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, 1999
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
PHYAMERICA PHYSICIAN GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1379244
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2828 CROASDAILE DRIVE, DURHAM, NC 27705
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(Address of principal executive offices) (Zip Code)
(919) 383-0355
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: 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 29, 2000 was $4,011,000. 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 29, 2000 was 42,571,203.
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
ITEM 1. BUSINESS
GENERAL
PhyAmerica Physician Group, Inc., together with its subsidiaries (the
"Company", "PhyAmerica" 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. In July 1999, the Company changed its name from Coastal
Physician Group, Inc.
Founded in 1977 to assist hospitals in staffing their emergency
departments, the Company expanded in the years 1991 to 1995 to provide
hospital-based emergency physician management, as well as physician business
management services such as practice management, billing and business
management. 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 emergency physician
management and physician business management services.
In July 1999, in order to expand its Emergency Physician Management
business, the Company acquired the hospital emergency department staffing assets
of Sterling Healthcare, Inc. ("Sterling"), a subsidiary of FPA Medical
Management, Inc., which was in a Chapter 11 proceeding under the United States
Bankruptcy Code, for a purchase price of approximately $69.3 million plus
assumption of up to $18 million in operating liabilities. This acquisition (the
"Sterling Acquisition") increased the number of emergency department staffing
contracts in the Emergency Physician Management business from approximately 151
to 280 (since reduced to approximately 241 as of December 31, 1999 through
contract attrition). In addition, on December 14, 1999 the Company increased the
size of its Billing and Business Management business by approximately 25% when
Healthcare Business Resources, Inc. ("HBR"), a subsidiary of the Company,
acquired from a subsidiary of Per Se Technology, Inc. the assets used in
providing billing services for the hospital staffing contracts acquired in the
Sterling Acquisition (the "Per Se Acquisition"). The Company paid $6.7 million
to terminate the billing agreement with Per Se Technologies, Inc. and to acquire
the billing operations assets. The Per Se Acquisition increased the number of
patient visits billed in the Billing and Business Management Business from
approximately 3.8 million per year to approximately 5 million per year.
As of December 31, 1999, the Company's ongoing businesses included
providing physicians to staff hospital emergency departments, providing billing
and business management 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. Information
about industry segments is included the Notes to Consolidated Financial
Statements.
EMERGENCY PHYSICIAN MANAGEMENT
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 emergency
physician management, the provision of contract management services to hospital
emergency departments represents the Company's principal hospital-based service.
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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.
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.
GOVERNMENT SERVICES. The Company provides emergency physician management 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. The
dollar amount of all such contracts through the end of the contract terms in
2004, assuming all options are exercised by the governmental agency (which is
within its sole discretion), was approximately $56,759,000 as of December 31,
1999.
BILLING AND BUSINESS MANAGEMENT SERVICES
The Company provides a range of billing, collection and business management
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 Physician Management services and are also marketed
independently to unaffiliated providers. The Company provides these services to
over 4,000 physicians in over 240 hospitals in 25 states. The Company codes,
bills and collects for professional services with respect to over 5 million
patient visits annually. Approximately 56% of the Company's billing and business
management operations serve providers with which the Company's emergency
physician management 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 99% of its net billing and collection revenue for 1999, and 97%
for 1998 and 1997 (including work for contract management clients and contracted
health care professionals) was derived from emergency medicine billing and
business management services. This change is primarily attributable to the
Company's renewed focus on emergency medicine billing with less emphasis on
billing for clinical settings.
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. 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.
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CONTRACTUAL ARRANGEMENTS AND CUSTOMERS
The Emergency Physician Management business include the following types of
contracts:
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 emergency physician management 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 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
Existing governmental regulation can adversely affect the Company's
business through, among other things, its potential to reduce the amount of
reimbursement received by the Company's clients for health care services.
Substantially all of the Company's revenue is derived from management fees that
are based upon a percentage of net collections of health care receivables.
During the past decade, federal and
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state governments have implemented legislation designed to stimulate a reduction
in the increase in health care costs and it is anticipated that such legislative
initiatives will continue. There can be no assurance that current or future
government regulations will not have a material adverse effect upon the
Company's business.
The Company may also be subject to applicable federal and state billing and
credit collection agency laws and regulations. In general, these laws provide
for various fines, penalties, damages and other assessments for violations,
including possible exclusion from Medicare, Medicaid and certain other federal
and state health care programs. A majority of the Company's clients are
reimbursed by private insurers as well as federal and state medical insurance
providers. Since the beginning of 1995, governmental agencies have instituted
investigations of, and actions against, at least two industry participants for
improper billing practices. Although management believes that its billing
practices are in material compliance with applicable laws and government
regulations, given the highly technical nature of this area, there can be no
assurance that a change in government regulations, industry practice or an
increased focus by governmental agencies on billing practices would not have a
material adverse effect on the industry and the Company.
Certain market changes are occurring in the health care market that may
continue regardless of whether comprehensive federal or state health care reform
legislation is adopted and implemented and that could adversely affect the
accounts receivable management services provided by the Company. These market
reforms include certain employer initiatives, such as creating purchasing
cooperatives and contracting for health care services for employees through
managed care companies (including health maintenance organizations), certain
provider initiatives, such as risk-sharing among health care providers and
managed care companies through capitated contracts and integration of hospitals
and physicians into comprehensive delivery systems, and certain payor
initiatives, such as new alliances between health care providers and third party
payors in which the health care providers are employed by such third party
payors. These changes may result in fixed fee schedules or capitation payment
arrangements lower than standard charges. Some of these changes may affect the
viability of certain billing and business management operations. Because the
Company derives its revenue largely based on the fees charged by its physician
clients, reductions in payments to physicians could have an adverse affect on
the Company's operations. Furthermore, because the Company's revenue is
generally based on its clients' net collections, any delay in its clients'
receipt of medical claims reimbursement, including due to an economic recession,
could have a material adverse effect on the Company.
Various state and federal laws may regulate the Company's business of
providing business management services to physicians. The Company also is
subject to laws and regulations relating to business corporations generally.
Management believes that the Company's operations are in material compliance
with applicable laws. However, many aspects of the Company's business operations
have not been the subject of state or federal regulatory interpretation, and
certain areas of the Company's business are highly technical in nature. In
addition, as the Company's business expands by the addition of services provided
or geographically, it may become subject to additional federal or state
regulations based on the services it provides or the states in which it conducts
business.
Regulatory authorities have broad discretion concerning how these laws and
regulations are interpreted and how they are enforced. The Company may,
therefore, be subject to lengthy and expensive investigations of its business
operations. If the Company were found to be in violation of these laws or
regulations, the Company could be subject to criminal and civil penalties or
both, which could limit or prevent the Company from providing its physician
business management services.
In accordance with Medicare regulations, physicians and hospitals are
permitted to assign Medicare claims to a billing and collection service only in
certain limited circumstances. The Medicare statutes that restrict assignment of
Medicare claims are supplemented by Medicare regulations and provisions in the
Medicare Carrier's Manual (the "Manual"). The Medicare regulations and the
Manual provide that a billing service that prepares and send bills for the
provider or physician and does not receive and negotiate the checks made payable
to the provider or physician does not violate the restrictions on assignment of
Medicare claims. Management believes that the Company's practices do not violate
the restrictions on assignment of Medicare claims and that it operates in a
manner consistent with these provisions.
The Social Security Act imposes criminal penalties for paying or receiving
remuneration (which is deemed a kickback, bribe or rebate) in connection with
Medicare or Medicaid programs. Violation of this
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law is a felony, punishable by fines and imprisonment. These anti-kickback laws
and rules have been broadly interpreted to prohibit the payment, solicitation,
offering or receipt of any form of remuneration in return for the referral of
Medicare or Medicaid patients or any item or service that is covered by Medicare
or Medicaid reimbursement. The Company believes that its business operations do
not put it in a position to make or induce the referral of patients or services
reimbursed under government programs and, therefore, believes that its practices
do not violate the federal anti-kickback statute. If, however, the Company were
found in violation of these laws, the Company could be subject to substantial
civil monetary fines, criminal sanctions or both.
The Company may also be subject to criminal, civil and administrative
penalties under federal and state law prohibitions against submitting false
claims for payments. Generally, criminal penalties subjecting participants to
fines and imprisonment require that the entity act knowingly, willfully, or with
fraudulent intent. Civil statues provide for monetary penalties. The Company
also may be subject to criminal laws regarding failure to disclose known
overpayments under Medicare or Medicaid.
Various states prohibit a physician from sharing or "splitting" fees with
persons not authorized to practice medicine. The Company believes that its
charges to its clients do not violate applicable fee splitting prohibitions. If
this belief is incorrect and the Company is determined to be engaged in fee
splitting arrangements with its clients, those clients would be subject to
charges of professional misconduct and penalties ranging from censure and
reprimand to revocation of their medical licenses. In addition, the Company
could be deprived of access to the courts to collect fees due from those
clients, thereby materially and adversely affecting the Company's revenues and
prospects.
Credit collection practices and activities are regulated by both federal
and state law. The Federal Fair Debt Collection Practices Act (the "Federal Fair
Debt Act") sets forth various provisions designed to eliminate abusive,
deceptive and unfair debt collection practices by debt collectors. The Federal
Fair Debt Act also provides for, among other things, a civil right against any
debt collector who fails to comply with the provisions thereof. Various states
have also promulgated laws and regulations that govern credit collection
practices. In general, these laws and regulations prohibit certain fraudulent
and oppressive credit collection practices and also may impose license or
registration requirements upon collection agencies. In addition, state credit
collection laws and regulations generally provide for criminal fines, civil
penalties, injunctions and jail terms for collection agency personnel who fail
to comply with such laws and regulations and may entitle states to recover
unclaimed refunds from overcollections. The accounts receivable management
services the Company provides to its clients are not considered debt collection
services and the Company is not a "debt collector" under the Federal Fair Debt
Act.
Various states regulate the provision of administrative and business
services by third parties to physician-sponsored health plans. In addition,
certain federal or state consumer protection laws may apply to the Company's
billing activities insofar as the Company bills patients directly for the cost
of physician services provided.
The Company anticipates that various health care reform proposals may be
introduced at the federal or state level. The Company is unable to predict
whether any such proposals will apply to the operation of the Company's business
or whether, if adopted, any such proposals would materially adversely affect the
Company.
CORPORATE LIABILITY AND INSURANCE
Each of the Company's emergency physician management 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.
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In addition, the Company's contracts with hospital clients generally
contain provisions under which the Company's contracting subsidiary agrees to
indemnify the client for losses resulting from the contracting physician's
malpractice up to the limits of such contracting physician's liability insurance
(whether or not such losses are covered by insurance policies) and the client
agrees to indemnify the Company's contracting subsidiary up to the limits of the
client's professional liability insurance for losses resulting from the
negligence of the client or client personnel (whether or not such losses are
covered by insurance policies). In addition, the Company's contracts with the
Department of Defense and the Department of Veterans Affairs generally provide
for the Company's contracting subsidiary to indemnify the government, without
limitation as to amount, for losses incurred under similar circumstances. The
Company's contracting subsidiary requires the contracted physicians to indemnify
the Company's contracting subsidiary for losses related to the performance of
medical services and to obtain professional liability insurance.
COMPETITION
The physician business management services business is highly competitive.
The Company competes with national, regional and local physician business manage
services organizations and physicians that provide their own practice
management. The Company's success depends upon the continued contributions of
its senior management. The Company enters into confidentiality, noncompete and
non-solicitation agreements with its key employees. In general, these agreements
contain certain covenants on the part of the key employees concerning
confidential and proprietary information of the Company and preclude the key
employees from soliciting customers or employees of the Company or competing
with the Company.
EMPLOYEES
At December 31, 1999, the Company had approximately 1,750 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 PhyAmerica 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
PhyAmerica 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 $2,655,000 for
the year ended December 31, 1999.
Further information concerning properties leased from related parties is
disclosed in "Item 13--Certain Relationships and Related Transactions".
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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 County,
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 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 of $500 for each
alleged violation of the statute, plus attorneys fees. Plaintiffs also filed a
motion seeking class certification. 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 filed motions to dismiss on the grounds of lack
of personal jurisdiction, and an Order was entered dismissing all of the
individual defendants. Plaintiffs have appealed this Order. On October 28, 1999,
the trial court issued its ruling denying Plaintiffs' Motion for Class
Certification, and Plaintiffs have filed an appeal of this ruling. On October
21, 1999, Plaintiffs filed an additional civil action in the North Carolina
state courts against Edward Suggs, Terry Blackwood, and Ralph Durr, who was
formerly an officer of HBR. The allegations and claims in the North Carolina
civil action are substantially similar to those filed in the Florida action.
Following a mediation, a comprehensive settlement of all claims was reached in
February 2000, resulting in the dismissal of all claims and suits in all
jurisdictions.
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. ("NCFE") 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 two and a half years. The Company believes 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 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. An arbitration was held in August 1999 in
Washington, D.C. and the arbitrator entered an award in favor of Dr. Sokolov.
The arbitration provisions of the Employment Agreement provided that the award
of the arbitrator was reviewable by a court of law for errors of law made by the
arbitrator. Following the award, the Company filed an action in the U.S.
District Court for the Middle District of North Carolina alleging that the
arbitrator made errors of law. Dr. Sokolov has filed a Motion to Change Venue of
the court proceeding to the U.S. District Court for the District of Columbia.
The Company is attempting to reach a settlement of this matter with Dr. Sokolov.
If it is not able to reach a settlement of this matter, the Company intends to
continue to vigorously challenge the ruling of the arbitrator. The Company has
provided a reserve for the amount of the award in its financial statements with
respect to this matter.
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,
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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.
Following an arbitration conducted in July 1999, the arbitrator entered an award
in favor of the Company finding it had no liability to Century. The Company and
Century have since entered into an agreement terminating the Risk Management
Agreement.
On March 23, 2000, two shareholders filed a lawsuit styled Bosco, et al v.
Scott, et al in the U. S. District Court for the District of Delaware,
individually and on behalf of all those similarly situated, and derivatively as
shareholders of the Company, alleging five claims for relief. The first claim
alleges breach of fiduciary duty by the directors, primarily related to the
sales of certain assets to Dr. Scott. The second claim is brought against NCFE
and Lance Poulsen, Chairman and Chief Executive Officer of NCFE, alleging the
aiding and abetting the breach of fiduciary duty by the individual defendents.
The third claim is brought derivatively against Dr. Scott, Mr. Poulsen and NCFE
alleging violation of the Racketeer Influenced and Corrupt Organizations Act.
Count four is brought against the individual directors for allegedly unlawfully
amending the Company's Certificate of Incorporation to restrict transferability
of the Company's stock. Count five is brought individually against the directors
for breach of fiduciary duty in failing to disclose the reason for the delisting
of the Company's stock by the New York Stock Exchange in December 1998. The
Company believes that the actions taken by management and the Board of Directors
in divesting certain operations were appropriate, were done for fair and
adequate consideration and have been properly documented and publicly disclosed.
The Company intends to vigorously defend the action and, at this stage of the
litigation, the exposure to the Company cannot be determined.
The New York State Department of Taxation and Finance has written a letter
to Better Health Plan, Inc. ("BHP") stating that as a result of an audit of the
Corporation Finance Tax return filed by BHP for the period from May 2, 1995 to
May 5, 1995, it has determined that an adjustment is required to the BHP tax
liability for that period. The Company has requested additional time to review
the findings. Based on the limited information available at this time, the
exposure to the Company, if any, 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 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 1999.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Beginning January 4, 1999, the Company's common stock was included on the
OTC Bulletin Board System 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 1999 and 1998.
1999 1998
---- ----
High Low High Low
-------------- --------------
First Quarter $ 0.41 $ 0.19 $ 1.00 $ 0.63
Second Quarter 0.72 0.22 0.75 0.19
Third Quarter 0.56 0.27 1.44 0.31
Fourth Quarter 0.44 0.25 0.75 0.38
As of December 31, 1999, the Company had approximately 5,000 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. Subsequent to approval by the holders of
the Common Stock in July 1999, the Series D Preferred was converted into 10
shares of Common Stock for each share of Preferred Stock, or 4,449,740 shares of
Common Stock, in November 1999. 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.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ----------- ---------- -----------
(in thousands, except per share data)
Results of Operations:
<S> <C> <C> <C> <C> <C>
Operating revenue, net $264,710 $294,221 $424,841 $552,109 $810,387
Operating loss (15,231) (11,576) (67,188) (125,029) (68,775)
Loss from continuing operations (32,663) (20,138) (81,981) (147,421) (63,138)
Loss per share from continuing (0.84) (0.53) (3.08) (6.18) (2.67)
operations
Net loss (32,663) (20,138) (81,981) (145,557) (46,901)
Net loss per share (0.84) (0.53) (3.08) (6.10) (1.98)
Weighted average shares 38,697 37,676 26,623 23,844 23,656
December 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ----------- ---------- -----------
Balance Sheet at Year-End:
Total assets $88,783 55,074 $99,531 $181,841 $313,057
Short-term debt 7,477 433 2,529 71,130 5,210
Long-term debt 120,736 77,109 74,698 4,799 77,270
Total shareholders' (96,267) (63,719) (61,427) 3,503 146,371
equity/(deficit)
</TABLE>
10
<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. 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. Collectively, these businesses are referred
to as the HMOs. During 1997, the Company also sold the last of its clinic
operations. The Company refers to the HMOs, clinic operations and some smaller
related businesses as the divested businesses. The core businesses are comprised
of emergency medicine practice management, government services and medical
billing and business management services.
In July 1999, in order to expand its Emergency Physician Management
business, the Company acquired the hospital emergency department staffing assets
of Sterling Healthcare, Inc. ("Sterling"), a subsidiary of FPA Medical
Management, Inc., which was in a Chapter 11 proceeding under the United States
Bankruptcy Code, for a purchase price of approximately $69.3 million plus
assumption of up to $18 million in operating liabilities. This acquisition (the
"Sterling Acquisition") increased the number of emergency department staffing
contracts in the Emergency Physician Management business from approximately 151
to 280 (since reduced to approximately 241 as of December 31, 1999 through
contract attrition). In addition, on December 14, 1999 the Company increased the
size of its Billing and Business Management business by approximately 25% when
Healthcare Business Resources, Inc. ("HBR"), a subsidiary of the Company,
acquired from a subsidiary of Per Se Technologies, Inc. the assets used in
providing billing services for the hospital staffing contracts acquired in the
Sterling Acquisition (the "Per Se Acquisition"). The Per Se Acquisition
increased the number of patient visits billed in the Billing and Business
Management Business from approximately 3.8 million per year to approximately 5
million per year. The acquisitions were accounted for in accordance with the
purchase method of accounting, and, therefore, the results of operations for the
acquired operations are included in the accompanying financial statements since
the acquisition date.
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.
