The principal of The Scotland Group, Inc., David L. Auchterlonie, served as Chief Financial Officer of Redken, Laboratories, Inc., a $110 million dollar publicly traded and entrepreneurially managed hair care and cosmetics products firm. He initiated the leveraged buy out plan to take Redken private in 1986 and engaged Merrill Lynch Capital Markets to complete this transaction. In 1993, the owners/founders sold Redken to L'Oreal for a sales price in excess of $200 million, representing a 20 times return or a compound annual rate of return in excess of 200% to shareholders in less than seven years.

The healthcare system is pervasively flawed. The economic interests of health insurance companies, hospitals, physicians/provider groups and Medicare/Medicaid are not aligned.
 

• A $30 million med-tech company encountered a management crisis following its acquisition by an equity sponsor. The original founders and management were paid handsomely for their previous equity interests and immediately resigned.

  Their business involves registered nurse review of over 350,000 individual patient medical records annually selected from health plan claim submissions to Centers for Medicare and Medicaid Services (CMS). Their sophisticated computer based algorithms use these electronic CMS claim submissions to select and retrieve individual member medical records for nurse examination. They assign new hierarchical condition codes (i.e., HCC’s or risk scores) to those Medicare Advantage patients statistically selected, if appropriate. The reviewed patient records are then compiled, resulting in revised electronic claims files for submission to CMS. Additional funds are then recovered from CMS to provide for improved care for health plan high-risk patients.

  Our firm stepped in as interim Chairman and CEO. We encountered a company that had grown beyond its human and systems capabilities. It faced immediate customer defection risk, lacked project management processes to support required nurse review processes, lacked confidential medical record management, customer post-sale activities, and was void of any organizational or human resource function. In addition, financial information was maintained on QuickBooks, no cash or financial planning function existed and the financial organization lacked appropriate management. The systems of internal operational and financial controls were virtually non-existent. Moreover, the underlying IT infrastructure was dysfunctional and mission critical application systems had no documentation and could not handle any additional volume.
  
  Over a 12 month period, the following selected initiatives were completed:

  • Met with each customer within first 30 days of engagement to calm uncertainty about the company. Continued active firsthand communication thereafter.

  • Grew revenue by almost 70% through new business, expansion of markets (Puerto Rico) and new product introduction.

  • Developed operating metrics to track the individual medical record through each step of the retrieval, nurse review, submission to customer and billing processes.

  • Hired an entirely new management team (COO, CFO, CIO, VP Clinical Ops, VP Sales & Marketing, and VP Customer Service).

  • Put in place a professional human relations function, which helped support hiring a 70% increase to the workforce. Developed first ever all employee training programs.

  • Instituted stringent HIPPA standards over each confidential medical record retrieved.

  • Collected seriously past due, previously contested billings from customers without harming relationships.

  • Established multiple chart retrieval vendors, reducing this cost by 25%.

  • Met with senior CMS personnel to validate our client’s new product roadmap.

  • Completely revamped IT department into cross-functional product-centric work teams, while instituting rigorous documentation and user acceptance tests before allowing mission critical systems to be put into live production mode.

  • Established a market rate line of credit with a financial institution in late October 2008 when worldwide credit markets were frozen.

  In 2008, our client recovered over $100 million from CMS for its health plan customers. It also reported profitable results despite a planned rapid growth in semi-variable costs. To complete this engagement, we helped recruit and put in place a new Board of Directors and hired a permanent CEO.

• Our client, a $350 million multi-location hospital organization, served a high proportion of uncompensated for and indigent care patients. $110 million of public municipal and private bank debt faced default. The Scotland Group, Inc. was engaged to develop a turnaround plan for the organization, which maintained 432 acute care beds and employed over 2,100 employees. We interviewed hospital management, county and state elected officials, regulators, staff and contract physicians, nurses, and state rate-making agency and community personnel as part of the work to develop the turnaround plan.

  • Completed formal turnaround plan in six weeks.

  • Identified 42 action items including timelines for completion of each.

  • Assessed corporate governance, hospital administration and quality assurance, including the accessibility of patients to the appropriately credentialed physician provider.

  • Analyzed physician contracts, nurses’ collective bargaining agreements, nurse registries, managed care contracts and pharmacological arrangements.

  • Examined billing systems, patient chart and coding practices, bill master file authenticity and collection practices.

  • Analyzed state census data for hospital system needs based on demographic projections and completed a competitive analysis.

  • Examined physical plant and equipment; analyzed capital expenditure and deferred maintenance projections; identified possible asset sales.

  • Dissected medical group relationships and physician practice patterns within selected medical group settings.

  • Analyzed the master lease agreement between the county and our client for the four separate facilities operated by our client.

  • Completed a thorough financial analysis and identified misguided assumptions concerning a $35 million unfunded pension obligation, thereby increasing the unfunded liability.

  • Identified significant shortcomings in our client's information systems.

