will continue to make all payments to
Payors necessary to prevent any Payor from offsetting any earlier overpayment to
the Seller against any amounts such Payor owes on a Purchased Receivable;
(x) Each Purchase Notice contains a complete and accurate list of all
Eligible Receivables of the Seller as of its date;
(y) For federal income tax reporting and accounting purposes, the
Seller will treat the sale of each Purchased Receivable pursuant to this
Agreement as a sale of, or absolute assignment of its full right, title and
ownership interest in, such Purchased Receivable to the Purchaser and the Seller
has not in any other manner accounted for or treated the transactions in
Purchased Receivables by the Seller contemplated hereby;
(z) This Agreement constitutes a valid transfer, assignment, set-over
and conveyance to the Purchaser of all right, title and interest of the Seller
in and to the Purchased Receivables now existing and hereafter created;
(aa) The Seller has valid business reasons for selling its interests
in the Purchased Receivables rather than obtaining a loan with the Purchased
Receivables as collateral; and
(bb) As of the date first above written, the Seller operates the
facilities included on Schedule 4 hereto. The Seller is not doing business under
any name other than those listed on `Schedule 4 hereto. Further, one or more but
no more than those names listed on Schedule 4 hereto are payees on the checks
received from Eligible Payors.
Section 6.2 Representations and Warranties of the Seller as to
Purchased Receivables.
With respect to each Purchased Receivable sold pursuant to this
Agreement (including, without limitation, claims which may be satisfied by
set-off of any amounts due under any Receivable), the Seller represents and
warrants, as of the date hereof and on each subsequent Purchase Date, as
follows:
(a) Such Receivable is the primary liability of an Eligible Payor and
is recognized by the Eligible Payor as its primary liability;
(b) The Required Information contained in the Purchase Notice is true
and correct;
(c) Such Receivable is not a Defaulted Receivable and has not become a
Paid Receivable;
(d) The Seller has submitted all necessary documentation and supplied
all necessary information for payment of such Receivable to the Payor and has
fulfilled all of its
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other obligations, in respect thereof, including verification of the eligibility
of the Receivable for payment by such Payor;
(e) Neither the Receivable nor the related Contract has been
satisfied, subordinated or rescinded, or except as disclosed in writing to the
Purchaser, amended in any manner;
(f) The Eligible Receivable Amount set forth in the applicable
Required Information of such Receivable is net of any Contractual Allowance or
other modifications and neither the Receivable nor the related Contract has or
will be compromised, adjusted, extended, satisfied, subordinated, rescinded,
set-off or modified by the Seller or Payor, and is not nor will be subject to
compromise, adjustment, extension, satisfaction, subordination, rescission,
set-off, counterclaim, defense, abatement, suspension, deferment, deductible,
reduction, termination or modification, whether arising out of transactions
concerning the Contract or otherwise;
(g) Such Receivable is an account receivable created through the
provision of medically necessary services or merchandise supplied by the Seller
in the ordinary course of its business and the sales prices of such services or
merchandise were usual, customary and reasonable in the Seller's community for
such services;
(h) Such Receivable is an "account" within the meaning of the UCC and
is not evidenced by an "instrument" within the meaning of the UCC;
(i) Such Receivable has a Net Value which, when added to the Net Value
of all other Receivables of such Payor or in such Payor Class and which
constitute Purchased Receivables hereunder, does not exceed the Concentration
Limits;
(j) Such Receivable (A) has a Purchase Date no later than 150 days
from its Billing Date, (B) with respect to all Purchases following the initial
Purchase, the claim with respect to the related Receivable must be submitted to
the related Payor no later than 30 days after the Discharge Date of the patient
to whom the health care services giving rise to the Receivable were rendered and
(C) is not past the statutory limit for collection applicable to the Payor;
(k) The related Contract is, and was at the time of the services
giving rise to the Receivable, in full force and effect and constitutes the
legal, valid and binding obligation of the Payor enforceable against such Payor
in accordance with its terms, such Receivable was created in accordance with the
requirements of the Contract and applicable law, including, without limitation,
to the extent the Receivable is subject to limitations imposed by workers'
compensation law or a related Contract and is entitled to be paid pursuant to
the terms of the related Contract, and a copy of any related Contract to which
the Seller is a party has been delivered to the Purchaser, the amount of the
Eligible Receivable does not exceed the limitations so imposed, and each
Receivable to which the fees are so restricted has been clearly identified as
being subject to such restrictions;
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(l) Such Receivable is denominated and payable in Dollars of the
United States and the Eligible Receivable Amount of such Receivable is not in
excess of $150,000;
(m) Such Receivable is owned by the Seller free and clear of any
Adverse Claim, and the Seller has the right to sell, assign and transfer the
same and interests therein as contemplated under this Agreement and, upon such
sale, the Purchaser has acquired a valid ownership interest in such Receivable,
free and clear of any Adverse Claim;
(n) No consent from the Payor or any other Person shall be required to
effect the sale of any Purchased Receivables;
(o) There are no procedures or investigations pending or threatened
before any Governmental Authority (i) asserting the invalidity of such
Receivable or such Contract, (ii) asserting the bankruptcy or insolvency of the
related Payor, (iii) seeking the payment of such Receivable or payment and
performance of such Contract or (iv) seeking any determination or ruling that
might materially and adversely affect the validity or enforceability of such
Receivable or such Contract;
(p) Neither such Receivable nor the related Contract contravenes in
any material respect any laws, rules or regulations applicable thereto
(including, without limitation, laws, rules and regulations relating to usury,
consumer protection, truth in lending, fair credit billing, fair credit
reporting, equal credit opportunity, fair debt collection practices and privacy)
and no party to such related Contract is in violation of any such law, rule or
regulation in any material respect;
(q) Such Receivable complies with such additional criteria and
requirements (other than those relating to the collectibility of such
Receivables) as the Purchaser may from time to time specify to the Seller
following 30 days' notice;
(r) The Seller has no knowledge of any fact which should have led it
to expect at the time of sale of such Receivable to the Purchaser that the
Eligible Receivable Amount of such Receivable would not be paid in full.
The parties acknowledge that some of the foregoing representations and
warranties may have been made only to the best of the Seller's knowledge.
Nevertheless, notwithstanding the Seller's lack of knowledge with respect to an
inaccuracy of a representation and warranty, the parties agree that any such
inaccuracy shall be deemed a breach of the applicable representation or
warranty.
Section 6.3 Repurchase Obligations.
Upon discovery by any party hereto of a breach of any representation
or warranty in this Article IV which materially and adversely affects the value
of a Purchased Receivable or the interests of the Purchaser therein, the party
discovering such breach shall give prompt written notice to the other parties
hereto. Thereafter, on the next Purchase Date, the Purchase Price for new
Purchased Receivables, to the extent sufficient, shall be offset by the Net
Value of such
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Receivable or the Seller shall, prior to the succeeding Determination Date,
remit to the Purchaser the Net Value of such Receivable or the Purchaser shall
offset the Net Value of such Receivable from other amounts due to the Seller
hereunder. Such amount shall be deemed to be Collections of such Receivable
(each such Receivable, a "Rejected Receivable") received and shall be deposited
in the Collection Account. It is understood and agreed that the obligation of
the Seller with respect to any Rejected Receivable pursuant to this Section 6.3
shall constitute the sole remedy for the breach of any representation or
warranty in respect of such Receivable; provided, that the foregoing limitation
shall not be construed to limit in any manner the Purchaser's right to (a) in
the event the Seller fails to effect a repurchase as set forth herein above
offset against any amounts it owes the Seller under this Agreement (including
any Purchase Price), the Net Value of such Rejected Receivable; or (b) declare
the Termination Date to have occurred or to terminate the responsibilities of
the Subservicer hereunder to the extent that such breaches also constitute an
Event of Seller Default. Except as set forth in this Section 6.3, the Seller
shall have no right to repurchase or remit funds with respect to any Purchased
Receivable.
ARTICLE V
GENERAL COVENANTS OF THE SELLER
Section 7.1 Affirmative Covenants of the Seller.
The Seller shall, unless the Purchaser shall otherwise consent in
writing:
(a) Comply in all material respects with all applicable laws, rules,
regulations and orders with respect to it, its business and properties and all
Receivables, related Contracts and Collections with respect thereto;
(b) Preserve and maintain its corporate existence, rights, franchises
and privileges in the jurisdiction of its incorporation and continue to operate
its business in the manner set forth in Section 6.1(a);
(c) Cause to be delivered to the Purchaser on or before May 2 of each
year beginning with May 2, 1999, (i) an Officer's Certificate of the Seller in
the form of Exhibit D, dated the date of such delivery; and (ii) an opinion of
counsel, in form and substance satisfactory to the Purchaser, reaffirming as of
the date of its delivery of the opinion of counsel which the Seller delivered to
the Purchaser and the Servicer on the Closing Date pursuant to Section 5.1(e);
(d) Deposit all Collections received in respect of Purchased
Receivables into the appropriate Lockbox Account within one Business Day of
receipt; and
(e) Make all payments to any Payors necessary to prevent the Payor
from offsetting a prior overpayment to the Seller against any amount the Payor
owes on a Purchased Receivable.
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(f) Timely, pay the Program Fee and all amounts due to the Purchaser
under Sections 2.3, 4.3, 9.1(a) and (b), and 10.4 of this Agreement.
Section 7.2 Reporting Requirements of the Seller.
The Seller shall furnish, or cause to be furnished, to the Purchaser:
(a) As soon as available and in any event within 45 days after the end
of each of the first three quarters of its fiscal year a consolidated and
consolidating financial statement of the Seller and its consolidated
Subsidiaries, if any, as of the end of such quarter, for the period commencing
at the end of the previous fiscal year and ending with the end of such quarter,
certified by the chief financial officer or chief accounting officer of the
Seller;
(b) As soon as available and in any event within 120 days after the
end of its fiscal year, a copy of the consolidated and consolidating financial
statement of the Seller and its consolidated Subsidiaries, if any, as of the end
of such year and the related consolidated statements of income and retained
earnings, and of cash flow, of the Seller and its consolidated Subsidiaries, if
any, for such year, in each case audited by a firm of independent public
accountants acceptable to the Servicer;
(c) Promptly after the sending or filing thereof, copies of all
reports which the Seller files with any Governmental Authority as they relate to
the Seller's Receivables or sends to any of its security holders and a copy of
the annual report (if any) of the Seller;
(d) As soon as possible and in any event within five days after the
occurrence of an Event of Seller Default (including without limitation a
material adverse change in the financial condition of the Seller as determined
by the Servicer) or each event which, with the giving of notice or lapse of time
or both, would constitute an Event of Seller Default, the statement of the chief
executive officer of the Seller setting forth complete details of such Event of
Seller Default and the action which the Seller has taken, is taking and proposes
to take with respect thereto; and
(e) Promptly, from time to time, such other information, documents,
records or reports respecting the Receivables or the Contracts or the condition
or operations, financial or otherwise, of the Seller, or the Seller or any of
its Subsidiaries, if any, as the Purchaser may, from time to time, reasonably
request.
Section 7.3 Negative Covenants of the Seller.
The Seller shall not, without the written consent of the Purchaser and
the Servicer:
(a) Sell, assign (by operation of law or otherwise) or otherwise
dispose of, or create or suffer to exist any Adverse Claim upon or with respect
to, any Receivable or related Contract with respect thereto, or, upon or with
respect to the Lockbox Account, the Seller Credit Reserve Account, the Offset
Reserve Account, the Collection Account, or any other account in
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which any Collections of any Receivable are deposited, or assign any right to
receive income in respect of any Purchased Receivable;
(b) Extend, amend or otherwise modify the terms of any Purchased
Receivable, or amend, modify or waive any term or condition of any Contract
related thereto or in any manner impede or interfere with the collection of such
Purchased Receivable;
(c) Make any material change in the character of its business;
(d) Make any change in its instructions to Payors regarding payments
to be made to the Seller or payments to be deposited to the Lockbox Account;
(e) Be the subject of or have the Person(s) controlling, directly or
indirectly, the Seller be the subject of a merger or merge with or into or
consolidate with or into, or convey, transfer, lease or otherwise dispose of all
or substantially all of its assets (whether now owned or hereafter acquired), or
acquire all or substantially all of the assets or capital stock or other
ownership interest of, any Person;
(f) Make any change to (i) the location of its chief executive office
or the location of the office where Records are kept or (ii) its corporate name
or use any tradenames, fictitious names, assumed names or "doing business as"
names; or
(g) Prepare any financial statements which shall account for the
transactions contemplated hereby in any manner other than as a sale of the
Purchased Receivables by the Seller to the Purchaser, and will not in any other
respect account for or treat the transactions contemplated hereby (including but
not limited to, for accounting, tax and reporting purposes) in any manner other
than as a sale of the Purchased Receivables by the Seller to the Purchaser. It
is understood and agreed that the obligation of the Seller to comply with the
covenants set forth in this Section 7.3 shall be subject to the Seller's
obligation to comply with any order or directive of a Governmental Authority of
competent jurisdiction and that compliance with such order or directive shall
not constitute a breach of such covenant; provided, that the foregoing shall not
be construed to limit in any manner the Purchaser's right to declare the
Termination Date to have occurred to the extent that such noncompliance with
such covenant (whether or not resulting from such an order or directive) shall
constitute, or contribute to the determination of, an Event of Seller Default.
ARTICLE VI
ACCOUNTS ADMINISTRATION
Section 8.1 Collection Account.
The Purchaser and the Servicer acknowledge that certain amounts
deposited in the Collection Account may relate to Receivables other than
Purchased Receivables and that such
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amounts continue to be owned by the Seller. All such amounts shall be returned
to the Seller in accordance with Section 8.3.
Section 8.2 Determinations of the Servicer.
On each Determination Date, the Servicer will determine:
(a) the Net Value of all Purchased Receivables as of the prior
Determination Date plus the Net Value of all Purchased Receivables purchased on
the prior Purchase Date (the "Prior Net Value Amount");
(b) the amount of Collections on all Purchased Receivables received
since the prior Determination Date (the "Paid Receivables Amount");
(c) the Net Value of all Purchased Receivables as of the current
Determination Date (the "Current Net Value Amount");
(d) an amount equal to (i) the Prior Net Value Amount minus (ii) the
Paid Receivables Amount minus (iii) the Current Net Value Amount (but not less
than zero) (the "Credit Deficiency"); and
(e) the Net Value of Purchased Receivables which became Rejected
Receivables since the prior Determination Date and which have not been
repurchased or offset in the manner set forth in Section 6.3 or Section 4.7 (the
"Rejected Amount").
The Servicer's determinations of the foregoing amounts shall be conclusive in
the absence of manifest error. The Servicer shall notify the Seller and the
Purchaser of such determinations.
Section 8.3 Distributions from Accounts.
(a) No later than 11:00 a.m. on each Determination Date, following the
determinations set forth in Section 8.2, the Servicer will notify the Trustee of
such determinations and will cause the Trustee to withdraw in the following
priority:
(i) the Paid Receivables Amount from the Collection Account and
deposit such amount in the Purchase Account;
(ii) the Credit Deficiency, if any, from the Seller Credit Reserve
Account and deposit such amount in the Purchase Account;
(iii) the Rejected Amount, if any, from the Collection Account and
deposit it in the Purchase Account; and
(iv) the remaining amount from the Collection Account and pay such
amount by check or wire transfer to the Seller.
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(b) Until the Termination Date on each Purchase Date following the
Purchase on such date, the Servicer shall cause the Trustee to withdraw (i) all
amounts deposited hereunder (net of withdrawals required hereunder) from the
Seller Credit Reserve Account in excess of the Specified Credit Reserve Balance
and (ii) all amounts deposited hereunder (net of withdrawals required hereunder)
from the Offset Reserve Account in excess of the Specified Offset Reserve
Balance and shall pay such amounts by check to the Seller.
Section 8.4 Allocation of Moneys following Termination Date.
(a) Following the Termination Date, the Servicer shall cause the
Trustee to the extent funds deposited hereunder (net of withdrawals required
hereunder) are sufficient, to withdraw an amount equal to the Program Fee from
the Offset Reserve Account on each Purchase Date and deposit it in the Equity
Account.
(b) On the first Determination Date on which the aggregate Net Value
of all Purchased Receivables (other than Defaulted Receivables) (i) is less than
10% of the aggregate Net Value of Purchased Receivables (other than Defaulted
Receivables) on the Termination Date and (ii) is less than the aggregate amounts
deposited hereunder (net of withdrawals required hereunder) and remaining in the
Seller Credit Reserve Account and the Offset Reserve Account, the Servicer shall
cause the Trustee to withdraw an amount equal to such aggregate Net Value from
such accounts and deposit it in the Purchase Account. Thereupon the Servicer
shall cause the Trustee to disburse all remaining amounts held in the Collection
Account, the Seller Credit Reserve Account and the Offset Reserve Account to the
Seller and all interests of the Purchaser in all Purchased Receivables owned by
the Purchaser shall be reconveyed by the Purchaser to the Seller. Following such
disbursement and reconveyance, this Agreement shall be deemed terminated.
Section 8.5 Accounting.
The Servicer shall make all determinations of actual and required
amounts in each of the accounts established pursuant to this Agreement, maintain
detailed accounting records of all deposits and withdrawals for each such
account, including the Seller and the Receivables with respect to which such
deposits and withdrawals were made and notify the Trustee as to such
determinations.
ARTICLE VII
APPOINTMENT OF THE SUBSERVICER
AND SUCCESSOR SERVICER
Section 9.1 Appointment of the Subservicer.
The Servicer and the Purchaser hereby appoint the Seller to act as
Subservicer hereunder. The Subservicer shall service the Purchased Receivables
and enforce the Purchaser's respective rights and interests in and under each
Purchased Receivable and each related Contract
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and shall serve in such capacity, including, in the event the Servicer has
resigned or been terminated, until the termination of its responsibilities
pursuant to Section 9.9, 9.11 or 10.1. The Subservicer hereby agrees to perform
the duties and obligations with respect thereto set forth herein.
Notwithstanding any term or provision hereof to the contrary, the Seller, the
Subservicer and the Purchaser hereby acknowledge and agree that the Servicer
acts as agent hereunder for the Purchaser and has no duties or obligations to,
will incur no liabilities or obligations to, and does not act as an agent in any
capacity for, the Seller or the Subservicer.
Section 9.2 Additional Subservicers.
The Subservicer may, with the prior consent of the Purchaser and the
Servicer, which consent shall not be unreasonably withheld, subcontract with a
subservicer (each such servicer, an "Additional Subservicer") for collection,
servicing or administration of the Receivables, provided, that (a) the
Subservicer shall continue to perform its obligations with respect to
collections of Medicaid Receivables, Medicare Receivables and CHAMPUS
Receivables, (b) the Subservicer shall remain liable for the performance of the
duties and obligations of the Additional Subservicer pursuant to the terms
hereof and (c) any subservicing agreement that may be entered into and any other
transactions or services relating to the Purchased Receivables involving an
Additional Subservicer (each such agreement, an "Additional Subservicing
Agreement") shall be deemed to be between the Additional Subservicer and the
Subservicer alone and the Purchaser and Servicer shall not be deemed parties
thereto and shall have no obligations, duties or liabilities with respect to the
Additional Subservicer.
Section 9.3 Duties and Responsibilities of the Subservicer.
(a) The Subservicer shall conduct the servicing, administration and
collection of the Purchased Receivables and shall take, or cause to be taken,
all such actions as may be necessary or advisable to service, administer and
collect each Purchased Receivable, from time to time, all in accordance with (i)
customary and prudent servicing procedures for health care receivables of a
similar type, and (ii) all applicable laws, rules and regulations.
(b) The duties of the Subservicer shall include, without limitation:
(i) preparation and submission of claims to, and post-billing liaison
with, Eligible Payors;
(ii) arranging for the direct remittance of all Collections on
Purchased Receivables to the Commercial Lockbox Account (other than
Collections with respect to Medicaid Receivables, Medicare Receivables and
CHAMPUS Receivables, in respect of which it shall arrange for the direct
remittance of such Collections to the Medicare Lockbox Account);
(iii) remitting any Collections with respect to Medicaid Receivables,
Medicare Receivables and CHAMPUS Receivables it may receive directly for
deposit in the Medicare Lockbox Account and remitting any Collections on
other Purchased
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Receivables it may receive directly for deposit in the Commercial Lockbox
Account, in each case no later than by the end of the day of receipt or the
following Business Day if the day of receipt is not a Business Day;
(iv) maintaining all necessary Servicing Records with respect to the
Purchased Receivables and promptly delivering such reports to the Purchaser
or the Servicer in respect of the servicing of the Purchased Receivables
(including information relating to its performance under this Agreement) as
may be required hereunder or as the Purchaser or the Servicer may
reasonably request;
(v) maintaining and implementing administrative and operating
procedures (including, without limitation, an ability to recreate Servicing
Records evidencing the Purchased Receivables in the event of the
destruction of the originals thereof) and keeping and maintaining all
documents, books, records and other information reasonably necessary or
advisable for the collection of the Purchased Receivables (including,
without limitation, records adequate to permit the identification of each
new Purchased Receivable and all Collections of and adjustments to each
existing Purchased Receivable);
(vi) identifying each Purchased Receivable clearly and unambiguously
in its Servicing Records to reflect that such Purchased Receivable is owned
by the Purchaser;
(vii) complying in all material respects with all applicable laws,
rules, regulations and orders with respect to it, its business and
properties and all Purchased Receivables and related Contracts and
Collections with respect thereto;
(viii) preserving and maintaining its corporate existence, rights,
franchises and privileges in the jurisdiction of its incorporation, and
qualifying and remaining qualified in good standing as a foreign
corporation and qualifying to and remaining authorized to perform
obligations as Subservicer (including enforcement of collection of
Purchased Receivables on behalf of the Purchaser) in each jurisdiction
where the failure to preserve and maintain such existence, rights,
franchises, privileges and qualification would materially adversely affect
(A) the rights or interests of the Purchaser in the Purchased Receivables,
(B) the collectibility of any Purchased Receivable or (C) the ability of
the Subservicer to perform its obligations hereunder or under the
Contracts;
(ix) any time and from time to time at reasonable intervals upon
notice to the Subservicer and during regular business hours, permitting the
Purchaser, the Servicer or any of their agents or representatives, (A) to
examine and make copies of and abstracts from all Servicing Records, and
(B) to visit the offices and properties of the Subservicer for the purpose
of examining such Servicing Records, and to discuss matters relating to the
Receivables or the Subservicer's performance under this Agreement with any
officer or employee of the Subservicer having knowledge of such matters;
(x) at the request of the Servicer, maintaining at its own expense, a
blanket fidelity bond with broad coverage, with responsible companies
acceptable to the Servicer,
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on all officers, employees or other persons acting on behalf of the
Subservicer in any capacity with regard to the Purchased Receivables,
including those handling funds, money, documents and papers relating to the
Purchased Receivables. Any such fidelity bond shall protect and insure the
Subservicer (and through the Subservicer, the Servicer and the Purchaser)
against losses commonly protected against by bonds of a similar type,
including forgery, theft, embezzlement, fraud, and negligent acts of such
persons and shall be maintained at a level acceptable to the Servicer. No
provision of this Section requiring such fidelity bond shall diminish or
relieve the Subservicer from its duties and obligations as set forth in
this Agreement. Any amounts received under any such bond with respect to
Purchased Receivables shall be deposited by the Subservicer in the
Collection Account and treated in the same manner as Collections with
respect to such Purchased Receivables. Upon request of the Purchaser or the
Servicer, the Subservicer shall cause to be delivered to the Purchaser and
the Servicer a certification evidencing coverage under such fidelity bond.
Promptly upon receipt of any notice from the surety or the insurer that
such fidelity bond has been terminated or modified in a materially adverse
manner, the Subservicer shall notify the Servicer of any such termination
or modification;
(xi) notifying the Purchaser and the Servicer of any action, suit,
proceeding, dispute, offset, deduction, defense or counterclaim that is or
may be asserted by a Payor with respect to any Purchased Receivable; and
(xii) providing the Purchaser and the Servicer with a report on each
Determination Date in the form of Exhibit G.
(c) Notwithstanding anything herein to the contrary, all collection
functions in respect of Medicaid Receivables, Medicare Receivables and CHAMPUS
Receivables shall be performed in accordance with Medicaid Regulations, Medicare
Regulations and CHAMPUS Regulations.
(d) The Purchaser shall not have any obligation or liability with
respect to any Purchased Receivables or related Contracts, nor shall it be
obligated to perform any of the obligations of the Subservicer hereunder.
Section 9.4 Authorization of the Servicer.
The Seller hereby authorizes the Servicer (including any successors
thereto) to take any and all reasonable steps in its name and on its behalf
necessary or desirable and not inconsistent with the sale of the Purchased
Receivables to the Purchaser, in the determination of the Servicer as the case
may be, to collect all amounts due under any and all Purchased Receivables and
process all Collections and related Remittance Advices within five Business Days
of receipt thereof. Further, the Servicer is authorized, to the extent permitted
under and in compliance with applicable law and regulations, to commence
proceedings with respect to enforcing payment of such Purchased Receivables and
the related Contracts, and adjusting, settling or compromising the account or
payment thereof, to the same extent as the Seller could have done if it had
continued to own such Receivable. The Seller shall furnish the Servicer (and
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any successors thereto) with any powers of attorney and other documents
necessary or appropriate to enable the Servicer to carry out its servicing and
administrative duties hereunder, and shall cooperate with the Servicer to the
fullest extent in order to ensure the collectibility of the Purchased
Receivables. Notwithstanding anything to the contrary contained herein, the
Servicer shall have the absolute and unlimited right to direct the Subservicer
to commence or settle any legal action to enforce collection of any Purchased
Receivable or to foreclose upon, repossess or take any other action which the
Servicer deems necessary or advisable with respect thereto. In no event shall
the Subservicer be entitled to make the Purchaser or the Servicer a party to any
litigation without such party's express prior written consent.
Section 9.5 Subservicing Fee; Subservicing Expenses.
On each Purchase Date, the Subservicer shall be paid a subservicing
fee by the Servicer for its performance as Subservicer hereunder (the
"Subservicing Fee") from the Servicer's own funds in an amount equal to 8.5% of
the Collections, if any, with respect to Purchased Receivables that were
received by the Servicer during the period from the prior Determination Date to
such Determination Date; provided that, if the Seller ceases to be Subservicer
hereunder, the Servicer's obligation to pay the Subservicing Fee shall
terminate. The Servicer shall offset the Subservicing Fee from the
Administrative Fee to be deposited with the Servicer on such Purchase Date. In
the event the Subservicing Fee is greater than the Administrative Fee to be
deposited on such Purchase Date, the Servicer shall pay to the Subservicer an
amount equal to the Net Subservicing Fee for such Purchase Date. The Subservicer
shall be required to pay for all expenses incurred by the Subservicer in
connection with its activities hereunder (including any payments to accountants,
counsel or any other Person) and shall not be entitled to any payment or
reimbursement therefor.
Section 9.6 Annual Statement as to Compliance.
The Subservicer shall deliver to the Purchaser and the Servicer on or
before May 2 of each year beginning with May 2, 1999, an Officer's Certificate
stating, as to each signer thereof, that (a) a review of the activities of the
Subservicer during the preceding calendar year and of performance under this
Agreement has been made under such officer's supervision; (b) to the best of
such officer's knowledge, based on such review, the Subservicer has fulfilled
all its obligations as Subservicer under this Agreement throughout such year,
or, if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officer and the nature and status
thereof.
Section 9.7 Transfer of Servicing Between Subservicer and Servicer.
(a) Upon determination by the Servicer that greater than 10% of the
Purchased Receivables remain outstanding for greater than 120 days after their
respective Billing Date, the Servicer may immediately give notice to the
Subservicer that the Servicer will assume servicing of such portion of the
Purchased Receivables that remain outstanding for greater than 120 days after
their respective Billing Date. Thereupon, the Servicer shall assume the
servicing responsibilities of Subservicer in respect of such Purchased
Receivables. The Subservicer shall thereupon provide the Servicer with all
information, documents and records (including original
34
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copies of documents), to the extent required by the Servicer to perform its
duties (including such records stored electronically on computer tapes, magnetic
discs and the like as may be reasonably requested by the Servicer).
(b) Notwithstanding the provisions of the preceding clause (a), the
Subservicer shall maintain ongoing payment records with respect to each
Purchased Receivable serviced by the Servicer.
(c) The Subservicer shall pay all fees and costs of the Servicer in
connection with its duties under this Section 9.7.
Section 9.8 Subservicer Not to Resign.
The Subservicer shall not resign from the obligations and duties
hereby imposed on it except upon determination that (a) the performance of its
duties hereunder has become impermissible under applicable law and (b) there is
no reasonable action which the Subservicer could take to make the performance of
its duties hereunder permissible under applicable law. Any such determination
permitting the resignation of the Subservicer shall be evidenced as to clause
(a) above by an opinion of counsel to such effect delivered to the Purchaser and
the Servicer. No such resignation shall become effective until the Servicer
shall have assumed the responsibilities and obligations of the Subservicer in
accordance with Section 9.9.
Section 9.9 Appointment of the Successor Subservicer.
In connection with the termination of the Subservicer's
responsibilities under this Agreement pursuant to Section 10.1, the Servicer
may, in its discretion, except with respect to Section 10.1(c) in which case the
Servicer shall, (a) succeed to and assume all of the Subservicer's
responsibilities, rights, duties and obligations as Servicer (but not in any
other capacity) under this Agreement except with respect to Medicaid
Receivables, Medicare Receivables and CHAMPUS Receivables or (b) require the
Seller to continue to act as Subservicer for all of its outstanding Purchased
Receivables at the time of the Event of Seller Default.
Section 9.10 Duties of the Subservicer to the Successor Servicer.
At any time following the succession of the Servicer to the
responsibilities of Subservicer under Section 9.9(a):
(a) The Subservicer agrees that it will terminate its activities as
Subservicer hereunder, except its collection functions in respect of Medicaid,
Medicare and CHAMPUS Receivables, in a manner acceptable to the Servicer so as
to facilitate the transfer of servicing to the Servicer including, without
limitation, timely delivery (i) to the Servicer of any funds that were required
to be remitted to the Servicer for deposit in the Collection Account, and (ii)
to the Servicer, at a place selected by the Servicer, of all information,
documents and records (including original copies of documents), to the extent
required by the Servicer to perform its duties under the Agreement (including
such records stored electronically on computer tapes, magnetic discs
35
<PAGE>
and the like as may be reasonably requested by the Servicer). The Subservicer
shall account for all funds and shall execute and deliver such instruments and
do such other things as may reasonably be required to more fully and definitely
vest and confirm in the Servicer all rights, powers, duties, responsibilities,
obligations and liabilities of the Subservicer.
