United States
Securities and Exchange Commission
Washington, DC 20549
Form 10-Q
{X} Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
OR
{ } Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 001-13460
PhyAmerica Physician Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
56-1379244
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
2828 Croasdaile Drive, Durham, NC
27705
(Address of principal executive offices)
(Zip Code)
(919) 383-0355
(Registrant's telephone number including area code)
Coastal Physician Group, Inc.
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
{X}Yes { } No
As of October 31, 1999 there were outstanding 38,049,061
shares of common stock, par value $.01 per share.
PHYAMERICA PHYSICIAN GROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31,
1998 and September 30, 1999
(unaudited)
Unaudited Consolidated Statements of Operations
Unaudited Consolidated Condensed Statements of Cash
Flows
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
SIGNATURES
PHYAMERICA PHYSICIAN GROUP, INC.
Consolidated Balance Sheets
(In thousands, except per share data)
September December
30, 31, 1998
1999
Assets (unaudited)
Current assets:
Cash and cash equivalents $ $
1,046 45
Trade accounts receivable, net 36,464 29,216
Reserves held by NCFE 14,317 5,400
Accounts receivable, other 1,935 686
Receivables from related party 609 54
Prepaid expenses and other current 10,198 5,411
assets
Total current assets 64,569 40,812
Property and equipment, at cost, less 6,828 7,171
accumulated depreciation
Excess of cost over fair value of net 21,487 2,248
assets acquired, net
Other assets 5,775 4,843
Total assets $ $
98,659 55,074
Liabilities and Shareholders' Equity
(Deficit)
Current liabilities:
Current maturities and other short-term $ $
borrowings 85,715 433
Accounts payable 27,388 22,559
Payable to related party 56 1,277
Accrued physicians fees and medical 18,773 9,986
costs
Accrued expenses 8,601 7,429
Total current liabilities 140,533 41,684
Long-term debt, excluding current 44,080 77,109
maturities
Total liabilities 184,613 118,793
Shareholders' equity (deficit):
Preferred stock $.01 par value;
authorized 10,000; issued and
outstanding 445 and 445, $ $
respectively 4 4
Additional paid-in capital 2,061 2,061
Common stock $.01 par value; shares
authorized 100,000; shares issued and 380 378
outstanding 38,049 and 37,832,
respectively
Additional paid-in capital 176,247 176,197
Common stock warrants 1,675 1,691
Retained earnings (accumulated deficit) (266,321) (244,050)
Total shareholders' equity (deficit)
(85,954) (63,719)
Total liabilities and shareholders' $ $
equity (deficit) 98,659 55,074
See accompanying notes to consolidated financial statements.
PHYAMERICA PHYSICIAN GROUP, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Three months ended
September 30,
1999 1998
Operating revenue, net $ $
80,032 79,338
Costs and expenses:
Physician and other provider services 66,835 63,359
Medical support services 8,631 8,520
Selling, general and administrative 11,959 7,672
Related party expense, net 746 134
Total costs and expenses 88,171 79,685
Operating loss (8,139) (347)
Other income (expense):
Interest expense (4,125) (2,708)
Interest income 45 619
Other related party expense, net (52) --
Other, net (2,904) (9)
Total other expense (7,036) (2,098)
Loss before income taxes (15,175) (2,445)
Benefit for income taxes -- --
Net loss $ $
(15,175) (2,445)
Net loss per share $ $
(0.40) (0.06)
Weighted average number of shares
outstanding 37,989 37,700
See accompanying notes to consolidated financial statements.
PHYAMERICA PHYSICIAN GROUP, INC.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Nine months ended
September 30,
1999 1998
Operating revenue, net $ $
179,913 245,799
Costs and expenses:
Physician and other provider services 136,140 196,994
Medical support services 25,981 24,892
Selling, general and administrative 26,660 29,766
Related party expense, net 1,043 621
Total costs and expenses 189,824 252,273
Operating loss (9,911) (6,474)
Other income (expense):
Interest expense (9,356) (7,662)
Interest income 124 785
Other related party expense, net (256) (588)
Other, net (2,872) 786
Total other expense (12,360) (6,679)
Loss before income taxes (22,271) (13,153)
Benefit for income taxes -- --
Net loss $ $
(22,271) (13,153)
Net loss per share $ $
(0.59) (0.35)
Weighted average number of shares
outstanding 37,921 37,637
See accompanying notes to consolidated financial statements.
PHYAMERICA PHYSICIAN GROUP, INC.