  Our firm presented the turnaround plan to the Oversight Committee appointed by the Governor, as well as to our client. The plan suggested: (1) a comprehensive overhaul of corporate governance; (2) restoring independent group practices for loss-producing employed physician specialties; (3) establishment of centers of excellence to serve the diverse needs of the county’s specific patient population; (4) creation of a management contract with the state university medical system to improve overall quality of patient care; and (5) specific financial recommendations. The plan exceeded our client's expectations.

• Our healthcare specialists assisted a significant, publicly traded HMO evaluate its options regarding the insolvency of its principal contracted-for physician network.

• Further, we assisted a prominent medical practice management company and its Northern California based medical IPA to evaluate its most appropriate turnaround strategy. In this case we completed a thorough analysis of operations, including an assessment of medical practice patterns, cost of units of care and potential contingent liabilities.

• In another case, we represented an unsecured creditors’ committee involved in a Northern California medical group Chapter 11 filing. We analyzed historical cost data and developed member month cost data to determine the most appropriate reimbursement rate for the debtor. We also provided the Committee with an independent assessment of the debtor’s operations and projections prepared by its Big 4 advisor.

At Inductor Supply, Inc. (ISI), the firm acted as financial advisor to this family owned importer and distributor of electronic components. Within one month of our engagement, we removed a court appointed receiver, reduced costs throughout the organization, and arranged off-balance sheet financing to provide the company with desperately needed cash as a result of a fully depleted credit facility. ISI more than doubled its sales, operated profitability each month and repaid its original bank line.

Our firm assisted a public company that holds the IT brands for Comdex, Java One and Seybold, among others. We worked with an equity sponsor to examine the acquisition opportunity prior to the company being fully distressed. We counseled the sponsor on strategies to acquire both bank debt and sub debt (thereby controlling two classes of creditors) and also the steps necessary to restructure operations. The sponsor successfully acquired controlling positions in both the sub debt and the bank debt, approached management and provided DIP financing. We served the sponsor as its advisor and informal CRO to help restructure the company operations in bankruptcy. As a result of our combined efforts, the company exited bankruptcy in an excellent position with a capital structure showing $50 million of bank debt compared to the pre-bankruptcy amounts exceeding $400 million. Furthermore, the company will produce EBITDA profits after reporting a $600 million loss in the year preceding the sponsor's acquisition.

A large specialty retailer selected our firm to act as business and financial advisor to its Board of Directors. After sizing up the situation with our tailored analysis, our team identified a turnaround strategy to keep this privately-owned company from filing for bankruptcy protection. We closed unprofitable store locations and liquidated excess inventories. We separated non-core businesses and sold off non-core assets. We surgically reduced $4 million of G&A costs and renegotiated above market store leases, reducing rents by $2 million. We stabilized supplier/vendor relationships to ensure a continued supply of product. With the help of special counsel, we renegotiated the bank debt and established a game plan for a large undeveloped, fully-indebted, non-core real property. In addition, we helped recruit a new independent Board of Directors and a new CEO.

In its last fiscal year prior to our engagement, the company reported a $25 million net loss. Through our efforts, the company was positioned to report a $3-3.5 EBITDA profit at the conclusion of our engagement.

This market segment presents numerous challenges. We worked on two cases recently; one, a public company, and another, backed by a private equity fund. We were referred to these cases by either existing Board members or by the equity sponsors. We assessed the viability of both organizations, examined the technology and an alternative market positioning for that technology, reviewed organizational strengths and weaknesses and developed turnaround plans providing the most appropriate recovery of value for the Boards and equity sponsors involved.

This sector remains challenged.

• We recently completed the sale transaction of a satellite photovoltaic cell manufacturer through a successful Section 363 sale. We acted as financial advisors to this failing company. Our estimated recovery value of the assets was $6-$8 million at the time of our engagement. Through our efforts we resurrected a strategic buyer to acquire the core business and sold the building and other assets through pre-negotiated auctions. As a result, approximately $36 million in proceeds were realized versus the $6-8 million estimated at the onset of this case.

• In another engagement in which our firm served as financial advisors, we helped management liquidate a public dotcom company. Unlike most dotcom meltdowns, the company returned almost $10 million in equity to shareholders as a result of the company management and our efforts.

• At Tiger International, a then publicly held $1.6 billion transportation and holding company for five operating companies including Flying Tiger, Mr. Auchterlonie was instrumental in restructuring $1.3 billion of debt outside of a bankruptcy proceeding. Working with other Tiger team members, he helped negotiate debt repayments with five creditor committees and financial institutions representing over 130 financial institutions globally, resulting in savings amounting to approximately $250 million per year to Tiger and its operating companies.

• The Scotland Group, Inc. was also engaged to provide senior management business advisory services as well as financial management services to a subsidiary of a Fortune 500, NYSE listed company in the jet engine overhaul business. Revenues during this period grew from $18 million to $28 million, the loss of $1.5 million annually was reversed, and the client reported a pre-tax profit of $1.5 million at the conclusion of our engagement.