(b) The Subservicer shall terminate each Additional Subservicing
Agreement that may have been entered into and the Servicer shall not be deemed
to have assumed any of the Subservicer's interest therein or to have replaced
the Subservicer as a party to any such Additional Subservicing Agreement.
(c) Notwithstanding any termination of the Seller as Subservicer
hereunder, the Seller agrees that it will continue to follow the procedures set
forth in Section 9.3(b)(iii) with respect to Collections on Purchased
Receivables.
Section 9.11 Effect of Termination or Resignation.
Any termination or resignation of the Subservicer under this Agreement
shall not affect any claims that the Purchaser or the Servicer may have against
the Subservicer for events or actions taken or not taken by the Subservicer
arising prior to any such termination or resignation.
ARTICLE VIII
EVENTS OF SELLER DEFAULT
Section 10.1 Events of Seller Default.
If any of the following events (each, an "Event of Seller Default")
shall occur and be continuing:
(a) The Seller (either as Seller or Subservicer) shall materially fail
to perform or observe any term, covenant or agreement contained in this
Agreement;
(b) A default shall have occurred and be continuing under any
instrument or agreement evidencing, securing or providing for the issuance of
Debt of the Seller;
(c) The Seller shall generally not pay any of its respective Debts as
such Debts become due, or shall admit in writing its inability to pay its Debts
generally, or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against the Seller seeking to
adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or composition of
it or any of its Debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for relief
or the appointment of a receiver, trustee, custodian or other similar official
for it or for any substantial part of its property, or any of the actions sought
in such proceeding (including, without limitation, the entry of an order for
relief against, or the
36
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appointment of a receiver, trustee, custodian or other similar official for, it
or for any substantial part of its property) shall occur; or the Seller shall
take any corporate action to authorize any of the actions set forth in this
subsection;
(d) Judgments or orders for the payment of money (other than such
judgments or orders in respect of which adequate insurance is maintained for the
payment thereof) in excess of $100,000 in the aggregate against the Seller or
any of its Affiliates shall remain unpaid, unstayed on appeal, undischarged,
unbonded or undismissed for a period of 30 days or more;
(e) There is a material breach of any of the representations and
warranties of the Seller set forth in Sections 6.1 or 6.2 that has remained
uncured for a period of 30 days;
(f) Any Governmental Authority (including the Internal Revenue Service
or the Pension Benefit Guaranty Corporation) shall file notice of a lien with
regard to any of the assets of the Seller or with regard to the Seller other
than a lien that does not materially adversely affect the financial condition of
the Seller or the Seller's ability to perform as Subservicer and that (1) is
limited by its terms to assets other than Receivables or (2) remains
undischarged for a period of 30 days;
(g) As of the first day of any month, the aggregate Net Value of
Purchased Receivables which became Defaulted Receivables or Rejected Receivables
(other than those with respect to which a withdrawal has previously been made
from the Offset Reserve Account) during the prior three-month period shall
exceed 8% of the average aggregate Net Values of all Purchased Receivables then
owned by the Purchaser (other than Defaulted Receivables) at the end of each of
such three months;
(h) The Servicer shall have reasonably determined that any event which
materially adversely affects the collectibility of the Receivables has occurred,
or that any other event which materially adversely affects the financial
condition of the Seller, the ability of the Seller to collect Purchased
Receivables in its capacity as Subservicer or the ability of the Seller (either
as Seller or Subservicer) to perform hereunder has occurred;
(i) A deterioration has taken place in the quality of servicing of
Purchased Receivables or other Receivables serviced by the Seller (in its
capacity as Subservicer) which the Servicer, in its sole discretion, determines
to be material;
(j) This Agreement shall for any reason cease to evidence the transfer
to the Purchaser (or its assignees or transferees) of the legal and equitable
title to, and ownership of, the Purchased Receivables;
(k) The Lockbox Account Agreement shall have been amended or
terminated without the written consent of the Purchaser and the Servicer;
(l) The amount deposited hereunder (net of withdrawals required
hereunder) in the Seller Credit Reserve Account has remained at less than the
Specified Credit Reserve Balance for fourteen consecutive days;
37
<PAGE>
(m) The amount deposited hereunder (net of withdrawals required
hereunder) in the Offset Reserve Account has remained at less than the Specified
Offset Reserve Balance for fourteen consecutive days; or
(n) A Principal Amortization Event shall have been declared; then and
in any such event, the Servicer shall, by notice to the Seller and the Purchaser
declare that an Event of Seller Default shall have occurred and, the Termination
Date shall forthwith occur, without demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Seller and the Purchaser
shall make no further Purchases from the Seller. Upon any such declaration or
automatic occurrence, the Purchaser and the Servicer shall have, in addition to
all other rights and remedies under this Agreement, all other rights and
remedies provided under the UCC and other applicable law, which rights shall be
cumulative provided, that, if an event of the kind described in 8.1(c) occurs
with regard to the Seller, an Event of Seller Default shall be deemed to have
occurred automatically.
ARTICLE IX
INDEMNIFICATION
Section 11.1 Indemnities by the Seller.
(a) Without limiting any other rights that the Purchaser, the
Servicer, or any director, officer, employee or agent of either such party (each
an "Indemnified Party") may have hereunder or under applicable law, the Seller
hereby agrees to indemnify each Indemnified Party from and against any and all
claims, losses, liabilities, obligations, damages, penalties, actions,
judgments, suits, and related costs and expenses of any nature whatsoever,
including reasonable attorneys' fees and disbursements (all of the foregoing
being collectively referred to as "Indemnified Amounts") which may be imposed
on, incurred by or asserted against an Indemnified Party in any way arising out
of or relating to any breach of the Seller's obligations (including its
obligations as Subservicer) under this Agreement or the ownership of the
Purchased Receivables or in respect of any Receivable or any Contract,
excluding, however, (i) Indemnified Amounts to the extent resulting from gross
negligence or willful misconduct on the part of such Indemnified Party or (ii)
recourse for unpaid Purchased Receivables. Without limiting or being limited by
the foregoing, the Seller shall pay on demand to each Indemnified Party any and
all amounts necessary to indemnify such Indemnified Party from and against any
and all Indemnified Amounts relating to or resulting from:
(A) reliance on any representation or warranty made or deemed made by
the Seller (or any of its officers) under or in connection with this
Agreement (except with respect to a Purchased Receivable, as to which the
Purchaser's remedies are set forth in Section 6.3), any report or any other
information delivered by the Seller pursuant hereto, which shall have been
incorrect in any material respect when made or deemed made or delivered;
38
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(B) the failure by the Seller to comply with any term, provision or
covenant contained in this Agreement, or any agreement executed by it in
connection with this Agreement or with any applicable law, rule or
regulation with respect to any Purchased Receivable, the related Contract,
or the nonconformity of any Purchased Receivable or the related Contract
with any such applicable law, rule or regulation; or
(C) the failure to vest and maintain vested in the Purchaser, or to
transfer to the Purchaser, legal and equitable title to and ownership of
the Receivables which are, or are purported to be, Purchased Receivables,
together with all Collections in respect thereof, free and clear of any
Adverse Claim (except as permitted hereunder) whether existing at the time
of the Purchase of such Receivable or at any time thereafter.
(b) Any Indemnified Amounts subject to the indemnification provisions
of this Section shall be paid to the Indemnified Party within five Business Days
following demand therefor, together with interest at the lesser of 12% per annum
or the highest rate permitted by law from the date of demand for such
Indemnified Amount.
Section 11.2 Security Interest.
The Seller hereby grants to the Purchaser a first priority perfected
security interest in the Seller's right, title and interest in, to and under all
of the Seller's Receivables not sold to the Purchaser hereunder, including all
rights to payments under any related Contracts or other agreements with all
Payors, and all the Collections, Records and proceeds thereof, as security for
the timely payment and performance of any and all obligations the Seller or the
Subservicer may owe the Purchaser under Sections 2.3, 4.3, 5.1(f), 9.1(a) and
(b), and 10.4, but excluding recourse for unpaid Purchased Receivables. This
Section 9.2 shall constitute a security agreement under the UCC and any other
applicable law and the Purchaser shall have the rights and remedies of a secured
party thereunder. Such security interest shall be further evidenced by Seller's
execution of appropriate UCC-1 financing statements prepared by and acceptable
to the Purchaser, and such other further assurances that may be reasonably
requested by the Purchaser from time to time.
ARTICLE X
MISCELLANEOUS
Section 12.1 Notices, Etc.
All notices and other communications provided for hereunder shall,
unless otherwise stated herein, shall be in writing and mailed or
telecommunicated, or delivered as to each party hereto, at its address set forth
under its name on the signature pages hereof or at such other address as shall
be designated by such party in a written notice to the other parties hereto. All
such notices and communications shall not be effective until received by the
party to whom such notice or communication is addressed.
39
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Section 12.2 Remedies.
No failure on the part of the Purchaser or the Servicer to exercise,
and no delay in exercising, any right hereunder or under any Purchase Assignment
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right hereunder preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 12.3 Binding Effect; Assignability.
This Agreement shall be binding upon and inure to the benefit of the
Seller, the Subservicer, the Purchaser, the Servicer and their respective
successors and permitted assigns. Neither the Seller nor the Subservicer may
assign any of their rights and obligations hereunder or any interest herein
without the prior written consent of the Purchaser and the Servicer. The
Purchaser may, at any time, without the consent of the Seller or the
Subservicer, assign any of its rights and obligations hereunder or interest
herein to any Person. Any such assignee may further assign at any time its
rights and obligations hereunder or interests herein without the consent of the
Seller or the Subservicer. Without limiting the generality of the foregoing, the
Seller acknowledges that the Purchaser has assigned its rights hereunder to the
Trustee for the benefit of third parties. This Agreement shall create and
constitute the continuing obligations of the parties hereto in accordance with
its terms, and shall remain in full force and effect until its termination;
provided, that the rights and remedies with respect to any breach of any
representation and warranty made by the Seller or the Servicer pursuant to
Article IV and the indemnification and payment provisions of Article IX shall be
continuing and shall survive any termination of this Agreement.
Section 12.4 Costs, Expenses and Taxes.
(a) In addition to the rights of indemnification under Article IX, the
Seller agrees to pay upon demand, all reasonable costs and expenses in
connection with the administration (including periodic auditing, modification
and amendment) of this Agreement, and the other documents to be delivered
hereunder, including, without limitation: (i) the reasonable fees and
out-of-pocket expenses of counsel for the Purchaser or the Servicer with respect
to (A) advising the Purchaser as to its rights and remedies under this Agreement
or (B) the enforcement (whether through negotiations, legal proceedings or
otherwise) of this Agreement, the Purchase Assignment or the other documents to
be delivered hereunder; and (ii) any and all stamp, sales, excise and other
taxes and fees payable or determined to be payable in connection with the
execution, delivery, filing or recording of this Agreement, each Purchase
Assignment or the other agreements and documents to be delivered hereunder, and
agrees to indemnify and save each Indemnified Party from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes and fees.
(b) If the Seller or the Subservicer fails to perform any agreement or
obligation contained herein, the Purchaser may, or may direct the Servicer to,
(but shall not be required to) itself perform, or cause performance of, such
agreement or obligation, and the
40
<PAGE>
expenses of the Purchaser or the Servicer incurred in connection therewith shall
be payable by the party which has failed to so perform upon the Purchaser's or
the Servicer's demand therefor.
Section 12.5 No Proceedings.
The Seller and the Subservicer each hereby agree that it will not,
directly or indirectly, institute, or cause to be instituted, against the
Purchaser any proceeding of the type referred to in Section 10.1(c) so long as
there shall not have elapsed one year plus one day since the latest maturing
note has been paid in full in cash.
Section 12.6 Amendments; Waivers; Consents.
No modification, amendment or waiver of, or with respect to, any
provision of this Agreement, and all other agreements, instruments and documents
delivered pursuant hereto or thereto, nor consent to any departure by the Seller
or the Subservicer from any of the terms or conditions thereof, shall be
effective unless it shall be in writing and signed by each of the parties
hereto. Any waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No consent to or demand on the Seller or
the Subservicer in any case shall, in itself, entitle it to any other consent or
further notice or demand in similar or other circumstances. This Agreement, the
Related Documents and the documents referred to therein embody the entire
agreement among the Seller, the Subservicer, the Purchaser and the Servicer, and
supersede all prior agreements and understandings relating to the subject
hereof, whether written or oral.
Section 12.7 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY
TRIAL.
(a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAWS PROVISIONS) OF THE STATE
OF OHIO, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE INTERESTS
OF THE PURCHASER IN THE PURCHASED RECEIVABLES OR REMEDIES HEREUNDER OR
THEREUNDER, IN RESPECT THEREOF, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF OHIO.
(b) THE SELLER AND THE SUBSERVICER HEREBY SUBMIT TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF OHIO AND THE UNITED STATES DISTRICT
COURT LOCATED IN THE SOUTHERN DISTRICT OF OHIO, AND EACH WAIVES PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE
MADE BY REGISTERED MAIL DIRECTED TO THE ADDRESS SET FORTH ON THE SIGNATURE PAGE
HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE DAYS AFTER THE
SAME SHALL HAVE BEEN DEPOSITED IN THE U.S. MAILS, POSTAGE PREPAID. THE SELLER,
AND THE SUBSERVICER EACH HEREBY WAIVES ANY OBJECTION BASED ON FORUM NON
CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER AND
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE
41
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BY THE COURT. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF THE PURCHASER TO
SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF
THE PURCHASER TO BRING ANY ACTION OR PROCEEDING AGAINST THE SELLER OR ITS
PROPERTY, OR THE SUBSERVICER OR ITS PROPERTY IN THE COURTS OF ANY OTHER
JURISDICTION. THE SELLER AND THE SUBSERVICER EACH HEREBY AGREE THAT THE
EXCLUSIVE AND APPROPRIATE FORUMS FOR ANY DISPUTE HEREUNDER ARE THE COURTS OF THE
STATE OF OHIO AND THE UNITED STATES DISTRICT COURT LOCATED IN THE SOUTHERN
DISTRICT OF OHIO AND AGREE NOT TO INSTITUTE ANY ACTION IN ANY OTHER FORUM.
(c) THE SELLER, AND THE SUBSERVICER EACH HEREBY WAIVES ANY RIGHT TO
HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR IN CONNECTION
WITH THIS PURCHASER AGREEMENT. INSTEAD, ANY DISPUTE RESOLVED IN COURT WILL BE
RESOLVED IN A BENCH TRIAL WITHOUT A JURY.
Section 12.8 Execution in Counterparts; Severability.
This Agreement may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original and all of which when
taken together shall constitute one and the same agreement. In case any
provision in or obligation under this Agreement shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining provisions or obligations, or of such provision or obligation in
any other jurisdiction, shall not in any way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
COASTAL CORRECTIONAL HEALTHCARE, INC.,
as Seller and as Subservicer
By: __________________________________
Name: Steven M. Scott, M.D.
Title: Senior Executive Vice President
42
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Address at which the chief executive office is located:
Address: 3104 Croasdaile Drive
Bldg. 100-300
Durham, NC 27705
Attention: Steven M. Scott, M.D.
Phone number: 919-383-0355
Telecopier number: 919-382-3287
Additional locations at which Records are maintained:
I-85 and Guess Road
Durham, NC 27705
2101 Tobacco Road
Durham, NC 27705
Additional names under which Seller does business:
Coastal Correctional Services, Inc.
Additional locations at which Seller does business:
2400 E. Commercial Blvd.
Ft. Lauderdale, FL 33308
1295 South Lecanto Hwy.
Lecanto, FL 33461
700 West Lincoln St.
P.O. Box 99
Pontiac, MI 61764
3855 Cooper St.
Jackson, MI 69201
100 Ribault Rd.
Beaufort, SC 29902
1511 Preston Ave.
Houston, TX 77002
515 W. Moreland Blvd.
Waukesha, WI 53187
550 Justice Drive
Lebanon, OH 45036
Rt. 301 North
Hanover, VA 23069
215 Rice St.
Grand Junction, CO 81505
600 Linwood Rd.
Galesburg, IL 62401
100 Hillcrest Rd.
East Moline, IL 61244
Rt. 17 West
P.O. Box 5001
Dwight, IL 60420
37040 South Illinois
Rt. 102
Manteno, IL 60950
NPF VI, INC.
By: __________________________________
Name:
Title:
Address: 6125 Memorial Drive
Dublin, OH 43017
Attention: Donald H. Ayers
Phone number: (614) 764-9944
Telecopier number: (614) 764-0602
43
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NATIONAL PREMIER FINANCIAL SERVICES, INC.
By: _______________________________________
Name:
Title:
Address: 6125 Memorial Drive
Dublin, OH 43017
Attention: Lance K. Poulsen
Phone number: (614) 764-9944
Telecopier number: (614) 764-0602
44
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SCHEDULE 1
----------
INELIGIBLE MEDICAID STATES
None. This Schedule 1 may be unilaterally amended from time to time by
the Servicer without the consent of any of the other parties hereto.
1-1
<PAGE>
SCHEDULE 2
----------
INELIGIBLE BLUE CROSS/BLUE SHIELD PLANS
2-1
<PAGE>
SCHEDULE 3
----------
SELLER'S PAYOR AND PROVIDER NUMBERS
Name of Seller Provider Numbers
-------------- ----------------
Coastal Correctional Healthcare, Inc.
Coastal Correctional Services, Inc.
3-1
<PAGE>
SCHEDULE 4
----------
LIST OF NAMES UNDER WHICH SELLER IS DOING BUSINESS
AND ADDRESSES AT WHICH SELLER IS DOING BUSINESS
Names Under Which Seller Is Addresses At Which
--------------------------- ------------------
Doing Business and Payee Names Seller Is Doing Business
- ------------------------------ ------------------------
Coastal Correctional 3104 Croasdaile Drive
Healthcare, Inc. Bldg. 100-300
Durham, NC 27705
(Durham County, NC)
I-85 and Guess Road
Durham, NC 27705
(Durham County, NC)
2101 Tobacco Road
Durham, NC 27705
(Durham County, NC)
2400 E. Commercial Blvd.
Ft. Lauderdale, FL 33308
(Broward County, FL)
1295 South Lecanto Hwy.
Lecanto, FL 33461
(Citrus County, FL)
700 West Lincoln St.
P.O. Box 99
Pontiac, MI 61764
(Oakland County, MI)
3855 Cooper St.
Jackson, MI 69201
(Jackson County, MI)
100 Ribault Rd.
Beaufort, SC 29902
(Beaufort County, SC)
1511 Preston Ave.
Houston, TX 77002
(Harris County, TX)
515 W. Moreland Blvd.
Waukesha, WI 53187
(Waukesha County, WI)
550 Justice Drive
Lebanon, OH 45036
(Warren County, OH)
Rt. 301 North
Hanover, VA 23069
(Hanover County, VA)
215 Rice St.
Grand Junction, CO 81505
(Mesa County, CO)
Coastal Correctional Services, 600 Linwood Rd.
Inc. Galesburg, IL 62401
(Knox County, IL)
100 Hillcrest Rd.
East Moline, IL 61244
(Rock Island County, IL)
Rt. 17 West
P.O. Box 5001
Dwight, IL 60420
(Livingston & Grundy County, IL)
37040 South Illinois
Rt. 102
Manteno, IL 60950
(Kankakee County, IL)
4-1
<PAGE>
EXHIBIT A
---------
FORM OF NOTICE TO PAYORS
[Name and Address of Payor]
Dear ________:
[Seller] (the "Seller") has entered into an agreement with NPF VI,
Inc. ("NPF VI") under which certain of the Seller's accounts receivables
("Receivables") of which you are the obligor will be sold, from time to time, to
NPF VI or affiliates of NPF VI. NPF VI or such affiliates may, in turn, from
time to time, pledge such Receivables to Bankers Trust Company, as Trustee for
the benefit of third parties. It is contemplated that the Receivables will
continue to be serviced by the Seller.
The Seller has established a lockbox (the "Lockbox") for collection of
the Receivables. Accordingly, you are hereby instructed to remit all payments on
Receivables of which you are, or have been, the obligor to:
[Lockbox Bank]-Lockbox Account ([name of Seller]) #_____________.
[Address of Lockbox Bank]
Payment of such Receivables in this manner will operate to discharge
your obligation with respect thereto (to the extent of such payment), whether or
not ownership has been transferred to NPF VI. Any prior notice of an assignment
of any interest in the Seller's Receivables previously delivered to you is
hereby superseded by this notice and all prior notices of such assignment are
hereby revoked. This notice shall be considered irrevocable absent written
notice otherwise received by you from NPF VI.
Thank you for your cooperation.
Very truly yours,
[SELLER]
By ________________________________
[Seller]
EIN#____________________
A-1
<PAGE>
EXHIBIT B
---------
LOCKBOX ACCOUNT AGREEMENT
[Varies from Seller to Seller. Both the Medicare Lockbox Account and the
Commercial Lockbox Account must, however, include provisions that:
(1) all Collections in the Lockbox Account shall be remitted directly to
the Collection Account within one Business Day of receipt; and
(2) are otherwise satisfactory to the Purchaser and the Servicer]
B-1
<PAGE>
EXHIBIT C
---------
FORM OF PURCHASE ASSIGNMENT
THIS PURCHASE ASSIGNMENT, dated as of __________, 199_ between [Seller]
(the "Seller"), NPF VI, Inc. (the "Purchaser") and National Premier Financial
Services, Inc. (the "Servicer").
1. We refer to the Sale and Subservicing Agreement (the "Sale Agreement"),
dated as of ______, 199_ by and among [Seller], as Seller and as Subservicer,
the Purchaser, and the Servicer. All provisions of such Sale Agreement are
incorporated by reference. All capitalized terms shall have the meanings set
forth in the Sale Agreement.
2. The Seller does hereby sell, transfer, assign, set over and convey to
the Purchaser, without recourse, all right, title and interest of the Seller in
and to the Receivables listed on Schedule 1 hereto (each, a "Purchased
Receivable") and the Purchaser does hereby purchase each such Purchased
Receivable.
3. The Seller does hereby certify:
(i) the representations and warranties of the Seller set forth in
Section 6.1 and 6.2 of the Agreement, are true and correct on and as of the
date, hereof, before and after giving effect to the Purchase of the
Purchased Receivables evidenced hereby and to the application of the
proceeds therefrom, as though made on and as of such date;
(ii) no event has occurred, or would result from such Purchase or from
the application of the proceeds therefrom, which constitutes an Event of
Seller Default or would constitute an Event of Seller Default but for the
requirement that notice be given or time elapse or both; and
(iii) the Seller is in compliance with each of its covenants set forth
in the Sale Agreement.
4. The Purchase Price for the Purchased Receivables sold and purchased
hereby is $_______.
C-1
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
[SELLER]
By _________________________________
Name:
Title:
NPF VI, INC.
By _________________________________
Name:
Title:
NATIONAL PREMIER FINANCIAL
SERVICES, INC.
By _________________________________
Name:
Title:
C-2
<PAGE>
EXHIBIT D
---------
FORM OF OFFICER'S CERTIFICATE
FOR THE SELLER
I hereby certify that I am a duly elected [Officer] of [Seller] (in
its capacity as Seller and as Subservicer, the "Seller") with all requisite
knowledge of the matters set forth below, and further certify as follows:
1. There has been no change of the Seller's legal name, identity or
corporate structure within the six month period preceding the execution
date hereof.
2. No proceedings looking toward merger, liquidation, dissolution or
bankruptcy of the Seller are pending or contemplated.
3. There is no litigation pending, or to my knowledge, threatened,
which, if determined adversely to the Seller, would adversely affect (i)
the execution, delivery or enforceability of the Sale and Subservicing
Agreement (the "Sale Agreement"), dated as of _________, 199_ by and among
the Seller, NPF VI, Inc., as Purchaser (the "Purchaser"), and National
Premier Financial Services, Inc., as Servicer (the "Servicer"), or the sale
or servicing of the Receivables as provided therein, and (ii) the
execution, delivery or enforceability of the Lockbox Account Agreement (the
"Lockbox Account Agreement"), dated as of ___, 199_, by and among the
Seller, the Servicer and/or [the lockbox bank].
4. With respect to the Sale Agreement and the Lockbox Account
Agreement, the Seller has complied with all the agreements by which it is
bound and has satisfied all the conditions on its part to be performed or
satisfied prior to the Closing Date.
5. No Event of Seller Default or other event of default in the
performance of any of the Seller's covenants or agreements under the Sale
Agreement or the Lockbox Account Agreement has occurred and is continuing,
nor has an event occurred which with the passage of time or notice or both
would become such an event of default.
6. The Seller is not a party to, or governed by, any contract,
indenture, mortgage, loan agreement, note, lease, deed of trust or other
instrument which restricts the Seller's ability to sell or service health
care receivables or consummate any of the transactions contemplated by the
Sale Agreement.
7. Independent certified public accountants for the Seller will treat
the transfer to the Purchaser of the Seller's interests in the Receivables
as a sale, pursuant to generally accepted accounting principles.
D-1
<PAGE>
8. For tax and reporting purposes, the Seller will treat the transfer
to the Purchaser of the Seller's interests in the Receivables as a sale.
9. The transfer to the Purchaser of the Seller's interests in the
Receivables will be made (a) in good faith and without intent to hinder,
delay, or defraud present or future creditors, and (b) in exchange for
reasonably equivalent value and fair consideration.
10. On the date hereof, the Seller (a) was solvent, and as a result of
the transfer to the Purchaser of the Seller's interests in the Receivables
will not become insolvent; (b) was paying its Debts, if any, as they
matured; (c) neither intended to incur, nor believed that it would incur,
Debts beyond its ability to pay as they mature; and (d) after giving effect
to the transfer to the Purchaser of the Seller's interests in the
Receivables, will have an adequate amount of capital to conduct its
business and anticipates no difficulty in continuing to do so for the
foreseeable future.
11. The Seller has and maintains [if applicable: its status as an
organization exempt from federal taxation under Section 501(c) (3) of the
Internal Revenue Code,] all material permits, licenses, authorizations,
registrations, approvals and consents of Governmental Authorities, and all
certificates of need for the construction or expansion of or investment in
health care facilities, all Health Facility Licenses, Accreditations,
Medicaid Certifications, Medicare Certifications and necessary for (a) the
activities and business of the Seller and each of its Subsidiaries as
currently conducted, (b) the ownership, use, operation and maintenance by
each of them of its respective properties, facilities and assets, and (c)
the performance by the Seller of the Agreement.
12. Without limiting the generality of the foregoing paragraph: (a)
each Health Facility License, the Medicaid Certification, Medicare
Certification, Medicaid Provider Agreement, Medicare Provider Agreement,
and the Blue Cross/Blue Shield Contracts of the Seller and each Subsidiary
are in full force and effect and have not been amended or otherwise
modified, rescinded or revoked or assigned, (b) the Seller and each
Subsidiary are in compliance with the requirements of Medicaid, Medicare,
CHAMPUS and related programs, and Blue Cross/Blue Shield Contracts, and (c)
no condition exists or event has occurred which, in itself or with the
giving of notice or lapse of time or both, would result in the suspension,
revocation, impairment, forfeiture, non-renewal of any Governmental Consent
applicable to the Seller or any other health care facility owned or
operated by the Seller or any Subsidiary, or such facility's participation
in any Medicaid, Medicare, CHAMPUS or other similar program, or of any Blue
Cross/Blue Shield Contract and there is no claim that any such Governmental
Consent, participation or contract is not in full force and effect.
13. No UCC financing statements, federal or state tax liens or
judgments with respect to the Purchased Receivables have been filed nor
shall be filed from and after the date and time of the UCC search results
provided by the Seller in accordance with Section 3.1(a)(v) of the Sale
Agreement.
D-2
<PAGE>
14. The officers listed on the attached schedule are designated as
Servicing Officers with respect to the duties and obligations of the Seller
as Subservicer under the Sale Agreement.
All capitalized terms used herein that are not otherwise defined shall
have the respective meanings ascribed thereto in the Agreement.
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the
seal of the Seller this ___ day of _______, 199_.
By _________________________________
Name:
Title:
D-3
<PAGE>
SCHEDULE OF SERVICING OFFICERS
Name Signature
---- ---------
________________________________ ________________________________
________________________________ ________________________________
________________________________ ________________________________
________________________________ ________________________________
D-4
<PAGE>
EXHIBIT E
---------
FORM OF OPINION OF COUNSEL FOR THE SELLER
[Closing Date]
NPF VI, Inc.
6125 Memorial Drive
Dublin, Ohio 43017
National Premier Financial Services, Inc.
6125 Memorial Drive
Dublin, Ohio 43017
Re: NPF VI, Inc. - Sale and Subservicing Agreement
----------------------------------------------
Gentlemen and Ladies:
We have acted as legal counsel to ________________________ _________
(the "Seller") in connection with the transactions contemplated by that certain
Sale and Subservicing Agreement (the "Sale Agreement"), dated as of
________________, 1994, by and among the Seller, NPF VI, Inc., an Ohio
corporation (the "Purchaser") and National Premier Financial Services, Inc. (the
"Servicer"). All references herein to the Seller shall refer to the Seller in
its capacity as both Seller and Subservicer under the Sale Agreement. This
opinion is being delivered at the Seller's request pursuant to Section 5.1(e) of
the Sale Agreement.
Capitalized terms used and not otherwise defined herein shall have the
meanings ascribed thereto in the Sale Agreement.
