<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 3, 1997
REGISTRATION NO. 333-15595
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PHYSICIAN PARTNERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6719 93-1217068
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
111 SW COLUMBIA STREET, SUITE 725
PORTLAND, OREGON 97201
(503) 224-2249
(Address, including ZIP Code, and telephone number, including
area code, of registrant's principal executive offices)
MR. DAVID GOLDBERG
111 SW COLUMBIA STREET, SUITE 725
PORTLAND, OREGON 97201
(503) 224-2249
(Name, address, including ZIP Code, and telephone number of agent for service)
--------------------------
PHYSICIAN PARTNERS HEALTHFIRST, P.C.
(Exact Name of Co-Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
OREGON 6719 93-1221389
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
10535 N.E. GLISAN
PORTLAND, OREGON 97220
(503) 408-2452
(Address, including ZIP Code, and telephone number, including
area code, of registrant's principal executive offices)
RUSSELL A. DOW, M.D.
10535 N.E. GLISAN
PORTLAND, OREGON 97220
(503) 229-7538
(Name, address, including ZIP Code, and telephone number of agent for service)
--------------------------
PHYSICIAN PARTNERS CORVALLIS, P.C.
(Exact Name of Co-Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
OREGON 6719 93-1221257
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
444 NW ELKS DRIVE
CORVALLIS, OREGON 97330
(541) 754-1374
(Address, including ZIP Code, and telephone number, including
area code, of registrant's principal executive offices)
DAVID H. CUTSFORTH, JR., M.D.
444 NW ELKS DRIVE
CORVALLIS, OREGON 97330
(541) 754-1374
(Name, address, including ZIP Code, and telephone number of agent for service)
--------------------------
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<PAGE>
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PHYSICIAN PARTNERS MEDFORD, P.C.
(Exact Name of Co-Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
OREGON 6719 93-1221063
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) Number)
</TABLE>
555 BLACK OAK DRIVE
MEDFORD, OREGON 97504
(541) 734-3601
(Address, including ZIP Code, and telephone number, including
area code, of registrant's principal executive offices)
STEPHEN J. SCHNUGG, M.D.
555 BLACK OAK DRIVE
MEDFORD, OREGON 97504
(541) 734-3601
(Name, address, including ZIP Code, and telephone number of agent for service)
--------------------------
COPIES TO:
DOUGLAS M. MANCINO, ESQ.
MARK J. MIHANOVIC, ESQ.
MCDERMOTT, WILL & EMERY
2049 CENTURY PARK EAST, SUITE 3400
LOS ANGELES, CALIFORNIA 90067
(310) 277-4110
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Physician Partners, Inc. Class A Common
Stock, par value $.01 per share...... 7,463,250 shares(1) $1.60(2) $5,769,634 $3,618.54(3)
Physician Partners HealthFirst, P.C.
Common Stock, no par value........... 92 shares N/A (4)
Physician Partners Corvallis, P.C.
Common Stock, no par value........... 64 shares N/A (4)
Physician Partners Medford, P.C. Common
Stock, no par value.................. 57 1/3 shares N/A (4)
</TABLE>
(1) The amount of Class A Common Stock, par value $.01 per share, of Physician
Partners, Inc. ("PPI") to be registered hereby is comprised of the maximum
number of shares of such Class A Common Stock issuable upon consummation of
the merger of HealthFirst Medical Group, P.C. ("HealthFirst"), The Corvallis
Clinic, P.C. ("Corvallis Clinic") and Medford Clinic, P.C. ("Medford
Clinic") with and into PPI (the "Merger").
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(f)(2) of the Securities Act of 1933, as amended (the
"Securities Act"), based upon the book value of the securities to be
cancelled in the Merger (as reflected in the initial filing of the
Registration Statement on Form S-4 as filed with the Securities and Exchange
Commission on November 6, 1996 (the "Initial Filing")). The proposed maximum
offering price per share is based on the proposed maximum aggregate offering
price divided by the number of shares initially proposed to be registered in
the Initial Filing.
(3) The aggregate registration fee of $3,618.54 has been calculated pursuant to
Rule 457(a) and 457(f)(2) as follows: 1/33 of one percent of the $1.60
offering price per share of Class A Common Stock of PPI, multiplied by the
7,463,250 shares of Class A Common Stock of PPI to be registered hereby.
(4) The Common Stock of Physician Partners HealthFirst, P.C. to be registered
hereby will be distributed by HealthFirst as a dividend to its shareholders.
The Common Stock of Physician Partners Corvallis, P.C. to be registered
hereby will be distributed by Corvallis Clinic as a dividend to its
shareholders. The Common Stock of Physician Partners Medford, P.C. to be
registered hereby will be distributed by Medford Clinic as a dividend to its
shareholders. In each case, such Common Stock is being distributed as a
dividend, without any consideration being paid by the recipients thereof.
There is no book value or market value for any such Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
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<PAGE>
PHYSICIAN PARTNERS, INC.
PHYSICIAN PARTNERS HEALTHFIRST, P.C.
PHYSICIAN PARTNERS CORVALLIS, P.C.
PHYSICIAN PARTNERS MEDFORD, P.C.
CROSS-REFERENCE SHEET FOR REGISTRATION STATEMENT ON FORM S-4
AND JOINT PROXY STATEMENT/PROSPECTUS
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION CAPTION IN JOINT PROXY STATEMENT/PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
A. Information about the Transaction
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus........................... Facing Page of Registration Statement; Cross-
Reference Sheet; Cover Page of Joint Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information.................................. Facing Page of Registration Statement; Summary; Risk
Factors
4. Terms of the Transaction............................. Available Information; Summary; The Merger and
Related Transactions; Terms of the Reorganization
and Merger; Operation, Management and Business of
PPI Following the Merger; Experts; Legal Matters
5. Pro Forma Financial Information...................... Summary; Unaudited Pro Forma Financial Statements of
PPI, Including Notes Thereto; Unaudited Pro Forma
Financial Statements of New PCs, Including Notes
Thereto; Operation, Management and Business of
HealthFirst New PC Following the New PC
Distribution; Operation, Management and Business of
Corvallis Clinic New PC Following the New PC
Distribution; Operation, Management and Business of
Medford Clinic New PC Following the New PC
Distribution
6. Material Contacts with the Company Being Acquired.... Terms of the Reorganization and Merger
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to Be Underwriters...... Not Applicable
8. Interests of Named Experts and Counsel............... Terms of the Reorganization and Merger; Experts;
Legal Matters
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
B. Information about the Registrants
10. Information With Respect to S-3 Registrants.......... Not Applicable
11. Incorporation of Certain Information by Reference.... Not Applicable
12. Information With Respect to S-2 or S-3 Registrants... Not Applicable
13. Incorporation of Certain Information by Reference.... Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION CAPTION IN JOINT PROXY STATEMENT/PROSPECTUS
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<C> <S> <C>
14. Information With Respect to Registrants Other Than
S-3 or S-2 Registrants............................. Summary; The PC Reorganization Transactions and
Related Transactions; Operation, Management and
Business of PPI Following the Merger; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Unaudited Pro Forma
Financial Statements of PPI, Including Notes
Thereto; Operation, Management and Business of
HealthFirst New PC Following the New PC
Distribution; Operation, Management and Business of
Corvallis Clinic New PC Following the New PC
Distribution; Operation, Management and Business of
Medford Clinic New PC Following the New PC
Distribution
C. Information About the Companies Being Acquired
15. Information With Respect to S-3 Companies............ Not Applicable
16. Information With Respect to S-2 or S-3 Companies..... Not Applicable
17. Information With Respect to Companies Other Than S-2
or S-3 Companies................................... Summary; Business of HealthFirst; Description of
Capital Stock of HealthFirst; Selected Financial
Data of HealthFirst; HealthFirst Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business of Corvallis
Clinic; Description of Capital Stock of Corvallis
Clinic; Selected Financial Data of Corvallis
Clinic; Corvallis Clinic Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business of Medford Clinic; Description
of Capital Stock of Medford Clinic; Selected
Financial Data of Medford Clinic; Medford Clinic
Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Information if Proxies, Consents or Authorizations
Are to be Solicited................................ Summary; The HealthFirst Shareholder Meeting; The
Corvallis Clinic Shareholder Meeting; The Medford
Clinic Shareholder Meeting; Terms of the
Reorganization and Merger; Operation, Management
and Business of PPI Following the Merger;
Description of Capital Stock of HealthFirst;
Description of Capital Stock of Corvallis Clinic;
Description of Capital Stock of Medford Clinic;
Proposal No. 3: Approval of the PPI Incentive
Compensation Plans Proposal; Legal Matters
19. Information if Proxies, Consents or Authorizations
Are Not to be Solicited, or in an Exchange Offer... Not Applicable
</TABLE>
<PAGE>
[LOGO]
IMPORTANT SHAREHOLDER COMMUNICATION
January , 1997
DEAR SHAREHOLDER:
You are cordially invited and encouraged to attend the special meeting (the
"Special Meeting") of shareholders of HealthFirst Medical Group, P.C., an Oregon
professional corporation ("HealthFirst"), to be held on Tuesday, January 21,
1997, at Lloyd Center, Red Lion Hotel, 1000 NE Multnomah Ave., Portland, Oregon
97232, commencing at 6:30 p.m. (Pacific Standard Time). At the Special Meeting,
shareholders of HealthFirst will consider and make a fundamental determination
regarding the future direction of HealthFirst.
REORGANIZATION AND MERGER
More specifically, at the Special Meeting, shareholders will be asked to
consider and vote upon three proposals (the "Proposals") in connection with the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996, as amended on November 4, 1996, November 29, 1996 and
December 31, 1996 (referred to herein, as so amended, as the "Reorganization and
Merger Agreement"), among HealthFirst, The Corvallis Clinic, P.C., an Oregon
professional corporation ("Corvallis Clinic"), Medford Clinic, P.C., an Oregon
professional corporation ("Medford Clinic" and, together with HealthFirst and
Corvallis Clinic, referred to herein, collectively, as the "Companies"), and
Physician Partners, Inc., a newly-formed Delaware corporation ("PPI").
The Reorganization and Merger Agreement contemplates that each Company will
effect a reorganization of its corporate structure and a merger with and into
PPI, resulting in a consolidation of the operations (other than the provider
professional services businesses) of the Companies. Upon consummation of the
transactions contemplated by the Reorganization and Merger Agreement, each
shareholder of HealthFirst will be a stockholder of PPI as well as a shareholder
of a newly-formed Oregon professional corporation ("HealthFirst New PC"), and
PPI and HealthFirst New PC will be parties to a 40-year practice management
agreement (the "Management Agreement"). It is a condition to the consummation of
the transactions contemplated by the Reorganization and Merger Agreement that
the holders of a majority of the outstanding Class A Shares of HealthFirst vote
in person or by proxy at the Special Meeting FOR the approval thereof.
The first two Proposals arising under the Reorganization and Merger
Agreement seek the approval, respectively, of (1) the distribution by
HealthFirst to its shareholders of the entire equity interest in HealthFirst New
PC, a newly-formed Oregon professional corporation and a subsidiary of
HealthFirst, to which the provider professional services business of HealthFirst
will be transferred, and (2) the merger (the "Merger") of HealthFirst,
reorganized to hold the physician practice management business, Corvallis Clinic
and Medford Clinic (each of which would be similarly reorganized) with and into
PPI.
The transfer of the provider professional services business is necessary to
comply with Oregon law restrictions on non-physician ownership or control of a
medical practice. Shareholders of HealthFirst at the time of such reorganization
and Merger would hold, after consummation thereof, common stock of both
HealthFirst New PC and PPI. The number of shares of common stock of PPI which
shareholders of HealthFirst will receive in the Merger is based on an exchange
ratio described in the accompanying Joint Proxy Statement/Prospectus.
[LOGO]
<PAGE>
The Reorganization and Merger Agreement also contemplates that PPI,
HealthFirst and the other Companies will, prior to the effective time of the
Merger, enter into an escrow agreement with an escrow agent reasonably
acceptable to PPI and the Companies, pursuant to which escrow agreement the
shareholders of each of the Companies will deposit into escrow certain number of
shares of common stock of PPI received in consideration of the Merger. The
aggregate number of shares of common stock of PPI deposited in escrow by
shareholders of HealthFirst as of the effective time of the Merger will be
840,000 (representing 8,000 shares for each full-time equivalent physician and
other specified provider ("FTE") of HealthFirst as of October 1, 1996).
Similarly, holders of Class B Common Stock of Corvallis Clinic and shareholders
of Medford Clinic will deposit in escrow 622,000 shares and 464,000 shares,
respectively, of common stock of PPI (again, representing 8,000 shares per FTE).
Since the shareholders of each of the Companies, as a group, will be receiving
an aggregate of 31,000 shares per FTE of such Company as consideration in the
Merger, such shareholders, as a group, will hold outside of escrow at least an
aggregate 23,000 shares per FTE of such Company. Common stock of PPI will be
released to such shareholders (referred to herein as "Escrow Holders") from
escrow based on the net shareholder equity per FTE of the Companies as reflected
on their audited balance sheets as of December 31, 1996 ("Net Shareholder Equity
Per FTE"). If the Net Shareholder Equity Per FTE of any Company (referred to
herein as an "Excess Company") exceeds that of any of the other Companies by
more than 20 percent (a difference of greater than 20 percent being referred to
herein as an "Excess Difference"), the number of shares released from escrow
will be adjusted to reflect such Excess Difference. More specifically, shares
will be released to Escrow Holders so that the Escrow Holders who had been
shareholders of an Excess Company would receive out of escrow, in the aggregate,
such number of shares of common stock of PPI as represents a value (measured
assuming a $15.82 per share value of common stock of PPI(1)) exceeding the
aggregate value of shares of common stock of PPI received by the Escrow Holders
who had been shareholders of the other Company or Companies by an amount equal
to the product of the Excess Difference multiplied by the FTE of such Excess
Company. In contrast, if the Net Shareholder Equity Per FTE of each of the
Companies is within 20 percent of one another, each Escrow Holder will receive
out of escrow one-half of the shares deposited thereby (which would result in
the shareholders of each of the Companies receiving, in the aggregate, 27,000
shares per FTE of such Company).
Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, the shareholders of each of the Companies
might receive all, a portion of or none of the shares of common stock of PPI
deposited thereby in escrow (ranging from an aggregate of 31,000 shares per FTE
to an aggregate of 23,000 shares per FTE on a Company-by-Company basis, provided
that the aggregate number of shares released from escrow will not result in the
total number of shares issued as consideration in the Merger to the shareholders
of all of the Companies exceeding 27,000 shares per FTE of all the Companies).
Balance sheets reflecting the December 31, 1996 net shareholder equity of the
Companies will be prepared and audited no later than March 31, 1997; within five
business days of delivery of such balance sheets, the Escrow Holders will
receive shares of common stock of PPI from escrow as described above. Any common
stock of PPI not so released from escrow will be cancelled and retired. For
details regarding the material terms of the escrow arrangement, see "Terms of
the Reorganization and Merger--Escrow Arrangement" of the accompanying Joint
Proxy Statement/Prospectus.
The shares of common stock of PPI to be received by each shareholder as
consideration in the Merger will be Class A Common Stock, par value $0.01 per
share ("PPI Class A Common Stock"), of PPI which are subject to repurchase by
PPI, at its option, only in the event that, for reasons other than death,
disability or retirement, such shareholder ceases to be an employee or member of
the board of directors of
- ------------------------
(1) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of common stock of PPI
(reflecting the sum of 27,000 shares per FTE of the Companies and 135,000
shares issued to four officers and one director of PPI) are outstanding
after the release of shares from escrow.
2
<PAGE>
PPI or HealthFirst New PC. If such shareholder undertakes certain activities in
competition with either PPI or physician groups with which PPI has entered into
a Management Agreement after the termination of employment or membership in the
board of directors of PPI or HealthFirst New PC, the repurchase price for the
shares held by such shareholder will be equal to the lesser of the fair market
value of such shares at the time of repurchase and the fair market value of such
shares of issuance of such shares. If PPI decides to exercise such right to
repurchase any share of PPI Class A Common Stock upon the occurrence of such
event, PPI will comply with applicable requirements of Rule 14e-1 promulgated
under the Securities Exchange Act of 1934, as amended. For details regarding the
repurchase right and the repurchase price, see "Terms of the Reorganization and
Merger--PPI's Right to Repurchase PPI Class A Common Stock."
The shares of PPI Class A Common Stock are also subject to a prohibition
against transfer for a period of five years from the date of issuance to the
original holder thereof (the "Issuance Date"), provided that such holder has a
right to elect, at any time after the second anniversary of the Issuance Date,
to require PPI to include up to 20 percent of such shares held thereby in a
subsequent registration statement relating to any proposed registered public
offering of common stock of PPI under which PPI receives net proceeds in excess
of $30 million, subject to a reduction in the number of shares included in such
public offering as determined by the managing underwriter. Upon the transfer of
any share of PPI Class A Common Stock to a third party unaffiliated with the
original holder thereof after the fifth anniversary of the Issuance Date when
the transfer restriction expires or, if earlier, after the second anniversary of
the Issuance Date pursuant to an exercise of the registration rights, such share
will convert into one fully paid and non-assessable share of Class B Common
Stock, par value $0.01 per share, of PPI. For a more detailed discussion of the
transfer restriction, the registration rights and the conversion of PPI Class A
Common Stock, see "Terms of the Reorganization and Merger--Resales of PPI Class
A Common Stock and Registration Rights and Conversion of PPI Class A Common
Stock."
MANAGEMENT AGREEMENT
In connection with the reorganization of HealthFirst, the Management
Agreement will be entered into between HealthFirst and HealthFirst New PC. Upon
consummation of the Merger, PPI would succeed to HealthFirst's rights and
obligations under the Management Agreement and would provide to HealthFirst New
PC management and administrative services and facilities and equipment. As
consideration, PPI would be entitled to (a) reimbursement of all Manager's
Expenses (as such term is hereinafter defined) incurred by PPI and (b) a
management fee equal to 16% of the "Distributable Profit Amount" (defined as (i)
gross revenues, booked on an accrual basis and subtracting specified contractual
allowances and bad debts, received by PPI or HealthFirst New PC relating to
services provided by HealthFirst New PC less (ii) Manager's Expenses).
HealthFirst New PC will be responsible for provider compensation and benefits.
HealthFirst New PC will be the entity responsible for the practice of medicine.
The term "Manager's Expenses" is defined in the Management Agreement to mean the
actual cost of all operating and non-operating expenses incurred by PPI in the
operation of HealthFirst New PC's medical offices. Any allocation of costs (as
opposed to a pass-through of actual direct costs incurred by PPI in connection
with the operation of HealthFirst New PC medical offices, for which PPI shall be
reimbursed in full) by PPI to HealthFirst New PC shall require approval of the
joint management board (composed of PPI and HealthFirst New PC representatives)
of the proposed cost allocation for a defined period of time prior to
implementation of the function for which a cost allocation is proposed.
"Manager's Expenses" expressly will not include any corporate overhead charges
of PPI (other than as expressly agreed to in the Management Agreement), federal
or state income taxes of PPI or HealthFirst New PC, any expenses which are
expressly designated as obligations to be assumed solely by PPI, and any
amortization expense resulting from the amortization of costs in connection with
the execution of the Management Agreement.
The Management Agreement will also provide for a Joint Management Board to
govern and monitor the contractual relationship (including budgetary matters)
between PPI and HealthFirst New PC. In addition, it will require HealthFirst New
PC to make payments to PPI in the event that certain HealthFirst
3
<PAGE>
New PC providers (excluding (i) those providers not subject to contracts with
the predecessor Company of the New PC containing similar restrictions as of
September 17, 1996, (ii) providers who, although not employed by such Company as
of September 17, 1996, had entered into an employment agreement with such
Company without some or all such covenants prior to September 17, 1996, (iii)
those providers employed by such Company as of September 17, 1996, and bound by
a covenant not to compete that shall have subsequently expired by its own terms
(such provider being an Unbound Provider only with respect to such
noncompetition covenant after the date of such expiration) or (iv) those
providers employed by such Company as of September 17, 1996 and bound by a
covenant not to compete whose employment by such Company or the successor New PC
shall have been subsequently terminated involuntarily by such employer (such
provider being an Unbound Provider only with respect to such noncompetition
covenant after the date of such termination)) (a) engage in competition against
HealthFirst New PC, (b) disclose or misappropriate trade secrets of HealthFirst
New PC or PPI or (c) solicit employees to terminate their employment by
HealthFirst New PC or PPI. It is anticipated that each provider who is employed
or promoted by HealthFirst New PC will enter into an employment agreement
containing a covenant requiring such provider to, in effect, indemnify
HealthFirst New PC in the event HealthFirst New PC becomes obligated to make any
such payments under the Management Agreement to PPI as a result of such
provider's activities.
The terms and conditions of the Reorganization and Merger Agreement and
related documentation are described in the accompanying Joint Proxy
Statement/Prospectus. The complete text of the Reorganization and Merger
Agreement is attached as Appendix A to the accompanying Joint Proxy Statement/
Prospectus.
STOCK OPTION PLAN
The third Proposal to be considered and voted upon by HealthFirst
shareholders at the Special Meeting seeks approval of various PPI incentive
compensation plans, copies of which are attached as Appendices B, C, D and E to
the accompanying Joint Proxy Statement/Prospectus.
Each of the Proposals to be considered and voted upon at the Special Meeting
is described in greater detail in the accompanying Joint Proxy
Statement/Prospectus.
PURPOSE OF TRANSACTIONS
The Board of Directors of HealthFirst believes that each of Corvallis Clinic
and Medford Clinic has proven its ability to manage its business and quality of
care and, thus, are good merger partners. Such Board of Directors also believes
that PPI (a) would have a base of geography, shareholders and equity that would
result in an enhanced ability to obtain capital and (b) should also be able to
realize cost savings. Furthermore, PPI would have an enhanced capacity to
provide a high quality of clinical care and to compete economically in both
managed care and fee-for-service markets.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The HealthFirst Board has unanimously approved the HealthFirst
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal and determined that the Merger is fair to, and in the best
interests of, the shareholders of HealthFirst. The material factors considered
by the HealthFirst Board in reaching its decision were the following: (i) the
ability to realize cost savings; (ii) a significant base of geography and equity
that would result in an enhanced ability to obtain capital; (iii) the broader
geographic coverage and improved access for patients of HMOs and larger
purchaser groups offered by PPI; (iv) the ability to provide better clinical
care for patients; (v) the ability to transfer employees among locations without
losing seniority or benefits; (vi) fair merger consideration to the shareholders
of HealthFirst; and (vii) the exchange of HealthFirst shares for shares of PPI
Class A Common Stock on a tax-free basis. Such factors outweighed the concerns
over (a) the recent operating losses of Corvallis Clinic; (b) the fear that the
formation of PPI would attract greater competition from
4
<PAGE>
other physician practice management companies and hospitals in the same service
areas and (c) uncertainty regarding the ability of the PPI management team to
manage effectively.
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF HEALTHFIRST HAS
UNANIMOUSLY APPROVED THE REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS
AND RECOMMENDS THAT YOU VOTE IN FAVOR THEREOF AT THE SPECIAL MEETING.
The directors and executive officers of HealthFirst, as a group,
beneficially hold an aggregate of 1,100 Class A Shares of HealthFirst,
representing approximately 12% of the outstanding Class A Shares of HealthFirst.
Each of the directors and executive officers of HealthFirst has indicated that
it is his or her present intention to vote all of the shares held thereby FOR
approval of the Proposals. The HealthFirst management has also indicated its
present intention to support approval of the Proposals.
------------------------
VOTING PROCEDURES
The affirmative vote of a majority of the outstanding Class A Shares of
HealthFirst is necessary for approval of the Proposals. It is important that
your Class A Shares be voted at the Special Meeting, regardless of the number of
such shares held by you. FAILURE OF A SHAREHOLDER TO SUBMIT A PROXY OR VOTE AT
THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE APPROVAL OF
THE PROPOSALS. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, AND NO LATER THAN JANUARY 21, 1997. A return envelope is enclosed for
your convenience and requires no postage for mailing in the United States. When
a proxy is properly executed and returned, Class A Shares of HealthFirst will be
voted in accordance with the directions indicated on the proxy, or if no
directions are indicated, such shares will be voted FOR each of the HealthFirst
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal.
This will not prevent you from voting such shares in person in the event
that you attend the Special Meeting. Any HealthFirst shareholder giving a proxy
may revoke his or her proxy at any time before it is voted at the Special
Meeting by (i) providing written notice of such revocation to HealthFirst, (ii)
signing and delivering a proxy bearing a later date, to Vern R. Williams, M.D.,
Secretary, HealthFirst Medical Group, P.C., 10535 NE Glisan, Portland, Oregon
97220 or (iii) attending the Special Meeting and voting in person.
We look forward to seeing you on Tuesday, January 21, 1997.
Sincerely,
[SIG]
--------------------------------------
Matthew M. Shelley, M.D.
President
5
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 21, 1997
To the Shareholders of HealthFirst Medical Group, P.C.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of the
shareholders of HealthFirst Medical Group, P.C., an Oregon professional
corporation ("HealthFirst"), will be held on Tuesday, January 21, 1997, at Lloyd
Center, Red Lion Hotel, 1000 NE Multnomah Ave., Portland, Oregon 97232,
commencing at 6:30 p.m. (Pacific Standard Time), for the following purposes:
1. To consider and vote upon a proposal to approve the following
constituting the HealthFirst Reorganization Proposal:
(a) the HealthFirst Asset Transfer (as such term is defined below);
(b) the HealthFirst Conversion (as such term is defined below) and other
transactions contemplated by the HealthFirst Reorganization
Transactions (as such term is defined below); and
(c) the provisions of the Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of September 19, 1996, as amended
on November 4, 1996, November 29, 1996 and December 31, 1996
(referred to herein, as so amended, as the "Reorganization and Merger
Agreement"), among HealthFirst, The Corvallis Clinic, P.C., an Oregon
professional corporation ("Corvallis Clinic"), Medford Clinic, P.C.,
an Oregon professional corporation ("Medford Clinic"), and Physician
Partners, Inc., a newly-formed Delaware corporation ("PPI"), relating
to the HealthFirst Reorganization Transactions.
Pursuant to the Reorganization and Merger Agreement, HealthFirst will effect
the following transactions (referred to herein, collectively, as the
"HealthFirst Reorganization Transactions"):
(i) HealthFirst will incorporate, as a wholly-owned subsidiary
thereof, a professional corporation ("HealthFirst New PC") under
the Oregon Professional Corporation Act;
(ii) HealthFirst will transfer to HealthFirst New PC certain of
HealthFirst's assets relating to the provider professional
services business of HealthFirst, which assets are expected to be
intangible assets related to the practice of medicine, including
employment agreements with providers, medical records and
insurance contracts (referred to herein, collectively, as the
"HealthFirst New PC Assets"), and cause HealthFirst New PC to
assume liabilities of HealthFirst relating to the HealthFirst New
PC Assets ("HealthFirst Asset Transfer");
(iii) HealthFirst will make a distribution under which the
shareholders of HealthFirst will receive all of the issued and
outstanding shares of capital stock of HealthFirst New PC,
allocated on a pro rata basis in accordance with the fair market
value of each such shareholder's then-current equity interest in
HealthFirst (such distribution being referred to herein as the
"HealthFirst Distribution");
(iv) HealthFirst will convert from an Oregon professional corporation
to an Oregon business corporation (such conversion being referred
to herein as the "HealthFirst Conversion") by filing Restated
Articles of Incorporation, together with the required fee, with
the Secretary of State of the State of Oregon in accordance with
the Oregon Professional Corporation Act and the Oregon Business
Corporation Act (the Oregon Business Corporation Act and the
Oregon Professional Corporation Act are referred to herein,
collectively, as the "Oregon Law"); and
(v) HealthFirst will enter into a 40-year practice management
agreement with HealthFirst New PC.
2. To consider and vote upon a proposal to approve the following
constituting the Merger Proposal:
(a) the Merger (as such term is defined below); and
<PAGE>
(b) the provisions of the Reorganization and Merger Agreement relating to
the Merger Transactions (as such term is defined below).
Pursuant to the Reorganization and Merger Agreement, the Companies will
effect the following transactions (referred to herein, collectively, as the
"Merger Transactions"):
(i) HealthFirst, Corvallis Clinic and Medford Clinic (each being, at
such time, a newly-converted Oregon business corporation) will
merge with and into PPI (the "Merger"), which Merger will occur
as promptly as practicable after the consummation of similar
reorganization transactions by Corvallis Clinic and Medford
Clinic as described in the Reorganization and Merger Agreement;
(ii) each outstanding Class A Share of HealthFirst, other than the
shares held by those shareholders who take required actions to
properly assert their dissenters' rights under the Oregon
Business Corporation Act, will be converted into the right to
receive 354 shares of Class A Common Stock, par value $0.01 per
share ("PPI Class A Common Stock"), of PPI (the term "par value"
denotes a stated value of capital stock, determined somewhat
arbitrarily and generally bearing no relation to the market or
actual value of such capital stock);
(iii) each outstanding share of Class A Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 1,454 shares of PPI Class A Common Stock;
(iv) each outstanding share of Class B Common Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 192 shares of PPI Class A Common Stock;
(v) each outstanding share of Class C Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 6 shares of PPI Class A Common Stock;
(vi) each outstanding share of Common Stock of Medford Clinic, other
than the shares held by those shareholders who take required
actions to properly assert their dissenters' rights under the
Oregon Business Corporation Act, will be converted into the right
to receive 31,362 shares of PPI Class A Common Stock; and
(vii) each outstanding option to purchase Series 1 of Class A Shares
of HealthFirst, Class B Common Stock of Corvallis Clinic and
Common Stock of Medford Clinic will be converted into the right
to acquire, on the same terms and conditions, shares of PPI Class
A Common Stock with the number of shares and exercise price
applicable to such option adjusted based on the applicable
exchange ratio for the underlying Class A Shares of HealthFirst,
Class B Common Stock of Corvallis Clinic or Common Stock of
Medford Clinic, as the case may be.
The Reorganization and Merger Agreement also contemplates that PPI,
HealthFirst and the other Companies will, prior to the Effective Time of the
Merger, enter into an escrow agreement with an escrow agent reasonably
acceptable to PPI and the Companies, pursuant to which escrow agreement the
shareholders of each of the Companies will deposit into escrow a certain number
of shares of PPI Class A Common Stock received in consideration of the Merger.
The aggregate number of shares of PPI Class A Common Stock desposited in escrow
by shareholders of HealthFirst as of the Effective Time will be 840,000
(representing 8,000 shares for each full-time equivalent physician and other
specified provider ("FTE") of HealthFirst as of October 1, 1996). Similarly,
holders of Class B Common Stock of Corvallis Clinic and shareholders of Medford
Clinic will deposit in escrow 622,000 shares and 464,000 shares,
2
<PAGE>
respectively of PPI Class A Common Stock (again, representing 8,000 shares per
FTE). On a per-share basis, (i) 91 shares of PPI Class A Common Stock per shares
of HealthFirst Class A Share will be deposited in escrow, (ii) 52 shares of PPI
Class A Common Stock per share of Corvallis Clinic Class B Stock will be
deposited in escrow and (iii) 8,098 shares of PPI Class A Common Stock per share
of Medford Clinic Common Stock will be deposited in escrow. Since the
shareholders of each of the Companies, as a group, will be entitled to receive
an aggregate of 31,000 shares per FTE of such Company as consideration in the
Merger, such shareholders, as a group, will hold outside of escrow at least
23,000 shares per FTE of such Company. Since the shareholders of each of the
Companies, as a group, will initially be entitled to receive an aggregate of
31,000 shares per FTE of such Company as consideration in the Merger, such
shareholders, as a group, will hold outside of escrow at least an aggregate of
23,000 shares per FTE of such Company. PPI Class A Common Stock will be released
to such shareholders (referred to herein as "Escrow Holders") from escrow based
on the net shareholder equity per FTE of the Companies as reflected on their
audited balance sheets as of December 31, 1996 ("Net Shareholder Equity Per
FTE"). If the Net Shareholder Equity Per FTE of any Company (referred to herein
as an "Excess Company") exceeds that of any of the other Companies by more than
20 percent (a difference of greater than 20 percent being referred to herein as
an "Excess Difference"), the number of shares released from escrow will be
adjusted to reflect such Excess Difference. More specifically, shares will be
released to Escrow Holders so that the Escrow Holders who had been shareholders
of an Excess Company would receive out of escrow, in the aggregate, such number
of shares of PPI Class A Common Stock as represents a value (measured assuming a
$15.82 per share value of PPI Class A Common Stock(1)) exceeding the aggregate
value of shares of PPI Class A Common Stock received by the Escrow Holders who
had been shareholders of the other Company or Companies by an amount equal to
the product of the Excess Difference multiplied by the FTE of such Excess
Company. In contrast, if the Net Shareholder Equity Per FTE of each of the
Companies is within 20 percent of one another, each Escrow Holder will receive
out of escrow one-half of the shares deposited thereby (which would result in
the shareholders of each of the Companies receiving in the aggregate, 27,000
shares per FTE of such Company.)
Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, the shareholders of each of the Companies
might receive all, a portion or none of the shares of PPI Class A Common Stock
deposited thereby in escrow (ranging from an aggregate of 31,000 shares per FTE
to an aggregate of 23,000 shares per FTE on a Company-by-Company basis, provided
that the aggregate number of shares released from escrow will not result in the
total number of shares issued as consideration in the Merger to the shareholders
of all of the Companies exceeding 27,000 shares per FTE of all the Companies).
The aggregate number of shares of PPI Class A Common Stock which the
shareholders of each of the Companies, may receive, as a group, as consideration
in the Merger ranges from an aggregate of 31,000 shares per FTE to an aggregate
of 23,000 per FTE on a Company-by-Company basis, provided that the aggregate
number of shares released from escrow will not result in the total number of
shares issued to all of the shareholders of the Companies as consideration in
the Merger exceeding 27,000 shares per FTE of all of the Companies. On a
per-share basis, the ranges are (i) from 263 shares to 354 shares of PPI Class A
Common Stock per HealthFirst Class A Share, (ii) from 140 shares to 192 shares
of PPI Class A Common Stock per share of Corvallis Clinic Class B Stock and
(iii) from 23,269 shares to 31,362 shares of PPI Class A Common Stock per share
of Medford Clinic Common Stock. Balance sheets reflecting the December 31, 1996
net shareholder equity of the Companies will be prepared and audited no later
than March 31, 1997; within five business days of delivery of such balance
sheets, the Escrow Holders will receive shares of PPI Class A Common Stock from
escrow as described above. Any PPI Class A Common Stock not so released from
escrow will be cancelled and retired. For details
- ------------------------
(1) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of PPI Class A Common
Stock (reflecting the sum of 27,000 shares per FTE of the Companies and
135,000 shares issued to four officers and one director of PPI) are
outstanding after the release of shares from escrow.
3
<PAGE>
regarding the material terms of the escrow arrangement, see "Terms of the
Reorganization and Merger-- Escrow Arrangement" of the accompanying Joint Proxy
Statement/Prospectus.
The complete text of the Reorganization and Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement/Prospectus.
3. To consider and vote upon a proposal to approve four plans (referred to
collectively herein as the "PPI Incentive Compensation Plans"):
(i) the Physician Partners, Inc. Employee Stock Option Plan;
(ii) the Physician Partners, Inc. Non-Employee Director Stock Option
Plan;
(iii) the Physician Partners, Inc. Non-Employee Provider Stock Option
Plan; and
(iv) the Physician Partners, Inc. Change in Control Plan,
under which, collectively a total of up to 2,500,000 shares of PPI Class A
Common Stock will be available for issuance to
(A) providers employed by HealthFirst New PC or any other
newly-formed professional corporation with which PPI enters
into a practice management agreement;
(B) officers and employees of PPI or any of its operating
subsidiaries; and
(C) non-employee members of the Board of Directors of PPI.
Copies of the PPI Incentive Compensation Plans are attached as Appendices B,
C, D and E to the accompanying Joint Proxy Statement/Prospectus.
4. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on December 24, 1996,
will be entitled to notice of and to vote at the Special Meeting or any
adjournment thereof.
The terms and conditions of the Reorganization and Merger Agreement are
described in the accompanying Joint Proxy Statement/Prospectus.
------------------------
YOUR VOTE IS IMPORTANT. The affirmative vote of a majority of the
outstanding Class A Shares of HealthFirst is necessary for approval of the
proposals described herein at the Special Meeting. THEREFORE, PLEASE COMPLETE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING, AND NO LATER THAN JANUARY 21, 1997. A return
envelope is enclosed for your convenience and requires no postage for mailing in
the United States. Proxies are revocable at any time prior to the time they are
voted, and shareholders who are present at the Special Meeting may withdraw
their proxies and vote in person if they so desire.
When a proxy is properly executed and returned, Class A Shares of
HealthFirst will be voted in accordance with the directions indicated on the
proxy, or if no directions are indicated, such shares will be voted FOR each of
the HealthFirst Reorganization Proposal, the Merger Proposal and the PPI
Incentive Compensation Plans Proposal. Additional terms and conditions of the
proxy are described in the accompanying Joint Proxy Statement/Prospectus.
By order of the Board of Directors
[SIG]
--------------------------------------
Vern R. Williams, M.D., Secretary
January , 1997
4
<PAGE>
[LOGO]
IMPORTANT SHAREHOLDER COMMUNICATION
January , 1997
DEAR SHAREHOLDER:
You are cordially invited and encouraged to attend the special meeting (the
"Special Meeting") of shareholders of The Corvallis Clinic, P.C., an Oregon
professional corporation ("Corvallis Clinic"), to be held on Monday, January 20,
1997, at 3680 NW Samaritan Drive, Corvallis, Oregon 97330, commencing at 6:30
p.m. (Pacific Standard Time). At the Special Meeting, shareholders of Corvallis
Clinic will consider and make a fundamental determination regarding the future
direction of Corvallis Clinic.
REORGANIZATION AND MERGER
More specifically, at the Special Meeting, shareholders will be asked to
consider and vote upon three proposals (the "Proposals") in connection with the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996, as amended on November 4, 1996, November 29, 1996 and
December 31, 1996 (referred to herein, as so amended, as the "Reorganization and
Merger Agreement"), among Corvallis Clinic, HealthFirst Medical Group, P.C., an
Oregon professional corporation ("HealthFirst"), Medford Clinic, P.C., an Oregon
professional corporation ("Medford Clinic" and, together with Corvallis Clinic
and HealthFirst, referred to herein, collectively, as the "Companies"), and
Physician Partners, Inc., a newly-formed Delaware corporation ("PPI").
The Reorganization and Merger Agreement contemplates that each Company will
effect a reorganization of its corporate structure and a merger with and into
PPI, resulting in a consolidation of the operations (other than the provider
professional services businesses) of the Companies. Upon consummation of the
transactions contemplated by the Reorganization and Merger Agreement, each
shareholder of Corvallis Clinic will be a stockholder of PPI as well as a
shareholder of a newly-formed Oregon professional corporation ("Corvallis Clinic
New PC"), and PPI and Corvallis Clinic New PC will be parties to a 40-year
practice management agreement (the "Management Agreement"). It is a condition to
the consummation of the transactions contemplated by the Reorganization and
Merger Agreement that the holders of two-thirds of the outstanding shares of
Class A Preferred Stock of Corvallis Clinic and the holders of two-thirds of the
outstanding shares of Class B Common Stock of Corvallis Clinic, in each case
voting separately as a group, vote in person or by proxy at the Special Meeting
FOR the approval thereof.
The first two proposals arising under the Reorganization and Merger
Agreement seek the approval, respectively, of (1) the distribution (the
"Corvallis Clinic Distribution") by Corvallis Clinic to its Class A shareholders
of the entire equity interest in Corvallis Clinic New PC, a newly-formed Oregon
professional corporation subsidiary of Corvallis Clinic, to which the provider
professional services business of Corvallis Clinic will be transferred, and (2)
the merger (the "Merger") of Corvallis Clinic, reorganized to hold the physician
practice management business, HealthFirst and Medford Clinic (each of which
would be similarly reorganized) with and into PPI.
The Corvallis Clinic Distribution will be made whereby the holders of Class
A Preferred Stock of Corvallis Clinic will receive all of the issued and
outstanding shares of Corvallis Clinic New PC, allocated on a pro rata basis in
accordance with the percentage of Class A Preferred Stock of Corvallis Clinic
then held by each such holder. The transfer of the provider professional
services business to Corvallis Clinic New PC and the subsequent Corvallis Clinic
Distribution is necessary to comply with Oregon law restrictions on
non-physician ownership or control of a medical practice. Holders of Class B
Common Stock of Corvallis Clinic and Class C Preferred Stock of Corvallis Clinic
at the time of such reorganization and Merger would hold, after consummation
thereof, common stock of PPI; holders of Class A Preferred Stock of Corvallis
Clinic would hold common stock of both Corvallis Clinic New PC and PPI. The
number
<PAGE>
of shares of common stock of PPI which shareholders of Corvallis Clinic will
receive in the Merger is based
on an exchange ratio described in the accompanying Joint Proxy
Statement/Prospectus.
The Reorganization and Merger Agreement also contemplates that PPI,
Corvallis Clinic and the other Companies will, prior to the effective time of
the Merger, enter into an escrow agreement with an escrow agent reasonably
acceptable to PPI and the Companies, pursuant to which escrow agreement the
shareholders of each of the Companies will deposit into escrow a certain number
of shares of common stock of PPI received in consideration of the Merger. The
aggregate number of shares of common stock of PPI deposited in escrow by holders
of Class B Common Stock of Corvallis Clinic as of the effective time of the
Merger will be 622,000 (representing 8,000 shares for each full-time equivalent
physician and other specified provider ("FTE") of Corvallis Clinic as of October
1, 1996). Shareholders of HealthFirst and Medford Clinic will deposit in escrow
840,000 shares and 464,000 shares, respectively, of common stock of PPI (again,
representing 8,000 shares per FTE). Since the shareholders of each of the
Companies, as a group, will initially be entitled to receive an aggregate of
31,000 shares per FTE of such Company as consideration in the Merger, such
shareholders, as a group, will hold outside of escrow at least 23,000 shares per
FTE of such Company. Common stock of PPI will be released to such shareholders
(referred to herein as "Escrow Holders") from escrow based on the net
shareholder equity per FTE of the Companies as reflected on their audited
balance sheets as of December 31, 1996 ("Net Shareholder Equity Per FTE"). If
the Net Shareholder Equity Per FTE of any Company (referred to herein as an
"Excess Company") exceeds that of any of the other Companies by more than 20
percent (a difference of greater than 20 percent being referred to herein as an
"Excess Difference"), the number of shares released from escrow will be adjusted
to reflect such Excess Difference. More specifically, shares will be released to
Escrow Holders so that the Escrow Holders who had been shareholders of an Excess
Company would receive out of escrow, in the aggregate, such number of shares of
common stock of PPI as represents a value (measured assuming a $15.82 per share
value of common stock of PPI(1)) exceeding the aggregate value of shares of
common stock of PPI received by the Escrow Holders who had been shareholders of
the other Company or Companies by an amount equal to the product of the Excess
Difference multiplied by the FTE of such Excess Company. In contrast, if the Net
Shareholder Equity Per FTE of each of the Companies is within 20 percent of one
another, each Escrow Holder will receive out of escrow one-half of the shares
deposited thereby (which would result in the shareholders of each of the
Companies receiving, in the aggregate, 27,000 shares per FTE of such Company).
Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, the shareholders of each of the Companies
might receive all, a portion or none of the shares of common stock of PPI
deposited thereby in escrow (ranging from an aggregate of 31,000 shares per FTE
to an aggregate 23,000 shares per FTE on a Company-by-Company basis, provided
that the aggregate number of shares released from escrow will not result in the
total number of shares issued as consideration in the Merger to the shareholders
of all of the Companies exceeding 27,000 shares per FTE of all the Companies).
Balance sheets reflecting the December 31, 1996 net shareholder equity of the
Companies will be prepared and audited no later than March 31, 1997; within five
business days of delivery of such balance sheets, the Escrow Holders will
receive shares of common stock of PPI from escrow as described above. Any common
stock of PPI not so released from escrow will be cancelled and retired. For
details regarding the material terms of the escrow arrangement, see "Terms of
the Reorganization and Merger-- Escrow Arrangement" of the accompanying Joint
Proxy Statement/Prospectus.
The shares of common stock of PPI to be received by each shareholder as
consideration in the Merger will be Class A Common Stock, par value $0.01 per
share ("PPI Class A Common Stock"), of PPI which
- ------------------------
(1) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of common stock of PPI
(reflecting the sum of 27,000 shares per FTE of the Companies and 135,000
shares issued to four officers and one director of PPI) are outstanding
after the release of shares from escrow.
2
<PAGE>
are subject to repurchase by PPI, at its option, only in the event that, for
reasons other than death, disability or retirement, such shareholder ceases to
be an employee or member of the board of directors of PPI or Corvallis Clinic
New PC. If such a shareholder undertakes certain activities in competition with
either PPI or physician groups with which PPI has entered into a Management
Agreement after the termination of employment or membership in the board of
directors of PPI or Corvallis Clinic New PC, the repurchase price for the shares
held by such shareholder will be equal to the lesser of fair market value at the
time of repurchase and fair market value at the time of issuance of such shares.
If PPI decides to exercise such right to repurchase any share of PPI Class A
Common Stock upon the occurrence of such event, PPI will comply with applicable
requirements of Rule 14e-1 promulgated under the Securities Exchange Act of
1934, as amended. For details regarding the repurchase right and the repurchase
price, see "Terms of the Reorganization and Merger--PPI's Right to Repurchase
PPI Class A Common Stock."
The shares of PPI Class A Common Stock are also subject to a prohibition
against transfer for a period of five years from the date of issuance to the
original holder thereof (the "Issuance Date"), provided that such holder has a
right to elect, at any time after the second anniversary of the Issuance Date,
to require PPI to include up to 20 percent of such shares held thereby in a
subsequent registration statement relating to any proposed registered public
offering of common stock of PPI under which PPI receives net proceeds in excess
of $30 million, subject to a reduction in the number of shares included in such
public offering as determined by the managing underwriter. Upon the transfer of
any share of PPI Class A Common Stock to a third party unaffiliated with the
original holder thereof after the fifth anniversary of the Issuance Date when
the transfer restriction expires or, if earlier, after the second anniversary of
the Issuance Date pursuant to an exercise of the registration rights, such share
will convert into one fully paid and non-assessable share of Class B Common
Stock, par value $0.01 per share, of PPI. For a more detailed discussion of the
transfer restriction, the registration rights and the conversion of PPI Class A
Common Stock, see "Terms of the Reorganization and Merger--Resales of PPI Class
A Common Stock and Registration Rights and Conversion of PPI Class A Common
Stock."
