UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Date of Report (Date of earliest event reported) July 8,
1999
PHYAMERICA PHYSICIAN GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 001-13460 56-1379244
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) No.)
2828 CROASDAILE DRIVE, DURHAM, NC 27705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code(919)383-0
355
COASTAL PHYSICIAN GROUP, INC.
(Former name or former address, if changed since last report
)
PhyAmerica Physician Group, Inc. (Formerly Coastal Physician
Group, Inc., "the Company") hereby amends the following
items, special-purpose financial statements, exhibits or
other portions of its Current Report on Form 8-K dated July
8, 1999, filed on July 23, 1999, as set forth in the pages
attached hereto:
Item 7. Special-purpose Financial Statements and Exhibits.
The following special-purpose financial statements and
exhibits are filed as part of this report:
(a) Special-purpose Financial Statements of the business
acquired:
Audited Special-purpose Financial Statements of Sterling
Healthcare Group, Inc.
Report of KPMG, LLP, Certified Public Accountants
Statement of Assets Acquired and Liabilities
Assumed as of June 30, 1999
Audited Statement of Revenues and Direct Expenses for
the year ended December 31, 1998 and for the six
months ended June 30, 1999 (unaudited)
(b) Pro Forma Financial Information:
Unaudited Pro Forma Financial Statements of PhyAmerica
Physician Group, Inc.
Consolidated Pro Forma Balance Sheet as of June
30, 1999.
Sterling Healthcare Group, Inc.
Special-purpose Financial Statements
(With Independent Auditors' Report Thereon)
Sterling Healthcare Group, Inc.
Table of Contents
Page
Independent Auditors' Report 1
Special-purpose Financial Statements:
Consolidated Statement of Assets Acquired and
Liabilities Assumed
June 30, 1999 2
Consolidated Statement of Revenues and Direct
Expenses for the
year ended December 31, 1998 and for the six
months ended
June 30, 1999 (unaudited) 3
Notes to Consolidated Financial Statements
4-8
Independent Auditors' Report
To the Board of Directors
PhyAmerica Physician Group, Inc.
We have audited the accompanying consolidated statement of
assets acquired and liabilities assumed of Sterling
Healthcare Group, Inc. as of June 30, 1999, and the related
consolidated statement of revenues and direct expenses for
the year ended December 31, 1998. These statements are the
responsibility of Sterling Healthcare Group, Inc.'s
management. Our responsibility is to express an opinion on
these statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the statements referred to above are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures
in the statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall statement
presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying consolidated statements were prepared to
present the assets acquired and liabilities assumed of
Sterling Healthcare Group, Inc. by PhyAmerica Physician
Group, Inc. (formerly Coastal Physician Group, Inc.), and
the revenues and direct expenses of Sterling Healthcare
Group, Inc. pursuant to the purchase agreement described in
Note 1, and is not intended to be a complete presentation of
Sterling Health Group, Inc.'s assets and liabilities,
results of operations, or cash flows.
In our opinion, the accompanying consolidated statements
referred to above present fairly, in all material respects,
the assets acquired and liabilities assumed, of Sterling
Healthcare Group, Inc., as of June 30, 1999, and the
revenues and direct expenses for the year ended December 31,
1998, pursuant to the purchase agreement referred to in Note
1, in conformity with generally accepted accounting
principles.
KPMG LLP
Raleigh, North Carolina
September 23, 1999
Sterling Healthcare Group, Inc.
Consolidated Statement of Assets Acquired and Liabilities
Assumed
June 30, 1999
(In thousands)
Assets Acquired
Current assets:
Cash and cash equivalents $ 3,495
Trade accounts receivable, net of 63,487
allowance $133,712
Prepaid expenses and other current assets
1,578
Total current assets 68,560
Property and equipment, at cost, net of
accumulated depreciation of $5,750 1,131
Other assets 50
Total assets acquired $ 69,741
Liabilities Assumed
Liabilities:
Accounts payable $ 4,581
Accrued physicians fees and medical costs 11,289
Accrued expenses 1,294
Total liabilities assumed 17,164
Net assets acquired $ 52,577
See accompanying notes to consolidated financial statements.
Sterling Healthcare Group, Inc.
Consolidated Statements of Revenues and Direct Expenses
(In thousands)
Six
Year Ended Months
Ended
December June 30,
31, 1998 1999
(unaudite
d)
Operating revenue, net $ 110,941 $ 67,152
Medical expenses 114,226 62,108
Gross profit (3,285) 5,044
Salaries 7,572 3,642
Benefits 1,059 604
Supplies 158 43
Purchased services 592 318
Facility costs 1,621 603
General insurance 7 --
Other expenses 3,206 1,209
Depreciation 1,013 388
Total operating 15,228 6,807
expenses
Excess of Direct Expenses over $ (18,513) $ (1,763)
Revenue
See accompanying notes to consolidated financial statements.