1999 COMPARED TO 1998
OPERATING REVENUE, NET. Net operating revenue for 1999 was $264.7 million,
representing a decrease of $29.5 million, or 10.0 %, from 1998 operating
revenues of $294.2 million. The decreases in operating revenue among the various
businesses were as follows:
Increase
1999 1998 (Decrease) %
----------------------------------------------------
Core businesses $264.7 $201.3 $63.4 31.5%
Divested businesses 0.0 92.9 (92.9) 100.0%
---------------------------------------
$264.7 $294.2 $(29.5) (10.0)%
====================================================
The increase in the revenue of the core businesses was due mostly to the
Sterling Acquisition. In 1999, the emergency physician management business
generated approximately $228.3 in revenue, which was an increase of
approximately $63.6 million, or 38.6%, from approximately $164.7 million of
revenue in 1998. Approximately $66.5 of this increase was attributable to
Sterling offset by a slight decrease in the non-Sterling contracts, related to
contract terminations. The government services group accounted for approximately
$17.8 million in 1999, which was a decline of approximately $2.4 million, or
11.9%, from $20.2 million in 1998. The decrease in revenue of the government
services group was mainly due to
11
<PAGE>
contract terminations. These decrease were partially offset by an increase in
revenue of the billing and collections operations of approximately $2.5 million,
or 15.4%, to $18.7 million in 1999 from $16.2 million in 1998 due to growth in
the billing contracts and fees. Revenue of the billing and business management
operations excludes intersegment revenue of approximately $16.3 million in 1999
and approximately $12.7 million in 1998 representing fees billed to the
emergency physician management business. Other miscellaneous revenue decreased
by approximately $0.1 million from approximately $0.2 million in 1998 to
approximately $0.1 million in 1999.
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 $34.2 million, or 14.6%,
to approximately $199.8 million in 1999 from approximately $234.0 million in
1998. Physician and other provider services costs and expenses decreased as
follows:
Increase
1999 1998 (Decrease) %
----------------------------------------------------
Core businesses $199.8 $145.5 $54.3 37.3%
Divested businesses 0.0 88.5 (88.5) 100.0%
---------------------------------------
$199.8 $234.0 $(34.2) (14.6)%
====================================================
These expenses for the core businesses increased mostly because of the
Sterling acquisition. In 1999, physician and other provider services costs and
expenses for the emergency physician management group were approximately $185.6
million. This represented an increase of $56.9 million, or 44.2%, from $128.7
million in 1998. Approximately $61.3 of this increase was attributable to
Sterling offset by a slight decrease in the non-Sterling contracts, related to
contract terminations. The government services group's expenses were
approximately $14.2 million in 1999, representing a decrease of approximately
$2.6 million, or 15.5%, from approximately $16.8 million in 1998. The decrease
in physician and other provider services costs and expenses of the government
services group was mainly due to contract terminations. The billing and business
management operations did not incur physician and other provider services costs
and expenses.
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 $1.3 million, or 3.9%, to $34.7 million in 1999 from $33.4 million
in 1998. Medical support services costs and expenses increased as follows:
Increase
1999 1998 (Decrease) %
----------------------------------------------------
Core businesses $34.6 $33.1 $1.5 4.5%
Divested businesses 0.1 0.3 (0.2) 66.7%
---------------------------------------
$34.7 $33.4 $1.3 3.9%
====================================================
These expenses for the core businesses increased due to the growth in the
billing operations. In 1999, medical support services costs and expenses for the
emergency physician management group were approximately $5.5 million. This
represented a decrease of $0.2 million, or 3.5%, from $5.7 million in 1998. The
government services group's expenses were approximately $1.8 million in 1999,
representing a decrease of approximately $0.5 million, or 21.7%, from
approximately $2.3 million in 1998. The billing and business management group's
expenses were approximately $27.3 million in 1999 representing an increase of
approximately $2.2 million, or 8.8%, from approximately $25.1 million in 1998.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE COSTS AND EXPENSES. Selling, general
and administrative costs and expenses increased by $8.8 million, or 25.0%, to
$44.0 million in 1999 from $35.2 million in 1998. Selling, general and
administrative costs and expenses increased as follows:
Increase
1999 1998 (Decrease) %
----------------------------------------------------
Core businesses $43.9 $24.7 $19.2 77.7%
Divested businesses 0.1 10.5 (10.4) (99.0)
---------------------------------------
$44.0 $35.2 $8.8 25.0%
====================================================
Selling, general and administrative costs and expenses for the core
businesses increased because of the Sterling acquisition. In 1999, selling,
general and administrative costs and expenses for the Physician Contract group
were approximately $ 33.4 million. This represented an increase of $14.3
million, or 74.7%, from $19.1 million in 1998. Approximately $11.6 million of
the increase is attributable to the Sterling acquisition. The government
services group's expenses were approximately $0.7 million in 1999 representing
an increase of approximately $0.5 million, or 250.0%, from approximately $0.2
million in 1998. The billing and business management group's expenses were
approximately $1.8 million in 1999 representing a decrease of approximately $0.3
million, or 14.3%, from approximately $2.1 million in 1998. Selling, general and
administrative costs and expenses for the corporate group increased to
approximately $8.0 million in 1999 representing a increase of approximately $4.7
million, or 142.4%, from approximately $3.3 million in 1998. 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. No
credits were received in 1999.
RELATED PARTY EXPENSE, NET. Related party expenses, net decreased by $0.2
million, or 12.5%, to $1.4 million in 1999 from $1.6 million in 1998. The
decrease is primarily due to an insurance company affiliate of the Company being
purchased by an unaffiliated party in May 1998. See "Notes to Consolidated
Financial Statements".
GAIN (LOSS) ON DIVESTED ASSETS, NET. There were no gains on divested assets
during 1999. 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 credited
directly to additional paid-in capital. 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.
INTEREST EXPENSE. Interest expense increased by $5.8 million to $14.5
million in 1999 from $8.7 million in 1998 due primarily to the Sterling
Acquisition resulting in higher outstanding amounts of debt during 1999. The
costs associated with the sale of eligible accounts receivable in 1999 and 1998
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. No credits were received in 1999.
OTHER, NET. Other expenses increased by $2.7 million from $0.2 million in
1998 to $2.9 million in 1999 due primarily to litigation expenses and
settlements in 1999.
BENEFIT (PROVISION) FOR INCOME TAXES. There was no benefit (provision) for
income taxes for 1999 and 1998. This is due to continued net operating losses.
13
<PAGE>
NET LOSS. Primarily as a result of the foregoing, the Company reported a
net loss of $32.7 million in 1999 compared to a net loss of $20.1 million in
1998.
1998 COMPARED TO 1997
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) %
------------------------------------------
Core businesses $201.3 $239.7 $(38.4) (16.0)%
Divested businesses 92.9 185.1 (92.2) (49.8)
--------------------------------
$294.2 $424.8 $(130.6) (30.7)%
==========================================
The decrease in the revenue of the core businesses was due mostly to net
contract terminations during 1997 and 1998 in the emergency physician management
business and the sale of most of the OB/GYN clinic business. In 1998, the
emergency physician management 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
business management 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 business management operations
excludes intersegment revenue of approximately $12.7 million in 1998 and
approximately $13.3 million in 1997 representing fees billed to the emergency
physician management 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 divested operations 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) %
-----------------------------------------
Core businesses $145.5 $186.4 $(40.9) (21.9)%
Divested businesses 88.5 172.8 (84.3) (48.8)
-------------------------------
$234.0 $359.2 $(125.2) (34.9)%
==========================================
These expenses for the core businesses decreased because the number of
contracts in the emergency physician management 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 emergency physician management
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 $16.8 million in 1998, representing a decrease of
approximately $3.5 million, or 17.2%, from approximately
14
<PAGE>
$20.3 million in 1997. The billing and business management 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 %
----------------------------------------
Core businesses $33.1 $33.9 $(0.8) (2.4)%
Divested businesses 0.3 6.8 (6.5) (95.6)
----------------------------
$33.4 $40.7 $(7.3) (17.9)%
========================================
These expenses for the core businesses decreased because the number of
contracts in the emergency physician management business declined and the
Company sold most of the OB/GYN clinic business. In 1998, medical support
services costs and expenses for the emergency physician management 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
business management 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 %
----------------------------------------
Core businesses $24.7 $49.6 $(24.9) (50.2)%
Divested businesses 10.5 31.7 (21.2) (66.9)
----------------------------
$35.2 $81.3 $(46.1) (56.7)%
========================================
Selling, general and administrative costs and expenses for the core
businesses decreased because the number of contracts in the emergency physician
management 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 business management group's expenses were
approximately $2.1
15
<PAGE>
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 business
management 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 "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 "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 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 the "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.
INTEREST EXPENSE. 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 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.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary financing source consists of three accounts
receivable sale programs with affiliates of NCFE. Under these programs, NCFE
purchases qualified receivables generated by the Company or acquired by the
Company from independent contractor physicians. The proceeds from these sales
are used to fund the Company's working capital needs. One program purchases
receivables generated by the hospital contracts of the Company other than those
acquired in the Sterling Acquisition (the "Coastal Program"), one program
purchases receivables generated by the hospital contracts acquired in the
Sterling Acquisition (the "Sterling Program"), and a third program purchases
receivables generated in the Government Services business (the "Government
Program"). The Emergency Physician Management business and the Government
Services business have not been able to generate sufficient receivables to sell
to the programs to finance the ongoing working capital needs of the Company.
NCFE has supported the Company by funding the purchase of receivables billed by
the Company and those to be billed in the future by the Company. As of December
31, 1999, the Company had outstanding advances of approximately $196 million of
receivables financing, of which approximately $79 million related to billed
receivables and approximately $117 of which related to future receivables.
Financing related to the purchase of future receivables is reflected as
long-term debt in the accompanying financial statements. The Coastal Program
provides for the purchase of up to $115 million of receivables and terminates on
June 30, 2001. The Sterling Program provides for the purchase of up to $95
million of receivables and terminates on June 30, 2003. The Government Program
provides for the purchase of up to $50 million of receivables and terminates on
June 30, 2001. Of the total purchase commitments of $260 million on these
facilities, the remaining availability for purchases is approximately $38
million at December 31, 1999. 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 current and future
receivables. The Company also borrowed $6.7 million from NCFE under a note dated
December 14, 1999. The funds were used to terminate the billing agreement with a
subsidiary of Per Se Technologies, Inc. and to acquire certain of its billing
operations in December 1999. The note is repayable in nine monthly installments
beginning January 14, 2000, including interest at 13% per annum.
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 $20
million through June 30, 2001. 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 no outstanding balance as of December 31,
1999. The Company borrowed and repaid $1 million under this facility during
1998.
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. Net cash used in operating activities was
$23.8 million and $17.2 million in 1999 and 1998, 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
used in investing activities in 1999 was $71.4 million, mainly attributable
Sterling acquisition. Net cash provided by investing activities in 1998 was $5.9
million, which was derived primarily from cash received from divestitures. In
1999, the net cash provided by financing activities was $95.1 million. During
1999, the Company had net borrowings of $95.1 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. As a result of the aforementioned, cash and cash
equivalents decreased from $45 thousand at December 31, 1998 to $0 at December
31, 1999.
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
17
<PAGE>
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.
Subsequent to approval by the holders of the Common Stock in July 1999, the
Series D Preferred was converted into 10 shares of Common Stock for each share
of Preferred Stock, or 4,449,740 shares of Common Stock, in November 1999.
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 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.
For the foreseeable future, to continue as a going concern, the Company
will depend upon NCFE to fund its working capital needs either by purchases of
accounts receivable or through the line of credit. The Company's accounts
receivables sales programs and line of credit with NCFE have been extended to
June 30, 2001 and beyond. Management believes that NCFE will be able to fulfill
the Company's needs. The consolidated financial statements do not include any
adjustments to the financial statements that might be necessary should NCFE not
provide the necessary working capital or should the Company be unable to
continue as a going concern.
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 have embarked on divestiture
programs to eliminate unprofitable operations. The Company divested its non-core
businesses during 1997 and 1998, expanded its core business through the
acquisition of Sterling in 1999 and focused its efforts on improving operations,
increasing revenue and decreasing costs. While there have been improvements in
operations within the Company's core businesses, the Company continues to incur
significant losses.
Although the Company has continued its marketing efforts, the number of new
contracts obtained has been lower than that historically experienced by the
Company. Management attributes the reduced rate of new business development to
several factors, including increased competition from local and regional groups,
increased payment and reimbursement pressures on hospitals, consolidation and
closures involving client hospitals and the Company's financial condition. The
Sterling Acquisition initially increased the number of contracts by 129. The
Company anticipated there would be a loss of contracts once the operations were
out of bankruptcy and hospitals were no longer bound by the automatic stay under
the United States Bankruptcy Code. Since the acquisition, 30 contracts from the
Sterling Acquisition have been terminated. While the Company believes it has an
excellent record in providing services, it believes that its financial condition
has been an impediment to the awarding of new contracts that it would otherwise
have received. Hospital administrators have expressed concerns about awarding
and renewing contracts both as to operational ability and financial viability of
companies operating in the Company's industry. The Company believes its success
is dependent upon retaining and renewing existing contracts and obtaining new
hospital contracts. The Company has not been able to add new contracts or renew
existing contracts at a rate that allows continued expansion of the Company's
business.
The Emergency Physician Management business is under pressure industry-wide
as government reimbursement programs and private insurance programs seek to
contain and reduce medical costs at the
18
<PAGE>
same time that the costs of delivering those services continue to rise. 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 and, as of June 1999, had substantially
completed the individual enrollment process.
Prior to July 1999, Sterling Healthcare Group, Inc. was also subject to
these enrollment requirements, but had not completed the individual enrollment
of its independent contractor physicians. Effective with the Company's
acquisition of the operations of Sterling Healthcare Group, Inc., the US
Bankruptcy Court issued orders that allowed the Company additional time to
individually enroll the physicians, continue to bill and collect using group
provider numbers and to enter into new contractual arrangements with the former
Sterling independent contractor physicians in order to comply with HCFA's
interpretation of the reimbursement regulations.
The Company is making progress in the re-enrollment process for the former
Sterling independent contractors in order to bring the Company into compliance
with HCFA's requirements. Although the court orders have provided the Company
some assurances that the independent contractors will be reimbursed for their
services, some delays in reimbursement may occur and the Company 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 the Company's business. This affects
the ability to contract directly with a hospital to provide services. In those
states, the Company forms a professional corporation or professional association
("PC/PA") to contract with the hospital. Generally, the PC/PA has a sole
shareholder who is a physician and, in most cases, is a Company shareholder. The
PC/PA, as well as the sole shareholder of the PC/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 with no more than a nominal
cost and no significant adverse impact on the Company or the PC/PA. The PC/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/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.
The Company has attempted to stabilize its labor force, limit the use of
temporary personnel and non-physician independent contractors and minimize
professional fees. The Company has also reduced overhead costs associated with
its Sterling Acquisition. Sterling's headquarters office in Miami was closed in
January, 2000 and functions were transferred to the corporate office in Durham,
North Carolina. Various administrative and support functions historically
provided by the corporate office in Durham 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.
19
<PAGE>
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. The Company may experience a reduction in
visits as a result of utilization policies of managed care plans. Additionally,
the Company will be subject to changes in premiums and 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 billing company that billed for substantially all of the Sterling
contracts prior to the Sterling Acquisition and after the acquisition until
December 14, 1999, had reached agreements to settle claims arising from
investigations by the United States Department of Justice and the United States
Attorney. The billing company entered into a Corporate Integrity Agreement with
respect to its coding and billing practices with the Office of the Inspector
General of the Department of Health and Human Services on September 2, 1998.
This Agreement, which has a term of sixty-five months, provides that the
government will not seek to exclude the billing company from participation in
governmental health care programs and requires the billing company to continue
its existing compliance program, augmented by an annual third-party review and
additional reporting requirements. If the billing company was not compliant with
its Corporate Integrity Agreement during the period of time it performed billing
services for the Company, the Company could be liable for any overpayments it
received as reimbursement for claims submitted on behalf of the Company.
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 were Year 2000 compliant before December
31, 1999. The Company completed the review of all applications and has not
experienced any significant problems or adverse consequences with its major
applications. The costs of the project were not material and a significant
reallocation of resources was not 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. The Company is not
aware of any significant problems or adverse consequences encountered by the
outside parties that have had, or may have, an adverse impact on the Company.
20
<PAGE>
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.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Report of Independent Auditors 23
Consolidated Balance Sheets, December 31, 1999 and 1998 24
Consolidated Statements of Operations, Years ended
December 31, 1999, 1998 and 1997 25
Consolidated Statements of Shareholders' Equity (Deficit)
and Comprehensive Income (Loss), Years ended
December 31, 1999, 1998 and 1997 26
Consolidated Statements of Cash Flows, Years ended
December 31, 1999, 1998 and 1997 27
Notes to Consolidated Financial Statements 28
22
<PAGE>
THE BOARD OF DIRECTORS AND SHAREHOLDERS
PHYAMERICA PHYSICIAN GROUP, INC.