In this connection, we have examined the following:
i) An executed copy of the Sale Agreement and all exhibits and
attachments thereto;
ii) An executed copy of the Lockbox Account Agreement and all
exhibits and attachments thereto;
iii) The form of Purchase Assignment and the form of Repurchase
Assignment;
iv) Copies of the UCC-1 financing statements executed by the Seller
as assignor/debtor and naming the Purchaser as assignee/secured
party relating to the Purchased Receivables (the "Financing
Statements"), copies of which are attached hereto as Annex 1;
E-1
<PAGE>
v) The results of the searches (the "Searches") conducted by the
Secretary of State of ______________________1 [and the County
Recorder, ________ County, _________, as of _____________,
1994]2, certified by such filing offices on Form UCC-11, as to
financing statements on Form UCC-1 on file with such offices and
naming the Seller as a "debtor" as of such date, copies of which
are attached hereto as Annex 2A;
vi) [Add if applicable] [Executed copies of appropriate releases of
all outstanding financing statements relating to security
interests in accounts of the Seller in favor of third parties
which are reflected on the Searches and which shall be released
at closing] (the "Releases") copies of which are attached hereto
as Annex 2B; and
vii) Such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
The Sale Agreement, the Lockbox Account Agreement the Purchase Assignments and
the Repurchase Assignments are hereinafter collectively referred to as the
"Agreements".
As to various questions of fact material to our opinions set forth
below we have relied upon certificates of officers of the Seller, copies of
which are attached hereto as Annex 3. Nothing has come to our attention in the
course of our representation of the Seller which leads us to believe that any
representations set forth in any of the foregoing certificates are inaccurate or
incomplete in any material respect.
In connection with the opinions set forth below we have assumed, with
your agreement, that each party to the Agreements other than the Seller has
executed and delivered such Agreements and has the corporate power and authority
to enter into and perform its obligations thereunder, and that the execution,
delivery and performance of each Agreement by each party thereto other than the
Seller will not breach, contravene, conflict with, or constitute a violation of
any provision of the articles of incorporation or bylaws or other organizational
documents of such party, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which such party is bound or to which any of
its property or assets is subject, or constitute a violation of any law,
statute, rule, regulation, order, writ, judgment, award, injunction or decree of
any Governmental Authority as to any such party.
In connection with the opinions set forth below which deal with the
perfection and priority of security interests, we have assumed that no financing
statements relating to Seller or
________________________
1 All references to "State of " in this form of opinion shall refer to
the state of the present location of the Provider.
2 UCC searches certified on form UCC-11 by the appropriate government
officials should be dated within ten (10) days of the closing of the
transaction.
E-2
<PAGE>
the Purchased Receivables have been misindexed or misfiled in the appropriate
filing offices covered by the Searches.
We have also assumed that all documents submitted to us as originals
are complete and authentic, that all copies of documents submitted to us conform
in all respects to the originals thereof, including all amendments or
modifications thereto; and that all signatures of parties, other than those of
the Seller and its authorized officers, to the respective documents are genuine.
We have also assumed that all documents or copies thereof examined by us have
been or will be duly, validly and properly authorized, executed, acknowledged
and delivered by all parties thereto other than the Seller.
As you have agreed, for purposes solely of ascertaining the existence
of security interests perfected by the filing of UCC financing statements, we
have limited our investigation to an examination of the Searches, which indicate
that there are no filed financing statements naming the Seller as debtor and
relating to the Seller's Receivables [,other than those which will be terminated
by the filing of the Releases]. We express no opinion as to the accuracy or
completeness of the Searches.
For purposes of the opinion expressed in the first sentence of
Paragraph 4 below, we have assumed, with your consent, that the description of
"Purchased Receivables" set forth in the Sale Agreement accurately and
completely describes all of the Seller's Purchased Receivables being transferred
to the Purchaser pursuant to the Sale Agreement.
For purposes of the opinions expressed in Paragraphs 5 and 6 below,
with your agreement we have assumed that all transfers of Purchased Receivables
will have occurred in accordance with the terms and conditions set forth in the
Agreements.
In addition to the foregoing, in rendering the opinions set forth
herein we have acted only as attorneys licensed to practice in the State of
____________ and do not hold ourselves out as being knowledgeable as to the laws
of any other jurisdiction. We therefore express no opinions as to the effect of
any laws other than federal laws of the United States of America and the laws of
the State of ________________. In this regard, we note that [- if the Seller is
located in a state other than Ohio -] the Sale Agreement, the Purchase
Assignments, the Repurchase Assignments are governed by the laws of the State of
Ohio and that the Lockbox Account Agreement is governed by the laws of the State
of Ohio. We have assumed, for purposes of issuing this letter, that insofar as
the laws of any such other jurisdiction are applicable to the matters set forth
below, such laws (including applicable conflict of laws provisions) are
identical to and will be interpreted in all respects in the same manner as the
laws of the State of ______________.
On the basis of the foregoing and subject to the limitations,
qualifications and exceptions set forth above, we are of the opinion as of the
date hereof that:
1. The Seller is a [not-for-profit] corporation duly organized and
validly existing under the laws of the State of _______________, is in good
standing under the laws of the State of [state of organization] and is duly
qualified to do business, and is in good standing
E-3
<PAGE>
in each jurisdiction in which it maintains an office and has the corporate power
and authority to own, lease and operate its properties and to conduct its
business as now conducted. The Seller has made all filings with, and has
obtained all necessary or appropriate approvals from federal and State of
______________ Governmental Authorities which are necessary to permit the Seller
to own, lease and operate its properties and to lawfully conduct its business as
presently conducted, and to consummate the transactions contemplated by the Sale
Agreement.
2. The Seller has the corporate power and authority to execute,
deliver and perform each of the Agreements. The execution, delivery and
performance of the Agreements have been duly authorized by all necessary
corporate action of the Seller and each of such Agreements constitutes a legal,
valid and binding obligation of Seller, enforceable against the Seller in
accordance with its terms.
3. The execution and delivery of, and the performance of the
Provider's obligations under, each of the Agreements does not and will not (a)
violate any provision of the Seller's articles of incorporation or bylaws, (b)
violate any statute, law, ordinance, rule or regulation of the United States of
America or the State of binding on the Seller, (c) violate any orders,
judgments, writs or decrees known to us to which the Seller is subject in any
respect, or (d) violate or create a breach or default under any loan agreement,
indenture, note, evidence of indebtedness, mortgage, financing agreement, bond,
debenture or similar agreement or instrument relating to obligations of the
Seller for borrowed money or for the deferred purchase price of property or
services payable more than one year from the date of incurrence thereof or on
demand or relating to obligations of the Seller under capital leases which is
presently in effect and known to us and to which the Seller is a party of its
property is subject.
4. The Purchased Receivables constitute "accounts" and "general
intangibles" within the meaning of the UCC. The Seller is "located" in the State
of ______________ for purposes of Section 9-103(3)(b) of the UCC such that the
laws (including the conflict of law rules) of the State of ____________ govern
the perfection of security interests in accounts and general intangibles of the
Seller and the sale of accounts by the Seller. The transfers of the Purchased
Receivables are "true sales" of the Purchased Receivables to the Purchaser. In
the event, however, that a court of competent jurisdiction were to hold that the
transaction evidenced hereby constitutes a loan and not a purchase and sale,
then the Sale Agreement creates a first priority perfected valid security
interest in favor of the Purchaser.
5. If transfers of the Purchased Receivables from the Seller to the
Purchaser pursuant to the Sale Agreement constitute a "true sale" of the
Purchased Receivables to the Purchaser, the execution and delivery of the Sale
Agreement and the Purchase Assignments in accordance with the Sale Agreement,
and
(i) upon the proper filing of the Financing Statements in the
UCC filing offices of the Secretary of State of
_______________, [and in the UCC filing offices of the
County Recorder of ______________ County,] and
E-4
<PAGE>
(ii) the delivery to the Payors of such Purchased Receivables of
the notices in the form of the notices on Exhibit A to the
Sale Agreement (assuming no prior such notice has been
delivered to any such Payor by any person claiming an
interest in the Purchased Receivables, and we hereby advice
you that we have no knowledge that the Seller has previously
made any such assignment thereof or granted any such lien or
encumbrance thereupon), and
(iii)the execution and delivery of the Purchase Assignments in
accordance with the Sale Agreement (assuming that the Seller
has not previously assigned, for security or otherwise, such
Purchased Receivables or granted any lien or encumbrance in
them, and we hereby advise you that we have no knowledge
that the Seller has previously made any such assignment
thereof or granted any such lien or encumbrance thereupon),
are effective under the laws of the [State or Location of Seller] to vest title
thereto in the Purchaser, and all necessary steps have been taken under the laws
of the State of [location of Seller] to protect the Purchaser's ownership
interest in the Purchased Receivables now existing, and hereafter created,
against creditors of, or subsequent Purchasers from, the Seller, provided that
(x) if the transfers of the Purchased Receivables are deemed to
be subject to Article 9 of the UCC, or previously filed
financing statements, priority may be subject to financing
statements effective as a result of Section 9-401(2) of the
UCC, or
(y) if the Purchased Receivables are deemed to be interests or
claims "in or under any policy of insurance" under s.
9-104(g) of the UCC [in English rule states: prior notices
to payors of such policies] [in American rule states: prior
sales of such Purchased Receivables].3
The filing of the Financing Statements in the filing offices identified in
paragraph 5(i) above are the only filings required to be made in the State of
__________ to evidence, provide notice to third parties with respect to, or
otherwise perfect the Purchaser's ownership interest in the Purchased
Receivables under any applicable law of the State of _____________. No other
filings, either in the filing offices identified in paragraph 5(i) or in any
other filing offices in the State of ____________, are required or are advisable
to be made to evidence, provide notice to third parties
_______________________
3 As to assignments of accounts and intangibles, if the UCC is not applicable
because of Section 9-104, most jurisdictions follow either the so-called
"American rule" (which in general provides that the transfer of an interest
therein is made effective by a written assignment, with priority being granted
to the assignment which is first in time) or the so-called "English rule" (which
in general provides that the transfer of an interest therein is only effective
if notice is given to the payor). Counsel should choose one approach or the
other in completing paragraph 5(y) or, if the law in the jurisdiction is
unsettled, counsel may include both as exceptions (i.e., by indicating in
paragraph 5(y) "prior notices to payors of such policies or prior sales of such
Purchased Receivables").
E-5
<PAGE>
with respect to, or otherwise perfect such interests, or to establish the
priority of the Purchaser's interest with respect to such Purchased Receivables.
6. If the transfers of the Purchased Receivables from the Seller to
the Purchaser pursuant to the Sale Agreement and Purchase Assignments do not
constitute a "true sale" of the Purchased Receivables to the Purchaser, the Sale
Agreement and the Purchase Assignments create a valid security interest in favor
of the Purchaser in the Purchased Receivables from time to time transferred to
the Purchaser pursuant to the Sale Agreement and the Purchase Assignments in
accordance with the Sale Agreement, which security interest will constitute
(i) upon the proper filing of the Financing Statements in the
UCC filing offices of the Secretary of State of
_______________, [and in the UCC filing offices of the
County Recorder of ______________ County,] and
(ii) upon the delivery to the Payors of such Purchased
Receivables of the notices in the form of the notices on
Exhibit A to the Sale Agreement (assuming that no prior such
notice has been delivered to any such Payor by any person
claiming an interest in the Purchased Receivables and we
hereby advise you that we have no knowledge that the Seller
has previously delivered any prior notice), and
(iii)upon the execution and delivery of the Purchase Assignments
in accordance with the Sale Agreement (assuming that the
Seller has not previously assigned, for security or
otherwise, such Purchased Receivables or granted any lien or
encumbrance in them, and we hereby advise you that we have
no knowledge that the Seller has previously made any such
assignment thereof or granted any such lien or encumbrance
thereupon),
a security interest (perfected under the UCC and under other appropriate law to
the extent applicable) in the Seller's right, title and interest in and to the
Purchased Receivables and the proceeds thereof now existing, and hereafter
created, prior and senior to all other liens, provided that:
(x) if the granting of a security interest in the Purchased
Receivables is deemed to be subject to Article 9 of the UCC
or previously filed financing statements, priority may be
subject to financing statements effective as a result of
Section 9-401(2) of the UCC, or
(y) if the Purchased Receivables are deemed to be interests or
claims "in or under any policy of insurance" under s.
9-104(g) of the UCC [in English rule states: prior notices
to payors of such policies]
E-6
<PAGE>
[in American rule states: prior sales of such Purchased
Receivables].
The filing of the Financing Statements in the filing offices identified in
paragraph 6(i) above are the only filings required to be made in the State of
______________ to evidence, provide notice to third parties with respect to, or
otherwise perfect the Purchaser's security interest in the Purchased Receivables
under any applicable law of the State of _____________. No other filings, either
in the filing offices identified in paragraph 6(i) or in any other filing
offices in the State of ______________, are required or are advisable to be made
to evidence, provide notice to third parties with respect to, or otherwise
perfect such interests, or to establish the priority of the Purchaser's interest
with respect to such Purchased Receivables.
7. A State of ____________ court and a federal court sitting in the
State of _____________________ would give effect to the choice of law provisions
of the Agreements, except that such court may apply State of _______________ law
to (a) certain remedial and procedural rights, (b) matters of public policy, (c)
matters pertaining to the perfection and priority of security interests, and (d)
matters as to which Ohio law cannot be proven to such court to be sufficiently
authoritative or certain for such court to rely on it.
8. No consent of, or other action by, and no notice to or filing with,
or licensing by any federal or State of ________ Governmental Authority or any
other party (except for those consents required under Section 5.1 of the Sale
Agreement which have been provided by the Seller to the Purchaser) is required
for the due execution, delivery and performance by the Seller of the Agreements
or any other agreement, document or instrument to be delivered thereunder or for
the perfection of or the exercise by the Seller, the Purchaser or the Servicer
of any of their rights or remedies thereunder. The transactions contemplated by
the Agreements will not cause the Purchaser to be subjected to any obligation to
pay any transfer tax to any Governmental Authority in the State of
_________________, including without limitation any transfer, sales, use, added
value, documentary stamp or other similar transfer tax other than [describe any
such taxes which are applicable].
9. To the best of our knowledge, there are no actions or proceedings
against or affecting the Seller or any of its assets, pending or threatened,
before any Governmental Authority (including, without limitation, any federal or
state court of competent jurisdiction) (i) which seek to affect the
enforceability of the Agreements or the transactions contemplated thereby, or
(ii) which, if determined adversely, would materially and adversely affect the
ability of the Seller to perform its obligations under the Agreements.
Our opinions set forth herein are subject to the following
qualifications and exceptions:
(a) The effect of certain laws governing bankruptcy, reorganization,
fraudulent conveyance, moratorium and insolvency and relating to
or affecting the enforcement of creditors' rights generally,
including, but not limited to, the right to take or retain
personal property encumbered by the Sale Agreement, the Financing
Statements and the Purchase Assignments;
E-7
<PAGE>
(b) The application of general principles of equity (regardless of
whether considered in a proceeding in equity or at law);
(c) Standards of commercial reasonableness and good faith;
(d) In the case of proceeds, perfection of security interests is
limited to the extent set forth in Section 9-306 of the UCC;
(e) Continuation of perfection in any proceeds which are subject
to a security interest or in any after acquired property may, if
such proceeds or after acquired property consist of property of a
type in which a perfected security interest cannot be obtained by
filing a financing statement, require additional compliance with
applicable provisions of the UCC and we express no opinion as to
the perfection, priority an effectiveness of any security
interest in any proceeds of the Purchased Receivables initially
subject to the security interest or after acquired property to
the extent that perfection, priority or effectiveness depends
upon additional compliance with the UCC. Any change (from one
state to another state) in the location of the Seller's place of
business or chief executive offices to a location outside of the
State of ____________, or any change in the name, identity or
corporate structure of the Seller that would make a filed
financing statement seriously misleading, may result in the lapse
of perfection of the security interest to the extent that
perfection is dependent on filing unless new and appropriate
financing statements are filed in a timely manner; and
(f) In the case of collateral (as such term is defined in Article 9
of the UCC) in which a debtor (as such term is defined in Article
9 of the UCC) has no present rights, a security interest will be
created therein only when the debtor acquires rights to such
collateral.4
In addition to the foregoing exceptions, we hereby advise you that,
because a portion of the Purchased Receivables are Medicaid and Medicare
Receivables, in accordance with 42 U.S.C. Sections 1396a(a)(32) (Medicaid) and
1395g(c) (Medicare), the regulations promulgated thereunder and the court
decisions with respect thereto, it is unlikely (i) that payments on Medicaid or
Medicare Receivables will be made to any party other than the Seller to which
they are due or an assignee qualified under such sections and regulations, or
(ii) that payment of the Medicaid or Medicare Receivables sold to the Purchaser
will be directly enforceable by the Purchaser or the Servicer against the
federal government or any agency or
______________________
4 [The opinion may also set forth such other exceptions or vary the
foregoing language to the extent that such exceptions or variations are not
materially inconsistent with the protections intended to be afforded by the
foregoing language or are required by the laws of a jurisdiction other than
Ohio, in either case in the sole reasonable judgment of the Servicer, upon
the advice of counsel.]
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<PAGE>
instrumentality thereof, notwithstanding that the Purchaser has obtained title
to or maintains a perfected security interest in such Purchased Receivables;
provided, however, that with respect to both the foregoing clauses (i) and (ii)
we hereby advise you that the Subservicer may collect and enforce payment on
Medicaid and Medicare Receivables on behalf of the Purchaser, its assigns, and
the Servicer, as provided in the Sale Agreement.
Our opinions expressed herein are limited to those matters expressly
set forth herein, and no opinion may be implied or inferred beyond the matters
expressly stated herein. Further, the opinions expressed herein are being
rendered solely in connection with the consummation of the transactions
contemplated by the Agreements to which Seller is a party, and may not be relied
upon for any other purpose.
Our opinions are rendered only as of the date hereof and we assume no
obligation to update or supplement this opinion to reflect any facts or
circumstances that may hereafter occur or to reflect the applicability of any
laws that may affect the transactions contemplated by the Sale Agreement after
the date hereof.
In addition to the foregoing, this letter may not be distributed to,
furnished to or relied upon by any person other than the addressees, the
Trustee, and Duff & Phelps Credit Rating Co. without the express written consent
of this firm, provided, however, that any assignee of the Purchaser pursuant to
the Sale Agreement may likewise rely upon this opinion as if named as an
addressee herein.
Very truly yours,
E-9
<PAGE>
ANNEX 1
-------
TO OPINION OF
-------------
COUNSEL FOR
-----------
THE SELLER
----------
E-10
<PAGE>
ANNEX 2A
--------
TO OPINION OF
-------------
COUNSEL FOR
-----------
THE SELLER
----------
E-11
<PAGE>
ANNEX 2B
--------
TO OPINION OF
-------------
COUNSEL FOR
-----------
THE SELLER
----------
E-12
<PAGE>
ANNEX 3
-------
TO OPINION OF
-------------
COUNSEL FOR
-----------
THE SELLER
----------
E-13
<PAGE>
EXHIBIT F
---------
[FORM OF REPURCHASE ASSIGNMENT]
REPURCHASE ASSIGNMENT, dated as of __________, 199_ between [Seller] (the
"Seller"), NPF VI, Inc. (the "Purchaser"), and National Premier Financial
Services, Inc. (the "Servicer").
We refer to the Sale and Subservicing Agreement (the "Sale Agreement"),
dated as of ___________, 199_, by and among the Seller, as Seller and
Subservicer, the Purchaser, and the Servicer. All provisions of such Agreement
are incorporated by reference. All capitalized terms shall have the meanings set
forth in the Sale Agreement.
Pursuant to Section 6.3 of the Agreement, the Purchaser does hereby sell,
transfer, assign, set over and convey to the Seller, without recourse or
warranty, express or implied, all right, title and interest of the Purchaser in
and to the Receivables listed on Schedule 1 hereto (each, a "Repurchased
Receivable") and the Seller does hereby purchase each such Purchased Receivable.
All liens created by the Purchaser have been released as of the date hereof.
The Purchase Price for each Repurchased Receivable shall be its Net Value
as set forth on Schedule 1 hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
[SELLER]
By _________________________________
Name:
Title:
NPF VI, INC.
By _________________________________
Name:
Title:
NATIONAL PREMIER FINANCIAL SERVICES, INC.
By _________________________________
Name:
Title:
F-1
<PAGE>
SCHEDULE 1
----------
TO REPURCHASE
-------------
ASSIGNMENT
----------
F-2
<PAGE>
EXHIBIT G
---------
NATIONAL PREMIER FINANCIAL SERVICES, INC.
Sale and Subservicing Agreement
Section 8.2 Determinations of the Servicer
Determination Date: ______ __, 199_
(1) Section 8.2(a) Prior Net Value Amount
Net Value of Purchased Receivables as of the prior
Determination Date plus the Net Value of all Purchased
Receivables purchased on the prior Purchase Date __________
(2) Section 6.2(b) Paid Receivables Amount
The amount of Collections on all Purchased Receivables
received since the prior Determination Date __________
(3) Section 8.2(c) Current Net Value Amount
Net Value of all Purchased Receivables as of the
current Determination Date __________
(4) Section 8.2(d) Credit Deficiency
Prior Net Value Amount __________
minus
Paid Receivables Amount (_________)
minus
Current Net Value Amount (_________)
Total
=========
(5) Section 8.2(e) Rejected Amount
Net Value of Purchased Receivables which became Rejected
Receivables since the prior Determination Date and which
have not yet been repurchased or offset ___________
G-1
<PAGE>
SCHEDULE 1
----------
TO EXHIBIT G
------------
Date: ___________, 199_
Bankers Trust Company
Four Albany Street
New York, NY 10006
Attention:
Please make the following distributions from accounts in accordance
with Section 8.3 of the Sale and Subservicing Agreement for [SELLER]:
(1) Deposit in the Purchase Account
(a) From the Collection Account:
Paid Receivables Amount __________
(b) From the Seller Credit
Reserve Account: Credit Deficiency __________
(c) From the Collection Account:
Rejected Amount __________
(2) Pay by check to [SELLER] the balance
in the Collection Account after
such distributions
NATIONAL PREMIER FINANCIAL SERVICES, INC.
By: ____________________________________
Title: _________________________________
G-2
FIRST AMENDED AND RESTATED
--------------------------
SALE AND SUBSERVICING AGREEMENT
-------------------------------
This First Amended and Restated Sale and Subservicing Agreement (the "Sale
and Subservicing Agreement"), dated as of April 1, 1998 by and among Coastal
Government Services, Inc., a North Carolina corporation, as Seller (as such,
together with its successors and permitted assigns, the "Seller") and as
Subservicer hereunder (as such, together with its successors and permitted
assigns, the "Subservicer"), NPF IV, Inc., an Ohio corporation, as Purchaser (as
such, together with its successors and permitted assigns, the "Purchaser"), and
National Premier Financial Services, Inc., an Ohio corporation, as Servicer (as
such, together with its successors and permitted assigns, the "Servicer").
WITNESSETH:
-----------
WHEREAS, the Seller, the Servicer and NPF-WL, Inc., an Ohio corporation,
entered into that certain Sale and Subservicing Agreement dated as of April 18,
1997 (the "Original Sale and Subservicing Agreement") pursuant to which the
Seller sold and was obligated to sell certain healthcare accounts receivable to
NPF-WL, Inc. among other obligations and pursuant to which the Servicer provides
certain servicing obligations with respect to such healthcare accounts
receivable;
WHEREAS, NPF-WL, Inc., the Purchaser and the Servicer entered into that
certain Assignment and Assumption Agreement dated as of April 1, 1998 (the
"Assignment Agreement") pursuant to which NPF-WL, Inc. assigned, transferred,
conveyed and set over to the Purchaser all of its right, title and interest in,
to and under the Original Sale and Subservicing Agreement, all ancillary
agreements executed with respect thereto and all healthcare accounts receivable
previously purchased by NPF-WL, Inc. from the Seller, subject to all the
conditions and terms set forth in the Assignment Agreement, the terms and
conditions set forth in the Original Sale and Subservicing Agreement and all
ancillary agreements executed with respect thereto; and
WHEREAS, the Purchaser, as assignee, the Seller and the Servicer each now
desire to amend the Original Sale and Subservicing Agreement in its entirety by
entering into this Sale and Subservicing Agreement.
NOW THEREFORE, intended to be legally bound, the parties hereby agree as
follows:
<PAGE>
SALE AND SUBSERVICING AGREEMENT
Dated as of April 1, 1998
by and among
COASTAL GOVERNMENT SERVICES, INC.,
as Seller and as Subservicer,
NPF VI, INC.,
as Purchaser,
and
NATIONAL PREMIER FINANCIAL SERVICES, INC.,
as Servicer
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINITIONS ................................................... 2
Section 1.1 Certain Defined Terms ...................................... 2
Section 1.2 Other Terms ................................................ 12
ARTICLE II PURCHASE AND SALE; ESTABLISHMENT OF ACCOUNTS ................. 12
Section 2.1 Purchase and Sale .......................................... 12
Section 2.2 Conveyance of Receivables .................................. 12
Section 2.3 Establishment of Accounts; Conveyance of Interests
Therein; Investment ........................................ 14
Section 2.4 Grant of Security Interest ................................. 15
Section 2.5 Further Action Evidencing Purchases ........................ 15
Section 2.6 Eligible Receivables ....................................... 16
Section 2.7 Offsets .................................................... 16
Section 2.8 Administrative Fee ......................................... 16
Section 2.9 Assignment of Agreement .................................... 17
ARTICLE III CONDITIONS OF PURCHASES ..................................... 17
Section 3.1 Conditions Precedent to Effectiveness of
Agreement .................................................. 17
Section 3.2 Conditions Precedent to All Purchases ...................... 18
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE SELLER .................. 19
Section 4.1 Representations and Warranties as to the Seller ............ 19
Section 4.2 Representations and Warranties of the Seller as to
Purchased Receivables ...................................... 23
Section 4.3 Repurchase Obligations ..................................... 25
ARTICLE V GENERAL COVENANTS OF THE SELLER ............................... 26
Section 5.1 Affirmative Covenants of the Seller ........................ 26
Section 5.2 Reporting Requirements of the Seller ....................... 27
Section 5.3 Negative Covenants of the Seller ........................... 27
ARTICLE VI ACCOUNTS ADMINISTRATION ...................................... 28
Section 6.1 Collection Account ......................................... 28
Section 6.2 Determinations of the Servicer ............................. 29
Section 6.3 Distributions from Accounts ................................ 29
Section 6.4 Allocation of Moneys following Termination Date ............ 30
Section 6.5 Accounting ................................................. 30
ARTICLE VII APPOINTMENT OF THE SUBSERVICER AND SUCCESSOR
SERVICER ............................................................... 30
Section 7.1 Appointment of the Subservicer ............................. 30
Section 7.2 Additional Subservicers .................................... 31
Section 7.3 Duties and Responsibilities of the Subservicer ............. 31
Section 7.4 Authorization of the Servicer .............................. 33
Section 7.5 Subservicing Fee; Subservicing Expenses .................... 34
Section 7.6 Annual Statement as to Compliance .......................... 34
i
<PAGE>
Section 7.7 Transfer of Servicing Between Subservicer and
Servicer ................................................... 34
Section 7.8 Subservicer Not to Resign .................................. 35
Section 7.9 Appointment of the Successor Subservicer ................... 35
Section 7.10 Duties of the Subservicer to the Successor
Servicer .................................................. 35
Section 7.11 Effect of Termination or Resignation ...................... 36
ARTICLE VIII EVENTS OF SELLER DEFAULT ................................... 36
Section 8.1 Events of Seller Default ................................... 36
ARTICLE IX INDEMNIFICATION .............................................. 38
Section 9.1 Indemnities by the Seller .................................. 38
Section 9.2 Section 9.2 Security Interest .............................. 39
ARTICLE X MISCELLANEOUS ................................................. 39
Section 10.1 Notices, Etc .............................................. 39
Section 10.2 Remedies .................................................. 40
Section 10.3 Binding Effect; Assignability ............................. 40
Section 10.4 Costs, Expenses and Taxes ................................. 40
Section 10.5 No Proceedings ............................................ 41
Section 10.6 Amendments; Waivers; Consents ............................. 41
Section 10.7 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF
JURY TRIAL ................................................ 41
Section 10.8 Execution in Counterparts; Severability ................... 42
Schedule 1 Ineligible Medicaid States
Schedule 2 Ineligible Blue Cross/Blue Shield Plans
Schedule 3 Seller's Payor and Provider Numbers
Schedule 4 List of Names Under Which Seller is Doing Business
and Addresses at Which Seller is Doing Business
Exhibit A Form of Notice to Payors
Exhibit B Form of Lockbox Account Agreement
Exhibit C Form of Purchase Assignment
Exhibit D Form of Officer's Certificate for the Seller
Exhibit E Form of Opinion of Counsel for the Seller
Exhibit F Form of Repurchase Assignment
Exhibit G Form of Section 8.2 Determination of the Servicer
ii
<PAGE>
SALE AND SUBSERVICING AGREEMENT (the "Agreement"), dated as of April
1, 1998, by and among COASTAL GOVERNMENT SERVICES, INC., a North Carolina
corporation, as Seller (as such, together with its successors and permitted
assigns, the "Seller") and as Subservicer hereunder (as such, together with its
successors and permitted assigns, the "Subservicer"), NPF VI, INC., an Ohio
corporation, as Purchaser (as such, together with its successors and permitted
assigns, the "Purchaser"), and NATIONAL PREMIER FINANCIAL SERVICES, INC., an
Ohio corporation, as Servicer (as such, together with its successors and
permitted assigns, the "Servicer").
WITNESSETH:
WHEREAS, the Seller desires to sell certain health care receivables
originated by the Seller;
WHEREAS, the Purchaser is a special purpose corporation formed for the
purpose of purchasing certain health care receivables and funding such purchases
with the proceeds from the issuance of promissory notes;
WHEREAS, the Seller and the Purchaser intend that the Purchaser will
purchase certain health care receivables from the Seller from time to time;
WHEREAS, the Purchaser has appointed the Servicer to perform certain
servicing, administrative and collection functions in respect of the receivables
purchased by the Purchaser under this Agreement (the "Purchased Receivables");
WHEREAS, in order to effectuate the purposes of this Agreement, the
Purchaser and the Servicer desire that the Subservicer be appointed to perform
certain servicing, administrative and collection functions in respect of the
Purchased Receivables;
WHEREAS, the Seller has been requested and is willing to act as the
Subservicer; and
WHEREAS, the Seller acknowledges and consents to the Purchaser's
anticipated assignment to an affiliate of all its right, title, interest and
obligations with respect to this Agreement.