Sterling Healthcare Group, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A. Principles of Consolidation and Basis of Presentation
Sterling Healthcare Group, Inc. ("Sterling" or the
"Company") 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, the Company
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.
The accompanying special-purpose consolidated financial
statements were prepared on the basis of the historical
costs of Sterling Healthcare Group, Inc. and its wholly-
owned subsidiary companies. Sterling was a wholly-owned
subsidiary of FPA Medical Management, Inc. ("FPA"). The
special-purpose financial statements include only certain
assets acquired and liabilities assumed by CPG Acquisition
Co., a wholly-owned subsidiary of PhyAmerica Physician
Group, Inc., formerly Coastal Physician Group, Inc.,
("PhyAmerica"), as described in the purchase agreement dated
July 8, 1999. Additionally only certain revenues and direct
expenses related to the contracts acquired and liabilities
assumed are included in the consolidated statements of
revenue and direct expenses.
Certain operating expenses of FPA, including corporate
overhead expenses have not been allocated to Sterling's
operations. Information as of December 31, 1997 and 1996
and for the years then ended is not presented because the
number and nature of contracts active during those periods
did not necessarily reflect the assets acquired, or
contracts and liabilities assumed by PhyAmerica. Further,
because certain expenses have been omitted and the
possibility that contracts assumed may terminate in
accordance with their terms, the historical financial
statements are not necessarily indicative of the results of
operations of Sterling going forward.
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."
B. Cash and Cash Equivalents
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.
C. Revenue and Accounts Receivable
Revenue from patient services is reported on the
accrual basis, net of estimated third-party contractual
adjustments. Further adjustments are recorded to reflect
amounts estimated to be uncollectible based upon individual
contract experience. 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.
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.
The collectibility of certain accounts
receivable, primarily amounts due from Medicare and
Medicaid, may be dependent upon the completion of physician
enrollment documentation, delivery of that information to
payor and compliance by the payors with certain court orders
regarding payment of claims, particularly those claims which
may have exceeded deadlines for submission.
Although the Company believes amounts provided are
adequate, the ultimate amounts uncollectible could be in
excess of the amounts provided. These receivables are
geographically dispersed throughout the United States.
D. Contracts
As of June 30, 1999, the Company provided physician
practice management services to 127 hospital-based emergency
departments and two correctional institutional health
facilities in 25 states. The Company contracted with
approximately 1,900 affiliated physicians. The Company
typically contracts to provide all necessary physician
coverage for hospital departments on a 24-hour, 365-day
basis. The Company identifies and recruits physicians as
candidates for admission to a client's medical staff and
coordinates the on-going scheduling of staff physicians, who
provide clinical coverage in the area of emergency medicine.
The Company may also provide an on-site medical director for
the hospital's emergency department, who works directly with
the hospital medical staff and administration in such areas
as quality assurance, risk management and departmental
accreditation.
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 provides physician practice
management services to hospitals under contracts that
generally have terms of one or two years, renewable
automatically under the same terms and conditions unless
either party gives the other written notice of its intent
not to renew prior to the end of the then current term,
during a period specified by the contract.
Below is data about the Company's historical
contract retention experience:
Six Months Years Ended
Ended June 30, December 31,
1999 1998 1997 1996
Number of contracts at beginning of period 134 148 104
93
Number of contracts terminated and not
renewed during the period (14) (35) (12) (20)
New contracts during the period 9 21 56 31
Number of contracts at end of period129 134 148 104
E. Use of Estimates
The preparation of the consolidated special-purpose
financial statements in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the
consolidated special -purpose financial statements and the
accompanying notes. Actual results could differ from those
estimates.
F. Property and Equipment
Property and equipment is recorded at cost.
Depreciation expense is computed using the straight-line
method over the estimated useful lives (5-30 years) of the
respective assets. Equipment under capital leases is
amortized using the straight-line method over the shorter
period of the lease term or the estimated useful life of the
equipment. Maintenance and repairs are charged to expense as
incurred. Significant renewals or betterments are
capitalized. When property and equipment are retired, or
otherwise disposed of, the cost and related accumulated
depreciation are removed from their respective accounts and
any gain or loss is reflected in earnings.
G. Current Assets
Other current assets consist primarily of prepaid
professional liability insurance.