We have audited the accompanying consolidated balance sheets of PhyAmerica
Physician Group, Inc. and subsidiaries as of December 31, 1999 and 1998, 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, 1999. 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 PhyAmerica
Physician Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Raleigh, North Carolina
April 14, 2000
23
<PAGE>
PHYAMERICA PHYSICIAN GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
---------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 0 $ 45
Trade accounts receivable, net 25,113 29,216
Reserves held by NCFE 16,167 5,400
Accounts receivable, other 2,329 686
Receivables from related party 1,129 54
Prepaid expenses and other current assets 7,194 5,411
---------- ----------
Total current assets 51,932 40,812
---------- ----------
Property and equipment, at cost, less accumulated 7,651 7,171
depreciation
Excess of cost over fair value of net assets acquired, 24,158 2,248
net
Other assets 5,042 4,843
---------- ----------
Total assets $ 88,783 $ 55,074
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities and other short-term borrowings $ 7,477 $ 433
Accounts payable 30,277 22,559
Payables to related party 0 1,277
Accrued physician fees and medical costs 18,429 9,986
Accrued expenses 8,191 7,429
---------- ----------
Total current liabilities 64,374 41,684
---------- ----------
Long-term debt, excluding current maturities 120,736 77,109
---------- ----------
Total liabilities 185,110 118,793
---------- ----------
Shareholders' equity (deficit):
Preferred stock $.01 par value; shares authorized 10,000
Series D convertible preferred stock shares
authorized 1,200; shares issued and outstanding
0 and 445, respectively 0 4
Additional paid-in capital preferred stock 0 2,061
Common stock $.01 par value; shares authorized
100,000; shares issued and outstanding 42,573
and 37,832, respectively 426 378
Additional paid-in capital 178,285 176,197
Common stock warrants 1,675 1,691
Retained earnings (accumulated deficit) (276,713) (244,050)
Accumulated other comprehensive income 0 0
---------- ----------
Total shareholders' equity (deficit) (96,327) (63,719)
---------- ----------
Total liabilities and shareholders' equity (deficit) $ 88,783 $ 55,074
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
PHYAMERICA PHYSICIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Operating revenue, net $ 264,710 $ 294,221 $ 424,841
Costs and expenses:
Physician and other provider services 199,812 234,038 359,165
Medical support services 34,734 33,374 40,720
Selling, general and administrative 43,992 35,188 81,332
Goodwill impairment 0 0 4,343
Related party expense, net 1,403 1,602 5,016
---------- ---------- ----------
Total costs and expenses 279,941 304,202 490,576
Loss on divested assets, net (including
losses on divestitures to related parties
of $0, $1,595 and $1,179, respectively) 0 (1,595) (1,453)
---------- ---------- ----------
Operating loss (15,231) (11,576) (67,188)
---------- ---------- ----------
Other income (expense):
Interest expense (14,456) (8,675) (15,536)
Interest income 258 116 628
Other related party income (expense), net (358) 203 15
Other, net (2,876) (206) (1,300)
---------- ---------- ----------
Total other expense (17,432) (8,562) (16,193)
---------- ---------- ----------
Loss before income taxes (32,663) (20,138) (83,381)
Benefit for income taxes 0 0 1,400
---------- ---------- ----------
Net loss $ (32,663) $ (20,138) $ (81,981)
========== ========== ==========
Net loss per common share:
Basic and diluted loss per share $ (0.84) $ (0.53) $ (3.08)
========== ========== ==========
Shares used to compute loss per share, 38,697 37,676 26,623
basic and diluted ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
PHYAMERICA PHYSICIAN GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
Shares of Additional Shares of
Comprehensive Preferred Preferred Paid-in Capital Common Common
Income (loss) Stock Stock Preferred Stock Stock Stock
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 0 $ 0 $ 0 24,126 $ 241
----------------------------------------------------------------------
Shares issued:
Employee stock purchase for cash 0 0 0 82 1
Conversion of preferred stock (1,164) (12) (13,478) 11,638 116
Issuance of stock related to receivable sales 0 0 0 1,000 10
Directors' stock compensation 0 0 0 14 0
Exercise of common stock warrants 0 0 0 187 2
Payment of proxy contest costs 33 1 982 0 0
Payment of litigation costs 46 1 1,657 0 0
Payment of rent costs 1,085 10 10,839 240 3
Payment of consulting costs 0 0 0 200 2
Issuance of common stock warrants 0 0 0 0 0
Employee stock compensation awards 0 0 0 6 0
Comprehensive income (loss):
Net loss (81,981) 0 0 0 0 0
Other comprehensive income (loss),
net of tax 18 0 0 0 0 0
----------
Total comprehensive income (loss) (81,963)
========== ----------------------------------------------------------------------
Balance at December 31, 1997 0 0 0 37,493 375
----------------------------------------------------------------------
Shares issued:
Employee stock purchase for cash 0 0 0 217 1
Directors' stock compensation 0 0 0 122 2
Issuance of stock related
to convertible debenture 445 4 2,061 0 0
Comprehensive income (loss)
Net loss (20,138) 0 0 0 0 0
Other comprehensive income (loss),
net of tax 74 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
Gain on sale of divested assets 0 0 0 0 0
----------------------------------------------------------------------
Balance at December 31, 1998 445 4 2,061 37,832 378
----------------------------------------------------------------------
Shares issued:
Employee stock purchase for cash 0 0 0 230 2
Exercise of warrants for stock 0 0 0 61 1
Conversion of preferred stock (445) (4) (2,061) 4,450 45
Comprehensive income (loss)
Net loss (32,663) 0 0 0 0 0
Other comprehensive income (loss),
net of tax 0 0 0 0 0 0
Total comprehensive income (loss) (32,663)
========== ----------------------------------------------------------------------
- ----------------------------
BALANCE AT DECEMBER 31, 1999 0 $ 0 $ 0 42,573 $ 426
============================ ======================================================================
<CAPTION>
Accumulated
Retained other Total
Additional Common Earnings Comprehensive Shareholders'
Paid-in Stock (Accumulated income Equity
Capital Warrants Deficit) (loss) (Deficit)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 144,070 $ 987 $ (141,931) 136 3,503
----------------------------------------------------------------------
Shares issued:
Employee stock purchase for cash 98 0 0 0 99
Conversion of preferred stock 13,371 0 0 0 (3)
Issuance of stock related to receivable sales 928 0 0 0 938
Directors' stock compensation 228 0 0 0 228
Exercise of common stock warrants 1,245 (1,247) 0 0 0
Payment of proxy contest costs 0 0 0 0 983
Payment of litigation costs 0 0 0 0 1,658
Payment of rent costs 237 0 0 0 11,089
Payment of consulting costs 186 0 0 0 188
Issuance of common stock warrants 0 1,842 0 0 1,842
Employee stock compensation awards 11 0 0 0 11
Comprehensive income (loss):
Net loss 0 0 (81,981) 0 (81,981)
Other comprehensive income (loss),
net of tax 0 0 0 18 18
Total comprehensive income (loss)
----------------------------------------------------------------------
Balance at December 31, 1997 160,374 1,582 (223,912) 154 (61,427)
----------------------------------------------------------------------
Shares issued:
Employee stock purchase for cash 93 0 0 0 94
Directors' stock compensation 226 0 0 0 228
Issuance of stock related
to convertible debenture 0 0 0 0 2,065
Comprehensive income (loss)
Net loss 0 0 (20,138) 0 (20,138)
Other comprehensive income (loss),
net of tax 0 0 0 74 74
Total comprehensive income (loss) 0
Additional expense related
to fair market value of warrants 0 109 0 0 109
Gain on sale of divested assets 15,504 0 0 (228) 15,276
----------------------------------------------------------------------
Balance at December 31, 1998 176,197 1,691 (244,050) 0 (63,719)
----------------------------------------------------------------------
Shares issued:
Employee stock purchase for cash 53 0 0 0 55
Exercise of warrants for stock 15 (16) 0 0 0
Conversion of preferred stock 2,020 0 0 0 0
Comprehensive income (loss)
Net loss 0 0 (32,663) 0 (32,663)
Other comprehensive income (loss),
net of tax 0 0 0 0 0
Total comprehensive income (loss)
- ---------------------------- ----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ 178,285 $ 1,675 $ (276,713) 0 (96,327)
============================ ======================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
PHYAMERICA PHYSICIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (32,663) $ (20,138) $ (81,981)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,472 3,023 5,510
Amortization 2,398 411 760
Loss on disposition of subsidiaries 0 0 1,453
Loss on disposal of fixed assets, net 333 137 2,211
(Gain) loss on sale of marketable
securities and investments 0 (576) 576
Goodwill impairment loss 0 0 4,343
Write-down of related party receivables 0 1,595 0
Change in assets and liabilities, net of effects
from acquisitions and dispositions:
Trade accounts receivable, net 9,143 (2,725) 53,401
Reserves held by NCFE (524) 996 (6,396)
Accounts receivable, notes receivable and other (1,643) 8,841 (14,007)
Receivables from related party (2,352) 8,478 8,850
Refundable income taxes 0 0 2,498
Prepaid expenses and other current assets 3,952 2,395 6,076
Other assets (149) 1,286 3,959
Accounts payable, accrued expenses
and income taxes payable 3,137 (17,848) (10,279)
Accrued physicians fees and medical costs (6,935) (3,083) (2,278)
---------- ---------- ----------
Total adjustments 8,832 2,930 56,677
---------- ---------- ----------
Net cash used in operating activities (23,831) (17,208) (25,304)
---------- ---------- ----------
Cash flows from investing activities:
Purchases of marketable securities
and investments, net 0 (42) $ (5,577)
Proceeds from sale of marketable
securities and investments 0 0 5,574
Proceeds from maturity of marketable
securities and investments 0 752 2,507
Purchases of property and equipment, net (131) (1,399) (1,543)
Acquisition of subsidiaries, net of cash acquired (71,271) 0 0
Disposition of subsidiaries, net of cash sold 0 6,612 12,261
---------- ---------- ----------
Net cash (used in) provided by
investing activities (71,402) 5,923 13,222
---------- ---------- ----------
Cash flows from financing activities:
Borrowing of debt 95,133 2,315 1,298
Cash payments for debt issue costs 0 0 (633)
Net proceeds from issuances of preferred stock 0 0 10,000
Net proceeds from issuances of common stock 55 94 99
---------- ---------- ----------
Net cash provided by financing activities 95,188 2,409 10,764
---------- ---------- ----------
Net decrease in cash and cash equivalents (45) (8,876) (1,318)
Cash and cash equivalents at beginning of year 45 8,921 10,239
---------- ---------- ----------
Cash and cash equivalents at end of year $ 0 $ 45 $ 8,921
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest $ 15,068 $ 8,673 $ 9,360
Income taxes 401 180 2,479
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
PHYAMERICA PHYSICIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. GENERAL
PhyAmerica Physician Group, Inc. (the "Company" or "PhyAmerica") 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 operates on a nationwide basis.
In July 1999, the Company changed its name from Coastal Physician Group, Inc.
For the foreseeable future, to continue as a going concern, the Company
will depend upon National Century Financial Enterprises, Inc. ("NCFE") to fund
its working capital needs either by purchases of accounts receivable or through
the line of credit. The Company's accounts receivables sales programs and line
of credit with NCFE have been extended to June 30, 2001 and beyond. Management
believes that NCFE will be able to fulfill the Company's needs. The consolidated
financial statements do not include any adjustments to the financial statements
that might be necessary should NCFE not provide the necessary working capital or
should the Company be unable to continue as a going concern.
B. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts
of PhyAmerica 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. This affects the
ability to contract directly with a hospital to provide services. In those
states, the Company forms a professional corporation or professional association
("PC/PA") to contract with the hospital. Generally, the PC/PA has a sole
shareholder who is a physician and, in most cases, is a Company shareholder. The
PC/PA, as well as the sole shareholder of the PC/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 with no more than a nominal
cost and no significant adverse impact on the Company or the PC/PA. The PC/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/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.
28
<PAGE>
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.
Noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998 1997
-------- -------- --------
<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 -- -- 4,004
expenses
Issuance of warrants -- -- 1,842
Conversion of warrants to common stock 16 -- 1,248
Conversion of preferred stock to common stock 2,065 -- 13,489
Warrants purchase price adjustment -- 109 --
Unrealized appreciation of available for
sale securities -- 74 18
Disposition of subsidiaries -- 15,504 --
</TABLE>
D. ACCOUNTS RECEIVABLE AND RESERVES HELD BY NCFE
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 5). Eligible trade accounts receivable
are comprised primarily of amounts due from hospitals under flat rate contracts
and amounts due under fee-for-service contracts from patients,
government-sponsored health care programs and other third party payors such as
insurance companies and self-insured employers. Ineligible receivables are
comprised primarily of amounts billed to individuals not covered by insurance
and certain other minor fee-for-service receivables deemed to be ineligible by
NCFE and 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.
Reserves held by NCFE represent a portion of the proceeds from the sales of
accounts receivable to provide for underpayments by payors or other payment
defaults. The amount of the reserves are determined by the various agreements
and are a percentage of the net eligible accounts receivable sold. At the time
an account receivable is fully collected by NCFE, remaining reserve balances
applicable to the account receivable are returned to the Company.
E. 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
29
<PAGE>
F. 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 twenty years, depending on the specific circumstances of each
acquisition. Accumulated amortization of goodwill was $3,396,000 and $998,000 at
December 31, 1999 and 1998 respectively.
Under Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and 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 1999, 1998 or 1997. Management considers the performance of
acquired hospital contracts to be the most important indicator of possible
impairment.
G. 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.
During 1998 and 1997, the Company recognized 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.
H. 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.
I. PER SHARE DATA
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," basic earnings (loss) per common share available to common
shareholders are based on the weighted average number of common shares
outstanding. Diluted earnings (loss) per common share available to common
shareholders are based on the weighted average number of common shares
outstanding and the dilutive potential common shares, such as dilutive stock
options and warrants. The computation of diluted net loss per share of common
stock was antidilutive in each of the periods presented; therefore the amounts
reported for basic and diluted are the same.
30
<PAGE>
J. 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.
K. 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.
L. RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 consolidated financial
statements to conform to the 1998 presentation. Such reclassifications had no
impact on net loss or shareholders' equity (deficit) as previously reported.
M. RECENT ACCOUNTING PRONOUNCEMENTS
Effective for fiscal quarters and 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.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS
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 approximates its carrying balance.
2. ACQUISITIONS
In July 1999, in order to expand its Emergency Physician Management
business, the Company acquired the hospital emergency department staffing assets
of Sterling Healthcare, Inc. ("Sterling"), a subsidiary of FPA Medical
Management, Inc., which was in a Chapter 11 proceeding under the United States
Bankruptcy Code, for a purchase price of approximately $69.3 million plus
assumption of up to $18 million in operating liabilities. This acquisition (the
"Sterling Acquisition") increased the number of emergency department staffing
contracts in the Emergency Physician Management business from approximately 151
to 280 (since reduced to approximately 241 as of December 31, 1999 through
contract attrition). In addition, on December 14, 1999 the Company acquired from
a subsidiary of Per Se Technology, Inc., the assets used in providing billing
services for the hospital staffing contracts acquired in the Sterling
Acquisition (the "Per Se Acquisition"). The Company paid $6.7 million to
terminate the billing agreement with Per Se Technologies, Inc. and to acquire
the billing operations assets. The acquisitions were accounted for in accordance
with the purchase method of accounting, and, therefore, the results of
operations for the acquired operations are included in the accompanying
financial statements since the acquisition dates. The excess purchase price over
the estimated fair market value of the net assets acquired is being amortized on
a straight line basis over 5 years for the Sterling Acquisition and 10 years for
the PerSe Acquisition. Unaudited pro forma results of operations for the
Sterling acquisition are not presented because the historical results of
operations are not indicative of the results of operations of the business
31
<PAGE>
going forward due to the short term nature of the contracts and the financial
condition during bankruptcy of the business acquired. Unaudited pro forma
results of operations for the Per Se acquisition are not presented because the
transaction was not a significant acquisition.
As of December 31, 1999, the Company had received funds from NCFE totaling
approximately $117.4 million for which repayment has been waived until June 30,
2001, 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 $20 million revolving line of credit described above in order to fund its
operations.
3. TRADE ACCOUNTS RECEIVABLE AND OPERATING REVENUE
Trade accounts receivable, net, consisted of the following:
As of December 31,
-----------------------
(In thousands) 1999 1998
---- ----
Gross trade receivables $35,923 $31,460
Less allowance for contractual adjustments
and uncollectibles (10,810) (2,244)
------- -------
Trade accounts receivable, net $25,113 $29,216
======= =======
Operating revenues, net consisted of the following:
For the years ended December 31,
-----------------------------------------
(In thousands) 1999 1998 1997
---- ---- ----
Gross non-capitated revenue $ 558,900 $ 381,161 $ 451,596
Gross capitated revenue 0 92,370 163,533
--------- --------- ---------
Total gross revenue 558,900 473,531 615,129
Less contractual adjustments and
uncollectibles (294,190) (179,310) (190,288)
--------- --------- ---------
Operating revenue, net $ 264,710 $ 294,221 $ 424,841
========= ========= =========
4. PROPERTY AND EQUIPMENT
The cost, accumulated depreciation, and book value of property and
equipment are summarized as follows:
December 31,
(In Thousands) 1999 1998
-------- --------
Land $ 1,325 $ 2,375
Buildings 3,427 3,184
Leasehold improvements 2,373 2,350
Construction in progress 282 112
Furniture and equipment 17,724 17,033
Automobiles 143 143
-------- --------
Total 25,274 25,197
Less accumulated depreciation (17,623) (18,026)
-------- --------
Net property and equipment $ 7,651 $ 7,171
======== ========
32
<PAGE>
5. BORROWINGS
Long-term debt consisted of the following:
December 31,
(In Thousands) 1999 1998
--------- --------
Funds received from NCFE:
NPF-XI, base rate of 10.94% $ 44,798 $ 47,036
NPF-VI, base rate of 12.5% 30,281 23,315
NPF-WL, base rate of 10.94% 3,921 3,817
NPF-XII, base rate of 10.8% 38,370 --
--------- --------
Total amounts due to NCFE 117,370 74,168
Term note payable in monthly installments
through September 2000 bearing interest
at 13.0% 6,738 --
Obligations under capital leases 3,426 3,231
Other 679 143
--------- --------
Total 128,213 77,542
Less current maturities (7,477) (433)
--------- --------
Long term portion $ 120,736 $ 77,109
========= ========
The Company's primary financing source consists of three accounts
receivable sale programs with affiliates of NCFE. Under these programs, NCFE
purchases qualified receivables generated by the Company, acquired by the
Company from independent contractor physicians and advances funds for the rights
to future receivables. The proceeds from these sales and advances are used to
fund the Company's working capital needs. Cash received for the rights to future
receivables is recorded as long-term debt in the accompanying consolidated
balance sheets.
One program purchases receivables generated by the hospital contracts of
the Company other than those acquired in the Sterling Acquisition (the "Coastal
Program"), one program purchases receivables generated by the hospital contracts
acquired in the Sterling Acquisition (the "Sterling Program"), and a third
program purchases receivables generated in the Government Services business (the
"Government Program"). The Emergency Physician Management business and the
Government Services business have not been able to generate sufficient
receivables to sell to the programs to finance the ongoing working capital needs
of the Company. NCFE has supported the Company by funding the purchase of
receivables billed by the Company and those to be billed in the future by the
Company. As of December 31, 1999, the Company had outstanding advances of
approximately $196 million of receivables financing, of which approximately $79
million related to billed receivables and approximately $117 of which related to
future receivables. The Coastal Program provides for the purchase of up to $115
million of receivables and terminates on June 30, 2001. The Sterling Program
provides for the purchase of up to $95 million of receivables and terminates on
June 30, 2003. The Government Program provides for the purchase of up to $50
million of receivables and terminates on June 30, 2001. Of the total purchase
commitments of $260 million on these facilities, the remaining availability for
purchases is approximately $38 million at December 31, 1999. 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. The Company also borrowed $6.7 million from NCFE under a
note dated December 14, 1999. The funds were used to terminate the billing
agreement with a subsidiary of Per Se Technologies, Inc. and to acquire certain
of its billing operations in December 1999. The note is repayable in nine
monthly installments beginning January 14, 2000, including interest at 13% per
annum.
33
<PAGE>
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 $20
million through June 30, 2001. 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 and reduced to $20 million effective February 1, 2000. There is
no outstanding balance as of December 31, 1999. The Company borrowed and repaid
$1 million under this facility during 1998. On March 31, 2000, the expiration
date of the line of credit was extended from July 1, 2000 to June 30, 2001. The
line of credit is secured by substantially all of the assets of PhyAmerica
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, 1999, the Company had received funds from NCFE totaling
approximately $117.4 million for which repayment has been waived until June 30,
2001, 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 $20 million revolving line of credit described above in order to fund its
operations.