NOW, THEREFORE, the parties agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
Section 3.1 Certain Defined Terms.
As used in this Agreement, the following terms shall have the
following meanings:
"Accreditation" means certification by the JCAHO that a facility fully
complies with the standards set by the JCAHO for operation of such facility.
"Additional Subservicer" has the meaning specified in Section 9.2.
"Additional Subservicing Agreement" has the meaning specified in
Section 9.2.
"Adverse Claim" means any claim of ownership or any lien, security
interest or other charge or encumbrance, or other type of preferential
arrangement having the effect of a lien or security interest.
"Administrative Fee" means, as of any Purchase Date, an amount equal
to 8.5% of the Net Value of Purchased Receivables purchased on such Purchase
Date, deposited, for subservicing expenses, with the Servicer, reimbursable,
from time to time, in whole or in part, to the Seller in its capacity as
Subservicer by payment of the Subservicing Fee.
"Affiliate" means, as to any Person, any other Person that, directly
or indirectly, is in control of, is controlled by, or is under common control
with, such Person within the meaning of control under Section 15 of the
Securities Act of 1933.
"Base Rate" means, as of any Purchase Date, a percentage equal to
12.5% per annum.
"Billed Amount" means, with respect to any Receivable the amount
billed to the related Payor with respect thereto prior to the application of any
Contractual Allowance.
"Billing Date" means the earlier of (a) the date on which the claim
with respect to a Receivable was submitted to the related Payor; (b) 14 days
from the Discharge Date; or (c) 14 days from the Service Date if Discharge Date
is inapplicable.
"Blue Cross/Blue Shield Contract" means any and all agreements
currently in force between the Seller and any Blue Cross/Blue Shield plan.
"Business Day" means any day of the year other than a Saturday, Sunday
or any day on which banks are required, or authorized, by law to close in the
State of Ohio or the State of New York.
2
<PAGE>
"CHAMPUS" means the Civilian Health and Medical Program of the
Uniformed Service, a program of medical benefits covering retirees and
dependents of a member or a former member of a uniformed service, provided,
financed and supervised by the United States Department of Defense established
by 10 USC 1071 et seq.
"CHAMPUS Receivable" means a Receivable payable pursuant to CHAMPUS.
"CHAMPUS Regulations" means collectively, all regulation of the
Civilian Health and Medical Program of the Uniformed Services including (a) all
federal statutes (whether set forth in 10 USC 1071 or elsewhere) affecting
CHAMPUS; and (b) all applicable provisions of all rules, regulations (including
32 CFR 199), manuals, orders, and administrative, reimbursement and other
guidelines of all Governmental Authorities (including, without limitation, HHS,
the Department of Defense, the Department of Transportation, the Assistant
Secretary of Defense (Health Affairs), and the Office of CHAMPUS, or any Person
or entity succeeding to the functions of any of the foregoing) promulgated
pursuant to or in connection with any of the foregoing (whether or not having
the force of law), in each case as may be amended, supplemented or otherwise
modified from time to time.
"Closing Date" means April 1, 1998.
"Collection Account" means the trust account maintained with the
Trustee described in Section 4.3(c).
"Collections" means, with respect to any Receivable, all cash
collections and other cash proceeds of such Receivable.
"Commercial Lockbox Account" has the meaning specified in Section
4.3(a).
"Concentration Limits" means: the following expressed as a percentage
or Dollar amount of the aggregate Net Value of the Purchased Receivables then
outstanding:
(a) Receivables payable by Blue Cross and Blue Shield Payors - 20%;
(b) Receivables for which any one commercial insurer or HMO, PPO or
other similar managed care program or Provider Payor is Payor
during the time such Payor has a long-term rating of A or better
but less than AA from D&P or if such Payor is not rated by D&P,
then which has a long-term rating of A or better but less than AA
from S&P - 8%; and
(c Receivables payable by all commercial insurance Payors, HMO, PPO
or other similar managed care program Payors and Provider Payors
which are unrated or which have a long-term rating of below A
from D&P or, if unrated by D&P, which have long-term ratings
below A from S&P - 1%.
3
<PAGE>
"Contract" means an agreement (or agreements), pursuant to, or under
which, a Payor shall be obligated to pay for services rendered or merchandise
sold to patients of the Seller from time to time.
"Contractual Allowance" means an amount verified by the Servicer in
accordance with historical liquidation experience (actual collections received
on the Billed Amount within 180 days of the Billing Date) and current
reimbursement schedules by Payor Class by which the amount of charges billed to
any Payor are to be adjusted to reflect the entitled reimbursement pursuant to
any contract or other arrangement between such Payor and the Seller.
"Credit Deficiency" has the meaning specified in Section 8.2(d).
"Current Net Value Amount" has the meaning specified in Section
8.2(c).
"Debt" of any Person means (a) indebtedness of such Person for
borrowed money, (b) obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments, (c) obligations of such Person to pay the
deferred purchase price of property or services, (d) obligations of such Person
as lessee under leases which have been or should be, in accordance with
generally accepted accounting principles, recorded as capital leases, (e)
obligations secured by any lien or other charge upon property or assets owned by
such Person, even though such Person has not assumed or become liable for the
payment of such obligations, (f) obligations of such Person under direct or
indirect guaranties in respect of, and obligations (contingent or otherwise) to
purchase or otherwise acquire, or otherwise to assure a creditor against loss in
respect of, indebtedness or obligations of others of the kinds referred to in
clauses (a) through (e) above, and (g) liabilities in respect of unfunded vested
benefits under plans covered by Title IV of the Employee Retirement Income
Security Act of 1974, as amended.
"Defaulted Receivable" means a Receivable as to which, on any
Determination Date (a) any part of the Net Value thereof remains unpaid for more
than 180 days from the Billing Date for such Receivable; or (b) the Payor
thereof has taken any action, or suffered any event to occur, of the type
described in Section 10.1(c); or (c) the Servicer or the Subservicer otherwise
deems any part of the Net Value thereof to be uncollectible.
"Determination Date" means the Business Day preceding the Purchase
Date of each week.
"Discharge Date" means, with respect to any Receivable, the date of
discharge by a Seller of the related patient, in the case of an in-patient and
the Billing Date, in the case of an out-patient and a Receivable originated by a
nursing home.
"Dollar" and "$" means lawful money of the United States of America.
"DRG Code" means the Diagnosis Related Group code assigned by HCFA.
"D&P" means Duff & Phelps Credit Rating Co., its successors and
assigns.
4
<PAGE>
"Eligible Payor" means a Payor which is
(a) (i) a commercial insurance company, organized under the laws of
any jurisdiction in the United States, having its principal
office in the United States; (ii) a Blue Cross/Blue Shield plan
other than those listed on Schedule 2; (iii) during such time as
the Seller is the Subservicer hereunder, (A) Medicare, (B)
Medicaid plans other than those administered by the states listed
on Schedule 1, or (C) CHAMPUS; (iv) a HMO, PPO or other similar
managed care program, each organized under the laws of any
jurisdiction in the United States, having its principal office in
the United States; or (v) a Provider Payor provided that a
Provider Payor shall not be an Eligible Payor without the consent
of the Servicer;
(b) not an Affiliate of any of the parties hereto;
(c) in the case of (a) (i) (ii), (iv) and (v) above, in receipt of a
letter substantially in the form of Exhibit A hereto; and
(d) not subject to bankruptcy or insolvency proceedings at the time
of sale of the Receivable to the Purchaser.
"Eligible Receivable" means, at any time, a Receivable as to which the
representations and warranties of Section 6.2 are true and correct in all
respects at the time of Purchase.
"Eligible Receivable Amount" means, with respect to any Eligible
Receivable, an amount equal to its Billed Amount after giving effect to any
Contractual Allowance with respect to such Eligible Receivable.
"Equity Account" means the trust account of the Purchaser maintained
with the Trustee titled "Equity Account".
"Event of Seller Default" has the meaning specified in Section 10.1.
"Governmental Authority" means the United States of America, federal,
any state, local or other political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions thereof or pertaining thereto.
"Governmental Consents" has the meaning specified in Section 6.1(h).
"HCFA" means the Health Care Financing Administration, an agency of
the HHS charged with administering and regulating, inter alia, certain aspects
of Medicaid and Medicare.
"Health Facility License" means a license issued by a state health
agency or similar agency or body certifying that the facility has been inspected
and found to comply with applicable laws for operating such a health facility.
5
<PAGE>
"HHS" means the Department of Health and Human Services, an agency of
the Federal Government of the United States.
"HMO" means a health maintenance organization.
"Indemnified Amounts" has the meaning specified in Section 11.1(a).
"Indemnified Party" has the meaning specified in Section 11.1(a).
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended.
"Investment Income" means income of any nature from the investment or
deposit of funds in the Seller Credit Reserve Account or Offset Reserve Account
or any other reserve or account required hereunder.
"JCAHO" means the Joint Commission for Accreditation of Health Care
Organizations.
"Lockbox Account" has the meaning specified in Section 4.3(a).
"Lockbox Account Agreement" means an agreement among the Servicer and
a depository institution satisfactory to the Purchaser with respect to the
Commercial Lockbox Account and among the Seller, the Servicer and a depository
institution satisfactory to the Purchaser with respect to the Medicare Lockbox
Account, in each case (a) providing that all Collections therein shall be
remitted directly by such depository institution to the Collection Account
within one Business Day of receipt and (b) otherwise satisfactory to the
Purchaser.
"Medicaid" means the medical assistance program established by Title
XIX of the Social Security Act (42 USC ss. 1396 et seq.) and any statutes
succeeding thereto.
"Medicaid Certification" means certification of a facility by HCFA or
a state agency or entity under contract with HCFA that the facility fully
complies with all the conditions of participation set forth in Medicaid
Regulations.
"Medicaid Provider Agreement" means an agreement entered into between
a federal or state agency or other such entity administering the Medicaid
program and a health care facility under which the health care facility agrees
to provide services or merchandise for Medicaid patients in accordance with the
terms of the agreement and Medicaid Regulations.
"Medicaid Receivable" means a Receivable payable pursuant to a
Medicaid Provider Agreement.
"Medicaid Regulations" means, collectively, (a) all federal statutes
(whether set forth in Title XIX of the Social Security Act or elsewhere)
affecting Medicaid; (b) all state statutes and plans for medical assistance
enacted in connection with such statutes and federal rules and regulations
promulgated pursuant to or in connection with such statutes; and (c) all
6
<PAGE>
applicable provisions of all rules, regulations, manuals, orders and
administrative, reimbursement and other guidelines of all Governmental
Authorities (including, without limitation, HHS, HCFA, the office of the
Inspector General for HHS, or any Person succeeding to the functions of any of
the foregoing) promulgated pursuant to or in connection with any of the
foregoing (whether or not having the force of law), in each case as may be
amended, supplemented or otherwise modified from time to time.
"Medicare" means the health insurance program for the aged and
disabled established by Title XVIII of the Social Security Act (42 USC ss. 1395
et seq.) and any statutes succeeding thereto.
"Medicare Certification" means certification of a facility by HCFA or
a state agency or entity under contract with HCFA that the facility fully
complies with all the conditions of participation set forth in Medicare
Regulations.
"Medicare Lockbox Account" has the meaning specified in Section
4.3(a).
"Medicare/Medicaid Offset" means, with respect to Medicare Receivables
and Medicaid Receivables, an offset against payment thereof, which has occurred
due to a Medicare or Medicaid settlement.
"Medicare Provider Agreement" means an agreement entered into between
a federal or state agency or other such entity administering the Medicare
program and a health care facility under which the health care facility agrees
to provide services or merchandise for Medicare patients in accordance with the
terms of the agreement and Medicare Regulations.
"Medicare Receivable" means a Receivable payable pursuant to a
Medicare Provider Agreement.
"Medicare Regulations" means, collectively, (a) all federal statutes
(whether set forth in Title XVIII of the Social Security Act or elsewhere)
affecting Medicare; and (b) all applicable provisions of all rules, regulations,
manuals, orders and administrative, reimbursement and other guidelines of all
Governmental Authorities (including, without limitation, HHS, HCFA, the Office
of the Inspector General for HHS, or any Person succeeding to the functions of
any of the foregoing) promulgated pursuant to or in connection with the
foregoing (whether or not having the force of law), as each may be amended,
supplemented or otherwise modified from time to time.
"Net Administrative Fee" means, as of any Purchase Date, an amount
equal to the Administrative Fee minus the Subservicing Fee for such Purchase
Date (but not less than zero).
"Net Subservicing Fee" means, as of any Purchase Date, an amount equal
to the Subservicing Fee minus the Administrative Fee for such Purchase Date (but
not less than zero).
7
<PAGE>
"Net Value" of any Receivable at any time means an amount (not less
than zero) equal to (a)(i) the Eligible Receivable Amount multiplied by (ii)
0.97; minus (b) all payments received from the Payor with respect thereto;
provided, that if the Servicer makes a determination that all payments by the
Payor with respect to such Receivable have been made, the Net Value shall be
zero, and provided, further, that for purposes of calculations under Article VI,
the Net Value of a Defaulted Receivable shall be zero and no deductions in Net
Value will be made until such time as the Servicer has received Collections with
respect to a Purchased Receivable and processed the related Remittance Advice.
"Officers' Certificate" means a certificate signed by two persons, one
of whom shall (a) hold the office of the Chairman of the Board, President, Vice
President or Treasurer and (b) the second of whom shall hold (i) any of the
offices described in the preceding clause (a) or (ii) the office of Assistant
Treasurer, Secretary or Assistant Secretary.
"Offset Reserve Account" means the trust account maintained with the
Trustee as specified in Section 4.3(b)
"Other Sellers" has the meaning specified in Section 4.7.
"Paid Receivable" means, as of any Determination Date, a Purchased
Receivable as to which a payment by the Payor with respect to such Receivable
has been received.
"Paid Receivables Amount" has the meaning specified in Section 8.2(b).
"Payor" means, with respect to any Receivable, the Person primarily
obligated to make payments in respect thereto.
"Payor Class" means, with respect to any Payor, one of the following:
(a) commercial insurance Payors; (b) Medicare Payors; (c) Medicaid Payors; (d)
Blue Cross/Blue Shield Payors; (e) CHAMPUS Payors; (f) HMO and PPO Payors; and
(g) Provider Payors.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, voluntary association, joint
venture, a government or any agency or political subdivision thereof, or any
other entity of whatever nature.
"PPO" means a preferred provider organization.
"Principal Amortization Event" means an event under any loan agreement
or indenture following which the funding of the Purchaser to be utilized in
purchasing Receivables hereunder may be terminated.
"Prior Net Value Amount" has the meaning specified in 8.2(a).
"Program Fee" means, (a) as of the first Purchase Date in any month,
an amount determined by the Servicer, equal to (i) 1/12 of the annualized Base
Rate multiplied by (ii) the aggregate Net Value of all Purchased Receivables
including (A) Defaulted Receivables (net of recoveries) and (B) those
Receivables to be purchased on such Purchase Date; and (b) as of any
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subsequent Purchase Date in any month, an amount determined by the Servicer,
equal to (i) 7/360 of the annualized Base Rate multiplied by (ii) any increase
in the aggregate Net Value of all Purchased Receivables since such first
Purchase Date including (A) Defaulted Receivables (net of recoveries) and (B)
those Receivables to be purchased on such Purchase Date.
"Provider Payor" means any medical services provider reimbursed by an
HMO, PPO or managed care program, commercial insurer, Medicare, Medicaid, or
CHAMPUS organized under the laws of any jurisdiction in the United States,
having its principal office in the United States.
"Purchase" means a purchase by the Purchaser of Eligible Receivables
from the Seller pursuant to Section 4.2.
"Purchase Account" means the trust account of the Purchaser maintained
with the Trustee titled "NPF VI - Purchase Account."
"Purchase Assignment" means the assignment of Purchased Receivables
entered into between the Seller and the Purchaser on the initial Purchase Date
and any subsequent Purchase Date upon Purchaser's request substantially in the
form of Exhibit C.
"Purchase Commitment" means an amount not to exceed $7,000,000.
"Purchase Date" means the Closing Date and thereafter, Tuesday of each
week or the preceding Business Day if such day is not a Business Day.
"Purchase Notice" means a notice in a form acceptable to the
Purchaser, which enables the Purchaser to identify all Eligible Receivables
owned on such date by the Seller, and the Required Information with respect
thereto, segregated by Payor Class.
"Purchase Price" has the meaning specified in Section 4.2(b).
"Purchased Receivable" means any Receivable which has been purchased
by the Purchaser hereunder, including a Rejected Receivable prior to its
repurchase. Notwithstanding anything to the contrary herein, Purchased
Receivable shall only refer to a Receivable (or part thereof) payable by the
primary Payor thereof.
"Purchaser" means NPF VI, Inc., an Ohio corporation, together with its
successors and assigns.
"Receivable" means (a) an account receivable billed to a Payor arising
from the provision of health care services (and any services or sales ancillary
thereto) by the Seller including the right to payment of any interest or finance
charges and other obligations of such Payor with respect thereto;
(b) all security interests or liens and property subject thereto from
time to time purporting to secure payment by the Payor;
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(c) all guarantees, indemnities and warranties and proceeds thereof,
proceeds of insurance policies, UCC financing statements and other agreements or
arrangements of whatever character from time to time supporting or securing
payment of such Receivable;
(d) all Collections with respect to any of the foregoing;
(e) all Records with respect to any of the foregoing; and
(f) all proceeds of any of the foregoing.
"Records" means all Contracts and other documents, books, records and
other information (including, without limitation, computer programs, tapes,
disks, punch cards, data processing software and related property and rights)
prepared and maintained by the Seller or the Subservicer with respect to
Receivables (including Purchased Receivables) and the related Payors.
"Rejected Amount" has the meaning specified in Section 8.2(e).
"Rejected Receivable" has the meaning specified in Section 6.3.
"Related Documents" means each Purchase Assignment, the Lockbox
Account Agreement and all documents required to be delivered thereunder and
under this Agreement.
"Remittance Advice" means, in respect of a Receivable, written
confirmation received by the Servicer from the Subservicer or the related Payor
of the amount paid on a patient specific Receivable.
"Required Information" means, with respect to a Receivable, (a) the
Payor, (b) the DRG Code, if applicable, (c) the Eligible Receivable Amount, (d)
the Billing Date, (e) the patient account number and (f) the Discharge Date, if
applicable.
"S & P" means Standard & Poor's Corporation, and its successors and
assigns.
"Seller" means Coastal Government Services, Inc., a North Carolina
corporation, together with its successors and assigns.
"Seller Credit Reserve Account" means the trust account maintained
with the Trustee as specified in Section 4.3(b).
"Service Date" means the date on which services are rendered to the
applicable patient or health care facility with respect to a particular
Receivable.
"Servicer" means National Premier Financial Services, Inc., an Ohio
corporation, or any Person designated as the successor Servicer, and its
successors and assigns, from time to time.
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"Servicing Officer" means any officer of the Subservicer involved in,
or responsible for, the administration and servicing of the Purchased
Receivables whose name appears on an Officer's Certificate listing servicing
officers furnished to the Purchaser and the Servicer by the Subservicer, as
amended, from time to time.
"Servicing Records" means all documents, books, records and other
information (including, without limitation, computer programs, tapes, disks,
punch cards, data processing software and related property and rights) prepared
and maintained by the Subservicer or the Servicer with respect to the Purchased
Receivables and the related Payors.
"Specified Credit Reserve Balance" means, with respect to the Seller
in the Seller Credit Reserve Account, as of any Purchase Date, an amount equal
to 6.50% of the Net Value of Purchased Receivables including (a) Defaulted
Receivables (net of recoveries) and (b) those Receivables to be purchased on
such Purchase Date.
"Specified Offset Reserve Balance" means, with respect to the Seller
in the Offset Reserve Account, as of any Purchase Date, an amount equal to the
greater of (a) 2.0% of the Net Value of Purchased Receivables including (i)
Defaulted Receivables (net of recoveries) and (ii) those Receivables to be
purchased on such Purchase Date; and (b) 1.5 times the most recent year's
aggregate audited Medicare and Medicaid cost report liabilities for the Seller.
"Subservicer" means the Seller, or any Person designated as
Subservicer, from time to time, hereunder.
"Subservicing Fee" has the meaning specified in Section 9.5.
"Subservicing Officer" means any officer of the Subservicer involved
in, or responsible for, the administration and servicing of the Purchased
Receivables whose name appears on an Officer's Certificate listing servicing
officers furnished to the Servicer by the Subservicer, as amended, from time to
time.
"Subsidiary" means, as to any Person, any corporation or other entity
of which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other Persons performing similar
functions are at the time directly or indirectly owned by such Person.
"Termination Date" means the earlier of (a) June 1, 2000 or (b) the
date of declaration or automatic occurrence of the Termination Date pursuant to
Section 10.1.
"Trustee" means Bankers Trust Company, a national banking association,
or any successor Trustee appointed by the Purchaser.
"UCC" means the Uniform Commercial Code as from time to time in effect
in the state of the location of the Seller's chief executive office.
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Section 3.2 Other Terms.
All accounting terms not specifically defined herein shall be
construed in accordance with generally accepted accounting principles. All terms
used in Article 9 of the UCC, and not specifically defined herein, are used
herein as defined in such Article 9.
ARTICLE II
PURCHASE AND SALE; ESTABLISHMENT OF ACCOUNTS
Section 4.1 Purchase and Sale.
The Seller does hereby agree to sell, transfer, assign, set over and
convey to the Purchaser, without recourse, all right, title and interest of the
Seller in and to the Purchased Receivables sold pursuant to this Agreement and
the Purchaser does hereby agree to purchase Eligible Receivables pursuant to the
terms of this Agreement; provided, that with respect to each Purchased
Receivable which is a Medicare Receivable, a Medicaid Receivable or a CHAMPUS
Receivable, the Seller, as Subservicer hereunder, shall retain all rights of
collection with respect to such Receivable.
Section 4.2 Conveyance of Receivables.
(a) No later than 2:00 p.m. on the fifth Business Day prior to each
Purchase Date, the Seller shall deliver, or cause to be delivered, to the
Servicer a Purchase Notice. In the event that the Seller does not provide such
notification, the Purchaser will have no obligation to purchase any Eligible
Receivable on such Purchase Date. Upon receipt of a Purchase Notice, the
Servicer, in its sole discretion, as agent for the Purchaser, shall determine
which, if any, of the Eligible Receivables specified therein the Purchaser shall
purchase. In the event the Servicer determines (the determination of the
Servicer being conclusive in this regard) that any Receivables identified on
such notice are not Eligible Receivables, such Receivables shall not be eligible
for sale on such Purchase Date. On each Purchase Date, following its selection,
if any, of Eligible Receivables, the Servicer will determine the Purchase Price
in accordance with the subsection (b) hereof. The Seller shall be obligated to
execute and deliver to the Purchaser a Purchase Assignment with respect to
Purchased Receivables as of the initial Purchase Date and thereafter upon the
written request of the Purchaser. Notwithstanding the foregoing, the Purchaser
shall have no obligation to purchase Receivables from the Seller to the extent
the aggregate Net Value of all Purchased Receivables (including Defaulted
Receivables to the extent recoveries have not been made with respect to such
Defaulted Receivables) is in excess of the Purchase Commitment.
(b) The Purchase Price with respect to Purchased Receivables purchased
on any Purchase Date shall be an amount (not less than zero) equal to (i) the
aggregate Net Values of such Purchased Receivables; minus (ii) the sum of (A)
the Program Fee as of such Purchase Date; (B) the amount, if any, by which the
amount in the Seller Credit Reserve Account
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deposited hereunder (net of withdrawals required hereunder) is less than the
Specified Credit Reserve Balance as of such Purchase Date (which amount will be
the full Specified Credit Reserve Balance on the initial Purchase Date); and (C)
the amount, if any, by which the amount in the Offset Reserve Account deposited
hereunder (net of withdrawals required hereunder) is less than the Specified
Offset Reserve Balance as of such Purchase Date (which amount will be the full
Specified Offset Reserve Balance on the initial Purchase Date) and (D) the Net
Administrative Fee due to the Servicer. Following delivery of a duly executed
Purchase Assignment, subject to the satisfaction of the conditions set forth in
Section 5.2, the Purchaser shall, by withdrawal from the Purchase Account, (w)
pay to the Seller the Purchase Price for all Purchased Receivables purchased on
such Purchase Date, (x) deposit the Program Fee in the Equity Account, (y) make
a deposit in the amount set forth in (B) above, if any, in the Seller Credit
Reserve Account, and (z) make a deposit in the amount set forth in (C) above, if
any, in the Offset Reserve Account and pay to the Servicer the Net
Administrative Fee. Payment of such Purchase Price shall be made by the
Servicer, as agent for the Purchaser, causing the Trustee to effect such
payment. In the event the Purchase Price is zero on any Purchase Date, the
Purchaser shall only be required to make deposits specified in (w), (x), (y),
and (z) above in an amount equal to the Net Value of such Purchased Receivables
as of such Purchase Date, with priority being given in the foregoing order. In
the event the Net Value of such Purchased Receivables purchased on that Purchase
Date is less than the Program Fee (including where no Receivables are purchased
on the relevant Purchase Date), to the extent funds deposited hereunder (net of
withdrawals required hereunder) are sufficient, the Servicer shall cause the
Trustee to withdraw the difference from the Seller Credit Reserve Account to the
extent of amounts in excess of the Specified Credit Reserve Balance on such
Purchase Date and deposit it in the Equity Account.
(c) Following payment of the Purchase Price on any Purchase Date,
ownership of each Purchased Receivable will be vested in the Purchaser. The
Seller shall not take any action inconsistent with such ownership and shall not
claim any ownership interest in any Purchased Receivable. The Seller shall
indicate in its Records that ownership of each Purchased Receivable is held by
the Purchaser. In addition, the Seller shall respond to any inquiries with
respect to ownership of a Purchased Receivable by stating that it is no longer
the owner of such Purchased Receivable and that ownership of such Purchased
Receivable is held by the Purchaser. Documents (other than medical records,
which shall be retained by the Seller) relating to the Purchased Receivables
shall be held in trust by the Seller and the Subservicer, for the benefit of the
Purchaser as the owner thereof, and possession of any Required Information or
incident relating to the Purchased Receivables so retained is for the sole
purpose of facilitating the servicing of the Purchased Receivables. Such
retention and possession is at the will of the Purchaser and in a custodial
capacity for the benefit of the Purchaser only. To further evidence such sale,
at the request of the Purchaser, the Seller shall (i) mark conspicuously each
invoice evidencing each Purchased Receivable with a legend, acceptable to the
Purchaser, evidencing that the Purchaser has purchased all right and title
thereto and interest therein as provided in this Agreement; (ii) mark its master
data processing records evidencing such Purchased Receivables with such legend;
and (iii) send notification to Payors as to the transfer of such interest in the
Purchased Receivables.
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Section 4.3 Establishment of Accounts; Conveyance of Interests
Therein; Investment.
(a) Lockbox Account. Prior to the execution and delivery of this
Agreement, the Seller shall (i) establish and maintain at the Seller's expense
(A) an account in the name of the Seller with a depository institution
satisfactory to the Purchaser (the "Medicare Lockbox Account") into which all
Collections in respect of Medicaid, Medicare and CHAMPUS Receivables shall be
deposited and (B) an account in the name of the Servicer into which all
Collections from Eligible Payors in respect of other Receivables shall be
deposited (the "Commercial Lockbox Account"); provided that neither the Seller
nor the Servicer shall be permitted to withdraw any amounts from the Commercial
Lockbox Account or change the procedures under the Lockbox Account Agreement
except in the case of an assignment by the Purchaser of its interests herein
under 12.3. The Medicare Lockbox Account and the Commercial Lockbox
Account are referred to collectively in this Agreement as the "Lockbox Account")
and (ii) enter into the Lockbox Account Agreement. The provisions of the Lockbox
Account Agreement described in the definition thereof may not be amended without
the consent of the Trustee. The Seller hereby agrees to direct each Payor of an
Eligible Receivable to remit all payments with respect to such Receivable for
deposit in the Commercial Lockbox Account (other than the Payors of Medicaid,
Medicare and CHAMPUS Receivables which shall be directed to remit all payments
with respect to such Receivables for deposit in the Medicare Lockbox Account) by
delivering to such Payor a notice attached as Exhibit A hereto. The Seller
further agrees not to change such directive to Payors without the prior written
consent of the Purchaser and the Servicer. The Seller agrees not to terminate
the Medicare Lockbox Account Agreement without first providing the Purchaser and
the Servicer with written notice at least 30 days prior to the effective date of
such termination. The Seller acknowledges that payments deposited in the
Medicare Lockbox Account will be swept from the Medicare Lockbox Account to the
Collection Account on a daily basis. The Seller hereby agrees not to change or
direct the custodian thereof to modify such sweep order without first providing
the Purchaser and the Servicer with written notice at least 30 days prior to the
effective date of such change in sweep order. In the event the Seller terminates
the Medicare Lockbox Account, changes the sweep order with respect to the
Medicare Lockbox Account or the Payors receive any instruction whatsoever from
the Seller indicating that Collections with respect to the Eligible Receivables
should be sent to any location other than the Lockbox Account, the Seller hereby
acknowledges and agrees that such actions would be an express violation of this
Agreement, would cause irreparable harm to the Purchaser for which there would
be no adequate remedy at law, and agrees and consents to grant the Purchaser
specific performance of the terms and provisions of this Agreement. The
custodian of the Lockbox Account may rely upon the terms and restrictions set
for in subsection 4.3(a).
(b) Seller Credit Reserve Account; Offset Reserve Account. The
Purchaser has established and shall maintain trust accounts with the corporate
trust department of the Trustee titled "NPF VI Seller Credit Reserve Account"
(the "Seller Credit Reserve Account") and "NPF VI - Offset Reserve Account" (the
"Offset Reserve Account").
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(c) Collection Account. The Purchaser has established and shall
maintain a trust account with the corporate trust department of the Trustee
titled "NPF VI - Collection Account" (the "Collection Account").