Unaudited Consolidated Condensed Statements of Cash Flows
(In thousands)
Nine months ended
September 30,
1999 1998
Net cash used in operating activities $ $
(30,645) (12,154)
Cash flows from investing activities:
Sales of marketable securities and -- 930
investments, net
Sales (purchases) of property and 99 (991)
equipment, net
Acquisition of subsidiaries, net of cash (20,392) --
acquired
Disposition of subsidiaries, net of -- (5,957)
cash disposed
Net cash provided by(used in) (20,293) (6,018)
investing activities
Cash flows from financing activities:
Net borrowings on long-term debt 51,903
14,261
Proceeds from issuances of -- 2,065
preferred stock
Proceeds from issuances of common 36 378
stock
Net cash provided by financing 51,939 16,704
activities
Net increase (decrease) in cash and 1,001 (1,468)
cash equivalents
Cash and cash equivalents at beginning 45 8,921
of period
Cash and cash equivalents at end of $ $
Period 1,046 7,453
Supplemental disclosures of cash flow
information:
Cash payments during the period
for:
Interest $ $
9,767 7,655
Income taxes $ $
421 212
See accompanying notes to consolidated financial statements.
PHYAMERICA PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying consolidated financial statements of
PhyAmerica Physician Group, Inc., formerly Coastal Physician
Group, Inc., (the "Company") are unaudited and, in the
opinion of management, include all adjustments which are
necessary for a fair presentation in accordance with GAAP.
The unaudited consolidated financial statements should be
read in conjunction with the Company's audited consolidated
financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998. Operating results for the interim periods
presented are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31,
1999.
Reclassifications
Certain reclassifications have been made to the 1998
consolidated financial statements to conform to the 1999
presentation. Such reclassifications had no impact on net
loss or shareholders' equity (deficit) as previously
reported.
(2) Acquisitions
The Company acquired the operations of Sterling Healthcare
Group, Inc. ("Sterling") in a transaction completed on July
8, 1999. Sterling Healthcare Group, Inc., was an emergency
physician practice management company which provided a broad
range of health care and administrative services to
physicians, hospitals, government agencies and other health
care organizations. Such services consisted primarily of
recruiting physicians and contracting their services to
provide staffing to hospital and government facility
clients. In addition, Sterling assisted its hospital clients
in such areas as physician scheduling, operational support,
quality assurance and departmental accreditation and
provided such administrative services as billing and record
keeping with regard to reimbursement. Sterling also owned
and operated two primary care offices. Sterling was a wholly
owned subsidiary of FPA Medical Management, Inc. ("FPA")
headquartered in Miami, Florida. FPA and Sterling were
debtors in a jointly administered Chapter 11 Bankruptcy
Proceeding in U.S. Bankruptcy Court in the District of
Delaware (Case No. 98-1596(PJW)). The assets were acquired
pursuant to an Asset Purchase Agreement in accordance with
the Modified Second Amended Joint Plan of Reorganization of
FPA Medical Management, Inc. and Certain of its Subsidiaries
and Affiliates. In connection with this acquisition, the
Company paid approximately $69.3 million and assumed certain
current operating liabilities. The transaction was accounted
for by the purchase method of accounting. In accordance with
the purchase method of accounting the Company recorded
goodwill of approximately $20.4 million, and amortization
expense of approximately $1.0 million is included in selling
general and administrative costs for the third quarter of
1999. The amortization period for the goodwill recorded is
5 years. Financing was provided to the Company by National
Century Financial Enterprises, Inc., of Dublin, Ohio,
through a sale of accounts receivables acquired from
Sterling.
(3) Comprehensive Income
The Company has adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income."
Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. The
adoption of this Statement requires that unrealized gains or
losses on the Company's available-for-sale securities be
included in other comprehensive income, which in prior
periods were reported separately in shareholders' equity.
Prior year financial statements have been reclassified to
conform to the requirements of Statement 130.
The components of comprehensive income, net of related tax,
for the three and nine-month periods ended September 30,
1999 and 1998, are as follows:
In thousands of Three months ended Nine months ended
dollars September 30 September 30
1999 1998 1999 1998
Net loss $(15,175 $(2,445) $(22,271) $(13,153)
)
Unrealized gains on -- 80 -- 73
securities
Comprehensive Income $(15,175 $(2,365) $(22,271) $(13,080)
)
(4) Segment Information
During the quarters ended September 30, 1999 and 1998, and
the nine months ended September 30, 1999 and 1998, the
Company had four reportable segments: physician contract
services, government services, billing and collection
services, 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 operations of Sterling are
reported as a component of the physician contract services
group. 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 segment provides support to independent
contractor physicians, independent practices and other
health care practitioners. These services are often provided
as part of the Company's physician contract services and are
also marketed independently to unaffiliated providers.