The Company has received waivers from NCFE related to all events of
non-compliance with debt covenants as of December 31, 1999.
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 $843,000 and $746,000 as of December 31, 1999 and
1998, respectively.
The following is a schedule of maturities of long-term debt and minimum
lease payments under capital leases as of December 31, 1999 (in thousands):
Long term debt Capital leases Total
-------------- -------------- --------
2000 $ 7,043 $ 498 $ 7,541
2001 117,674 488 118,162
2002 5 3,392 3,397
2003 5 -- 5
2004 6 -- 6
Thereafter 54 -- 54
-------- ------ --------
Totals $124,787 $4,378 $129,165
======== ======
Less amount representing interest on capital leases 952
--------
128,213
Less current maturities 7,477
--------
$120,736
========
6. DIVESTITURES
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."
34
<PAGE>
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.
7. SEGMENT INFORMATION
During the years ended December 31, 1999, 1998, and 1997, the Company had
four reportable segments: emergency physician management, government services,
billing and business management services and divested businesses. The emergency
physician management 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 emergency
physician management, 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 business management 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
emergency physician management and are also marketed independently to
unaffiliated providers. Divested businesses in 1998 consist of two health plans
which were divested during 1998 and the wrap up of businesses divested prior to
1998. Divested businesses in 1997 consist of one health plan that was divested
in 1997 and 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. "All other" also includes amounts related to
eliminations.
35
<PAGE>
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, 1999
<TABLE>
<CAPTION>
Emergency Total
Physician Gov't Divested Reportable All
(In Thousands) Management Services Billing Segments Segments Other Totals
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue from external sources $ 228,291 $ 17,752 $ 18,689 $ -- $ 264,732 $ (22) $ 264,710
Intersegment revenues -- -- 16,274 -- 16,274 -- 16,274
Interest expense 10,788 3,459 2 -- 14,249 207 14,456
Depreciation and amortization 3,004 28 695 2 3,729 141 3,870
Segment profit (loss) (24,361) (2,482) 5,719 (204) (21,328) (11,335) (32,663)
Segment assets 67,542 3,682 15,819 2,411 89,454 (671) 88,783
</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, 1999
Total external revenues for reportable segments $ 264,732
Intersegment revenues for reportable segments 16,274
Other revenue (22)
Elimination of intersegment revenues (16,274)
----------
Total consolidated revenues $ 264,710
==========
Profit or Loss for the year ended December 31, 1999
Total loss for reportable segments $ (21,328)
Other profit or loss (11,335)
----------
Loss before income taxes and extraordinary item $ (32,663)
==========
Assets as of December 31, 1999
Total assets for reportable segments $ 89,454
Other assets (671)
----------
Total consolidated assets $ 88,783
==========
36
<PAGE>
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Emergency Total
Physician Gov't Divested Reportable All
(In Thousands) Management Services Billing Segments Segments Other Totals
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue from external sources $ 164,700 $ 20,185 $ 16,164 $ 92,895 $ 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 1,132 3,109 325 3,434
Segment profit (loss) (7,957) (1,791) 1,492 (7,018) (15,274) (4,864) (20,138)
Segment assets 30,781 4,798 11,529 2,585 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
==========
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
==========
37
<PAGE>
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Emergency Total
Physician Gov't Divested Reportable All
(In Thousands) Management Services Billing Segments Segments Other Totals
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue from external sources $ 202,174 $ 23,065 $ 14,126 $ 185,071 $ 424,436 $ 405 $ 424,841
Intersegment revenues -- 621 13,298 -- 13,919 22 13,941
Interest expense 4,893 575 2 161 5,631 9,905 15,536
Depreciation and amortization 1,173 133 1,957 2,129 5,392 878 6,270
Segment profit (loss) (17,187) (2,098) (4,178) (32,226) (55,689) (27,692) (83,381)
Segment assets 29,223 2,078 13,088 50,200 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
==========
8. GOODWILL IMPAIRMENT
During 1997, the Company recognized goodwill impairment losses of
$4,343,000 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 1999 or 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 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 for Better Health Plan, Inc., ("BHP") a New York-based Medicaid
managed care entity acquired in 1995.
38
<PAGE>
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.
9. INCOME TAXES
Benefit (provision) for income taxes consisted of the following:
Year Ended December 31,
(In Thousands) 1999 1998 1997
------- ------- -------
Current:
Federal $ -- $ -- $ 1,400
State -- -- --
Deferred:
Federal -- -- --
State -- -- --
------- ------- -------
Benefit (provision) for income taxes $ -- $ -- $ 1,400
======= ======= =======
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,
-------------------------
1999 1998
---------- ----------
Deferred tax assets:
Net operating loss carry forward $ 87,449 $ 77,863
Reserve for liabilities 4,159 1,711
Depreciation of equipment and amortization 2,227 356
Other 2,571 2,473
---------- ----------
Total gross deferred tax 96,406 82,403
Less valuation allowance (95,611) (81,407)
---------- ----------
Net deferred tax assets $ 795 $ 996
========== ==========
Deferred tax liabilities:
Deferred revenue and prepaid expenses $ 795 $ 996
---------- ----------
Total gross deferred tax liabilities $ 795 $ 996
========== ==========
Net deferred tax assets $ -- $ --
========== ==========
The valuation reserve for the year ended December 31, 1999 increased by
$14,204,000 primarily due to current year loss carryforwards. The net change in
the total valuation reserve for the year ended December 31, 1998 was an decrease
of $4,926,000. 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, 1999 the Company had federal loss carryforwards of
approximately $205,000,000. In addition, as of December 31, 1999, the Company
had state loss carryforwards of approximately $254,000,000. These net operating
loss carryforwards expire at various dates to 2015.
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,
1999, the Company's cumulative ownership change since July 1996 was
39
<PAGE>
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.
A reconciliation of the benefit (provision) for income taxes to the amount
computed by applying the 34% statutory federal income tax rate to income (loss)
before income taxes is as follows:
Years Ended December 31,
1999 1998 1997
-------- -------- --------
"Expected" benefit (provision) 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax effect 5.3% 5.3% 8.1%
Nondeductible purchased goodwill 0.0% 0.4% 6.9%
Change in valuation reserve (39.3)% (40.8)% (46.5)%
Other 0.0% 1.1% (0.8)%
-------- -------- --------
"Actual" benefit (provision) 0.0% 0.0% 1.7%
======== ======== ========
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 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.
40
<PAGE>
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. Effective January 1999, the Company's stock is 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 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 $1,938,000 at
December 31, 1999 (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.
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. No notice
has been received.
41
<PAGE>
The Company leases an additional building in Durham, North Carolina that
contains approximately 21,600 square feet of space. The lease requires the
Company to purchase the leased property, prior to the termination of the lease
on June 30, 2002. The purchase price ranges from $3,142,000 to $3,606,000
depending upon the date of purchase. The lessor has the option of requiring the
Company to purchase the property upon 75 days' notice. 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 County,
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 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 of $500 for each
alleged violation of the statute, plus attorneys fees. Plaintiffs also filed a
motion seeking class certification. 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 filed motions to dismiss on the grounds of lack
of personal jurisdiction, and an Order was entered dismissing all of the
individual defendants. Plaintiffs have appealed this Order. On October 28, 1999,
the trial court issued its ruling denying Plaintiffs' Motion for Class
Certification, and Plaintiffs have filed an appeal of this ruling. On October
21, 1999, Plaintiffs filed an additional civil action in the North Carolina
state courts against Edward Suggs, Terry Blackwood, and Ralph Durr, who was
formerly an officer of HBR. The allegations and claims in the North Carolina
civil action are substantially similar to those filed in the Florida action.
Following a mediation, a comprehensive settlement of all claims was reached in
February 2000, resulting in the dismissal of all claims and suits in all
jurisdictions.
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
two and a half years. The Company believes 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 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. An arbitration was held in August 1999 in
Washington, D.C. and the arbitrator entered an award of approximately $2,300,000
in favor of Dr. Sokolov. The arbitration provisions of the Employment Agreement
provided that the award of the arbitrator was reviewable by a court of law for
errors of law made by the arbitrator. Following the award, the Company filed an
action in the U.S. District Court for the Middle District of North Carolina
alleging that the arbitrator made errors of law. Dr. Sokolov has filed a Motion
to Change Venue of the court proceeding to the U.S. District Court for the
District of Columbia. The Company is attempting to reach a settlement of this
matter with Dr. Sokolov. If it is not able to reach a settlement of this matter,
the Company intends to continue to vigorously challenge the ruling of the
arbitrator. The Company has provided a reserve for the amount of the award in
its financial statements with respect to this matter.
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
42
<PAGE>
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. Following an arbitration conducted in July 1999, the arbitrator
entered an award in favor of the Company finding it had no liability to Century.
The Company and Century have since entered into an agreement terminating the
Risk Management Agreement.
On March 23, 2000, two shareholders filed a lawsuit styled Bosco, et al v.
Scott, et al in the U. S. District Court for the District of Delaware,
individually and on behalf of all those similarly situated, and derivatively as
shareholders of the Company, alleging five claims for relief. The first claim
alleges breach of fiduciary duty by the directors, primarily related to the
sales of certain assets to Dr. Scott. The second claim is brought against NCFE
and Lance Poulsen, Chairman and Chief Executive Officer of NCFE, alleging the
aiding and abetting the breach of fiduciary duty by the individual defendents.
The third claim is brought derivatively against Dr. Scott, Mr. Poulsen and NCFE
alleging violation of the Racketeer Influenced and Corrupt Organizations Act.
Count four is brought against the individual directors for allegedly unlawfully
amending the Company's Certificate of Incorporation to restrict transferability
of the Company's stock. Count five is brought individually against the directors
for breach of fiduciary duty in failing to disclose the reason for the delisting
of the Company's stock by the New York Stock Exchange in December 1998. The
Company believes that the actions taken by management and the Board of Directors
in divesting certain operations were appropriate, were done for fair and
adequate consideration and have been properly documented and publicly disclosed.
The Company intends to vigorously defend the action and, at this stage of the
litigation, the exposure to the Company cannot be determined.
The New York State Department of Taxation and Finance has written a letter
to Better Health Plan, Inc. ("BHP") stating that, as a result of an audit of the
Corporation Finance Tax return filed by BHP for the period from May 2, 1995 to
May 5, 1995, it has determined that an adjustment is required to the BHP tax
liability for that period. The Company has requested additional time to review
the findings. Based on the limited information available at this time, the
exposure to the Company, if any, 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 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 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
payments of $2,275,000 for the year ended December 31, 1999 and net receipts of
$6,978,000 for the year ended December 31, 1998 and payments of $4,186,000 for
the year ended December 31, 1997. 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, 1999, 1998 and 1997,
43
<PAGE>
the Company paid approximately $758,000, $676,000 and $562,000, 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 1999, 1998, and 1997 of $73,000,
$33,000 and $286,000, 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. 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. The combined balance of these notes as of
December 31, 1999 is $1,620,000. In addition, the Company made payments of
approximately $1,445,000 to entities controlled by Dr. Scott for health
insurance premiums and other reimbursements net of management fees and other
receipts during 1999.
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, 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. Subsequent to approval by the holders of
the Common Stock in July 1999, the Series D Preferred was converted into 10
shares of Common Stock for each share of Preferred Stock, or 4,449,740 shares of
Common Stock, in November 1999.
On March 18, 1998, PhyAmerica 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 had the right to market and sell HPSE to potential third party
purchasers. No third party purchasers were identified prior to October 1, 1999.
44
<PAGE>
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 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, 1999. Rent expense related to noncancelable office space and
equipment leases amounted to $3,408,000 $2,146,000 and $9,963,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Future minimum lease payments required under noncancelable operating leases
as of December 31, 1999, are as follows: 2000 - $2,906,340; 2001 - $2,206,086;
2002 - $992,303; 2003 - $180,339; and 2004 - $87,780.
14. STOCK OPTIONS AND STOCK COMPENSATION
At December 31, 1999, 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, 1999, 1998 and 1997.
The Company adopted, on May 8, 1991, an incentive stock option plan
primarily for selected key employees. Under the plan, options may be granted at
not less than the fair market value of the stock at the date of grant. Options
are exercisable at various times from the date of grant, as determined by the
Compensation Committee of the Board of Directors (the "committee"), and expire
after ten years from the date of grant. The Company has authorized 4,000,000
shares of common stock for grants of options under 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. 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
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<PAGE>
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.
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 230,000 shares, 217,000 shares, and
82,000 shares to employees in 1999, 1998 and 1997, 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.
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1999, 1998, and 1997, and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
Weighted-Average Weighted-Average Weighted-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 1,004 $ 12.68 2,095 $ 21.95 2,014 $ 25.60
Granted -- -- 4 0.75 626 1.96
Exercised -- -- -- -- -- --
Forfeited (67) 6.66 (1,095) 30.39 (545) 12.46
----------------------------------------------------------------------------
Outstanding at end of year 937 $ 13.11 1,004 $ 12.68 2,095 $ 21.95
----------------------------------------------------------------------------
Options exercisable at year-end 480 $ 23.74 497 $ 23.61 827 $ 31.46
Weighted-average fair value of options
granted during the year $ -- $ 0.75 $ 1.96
</TABLE>
46
<PAGE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Avg. Remaining Avg. Number Avg.
Outstanding Contractual Exercise Exercisable Exercise
at 12/31/99 Life Price at 12/31/99 Price
Range of Exercise (000) (000)
<S> <C> <C> <C> <C> <C>
$ 0.75 to 5.25 461 7.39 $1.98 4 $5.25
11.50 to 13.88 103 4.32 13.20 103 13.20
16.00 to 25.75 215 4.65 23.81 215 23.81
26.75 to 30.25 126 4.22 29.93 126 29.93
34.50 to 38.00 32 4.56 35.11 32 35.11
- ------------------------------------------------------------------------------------------
$ 0.75 to 38.00 937 5.90 $13.11 480 $23.74
</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
amounts to the plan. The Company made contributions of $0, $431,000 and $760,000
to the plan during the years ended December 31, 1999, 1998 and 1997,
respectively.
16. QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of the unaudited quarterly results of
operations:
First Second Third Fourth
Year ended December 31, 1999 Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Operating revenue, net $50,695 $49,186 $ 80,032 $84,797
Operating income (loss) 17 (1,789) (8,140) (5,319)
Loss before income taxes (2,336) (4,760) (15,176) (10,391)
Net loss (2,336) (4,760) (15,176) (10,391)
Basic and diluted loss per share (0.06) (0.13) (0.40) (0.26)
Weighted average number of shares
outstanding 37,832 37,943 37,989 40,237
First Second Third Fourth
Year ended December 31, 1998 Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
Operating revenue, net $87,877 $78,692 $ 79,392 $48,260
Operating loss (2,659) (3,468) (347) (5,102)
47
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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
48
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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. 52 Chairman of the Board, President
and Chief Executive Officer
Bertram E. Walls, M.D. (1) 48 Director
Eugene F. Dauchert, Jr. 46 Director, Secretary, Executive
Vice President
Edward L. Suggs, Jr. 48 Director, President and Chief
Executive Officer, Healthcare
Business Resources, Inc.
Charles E. Potter (1) 56 Director
Sherman M. Podolsky, M.D. 49 Director, President, PhyAmerica
Physician Services of South
Florida, Inc.
W. Randall Dickerson 46 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 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, an independent consultant, has been a director since 1991. He
served as President and Chief Executive Officer of Doctors Health Plan, Inc., a
former subsidiary of the Company, through September 30, 1999. The Company sold
Doctors Health Plan, Inc. on March 18, 1998. Dr. Walls also served as President
of Coastal Emergency Physician Management 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
49
<PAGE>
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 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
PhyAmerica 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
50
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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
1999, all Section 16(a) filing requirements applicable to the Company's
officers, directors, and greater than ten percent shareholders were complied
with.
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 1999
and its four other most highly compensated executive officers who were serving
as executive officers at December 31, 1999 (collectively, the "Named Executive
Officers"), for services rendered to the Company or its subsidiaries during the
years ended December 31, 1999, 1998 and 1997, as applicable:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Awards
------------------- Other Annual Securities All Other
Salary Bonus Compensation Underlying Compensation
Name and Principal Position Year ($) ($) ($) Options/SARs(#) ($) (1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Steven M. Scott, M.D. 1999 433,333 --- --- --- 2,016
Chairman of the Board, 1998 400,000 --- --- --- 5,416
President and Chief 1997 400,000 --- --- --- 4,290
Executive Officer of the
Company
Eugene F. Dauchert, Jr. 1999 193,500 82,487 --- --- 452
Director and Executive Vice 1998 190,000 --- --- 100,000 3,645
President. 1997 160,000 54,745 --- --- 4,405
Edward L. Suggs, Jr. 1999 220,000 --- --- --- 592
Director, President and 1998 228,462 --- --- --- 4,342
Chief Executive Officer, 1997 213,654 50,769 --- 100,000 4,049
Healthcare Business
Resources, Inc. (2)
Sherman M. Podolsky, M.D. 1999 260,000 48,900 --- --- 661
Director, President, 1998 242,430 28,800 --- --- 4,411
PhyAmerica Physician 1997 176,667 50,000 --- --- 3,563
Services of South Florida,
Inc. (3)
W. Randall Dickerson 1999 180,000 20,000 --- --- 452
Executive Vice President and 1998 154,734 --- --- --- 273
Chief Financial Officer 1997 126,182 80,000 --- --- 97
</TABLE>
- -----------------
(1) Includes, for 1999, premiums paid for group life insurance policies of
$2,016, $452, $592, $661, and $452 for Dr. Scott, Mr. Dauchert, Mr. Suggs, Dr.
Podolsky, and Mr. Dickerson, respectively.
(2) Healthcare Business Resources, Inc. is a subsidiary of the Company.
(3) PhyAmerica Physician Services of South Florida, Inc. is a subsidiary of the
Company.
51
<PAGE>
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,
1999:
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 Unexercisable Exercisable
- ---- ------------- -----------
Eugene F. Dauchert, Jr. 73,883 100,000
Edward L. Suggs, Jr. 154,292 100,000
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 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
$500,000, 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
52
<PAGE>
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 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
53
<PAGE>
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 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 one 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. (now known as PhyAmerica
Physician Services of South Florida, Inc.,"PPS 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 PPS of South Florida. Dr. Podolsky
receives an annual base salary of $300,000, 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 certain cash improvement
target quotas and other factors which are established by the President of
PhyAmerica Physician Services, Inc. The employment agreement imposes certain
confidentiality obligations upon Dr. Podolsky and contains a covenant not to
compete with PPS 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
54
<PAGE>
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.