(d) The Seller does hereby sell, transfer, assign, set over and convey
to the Purchaser all right, title and interest of the Seller in and to (i) all
amounts deposited, from time to time, in the Seller Credit Reserve Account and
the Offset Reserve Account and (ii) subject to the provisions of Article VI
hereunder, all amounts deposited, from time to time, in the Lockbox Account and
the Collection Account. Any Collections in respect of Purchased Receivables held
by the Seller or the Subservicer pending transfer to the Collection Account as
provided in this Agreement, shall be held by the Seller in trust for the benefit
of the Purchaser until such amounts are deposited into the Collection Account or
the Lockbox Account. In the event Collections in respect of Purchased
Receivables held by the Seller (whether in the Lockbox Account or otherwise)
shall not be remitted to the Collection Account on the day of receipt or the
following Business Day if the day of receipt is not a Business Day in addition
to its other remedies hereunder, the Purchaser shall be entitled to receive a
late charge (which shall be in addition to the Program Fee) equal to 12% per
annum or the maximum rate legally permitted if less than such rate, calculated
as of the first Business Day of such delinquency.
(e) Notwithstanding anything to the contrary herein, the Seller may,
but shall not be obligated to, make a deposit at any time in the Seller Credit
Reserve Account or the Offset Reserve Account. Further, the Seller is not
entitled to, nor shall the Seller have any interest in, Investment Income.
Section 4.4 Grant of Security Interest.
It is the intention of the parties hereto that each payment by the
Purchaser to the Seller with respect to Purchased Receivables to be made
hereunder shall constitute part of the purchase and sale of such Purchased
Receivables and not a loan. In the event, however, that a court of competent
jurisdiction were to hold that the transaction evidenced hereby constitutes a
loan and not a purchase and sale, it is the intention of the parties hereto that
this Agreement shall constitute a security agreement under the UCC and any other
applicable law, and that the Seller shall be deemed to have granted to the
Purchaser a first priority perfected security interest in all of the Seller's
right, title and interest in, to and under the Purchased Receivables; all
payments of principal of or interest on such Purchased Receivables; all amounts
on deposit from time to time in the Seller Credit Reserve Account, the Offset
Reserve Account; and all amounts on deposit with respect to Purchased
Receivables from time to time in the Lockbox Account and the Collection Account,
all other rights relating to and payments made in respect of this Agreement, and
all proceeds of any of the foregoing.
Section 4.5 Further Action Evidencing Purchases.
(a) The Seller agrees that, from time to time, at its expense, it will
promptly execute and deliver all further instruments and documents, and take all
further action, that may be necessary or appropriate, or that the Purchaser may
reasonably request, in order to perfect, protect or more fully evidence the
transfer of ownership of the Purchased Receivables or to
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enable the Purchaser to exercise or enforce any of its rights hereunder or under
any Purchase Assignment. Without limiting the generality of the foregoing, the
Seller will, upon the request of the Purchaser, execute and file such financing
or continuation statements, or amendments thereto or assignments thereof, and
such other instruments or notices, as may be necessary or appropriate, or as the
Purchaser may request.
(b) The Seller hereby authorizes the Purchaser to file one or more
financing or continuation statements, and amendments thereto and assignments
thereof, relating to all or any of the Purchased Receivables and Collections
with respect thereto without the signature of the Seller.
Section 4.6 Eligible Receivables.
All determinations of the Servicer under this Agreement including,
without limitation, whether Receivables are Eligible Receivables and the
Eligible Receivable Amounts, shall be conclusive.
Section 4.7 Offsets.
The parties acknowledge that the Purchaser and the Servicer have
entered into a series of agreements in substantially the form as this Agreement
with other sellers of Receivables ("Other Sellers") and that the Offset Reserve
Account has been established to provide liquidity to the Purchaser with respect
to Rejected Receivables, whether such Receivables were sold to the Purchaser by
the Seller or by Other Sellers. In the event of an offset with respect to a
Receivable purchased by the Purchaser from the Seller or an Other Seller and
such Rejected Receivable is not repurchased by such Seller or Other Seller in
the manner set forth in Section 6.3 herein, the Servicer will cause the Trustee
to withdraw the Net Value of such Rejected Receivable from the Offset Reserve
Account and deposit it in the Purchase Account. In the event such Receivable was
sold to the Purchaser by an Other Seller, the Purchaser agrees to enforce the
Other Seller's obligation to repurchase such Receivable under the terms of its
agreement with such Other Seller and to cause the amount of such repurchase by
the Other Seller to be deposited in the Offset Reserve Account. The Servicer
will maintain a detailed accounting record of all deposits and withdrawals from
the Offset Reserve Account including whether a withdrawal was made with respect
to a Medicare/Medicaid Offset on a Receivable sold to the Purchaser by the
Seller or an Other Seller. For purposes of calculating whether the amount in the
Offset Reserve Account deposited by the Servicer on behalf of the Seller (net of
withdrawals required hereunder with respect to the Seller) is equal to the
Specified Offset Reserve Balance, only withdrawals with respect to a Rejected
Receivable sold to the Purchaser by the Seller will be deemed to be with respect
to the Seller.
Section 4.8 Administrative Fee.
On each Purchase Date, the Seller shall deposit with the Servicer an
amount equal to the Administrative Fee. The Subservicer acknowledges that such
amount may be offset by the Subservicing Fee pursuant to Section 9.5. Payment of
the Net Administrative Fee may be made
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by application of amounts otherwise payable to the Seller (including the
Purchase Price to the extent allocable to the Seller).
Section 4.9 Assignment of Agreement.
The Seller does hereby agree, acknowledge and consent to the
assignment by the Purchaser of all of the Purchaser's right, title, interest and
obligations with respect to this Agreement. The Seller does hereby further agree
to execute and deliver to the Purchaser all documents and amendments presented
to the Seller by the Purchaser in order to effectuate the assignment by the
Purchaser in furtherance of this Section 4.9 consistent with the terms and
provisions of this Agreement.
ARTICLE III
CONDITIONS OF PURCHASES
Section 5.1 Conditions Precedent to Effectiveness of Agreement.
The effectiveness of this Agreement is subject to the condition
precedent that the Purchaser and the Servicer shall have received on or before
the Closing Date the following, in form and substance satisfactory to the
Purchaser and the Servicer:
(a) With respect to the Seller:
(i) the certificate or articles of incorporation of the Seller
certified, as of a date no more than ten days prior to the Closing Date, by
the Secretary of State of its state of incorporation;
(ii) a Good Standing Certificate, dated no more than ten days prior to
the Closing Date, from the respective Secretary of State of its state of
incorporation and each state in which the Seller is required to qualify to
do business;
(iii) a certificate of the Secretary or Assistant Secretary of the
Seller (on which certificate the Servicer and the Purchaser may
conclusively rely until such time as the Servicer shall receive from the
Seller a revised certificate meeting the requirements of this subsection)
certifying as of the Closing Date: (A) the names and true signatures of the
officers authorized on its behalf to sign this Agreement and the Related
Documents, (B) a copy of the Seller's by-laws or code of regulations, and
(C) a copy of the resolutions of the board of directors of the Seller
approving this Agreement, the Related Documents and the transactions
contemplated thereby;
(iv) an Officer's Certificate in the form of Exhibit D hereto;
(v) certified copies of Requests for Information or Copies (Form
UCC-11) (or a similar search report certified by a party acceptable to the
Purchaser), dated a date no
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more than ten days prior to the Closing Date listing all effective
financing statements which name the Seller (under its present name and any
previous name) as debtor, together with copies of such financing
statements, and searches of applicable federal and state court and agency
dockets and lien records showing all judgment liens affecting the Seller or
the Eligible Receivables and tax liens; and
(vi) acknowledgment copies of proper financing statements (Form
UCC-3), if any, necessary to release all security interests and other
rights of any Person in Purchased Receivables previously granted by the
Seller including, without limitation, all such releases specified by the
Seller prior to the date hereof;
(b) Consents required by, or of, any Person or Governmental Authority,
if any, to the closing of the transactions contemplated hereby, in form and
substance satisfactory to the Purchaser;
(c) Acknowledgment copies of proper financing statements (Form UCC-1),
duly filed, in respect of Purchased Receivables, naming the Seller as the
assignor and the Purchaser as the assignee or other, similar instruments or
documents, as may be necessary or, in the opinion of the Purchaser or the
Servicer, desirable under the UCC of all appropriate jurisdictions or any
comparable law to perfect the Purchaser's ownership interests in all Purchased
Receivables in which an interest may be assigned hereunder;
(d) Fully executed copies of the Lockbox Account Agreement;
(e) The favorable opinion of counsel to the Seller substantially in
the form attached hereto as Exhibit E;
(f) Such other approvals, opinions, documents and instruments, as the
Purchaser or the Servicer may reasonably request;
(g) The Seller shall have paid such closing costs as have previously
been agreed with the Purchaser; and
(h) The Seller shall have sent each Eligible Payor a notice
substantially in the form of Exhibit A.
Section 5.2 Conditions Precedent to All Purchases.
Each Purchase (including the initial Purchase) from the Seller by the
Purchaser shall be subject to the further conditions precedent that:
(a) The representations and warranties of the Seller set forth in
Sections 6.1 and 6.2 are true and correct on and as of such date, before and
after giving effect to such Purchase and to the application of the proceeds
therefrom, as though made on and as of such date;
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(b) No event has occurred, or would result from such Purchase or from
the application of the proceeds therefrom, which constitutes an Event of Seller
Default or would constitute an Event of Seller Default, but for the requirement
that notice be given or time elapse or both;
(c) The Seller is in compliance with each of its covenants set forth
herein;
(d) The Termination Date shall not have occurred;
(e) Each Receivable submitted by the Seller for purchase is an
Eligible Receivable; and
(f) The Seller shall have taken such other action, including delivery
of approvals, opinions or documents to the Purchaser, as the Purchaser may
reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLER
Section 6.1 Representations and Warranties as to the Seller.
The Seller (in its capacities as Seller and Subservicer hereunder)
represents and warrants to the Purchaser and the Servicer, as of the date hereof
and on each subsequent Purchase Date, as follows:
(a) The Seller is a corporation duly organized, validly existing and
in good standing under the laws of its state of incorporation and is duly
qualified to do business, and is in good standing in each jurisdiction in which
the nature of its business requires it to be so qualified;
(b) The Seller has the power and authority to own and convey all of
its properties and assets and to execute and deliver, this Agreement and the
Related Documents and to perform the transactions contemplated hereby and
thereby;
(c) The execution, delivery and performance by the Seller of this
Agreement and the Related Documents, and the transactions contemplated thereby,
(i) have been duly authorized by all necessary corporate or other action on the
part of the Seller, (ii) do not contravene or cause the Seller to be in default
under (A) the Seller's certificate or articles of incorporation or by-laws or
code of regulations, (B) any contractual restriction contained in any indenture,
loan or credit agreement, lease, mortgage, security agreement, bond, note, or
other agreement or instrument binding on or affecting the Seller or its property
or (C) any law, rule, regulation, order, writ, judgment, award, injunction, or
decree applicable to, binding on or affecting the Seller or its property and
(iii) do not result in or require the creation of any Adverse Claim upon or with
respect to any of the property of the Seller (other than in favor of the
Purchaser as contemplated hereunder);
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(d) This Agreement and the Related Documents have each been duly
executed and delivered on behalf of the Seller and each is the legal, valid and
binding obligation of the Seller enforceable against the Seller in accordance
with its terms;
(e) No consent of, or other action by, and no notice to or filing
with, any Governmental Authority or any other party, is required for the due
execution, delivery and performance by the Seller of this Agreement or any of
the Related Documents or for the perfection of or the exercise by the Purchaser
or the Servicer of any of their rights or remedies thereunder;
(f) There is no pending or threatened action, suit or proceeding, of a
material nature against or affecting the Seller, its officers or directors, or
the property of the Seller, in any court or tribunal, or before any arbitrator
of any kind or before or by any Governmental Authority (i) asserting the
invalidity of this Agreement or any of the Related Documents, (ii) seeking to
prevent the sale and assignment of any Receivable or the consummation of any of
the transactions contemplated thereby, (iii) seeking any determination or ruling
that might materially and adversely affect (A) the performance by the Seller or
the Subservicer of its obligations under this Agreement or any of the Related
Documents, (B) the validity or enforceability of this Agreement or any of the
Related Documents, (C) the Receivables or the Contracts or (D) the federal
income tax attributes of the Purchases, or (iv) asserting a claim for payment of
money in excess of $50,000 (other than such judgments or orders in respect of
which adequate insurance is maintained by the Seller for the payment thereof);
(g) No injunction, bankruptcy petition, writ, restraining order or
other order of any material nature adverse to the Seller or the conduct of its
business or which is inconsistent with the due consummation of the transactions
contemplated by this Agreement has been issued by or filed with a Governmental
Authority;
(h) The Seller has complied in all material respects with all
applicable laws, rules, regulations, and orders with respect to it, its business
and properties and all Receivables and related Contracts (including without
limitation, all applicable environmental, health and safety requirements) and
all restrictions contained in any indenture, loan or credit agreement, mortgage,
security agreement, bond, note, or other agreement or instrument binding on or
affecting the Seller or its property, and has and maintains all permits,
licenses, authorizations, registrations, approvals and consents of Governmental
Authorities, and all certificates of need for the construction or expansion of
or investment in health care facilities, all Health Facility Licenses,
Accreditations, Medicaid Certifications and Medicare Certifications necessary
for the activities and business of the Seller and each of its Subsidiaries as
currently conducted and as proposed to be conducted, the ownership, use,
operation and maintenance by each of them of its properties, facilities and
assets and the performance by the Seller of this Agreement and the related
Documents (hereinafter referred to collectively as "Governmental Consents");
(i) Without limiting the generality of the prior representation: (A)
each Health Facility License, Medicaid Certification, Medicare Certification,
Medicaid Provider Agreement, Medicare Provider Agreement and each of the Blue
Cross/Blue Shield Contracts of
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the Seller and each of its Subsidiaries is in full force and effect and has not
been amended or otherwise modified, rescinded or revoked or assigned, (B) the
Seller and each Subsidiary is in compliance with the requirements of Medicaid,
Medicare, CHAMPUS and related programs, and the Blue Cross/Blue Shield
Contracts, and (C) no condition exists or event has occurred which, in itself or
with the giving of notice or lapse of time or both, would result in the
suspension, revocation, impairment, forfeiture, non-renewal of any Governmental
Consent applicable to the Seller or any other health care facility owned or
operated by the Seller or any of its Subsidiaries, or such facility's
participation in any Medicaid, Medicare, CHAMPUS or other similar program, or of
any Blue Cross/Blue Shield Contracts and there is no claim that any such
Governmental Consent, participation or contract is not in full force and effect;
(j) The Seller has filed on a timely basis all tax returns (federal,
state, and local) required to be filed and has paid or made adequate provisions
for the payment of all taxes, assessments, and other governmental charges due
from the Seller;
(k) The primary business of the Seller is the provision of health care
services and/or equipment. The Payors' related provider numbers set forth on
Schedule 3 have been issued to the Seller and Schedule 3 is a true and complete
list of all provider numbers assigned by Payors to the Seller or its
Subsidiaries;
(l) The Seller is not required to prepare and submit Medicaid and
Medicare cost reports of each facility and of the home office of the Seller (A)
as to Medicaid, to the state agency, or other HCFA-designated agents or agents
of such state agency, charged with such responsibility or (B) as to Medicare, to
the Medicare intermediary or other HCFA-designated agents charged with such
responsibility. In the event the Seller is required to prepare and submit
Medicaid and Medicare cost reports to the appropriate agencies, the Seller
hereby represents and warrants that it will prepare and submit such reports to
such agencies on a timely basis and notify the Purchaser and the Servicer of
such requirement;
(m) All information heretofore or hereafter furnished by or on behalf
of the Seller to the Servicer or the Purchaser in connection with this Agreement
or any transaction contemplated hereby is and will be true and complete in all
material respects and does not and will not omit to state a material fact
necessary to make the statements contained therein not misleading;
(n) With respect to the Seller or any of its Subsidiaries, there has
occurred no event which has or is reasonably likely to have a material adverse
effect on the Seller's financial condition, business or operations, including
its ability to perform its obligations under this Agreement;
(o) The Seller is solvent and will not become insolvent after giving
effect to the transactions contemplated by this Agreement; the Seller has not
incurred Debts beyond its ability to pay; the Seller, after giving effect to the
transactions contemplated by this Agreement, will have an adequate amount of
capital to conduct its business in the foreseeable future; and the sales of
Purchased Receivables hereunder are made in good faith and without intent to
hinder, delay or defraud present or future creditors of the Seller;
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(p) The consolidated balance sheets of the Seller's indirect parent,
Coastal Physician Group, Inc., and its consolidated Subsidiaries as at December
31, 1995, and the related statements of income and shareholders' equity of
Coastal Physician Group, Inc. and its consolidated Subsidiaries of the fiscal
year then ended, prepared by KPMG Peat Marwick, independent certified public
accountant(s), copies of which have been furnished to the Purchaser and
Servicer, fairly present the consolidated financial condition, business and
operations of Coastal Physician Group, Inc. and its consolidated Subsidiaries as
at such date and the consolidated results of the operations of Coastal Physician
Group, Inc. and its consolidated Subsidiaries for the period ended on such date,
all in accordance with generally accepted accounting principles consistently
applied;
(q) The Medicare Lockbox Account and the Commercial Lockbox Account
are the only lockbox accounts maintained by the Seller and each Payor of an
Eligible Receivable has been directed upon its receipt of the notice attached as
Exhibit A hereto, which notice was mailed on the Closing Date, and is required
to, remit all payments with respect to such Receivable for deposit in the
Commercial Lockbox Account (other than the Payors of Medicaid, Medicare and
CHAMPUS Receivables which have been directed to remit all payments with respect
to such Receivables for deposit in the Medicare Lockbox Account);
(r) The principal place of business and chief executive office of the
Seller are located at the address of the Seller set forth under its signature
below and there are now no, and during the past four months there have not been,
any other locations where the Seller is located (as that term is used in the
UCC) or keeps Records except as set forth in the designated space beneath its
signature line in this Agreement;
(s) The legal name of the Seller is as set forth at the beginning of
this Agreement and except as set forth in the designated space beneath its
signature line in this Agreement the Seller has not changed its name in the last
six years, and during such period, the Seller did not use, nor does the Seller
now use any tradenames, fictitious names, assumed names or "doing business as"
names;
(t) The Receivables of the Seller have been and will continue to be
adjusted to reflect reimbursement policies of the Payors with respect thereto;
in particular, the Eligible Receivable Amounts of Receivables relating to such
Payors do not and shall not exceed amounts the Seller is entitled to receive
under any capitation arrangement, fee schedule, discount formula, cost-based
reimbursement, or other adjustment or limitation to the usual charges of the
Seller;
(u) No Payor of an Eligible Receivable being sold on any Purchase Date
has any claim of a material nature against or affecting the Seller or the
property of the Seller;
(v) The Seller has not done and shall not do anything to impede or
interfere with the collection by the Purchaser of the Purchased Receivables and
shall not amend, waive or otherwise permit or agree to any deviation from the
terms or conditions of any Purchased Receivable or any related Contract;
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(w) The Seller has made and will continue to make all payments to
Payors necessary to prevent any Payor from offsetting any earlier overpayment to
the Seller against any amounts such Payor owes on a Purchased Receivable;
(x) Each Purchase Notice contains a complete and accurate list of all
Eligible Receivables of the Seller as of its date;
(y) For federal income tax reporting and accounting purposes, the
Seller will treat the sale of each Purchased Receivable pursuant to this
Agreement as a sale of, or absolute assignment of its full right, title and
ownership interest in, such Purchased Receivable to the Purchaser and the Seller
has not in any other manner accounted for or treated the transactions in
Purchased Receivables by the Seller contemplated hereby;
(z) This Agreement constitutes a valid transfer, assignment, set-over
and conveyance to the Purchaser of all right, title and interest of the Seller
in and to the Purchased Receivables now existing and hereafter created;
(aa) The Seller has valid business reasons for selling its interests
in the Purchased Receivables rather than obtaining a loan with the Purchased
Receivables as collateral; and
(bb) As of the date first above written, the Seller operates the
facilities included on Schedule 4 hereto. The Seller is not doing business under
any name other than those listed on `Schedule 4 hereto. Further, one or more but
no more than those names listed on Schedule 4 hereto are payees on the checks
received from Eligible Payors.
Section 6.2 Representations and Warranties of the Seller as to
Purchased Receivables.
With respect to each Purchased Receivable sold pursuant to this
Agreement (including, without limitation, claims which may be satisfied by
set-off of any amounts due under any Receivable), the Seller represents and
warrants, as of the date hereof and on each subsequent Purchase Date, as
follows:
(a) Such Receivable is the primary liability of an Eligible Payor and
is recognized by the Eligible Payor as its primary liability;
(b) The Required Information contained in the Purchase Notice is true
and correct;
(c) Such Receivable is not a Defaulted Receivable and has not become a
Paid Receivable;
(d) The Seller has submitted all necessary documentation and supplied
all necessary information for payment of such Receivable to the Payor and has
fulfilled all of its
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other obligations, in respect thereof, including verification of the eligibility
of the Receivable for payment by such Payor;
(e) Neither the Receivable nor the related Contract has been
satisfied, subordinated or rescinded, or except as disclosed in writing to the
Purchaser, amended in any manner;
(f) The Eligible Receivable Amount set forth in the applicable
Required Information of such Receivable is net of any Contractual Allowance or
other modifications and neither the Receivable nor the related Contract has or
will be compromised, adjusted, extended, satisfied, subordinated, rescinded,
set-off or modified by the Seller or Payor, and is not nor will be subject to
compromise, adjustment, extension, satisfaction, subordination, rescission,
set-off, counterclaim, defense, abatement, suspension, deferment, deductible,
reduction, termination or modification, whether arising out of transactions
concerning the Contract or otherwise;
(g) Such Receivable is an account receivable created through the
provision of medically necessary services or merchandise supplied by the Seller
in the ordinary course of its business and the sales prices of such services or
merchandise were usual, customary and reasonable in the Seller's community for
such services;
(h) Such Receivable is an "account" within the meaning of the UCC and
is not evidenced by an "instrument" within the meaning of the UCC;
(i) Such Receivable has a Net Value which, when added to the Net Value
of all other Receivables of such Payor or in such Payor Class and which
constitute Purchased Receivables hereunder, does not exceed the Concentration
Limits;
(j) Such Receivable (A) has a Purchase Date no later than 150 days
from its Billing Date, (B) with respect to all Purchases following the initial
Purchase, the claim with respect to the related Receivable must be submitted to
the related Payor no later than 30 days after the Discharge Date of the patient
to whom the health care services giving rise to the Receivable were rendered and
(C) is not past the statutory limit for collection applicable to the Payor;
(k) The related Contract is, and was at the time of the services
giving rise to the Receivable, in full force and effect and constitutes the
legal, valid and binding obligation of the Payor enforceable against such Payor
in accordance with its terms, such Receivable was created in accordance with the
requirements of the Contract and applicable law, including, without limitation,
to the extent the Receivable is subject to limitations imposed by workers'
compensation law or a related Contract and is entitled to be paid pursuant to
the terms of the related Contract, and a copy of any related Contract to which
the Seller is a party has been delivered to the Purchaser, the amount of the
Eligible Receivable does not exceed the limitations so imposed, and each
Receivable to which the fees are so restricted has been clearly identified as
being subject to such restrictions;
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(l) Such Receivable is denominated and payable in Dollars of the
United States and the Eligible Receivable Amount of such Receivable is not in
excess of $150,000;
(m) Such Receivable is owned by the Seller free and clear of any
Adverse Claim, and the Seller has the right to sell, assign and transfer the
same and interests therein as contemplated under this Agreement and, upon such
sale, the Purchaser has acquired a valid ownership interest in such Receivable,
free and clear of any Adverse Claim;
(n) No consent from the Payor or any other Person shall be required to
effect the sale of any Purchased Receivables;
(o) There are no procedures or investigations pending or threatened
before any Governmental Authority (i) asserting the invalidity of such
Receivable or such Contract, (ii) asserting the bankruptcy or insolvency of the
related Payor, (iii) seeking the payment of such Receivable or payment and
performance of such Contract or (iv) seeking any determination or ruling that
might materially and adversely affect the validity or enforceability of such
Receivable or such Contract;
(p) Neither such Receivable nor the related Contract contravenes in
any material respect any laws, rules or regulations applicable thereto
(including, without limitation, laws, rules and regulations relating to usury,
consumer protection, truth in lending, fair credit billing, fair credit
reporting, equal credit opportunity, fair debt collection practices and privacy)
and no party to such related Contract is in violation of any such law, rule or
regulation in any material respect;
(q) Such Receivable complies with such additional criteria and
requirements (other than those relating to the collectibility of such
Receivables) as the Purchaser may from time to time specify to the Seller
following 30 days' notice;
(r) The Seller has no knowledge of any fact which should have led it
to expect at the time of sale of such Receivable to the Purchaser that the
Eligible Receivable Amount of such Receivable would not be paid in full.
The parties acknowledge that some of the foregoing representations and
warranties may have been made only to the best of the Seller's knowledge.
Nevertheless, notwithstanding the Seller's lack of knowledge with respect to an
inaccuracy of a representation and warranty, the parties agree that any such
inaccuracy shall be deemed a breach of the applicable representation or
warranty.
Section 6.3 Repurchase Obligations.
Upon discovery by any party hereto of a breach of any representation
or warranty in this Article IV which materially and adversely affects the value
of a Purchased Receivable or the interests of the Purchaser therein, the party
discovering such breach shall give prompt written notice to the other parties
hereto. Thereafter, on the next Purchase Date, the Purchase Price for new
Purchased Receivables, to the extent sufficient, shall be offset by the Net
Value of such
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Receivable or the Seller shall, prior to the succeeding Determination Date,
remit to the Purchaser the Net Value of such Receivable or the Purchaser shall
offset the Net Value of such Receivable from other amounts due to the Seller
hereunder. Such amount shall be deemed to be Collections of such Receivable
(each such Receivable, a "Rejected Receivable") received and shall be deposited
in the Collection Account. It is understood and agreed that the obligation of
the Seller with respect to any Rejected Receivable pursuant to this Section 6.3
shall constitute the sole remedy for the breach of any representation or
warranty in respect of such Receivable; provided, that the foregoing limitation
shall not be construed to limit in any manner the Purchaser's right to (a) in
the event the Seller fails to effect a repurchase as set forth herein above
offset against any amounts it owes the Seller under this Agreement (including
any Purchase Price), the Net Value of such Rejected Receivable; or (b) declare
the Termination Date to have occurred or to terminate the responsibilities of
the Subservicer hereunder to the extent that such breaches also constitute an
Event of Seller Default. Except as set forth in this Section 6.3, the Seller
shall have no right to repurchase or remit funds with respect to any Purchased
Receivable.
ARTICLE V
GENERAL COVENANTS OF THE SELLER
Section 7.1 Affirmative Covenants of the Seller.
The Seller shall, unless the Purchaser shall otherwise consent in
writing:
(a) Comply in all material respects with all applicable laws, rules,
regulations and orders with respect to it, its business and properties and all
Receivables, related Contracts and Collections with respect thereto;
(b) Preserve and maintain its corporate existence, rights, franchises
and privileges in the jurisdiction of its incorporation and continue to operate
its business in the manner set forth in Section 6.1(a);
(c) Cause to be delivered to the Purchaser on or before May 2 of each
year beginning with May 2, 1999, (i) an Officer's Certificate of the Seller in
the form of Exhibit D, dated the date of such delivery; and (ii) an opinion of
counsel, in form and substance satisfactory to the Purchaser, reaffirming as of
the date of its delivery of the opinion of counsel which the Seller delivered to
the Purchaser and the Servicer on the Closing Date pursuant to Section 5.1(e);
(d) Deposit all Collections received in respect of Purchased
Receivables into the appropriate Lockbox Account within one Business Day of
receipt; and
(e) Make all payments to any Payors necessary to prevent the Payor
from offsetting a prior overpayment to the Seller against any amount the Payor
owes on a Purchased Receivable.
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(f) Timely, pay the Program Fee and all amounts due to the Purchaser
under Sections 2.3, 4.3, 9.1(a) and (b), and 10.4 of this Agreement.
Section 7.2 Reporting Requirements of the Seller.
The Seller shall furnish, or cause to be furnished, to the Purchaser:
(a) As soon as available and in any event within 45 days after the end
of each of the first three quarters of its fiscal year a consolidated and
consolidating financial statement of the Seller and its consolidated
Subsidiaries, if any, as of the end of such quarter, for the period commencing
at the end of the previous fiscal year and ending with the end of such quarter,
certified by the chief financial officer or chief accounting officer of the
Seller;
(b) As soon as available and in any event within 120 days after the
end of its fiscal year, a copy of the consolidated and consolidating financial
statement of the Seller and its consolidated Subsidiaries, if any, as of the end
of such year and the related consolidated statements of income and retained
earnings, and of cash flow, of the Seller and its consolidated Subsidiaries, if
any, for such year, in each case audited by a firm of independent public
accountants acceptable to the Servicer;
(c) Promptly after the sending or filing thereof, copies of all
reports which the Seller files with any Governmental Authority as they relate to
the Seller's Receivables or sends to any of its security holders and a copy of
the annual report (if any) of the Seller;
(d) As soon as possible and in any event within five days after the
occurrence of an Event of Seller Default (including without limitation a
material adverse change in the financial condition of the Seller as determined
by the Servicer) or each event which, with the giving of notice or lapse of time
or both, would constitute an Event of Seller Default, the statement of the chief
executive officer of the Seller setting forth complete details of such Event of
Seller Default and the action which the Seller has taken, is taking and proposes
to take with respect thereto; and
(e) Promptly, from time to time, such other information, documents,
records or reports respecting the Receivables or the Contracts or the condition
or operations, financial or otherwise, of the Seller, or the Seller or any of
its Subsidiaries, if any, as the Purchaser may, from time to time, reasonably
request.
Section 7.3 Negative Covenants of the Seller.