MANAGEMENT AGREEMENT
In connection with the reorganization of Corvallis Clinic, the Management
Agreement will be entered into between Corvallis Clinic and Corvallis Clinic New
PC. Upon consummation of the Merger, PPI would succeed to Corvallis Clinic's
rights and obligations under the Management Agreement and would provide to
Corvallis Clinic New PC management and administrative services and facilities
and equipment. As consideration, PPI would be entitled to (a) reimbursement of
all Manager's Expenses (as such term is hereinafter defined) incurred by PPI and
(b) a management fee equal to 16% of the "Distributable Profit Amount" (defined
as (i) gross revenues, booked on an accrual basis and subtracting specified
contractual allowances and bad debts, received by PPI or Corvallis Clinic New PC
relating to services provided by Corvallis Clinic New PC less (ii) Manager's
Expenses). Corvallis Clinic New PC will be responsible for provider compensation
and benefits. Corvallis Clinic New PC will be the entity responsible for the
practice of medicine. The term "Manager's Expenses" is defined in the Management
Agreement to mean the actual cost of all operating and non-operating expenses
incurred by PPI in the operation of Corvallis Clinic New PC's medical offices.
Any allocation of costs (as opposed to a pass-through of actual direct costs
incurred by PPI in connection with the operation of Corvallis Clinic New PC
medical offices, for which PPI shall be reimbursed in full) by PPI to Corvallis
Clinic New PC shall require approval of the joint management board (composed of
PPI and Corvallis Clinic New PC representatives) of the proposed cost allocation
for a defined period of time prior to implementation of the function for which a
cost allocation is proposed. "Manager's Expenses" expressly will not include any
corporate overhead charges of PPI (other than as expressly agreed to in the
Management Agreement), federal or state income taxes of PPI or Corvallis Clinic
New PC, any expenses which are expressly designated as obligations to be assumed
solely by PPI, and any amortization expense resulting from the amortization of
costs in connection with the execution of the Management Agreement.
3
<PAGE>
The Management Agreement will also provide for a Joint Management Board to
govern and monitor the contractual relationship (including budgetary matters)
between PPI and Corvallis Clinic New PC. In addition, it will require Corvallis
Clinic New PC to make payments to PPI in the event that certain Corvallis Clinic
New PC providers (excluding (i) those providers not subject to contracts with
the predecessor Company of the New PC containing similar restrictions as of
September 17, 1996, (ii) providers who, although not employed by such Company as
of September 17, 1996, had entered into an employment agreement with such
Company without some or all such covenants prior to September 17, 1996, (iii)
those providers employed by such Company as of September 17, 1996, and bound by
a covenant not to compete that shall have subsequently expired by its own terms
(such provider being an Unbound Provider only with respect to such
noncompetition covenant after the date of such expiration) or (iv) those
providers employed by such Company as of September 17, 1996 and bound by a
covenant not to compete whose employment by such Company or the successor New PC
shall have been subsequently terminated involuntarily by such employer (such
provider being an Unbound Provider only with respect to such noncompetition
covenant after the date of such termination)) (a) engage in competition against
Corvallis Clinic New PC, (b) disclose or misappropriate trade secrets of
Corvallis Clinic New PC or PPI or (c) solicit employees to terminate their
employment by Corvallis Clinic New PC or PPI. It is anticipated that each
provider who is newly employed or promoted by Corvallis Clinic New PC will enter
into an employment agreement containing a covenant requiring such provider to,
in effect, indemnify Corvallis Clinic New PC in the event Corvallis Clinic New
PC becomes obligated to make any such payment under the Management Agreement to
PPI as a result of such provider's activities.
The terms and conditions of the Reorganization and Merger Agreement and
related documentation are described in the accompanying Joint Proxy
Statement/Prospectus. The complete text of the Reorganization and Merger
Agreement is attached as Appendix A to the accompanying Joint Proxy Statement/
Prospectus.
STOCK OPTION PLAN
The third Proposal to be considered and voted upon by Corvallis Clinic
shareholders at the Special Meeting seeks approval of various PPI incentive
compensation plans, copies of which are attached as Appendices B, C, D and E to
the accompanying Joint Proxy Statement/Prospectus.
Each of the Proposals to be considered and voted upon at the Special Meeting
is described in greater detail in the accompanying Joint Proxy
Statement/Prospectus.
PURPOSE OF TRANSACTIONS
The Board of Directors of Corvallis Clinic believes that in order to
maintain competitiveness in the health care industry and to continue to fund the
growth of Corvallis Clinic, the ability to raise capital is critical for the
future of Corvallis Clinic and that the proposed business combination with
HealthFirst and Medford Clinic would enable the combined entity to have a
significantly better chance of raising capital than that of Corvallis Clinic
alone. The Board of Directors of Corvallis Clinic also believes that each of
HealthFirst and Medford Clinic has proven its ability to manage its business and
quality of care and, thus, are good merger partners. Furthermore, with a greater
base of physicians and extensive geographical presence, the combined entity
would have an enhanced capacity to provide a high quality of clinical care and
to compete economically in both managed care and fee-for-service markets.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Corvallis Clinic Board has unanimously approved the Corvallis Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal and determined that the Merger is fair to, and in the best
interest of, the shareholders of Corvallis Clinic. The material factors
considered by the Corvallis Clinic Board in reaching its decision were the
following: (i) a significantly better chance of acquiring capital for the future
through PPI than as Corvallis Clinic alone; (ii) the ability to share strengths
4
<PAGE>
and management expertise with the other Companies; (iii) the ability to transfer
employees among offices without losing seniority or benefits; (iv) significantly
better Merger consideration to the shareholders of Corvallis Clinic than any
other alternative; (v) the exchange of Corvallis Clinic shares for shares of PPI
Class A Common Stock on a tax-free basis; and (vi) fairness of Merger
consideration to the shareholders of Corvallis Clinic. Potential negative
factors considered by the Corvallis Clinic Board included (a) apprehension that
acquisitions by PPI in surrounding service areas could limit Corvallis Clinic's
growth and (b) the impact of losing the services of certain key personnel to
PPI. Such considerations were outweighed by the positive factors. AFTER CAREFUL
CONSIDERATION, THE BOARD OF DIRECTORS OF CORVALLIS CLINIC HAS UNANIMOUSLY
APPROVED THE REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS AND
RECOMMENDS THAT YOU VOTE IN FAVOR THEREOF AT THE SPECIAL MEETING.
The directors and executive officers of Corvallis, as a group, beneficially
hold an aggregate of 6 shares of Class A Preferred Stock of Corvallis Clinic and
an aggregate of 891 shares of Class B Common Stock of Corvallis Clinic,
representing approximately 10% and 7% of the outstanding shares of Class A
Preferred Stock of Corvallis Clinic and Class B Common Stock of Corvallis
Clinic, respectively. Each of the directors and executive officers of Corvallis
Clinic has indicated that it is his or her present intention to vote all of the
shares held thereby FOR approval of the Proposals. The Corvallis Clinic
management has also indicated its present intention to support approval of the
Proposals.
------------------------
VOTING PROCEDURES
The affirmative vote of two-thirds of the outstanding shares of Class A
Preferred Stock of Corvallis Clinic and two-thirds of the outstanding shares of
Class B Common Stock of Corvallis Clinic, in each case as a voting group, is
necessary for approval of the Proposals. It is important that your shares of
Class A Preferred Stock of Corvallis Clinic and Class B Common Stock of
Corvallis Clinic be voted at the Special Meeting, regardless of the number of
such shares held by you. FAILURE OF A SHAREHOLDER TO SUBMIT A PROXY OR VOTE AT
THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE APPROVAL OF
THE PROPOSALS. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED
PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING, AND NO LATER THAN JANUARY 20, 1997.
A return envelope is enclosed for your convenience and requires no postage
for mailing in the United States. When a proxy is properly executed and
returned, shares of Class A Preferred Stock of Corvallis Clinic and Class B
Common Stock of Corvallis Clinic will be voted in accordance with the directions
indicated on the proxy, or if no directions are indicated, such shares will be
voted FOR each of the Corvallis Clinic Reorganization Proposal, the Merger
Proposal and the PPI Incentive Compensation Plans Proposal.
This will not prevent you from voting such shares in person in the event
that you attend the Special Meeting. Any Corvallis Clinic shareholder giving a
proxy may revoke his or her proxy at any time before it is voted at the Special
Meeting by (i) providing written notice of such revocation to Corvallis Clinic,
(ii) signing and delivering a proxy bearing a later date, to Darrel D. Bibler,
M.D., Secretary, The Corvallis Clinic, P.C., 444 NW Elks Drive, Corvallis,
Oregon 97330 or (iii) attending the Special Meeting and voting in person.
We look forward to seeing you on Monday, January 20, 1997.
Sincerely,
[SIG]
--------------------------------------
David H. Cutsforth, Jr., M.D.
President
5
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 20, 1997
To the Shareholders of The Corvallis Clinic, P.C.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of the
shareholders of The Corvallis Clinic, P.C., an Oregon professional corporation
("Corvallis Clinic"), will be held on January 20, 1997, at 3680 NW Samaritan
Drive, Corvallis, Oregon 97330, commencing at 6:30 p.m. (Pacific Standard Time),
for the following purposes (which shall constitute the agenda for the meeting):
1. To consider and vote upon a proposal to approve the following
constituting the Corvallis Clinic Reorganization Proposal:
(a) the Corvallis Clinic Asset Transfer (as such term is defined below);
(b) the Corvallis Clinic Conversion (as such term is defined below) and
other transactions contemplated by the Corvallis Clinic
Reorganization Transactions (as such term is defined below); and
(c) the provisions of the Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of September 19, 1996, as amended
on November 4, 1996, November 29, 1996 and December 31, 1996
(referred to herein, as so amended, as the "Reorganization and Merger
Agreement"), among Corvallis Clinic, HealthFirst Medical Group, P.C.,
an Oregon professional corporation ("HealthFirst"), Medford Clinic,
P.C., an Oregon professional corporation ("Medford Clinic"), and
Physician Partners, Inc., a newly-formed Delaware corporation
("PPI"), relating to the Corvallis Clinic Reorganization
Transactions.
Pursuant to the Reorganization and Merger Agreement, Corvallis Clinic will
effect the following transactions (referred to herein, collectively, as the
"Corvallis Clinic Reorganization Transactions"):
(i) Corvallis Clinic will incorporate, as a wholly-owned subsidiary
thereof, a professional corporation ("Corvallis Clinic New PC")
under the Oregon Professional Corporation Act;
(ii) Corvallis Clinic will transfer to Corvallis Clinic New PC
certain of Corvallis Clinic's assets relating to the provider
professional services business of Corvallis Clinic, which assets
are expected to be intangible assets related to the practice of
medicine, including employment agreements with providers, medical
records and insurance contracts (referred to herein,
collectively, as the "Corvallis Clinic New PC Assets"), and cause
Corvallis Clinic New PC to assume liabilities of Corvallis Clinic
relating to the Corvallis Clinic New PC Assets ("Corvallis Clinic
Asset Transfer");
(iii) it is anticipated that Corvallis Clinic will make a
distribution under which the holders of Class A Preferred Stock
of Corvallis Clinic shall receive all of the issued and
outstanding shares of Corvallis Clinic New PC, allocated on a pro
rata basis in accordance with the percentage of Class A Preferred
Stock of Corvallis Clinic then held by each such holder (such
distribution being referred to herein as the "Corvallis Clinic
Distribution"), so long as such distribution would not cause
adverse tax or other consequences for HealthFirst or Medford
Clinic or their respective shareholders with respect to the
qualification of the Merger (as such term is defined below) as a
"reorganization" within the meaning of Section 368(a)(i)(A) of
the Internal Revenue Code, as amended (the "Code");
(iv) Corvallis Clinic will convert from an Oregon professional
corporation to an Oregon business corporation (such conversion
being referred to herein as the "Corvallis Clinic Conversion") by
filing Restated Articles of Incorporation, together with the
required fee, with the Secretary of State of the State of Oregon
in accordance with the Oregon Professional Corporation Act and
the Oregon Business Corporation Act (collectively, the "Oregon
Law"); and
<PAGE>
(v) Corvallis Clinic will enter into a 40-year practice management
agreement with Corvallis Clinic New PC.
2. To consider and vote upon a proposal to approve the following
constituting the Merger Proposal:
(a) the Merger (as such term is defined below); and
(b) the provisions of the Reorganization and Merger Agreement relating to
the Merger Transactions (as such term is defined below).
Pursuant to the Reorganization and Merger Agreement, the Companies will
effect the following transactions (referred to herein, collectively, as the
"Merger Transactions"):
(i) Corvallis Clinic, HealthFirst and Medford Clinic (each being, at
such time, a newly-converted Oregon business corporation) will
merge with and into PPI (the "Merger"), which Merger will occur
as promptly as practicable after the consummation of similar
reorganization transactions by each of HealthFirst and Medford
Clinic as described in the Reorganization and Merger Agreement;
(ii) each outstanding share of Class A Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 1,454 shares of Class A Common Stock, par
value $0.01 per share ("PPI Class A Common Stock"), of PPI (the
term "par value" denotes a stated value of capital stock,
determined somewhat arbitrarily and generally bearing no relation
to the market or actual value of such capital stock);
(iii) each outstanding share of Class B Common Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 192 shares of PPI Class A Common Stock;
(iv) each outstanding share of Class C Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive six shares of PPI Class A Common Stock;
(v) each outstanding Class A Share of HealthFirst, other than the
shares held by those shareholders who take required actions to
properly assert their dissenters' rights under the Oregon
Business Corporation Act, will be converted into the right to
receive 354 shares of PPI Class A Common Stock;
(vi) each outstanding share of Common Stock of Medford Clinic, other
than the shares held by those shareholders who take required
actions to properly assert their dissenters' rights under the
Oregon Business Corporation Act, will be converted into the right
to receive 31,362 shares of PPI Class A Common Stock; and
(vii) each outstanding option to purchase Class B Common Stock of
Corvallis Clinic, Series 1 of Class A Shares of HealthFirst and
Common Stock of Medford Clinic will be converted into the right
to acquire, on the same terms and conditions, shares of PPI Class
A Common Stock with the number of shares and exercise price
applicable to such option adjusted based on the applicable
exchange ratio for the underlying Class A Common Stock of
Corvallis Clinic, Class A Shares of HealthFirst or Common Stock
of Medford Clinic, as the case may be.
The Reorganization and Merger Agreement also contemplates that PPI,
Corvallis Clinic and the other Companies will, prior to the Effective Time of
the Merger, enter into an escrow agreement with an escrow agent reasonably
acceptable to PPI and the Companies, pursuant to which escrow agreement the
shareholders of each of the Companies will deposit into escrow a certain number
of shares of PPI Class A
2
<PAGE>
Common Stock received in consideration of the Merger. The aggregate number of
shares of PPI Class A Common Stock deposited in escrow by holders of Class B
Common Stock of Corvallis Clinic as of the Effective Time of the Merger will be
622,000 (representing 8,000 shares for each full-time equivalent physician and
other specified provider ("FTE") of Corvallis Clinic as of October 1, 1996).
Shareholders of HealthFirst and Medford Clinic will deposit in escrow 840,000
shares and 464,000 shares, respectively, of PPI Class A Common Stock (again,
representing 8,000 shares per FTE). On a per-share basis, (i) 91 shares of PPI
Class A Common Stock per share of HealthFirst Class A Share will be deposited in
escrow, (ii) 52 shares of PPI Class A Common Stock per share of Corvallis Clinic
Class B Stock will be deposited in escrow and (iii) 8,098 shares of PPI Class A
Common Stock per share of Medford Clinic Common Stock will be deposited in
escrow. Since the shareholders of each of the Companies, as a group, will be
entitled to receive an aggregate of 31,000 shares per FTE of such Company as
consideration in the Merger, such shareholders, as a group, will hold outside of
escrow at least 23,000 shares per FTE of such Company. Since the shareholders of
each of the Companies, as a group, will initially be entitled to receive an
aggregate of 31,000 shares per FTE of such Company as consideration in the
Merger, such shareholders, as a group, will hold outside of escrow at least an
aggregate 23,000 shares per FTE of such Company. PPI Class A Common Stock will
be released to such shareholders (referred to herein as "Escrow Holders") from
escrow based on the net shareholder equity per FTE of the Companies as reflected
on their audited balance sheets as of December 31, 1996 ("Net Shareholder Equity
Per FTE"). If the Net Shareholder Equity Per FTE of any Company (referred to
herein as an "Excess Company") exceeds that of any of the other Companies by
more than 20 percent (a difference of greater than 20 percent being referred to
herein as an "Excess Difference"), the number of shares released from escrow
will be adjusted to reflect such Excess Difference. More specifically, shares
will be released to Escrow Holders so that the Escrow Holders who had been
shareholders of an Excess Company would receive out of escrow, in the aggregate,
such number of shares of PPI Class A Common Stock as represents a value
(measured assuming a $15.82 per share value of PPI Class A Common Stock(1))
exceeding the aggregate value of shares of PPI Class A Common Stock received by
the Escrow Holders who had been shareholders of the other Company or Companies
by an amount equal to the product of the Excess Difference multiplied by the FTE
of such Excess Company. In contrast, if the Net Shareholder Equity Per FTE of
each of the Companies is within 20 percent of one another, each Escrow Holder
will receive out of escrow one-half of the shares deposited thereby (which would
result in the shareholders of each of the Companies receiving, in the aggregate,
27,000 shares per FTE of such Company).
Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, the shareholders of each of the Companies
might receive all, a portion or none of the shares of PPI Class A Common Stock
deposited thereby in escrow (ranging from an aggregate of 31,000 shares per FTE
to an aggregate of 23,000 shares per FTE on a Company-by-Company basis, provided
that the aggregate number of shares released from escrow will not result in the
total number of shares issued as consideration in the Merger to the shareholders
of all of the Companies exceeding 27,000 shares per FTE of all the Companies).
The aggregate number of shares of PPI Class A Common Stock which the
shareholders of each of the Companies, may receive, as a group, as consideration
in the Merger ranges from an aggregate of 31,000 shares per FTE to an aggregate
of 23,000 per FTE on a Company-by-Company basis, provided that an aggregate
number of shares released from escrow will not result in the total number of
shares issued to all of the shareholders of the Companies as consideration in
the Merger exceeding 27,000 shares per FTE of all of the Companies. On a
per-share basis, the ranges are (i) from 263 shares to 354 shares of PPI Class A
Common Stock per HealthFirst Class A Share, (ii) from 140 shares to 192 shares
of PPI Class A Common Stock per share of Corvallis Clinic Class B Stock and
(iii) from 23,269
- ------------------------
(1) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of PPI Class A Common
Stock (reflecting the sum of 27,000 shares per FTE of the Companies and
135,000 shares issued to four officers and one director of PPI) are
outstanding after the release of shares from escrow.
3
<PAGE>
shares to 31,362 shares of PPI Class A Common Stock per share of Medford Clinic
Common Stock. Balance sheets reflecting the December 31, 1996 net shareholder
equity of the Companies will be prepared and audited no later than March 31,
1997; within five business days of delivery of such balance sheets, the Escrow
Holders will receive shares of PPI Class A Common Stock from escrow as described
above. Any PPI Class A Common Stock not so released from escrow will be
cancelled and retired. For details regarding the material terms of the escrow
arrangement, see "Terms of the Reorganization and Merger-- Escrow Arrangement"
of the accompanying Joint Proxy Statement/Prospectus.
The complete text of the Reorganization and Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement/Prospectus.
3. To consider and vote upon a proposal to approve four plans (referred to
collectively herein as the "PPI Incentive Compensation Plans"):
(i) the Physician Partners, Inc. Employee Stock Option Plan;
(ii) the Physician Partners, Inc. Non-Employee Director Stock Option
Plan;
(iii) the Physician Partners, Inc. Non-Employee Provider Stock Option
Plan; and
(iv) the Physician Partners, Inc. Change in Control Plan,
under which a total of up to 2,500,000 shares of PPI Class A Common Stock will
be available for issuance to.
(A) providers employed by Corvallis Clinic New PC or any other
newly-formed professional corporation with which PPI enters
into a practice management agreement;
(B) officers and employees of PPI or any of its operating
subsidiaries; and
(C) non-employee members of the Board of Directors of PPI.
Copies of the PPI Incentive Compensation Plans are attached as Appendices B,
C, D and E to the accompanying Joint Proxy Statement/Prospectus.
4. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on December 24, 1996,
will be entitled to notice of and to vote at the Special Meeting or any
adjournment thereof.
The terms and conditions of the Reorganization and Merger Agreement are
described in the accompanying Joint Proxy Statement/Prospectus.
------------------------
YOUR VOTE IS IMPORTANT. The affirmative vote of two-thirds of the
outstanding shares of Class A Preferred Stock of Corvallis Clinic and two-thirds
of the outstanding shares of Class B Common Stock of Corvallis Clinic, in each
case as a voting group, is necessary for approval of the proposals described
herein at the Special Meeting. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN
THE ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE
SPECIAL MEETING, AND NO LATER THAN JANUARY 20, 1997. A return envelope is
enclosed for your convenience and requires no postage for mailing in the United
States. Proxies are revocable at any time prior to the time they are voted, and
shareholders who are present at the Special Meeting may withdraw their proxies
and vote in person if they so desire.
When a proxy is properly executed and returned, the shares of Class A
Preferred Stock of Corvallis Clinic and Class B Common Stock of Corvallis Clinic
will be voted in accordance with the directions indicated on the proxy, or if no
directions are indicated, such shares will be voted FOR each of the Corvallis
Clinic Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans
4
<PAGE>
Proposal. Additional terms and conditions of the proxy are described in the
accompanying Joint Proxy Statement/Prospectus.
By Order of the Board of Directors
[SIG]
--------------------------------------
Darrel D. Bibler, M.D., Secretary
January , 1997
5
<PAGE>
[LOGO]
IMPORTANT SHAREHOLDER COMMUNICATION
January , 1997
Dear Shareholder:
You are cordially invited and encouraged to attend the special meeting (the
"Special Meeting") of shareholders of Medford Clinic, P.C., an Oregon
professional corporation ("Medford Clinic"), to be held on Sunday, January 19,
1997, at 555 Black Oak Drive, Medford, Oregon 97504, commencing at 6:00 p.m.
(Pacific Standard Time). At the Special Meeting, shareholders of Medford Clinic
will consider and make a fundamental determination regarding the future
direction of Medford Clinic.
REORGANIZATION AND MERGER
More specifically, at the Special Meeting, shareholders will be asked to
consider and vote upon three proposals (the "Proposals") in connection with the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996, as amended on November 4, 1996, November 29, 1996 and
December 31, 1996 (referred to herein, as so amended, as the "Reorganization and
Merger Agreement"), among Medford Clinic, HealthFirst Medical Group, P.C., an
Oregon professional corporation ("HealthFirst"), The Corvallis Clinic, P.C., an
Oregon professional corporation ("Corvallis Clinic" and, together with Medford
Clinic and HealthFirst, referred to herein, collectively, as the "Companies"),
and Physician Partners, Inc., a newly-formed Delaware corporation ("PPI").
The Reorganization and Merger Agreement contemplates that each Company will
effect a reorganization of its corporate structure and a merger with and into
PPI resulting in a consolidation of the operations (other than the provider
professional services businesses) of the Companies. Upon consummation of the
transactions contemplated by the Reorganization and Merger Agreement, each
shareholder of Medford Clinic will be a stockholder of PPI as well as a
shareholder of a newly-formed Oregon professional corporation ("Medford Clinic
New PC"), and PPI and Medford Clinic New PC will be parties to a 40-year
practice management agreement (the "Management Agreement"). It is a condition to
the consummation of the transactions contemplated by the Reorganization and
Merger Agreement that the holders of a majority of Common Stock of Medford
Clinic vote in person or by proxy at the Special Meeting FOR the approval
thereof.
The first two Proposals arising under the Reorganization and Merger
Agreement seek the approval, respectively, of (1) the distribution (the "Medford
Clinic Distribution") by Medford Clinic to its shareholders of the entire equity
interest in Medford Clinic New PC, a newly-formed Oregon professional
corporation and a subsidiary of Medford Clinic to which the provider
professional services business of Medford Clinic will be transferred, and (2)
the merger (the "Merger") of Medford Clinic, reorganized to hold the physician
practice management business, HealthFirst and Corvallis Clinic (each of which
would be similarly reorganized) with and into PPI.
The transfer of the provider professional services business to Medford
Clinic New PC and the subsequent Medford Clinic Distribution is necessary to
comply with Oregon law restrictions on non-physician ownership or control of a
medical practice. Shareholders of Medford Clinic at the time of such
reorganization and Merger would hold, after consummation thereof, common stock
of both Medford Clinic New PC and PPI. The number of shares of common stock of
PPI which shareholders of Medford Clinic will receive in the Merger is based on
an exchange ratio described in the accompanying Joint Proxy
Statement/Prospectus.
The Reorganization and Merger Agreement also contemplates that PPI, Medford
Clinic and the other Companies will, prior to the effective time of the Merger,
enter into an escrow agreement with an escrow agent reasonably acceptable to PPI
and the Companies, pursuant to which escrow agreement the
<PAGE>
shareholders of each of the Companies will deposit into escrow a certain number
of shares of common stock of PPI received in consideration of the Merger. The
aggregate number of shares of common stock of PPI deposited in escrow by
shareholders of Medford Clinic as of the effective time of the Merger will be
464,000 (representing 8,000 shares for each full-time equivalent physician and
other specified provider ("FTE") of Medford Clinic as of October 1, 1996).
Similarly, shareholders of HealthFirst and holders of Class B Common Stock of
Corvallis Clinic will deposit in escrow 840,000 shares and 622,000 shares,
respectively, of common stock of PPI, again, representing 8,000 shares per FTE).
Since the shareholders of each of the Companies, as a group, will initially be
entitled to receive an aggregate of 31,000 shares per FTE of such Company as
consideration in the Merger, such shareholders, as a group, will hold outside of
escrow at least an aggregate of 23,000 shares per FTE of such Company. Common
stock of PPI will be released to such shareholders (referred to herein as
"Escrow Holders") from escrow based on the net shareholder equity per FTE of the
Companies as reflected on their audited balance sheets as of December 31, 1996
("Net Shareholder Equity Per FTE"). If the Net Shareholder Equity Per FTE of any
Company (referred to herein as an "Excess Company") exceeds that of any of the
other Companies by more than 20 percent (a difference of greater than 20 percent
being referred to herein as an "Excess Difference"), the number of shares
released from escrow will be adjusted to reflect such Excess Difference. More
specifically, shares will be released to Escrow Holders so that the Escrow
Holders who had been shareholders of an Excess Company would receive out of
escrow, in the aggregate, such number of shares of common stock of PPI as
represents a value (measured assuming a $15.82 per share value of common stock
of PPI(1)) exceeding the aggregate value of shares of common stock of PPI
received by the Escrow Holders who had been shareholders of the other Company or
Companies by an amount equal to the product of the Excess Difference multiplied
by the FTE of such Excess Company. In contrast, if the Net Shareholder Equity
Per FTE of each of the Companies is within 20 percent of one another, each
Escrow Holder will receive out of escrow one-half of the shares deposited
thereby (which would result in the shareholders of each of the Companies
receiving, in the aggregate, 27,000 shares per FTE of such Company).
Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, the shareholders of each of the Companies
might receive all, any portion or none of the shares of common stock of PPI
deposited thereby in escrow (ranging from an aggregate of 31,000 shares per FTE
to an aggregate of 23,000 shares per FTE on a Company-by-Company basis, provided
that the aggregate number of shares released from escrow will not result in the
total number of shares issued as consideration in the Merger the shareholders of
all of the Companies exceeding 27,000 shares per FTE of all the Companies).
Balance sheets reflecting the December 31, 1996 net shareholder equity of the
Companies will be prepared and audited no later than March 31, 1997; within five
business days of delivery of such balance sheets, the Escrow Holders will
receive shares of common stock of PPI from escrow as described above. Any common
stock of PPI not so released from escrow will be cancelled and retired. For
details regarding the material terms of the escrow arrangement, see
"Summary--The Merger" and "Terms of the Reorganization and Merger--Escrow
Arrangement" of the accompanying Joint Proxy Statement/Prospectus. For details
of the number of shares of common stock of PPI allocated to the shareholders of
each Company based on the number of FTE of such Company and the material terms
of the escrow arrangement, see "Summary -- The Merger" of such accompanying
Joint Proxy Statement/Prospectus.
The shares of common stock of PPI to be received by each shareholder as
consideration in the Merger will be Class A Common Stock, par value $0.01 per
share ("PPI class A Common Stock"), of PPI which are subject to repurchase by
PPI, at its option, only in the event that, for reasons other than death,
disability or retirement, such shareholder ceases to be an employee or member of
the board of directors of PPI or
- ------------------------
(1) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of common stock of PPI
(reflecting the sum of 27,000 shares per FTE of the Companies and 135,000
shares issued to four officers and one director of PPI) are outstanding
after the release of shares from escrow.
2
<PAGE>
Medford Clinic New PC. If such shareholder undertakes certain activities in
competition with either PPI or physician groups with which PPI has entered into
a Management Agreement after the termination of employment or membership in the
board of directors of PPI or Medford Clinic New PC, the repurchase price for the
shares held by such shareholder will be equal to the lesser of fair market value
at the time of repurchase and fair market value at the time of issuance of such
shares. If PPI decides to exercise its right to repurchase any share of PPI
Class A Common Stock upon the occurrence of any of the foregoing events, PPI
will comply with applicable requirements of Rule 14e-1 promulgated under the
Securities Exchange Act of 1934 as amended. For details regarding events
triggering the repurchase right and the repurchase price, see "Terms of the
Reorganization and Merger--PPI's Right to Repurchase PPI Class A Common Stock."
The shares of PPI Class A Common Stock are also subject to a prohibition
against transfer for a period of five years from the date of issuance to the
original holder thereof (the "Issuance Date"), provided that such holder has a
right to elect, at any time after the second anniversary of the Issuance Date,
to require PPI to include up to 20 percent of such shares held thereby in a
subsequent registration statement relating to any proposed registered public
offering of common stock of PPI under which PPI receives net proceeds in excess
of $30 million, subject to a reduction in the number of shares included in such
public offering as determined by the managing underwriter. Upon the transfer of
any share of PPI Class A Common Stock to a third party unaffiliated with the
original holder thereof after the fifth anniversary of the Issuance Date when
the transfer restriction expires or, if earlier, after the second anniversary of
the Issuance Date pursuant to an exercise of the registration rights, such share
will convert into one fully paid and non-assessable share of Class B Common
Stock, par value $0.01 per share, of PPI. For a more detailed discussion of the
transfer restriction, the registration rights and the conversion of PPI Class A
Common Stock, see "Terms of the Reorganization and Merger--Resales of PPI Class
A Common Stock and Registration Rights and Conversion of PPI Class A Common
Stock."
MANAGEMENT AGREEMENT
In connection with the reorganization of Medford Clinic, the Management
Agreement will be entered into between Medford Clinic and Medford Clinic New PC.
Upon consummation of the Merger, PPI would succeed to Medford Clinic's rights
and obligations under the Management Agreement and would provide to Medford
Clinic New PC management and administrative services and facilities and
equipment. As consideration, PPI would be entitled to (a) reimbursement of all
Manager's Expenses (as such term is hereinafter defined) incurred by PPI and (b)
a management fee equal to 16% of the "Distributable Profit Amount" (defined as
(i) gross revenues, booked on an accrual basis and subtracting specified
contractual allowances and bad debts, received by PPI or Medford Clinic New PC
relating to services provided by Medford Clinic New PC less (ii) Manager's
Expenses). Medford Clinic New PC will be responsible for provider compensation
and benefits. Medford Clinic New PC will be the entity responsible for the
practice of medicine. The term "Manager's Expenses" is defined in the Management
Agreement to mean the actual cost of all operating and non-operating expenses
incurred by PPI in the operation of Medford Clinic New PC's medical offices. Any
allocation of costs (as opposed to a pass-through of actual direct costs
incurred by PPI in connection with the operation of Medford Clinic New PC
medical offices, for which PPI shall be reimbursed in full) by PPI to Medford
Clinic New PC shall require approval of the joint management board (composed of
PPI and Medford Clinic New PC representatives) of the proposed cost allocation
for a defined period of time prior to implementation of the function for which a
cost allocation is proposed. "Manager's Expenses" expressly will not include any
corporate overhead charges of PPI (other than as expressly agreed to in the
Management Agreement), federal or state income taxes of PPI or Medford Clinic
New PC, any expenses which are expressly designated as obligations to be assumed
solely by PPI, and any amortization expense resulting from the amortization of
costs in connection with the execution of the Management Agreement.
The Management Agreement will also provide for a Joint Management Board to
govern and monitor the contractual relationship (including budgetary matters)
between PPI and Medford Clinic New PC. In addition, it will require Medford
Clinic New PC to make payments to PPI in the event certain Medford
3
<PAGE>
Clinic New PC providers (excluding (i) those providers not subject to contracts
with the predecessor Company of the New PC containing similar restrictions as of
September 17, 1996, (ii) providers who, although not employed by such Company as
of September 17, 1996, had entered into an employment agreement with such
Company without some or all such covenants prior to September 17, 1996, (iii)
those providers employed by such Company as of September 17, 1996, and bound by
a covenant not to compete that shall have subsequently expired by its own terms
(such provider being an Unbound Provider only with respect to such
noncompetition covenant after the date of such expiration) or (iv) those
providers employed by such Company as of September 17, 1996 and bound by a
covenant not to compete whose employment by such Company or the successor New PC
shall have been subsequently terminated involuntarily by such employer (such
provider being an Unbound Provider only with respect to such noncompetition
covenant after the date of such termination)) (a) engage in competition against
Medford Clinic New PC, (b) disclose or misappropriate trade secrets of Medford
Clinic New PC or PPI or (c) solicit employees to terminate their employment by
Medford Clinic New PC. It is anticipated that each provider who is employed or
promoted by Medford Clinic New PC will enter into an employment agreement
containing a covenant requiring such provider to, in effect, indemnify Medford
Clinic New PC in the event Medford Clinic New PC becomes obligated to make any
such payment under the Management Agreement to PPI as a result of such
provider's activities.
The terms and conditions of the Reorganization and Merger Agreement and
related documentation are described in the accompanying Joint Proxy
Statement/Prospectus. The complete text of the Reorganization and Merger
Agreement is attached as Appendix A to the accompanying Joint Proxy Statement/
Prospectus.
STOCK OPTION PLAN
The third Proposal to be considered and voted upon by Medford Clinic
shareholders at the Special Meeting seeks approval of various PPI incentive
compensation plans, copies of which are attached as Appendices B, C, D and E to
the accompanying Joint Proxy Statement/Prospectus.
Each of the Proposals to be considered and voted upon at the Special Meeting
is described in greater detail in the accompanying Joint Proxy
Statement/Prospectus.
PURPOSE OF TRANSACTIONS
The Board of Directors of Medford Clinic believes that in order to fund the
expansion of provider base and supporting facilities, including sophisticated
information systems, necessary to meet service needs, the ability to raise
capital is critical for the future of Medford Clinic. By merging with
HealthFirst and Corvallis Clinic, both of which share similarities with Medford
Clinic in values, style of practice and governance, and, thus are good merger
partners, the merged entity would be in a much stronger position to raise
capital than Medford Clinic alone. Such Board of Directors also believes that
PPI should be able to realize cost savings through economies of scale and that
such entity would have an enhanced capacity to provide a high quality of
clinical care and to compete economically in both managed care and fee-for-
service markets.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Medford Clinic Board has unanimously approved the Medford Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal and determined that the Merger is fair to, and in the best
interests of, the shareholders of Medford Clinic. The material factors
considered by the Medford Clinic Board in reaching its decision were the
following: (i) the need for additional capital to fund the expansion of both the
provider base and the supporting facilities; (ii) economies of scale in sharing
costs and benefits of infrastructure; (iii) solid geographic coverage with
HealthFirst and Corvallis Clinic; (iv) a potential opportunity to access public
capital and other sources; (v) fairness of Merger consideration to the
shareholders of Medford Clinic; and (vi) the exchange of Medford Clinic shares
for shares of PPI Class A Common Stock on a tax-free basis. Among other concerns
reviewed by the Medford Clinic Board were (a) the recent operating losses
incurred by Corvallis Clinic and (b) potential disruption of Medford Clinic's
relationships with payors and hospitals due to possible actions by PPI. The
Medford
4
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Clinic Board determined that such concerns were far outweighed by the advantages
enumerated in (i) through (vi).
AFTER CAREFUL CONSIDERATION, THE BOARD OF DIRECTORS OF MEDFORD CLINIC HAS
UNANIMOUSLY APPROVED THE REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS
AND RECOMMENDS THAT YOU VOTE IN FAVOR THEREOF AT THE SPECIAL MEETING.
The directors and executive officers of Medford Clinic, as a group,
beneficially hold an aggregate of seven shares of Common Stock of Medford
Clinic, representing approximately 12% of the outstanding shares of Common Stock
of Medford Clinic. Each of the directors and executive officers of Medford
Clinic has indicated that it is his or her present intention to vote all of the
shares held thereby FOR approval of the Proposals. The Medford Clinic management
has also indicated its present intention to support approval of the Proposals.
------------------------
VOTING PROCEDURES
The affirmative vote of a majority of the outstanding shares of Common Stock
of Medford Clinic is necessary for approval of the Proposals. It is important
that your shares of Common Stock of Medford Clinic be voted at the Special
Meeting. FAILURE OF A SHAREHOLDER TO SUBMIT A PROXY OR VOTE AT THE SPECIAL
MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE APPROVAL OF THE
PROPOSALS. THEREFORE, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY
AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, AND
NO LATER THAN JANUARY 19, 1997. A return envelope is enclosed for your
convenience and requires no postage for mailing in the United States. When a
proxy is properly executed and returned, shares of Common Stock of Medford
Clinic will be voted in accordance with the directions indicated on the proxy,
or if no directions are indicated, such shares will be voted FOR each of the
Medford Clinic Reorganization Proposal, the Merger Proposal and the PPI
Incentive Compensation Plans Proposal.
This will not prevent you from voting such shares in person in the event
that you attend the Special Meeting. Any Medford Clinic shareholder giving a
proxy may revoke his or her proxy at any time before it is voted at the Special
Meeting by (i) providing written notice of such revocation to Medford Clinic,
(ii) signing and delivering a proxy bearing a later date, to Jon Ness,
Secretary, Medford Clinic, P.C., 555 Black Oak Drive, Medford, Oregon 97504 or
(iii) attending the Special Meeting and voting in person.
We look forward to seeing you on Sunday, January 19, 1997.
Sincerely,
[SIG]
--------------------------------------
Stephen J. Schnugg, M.D.
PRESIDENT
5
<PAGE>
MEDFORD CLINIC, P.C.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 19, 1997
To the Shareholders of Medford Clinic, P.C.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of the
shareholders of Medford Clinic, P.C., an Oregon professional corporation
("Medford Clinic"), will be held on January 19, 1997, at 555 Black Oak Drive,
Medford, Oregon 97504, commencing at 6:00 p.m. (Pacific Standard Time), for the
following purposes:
1. To consider and vote upon a proposal to approve the following
constituting the Medford Clinic Reorganization Proposal:
(a) the Medford Clinic Asset Transfer (as such term is defined below);
(b) the Medford Clinic Conversion (as such term is defined below) and
other transactions contemplated by the Medford Clinic Reorganization
Transactions (as such term is defined below);
(c) the provisions of the Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of September 19, 1996, as amended
on November 4, 1996, November 29, 1996 and December 31, 1996
(referred to herein, as so amended, as the "Reorganization and Merger
Agreement"), among Medford Clinic, The Corvallis Clinic, P.C., an
Oregon professional corporation ("Corvallis Clinic"), HealthFirst
Medical Group, P.C., an Oregon professional corporation
("HealthFirst"), and Physician Partners, Inc., a newly-formed
Delaware corporation ("PPI"), relating to the Medford Clinic
Reorganization Transactions.
Pursuant to the Reorganization and Merger Agreement, Medford Clinic will
effect the following transactions (referred to herein, collectively, as the
"Medford Clinic Reorganization Transactions"):
(i) Medford Clinic will incorporate, as a wholly-owned subsidiary
thereof, a professional corporation ("Medford Clinic New PC")
under the Oregon Professional Corporation Act;
(ii) Medford Clinic will transfer to Medford Clinic New PC certain of
Medford Clinic's assets relating to the provider professional
services business of Medford Clinic, which assets are expected to
be intangible assets related to the practice of medicine,
including employment agreements with providers, medical records
and insurance contracts (referred to herein, collectively, as the
"Medford Clinic New PC Assets"), and cause Medford Clinic New PC
to assume liabilities of Medford Clinic relating to the Medford
Clinic New PC Assets ("Medford Clinic Asset Transfer");
(iii) Medford Clinic will make a distribution under which the
shareholders of Medford Clinic will receive all of the issued and
outstanding shares of capital stock of Medford Clinic New PC,
allocated on a pro rata basis in accordance with the fair market
value of each such shareholder's then-current equity interest in
Medford Clinic (such distribution being referred to herein as the
"Medford Clinic Distribution");
(iv) Medford Clinic will convert from an Oregon professional
corporation to an Oregon business corporation (such conversion
being referred to herein as the "Medford Clinic Conversion") by
filing Restated Articles of Incorporation, together with the
required fee, with the Secretary of State of the State of Oregon
in accordance with the Oregon Professional Corporation Act and
the Oregon Business Corporation Act (collectively, the "Oregon
Law"); and
(v) Medford Clinic will enter into a 40-year practice management
agreement with Medford Clinic New PC.
<PAGE>
2. To consider and vote upon a proposal to approve the following
constituting the Merger Proposal:
(a) the Merger (as such term is defined below); and
(b) the provisions of the Reorganization and Merger Agreement relating to
the Merger Transactions (as such term is defined below).
Pursuant to the Reorganization and Merger Agreement, the Companies will
effect the following transactions (referred to herein, collectively, as the
"Merger Transactions"):
(i) Medford Clinic, HealthFirst and Corvallis Clinic (each being, at
such time, a newly-converted Oregon business corporation) will
merge with and into PPI (the "Merger"), which Merger will occur
as promptly as practicable after the consummation of similar
reorganization transactions by each of HealthFirst and Corvallis
Clinic as described in the Reorganization and Merger Agreement;
(ii) each outstanding share of Common Stock of Medford Clinic, other
than the shares held by those shareholders who take required
actions to properly assert their dissenters' rights under the
Oregon Business Corporation Act, will be converted into the right
to receive 31,362 shares of Class A Common Stock, par value $0.01
per share ("PPI Class A Common Stock"), of PPI (the term "par
value" denotes a stated value of capital stock, determined
somewhat arbitrarily and generally bearing no relation to the
market or actual value of such capital stock);
(iii) each outstanding Class A Share of HealthFirst, other than the
shares held by those shareholders who take required actions to
properly assert their dissenters' rights under the Oregon
Business Corporation Act, will be converted into the right to
receive 354 shares of PPI Class A Common Stock;
(iv) each outstanding share of Class A Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 1,454 shares of PPI Class A Common Stock;
(v) each outstanding share of Class B Common Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 192 shares of PPI Class A Common Stock;
(vi) each outstanding share of Class C Preferred Stock of Corvallis
Clinic, other than the shares held by those shareholders who take
required actions to properly assert their dissenters' rights
under the Oregon Business Corporation Act, will be converted into
the right to receive 6 shares of PPI Class A Common Stock; and
(vii) each outstanding option to purchase Common Stock of Medford
Clinic, Series 1 of Class A Shares of HealthFirst and Class B
Common Stock of Corvallis Clinic will be converted into the right
to acquire, on the same terms and conditions, shares of PPI Class
A Common Stock with the number of shares and exercise price
applicable to such option adjusted based on the applicable
exchange ratio for the underlying Common Stock of Medford Clinic,
Class A Shares of HealthFirst or Class B Common Stock of
Corvallis Clinic, as the case may be.
The Reorganization and Merger Agreement also contemplates that PPI, Medford
Clinic and the other Companies will, prior to the Effective Time of the Merger,
enter into an escrow agreement with an escrow agent reasonably acceptable to PPI
and the Companies, pursuant to which escrow agreement the shareholders of each
of the Companies will deposit into escrow a certain number of shares of PPI
Class A
2
<PAGE>
Common Stock received in consideration of the Merger. The aggregate number of
shares of PPI Class A Common Stock deposited in escrow by shareholders of
Medford Clinic as of the Effective Time of the Merger will be 464,000
(representing 8,000 shares for each full-time equivalent physician and other
specified provider ("FTE") of Medford Clinic as of October 1, 1996). Similarly,
shareholders of HealthFirst and holders of Class B Common Stock of Corvallis
Clinic will deposit in escrow 840,000 shares and 622,000 shares, respectively,
of PPI Class A Common Stock (again, representing 8,000 shares per FTE). Since
the shareholders of each of the Companies, as a group, will initially be
entitled to receive an aggregate of 23,000 shares per FTE of such Company as
consideration in the Merger, such shareholders, as a group, will hold outside of
escrow at least an aggregate of 31,000 shares per FTE of such Company. On a
per-share basis, (i) 91 shares of PPI Class A Common Stock per share of
HealthFirst Class A Share will be deposited in escrow, (ii) 52 shares of PPI
Class A Common Stock per share of Corvallis Clinic Class B Stock will be
deposited in escrow and (iii) 8,098 shares of PPI Class A Common Stock per share
of Medford Clinic Common Stock will be deposited in escrow. Since the
shareholders of each of the Companies, as a group, will be entitled to receive
an aggregate of 31,000 shares per FTE of such Company as consideration in the
Merger, such shareholders, as a group, will hold outside of escrow at least
23,000 shares per FTE of such Company.
PPI Class A Common Stock will be released to such shareholders (referred to
herein as "Escrow Holders") from escrow based on the net shareholder equity per
FTE of the Companies as reflected on their audited balance sheets as of December
31, 1996 ("Net Shareholder Equity Per FTE"). If the Net Shareholder Equity Per
FTE of any Company (referred to herein as an "Excess Company") exceeds that of
any of the other Companies by more than 20 percent (a difference of greater than
20 percent being referred to herein as an "Excess Difference") the number of
shares released from escrow will be adjusted to reflect such Excess Difference.
More specifically, shares will be released to Escrow Holders so that the Escrow
Holders who had been shareholders of an Excess Company would receive out of
escrow, in the aggregate, such number of shares of PPI Class A Common Stock as
represents a value (measured assuming a $15.82 per share value of PPI Class A
Common Stock(1)) exceeding the aggregate value of shares of PPI Class A Common
Stock received by the Escrow Holders who had been shareholders of the other
Company or Companies by an amount equal to the product of the Excess Difference
multiplied by the FTE of such Excess Company. In contrast, if the Net
Shareholder Equity Per FTE of each of the Companies is within 20 percent of one
another, each Escrow Holder will receive out of escrow one-half of the shares
deposited thereby (which would result in the shareholders of each of the
Companies receiving, in the aggregate, 27,000 shares per FTE of such Company).
Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, the shareholders of each of the Companies
might receive all, any portion or none of the shares of PPI Class A Common Stock
deposited thereby in escrow (ranging from an aggregate of 31,000 shares per FTE
to an aggregate of 23,000 shares per FTE on a Company-by-Company basis, provided
that the aggregate number of shares released from escrow will not result in the
total number of shares issued as consideration in the Merger exceeding 27,000
shares per FTE of all the Companies). The aggregate number of shares of PPI
Class A Common Stock which the shareholders of each of the Companies, may
receive, as a group, as consideration in the Merger ranges from an aggregate of
23,000 shares per FTE to an aggregate of 31,000 per FTE on a Company-by-Company
basis, provided that the aggregate number of shares released from escrow will
not result in the total number of shares issued to all of the shareholders of
the Companies as consideration in the Merger exceeding 27,000 shares per FTE of
all of the Companies. On a per-share basis, the ranges are (i) from 263 shares
to 354 shares of PPI Class A Common Stock per
- ------------------------
(1) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of PPI Class A Common
Stock (reflecting the sum of 27,000 shares per FTE of the Companies and
135,000 shares issued to four officers and one director of PPI) are
outstanding after the release of shares from escrow.
3
<PAGE>
HealthFirst Class A Share, (ii) from 140 shares to 192 shares of PPI Class A
Common Stock per share of Corvallis Clinic Class B Stock and (iii) from 23,269
shares to 31,362 shares of PPI Class A Common Stock per share of Medford Clinic
Common Stock. Balance sheets reflecting the December 31, 1996 net shareholder
equity of the Companies will be prepared and audited no later than March 31,
1997; within five business days of delivery of such balance sheets, the Escrow
Holders will receive shares of PPI Class A Common Stock from escrow as described
above. Any PPI Class A Common Stock not so released from escrow will be
cancelled and retired. For details regarding the material terms of the escrow
arrangement, see "Terms of the Reorganization and Merger--Escrow Arrangement" of
the accompanying Joint Proxy Statement/Prospectus.
The complete text of the Reorganization and Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement/Prospectus.
The complete text of the Reorganization and Merger Agreement is attached as
Appendix A to the accompanying Joint Proxy Statement/Prospectus. For details of
the number of shares of PPI Class A Common Stock allocated to the shareholders
of each Company based on the number of FTE of such Company and the material
provisions of the escrow arrangement, see "Summary -- the Merger" of such
accompanying Joint Proxy Statement/Prospectus.
3. To consider and vote upon a proposal to approve four plans (referred to
collectively herein as the "PPI Incentive Compensation Plans"):
(i) the Physician Partners, Inc. Employee Stock Option Plan;
(ii) the Physician Partners, Inc. Non-Employee Director Stock Option
Plan;
(iii) the Physician Partners, Inc. Non-Employee Provider Stock Option
Plan; and
(iv) the Physician Partners, Inc. Change in Control Plan,
under which a total of up to 2,500,000 shares of PPI Class A Common Stock will
be available for issuance to
(A) providers employed by Medford Clinic New PC or any other
newly-formed professional corporation with which PPI enters
into a practice management agreement;
(B) officers and employees of PPI or any of its operating
subsidiaries; and
(C) non-employee members of the Board of Directors of PPI.
Copies of the PPI Incentive Compensation Plans are attached as Appendices B,
C, D and E to the accompanying Joint Proxy Statement/Prospectus.
4. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on December 24, 1996,
will be entitled to notice of and to vote at the Special Meeting or any
adjournment thereof.
The terms and conditions of the Reorganization and Merger Agreement are
described in the accompanying Joint Proxy Statement/Prospectus.
------------------------
YOUR VOTE IS IMPORTANT. The affirmative vote of a majority of the
outstanding shares of Common Stock of Medford Clinic is necessary for approval
of the proposals described herein at the Special Meeting. THEREFORE, PLEASE
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE, WHETHER
OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, NO LATER THAN JANUARY 19, 1997. A
return envelope is enclosed for your convenience and requires no postage for
mailing in the United States. Proxies are revocable at any time prior to the
time they are voted, and
4
<PAGE>
shareholders who are present at the Special Meeting may withdraw their proxies
and vote in person if they so desire.
When a proxy is properly executed and returned, the shares of Common Stock
of Medford Clinic will be voted in accordance with the directions indicated on
the proxy, or if no directions are indicated, such shares will be voted FOR each
of the Medford Clinic Reorganization Proposal, the Merger Proposal and the PPI
Incentive Compensation Plans Proposal. Additional terms and conditions of the
proxy are described in the accompanying Joint Proxy Statement/Prospectus.
By Order of the Board of Directors
[SIG]
--------------------------------------
Jon Ness, Secretary
January , 1997
5
<PAGE>
JOINT PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS OF
HEALTHFIRST MEDICAL GROUP, P.C.
TO BE HELD ON JANUARY 21, 1997
SPECIAL MEETING OF SHAREHOLDERS OF
THE CORVALLIS CLINIC, P.C.
TO BE HELD ON JANUARY 20, 1997
SPECIAL MEETING OF SHAREHOLDERS OF
MEDFORD CLINIC, P.C.
TO BE HELD ON JANUARY 19, 1997
PHYSICIAN PARTNERS, INC.
PHYSICIAN PARTNERS HEALTHFIRST, P.C.
PHYSICIAN PARTNERS CORVALLIS, P.C.
PHYSICIAN PARTNERS MEDFORD, P.C.
PROSPECTUS
This Joint Proxy Statement/Prospectus is provided in connection with the
solicitation by:
(i) the Board of Directors of HealthFirst Medical Group, P.C., an Oregon
professional corporation ("HealthFirst"), of proxies from holders of
Class A Shares of HealthFirst ("HealthFirst Class A Shares") and for
use at the special meeting of HealthFirst shareholders to be held on
Tuesday, January 21, 1997 and at any adjournment thereof (the
"HealthFirst Special Meeting");
(ii) the Board of Directors of The Corvallis Clinic, P.C., an Oregon
professional corporation ("Corvallis Clinic"), of proxies from
holders of shares of Class A Preferred Stock of Corvallis Clinic
("Corvallis Clinic Class A Stock") and Class B Common Stock of
Corvallis Clinic ("Corvallis Clinic Class B Stock") for use at the
special meeting of Corvallis Clinic shareholders to be held on
Monday, January 20, 1997 and at any adjournment thereof (the
"Corvallis Clinic Special Meeting"); and
(iii) the Board of Directors of Medford Clinic, P.C., an Oregon
professional corporation ("Medford Clinic" and, together with
HealthFirst and Corvallis Clinic, referred to herein, collectively,
as the "Companies"), of proxies from holders of shares of Common
Stock of Medford Clinic ("Medford Clinic Common Stock") for use at
the special meeting of Medford Clinic shareholders to be held on
Sunday, January 19, 1997 and at any adjournment thereof (the
"Medford Clinic Special Meeting").
This Joint Proxy Statement/Prospectus relates to the transactions
contemplated by the Amended and Restated Agreement and Plan of Reorganization
and Merger, dated as of September 19, 1996, as amended on November 4, 1996,
November 29, 1996 and December 31, 1996 (referred to herein, as so amended, as
the "Reorganization and Merger Agreement"), by and among HealthFirst, Corvallis
Clinic, Medford Clinic and Physician Partners, Inc., a newly-formed Delaware
corporation ("PPI"). The Reorganization and Merger Agreement provides for:
(i) the HealthFirst Reorganization Transactions, the Corvallis Clinic
Reorganization Transactions and the Medford Clinic Reorganization
Transactions (as such terms are defined herein and, collectively,
the "PC Reorganization Transactions"); and
(ii) the Merger Transactions (as such term is defined herein).
<PAGE>
The complete text of the Reorganization and Merger Agreement, together with
all amendments thereto, is attached hereto as Appendix A and is incorporated
herein by this reference.
THE BOARD OF DIRECTORS OF HEALTHFIRST HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS CONTAINED HEREIN AND
RECOMMEND THAT THE SHAREHOLDERS OF HEALTHFIRST VOTE IN FAVOR THEREOF AT THE
HEALTHFIRST SPECIAL MEETING.
THE BOARD OF DIRECTORS OF CORVALLIS CLINIC HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS CONTAINED HEREIN AND
RECOMMEND THAT THE SHAREHOLDERS OF CORVALLIS CLINIC VOTE IN FAVOR THEREOF AT THE
CORVALLIS CLINIC SPECIAL MEETING.
THE BOARD OF DIRECTORS OF MEDFORD CLINIC HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AND MERGER AGREEMENT AND THE PROPOSALS CONTAINED HEREIN AND
RECOMMEND THAT THE SHAREHOLDERS OF MEDFORD CLINIC VOTE IN FAVOR THEREOF AT THE
MEDFORD CLINIC SPECIAL MEETING.
------------------------
This Joint Proxy Statement/Prospectus is a prospectus under the Securities
Act of 1933, as amended (the "Securities Act"), for (1) the dividend
distribution of shares (the "New PC Distributions") (a) by HealthFirst of common
stock of Physician Partners HealthFirst, P.C., a newly formed, wholly owned
subsidiary of HealthFirst, (b) by Corvallis Clinic of common stock of Physician
Partners Corvallis, P.C., a newly formed, wholly owned subsidiary of Corvallis
Clinic, and (c) by Medford Clinic of common stock of Physician Partners Medford,
P.C., a newly formed, wholly owned subsidiary of Medford Clinic (Physician
Partners HealthFirst, P.C., Physician Partners Corvallis, P.C. and Physician
Partners Medford, P.C. being referred to herein, collectively, as the "New PCs")
and (2) the issuance of shares of Class A Common Stock, par value $0.01 per
share ("PPI Class A Common Stock"), of PPI into which outstanding HealthFirst
Class A Shares, Corvallis Clinic Class A Stock, Corvallis Clinic Class B Stock,
Corvallis Clinic Class C Stock and Medford Clinic Common Stock (referred to
herein, collectively, as the "Old PC Shares") will be converted upon
consummation of the Merger.
If the HealthFirst Reorganization Proposal and the Merger Proposal are
approved by the shareholders of HealthFirst at the HealthFirst Special Meeting,
the Corvallis Clinic Reorganization Proposal and the Merger Proposal are
approved by the shareholders of Corvallis Clinic at the Corvallis Clinic Special
Meeting and the Medford Clinic Reorganization Proposal and the Merger Proposal
are approved by the shareholders of Medford Clinic at the Medford Clinic Special
Meeting, and if the other conditions specified in the Reorganization and Merger
Agreement (including the condition that not more than 15% of the outstanding
shares of capital stock of any Company dissent from the Merger) are satisfied or
waived, the Companies will make the New PC Distributions. Each HealthFirst
shareholder will receive one share of common stock of Physician Partners
HealthFirst, P.C. Each Corvallis Clinic Class A shareholder will receive one
share of common stock of Physician Partners Corvallis, P.C. Each Medford Clinic
shareholder will receive one share of common stock of Physician Partners
Medford, P.C. Subsequently, each of HealthFirst, Corvallis Clinic and Medford
Clinic will merge with and into PPI and will cease to exist as a separate
entity, with PPI continuing as the surviving corporation of the Merger. Upon the
Merger (A) each outstanding HealthFirst Class A Share will be converted into the
right to receive 354 shares of PPI Class A Common Stock, (B) each outstanding
share of Corvallis Clinic Class A Stock, Corvallis Clinic Class B Stock and
Corvallis Clinic Class C Stock will be converted into the right to receive 1,454
shares of PPI Class A Common Stock, 192 shares of PPI Class A Common Stock and
six shares of PPI Class A Common Stock, respectively, and (C) each outstanding
share of Medford Clinic Common Stock will be converted into the right to receive
31,362 shares of PPI Class A Common Stock.
The Reorganization and Merger Agreement also contemplates that PPI and the
Companies will, prior to the effective time of the Merger (the "Effective
Time"), as determined by the Board of Directors of PPI (the "PPI Board"), enter
into an escrow agreement with an escrow agent reasonably acceptable to PPI and
the Companies, pursuant to which escrow agreement the shareholders of each of
the Companies will deposit into escrow certain number of shares of PPI Class A
Common Stock received in consideration of
<PAGE>
the Merger. The total number of shares of PPI Class A Common Stock that will be
deposited in escrow by shareholders of HealthFirst, holders of Corvallis Clinic
Class B Stock and shareholders of Medford Clinic as of the Effective Time of the
Merger 1,926,000 (representing 8,000 shares for each full-time equivalent
physician and other specified provider ("FTE") of each of the Companies as of
October 1, 1996, with full-or part-time equivalence determined based on a work
week of at least four full working days for full-time equivalence). Shareholders
of HealthFirst, holders of Corvallis Clinic Class B Stock and shareholders of
Medford Clinic, in each case as a group, will deposit in escrow 840,000 shares,
622,000 shares and 464,000 shares, respectively, of PPI Class A Common Stock. On
a per-share basis, (i) 91 shares of PPI Class A Common Stock per HealthFirst
Class A Share will be deposited in escrow, (ii) 52 shares of PPI Class A Common
Stock per share of Corvallis Clinic Class B Stock will be deposited in escrow
and (iii) 8,098 shares of PPI Class A Common Stock per share of Medford Clinic
Common Stock will be deposited in escrow. Since the shareholders of each of the
Companies, as a group, will be entitled to receive an aggregate of 31,000 shares
per FTE of such Company as consideration in the Merger, such shareholders, as a
group, will hold outside of escrow at least 23,000 shares per FTE of such
Company.
PPI Class A Common Stock will be released to such shareholders (referred to
herein as "Escrow Holders") from the escrow based on the net shareholder equity
per FTE of the Companies as reflected on their audited balance sheets as of
December 31, 1996 ("Net Shareholder Equity Per FTE"). If the Net Shareholder
Equity Per FTE of any Company (referred to herein as an "Excess Company")
exceeds that of any of the other Companies by more than 20 percent (a difference
of greater than 20 percent being referred to herein as an "Excess Difference"
and the Company with the lowest Net Shareholder Equity Per FTE being referred to
herein as the "Baseline Company"), the number of shares released from escrow
will be adjusted to reflect such Excess Difference. More specifically, shares
will be released to Escrow Holders so that the Escrow Holders who had been
shareholders of an Excess Company would receive out of escrow, in the aggregate,
such number of shares of PPI Class A Common Stock as represents a value
(measured assuming a $15.82 per share value of PPI Class A Common Stock (1))
exceeding the aggregate value of shares of PPI Class A Common Stock received by
the Escrow Holders who had been shareholders of the other Company or Companies
by an amount equal to the product of the Excess Difference of such Excess
Company multiplied by the FTE of such Excess Company. In contrast, if the Net
Shareholder Equity Per FTE of each of the Companies is within 20 percent of one
another, each Escrow Holder will receive out of escrow one-half of the shares
deposited thereby (which would result in the shareholders of each of the
Companies receiving, in the aggregate, 27,000 shares per FTE of such Company as
consideration in the Merger).
Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, each Escrow Holder might receive all, a
portion or none of the shares of PPI Class A Common Stock deposited thereby in
escrow. The aggregate number of shares of PPI Class A Common Stock which the
shareholders of each of the Companies may receive, as a group, as consideration
in the Merger ranges from an aggregate of 31,000 shares per FTE to an aggregate
of 23,000 per FTE on a Company-by-Company basis, provided that the aggregate
number of shares released from escrow will not result in the total number of
shares issued to all of the shareholders of the Companies as consideration in
the Merger exceeding 27,000 shares per FTE of all of the Companies. On a
per-share basis, the ranges are (i) from 263 shares to 354 shares of PPI Class A
Common Stock per HealthFirst Class A Share, (ii) from 140 shares to 192 shares
of PPI Class A Common Stock per share of Corvallis Clinic Class B Stock and
(iii) from 23,269 shares to 31,362 shares of PPI Class A Common Stock per share
of Medford Clinic Common Stock.
Balance sheets reflecting the December 31, 1996 net shareholder equity of
the Companies will be prepared and audited no later than March 31, 1997; within
five business days of delivery of such balance sheets, the Escrow Holders will
receive shares of PPI Class A Common Stock from escrow as described above. Any
PPI Class A Common Stock not so released from escrow will be cancelled and
retired. For
- ------------------------
(1) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of PPI Class A Common
Stock (reflecting the sum of 27,000 shares per FTE of the Companies and
135,000 shares issued to four officers and one director of PPI) are
outstanding after the release of shares from escrow.
<PAGE>
details regarding the material terms of the escrow arrangement, see
"Summary--The Merger" and "Terms of the Reorganization and Merger--Escrow
Arrangement" of this Joint Proxy Statement/Prospectus.
The complete text of the Reorganization and Merger Agreement is attached as
Appendix A to this Joint Proxy Statement/Prospectus.
Cash, without interest, will be paid in lieu of the issuance of fractional
shares of PPI Class A Common Stock, rounded to the nearest cent, equal to the
product of such fraction multiplied by the fair market value of a share of PPI
Class A Common Stock as of the Effective Time.
The shares of PPI Class A Common Stock to be received by each shareholder of
each Company as consideration in the Merger will be subject to repurchase by
PPI, at its option, at a price equal to the fair market value at the time of
repurchase, only in the event such shareholder ceases (for reasons other than
death, disability or certain retirement events) to be an employee or member of
the board of directors of (i) PPI or (ii) any professional corporation with
which PPI has entered into a practice management agreement (a "New PC Management
Agreement"). If such shareholder, after the termination of employment or
membership in the board of directors of PPI or such professional corporation
undertakes activities which are competitive with PPI or physician groups with
which PPI has entered into a practice management agreement, the repurchase price
for the shares held by such shares will be equal to the lesser of (i) the fair
market value of such shares at the time of issuance thereof to such shareholder
or (ii) the fair market value of such shares at the time of such repurchase. If
PPI decides to exercise such right to repurchase any share of PPI Class A Common
Stock upon the occurrence of such event, PPI will comply with applicable
requirements of Rule 14e-1 promulgated under the Securities Exchange Act of
1934, as amended. See "Terms of the Reorganization and Merger--PPI's Right to
Repurchase PPI Class A Common Stock."
The shares of PPI Class A Common Stock will not be transferable for five
years other than under certain "piggyback" registration rights to which holders
thereof are entitled beginning upon the second anniversary of the Merger. Each
share of PPI Class A Common Stock converts automatically into one share of Class
B Common Stock, par value $0.01 per share ("PPI Class B Common Stock") upon any
such permitted sale or transfer thereof. PPI Class A Common Stock will not be
convertible into PPI Class B Common Stock in any other circumstances. For a more
detailed description of the transfer restrictions, the registration rights and
the conversion feature regarding PPI Class A Common Stock, see "Terms of the
Reorganization and Merger -- Resales of PPI Class A Common Stock and
Registration Rights" and "Terms of the Reorganization and Merger -- Conversion
of PPI Class A Common Stock."
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED WHEN
EVALUATING THE TRANSACTIONS CONTEMPLATED BY THIS JOINT PROXY
STATEMENT/PROSPECTUS, SEE "RISK FACTORS" ON PAGES 27 THROUGH 38 OF THIS JOINT
PROXY STATEMENT/PROSPECTUS.
NONE OF THE NEW PC DISTRIBUTIONS OR THE NEW PC SHARES TO BE DIVIDENDED IN
CONNECTION THEREWITH NOR THE MERGER OR THE SECURITIES TO BE ISSUED IN THE MERGER
HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is December , 1996, and
it was mailed on or about such date.
<PAGE>
AVAILABLE INFORMATION
PPI has filed a registration statement on Form S-4 (the "Registration
Statement") under the Securities Act, with the Securities and Exchange
Commission (the "SEC") covering the PPI Class A Common Stock to be issued
pursuant to the Reorganization and Merger Agreement. As permitted by the rules
and regulations of the SEC, this Joint Proxy Statement/Prospectus does not
contain all information set forth in the Registration Statement and exhibits
thereto. For further information, please refer to the Registration Statement,
including the exhibits thereto, all of which are available for inspection and
copying at prescribed rates at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, and at the regional offices of the SEC located at 5670 Wilshire Blvd.,
11th Floor, Los Angeles, California 90036; 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and 7 World Trade Center, Suite 1300, New York,
New York 10048. The SEC maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. Statements contained in this
Joint Proxy Statement/Prospectus relating to the contents of any contract or
other document referred to herein are not necessarily complete, and reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
Information regarding the New PCs is anticipated to be made available to
shareholders in accordance with the past practices of the respective Companies.
Each New PC intends to make such filings under the Securities Exchange Act of
1934, as amended, as are required to suspend, for so long as there are fewer
than 300 shareholders thereof, the ongoing periodic informational reporting
requirements otherwise applicable thereto after the effectiveness of this
Registration Statement. The New PCs do not expect to deliver to their
shareholders annual reports containing financial information for so long as such
requirements are so suspended. No separate financial statements of the New PCs
have been included herein. PPI and the New PCs do not consider that such
financial statements would be material to the shareholders of the Companies
because the New PCs are newly-formed corporations with no operating history.
* * *
All information in this Joint Proxy Statement/Prospectus concerning
HealthFirst, HealthFirst New PC and their affiliates has been furnished by
HealthFirst. All information in this Joint Proxy Statement/ Prospectus
concerning Corvallis Clinic, Corvallis Clinic New PC and their affiliates has
been furnished by Corvallis Clinic. All information in this Joint Proxy
Statement/Prospectus concerning Medford Clinic, Medford Clinic New PC and their
affiliates has been furnished by Medford Clinic. All information in this Joint
Proxy Statement/Prospectus concerning PPI has been furnished by PPI.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO EXCHANGE OR SELL, OR
A SOLICITATION OF AN OFFER TO EXCHANGE OR PURCHASE, THE SECURITIES OFFERED
HEREBY, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SHARES
OF PPI CLASS A COMMON STOCK OR SHARES OF THE NEW PCS MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE INFORMATION SET FORTH HEREIN OR THE AFFAIRS OF PPI, HEALTHFIRST, HEALTHFIRST
NEW PC, CORVALLIS CLINIC, CORVALLIS CLINIC NEW PC, MEDFORD CLINIC, OR MEDFORD
CLINIC NEW PC SINCE THE DATE HEREOF.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION................................................................. i
SUMMARY............................................................................... 1
General............................................................................. 1
Risk Factors........................................................................ 2
The Companies....................................................................... 2
The New PCs......................................................................... 3
Background of the Merger............................................................ 3
Physician Partners, Inc............................................................. 4
Meetings of the Shareholders........................................................ 5
Record Date and Vote Required....................................................... 6
The Merger.......................................................................... 6
Comparison of Shares and Options.................................................... 8
The PC Reorganization Transactions.................................................. 10
Terms of the Reorganization and Merger.............................................. 12
Government and Regulatory Approvals................................................. 12
Closing and Effective Time of the Merger............................................ 12
Interests of Certain Persons in the Merger.......................................... 12
Potential Adverse Consequences to Shareholders...................................... 14
Conditions of the PC Reorganization Transactions and the Merger..................... 15
Termination of the PC Reorganization Transactions and the Merger.................... 15
Closing and Effective Time of the PC Reorganization Transactions and the Merger..... 16
Effect of Merger on New Options..................................................... 16
Recommendations of the Boards of Directors.......................................... 16
Federal Income Tax Considerations................................................... 17
Accounting Treatment................................................................ 18
Dissenters' Rights Regarding the Merger............................................. 18
Exchange/Issuance of Stock Certificates in the Merger............................... 19
Summary Financial Data of the Companies, PPI and New PCs............................ 19
RISK FACTORS.......................................................................... 27
Lack of Combined Operating History; New Company..................................... 27
PPI's Dependence on New PCs......................................................... 27
Impact of New PC Management Agreements on Provider Compensation and Benefits........ 28
Impact of Certain Restrictions on Providers of New PCs.............................. 28
Recent Operating Losses of Certain Companies........................................ 29
Risks Related to Capitation......................................................... 29
Reduction in Third-Party Payor Reimbursement........................................ 29
Concentration of Payors............................................................. 30
Growth Strategy; Capital Requirements............................................... 30
Competition......................................................................... 31
Exposure to Professional Liability Claims........................................... 31
Government Regulation............................................................... 32
Anti-Takeover Considerations........................................................ 34
Management Information System and Other Technology Needs............................ 35
Possible Inability to Retain or Attract Key Personnel; Dependence on Executive
Officers.......................................................................... 35
Consent to Assignment of Health Plan Contracts...................................... 35
No Public Trading Market for PPI Class A Common Stock............................... 35
PPI's Repurchase Right.............................................................. 36
Income Tax Risks.................................................................... 36
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Risks Relating to Failure to Approve the Merger and PC Reorganization
Transactions...................................................................... 36
Risks Relating to Escrow Arrangement................................................ 37
THE HEALTHFIRST SHAREHOLDER MEETING................................................... 38
Time, Date and Place of HealthFirst Meeting......................................... 38
Business to be Conducted at the HealthFirst Meeting................................. 38
Proxies: Voting and Revocation...................................................... 38
Proxy Solicitation.................................................................. 39
Vote Required....................................................................... 39
Other Matters....................................................................... 39
THE CORVALLIS CLINIC SHAREHOLDER MEETING.............................................. 39
Time, Date and Place of Corvallis Clinic Meeting.................................... 39
Business to be Conducted at the Corvallis Clinic Meeting............................ 40
Proxies: Voting and Revocation...................................................... 40
Proxy Solicitation.................................................................. 40
Vote Required....................................................................... 40
Other Matters....................................................................... 41
THE MEDFORD CLINIC SHAREHOLDER MEETING................................................ 41
Time, Date and Place of Medford Clinic Meeting...................................... 41
Business to be Conducted at the Medford Clinic Meeting.............................. 41
Proxies: Voting and Revocation...................................................... 41
Proxy Solicitation.................................................................. 42
Vote Required....................................................................... 42
Other Matters....................................................................... 42
THE MERGER AND RELATED TRANSACTIONS................................................... 43
General............................................................................. 43
Background of the Merger............................................................ 43
HealthFirst's Reasons for the Merger................................................ 47
HealthFirst Board's Recommendation.................................................. 51
Corvallis Clinic's Reasons for the Merger........................................... 51
Corvallis Clinic Board's Recommendation............................................. 58
Medford Clinic's Reasons for the Merger............................................. 58
Medford Clinic Board's Recommendation............................................... 61
Failure to Approve the Merger....................................................... 61
THE PC REORGANIZATION TRANSACTIONS AND RELATED TRANSACTIONS........................... 62
General............................................................................. 62
Characteristics of the New PCs...................................................... 62
HealthFirst's Reasons for the HealthFirst Reorganization Transactions............... 64
HealthFirst Board's Recommendation.................................................. 64
Corvallis Clinic's Reasons for the Corvallis Clinic Reorganization Transactions..... 64
Corvallis Clinic Board's Recommendation............................................. 65
Medford Clinic's Reasons for the Medford Clinic Reorganization Transactions......... 65
Medford Clinic's Board Recommendation............................................... 66
Failure to Approve the PC Reorganization Transactions............................... 66
TERMS OF THE REORGANIZATION AND MERGER................................................ 67
Closing and Effective Time of the Merger............................................ 67
Conditions of the Reorganization and Merger Agreement............................... 67
Escrow Arrangement.................................................................. 68
Conduct of Businesses of Companies Pending the Merger............................... 71
Termination of the Reorganization and Merger Agreement.............................. 71
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Expense Sharing Agreement........................................................... 72
Interests of Certain Persons in the Merger.......................................... 73
Shareholder Approvals............................................................... 77
Rights of Security Holders.......................................................... 77
Government and Regulatory Approvals................................................. 81
Federal Income Tax Considerations................................................... 82
Accounting Treatment................................................................ 83
Dissenters' Rights Regarding the Merger............................................. 84
Break-Up Fee........................................................................ 86
Effects of the Merger............................................................... 86
Effect on New Stock Option Plans.................................................... 89
Effect on Existing Employee Benefit Plans........................................... 90
Exchange/Issuance of Stock Certificates in the Merger............................... 90
Payment in Lieu of Fractional Shares................................................ 91
PPI's Right to Repurchase PPI Class A Common Stock.................................. 91
Resales of PPI Class A Common Stock and Registration Rights......................... 91
Conversion of PPI Class A Common Stock.............................................. 92
PHYSICIAN PRACTICE MANAGEMENT INDUSTRY................................................ 94
General............................................................................. 94
The Industry........................................................................ 94
Capitation.......................................................................... 95
Benefits a PPM Can Provide a Group Practice......................................... 96
Government Regulation............................................................... 96
Management Information Systems...................................................... 98
OPERATION, MANAGEMENT AND BUSINESS OF PPI FOLLOWING THE MERGER........................ 99
Business of PPI..................................................................... 99
The PPI Strategy.................................................................... 99
Practice Management Agreement....................................................... 100
Properties and Facilities of PPI.................................................... 102
Legal Proceedings................................................................... 102
Compensation of Directors........................................................... 105
Compensation of Executive Officers.................................................. 105
Indemnification Agreements.......................................................... 106
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements...................................................................... 107
Certain Transactions................................................................ 107
Description of Capital Stock of PPI................................................. 107
PPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 110
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF PPI, INCLUDING NOTES THERETO.... 113
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF NEW PCs, INCLUDING NOTES
THERETO.............................................................................. 121
OPERATION, MANAGEMENT AND BUSINESS OF HEALTHFIRST NEW PC FOLLOWING THE NEW PC
DISTRIBUTION......................................................................... 133
Development of Business of HealthFirst New PC....................................... 133
Legal Proceedings................................................................... 133
Management of HealthFirst New PC.................................................... 133
Ownership of Shares of HealthFirst New PC........................................... 136
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
OPERATION, MANAGEMENT AND BUSINESS OF CORVALLIS CLINIC NEW PC FOLLOWING THE NEW PC
DISTRIBUTION......................................................................... 137
Development of Business of Corvallis Clinic New PC.................................. 137
Legal Proceedings................................................................... 137
Management of Corvallis Clinic New PC............................................... 137
Compensation of Directors........................................................... 138
Compensation of Executive Officers.................................................. 138
Indemnification Agreements.......................................................... 139
Ownership of Shares of Corvallis Clinic New PC...................................... 139
OPERATION, MANAGEMENT AND BUSINESS OF MEDFORD CLINIC NEW PC FOLLOWING THE NEW PC
DISTRIBUTION......................................................................... 140
Development of Business of Medford Clinic New PC.................................... 140
Legal Proceedings................................................................... 140
Management of Medford Clinic New PC................................................. 140
Compensation of Directors........................................................... 142
Compensation of Executive Officers.................................................. 142
Indemnification Agreements.......................................................... 143
Ownership of Shares of Medford Clinic New PC........................................ 143
BUSINESS OF HEALTHFIRST............................................................... 144
General............................................................................. 144
Strategy............................................................................ 145
Government Regulation............................................................... 145
Services Provided................................................................... 146
Marketing and Development........................................................... 147
Competition......................................................................... 147
Employees........................................................................... 147
Insurance........................................................................... 148
Properties and Facilities........................................................... 148
Information Systems................................................................. 148
Legal Proceedings................................................................... 149
DESCRIPTION OF CAPITAL STOCK OF HEALTHFIRST........................................... 150
SELECTED FINANCIAL DATA OF HEALTHFIRST................................................ 151
HEALTHFIRST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 152
Overview............................................................................ 152
Results of Operations............................................................... 153
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995.............................................................................. 153
Twelve Months Ended December 31, 1995 Compared to Twelve Months Ended December 31,
1994.............................................................................. 156
Twelve Months Ended December 31, 1994 Compared to Twelve Months Ended December 31,
1993.............................................................................. 157
Liquidity and Capital Resources..................................................... 159
BUSINESS OF CORVALLIS CLINIC.......................................................... 160
General............................................................................. 160
Business Strategy................................................................... 161
Government Regulation............................................................... 161
Services Provided................................................................... 162
Marketing and Development........................................................... 162
</TABLE>
v
<PAGE>
<TABLE>
<S> <C>
Competition......................................................................... 162
Employees........................................................................... 163
Insurance........................................................................... 163
Properties and Facilities........................................................... 163
Information Systems................................................................. 164
Legal Proceedings................................................................... 164
DESCRIPTION OF CAPITAL STOCK OF CORVALLIS CLINIC...................................... 165
SELECTED FINANCIAL DATA OF CORVALLIS CLINIC........................................... 166
CORVALLIS CLINIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................................ 167
Overview............................................................................ 167
Results of Operations............................................................... 168
Ten Months Ended September 30, 1996 Compared to Ten Months Ended September 30,
1995.............................................................................. 168
Twelve Months Ended November 30, 1995 Compared to Twelve Months Ended November 30,
1994.............................................................................. 170
Twelve Months Ended November 30, 1994 Compared to Twelve Months Ended November 30,
1993.............................................................................. 172
Liquidity and Capital Resources..................................................... 173
BUSINESS OF MEDFORD CLINIC............................................................ 175
General............................................................................. 175
Strategy............................................................................ 175
Government Regulation............................................................... 176
Services Provided................................................................... 176
Marketing and Development........................................................... 178
Competition......................................................................... 178
Employees........................................................................... 178
Insurance........................................................................... 179
Properties and Facilities........................................................... 179
Information Systems................................................................. 179
Legal Proceedings................................................................... 179
DESCRIPTION OF CAPITAL STOCK OF MEDFORD CLINIC........................................ 180
SELECTED FINANCIAL DATA OF MEDFORD CLINIC............................................. 182
MEDFORD CLINIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS................................................................ 183
Overview............................................................................ 183
Results of Operations............................................................... 184
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September 30,
1995.............................................................................. 184
Twelve Months Ended December 31, 1995 Compared to Twelve Months Ended December 31,
1994.............................................................................. 186
Twelve Months Ended December 31, 1994 Compared to Twelve Months Ended December 31,
1993.............................................................................. 188
Liquidity and Capital Resources..................................................... 189
PROPOSAL NO. 3
APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL............................ 191
Employee Stock Option Plan.......................................................... 191
Non-Employee Director Stock Option Plan............................................. 193
Non-Employee Provider Stock Option Plan............................................. 195
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
Change in Control Plan.............................................................. 197
Plan Benefits to Officers and Directors............................................. 199
Shareholder Approval and Board Recommendation....................................... 200
FUTURE SHAREHOLDER PROPOSALS.......................................................... 200
EXPERTS............................................................................... 201
LEGAL MATTERS......................................................................... 201
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS APPENDICES
</TABLE>
APPENDICES
<TABLE>
<S> <C>
Appendix A: Amended and Restated Agreement and Plan of Reorganization................. A-1
Appendix B: PPI Employee Stock Option Plan............................................ B-1
Appendix C: PPI Non-Employee Directors' Option Plan................................... C-1
Appendix D: PPI Non-Employee Provider Option Plan..................................... D-1
Appendix E: PPI Change in Control Plan................................................ E-1
Appendix G: Form of Company Restated Articles of Incorporation........................ G-1
Appendix H: Form of New PC Restated Articles of Incorporation......................... H-1
Appendix I: Form of Escrow Agreement.................................................. I-1
Appendix J: Sections 60.551 through 60.594 of the Oregon Business Corporation Act..... J-1
</TABLE>
vii
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS JOINT PROXY STATEMENT/ PROSPECTUS. REFERENCE IS MADE TO, AND THIS SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO.
GENERAL
This Joint Proxy Statement/Prospectus is provided to shareholders of
HealthFirst, Corvallis Clinic and Medford Clinic, in connection with the
solicitation of proxies by their respective Boards of Directors for use at the
HealthFirst Special Meeting which will be held on January 21, 1997, the
Corvallis Clinic Special Meeting which will be held on January 20, 1997 and the
Medford Clinic Special Meeting which will be held on January 19, 1997
(collectively, the "Special Meetings").
At the Special Meetings, shareholders of each of the Companies will consider
and vote on a proposal to approve the Reorganization and Merger Agreement, and
the transactions contemplated therein. Pursuant to the Reorganization and Merger
Agreement:
(i) Each Company will perform certain steps to reorganize (the "HealthFirst
Reorganization Transactions," the "Corvallis Clinic Reorganization
Transactions" and the "Medford Clinic Reorganization Transactions,"
respectively, and, collectively, the "PC Reorganization Transactions")
by (a) incorporating as a wholly-owned subsidiary thereof, a
professional corporation (each, a "New PC"), under the Oregon
Professional Corporation Act, (b) transferring to the New PC certain
assets and liabilities relating to the provider professional services
business, (c) making a distribution under which the shareholders of such
Company will receive all of the issued and outstanding shares of capital
stock of the New PC, allocated on a pro rata basis in accordance with
the fair market value of each such shareholder's then-current equity
interest in such Company (except for the Corvallis Clinic Distribution,
under which the holders of Class A Preferred Stock of Corvallis Clinic
shall receive all of the issued and outstanding shares of Corvallis
Clinic New PC, allocated on a pro rata basis in accordance with the
percentage of Class A Preferred Stock of Corvallis Clinic then held by
each such holder) (each, a "New PC Distribution"), (d) converting such
Company from an Oregon professional corporation to an Oregon business
corporation and (e) entering into a 40-year New PC Management Agreement.
HealthFirst will effectuate the HealthFirst Reorganization Transactions,
Corvallis Clinic will effectuate the Corvallis Clinic Reorganization
Transactions and Medford Clinic will effectuate the Medford Clinic
Reorganization Transactions. The proposals to approve the HealthFirst
Reorganization Transactions, the Corvallis Clinic Reorganization
Transactions and the Medford Clinic Reorganization Transactions are
referred to herein as the "HealthFirst Reorganization Proposal," the
"Corvallis Clinic Reorganization Proposal" and the "Medford Clinic
Reorganization Proposal," respectively;
(ii) PPI, HealthFirst, Corvallis Clinic and Medford Clinic will effect a
merger of HealthFirst, Corvallis Clinic and Medford Clinic with and
into PPI (the "Merger") by undertaking the following "Merger
Transactions": (a) HealthFirst, Corvallis Clinic and Medford Clinic, as
newly-converted Oregon business corporations, will merge with and into
PPI; (b) each outstanding share of each of the Companies, other than
the shares held by those shareholders who take required actions to
properly assert their dissenters' rights under the Oregon Business
Corporation Act, will be converted into the right to receive a
specified number of shares of PPI Class A Common Stock (see
"Summary--The Merger" for the consideration in the Merger); and (c)
each outstanding option to purchase shares of each of the Companies
will be converted into an option to purchase, on the same terms and
conditions, shares of PPI Class A Common Stock, with the number of such
shares and exercise price applicable to such option adjusted based on
the applicable exchange ratio for the underlying HealthFirst Class A
Shares, Corvallis Clinic Class B Stock or Medford Clinic Common Stock,
as the case may be.
1
<PAGE>
At the Special Meetings, the shareholders of each of the Companies will also
consider and vote on a proposal to approve the Physician Partners, Inc. Employee
Stock Option Plan, the Physician Partners, Inc. Non-Employee Director Stock
Option Plan, the Physician Partners, Inc. Non-Employee Provider Stock Option
Plan and the Physician Partners, Inc. Change in Control Plan (collectively, the
"PPI Incentive Compensation Plans"), which proposal is referred to herein as the
"PPI Incentive Compensation Plans Proposal."
RISK FACTORS
A number of risk factors should be considered in evaluating the Merger and
Reorganization Transactions and the receipt by the Companies' shareholders of
shares of PPI Class A Common Stock and of their respective New PCs in connection
therewith. These risk factors include: the lack of combined operating history of
the Companies, PPI's dependence on the New PCs, the impact of the New PC
Management Agreement on provider compensation and benefits, the impact of
certain noncompetition and other restrictions on providers of the New PCs,
recent operating losses of certain Companies, risks related to capitation, risks
related to reductions in third-party payor reimbursement, concentration of
payors, risks relating to the growth strategy and capital requirements of PPI,
competition risks, risk of exposure to claims of professional liability, risks
relating to government regulation, anti-takeover considerations, management
information system and other technology needs, PPI's possible inability to
retain or attract key personnel and dependence on executive officers, the need
for consent to the assignment of health plan contracts, the lack of a public
trading market for PPI Class A Common Stock, PPI's repurchase rights, certain
income tax risks, risks relating to the failure to approve the Merger and PC
Reorganization Transactions and risks relating to the escrow arrangement
relating to the differences in net shareholder equity of the Companies as of
December 31, 1996.
THE COMPANIES
HEALTHFIRST MEDICAL GROUP, P.C.
HealthFirst is an Oregon professional corporation founded in 1909.
HealthFirst (formerly known as Metropolitan Clinic, P.C. ("Metropolitan"))
consummated a business combination, accounted for on the purchase method, with
Suburban Medical Clinic, Inc., an Oregon corporation ("Suburban"), on February
1, 1996. It operates 11 medical facilities located in and around Portland,
Oregon. HealthFirst's physicians and other medical care providers (numbering 121
and 17, respectively, as of November 1, 1996) provide a broad range of primary
care and specialty services, along with certain ancillary services (such as
clinical laboratory and radiology services). The principal executive offices of
HealthFirst are located at 10535 N.E. Glisan, Portland, Oregon 97220, and its
telephone number is (503) 408-2542.
THE CORVALLIS CLINIC, P.C.
Corvallis Clinic is an Oregon professional corporation founded in 1947. It
is a multi-specialty clinic located in the Willamette Valley approximately 45
miles north of Eugene, Oregon and 80 miles south of Portland, Oregon. Corvallis
Clinic currently has two main facilities located in Corvallis, and five
satellite locations in Corvallis, Philomath and Albany, Oregon. As of November
1, 1996, Corvallis Clinic employed 77 physicians and 12 other medical care
providers. Corvallis Clinic provides coverage in most medical specialties. It
has a full-service occupational medicine department and an immediate care center
which is open 365 days a year. In addition to physician services, services are
offered through the physical therapy, radiology, laboratory, pharmacy, and
audiology departments and an optical shop. The principal executive offices of
Corvallis Clinic are located at 444 NW Elks Drive, Corvallis, Oregon 97330. The
telephone number is (541) 754-1374.
2
<PAGE>
MEDFORD CLINIC, P.C.
Medford Clinic is a multi-specialty medical group organized in 1946 as an
Oregon professional corporation. Medford Clinic operates seven medical office
sites in Medford, Oregon and the greater Medford area (including Ashland, Grants
Pass and Talent, Oregon). As of November 1, 1996, Medford Clinic employed 66
physicians and nine other medical care providers. Medford Clinic, at its various
locations, provides a wide range of primary care and specialty physician
services. Additional ancillary services include a clinical laboratory, radiology
services, a pharmacy, a vascular laboratory and a category II ambulatory surgery
center. In addition, Medford Clinic owns and operates two dialysis centers
(Rogue Valley Dialysis Services and Redwood Dialysis Service Center) and manages
certain other hospital-based dialysis centers. The principal executive offices
of Medford Clinic are located at 555 Black Oak Drive, Medford, Oregon 97504, and
the telephone number is (541) 734-3601.
THE NEW PCS
Each of the Companies has formed a New PC as a wholly-owned subsidiary
thereof and contemplates making an asset transfer to such New PC in connection
with the PC Reorganization Transactions. The principal executive office and
telephone number of each New PC is the same as that of the Company which formed
such New PC.
BACKGROUND OF THE MERGER
The original concept of merging multi-specialty clinics was initiated at a
meeting of the board of directors of Corvallis Clinic in May, 1995. Through
additional research of national and regional trends and due to perceived
opportunities in the Oregon market, the board of directors of Corvallis Clinic
agreed to pursue merger possibilities with similar group practices in the State
of Oregon.
Preliminary contacts were made with HealthFirst and Medford Clinic resulting
in commitments of their respective boards of directors to evaluate the
feasibility of a merger. From the fall of 1995 through spring of 1996, a
preliminary compilation of the Companies' respective unaudited historical
financial information was prepared and a management and governance structure was
developed. In the spring of 1996, a Confidentiality Agreement was entered into
among the Companies and significant legal and financial work was initiated. On
June 28, 1996, the Companies entered into a Memorandum of Understanding setting
forth the basic terms of the proposed merger. In late July 1996, the respective
boards of directors of the Companies unanimously approved the Reorganization and
Merger Agreement to proceed with the PC Reorganization Transactions and the
Merger contingent upon shareholder approval. Various amendments to the
Reorganization and Merger Agreement have been made with respect to certain terms
of the PC Reorganization Transactions and the Merger, including an amendment
establishing an escrow arrangement with respect to a part of the PPI Class A
Common Stock issued to shareholders of the Company in the Merger. Ultimately,
the respective boards of directors of the Companies concluded the proposed
merger was the best available strategic alternative providing physician
governance, economies of scale, size, access to capital and strong management.
It is anticipated that the Merger will be consummated on or before January 31,
1997.
For a more detailed discussion of the reasons considered by the respective
boards of directors of HealthFirst, Corvallis Clinic and Medford Clinic in
approving the HealthFirst Reorganization Proposal, the Corvallis Clinic
Reorganization Proposal and the Medford Clinic Reorganization Proposal,
respectively, and the Merger Proposal, see "The Merger and Related
Transactions--Background of the Merger, Reasons for the Merger and Board's
Recommendation."
3
<PAGE>
PHYSICIAN PARTNERS, INC.
GENERAL.
PPI is a Delaware corporation newly formed for the purposes of the Merger.
Upon the consummation of the Merger, PPI will provide management services to
medical group practices. At the effective time of the Merger (the "Effective
Time"), each Company will merge with and into PPI and PPI will be the surviving
company. As the combined entity resulting from the Merger of the three
Companies, PPI will provide management and administrative services and
facilities and equipment to (i) HealthFirst New PC under the new PC Management
Agreement with HealthFirst (the "HealthFirst Management Agreement"), (ii)
Corvallis Clinic New PC under the New PC Management Agreement with Corvallis
Clinic (the "Corvallis Clinic Management Agreement") and (iii) Medford Clinic
New PC under the New PC Management Agreement with Medford Clinic (the "Medford
Clinic Management Agreement"). Through these New PC Management Agreements, PPI's
physician practice management operations will involve at the Effective Time
approximately 265 physicians and 40 other medical care providers. The principal
executive offices of PPI are located at 111 SW Columbia Street, Suite 725,
Portland, Oregon 97201 and its telephone number is (503) 224-2249.
Set forth below is a diagram showing the organizational structure of PPI
immediately after the Merger.