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, 1999.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of December 31, 1999 by: (i) each
director of the Company; (ii) the Company's Chief Executive Officer and its
three other most highly compensated executive officers; and (iii) all current
directors and executive officers of the Company as a group. Except as otherwise
indicated, each stockholder named has sole voting and investment power with
respect to such stockholder's securities.
Name and Address (1) Amount and Nature Percent of
of Beneficial Owner of Beneficial Ownership Class (2)
- --------------------------------------------------------------------------------
Steven M. Scott, M.D. 22,782,383 (3) 53.6
Bertram E. Walls, M.D. 1,648,564 (4) 3.9
Charles E. Potter 191,277 (5) *
Edward L. Suggs, Jr. 135,391 (6) *
Sherman M. Podolsky, M.D. 69,415 (7) *
Eugene F. Dauchert, Jr. 8,883 (8) *
W. Randall Dickerson 5,012 (9) *
Shares owned by all
directors and executive
officers as a group
(7 persons): 24,696,825 (10) 58.1
- ------------------------
(1) The address for all persons listed is c/o PhyAmerica Physician Group, Inc.,
2828 Croasdaile Drive, Durham, NC 27705.
(2) An asterisk (*) indicates less than one percent.
(3) Includes share held by entities that are controlled by Dr. Scott, including
5,434,977 shares held by Scott Medical Partners LLC, 1,703,334 shares held
by American Alliance Holding Company, 1,500,000 shares held by Doctors
Health Plan, Inc., 815,000 shares held by Scott Medical Partners II Limited
Partnership, 7,150,000 share held by S & B Investors, 995,223 shares held
by SMS Revocable Trusts dated December 15, 1993, and 119,143 shares held by
S and W Limited Partnership. 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 79,100 shares held by Mrs. Scott as to which Dr. Scott
disclaims beneficial ownership. Dr. Scott also disclaims beneficial
ownership of the shares held by American Alliance Holding Company. The
remaining 4,449,840 shares are held by Dr. Scott directly.
55
<PAGE>
(4) Includes 145,100 shares with respect to which Dr. Walls has voting power
and Dr. Scott has investment power. Such shares also are included under the
beneficial ownership of Dr. Scott. Also includes 1,171,695 shares held by
certain trusts established for the benefit of Dr. Scott's children with
respect to which Dr. Walls, as trustee, holds voting and investment power.
Includes 2,000 shares owned directly by Dr. Walls, 7,000 shares subject to
presently exercisable stock options and 177,669 shares reserved for
issuance under the Deferred Compensation Plan.
(5) Includes 5,000 shares subject to presently exercisable stock options and
186,277 shares reserved for issuance under the Deferred Compensation Plan.
(6) Includes 114,292 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 23,939 shares subject to presently exercisable stock options.
(8) Includes 3,883 shares subject to presently exercisable stock options.
(9) Includes 5,012 shares subject to presently exercisable stock options.
(10) Includes 159,126 shares subject to presently exercisable stock options and
363,946 shares reserved for issuance under the Deferred Compensation Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company engaged in transactions with entities owned or controlled by
Dr. Scott including 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 payments of $2,275,000 for
the year ended December 31, 1999, net receipts of $6,978,000 for the year ended
December 31, 1998 and net payments of $4,186,000 for the year ended December 31,
1997. 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 agreed to provide, and the Company and MGPA
agreed 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 was
four years and the agreement thereafter automatically renewed for additional one
year terms unless either party give notice of non-renewal by July 1 of the year
preceding the renewal term. The Company and MGPA had the ability to "opt out" of
coverage under the policy in the event that a competitive policy was located at
a price less than 85% of the quoted premium from Century Insurance for coverage
on substantially the same terms and conditions. The agreement could 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. In February 1999, Century Insurance instituted an arbitration
procedure against the Company (see Legal proceedings). Following the
arbitration, an award was entered in favor of the Company, and the parties
thereafter agreed to terminate the Risk Management Agreement.
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 Realty"). During
the year ended December 31, 1999, the Company paid approximately $758,000 under
these lease agreements. The Company and Alliance Realty 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 Realty with respect to the total rentals. The prime lease commenced in
August 1988 and has a fifteen-year term requiring minimum lease payments of
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<PAGE>
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 1999 of $73,000. 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 was $810,283, which was paid 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
57
<PAGE>
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 ("DHP Holdings") for a price of $5,993,532. DHP Holdings is a privately held
limited liability company controlled by Dr. Scott. DHP Holdings acquired all of
the outstanding stock of DHP 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 DHP Holdings, 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 of DHP from the provisions of North Carolina law
that pertain to acquisition of control of a domestic insurer. This order
required the Company to complete the transaction within thirty days and to
convert to equity a $1,100,000 loan made by the Company to DHP on March 2, 1998.
Immediately prior to the closing of the sale of DHP, the Company made an
additional equity contribution required by regulatory authorities in the amount
of $993,532 to DHP. 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 DHP
Holdings notice that it intended to accept a Strike Price (as defined below),
DHP Holdings 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. DHP Holdings 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, the principal amount of the DHP note and accrued interest of
$396,164 were paid and all collateral was released. Proceeds were used to reduce
debt of the Company.
For a period of 12 months from the closing, the Company had the right to
market and sell DHP 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 DHP.
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 Common Stock and a new series of
58
<PAGE>
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. Subsequent to approval by
the holders of the Common Stock in July 1999, the Series D Preferred was
converted into 10 shares of Common Stock for each share of Preferred Stock, or
4,449,740 shares of Common Stock, in November 1999. 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 October 30, 1998, the Company completed the sale of Health Enterprises,
Inc., whose primary operating subsidiary 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. As a
result of these losses, the Company was required to make significant capital
contributions to HPSE in 1998 prior to its sale, and the Company anticipated
that substantial additional capital contributions would be required during the
balance of 1998.
The Company retained the investment banking firm of Salomon Smith Barney to
advise the Company, to assist in completing the sale and advise the Company on
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.
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."
59
<PAGE>
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.............................. 23
Consolidated Balance Sheets, December 31,
1999 and 1998 .............................................. 24
Consolidated Statements of Operations, Years Ended
December 31, 1999, 1998 and 1997............................ 25
Consolidated Statements of Shareholders' Equity
(Deficit) and Comprehensive Income (Loss), Years
Ended December 31, 1999, 1998 and 1997...................... 26
Consolidated Statements of Cash Flows, Years Ended
December 31, 1999, 1998 and 1997............................ 27
Notes to Consolidated Financial Statements.................. 28
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.
60
<PAGE>
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 14, 2000
PHYAMERICA 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 14, 2000
- ---------------------------- President and Chief Executive Officer
Steven M. Scott, M.D
/S/ W. Randall Dickerson Executive Vice President, April 14, 2000
- ---------------------------- Chief Financial Officer and Chief
W. Randall Dickerson Accounting Officer
/S/ Bertram E. Walls, M.D. Director April 14, 2000
- ----------------------------
Bertram E. Walls, M.D.
/S/ Eugene F. Dauchert, Jr. Director April 14, 2000
- ----------------------------
Eugene F. Dauchert, Jr.
/S/ Edward L. Suggs, Jr. Director April 14, 2000
- ----------------------------
Edward L. Suggs, Jr.
/S/ Sherman M. Podolsky, M.D. Director April 14, 2000
- ----------------------------
Sherman M. Podolsky, M.D.
/S/ Charles E. Potter Director April 14, 2000
- ----------------------------
Charles E. Potter
</TABLE>
61
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
PhyAmerica Physician Group, Inc.
Under the date of April 14, 2000, we reported on the consolidated balance sheets
of PhyAmerica Physician Group, Inc. and subsidiaries as of December 31, 1999 and
1998, 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, 1999, as contained in the 1999
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 1999. 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
April 14, 2000
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, 1999 $ 2,244 $294,190 $189,226 $474,850 $ 10,810
Allowance for contractual
adjustments and uncollectibles
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
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 Stock Purchase Agreement As Of January 1, 1998 By And Among Coastal
Physician Group, Inc., Coastal Managed Healthcare, Inc., and DHP
Holdings, LLC (1)
2.2 Asset Purchase Agreement, dated May 24, 1999, by and between the
Company and Sterling Healthcare, Inc. (2)
2.3 Amendment to Asset Purchase Agreement, dated June 21, 1999, by and
between the Company and Sterling Healthcare, Inc. (2)
2.4 Promissory Note and Security Interest Agreement, dated June 4, 1999,
by and between the Company and Sterling Healthcare, Inc. (2)
2.5 Sales and Subservicing Agreement, dated June 30, 1999, by and between
the Company and Sterling Healthcare, Inc. (2)
3.1 Amended and Restated Certificate of Incorporation (the "Restated
Certificate")
3.2 Amendment, dated August 14, 1998 to the Restated Certificate
3.3 Amendment, dated August 2, 1999 to the Restated Certificate
3.5 Amendment to the By-laws (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 (4)
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 (5)
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 (5)
4.2 Certificate Of Designations, Preferences and Rights of Series D
Convertible Preferred Stock Of Coastal Physician Group, Inc. Dated
August 13,1998 (6)
10.1 Employment Agreement By and Between Coastal Physician Group, Inc., and
Steven M. Scott, M.D. Dated April 1, 1991 (7)
10.2 Partial Release Of Non-Compete Provisions Of Employment Agreement
Between Steven M. Scott, M.D. And Coastal Physician Group, Inc. Dated
December 31, 1997 (8)
10.3 Partial Release Of Non-Compete Provisions Of Employment Agreement
Between Steven M. Scott, M.D. And Coastal Physician Group, Inc. Dated
March 18, 1998 (8)
10.4 Second Amendment to Employment Agreement by and between Phyamerica
Physician Group, Inc., f/k/A Coastal Healthcare Group, Inc. and Steven
M. Scott, M.D.
<PAGE>
10.5 Restated and Amended Employment By and Between Coastal Physician
Group, Inc., and Eugene F. Dauchert, Jr. Dated January 15, 1997 (3)
10.6 Amended And Restated Employment Between Coastal Physician Group, Inc.
and Eugene F. Dauchert, Jr. Dated July 1, 1997 (1)
10.7 First Amendment to Employment Between Coastal Physician Group, Inc.
and Eugene F. Dauchert, Jr. Dated January 1, 1999 (10)
10.8 Employment Agreement By and Between Healthcare Business Resources,
Inc., and Edward L. Suggs, Jr. Dated March 1, 1997 (3)
10.9 Employment Agreement Between Coastal Physician Services Of South
Florida, Inc. and Sherman Podolsky, M.D. (1)
10.10 First Amendment to Employment Between Coastal Services Of South
Florida, Inc. and Sherman Podolsky, M.D. Dated January 1, 1999
10.11 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 (9)
10.12 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 (9)
10.13 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)
10.14 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)
10.15 Loan and Security Agreement by and among Coastal Physician Group, Inc.
and NPF X, Inc. Dated June 6, 1997 (9)
10.16 Pledge Agreement, Dated June 6, 1997 (9)
10.17 Employment Agreement By and Between Coastal Physician Group, Inc. And
W. Randall Dickerson dated November 1, 1998. (10)
21 Subsidiaries of the Registrant
27 Financial Data Schedule
- -----------------------------
(1) Incorporated by reference to the December 31, 1997 Form 10-K filed by the
Company on June 5, 1998. (File No. 001-13460)
(2) Incorporated by reference to the Company's Current Report on Form 8-K,
filed July 23, 1999.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
<PAGE>
(4) Incorporated by reference to the Form 8-A/A for the event dated December
27, 1996, filed by the Company on December 30, 1996.
(5) 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)
(6) Incorporated by reference to the June 30, 1998 Form 10-Q filed by the
Company on August 13, 1998.
(7) Incorporated by reference to the S-1 registration statement, as amended,
filed by the Company on June 20, 1991. (File No. 33-40490)
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(9) 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)
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
COASTAL HEALTHCARE GROUP, INC.
Coastal Healthcare Group, Inc., a Delaware corporation, hereby
certifies as follows:
The name of the corporation is Coastal Healthcare Group, Inc.
(hereinafter, the "Corporation").
The date of filing of its original certificate of incorporation with
the Secretary of State was April 13, 1992.
This restated certificate of incorporation amends, restates and
integrates the provisions of the certificate of incorporation of the Corporation
and has been duly adopted in accordance with the provisions of Sections 242 and
245 of the General Corporation Law of the State of Delaware by the vote of the
majority of the outstanding stock entitled to vote thereon in accordance with
the provisions of Section 216 of the Delaware General Corporation Law, and upon
filing with the Secretary of State in accordance with Section 103 of the General
Corporation Law of the State of Delaware, shall thenceforth supersede the
original certificate of incorporation and shall, as it may thereafter be amended
in accordance with its terms, be the certificate of incorporation of the
Corporation.
The text of the certificate of incorporation is hereby amended and
restated to read herein as set forth in full:
1. The name of the Corporation is:
COASTAL PHYSICIAN GROUP, INC.
2. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
3. The purposes for which the Corporation is organized are:
(a) to purchase, own, and hold the stock of other corporations, and to
do every act and thing covered generally by the denomination "holding
corporation," and especially to direct the operations of other corporations
through the ownership of stock therein; to purchase, subscribe for, acquire,
own, hold, sell, exchange, assign, pledge or otherwise dispose of shares of the
capital stock, or any bonds, notes, securities, or evidences of indebtedness
created by any other corporation; to issue in exchange therefor shares of the
capital stock, bonds, notes or other obligations of the Corporation and while
the owner thereof, to exercise all the rights, powers and privileges of
ownership, and to do any acts and things permitted by law and designed to
protect,
<PAGE>
preserve, improve or enhance the value of any such bonds, stocks or other
securities or evidences of indebtedness or property of the Corporation; and
(b) to engage in any business whatsoever, either as principal or as
agent or both, or as a syndicate, which the Corporation may been convenient or
proper in furtherance of any of the purposes hereinabove mentioned or otherwise;
to conduct its business in North Carolina, in other states, in the District of
Columbia, in the territories and possessions of the United States, and in
foreign countries; and to have and to exercise all powers authorized by the laws
of the State of Delaware under which the Corporation is formed, whether
expressly set forth in this third paragraph or not, as such laws are now in
effect or may at any time hereafter be amended; and
(c) to acquire by lease, purchase, contract, concession, or otherwise,
and to own, develop, explore, exploit, improve, operate, lease, enjoy, control,
manage, or otherwise turn to account, mortgage, grant, sell, exchange, convey,
or otherwise dispose of either within or without the State of North Carolina and
in any country, domestic or foreign, any and all real estate, lands, options,
concessions, grants, land patents, franchises, rights, privileges, easements,
tenements, estates, hereditaments, interests, and properties of every
description and nature whatsoever which the Corporation may deem wise and proper
in connection with the conduct of any business or businesses herein enumerated;
and
(d) to engage in any other lawful activity, including, but not limited
to, constructing, manufacturing, raising or otherwise producing and repairing,
servicing, storing or otherwise caring for any type of structure or commodity
whatsoever; processing, selling, brokering, factoring, distributing, lending,
borrowing or investing in any type of propoerty whether real or personal,
tangible or intangible; extracting and processing natural resources;
transporting freight or passengers by land, sea, or air; collecting and
disseminating information or advertisement through any medium whatsoever;
performing personal services of any nature; and entering into or serving in any
type of management, investigative, advisory, promotional, protective, insurance,
guarantyship, suretyship, fiduciary or representative capacity or relationship
for any persons or corporations whatsoever; and
(e) the purposes specified herein shall be construed both as purposes
and powers and shall be in no wise limited or restricted by reference to, or
inference from, the terms of any other clause in this or any other article, but
the purposes and powers specified in each of the clauses herein shall be
regarded as independent purposes and powers, and the enumeration of specific
purposes and powers shall not be construed to limit or restrict in any manner
the meaning of general terms or of the general powers of the Corporation; nor
shall the expression of one thing be deemed to exclude another, although it be
of like nature not expressed.
4. (a) The Corporation shall have authority to issue One Hundred Million
(100,000,000) shares of common stock with a par value of One Cent ($0.01) per
share.
(b) The Corporation shall also have the authority to issue Ten Million
(10,000,000) shares of preferred stock with a par value of One Cent ($0.01) per
share in one or more series with such preferences, limitations, and relative
rights as may be determined by the
<PAGE>
Board of Directors prior to the issuance of such stock. Attached hereto as
Exhibit A is a copy of the Certificate of Designations, Preferences and Rights
of the Junior Participating Cumulative Preferred Stock of the Corporation.
5. The name and mailing address of the incorporator is as follows:
NAME MAILING ADDRESS
---- ---------------
David G. Odrich o/c LeBoeuf, Lamb, Leiby & MacRae
520 Madison Avenue
New York, New York 10022
6. The Corporation shall have nine (9) Directors who shall serve staggered
three-year terms.
7. Any Director or the entire Board of Directors may be removed, for cause
only, by the holders of a majority of shares entitled to vote at an election of
Directors.
8. A Director of the Corporation shall not be personally liable for
monetary damages for breach of his duty as a Director, except for liability (i)
for any breach of the Director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from which the
Director derived an improper personal benefit.
9. In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation shall have the power to adopt, amend
or repeal the By-Laws of the Corporation.
10. Section 203 of the Delaware General Corporation Law shall be applicable
to the Corporation.
11. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation; provided, however, that
notwithstanding any provisions of law which might otherwise permit a lesser vote
or no vote, the stockholders may only alter, amend, change or repeal the
provisions of Sections 6, 7, 9, 10 and 11 hereof by the vote of the holders of
at least 75% of the shares entitled to vote thereon.
<PAGE>
IN WITNESS WHEREOF, Coastal Healthcare Group, Inc. has caused this
certificate to be signed by Steven M. Scott, M.D., its President and Chief
Executive Officer, and attested by Joseph G. Piemont, its Executive
Vice-President, Assistant Secretary and General Counsel, on the 18th day of May,
1995.
COASTAL HEALTHCARE GROUP, INC.
By __________________________________
Steven M. Scott, M.D.
Attest:
By ________________________
Joseph G. Piemont
CERTIFICATE OF AMENDMENT
OF
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
COASTAL PHYSICIAN GROUP, INC.