H. Professional Liability Insurance
The Company and its independent contractor physicians
and other retained healthcare providers are currently
covered by various policies of professional liability
insurance underwritten by an insurance company not
affiliated with the Company. Coverage is provided in
amounts the Company deems to be appropriate, based upon
historical claims and the nature and risks of the Company's
business. The professional liability insurance coverage is
generally written on a claims-made basis. Effective as of
July 1, 1999, there are non deductibles or self-insured
retentions. There can be no assurance that a future claim
for medical professional liability will not exceed the
limits of the Company's available insurance coverage or that
such coverage will continue to be available at acceptable
costs or at all; however, management believes that it will
be able to continue to arrange for such insurance coverage
on acceptable terms. The insurance provides coverage,
subject to the policy terms and conditions and limits of
coverage, in the event that the Company is held liable as a
defendant or co-defendant in a claim or lawsuit alleging
liability arising as a result of actions by an independent
contractor physician providing services at a contracted
hospital or other client. The Company does not control the
practice of medicine by physicians or the compliance with
certain other regulatory and other requirements directly
applicable to the physicians or hospitals. The likelihood
that the Company could be held vicariously liable for the
negligence of a physician could be increased if such
physician were determined to be an employee or other agent
of the Company.
Professional liability insurance expenses allocated to
the specific contracts purchased were based on relative
physician compensation expense.
I. Liabilities Assumed
On July 8, 1999, PhyAmerica assumed $17,163,878 in
operating liabilities with the purchase and assumption of
the assets and liabilities respectively, as stated in the
purchase agreement. These liabilities primarily consisted of
physician compensation, trade payables and other accrued
expenses.
Presentation of Expenses
Costs of medical services are recorded as expenses in
the period in which they are incurred. All physician costs
and medical support services costs and expenses are fixed to
the extent that they are direct costs. Physician costs and
expenses are comprised primarily of fees paid to physicians.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Consolidated Pro Forma Financial
Information should be read in conjunction with the separate
historical consolidated financial statements and notes
thereto of Sterling Healthcare Group, Inc.
PHYAMERICA PHYSICIAN GROUP, INC.
Unaudited Pro Forma Balance Sheet
June 30, 1999
(In thousands)
PhyAmeri Sterlin Adjustme Total
ca g nts
Assets
Current assets:
Cash and cash $ 1,663 $ 3,495 $ 600 (a, $ 5,758
equivalents b,c
)
Trade accounts 27,013 63,487 (58,445) d 32,055
receivable, net
Reserves held by 5,656 -- 10,243 d 15,899
NCFE
Accounts receivable, 6,680 -- (5,000) b 1,680
other
Receivables from 348 -- -- 348
related party
Prepaid expenses and
other current assets 6,052 1,578 3,658 d 11,288
Total 47,412 68,560 (48,944) 67,028
current assets
Property and equipment,
at cost, less 5,693 1,131 -- 6,824
accumulated
depreciation
Excess of cost over fair
value of net assets 2,160 -- 16,915 c 19,075
acquired, net
Other assets 3,333 50 -- 3,383
Total assets $ 58,598 $ 69,741 $ (32,029) $ 96,310
Liabilities and
Shareholders' Equity
Current liabilities:
Current maturities and
other short-term $ 88,749 $ -- $ -- $ 88,749
borrowings
Accounts payable 20,266 4,581 -- 24,847
Payable to related 181 -- -- 181
party
Accrued physicians
fees and medical costs 9,794 11,289 (4,400) b 16,683
Accrued expenses 7,472 1,294 -- 8,766
Total current 126,462 17,164 (4,400) 139,22
liabilities 6
Long-term debt,
excluding current 2,940 -- 24,948 (a, 27,888
maturities d)
Total liabilities 129,402 17,164 20,548 167,11
4
Shareholders' equity
(deficit):
Preferred stock $.01 par
value; shares
authorized 10,000;
shares issued and
outstanding 445
Series D convertible
preferred stock shares
authorized 1,200;
shares issued and 4 -- -- 4
outstanding 445
Additional paid-in
capital preferred 2,061 -- -- 2,061
stock
Common stock $.01 par
value; shares
authorized 100,000;
shares issued and 380 -- -- 380
outstanding 37,953
Additional paid-in 176,222 -- -- 176,22
capital 2
Common stock 1,675 -- -- 1,675
warrants
Accumulated deficit (251,146 -- -- (251,1
) 46)
Total (70,804) -- -- (70,80
shareholders' deficit 4)
Total liabilities
and shareholders' $ 58,598 $ 17,164 $ 20,548 $ 96,310
deficit
See accompanying notes to consolidated financial statements.
Explanation of adjustments:
Financing provided to PhyAmerica Physician Group, Inc.,
by National Century Financial Enterprises, Inc.
Elimination of intercompany transactions.
Goodwill recorded on purchase of Sterling.
Sale of accounts receivables acquired from Sterling
Healthcare Group, Inc., to National Century Financial
Enterprises, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
PHYAMERICA PHYSICIAN GROUP, INC.
(Registrant)
Date: September 24, 1999 By: /S/Steven M. Scott,
M.D.
Steven M. Scott,
M.D.
President and Chief
Executive Officer
Date: September 24, 1999 By: /S/W. Randall Dick
erson
W. Randall Dickerson
Executive Vice
President and Chief
Financial Officer