STRUCTURE AFTER MERGER
The diagram is in the form of pyramid-like flow-chart, with the apex represented
in the form of an oval containing the phrase "PPI STOCKHOLDERS"( "PPI
Stockholder Oval"). Directly underneath the PPI Stockholder Oval, connected via
a solid line, is a rectangle representing PPI and inscribed "PPI" ("PPI
Rectangle"). Underneath the PPI Rectangle are three individual rectangles
situated side-by-side with each rectangle representing each of the New PCs ("New
PC Rectangles") and each inscribed, from left to right, "New Healthfirst PC",
"New Corvallis PC" and "New Medford PC", respectively. The New PC Rectangles are
connected to the PPI Rectangle via broken arrows. The broken arrows represent
the PC Management Agreements. A notation is next to each of the individual
broken arrows which states "Practice Management Agreement (Joint Management
Board"). Additionally, the New PC Rectangles each have a broken dotted line
connecting them to three separate oval figures which are inscribed with "PC
Shareholders" ("PC Shareholders Oval"). The PC Shareholder Ovals represent the
shareholders of the respective New PCs and are not connected to any other
figures in the diagram.
4
<PAGE>
BUSINESS STRATEGY
PPI's strategy is to consolidate medical group practices into networks of
health care providers. Although PPI's operations initially will be concentrated
in the Pacific Northwest, PPI intends to explore growth opportunities
nationally. Within each of its managed clinics, PPI will seek to achieve a mix
of primary care and specialty physicians who can provide services necessary to
establish a significant market presence. PPI will enhance medical group
operations by centralizing administrative functions and introducing management
tools, such as clinical guidelines, utilization review and outcomes measurement.
PPI will seek to affiliate with highly productive groups with significant
shares of the markets in which they practice and strong reputations among
patients, payors and peers for providing quality medical care. Typically, PPI
will acquire the operating assets of these practices and will contract with the
medical groups for 40 years for management services in exchange for a fixed
percentage of practice revenue. PPI's profitability then will depend on
enhancing operating efficiency, expanding health care services provided,
increasing market share and assisting affiliated providers in managing the
delivery of health care. PPI's network will integrate practices via financial
and clinical systems and will offer groups the opportunity to maintain market
competitive compensation, and to gain access to capital, management expertise,
sophisticated information systems, and managed care contracts. For a detailed
discussion of the business strategy of PPI as a physician practice management
company, see "Operation, Management and Business of PPI Following the Merger."
MEETINGS OF THE SHAREHOLDERS
The HealthFirst Special Meeting will be held at 6:30 p.m. (Pacific Standard
Time), on Tuesday, January 21, 1997, at Lloyd Center, Red Lion Hotel, 1000 NE
Multnomah Ave., Portland, Oregon 97232.
The Corvallis Clinic Special Meeting will be held at 6:30 p.m. (Pacific
Standard Time), on Monday, January 20, 1997, at 3680 NW Samaritan Drive,
Corvallis, Oregon 97330.
The Medford Clinic Special Meeting will be held at 6:00 p.m. (Pacific
Standard Time), on Sunday, January 19, 1997, at 555 Black Oak Drive, Medford,
Oregon 97504.
At the Special Meetings, shareholders of the respective Companies will be
asked to consider and vote upon the HealthFirst Reorganization Proposal, the
Corvallis Clinic Reorganization Proposal or the Medford Clinic Reorganization
Proposal, as the case may be, and the Merger Proposal. A copy of the
Reorganization and Merger Agreement is attached to this Joint Proxy
Statement/Prospectus as Appendix A. The shareholders also will be asked to
consider and vote upon the PPI Incentive Compensation Plans Proposal. The
principal provisions of the PPI Incentive Compensation Plans are described in
the Section below entitled "Proposal No. 3: Approval of the PPI Incentive
Compensation Plans Proposal." Each of the PPI Incentive Compensation Plans is
attached to this Joint Proxy Statement/Prospectus as Appendices B, C, D and E.
The outstanding HealthFirst Class A Shares and the outstanding shares of
Corvallis Clinic Class A Stock, Corvallis Clinic Class B Stock and Medford
Clinic Common Stock (collectively, the "Voting Shares") represented by properly
executed proxies will be voted at the appropriate Special Meeting in accordance
with the directions on the proxies, unless such proxies previously have been
revoked. If no direction is indicated, the Voting Shares will be voted FOR
approval of the HealthFirst Reorganization Proposal, the Corvallis Clinic
Reorganization Proposal or the Medford Clinic Reorganization Proposal, as the
case may be, FOR the Merger Proposal and FOR approval of the PPI Incentive
Compensation Plans Proposal. Any HealthFirst, Corvallis Clinic or Medford Clinic
shareholder giving a proxy may revoke his or her proxy at any time before its
exercise at the appropriate Special Meeting by (i) giving written notice of such
revocation to the Secretary of HealthFirst, Corvallis Clinic or Medford Clinic,
as the case may be, (ii) signing and delivering to such Secretary a proxy
bearing a later date or (iii) attending the appropriate
5
<PAGE>
Special Meeting and voting in person. A valid proxy will not be revoked if a
shareholder attends a Special Meeting but does not vote. See "The Special
Meetings--Proxies: Voting and Revocation".
RECORD DATE AND VOTE REQUIRED
The record date for shareholders of HealthFirst entitled to vote at the
HealthFirst Special Meeting is December 24, 1996. The record date for
shareholders of Corvallis Clinic entitled to vote at the Corvallis Clinic
Special Meeting is December 24, 1996. The record date for shareholders of
Medford Clinic entitled to vote at the Medford Clinic Special Meeting is
December 24, 1996.
The HealthFirst Reorganization Proposal, the Merger Proposal and the PPI
Incentive Compensation Plans Proposal must be approved by a majority of the
outstanding HealthFirst Class A Shares. The Corvallis Clinic Reorganization
Proposal, the Merger Proposal and the PPI Incentive Compensation Plans Proposal
must be approved by holders of two-thirds of the outstanding shares of each of
Corvallis Clinic Class A Stock and Corvallis Clinic Class B Stock, in each case
as a voting group. The Medford Clinic Reorganization Proposal, the Merger
Proposal and the PPI Incentive Compensation Plans Proposal must be approved by a
majority of the outstanding shares of Medford Clinic Common Stock. In each case,
abstentions will have the same effect as a vote against the Proposals.
If the shareholders of any Company fail to approve by the requisite
percentage any of the HealthFirst Reorganization Proposal, the Corvallis Clinic
Reorganization Proposal, the Medford Clinic Reorganization Proposal or the
Merger Proposal, the Merger will not be consummated.
THE MERGER
The Reorganization and Merger Agreement contemplates that each of the
Companies will merge with and into PPI, provided that all conditions to the
consummation of the Merger are satisfied or waived. Shareholders of each of
HealthFirst, Corvallis Clinic and Medford Clinic (other than shareholders who
take required actions to properly assert their dissenters' rights under the
Oregon Business Corporation Act) will receive shares of PPI Class A Common Stock
in exchange for their shares of HealthFirst Class A Shares, Corvallis Clinic
Class A Stock, Corvallis Clinic Class B Stock, Corvallis Clinic Class C Stock
and Medford Common Stock, as applicable, as follows:
- Each outstanding HealthFirst Class A Share will be converted into the
right to receive 354 shares of PPI Class A Common Stock.
- Each outstanding share of Corvallis Clinic Class A Stock will be converted
into the right to receive 1,454 shares of PPI Class A Common Stock.
- Each outstanding share of Corvallis Clinic Class B Stock will be converted
into the right to receive 192 shares of PPI Class A Common Stock.
- Each outstanding share of Corvallis Clinic Class C Stock will be converted
into the right to receive 6 shares of PPI Class A Common Stock.
- Each outstanding share of Medford Clinic Common Stock will be converted
into the right to receive 31,362 shares of PPI Class A Common Stock.
The exchange ratios set forth above were determined on the basis of the
number of full-time-equivalent physicians and other specified providers ("FTE")
of each Company as of October 1, 1996, with full- or part-time equivalence
determined based on a work-week of at least four full-working days for full-time
equivalence. A specified number of shares of PPI Class A Common Stock, equal to
the product of 31,000 multiplied by the number of FTE of each Company ("Merger
Shares"), was allocated to each of the Companies. The exchange ratio for each
share of capital stock of each of the Companies was then computed by dividing
the total outstanding number of shares of capital stock of such Company into the
number of Merger Shares.
6
<PAGE>
The Reorganization and Merger Agreement also contemplates that PPI and the
Companies will, prior to the Effective Time of the Merger, enter into an escrow
agreement with an escrow agent reasonably acceptable to PPI and the Companies,
pursuant to which escrow agreement the shareholders of each of the Companies
will deposit into escrow a certain number of shares of PPI Class A Common Stock
received in consideration of the Merger. The aggregate number of shares of PPI
Class A Common Stock that will be deposited in escrow by shareholders of each of
the Companies as of the Effective Time will be 1,926,000 (representing 8,000
shares for each full-time equivalent physician and other specified provider
("FTE") of each of the Companies as of October 1, 1996, with full- or part-time
equivalence determined based on a work week of at least four full working days
for full-time equivalence). Shareholders of HealthFirst, holders of Corvallis
Clinic Class B Stock and shareholders of Medford Clinic will deposit in escrow
840,000 shares, 622,000 shares and 464,000 shares, respectively, of PPI Class A
Common Stock (again, representing 8,000 shares per FTE). On a per-share basis,
(i) 91 shares of PPI Class A Common Stock per share of Healthfirst Class A Share
will be deposited in escrow, (ii) 52 shares of PPI Class A Common Stock per
share of Corvallis Clinic Class B Stock will be deposited in escrow and (iii)
8,098 shares of PPI Class A Common Stock per share of Medford Clinic Common
Stock will be deposited in escrow. Since the shareholders of each of the
Companies, as a group, will be entitled to receive an aggregate of 31,000 shares
per FTE of such Company as consideration in the Merger, such shareholders, as a
group, will hold outside of escrow at least 23,000 shares per FTE of such
Company.
PPI Class A Common Stock will be released to such shareholders (referred to
herein as "Escrow Holders") from the escrow based on the net shareholder equity
per FTE of the Companies as reflected on their audited balance sheets as of
December 31, 1996 ("Net Shareholder Equity Per FTE"). If the Net Shareholder
Equity Per FTE of any Company (referred to herein as an "Excess Company")
exceeds that of any of the other Companies by more than 20 percent (a difference
of greater than 20 percent being referred to herein as an "Excess Difference"),
the number of shares released from escrow will be adjusted to reflect such
Excess Difference. More specifically, shares shall be released to Escrow Holders
so that the Escrow Holders who had been shareholders of an Excess Company would
receive out of escrow, in the aggregate, such number of shares of PPI Class A
Common Stock as represents a value (measured assuming a $15.82 per share value
of PPI Class A Common Stock(1)) exceeding the aggregate value of shares of PPI
Class A Common Stock received by the Escrow Holders who had been shareholders of
the other Company or Companies by an amount equal to the product of the Excess
Difference multiplied by the FTE of such Excess Company. In contrast, if the Net
Shareholder Equity Per FTE of each of the Companies is within 20 percent of one
another, each Escrow Holder will receive out of escrow one-half of the shares
deposited thereby, which would result in the shareholders of each of the
Companies receiving, in the aggregate, 27,000 shares per FTE of such Company.
Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, the shareholders of each of the Companies
might receive all, a portion of or none of the shares of PPI Class A Common
Stock deposited thereby in escrow (ranging from an aggregate of 31,000 shares
per FTE to an aggregate of 23,000 shares per FTE on a Company-by-Company basis,
provided that the aggregate number of shares released from escrow will not
result in the total number of shares issued as consideration in the Merger
exceeding 27,000 shares per FTE of all the Companies). The aggregate number of
shares of PPI Class A Common Stock which the shareholders of each of the
Companies, may receive, as a group, as consideration in the Merger ranges from
an aggregate of 31,000 shares per FTE to an aggregate of 23,000 per FTE on a
Company-by-Company basis, provided that the aggregate number of shares released
from escrow will not result in the total number of shares issued to all of the
shareholders of
- ------------------------
(1) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of PPI Class A Common
Stock (reflecting the sum of 27,000 shares per FTE of the Companies and
135,000 shares issued to four officers and one director of PPI) are
outstanding after the release of shares from escrow.
7
<PAGE>
the Companies as consideration in the Merger exceeding 27,000 shares per FTE of
all of the Companies. On a per-share basis, the ranges are (i) from 263 shares
to 354 shares of PPI Class A Common Stock per HealthFirst Class A Share, (ii)
from 140 shares to 192 shares of PPI Class A Common Stock per share of Corvallis
Clinic Class B Stock and (iii) from 23,269 shares to 31,362 shares of PPI Class
A Common Stock per share of Medford Clinic Common Stock. Balance sheets
reflecting the December 31, 1996 net shareholder equity of the Companies will be
prepared and audited no later than March 31, 1997; within five business days of
delivery of such balance sheets, the Escrow Holders will receive shares of PPI
Class A Common Stock from escrow as described above. Any PPI Class A Common
Stock not so released from escrow will be cancelled and retired.
Under the escrow arrangement described above, the shareholders of each of
the Companies will be receiving, in the aggregate, initially outside of escrow
23,000 shares per FTE of such Company as consideration in the Merger, since
8,000 shares per FTE will be deposited in escrow. Thus, regardless of the amount
of Excess Difference between the Companies, the shareholders of each of the
Companies will receive, in the aggregate, at least 23,000 shares per FTE of such
Company. On the other hand, the maximum number of shares the shareholders of a
Company with the highest Excess Difference will receive, regardless of the
amount of such Excess Difference, in the aggregate, is 31,000 shares per FTE of
such Company. For details regarding the number of shares of PPI Class A Common
Stock allocated to the shareholders of each Company based on the number of FTE
of such Company and the material terms of the escrow arrangement provided for in
an escrow agreement, see and "Terms of the Reorganization and Merger--Escrow
Arrangement" of this Joint Proxy Statement/Prospectus.
The complete texts of the Reorganization and Merger Agreement and such
escrow agreement are attached as Appendix A and Appendix I, respectively, to
this Joint Proxy Statement/Prospectus.
The respective boards of directors of the Companies also determined that the
FTE of each Company was a fair and reasonable method of determining the value of
each Company and thus the consideration in the Merger. See "Summary --
Recommendations of the Boards of Directors."
It is contemplated that the Merger will occur as soon as practicable after
each of the Companies' shareholders approve the PC Reorganization Transactions,
the Merger Transactions and the PPI Incentive Compensation Plans at their
respective Special Meetings on or before January 31, 1997.
COMPARISON OF SHARES AND OPTIONS
Each Company is a privately-held professional corporation. No trading market
currently exists for their shares.
8
<PAGE>
The following table sets forth for each Company the number of FTE, the
aggregate number of shares of PPI Class A Common Stock allocated on an aggregate
basis to the shareholders of such Company at the Effective Time and the
applicable exchange ratio (with the minimum and maximum number of shares
receivable as consideration in the Merger) for the underlying capital stock of
such Company in the Merger.
CAPITAL STOCK MERGER CONSIDERATION TABLE
<TABLE>
<CAPTION>
E
--------------
C MERGER
---------- D CONSIDERATION
TOTAL PPI ----------- RATIO (ROUNDED
B COMMON OUTSTANDING TO NEAREST
A ------------- STOCK SHARES WHOLE)
------------- PPI COMMON ALLOCATION OF EACH (C DIVIDED BY
PROVIDER FTE STOCK PER FTE (A X B) COMPANY D)(1)
------------- ------------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
HEALTHFIRST............................. 105
Minimum............................. 23,000(2) 2,415,000
Maximum............................. 31,000(2) 3,255,000
Class A............................... 9,200
Minimum............................. 263:1
Maximum............................. 354:1
Percent of Total...................... 43.61% 43.61%
CORVALLIS............................... 77.75
Minimum............................. 23,000(2) 1,788,250
Maximum............................. 31,000(2) 2,410,250
Class A............................... 64 1,454:1(3)
Class B............................... 11,800
Minimum............................. 140:1(4)
Maximum............................. 192:1(4)
Class C............................... 8,000 6:1(3)
Percent of Total...................... 32.29% 32.29%
MEDFORD................................. 58
Minimum............................. 23,000(2) 1,334,000
Maximum............................. 31,000(2) 1,798,000
Common................................ 57.33
Minimum............................. 23,269:1
Maximum............................. 31,362:1
Percent of Total...................... 24.09% 24.09%
TOTAL: 240.75 7,463,250
</TABLE>
- ------------------------
(1) The calculation (C DIVIDED BY D) applies, unless otherwise noted below.
(2) Although the number of shares of PPI Class A Common Stock allocated to the
shareholders of each of the Companies is based on a range of 23,000 to
31,000 shares per FTE of such Company as of October 1, 1996, the escrow
arrangement, which will be entered into by PPI and the Companies with an
escrow agent prior to the Merger, will result in the total number of shares
of PPI Class A Common Stock issued to shareholders of all of the Companies
as consideration in the Merger not exceeding 27,000 shares per FTE of all of
the Companies.
(3) The number of shares of PPI Class A Common Stock into which each share of
Corvallis Clinic Class A Stock and the number of shares of PPI Class A
Common Stock into which shares of Corvallis Clinic Class C Stock will be
converted pursuant to the Merger represent aggregate values of $23,000 and
$100, respectively, with the value of PPI Class A Common Stock being based
on a valuation of the
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<PAGE>
Companies as a combined entity, assuming such combination as of June 30,
1996 prepared by American Appraisal Associates, Inc. (an independent
valuation firm selected by Corvallis Clinic pursuant to the Reorganization
and Merger Agreement).
(4) The number of shares of PPI Class A Common Stock into which each share of
Corvallis Clinic Class B Stock and ultimately released from escrow is equal
to the quotient obtained by dividing (a) 11,800 (the number of all issued
and outstanding shares of Corvallis Clinic Class B Stock at the Effective
Time) into (b)2,269,194 (the excess of (i) or 2,410,250, which is the
aggregate number of shares of PPI Class A Common Stock which Corvallis
Clinic shareholders will be issued to Corvallis Clinic Shareholders as
consideration in the Merger, over (ii) 141,056, the aggregate number of
shares of PPI Class A Common Stock and ultimately released from escrow
Corvallis Clinic Class A Stock and Corvallis Clinic Class C Stock and
ultimately released from escrow under (3) above).
The Reorganization and Merger Agreement also contemplates that each of the
Companies will, prior to the Merger, adopt a stock option plan for certain of
its employees and issue options to purchase HealthFirst Class A Shares,
Corvallis Clinic Class B Stock or Medford Clinic Common Stock, as the case may
be. These options will be converted into the right to acquire, on the same terms
and conditions, shares of PPI Class A Common Stock with the number of shares and
exercise price applicable to such option adjusted on the basis of applicable
stock option exchange ratios set forth in the Reorganization and Merger
Agreement (established on the basis of 27,000 shares per FTE of each Company
being issued as consideration in the Merger and ultimately released from
escrow).
The following table sets forth for each Company the number of FTE, the
number of options to purchase shares of PPI Class A Common Stock allocated on an
aggregate basis to the shareholders of such Company, and the applicable exchange
ratio for such options in the Merger.
STOCK OPTION EXCHANGE RATIO TABLE
<TABLE>
<CAPTION>
E
D -----------
B C -------------- OUTSTANDING
--------------- ---------- STOCK OPTION OPTIONS OF
OPTIONS TO TOTAL EXCHANGE EACH
A PURCHASE PPI OPTIONS RATIO (ROUNDED COMPANY (C
------------- COMMON STOCK ALLOCATION TO NEAREST DIVIDED BY
PROVIDER FTE PER FTE (A X B) WHOLE)* D)
------------- --------------- ---------- -------------- -----------
<S> <C> <C> <C> <C> <C>
HEALTHFIRST............................. 105 5,000 525,000 308:1 1,704.5
Class A...............................
Percent of Total...................... 43.61% 43.61%
CORVALLIS............................... 77.75 5,000 388,750 163:1 2,385.0
Class B...............................
Percent of Total...................... 32.29% 32.29%
MEDFORD................................. 58 5,000 290,000 27,330:1 10.6
Common................................
Percent of Total...................... 24.09% 24.09%
TOTAL: 240.75 1,203,750
</TABLE>
- ------------------------
* Stock option exchange ratios were calculated on the basis of 27,000 shares per
FTE.
THE PC REORGANIZATION TRANSACTIONS
The purpose of the PC Reorganization Transactions is to comply with the
requirements of the Oregon Professional Corporation Act which prohibit a
professional corporation from merging into a business corporation and which
restrict non-physician ownership or control of a medical practice. The
incorporation of each of HealthFirst New PC, Corvallis Clinic New PC and Medford
Clinic New PC allows the respective
10
<PAGE>
shareholders of the Companies to continue as shareholders of a professional
corporation. The conversion of each of the Companies from a professional
corporation to a business corporation enables the Companies to merge with and
into PPI.
The Reorganization and Merger Agreement contemplates that each of the
Companies will, prior to the Merger, incorporate, as a wholly-owned subsidiary
thereof, a New PC. Each of HealthFirst New PC, Corvallis Clinic New PC and
Medford Clinic New PC was incorporated under the laws of the State of Oregon on
September 18, 1996. Each such New PC will, prior to the Effective Time, adopt
and file with the Secretary of State of the State of Oregon the Restated
Articles of Incorporation substantially in the form attached hereto as Appendix
H, with such modifications as deemed appropriate by each such New PC. The bylaws
of each such New PC, which will be adopted prior to the Effective Time, will be
as close to the bylaws of the Company by which it was incorporated as is
practical for a new entity, until modified by means provided in such bylaws.
Each of the Companies will then transfer certain assets integral to its provider
professional services business to such New PC and cause such New PC to assume
liabilities of such Company relating to such transferred assets. After such
transfer of assets, each of HealthFirst and Medford Clinic will make a
distribution under which the then-current shareholders of such Company will
receive all of the issued and outstanding shares of such New PC, allocated on a
pro rata basis in accordance with the fair market value of each such
shareholder's then-current equity interest in such Company. Corvallis Clinic
will instead make a distribution under which the holders of Class A Preferred
Stock of Corvallis Clinic shall receive all of the issued and outstanding shares
of Corvallis Clinic New PC, allocated on pro rata basis in accordance with the
percentage of Class A Preferred Stock of Corvallis Clinic then held by each such
holder.
Each of the Companies will then convert from an Oregon professional
corporation to an Oregon business corporation by filing Restated Articles of
Incorporation substantially in the form attached hereto as Appendix G to this
Joint Proxy Statement/Prospectus, together with the required fee, with the
Secretary of State of the State of Oregon in accordance with Oregon Law and
enter into a New PC Management Agreement with each such Company's New PC. In
connection with the Merger, by operation of law, such New PC Management
Agreement will be assigned by such Company to PPI pursuant to which, in exchange
for the management services provided by PPI to such Company's New PC, PPI will
be entitled to receive (a) reimbursement of all Manager's Expenses (as such term
is hereinafter defined) incurred by PPI plus (b) 16% of the Distributable Profit
Amount of such Company's New PC. "Distributable Profit Amount" is defined as (i)
gross revenues, booked on an accrual basis and subtracting specified contractual
allowances and bad debt, received by PPI or such New PC relating to services
provided by such New PC, less (ii) Manager's Expenses. Each Company's New PC
will be responsible for provider compensation and benefits. The term "Manager's
Expenses" is defined in the New PC Management Agreement to mean the actual cost
of all operating and non-operating expenses incurred by PPI in the operation of
a New PC's medical offices. Any allocation of costs (as opposed to a
pass-through of actual direct costs incurred by PPI in connection with the
operation of such New PC's medical offices for which PPI shall be reimbursed in
full) by PPI to such New PC shall require approval of the joint management board
(composed of PPI and such New PC representatives) of the proposed cost
allocation for a defined period of time prior to implementation of the function
for which a cost allocation is proposed. "Manager's Expenses" expressly will not
include any corporate overhead charges of PPI (other than as expressly agreed to
in the New PC Management Agreement), federal or state income taxes of PPI or
such New PC, any expenses which are expressly designated as obligations to be
assumed solely by PPI, and any amortization expense resulting from the
amortization of costs in connection with the execution of the New PC Management
Agreement.
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Upon consummation of the PC Reorganization Transactions, the new
organizational structure of each New PC will be as follows:
STRUCTURE AFTER REORGANIZATION
The diagram is in the form of a triangular flow-chart with the top angle in the
form of an oval inscribed with 'A Company's Shareholders' ('Shareholders Oval').
The Shareholders Oval is above and connected to, via a solid line, two
individual rectangles which are situated side by side. The rectangle on the left
is inscribed with 'Company as Business Corporation' and the rectangle on the
right is inscribed with 'New PC.' The two individual rectangles are connected to
each other via a broken arrow inscribed with, and representing, the 'Practice
Management Agreement.'
TERMS OF THE REORGANIZATION AND MERGER
The Reorganization and Merger Agreement was entered into by and among PPI,
HealthFirst, Corvallis Clinic and Medford Clinic on July 29, 1996, following
approval by the boards of directors of each party thereto, and subsequently
amended and restated on September 19, 1996 and further amended on November 4,
1996 and November 29, 1996. Pursuant to the terms of the Reorganization and
Merger Agreement, HealthFirst, Corvallis Clinic and Medford Clinic will
effectuate the HealthFirst Reorganization Transactions, the Corvallis Clinic
Reorganization Transactions and the Medford Clinic Reorganization Transactions,
as the case may be, and will merge with and into PPI, all in accordance with the
terms and conditions set forth in the Reorganization and Merger Agreement.
GOVERNMENT AND REGULATORY APPROVALS
PPI, HealthFirst, Corvallis Clinic and Medford Clinic are aware of no
governmental or regulatory approvals required for the consummation of the
Merger, other than compliance with federal and applicable state securities and
corporate laws, including the declaration of the SEC of the effectiveness of the
Registration Statement relating to this Joint Proxy Statement/Prospectus and the
required transfer of or amendment to licenses and permits of HealthFirst,
Corvallis Clinic or Medford Clinic, as the case may be.
CLOSING AND EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the completion of the filing of a
properly executed Certificate of Merger with the Secretary of State of the State
of Delaware reflecting the Merger, which filings will be made after satisfaction
of certain conditions set forth in the Reorganization and Merger Agreement. See
"Terms of the Reorganization and Merger--Conditions of the Reorganization and
Merger Agreement".
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Due to the benefits to be received by certain individuals who are employees
or directors of HealthFirst, Corvallis Clinic or Medford Clinic in connection
with the Merger, as described below, the interests of these individuals may be
different from the interests of shareholders of the Companies generally.
Shareholders should consider such persons' interests in the Merger in connection
with any such person's recommendation of the Merger.
Upon the Effective Time, it is anticipated that (a) the current directors
and executive officers of HealthFirst will beneficially own approximately four
percent of the outstanding shares of PPI Class A Common Stock and approximately
12% of the outstanding shares of HealthFirst New PC, (b) the current directors
and executive officers of Corvallis Clinic will beneficially own approximately
two percent of the outstanding shares of PPI Class A Common Stock and
approximately nine percent of the outstanding shares of Corvalis Clinic New PC,
and (c) the current directors and executive officers of Medford Clinic
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<PAGE>
will beneficially own approximately three percent of the outstanding shares of
PPI Class A Common Stock and approximately 12% of the outstanding shares of
Medford Clinic New PC.
In anticipation of the consummation of the Merger, each of David M.
Goldberg, M.H.A., Tim E. Dupell, C.P.A., Michael F. Bonazzola, M.D., Jerald W.
Erstgaard, David L. Kobriger and Jon D. Ness has executed an employment
agreement with PPI. The employment agreements of Mr. Goldberg and Mr. Dupell are
currently effective; the employment agreements of Dr. Bonazzola, Mr. Erstgaard
and Mr. Ness become effective at the Effective Time; and Mr. Kobriger's
employment with Corvallis Clinic and anticipated employment with PPI were both
terminated on December 18, 1996. The employment agreements for the respective
executive officers provide as follows:
1. Mr. Goldberg is employed as President and Chief Executive Officer of PPI
for a term of three years. From July 1, 1996 until the Effective Time, Mr.
Goldberg will be paid a base salary at an annual rate of $300,000; from and
after the Effective Time, he will be paid a base salary at an annual rate of
$225,000 and an option to purchase 50,000 shares of PPI Class A Common Stock.
Pursuant to his employment agreement, on October 30, 1996, Mr. Goldberg received
a restricted stock award of 27,000 shares of PPI Class A Common Stock. In the
event Mr. Goldberg's employment is terminated without cause, he shall receive
his base salary and medical, health and accident and disability insurance for a
term of 12 months after the date of such termination. In the event the Merger
fails to occur on or before January 31, 1997, Mr. Goldberg would be entitled to
receive, among other things, severance compensation in the amount of $300,000
and health and disability insurance coverage for 12 months. The obligations of
PPI under the employment agreement with Mr. Goldberg are guaranteed by the
Companies.
2. Mr. Dupell, is employed as Senior Vice President and Chief Financial
Officer of PPI for a term of three years. From July 29, 1996 until the Effective
Time, Mr. Dupell will be paid a base salary at an annual rate of $150,000; at
the Effective Time, Mr. Dupell will receive an option to purchase 35,000 shares
of PPI Class A Common Stock. Pursuant to his employment agreement, on October
30, 1996 Mr. Dupell received a restricted stock award for 27,000 shares of PPI
Class A Common Stock. In the event Mr. Dupell's employment is terminated without
cause, he shall receive his base salary and medical, health and accident and
disability insurance for a term of 12 months after the date of such termination.
In the event the Merger fails to occur on or before January 31, 1997, Mr. Dupell
would be entitled to receive, among other things, severance compensation in the
amount of $150,000 and health and disability insurance coverage for 12 months.
The obligations of PPI under the employment agreement of Mr. Dupell are
guaranteed by the Companies.
3. Dr. Bonazzola, is employed as Senior Vice President and Chief Medical
Officer of PPI for a term of three years. Commencing at the Effective Time, Dr.
Bonazzola will be paid a base salary at an annual rate of $190,000, and receive
a bonus award of $25,000 and an option to purchase 35,000 shares of PPI Class A
Common Stock. In the event Dr. Bonazzola's employment is terminated without
cause, he shall receive his base salary and medical, health and accident and
disability insurance for a term of 12 months after the date of such termination.
In the event the Merger fails to occur on or before January 31, 1997, Dr.
Bonazzola would be entitled to receive, among other things, severance
compensation in the amount of $190,000 and health and disability insurance
coverage for 12 months. The obligations of PPI under the employment agreement of
Dr. Bonazzola are guaranteed by the Companies.
4. Mr. Ness is employed as Senior Vice President of PPI for a term of three
years. Commencing at the Effective Time, Mr. Ness will be paid a base salary at
an annual rate of $175,000 and receive an option to purchase 35,000 shares of
PPI Class A Common Stock. Pursuant to his employment agreement, Mr. Ness
received on October 30, 1996 a restricted stock award for 27,000 shares of PPI
Class A Common Stock. In the event Mr. Ness' employment is terminated without
cause, he shall receive his base salary and medical, health and accident and
disability insurance for a term of 12 months after the date of such termination.
Mr. Ness is not entitled to any severance compensation in the event the Merger
fails to occur.
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<PAGE>
5. Mr. Erstgaard is employed as Senior Vice President of PPI for a term of
three years. Commencing at the Effective Time, Mr. Erstgaard will be paid a base
salary at an annual rate of $132,000 and receive an option to purchase 35,000
shares of PPI Class A Common Stock. In the event Mr. Erstgaard is terminated
without cause, he shall be entitled to receive his base salary and medical,
health and accident and disability insurance for a term of 12 months after the
date of such termination. Mr. Erstgaard is not entitled to any severance
compensation in the event the Merger fails to occur.
6. Mr. Kobriger's employment with PPI was terminated without cause on
December 18, 1996. Under Mr. Kobriger's employment agreement, if the Merger
occurs, Mr. Kobriger will be entitled to receive from PPI his agreed-upon annual
base salary in the amount of $175,000 over a 12-month period and medical, health
and accident and disability insurance for a term of 12 months from the date of
termination.
For further details relating to such benefits and compensation, see "The
Merger and Related Transactions--Interests of Certain Persons in the Merger,"
and "Executive Compensation of PPI-- Employment Agreements and Severance
Arrangements".
The current employment agreements of such executive officers with the
Companies provide no severance or termination payments upon termination of
employment either in anticipation of the consummation of the Merger, or upon
consummation of the Merger.
POTENTIAL ADVERSE CONSEQUENCES TO SHAREHOLDERS
Shareholders of each Company may not have the same rights in PPI as they do
in such Company due to material differences between the provisions of the
articles of incorporation and bylaws of each Company and the Certificate of
Incorporation (the "PPI Certificate") and the Bylaws of PPI (the "PPI Bylaws").
Such material differences include the rights of holders of Old PC Shares, on the
one hand, and the holders of PPI Class A Common Stock, on the other hand. In
addition, such material differences include provisions in the PPI Certificate
and the PPI Bylaws that may have the effect of delaying or preventing a change
of control, including (a) a two-thirds vote requirement (i) for removal of
directors, which may be effected only for cause and (ii) for amending certain
provisions of the PPI Certificate and the PPI Bylaws and (b) a more restrictive
requirement with respect to calling special meetings of shareholders. Similarly,
rights of shareholders of each Company will vary from those in the respective
New PC.
In addition, certain provisions of the PPI Certificate, the PPI Bylaws and
Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of PPI and limit the price that
certain investors might be willing to pay in the future for shares of PPI Class
A Common Stock. These provisions include a staggered board of directors and
authority granted to the PPI Board to authorize the issuance, without further
shareholder approval, of preferred stock with rights and privileges senior to
PPI Common Stock. PPI also is subject to Section 203 of the General Corporation
Law of the State of Delaware ("DGCL"), which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" (the owner of 15% or
more of the then outstanding shares of PPI Common Stock) for a period of three
years following the date that such stockholder became an interested stockholder.
See "The Merger and Related Transactions--Rights of Security Holders."
CONDITIONS OF THE PC REORGANIZATION TRANSACTIONS AND THE MERGER
Conditions to the closing of the Reorganization and Merger Agreement
include, but are not limited to, the following:
1. The requisite number of shareholders of each of HealthFirst, Corvallis
Clinic and Medford Clinic shall have approved the Reorganization and
Merger Agreement and all of the transactions contemplated thereby;
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2. The SEC shall have declared the Registration Statement effective;
3. There shall be issued no preliminary or permanent injunction or other
order by any federal, state or foreign court which prohibits the
consummation of the transactions;
4. PPI and the Companies shall have taken all necessary action to adopt the
PPI Incentive Compensation Plans;
5. PPI shall have adopted a rights agreement for a dividend distribution of
one right to purchase a certain number of shares of a class of preferred
stock of PPI for each share of PPI Common Stock;
6. PPI and each of the Companies shall have received the opinion of
counsel, with such assumptions and qualifications as are reasonably
satisfactory to the Companies, based on certificates of officers of the
Companies as requested by counsel, to the effect that the Merger will,
more likely than not, be treated for federal income tax purposes as a
tax-free transaction;
7. Each New PC shall have obtained all material approvals, licenses,
provider numbers and other items to operate and receive reimbursement
after the effectiveness of the Merger;
8. The respective Restated Articles of Incorporation of the Companies shall
have been made effective and the PC Reorganization Transactions shall
have been consummated in accordance with Oregon Law;
9. Each Company shall have entered into a New PC Management Agreement with
such Company's New PC;
10. The aggregate number of shares held by the shareholders of any Company
dissenting from the Merger shall not exceed 15% of all issued and
outstanding capital stock of such Company; and
11. PPI and the Companies shall have entered into an escrow agreement with
an escrow agent reasonably acceptable to PPI and the Companies.
TERMINATION OF THE PC REORGANIZATION TRANSACTIONS AND THE MERGER
The Reorganization and Merger Agreement may be terminated prior to the
Effective Time upon certain occurrences, including, without limitation, the
following:
1. Written consent of all of the parties;
2. An uncured or uncurable material breach;
3. A determination by the Board of Directors of any party not to recommend
the Reorganization and Merger Agreement, the HealthFirst Reorganization
Proposal, the Corvallis Clinic Reorganization Proposal or the Medford
Clinic Reorganization Proposal, as the case may be, or the Merger
Proposal or withdrawal of a recommendation or resolution to do any of the
foregoing;
4. Any court order, decree or ruling or other action restraining or
prohibiting any of the HealthFirst Reorganization Transactions, the
Corvallis Clinic Reorganization Transactions or the Medford Clinic
Reorganization Transactions, or the Merger;
5. Written notice by any party to the other parties if approval of the
shareholders of such party shall not have been obtained as required; and
6. The Effective Time has not occurred on or before January 31, 1997.
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CLOSING AND EFFECTIVE TIME OF THE PC REORGANIZATION TRANSACTIONS AND THE MERGER
The Effective Time will occur upon the completion of the filing of a
properly executed Certificate of Merger with the Secretary of State of the State
of Delaware reflecting the merger of the Companies with and into PPI, which
filing will be made after satisfaction of certain conditions set forth in the
Reorganization and Merger Agreement, including approval by the shareholders of
each Company. See "The Merger and Related Transactions--Closing and Effective
Time of the Merger" below.
EFFECT OF MERGER ON NEW OPTIONS
None of the Companies currently has any options outstanding. The
Reorganization and Merger Agreement contemplates that each of the Companies
will, prior to the consummation of the Merger, adopt a stock option plan for
certain of its employees and issue options to purchase HealthFirst Class A
Shares, Corvallis Clinic Class B Stock and Medford Clinic Common Stock
(collectively, the "New Options"). New Options will be assumed by PPI and
converted into rights to a number of shares of PPI Class A Common Stock equal to
the number of shares subject to the New Options multiplied by the applicable
exchange ratio for the underlying shares of HealthFirst Class A Shares,
Corvallis Clinic Class B Stock or Medford Clinic Common Stock. The exercise
price per share of an option to buy PPI Class A Common Stock will equal the
former exercise price per share under the New Options divided by the applicable
exchange ratio.
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The HealthFirst Board has unanimously approved the HealthFirst
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal and determined that the Merger is fair to, and in the best
interests of, the shareholders of HealthFirst.
The material factors considered by the HealthFirst Board in reaching its
decision were the following: (i) the ability to realize cost savings; (ii) a
significant base of geography and equity that would result in an enhanced
ability to obtain capital; (iii) the broader geographic coverage and improved
access for patients of HMOs and larger purchaser groups offered by PPI; (iv) the
ability to provide better clinical care for patients; (v) the ability to
transfer employees among locations without losing seniority or benefits; (vi)
fair merger consideration to the shareholders of HealthFirst; and (vii) the
exchange of HealthFirst shares for shares of PPI Class A Common Stock on a
tax-free basis. Such factors outweighed the concerns over (a) the recent
operating losses of Corvallis Clinic (b) the fear that the formation of PPI
would attract greater competition from other physician practice management
companies and hospitals in the same service areas and (c) uncertainty regarding
the ability of the PPI management team to manage effectively. ACCORDINGLY, THE
HEALTHFIRST BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE HEALTHFIRST
REORGANIZATION PROPOSAL, THE MERGER PROPOSAL AND THE PPI INCENTIVE COMPENSATION
PLANS PROPOSAL BY ITS SHAREHOLDERS.
The Corvallis Clinic Board has unanimously approved the Corvallis Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal and determined that the Merger is fair to, and in the best
interests of, the shareholders of Corvallis Clinic.
The material factors considered by the Corvallis Clinic Board in reaching
its decision were the following: (i) a significantly better chance of acquiring
capital for the future through PPI than as Corvallis Clinic alone; (ii) the
ability to share strengths and management expertise with the other Companies;
(iii) the ability to transfer employees among offices without losing seniority
or benefits; (iv) significantly better merger consideration to the shareholders
of Corvallis Clinic than any other alternative; (v) the exchange of Corvallis
Clinic shares for shares of PPI Class A Common Stock on a tax-free basis; (vi)
fairness of Merger consideration to the shareholders of Corvallis Clinic and
(vii) the exchange of Corvallis Clinic shares for shares of PPI Class A Common
Stock on a tax-free basis. Potential negative factors considered by the
Corvallis Clinic Board included (a) apprehension that acquisitions by PPI in
surrounding service areas could limit Corvallis Clinic's growth and (b) the
impact of losing the services of
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certain key personnel to PPI. Such considerations were outweighed by the
positive factors. ACCORDINGLY, THE CORVALLIS CLINIC BOARD UNANIMOUSLY RECOMMENDS
APPROVAL OF THE CORVALLIS CLINIC REORGANIZATION PROPOSAL, THE MERGER PROPOSAL
AND THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL BY ITS SHAREHOLDERS.
The Medford Clinic Board has unanimously approved the Medford Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal and determined that the Merger is fair to, and in the best
interests of, the shareholders of Medford Clinic.
The material factors considered by the Medford Clinic Board in reaching its
decision were the following: (i) the need for additional capital to fund the
expansion of both the provider base and the supporting facilities; (ii)
economies of scale in sharing costs and benefits of infrastructure; (iii) solid
geographic coverage with HealthFirst and Corvallis Clinic; (iv) a potential
opportunity to access public capital and other sources; (v) fairness of Merger
consideration to the shareholders of Medford Clinic; and (vi) the exchange of
Medford Clinic shares for shares of PPI Class A Common Stock on a tax-free
basis. Among the concerns reviewed by the Medford Clinic Board were (a) the
recent operating losses incurred by Corvallis Clinic and (b) potential
disruption of Medford Clinic's relationships with payors and hospitals due to
possible actions by PPI. The Medford Clinic Board determined that such concerns
were far outweighed by the advantages enumerated in (i) through (vi).
ACCORDINGLY, THE MEDFORD CLINIC BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE
MEDFORD CLINIC REORGANIZATION PROPOSAL, THE MERGER PROPOSAL AND THE PPI
INCENTIVE COMPENSATION PLANS PROPOSAL BY ITS SHAREHOLDERS.
The respective boards of directors of each of the Companies also determined
that the respective FTE of each Company represented a fair and reasonable basis
for allocation of shares of PPI Class A Common Stock to be issued by PPI as
consideration in the Merger. Each such board of directors believed that the
relative economic value of each of the Companies derives from the capacity of
such Company to generate revenues for the combined PPI entity. Each Company's
board of directors determined that such capacity was best measured by reference
to the relative numbers of FTE providers employed thereby. The provisions of the
Reorganization and Merger Agreement requiring the establishment of an escrow of
a certain number of shares of PPI Class A Common Stock deposited by the
shareholders of each of the Companies to be released to the shareholders of such
Company based on the differences in net shareholder equity of the Companies as
reflected on their audited balance sheets as of December 31, 1996 was also
considered significant. Also see "Terms of the Reorganization and Merger--Escrow
Arrangement."
FEDERAL INCOME TAX CONSIDERATIONS
PC REORGANIZATIONS
The PC Reorganization Transactions may be treated as taxable distributions,
with the effect of the creation of taxable income at both the Company and the
shareholder levels. The respective boards of directors of the Companies,
however, did not require opinions from legal counsel with respect to the tax
consequences of the PC Reorganization Transactions. McDermott, Will & Emery,
counsel to PPI and the Companies, has provided a legal opinion to each of the
Companies to the effect that the amount of income produced by a taxable
distribution at both the Company and shareholder levels would be no more than
the fair market value of the property distributed. It is the belief of the
respective boards of directors of the Companies that, based on the terms and
conditions of the New PC Management Agreement between PPI and each New PC and
the limited nature of each New PC's business, each such New PC would have no
more than a nominal value and, therefore, that the New PC Distribution would not
involve material tax exposure to its shareholders. This belief is based on (a)
the limited nature and value of assets that each Company will capitalize each
New PC with in exchange for shares of such New PC and (b) a belief that the
value of the common stock of each New PC is not material because the present
value of the cash flow of
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each such New PC is expected to be not material. Among other reasons, none of
the New PCs are expected to retain any significant earnings or otherwise build
value, as essentially all cash receipts of the New PCs will be paid out as
Manager's Expenses, the management fee, provider compensation and other
expenses. For further information on assets to be held be each New PC, see "The
PC Reorganization Transactions and Related Transactions--Characteristics of the
New PCs."
MERGER
McDermott, Will & Emery, counsel to PPI and the Companies, has, upon the
basis of certain assumed and described facts, rendered an opinion that, for
federal income tax purposes, it is more likely than not that the Merger will
constitute a tax-free transaction. As a tax-free transaction, the Merger would
result in the following general federal income tax consequences: (i) no gain or
loss would be recognized by the shareholders of each of the Companies who
exchange their Old PC Shares for PPI Class A Common Stock pursuant to the
Merger, (ii) the aggregate tax basis of PPI Class A Common Stock received in the
Merger would equal the aggregate tax basis of the Old PC Shares exchanged
therefor, (iii) no gain or loss would be recognized by each of the Companies in
connection with the Merger and (iv) provided that the Old PC Shares are held as
a capital asset at the Effective Time, the holding period of PPI Class A Common
Stock would include the holding period of such Old PC Shares. An opinion of
counsel is not binding on the Internal Revenue Service or the courts. No
assurance can be given that the tax-deferred characterization of the Merger will
not be challenged, or if challenged, will be defended successfully. If the tax
characterization of the Merger is successfully challenged, there would be
significant adverse tax consequences to the Companies and their respective
shareholders. See "Terms of the Reorganization and Merger--Federal Income Tax
Considerations."
ACCOUNTING TREATMENT
Staff Accounting Bulletin ("SAB") 48 indicates that when a company acquires
assets from promoters and shareholders in exchange for stock just prior to or at
the time of its first public offering, such assets should generally be recorded
at the cost to any such promoter or shareholder. Each of the Companies are
involved as promoters of the Merger and the related first-time public
registration of PPI capital stock. Accordingly, the assets and liabilities to be
transferred from the Companies to PPI in the Merger Transactions will be
recorded on the balance sheet of PPI in the same amounts as reflected in the
balance sheets of the Companies at the Effective Time. See "Terms of the
Reorganization and Merger-- Accounting Treatment."
As reflected in the "Unaudited Pro Forma Financial Statements of PPI",
substantially all assets and liabilities reflected on the historic balance
sheets of the Companies are expected to be transferred to PPI. In addition, it
is expected that certain of the intangible assets, contractual commitments and
contingent liabilities of the Companies, which are not set forth on the
Companies' respective balance sheets, would also be transferred to PPI in the
Merger.