The undersigned Corporation hereby executes and certifies this Certificate
of Amendment for purposes of amending its Amended and Restated Certificate of
Incorporation under the General Corporation Law of the State of Delaware:
1. The name of the Corporation is Coastal Physician Group, Inc.
2. The Amended and Restated Certificate of Incorporation is hereby amended
by adding a new paragraph 12 which shall read in its entirety as follows:
12(a) Certain Definitions. As used in this Paragraph 12, the following
terms shall have the following respective meanings:
(1) "Acquiring Person" means
(A) any Person who Acquires Stock of the Corporation (other
than by reason of death, gift, divorce, separation or other
circumstance described in section 382(1)(3)(B) of the Code) if:
(I) (i) such Person (or any Person having a direct or
indirect ownership interest in such Person) was a 5%
Stockholder at any time during the applicable Testing
Period, (ii) such Person (or any Person having a direct or
indirect ownership interest in such Person) becomes a 5%
Stockholder as a result of such Acquisition, (iii) any new
"public group" (as such term is defined in Treasury
regulation ss. 1.382-2T(f)(13)) is created under section 382
of the Code and the Treasury regulations thereunder as a
result of such Acquisition, or (iv) the Person from whom the
Stock was Acquired in such Acquisition (or any Person having
a direct or indirect ownership interest in such Person) was
a 5% Stockholder at any time during the applicable Testing
Period; and
(II) immediately after the date of such Acquisition,
the aggregate Percentage Interest of all 5% Stockholders has
increased by at least 45
<PAGE>
percentage points over the aggregate lowest Percentage
Interest owned by such 5% Stockholders at any time during
the applicable Testing Period; or
(B) any Person who Acquires Stock of the Corporation in
circumstances in which the Corporation reasonably determines that
such Acquisition could limit or adversely affect the
Corporation's past, present or future ability to use or benefit
from any Section 382 Attributes.
(2) "Acquisition" means any transaction or event which, for
purposes of section 382 of the Code and the Treasury regulations
thereunder, results in an increase in the Percentage Interest of any
Person. "Acquirer" means the Person whose Percentage Interest is so
increased. "Acquire," "Acquires," "Acquired" and "Acquiring" shall
have similar meanings.
(3) "Act" means the Securities Exchange Act of 1934, as amended.
(4) "Affiliate" and "Associate" shall have the meaning ascribed
to them in the Rule 12b-2 of the General Rules and Regulations under
the Act.
(5) "Code" means the Internal Revenue Code of 1986, as amended.
(6) "5% Stockholder" shall have the meaning ascribed to the term
"5-percent shareholder" in section 382 of the Code and the Treasury
regulations thereunder and shall include, for example: (i) any
individual whose Percentage Interest in the Corporation at any time
during the applicable Testing Period equals or exceeds 5 percent; (ii)
any "public group" (including any "segregated" public group) of the
Corporation; and (iii) any "public group" (including any "segregated"
public group) of any "first tier entity" or "higher tier entity" whose
Percentage Interest in the Corporation at any time during the
applicable Testing Period equals or exceeds 5 percent. (For purposes
of the preceding sentence, the terms in quotation marks shall have the
meanings ascribed to such terms in section 382 of the Code and the
Treasury regulations thereunder.)
(7) "Percentage Interest" means, with respect to a Person:
(A) the fair market value of the Stock beneficially owned by
such Person (including Stock indirectly owned by virtue of any
direct or indirect ownership interest in an
<PAGE>
entity which directly owns Stock of the Corporation) as
determined under section 382 of the Code and the Treasury
regulations thereunder, including the attribution rules of
section 382(1)(3) of the Code and the Treasury regulations
thereunder and the option rules of Treasury regulation ss.
1.382-4(d)(2);
calculated as a percentage of
(B) the sum of (i) the fair market value of all the
outstanding Stock of the Corporation, plus (ii) the fair market
value of any outstanding Pure Preferred Stock of the Corporation.
(8) "Person" means any individual, firm, corporation,
partnership, joint venture or other entity and shall include any group
comprised of such Person and any other Person who is a parent, child
or sibling of such Person or with whom such Person or any Affiliate or
Associate of such Person has any agreement, arrangement or
understanding, directly or indirectly, for the purpose of Acquiring,
holding, voting or disposing of Stock, and any other Person who is a
member of such group, but does not include any underwriter which
participates in an underwritten public offering of the Corporation's
Stock, provided that such underwriter shall not own such Stock on the
last day of any fiscal year.
(9) "Pure Preferred Stock" means stock issued by the Corporation
that is described in section 1504(a)(4) of the Code, as modified by
Treasury regulation ss. l.382-2(a)(3)(i).
(10) "Section 382 Attribute" means any "net operating loss
carryforward," "capital loss carryover," "excess foreign taxes
carryover," "general business credit carryover," "minimum tax credit
carryover" or "net unrealized built-in loss" (as such terms are
defined in the Code).
(11) "Stock" means any interest in the Corporation that would be
treated as stock for purposes of section 382 of the Code and the
Treasury regulations thereunder, including for example, shares of the
Corporation's common stock, par value $.01 per share ("Common Stock"),
shares of any other class issued by the Corporation and any options,
warrants, convertible debt or securities or other rights (whether or
not subject to any contingencies or limitations) to Acquire such
shares; provided, that Stock shall not include any shares of Pure
Preferred Stock.
<PAGE>
(12) "Testing Period" means, with respect to any Acquisition, the
period of time beginning on July 11, 1996 (or on the day following any
subsequent "ownership change" under Section 382 of the Code and the
regulations thereunder, as determined by the Corporation) and
concluding on the date of such Acquisition; provided that if the
preceding clause would result in a Testing Period having a duration in
excess of three years, then the Testing Period shall be the period of
three years concluding on the date of such Acquisition.
(13) "Transfer Agent" means the transfer agent with respect to
the Corporation's common stock, par value $.01 per share ("Common
Stock"), appointed by the Corporation and, in the case of any other
securities of the Corporation, "Transfer Agent" means the Corporation
or such other transfer agent with respect to such securities as may be
appointed by the Corporation.
(b) Acquisition Restrictions. For so long as the Corporation has
Section 382 Attributes (the "Restriction Period"), any Acquisition of Stock
or attempted Acquisition of Stock, or any agreement to Acquire Stock
entered into prior to the expiration of the Restriction Period, shall be
prohibited and void ab initio to the extent that, as a result of any such
transaction, any Person would become an Acquiring Person.
(c) Certain Exceptions. The restrictions set forth in subparagraph
12(b) hereof shall not apply if:
(1) the Acquisition of Stock occurs pursuant to a transaction
approved in advance by a majority of the Board of Directors of the
Corporation (the "Board"), including, but not limited to, a merger or
consolidation transaction, in which all holders of outstanding shares
of Stock receive, or are offered the opportunity to receive, cash or
other consideration for such shares, and upon the consummation of
which the Acquirer of such shares will own at least a majority of the
outstanding shares of Stock;
(2) The Board determines, in its absolute discretion, that the
Person who Acquires Stock is not an Acquiring Person; or
(3) The Board determines, in its absolute discretion, that it is
not in the best interests of the Corporation and its stockholders at
such time to protect the Corporation's ability to use or benefit from
any Section 382 Attributes.
(d) Treatment of Excess Shares.
<PAGE>
(1) Any transfer or purported transfer of Stock that is the
subject of an Acquisition of Stock, an attempted Acquisition of Stock
or agreement to Acquire Stock that is prohibited and void under the
provisions of subparagraph 12(b) hereof (a "Prohibited Transfer")
shall not be recorded by any employee or agent of the Corporation, and
the purported transferee of such a Prohibited Transfer (the "Purported
Transferee") shall not acquire any rights as a stockholder of the
Corporation for any purpose whatsoever in respect of the shares of
Stock which would cause the Purported Transferee to become an
Acquiring Person (the "Excess Shares"). Until the Excess Shares are
transferred to another Person in a transaction that is not a
Prohibited Transfer, (A) the Purported Transferee shall not be
entitled with respect to such Excess Shares to any rights as a
stockholder of the Corporation, including, without limitation, the
right to vote such Excess Shares and to receive dividends or
distributions, whether liquidating or otherwise, in respect thereof,
if any, and (B) the Board may, in its absolute discretion, institute
proceedings to enjoin or rescind any attempted transfer or transfer of
Excess Shares to the Purported Transferee. Once the Excess Shares have
been transferred in a transaction that is not a Prohibited Transfer,
the Stock that is the subject of such transaction shall cease to be
Excess Shares.
(2) If the Board determines that a Prohibited Transfer has
occurred, then, upon written demand by the Corporation, the Purported
Transferee shall transfer or cause to be transferred any certificate
or other evidence of ownership of the Excess Shares within the
Purported Transferee's possession or control, together with any
dividends or other distributions that were received by the Purported
Transferee from the Corporation with respect to the Excess Shares
("Prohibited Distributions"), to an agent designated by the Board (the
"Agent"). The Agent shall proceed to sell to a buyer or buyers, which
may include the Corporation, the Excess Shares transferred to it in
one or more arm's-length transactions (over the New York Stock
Exchange, if possible); provided, however, that the Agent shall effect
such sale or sales in an orderly fashion and shall not be required to
effect any such sale within any specific time frame if, in the Agent's
discretion, such sale or sales would disrupt the market for the Common
Stock or other securities of the Corporation or otherwise would
adversely affect the value of the Common Stock or such other
securities. If the Purported Transferee has resold the Excess Shares
before receiving the Corporation's demand to surrender the Excess
Shares to the Agent, the Purported Transferee shall be deemed to have
sold the Excess Shares for the Agent, and shall be required to
transfer to the Agent
<PAGE>
the proceeds of such resale and any Prohibited Distributions, except
to the extent that the Agent grants written permission to the
Purported Transferee to retain a portion of such proceeds not
exceeding the amount that the Purported Transferee would have received
from the Agent pursuant to subparagraph (d)(3) of this paragraph 12 if
the Agent rather than the Purported Transferee had resold the Excess
Shares.
(3) The Agent shall apply any proceeds of a sale by it of Excess
Shares and, if the Purported Transferee has previously resold the
Excess Shares, any amounts received by the Agent from a Purported
Transferee, as follows: (A) first, such amounts shall be paid to the
Agent to the extent necessary to cover its costs and expenses incurred
in connection with its duties hereunder; (B) second, any remaining
amounts shall be paid to the Purported Transferee, up to the amount
paid by the Purported Transferee for the Excess Shares, which amount
shall be determined in the discretion of the Board; and (C) third, any
remaining amounts shall be paid to one or more organizations
qualifying under Section 501(c)(3) of the Code (and any comparable
successor provision) ("Section 501(c)(3)") selected by the Board, and
if the Excess Shares (including any Excess Shares arising from a
previous Prohibited Transfer not sold by the Agent in a prior sale or
sales), represent a 5% or greater Percentage Interest in any class of
Stock, then any such remaining amounts to the extent attributable to
the disposition of the portion of such Excess Shares exceeding a 4.99
Percentage Interest in such class shall be paid to one or more other
organizations qualifying under Section 501(c)(3) selected by the
Board. The recourse of any Purported Transferee in respect of any
Prohibited Transfer shall be limited to the amount payable to the
Purported Transferee pursuant to clause (B) of the preceding sentence.
In no event shall the proceeds of any sale of Excess Shares pursuant
to this subparagraph 12(d)(3) inure to the benefit of the Corporation.
(4) If the Purported Transferee fails to surrender the Excess
Shares or the proceeds of a sale thereof to the Agent within thirty
business days from the date on which the Corporation makes a demand
pursuant to subparagraph (d)(2), then the Corporation may institute
legal proceedings to compel the surrender.
(5) The Corporation shall make the demand described in
subparagraph (d)(2) hereof within thirty days of the date on which the
Board determines that a Prohibited Transfer has occurred; provided,
however, that if the Corporation makes such demand at a
<PAGE>
later date, the provisions of this paragraph 12 shall apply
nonetheless.
(e) Reliance on Certain Information. In determining whether any Person
has become or would become an Acquiring Person under this paragraph 12, to
the extent permitted by section 382 of the Code and the Treasury
regulations thereunder:
(1) the Corporation shall be entitled to rely on the existence
and absence, as of the date of the relevant Acquisition, of filings of
Schedules 13D and 13G (or any similar schedules) under the Act to
identify any 5% Stockholder of the Corporation; and
(2) in the case of any "first tier entity" or "higher tier
entity" (as such term is defined in Treasury regulation ss.
1.382-2T(f)(14)) whose Percentage Interest in the Corporation equals
or exceeds 5 percent, the Corporation may rely on a statement signed
under oath or an affirmation by an authorized officer or similar
responsible person on behalf of such entity, to establish the extent,
if any, to which the Percentage Interests of such entity's owners have
changed as of the date of the relevant Acquisition; provided that the
Corporation may not rely on a statement of such entity if (i) the
Corporation knows that the statement is false, or (ii) the entity's
Percentage Interest in the Corporation equals or exceeds 50 percent.
(f) Legend. All certificates representing Stock issued after the
effectiveness of paragraph 12 shall bear a conspicuous legend as follows:
"THE TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS SUBJECT TO
RESTRICTIONS PURSUANT TO PARAGRAPH 12 OF THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF COASTAL PHYSICIAN GROUP, INC.
REPRINTED IN ITS ENTIRETY ON THE BACK OF THIS CERTIFICATE.
(g) Procedures. The Board may, to the extent permitted by law, from
time to time establish, modify, amend or rescind, by by-law or otherwise,
procedures not inconsistent with the express provisions of this paragraph
12, the Code, the Treasury Regulations thereunder, and Delaware law for
determining whether any Acquisition of Stock would jeopardize the
Corporation's ability to preserve and use its Section 382 Attributes, and
for the orderly application, administration and implementation of the
provisions of this paragraph 12. Such procedures as may be adopted by the
Board shall be kept on file with the Secretary of the
<PAGE>
Corporation and shall be made available for inspection by the public and,
upon request, shall be mailed to any holder of Stock of the Corporation.
(h) General Authorization. The purpose of this paragraph 12 is to
facilitate the Corporation's ability to preserve and use its Section 382
Attributes and to that end the Board is authorized to take such action, to
the extent permitted by law and not inconsistent with this paragraph 12, as
it may deem necessary or advisable to protect the Corporation and the
interests of its stockholders in preserving the Corporation's ability to
preserve and use its Section 382 Attributes.
(i) Full Protection of Board. In administering the provisions of
paragraph 12 hereof and determining whether a Person is or may be an
Acquiring Person, the Board and any committee designated by the Board shall
be fully protected in relying in good faith upon the information, opinions,
reports or statements provided to the Board or any such committee by the
Corporation's executive officers or the Corporation's legal counsel or
independent accountants.
(j) Notice to Corporation. Any Person who Acquires Stock or attempts
to Acquire Stock in a transaction that constitutes a Prohibited Transfer
shall immediately give, or cause to be given, written notice thereof to the
Corporation of such event and shall provide the Corporation such other
information as the Corporation may request to determine the status of such
Person as an Acquiring Person or a Purported Transferee of Excess Shares.
(k) No Claim Against Transferor. The Purported Transferee of Excess
Shares shall have no claim, cause of action, or any other recourse
whatsoever against the purported transferor of Excess Shares to the
Purported Transferee. The Purported Transferee's sole right with respect to
such shares shall be limited to the amount payable to the Purported
Transferee pursuant to subparagraph 12(d)(3) hereof.
(l) Partial Invalidity. If any provision of this paragraph 12 or any
application of any such provision is determined to be invalid by any
federal or state court having jurisdiction over the issues, the validity of
the remaining provisions shall not be affected and other applications of
such provision shall be affected only to the extent necessary to comply
with the determination of such court.
3. The foregoing amendment to the Amended and Restated Certificate of
Incorporation herein certified was duly adopted in accordance with the
applicable provisions of Section 242 of the General Corporation Law of State of
Delaware.
Signed on the _____ day of August 1998.
<PAGE>
COASTAL PHYSICIAN GROUP, INC.
By:______________________________
Steven M. Scott, M.D.
Chairman and Chief Executive Officer
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
COASTAL PHYSICIAN GROUP, INC.
Coastal Physician Group, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, does
hereby certify:
FIRST: That at a duly held meeting of the Board of Directors of Coastal
Physician Group, Inc., resolutions were duly adopted setting forth proposed
amendments to the Restated Certificate of Incorporation of said corporation,
declaring said amendments to be advisable and calling a meeting of the
stockholders of said corporation for consideration thereof. The resolutions
setting forth the proposed amendments are as follows:
RESOLVED, that the Restated Certificate of Incorporation of this corporation be
amended by changing Section 1 thereof so that, as amended, said section shall be
and read as follows:
"1. The name of the corporation (the "Corporation") is PhyAmerica Physician
Group, Inc."
RESOLVED, that the Restated Certificate of Incorporation of the corporation be
amended by changing Section 4(a) thereof so that, as amended said section shall
be and read as follows:
"4(a) The Corporation shall have the authority to issue Two Hundred
Million (200,000,000) shares of common stock with a par value of One Cent
($0.01) per share. One Hundred Million (100,000,000) shares shall be
designated as 'Common Stock.' Holders of Common Stock shall be entitled to
cast one (1) vote in person or by proxy for each share of Common Stock upon
all matters upon which shareholders are entitled to vote or to which
shareholders are entitled to give consent. One Hundred Million
(100,000,000) shares shall be designated as 'Non-Voting Common Stock.'
Except as may otherwise be required by law, the holders of Non-Voting
Common Stock shall have no voting rights and shall not vote. Holders of
Common Stock and Non-Voting Common Stock shall be entitled to share ratably
in all such dividends or distributions, payable in cash or otherwise, as
may be declared thereon by the Board of Directors from time to time out of
assets or funds of the Corporation legally available therefor."
SECOND: That thereafter, pursuant to resolution of its Board of Directors, the
annual meeting of the stockholders of said corporation was duly called and held
on July 29, 1999, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendments.
<PAGE>
THIRD: That said amendments were duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said COASTAL PHYSICIAN GROUP, INC. has caused this
certificate to be signed by W. Randall Dickerson, its Executive Vice President,
this 2nd day of August, 1999 .
COASTAL PHYSICIAN GROUP, INC.
By:______________________________
W. Randall Dickerson
Executive Vice President
2
EXHIBIT 3.4
BY-LAWS
COASTAL PHYSICIAN GROUP, INC.
(AMENDED AND RESTATED AS OF DECEMBER 3, 1996)
ARTICLE I
OFFICES
Section 1.1 The principal office of the Corporation shall be located in
North Carolina.
Section 1.2 Except as otherwise required by the laws of the State of
Delaware, the Corporation may also have offices at such other places both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 All meetings of the stockholders shall be held at the principal
office of the Corporation or at such other place, either within or without the
State of Delaware, as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting.
Section 2.2 The annual meetings of stockholders shall be held not later
than 180 days after the end of each fiscal year for the purpose of electing
Directors and transacting any and all business that may properly come before the
meeting. If the annual meeting of stockholders is not held on a day designated
above, any business, including the election of Directors, which might properly
have been acted upon at that meeting may be acted upon at any subsequent
stockholders' meeting held pursuant to these bylaws or held pursuant to a court
order requiring a substitute annual meeting.
Section 2.3 Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than ten nor more than sixty days before the date of the
meeting.
Section 2.4 The officer who has charge of the share ledger of the
Corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period at least
ten (10) days prior to the meeting, at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting. The
list shall also be produced and kept at the time and place of the meeting during
the whole time thereof, and may be inspected by any stockholder who is present.