Divested businesses include two health plans which were
divested during 1998 and the wrap up of businesses divested
prior to 1998. 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.
Quarter ended September 30, 1999
Billing Total
PhysicianGov't and Divested Reportable All
(In Thousands)ContractingServices CollectionsSegmentsSegments Other
Totals
Revenue from external sources$70,743$4,542$4,744 $- $80,029 $3
$80,032
Intersegment revenues - - 3,930 - 3,930 - 3,930
Interest expense(3,213) (906) - -(4,119) (6) (4,125)
Depreciation and amortization 1,322 6 160 - 1,488 33
1,521
Segment profit (loss)(12,207) (608) 1,211 (47)
(11,651) (3,524) (15,175)
Segment assets
at September 30, 1999$76,063$2,833$11,030$2,479$92,405 $6,254
$98,659
Quarter ended September 30, 1998
Billing Total
PhysicianGov't andDivested Reportable All
(In Thousands)ContractingServicesCollectionsSegmentsSegments Other
Totals
Revenue from external sources$42,867$4,928$4,291$27,234$79,320 $18 $79,338
Intersegment revenues - 11 3,377 - 3,388 - 3,388
Interest expense(1,261) (982) - (17)(2,260)(448)(2,708)
Depreciation and amortization 119 12 177 135 443 57 500
Segment profit (loss)(1,705)(456)654(1,082)(2,589)144(2,445)
Segment assets
at December 31, 1998$30,781 $4,798$11,529$2,585$49,693$5,381 $55,074
Nine Months Ended September 30, 1999
Billing Total
PhysicianGov't and Divested Reportable All
(In Thousands)ContractingServices CollectionsSegmentsSegments Other
Totals
Revenue from external sources$152,930$13,239$13,744$-$179,913 $- $179,913
Intersegment revenues - -11,433 - 11,433 - 11,433
Interest expense(6,583)(2,494) - -(9,077)(279)(9,356)
Depreciation and amortization 1,520 22 540 2 2,084 112 2,196
Segment profit (loss)(16,317)(1,924)3,698 (43)(14,586) (7,685) (22,271)
Segment assets
at September 30, 1999 $ 76,063 $2,833
$11,030 $2,479 $92,405 $6,254 $98,659
Nine Months Ended September 30, 1998
Billing Total
PhysicianGov't andDivested Reportable All
(In Thousands)ContractingServicesCollectionsSegmentsSegments Other
Totals
Revenue from external sources$124,294$15,928$12,635$92,895$245,752 $47
$245,799
Intersegment revenues - 32 9,450 - 9,482 - 9,482
Interest expense(4,419)(1,293) - (113)(5,825)(1,837)(7,662)
Depreciation and amortization 445 44 1,127 550 2,166 278 2,444
Segment profit (loss)(5,494)(1,046)1,719(3,468)(8,289)(4,864) (13,153)
Segment assets
at December 31, 1998$30,781 $4,798$11,529$2,585$49,693$5,381 $55,074
(5) Recently Issued Accounting Pronouncements
Effective for all fiscal quarters of fiscal years beginning
after June 15, 2000, the Company will be required to adopt
Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 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.
(6) Legal Settlements
On August 30, 1999, the Company received an Arbitration
Interim Decision and Award in the arbitration between the
Company and Jacque J. Sokolov, M.D. who previously served as
Chairman of the Company and President of Advanced Health
Plans, Inc. The Company filed an action in federal court
contesting certain legal findings by the arbitrator that the
Company believes are erroneous under North Carolina law, and
seeking a reduction in the award granted by the arbitrator.
The ultimate outcome of the arbitration and the Company's
legal challenge to that action is not determinable at this
time. In addition, the Company entered into an agreement
settling other outstanding litigation matters, primarily
involving employment related claims. The Company has
provided approximately $2.24 million in the accompanying
financial statements included in Other Nonoperating Expenses
for the quarter ended September 30, 1999.
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 County, Florida seeking 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 contracted physicians. The
invoices contained language indicating various actions that
might be pursued in the event of non-payment, including
references to the Attorney General. Plaintiffs sought to
have the matter certified as a class action. On October 28,
1999, the trial court denied plaintiffs' motion for class
certification, leaving claims of the three individual
plaintiffs for $500 in statutory damages plus reasonable
attorneys' fees as awarded by the Court. The order of the
trial court denying class certification is subject to
interlocutory appeal. The Company believes that it has
several defenses to the lawsuit and intends to continue to
vigorously defend the action but at this stage of the
litigation, the exposure to the Company cannot be
determined.