The Seller shall not, without the written consent of the Purchaser and
the Servicer:
(a) Sell, assign (by operation of law or otherwise) or otherwise
dispose of, or create or suffer to exist any Adverse Claim upon or with respect
to, any Receivable or related Contract with respect thereto, or, upon or with
respect to the Lockbox Account, the Seller Credit Reserve Account, the Offset
Reserve Account, the Collection Account, or any other account in
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which any Collections of any Receivable are deposited, or assign any right to
receive income in respect of any Purchased Receivable;
(b) Extend, amend or otherwise modify the terms of any Purchased
Receivable, or amend, modify or waive any term or condition of any Contract
related thereto or in any manner impede or interfere with the collection of such
Purchased Receivable;
(c) Make any material change in the character of its business;
(d) Make any change in its instructions to Payors regarding payments
to be made to the Seller or payments to be deposited to the Lockbox Account;
(e) Be the subject of or have the Person(s) controlling, directly or
indirectly, the Seller be the subject of a merger or merge with or into or
consolidate with or into, or convey, transfer, lease or otherwise dispose of all
or substantially all of its assets (whether now owned or hereafter acquired), or
acquire all or substantially all of the assets or capital stock or other
ownership interest of, any Person;
(f) Make any change to (i) the location of its chief executive office
or the location of the office where Records are kept or (ii) its corporate name
or use any tradenames, fictitious names, assumed names or "doing business as"
names; or
(g) Prepare any financial statements which shall account for the
transactions contemplated hereby in any manner other than as a sale of the
Purchased Receivables by the Seller to the Purchaser, and will not in any other
respect account for or treat the transactions contemplated hereby (including but
not limited to, for accounting, tax and reporting purposes) in any manner other
than as a sale of the Purchased Receivables by the Seller to the Purchaser. It
is understood and agreed that the obligation of the Seller to comply with the
covenants set forth in this Section 7.3 shall be subject to the Seller's
obligation to comply with any order or directive of a Governmental Authority of
competent jurisdiction and that compliance with such order or directive shall
not constitute a breach of such covenant; provided, that the foregoing shall not
be construed to limit in any manner the Purchaser's right to declare the
Termination Date to have occurred to the extent that such noncompliance with
such covenant (whether or not resulting from such an order or directive) shall
constitute, or contribute to the determination of, an Event of Seller Default.
ARTICLE VI
ACCOUNTS ADMINISTRATION
Section 8.1 Collection Account.
The Purchaser and the Servicer acknowledge that certain amounts
deposited in the Collection Account may relate to Receivables other than
Purchased Receivables and that such
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amounts continue to be owned by the Seller. All such amounts shall be returned
to the Seller in accordance with Section 8.3.
Section 8.2 Determinations of the Servicer.
On each Determination Date, the Servicer will determine:
(a) the Net Value of all Purchased Receivables as of the prior
Determination Date plus the Net Value of all Purchased Receivables purchased on
the prior Purchase Date (the "Prior Net Value Amount");
(b) the amount of Collections on all Purchased Receivables received
since the prior Determination Date (the "Paid Receivables Amount");
(c) the Net Value of all Purchased Receivables as of the current
Determination Date (the "Current Net Value Amount");
(d) an amount equal to (i) the Prior Net Value Amount minus (ii) the
Paid Receivables Amount minus (iii) the Current Net Value Amount (but not less
than zero) (the "Credit Deficiency"); and
(e) the Net Value of Purchased Receivables which became Rejected
Receivables since the prior Determination Date and which have not been
repurchased or offset in the manner set forth in Section 6.3 or Section 4.7 (the
"Rejected Amount").
The Servicer's determinations of the foregoing amounts shall be conclusive in
the absence of manifest error. The Servicer shall notify the Seller and the
Purchaser of such determinations.
Section 8.3 Distributions from Accounts.
(a) No later than 11:00 a.m. on each Determination Date, following the
determinations set forth in Section 8.2, the Servicer will notify the Trustee of
such determinations and will cause the Trustee to withdraw in the following
priority:
(i) the Paid Receivables Amount from the Collection Account and
deposit such amount in the Purchase Account;
(ii) the Credit Deficiency, if any, from the Seller Credit Reserve
Account and deposit such amount in the Purchase Account;
(iii) the Rejected Amount, if any, from the Collection Account and
deposit it in the Purchase Account; and
(iv) the remaining amount from the Collection Account and pay such
amount by check or wire transfer to the Seller.
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(b) Until the Termination Date on each Purchase Date following the
Purchase on such date, the Servicer shall cause the Trustee to withdraw (i) all
amounts deposited hereunder (net of withdrawals required hereunder) from the
Seller Credit Reserve Account in excess of the Specified Credit Reserve Balance
and (ii) all amounts deposited hereunder (net of withdrawals required hereunder)
from the Offset Reserve Account in excess of the Specified Offset Reserve
Balance and shall pay such amounts by check to the Seller.
Section 8.4 Allocation of Moneys following Termination Date.
(a) Following the Termination Date, the Servicer shall cause the
Trustee to the extent funds deposited hereunder (net of withdrawals required
hereunder) are sufficient, to withdraw an amount equal to the Program Fee from
the Offset Reserve Account on each Purchase Date and deposit it in the Equity
Account.
(b) On the first Determination Date on which the aggregate Net Value
of all Purchased Receivables (other than Defaulted Receivables) (i) is less than
10% of the aggregate Net Value of Purchased Receivables (other than Defaulted
Receivables) on the Termination Date and (ii) is less than the aggregate amounts
deposited hereunder (net of withdrawals required hereunder) and remaining in the
Seller Credit Reserve Account and the Offset Reserve Account, the Servicer shall
cause the Trustee to withdraw an amount equal to such aggregate Net Value from
such accounts and deposit it in the Purchase Account. Thereupon the Servicer
shall cause the Trustee to disburse all remaining amounts held in the Collection
Account, the Seller Credit Reserve Account and the Offset Reserve Account to the
Seller and all interests of the Purchaser in all Purchased Receivables owned by
the Purchaser shall be reconveyed by the Purchaser to the Seller. Following such
disbursement and reconveyance, this Agreement shall be deemed terminated.
Section 8.5 Accounting.
The Servicer shall make all determinations of actual and required
amounts in each of the accounts established pursuant to this Agreement, maintain
detailed accounting records of all deposits and withdrawals for each such
account, including the Seller and the Receivables with respect to which such
deposits and withdrawals were made and notify the Trustee as to such
determinations.
ARTICLE VII
APPOINTMENT OF THE SUBSERVICER
AND SUCCESSOR SERVICER
Section 9.1 Appointment of the Subservicer.
The Servicer and the Purchaser hereby appoint the Seller to act as
Subservicer hereunder. The Subservicer shall service the Purchased Receivables
and enforce the Purchaser's respective rights and interests in and under each
Purchased Receivable and each related Contract
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and shall serve in such capacity, including, in the event the Servicer has
resigned or been terminated, until the termination of its responsibilities
pursuant to Section 9.9, 9.11 or 10.1. The Subservicer hereby agrees to perform
the duties and obligations with respect thereto set forth herein.
Notwithstanding any term or provision hereof to the contrary, the Seller, the
Subservicer and the Purchaser hereby acknowledge and agree that the Servicer
acts as agent hereunder for the Purchaser and has no duties or obligations to,
will incur no liabilities or obligations to, and does not act as an agent in any
capacity for, the Seller or the Subservicer.
Section 9.2 Additional Subservicers.
The Subservicer may, with the prior consent of the Purchaser and the
Servicer, which consent shall not be unreasonably withheld, subcontract with a
subservicer (each such servicer, an "Additional Subservicer") for collection,
servicing or administration of the Receivables, provided, that (a) the
Subservicer shall continue to perform its obligations with respect to
collections of Medicaid Receivables, Medicare Receivables and CHAMPUS
Receivables, (b) the Subservicer shall remain liable for the performance of the
duties and obligations of the Additional Subservicer pursuant to the terms
hereof and (c) any subservicing agreement that may be entered into and any other
transactions or services relating to the Purchased Receivables involving an
Additional Subservicer (each such agreement, an "Additional Subservicing
Agreement") shall be deemed to be between the Additional Subservicer and the
Subservicer alone and the Purchaser and Servicer shall not be deemed parties
thereto and shall have no obligations, duties or liabilities with respect to the
Additional Subservicer.
Section 9.3 Duties and Responsibilities of the Subservicer.
(a) The Subservicer shall conduct the servicing, administration and
collection of the Purchased Receivables and shall take, or cause to be taken,
all such actions as may be necessary or advisable to service, administer and
collect each Purchased Receivable, from time to time, all in accordance with (i)
customary and prudent servicing procedures for health care receivables of a
similar type, and (ii) all applicable laws, rules and regulations.
(b) The duties of the Subservicer shall include, without limitation:
(i) preparation and submission of claims to, and post-billing
liaison with, Eligible Payors;
(ii) arranging for the direct remittance of all Collections on
Purchased Receivables to the Commercial Lockbox Account (other than
Collections with respect to Medicaid Receivables, Medicare Receivables and
CHAMPUS Receivables, in respect of which it shall arrange for the direct
remittance of such Collections to the Medicare Lockbox Account);
(iii) remitting any Collections with respect to Medicaid Receivables,
Medicare Receivables and CHAMPUS Receivables it may receive directly for
deposit in the Medicare Lockbox Account and remitting any Collections on
other Purchased
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Receivables it may receive directly for deposit in the Commercial Lockbox
Account, in each case no later than by the end of the day of receipt or the
following Business Day if the day of receipt is not a Business Day;
(iv) maintaining all necessary Servicing Records with respect to the
Purchased Receivables and promptly delivering such reports to the Purchaser
or the Servicer in respect of the servicing of the Purchased Receivables
(including information relating to its performance under this Agreement) as
may be required hereunder or as the Purchaser or the Servicer may
reasonably request;
(v) maintaining and implementing administrative and operating
procedures (including, without limitation, an ability to recreate Servicing
Records evidencing the Purchased Receivables in the event of the
destruction of the originals thereof) and keeping and maintaining all
documents, books, records and other information reasonably necessary or
advisable for the collection of the Purchased Receivables (including,
without limitation, records adequate to permit the identification of each
new Purchased Receivable and all Collections of and adjustments to each
existing Purchased Receivable);
(vi) identifying each Purchased Receivable clearly and unambiguously
in its Servicing Records to reflect that such Purchased Receivable is owned
by the Purchaser;
(vii) complying in all material respects with all applicable laws,
rules, regulations and orders with respect to it, its business and
properties and all Purchased Receivables and related Contracts and
Collections with respect thereto;
(viii) preserving and maintaining its corporate existence, rights,
franchises and privileges in the jurisdiction of its incorporation, and
qualifying and remaining qualified in good standing as a foreign
corporation and qualifying to and remaining authorized to perform
obligations as Subservicer (including enforcement of collection of
Purchased Receivables on behalf of the Purchaser) in each jurisdiction
where the failure to preserve and maintain such existence, rights,
franchises, privileges and qualification would materially adversely affect
(A) the rights or interests of the Purchaser in the Purchased Receivables,
(B) the collectibility of any Purchased Receivable or (C) the ability of
the Subservicer to perform its obligations hereunder or under the
Contracts;
(ix) any time and from time to time at reasonable intervals upon
notice to the Subservicer and during regular business hours, permitting the
Purchaser, the Servicer or any of their agents or representatives, (A) to
examine and make copies of and abstracts from all Servicing Records, and
(B) to visit the offices and properties of the Subservicer for the purpose
of examining such Servicing Records, and to discuss matters relating to the
Receivables or the Subservicer's performance under this Agreement with any
officer or employee of the Subservicer having knowledge of such matters;
(x) at the request of the Servicer, maintaining at its own expense, a
blanket fidelity bond with broad coverage, with responsible companies
acceptable to the Servicer,
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on all officers, employees or other persons acting on behalf of the
Subservicer in any capacity with regard to the Purchased Receivables,
including those handling funds, money, documents and papers relating to the
Purchased Receivables. Any such fidelity bond shall protect and insure the
Subservicer (and through the Subservicer, the Servicer and the Purchaser)
against losses commonly protected against by bonds of a similar type,
including forgery, theft, embezzlement, fraud, and negligent acts of such
persons and shall be maintained at a level acceptable to the Servicer. No
provision of this Section requiring such fidelity bond shall diminish or
relieve the Subservicer from its duties and obligations as set forth in
this Agreement. Any amounts received under any such bond with respect to
Purchased Receivables shall be deposited by the Subservicer in the
Collection Account and treated in the same manner as Collections with
respect to such Purchased Receivables. Upon request of the Purchaser or the
Servicer, the Subservicer shall cause to be delivered to the Purchaser and
the Servicer a certification evidencing coverage under such fidelity bond.
Promptly upon receipt of any notice from the surety or the insurer that
such fidelity bond has been terminated or modified in a materially adverse
manner, the Subservicer shall notify the Servicer of any such termination
or modification;
(xi) notifying the Purchaser and the Servicer of any action, suit,
proceeding, dispute, offset, deduction, defense or counterclaim that is or
may be asserted by a Payor with respect to any Purchased Receivable; and
(xii) providing the Purchaser and the Servicer with a report on each
Determination Date in the form of Exhibit G.
(c) Notwithstanding anything herein to the contrary, all collection
functions in respect of Medicaid Receivables, Medicare Receivables and CHAMPUS
Receivables shall be performed in accordance with Medicaid Regulations, Medicare
Regulations and
CHAMPUS Regulations.
(d) The Purchaser shall not have any obligation or liability with
respect to any Purchased Receivables or related Contracts, nor shall it be
obligated to perform any of the obligations of the Subservicer hereunder.
Section 9.4 Authorization of the Servicer.
The Seller hereby authorizes the Servicer (including any successors
thereto) to take any and all reasonable steps in its name and on its behalf
necessary or desirable and not inconsistent with the sale of the Purchased
Receivables to the Purchaser, in the determination of the Servicer as the case
may be, to collect all amounts due under any and all Purchased Receivables and
process all Collections and related Remittance Advices within five Business Days
of receipt thereof. Further, the Servicer is authorized, to the extent permitted
under and in compliance with applicable law and regulations, to commence
proceedings with respect to enforcing payment of such Purchased Receivables and
the related Contracts, and adjusting, settling or compromising the account or
payment thereof, to the same extent as the Seller could have done if it had
continued to own such Receivable. The Seller shall furnish the Servicer (and
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any successors thereto) with any powers of attorney and other documents
necessary or appropriate to enable the Servicer to carry out its servicing and
administrative duties hereunder, and shall cooperate with the Servicer to the
fullest extent in order to ensure the collectibility of the Purchased
Receivables. Notwithstanding anything to the contrary contained herein, the
Servicer shall have the absolute and unlimited right to direct the Subservicer
to commence or settle any legal action to enforce collection of any Purchased
Receivable or to foreclose upon, repossess or take any other action which the
Servicer deems necessary or advisable with respect thereto. In no event shall
the Subservicer be entitled to make the Purchaser or the Servicer a party to any
litigation without such party's express prior written consent.
Section 9.5 Subservicing Fee; Subservicing Expenses.
On each Purchase Date, the Subservicer shall be paid a subservicing
fee by the Servicer for its performance as Subservicer hereunder (the
"Subservicing Fee") from the Servicer's own funds in an amount equal to 8.5% of
the Collections, if any, with respect to Purchased Receivables that were
received by the Servicer during the period from the prior Determination Date to
such Determination Date; provided that, if the Seller ceases to be Subservicer
hereunder, the Servicer's obligation to pay the Subservicing Fee shall
terminate. The Servicer shall offset the Subservicing Fee from the
Administrative Fee to be deposited with the Servicer on such Purchase Date. In
the event the Subservicing Fee is greater than the Administrative Fee to be
deposited on such Purchase Date, the Servicer shall pay to the Subservicer an
amount equal to the Net Subservicing Fee for such Purchase Date. The Subservicer
shall be required to pay for all expenses incurred by the Subservicer in
connection with its activities hereunder (including any payments to accountants,
counsel or any other Person) and shall not be entitled to any payment or
reimbursement therefor.
Section 9.6 Annual Statement as to Compliance.
The Subservicer shall deliver to the Purchaser and the Servicer on or
before May 2 of each year beginning with May 2, 1999, an Officer's Certificate
stating, as to each signer thereof, that (a) a review of the activities of the
Subservicer during the preceding calendar year and of performance under this
Agreement has been made under such officer's supervision; (b) to the best of
such officer's knowledge, based on such review, the Subservicer has fulfilled
all its obligations as Subservicer under this Agreement throughout such year,
or, if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officer and the nature and status
thereof.
Section 9.7 Transfer of Servicing Between Subservicer and
Servicer.
(a) Upon determination by the Servicer that greater than 10% of the
Purchased Receivables remain outstanding for greater than 120 days after their
respective Billing Date, the Servicer may immediately give notice to the
Subservicer that the Servicer will assume servicing of such portion of the
Purchased Receivables that remain outstanding for greater than 120 days after
their respective Billing Date. Thereupon, the Servicer shall assume the
servicing responsibilities of Subservicer in respect of such Purchased
Receivables. The Subservicer shall thereupon provide the Servicer with all
information, documents and records (including original
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copies of documents), to the extent required by the Servicer to perform its
duties (including such records stored electronically on computer tapes, magnetic
discs and the like as may be reasonably requested by the Servicer).
(b) Notwithstanding the provisions of the preceding clause (a), the
Subservicer shall maintain ongoing payment records with respect to each
Purchased Receivable serviced by the Servicer.
(c) The Subservicer shall pay all fees and costs of the Servicer in
connection with its duties under this Section 9.7.
Section 9.8 Subservicer Not to Resign.
The Subservicer shall not resign from the obligations and duties
hereby imposed on it except upon determination that (a) the performance of its
duties hereunder has become impermissible under applicable law and (b) there is
no reasonable action which the Subservicer could take to make the performance of
its duties hereunder permissible under applicable law. Any such determination
permitting the resignation of the Subservicer shall be evidenced as to clause
(a) above by an opinion of counsel to such effect delivered to the Purchaser and
the Servicer. No such resignation shall become effective until the Servicer
shall have assumed the responsibilities and obligations of the Subservicer in
accordance with Section 9.9.
Section 9.9 Appointment of the Successor Subservicer.
In connection with the termination of the Subservicer's
responsibilities under this Agreement pursuant to Section 10.1, the Servicer
may, in its discretion, except with respect to Section 10.1(c) in which case the
Servicer shall, (a) succeed to and assume all of the Subservicer's
responsibilities, rights, duties and obligations as Servicer (but not in any
other capacity) under this Agreement except with respect to Medicaid
Receivables, Medicare Receivables and CHAMPUS Receivables or (b) require the
Seller to continue to act as Subservicer for all of its outstanding Purchased
Receivables at the time of the Event of Seller Default.
Section 9.10 Duties of the Subservicer to the Successor Servicer.
At any time following the succession of the Servicer to the
responsibilities of Subservicer under Section 9.9(a):
(a) The Subservicer agrees that it will terminate its activities as
Subservicer hereunder, except its collection functions in respect of Medicaid,
Medicare and CHAMPUS Receivables, in a manner acceptable to the Servicer so as
to facilitate the transfer of servicing to the Servicer including, without
limitation, timely delivery (i) to the Servicer of any funds that were required
to be remitted to the Servicer for deposit in the Collection Account, and (ii)
to the Servicer, at a place selected by the Servicer, of all information,
documents and records (including original copies of documents), to the extent
required by the Servicer to perform its duties under the Agreement (including
such records stored electronically on computer tapes, magnetic discs
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and the like as may be reasonably requested by the Servicer). The Subservicer
shall account for all funds and shall execute and deliver such instruments and
do such other things as may reasonably be required to more fully and definitely
vest and confirm in the Servicer all rights, powers, duties, responsibilities,
obligations and liabilities of the Subservicer.
(b) The Subservicer shall terminate each Additional Subservicing
Agreement that may have been entered into and the Servicer shall not be deemed
to have assumed any of the Subservicer's interest therein or to have replaced
the Subservicer as a party to any such Additional Subservicing Agreement.
(c) Notwithstanding any termination of the Seller as Subservicer
hereunder, the Seller agrees that it will continue to follow the procedures set
forth in Section 9.3(b)(iii) with respect to Collections on Purchased
Receivables.
Section 9.11 Effect of Termination or Resignation.
Any termination or resignation of the Subservicer under this Agreement
shall not affect any claims that the Purchaser or the Servicer may have against
the Subservicer for events or actions taken or not taken by the Subservicer
arising prior to any such termination or resignation.
ARTICLE VIII
EVENTS OF SELLER DEFAULT
Section 10.1 Events of Seller Default.
If any of the following events (each, an "Event of Seller Default")
shall occur and be continuing:
(a) The Seller (either as Seller or Subservicer) shall materially fail
to perform or observe any term, covenant or agreement contained in this
Agreement;
(b) A default shall have occurred and be continuing under any
instrument or agreement evidencing, securing or providing for the issuance of
Debt of the Seller;
(c) The Seller shall generally not pay any of its respective Debts as
such Debts become due, or shall admit in writing its inability to pay its Debts
generally, or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against the Seller seeking to
adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or composition of
it or any of its Debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for relief
or the appointment of a receiver, trustee, custodian or other similar official
for it or for any substantial part of its property, or any of the actions sought
in such proceeding (including, without limitation, the entry of an order for
relief against, or the
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appointment of a receiver, trustee, custodian or other similar official for, it
or for any substantial part of its property) shall occur; or the Seller shall
take any corporate action to authorize any of the actions set forth in this
subsection;
(d) Judgments or orders for the payment of money (other than such
judgments or orders in respect of which adequate insurance is maintained for the
payment thereof) in excess of $100,000 in the aggregate against the Seller or
any of its Affiliates shall remain unpaid, unstayed on appeal, undischarged,
unbonded or undismissed for a period of 30 days or more;
(e) There is a material breach of any of the representations and
warranties of the Seller set forth in Sections 6.1 or 6.2 that has remained
uncured for a period of 30 days;
(f) Any Governmental Authority (including the Internal Revenue Service
or the Pension Benefit Guaranty Corporation) shall file notice of a lien with
regard to any of the assets of the Seller or with regard to the Seller other
than a lien that does not materially adversely affect the financial condition of
the Seller or the Seller's ability to perform as Subservicer and that (1) is
limited by its terms to assets other than Receivables or (2) remains
undischarged for a period of 30 days;
(g) As of the first day of any month, the aggregate Net Value of
Purchased Receivables which became Defaulted Receivables or Rejected Receivables
(other than those with respect to which a withdrawal has previously been made
from the Offset Reserve Account) during the prior three-month period shall
exceed 8% of the average aggregate Net Values of all Purchased Receivables then
owned by the Purchaser (other than Defaulted Receivables) at the end of each of
such three months;
(h) The Servicer shall have reasonably determined that any event which
materially adversely affects the collectibility of the Receivables has occurred,
or that any other event which materially adversely affects the financial
condition of the Seller, the ability of the Seller to collect Purchased
Receivables in its capacity as Subservicer or the ability of the Seller (either
as Seller or Subservicer) to perform hereunder has occurred;
(i) A deterioration has taken place in the quality of servicing of
Purchased Receivables or other Receivables serviced by the Seller (in its
capacity as Subservicer) which the Servicer, in its sole discretion, determines
to be material;
(j) This Agreement shall for any reason cease to evidence the transfer
to the Purchaser (or its assignees or transferees) of the legal and equitable
title to, and ownership of, the Purchased Receivables;
(k) The Lockbox Account Agreement shall have been amended or
terminated without the written consent of the Purchaser and the Servicer;
(l) The amount deposited hereunder (net of withdrawals required
hereunder) in the Seller Credit Reserve Account has remained at less than the
Specified Credit Reserve Balance for fourteen consecutive days;
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(m) The amount deposited hereunder (net of withdrawals required
hereunder) in the Offset Reserve Account has remained at less than the Specified
Offset Reserve Balance for fourteen consecutive days; or
(n) A Principal Amortization Event shall have been declared; then and
in any such event, the Servicer shall, by notice to the Seller and the Purchaser
declare that an Event of Seller Default shall have occurred and, the Termination
Date shall forthwith occur, without demand, protest or further notice of any
kind, all of which are hereby expressly waived by the Seller and the Purchaser
shall make no further Purchases from the Seller. Upon any such declaration or
automatic occurrence, the Purchaser and the Servicer shall have, in addition to
all other rights and remedies under this Agreement, all other rights and
remedies provided under the UCC and other applicable law, which rights shall be
cumulative provided, that, if an event of the kind described in 8.1(c) occurs
with regard to the Seller, an Event of Seller Default shall be deemed to have
occurred automatically.
ARTICLE IX
INDEMNIFICATION
Section 11.1 Indemnities by the Seller.
(a) Without limiting any other rights that the Purchaser, the
Servicer, or any director, officer, employee or agent of either such party (each
an "Indemnified Party") may have hereunder or under applicable law, the Seller
hereby agrees to indemnify each Indemnified Party from and against any and all
claims, losses, liabilities, obligations, damages, penalties, actions,
judgments, suits, and related costs and expenses of any nature whatsoever,
including reasonable attorneys' fees and disbursements (all of the foregoing
being collectively referred to as "Indemnified Amounts") which may be imposed
on, incurred by or asserted against an Indemnified Party in any way arising out
of or relating to any breach of the Seller's obligations (including its
obligations as Subservicer) under this Agreement or the ownership of the
Purchased Receivables or in respect of any Receivable or any Contract,
excluding, however, (i) Indemnified Amounts to the extent resulting from gross
negligence or willful misconduct on the part of such Indemnified Party or (ii)
recourse for unpaid Purchased Receivables. Without limiting or being limited by
the foregoing, the Seller shall pay on demand to each Indemnified Party any and
all amounts necessary to indemnify such Indemnified Party from and against any
and all Indemnified Amounts relating to or resulting from:
(A) reliance on any representation or warranty made or deemed made by
the Seller (or any of its officers) under or in connection with this
Agreement (except with respect to a Purchased Receivable, as to which the
Purchaser's remedies are set forth in Section 6.3), any report or any other
information delivered by the Seller pursuant hereto, which shall have been
incorrect in any material respect when made or deemed made or delivered;
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(B) the failure by the Seller to comply with any term, provision or
covenant contained in this Agreement, or any agreement executed by it in
connection with this Agreement or with any applicable law, rule or
regulation with respect to any Purchased Receivable, the related Contract,
or the nonconformity of any Purchased Receivable or the related Contract
with any such applicable law, rule or regulation; or
(C) the failure to vest and maintain vested in the Purchaser, or to
transfer to the Purchaser, legal and equitable title to and ownership of
the Receivables which are, or are purported to be, Purchased Receivables,
together with all Collections in respect thereof, free and clear of any
Adverse Claim (except as permitted hereunder) whether existing at the time
of the Purchase of such Receivable or at any time thereafter.
(b) Any Indemnified Amounts subject to the indemnification provisions
of this Section shall be paid to the Indemnified Party within five Business Days
following demand therefor, together with interest at the lesser of 12% per annum
or the highest rate permitted by law from the date of demand for such
Indemnified Amount.
Section 11.2 Security Interest.
The Seller hereby grants to the Purchaser a first priority perfected
security interest in the Seller's right, title and interest in, to and under all
of the Seller's Receivables not sold to the Purchaser hereunder, including all
rights to payments under any related Contracts or other agreements with all
Payors, and all the Collections, Records and proceeds thereof, as security for
the timely payment and performance of any and all obligations the Seller or the
Subservicer may owe the Purchaser under Sections 2.3, 4.3, 5.1(f), 9.1(a) and
(b), and 10.4, but excluding recourse for unpaid Purchased Receivables. This
Section 9.2 shall constitute a security agreement under the UCC and any other
applicable law and the Purchaser shall have the rights and remedies of a secured
party thereunder. Such security interest shall be further evidenced by Seller's
execution of appropriate UCC-1 financing statements prepared by and acceptable
to the Purchaser, and such other further assurances that may be reasonably
requested by the Purchaser from time to time.
ARTICLE X
MISCELLANEOUS
Section 12.1 Notices, Etc.
All notices and other communications provided for hereunder shall,
unless otherwise stated herein, shall be in writing and mailed or
telecommunicated, or delivered as to each party hereto, at its address set forth
under its name on the signature pages hereof or at such other address as shall
be designated by such party in a written notice to the other parties hereto. All
such notices and communications shall not be effective until received by the
party to whom such notice or communication is addressed.
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Section 12.2 Remedies.
No failure on the part of the Purchaser or the Servicer to exercise,
and no delay in exercising, any right hereunder or under any Purchase Assignment
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right hereunder preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
Section 12.3 Binding Effect; Assignability.
This Agreement shall be binding upon and inure to the benefit of the
Seller, the Subservicer, the Purchaser, the Servicer and their respective
successors and permitted assigns. Neither the Seller nor the Subservicer may
assign any of their rights and obligations hereunder or any interest herein
without the prior written consent of the Purchaser and the Servicer. The
Purchaser may, at any time, without the consent of the Seller or the
Subservicer, assign any of its rights and obligations hereunder or interest
herein to any Person. Any such assignee may further assign at any time its
rights and obligations hereunder or interests herein without the consent of the
Seller or the Subservicer. Without limiting the generality of the foregoing, the
Seller acknowledges that the Purchaser has assigned its rights hereunder to the
Trustee for the benefit of third parties. This Agreement shall create and
constitute the continuing obligations of the parties hereto in accordance with
its terms, and shall remain in full force and effect until its termination;
provided, that the rights and remedies with respect to any breach of any
representation and warranty made by the Seller or the Servicer pursuant to
Article IV and the indemnification and payment provisions of Article IX shall be
continuing and shall survive any termination of this Agreement.
Section 12.4 Costs, Expenses and Taxes.
(a) In addition to the rights of indemnification under Article IX, the
Seller agrees to pay upon demand, all reasonable costs and expenses in
connection with the administration (including periodic auditing, modification
and amendment) of this Agreement, and the other documents to be delivered
hereunder, including, without limitation: (i) the reasonable fees and
out-of-pocket expenses of counsel for the Purchaser or the Servicer with respect
to (A) advising the Purchaser as to its rights and remedies under this Agreement
or (B) the enforcement (whether through negotiations, legal proceedings or
otherwise) of this Agreement, the Purchase Assignment or the other documents to
be delivered hereunder; and (ii) any and all stamp, sales, excise and other
taxes and fees payable or determined to be payable in connection with the
execution, delivery, filing or recording of this Agreement, each Purchase
Assignment or the other agreements and documents to be delivered hereunder, and
agrees to indemnify and save each Indemnified Party from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes and fees.