<PAGE>
Section 2.5 Special meetings of the stockholders, for any purpose or
purposes, including, but not limited to, a special meeting in lieu of the annual
meeting, may be called by the President and shall be called by the President or
Secretary at the request in writing of a majority of the Board of Directors.
Such request shall state the purpose or purposes of the proposed meeting.
Section 2.6 Written notice of a special meeting, stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not less than ten nor more than sixty days before the
date of the meeting to each stockholder entitled to vote at such meeting.
Section 2.7 The Corporation shall solicit proxies and provide proxy
statements for all meetings of stockholders. Each proxy solicitation and proxy
statement shall conform to all applicable state and federal statutes, rules and
regulations. All proxies shall be in writing, signed by the stockholder. No
proxy shall be voted on after three years from its date, unless the proxy
expressly provides for a longer period.
Section 2.8 Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 2.9 The holders of a majority of the shares issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 2.10 When a quorum is present at any meeting, the vote of the
holders of a majority of the shares entitled to vote thereat, present in person
or represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provision of the statutes, the
certificate of incorporation, or these bylaws, a different vote is required, in
which case such express provision shall govern and control the decision of such
question.
Section 2.11 The stockholders at a meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum.
2
<PAGE>
Section 2.12 Unless otherwise provided in the certificate of incorporation,
each holder of common stock shall, at every meeting of the stockholders, be
entitled to one vote for each share of the capital shares having voting power
held by such stockholder.
Section 2.13 Except as limited by the General Corporation Law of Delaware,
as amended from time to time, any action required to be taken at any annual or
special meeting of stockholders of the Corporation or any action which may be
taken at any annual or special meeting of such stockholders may be taken without
a meeting, without prior notice, and without a vote if one or more consents in
writing, setting forth the action so taken, shall be signed by the holders of
all outstanding shares entitled to vote on such action.
Section 2.14 Except as herein excepted, stockholder approval shall be
required for any plan or arrangement (under (a) below) or, prior to the issuance
of designated securities (under (b), (c), or (d) below) when:
(a) A stock option or purchase plan is to be established or other
arrangement made pursuant to which stock may be acquired by officers or
directors, except for warrants or rights issued generally to security
holders of the Corporation or broadly based plans or arrangements including
other employees (e.g., ESOPs). In a case where the Corporation, as an
inducement essential to the individual's entering into an employment
contract with the Corporation, stockholder approval will generally not be
required.
The establishment of a plan or arrangement under which the amount of
securities which may be issued does not exceed the lesser of 1% of the
number of shares of common stock, 1% of the voting power outstanding, or
25,000 shares will not generally require stockholder approval.
(b) The issuance will result in a change of control of the issuer.
(c) In connection with the acquisition of the stock or assets of
another corporation if:
(i) any director, officer or substantial stockholder of the
issuer has a 5% or greater interest (or such persons collectively have
a 10% or greater interest), directly or indirectly, in the Corporation
or assets to be acquired or in the consideration to be paid in the
transaction or series of related transactions and the present or
potential issuance of common stock, or securities convertible into or
exercisable for common stock, could result in an increase in
outstanding common shares or voting power of 5% or more; or
(ii) where the present or potential issuance of common stock, or
securities convertible into or exercisable for common stock, other
than a public offering for cash, if the common stock has or will have
upon issuance voting power equal to or in excess of 20% of the voting
power outstanding before the issuance of stock or securities
convertible into or exercisable for common stock, or
3
<PAGE>
the number of shares of common stock to be issued is or will be equal
to or in excess of 20% of the number of shares or common stock
outstanding before the issuance of the stock or securities.
(d) In connection with a transaction other than a public offer
involving:
(i) the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) at a
price less than the greater of book or market value which together
with sales by officers, directors, or substantial stockholders of the
Corporation equals 20% or more of common stock or 20% or more of the
voting power outstanding before the issuance; or
(ii) the sale or issuance by the Corporation of common stock (or
securities convertible into or exercisable for common stock) equal to
20% or more of the common stock or 20% or more of the voting power
outstanding before the issuance for less than the greater of book or
market value of the stock.
(e) Exceptions may be made when (1) the delay in securing stockbroker
approval would seriously jeopardize the financial viability of the
enterprise and (2) reliance by the Corporation on this exception is
expressly approved by the Audit Committee of the Board or a comparable
body.
Section 2.15 Only persons who are nominated in accordance with the
procedures set forth in this paragraph shall be eligible to be nominated as
directors at any meeting of the stockholders of the Corporation. At any meeting
of the stockholders of the Corporation, nominations of persons for election to
the Board of Directors may be made (1) by or at the direction of the Board of
Directors or (2) by any stockholder of the corporation who is a holder of record
at the time of giving the notice provided for in this paragraph, who shall be
entitled to vote at the meeting, and who complies with the notice procedures set
forth in this paragraph. For a nomination to be properly brought before a
stockholders' meeting by a stockholder, timely written notice shall be made to
the Secretary of the Corporation. The stockholder's notice shall be delivered
to, or mailed and received at, the principal office of the Corporation no less
than 45 days nor more than 60 days prior to the meeting; provided, however, in
the event that less than 45 days notice or prior public disclosure of the date
of the meeting is given or made to stockholders, notice by the stockholders to
be timely must be received not later than the close of business on the tenth day
following the day on which the notice of the date of the meeting was mailed or
the public disclosure was made; provided further, notice by the stockholder to
be timely must be received in any event not later than the close of business on
the seventh day preceding the day on which the meeting is to be held. The
stockholder's notice shall set forth (1) as to each person whom the stockholder
proposes to nominate for election or reelection as a director, all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required by applicable law
(including the person's written consent to being named as a nominee and to
serving as a director if elected), and (2)(a) the name and address, as they
appear on the Corporation's books, of the stockholder, (b) the class and number
of shares of capital stock of the Corporation owned by the stockholder and (c) a
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description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder. The stockholder shall also comply with all applicable requirements
of the Securities Exchange Act of 1934, as amended (the "1934 Act") and the
rules and regulations thereunder with respect to the matters set forth in this
paragraph. If the chairman of the meeting, shall determine and declare at the
meeting that a nomination was not made in accordance with the procedures
prescribed by this paragraph, the nomination shall not be accepted.
Section 2.16 At any meeting of the stockholders of the Corporation, only
such business shall be conducted as shall have been brought before the meeting
(1) by or at the direction of the Board of Directors or (2) by any stockholder
of the Corporation who is a holder of record at the time of giving the notice
provided for in this paragraph, who shall be entitled to vote at the meeting,
and who complies with the notice procedures set forth in this paragraph. For
business to be properly brought before a stockholders' meeting by a stockholder,
timely written notice shall be made to the Secretary of the Corporation. The
stockholder's notice shall be delivered to, or mailed and received at, the
principal office of the Corporation not less than 45 days nor more than 60 days
prior to the meeting; provided however, in the event that less than 45 days
notice or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholders to be timely must be received not later
than the close of business on the tenth day following the day on which the
notice of the date of the meeting was mailed or the public disclosure was made;
provided further, notice by the stockholder to be timely must be received in any
event not later than the close of business on the seventh day preceding the day
on which the meeting is to be held. The stockholder's notice shall set forth (1)
a brief description of the business desired to be brought before the meeting and
the reasons for considering the business, and (2)(a) the name and address, as
they appear on the Corporation's books, of the stockholder, (b) the class and
number of shares of capital stock of the Corporation owned by the stockholder
and (c) any material interest of the stockholder in the proposed business. The
stockholder shall also comply with all applicable requirements of the 1934 Act
and the rules and regulations thereunder with respect to the matters set forth
in this paragraph. If the chairman of the meeting shall determine and declare at
the meeting that the proposed business was not brought before the meeting in
accordance with the procedures prescribed by this paragraph, the business shall
not be considered.
The notice procedures set forth in this Article II do not change or limit
any procedures the Corporation may require in accordance with applicable law
with respect to the inclusion of matters in the Corporation's proxy statement.
ARTICLE III
DIRECTORS
Section 3.1 The business of the Corporation shall be managed by or under
the direction of its Board of Directors or by such Executive Committee as the
Board of Directors may establish pursuant to these bylaws.
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Section 3.2 The Corporation shall have a Board of Directors consisting of
nine (9) Directors who shall serve staggered three-year terms. Three (3)
Directors shall be elected for a three-year term at each annual meeting of the
stockholders, except as provided in Section 3.3 of this Article, and each
Director elected shall hold office until his death, retirement, resignation,
removal or disqualification, or until his successor is elected and qualified.
Directors need not be residents of Delaware or stockholders of the Corporation.
At least two Directors shall be Independent Directors. For purposes of this
section, "Independent Director" shall mean a person other than an officer or
employee of the Corporation or its subsidiaries or any other individual having a
relationship which, in the opinion of the Board of Directors, would interfere
with the exercise of independent judgment in carrying out the responsibilities
of a Director. In the event of an increase or decrease in the authorized number
of Directors or any vacancies in the Board, the newly created or eliminated
directorships resulting from such increase or decrease shall be apportioned by
the Board of Directors among the classes of Directors so as to maintain such
classes as nearly equal in number as possible.
Section 3.3 Vacancies, including vacancies caused by the failure of the
stockholders to elect the fully authorized number of directors, and newly
created directorships resulting from any increase, in the authorized number of
Directors may be filled by a majority of the Directors then in office, though
less than a quorum, or by a sole remaining Director, and the Directors so chosen
shall hold office until the next annual meeting and until their successors are
duly elected and shall qualify, unless sooner displaced. If there are no
Directors in office, then an election of Directors may be held in the manner
provided by statute. A Director elected to fill a vacancy shall be elected for
the unexpired term of his predecessor in office.
Section 3.4 The President, or such other individual as may be appointed by
the Board of Directors of the Corporation, shall serve as Chairman of the Board
of Directors. Subject to the provisions of Section 3.11, the President, or the
Chairman if the President and Chairman are different people, shall preside at
all meetings of the Board of Directors and perform such other duties as may be
directed by the Board.
MEETINGS OF THE BOARD OF DIRECTORS
Section 3.5 The Board of Directors of the Corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
Section 3.6 The first meeting of each newly elected Board of Directors
shall be held immediately after the annual meeting of stockholders or at such
other time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the elected
Directors in order legally to constitute the meeting, provided a quorum shall be
present. In the event such meeting is not held immediately after the
stockholders meeting or at the time and place fixed by the stockholders, the
meeting may be held at such time and place as shall be specified in a notice
given as hereinafter provided for special meetings of the Board of Directors, or
as shall be specified in a written waiver signed by all of the Directors.
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Section 3.7 Regular meetings of the Board of Directors may be held without
notice at such time and at such place as shall from time to time be determined
by the Board.
Section 3.8 Special meetings of the Board may be called by the President on
three days' notice to each Director, either personally or by mail or by
telegram; special meetings shall be called by the President or Secretary in like
manner and on like notice on the written request of two Directors unless the
Board consists of only one Director; in which case special meetings shall be
called by the President or Secretary in like manner and on like notice on the
written request of the sole Director. Notice of special meetings need not
specify the purpose for which the meeting is called.
Section 3.9 At all meetings of the Board, a majority of the Directors shall
constitute a quorum for the transaction of business and the act of a majority of
the Directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be present
at any meeting of the Board of Directors, the Directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present. The vote of a majority of the duly
elected or appointed and qualified Directors of the Corporation shall be
required to adopt a resolution constituting the Executive Committee. The vote of
a majority of the Directors then holding office shall be required to adopt,
amend or repeal a bylaw.
Section 3.10 Unless otherwise restricted by the certificate of
incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 3.11 Unless otherwise restricted by the certificate of
incorporation or these bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by conference telephone or other means
by which all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at the meeting.
If members of the Board of Directors are participating in a meeting of the Board
of Directors by conference telephone or other means and are not physically
present at a single location, and if the Chairman, or such other person as has
been designated to preside at the meeting, is not physically present at the
location where the greatest number of members are physically present, then the
President, if different than the Chairman and present at such location, shall
preside at the meeting. If neither the Chairman nor the President are physically
present at such location, then the Board of Directors shall select from among
the members at the location where the greatest number of directors are
physically present a person to preside at the meeting.
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COMMITTEES OF DIRECTORS
Section 3.12 The Board of Directors may, by resolution passed by a majority
of the whole Board, designate one or more committees, each committee to consist
of one or more of the Directors of the Corporation and any officers or employees
of the Corporation as named by the Board. Such committee shall have at least two
members. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
The Board may designate one or more Directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a committee,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Except as prohibited by law, each
committee shall have the authority set forth in the resolution establishing such
committee.
Section 3.13 The Board shall establish an Audit Committee. The majority of
the members of the Audit Committee shall be Independent Directors as defined in
Section 3.2. Where appropriate, the Audit Committee shall review related party
transactions for potential conflict of interest situations.
Section 3.14 Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 3.15 Unless otherwise restricted by the certificate of
incorporation or these bylaws, the Board of Directors shall have the authority
to fix the compensation of Directors. The Directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as Director. No such payment shall preclude any Director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
NOTICES
Section 4.1 Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any Director or stockholders, such notice may be given in writing, by mail
addressed to such Director or stockholder, at his address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Notice to Directors may also be given by any usual means of
communication.
Section 4.2 Whenever any notice is required to be given under the
provisions of a statute or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed
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by the person or persons entitled to said notice, whether before or after the
time stated therein, shall be deemed equivalent thereto.
ARTICLE V
OFFICERS
Section 5.1 The Corporation shall have a President, a Secretary, a
Treasurer and such Assistant Secretaries and Assistant Treasurers and other
officers as the Board of Directors may from time to time appoint, and such
Vice-Presidents as may be appointed from time to time by the Board or the
President. Any two or more offices may be held by the same person, except the
office of President and Secretary. However, no officer shall execute,
acknowledge, or verify any instrument in more than one capacity if such
instrument is required by law, by the certificate of incorporation, or by these
bylaws to be executed, acknowledged, or verified by two or more officers.
Section 5.2 The officers of the Corporation, other than Vice-Presidents,
shall be appointed by the Board of Directors; in addition, Vice-Presidents may
be appointed by the President. Such appointments may be made at any regular or
special meeting of the Board. Each officer shall hold office until his death,
resignation, retirement, removal, disqualification, or until his successor is
elected an qualified, unless otherwise specified by the Board of Directors (or
in the case of Vice-Presidents, by the President).
Section 5.3 The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 5.4 The compensation of all officers and agents of the Corporation
shall be fixed by the Board of Directors or by a Compensation Committee
appointed by the Board.
Section 5.5 The officers of the Corporation shall hold office until their
successors are chosen and qualify. Any officer elected or appointed by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors; however, such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Any vacancy occurring in any
office of the Corporation may be filled by the Board of Directors; except that
vacant Vice-Presidencies may be filled by the President.
THE PRESIDENT
Section 5.6 The President shall be the Chief Executive Officer of the
Corporation, and shall preside (subject to the provisions of Section 3.4 and
Section 3.11) at all meetings of the stockholders and the Board of Directors;
shall have general and active management of the business of the Corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. Subject to the direction and control of the Board of Directors and
the Executive Committee, if created, he shall have general charge and authority
over the business of
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the Corporation. He shall make reports regarding the business and activities of
the Corporation for the preceding fiscal year to the stockholders at each annual
meeting.
Section 5.7 The President shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation, except where such
documents are required or where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation. In general, he shall perform all duties incident to the office
of President and such other duties as may be prescribed by the Board of
Directors from time to time.
THE VICE-PRESIDENT
Section 5.8 If there be more than one Vice-President, the President or the
Board or the Executive Committee thereof may designate their seniority (such as
First Vice-President, Senior Vice-President, Executive Vice-President, etc.)
and/or the particular department of the Corporation of which they shall have
charge. The Vice-President, or if there be more than one, the Vice-Presidents in
order of their seniority by designation, or if not so designated, in the order
of their seniority by appointment, shall perform the duties of the President in
his absence or during his disability to act. The Vice-Presidents shall have such
other duties and powers as may be assigned to or vested in them by the President
or by the job description relating to any duties associated with management of a
particular department.
THE SECRETARY AND ASSISTANT SECRETARY
Section 5.9 The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the Corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or the
President, under whose supervision he shall be. He shall have custody of the
corporate seal of the Corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and, when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The Board of Directors may give general authority to any other
officer to affix the seal of the Corporation and to attest the affixing by his
signature .
Section 5.10 The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the Secretary or in the event of his inability or refusal to act,
perform the duties and exercise the powers of the Secretary and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
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THE TREASURER AND ASSISTANT TREASURERS
Section 5.11 The Treasurer shall have the custody of the corporate funds
and securities belonging to the Corporation and shall receive, deposit, or
disburse the same under the direction of the Board of Directors or the Executive
Committee. He shall keep full and accurate accounts of the finances of the
Corporation in books specifically provided for that purpose; and he shall cause
a true statement of its assets and liabilities as of the close of each fiscal
year and of the results of its operations and of changes in surplus for each
fiscal year, all in reasonable detail, including particulars as to convertible
securities then outstanding, to be made and filed within four months after the
end of such fiscal year. The statement so filed shall be kept available for
inspection for a period of ten (10) years; and the Treasurer shall, in general,
perform all duties incident to his office and such other duties as may be
assigned to him from time to time by the President, the Board of Directors, or
the Executive Committee.
Section 5.12 The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors (or
if there be no such determination, then in the order of their election), shall,
in the absence of the Treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the Treasurer and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
Section 5.13 The Treasurer or in his absence, the Assistant Treasurer,
shall vote the Corporation's shares of stock in its subsidiaries at any
stockholders' meeting of such subsidiaries.
Section 5.14 The Board of Directors may by resolution require any or all
officers, agents, and employees of the Corporation to give bond to the
Corporation, with sufficient sureties, conditioned on the faithful performance
of the duties of their respective offices or positions, and to comply with such
other conditions as may from time to time be required by the Board of Directors.
ARTICLE VI
SHARE CERTIFICATES
Section 6.1 The par value and the maximum number of shares of any class of
the Corporation which may be issued and outstanding shall be set forth from time
to time in the certificate of incorporation of the Corporation. The Board of
Directors may increase or decrease the number of issued and outstanding shares
of the Corporation within the maximum authorized by the certificate of
incorporation and the minimum requirements of the certificate of incorporation
of Delaware law.
Section 6.2 Certificates representing shares of the Corporation shall be
issued in such form as the Board of Directors shall determine to every
stockholder for the fully paid shares owned by him. These certificates shall be
signed by the President or any Vice-President and by the Secretary, Assistant
Secretary, Treasurer, or Assistant Treasurer. They shall be consecutively
numbered or otherwise identified; and the name and address of the persons to
whom they are
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issued, with the number of shares and date of issue, shall be entered on the
stock transfer books of the Corporation.