PHYAMERICA PHYSICIAN GROUP, INC.
Management's Discussion And Analysis Of
Financial Condition And Results Of Operations
RESULTS OF OPERATIONS
THIRD QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO THE THIRD
QUARTER ENDED SEPTEMBER 30, 1998.
The Company acquired the operations of Sterling
Healthcare Group, Inc. in a transaction completed on July 8,
1999. The Company accounted for the acquisition of certain
assets and assumption of certain liabilities of Sterling by
the purchase method of accounting. Therefore the results of
operations for Sterling will be the same for the quarter and
nine months ended September 30, 1999. In accordance with the
purchase method of accounting, the quarter and nine months
ended September 30, 1998 does not included results of
operations for Sterling.
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 its
core 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 which
continues to have some wrap-up operations activity. During
1997, the Company also sold the last of its clinic
operations. The Company refers to the HMO and clinic
operations and some smaller related businesses as the
divested businesses.
Operating Revenue, Net. Net operating revenue in the
third quarter of 1999 was $80.0 million, representing an
increase of $0.7million, or 0.9%, from operating revenues of
$79.3 million in the third quarter of 1998. The changes in
operating revenue among the various businesses were as
follows:
3 Months
ended September 30
1999 1998 (Increase) %
Ongoing businesses $80.0 $52.1
$27.9 53.6%
Divested operations 0.0 27.2 (27.2)
(100.0)
$80.0 $79.3
$0.7 0.9%
In the third quarter of 1999, the physician contract
services business generated approximately $70.8 in revenue,
which was an increase of approximately $27.9 million, or
65.0%, from approximately $42.9 million of revenue in the
third quarter of 1998. Sterling accounted for $31.4 million
of revenue for the third quarter of 1999. The decrease in
revenue for the remainder of the physician contract services
business is related to terminated contracts. Revenue for the
billing and collections operations was $4.7 million for the
third quarter of 1999, which was an increase of
approximately $0.4 million, or 9.3%, from $4.3 million in
the third quarter of 1998 due to growth in the billing
contracts and fees. Revenue of the billing and collections
operations excludes intersegment revenue of approximately
$3.9 million in the third quarter of 1999 and approximately
$3.4 million in the third quarter of 1998 representing fees
billed to the physician contract services business. The
government services group accounted for approximately $4.5
million in the third quarter of 1999, which was a decline of
approximately $0.4 million, or 8.2%, from $4.9 million in
the third quarter of 1998. There were minimal decreases in
other miscellaneous revenue during the third quarter of 1999
compared to the same period for 1998.
There was no revenue from the HMOs for the third
quarter of 1999. DHP, which was sold in March 1998,
generated no revenue in the third quarter of 1998. HPSE,
which was sold in October 1998, generated revenue in the
third quarter of 1998 of approximately $27.2 million.
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 increased by approximately $3.4 million,
or 5.4%, to approximately $66.8 million in the third quarter
of 1999 from approximately $63.4 million in the third
quarter of 1998. Physician and other provider services costs
and expenses increased as follows:
3 months ended September 30,
1999 1998 Increase %
Ongoing businesses $66.8 $36.9 $29.9
81.0%
Divested operations 0.0 26.5 (26.5)
(100.0)
$66.8 $63.4 $3.4 5.4%
These expenses for the ongoing businesses increased
because of overall lower expenses of contracts in the
physician contract services business. In the third quarter
of 1999, physician and other provider services costs and
expenses for the physician contract services group were
approximately $63.2 million. This represented an increase of
$30.4 million, or 92.7%, from $32.8 million in the third
quarter of 1998. Sterling accounted for $31.9 million of the
increase in physician and other provider services costs and
expenses for the physician contract services business in the
third quarter of 1999. The government services group's
expenses were approximately $3.6 million in the third
quarter of 1999, representing a decrease of approximately
$0.5 million, or 13.9%, from approximately $4.1 million in
the third quarter of 1998. 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 1998. DHP reported no expense for
physician and other provider services costs in the third
quarter of 1998. HPSE reported approximately $26.5 million
of physician and other provider services costs in the third
quarter of 1998.