DISSENTERS' RIGHTS REGARDING THE MERGER
Holders of record of HealthFirst Class A Shares, Corvallis Clinic Class A
Stock, Corvallis Clinic Class B Stock or Medford Clinic Common Stock who comply
with the applicable procedures under Sections 60.551 through 60.594 of the
Oregon Business Corporation Act will be entitled to receive the fair value of
shares held by such dissenting shareholders. The term "fair value" means the
value of the shares immediately before the consummation of the Merger, excluding
any element of value arising from the consummation or the expectation of the
Merger. Dissenting shareholders have certain rights of appraisal. A dissenting
shareholder must follow the steps specified by Oregon law properly and take
required actions to assert such dissenting shareholder's dissenters' rights.
Dissenting shareholders are urged to consult legal counsel with respect to
dissenters' rights under the Oregon Business Corporation Act. See "Terms of the
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Reorganization and Merger--Dissenter's Rights Regarding the Merger;" "The
HealthFirst Shareholder Meeting;" "The Corvallis Clinic Shareholder Meeting;"
and the "Medford Clinic Shareholder Meeting."
EXCHANGE/ISSUANCE OF STOCK CERTIFICATES IN THE MERGER
No later than the Effective Time, PPI shall make available, and each holder
of the Old PC Shares (other than those shareholders who take required actions to
properly assert their dissenters' rights under the Oregon Business Corporation
Act) will be entitled to receive, upon surrender to PPI of one or more stock
certificates for cancellation, certificates evidencing the number of shares of
PPI Class A Common Stock into which such Old PC Shares are converted in the
Merger. As soon as reasonably practicable after the Effective Time, PPI shall
mail to each holder of record of a certificate or certificates evidencing
outstanding Old PC Shares which were converted into shares of PPI Class A Common
Stock documents for effecting the surrender of such certificates in exchange for
certificates evidencing shares of PPI Class A Common Stock. Cash, without
interest, will be paid in lieu of the issuance of fractional shares of PPI Class
A Common Stock, rounded to the nearest cent, equal to the product of such
fraction multiplied by the fair market value of a share of PPI Class A Common
Stock as of the Effective Time as determined by the PPI Board.
Prior to the Effective Time, each Company shall make available, and each
shareholder of HealthFirst, each holder of Corvallis Clinic Class A Stock and
each shareholder of Medford Clinic (other than those shareholders who take
required actions to properly assert their dissenters' rights under the Oregon
Business Corporation Act) will be entitled to receive, a stock certificate
evidencing one share of common stock of the respective New PC pursuant to the
applicable New PC Distribution.
SUMMARY FINANCIAL DATA OF THE COMPANIES, PPI AND NEW PCS
The following summary financial information for the Companies does not
represent the financial position of PPI, the entity whose securities are being
exchanged pursuant to the Reorganization and Merger Agreement as described in
this Joint Proxy Statement/Prospectus. The financial information herein is
provided to show the past operations of each of the Companies which will pay
management fees to PPI under the New PC Management Agreements. The summary
financial data for the years ended December 31, 1993, 1994 and 1995 and for the
nine-month periods ended September 30, 1995 and 1996, respectively, regarding
HealthFirst and Medford Clinic and for the years ended November 30, 1993, 1994
and 1995 and the ten-month periods ended September 30, 1995 and 1996 regarding
Corvallis Clinic have been derived from, and should be read in conjunction with,
the financial statements and related notes of the individual Companies included
elsewhere in this Joint Proxy Statement/Prospectus.
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SUMMARY FINANCIAL DATA OF HEALTHFIRST MEDICAL GROUP, P.C.
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
------------------------------- --------------------
SUMMARY OF OPERATIONS DATA: 1993 1994 1995 1995 1996(1)
- --------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net Revenue Less Provider Compensation and Benefits...... $ 18,120 $ 23,901 $ 28,122 $ 19,131 $ 25,337
Operating Expenses....................................... 15,963 20,648 27,593 18,919 22,440
Net Income (Loss)........................................ 1,314 1,938 292 107 (4,639)(2)
<CAPTION>
AS OF DECEMBER 31 AS OF SEPTEMBER 30
------------------------------- --------------------
BALANCE SHEET DATA: 1993 1994 1995 1995 1996(1)
- --------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Working Capital (Deficit)................................ 1,882 1,961 (1,507) (739) (6,195)
Total Assets............................................. 11,742 16,848 21,075 18,726 29,868
Long Term Debt, net...................................... 2,223 1,731 3,711 2,935 3,911
Capital Leases and Direct Financing Obligations,
net(3)................................................. -- -- -- -- 4,167
Shareholders' Equity..................................... 5,344 7,253 7,597 7,404 1,977
<CAPTION>
AS OF DECEMBER 31 AS OF SEPTEMBER 30
------------------------------- --------------------
SUMMARY OF OPERATIONS HISTORY: 1993 1994 1995 1995 1996(1)
- --------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Number of:
Providers................................................ 60 72 105 86 145
Clinical Sites........................................... 5 6 7 6 11
Capitated Lives.......................................... 16,431 20,186 23,661 20,176 44,559
</TABLE>
- ------------------------
(1) Includes Suburban which was acquired in February, 1996.
(2) Includes a charge of $3.9 million relating to a Deferred Compensation Plan
enacted in 1996 as discussed further in footnote 8 to the financial
statements.
(3) Represents direct financing lease obligations and capital lease obligations
with a related party.
20
<PAGE>
SUMMARY FINANCIAL DATA OF THE CORVALLIS CLINIC, P.C.
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE TEN MONTHS
FOR THE YEAR ENDED NOVEMBER 30 ENDED SEPTEMBER 30
------------------------------- --------------------
SUMMARY OF OPERATIONS DATA: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net Revenue Less Provider Compensation and Benefits........ $ 22,817 $ 21,615 $ 25,965 $ 20,879 $ 25,841
Operating Expenses......................................... 20,159 22,334 27,779 21,461 24,928
Net Income (Loss).......................................... 1,180 (1,277) (2,107) (1,117) 73
<CAPTION>
AS OF NOVEMBER 30 AS OF SEPTEMBER 30
------------------------------- --------------------
BALANCE SHEET DATA: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Working Capital (Deficit).................................. 1,666 (296) (1,251) 94 (934)
Total Assets............................................... 21,697 21,808 26,549(1) 26,111 26,894
Long Term Debt, net........................................ 8,374 8,310 729(1) 463 1,549
Capital Leases and Direct Financing Obligations, net....... 245 155 14,258(1) 14,629 14,026
Redeemable Stocks and Accumulated Deficit.................. 5,251 4,329 2,316 3,823 1,437
<CAPTION>
AS OF NOVEMBER 30 AS OF SEPTEMBER 30
------------------------------- --------------------
SUMMARY OF OPERATIONS HISTORY: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Number of:
Providers.................................................. 82 82 95 88 86
Clinical Sites............................................. 7 7 7 7 8
Capitated Lives............................................ 20,031 23,457 28,487 26,815 28,724
</TABLE>
- ------------------------
(1) In June 1995, Corvallis Clinic contributed property and related notes
payable to HealthCare Partners, LLC. Corvallis Clinic recorded a direct
financing lease obligation representing the underlying obligations assumed
by HealthCare Partners, LLC as part of the transaction (see footnote 12 of
the financial statements).
21
<PAGE>
SUMMARY FINANCIAL DATA OF MEDFORD CLINIC, P.C.
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
------------------------------- --------------------
SUMMARY OF OPERATIONS DATA: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net Revenue Less Provider Compensation and Benefits........ $ 16,065 $ 23,079 $ 27,727 $ 20,012 $ 21,716
Operating Expense.......................................... 15,805 22,457 26,277 19,020 21,893
Net Income (Loss).......................................... 84 192 652 404 (174)
<CAPTION>
AS OF DECEMBER 31 AS OF SEPTEMBER 30
------------------------------- --------------------
BALANCE SHEET DATA: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Working Capital............................................ 2,511 2,838 3,053 3,138 1,828
Total Assets............................................... 10,969 14,534 15,245 16,387 16,162
Long Term Debt, net........................................ 3,128 5,459 4,932 5,090 4,184
Shareholders' Equity....................................... 2,322 2,514 3,166 2,918 2,356
<CAPTION>
AS OF DECEMBER 31 AS OF SEPTEMBER 30
------------------------------- --------------------
SUMMARY OF OPERATIONS HISTORY: 1993 1994 1995 1995 1996
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Number of:
Providers 64 72 71 68 73
Clinical Sites............................................. 7 9 9 9 9
Capitated Lives............................................ 2,531 3,993 7,144 7,654 8,529
</TABLE>
22
<PAGE>
The following summary pro forma financial data of PPI and the New PCs
assumes that the PC Reorganization Transactions and the Merger Transactions
described in this Joint Proxy Statement/ Prospectus had previously occurred. The
summary of operations data assumes these transactions had taken place as of
January 1, 1995, and the summary balance sheet data assumes the transactions
were completed as of September 30, 1996.
These summary pro forma financial data have been derived from the unaudited
pro forma condensed financial statements of PPI and the New PCs and related
assumptions deemed appropriate by PPI's management as included elsewhere in this
Joint Proxy Statement/Prospectus. This summary financial data may not be
indicative of actual results if the transactions had occurred on the dates
indicated or which may be realized in the future. Neither expected benefits and
cost reductions anticipated from the Merger nor future corporate costs of PPI
have been reflected in such summary pro forma financial data.
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA OF PHYSICIAN PARTNERS, INC. AND THE
NEW PCS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
Physician Partners, Inc. DECEMBER 31 SEPTEMBER 30
- -------------------------------------------------------------------------------- ------------ ------------------
SUMMARY OF OPERATIONS DATA: 1995 1996
------------ ------------------
<S> <C> <C>
Net Revenue Less Provider Compensation and Benefits............................. $ 101,059 $ 85,512
Operating Expenses.............................................................. 94,419 80,297
Net Income...................................................................... 2,486 1,882
<CAPTION>
AS OF SEPTEMBER
BALANCE SHEET DATA: 30, 1996
------------------
<S> <C> <C>
Total Assets.................................................................... 72,927
Long Term Debt, net............................................................. 9,644
Capital Leases and Direct Financing Obligations, net............................ 18,193
Stockholders' Equity............................................................ 5,773
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
HealthFirst New PC DECEMBER 31, SEPTEMBER 30
- -------------------------------------------------------------------------------- ------------ ------------------
SUMMARY OF OPERATIONS DATA: 1995 1996
------------ ------------------
<S> <C> <C>
Net Revenue Less Provider Compensation and Benefits............................. $ 42,576 $ 34,977
Management Fee.................................................................. 42,576 34,977
Net Income...................................................................... 0 0
<CAPTION>
Corvallis Clinic New PC
- --------------------------------------------------------------------------------
SUMMARY OF OPERATIONS DATA:
<S> <C> <C>
Net Revenue Less Provider Compensation and Benefits............................. 29,848 27,099
Management Fee.................................................................. 28,848 27,099
Net Income...................................................................... 0 0
<CAPTION>
Medford Clinic New PC
- --------------------------------------------------------------------------------
SUMMARY OF OPERATIONS DATA:
<S> <C> <C>
Net Revenue Less Provider Compensation and Benefits............................. 28,635 23,436
Management Fee.................................................................. 28,635 23,436
Net Income...................................................................... 0 0
</TABLE>
23
<PAGE>
EQUIVALENT PER COMMON SHARE DATA
The following table sets forth selected historical common share data for
HealthFirst, Corvallis Clinic, Medford Clinic and PPI, pro forma data per share
of PPI Class A Common Stock, and pro forma equivalent data per share for
HealthFirst, Corvallis Clinic, and Medford Clinic. The pro forma equivalent data
for HealthFirst, Corvallis Clinic and Medford Clinic are based on the historical
amounts per share divided by the minimum and maximum merger consideration
ratios. The data should be read in conjunction with the financial statements and
notes thereto of the respective entities set forth elsewhere in this Joint
Prospectus/Proxy Statement, and such data is qualified in its entirety by
reference thereto.
<TABLE>
<CAPTION>
DECEMBER 31(5) SEPTEMBER 30(5)
-------------- ---------------
HEALTHFIRST 1995 1996
- ------------------------------------------------------------------------------ -------------- ---------------
<S> <C> <C>
Net Income (Loss) Per Share:
Historical.................................................................. $ 55.05 $ (679.69)(2)
Pro Forma Equivalent........................................................
Minimum................................................................... .21 (2.68)(2)
Maximum................................................................... .16 (1.99)(2)
Book Value Per Share at Period End:(1)
Historical.................................................................. -- 247.12(2)
Pro Forma Equivalent........................................................ --
Minimum................................................................... -- 0.94(2)
Maximum................................................................... -- 0.70(2)
CORVALLIS
- ------------------------------------------------------------------------------
Net Income (Loss) Per Share:
Historical.................................................................. (239.69) (3.59)
Pro Forma Equivalent........................................................
Minimum................................................................... (1.15) 0.04
Maximum................................................................... (0.86) 0.03
Book Value Per Share at Period End:(1)
Historical.................................................................. -- (70.48)
Pro Forma Equivalent........................................................ --
Minimum................................................................... -- 0.79
Maximum................................................................... -- 0.59
MEDFORD
- ------------------------------------------------------------------------------
Net Income (Loss) Per Share:
Historical.................................................................. 11,535.31 (3,106.82)
Pro Forma Equivalent........................................................
Minimum................................................................... 0.50 (0.13)
Maximum................................................................... 0.37 (0.10)
Book Value Per Share at Period End:(1)
Historical.................................................................. -- 42,070.75
Pro Forma Equivalent........................................................ --
Minimum................................................................... -- 1.81
Maximum................................................................... -- 1.34
PPI
- ------------------------------------------------------------------------------
Net Income (Loss) Per Share:
Historical(3)............................................................... -- 642.33
Pro Forma Equivalent(4)..................................................... 0.46 0.32
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31(5) SEPTEMBER 30(5)
-------------- ---------------
PPI 1995 1996
- ------------------------------------------------------------------------------ -------------- ---------------
<S> <C> <C>
Book Value Per Share at Period End:(1)
Historical(3)............................................................... -- 1.00
Pro Forma Equivalent(4)..................................................... -- 0.92
</TABLE>
- ------------------------
(1) Book value per share at period-end is included for period-end date specified
(September 30, 1996) in accordance with SEC rules.
(2) In February, 1996, HealthFirst acquired the stock of Suburban Medical
Clinic. HealthFirst financial information for the nine months ended
September 30, 1996 includes pro forma combined income data as if this
acquisition had occurred at the beginning of the period. In addition,
September 30, 1996 results include a non-recurring charge of $3.9 million
relating to a Deferred Compensation Plan enacted in 1996 as discussed
further in Footnote 8 to the Financial Statements.
(3) Historical data for PPI represents the period from its inception to the
period-end date noted.
(4) Pro forma data for PPI is included only for periods specified (year ended
December 31, 1995 and nine months ended September 30, 1996) in accordance
with SEC rules.
(5) Corvallis Clinic results are for the ten months ended September 30, 1996 and
as of November 30, 1995. HealthFirst, Medford Clinic and PPI results are for
the nine months ended September 30, 1996 and as of December 31, 1995.
25
<PAGE>
The information utilized to determine pro forma equivalent per share data on
the basis of the minimum and maximum merger consideration ratio is summarized
below.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
HealthFirst:
Net Income (Loss) $ 291,766 $ (4,804,900)
Net Book Value $ 1,976,927
PPI Equivalent Shares:
Average During Period
Minimum 1,393,900 1,794,975
Maximum 1,876,200 2,416,050
End of Period
Minimum 2,104,000
Maximum 2,832,000
Corvallis:
Net Income (Loss) $ (2,107,179) $ 73,246
Net Book Value $ 1,436,745
PPI Equivalent Shares:
Average During Period
Minimum 1,835,762 1,829,847
Maximum 2,461,582 2,455,667
End of Period
Minimum 1,824,502
Maximum 2,450,340
Medford:
Net Income (Loss) $ 651,745 $ (173,982)
Net Book Value $ 2,355,962
PPI Equivalent Shares:
Average During Period
Minimum 1,314,699 1,303,064
Maximum 1,771,953 1,756,272
End of Period
Minimum 1,303,064
Maximum 1,756,272
PPI:
Net Income (Loss) $ 2,486,000 $ 1,882,000
Net Book Value $ 5,772,634
PPI Equivalent Shares:
Average During Period 5,435,426 5,885,553
End of Period 6,242,108
</TABLE>
26
<PAGE>
RISK FACTORS
THE FOLLOWING FACTORS, IN ADDITION TO THOSE DISCUSSED ELSEWHERE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING
THE MERGER AND REORGANIZATION TRANSACTIONS AND THE RECEIPT BY THE COMPANIES'
SHAREHOLDERS OF SHARES OF PPI CLASS A COMMON STOCK AND SHARES OF COMMON STOCK,
NO PAR VALUE, OF EACH APPLICABLE NEW PC IN CONNECTION THEREWITH.
LACK OF COMBINED OPERATING HISTORY; NEW COMPANY
Upon the consummation of the Merger, PPI will be conducting medical group
management operations that previously have been conducted individually by the
respective Companies. Because PPI does not have an independent operating
history, its performance as a newly combined entity is uncertain. There can be
no assurance that PPI will not encounter difficulties in integrating the
operations of the Companies, that the benefits from such integration will be
realized or that the operations, systems and personnel of the Companies will be
compatible. For example, there can be no assurance that PPI will achieve desired
levels of efficiencies and cost savings as a result of the combination of the
Companies. Furthermore, any material delays or unexpected costs incurred in
connection with such integration of management operations also could have a
material adverse effect on PPI.
PPI'S DEPENDENCE ON NEW PCS
PPI's revenue will depend substantially on revenue generated by HealthFirst
New PC, Corvallis Clinic New PC and Medford Clinic New PC and any other medical
groups with which PPI enters into a practice management agreement in the future.
Under the New PC Management Agreements, PPI, as the manager, will provide
management and administrative services, facilities and equipment to each
respective New PC and, as compensation for its services, PPI will be entitled to
receive (a) reimbursement of all Manager's Expenses (as defined below) incurred
by PPI plus (b) 16% of the Distributable Profit Amount of such New PC.
"Distributable Profit Amount" is defined as (i) gross revenues, booked on an
accrual basis and subtracting specified contractual allowances and bad debt,
received by PPI or such New PC relating to services provided by such New PC,
less (ii) Manager's Expenses. Each New PC will be responsible for provider
compensation and benefits. The term "Manager's Expenses" is defined in the New
PC Management Agreement to mean the actual cost of all operating and
non-operating expenses incurred by PPI in the operation of each respective New
PC's medical offices. Any allocation of costs (as opposed to a pass-through of
actual direct costs incurred by PPI, for which PPI shall be reimbursed in full)
by PPI to each respective New PC shall require approval of the joint management
board (composed of PPI and the applicable New PC representatives) of the
proposed cost allocation for a defined period of time prior to implementation of
the function for which a cost allocation is proposed. "Manager's Expenses"
expressly will not include any corporate overhead charges of PPI (other than as
expressly agreed to in the New PC Management Agreement), federal or state income
taxes of PPI or the New PC, any expenses which are expressly designated as
obligations to be assumed solely by PPI, and any amortization expense resulting
from the amortization of costs in connection with the execution of the New PC
Management Agreement. Each New PC Management Agreement will have a term of 40
years. Any loss of revenue by any or all of the New PCs could have a material
adverse effect on PPI. The termination of any of the New PC Management
Agreements also could have a material adverse effect on PPI.
PPI will rely on providers of each New PC to provide sufficient provider
coverage to meet payor requirements. Pursuant to each New PC Management
Agreement, the New PC will be bound to agree to provide all required medical
services under each contract entered into with payors that is approved by the
New PC. There is no assurance that PPI, through the New PCs and any future
PPI-managed medical groups, will be able to arrange for the provision of
sufficient primary care and specialty services to retain existing contracts with
payors, obtain additional contracts with health plans and other payors or be
assigned additional members under existing health plan contracts.
27
<PAGE>
Furthermore, there is no assurance that PPI's relations with health plans
and other payors after the consummation of the Merger would be on the same terms
as the relations of the individual Companies with such payors before the Merger.
Likewise, it is possible that relations with patients could be affected by the
Merger, but this is not likely since the New PCs will operate in the same
locations and employ the same providers (other than physicians who exercise
their dissenters' rights and elect to terminate their employment by the
Companies) as the Companies do prior to the effectiveness of the Merger.
If one or more of the New PCs were to suffer significant losses of
physicians to retirement, competitors or for other reasons, the ability of the
New PCs to provide services to assigned patients could be materially affected.
Many of the providers currently employed by the Companies and who will be
employed by the New PCs after the Merger will not be restricted from competing
with the New PCs or PPI after any termination of such providers' employment;
hence, there is no assurance that such providers will not compete with the New
PCs or PPI. Furthermore, there is no assurance that providers who will be
subject to a covenant not to compete by their employing New PC will not relocate
to a different market or that such covenant not to compete will not be subjected
to legal challenge by any such providers. The New PC Management Agreements will
contain provisions that require liquidated damages payments by the respective
New PCs to PPI if, among other things, a provider of such New PC engages in
certain competitive behavior with the New PC. While each New PC may seek
indemnification from its providers under provisions of their employment
agreements or shareholder agreements, significant provider defections from one
or more of the New PCs and/or competition by such providers against the New PCs
nevertheless could have a material adverse effect on PPI.
IMPACT OF NEW PC MANAGEMENT AGREEMENTS ON PROVIDER COMPENSATION AND BENEFITS
The New PC Management Agreements provide that each New PC managed by PPI,
out of revenues attributable thereto, will make disbursements of funds to PPI as
reimbursement for certain enumerated costs incurred on behalf of the New PC and
then for its management fee. The New PC will be required to cover certain of its
other operating costs (comprised mostly of provider compensation and benefits)
out of the residual amount. During certain periods in the past, the Companies
have incurred expenses (including provider compensation and benefits) in excess
of their respective revenues. The New PC Management Agreements will limit the
ability of the New PCs to pay out of revenues provider compensation and benefits
in excess of actual revenues. Moreover, subsequent to the Merger, the ability of
the New PCs to obtain financing in order to subsidize provider compensation may
be limited.
If the New PC Management Agreements had been in effect (and assuming no
reduced costs or enhanced revenues, or other synergies from the Merger), the
aggregate amounts available to the Companies for provider compensation and
benefits would have been reduced by $4,436,000, $6,066,000 and $5,743,000 in the
1993, 1994 and 1995 calendar years, respectively, and $4,336,000 for the
nine-month period ended September 30, 1996. See "PPI Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Unaudited Pro
Forma Condensed Financial Statements of PPI, Including Notes Thereto."
IMPACT OF CERTAIN RESTRICTIONS ON PROVIDERS OF NEW PCS
The New PC Management Agreements contain provisions calling for the payment
by the New PCs to PPI of certain liquidated damages in the event that certain
physicians and other specified providers employed by such New PC with respect to
which such New PC is bound, engage in any of the following activities: (a)
competition against the New PC during the term of employment or for 18 months
thereafter within a specified geographic area, (b) disclosing or
misappropriating confidential information or trade secrets of the New PC or PPI
and (c) soliciting employees of the New PC or PPI to leave such employment. See
"Operation, Management and Business of PPI Following the Merger--Practice
Management Agreement" for a detailed description of such restrictions. The New
PCs will be required to restrict such activities of their respective providers
and will be required to pay liquidated damages in certain amounts to
28
<PAGE>
PPI if a provider who is required to be subject to any such restriction violates
any such restriction (whether or not the provider's employment agreement with
the New PC in fact includes such restrictions).
Providers who take prohibited actions generally will be required to
indemnify the New PC for the New PC's liability to PPI as a result of such
providers' prohibited actions. The New PCs will enter into new or amended
agreements with providers who are required under the New PC Management
Agreements to be bound by any of the above restrictions, which agreements will
restrict providers from taking the prohibited actions. Under the terms of such
agreements, the New PCs will generally seek to recover from any provider who
engages in a prohibited action liquidated damages in an amount equal to the
amount of liquidated damages that the New PC will owe to PPI as a result of such
provider's actions. With respect to a violation by a provider of a covenant not
to compete with the New PC and the covenant not to disclose or misappropriate
proprietary information, the provider generally would be liable to the New PC
for each such violation in an amount equal to one-half of such provider's gross
compensation from the New PC during the previous full fiscal year. In addition,
with respect to a violation of the nonsolicitation provision, a breaching
provider generally would be liable to the New PC for an amount equal to one
year's salary of any employee solicited by the provider to leave such employee's
employment with the New PC or PPI. Apart from the liquidated damages provisions
that will apply to a provider who violates an applicable covenant not to
compete, a provider who is subject to such a covenant will be prohibited from
competing with the New PC and PPI during the period of time and in the
geographic area specified in the covenant not to compete. Only if such
restriction is violated will any monetary payment be due to the New PC. The
existence of the above restrictions on certain providers is a material
limitation on the ability of such providers to, among other things, practice in
the same community as the New PC if the employment of such providers by their
employing New PCs were to terminate.
RECENT OPERATING LOSSES OF CERTAIN COMPANIES
Each of the Companies has experienced recent operating losses. Corvallis
Clinic incurred operating losses of $1,277,000 and $2,107,000 in its fiscal
years ended November 30, 1994 and November 30, 1995, respectively. HealthFirst
has experienced a loss of $4,639,000, and Medford Clinic had a loss of $174,000,
for the nine-month period ended September 30, 1996. There can be no assurance
that the New PCs will not experience similar operating losses.
RISKS RELATED TO CAPITATION
The Companies receive significant revenue related to agreements with HMOs
that typically provide for the payment of fees on a capitated or per member per
month ("PMPM") basis. Under such agreements, the Companies are responsible for
providing or arranging for the provision of covered benefits to the applicable
HMO members. Depending on the amount and cost of services required by members,
PMPM capitation payments may be insufficient to cover such costs of services,
thereby adversely affecting the Companies' operating results. It is sometimes
necessary for the Companies to refer a member to an external provider in order
to arrange for the provision of certain covered services. Each Company has
contracted with a number of providers in order to ensure access to all covered
services. Each Company is obligated to pay the cost of such external services
and carries estimates in its financial statements related to the charges for
these services which have been incurred but not reported ("IBNR") to the
Company. While each Company estimates IBNR amounts based upon historical
experience, there can be no assurance that actual charges incurred will not
exceed such estimates.
REDUCTION IN THIRD-PARTY PAYOR REIMBURSEMENT
The Companies render services to certain patients on a fee-for-service basis
(as opposed to a capitated basis), and bill third-party payors such as private
insurance carriers, Medicare and Medicaid. A significant portion of each
Company's revenue is derived from payments made by these third-party payors.
Such third-party payors are increasingly negotiating for lower prices charged
for medical services with the goal of lowering reimbursement. In addition,
third-party payors can deny reimbursement if they determine that
29
<PAGE>
treatment was not performed in accordance with the cost-effective treatment
methods established by such payors or for other reasons. There can be no
assurance that payment levels under these third-party contracts will remain at
present levels. Any loss of revenue related to third-party payors could have a
material adverse effect on a New PC's or PPI's operating results.
CONCENTRATION OF PAYORS
Six health plans, Secure Horizons, PacifiCare, Blue Cross/Blue Shield of
Oregon, HMO Oregon, Select Care and Oregon Health Plan, accounted for
approximately 37% of the combined net revenue of the Companies for the six
months ended June 30, 1996. The agreements with such health plans are generally
for one-year terms and are thus subject to annual negotiation of rates, covered
benefits and other terms and conditions. In addition, certain of such contracts
with payors are terminable without cause upon prior notice to the Company. There
can be no assurance that such agreements will be renewed or that they will
contain favorable terms. Given this concentration of payors, the loss of any of
the above health plans could have a material adverse effect on PPI.
GROWTH STRATEGY; CAPITAL REQUIREMENTS
The implementation of PPI's growth strategy will depend largely on its
ability to successfully manage the New PCs, under the New PC Management
Agreements, and develop new physician practice management relationships through
acquisitions or other means.
PPI's success in effectively managing the New PCs will be measured, to a
great extent, by its (a) expansion of the number of fee-for-service patients and
prepaid health plan patients, (b) management and control of costs, (c)
realization of economies of scale and (d) effective negotiation of existing and
new health plan contracts. The growth in numbers of fee-for-service and health
plan enrollees using PPI-managed medical groups for their medical care may come
from the development or acquisition of medical groups serving enrollees in
existing or new markets, increased enrollment in health plans currently
contracting with PPI or PPI's managed medical groups or contracts with new
health plans. There can be no assurance that PPI or PPI-managed medical groups
will experience such patient growth. Any failure by PPI to implement
economically feasible management relationships with the New PCs and any other
medical groups it may manage in the future could result in failure to meet such
objectives, and thereby have a material adverse effect on PPI.
In light of its growth strategy, PPI will be subject to various risks
associated with any acquisition-oriented business, including the risk that PPI
will be unable to identify and recruit suitable acquisition candidates in the
future or to successfully integrate or manage affiliated medical groups.
Furthermore, there can be no assurance that PPI will be able to maintain and
develop a system of business management to support future growth.
PPI's expansion strategy also requires substantial capital investment.
Capital is needed not only for the acquisition of medical groups, but also for
the effective integration, operation and expansion of acquired medical groups,
information systems maintenance and improvements. Acquired medical groups may
require capital for renovation and expansion. In addition, newly-managed medical
groups may not have been financially successful under prior management, and
there is no assurance that PPI will be able to improve the performance of such
practices to make them profitable.
PPI will operate in a capital intensive industry that faces external
pressures to contain costs and reduce fees. PPI may not be in a position to
maintain adequate liquidity to respond to further expected and unexpected
industry pressures. PPI will depend in large part upon cash flow from operations
to satisfy its financial obligations. If cash provided by operations is not
sufficient, PPI may experience difficulty in meeting its obligations to vendors,
lessors and other creditors, which could have a material adverse effect on PPI.
PPI might raise capital through the incurrence of long-term or short-term
indebtedness (which could result in increased interest and amortization expense
and decreased income to fund future expansion) or the issuance of equity
securities in private or public transactions (which would result in the dilution
30
<PAGE>
of the equity positions of then-current PPI shareholders). There can be no
assurance that acceptable financing for future acquisitions can be obtained.
COMPETITION
In general, both the physician management industry and the health care
provider industry are highly competitive. The Companies individually have
significant experience and generally successful operating histories with respect
to operating their respective medical practices in the greater Portland,
Corvallis and Medford areas. However, the Companies have not previously
operated, as a physician practice management company, on a combined basis in
competition with other entities that provide medical practice management
services. Some established physician practice management companies in Oregon
currently provide some or all of the services that will be provided by PPI.
There is no assurance that PPI will succeed in competing with such competitors.
Competition in the provision of medical services in the markets where PPI
will operate also comes from an increasing variety of providers who are in or
have recently entered the physician provider business (E.G., other group
practices, hospital systems, IPAs, HMOs, and academic medical centers). In the
three markets presently served by the Companies, hospital systems employ primary
care physicians who will compete directly against the PCs. While PPI will seek
to acquire groups with significant market presence, there can be no assurance
that PPI or the New PCs can successfully compete with other provider
competitors.
With respect to physician practice management companies, only two,
MedPartners/Mullikin, Inc. ("MedPartners") and American Oncology Resources
("AORI"), have a presence in any of the markets currently served by the
Companies. Both of these publicly traded PPMs have holdings in the Portland,
Oregon market. MedPartners manages a growing multi-specialty group practice of
approximately 70 physicians in the Portland market. MedPartners has been an
aggressive suitor of physician groups in the Portland market, and recently
acquired a group of OB/Gyn physicians who might have joined HealthFirst. AORI
has during the past several years purchased two high-profile oncology providers
in the Portland market which are in direct competition with HealthFirst's
oncology practice. In the larger context of PPI's regional and national
strategic growth plan in the pursuit of quality primary care-based
multi-specialty group practice acquisitions, PPI will directly compete with
public as well as private physician practice management companies. The can be no
assurance that PPI will successfully compete against other PPMs in such markets.
Finally, there is a risk that PPMs in service areas of the Companies will
intensify their competitive behavior if the Companies merge with and into PPI.
The commencement of business by PPI also could create an impetus to PPMs not
currently in the Companies' markets to enter into such markets.
EXPOSURE TO PROFESSIONAL LIABILITY CLAIMS
Physicians, hospitals and other participants in the health care industry are
subject to an increasing number of lawsuits alleging medical malpractice and
related claims. Many of these lawsuits involve large claims and substantial
defense costs. Although neither PPI nor its employees will practice medicine, it
is subject to the risks associated with medical malpractice and related
litigation. PPI is susceptible to being named in actions involving care rendered
to patients of the New PCs or any future PPI-managed medical groups. Because of
PPI's economic dependence on each of the New PCs actions which threaten the
economic or operational viability of such medical groups similarly threaten PPI.
There can be no assurance that PPI, the New PCs or other PPI-managed practices
will not become involved in such litigation in the future.
Current professional liability coverage of the Companies is as follows:
Corvallis Clinic has coverage of $5 million per claim, with no aggregate
maximum; HealthFirst's coverage with respect to Metropolitan providers is $5
million per claim and its coverage with respect to Suburban providers is $2
million per occurrence and $4 million annually in the aggregate; and Medford
Clinic and each Medford Clinic
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provider has coverage of $1 million per occurrence and $3 million annually in
the aggregate. Upon the effectiveness of the Merger, PPI expects that each of
the New PCs will have professional liability coverage of $2 million per claim,
plus $13 million annual aggregate excess professional liability coverage.
Certain types of professional liability risks are not covered by insurance,
and certain claims could exceed available insurance coverage. There can be no
assurance that any professional liability claim or claims will be covered by
insurance or will not exceed the limits of available insurance coverage.
GOVERNMENT REGULATION
Many aspects of the health care industry are presently subject to extensive
federal and state governmental regulation. Applicable federal and state laws
include the fraud and abuse provisions of the federal Medicare and Medicaid
statutes, which prohibit the solicitation, payment, receipt or offering of any
remuneration, either direct or indirect, in exchange for or with the intent to
induce the referral, of Medicare or Medicaid patients or for the recommendation,
arranging, leasing or purchasing of goods or services for which payment may be
made under the Medicare or Medicaid programs. Violation of the fraud and abuse
laws is punishable with criminal and civil penalties. Federal law also imposes
significant penalties for false or improper billings for physician services. In
addition, the federal "Stark" law generally prohibits referrals by physicians
for designated health services reimbursable under the Medicare and Medicaid
programs to entities with which such physicians or their immediate family
members have a financial interest.
There can be no assurance that review of the operations of the Companies
prior to the Merger, or the operations of the New PCs and PPI after the Merger,
by courts or regulatory authorities will not result in a determination or
further action that could have a material adverse effect on PPI. Moreover, there
can be no assurance that existing laws and regulations will not be amended,
interpreted or applied in the future in such a way as to have a material adverse
effect on PPI, or that additional laws will not be enacted.
Significant risk factors relating to the business of the Companies, the New
PCs and PPI are described in more detail below.
FRAUD AND ABUSE LAWS
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. In recent years, there has
been increasing scrutiny by law enforcement authorities, the United States
Department of Health and Human Services, various state agencies, the federal and
state courts and Congress, of financial arrangements between health care
providers and potential sources of patient referrals to ensure that such
arrangements are not disguised mechanisms to pay for patient referrals. The
Anti-Kickback Statute is broad in scope and interpretations by various courts
have been ambiguous or conflicting in certain respects. To the extent PPI is
deemed to be either a referral source or a separate provider under the New PC
Management Agreements that is in a position to influence referrals to or from
physicians, the financial arrangements under these agreements could be subject
to scrutiny and prosecution under the Anti-Kickback Statute.
Furthermore, each of the Companies has had a history of receiving and making
referrals to providers in their respective communities. There can be no
assurance that the business practices of the Companies prior to the consummation
of the Merger would be construed to comply with the fraud and abuse laws in all
respects by applicable federal or state authorities. PPI or the New PCs, as
successors in interest to the Companies, would be subject to liability in
connection with any enforcement action taken against the Companies by a
regulatory enforcement agency with respect to such laws.
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PHYSICIAN SELF-REFERRAL LAW
Significant prohibitions against physician "self-referrals" apply to a
variety of physician-owned or physician-interested entities. The Stark statute
(42 U.S.C. Section1395nn) generally prohibits referrals by physicians for
designated health services reimbursable under the Medicare and Medicaid programs
to entities in which the referring physician or an immediate family member has
an ownership interest or compensation arrangement, unless an exception provided
under the statute applies. The Stark statute is broad and ambiguous in some
respects, and regulations clarifying the provisions have been issued only with
respect to clinical laboratory services (which was the subject of the "Stark I"
legislation). Regulations interpreting the portion of the Stark statute known as
"Stark II" or future clarification of existing regulations could require PPI,
the New PCs and related physicians to modify the form of their relationships.
Violations of the Stark statute are punishable by civil penalties, including
exclusion from the Medicare and Medicaid programs.
THE CORPORATE PRACTICE OF MEDICINE
Certain laws prohibit the practice of medicine by corporations other than
professional corporations. It is possible that the operations of PPI could be
challenged on grounds that PPI, a business corporation, will participate in
operations or revenues of the New PCs and other PPI-managed medical practices to
a prohibited extent. Oregon law regarding the corporate practice of medicine
does not specifically approve or forbid practice management companies from
contracting with professional corporations and has been subjected to limited
judicial and regulatory interpretation. Therefore, no assurance can be given
that PPI's activities will be found to be in compliance with state law if
challenged. In the event of a prohibition against the PPI form of business, the
relationship between PPI and each of the New PCs may have to be modified,
possibly resulting in a reduction of revenues received by PPI for managing the
New PCs.
FEE-SPLITTING LAWS
The laws of many states prohibit physicians from splitting fees with
non-physicians. Although Oregon currently does not have such a prohibition,
there is no assurance that Oregon will not enact new laws or interpret existing
laws in a manner that would require modifications to PPI's business in order to
comply with such a law. In addition, expansion of the operations of PPI to
jurisdictions that have laws that could be deemed to restrict or prohibit PPI's
form of arrangement with managed medical groups may require structural and
organizational modifications to PPI's form of management relationship, which
could have an adverse effect on PPI.
MEDICARE/MEDICAID REIMBURSEMENT
State and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, upon health care providers
who fraudulently or wrongfully bill governmental or other third-party payors for
health care services. The federal law prohibiting false billings allows a
private person to bring a civil action in the name of the United States
government for violations of its provisions. While management of each Company
has attempted to comply with billing requirements, there is no assurance that
PPI's or the New PCs' activities will not be challenged or scrutinized by
governmental authorities. Moreover, Medicare and other reimbursement rules
impact the fee structure of medical billing. To the extent PPI's or the New PCs'
billing arrangements may need to be modified to comply with existing or modified
regulations, there could be a material adverse financial effect on PPI.
OREGON INSURANCE LAW
The Oregon Department of Consumer and Business Affairs, Insurance Division
(the "Insurance Division"), regulates the transaction of insurance pursuant to
the Oregon Insurance Code. Pursuant to Insurance Division Bulletin 96-2 (the
"Bulletin") issued in April 1996 by the Oregon Insurance Commissioner, health
care providers that are compensated on a capitated basis by a health insurer or
health care service contractor ("HCSC") are not required to obtain a certificate
of authority to transact insurance if
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the capitation is internal to a policy of insurance that is delivered by an
authorized insurer or HCSC. The Bulletin also states that discounted
fee-for-service arrangements with reasonable limits on discounts (i.e., not
open-ended discounts) also do not require a certificate of authority. PPI
arrangements should fall into these categories and therefore be exempt from
regulation as an insurance company. There is no assurance, however, that the
position of the Insurance Division will not change in the future. In such an
event, PPI may be required to restructure its New PC Management Agreements or
apply for a certificate of authorization, which could have a material adverse
effect on PPI.
ANTITRUST LAWS
Because the New PCs will remain separate legal entities after the Merger,
they may be deemed competitors subject to a range of antitrust laws which
prohibit anti-competitive conduct, including price fixing, concerted refusals to
deal and division of market. There is no assurance that the review of the
businesses of the New PCs and PPI by courts or regulatory authorities will not
result in a determination that could have a material adverse effect on PPI.
PROPOSED LEGISLATION
In addition to current federal regulations, the Clinton Administration and
several members of Congress have proposed legislation for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain such health care proposals, such as reductions in Medicare and Medicaid
payments and additional prohibitions on direct or indirect physician ownership
of facilities to which they refer patients, if adopted, could have a material
adverse effect on PPI. There can be no assurance as to the ultimate content,
timing or effect of any health care reform legislation, nor is it possible at
this time to estimate the impact of potential legislation on PPI.
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the PPI Certificate of Incorporation, the PPI Bylaws
and Delaware law could, together or separately, discourage potential acquisition
proposals, delay or prevent a change in control of PPI and limit the price that
certain investors might pay in the future for shares of PPI Class A Common
Stock. These provisions include a staggered board of directors and authority of
the PPI Board to authorize the issuance, without further shareholder approval,
of preferred stock with rights and privileges senior to PPI Class A Common
Stock. PPI also is subject to Section 203 of the General Corporation Law of the
State of Delaware ("DGCL"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder.
Certain PPI stock option plans may also inhibit a change in control of PPI.
The 1996 Stock Option Plan for Employees of Physician Partners, Inc., the 1996
Stock Option Plan for Non-Employee Directors of Physician Partners, Inc. (the
"Director Option Plan") and the 1996 Stock Option Plan for Non-Employee
Providers Affiliated with Physician Partners, Inc. (the "Provider Option Plan")
provide discretion to the committee that administers such plans (the
"Committee") to shorten the time during which options may be exercised or cancel
options upon payment in cash of the amount determined by the Committee to be the
fair market value of the option. The Physician Partners, Inc. Change in Control
Plan (the "Change in Control Plan") contains several significant provisions that
may inhibit a takeover, including a provision making benefits payable to
eligible participants, a provision that participants will not be required to
work to reduce the amount of payments to such person by seeking alternative
employment in the event of a change in control, and a provision that would
require PPI or its successor to pay all reasonable legal fees and related
expenses incurred by a plan participant as a result of contesting or disputing a
termination of employment following a change in control whether or not such
dispute is resolved in the participant's favor.
Pursuant to PPI's Rights Agreement, the PPI Board is authorized to declare a
dividend distribution of one right (a "Right") for each outstanding share of PPI
Common Stock to shareholders of record at the
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close of business on a specified record date. The Rights have certain
anti-takeover effects. The Rights will cause substantial dilution to a person or
group that attempts to acquire PPI on terms not approved by the PPI Board. The
Rights should not interfere with any merger or other business combination
approved by the PPI Board since the PPI Board may, at its option, at any time
until 10 days following the stock acquisition date, redeem all, but no less than
all, of the then outstanding Rights at the applicable redemption price. The PPI
Board currently has no plans to declare such distribution. For further details
of the terms of the Rights, see "Description of PPI Capital Stock."
MANAGEMENT INFORMATION SYSTEM AND OTHER TECHNOLOGY NEEDS
Physician practice management depends heavily on access to sophisticated and
state of the art information systems in order to track utilization of services,
costs, patient encounters, diagnoses and other elements of a medical practice.
The development of new technologies or refinement of existing technologies
potentially could make existing information systems technologically obsolete or
cause a reduction in the value of, or reduce the need for, the equipment the
Companies currently use. Should such developments occur, there can be no
assurance that PPI will be able to acquire any new or improved equipment or
upgrades to the extent necessary to service its customers and to compete
effectively in the industry. The inability of PPI to access or acquire new
equipment in a timely manner could have a material adverse effect on PPI.
Each of the Companies presently has well functioning practice management
electronic data systems. Each of these systems, however, is incompatible with
the other two. There is no intent or need to integrate the practice management
systems of the Companies and consequently no synergies can immediately be
presumed. There may be future problems associated with the incompatibility of
these data systems.
The rapidity of change and technological obsolescence will pose challenges
to PPI with significant downside financial impact. New developments in areas
such as voice recognition systems, electronic medical record, integrated data
management systems (e,g, ancillary data, hospital data) offer significant
potential; however, such developments come with serious financial risk. There
can be no assurances that PPI can develop and execute a sound plan of integrated
electronic data management in the future.
POSSIBLE INABILITY TO RETAIN OR ATTRACT KEY PERSONNEL; DEPENDENCE ON EXECUTIVE
OFFICERS
The success of PPI will depend largely on its ability to retain and attract
qualified key management personnel. PPI will be highly dependent on each of its
executive officers, in particular, upon the consummation of the Merger. There
can be no assurance that PPI will be able to retain such personnel and attract
any additional personnel deemed necessary by PPI. Any failure to retain key
employees or attract qualified new personnel deemed necessary to operate PPI
successfully could have a material adverse effect on PPI.
CONSENT TO ASSIGNMENT OF HEALTH PLAN CONTRACTS
In connection with the reorganization of the respective Companies and the
Merger, it is contemplated that, to the extent legally permissible, the
agreements with health plans that the respective Companies currently maintain
will be assigned to PPI, and that the New PCs will provide the professional
services pursuant to the New PC Management Agreements. In order to effect the
assignment (by operation of law, pursuant to the Merger) of health plan
contracts to PPI, certain such contracts require that the Companies obtain
consents from the respective health plans. If and to the extent that health
plans are unwilling to consent to the assignment of such contracts to PPI, PPI's
financial position may be materially adversely affected.
NO PUBLIC TRADING MARKET FOR PPI CLASS A COMMON STOCK OR COMMON STOCK OF NEW PC;
TRANSFER RESTRICTIONS
There is currently no public market for the shares of PPI Class A Common
Stock. There is no assurance that such a market will develop. In addition,
holders of PPI Class A Common Stock will be
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prohibited from making any transfer or sale of such stock for a period of five
years after the Effective Time other than in connection with certain "piggyback"
registration rights of PPI shareholders. See "Terms of Reorganization and
Merger--Resales of PPI Class A Common Stock and Registration Rights" and "Terms
of the Reorganization and Merger--Conversion of PPI Class A Common Stock".
Restrictions on transfer of the shares of the New PCs are contained in state law
relating to Oregon professional corporations and the organizational documents of
the New PCs.
PPI'S REPURCHASE RIGHT
PPI will have the right to repurchase all or any portion of shares of PPI
Class A Common Stock owned by a stockholder, for the fair market value of such
shares at the time of repurchase only in the event such a stockholder ceases
(for reasons other than death, disability or retirement after a specified number
of years or age) to be an employee or member of the board of directors of (i)
PPI or (ii) any entity with which PPI has entered into a practice management
agreement. If such stockholder, after termination of employment or membership in
the board of directors of PPI or such entity, undertakes activities which are
competitive with PPI or with physician groups with which PPI has entered into a
practice management agreement the repurchase price will be the lesser of (i) the
fair market value of the stock at the time of issuance or (ii) the fair market
value of such stock at the time of such repurchase. Thus, the appreciation to be
realized by any such stockholder, who leaves employment of PPI or such entity
and competes, with respect to such stockholder's PPI Class A Common Stock would
potentially be limited by such repurchase right of PPI. For further information
regarding such PPI repurchase right, see "Terms of the Reorganization and
Merger--PPI's Right to Repurchase PPI Class A Common Stock".