Section 6.3 Any or all of the signatures on the certificate may be by
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 6.4 The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of shares to be lost; stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the Corporation, in such sum as it may direct, an indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFER OF SHARES
Section 6.5 Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares, duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
REGISTERED STOCKHOLDERS
Section 6.6 The Corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and shall be entitled to hold liable for
calls and assessments a person registered on its books as the owner of shares,
and shall not be bound to recognize any equitable or other claim to or interest
in such share or shares on the part of any other person, whether or not it shall
have express or any other notice; provided, however, that the Board of Directors
may establish a procedure by which the beneficial owner of shares held in the
name of a nominee is recognized as the stockholder.
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ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 7.1 Dividends upon the outstanding shares of the Corporation may be
declared by the Board of Directors at any regular or special meeting and paid in
cash or property only as authorized by the law of Delaware.
Section 7.2 Before payment of any dividend, there shall be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
Directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the Directors shall think conducive to the interests of the
Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 7.3 The Board of Directors shall present at each annual meeting, a
full and clear statement of the business and condition of the Corporation.
CHECKS AND DRAFTS
Section 7.4 All checks, drafts or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 7.5 The fiscal year of the Corporation shall be January 1 to
December 31 of each calendar year.
SEAL
Section 7.6 The corporate seal shall be in such form as approved by the
Board of Directors and may be altered at their discretion. The corporate seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
otherwise reproduced.
CONTRACTS
Section 7.7 The Board of Directors or Executive Committee may authorize any
officer or officers, agent or agents, to enter into any contract or execute and
deliver any instrument on behalf of the Corporation, and such authority may be
general or confined to specific instances.
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DEPOSITS
Section 7.8 All funds of the Corporation, not otherwise employed, shall be
deposited from time to time to the credit of the Corporation in such
depositories as the Board of Directors shall direct.
LOANS
Section 7.9 No loans shall be contracted on behalf of the Corporation, and
no evidence of indebtedness shall be issued in its name unless otherwise
authorized by resolution of the Board of Directors or the Executive Committee.
Such authority may be general or confined to specific instances.
ARTICLE VIII
INDEMNIFICATION
Section 8.1 NATURE OF INDEMNITY. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation), by reason of the fact that he is or was or has agreed to become a
Director or officer of the Corporation, or is or was serving or has agreed to
serve at the request of the Corporation as a Director or officer of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action alleged to have been taken or omitted in such capacity, and may
indemnify any person who was or is a party or is threatened to be made a party
to such an action, suit or proceeding by reason of the fact that he is or was or
has agreed to become an employee or agent of the Corporation, or is or was
serving or has agreed to serve at the request of the Corporation as an employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful; except that in the case of an action or suit by or in the
right of the Corporation to procure a judgment in its favor (1) such
indemnification shall be limited to expenses (including attorneys' fees)
actually and reasonably incurred by such person in the defense or settlement of
such action or suit, and (2) no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a
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presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 8.2 SUCCESSFUL DEFENSE. To the extent that a Director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section
8.1 of this Article VIII or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Section 8.3 DETERMINATION THAT INDEMNIFICATION IS PROPER. Any
indemnification of a Director or officer of the Corporation under Section 8.1 of
this Article VIII (unless ordered by a court) shall be made by the Corporation
unless a determination is made that indemnification of the Director or officer
is not proper in the circumstances because he has not met the applicable
standard of conduct set forth in Section 8.1. Any indemnification of an employee
or agent of the Corporation under Section 8.1 (unless ordered by a court) may be
made by the Corporation upon a determination that indemnification of the
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 8.1. Any such determination
shall be made (1) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to such action, suit or proceeding,
or (2) if such quorum is not obtainable, or, even if obtainable a quorum of
disinterested Directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
Section 8.4 ADVANCE PAYMENT OF EXPENSES. Expenses incurred by a Director or
officer in defending a civil or criminal action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article
VIII. Such expenses incurred by other employees and agents may be so paid upon
such terms and conditions, if any, as the Board of Directors deems appropriate.
The Board of Directors may authorize the Corporation's legal counsel to
represent such Director, officer, employee or agent in any action, suit or
proceeding, whether or not the Corporation is a party to such action, suit or
proceeding.
Section 8.5 SURVIVAL; Preservation of Other Rights. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each Director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are in effect and any repeal
or modification thereof shall not affect any right or obligation then existing
with respect to any state of facts then or previously existing or any action,
suit, or proceeding previously or thereafter brought or threatened based in
whole or in part upon any such state of facts. Such a contract right may not be
modified retroactively without the consent of such Director, officer, employee
or agent.
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The indemnification provided by this Article VIII shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Section 8.6 SEVERABILITY. If this Article VIII or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges and
expenses (including attorneys' fees), judgment, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the fullest extent permitted by any applicable
portion of this Article VIII that shall not have been invalidated and to the
fullest extent permitted by applicable law.
Section 8.7 INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
ARTICLE IX
AMENDMENTS
Section 9.1 Except as set forth in the next sentence, these Bylaws may be
altered, amended or repealed or new Bylaws adopted by the stockholders or by the
Board of Directors at any regular meeting of the stockholders or of the Board of
Directors, or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment or repeal or adoption of new
Bylaws be contained in the notice of such special meeting. Notwithstanding any
other provisions of these Bylaws or any provisions of law which might otherwise
permit a lesser vote or no vote, the stockholders may only alter, amend, change
or repeal the provisions of Sections 2.5, 2.13, 2.15, 2.16, 3.2, 3.3 and 9.1
hereof by the vote of the holders of at least 75% of the shares entitled to vote
thereon.
16
NORTH CAROLINA SECOND AMENDMENT
TO
DURHAM COUNTY EMPLOYMENT AGREEMENT
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is made
and entered into effective the 1st day of September, 1999 by and between
PHYAMERICA PHYSICIAN GROUP, INC., f/k/a COASTAL HEALTHCARE GROUP, INC., a
Delaware corporation ("Corporation"), and STEVEN M. SCOTT, M.D. ("Employee").
W I T N E S S E T H
-------------------
WHEREAS, Corporation and Employee have previously entered into an
employment agreement dated April 1, 1991, and an amendment thereto dated April
1, 1994 (collectively, the "Employment Agreement") under which Employee is
currently employed by Corporation; and
WHEREAS, Corporation and Employee desire to modify the existing terms of
employment of Employee to increase his annual salary;
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements hereinafter set forth, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
1. Paragraph 3(a) of the Employment Agreement shall be amended effective as
of September 1, 1999, to read as follows:
(a) An annual salary of Five Hundred Thousand Dollars ($500,000)
payable in twelve equal monthly installments in accordance with the
Corporation's payroll policies. The annual salary shall be reviewed
annually, and may be increased in the discretion of the Compensation
Committee of the Corporation's Board of Directors.
2. Except as specifically modified as set forth above, all of the
remaining terms, conditions and covenants of the Employment Agreement
between Corporation and Employee are hereby ratified and confirmed in all
respects.
<PAGE>
IN WITNESS WHEREOF, Corporation has caused this Amendment to be executed under
its seal and by its duly authorized officers, upon the approval by the
Compensation Committee of the Board of Directors, and Employee has hereunto set
his hand and seal as of the day and year first above written.
PHYAMERICA PHYSICIAN GROUP, INC.
By:________________________________
ATTEST:
- ----------------------
Secretary
[Corporate Seal]
EMPLOYEE:
_______________________________(SEAL)
Steven M. Scott, M.D.
<PAGE>
NORTH CAROLINA
DURHAM COUNTY
I, __________________________________, a Notary Public of the aforesaid
County and State, do hereby certify that _______________________ personally
appeared before me this day and acknowledged that (s)he is the ______________ of
PhyAmerica Physician Group, Inc., a Delaware corporation, and that by authority
duly given and as an act of the corporation, the foregoing instrument was signed
in its name by its ___________, and attested by herself/himself as
____________________, and sealed with its common corporate seal.
Witness my hand and notarial seal this ____ day of _____________, 1999.
----------------------------
Notary Public
My Commission Expires:
- ----------------------
NORTH CAROLINA
DURHAM COUNTY
I, _______________________________, a Notary Public of the aforesaid County
and State, do hereby certify that Steven M. Scott, M.D. personally appeared
before me this day and acknowledged the execution of the foregoing instrument.
Witness my hand and notarial seal this ____ day of _________, 1999.
------------------------------
Notary Public
My Commission Expires:
- ----------------------
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 September, 1999 by and between PHYAMERICA
PHYSICIAN SERVICES OF SOUTH FLORIDA, INC., f/k/a Coastal Physician Services of
South Florida, Inc. ("the "Employer" or "PhyAmerica"), a Florida corporation,
and SHERMAN PODOLSKY, M.D. ("Employee").
W I T N E S S E T H
-------------------
WHEREAS, Employer and Employee have previously entered into an employment
agreement dated January 1, 1998 (the "Agreement") under which Employee is
currently employed by Employer; and
WHEREAS, Employer and Employee desire to modify the existing terms of
employment of Employee to increase his Base Salary;
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. AMENDMENT TO EXHIBIT A. Section 1 of EXHIBIT A, Compensation, attached
to the Agreement is hereby amended as of September 1, 1999, to increase the Base
Salary of Employee from $240,000 per annum to $300,000 per annum.
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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
PHYAMERICA PHYSICIAN SERVICES
OF SOUTH FLORIDA, INC.
By:_____________________________
Its:____________________________
ATTEST:
- ----------------------
Secretary
[Corporate Seal]
____________________________(SEAL)
Sherman
Podolsky,
M.D.
<PAGE>
NORTH CAROLINA
DURHAM COUNTY
I, __________________________________, a Notary Public of the aforesaid
County and State, do hereby certify that _______________________ personally
appeared before me this day and acknowledged that (s)he is the ______________ of
PHYAMERICA PHYSICIAN SERVICES OF SOUTH FLORIDA, INC., a Florida corporation, and
that by authority duly given and as an act of the corporation, the foregoing
instrument was signed in its name by its ___________, and attested by
herself/himself as ____________________, and sealed with its common corporate
seal.
Witness my hand and notarial seal this ____ day of _____________, 1999.
----------------------------
Notary Public
My Commission Expires:
- ----------------------
NORTH CAROLINA
DURHAM COUNTY
I, _______________________________, a Notary Public of the aforesaid County
and State, do hereby certify that SHERMAN PODOLSKY, M.D. personally appeared
before me this day and acknowledged the execution of the foregoing instrument.
Witness my hand and notarial seal this ____ day of _________, 1999.
------------------------------
Notary Public
My Commission Expires:
- ----------------------
EXHIBIT 21.1 Page 1
SUBSIDIARIES OF THE REGISTRANT AS OF 12-31-99
Subsidiary State of Incorporation
- --------------------------------------------------------------------------------
Adrian Emergency Services, LLC North Carolina
Amory Emergency Services I, LLC North Carolina
Amory Emergency Services II, LLC North Carolina
Ashland Emergency Services, LLC North Carolina
Augusta Emergency Services I, LLC North Carolina
Augusta Emergency Services II, LLC North Carolina
Baltimore Emergency Services I, LLC North Carolina
Baltimore Emergency Services II, LLC North Carolina
Bay City Emergency Services, LLC North Carolina
Better Health Plan, Inc New York
Booneville Emergency Services, LLC North Carolina
Bowling Green Emergency Services, LLC North Carolina
Brookhaven Emergency Services, LLC North Carolina
Brunswick Emergency Services, LLC North Carolina
Canton Emergency Services I, LLC North Carolina
Canton Emergency Services II, LLC North Carolina
Carbondale Emergency Services, LLC North Carolina
Clinton Emergency Services, LLC North Carolina
Coastal Receivables, LLC Delaware
Coastal SPC Member Corp. Delaware
Coral Gables Emergency Services, LLC North Carolina
CPS/PhyAmerica Physician Services, Inc. North Carolina
Crestview Emergency Services, LLC North Carolina
Crystal City Emergency Services, LLC North Carolina
Daytona Beach Emergency Services, LLC North Carolina
Decatur Emergency Services, II, LLC North Carolina
Edgefield Emergency Services, LLC North Carolina
Effingham Emergency Services, LLC North Carolina
Enid Emergency Services, LLC North Carolina
Fairmont Emergency Services, LLC North Carolina
Fayetteville Emergency Services, LLC North Carolina
FirstCollect, Inc. North Carolina
Ft. Walton Beach Emergency Services, LLC North Carolina
Fulton Emergency Services, LLC North Carolina
Galesburg Emergency Services, LLC North Carolina
Greenville Emergency Services, LLC North Carolina
Hartselle Emergency Services, LLC North Carolina
Healthcare Business Resources, Inc. North Carolina
Henderson Emergency Services I, LLC North Carolina
Henderson Emergency Services II, LLC North Carolina
Herrin Emergency Services, LLC North Carolina
Hickory Emergency Services, LLC North Carolina
Highland Park Emergency Services, LLC North Carolina
Ironwood Emergency Services, LLC North Carolina
Jonesboro Emergency Services, LLC North Carolina
Kosciusko Emergency Services, LLC North Carolina
Lansing Emergency Services, LLC North Carolina
Lauderdale Lakes Emergency Services, LLC North Carolina
Lawrenceburg Emergency Services, LLC North Carolina
Lexington Emergency Services I, LLC North Carolina
<PAGE>
EXHIBIT 21.1 Page 2
SUBSIDIARIES OF THE REGISTRANT AS OF 12-31-99
Subsidiary State of Incorporation
- --------------------------------------------------------------------------------
Madison Emergency Services, LLC North Carolina
Mayfield Emergency Services, LLC North Carolina
Mckenzie Emergency Services, LLC North Carolina
Mcminnville Emergency Services, LLC North Carolina
Medstaff National Medical Staffing, Inc North Carolina
Mesa Emergency Services, LLC North Carolina
Mt. Sterling Emergency Services, LLC North Carolina
Mt. Vernon Emergency Services, LLC North Carolina
Nevada Emergency Services, LLC North Carolina
New Albany Emergency Services, LLC North Carolina
Newnan Emergency Services, LLC North Carolina
Niceville Emergency Services, LLC North Carolina
Oregon Emergency Services, LLC North Carolina
Orlando Emergency Services, LLC North Carolina
Ormond Beach Emergency Services, LLC North Carolina
Palatka Emergency Services, LLC North Carolina
Passaic Emergency Physicians, LLC North Carolina
Paulding Emergency Services, LLC North Carolina
Pediatric Consultants of Broward County, Inc. Florida
Pediatric Healthcare, Inc. Florida
Phoenix Emergency Services I, LLC North Carolina
Phoenix Emergency Services II, LLC North Carolina
PhyAmerica Correctional Healthcare, Inc. North Carolina
PhyAmerica Emergency Services of Dade County, Inc. Florida
PhyAmerica Emergency Services of Ft. Lauderdale, Inc. Florida
PhyAmerica Emergency Services of Hollywood, Inc. Florida
PhyAmerica Emergency Services of Orlando, Inc. Florida
PhyAmerica Government Services Management Group, Inc. North Carolina
PhyAmerica Government Services, Inc. North Carolina
PhyAmerica Physician Group of Florida, Inc. Florida
PhyAmerica Physician Networks, Inc. North Carolina
PhyAmerica Physician Services of Broward County, Inc Florida
PhyAmerica Physician Services of Florida, Inc. Florida
PhyAmerica Physician Services of Orlando, Inc. Florida
PhyAmerica Physician Services of South Florida, Inc. Florida
PhyAmerica Physician Services of the Midwest, Inc. Tennessee
PhyAmerica Physician Services of the Southeast, Inc. North Carolina
PhyAmerica Physician Services of the West, Inc. Texas
PhyAmerica Physician Services, Inc. North Carolina
PhyAmerica Practice Services of the Northeast, Inc. New York
PhyAmerica Receivables LLC Delaware
PhyAmerica SPC Member Corp. Delaware
Physicians Planning Group, Inc. Maryland
Pontiac Emergency Services, LLC North Carolina
Premier Credentialing Resources, Inc. North Carolina
Princeton Emergency Services, LLC North Carolina
Reidsville Emergency Services, LLC North Carolina
Richmond Emergency Services, LLC North Carolina
Rock Hill Emergency Services, LLC North Carolina
Rolla Emergency Services, LLC North Carolina
<PAGE>
EXHIBIT 21.1 Page 3
SUBSIDIARIES OF THE REGISTRANT AS OF 12-31-99
Subsidiary State of Incorporation
- --------------------------------------------------------------------------------
Rutherfordton Emergency Services, LLC North Carolina
Sanford Emergency Services, LLC North Carolina
Scottsburg Emergency Services, LLC North Carolina
Sedalia Emergency Services, LLC North Carolina
Shelby Emergency Services, LLC North Carolina
SHG/PhyAmerica Physician Services, Inc. North Carolina
Signum Primary Care, Inc. North Carolina
Skokie Emergency Services, LLC North Carolina
Smithfield Emergency Services, LLC North Carolina
Specialty Services Group, Inc. Pennsylvania
Springfield Emergency Services I, LLC North Carolina
Springfield Emergency Services II, LLC North Carolina
St. Petersburg Emergency Services, LLC North Carolina
Sullivan Emergency Services, LLC North Carolina
Sunlife OB/GYN Servcies of Alexandria, LLC Virginia
Sunlife OB/GYN Services of Hollywood, Florida, Inc. Florida
Sunlife OB/GYN Services of Maryland, Inc. Maryland
Sunlife OB/GYN Services of New Jersey, LLC New Jersey
Tawas City Emergency Services, LLC North Carolina
Terre Haute Emergency Services, LLC North Carolina
Thomasville Emergency Services I, LLC North Carolina
Tiffin Emergency Services, LLC North Carolina
Troy Emergency Services, LLC North Carolina
Tuscon Emergency Services, LLC North Carolina
Union Emergency Services, LLC North Carolina
Waimea Emergency Services, LLC North Carolina
Washington Emergency Services, LLC North Carolina
West Birmingham Emergency Services, LLC North Carolina
West Plains Emergency Services, LLC North Carolina
Willard Emergency Services, LLC North Carolina
Winter Park Emergency Services, LLC North Carolina
Wooster Emergency Services, LLC North Carolina
Wynne Emergency Services, LLC North Carolina
Wytheville Emergency Services, LLC North Carolina
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 44,738
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,932
<PP&E> 7,651
<DEPRECIATION> 0
<TOTAL-ASSETS> 88,783
<CURRENT-LIABILITIES> 64,374
<BONDS> 0
0
0
<COMMON> 426
<OTHER-SE> 96,753
<TOTAL-LIABILITY-AND-EQUITY> 95,901
<SALES> 264,710
<TOTAL-REVENUES> 264,710
<CGS> 279,941
<TOTAL-COSTS> 279,941
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,456
<INCOME-PRETAX> (32,663)
<INCOME-TAX> 0
<INCOME-CONTINUING> (32,663)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,663)
<EPS-BASIC> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