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 increased by $0.1 million, or
1.2%, to $8.6 million in the third quarter of 1999 from $8.5
million in the third quarter of 1998. Medical support
services costs and expenses increased as follows:
3 months ended September 30,
1999 1998 Increase %
Ongoing businesses $8.6 $8.5 $0.1 1.2%
Divested operations 0.0 0.0 (0.0) (0.0)
$8.6 $8.5 $0.1 1.2%
In the third quarter of 1999, medical support services
costs and expenses for the physician contract services group
were approximately $1.1 million. This represented a decrease
of $0.4 million, or 26.7%, from $1.5 million in the third
quarter of 1998. Sterling accounted for $0.6 million of the
medical support services costs and expenses for the
physician contract services group in the third quarter of
1999. The government services group's expenses were
approximately $0.5 million in the third quarter of 1999 and
1998. The billing and collections group's expenses were
approximately $7.0 million in the third quarter of 1999
representing an increase of approximately $0.5 million, or
7.7%, from approximately $6.5 million in the third quarter
of 1998.
Selling, General and Administrative Costs and Expenses.
Selling, general and administrative costs and expenses
increased by $4.3 million, or 55.8%, to $12.0 million in the
third quarter 1999 from $7.7 million in the third quarter
1998. Selling, general and administrative costs and expenses
increased as follows:
3 months ended September 30,
1999 1998 Increase %
Ongoing businesses $12.0 $5.4
$ 6.6 122.2%
Divested operations 0.0 2.3
(2.3) (100.0)
$12.0 $7.7 $4.3
55.8%
In the third quarter of 1999, selling general and
administrative costs and expenses for the physician contract
group were $10.3, this represented an increase of $4.3
million, or 71.7%, from $6.0 million in the third quarter of
1998. Sterling accounted for $3.9 million of the selling,
general and administrative costs and expenses for the
physician contract group in the third quarter of 1999. The
government services group's expenses were $0.1 million in
the third quarter of 1999, this represented an increase of
$0.3 million, or 150.0%, from a negative $0.2 million in the
third quarter of 1998. The billing and collections group's
expenses were $0.5 million in the third quarter of 1999 and
1998. Selling, general and administrative costs and expenses
for the corporate group were $1.1 million in the third
quarter of 1999, this represented an increase of $1.6
million, or 320.0%, from a negative $0.5 in the third
quarter of 1998. Approximately $2.3 million related to
accounts receivable sales and subservicing programs costs
are included in selling, general and administrative costs
and expenses for the third quarter of 1999 compared to $1.4
million in the third quarter of 1998. Approximately $1.0
million related to accounts receivable sales under a new
financing arrangement with NCFE.
Selling, general and administrative costs and expenses
of the HMOs declined because the Company sold those
businesses during 1998. DHP reported no selling, general
and administrative costs and expenses in the third quarter
1998. HPSE reported approximately $2.3 million of selling,
general and administrative costs and expenses in the third
quarter 1998.
Related party expense, net. Related party expense, net
increased by $0.6 million, or 600.0%, to $0.7 million in the
third quarter 1999 from $0.1 million in the third quarter
1998. The increase is primarily related to accounts payable
with affiliates, as well as, lease payments to a related
party .
Other income (expense). Other income (expense)
increased by $2.9 million in the third quarter of 1999. This
increase is primarily related to legal settlements of $2.2
million and an additional $0.6 million related to the sale
of a contract.
Benefit for income taxes. There was no benefit for
income taxes recorded for the third quarter of 1999 or 1998.
The Company expects to record no tax expense or benefit,
other than as a result of potential asset dispositions,
until the Company returns to profitability in the future.
Net Loss. Primarily as a result of the foregoing, the
Company reported a net loss of $15.2 million in the third
quarter of 1999 compared to a net loss of $2.4 million in
the third quarter of 1998. Sterling accounted for $7.9
million of net loss for the third quarter of 1999.
In summary, the Company's net loss for the quarter
ended September 30, 1999, was attributable primarily to the
decline in the number of contracts in the emergency medicine
practice management group. The former operations of
Sterling Healthcare Group experienced a loss of
approximately eleven contracts during the quarter and
experienced higher than expected physician fees in the
remaining contracts. The emergency medicine practice
management group reported a combined operating loss of
approximately $7.9 million of which approximately $5.9
million was attributable to the acquired operations
including amortization of goodwill of approximately $1.0
million. The Company also reported approximately $6.4
million in costs (including approximately $2.3 million
reported in selling, general and administrive costs) arising
from the accounts receivable sales and subservicing programs
of which approximately $2.5 million was related to the
acquired operations. Further, the Company recorded legal
settlements in the quarter of approximately $2.2 million.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE
MONTHS ENDED SEPTEMBER 30, 1998.