INCOME TAX RISKS
PPI and the Companies have received an opinion from McDermott, Will & Emery
to the effect that the Merger will, more likely than not, satisfy the
requirements for tax deferral under Section 368 of the Code. No ruling will be
requested from the Internal Revenue Service (the "IRS") on this issue. An
opinion of counsel is not binding on the IRS or the courts. Furthermore, no
assurance can be given that the tax-deferred characterization of the Merger will
not be challenged, or if challenged, will be defended successfully. If the tax
characterization of the Merger is successfully challenged, there could be
significant adverse tax consequences to the Companies and their respective
shareholders.
In addition, the PC Reorganization Transactions may be treated as taxable
distributions, with the effect of the creation of taxable income at both the
Company and the shareholder levels. The Companies have received a legal opinion
from McDermott, Will & Emery to the effect that the amount of income produced by
a taxable distribution at both the Company and shareholder levels would be no
more than the fair market value of the property distributed. An opinion of
counsel is not binding on the IRS or the courts. If the value of capital stock
of one or more of the new PCs distributed in the respective New PC
Reorganization Transactions exceeds the nominal value determined to be
applicable by the respective boards of directors of the Companies, there could
be significant adverse tax consequences to the Companies distributing, and
shareholders receiving, the capital stock of such New PC or New PCs.
RISKS RELATING TO FAILURE TO APPROVE THE MERGER AND PC REORGANIZATION
TRANSACTIONS
The Companies have incurred and are expected to further incur substantial
costs, in an aggregate amount estimated to be $3,500,000 through the end of
1996, in connection with the analysis, planning, documentation, negotiation and
approval process related to the Merger and PC Reorganization Transactions. In
the event the shareholders of the Companies do not approve the proposed Merger
and Reorganization Transactions, a large portion of such costs will be shared
pro rata by the Companies according to the number of full-time equivalent
providers of each Company on June 1, 1996, pursuant to the terms of the Expense
Sharing Agreement, dated as of July 29, 1996, as amended and restated September
18, 1996, among HealthFirst, Corvallis Clinic, Medford Clinic and PPI.
Additional costs will be incurred by PPI (which costs are guaranteed by the
Company) in connection with the payment of severance and benefit amounts to PPI
executives Mr. Goldberg, Dr. Bonazzola and Mr. Dupell. Further, under the
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Expense Sharing Agreement, the Companies would be required to reimburse PPI for
certain additional liabilities to which it may be subject. PPI has entered into
a seven-year lease of office space (which may be sublet with the consent of the
landlord thereto, such event not to be unreasonably withheld) in Portland,
Oregon, which has a current rent obligation of $7,317 per month and increases
annually based on inflation.
Another risk of failure to approve the Merger and PC Reorganization
Transactions is that the Companies would remain in their current respective
circumstances, which include the circumstances that led the respective board of
directors of each Company to recommend the Merger. See "HealthFirst's Reasons
for the Merger," "Corvallis Clinic's Reasons for the Merger" and "Medford
Clinic's Reasons for the Merger."
RISKS RELATING TO ESCROW ARRANGEMENT
The Reorganization and Merger Agreement also contemplates that PPI and the
Companies will, prior to the Effective Time of the Merger, enter into an escrow
agreement with an escrow agent reasonably acceptable to PPI and the Companies,
pursuant to which escrow agreement the shareholders of each of the Companies
will deposit into escrow certain number of shares of PPI Class A Common Stock
received in consideration of the Merger. The aggregate number of shares of PPI
Class A Common Stock that will be deposited in escrow by shareholders of each of
the Companies as of the Effective Time is 1,926,000 (representing 8,000 shares
for each full-time equivalent physician and other specified provider ("FTE") of
each of the Companies as of October 1, 1996, with full- or part-time equivalence
determined based on a work week of at least four full working days for full-time
equivalence). Shareholders of HealthFirst, holders of Corvallis Clinic Class B
Stock and shareholders of Medford Clinic will deposit in escrow 840,000 shares,
622,000 shares and 464,000 shares, respectively, of PPI Class A Common Stock. On
a per-share basis, (i) 91 shares of PPI Class A Common Stock per share of
HealthFirst Class A Share will be deposited in escrow, (ii) 52 shares of PPI
Class A Common Stock per share of Corvallis Clinic Class B Stock will be
deposited in escrow and (iii) 8,098 shares of PPI Class A Common Stock per share
of Medford Clinic Common Stock will be deposited in escrow. Since the
shareholders of each of the Companies, as a group, will be entitled to receive
an aggregate of 31,000 shares per FTE of such Company as consideration in the
Merger, such shareholders, as a group, will hold outside of escrow at least
23,000 shares per FTE of such Company.
PPI Class A Common Stock will be released to such shareholders (referred to
herein as "Escrow Holders") from escrow based on the net shareholder equity per
FTE of the Companies as reflected on their audited balance sheets as of December
31, 1996 ("Net Shareholder Equity Per FTE"). If the Net Shareholder Equity Per
FTE of any Company (referred to herein as an "Excess Company") exceeds that of
any of the other Companies by more than 20 percent (a difference of greater than
20 percent being referred to herein as an "Excess Difference"), the number of
shares released from escrow will be adjusted to reflect such Excess Difference.
More specifically, shares will be released to Escrow Holders so that the Escrow
Holders who had been shareholders of an Excess Company would receive out of
escrow, in the aggregate, such number of shares of PPI Class A Common Stock as
represents a value (measured assuming a $15.82 per share value of PPI Class A
Common Stock(1)) exceeding the aggregate value of shares of PPI Class A Common
Stock received by the Escrow Holders who had been shareholders of the other
Company or Companies by an amount equal to the product of the Excess Difference
multiplied by the FTE of such Excess Company. In contrast, if the Net
Shareholder Equity Per FTE of each of the Companies is within 20 percent of one
another, each Escrow Holder will receive out of escrow one-half of the shares
deposited thereby (which would result in the shareholders of each of the
Companies receiving, in the aggregate, 27,000 shares per FTE of such Company.)
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(1) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of PPI Class A Common
Stock (reflecting the sum of 27,000 shares per FTE of the Companies and
135,000 shares issued to four officers and one director of PPI) are
outstanding after the release of shares from escrow.
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Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, the shareholders of each of the Companies
might receive all, any portion or none of the shares of PPI Class A Common Stock
deposited thereby in escrow, the aggregate number of shares of PPI Class A
Common Stock which the shareholders of each of the Companies, may receive, as a
group, as consideration in the Merger ranges from an aggregate of 23,000 shares
per FTE to an aggregate of 31,000 per FTE on a Company-by-Company basis,
provided that the aggregate number of shares released from escrow will not
result in the total number of shares issued to the shareholders of all of the
Companies as consideration in the Merger exceeding 27,000 shares per FTE of all
of the Companies. On a per-share basis, the ranges are (i) from 263 shares to
354 shares of PPI Class A Common Stock per HealthFirst Class A share, (ii) from
140 shares to 192 shares of PPI Class A Common Stock per share of Corvallis
Clinic Class B Stock and (iii) from 23,269 shares to 31,262 shares of PPI Class
A Common Stock per share of Medford Clinic Common Stock. Balance sheets
reflecting the December 31, 1996 net shareholder equity of the Companies will be
prepared and audited no later than March 31, 1997; within five business days of
delivery of such balance sheets, the Escrow Holders will receive shares of PPI
Class A Common Stock from escrow as described above. Any PPI Class A Common
Stock not so released from escrow will be cancelled and retired.
Under the escrow arrangement described above, regardless of the amount of
Excess Difference between the Companies, the shareholders of each of the
Companies will receive, in the aggregate, at least 23,000 shares per FTE of such
Company. On the other hand, the maximum number of shares the shareholders of a
Company with the highest Excess Difference will receive, regardless of the
amount of such Excess Difference, in the aggregate, is 31,000 shares per FTE of
such Company. For details regarding the material terms of the escrow
arrangement, see 'Terms of the Reorganization and Merger--Escrow Arrangement" of
this Joint Proxy Statement/Prospectus. To the extent such adjustment is made
pursuant to such escrow arrangement, shareholders of a Company with the lowest
Net Shareholder Equity per FTE will suffer a relative reduction in the amount of
consideration in the Merger.
THE HEALTHFIRST SHAREHOLDER MEETING
TIME, DATE AND PLACE OF HEALTHFIRST MEETING
The HealthFirst Special Meeting will be held at 6:30 p.m., Pacific Standard
Time ("P.S.T."), on Tuesday, January 21, 1997 at Lloyd Center, Red Lion Hotel,
1000 NE Multnomah Ave., Portland, Oregon 97232.
BUSINESS TO BE CONDUCTED AT THE HEALTHFIRST MEETING
Each copy of this Joint Proxy Statement/Prospectus mailed to HealthFirst
shareholders is accompanied by a form of proxy solicited by the HealthFirst
Board of Directors ("HealthFirst Board") for use at the HealthFirst Special
Meeting and at any adjournment thereof. At the HealthFirst Special Meeting, the
HealthFirst shareholders will vote upon the HealthFirst Reorganization Proposal
and the Merger Proposal. See "The PC Reorganization Transactions and Related
Transactions" and "The Merger and Related Transactions." The HealthFirst
shareholders will also be asked at the HealthFirst Special Meeting to vote upon
the PPI Incentive Compensation Plans Proposal. See "Proposal No. 3: Approval of
the PPI Incentive Compensation Plans Proposal" for a description of the material
provisions of the PPI Incentive Compensation Plans.
PROXIES: VOTING AND REVOCATION
When a proxy is properly executed and returned, HealthFirst Class A Shares
will be voted in accordance with the directions indicated on the proxy, or if no
directions are indicated, such shares will be voted FOR each of the HealthFirst
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal. Any HealthFirst shareholder giving a proxy may revoke his or her
proxy at
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any time before its exercise at the HealthFirst Special Meeting by (i) giving
written notice of such revocation, (ii) signing and delivering a proxy bearing a
later date, to Vern R. Williams, M.D., Secretary, HealthFirst Medical Group,
P.C., 10535 NE Glisan, Portland, Oregon 97220 or (iii) attending the HealthFirst
Special Meeting and voting in person.
HEALTHFIRST SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO HEALTHFIRST IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE HEALTHFIRST
SPECIAL MEETING.
PROXY SOLICITATION
HealthFirst will bear the costs of soliciting proxies from its shareholders.
Proxies may be solicited by directors, officers or employees of HealthFirst in
person, by telephone or through other forms of communication without payment of
additional compensation to such persons. HealthFirst does not intend to incur
any outside expenses in connection with the solicitation of proxies.
VOTE REQUIRED
The presence in person or by proxy of persons entitled to vote a majority of
the outstanding HealthFirst Class A Shares is necessary to constitute a quorum
at the HealthFirst Special Meeting. Under the Restated Articles of HealthFirst
and Oregon Law, the holders of a majority of the outstanding HealthFirst Class A
Shares must approve the HealthFirst Reorganization Proposal, the Merger Proposal
and the PPI Incentive Compensation Plans Proposal. Votes will be counted by the
HealthFirst Board of Directors. Neither the Restated Articles nor the Bylaws of
HealthFirst contain any provisions with respect to the treatment or effect of
abstentions. Abstentions will have the same effect as a vote against the
HealthFirst Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal.
Only holders of record of HealthFirst Class A Shares at the close of
business on December 24, 1996, are entitled to receive notice of, and to vote
at, the HealthFirst Special Meeting. As of December 1, 1996, there were 9,200
Class A Shares outstanding and entitled to vote, with each such share entitled
to one vote, and 92 holders of record thereof. As of that date, the directors
and executive officers of HealthFirst, together with their affiliates,
beneficially held an aggregate of 1,100 HealthFirst Class A Shares, not
including options, warrants or other rights to purchase HealthFirst Class A
Shares (representing approximately 12% of the outstanding HealthFirst Class A
Shares). The directors and executive officers of HealthFirst have indicated that
it is their present intention to vote all of the shares held thereby FOR the
approval of the HealthFirst Reorganization Proposal, the Merger Proposal and the
PPI Incentive Compensation Plans Proposal.
OTHER MATTERS
HealthFirst is not aware of any other business to be brought before the
HealthFirst Special Meeting. If any matters come before the HealthFirst Special
Meeting which are not directly referred to in this Joint Proxy
Statement/Prospectus or the enclosed proxy, including matters incident to the
conduct of the HealthFirst Special Meeting, the proxy holders will vote the
shares represented by the proxies in accordance with the recommendations of the
HealthFirst Board.
THE CORVALLIS CLINIC SHAREHOLDER MEETING
TIME, DATE AND PLACE OF CORVALLIS CLINIC MEETING
The Corvallis Clinic Special Meeting will be held at 6:30 p.m., P.S.T., on
Monday, January 20, 1997, at 3680 NW Samaritan Drive, Corvallis, Oregon 97330.
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BUSINESS TO BE CONDUCTED AT THE CORVALLIS CLINIC MEETING
Each copy of this Joint Proxy Statement/Prospectus mailed to Corvallis
Clinic shareholders is accompanied by a form of proxy solicited by the Board of
Directors of Corvallis Clinic (the "Corvallis Clinic Board") for use at the
Corvallis Clinic Special Meeting and at any adjournment thereof. At the
Corvallis Clinic Special Meeting, the Corvallis Clinic shareholders will vote
upon the Corvallis Clinic Reorganization Proposal and the Merger Proposal. See
"The PC Reorganization Transactions and Related Transactions" and "The Merger
and Related Transactions." The Corvallis Clinic shareholders will also be asked
at the Corvallis Clinic Special Meeting to vote upon the PPI Incentive
Compensation Plans Proposal. See "Proposal No. 3: Approval of the PPI Incentive
Compensation Plans Proposal" for a description of the material provisions of the
PPI Incentive Compensation Plans.
PROXIES: VOTING AND REVOCATION
When a proxy is properly executed and returned, the shares of Corvallis
Clinic Class A Stock and Corvallis Clinic Class B Stock will be voted in
accordance with the directions indicated on the proxy, or if no directions are
indicated, such shares will be voted FOR each of the Corvallis Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal. Any Corvallis Clinic shareholder giving a proxy may revoke his
or her proxy at any time before its exercise at the Corvallis Clinic Special
Meeting by (i) giving written notice of such revocation, (ii) signing and
delivering a proxy bearing a later date, to Darrel D. Bibler, M.D., Secretary,
The Corvallis Clinic, P.C., Corvallis, Oregon 97330 or (iii) attending the
Corvallis Clinic Special Meeting and voting in person.
CORVALLIS CLINIC SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO CORVALLIS CLINIC IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE CORVALLIS CLINIC
SPECIAL MEETING.
PROXY SOLICITATION
Corvallis Clinic will bear the costs of soliciting proxies from its
shareholders. Proxies may be solicited by directors, officers or employees of
Corvallis Clinic in person, by telephone or through other forms of communication
without payment of additional compensation to such persons. Corvallis Clinic
does not intend to incur any outside expenses in connection with the
solicitation of proxies.
VOTE REQUIRED
The presence in person or by proxy of persons entitled to vote a majority of
the outstanding shares of each of Corvallis Clinic Class A Stock and Corvallis
Clinic Class B Stock is necessary to constitute a quorum at the Corvallis Clinic
Special Meeting. Under the Restated Articles of Corvallis Clinic and Oregon Law,
the holders of two-thirds of the outstanding shares of Corvallis Clinic Class A
Stock and two-thirds of the outstanding shares of Corvallis Clinic Class B
Stock, in each case as a separate voting group, must approve the Corvallis
Clinic Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal. Votes will be counted by the Corvallis Clinic Board
of Directors. Neither the Restated Articles nor the Bylaws of Corvallis Clinic
contain any provisions with respect to the treatment or effect of abstentions.
Abstentions will have the same effect as a vote against the Corvallis Clinic
Reorganization Proposal, the Merger Proposal and the PPI Incentive Compensation
Plans Proposal.
Only holders of record of Corvallis Clinic Class A Stock and Corvallis
Clinic Class B Stock at the close of business on December 24, 1996, are entitled
to receive notice of, and to vote at, the Corvallis Clinic Special Meeting. As
of December 1, 1996, there were 64 shares of Corvallis Clinic Class A Stock and
11,800 shares of Corvallis Clinic Class B Stock outstanding and entitled to
vote, with each such share entitled to one vote. There were 64 holders of record
of Corvallis Clinic Class A Stock and 74 holders of record of Corvallis Clinic
Class B Stock. As of that date, the directors and executive officers of
Corvallis
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Clinic, together with their affiliates, beneficially held an aggregate of six
shares of Corvallis Clinic Class A Stock and an aggregate of 891 shares of
Corvallis Clinic Class B Stock, exclusive of options, warrants or other rights
to purchase Corvallis Clinic Class A Stock or Corvallis Clinic Class B Stock
(representing approximately 10 percent and 7 percent of the outstanding shares
of Corvallis Clinic Class A Stock and Corvallis Clinic Class B Stock,
respectively). The directors and executive officers of Corvallis Clinic have
indicated that it is their present intention to vote all of the shares held
thereby FOR the approval of the Corvallis Clinic Reorganization Proposal, the
Merger Proposal and the PPI Incentive Compensation Plans Proposal.
OTHER MATTERS
Corvallis Clinic is not aware of any other business to be brought before the
Corvallis Clinic Special Meeting. If any matters come before the Corvallis
Clinic Special Meeting which are not directly referred to in this Joint Proxy
Statement/Prospectus or the enclosed proxy, including matters incident to the
conduct of the Corvallis Clinic Special Meeting, the proxy holders will vote the
shares represented by the proxies in accordance with the recommendations of the
Corvallis Clinic Board.
THE MEDFORD CLINIC SHAREHOLDER MEETING
TIME, DATE AND PLACE OF MEDFORD CLINIC MEETING
The Medford Clinic Special Meeting will be held at 4:00 p.m., P.S.T., on
Sunday, January 19, 1997, at 555 Black Oak Drive, Medford, Oregon 97504.
BUSINESS TO BE CONDUCTED AT THE MEDFORD CLINIC MEETING
Each copy of this Joint Proxy Statement/Prospectus mailed to Medford Clinic
shareholders is accompanied by a form of proxy solicited by the Board of
Directors of Medford Clinic (the "Medford Clinic Board") for use at the Medford
Clinic Special Meeting and at any adjournment thereof. At the Medford Clinic
Special Meeting, the Medford Clinic shareholders will vote upon the Medford
Clinic Reorganization Proposal and the Merger Proposal. See "The PC
Reorganization Transactions and Related Transactions" and "The Merger and
Related Transactions." The Medford Clinic shareholders will also be asked at the
Medford Clinic Special Meeting to vote upon the PPI Incentive Compensation Plans
Proposal. See "Proposal No. 3: Approval of the PPI Incentive Compensation Plans
Proposal" for a description of the material provisions of the PPI Incentive
Compensation Plans.
PROXIES: VOTING AND REVOCATION
When a proxy is properly executed and returned, the shares of Medford Clinic
Common Stock will be voted in accordance with the directions indicated on the
proxy, or if no directions are indicated, such shares will be voted FOR each of
the Medford Clinic Reorganization Proposal, the Merger Proposal and the PPI
Incentive Compensation Plans Proposal. Any Medford Clinic shareholder giving a
proxy may revoke his or her proxy at any time before its exercise at the Medford
Clinic Special Meeting by (i) giving written notice of such revocation, (ii)
signing and delivering a proxy bearing a later date, to Jon Ness, Secretary,
Medford Clinic, P.C., 555 Black Oak Drive, Medford, Oregon 97504 or (iii)
attending the Medford Clinic Special Meeting and voting in person.
MEDFORD CLINIC SHAREHOLDERS ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING PROXY AND RETURN IT PROMPTLY TO MEDFORD CLINIC IN THE ENCLOSED
POSTAGE-PAID ENVELOPE, EVEN IF THEY ARE PLANNING TO ATTEND THE MEDFORD CLINIC
SPECIAL MEETING.
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PROXY SOLICITATION
Medford Clinic will bear the costs of soliciting proxies from its
shareholders. Proxies may be solicited by directors, officers or employees of
Medford Clinic in person, by telephone or through other forms of communication
without payment of additional compensation to such persons. Medford Clinic does
not intend to incur any outside expenses in connection with the solicitation of
proxies.
VOTE REQUIRED
The presence in person or by proxy of persons entitled to vote a majority of
the outstanding shares of Medford Clinic Common Stock is necessary to constitute
a quorum at the Medford Clinic Special Meeting. Under the Articles of
Incorporation of Medford Clinic and Oregon Law, the holders of a majority of the
outstanding shares of Medford Clinic Common Stock must approve the Medford
Clinic Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal. Votes will be counted by the Medford Clinic Board
of Directors. Neither the Articles of Incorporation nor the Bylaws of Medford
Clinic contain any provisions with respect to the treatment or effect of
abstentions. Abstentions will have the same effect as a vote against the Medford
Clinic Reorganization Proposal, the Merger Proposal and the PPI Incentive
Compensation Plans Proposal.
Only holders of record of Medford Clinic Common Stock at the close of
business on December 24, 1996, are entitled to receive notice of, and to vote
at, the Medford Clinic Special Meeting. As of January 2, 1997, there were 58
holders of 57 1/3 shares of Medford Clinic Common Stock outstanding and entitled
to one vote per share. As of that date, the directors and executive officers of
Medford Clinic, together with their affiliates, beneficially held an aggregate
of seven shares of Medford Clinic Common Stock, exclusive of options, warrants
or other rights to purchase Medford Clinic Common Stock (representing
approximately 12% of the outstanding shares of Medford Clinic Common Stock). The
directors and executive officers of Medford Clinic have indicated that it is
their present intention to vote all of the shares held thereby FOR the approval
of the Medford Clinic Reorganization Proposal, the Merger Proposal and the PPI
Incentive Compensation Plans Proposal.
OTHER MATTERS
Medford Clinic is not aware of any other business to be brought before the
Medford Clinic Special Meeting. If any matters come before the Medford Clinic
Special Meeting which are not directly referred to in this Joint Proxy
Statement/Prospectus or the enclosed proxy, including matters incident to the
conduct of the Medford Clinic Special Meeting, the proxy holders will vote the
shares represented by the proxies in accordance with the recommendations of the
Medford Clinic Board.
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THE MERGER AND RELATED TRANSACTIONS
GENERAL
The descriptions in this Joint Proxy Statement/Prospectus of the terms and
conditions of the PC Reorganization Proposal and the Merger Proposal are
qualified in their entirety by reference to the copy of the Reorganization and
Merger Agreement attached as Appendix A to this Joint Proxy Statement/
Prospectus, and to each of the other Appendices to this Joint Proxy
Statement/Prospectus, all of which are incorporated herein by this reference.
The Reorganization and Merger Agreement contemplates that each of the
Companies will merge with and into PPI, provided that all conditions to the
consummation of the Merger are satisfied or waived. Each shareholder of
HealthFirst, Corvallis Clinic and Medford Clinic (other than those shareholders
who exercise their dissenters' rights under the Oregon Business Corporation Act)
will receive shares of PPI Class A Common Stock in exchange for their shares in
HealthFirst, Corvallis Clinic or Medford Clinic, as applicable (with the number
of shares received based on a separate exchange ratio for each class and series
of stock of each Company, as necessary). It is contemplated that the Merger will
occur as soon as practicable after the HealthFirst Special Meeting, the
Corvallis Clinic Special Meeting, and the Medford Clinic Special Meeting, and
upon satisfaction or waiver of all of the other conditions set forth in the
Reorganization and Merger Agreement. The Merger is presently anticipated to
occur on or before January 31, 1997. See "The Merger and Related Transactions."
BACKGROUND OF THE MERGER
In early May 1995, the Corvallis Clinic Board held a meeting which included
members of the Corvallis Clinic Board and senior management to explore strategic
issues and capital needs. The Corvallis Clinic Board reviewed summaries of
industry research reports as well as the prospectuses relating to the then-
recent initial public offering of MedPartners and other similar offerings. The
Corvallis Clinic Board and senior management discussed (i) the concept of a
physician practice management company (a "PPM") and the potential value added
thereby to medical groups, (ii) the possibility of Corvallis Clinic forming a
PPM, (iii) the possible opportunities to join other similar group practices and
form a PPM and (iv) preliminary criteria of a PPM. The Corvallis Clinic Board
considered Oregon a unique market based on several factors: (a) Oregon is one of
the most heavily managed care states in the U.S., (b) Oregon had, to date,
little national physician practice management penetration, (c) Oregon has a
number of independent, historically strong, physician-owned primary care based
multi-specialty group practices which do not compete with one another in their
distinct local markets and (d) Oregon has a limited number of major payors which
contract with each of the large primary care based multi-specialty groups.
The Corvallis Clinic Board and senior management developed criteria for
primary care-based multi-specialty group practices in Oregon with which it would
consider combining to form a PPM: (i) The groups must be physician owned, (ii)
the groups must be physician governed, (iii) the groups must be for-profit, (iv)
the groups must have had significant successful history in their respective
communities, (v) the groups must not be competitors with each other (i.e. in
separate markets), AND (vi) the groups must have strong physician management
(i.e. the existence of a paid full-time medical director) and (vii) the groups
must have a minimum of 50 providers. Further, the Corvallis Clinic Board and
senior management believed that, due to the customary complexity of merger
transactions, no more than three medical group organizations should be combined.
Only five medical groups located in Oregon, in addition to Corvallis Clinic, met
the criteria. Four of such groups were approached, two of which expressed little
interest in proceeding. The other two groups, Medford Clinic and HealthFirst
(then known as Metropolitan Clinic, P.C.), responded positively to the idea of
pursuing the possibility of a business combination. Due to such positive
response from HealthFirst and Medford Clinic, Corvallis Clinic did not hold
further discussions with the two groups which had initially expressed little
interest in pursuing a business combination. Corvallis Clinic did not
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even initiate initial contact with the fifth group meeting its qualifying
criteria because such group is located in the same geographic market as one of
the interested groups.
Later in May 1995, the senior management of Corvallis Clinic met with the
executive committee of the Medford Clinic Board and Medford Clinic senior
management and reviewed similar materials and discussed similar issues,
including preliminary discussions regarding a merger between Corvallis Clinic
and Medford Clinic.
In July and August 1995, Corvallis Clinic held similar preliminary meetings
with the leadership of three other Oregon group practices, including
HealthFirst. Of the three, only HealthFirst expressed a strong interest in
pursuing merger discussions and based on such initial meetings, representatives
of each of Corvallis Clinic, Medford Clinic and HealthFirst determined that it
would be in the best interest of such Company to further explore a business
combination with the other Companies. As a result of these meetings, the board
of directors of each Company concluded that the other Companies were compatible
in financial condition, assessment of future market changes and business
philosophy. Each Company also acknowledged that its management team possessed
strengths that would be compatible with and complementary to that of the other
Companies. An initial meeting of the chief executive officers of the Companies
and the chief financial officer of Corvallis Clinic was held in late August
1995. The primary issues discussed during such meeting were (a) summary of the
preliminary PPM industry research, (b) proposed timetable and (c) general
outline of a letter of intent.
Early in the discussion process, David Goldberg, a consultant was retained
by HealthFirst and Medford Clinic to explore appropriate long-term business
plans for such entities. Mr. Goldberg became involved in preliminary transaction
development discussions.
In September 1995, the three Companies executed a letter of intent and
confidentiality agreement to initiate a preliminary study to determine what a
merged organization might comprise. In October 1995, a preliminary compilation
of the Companies' respective unaudited historical financial information was
presented at a meeting of the senior management of the three Companies. The
Companies agreed to provide the other Companies, on a confidential basis, with
information on corporate structure, financial condition, capital structure and
contractual obligations with third parties. Site visits were also approved by
the Companies to permit the other Companies to perform a preliminary financial
analysis. By the end of September 1995, HealthFirst, Corvallis Clinic and
Medford Clinic were negotiating and developing preliminary terms and structure
of the proposed reorganization and merger transactions for presentations to
their respective shareholders. Based upon the perceived complimentary nature of
the three Companies as to markets, management style, facilities and business
philosophy, the respective boards of directors and managements began to form a
belief that a merger among the Companies would present strategic opportunities
not available from other potential acquisition or merger partners. In November
1995, several members of the senior management of the Companies met informally
and separately with the representatives of two investment banks to discuss
generally the PPM industry and the availability of capital for PPMs. The
investment bank representatives expressed positive views on the consolidation of
the PPM industry and were generally enthusiastic about the favorable investment
climate for PPMs. Neither of the investment banks was retained by the Companies
and none of them provided any written report or advice to any of the Companies
in connection with the proposed business combination or otherwise.
In January 1996, members of the respective boards of directors and senior
management met to discuss the proposed business combination and the process for
further discussion. The meeting was also attended by representatives of
potential financial and accounting firms who were potential advisors to the
Companies. Such meeting was informational in nature and no written report or
other specific advisory material was provided by such potential advisors. Of
such advisory firms, only Arthur Andersen, LLP, (which has audited the financial
statements in this Joint Proxy Statement/Prospectus) was retained by any of the
Companies. The participants in such meeting reviewed the preliminary unaudited
historical financial information previously compiled, discussed PPM industry
overview and a preliminary process timetable.
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On January 13, 1996, the Companies entered into the second letter of intent
pursuant to which the Companies agreed to share the expenses of outside experts
in preparing a draft business plan for the proposed business combination. During
the first quarter of 1996, each Company, along with its legal and accounting
advisors, assessed projected transaction costs relating to the proposed business
combination with the other Companies.
The chief executive officers of the Companies met on January 12 and on
February 16, 1996. These meetings were informal and no outside advisors were
present. The purpose of the January 12, 1996 meeting, attended by the three
chief executive officers of the Companies and the chief financial officer of
Corvallis Clinic, was to evaluate if and how the executive officers could work
together. The discussion was general and addressed, in broad terms, the tasks
required to potentially bring the Companies together. The meeting of January 12,
1996 was attended by the three chief executive officers of the Companies and the
chief financial officer of Corvallis Clinic. The purpose of this meeting was to
further the discussions concerning management, structure, governance, tax
concerns, use of advisors and future operational concerns and to begin to
consider a timetable for the tasks required. The meeting of February 16, 1996
was also attended by the three chief executive officers of the Companies and the
chief financial officer of Corvallis Clinic. Here, again, the three chief
executive officers increased their comfort with one another and with the effort
which would be required to proceed toward a business combination. No materials
were prepared or distributed at these meetings. At the end of February, the
three Companies agreed to commission a draft business plan of the proposed
business combination to be completed in April 1996.
In March 1996, a working group was convened comprised of the chief executive
officers and physician board leaders from each of the Companies and the chief
financial officer of Corvallis Clinic. Legal counsel specializing in health care
business combinations was also present. Issues discussed during the initial
meeting of such working group included (i) process for selection of an
accounting auditing firm, (ii) process for interviewing and selection of an
investment banking advisor, (iii) overview of a proposed reorganization
structure, (iv) management and governance issues and (v) work plan.
On April 4, 1996, the working group reconvened to provide an update on the
proposed corporate management and board structure and for presentation of the
general project goals to the respective Companies. On the same day, the
Companies entered into a confidentiality agreement to keep confidential all
information provided by the other Companies in connection with due diligence for
the proposed reorganization and merger.
On June 28, 1996, the Companies entered into a memorandum of understanding
which set forth the basic terms and structure of the proposed reorganization and
merger and the agreement by the Companies not to initiate or solicit any inquiry
or proposal with respect to, or engage in negotiations concerning, any
acquisition or business combination with any person or entity other than the
other Companies. Pursuant to the memorandum of understanding, the Companies also
agreed that the execution and delivery of definitive documentation relating to
the proposed reorganization and merger are subject to completion of due
diligence and approval of the respective boards of directors of the Companies.
On July 24, 1996, the Corvallis Clinic Board held a board meeting and
approved the Corvallis Clinic Reorganization Proposal and the Merger Proposal,
subject to approval of the shareholders of the Company.
On July 25, 1996, the Medford Clinic Board held a board meeting and approved
the Medford Clinic Reorganization Proposal and the Merger Proposal, subject to
approval of the shareholders of the Company.
On July 26, 1996, the HealthFirst Board held a board meeting and approved
the HealthFirst Reorganization Proposal and the Merger Proposal, subject to
approval of the shareholders of the Company.
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On July 29, 1996, the Reorganization and Merger Agreement and the Expense
Sharing Agreement were executed and delivered by PPI and the Companies.
On September 13, 1996, the Reorganization and Merger Agreement and the
Expense Sharing Agreement, in each case as amended and restated, were executed
and delivered by PPI and the Companies. On November 4, 1996, an amendment to the
Reorganization and Merger Agreement was executed and delivered by PPI and the
Companies pursuant to which the parties agreed to amend, among other provisions,
Section 5.1(b)(ii) of the Reorganization and Merger Agreement which permitted
each of the Companies to make, prior to the Effective Time, a distribution to
its shareholders in the event the net shareholder equity per FTE of such Company
exceeded the net shareholder equity per FTE of any other Company by more than
20%, based on the reviewed balance sheet thereof as of June 30, 1996. Such
amendment provided that in the event the balance sheet as of September 30, 1996
for each of the Companies became available before the mailing of the Joint Proxy
Statement/Prospectus, the net shareholder equity per FTE would be determined by
the September 30, 1996 balance sheet.
On November 24, 1996, several members of the senior management of the
Companies and PPI met to discuss the unaudited balance sheets of each of the
Companies for the period ended September 30, 1996 which had been recently
completed. The September 30, 1996 balance sheet of HealthFirst showed a
significant operating loss, reflecting a cumulative loss of $4,639,000 for the
nine-month period ended September 30, 1996. Under the Amended and Restated
Agreement and Plan of Reorganization and Merger, dated as of September 19, 1996
and amended on November 4, 1996, based on the September 30, 1996 balance sheet,
each of Corvallis Clinic and Medford Clinic was entitled to make a significant
amount of distribution to its shareholders prior to the Effective Time. The
Companies expressed a concern and agreed with PPI management that such
distributions by Corvallis Clinic and Medford Clinic would result in a
substantially weaker financial condition of PPI after the Merger. As an
alternative, it was agreed that the differentials in the net shareholder equity
per FTE among the Companies, as reflected in the respective audited balance
sheets of the Companies as of December 31, 1996 delivered to PPI on or before
March 31, 1997, be adjusted by establishing an escrow prior to the Effective
Time into which the shareholders of each Company would deposit a certain number
of shares of PPI Class A Common Stock. The aggregate number of shares of PPI
Class A Common Stock that will be deposited in escrow by shareholders of each of
the Companies as of the Effective Time is 1,926,000 (representing 8,000 shares
per FTE of each of the Companies as of October 1, 1996). Shareholders of
HealthFirst, holders of Corvallis Clinic Class B Stock and shareholders of
Medford Clinic will deposit in escrow 840,000 shares, 622,000 shares and 464,000
shares, respectively, of PPI Class A Common Stock (again, representing 8,000
shares per FTE). PPI Class A Common Stock will be released to such shareholders
(referred to herein as "Escrow Holders") from escrow based on the Net
Shareholder Equity Per FTE. If the Net Shareholder Equity Per FTE of any Company
(referred to herein as an "Excess Company") exceeds that of any of the other
Companies by more than 20 percent (a difference of greater than 20 percent being
referred to herein as an "Excess Difference"), the number of shares released
from escrow will be adjusted to reflect such Excess Difference. More
specifically, shares shall be released to Escrow Holders so that the Escrow
Holders who had been shareholders of an Excess Company would receive out of
escrow, in the aggregate, such number of shares of PPI Class A Common Stock as
represents a value (measured assuming a $15.82 per share value of PPI Class A
Common Stock(1)) exceeding the aggregate value of shares of PPI Class A Common
Stock received by the Escrow Holders who had been shareholders of the other
Company or Companies by an amount equal to the product of the Excess Difference
multiplied by the FTE of such Excess Company. In contrast, if the Net
Shareholder Equity Per FTE of each of the Companies is within 20 percent of one
- ------------------------
(1)The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of PPI Class A Common
Stock (reflecting 27,000 shares per FTE of the Companies and 135,000 shares
issued to former officers and one director of PPI, in the aggregate) are
outstanding after the release of shares from escrow.
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another, each Escrow Holder will receive out of escrow one-half of the shares
deposited thereby (which would result in the shareholders of each of the
Companies receiving, in the aggregate, 27,000 shares per FTE of such Company).
Thus, depending upon differences between net shareholder equity of the Companies
as of December 31, 1996, the shareholders of each of the Companies might receive
any portion of or none of the shares of PPI Class A Common Stock deposited
thereby in escrow (ranging from an aggregate of 31,000 shares per FTE to an
aggregate of 23,000 shares per FTE on a Company-by-Company basis, provided that
the aggregate number of shares released from escrow will not result in the total
number of shares issued to the shareholders of all the Companies as
consideration in the Merger exceeding 27,000 shares per FTE of all the
Companies). Balance sheets reflecting the December 31, 1996 net shareholder
equity of the Companies will be prepared and audited no later than March 31,
1997; within five business days of delivery of such balance sheets, the Escrow
Holders will receive shares of PPI Class A Common Stock from escrow as described
above. Any PPI Class A Common Stock not so released from escrow will be
cancelled and retired.
On November 25, 1996 the Corvallis Clinic Board and the Medford Clinic Board
unanimously approved the escrow arrangement. On November 26, 1996 the
HealthFirst Board unanimously approved the escrow arrangement. The respective
boards of directors of the Companies agreed with the PPI Board's concern that
cash distributions by Corvallis Clinic and Medford Clinic permitted under the
Reorganization and Merger Agreement then in effect would have resulted in a
substantially weaker financial condition of PPI, which, in turn, would have made
PPI a much less attractive vehicle for raising capital. They were also in
agreement that calculating the Net Shareholder Equity Per FTE on the basis of
audited balance sheets of the Companies as of December 31, 1996 would also
provide a more appropriate and up-to-date basis for determining the relative net
shareholder equity of the Companies. On November 29, 1996, PPI and the Companies
entered into the Second Amendment and Waiver of Amended and Restated Agreement
and Plan of Reorganization and Merger on November 29, 1996 and the Third
Amendment to Amended and Restated Agreement and Plan of Reorganization and
Merger on December 31, 1996.
HEALTHFIRST'S REASONS FOR THE MERGER
In anticipation of changes in the business of medicine, Metropolitan, the
predecessor to HealthFirst, had by the early 1990s accomplished a change in its
corporate structure and begun to accumulate retained earnings, both of which
were unusual in medical groups. These changes at Metropolitan, combined with its
success since 1985 with managed and capitated care in the Portland area, allowed
for substantial growth from 1990 to 1995. Metropolitan subsequently entered into
a business combination with Suburban Medical Group ("Suburban"). As the product
of such business combination, HealthFirst positioned itself for continued
growth. However, despite the wide geographic coverage, large number of providers
and long-standing managed care experience of HealthFirst in the Portland area,
the HealthFirst Board also recognized the following conditions:
- CAPITAL NEEDS: Increased capital, which could no longer be obtained from
retained earnings, would be needed to sustain continued growth and build
increasingly necessary and capital-intensive infrastructure, including the
technological infrastructure necessary to improve computer capabilities,
link multiple HealthFirst sites and make the transition to electronic
medical record systems; and various sources of capital, including debt,
venture capital and existing physician practice management ("PPM")
companies would not adequately meet the needs of HealthFirst for capital
while maintaining physician control.
- PHYSICIAN LEADERSHIP: Physicians, especially those in practice groups,
were in a better position than non-physician business people to guide the
direction of changes in medicine and to control costs because of their
unique role as advocates for patients.
- COMPETITION: Competitors in the HealthFirst market were beginning to
affiliate with PPMs, hospitals and other third parties, giving them a
better access to capital; and competition for managed care lives was
increasing in the Portland market.
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In response to these business conditions, in March 1996, the HealthFirst
Board undertook a strategic planning initiative. One of the purposes of this
initiative was to explore a variety of potential strategic capital partners,
including local hospitals, publicly-traded PPMs and large medical group
practices. The HealthFirst Board eliminated consideration of local hospitals due
to the long-standing strategic position taken by HealthFirst and its predecessor
clinic (Metropolitan) to stay neutral in the highly competitive and complex
local hospital marketplace in Portland. Subsequently, the HealthFirst Board also
considered the possibility of combining with two separate national PPMs. In
September 1995 a marketing representative from a publicly-traded PPM met with
the HealthFirst Board. Such representative provided a general marketing
presentation and answered some general questions regarding organization,
governance and management of such PPM. No HealthFirst data was provided to this
representative. The HealthFirst Board concluded that there was not a strategic
fit with such PPM due to its lack of managed care experience and the lack of
meaningful influence which HealthFirst physicians would have on the governance
thereof. No further analysis was undertaken or contacts initiated with such PPM.
Subsequently, in March 1996, the HealthFirst Board met with representatives from
another publicly-traded PPM. Again, no HealthFirst data was offered to these
representatives. After such meeting, the HealthFirst Board concluded that there
was not a strategic fit with this PPM based on the PPM's then existing
relationships in the Portland market, the history of this PPM in terms of the
Board's perception that such PPM was focused on growth for growth's sake, and
the Board's concern about the future financial stability of such PPM. Again, no
further analysis was undertaken or contacts initiated with such PPM.
At the same time, the HealthFirst Board began to establish essential
criteria for selecting a strategic capital partner. The criteria required that a
strategic capital partner have significant physician ownership,
physician-controlled governance, extensive group practice experience and
culture, extensive managed care (capitated) experience and the ability to exert
local market leverage. Based on meetings with national PPMs and upon the
criteria established, the HealthFirst Board determined that a merger with other
Oregon primary care based multi-specialty groups was the preferred option for a
strategic and capital partnership. Accordingly, the HealthFirst Board and
management decided to enter into discussions with Corvallis Clinic and Medford
Clinic for a possible merger of the three Companies and the formation of PPI as
a PPM. See "The Merger and Related Transactions--Background of the Merger".
The material favorable, unfavorable and certain neutral factors considered
by the HealthFirst Board in reaching its decision to approve the Merger Proposal
are set forth below:
- SYNERGIES: The HealthFirst Board's belief that medical groups with similar
culture and quality in delivery of health care services would be its best
partners. Medical groups with the proven ability to deliver quality
medical care and manage covered lives efficiently would benefit patients
as well as their shareholders. In Corvallis Clinic and Medford Clinic, the
HealthFirst Board perceived two excellent potential partners. By forming
PPI, HealthFirst believed that it would be able to withstand adverse
market conditions through realization of cost savings, elimination of
redundancy and economies of scale. The HealthFirst Board has identified
several areas where there are potential cost savings resulting from the
proposed merger: (a) supply purchasing (medical, surgical, drug and
administrative); (b) business insurance (including professional liability,
capitation risk stop loss, business and property liability and casualty
insurance); (c) employee insurance (health, life and disability); and (d)
consolidation of existing long and short term indebtedness. The
HealthFirst Board's belief regarding opportunities for synergies was based
on its general knowledge of the marketplace, extensive experience in
managing a medical group and on general discussions by its managers with
the management of Corvallis Clinic and Medford Clinic. The HealthFirst
Board did not, at such time, wish to incur the expense or assign the
resources necessary to quantify such synergies. The HealthFirst Board
considered the possible inability to realize synergies in aligning with a
Company--Corvallis Clinic--which had experienced recent operating losses.
There was also uncertainty among members of the HealthFirst Board
regarding the new PPI management team's ability to manage effectively. The
HealthFirst Board concluded that the potential synergies resulting
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from the business combination with Corvallis Clinic and Medford Clinic
outweighed the HealthFirst Board's concerns regarding management.
- CAPITAL NEEDS: The HealthFirst Board's conclusion that a capital equity
partner was required in order for HealthFirst to meet future capital
requirements needed to sustain continued growth and competitiveness. The
HealthFirst Board perceived increasingly adverse market conditions
stemming from the competitive environment for attracting and retaining
quality physicians and medical groups. Merger and acquisition activities,
as well as direct employment of primary care physicians by local
hospitals, had all been on the rise. In addition, one national PPM had
already created competition for HealthFirst as a potential merger
candidate with another medical group in the market. By merging with
entities outside of its geographic market, HealthFirst could address its
need to expand in order to attract managed care providing without
additional recruitment in Portland, Oregon, or incurring the expense of
opening up new offices in more distant locations. The HealthFirst Board
considered questions concerning competition for limited PPI capital
resources among the New PCs after the Merger. The HealthFirst Board
believed, however, that financially justifiable capital investments could
be recommended to PPI and endorsed for funding. The HealthFirst Board
concluded that the potential need to compete and justify future capital
needs was outweighed by the new business discipline that would apply to
all of the New PCs to the analysis of future capital needs.
- ACCESS TO CAPITAL: The HealthFirst Board's conclusion that PPI, as the
combined entity, would have a significant base of shareholders, providers,
geography and equity and, thus, an advantageous position for obtaining
capital. The Merger enhances the possibility that shareholders could hold
securities traded on a national securities exchange in the future. If the
shares of PPI Class A Common Stock were publicly traded, the stockholders
of PPI, including the current shareholders of HealthFirst, would enjoy
more liquidity in their investment and greater potential for maximizing
long-term shareholder return (although the HealthFirst Board understood
there could be no assurance that PPI securities would be so traded).
Although the HealthFirst Board realized that in the short term the
Management Fee would likely reduce provider compensation, the HealthFirst
Board determined that the overriding factor was that the Merger would
greatly enhance HealthFirst's access to capital. This factor weighed
strongly in the HealthFirst Board's overall decision to recommend the
Merger Proposal.
- GEOGRAPHIC COVERAGE: The HealthFirst Board's belief that the broader
geographic coverage and improved access for patients of HMOs and larger
purchaser groups offered by PPI would allow it to better compete in a
managed care environment and would improve growth in covered lives. The
HealthFirst Board was concerned about the possibility that the formation
of PPI would attract greater competition from other PPMs and hospitals in
HealthFirst's and other Companies' service areas. The HealthFirst Board
was also concerned about potential difficulties for PPI in attempting to
satisfy the differing and sometimes conflicting needs of the Portland
market compared to that of Corvallis or Medford. Specific concern was
expressed regarding relationships with payors. If, for example, PPI were
to seek substantially better terms from a payor in one of PPI's markets,
there could be a backlash in such payor's relationship with HealthFirst.
The HealthFirst Board concluded, however, that it was more likely that
HealthFirst would instead achieve greater leverage and opportunity by
virtue of greater geographic coverage.