(b) If the Seller or the Subservicer fails to perform any agreement or
obligation contained herein, the Purchaser may, or may direct the Servicer to,
(but shall not be required to) itself perform, or cause performance of, such
agreement or obligation, and the
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expenses of the Purchaser or the Servicer incurred in connection therewith shall
be payable by the party which has failed to so perform upon the Purchaser's or
the Servicer's demand therefor.
Section 12.5 No Proceedings.
The Seller and the Subservicer each hereby agree that it will not,
directly or indirectly, institute, or cause to be instituted, against the
Purchaser any proceeding of the type referred to in Section 10.1(c) so long as
there shall not have elapsed one year plus one day since the latest maturing
note has been paid in full in cash.
Section 12.6 Amendments; Waivers; Consents.
No modification, amendment or waiver of, or with respect to, any
provision of this Agreement, and all other agreements, instruments and documents
delivered pursuant hereto or thereto, nor consent to any departure by the Seller
or the Subservicer from any of the terms or conditions thereof, shall be
effective unless it shall be in writing and signed by each of the parties
hereto. Any waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No consent to or demand on the Seller or
the Subservicer in any case shall, in itself, entitle it to any other consent or
further notice or demand in similar or other circumstances. This Agreement, the
Related Documents and the documents referred to therein embody the entire
agreement among the Seller, the Subservicer, the Purchaser and the Servicer, and
supersede all prior agreements and understandings relating to the subject
hereof, whether written or oral.
Section 12.7 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF
JURY TRIAL.
(a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAWS PROVISIONS) OF THE STATE
OF OHIO, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE INTERESTS
OF THE PURCHASER IN THE PURCHASED RECEIVABLES OR REMEDIES HEREUNDER OR
THEREUNDER, IN RESPECT THEREOF, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER
THAN THE STATE OF OHIO.
(b) THE SELLER AND THE SUBSERVICER HEREBY SUBMIT TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF OHIO AND THE UNITED STATES DISTRICT
COURT LOCATED IN THE SOUTHERN DISTRICT OF OHIO, AND EACH WAIVES PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE
MADE BY REGISTERED MAIL DIRECTED TO THE ADDRESS SET FORTH ON THE SIGNATURE PAGE
HEREOF AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE DAYS AFTER THE
SAME SHALL HAVE BEEN DEPOSITED IN THE U.S. MAILS, POSTAGE PREPAID. THE SELLER,
AND THE SUBSERVICER EACH HEREBY WAIVES ANY OBJECTION BASED ON FORUM NON
CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER AND
CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED
APPROPRIATE
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BY THE COURT. NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF THE PURCHASER TO
SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF
THE PURCHASER TO BRING ANY ACTION OR PROCEEDING AGAINST THE SELLER OR ITS
PROPERTY, OR THE SUBSERVICER OR ITS PROPERTY IN THE COURTS OF ANY OTHER
JURISDICTION. THE SELLER AND THE SUBSERVICER EACH HEREBY AGREE THAT THE
EXCLUSIVE AND APPROPRIATE FORUMS FOR ANY DISPUTE HEREUNDER ARE THE COURTS OF THE
STATE OF OHIO AND THE UNITED STATES DISTRICT COURT LOCATED IN THE SOUTHERN
DISTRICT OF OHIO AND AGREE NOT TO INSTITUTE ANY ACTION IN ANY OTHER FORUM.
(c) THE SELLER, AND THE SUBSERVICER EACH HEREBY WAIVES ANY RIGHT TO
HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT, OR OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR IN CONNECTION
WITH THIS PURCHASER AGREEMENT. INSTEAD, ANY DISPUTE RESOLVED IN COURT WILL BE
RESOLVED IN A BENCH TRIAL WITHOUT A JURY.
Section 12.8 Execution in Counterparts; Severability.
This Agreement may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original and all of which when
taken together shall constitute one and the same agreement. In case any
provision in or obligation under this Agreement shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining provisions or obligations, or of such provision or obligation in
any other jurisdiction, shall not in any way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
COASTAL GOVERNMENT SERVICES, INC.,
as Seller and as Subservicer
By: ______________________________________
Name: Steven M. Scott, M.D.
Title: Senior Executive Vice President
42
<PAGE>
Address at which the chief executive office is located:
Address: 3104 Croasdaile Drive
Bldg. 100-300
Durham, NC 27705
Attention: Steven M. Scott,M.D.
Phone number: 919-383-0355
Telecopier number: 919-382-3287
Additional locations at which Records are maintained:
I-85 and Guess Road
Durham, NC 27705
2101 Tobacco Road
Durham, NC 27705
Additional names under which, and locations at which,
Seller does business:
_______________________________________________________
_______________________________________________________
_______________________________________________________
NPF VI, INC.
By: __________________________________________________
Name:
Title:
Address: 6125 Memorial Drive
Dublin, OH 43017
Attention: Donald H. Ayers
Phone number: (614) 764-9944
Telecopier number: (614) 764-0602
43
<PAGE>
NATIONAL PREMIER FINANCIAL
SERVICES, INC.
By: __________________________________________________
Name:
Title:
Address: 6125 Memorial Drive
Dublin, OH 43017
Attention: Lance K. Poulsen
Phone number: (614) 764-9944
Telecopier number: (614) 764-0602
44
<PAGE>
SCHEDULE 1
----------
INELIGIBLE MEDICAID STATES
None. This Schedule 1 may be unilaterally amended from time to time by
the Servicer without the consent of any of the other parties hereto.
1-1
<PAGE>
SCHEDULE 2
----------
INELIGIBLE BLUE CROSS/BLUE SHIELD PLANS
2-1
<PAGE>
SCHEDULE 3
----------
SELLER'S PAYOR AND PROVIDER NUMBERS
Name of Seller Provider Numbers
-------------- ----------------
Coastal Government Services, Inc.
3-1
<PAGE>
SCHEDULE 4
----------
LIST OF NAMES UNDER WHICH SELLER IS DOING BUSINESS
AND ADDRESSES AT WHICH SELLER IS DOING BUSINESS
Names Under Which Seller Is Addresses At Which
--------------------------- ------------------
Doing Business and Payee Names Seller Is Doing Business
- ------------------------------ ------------------------
Coastal Government Services, Inc. 3104 Croasdaile Drive
Bldg. 100-300
Durham, NC 27705
(Durham County, NC)
I-85 and Guess Road
Durham, NC 27705
(Durham County, NC)
2101 Tobacco Road
Durham, NC 27705
(Durham County, NC)
4-1
<PAGE>
EXHIBIT A
---------
FORM OF NOTICE TO PAYORS
[Name and Address of Payor]
Dear ________:
[Seller] (the "Seller") has entered into an agreement with NPF VI,
Inc. ("NPF VI") under which certain of the Seller's accounts receivables
("Receivables") of which you are the obligor will be sold, from time to time, to
NPF VI or affiliates of NPF VI. NPF VI or such affiliates may, in turn, from
time to time, pledge such Receivables to Bankers Trust Company, as Trustee for
the benefit of third parties. It is contemplated that the Receivables will
continue to be serviced by the Seller.
The Seller has established a lockbox (the "Lockbox") for collection of
the Receivables. Accordingly, you are hereby instructed to remit all payments on
Receivables of which you are, or have been, the obligor to:
[Lockbox Bank]-Lockbox Account ([name of Seller]) #____________.
[Address of Lockbox Bank]
Payment of such Receivables in this manner will operate to discharge
your obligation with respect thereto (to the extent of such payment), whether or
not ownership has been transferred to NPF VI. Any prior notice of an assignment
of any interest in the Seller's Receivables previously delivered to you is
hereby superseded by this notice and all prior notices of such assignment are
hereby revoked. This notice shall be considered irrevocable absent written
notice otherwise received by you from NPF VI.
Thank you for your cooperation.
Very truly yours,
[SELLER]
By ___________________________________
[Seller]
EIN#____________________
A-1
<PAGE>
EXHIBIT B
---------
LOCKBOX ACCOUNT AGREEMENT
[Varies from Seller to Seller. Both the Medicare Lockbox Account and the
Commercial Lockbox Account must, however, include provisions that:
(1) all Collections in the Lockbox Account shall be remitted directly to
the Collection Account within one Business Day of receipt; and
(2) are otherwise satisfactory to the Purchaser and the
Servicer]
B-1
<PAGE>
EXHIBIT C
---------
FORM OF PURCHASE ASSIGNMENT
THIS PURCHASE ASSIGNMENT, dated as of __________, 199_ between [Seller]
(the "Seller"), NPF VI, Inc. (the "Purchaser") and National Premier Financial
Services, Inc. (the "Servicer").
1. We refer to the Sale and Subservicing Agreement (the "Sale Agreement"),
dated as of ______, 199_ by and among [Seller], as Seller and as Subservicer,
the Purchaser, and the Servicer. All provisions of such Sale Agreement are
incorporated by reference. All capitalized terms shall have the meanings set
forth in the Sale Agreement.
2. The Seller does hereby sell, transfer, assign, set over and convey to
the Purchaser, without recourse, all right, title and interest of the Seller in
and to the Receivables listed on Schedule 1 hereto (each, a "Purchased
Receivable") and the Purchaser does hereby purchase each such Purchased
Receivable.
3. The Seller does hereby certify:
(i) the representations and warranties of the Seller set forth in
Section 6.1 and 6.2 of the Agreement, are true and correct on and as of the
date, hereof, before and after giving effect to the Purchase of the
Purchased Receivables evidenced hereby and to the application of the
proceeds therefrom, as though made on and as of such date;
(ii) no event has occurred, or would result from such Purchase or from
the application of the proceeds therefrom, which constitutes an Event of
Seller Default or would constitute an Event of Seller Default but for the
requirement that notice be given or time elapse or both; and
(iii) the Seller is in compliance with each of its covenants set forth
in the Sale Agreement.
4. The Purchase Price for the Purchased Receivables sold and purchased
hereby is $_______.
C-1
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
[SELLER]
By _______________________________
Name:
Title:
NPF VI, INC.
By ________________________________
Name:
Title:
NATIONAL PREMIER FINANCIAL
SERVICES, INC.
By ________________________________
Name:
Title:
C-2
<PAGE>
EXHIBIT D
---------
FORM OF OFFICER'S CERTIFICATE
FOR THE SELLER
I hereby certify that I am a duly elected [Officer] of [Seller] (in
its capacity as Seller and as Subservicer, the "Seller") with all requisite
knowledge of the matters set forth below, and further certify as follows:
1. There has been no change of the Seller's legal name, identity or
corporate structure within the six month period preceding the execution
date hereof.
2. No proceedings looking toward merger, liquidation, dissolution or
bankruptcy of the Seller are pending or contemplated.
3. There is no litigation pending, or to my knowledge, threatened,
which, if determined adversely to the Seller, would adversely affect (i)
the execution, delivery or enforceability of the Sale and Subservicing
Agreement (the "Sale Agreement"), dated as of _________, 199_ by and among
the Seller, NPF VI, Inc., as Purchaser (the "Purchaser"), and National
Premier Financial Services, Inc., as Servicer (the "Servicer"), or the sale
or servicing of the Receivables as provided therein, and (ii) the
execution, delivery or enforceability of the Lockbox Account Agreement (the
"Lockbox Account Agreement"), dated as of ___, 199_, by and among the
Seller, the Servicer and/or [the lockbox bank].
4. With respect to the Sale Agreement and the Lockbox Account
Agreement, the Seller has complied with all the agreements by which it is
bound and has satisfied all the conditions on its part to be performed or
satisfied prior to the Closing Date.
5. No Event of Seller Default or other event of default in the
performance of any of the Seller's covenants or agreements under the Sale
Agreement or the Lockbox Account Agreement has occurred and is continuing,
nor has an event occurred which with the passage of time or notice or both
would become such an event of default.
6. The Seller is not a party to, or governed by, any contract,
indenture, mortgage, loan agreement, note, lease, deed of trust or other
instrument which restricts the Seller's ability to sell or service health
care receivables or consummate any of the transactions contemplated by the
Sale Agreement.
7. Independent certified public accountants for the Seller will treat
the transfer to the Purchaser of the Seller's interests in the Receivables
as a sale, pursuant to generally accepted accounting principles.
D-1
<PAGE>
8. For tax and reporting purposes, the Seller will treat the transfer
to the Purchaser of the Seller's interests in the Receivables as a sale.
9. The transfer to the Purchaser of the Seller's interests in the
Receivables will be made (a) in good faith and without intent to hinder,
delay, or defraud present or future creditors, and (b) in exchange for
reasonably equivalent value and fair consideration.
10. On the date hereof, the Seller (a) was solvent, and as a result of
the transfer to the Purchaser of the Seller's interests in the Receivables
will not become insolvent; (b) was paying its Debts, if any, as they
matured; (c) neither intended to incur, nor believed that it would incur,
Debts beyond its ability to pay as they mature; and (d) after giving effect
to the transfer to the Purchaser of the Seller's interests in the
Receivables, will have an adequate amount of capital to conduct its
business and anticipates no difficulty in continuing to do so for the
foreseeable future.
11. The Seller has and maintains [if applicable: its status as an
organization exempt from federal taxation under Section 501(c) (3) of the
Internal Revenue Code,] all material permits, licenses, authorizations,
registrations, approvals and consents of Governmental Authorities, and all
certificates of need for the construction or expansion of or investment in
health care facilities, all Health Facility Licenses, Accreditations,
Medicaid Certifications, Medicare Certifications and necessary for (a) the
activities and business of the Seller and each of its Subsidiaries as
currently conducted, (b) the ownership, use, operation and maintenance by
each of them of its respective properties, facilities and assets, and (c)
the performance by the Seller of the Agreement.
12. Without limiting the generality of the foregoing paragraph: (a)
each Health Facility License, the Medicaid Certification, Medicare
Certification, Medicaid Provider Agreement, Medicare Provider Agreement,
and the Blue Cross/Blue Shield Contracts of the Seller and each Subsidiary
are in full force and effect and have not been amended or otherwise
modified, rescinded or revoked or assigned, (b) the Seller and each
Subsidiary are in compliance with the requirements of Medicaid, Medicare,
CHAMPUS and related programs, and Blue Cross/Blue Shield Contracts, and (c)
no condition exists or event has occurred which, in itself or with the
giving of notice or lapse of time or both, would result in the suspension,
revocation, impairment, forfeiture, non-renewal of any Governmental Consent
applicable to the Seller or any other health care facility owned or
operated by the Seller or any Subsidiary, or such facility's participation
in any Medicaid, Medicare, CHAMPUS or other similar program, or of any Blue
Cross/Blue Shield Contract and there is no claim that any such Governmental
Consent, participation or contract is not in full force and effect.
13. No UCC financing statements, federal or state tax liens or
judgments with respect to the Purchased Receivables have been filed nor
shall be filed from and after the date and time of the UCC search results
provided by the Seller in accordance with Section 3.1(a)(v) of the Sale
Agreement.
D-2
<PAGE>
14. The officers listed on the attached schedule are designated as
Servicing Officers with respect to the duties and obligations of the Seller
as Subservicer under the Sale Agreement.
All capitalized terms used herein that are not otherwise defined shall
have the respective meanings ascribed thereto in the Agreement.
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the
seal of the Seller this ___ day of _______, 199_.
By ________________________________
Name:
Title:
D-3
<PAGE>
SCHEDULE OF SERVICING OFFICERS
Name Signature
---- ---------
________________________________ ________________________________
________________________________ ________________________________
________________________________ ________________________________
________________________________ ________________________________
D-4
<PAGE>
EXHIBIT E
---------
FORM OF OPINION OF COUNSEL FOR THE SELLER
[Closing Date]
NPF VI, Inc.
6125 Memorial Drive
Dublin, Ohio 43017
National Premier Financial Services, Inc.
6125 Memorial Drive
Dublin, Ohio 43017
Re: NPF VI, Inc. - Sale and Subservicing Agreement
Gentlemen and Ladies:
We have acted as legal counsel to ________________________ _________
(the "Seller") in connection with the transactions contemplated by that certain
Sale and Subservicing Agreement (the "Sale Agreement"), dated as of
________________, 1994, by and among the Seller, NPF VI, Inc., an Ohio
corporation (the "Purchaser") and National Premier Financial Services, Inc. (the
"Servicer"). All references herein to the Seller shall refer to the Seller in
its capacity as both Seller and Subservicer under the Sale Agreement. This
opinion is being delivered at the Seller's request pursuant to Section 5.1(e) of
the Sale Agreement.
Capitalized terms used and not otherwise defined herein shall have the
meanings ascribed thereto in the Sale Agreement.
In this connection, we have examined the following:
i) An executed copy of the Sale Agreement and all exhibits and
attachments thereto;
ii) An executed copy of the Lockbox Account Agreement and all
exhibits and attachments thereto;
iii) The form of Purchase Assignment and the form of Repurchase
Assignment;
iv) Copies of the UCC-1 financing statements executed by the Seller
as assignor/debtor and naming the Purchaser as assignee/secured
party relating to the Purchased Receivables (the "Financing
Statements"), copies of which are attached hereto as Annex 1;
E-1
<PAGE>
v) The results of the searches (the "Searches") conducted by the
Secretary of State of ______________________1 [and the County
Recorder, ________ County, _________, as of _____________,
1994]2, certified by such filing offices on Form UCC-11, as to
financing statements on Form UCC-1 on file with such offices and
naming the Seller as a "debtor" as of such date, copies of which
are attached hereto as Annex 2A;
vi) [Add if applicable] [Executed copies of appropriate releases of
all outstanding financing statements relating to security
interests in accounts of the Seller in favor of third parties
which are reflected on the Searches and which shall be released
at closing] (the "Releases") copies of which are attached hereto
as Annex 2B; and
vii) Such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
The Sale Agreement, the Lockbox Account Agreement the Purchase Assignments and
the Repurchase Assignments are hereinafter collectively referred to as the
"Agreements".
As to various questions of fact material to our opinions set forth
below we have relied upon certificates of officers of the Seller, copies of
which are attached hereto as Annex 3. Nothing has come to our attention in the
course of our representation of the Seller which leads us to believe that any
representations set forth in any of the foregoing certificates are inaccurate or
incomplete in any material respect.
In connection with the opinions set forth below we have assumed, with
your agreement, that each party to the Agreements other than the Seller has
executed and delivered such Agreements and has the corporate power and authority
to enter into and perform its obligations thereunder, and that the execution,
delivery and performance of each Agreement by each party thereto other than the
Seller will not breach, contravene, conflict with, or constitute a violation of
any provision of the articles of incorporation or bylaws or other organizational
documents of such party, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which such party is bound or to which any of
its property or assets is subject, or constitute a violation of any law,
statute, rule, regulation, order, writ, judgment, award, injunction or decree of
any Governmental Authority as to any such party.
In connection with the opinions set forth below which deal with the
perfection and priority of security interests, we have assumed that no financing
statements relating to Seller or
____________________________
1 All references to "State of " in this form of opinion shall refer to
the state of the present location of the Provider.
2 UCC searches certified on form UCC-11 by the appropriate government
officials should be dated within ten (10) days of the closing of the
transaction.
E-2
<PAGE>
the Purchased Receivables have been misindexed or misfiled in the appropriate
filing offices covered by the Searches.
We have also assumed that all documents submitted to us as originals
are complete and authentic, that all copies of documents submitted to us conform
in all respects to the originals thereof, including all amendments or
modifications thereto; and that all signatures of parties, other than those of
the Seller and its authorized officers, to the respective documents are genuine.
We have also assumed that all documents or copies thereof examined by us have
been or will be duly, validly and properly authorized, executed, acknowledged
and delivered by all parties thereto other than the Seller.
As you have agreed, for purposes solely of ascertaining the existence
of security interests perfected by the filing of UCC financing statements, we
have limited our investigation to an examination of the Searches, which indicate
that there are no filed financing statements naming the Seller as debtor and
relating to the Seller's Receivables [,other than those which will be terminated
by the filing of the Releases]. We express no opinion as to the accuracy or
completeness of the Searches.
For purposes of the opinion expressed in the first sentence of
Paragraph 4 below, we have assumed, with your consent, that the description of
"Purchased Receivables" set forth in the Sale Agreement accurately and
completely describes all of the Seller's Purchased Receivables being transferred
to the Purchaser pursuant to the Sale Agreement.
For purposes of the opinions expressed in Paragraphs 5 and 6 below,
with your agreement we have assumed that all transfers of Purchased Receivables
will have occurred in accordance with the terms and conditions set forth in the
Agreements.
In addition to the foregoing, in rendering the opinions set forth
herein we have acted only as attorneys licensed to practice in the State of
____________ and do not hold ourselves out as being knowledgeable as to the laws
of any other jurisdiction. We therefore express no opinions as to the effect of
any laws other than federal laws of the United States of America and the laws of
the State of ________________. In this regard, we note that [- if the Seller is
located in a state other than Ohio -] the Sale Agreement, the Purchase
Assignments, the Repurchase Assignments are governed by the laws of the State of
Ohio and that the Lockbox Account Agreement is governed by the laws of the State
of Ohio. We have assumed, for purposes of issuing this letter, that insofar as
the laws of any such other jurisdiction are applicable to the matters set forth
below, such laws (including applicable conflict of laws provisions) are
identical to and will be interpreted in all respects in the same manner as the
laws of the State of ______________.
On the basis of the foregoing and subject to the limitations,
qualifications and exceptions set forth above, we are of the opinion as of the
date hereof that:
1. The Seller is a [not-for-profit] corporation duly organized and
validly existing under the laws of the State of _______________, is in good
standing under the laws of the State of [state of organization] and is duly
qualified to do business, and is in good standing
E-3
<PAGE>
in each jurisdiction in which it maintains an office and has the corporate power
and authority to own, lease and operate its properties and to conduct its
business as now conducted. The Seller has made all filings with, and has
obtained all necessary or appropriate approvals from federal and State of
______________ Governmental Authorities which are necessary to permit the Seller
to own, lease and operate its properties and to lawfully conduct its business as
presently conducted, and to consummate the transactions contemplated by the Sale
Agreement.
2. The Seller has the corporate power and authority to execute,
deliver and perform each of the Agreements. The execution, delivery and
performance of the Agreements have been duly authorized by all necessary
corporate action of the Seller and each of such Agreements constitutes a legal,
valid and binding obligation of Seller, enforceable against the Seller in
accordance with its terms.
3. The execution and delivery of, and the performance of the
Provider's obligations under, each of the Agreements does not and will not (a)
violate any provision of the Seller's articles of incorporation or bylaws, (b)
violate any statute, law, ordinance, rule or regulation of the United States of
America or the State of binding on the Seller, (c) violate any orders,
judgments, writs or decrees known to us to which the Seller is subject in any
respect, or (d) violate or create a breach or default under any loan agreement,
indenture, note, evidence of indebtedness, mortgage, financing agreement, bond,
debenture or similar agreement or instrument relating to obligations of the
Seller for borrowed money or for the deferred purchase price of property or
services payable more than one year from the date of incurrence thereof or on
demand or relating to obligations of the Seller under capital leases which is
presently in effect and known to us and to which the Seller is a party of its
property is subject.
4. The Purchased Receivables constitute "accounts" and "general
intangibles" within the meaning of the UCC. The Seller is "located" in the State
of ______________ for purposes of Section 9-103(3)(b) of the UCC such that the
laws (including the conflict of law rules) of the State of ____________ govern
the perfection of security interests in accounts and general intangibles of the
Seller and the sale of accounts by the Seller. The transfers of the Purchased
Receivables are "true sales" of the Purchased Receivables to the Purchaser. In
the event, however, that a court of competent jurisdiction were to hold that the
transaction evidenced hereby constitutes a loan and not a purchase and sale,
then the Sale Agreement creates a first priority perfected valid security
interest in favor of the Purchaser.
5. If transfers of the Purchased Receivables from the Seller to the
Purchaser pursuant to the Sale Agreement constitute a "true sale" of the
Purchased Receivables to the Purchaser, the execution and delivery of the Sale
Agreement and the Purchase Assignments in accordance with the Sale Agreement,
and
(i) upon the proper filing of the Financing Statements in the
UCC filing offices of the Secretary of State of
_______________, [and in the UCC filing offices of the
County Recorder of ______________ County,] and
E-4
<PAGE>
(ii) the delivery to the Payors of such Purchased Receivables of
the notices in the form of the notices on Exhibit A to the
Sale Agreement (assuming no prior such notice has been
delivered to any such Payor by any person claiming an
interest in the Purchased Receivables, and we hereby advice
you that we have no knowledge that the Seller has previously
made any such assignment thereof or granted any such lien or
encumbrance thereupon), and
(iii)the execution and delivery of the Purchase Assignments in
accordance with the Sale Agreement (assuming that the Seller
has not previously assigned, for security or otherwise, such
Purchased Receivables or granted any lien or encumbrance in
them, and we hereby advise you that we have no knowledge
that the Seller has previously made any such assignment
thereof or granted any such lien or encumbrance thereupon),
are effective under the laws of the [State or Location of Seller] to vest title
thereto in the Purchaser, and all necessary steps have been taken under the laws
of the State of [location of Seller] to protect the Purchaser's ownership
interest in the Purchased Receivables now existing, and hereafter created,
against creditors of, or subsequent Purchasers from, the Seller, provided that
(x) if the transfers of the Purchased Receivables are deemed to
be subject to Article 9 of the UCC, or previously filed
financing statements, priority may be subject to financing
statements effective as a result of Section 9-401(2) of the
UCC, or
(y) if the Purchased Receivables are deemed to be interests or
claims "in or under any policy of insurance" under 9-104(g)
of the UCC [in English rule states: prior notices to payors
of such policies] [in American rule states: prior sales of
such Purchased Receivables].3
The filing of the Financing Statements in the filing offices identified in
paragraph 5(i) above are the only filings required to be made in the State of
__________ to evidence, provide notice to third parties with respect to, or
otherwise perfect the Purchaser's ownership interest in the Purchased
Receivables under any applicable law of the State of _____________. No other
filings, either in the filing offices identified in paragraph 5(i) or in any
other filing offices in the State of ____________, are required or are advisable
to be made to evidence, provide notice to third parties
______________________________
3 As to assignments of accounts and intangibles, if the UCC is not applicable
because of Section 9-104, most jurisdictions follow either the so-called
"American rule" (which in general provides that the transfer of an interest
therein is made effective by a written assignment, with priority being granted
to the assignment which is first in time) or the so-called "English rule" (which
in general provides that the transfer of an interest therein is only effective
if notice is given to the payor). Counsel should choose one approach or the
other in completing paragraph 5(y) or, if the law in the jurisdiction is
unsettled, counsel may include both as exceptions (i.e., by indicating in
paragraph 5(y) "prior notices to payors of such policies or prior sales of such
Purchased Receivables").
E-5
<PAGE>
with respect to, or otherwise perfect such interests, or to establish the
priority of the Purchaser's interest with respect to such Purchased Receivables.
6. If the transfers of the Purchased Receivables from the Seller to
the Purchaser pursuant to the Sale Agreement and Purchase Assignments do not
constitute a "true sale" of the Purchased Receivables to the Purchaser, the Sale
Agreement and the Purchase Assignments create a valid security interest in favor
of the Purchaser in the Purchased Receivables from time to time transferred to
the Purchaser pursuant to the Sale Agreement and the Purchase Assignments in
accordance with the Sale Agreement, which security interest will constitute
(i) upon the proper filing of the Financing Statements in the
UCC filing offices of the Secretary of State of
_______________, [and in the UCC filing offices of the
County Recorder of ______________ County,] and
(ii) upon the delivery to the Payors of such Purchased
Receivables of the notices in the form of the notices on
Exhibit A to the Sale Agreement (assuming that no prior such
notice has been delivered to any such Payor by any person
claiming an interest in the Purchased Receivables and we
hereby advise you that we have no knowledge that the Seller
has previously delivered any prior notice), and
(iii)upon the execution and delivery of the Purchase Assignments
in accordance with the Sale Agreement (assuming that the
Seller has not previously assigned, for security or
otherwise, such Purchased Receivables or granted any lien or
encumbrance in them, and we hereby advise you that we have
no knowledge that the Seller has previously made any such
assignment thereof or granted any such lien or encumbrance
thereupon),
a security interest (perfected under the UCC and under other appropriate law to
the extent applicable) in the Seller's right, title and interest in and to the
Purchased Receivables and the proceeds thereof now existing, and hereafter
created, prior and senior to all other liens, provided that:
(x) if the granting of a security interest in the Purchased
Receivables is deemed to be subject to Article 9 of the UCC
or previously filed financing statements, priority may be
subject to financing statements effective as a result of
Section 9-401(2) of the UCC, or
(y) if the Purchased Receivables are deemed to be interests or
claims "in or under any policy of insurance" under ss.
9-104(g) of the UCC [in English rule states: prior notices
to payors of such policies]
E-6
<PAGE>
[in American rule states: prior sales of such Purchased
Receivables].
The filing of the Financing Statements in the filing offices identified in
paragraph 6(i) above are the only filings required to be made in the State of
______________ to evidence, provide notice to third parties with respect to, or
otherwise perfect the Purchaser's security interest in the Purchased Receivables
under any applicable law of the State of _____________. No other filings, either
in the filing offices identified in paragraph 6(i) or in any other filing
offices in the State of ______________, are required or are advisable to be made
to evidence, provide notice to third parties with respect to, or otherwise
perfect such interests, or to establish the priority of the Purchaser's interest
with respect to such Purchased Receivables.
7. A State of ____________ court and a federal court sitting in the
State of _____________________ would give effect to the choice of law provisions
of the Agreements, except that such court may apply State of _______________ law
to (a) certain remedial and procedural rights, (b) matters of public policy, (c)
matters pertaining to the perfection and priority of security interests, and (d)
matters as to which Ohio law cannot be proven to such court to be sufficiently
authoritative or certain for such court to rely on it.
8. No consent of, or other action by, and no notice to or filing with,
or licensing by any federal or State of ________ Governmental Authority or any
other party (except for those consents required under Section 5.1 of the Sale
Agreement which have been provided by the Seller to the Purchaser) is required
for the due execution, delivery and performance by the Seller of the Agreements
or any other agreement, document or instrument to be delivered thereunder or for
the perfection of or the exercise by the Seller, the Purchaser or the Servicer
of any of their rights or remedies thereunder. The transactions contemplated by
the Agreements will not cause the Purchaser to be subjected to any obligation to
pay any transfer tax to any Governmental Authority in the State of
_________________, including without limitation any transfer, sales, use, added
value, documentary stamp or other similar transfer tax other than [describe any
such taxes which are applicable].