Operating Revenue, Net. Net operating revenue for the nine
months ended September 30, 1999 was $179.9 million,
representing a decrease of $65.9 million, or 26.8%, from
operating revenues of $245.8 million for the nine months
ended September 30, 1998. The changes in operating revenue
among the various businesses were as follows:
9 months ended September 30
Increase/
1999 1998 (Decrease) %
Ongoing businesses $179.9 $152.9
$27.0 17.7%
Divested operations 0.0 92.9
(92.9) (100.0)
$179.9
$245.8 $(65.9) (26.8)%
For the nine months September 30, 1999, the physician
contract services business generated approximately $152.9 in
revenue, which was an increase of approximately $28.6
million, or 23.0%, from approximately $124.3 million of
revenue for the nine months ended September 30, 1998.
Sterling accounted for $31.4 million of revenue for the nine
months ended September 30, 1999. Revenue for the billing and
collections operations was $13.8 million for the nine months
ended September 30, 1999, which was an increase of
approximately $1.2 million, or 9.5%, from $12.6 million for
the nine months ended September 30, 1998 due to growth in
the billing contracts and fees. Revenue of the billing and
collections operations excludes intersegment revenue of
approximately $11.4 million for the nine months ended
September 30, 1999 and approximately $9.5 million for the
nine months ended September 30, 1998 representing fees
billed to the physician contract services business. The
government services group accounted for approximately $13.2
million for the nine months ended September 30, 1999, which
was a decline of approximately $2.7 million, or 17.0%, from
$15.9 million for the nine months ended September 30, 1998.
The decrease in revenue for the government services group
was directly related to contract terminations.
There was no revenue from the HMOs for the nine months
ended September 30, 1999. DHP, which was sold in March 1998,
generated revenue of approximately $10.0 million for the
nine months ended September 30, 1998. HPSE, which was sold
in October 1998, generated revenue of approximately $82.9
million for the nine months ended September 30, 1998.
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 $60.9 million,
or 30.9%, to approximately $136.1 million for the nine
months ended September 30, 1999 from approximately $197.0
million for the nine months ended September 30, 1998.
Physician and other provider services costs and expenses
decreased as follows:
9 months ended September 30,
Increase/
1999 1998 (Decrease) %
Ongoing businesses $136.1 $109.8
$26.3 24.0%
Divested operations 0.0 87.2(87.2)
(100.0)
$136.1 $197.0 $(60.9) (30.9)%
These expenses for the ongoing businesses decreased
because of overall lower expenses of contracts in the
physician contract services business. For the nine months
ended September 30, 1999, physician and other provider
services costs and expenses for the physician contract
services group were approximately $125.4 million. This
represented an increase of $28.7 million, or 29.7%, from
$96.7 million for the nine months ended September 30, 1998.
Sterling accounted for $31.9 million of the increase in
physician and other provider services costs and expenses for
the physician contract services business for the nine months
ended September 30, 1999. The government services group's
expenses were approximately $10.7 million for the nine
months ended September 30, 1999, representing a decrease of
approximately $2.4 million, or 18.3%, from approximately
$13.1 million for the nine months ended September 30, 1998.
The decrease in physician and other provider services costs
and expenses for the government services group was directly
related to contract terminations. 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 1998. DHP reported approximately $9.0
million of physician and other provider services costs for
the nine months ended September 30, 1998. HPSE reported
approximately $78.1 million of physician and other provider
services costs for the nine months ended September 30, 1998.
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 increased by $1.1 million, or
4.4%, to $26.0 million for the nine months ended September
30, 1999 from $24.9 million for the nine months ended
September 30, 1998. Medical support services costs and
expenses increased as follows:
9 months ended September 30, (Decrease)
1999 1998 Increase %
Ongoing businesses $26.0 $24.6
$1.4 5.7%
Divested operations 0.0 0.3
(0.3) (100.0)
$26.0
$ 24.9 $1.1 4.4%
For the nine months ended September 30, 1999, medical
support services costs and expenses for the physician
contract services group were approximately $4.5 million.
This represented an increase of $0.4 million, or 9.8%, from
$4.1 million for the nine months ended September 30, 1998.
Sterling accounted for $0.6 million of the medical support
services costs and expenses for the physician contract
services group for the nine months ended September 30, 1999.