- PHYSICIAN LEADERSHIP: The HealthFirst Board's belief that the ability of
PPI to provide leadership by physicians in both governance and clinical
program development of PPI would enhance HealthFirst's ability to provide
better clinical care for patients and compete in both managed care and
fee-for-service markets. During the HealthFirst Board's deliberations,
concern was expressed regarding the structure of physician leadership and
whether HealthFirst's medical director would be distracted by the larger
needs of PPI. In addition, the HealthFirst Board was concerned that
outside leadership might change positive features of the governance of
HealthFirst. Nonetheless, after
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becoming acquainted with the leaders of the other entities and their
values, the HealthFirst Board concluded that PPI's physician leadership
component provided a strong reason to recommend the Merger Proposal.
- EMPLOYEE BENEFITS: The HealthFirst Board's belief that the Merger would
enhance the workplace for its employees and future employees of
HealthFirst New PC by allowing the ability to transfer among locations
without losing seniority or benefits and, for its provider-employees, by
providing eligibility for ownership of PPI through stock option plans.
Significant concern was expressed, however, that employees might lose
benefits which they presently have at HealthFirst as a result of the
Merger.
- FAIR VALUE AND OTHER TERMS: The HealthFirst Board's conclusion that the
consideration to be received by the shareholders of HealthFirst pursuant
to the Merger and other terms of the Reorganization and Merger Agreement
are fair to, and in the best interests of, HealthFirst and its
shareholders. The HealthFirst Board determined that the respective FTE of
each Company represented a fair and reasonable basis for allocation of
shares of PPI Class A Common Stock to be issued by PPI as a consideration
in the Merger. The HealthFirst Board believed that the relative economic
value of each of the Companies derives from the capacity of such Company
to generate revenues for the combined entity, PPI. The HealthFirst Board
determined that such capacity was best measured by reference to the number
of FTE providers employed by a Company. The HealthFirst Board deemed it
unnecessary to engage an outside advisor to confirm the fairness of the
consideration in the Merger to be received by the shareholders of
HealthFirst in the Merger. The HealthFirst Board did not consider engaging
an outside party to determine whether the exchange ratio and other terms
of the New PC Reorganization and the Merger were fair to HealthFirst
shareholders.
- ESCROW ARRANGEMENT: The provision of the Reorganization and Merger
Agreement calling for a certain number shares of PPI Class A Common Stock
for issuance to shareholders of each of the Companies to be deposited into
escrow for release to such shareholders in amounts corresponding with the
relative Net Shareholder Equity Per FTE of each such Company was also
considered significant. The HealthFirst Board determined that using the
report of American Appraisal that was originally prepared for the purpose
of allocating Merger consideration value among Corvallis Clinic
shareholders was a reasonable and fair basis for valuing the shares to be
deposited in escrow by the shareholders of each Company. For a more
detailed discussion of such American Appraisal Report, see "The Merger and
Related Transactions--Corvallis Clinic's Reasons for the Merger." The
HealthFirst Board recognized that cash distributions by Corvallis Clinic
and Medford Clinic, based on the unaudited September 30, 1996 balance
sheets of the Companies, permitted under the Amended and Restated
Agreement and Plan of Reorganization and Merger, dated as of September 19,
1996 and amended on November 4, 1996, would have substantially weakened
financial condition of PPI, which, in turn, would have had an adverse
impact on one of the more important factors considered by the HealthFirst
Board in approving the Merger--an enhanced ability to raise capital. The
HealthFirst Board also concluded that calculating the Net Shareholder
Equity Per FTE on the basis of audited balance sheets of the Companies as
of December 31, 1996 would provide a more appropriate and timely basis for
determining Merger consideration adjustment based on the relative net
shareholder equity of the Companies. The potential risk to its
shareholders in the event HealthFirst's financial performance did not
improve during the last quarter of 1996 was not considered to be
significant. (For a more detailed description of the circumstances under
which such adjustment and the amount thereof may be made, see "Terms of
the Reorganization and Merger--Escrow Arrangement").
- TAX CONSEQUENCES: The HealthFirst Board's conclusion that the structure of
the Merger would permit the holders of HealthFirst Class A Shares to
exchange their shares for PPI Class A Common Stock on a tax-free basis.
HealthFirst has received an opinion from McDermott, Will & Emery,
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counsel to PPI and each of the Companies, that, upon the basis of certain
assumed and described facts, it is more likely than not that the Merger
will constitute a tax-free transaction. See "Terms of the Reorganization
and Merger--Federal Income Tax Considerations."
- INTEREST OF CERTAIN PARTIES: The HealthFirst Board considered the
potential benefit of the proposed Merger to individuals associated with
HealthFirst. The HealthFirst Board did not believe the potential benefits
of the proposed Merger inuring to certain individuals (including any
possible conflicts of interest) were significant negative factors in its
determination to recommend the Merger.
In light of the factors described above, the HealthFirst Board concluded
that the Merger was fair to, and in the best interests of, HealthFirst and its
shareholders. The HealthFirst Board found that the potential negative effects of
the Merger were outweighed by the positive factors and, thus, that such positive
factors were persuasive in recommending approval of the Merger Proposal to the
shareholders of HealthFirst. The HealthFirst Board was willing to forego
exploring proposals from other parties for a specified period of time in order
to concentrate solely on the Merger with Corvallis Clinic and Medford Clinic.
The downside risks of putting aside other potential opportunities and the risk
of incurring a break-up fee were determined to be secondary to the benefits of
the opportunity to attempt to consummate the Merger.
HEALTHFIRST BOARD'S RECOMMENDATION
The HealthFirst Board believes that the Merger and the terms of the
Reorganization and Merger Agreement are fair to, and in the best interests of,
HealthFirst and its shareholders and has thus unanimously approved the Merger
Proposal. THE HEALTHFIRST BOARD UNANIMOUSLY RECOMMENDS THAT HEALTHFIRST
SHAREHOLDERS VOTE IN FAVOR OF THE MERGER PROPOSAL.
CORVALLIS CLINIC'S REASONS FOR THE MERGER
At a meeting held on July 18, 1996, the Corvallis Clinic Board, with the
assistance of Corvallis Clinic's outside legal counsel, considered the terms and
structure of the Merger and the related transactions and reviewed the legal,
financial and other ramifications of the Merger and the related transactions. At
a meeting held on July 24, 1996, the Corvallis Clinic Board unanimously adopted
the Merger Proposal and the other Proposals. The Merger Proposal was adopted
because it appeared to allow Corvallis Clinic physicians the maximum opportunity
to retain physician control over the medical affairs of Corvallis Clinic while
adjusting its business structure to align with a marketplace requiring an
increased ability to negotiate with managed care payors and to raise capital.
Such factors were more important to the Corvallis Clinic Board than the
attainment of specified cost savings through the Merger. The Corvallis Clinic
Board agreed to forego exploring proposals from other parties for a specified
period of time and accepted the risk of incurring a break-up fee in order to
move ahead with the agreed upon Merger with HealthFirst and Medford Clinic on a
mutually concentrated and focused basis. The Corvallis Clinic Board determined
that it was appropriate to do so based on its perception of the marked potential
advantages of the proposed business combination with HealthFirst and Medford
Clinic.
No outside consultants were engaged by the Corvallis Clinic Board to analyze
the relative values of the Companies for purposes of determining the allocation
of shares of PPI Class A Common Stock because the Corvallis Clinic Board
believed that it, together with management of HealthFirst and Medford Clinic,
could agree upon proposals that would mutually benefit the shareholders of each
of the Companies and also felt positive about the methodology ultimately adopted
regarding Merger consideration.
As contemplated by the Reorganization and Merger Agreement, an outside
party, American Appraisal, was engaged for the purpose of determining the
exchange of the Companies' shares for PPI equity to be received among the
holders of Corvallis Clinic Class A Stock, Corvallis Clinic Class B Stock
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and Corvallis Clinic Class C Stock. American Appraisal was selected based upon
the accessibility it could provide and its expertise in valuations in the health
care industry. American Appraisal has performed over 6,500 engagements regarding
health care valuation since 1965. It is familiar with valuations involving
complex health care provider enterprises and related intangible assets. In order
to determine the appropriate allocation as contemplated under the Reorganization
and Merger Agreement, American Appraisal completed an investigation and
appraisal of the total business enterprise of PPI and opined that, as of June
30, 1996 (based on the assumption that the transactions contemplated by the
Reorganization and Merger Agreement were consummated as of such date), the fair
market value of the total business enterprise of PPI, for purposes of the
exchange of shares for equity in PPI and financial reporting, would be
reasonably represented by the amount of $105,000,000. "Fair market value" is
defined in the Appraisal Report prepared and issued on November 2, 1996 by
American Appraisal (the "American Appraisal Report"), as the estimated amount at
which the property or total business enterprise might be expected to exchange
between an informed, willing buyer and an informed willing seller neither being
under compulsion each having reasonable knowledge of all relevant facts. Balance
sheets, financial statistics and operating results furnished to American
Appraisal by Corvallis and PPI with respect to the Companies were assumed to
properly represent business operations and conditions. The American Appraisal
Report was provided to the Corvallis Clinic Board as an opinion of value to be
used as a basis for the exchange of Corvallis Clinic's shares for PPI equity
among its various classes of shareholders. The American Appraisal Report does
not address any aspect of the Merger other than the exchange of shares for PPI
equity and does not address any related transaction, nor does it constitute a
recommendation to any Corvallis Clinic shareholder or other shareholder
regarding a vote on the Proposals.
For its business enterprise appraisal, American Appraisal's investigation
included a review of financial data, as well as discussions with management
regarding operations. The appraisal process undertaken by American Appraisal
included consideration of various factors affecting the operation of the
business and its ability to generate future investment returns. The factors
considered by American Appraisal in reaching its conclusion on value, included
but not limited to: (i) history of the Companies and PPI from their inception
and the nature of such enterprises, (ii) financial condition and book value,
(iii) historical revenues and earnings of the Companies, (iv) specific economic
and competitive elements affecting PPI, its industry and markets, (v) projected
operating results, (vi) dividend-paying capacity, (vii) present worth of future
monetary benefits based upon appropriate rates of return as indicated by
alternative investment opportunities of comparable magnitude, character and
risk, (viii) comparative analysis of the financial condition and operating
results with those of publicly owned companies engaged in similar lines of
business activity, (ix) existence of nonoperating assets, (x) existence of
assets of an intangible nature (xi) current and historical relationships between
the reported stock prices and earnings levels of selected publicly traded
companies and (xii) balance sheet historical costs for certain assets and
liabilities and the likelihood of receiving value in a continued-use scenario
for such assets or being obligated to satisfy liabilities in a continued-use
scenario.
More specifically, with respect to certain of such items, American
Appraisal, in connection with its opinion, (i) reviewed the Reorganization and
Merger Agreement, (ii) reviewed the consolidated financial statements and
results of the three Companies that will be managed by PPI, (iii) reviewed
financial statements as of and for the years ended November 30, 1991 through
1995 for Corvallis Clinic and as of and for the years ended December 31, 1991
through 1995 for HealthFirst and Medford Clinic, (iv) reviewed audited balance
sheets as of November 30, 1994 and 1995 for Corvallis Clinic and as of December
31, 1994 through 1995 for HealthFirst and Medford Clinic and audited statements
of operations for the years ended November 30, 1993 through 1995 for Corvallis
Clinic and for the years ended December 31, 1993 through 1995, (v) reviewed
fiscal year-to-date statements for the seven months ended June 30, 1996, for
Corvallis Clinic and the six months ended June 30, 1996, for HealthFirst and
Medford Clinic, (vi) reviewed historical financial statements for HealthFirst
for the five years ended December 31, 1991 through 1995, (HealthFirst's
historical financial statements were aggregated by American Appraisal by adding
Metropolitan and Suburban historical financial statements together), (vii)
reviewed internal
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financial projections of PPI prepared by the management of PPI for the six years
ending December 31, 2001, (viii) reviewed the financial terms, to the extent
publicly available, of certain comparable transactions, which are similar in
certain respects to the Merger, (ix) compared the historical and projected
financial results of PPI to comparable publicly traded companies which are
similar in certain respects to PPI, and (x) considered such other information,
financial studies and analyses, and financial, economic and market criteria as
American Appraisal deemed relevant.
American Appraisal used both an income approach (based generally on a
discounted cash flow analysis) and a market approach (based generally on
acquisition prices for multi-specialty and physician practices which have
recently been acquired or are in the process of being acquired in the
marketplace) as indications of the fair market value of PPI's business
enterprise. No limitations were placed on American Appraisal by Corvallis Clinic
or PPI with respect to the investigation made or the procedures followed in
preparing its report.
INCOME APPROACH--The income approach explicitly recognizes that the current
value of an investment is premised upon the expected receipt of future economic
benefits, such as cost savings, periodic income, or sale proceeds.
The discounted cash flow analysis of the income approach to valuation used
by American Appraisal for PPI utilized a net debt-free cash flow stream, defined
as cash flow free of long-term debt charges and net of requirements for future
working capital, capital expenditures, cash for acquisitions, and bonus
payments. Anticipated depreciation and amortization expense was then added to
the projected debt-free net income to arrive at debt-free cash flows.
American Appraisal reviewed a forecast prepared by PPI of operating results
for the fiscal years ending December 31, 1996 through 2001. The forecast was
divided into the following six periods: (1) June 30, 1996 to December 31, 1996,
(2) January 1, 1997 to December 31, 1997, (3) January 1, 1998 to December 31,
1998, (4) January 1, 1999 to December 31, 1999, (5) January 1, 2000 to December
31, 2000 and (6) January 1, 2001 to December 31, 2001.
The projections reviewed by American Appraisal were prepared by the
management of PPI. Such projections were not prepared with a view towards public
disclosure. Such projections were based on numerous variables and assumptions
which are inherently uncertain, including, without limitation, factors related
to general economic and competitive conditions. Accordingly, actual results
could vary significantly from those set forth in such projections.
A discount rate was applied to PPI's debt-free net cash flows through
December 31, 2001 and relevant terminal values. The discount was based on the
weighted average cost of capital ("WACC") analysis. In determining the correct
discount rate utilizing the WACC analysis, consideration was given to an
analysis of short-term interest rates, the yields of long-term corporate and
government bonds, and other alternative instruments, as well as to the typical
capital structure of the companies in the industry.
As the cash inflows were projected on a debt-free basis, the discount rate
applied was weighted to incorporate the rates of return currently required by
all suppliers of capital. Because the optimum debt ratio for a specific firm
cannot be calculated and because the purpose of the appraisal was to value the
business to any willing buyer, the discount rate developed was based on the
average capital structure of firms in the industry under review.
American Appraisal used Ibbotson and Sinquefield's Stocks, Bonds, Bills, and
Inflation: The Past and Future, which included a statistical examination of six
basic series: common stocks, small capitalization common stocks, long-term U.S.
government bonds, U.S. Treasury bills, and inflation. This study computed total
rates of return reflecting capital gains and dividends or interest income for
each series. It demonstrated that investments in common stocks, as represented
by Standard & Poor's Composite Index, have provided an arithmetic mean return
premium of 7 percent over the benchmark government issues since 1926.
Additionally, American Appraisal compared historical returns on investments in
New York Stock
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Exchange ("NYSE") stocks in general and on investments in small capitalization
stocks--those making up the fifth quintile of the NYSE. The results of this
comparison indicated that returns on small capitalization stocks listed on the
NYSE have historically been about 5.2 percent greater than the returns on
investments in NYSE stocks taken as a whole. employing this data, the discount
rate was calculated to be 19 percent. Thus, a discount rate of 19 percent was
utilized to present value PPI's debt-free cash flows for Periods 1 through 6 and
the terminal values.
Terminal values were derived by applying market multiples to various
earnings streams of PPI during calendar year 2001 and discounting the terminal
value to present value with a selected 19.0% discount rate. This approach made
use of market price data of stocks of corporations engaged in the same or
similar line of business as that of PPI. Stocks of these corporations are
actively traded in a public, free, and open market, either on an exchange or
over-the-counter basis. The companies selected were Caremark International,
Inc., FPA Medical Management, Inc., InPhyNet Medical Management, Inc.,
Medpartners/Mullikin, Inc. and Phycor, Inc. (referred to herein, collectively,
as the "Guideline Companies").
Based on an analysis of the Guideline Companies in terms of business line
and history, profitability and performance and growth, assuming the historical
receipt of a management fee, as contemplated to be paid to PPI, in comparison to
the consolidated results of the Companies, American Appraisal weighted such
companies as follows in selection of the market multiples: Caremark
International, Inc. at 25 percent, FPA Medical Management, Inc. at 15 percent,
InPhyNet Medical Management, Inc. at 20 percent, Medpartners/Mullikin, Inc. at
15 percent, and Phycor, Inc. at 25 percent.
American Appraisal used the latest 12-month invested capital to revenue,
earnings before depreciation, interest, taxes and amortization ("EBDITA"), and
earnings before interest and taxes ("EBIT") multiples of the Guideline Companies
as a basis to derive multiples for PPI. The weighted multiples were adjusted for
risk, growth and profitability and adjustments were made based on a restatement
of the consolidated results of the Guideline Companies to a PPI-type structure
in which a management fee would have been charged historically. An adjustment of
70 percent was applied to the indicated market weighted multiples to account for
PPI's smaller size, assumed inferior growth, and similar profitability.
American Appraisal weighted PPI's indicated invested capital values based on
operating revenue, EBDITA and EBIT multiples to conclude an invested capital
value of $90,478,000. The multiple for operating revenue was weighted at 50
percent, and each of the EBDITA and EBIT multiples were weighted at 25 percent.
More weighting was applied to operating revenues as PPI has not operated
historically and the projections prepared by PPI did not take into account any
synergies.
American Appraisal concluded that the market-derived multiples inherently
reflect the aggregate opinion of minority investors due to the very nature of
stock market transactions, and the PPI projections do not reflect any synergy.
As such, American Appraisal adjusted the minority-indicated invested capital
value to a majority-indicated invested capital value by applying a 25 percent
premium for control to the concluded invested capital. A control premium of 25
percent was derived from an analysis of equity premiums offered in the health
service industry. Mergerstat Review was the source of acquisition data for the
period 1991 through 1995.
Based on the preceding discussion of the valuation process, American
Appraisal concluded that the indicated fair market value of the PPI business
enterprise using the income approach is $113,100,000.
MARKET APPROACH--Using transaction data provided by Irving Levine
Associates, Inc. and The Goodwill Registry 1996, American Appraisal identified
transactions involving multispecialty and physician practices which have been
acquired or are in the process of being acquired. In its search for transaction
data, American Appraisal concentrated on either primary care or multispecialty
physician practices involving transactions occurring during 1995 or early 1996.
American Appraisal noted that, due to the complexity of physician practice
acquisitions, the market data presented was considered only in a broad sense,
with the data providing the general limits or range
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within which physician practices of a particular size and quality should
reasonably transfer in the currently competitive market.
The first benchmark used by American Appraisal was to analyze the price paid
on a per-physician basis. In this approach, American Appraisal viewed physicians
as a common economic unit, capable of generating a certain level of profits.
Thus, the value per physician would be comparable. In order to derive an
applicable price per physician, American Appraisal reviewed Irving Levine
Associates, Inc.'s, publication entitled "The Physicians Medical Group
Acquisition Report," First Edition. American Appraisal selected 42 transactions
(including 25 transactions which involved the Guideline Companies) in which the
acquirer is in the process of acquiring multispecialty or primary care-type
practices and in which the following data were available--target company,
acquirer, number of physicians, purchase price, and latest annual revenue. From
these data, American Appraisal determined the average and median price paid per
physician, as well as the average and median price to revenue multiplier for
each of the acquisitions. Based on the wide variability in data, American
Appraisal determined that the median price per physician was a better indicator
of value. Based on a median price per physician of approximately $380,000 and a
physician base of approximately 270 physicians, the business enterprise value of
PPI was calculated as $102,600,000.
The second benchmark applied to the Companies' 1995 results by American
Appraisal was to determine the revenue multiplier paid for the various medical
practices from the 42 transactions analyzed. Based on correlating the prices
paid for the business enterprise of each practice and the practice's most recent
annual net revenue, American Appraisal derived the revenue multipliers for most
of the transactions. Based on the data analyzed by American Appraisal, the
prices paid ranged from a revenue multiplier at the low end of 24 percent to a
high of 323 percent. Additionally, the average of the revenue multipliers was
78.0% and the median was 72 percent. Based on a median revenue multiplier of
0.72 and a 1995 consolidated net revenue of $131,211,000, the business
enterprise value of PPI was calculated as $94,472,000.
In addition, American Appraisal utilized The Health Care Group's publication
entitled "Goodwill Registry 1996" in order to analyze transactions for
multispecialty practices. American Appraisal analyzed 12 transactions of
multispecialty practices that occurred during the period 1992 through 1995 and
derived the gross revenue multipliers for the various medical practices. Based
on the data, the average revenue multiplier excluding the high and low of the
transactions was 62 percent, and the median gross revenue multiplier was 64
percent and a 1995 consolidated gross revenue of $153,209,000. Based on a median
gross revenue multiplier of 64 percent, the business enterprise value of PPI was
calculated as $98,054,000.
American Appraisal applied the third benchmark to the Companies' financial
results by isolating goodwill attributable to various market transactions in
order to determine the ratio of goodwill as a percent of revenue for 34 medical
specialties for the period 1987 to 1996. Applying approximately the median to
the Companies gross revenue for 1995 indicates goodwill and business enterprise
as $94,725,000.
Based on the preceding discussion and the equal weighting of the results
obtained under the guideline transaction technique, a business enterprise value
of $97.5 million for PPI as of June 30, 1996 was concluded.
American Appraisal concluded that each of the income and market approaches
provide an appropriate indication of value. It was determined that the concluded
values in each approach would be weighted equally and, as a result, a weighted
indication of value was developed as follows: 50 percent of the income approach
valuation of $113,100,000 plus 50 percent of the market approach valuation of
$97,500,000 equals $105,300,000. As such, based on the investigation and premise
described the appraisal report, it is American Appraisal's opinion that, as of
June 30, 1996, the valuation of the total business enterprise of Physicians
Partners, Inc., for the purpose of the exchange of the Companies' shares for PPI
equity and financial reporting purposes, is reasonably represented by the amount
of $105,000,000.
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The American Appraisal valuation report has been filed as an exhibit to the
Registration Statement and is available for inspection and copying at the
principal executive offices of PPI during its regular business hours by any
shareholder of the Companies or a representative of such shareholders who is
designated in writing.
A more specific description of the material factors considered by the
Corvallis Clinic Board in reaching its decision to adopt the Merger Proposal
rather than other alternatives, is set forth below.
- ACCESS TO CAPITAL: The Corvallis Clinic Board's recognition that in order
to be competitive and to continue to expand in its market area, access to
capital would be critical. The Corvallis Clinic Board believed that the
combined entity could have a greater base of shareholders and a stronger
capital structure, enhancing the likelihood that the capital stock of the
combined entity would be listed on a national securities exchange
(although the Corvallis Clinic Board understood there could be no
assurance that PPI securities would be so listed). Thus, a combined entity
would have a significantly better chance of acquiring capital for the
future than Corvallis Clinic alone. Further, the Corvallis Clinic Board
believed that, due in part to the recent operating losses incurred by
Corvallis Clinic, future access to capital would be increasingly costly
and difficult to obtain. Therefore, this factor was very significant in
the Corvallis Clinic Board's recommendation of the Merger.
- SYNERGIES: The Corvallis Clinic Board's belief that, because of the
uniqueness and synergy of the three Companies, the Merger would have a
positive impact on profitability. Significant economies of scale and
financial benefits are anticipated from consolidation of the operations of
the Companies in many areas, including business insurance, purchasing and
employee benefits. The Corvallis Clinic Board's belief regarding
opportunities for synergies was based on its experience in managing a
significantly capitated multi-specialty group practice and on general
discussions by its managers with the management of HealthFirst and Medford
Clinic. The Corvallis Clinic Board did not, at such time, wish to incur
the expense or make the staff time and effort commitment to quantify such
synergies. The Corvallis Clinic Board expects the combined entity to have
an enhanced negotiating posture with local hospitals and state-wide HMOs.
The Corvallis Clinic Board further perceived an opportunity, as a result
of the Merger, for PPI to build on the strengths of each of the three
combining Companies across a variety of business and clinical operations
which would benefit Corvallis Clinic and its shareholders. One issue of
concern was the effect of the natural geographic boundaries which limit
Corvallis Clinic's growth. In the event that PPI were to acquire
additional hubs in Eugene and in Salem, Oregon, Corvallis Clinic could be
adversely affected. In weighing its concerns, the Corvallis Clinic Board
determined that such limitations and possibilities would exist whether or
not Corvallis Clinic were to consummate the Merger and that, in any event,
the synergies resulting from the Merger would outweigh the possible
downside.
- QUALITY OF KEY PERSONNEL: The Corvallis Clinic Board's belief that,
because of the size and similarity of the Companies, there may be a
distinct benefit created by enabling each Company to share its strengths
and management expertise with the other Companies. The Corvallis Clinic
Board considered, in connection with the Merger, the impact of losing the
services of its chief financial officer to PPI. Such concern was mitigated
by the notion that such officer would still be available, albeit on a more
limited basis, to serve as a resource to Corvallis Clinic and its
shareholders. The Corvallis Clinic Board believed that the benefits to
Corvallis Clinic of the proposed Merger clearly outweighed such loss.
- EMPLOYEE BENEFITS: The Corvallis Clinic Board's belief that the Merger
would (1) in time enhance the workplace for its employees (as future
employees of PPI or of Corvallis Clinic New PC, as the case may be) by
allowing the ability to transfer among offices without losing seniority or
benefits and (2) would offer its physician-employees eligibility to
participate in stock option plans of PPI.
- FAIR VALUE: The Corvallis Clinic Board's conclusion that the consideration
to be received by the shareholders of Corvallis Clinic pursuant to the
Merger was not only fair to such shareholders but
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better than other alternatives it reviewed. Looser affiliations among the
Companies and transactions with other entities had been explored as
alternatives at various times. The Corvallis Clinic Board determined that
the respective FTE of each Company represented a fair and reasonable basis
for allocation of shares of PPI Class A Common Stock to be issued by PPI
as a consideration in the Merger. The Corvallis Clinic Board believed that
the relative economic value of each of the Companies derives from the
capacity of such Company to generate revenues for the combined entity,
PPI. The Corvallis Clinic Board determined that such capacity was best
measured by reference to the number of FTE providers employed by a
Company. The Corvallis Clinic Board deemed unnecessary to engage an
outside advisor to confirm the fairness of the consideration in the Merger
to be received by the shareholders of Corvallis Clinic Board in the
Merger. The following methodology was used by the Corvallis Clinic Board
to allocate the PPI Class A Common Stock among the three classes of
Capital Stock of Corvallis Clinic as follows: (i) the number of shares of
PPI Class A Common Stock into which each share of Corvallis Clinic Class A
Stock and each share of Corvallis Clinic Class B Stock will be converted
pursuant to the merger represents that number having aggregate value of
$23,000 and $100, respectively, the value of each share of PPI Class A
Common Stock being based on the valuation prepared by American Appraisal
of the Companies as a combined entity, assuming such combination as of
June 30, 1996, and (ii) the number of shares of PPI Class A Common Stock
into which each share of Corvallis Clinic Class B Stock will be converted
pursuant to the Merger is equal to the quotient obtained by dividing (A)
11,800 (the number of all issued and outstanding shares of Corvallis
Clinic Class B Stock at the Effective Time) into (B) 2,269,194 (the excess
of 2,410,250 (the aggregate number of shares of PPI Class A Common Stock
which Corvallis Clinic shareholders will be entitled to receive as
consideration in the Merger) over 141,056 (the aggregate number of PPI
Class A Common Stock into which all of the issued and outstanding shares
of Corvallis Clinic Class A Stock and Corvallis Clinic Class C Stock will
be converted under footnote 1 above)).
- ESCROW ARRANGEMENT: The provisions of the Reorganization and Merger
Agreement calling for shares of PPI Class A Common Stock for issuance to
shareholders of each of the Companies to be deposited into escrow for
release to such shareholders in amounts corresponding with the relative
Net Shareholder Equity Per FTE of each such Company was determined to be
fair to the shareholders. The Corvallis Clinic Board determined that the
American Appraisal Report prepared for the purpose of allocating Merger
consideration value among Corvallis Clinic shareholders would provide a
reasonable basis for the valuation of shares to be deposited in escrow.
See the above discussion of such report. In concluding that the escrow
arrangement was fair to its shareholders, the Corvallis Clinic Board
recognized that cash distributions by Corvallis Clinic and Medford Clinic
to their shareholders under the Amended and Restated Agreement and Plan of
Reorganization and Merger, dated as of September 19, 1996 and amended on
November 4, 1996, would have eliminated most of the capital of PPI
anticipated to exist upon the Merger and substantially hamper PPI's
ability to raise new capital. The Corvallis Clinic Board also took in to
consideration the fact that the audited December 31, 1996 balance sheets
of the Companies, when compared with the unaudited September 30, 1996
balance sheets, would provide a more reasonable basis for determining
Merger consideration adjustments based on the relative net shareholder
equity of the Companies. In addition, the change from June 1, 1996 to
October 1, 1996 as the date on which to determine the FTE of each Company
pursuant to the Reorganization and Merger Agreement was considered
significant, as Corvallis Clinic's effort in reducing its FTE from 83.25
to 77.25 from June 1, 1996 to October 1, 1996 had helped increase its Net
Shareholder Equity Per FTE. Although the Corvallis Clinic Board also
recognized that it shareholders, as a group, may not be entitled to any
additional shares in excess of 23,000 shares per FTE (reduced from 27,000
shares per FTE as originally contemplated) due to possible changes in the
financial performance of each of the Companies between September 30, 1996
and December 31, 1996, such risk was more than outweighed by the
importance of maintaining the financial integrity of PPI upon the Merger.
(For a more detailed
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description of the circumstances under which such adjustment may be made,
see "Terms of the Reorganization and Merger--Escrow Arrangement").
- TAX CONSEQUENCES: The Corvallis Clinic Board's conclusion that the
structure of the Merger would permit the holders of each of Corvallis
Clinic Class A Stock, Corvallis Clinic Class B Stock and Corvallis Clinic
Class C Stock to exchange their shares for shares of PPI Class A Common
Stock on a tax-free basis. Corvallis Clinic has received an opinion from
McDermott, Will and Emery, counsel to PPI and each of the Companies, that,
upon the basis of certain assumed and described facts, it is more likely
than not that the Merger will constitute a tax-free transaction (See
"Terms of the Reorganization and Merger--Federal Income Tax
Considerations").
- INTEREST OF CERTAIN PARTIES: The Corvallis Clinic Board considered the
potential benefit of the proposed Merger to individuals associated with
Corvallis Clinic and the other Companies. The Corvallis Clinic Board did
not believe the potential benefits of the proposed Merger inuring to
certain individuals (including any possible conflicts of interest) were
significant negative factors in its determination to recommend the Merger.
In light of the factors noted above, the Corvallis Clinic Board concluded
that the Merger is fair to, and in the best interests of, Corvallis Clinic and
its shareholders.
CORVALLIS CLINIC BOARD'S RECOMMENDATION
The Corvallis Clinic Board believes that the Merger and the terms of the
Reorganization and Merger Agreement are fair to, and in the best interests of,
Corvallis Clinic and its shareholders and has, thus, unanimously approved the
Merger Proposal. THE CORVALLIS CLINIC BOARD UNANIMOUSLY RECOMMENDS THAT
CORVALLIS CLINIC SHAREHOLDERS VOTE IN FAVOR OF THE MERGER PROPOSAL.
MEDFORD CLINIC'S REASONS FOR THE MERGER
In the fall of 1995, Medford Clinic embarked on a strategic planning process
which identified several priorities for the future of Medford Clinic. First and
foremost was the conclusion that in order to thrive in the managed care era and
to deal successfully with the challenges of the future, Medford Clinic would
need a strategic capital partner. Medford Clinic systematically identified and
prioritized potential partners, including hospital systems, health plans and
practice management companies. In the spring of 1996, several potential partners
were considered. At the same time, discussions with HealthFirst and Corvallis
Clinic were in progress. By late spring of 1996, Medford Clinic had concluded
that the interests of Medford Clinic were best served by a merger of the three
Companies and formation of PPI as a PPM. The interests of the Medford Clinic
Board in maintaining local autonomy and control were instrumental in its
determination to commit to a period of exclusive negotiations with HealthFirst
and Corvallis Clinic. The Medford Clinic Board agreed to forego exploring
relationships with any other parties pending consummation or termination of the
Merger with HealthFirst and Corvallis Clinic. The risks of ceasing to explore
other strategic alliances and the financial risk of incurring a break-up fee
were considered and thought to be reasonable in light of the benefits which
would accrue to Medford Clinic as a result of the successful consummation of the
Merger.
At a meeting held on July 22, 1996, the Medford Clinic Board, with the
assistance of Medford Clinic's legal advisors, considered the terms and
structure of the Merger and related transactions and reviewed the legal,
financial and strategic ramifications of the Merger and related transactions. At
a meeting held on July 25, 1996, the Medford Clinic Board and management team
reached a unanimous decision to adopt the Merger Proposal for the following
reasons:
- GROWTH REQUIREMENTS: The Medford Clinic Board's recognition of the need to
expand both the provider base and the supporting facilities. New satellite
clinics in Medford Clinic's service area as
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well as expansion of current facilities would be needed to meet patient
needs. Capital would be required to fund those expansions.
- MANAGED CARE INFRASTRUCTURE: The Medford Clinic Board's recognition that
the increasing requirements for sophisticated information systems, data
analysis, contract negotiation, utilization review, quality assurance and
monitoring and outcome analysis demand increasingly complex and expensive
technologies. Expected capital expenditures were not quantified by or for
the Medford Clinic Board during its evaluation of the Merger. Nonetheless,
the Medford Clinic Board determined that economies of scale in sharing
costs and benefits of such infrastructure with similar multi-specialty
medical groups made strategic and financial sense.
- GEOGRAPHIC COVERAGE: The Medford Clinic Board's belief that the strategic
locations of Medford Clinic, HealthFirst and Corvallis Clinic throughout
Oregon provide solid geographic coverage which will create strategic
advantages with payors and health plans. The Medford Clinic Board
considered the possible negative impact to the Medford market of potential
actions which PPI might take in Portland or Corvallis, focusing
particularly on possible disruption of Medford Clinic's relationship with
payors and hospitals. The Medford Clinic Board determined that the
leverage and strength gained by expansion of Medford Clinic's geographic
coverage outweighed any such potential problems.
- ACCESS TO CAPITAL: The Medford Clinic Board's belief that the Merger
creates a potential opportunity to access capital on terms more favorable
than those available to any of the three Companies separately.
- SIMILAR CULTURES: The Medford Clinic Board's belief that the health care
systems most likely to be successful in the future are those that combine
physician clinically-oriented leadership and values with expert business
management in a collaborative way. Medford Clinic, HealthFirst and
Corvallis Clinic each have at minimum a 50-year tradition of successful
delivery of health care in their respective communities. The cultures of
the three Companies in terms of values, style of practice and governance
are perceived as similar.
- ECONOMIES OF SCALE: The Medford Clinic Board's belief that the Merger, by
affording the consolidation of various systems among the Companies (such
as human resources, information systems, managed care contracting, review
and monitoring functions, supply acquisition, insurance, credentialing,
accounting and billing) would achieve significant cost savings. The
Medford Clinic Board's belief regarding opportunities for synergies was
based on its substantial experience in managing a successful
multi-specialty group practice and on general discussions by its managers
with the management of HealthFirst and Corvallis Clinic. The Medford
Clinic Board did not, at such time, wish to incur the expense or dedicate
limited management time to quantify such synergies.
- COMPETITION: The Medford Clinic Board's conclusion that the Merger and the
subsequent operation of PPI as a combined entity resulting from the Merger
represented the best alternative to enhance Medford Clinic's ability to
compete and grow in the competitive environment of Southern Oregon and,
potentially, in Northern California. The Medford Clinic was increasingly
concerned about the acquisition of physician practices and development of
physician hospital organizations ("PHOs") by local hospitals.
- QUALITY OF KEY PERSONNEL: The Medford Clinic Board's belief that the
merged entity, by virtue of its size, strategic position and access to
capital, would be able to attract top level management personnel and
physician providers. The Medford Clinic Board was concerned about the
potential negative impact to its management of the loss of its Medical
Director and its Chief Financial Officer, each of whom has joined PPI's
corporate staff. The Medford Clinic Board believed that the reduced access
it would have to such individuals, who still would be able to work closely
with newly recruited staff in Medford, would be sufficient to ensure
adequate transition of their duties.
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- REALIZATION OF EQUITY: The Medford Clinic Board recognized that the Merger
afforded an opportunity to further the equity interests of its
stockholders and concluded that their equity interests would be enhanced
over time with continued success of PPI.
- FAIR VALUE: The Medford Clinic Board concluded that the terms of the
Medford Clinic Reorganization Transactions and the Merger were fair to,
and in the best interests of, Medford Clinic's shareholders based upon the
aggregate value of shares of PPI Class A Common Stock that the Medford
Clinic shareholders would receive in the Merger under the proposed
exchange ratios. The Medford Clinic Board determined that the respective
FTE of each Company represented a fair and reasonable basis for allocation
of shares of PPI Class A Common Stock to be issued by PPI as a
consideration in the Merger. The Medford Clinic Board believed that the
relative economic value of each of the Companies derives from the capacity
of such Company to generate revenues for the combined entity, PPI. The
Medford Clinic Board determined that such capacity was best measured by
reference to the number of FTE providers employed by a Company. The
Medford Clinic Board deemed unnecessary to engage an outside advisor to
confirm the fairness of the consideration in the Merger to be received by
the shareholders of Medford Clinic in the Merger.
- ESCROW ARRANGEMENT: The provision of the Reorganization and Merger
Agreement requiring approximately 26% of the shares of PPI Class A Common
Stock issued to shareholders of each of the Companies to be deposited into
escrow for release to the shareholders of a Company with the Excess
Difference in amounts corresponding with the relative Net Shareholder
Equity Per FTE of such Companies was considered fair and was significant
in the Medford Clinic Board's recommendation of approval of the Merger.
One factor contributing to the assessment of the Medford Clinic Board that
the escrow mechanism was fair was the use of the American Appraisal
Report, originally prepared for the purpose of allocating Merger
consideration value among Corvallis Clinic shareholders, to provide a
dollar value for the shares to be deposited in escrow by the shareholders
of each Company. For a more detailed discussion of the appraisal report,
see "The Merger and Related Transactions--Corvallis Clinic's Reasons for
the Merger." The Medford Clinic Board recognized that even though its
shareholders, like the shareholders of Corvallis Clinic, would be entitled
to a cash distribution under the Amended and Restated Agreement and Plan
of Reorganization and Merger, dated as of September 19, 1996 and amended
on November 4, 1996, based on the unaudited September 30, 1996 balance
sheet, such distributions by both Medford Clinic and Corvallis Clinic
would have significantly impaired the ability of PPI to obtain capital
after the Merger. The Medford Clinic Board determined that the audited
December 31, 1996 balance sheets of the Companies, when compared with the
unaudited September 30, 1996 balance sheets, would provide a more
reasonable basis for determining Merger Consideration adjustments based on
the relative net shareholder equity of the Companies. Although the Medford
Clinic Board also recognized that its shareholders, as a group, may not be
entitled to any additional shares in excess of 23,000 shares per FTE
(reduced from 27,000 shares per FTE as originally contemplated) due to
changes in the financial performance of the respective Companies between
September 30, 1996 and December 31, 1996, such risk was not enough to
outweigh its interest in maintaining the financial integrity of PPI as a
combined entity after the Merger. (For a more detailed description of the
circumstances under which such release may be made, see "Terms of the
Reorganization and Merger--Escrow Arrangement").
- TAX CONSEQUENCES: With respect to the tax consequences of the Merger,
Medford Clinic has received an opinion from McDermott, Will & Emery,
counsel to PPI and each of the Companies, that, upon the basis of certain
assumed and described facts, it is more likely than not that the Merger
will constitute a tax-free transaction (see "Terms of the Reorganization
and Merger-- Federal Income Tax Considerations").
- INTEREST OF CERTAIN PARTIES: The Medford Clinic Board considered the
potential benefit of the proposed Merger to individuals associated with
Medford Clinic. The Medford Clinic Board did not
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believe the potential benefits of the proposed Merger inuring to certain
individuals (including any possible conflicts of interest) were
significant negative factors in its determination to recommend the Merger.
The Medford Clinic Board considered all of these factors and weighed them
against the advantages and disadvantages of other available options. Because the
advantages of the Merger Proposal were believed to outweigh both its
disadvantages and the advantages of competing business alternatives, the Medford
Clinic Board concluded that Medford Clinic's shareholders were best served by
proceeding with the terms of the Reorganization and Merger Agreement. The
Medford Clinic Board further concluded that the terms expressed in the
Reorganization and Merger Agreement are fair to and in the best interests of,
Medford Clinic and its shareholders.
The Medford Clinic Board did not rely significantly upon outside consultants
or legal advice in evaluating whether the Merger was in the best interests of
its shareholders. No outsiders evaluated the fairness of the transactions.
MEDFORD CLINIC BOARD'S RECOMMENDATION
The Medford Clinic Board believes that the Merger and the terms of the
Reorganization and Merger Agreement are fair to, and in the best interests of,
Medford Clinic and its shareholders and has unanimously approved the Merger
Proposal. THE MEDFORD CLINIC BOARD UNANIMOUSLY RECOMMENDS THAT MEDFORD CLINIC
SHAREHOLDERS VOTE IN FAVOR OF THE MERGER PROPOSAL.
FAILURE TO APPROVE THE MERGER
The combination of the operations of HealthFirst, Corvallis Clinic and
Medford Clinic is conditioned upon the approval of the Merger Proposal by the
respective shareholders of HealthFirst, Corvallis Clinic and Medford Clinic.
Without the consummation of the Merger, the Companies believe that the
initiative in the physician practice management business and the synergy created
by linking together the three significant and successful medical groups with
similar culture, management strategies and business plans will be lost.
Moreover, the Companies' common goal to develop a high-quality physician
services delivery system that will be managed by a centralized management
services entity with emphasis on cost-efficient provision of services will
suffer a setback. In addition, the Companies, and their shareholders indirectly,
have incurred and are expected to further incur substantial costs in an amount
estimated to be $3.5 million through the end of 1996 in connection with the
analysis, planning, documentation and approval process related to the Merger and
the PC Reorganization Transactions.
In the event that the shareholders of the Companies do not approve the
Merger and the PC Reorganization Transactions, a large portion of the
above-mentioned costs will be shared on a pro rata basis among the Companies in
accordance with the respective FTEs of the Companies under the Expense Sharing
Agreement, dated as of July 29, 1996, as amended and restated September 18, 1996
among HealthFirst, Corvallis Clinic, Medford Clinic and PPI (as so amended and
restated, the "Expense Sharing Agreement"). For the details on the terms and
conditions of the Expense Sharing Agreement, see "Terms of the Reorganization
and Merger--Expense Sharing Agreement." Common costs under the Expense Sharing
Agreement include, without limitation, payment of (i) certain severance
compensation and benefits to David M. Goldberg, M.H.A., Tim E. Dupell, C.P.A.
and Michael F. Bonazzola, M.D. under their respective employment agreements with
PPI and (ii) rent under a lease agreement, dated as of September 9, 1996,
between PPI, as tenant, and 111 SW Columbia Avenue, as landlord, for the lease
of the executive office of PPI for a term of seven years in the amount of $7,317
per month, increased annually based on increases in inflation. Each Company's
portion of all such costs and expenses arising from the failure of the Merger to
occur would be allocated pro rata in accordance with the number of full-time
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equivalent physicians and other specified providers ("FTE") of such Company on
June 1, 1996, with full-time equivalence determined based on a workweek of at
least four full-working days.
THE PC REORGANIZATION TRANSACTIONS AND RELATED TRANSACTIONS
GENERAL
The descriptions in this Joint Proxy Statement/Prospectus of the terms and
conditions of the PC Reorganization Proposal are qualified in their entirety by
reference to the copy of the Reorganization and Merger Agreement attached as
Appendix A to this Joint Proxy Statement/Prospectus, and to each of the other
Appendices to this Joint Proxy Statement/Prospectus, all of which are
incorporated herein by this reference.
The Reorganization and Merger Agreement contemplates that each of the
Companies will, as soon as practicable prior to the Merger:
(i) incorporate a New PC under the Oregon Professional Corporation Act;
(ii) transfer to such New PC certain of such Company's assets relating to
the provider professional services business of such Company, which
assets are expected to be intangible assets related to the practice of
medicine, including medical records, employment agreements with
providers, certain provider contracts under which the New PC will be
receiving fee-for-service compensation from a governmental payor, such
as Medicare, and in the case of Corvallis Clinic and Medford Clinic,
membership interests in not-for-profit fundraising corporations of
which such Companies are sole members (collectively, the "New PC
Assets"), and cause such New PC to assume liabilities of such Company
relating to the New PC Assets (the "New PC Asset Transfer");
(iii) make a distribution under which the shareholders of such Company will
receive all of the issued and outstanding shares of capital stock of
such New PC, allocated on a pro rata basis in accordance with the fair
market value of each such shareholder's then-current equity interest in
such Company (except that the holders of Class A Preferred Stock of
Corvallis Clinic will receive all of the issued and outstanding shares
of Corvallis Clinic New PC, allocated on a pro rata basis in accordance
with the percentage of Class A Preferred Stock of Corvallis Clinic then
held by each such holder.) (such distribution being referred to herein
as the "New PC Distribution");
(iv) convert from an Oregon professional corporation to an Oregon business
corporation (such conversion being referred to herein as the "PC
Conversion") by filing Restated Articles of Incorporation, together
with the required fee, with the Secretary of State of the State of
Oregon in accordance with Oregon Law; and
(v) enter into the New PC Management Agreement with such New PC (all of the
foregoing transactions referred to herein, collectively, as the "PC
Reorganization Transactions").
It is contemplated that the PC Reorganization Transactions will occur as
soon as practicable after the HealthFirst Special Meeting, the Corvallis Clinic
Special Meeting and the Medford Clinic Special Meeting, and upon satisfaction or
waiver of all of the other applicable conditions set forth in the Reorganization
and Merger Agreement. The PC Reorganization Transactions are presently
anticipated to occur on or before January 31, 1997.