9. To the best of our knowledge, there are no actions or proceedings
against or affecting the Seller or any of its assets, pending or threatened,
before any Governmental Authority (including, without limitation, any federal or
state court of competent jurisdiction) (i) which seek to affect the
enforceability of the Agreements or the transactions contemplated thereby, or
(ii) which, if determined adversely, would materially and adversely affect the
ability of the Seller to perform its obligations under the Agreements.
Our opinions set forth herein are subject to the following
qualifications and exceptions:
(a) The effect of certain laws governing bankruptcy, reorganization,
fraudulent conveyance, moratorium and insolvency and relating to
or affecting the enforcement of creditors' rights generally,
including, but not limited to, the right to take or retain
personal property encumbered by the Sale Agreement, the Financing
Statements and the Purchase Assignments;
E-7
<PAGE>
(b) The application of general principles of equity (regardless of
whether considered in a proceeding in equity or at law);
(c) Standards of commercial reasonableness and good faith;
(d) In the case of proceeds, perfection of security interests is
limited to the extent set forth in Section 9-306 of the UCC;
(e) Continuation of perfection in any proceeds which are subject
to a security interest or in any after acquired property may, if
such proceeds or after acquired property consist of property of a
type in which a perfected security interest cannot be obtained by
filing a financing statement, require additional compliance with
applicable provisions of the UCC and we express no opinion as to
the perfection, priority an effectiveness of any security
interest in any proceeds of the Purchased Receivables initially
subject to the security interest or after acquired property to
the extent that perfection, priority or effectiveness depends
upon additional compliance with the UCC. Any change (from one
state to another state) in the location of the Seller's place of
business or chief executive offices to a location outside of the
State of ____________, or any change in the name, identity or
corporate structure of the Seller that would make a filed
financing statement seriously misleading, may result in the lapse
of perfection of the security interest to the extent that
perfection is dependent on filing unless new and appropriate
financing statements are filed in a timely manner; and
(f) In the case of collateral (as such term is defined in Article 9
of the UCC) in which a debtor (as such term is defined in Article
9 of the UCC) has no present rights, a security interest will be
created therein only when the debtor acquires rights to such
collateral.4
In addition to the foregoing exceptions, we hereby advise you that,
because a portion of the Purchased Receivables are Medicaid and Medicare
Receivables, in accordance with 42 U.S.C. Sections 1396a(a)(32) (Medicaid) and
1395g(c) (Medicare), the regulations promulgated thereunder and the court
decisions with respect thereto, it is unlikely (i) that payments on Medicaid or
Medicare Receivables will be made to any party other than the Seller to which
they are due or an assignee qualified under such sections and regulations, or
(ii) that payment of the Medicaid or Medicare Receivables sold to the Purchaser
will be directly enforceable by the Purchaser or the Servicer against the
federal government or any agency or
___________________________________
4 [The opinion may also set forth such other exceptions or vary the
foregoing language to the extent that such exceptions or variations are not
materially inconsistent with the protections intended to be afforded by the
foregoing language or are required by the laws of a jurisdiction other than
Ohio, in either case in the sole reasonable judgment of the Servicer, upon
the advice of counsel.]
E-8
<PAGE>
instrumentality thereof, notwithstanding that the Purchaser has obtained title
to or maintains a perfected security interest in such Purchased Receivables;
provided, however, that with respect to both the foregoing clauses (i) and (ii)
we hereby advise you that the Subservicer may collect and enforce payment on
Medicaid and Medicare Receivables on behalf of the Purchaser, its assigns, and
the Servicer, as provided in the Sale Agreement.
Our opinions expressed herein are limited to those matters expressly
set forth herein, and no opinion may be implied or inferred beyond the matters
expressly stated herein. Further, the opinions expressed herein are being
rendered solely in connection with the consummation of the transactions
contemplated by the Agreements to which Seller is a party, and may not be relied
upon for any other purpose.
Our opinions are rendered only as of the date hereof and we assume no
obligation to update or supplement this opinion to reflect any facts or
circumstances that may hereafter occur or to reflect the applicability of any
laws that may affect the transactions contemplated by the Sale Agreement after
the date hereof.
In addition to the foregoing, this letter may not be distributed to,
furnished to or relied upon by any person other than the addressees, the
Trustee, and Duff & Phelps Credit Rating Co. without the express written consent
of this firm, provided, however, that any assignee of the Purchaser pursuant to
the Sale Agreement may likewise rely upon this opinion as if named as an
addressee herein.
Very truly yours,
E-9
<PAGE>
ANNEX 1
-------
TO OPINION OF
-------------
COUNSEL FOR
-----------
THE SELLER
----------
E-10
<PAGE>
ANNEX 2A
--------
TO OPINION OF
-------------
COUNSEL FOR
-----------
THE SELLER
----------
E-11
<PAGE>
ANNEX 2B
--------
TO OPINION OF
-------------
COUNSEL FOR
-----------
THE SELLER
----------
E-12
<PAGE>
ANNEX 3
-------
TO OPINION OF
-------------
COUNSEL FOR
-----------
THE SELLER
----------
E-13
<PAGE>
EXHIBIT F
---------
[FORM OF REPURCHASE ASSIGNMENT]
REPURCHASE ASSIGNMENT, dated as of __________, 199_ between [Seller] (the
"Seller"), NPF VI, Inc. (the "Purchaser"), and National Premier Financial
Services, Inc. (the "Servicer").
We refer to the Sale and Subservicing Agreement (the "Sale Agreement"),
dated as of ___________, 199_, by and among the Seller, as Seller and
Subservicer, the Purchaser, and the Servicer. All provisions of such Agreement
are incorporated by reference. All capitalized terms shall have the meanings set
forth in the Sale Agreement.
Pursuant to Section 6.3 of the Agreement, the Purchaser does hereby sell,
transfer, assign, set over and convey to the Seller, without recourse or
warranty, express or implied, all right, title and interest of the Purchaser in
and to the Receivables listed on Schedule 1 hereto (each, a "Repurchased
Receivable") and the Seller does hereby purchase each such Purchased Receivable.
All liens created by the Purchaser have been released as of the date hereof.
The Purchase Price for each Repurchased Receivable shall be its Net Value
as set forth on Schedule 1 hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
[SELLER]
By _______________________________________________
Name:
Title:
NPF VI, INC.
By _______________________________________________
Name:
Title:
NATIONAL PREMIER FINANCIAL SERVICES, INC.
By _______________________________________________
Name:
Title:
F-1
<PAGE>
SCHEDULE 1
----------
TO REPURCHASE
-------------
ASSIGNMENT
----------
F-2
<PAGE>
EXHIBIT G
---------
NATIONAL PREMIER FINANCIAL SERVICES, INC.
Sale and Subservicing Agreement
Section 8.2 Determinations of the Servicer
Determination Date: ______ __, 199_
(1) Section 8.2(a) Prior Net Value Amount
Net Value of Purchased Receivables as of the prior
Determination Date plus the Net Value of all
Purchased Receivables purchased on the prior
Purchase Date __________
(2) Section 8.2(b) Paid Receivables Amount
The amount of Collections on all Purchased
Receivables received since the prior Determination Date __________
(3) Section 8.2(c) Current Net Value Amount
Net Value of all Purchased Receivables as of the
current Determination Date __________
(4) Section 8.2(d) Credit Deficiency
Prior Net Value Amount __________
minus
Paid Receivables Amount (__________)
minus
Current Net Value Amount
(__________)
Total
==========
(5) Section 8.2(e) Rejected Amount
Net Value of Purchased Receivables which became Rejected
Receivables since the prior Determination Date and
which have not yet been repurchased or offset __________
G-1
<PAGE>
SCHEDULE 1
----------
TO EXHIBIT G
------------
Date: ___________, 199_
Bankers Trust Company
Four Albany Street
New York, NY 10006
Attention:
Please make the following distributions from accounts in accordance
with Section 8.3 of the Sale and Subservicing Agreement for [SELLER]:
(1) Deposit in the Purchase Account
(a) From the Collection Account:
Paid Receivables Amount ____________
(b) From the Seller Credit
Reserve Account: Credit Deficiency ____________
(c) From the Collection Account:
Rejected Amount ____________
(2) Pay by check to [SELLER] the balance
in the Collection Account after
such distributions
NATIONAL PREMIER FINANCIAL SERVICES, INC.
By: ______________________________________________
Title: ___________________________________________
G-2
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
the 1st day of November, 1998 (the "Effective Date") by and between COASTAL
PHYSICIAN GROUP, INC. (the "Employer" or "Coastal"), a Delaware corporation with
its principal place of business in Durham, North Carolina and W. RANDALL
DICKERSON ("Employee"), a resident of Durham, North Carolina.
W I T N E S S E T H:
--------------------
WHEREAS, Employee is currently an employee of Employer; and
WHEREAS, Employer and Employee desire to substantially and materially
modify the existing terms of employment of Employee in order to provide for an
extended term of employment, revised compensation terms and other matters; and
WHEREAS, subject to the terms and conditions hereinafter provided, Employer
desires to restate and amend the existing employment arrangement and to employ
Employee, and Employee desires to accept such employment, on the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the employment of Employee and the
compensation to be paid by Employer to Employee, and the covenants set forth
herein, Employee hereby accepts employment hereunder subject to the terms and
conditions stated below, including the agreement of Employee not to enter into
certain competitive activities with the Employer, as follows:
1. Employment. Employer hereby employs Employee, and Employee hereby
accepts such employment, subject to the terms and conditions stated herein. This
Agreement shall amend, restate and supersede all existing employment agreements
and arrangements applicable to Employee, either written or oral.
2. Term. This Agreement shall commence effective as of November 1, 1998
(the "Effective Date") and shall continue through and including October 31, 1999
(the "Initial Term"), unless this Agreement is (a) otherwise terminated in
accordance with the provisions contained herein, or (b) extended by mutual
agreement of Employer and Employee. After the Initial Term, this Agreement may
be renewed or extended upon mutual agreement of the parties. If the parties do
not agree to an extension on other terms, then this Agreement shall
automatically renew on a month-to-month basis until either Employer or Employee
terminates this Agreement pursuant to Section 12 herein.
3. Duties. Employee shall perform the following duties pursuant to this
Agreement:
<PAGE>
(a) Employee shall serve as an Executive Vice President and Chief
Financial Officer of Employer. During the term of this Agreement, Employee may
be elected to the Board of Directors of Employer. If so elected, Employee may be
removed at anytime from any board seat as deemed appropriate by the shareholders
of Employer, and such removal shall not be considered a breach by the Employer
of this Agreement. Removal of Employee from the office of Executive Vice
President and Chief Financial Officer shall be considered a material breach of
the terms of this Agreement by Employer.
(b) Employee shall at all times abide and observe Employer's policies
and procedures as are in effect from time to time. Employee acknowledges that
Employer is an equal opportunity employer and that Employer's established policy
is not to discriminate on the basis of age, marital status, race, color, sex,
religion or national origin, or to violate any federal or state
anti-discrimination law. Employee shall be responsible for carrying out and
implementing the foregoing policy throughout the operations and activities of
Employer.
4. Compensation. For the services provided by Employee as an employee of
Employer, Employer shall pay Employee the annual base salary (the "Base Salary")
and other compensation identified on Exhibit A.
5. Additional Benefits. Commencing on or about the Effective Date, and
thereafter during the Initial Term of this Agreement and any renewals or
extensions thereof, Employee shall be entitled to and Employer shall provide to
Employee all employment benefits which are generally provided to senior
executive officers of Employer. In addition, Employer will provide Employee an
office and administrative support appropriate to Employee's position, and
Employer will pay the cost of continuing professional education required to
maintain the Certified Public Accountant license of Employee and provide
reimbursement of usual and customary dues and license fees consistent with other
senior management.
6. Devotion of Time. During the term of this Agreement, Employee shall
devote his full time and attention to the business of Employer and its
affiliates in a manner and to an extent commensurate with the commitment of
other executive officers of Employer, to fulfill his duties and responsibilities
under the Agreement and to advance the business interests and good reputation of
Employer and the direct and indirect subsidiaries of Employer.
7. Confidentiality and Non-Disclosure. Employee acknowledges that, during
this employment, he will gain access to, or possession or knowledge of, numerous
trade secrets, confidential information, other valuable properties not generally
available to the public and proprietary information, including but not limited
to, hospital and healthcare facility client lists, client files and records,
lists of potential clients, prospects or targets, and/or other market and
marketing data and plans, price books, promotional devices and methods, business
methods, manuals and plans, business and sales techniques, strategic plans,
computer programs, hospital and physician contracts, and research and
development (hereinafter referred to collectively as "Confidential
Information"). Employee acknowledges that such Confidential Information is
unique and a valuable asset which is owned solely by Employer (or affiliates of
Employer) and is to be used only for Employer's or its affiliates' (other than
any natural persons) benefit.
2
<PAGE>
Employee shall not, during or after the term of this Agreement, disclose,
divulge, reveal, transfer, reproduce, sell, capitalize upon or take advantage of
such Confidential Information and, in addition, Employee shall exercise all
reasonable efforts and precautions to protect against such Confidential
Information from misappropriation, misuse, disclosure, breach of
confidentiality, or other conduct or action inconsistent with Employer's rights;
provided, however, that Confidential Information may be disclosed to the extent
(i) required by law or court order or (ii) generally available to the public
other than by unauthorized disclosure. Upon termination of this Agreement,
Employee shall return immediately to Employer all of Employer's (or its
affiliates) property (including, without limitation, Confidential Information)
in Employee's possession or control. Any materials, manuals, documents or
records developed, written, edited or designed by Employee while employed by
Employer are the exclusive property of Employer.
8. Covenant Not To Compete. Employee will, as a result of this employment,
be responsible for the executive management and direction of substantial
business resources and assets of Employer and its affiliates and will develop
additional contacts and relationships with numerous individuals, executives,
companies, insurers, providers and health maintenance organizations which are
also involved in the managed healthcare business. Such individuals and
organizations will have business and contractual relationships with Employer or
its affiliates that will be a valuable asset thereof. Employee therefore agrees
as follows:
(a) For a period of six (6) months after termination of this
Agreement, Employee will not become employed by, own, operate, manage, or
provide consulting services to any business that provides the same type of
services as Employer currently provides in the states where Employer is
providing services as of the date of termination of this Agreement.
(b) For a period of twelve (12) months after termination of this
Agreement, Employee will not solicit any hospital, clinic, healthcare facility
or other client having a contractual or business relationship with Employer or
of any subsidiary of Employer, or of any prospect or potential client to which a
marketing proposal or presentation was made within six (6) months of
termination, and of which Employee was aware, involving the provision of
healthcare services, which solicitation would be for the purpose of providing
healthcare or healthcare related services.
(c) For a period of twelve (12) months following the termination of
this Agreement, Employee will refrain from any activity of any nature intended
or reasonably calculated to result in the termination or cancellation of any
contractual or business arrangement between the Employer or any subsidiary of
Employer, and any insurer, client, facility or other business or entity.
(d) Employee shall notify any entity or organization of which he is a
director, significant shareholder (or other equity owner), manager, general
partner, executive officer or as to which he is otherwise a controlling party or
over whom he exerts significant influence (an "Affiliate") of the provisions of
Sections 7, 8 and 9 of this Agreement, and Employee will not cause or permit
such Affiliate to engage in any activity that would be prohibited for Employee
personally under this Agreement.
3
<PAGE>
(e) Nothing in this Agreement shall prevent Employee from making
passive investments in third parties so long as such investments do not require
Employee to perform any services in connection with any such investments in such
third parties.
9. Solicitation of Other Employees.
(a) Employee agrees that he shall not, for a period of twelve (12)
months after the termination of this Agreement, solicit or seek to influence,
either directly or indirectly, any employee or any physician or healthcare
provider under contract with Employer at any time during Employee's employment
by Employer or any of its subsidiaries or affiliates, to enter into any
employment agreement, independent contractor arrangement, or any other
contractual arrangement whereby such individual would perform services for
compensation, either directly or indirectly, for any person, firm, corporation
or other entity or business that provides products or services in competition
with Employer or any of its subsidiaries or affiliates.
(b) Employee further agrees that neither he nor any Affiliate shall,
for a period of twelve (12) months after the termination of this Agreement,
hire, employ, enter into any employment agreement, independent contractor
arrangement, or any other contractual arrangement whereby a "Coastal Employee"
(as defined below) would perform services for compensation for Employee or such
entity. For the purposes hereof, "Coastal Employee" shall mean any person who
has been employed by Coastal or any or its direct or indirect subsidiaries at
any time during the six (6) month period immediately preceding the termination
of this Agreement.
10. Breach and Remedies.
(a) Employee acknowledges that the breach or threatened breach of any
of the covenants set forth in Sections 7, 8 or 9 may result in immediate and
irreparable injury to Employer or its affiliates. Accordingly, Employee agrees
that the provisions of Sections 7, 8 and 9 shall inure to the benefit of and may
be enforced by Employer or any if its affiliates. In addition to any rights or
remedies available to Employer for a breach by Employee of Sections 7, 8 or 9,
Employer and its affiliates shall be entitled to injunctive relief to enforce
the obligations of Employee contained in such Sections. Nothing herein shall be
construed as prohibiting Employer or its affiliates from pursuing any other
legal or equitable remedies that may be available to it for any such breach or
threatened breach, including the recovery of damages from Employee.
(b) The periods of time provided for in Sections 7, 8 or 9 shall be
extended by any period of violation or periods of time required to resolve by
arbitration, not to exceed 45 days, any dispute regarding the provisions
thereof.
(c) Employee hereby acknowledges that the covenants set forth in
Sections 7, 8 and 9 are reasonable in all respects and are necessary to protect
the legitimate business interests of Employer and its affiliates. It is the
intention of parties to restrict the activities of Employee
4
<PAGE>
only to the extent necessary to protect the legitimate business interests of
Employer, its subsidiaries and/or affiliates, and not to deprive Employee of the
right or ability to earn a livelihood.
11. Vacation and Sick Leave. All earned, accrued and unused vacation and
any unused sick pay, upon termination, will be governed by Employer's then
current policies.
12. Termination. This Agreement may be terminated as follows:
(a) Either party may terminate this Agreement without cause at any
time upon thirty (30) days' prior written notice to the other party. This thirty
day period is hereafter referred to as the "Notice Period." In the event of such
termination, Employee, if requested by Employer, shall continue to perform his
obligations and duties under this Agreement and assist with the transition of
duties to a new employee during the Notice Period. Employer, at its option, may
notify Employee at any time during the Notice Period that no further services
are to be performed. In the event that this Agreement is terminated without
cause by either party, the covenants set forth in Sections 7, 8 and 9 shall
continue in effect, and the applicable start date for the periods of time in
Sections 7, 8 or 9 shall be the later of the date that notice of termination is
given or the last date upon which services are performed.
(b) Upon expiration of the Initial Term or any extended term
(including month to month extensions) of this Agreement without renewal or
extension or if this Agreement is terminated without cause by Employer at any
time during the term hereof, Employer shall pay Employee an amount equal to
one-half of the annual Base Salary then in effect (see Exhibit A), all to be
paid out in equal installments over the six (6) months following the date of
termination, beginning thirty (30) days from the date of termination; provided
that if Employee is terminated without cause at any time within one (1) year of
a merger or consolidation of Employer or other change of ownership of Employer
which in any case results in any person or group having the ability to elect or
appoint a majority of the Board of Directors of Employer (unless such person or
group currently has such power), then the amount to be paid out under this
subsection shall be equal to the annual Base Salary then in effect, to be paid
out in equal installments over the twelve (12) months following termination.
(c) This Agreement may be terminated by Employer at any time for cause
upon written notice to Employee, which notice shall specify the reason for
termination. For purposes of this Subsection 12(c), cause shall include, but
shall not be limited to, the following: fraud; dishonesty; substantial and
continuous nonperformance of assigned duties; failure to comply with a material
written policy of Employer; failure by Employee to perform or meet objective and
measurable standards; unlawful activities for which Employee is indicted or
convicted in a jurisdiction of the United States; and material breach of this
Agreement.
(d) This Agreement shall terminate upon the death or total and
permanent disability of Employee. In the event that this Agreement terminates
due to Employee's death or total and permanent disability, Employer shall pay
upon such termination to Employee, Employee's Base Salary accrued through the
date of Employee's death or the date he becomes
5
<PAGE>
totally and permanently disabled, as the case may be. Permanent disability for
purposes of this Agreement shall mean the inability to perform the functions of
Employee's position for a continuous period of six (6) months.
(e) This Agreement may be terminated by Employee upon a material
breach of the terms of this Agreement by Employer, and if this Agreement is
terminated at any time during the term hereof by Employer under this subsection,
then Employer shall pay Employee an amount equal to one-half of the annual Base
Salary then in effect (see Exhibit A), all to be paid out in equal monthly
installments over the six (6) months following the date of termination,
beginning thirty (30) days from the date of termination.
(f) Except as expressly set forth herein, all of Employer's
obligations for compensation or other benefits shall terminate upon the
effective date of the termination of this Agreement.
(g) Upon termination of Employee's employment for any reason, Employee
agrees to resign any position as a director of Employer then held by Employee.
In that regard, Employee agrees that if, during the term of this Agreement, he
is elected or appointed to be a director of Employer, Employee shall execute and
deliver to Moore & Van Allen, PLLC, as escrow agent, an undated resignation
letter with respect to such director position, which escrow agent is authorized
to date and deliver to Employer upon receipt of notice from Employer that
Employee's employment has terminated.
13. Compliance With Securities Laws. Employee agrees to comply with all
applicable federal and state securities laws and with all applicable policies of
Employer concerning the buying and selling of stock of Employer by employees to
the extent such policies do not restrict Employee's express rights under this
Agreement.
14. Entire Agreement. This Agreement contains the entire understanding
between the parties and supersedes and cancels any prior oral and written
understanding and/or agreements between them respecting the subject matter of
this Agreement. This Agreement may be amended or modified only in a writing
signed by both parties.
15. Severability. If any provision, term, condition, or clause of this
Agreement or the application thereof shall be found to be invalid or
unenforceable to any extent, then the offending portion shall be construed as
valid and enforceable only to the extent permitted by law and the remainder of
this Agreement shall not be affected thereby and shall remain in full force and
effect.
16. Governing Law. This Agreement is made and entered into in the State of
North Carolina and is to be construed in accordance with and take effect under
the laws of the State of North Carolina without regard to principles of
conflicts of laws.
17. Dispute Resolution. All disputes under this Agreement shall be resolved
in accordance with the procedure set forth in Exhibit B.
6
<PAGE>
18. Assignment. No party shall have any right to assign, mortgage, pledge,
hypothecate or encumber this Agreement in whole or in part, or any benefit or
any right accruing hereunder, without in any such case first obtaining the prior
written consent of the other party hereto, except that Employer may assign this
Agreement to one of its affiliates or wholly-owned subsidiaries, provided that
in the event of such an assignment, Employer shall remain primarily responsible
for its obligations hereunder. All rights hereunder are personal to the Employee
and shall cease upon the termination of this Agreement unless otherwise stated
herein; provided, however, that the provisions hereof shall inure to the benefit
of the personal representatives, heirs and legatees of Employee.
19. Notice. Any notice, or other written communication to be given pursuant
to this Agreement for whatever reason shall be deemed duly given and received
(a) if delivered personally, from the date of delivery, or (b) by certified
mail, postage pre-paid, return receipt requested, three (3) days after the date
of mailing, addressed: in the case of Employer, to its principal office and
marked "Attention: President," and in the case of Employee, to his last known
permanent address according to the books and records of Employer.
20. Miscellaneous. Any protection, benefits, rights or other provisions
given to Employer in this Agreement shall also be deemed to apply to, protect
and inure to the benefit of Employer's affiliates and subsidiaries. All rights
of Employer expressed in this Agreement are in addition to any rights available
under the common law or other legal principles. Section or paragraph titles or
captions contained in this Agreement are inserted only as a matter of
convenience and for reference and in no way define, limit, extend or describe
the scope of this Agreement or the intent of any provision hereof. All pronouns
and any variation thereof shall be deemed to refer to the masculine, feminine,
neuter, singular or plural as the identity of person or persons, firm or firms,
corporation or corporations, and as context may require.
(signature page to follow)
7
<PAGE>
IN WITNESS WHEREOF, the parties sign and seal below, effective the date
first written in this Agreement.
EMPLOYEE:
_________________________________________(SEAL)
W. Randall Dickerson
EMPLOYER:
COASTAL PHYSICIAN GROUP, INC.
By: ___________________________________________
Steven M. Scott, President and
Chief Executive Officer
ATTEST:
By: _____________________________
Assistant Secretary
[CORPORATE SEAL]
8
<PAGE>
EXHIBIT A
---------
COMPENSATION
------------
1. Base Salary. For services provided as an employee of Employer,
Employee shall receive, beginning on the Effective Date, a base
salary of $180,000 per annum (the "Base Salary") payable in
accordance with Employer's current payroll practices. The Base Salary
shall be subject to annual review and adjustment as of each November
1 during the term of this Agreement (or such other times as may be
determined by Employer).
2. Incentive Bonus. Employee shall be eligible for an incentive or
performance bonus (the "Incentive Bonus") up to a maximum annual
amount equal to forty percent (40%) of Employee's Base Salary. The
Incentive Bonus shall be awarded pursuant to a bonus plan to be
implemented by Employer and shall be based upon such criteria as
Employer and Employee may mutually agree, which criteria shall
include, without limitation, the timely filing of all required
reports of Employer with the Securities and Exchange Commission.
During the Initial Term of this Agreement, Employer and Employee have
agreed that Employee shall be eligible for a bonus of up to $40,000
awarded as follows:
(i) $10,000 for timely filing of Employer's 10-Q's (for the
third quarter of 1998 and the first and second quarters of
1999).
(ii) $20,000 for the timely filing Employer's Form 10-K for 1998
with a "clean" audit opinion (i.e., with no "going concern"
caveat).
(iii) $10,000 in the discretion of the Chief Executive Officer.
Provided, that in the event Employer enters into a transaction or
series of transactions that render the filing of 10-Q's and 10-K
unnecessary or impossible, Employer and Employee will negotiate in
good faith to adopt alternative standards for (i) and (ii) above.
3. Stock Options or Awards. Employee shall be eligible for stock options
and awards available to other senior management of Employer and its
affiliates from time to time. This subsection shall not be a
guarantee of any awards or options, and Employee recognizes that the
awarding of such compensation is governed by plans adopted by the
Board of Directors of Employer from time to time.
<PAGE>
EXHIBIT B
---------
MEDIATION/ARBITRATION
---------------------
The parties hereto shall resolve any dispute or disagreement arising out of
this Agreement or the performance of Employee or Employer hereunder by
submitting such dispute first to mediation and second to arbitration pursuant to
the following procedures; provided that nothing herein shall prevent Employer
from obtaining injunctive relief under Section 10 for violations by Employee of
the provisions of Sections 7, 8 or 9.
(a) Mediation. The parties shall mediate any dispute or disagreement
upon the written demand of either party or both of the parties with the mediator
appointed by the Judicial Arbitration & Mediation Services, Inc. ("JAMS") or
another party upon mutual agreement of Employer and Employee, 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 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
<PAGE>
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 the parties 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 both 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, shall be enforceable under North
Carolina's Uniform Arbitration Act and the terms of that Act shall
apply.
2
<PAGE>
(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. The
decision of the arbitrator may be entered as a judgment in any court
of the State of North Carolina or elsewhere.
(c) Except where specifically modified above, all other terms and
procedures specified for the mediation in paragraph (a) shall apply in the
arbitration. Article 45A of Chapter 1 of the General Statutes of North Carolina
shall apply to such arbitration.
3
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT AS OF 12-31-98
Subsidiary State of Incorporation
Better Health Plan, Inc New York
CHG Properties, Inc North Carolina
Coastal Correctional Healthcare, Inc. North Carolina
Coastal Emergency Services of Dade County, Inc. Florida
Coastal Emergency Services of Ft. Lauderdale, Inc. Florida
Coastal Emergency Services of Hollywood, Inc. Florida
Coastal Emergency Services of Orlando, Inc. Florida
Coastal Government Services Management Group, Inc. North Carolina
Coastal Government Services, Inc. North Carolina
Coastal Physician Group of Florida, Inc. Florida
Coastal Physician Group, Inc. Delaware
Coastal Physician Networks, Inc. North Carolina
Coastal Physician Services of Florida, Inc. Florida
Coastal Physician Services of Orlando, Inc. Florida
Coastal Physician Services of South Florida, Inc. Florida
Coastal Physician Services of the Midwest, Inc. Tennessee
Coastal Physician Services of the Southeast, Inc. North Carolina
Coastal Physician Services of the West, Inc. Texas
Coastal Physician Services, Inc. North Carolina
Coastal Physicians Services of Broward County, Inc Florida
Coastal Practice Services of the Northeast, Inc. New York
Coastal Receivables LLC Delaware
Coastal SPC Member Corp. Delaware
FirstCollect, Inc. North Carolina
Healthcare Business Resources, Inc. North Carolina
Medstaff National Medical Staffing, Inc North Carolina
Pediatric Consultants of Broward County, Inc. Florida
Pediatric Healthcare, Inc. Florida
Physicians Planning Group, Inc. Maryland
Premier Credentialing Resources, Inc. North Carolina
Signum Primary Care, Inc. North Carolina
Specialty Services Group, Inc. Pennsylvania
Sunlife OB/GYN Services of Hollywood, Florida, Inc. Florida
Sunlife OB/GYN Services of Maryland, Inc. Maryland
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Coastal Physician Group., Inc. for the 12 months ended
December 31, 1998, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 35,356
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 40,812
<PP&E> 7,171
<DEPRECIATION> 0
<TOTAL-ASSETS> 55,074
<CURRENT-LIABILITIES> 41,684
<BONDS> 0
0
4
<COMMON> 378
<OTHER-SE> (64,101)
<TOTAL-LIABILITY-AND-EQUITY> 55,074
<SALES> 294,221
<TOTAL-REVENUES> 294,221
<CGS> 304,202
<TOTAL-COSTS> 302,607
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,675
<INCOME-PRETAX> (20,138)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,138)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,138)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