The government services group's expenses were approximately
$1.4 million for the nine months ended September 30, 1999,
representing a decrease of approximately $0.5 million, or
26.3%, from approximately $1.9 million for the nine months
ended September 30, 1998. The decrease in medical support
services costs and expenses for the government services
group was directly related to contract terminations. The
billing and collections group's expenses were approximately
$20.1 million for the nine months ended September 30, 1999
representing an increase of approximately $1.5 million, or
8.1%, from approximately $18.6 million for the nine months
ended September 30, 1998.
Selling, General and Administrative Costs and Expenses.
Selling, general and administrative costs and expenses
decreased by $3.1 million, or 10.4%, to $26.7 million for
the nine months ended September 30, 1999 from $29.8 million
for the nine months ended September 30, 1998. Selling,
general and administrative costs and expenses decreased as
follows:
9 months
ended September 30,
1999 1998 (Decrease) %
Ongoing businesses $26.6 $20.5
$ 6.1 29.8%
Divested operations 0.1 9.3
(9.2) (98.9)
$26.7
$29.8 $(3.1) (10.4)%
For the nine months ended September 30, 1999, selling
general and administrative costs and expenses for the
physician contract group were $20.7 million, this
represented an increase of $4.9 million, or 31.0%, from
$15.8 million for the nine months ended September 30, 1998.
Sterling accounted for $3.9 million of the selling, general
and administrative costs and expenses for the physician
contract group for the nine months ended September 30, 1999.
The government services group's expenses were $0.6 million
for the nine months ended September 30, 1999, this
represented a decrease of $0.1 million, or 14.3%, from $0.7
million for the nine months ended September 30, 1998. The
billing and collections group's expenses were $1.3 million
for the nine months ended September 30, 1999 representing a
decrease of $0.2 million, or 13.3%, from $1.5 million for
the nine months ended September 30, 1998. Selling, general
and administrative costs and expenses for the corporate
group were $4.0 million for the nine months ended September
30, 1999, this represented an increase of $1.5 million, or
60.0%, from $2.5 for the nine months ended September 30,
1998. Approximately $5.4 million related to accounts
receivable sales and subservicing programs costs are
included in selling, general and administrative costs and
expenses for the nine months ended September 30, 1999
compared to $3.6 million for the nine months ended September
30, 1998.
Selling, general and administrative costs and expenses
of the HMOs declined because the Company sold those
businesses during 1998. DHP reported approximately $1.1
million of selling, general and administrative costs for the
nine months ended September 30, 1998. HPSE reported
approximately $9.8 million of selling, general and
administrative costs and expenses for the nine months ended
September 30, 1998. Additionally, there were decreases of
$1.6 million, in selling, general and administrative costs
and expenses for the nine months ended September 30, 1998,
related to the HMOs.
Related party expense, net. Related party expense, net
increased by $0.4 million, or 66.7%, to $1.0 million for the
nine months ended September 30, 1999 from $0.6 million for
the nine months ended September 30, 1998.
Other income (expense). Other income (expense)
increased by $3.7 million or 462.5%, to expense of $2.9
million for the nine months ended September 30, 1999 from
income of $0.8 million for the nine months ended September
30, 1998. This increase is primarily related to legal
settlements of $2.2 million and an additional $0.6 million
related to the sale of a contract.
Benefit for income taxes. There was no benefit for
income taxes recorded for the nine months ended September
30, 1999 or 1998. The Company expects to record no tax
expense or benefit, other than as a result of potential
asset dispositions, until the Company returns to
profitability in the future.
Net Loss. Primarily as a result of the foregoing, the
Company reported a net loss of $22.3 million for the nine
months ended September 30, 1999 compared to a net loss of
$13.2 million for the nine months ended September 30, 1998.
Sterling accounted for $7.9 million of net loss for the nine
months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities increased by
$18.4 million, or 150.8%, for the nine months ended
September 30, 1999, to $30.6 million as compared to $12.2
million for the nine months ended September 30, 1998. The
Company's net use of cash to support operating activities
resulted primarily from operating losses, increases in
accounts receivable, reduction of accounts payable and
amounts due to related parties. Net cash used in investing
activities increased by $14.3 million, or 238.3% for the
nine months ended September 30, 1999, to $20.3 million from
$6.0 million used in investing activities, for the nine
months ended September 30, 1998. The change in net cash used
in investing activities, for the nine months ended September
30, 1999 compared to September 30, 1998, is primarily
related to the acquisition of Sterling. The Company paid
approximately $69.3 million and assumed certain current
operating liabilities to acquire net assets of approximately
$49.1 million. This results in acquisition of subsidiaries,
net of cash acquired of $20.3 for the nine months ended
September 30, 1999. Net cash provided by financing
activities increased by $35.2 million, or 210.8%, to $51.9
million for the nine months ended September 30, 1999 from
$16.7 million for the nine months ended September 30, 1998.
The increase represented additional funding under the sales
and subservcing agreements with various affiliates of
National Century Financial Enterprises, Inc. ("NCFE").
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 $260 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 $18 million as of September 30,
1999. 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 $39 million as of September
30, 1999. A new Sale Agreement creates a facility for the
purchase of up to $95 million of receivables and terminates
on June 30, 2003. The remaining availability for purchases
on this facility is approximately $13 million as of
September 30, 1999. Pursuant to the Sale Agreement, the
Company pays a program fee ranging from approximately 10.8%
to approximately 12.5% 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, including pledges of the common stock of each of its
subsidiaries. There is currently nothing outstanding under
this loan and security agreement.
Financing to acquire Sterling was provided to
PhyAmerica by National Century Financial Enterprises, Inc.,
of Dublin, Ohio, through a sale of accounts receivables
acquired from Sterling.
The Company expects to satisfy its anticipated demands
and commitments for cash in the next twelve months from the
amounts available under the various agreements with NCFE
discussed above, as well as a reduction in cash used in
operations. During the next twelve months the Company
intends to renegotiate, restructure or refinance its
agreement with NCFE or other lenders. The Company continues
to review 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. 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 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.
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 completed the review of all applications and 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
modifications for other applications are expected to be
completed before experiencing any adverse consequences. 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 consolidated
financial position or the results of operations. Further, a
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 aware of an announcement that Medicare
contractors plan to hold all claims with dates of service of
January 1, 2000 or later until January 17, 2000, in order to
correctly apply the year 2000 and other annual updates,
including any changes in beneficiary coinsurance and
deductibles. The Company does not anticipate a significant
disruption of cash flow as a result of these claims being
held unless additional delays are encountered. Further, any
claims for dates of service during calendar year 1999 or a
previous year submitted along with calendar year 2000 dates
will also be held. The Company will take steps to ensure
reimbursement as timely as possible for claims with 1999
dates of service submitted from January 1, 2000 to January
17, 2000.
The Company is continuing to 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.
PART II - OTHER INFORMATION
Item 4. - Matters Voted Upon By Shareholders
The Annual Meeting of Shareholders of the Company was held
on July 29, 1999. At such meeting, the following members
were elected to the Board of Directors.
Number of Shares Voted
For Abstain
Eugene F. Dauchert, Jr. 39,530,686
233,429
Charles E. Potter 39,533,503
230,612
Edward L. Suggs, Jr. 39,533,503
230,612
The following directors' terms of office continued after the
meeting:
Steven M. Scott, M.D. Bertram E. Walls, M.D.
Sherman M. Podolsky, M.D. W. Randall Dickerson
The vote for the approval of issuance of Common Stock upon
conversion of the Series D Convertible Preferred Stock was
as follows:
For 23,369,525 Against 593,493 Abstain 46,371
The vote for the approval of amendment to the Company's
Certificate of Incorporation to change the Company's name
from Coastal Physician Group, Inc. to PhyAmerica Physician
Group, Inc. was as follows:
For 39,422,054 Against 324,936 Abstain 17,125
The vote for the approval of amendment to the Company's
Certificate of Incorporation to authorize the Company to
issue 100,000,000 shares of nonvoting common stock with a
par value of $0.01 per share was as follows:
For 39,225,383 Against 514,776 Abstain 23,956
The vote taken on the proposal to ratify the selection of
KPMG LLP, as the Company's independent certified public
accountants for the Corporation for the fiscal year ending
December 31, 1999 was as follows:
For 39,621,795 Against 125,624 Abstain 16,696
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Two reports on form 8-K were filed during the quarter for
which this report is filed:
On July 23, 1999, Company filed a report on Form 8-K to
announce the acquisition of Sterling Healthcare Group, Inc
on July 8, 1999.
On September 24, 1999, the Company filed a report on
form 8-K to include financial statements of Sterling and pro
forma financial information required pursuant to Item 7(a)
and 7 (b), respectively, of Form 8-K.
SIGNATURES
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.
PHYAMERICA PHYSICIAN GROUP, INC.
(Registrant)
Date: November 22, 1999 By: /S/ STEVEN M. SCOTT,
M.D.
Steven M. Scott, M.D.
President and Chief
Executive Officer
Date: November 22, 1999 By: /S/W. RANDALL
DICKERSON
W.
Randall Dickerson
Executive Vice President
and
Chief Financial Officer
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