CHARACTERISTICS OF THE NEW PCS
Each Company will form a New PC to which it will transfer the New PC Assets,
which are largely intangible assets. As of the date of this Joint Proxy
Statement/Prospectus, HealthFirst holds all 92 issued and outstanding shares of
Common Stock of HealthFirst New PC, Corvallis Clinic holds all 64 issued and
outstanding shares of Common Stock of Corvallis Clinic New PC and Medford Clinic
holds all 57 1/3 issued and outstanding shares of Common Stock of Medford Clinic
New PC. Each of the New PCs have adopted
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Bylaws containing terms and provisions generally similar to those set forth in
the Bylaws of its sole shareholder. No shares are currently owned by officers or
directors; no assets have been contributed to the New PCs. It is not anticipated
that the New PCs will own any significant fixed assets while they are managed by
PPI, because their sole purpose is to employ health care providers who will
render professional services. After the Merger, all other assets now held by the
Companies will be held by PPI. Upon an evaluation of the assets to be
contributed to each New PC, each Board of Directors has determined that the
value of the assets to be held by its respective New PC is not material.
In the case of the New PCs, essentially all of the cash of each New PC will
flow to the providers employed by the New PCs as compensation and benefits or to
PPI either as reimbursement for its expenses in managing the New PC or as its
management fee. It is believed that the respective New PCs will not have
material present value in light of the contractual obligations each will have to
(i) PPI for its management fee and reimbursement of specified expenses of PPI
incurred on behalf of such New PC, (ii) vendors and other creditors and (iii)
its providers for compensation and benefits. To the extent that funds remain
after payment to other parties is made, payments to providers as compensation
generally are expected to reflect the residual cash remaining. In addition, the
replacement cost of the assets to be transferred to each New PC from the
respective Companies is not deemed to be material. It is therefore contemplated
that, and the contractual arrangement between each New PC and PPI will be
designed so that, substantially all of the economic value of the Companies will
be transferred to PPI. This analysis has led the Board of Directors of each
Company to determine that, in the event the PC Reorganization of such Company is
ultimately not treated as a tax-free transaction, such New PC Distribution would
not involve material tax exposure.
Although the New PCs will not hold significant assets or retain significant
amounts of cash, they will serve functions independent from PPI. The New PCs
will have responsibility for functions including hiring providers, ensuring that
the terms of their contracts are met, and coordinating peer review.
Prior to the Effective Time, HealthFirst New PC, Corvallis Clinic New PC and
Medford Clinic New PC will amend and restate their respective Articles of
Incorporation in substantially the form attached hereto as Appendix H, with such
changes thereto as deemed appropriate by the respective New PCs (the "Restated
Articles"). Certain differences between the documents governing the New PCs and
the documents governing the Companies are discussed under "Terms of the
Reorganization and Merger-- Rights of Security Holders." The Restated Articles
of each of the New PCs contain, among other provisions, a provision restricting
the transfer of the Common Stock of such New PC. There is no established market
for the Common Stock of any of the New PCs. Shareholders of the New PCs will
not, in general, be able to sell or otherwise transfer the shares of Common
Stock of the New PCs. The Restated Articles of each of the New PCs allow (but do
not require) such New PC to repurchase shares of Common Stock of the New PC when
a shareholder is no longer eligible to be a shareholder caused by certain
events, including when a provider is no longer employed by such New PC or in
good standing with the state licensing authorities. The eligibility requirements
for shareholders may vary among the New PCs. These provisions assist compliance
with Sections 58.255 and 58.108 of Oregon Law, which indicate, respectively,
that shareholders may sell or transfer their shares only in a manner which
leaves the professional corporation in compliance with the Oregon Professional
Corporation Act and that a majority of shareholders of an Oregon professional
corporation must be licensed or authorized to render the professional services
for which the corporation is organized. The Articles of Incorporation and Bylaws
of each of the New PCs do not restrict the right of such New PC to declare a
dividend to its shareholders; however, the New PCs have no intention of
declaring any dividend in the future.
It is contemplated that the PC Reorganization Transactions will occur as
soon as practicable after the HealthFirst Special Meeting, the Corvallis Clinic
Special Meeting and the Medford Clinic Special Meeting, and upon satisfaction or
waiver of all of the other applicable conditions set forth in the Reorganization
and Merger Agreement. The PC Reorganization Transactions are presently
anticipated to occur on or before January 31, 1997.
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HEALTHFIRST'S REASONS FOR THE HEALTHFIRST REORGANIZATION TRANSACTIONS
In reaching its decision to approve the HealthFirst Reorganization
Transactions, the HealthFirst Board recognized that the PC Reorganization
Transactions are structured so as to comply with the requirements of the Oregon
Professional Corporation Act which prohibit a professional corporation from
merging into a business corporation and which restrict non-physician ownership
or control of a medical practice. The incorporation of HealthFirst New PC allows
the shareholders of HealthFirst to continue as shareholders of a professional
corporation and the conversion of HealthFirst from a professional corporation to
a business corporation enables the Companies to consummate the Merger. The
HealthFirst Board also took into consideration the fact that the New PC
Distribution by HealthFirst would be unlikely to generate any potential tax to
the shareholders because of the nominal value believed by the HealthFirst Board
to be attributable to HealthFirst New PC. The HealthFirst Board determined that
there was no better alternative to achieving the two goals of (i) complying with
Oregon law in consummating the Merger and (ii) enabling the shareholders to
maintain an equity interest in a professional corporation.
The HealthFirst Board also recognized that the consummation of the business
combination contemplated by the Reorganization and Merger Agreement is
predicated upon (i) the formation of PPI as a physician practice management
company and HealthFirst New PC as the medical group and (ii) the creation of a
contractual relationship between the two companies under the HealthFirst
Management Agreement. The HealthFirst Reorganization Transactions enable the
shareholders of HealthFirst to maintain the culture and identity of the
professional corporation in which they practice even after the Merger by
retaining an equity interest in HealthFirst New PC. In addition, the transfer of
the provider professional services business followed by New PC Distribution by
HealthFirst is necessary to comply with Oregon law restrictions on non-physician
ownership or control of a medical office.
Most importantly, however, the HealthFirst Board also concluded that the
HealthFirst Reorganization Transactions are necessary to the consummation of the
Merger. The material factors considered by the HealthFirst Board in reaching its
decision to approve the Merger were the following: (i) the ability to realize
cost savings; (ii) a significant base of geography and equity that would result
in an enhanced ability to obtain capital; (iii) the broader geographic coverage
and improved access for patients of HMOs and larger purchaser groups offered by
PPI; (iv) the ability to provide better clinical care for patients; (v) the
ability to transfer employees among locations without losing seniority or
benefits; (vi) fair merger consideration to the shareholders of HealthFirst; and
(vii) the exchange of HealthFirst shares for shares of PPI Class A Common Stock
on a tax-free basis. Such factors outweighed the concerns over (a) the recent
operating losses of Corvallis Clinic; (b) the fear that the formation of PPI
would attract greater competition from other physician practice management
companies and hospitals in the same service areas and (c) uncertainty regarding
the ability of the PPI management team to manage effectively.
HEALTHFIRST BOARD'S RECOMMENDATION
The HealthFirst Board believes that the HealthFirst Reorganization
Transactions and the terms of the Reorganization and Merger Agreement are fair
to, and in the best interests of, HealthFirst and its shareholders and has
unanimously approved the HealthFirst Reorganization Proposal. THE HEALTHFIRST
BOARD UNANIMOUSLY RECOMMENDS THAT HEALTHFIRST SHAREHOLDERS VOTE IN FAVOR OF THE
HEALTHFIRST REORGANIZATION PROPOSAL.
CORVALLIS CLINIC'S REASONS FOR THE CORVALLIS CLINIC REORGANIZATION TRANSACTIONS
The Corvallis Clinic Board has determined that the Merger is fair to, and in
the best interests of, Corvallis Clinic and its shareholders for a number of
reasons. See "The Merger and Related Transactions--Corvallis Clinic's Reasons
for the Merger." In reaching its decision to approve the Corvallis Clinic
Reorganization Transactions, the Corvallis Clinic Board recognized that the PC
Reorganization Transactions are structured so as to comply with the requirements
of the Oregon Professional Corporation Act
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which prohibit a professional corporation from merging into a business
corporation and which restrict non-physician ownership or control of a medical
practice. The incorporation of Corvallis Clinic New PC allows the holders of
Class A Preferred Stock of Corvallis Clinic to continue as shareholders of a
professional corporation and the conversion of Corvallis Clinic from a
professional corporation to a business corporation enables the Companies to
consummate the Merger. The Corvallis Clinic Board also took into consideration
the fact that the New PC Distribution by Corvallis Clinic would be unlikely to
generate tax to the shareholders because of the immaterial value of Corvallis
Clinic New PC. The Corvallis Clinic Board determined that there was no better
alternative to achieving the two goals of (i) complying with Oregon law in
consummating the Merger and (ii) enabling the shareholders to maintain an equity
interest in a professional corporation.
The Corvallis Clinic Board also recognized that the consummation of the
business combination contemplated by the Reorganization and Merger Agreement is
predicated upon (i) the formation of PPI as a physician practice management
company and Corvallis Clinic New PC as the medical group and (ii) the creation
of a contractual relationship between the two companies under the Corvallis
Clinic Management Agreement. The Corvallis Clinic Reorganization Transactions
enable the holders of Class A Preferred Stock of Corvallis Clinic to maintain
the Corvallis Clinic's culture and identity and to control the medical affairs
of the New PC even after the Merger by retaining an equity interest in Corvallis
Clinic New PC. In addition, the transfer of the provider professional services
business followed by New PC Distribution by Corvallis Clinic is necessary to
comply with Oregon law restrictions on non-physician ownership or control of a
medical practice.
Most importantly, however, the Corvallis Clinic Board concluded that the
Corvallis Clinic Reorganization Transactions are necessary to the consummation
of the Merger. The material factors considered by the Corvallis Clinic Board in
reaching its decision to approve the Merger were the following: (i) a
significantly better chance of acquiring capital for the future through PPI than
as Corvallis Clinic alone; (ii) the ability to share strengths and management
expertise with the other Companies; (iii) the ability to transfer employees
among offices without losing seniority or benefits; (iv) significantly better
merger consideration to the shareholders of Corvallis Clinic than any other
alternative; (v) the exchange of Corvallis Clinic shares for shares of PPI Class
A Common Stock on a tax-free basis; and (vi) fairness of Merger consideration to
the shareholders of Corvallis Clinic. Potential negative factors considered by
the Corvallis Clinic Board included (a) apprehension that acquisitions by PPI in
surrounding service areas could limit Corvallis Clinic's growth and (b) the
impact of losing the services of certain key personnel to PPI. Such
considerations were outweighed by the positive factors.
CORVALLIS CLINIC BOARD'S RECOMMENDATION
The Board of Corvallis Clinic believes that the Corvallis Clinic
Reorganization Transactions and the terms of the Reorganization and Merger
Agreement are fair to, and in the best interests of, Corvallis Clinic and its
shareholders and has unanimously approved the Corvallis Clinic Reorganization
Proposal. THE CORVALLIS CLINIC BOARD UNANIMOUSLY RECOMMENDS THAT CORVALLIS
CLINIC SHAREHOLDERS VOTE IN FAVOR OF THE CORVALLIS CLINIC REORGANIZATION
PROPOSAL.
MEDFORD CLINIC'S REASONS FOR THE MEDFORD CLINIC REORGANIZATION TRANSACTIONS
The Medford Clinic Board has determined that the Merger is fair to, and in
the best interests of, Medford Clinic and its shareholders for a number of
reasons. See "The Merger and Related Transactions--Medford Clinic's Reasons for
the Merger." In reaching its decision to approve the Medford Clinic
Reorganization Transactions, the Medford Clinic Board recognized that the PC
Reorganization Transactions are structured so as to comply with the requirements
of the Oregon Professional Corporation Act which prohibit a professional
corporation from merging into a business corporation and which restrict non-
physician ownership or control of a medical practice. The incorporation of
Medford Clinic New PC allows
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the shareholders of Medford Clinic to continue as shareholders of a professional
corporation and the conversion of Medford Clinic from a professional corporation
to a business corporation enables the Companies to consummate the Merger. The
Medford Clinic Board also took into consideration the fact that the New PC
Distribution by Medford Clinic would be unlikely to generate tax to shareholders
because of the immaterial value of Medford Clinic New PC. The Medford Clinic
Board determined that there was no better alternative to achieving the two goals
of (i) complying with Oregon law in consummating the Merger and (ii) enabling
the shareholders to maintain an equity interest in a professional corporation.
The Medford Clinic Board also recognized that the consummation of the
business combination contemplated by the Reorganization and Merger Agreement is
predicated upon (i) the formation of PPI as a physician practice management
company and Medford Clinic New PC as the medical group and (ii) the creation of
a contractual relationship between the two companies under the Medford Clinic
Management Agreement. The Medford Clinic Reorganization Transactions enable the
shareholders of Medford Clinic to maintain their own culture and identity even
after the Merger by retaining an equity interest in Medford Clinic New PC. In
addition, the transfer of the provider professional services business followed
by the New PC Distribution by Medford Clinic is necessary to comply with Oregon
law restrictions on non-physician ownership or control of a medical practice.
Most importantly, however, the Medford Clinic Board concluded that the
Medford Clinic Reorganization Transactions are necessary to the consummation of
the Merger. The material factors considered by the Medford Clinic Board in
reaching its decision to approve the Merger were the following: (i) the need for
additional capital to fund the expansion of both the provider base and the
supporting facilities; (ii) economies of scale in sharing costs and benefits of
infrastructure; (iii) solid geographic coverage with HealthFirst and Corvallis
Clinic; (iv) a potential opportunity to access public capital and other sources;
(v) fairness of Merger consideration to the shareholders of Medford Clinic; and
(vi) the exchange of Medford Clinic shares for PPI Class A Common Stock on a
tax-free basis. Among the concerns reviewed by the Medford Clinic Board were (a)
the recent operating losses incurred by Corvallis Clinic and (b) potential
disruption of Medford Clinic's relationships with payors and hospitals due to
possible actions by PPI. The Medford Clinic Board determined that such concerns
were far outweighed by the advantages enumerated in (i) through (vi).
MEDFORD CLINIC'S BOARD RECOMMENDATION
The Medford Clinic Board believes that the Medford Clinic Reorganization
Transactions and the terms of the Reorganization and Merger Agreement are fair
to, and in the best interests of, Medford Clinic and its shareholders and has
unanimously approved the Medford Clinic Reorganization Proposal. THE MEDFORD
CLINIC BOARD UNANIMOUSLY RECOMMENDS THAT MEDFORD CLINIC SHAREHOLDERS VOTE IN
FAVOR OF THE MEDFORD CLINIC REORGANIZATION PROPOSAL.
FAILURE TO APPROVE THE PC REORGANIZATION TRANSACTIONS
The consummation of the Merger is conditioned upon the approval of the
HealthFirst Reorganization Proposal, the Corvallis Clinic Reorganization
Proposal, and the Medford Reorganization Proposal by the respective shareholders
of HealthFirst, Corvallis Clinic and Medford Clinic. The consequences of the
failure of the shareholders of HealthFirst to approve the HealthFirst
Reorganization, the failure of shareholders of Corvallis Clinic to approve the
Corvallis Clinic Reorganization Proposal, or the failure of the shareholders of
Medford Clinic to approve the Medford Reorganization Proposal are similar to
those described in "The Merger and Related Transactions--Failure to Approve the
Merger."
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TERMS OF THE REORGANIZATION AND MERGER
The Reorganization and Merger Agreement was entered into by and among PPI,
HealthFirst, Corvallis Clinic and Medford Clinic on July 29, 1996, following
approval by each of their boards of directors, and subsequently amended and
restated on September 19, 1996 and further amended on November 4, 1996 and on
November 29, 1996. Pursuant to the terms of the Reorganization and Merger
Agreement, HealthFirst, Corvallis Clinic and Medford Clinic will merge with and
into PPI. Descriptions of the Reorganization and Merger Agreement set forth
below provide a discussion of all material terms thereof and are qualified in
their entirety by reference to the Reorganization and Merger Agreement set forth
as Appendix A hereto and incorporated herein by this reference.
CLOSING AND EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the completion of the filing of a
properly executed Certificate of Merger with the Secretary of State of the State
of Delaware reflecting the Merger, which filing will be made after satisfaction
of certain conditions set forth in the Reorganization and Merger Agreement. See
"Conditions of the Reorganization and Merger Agreement" below.
CONDITIONS OF THE REORGANIZATION AND MERGER AGREEMENT
Conditions to the closing of the Reorganization and Merger Agreement
include, but are not limited to, the following:
1. SHAREHOLDER APPROVAL. The Reorganization and Merger Agreement and
the transactions contemplated hereby (including, without limitation, the PC
Reorganization Transactions and the Merger Transactions) shall have been
approved and adopted by the affirmative vote of the holders of (a) a
majority of the outstanding HealthFirst Class A Shares, (b) two-thirds of
the outstanding shares of Corvallis Clinic Class A Stock and two-thirds of
the outstanding shares of Corvallis Clinic Class B Stock, in each case as a
separate voting group, and (c) a majority of the outstanding shares of
Medford Clinic Common Stock.
2. REGISTRATION STATEMENT. The SEC shall have declared the
Registration Statement effective, no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose or similar proceeding in respect of the Joint
Proxy Statement/Prospectus, shall have been initiated or threatened in
writing by the SEC.
3. NO INJUNCTION OR ORDER. No preliminary or permanent injunction or
other order by any federal, state or foreign court of competent jurisdiction
which prohibits the consummation of the Merger shall have been issued and
remain in effect.
4. INCENTIVE COMPENSATION PLANS. PPI shall have taken all necessary
action to adopt the Physician Partners, Inc. Employee Option Plan, the
Physician Partners, Inc. Non-Employee Director Option Plan, the Physician
Partners, Inc. Non-Employee Provider Option Plan and the Physician Partners,
Inc. Change in Control Plan.
5. RIGHTS AGREEMENT. PPI shall have taken all necessary action to
adopt a rights agreement for a dividend distribution of one right to
purchase a certain number of shares of a class of preferred stock of PPI for
each share of PPI Common Stock.
6. TAX OPINION. PPI and each of the Companies shall have received the
opinion of counsel with such assumptions and qualifications as are
reasonably satisfactory to the Companies, based on certificates of the
Companies as requested by counsel to the effect that the Merger will, more
likely than not, be treated for federal income tax purposes as a
"reorganization" within the meaning of Section 368 of the Code.
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7. APPROVALS; PROVIDER NUMBERS. Each of HealthFirst New PC, Corvallis
Clinic New PC and Medford Clinic New PC shall have obtained approvals,
licenses and provider numbers from all governmental authorities, in form and
substance reasonably satisfactory to the Companies, necessary or appropriate
for the operation following the Effective Time of the respective businesses
of HealthFirst, Corvallis Clinic and Medford Clinic as currently operated
thereby, including the receipt of confirmation from all applicable
governmental agencies that at the Effective Time all licenses required by
law to operate such businesses as currently operated will be transferred to,
or reissued in the name of HealthFirst New PC, Corvallis Clinic New PC and
Medford Clinic New PC, as the case may be. Further, each of HealthFirst New
PC, Corvallis Clinic New PC and Medford Clinic New PC shall have received
approvals, consents or commitments satisfactory to the Companies from
Medicare and other third-party payors of certification effective as of the
Effective Time for the participation by HealthFirst New PC, Corvallis Clinic
New PC and Medford Clinic New PC in each such program and the right of
HealthFirst New PC, Corvallis Clinic New PC and Medford Clinic New PC to
receive reimbursement with respect thereto.
8. PC REORGANIZATION TRANSACTIONS. The Articles of Incorporation of
the Companies as restated after the Merger shall have been made effective
and the PC Reorganization Transactions shall have been consummated in
accordance with Oregon Law.
9. MANAGEMENT AGREEMENTS. HealthFirst shall have entered into the
HealthFirst Management Agreement with HealthFirst New PC; Corvallis Clinic
shall have entered into the Corvallis Clinic Management Agreement with
Corvallis Clinic New PC; Medford Clinic shall have entered into the Medford
Clinic Management Agreement with Medford Clinic New PC.
10. DISSENTING SHAREHOLDERS. The aggregate number of shares held by
shareholders of each of the Companies dissenting from the Merger and
exercising their dissenters' rights to demand fair value of such shares in
accordance with the provisions of Section 60.554 of the Oregon Business
Corporation Act shall not exceed 15% of all issued and outstanding shares of
capital stock of such Company.
11. ESCROW AGREEMENT. PPI and the Companies shall have entered into an
escrow agreement with an escrow agent reasonably acceptable to PPI and the
Companies.
ESCROW ARRANGEMENT
The Reorganization and Merger Agreement contemplates that, prior to the
Effective Time, PPI and the Companies will enter into an escrow agreement, upon
such terms and conditions as are acceptable to the parties thereto, with an
escrow agent reasonably acceptable to PPI and the Companies. The escrow
agreement will require, among other things, that, at the Effective Time, (a)
each holder of Class B Common Stock of Corvallis Clinic as of the Effective Time
(each, a "Corvallis Clinic Class B Shareholder") shall deposit into escrow (the
"Corvallis Clinic Escrow Deposit") such number of shares of PPI Class A Common
Stock as is equal to approximately 27% of all shares of PPI Class A Common Stock
issued to such Corvallis Clinic Class B Shareholder in the Merger, which would
result in a total of 622,000 shares of PPI Class A Common Stock being deposited
by all Corvallis Clinic Class B Shareholders in the Corvallis Clinic Escrow
Deposit, (b) each holder of Class A Shares of HealthFirst as of the Effective
Time (each, a "HealthFirst Shareholder") shall deposit into escrow (the
"HealthFirst Escrow Deposit") such number of shares of PPI Class A Common Stock
as is equal to approximately 26% of all shares of PPI Class A Common Stock
issued to such HealthFirst Shareholder in the Merger, which would result in a
total of 840,000 shares of PPI Class A Common Stock being deposited by all
HealthFirst Shareholders in the HealthFirst Escrow Deposit and (c) each holder
of Common Stock of Medford Clinic as of the Effective Time (each, a "Medford
Clinic Shareholder") shall deposit into escrow (the "Medford Clinic Escrow
Deposit") and, together with the Corvallis Clinic Escrow Deposit and the
HealthFirst Escrow Deposit, referred to herein, collectively, as the "Escrow
Deposits") such number of shares of PPI Class A Common Stock as is equal to
approximately 26% of all shares of PPI Class A Common Stock issued to
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such Medford Clinic Shareholder in the Merger, which would result in a total of
464,000 shares of PPI Class A Common Stock being deposited by all Medford Clinic
Shareholders in the Medford Common Stock Escrow Deposit. There will be deposited
in escrow, specifically, (i) 91 shares of PPI Class A Common Stock per
HealthFirst Class A Share, (ii) 52 shares of PPI Class A Common Stock per share
of Corvallis Clinic Class B Stock and (iii) 8,098 shares of PPI Class A Common
Stock per share of Medford Clinic Common Stock. Thus, out of the 31,000 shares
of PPI Class A Common Stock per FTE to be received, at the Effective Time in the
aggregate, by shareholders of each Company, 8,000 shares per FTE will be
deposited in escrow.
The shares of PPI Class A Common Stock in the Corvallis Clinic Escrow
Deposit, the HealthFirst Escrow Deposit and the Medford Clinic Escrow Deposit
will be held by the Escrow Agent pending the determinations described below. In
the event that the quotient obtained by dividing (a) the FTE of Corvallis
Clinic, the FTE of HealthFirst or the FTE of Medford Clinic as of October 1,
1996 into (b) the excess of total assets over total liabilities of Corvallis
Clinic, HealthFirst or Medford Clinic, as applicable (such Company's "Net
Shareholder Equity Per FTE"), as reflected on the balance sheet thereof as at
December 31, 1996, audited by Arthur Andersen LLP and delivered to PPI no later
than March 31, 1997, which audited balance sheet shall be adjusted (except in
the case of HealthFirst) by changing the value of any real estate specified
thereon from book value to fair market value based on fair market value
appraisals prepared by appraisers reasonably acceptable to the other Companies
during the 30-month period prior to December 31, 1996 (such reviewed balance
sheets and such fair market value appraisals, absent manifest error, being
conclusive and binding for purposes of determining each Company's Net
Shareholder Equity Per FTE), does not exceed the Net Shareholder Equity Per FTE
of any other Company by more than 20 percent (the "Minimum Net Equity
Threshold"), the Escrow Agent shall, no later than five business days after the
delivery of such balance sheets of the Companies, release from the Escrow
Deposits to Corvallis Clinic Class B Shareholders, HealthFirst Shareholders and
Medford Clinic Shareholders as of the Effective Time such number of shares of
PPI Class A Common Stock as is equal to 50 percent of the number of shares of
PPI Class A Common Stock deposited by each such shareholder in the Corvallis
Clinic Escrow Deposit, the HealthFirst Escrow Deposit or the Medford Clinic
Escrow Deposit, as applicable. Any shares of PPI Class A Common Stock remaining
in the Escrow Deposits will be cancelled and retired and cease to exist.
Alternatively, in the event that the Net Shareholder Equity Per FTE of a
Company or Companies (each, the "Excess Company") exceeds the Net Shareholder
Equity Per FTE of any other Company by more than the Minimum Net Equity
Threshold (such excess, referred to herein, as the "Excess Difference"), the
Escrow Agent will release from the Escrow Deposits to Corvallis Clinic Class B
Shareholders, HealthFirst Shareholders and Medford Clinic Shareholders as of the
Effective Time, as the case may be, such number of shares of PPI Class A Common
Stock as determined by the following formula:
(a) Multiply the Excess Difference of the Excess Company by the FTE of
such Excess Company and multiply the Excess Difference of any other Excess
Company, if any, by the FTE of such Excess Company (each, the "Excess
Company's True-Up Amount");
(b) If more than one Excess Company's True-Up Amount is applicable
(because more than one Company is an Excess Company) add both Excess
Company's True-Up Amounts (collectively, the "Total True-Up Adjustment");
(c) Multiply $15.82 (representing the value per share of PPI Class A
Common Stock issued by PPI as consideration in the Merger, based on the
$105,000,000 valuation of the Companies as a combined entity, assuming such
combination as of June 30, 1996 (1), and the aggregate number of
- ------------------------
(1) The $105,000,000 valuation was derived from the American Appraisal Report
prepared in connection with the Corvallis Clinic Merger consideration
allocation, which the Companies also agreed to use to value the shares to
be deposited in escrow. For a more detailed discussion of the appraisal
report, see "The Merger and Related Transactions--Corvallis Clinic's
Reasons for the Merger."
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shares of PPI Class A Common Stock outstanding after the Merger being equal
to 6,635,250, which is the sum of (A) 6,500,250, (the product of 27,000
shares multiplied by 240.75, which is the total FTEs of the Companies) PLUS
(B) 135,000 shares issued to four officers and one director of PPI), by
135,000 (the aggregate number of restricted shares of PPI Class A Common
Stock issued to four executive officers and one director of PPI) for a total
of $2,135,700 (the "Restricted Stock Adjustment");
(d) Add the Excess Company's True-Up Amount or, if there is more than
one Excess Company, the Total True-Up Adjustment, to the Restricted Stock
Adjustment (the "Total Adjustment");
(e) Subtract the Total Adjustment from the $105,000,000 valuation of the
Companies as a combined entity, assuming such combination as of June 30,
1996, made by American Appraisal (the resulting amount being referred to as
the "Adjusted Combined Enterprise Value");
(f) For each Company, multiply the Adjusted Combined Enterprise Value by
a fraction, the numerator of which is the FTE of such Company and the
denominator of which is the sum of the FTE of the three Companies, or 240.75
(such Company's "FTE-Based Value");
(g) Divide each Company's FTE-Based Value by $15.82 (such Company's
"FTE-Based Share Allocation");
(h) Divide each Company's FTE-Based Share Allocation by the FTE of such
Company (such Company's "Share Allocation per FTE");
(i) Divide any Excess Company's True-Up Amount by $15.82 (such Excess
Company's "PPI Share Equivalency");
(j) Divide each Excess Company's PPI Share Equivalency by the FTE of
such Excess Company (such Excess Company's "True-Up Share Allocation per
FTE"); and
(k) Add Share Allocation per FTE to True-Up Share Allocation per FTE of
each Company (such Company's "Final Share Allocation per FTE").
If any Company's Final Share Allocation per FTE exceeds 27,000 (such excess
referred to herein as "FTE Differential"), the Escrow Agent will release to each
of the shareholders of such Company as of the Effective Time such number of
shares of PPI Class A Common Stock as is equal to (a) 50 percent of the number
of shares of PPI Class A Common Stock deposited in the applicable Escrow Deposit
by such shareholder, PLUS (b) such number of shares of PPI Class A Common Stock
as is equal to the product of the FTE Differential, multiplied by a fraction (x)
the numerator of which is the number of shares of PPI Class A Common Stock
deposited by such shareholder in the applicable Escrow Deposit and (y) the
denominator of which is the aggregate number of shares of PPI Class A Common
Stock deposited by all of the shareholders of such Company in the applicable
Escrow Deposit.
Alternatively, if any Company's Final Share Allocation per FTE is less than
27,000 (such shortfall referred to herein as "FTE Shortfall"), the Escrow Agent
will release to each of the shareholders of such Company as of the Effective
Time such number of shares of PPI Class A Common Stock as is equal to (a) 50
percent of the number of shares of PPI Class A Common Stock deposited in the
applicable Escrow Deposit by such shareholder, MINUS (b) such number of shares
of PPI Class A Common Stock as is equal to the product of the FTE Shortfall
multiplied by a fraction (x) the numerator of which is the number of shares of
PPI Class A Common Stock deposited by such shareholder in the applicable Escrow
Deposit and (y) the denominator of which is the aggregate number of shares of
PPI Class A Common Stock deposited by all of the shareholders of such Company in
the applicable Escrow Deposit.
If any Company's Final Share Allocation per FTE equals 27,000, the Escrow
Agent will release to each of the shareholders of such Company as of the
Effective Time such number of shares of PPI Class A Common Stock as is equal to
50 percent of the number of shares of PPI Class A Common Stock deposited by each
such shareholder in the applicable Escrow Deposit.
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Any shares of PPI Class A Common Stock remaining in the Escrow Deposits will
be cancelled and retired and cease to exist.
Within five business days after delivery of audited balance sheets
reflecting the December 31, 1996 net shareholder equity of the Companies, the
shareholders of the former companies will receive shares of PPI Class A Common
Stock from escrow as described above. After such release of shares of PPI Class
A Common Stock from the Escrow Deposit to Escrow Holders and the cancellation of
the balance of such shares, depending on the relative Net Shareholder Equity Per
FTE of the Companies as herein described (1) holders of HealthFirst Class A
Shares will have received in the Merger, in respect of each such HealthFirst
Class A Share, a minimum of 263 shares of PPI Class A Common Stock and a maximum
of 354 shares of PPI Class A Common Stock, (2) holders of Corvallis Clinic Class
B Stock will have received in the Merger, in respect to each share thereof, a
minimum of 23,403 shares of PPI Class A Common Stock and a maximum of 31,544
shares of PPI Class A Common Stock, and (3) holders of Medford Clinic Common
Stock will have received in the Merger, in respect to each share thereof, a
minimum of 1,334,000 shares of PPI Class A Common Stock and a minimum of
1,798,000 shares of PPI Class A Common Stock. Such numbers reflect, in each
case, shareholders of each of these Companies receiving an aggregate range of
23,000 shares of PPI Class A Common Stock per FTE to 31,000 shares of PPI Class
A Common Stock per FTE for all shareholders of a Company. Ultimately, the sum of
the aggregate number of shares released from escrow to the shareholders of each
Company and the aggregate number of shares retained by the shareholders of such
Company before escrow will equal 27,000 shares per FTE of such Company.
CONDUCT OF BUSINESSES OF COMPANIES PENDING THE MERGER
During the period from the date of the Reorganization and Merger Agreement
until the Effective Time, each of the Companies is generally required to conduct
its operations only in the ordinary course of business and consistent with past
practice. However, the Reorganization and Merger Agreement does provide that the
cumulative amount of obligations incurred by each of the Companies under any
contract, agreement commitment or arrangement in the ordinary course of business
(i) after December 1, 1995 through the Effective Time shall not, without the
prior approval of PPI and the other Companies, exceed $1,300,000 in the case of
Corvallis Clinic and (ii) after January 1, 1996 through the Effective Time shall
not, without the prior approval of PPI and the other companies, exceed
$4,300,000 in the case of HealthFirst and $1,600,000 in the case of Medford
Clinic.
In addition, the cumulative amount of compensation and benefits received by
providers employed by each of the Companies in the ordinary of course of
business (i) after December 1, 1995 through the Effective Time shall not,
without the prior approval of PPI and the other Companies, exceed $12,500,000 in
the case of Corvallis Clinic and (ii) after January 1, 1996 through the
Effective Time shall not, without the prior approval of PPI and the other
Companies, exceed $20,000,000 in the case of HealthFirst or $12,500,000 in the
case of Medford Clinic.
TERMINATION OF THE REORGANIZATION AND MERGER AGREEMENT
TERMINATION EVENT
The Reorganization and Merger Agreement may be terminated prior to the
Effective Time upon certain occurrences, including, without limitation, the
following:
1. By written consent of all of the parties.
2. By any party (referred to herein as the "Notice Party") if there
shall have been any material breach of a material obligation of any other
party (referred to herein as the "Breaching Party") thereunder and, if such
breach is curable, such default shall have not been remedied within 10 days
after receipt by the Breaching Party of notice in writing from the Notice
Party specifying such breach and requesting that such breach be remedied;
provided, however, that such 10-day period shall be
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extended for so long as the Breaching Party shall make diligent attempts to
cure such default and such default remains curable.
3. By any party if the board of directors of such party shall have (i)
determined, in the exercise of its fiduciary duties under applicable law,
not to recommend the Reorganization and Merger Agreement, the applicable PC
Reorganization or the Merger or shall have withdrawn such recommendation or
(ii) resolved to do any of the foregoing.
4. By any party if any court of competent jurisdiction in the United
States or any governmental authority shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or otherwise
prohibiting any PC Reorganization or the Merger and such order, decree,
ruling or other action shall have become final and non-appealable.
5. By any party upon written notice to the other Parties if any
approval of the shareholders of such party required for the consummation of
the transactions submitted for their approval shall not have been obtained
by reason of the failure to obtain the required vote at a duly-held meeting
of shareholders or at any adjournment thereof.
6. By any party if the Effective Time shall not have taken place on or
before January 31, 1997 (which date may be extended by agreement of the
Parties hereto), unless the party desiring to so terminate pursuant to this
provision is in default under the Reorganization and Merger Agreement.
BREAK-UP FEE
If the Reorganization and Merger Agreement is terminated as a result of any
material breach of a material obligation of any party or if the board of
directors of any Company shall have determined not to recommend the
Reorganization and Merger Agreement, then in such event, such party shall
forthwith pay to each of the other Companies a breakup fee in an amount equal to
all costs and expenses incurred by each such Company or on its behalf in
connection with or related to the authorization, preparation, negotiation,
execution and performance of the Reorganization and Merger Agreement and all
other matters related to the consummation of the transactions contemplated
thereby.
EXPENSE SHARING AGREEMENT
HealthFirst, Corvallis Clinic and Medford Clinic entered into the Expense
Sharing Agreement in order to share in the payment of certain costs and expenses
incurred in connection with the transactions contemplated by the Reorganization
and Merger Agreement (collectively, the "Common Transactional Expenses"),
including, without limitation (i) all fees and expenses of counsel, accountants,
investment bankers, experts and consultants (specifically excluding the fees and
expenses of accountants retained by HealthFirst and Medford Clinic in converting
the method of accounting from cash basis to accrual basis and the fees and
expenses of local counsel and other experts and consultants retained by any
Company to advise such Company on matters that are of specific interest or
benefit to such Company) in connection with or related to (A) the authorization,
preparation, negotiation, execution and performance of the Reorganization and
Merger Agreement and all agreements, documents and instruments relating thereto,
(B) the formation of PPI and other entities contemplated by the Reorganization
and Merger Agreement, (C) the preparation, filing, printing and mailing of this
Joint Proxy Statement/Prospectus and the Registration Statement, (D) the
solicitation of shareholder approvals, (E) the compensation and benefits paid by
(x) Medford Clinic to Dr. Bonazzola and Medford Clinic's former chief financial
officer (currently PPI's controller) since September 1, 1996, (y) Corvallis
Clinic to Mr. Dupell from January 1, 1996 through July 28, 1996, and (z)
HealthFirst to Mr. Goldberg since July 1, 1996 and a PPI executive assistant
since July 15, 1996, in each case only to the extent the services of such
persons since such dates or during such period have been directed on matters
that are of common interest and benefit to the Companies and (f) all other
matters related to the consummation of the transactions contemplated by the
Reorganization and Merger Agreement that are of common interest and benefit to
the Companies and (ii) all reasonable
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operating expenses of PPI, including salaries of employees, and, in the event
the Proposals are abandoned by the parties, all severance payments to be made to
executive officers of PPI.
Under the Expense Sharing Agreement, each Company is required to make cash
disbursements to PPI in an amount equal to its pro rata share of the Common
Transactional Expenses, calculated on the basis of FTE of such Company on June
1, 1996, which pro rata shares (the "Pro Rata Shares") are 42.6% for
HealthFirst, 33.8% for Corvallis Clinic and 23.6% for Medford Clinic.
The September 19, 1996 amendment and restatement of the Expense Sharing
Agreement provided that (i) the Companies shall make cash disbursements
(referred to herein as "Disbursements") to PPI from time to time on any business
day during the period from July 29, 1996 to and including the Effective Time, or
an earlier date if the Transactions are abandoned or terminated prior to the
Effective Time, in accordance with the terms of the Reorganization and Merger
Agreement, its Pro Rata Share of the Common Transactional Expenses, (ii) all
Disbursements relating to the Common Transactional Expenses shall be made only
to PPI and no such Disbursements shall be made directly to third parties on
behalf of PPI to which PPI is indebted contractually or otherwise obligated
("Third-Party Disbursements"); PROVIDED, HOWEVER, that (A) Corvallis Clinic may,
on behalf of PPI, continue to make compensation payments directly to Mr. Dupell
pursuant to the Amended and Restated Employment Agreement, dated as of September
19, 1996, between Mr. Dupell and PPI and (B) HealthFirst may, on behalf of PPI,
continue to make compensation payments directly to Mr. Goldberg pursuant to the
Amended and Restated Employment Agreement, dated as of September 19, 1996,
between Mr. Goldberg and PPI, and to a PPI executive assistant, (C) Medford
Clinic may, on behalf of PPI, continue to make compensation payments directly to
Medford Clinic's former chief financial officer (currently PPI's controller),
(D) all Third-Party Disbursements relating to the Common Transactional Expenses
made by any Company from January 1, 1996 through September 19, 1996 shall be
recognized and counted as part of such Company's Pro Rata Share and (E) any
Company that has made disbursements in excess of its Pro Rata Share shall be
reimbursed by the other Companies in an aggregate amount equal to such excess.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
STOCK AND OPTION HOLDINGS OF DIRECTORS AND OFFICERS
The Reorganization and Merger Agreement contemplates that, prior to the
Merger, each of the Companies will adopt a stock option plan for certain of its
employees and grant New Options to purchase shares of its capital stock. From
and after the Effective Time, each New Option to purchase or receive HealthFirst
Class A Shares, Corvallis Clinic Class B Stock or Medford Clinic Common Stock,
as the case may be, will be converted into a PPI Option to purchase or receive
the same number of shares of PPI Class A Common Stock as the holder of such New
Option would have received had such holder exercised his or her New Option in
full immediately prior to the Effective Time, with the exercise price per share
to be adjusted as described below.
- The adjusted exercise price per share for each New Option currently
covering shares of HealthFirst Class A Shares will be determined by
dividing the exercise price in effect for such New Option immediately
prior to the Effective Time by 308.
- The adjusted exercise price per share for each New Option currently
covering shares of Corvallis Clinic Class B Stock will be determined by
dividing the exercise price in effect for such New Option immediately
prior to the Effective Time by 163.
- The adjusted exercise price per share for each New Option currently
covering shares of Medford Clinic Common Stock will be determined by
dividing the exercise price in effect for such New Option immediately
prior to the Effective Time by 27,330.
As of December 1, 1996, none of the Companies have issued stock options
under their respective stock option plans. See "Terms of the Reorganization and
Merger--Effect on New Stock Option Plans." It
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is anticipated that the Companies will issue, in accordance with the
Reorganization and Merger Agreement, (i) New Options to purchase an aggregate of
1,704.5 HealthFirst Series 1 Shares, (ii) New Options to purchase an aggregate
of 2,385 shares of Corvallis Clinic Class B Stock and (iii) New Options to
purchase an aggregate of 10.6 shares of Medford Clinic Common Stock.
In the aggregate, as of December 1, 1996 (a) HealthFirst's directors and
executive officers beneficially owned approximately 10% of the outstanding
HealthFirst Class A Shares, (b) Corvallis Clinic's directors and executive
officers beneficially owned (i) approximately 10% of the outstanding Corvallis
Clinic Class A Stock, (ii) approximately seven percent of the outstanding
Corvallis Clinic Class B Stock and (iii) approximately 10% of the outstanding
Corvallis Clinic Class C Stock, and (c) Medford Clinic's directors and executive
officers beneficially owned approximately 12% of the outstanding Medford Clinic
Common Stock. Immediately after the Effective Time, it is anticipated that (A)
directors and officers of Corvallis Clinic will own, in the aggregate, the
percentage of stock of Corvallis Clinic New PCs as is equivalent to the
aggregate ownership of Corvallis Clinic Class A Stock and (B) directors and
officers will own, in the aggregate, of the other Companies percentages of stock
of the respective New PCs equivalent to their aggregate ownership in such
respective other Companies.
Additionally, upon the Effective Time, it is anticipated that (a) the
current directors and executive officers of HealthFirst will beneficially own
approximately four percent of the outstanding shares of PPI Class A Common
Stock, (b) the current directors and executive officers of Corvallis Clinic will
beneficially own approximately two percent of the outstanding shares of PPI
Class A Common Stock and (c) the current directors and executive officers of
Medford Clinic will beneficially own approximately three percent of the
outstanding shares of PPI Class A Common Stock.
All of the current directors and executive officers of each Company have
indicated that it is their present intention to vote their shares in the
respective Company FOR approval of the Merger Proposal. For more information,
see "Operation, Management and Business of PPI After the Merger--Principal
Stockholders of PPI." See "The HealthFirst Shareholder Meeting--Vote Required";
"The Corvallis Clinic Shareholder Meeting--Vote Required" and "The Medford
Clinic Shareholder Meeting--Vote Required".
EMPLOYMENT AND SEVERANCE ARRANGEMENTS
In anticipation of the consummation of the Merger, certain of the executive
officers and directors of HealthFirst, Corvallis Clinic and Medford Clinic have
been named as executive officers and directors of PPI. See "Operation,
Management and Business of PPI After the Merger--Management of PPI."
In anticipation of the consummation of the Merger, each of Mr. Goldberg, Mr.
Dupell, Dr. Bonazzola, Mr. Erstgaard, Mr. Kobriger and Mr. Ness executed an
employment agreement with PPI on July 1, 1996, which was amended and restated on
September 19, 1996 (each, a "PPI Employment Agreement"). The PPI Employment
Agreement of Mr. Goldberg became effective as of July 1, 1996; the PPI
Employment Agreement of Mr. Dupell became effective as of July 29, 1996; the PPI
Employment Agreements of Dr. Bonazzola, Mr. Erstgaard and Mr. Ness will become
effective at the Effective Time. On December 18, 1996, Mr. Kobriger's employment
with Corvallis Clinic and prospective employment with PPI was terminated. The
PPI Employment Agreements provide for the following compensation and benefits:
1. Mr. Goldberg is employed as President and Chief Executive Officer of PPI
for a term of three years. From July 1, 1996 until the Effective Time, Mr.
Goldberg is paid a base salary at an annual rate of $300,000. From and after the
Effective Time, Mr. Goldberg will (a) be paid a base salary at an annual rate of
$225,000, (b) be eligible for an annual incentive bonus not less than $125,000
assuming achievement of the financial standards of performance and 100% of the
agreed non-financial objectives and (c) receive an option to purchase 50,000
shares of PPI Class A Common Stock at the fair market value of such shares as of
the date such option is granted, which option shall vest and become exercisable
with respect to 20% of such shares subject to such option on each anniversary of
the date of the grant.
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Pursuant to his PPI Employment Agreement, Mr. Goldberg, on October 30, 1996,
received a restricted stock award of 27,000 shares of PPI Class A Common Stock,
one-third of which restricted shares shall vest as of each of the first, second
and third anniversaries of the Effective Time, provided that Mr. Goldberg is
still employed on each such anniversary. In connection with the grant of
restricted stock to Mr. Goldberg, PPI and Mr. Goldberg entered into a restricted
stock agreement, which agreement sets forth certain terms and conditions,
including, without limitation, restrictions on transfer of shares, requirements
of vesting and forfeiture, redemption of shares and extension of a loan by PPI
to Mr. Goldberg in an amount equal to the tax liability resulting from the grant
of such restricted stock not to exceed $25,000. Such loan shall accrue interest
at the adjusted federal rate, as determined by the IRS, and shall be repaid in
120 equal and consecutive monthly installments, which installments shall be
deducted from his payroll; provided, however, that the loan shall be immediately
due and payable on the date Mr. Goldberg's employment with PPI is terminated.
In the event Mr. Goldberg's employment is terminated by PPI without cause,
he shall receive his base salary and medical, health and accident and disability
insurance for a term of 12 months after the date of such termination. In the
event the Merger fails to occur on or before January 31, 1997, Mr. Goldberg
would be entitled to (i) be "made whole" by PPI for losses (if any) in
purchasing a home in Portland, Oregon (including closing and loan costs),
provided Mr. Goldberg sells that home and relocates to a new home outside of
Portland, Oregon within one year, and (ii) severance compensation in the amount
of $300,000 and health and disability insurance coverage for 12 months. The
obligations of PPI under the PPI Employment Agreement of Mr. Goldberg are
guaranteed by the Companies.
2. Mr. Dupell is employed as Senior Vice President and Chief Financial
Officer of PPI for a term of three years. Since July 29, 1996, Mr. Dupell has
been paid a base salary at an annual rate of $150,000. From and after the
Effective Time, Mr. Dupell will (a) be eligible for an annual incentive bonus of
not less than $90,000 assuming achievement of the financial standards of
performance and 100% of the agreed non-financial objectives and (b) receive an
option to purchase 35,000 shares of PPI Class A Common Stock at the fair market
value of such shares as of the date such option is granted, which option shall
vest and become exercisable with respect to 20% of such shares subject to such
option on each anniversary of the date of such grant.
Pursuant to his PPI Employment Agreement, Mr. Dupell received, on October
30, 1996, a restricted stock award for 27,000 shares of PPI Class A Common
Stock, one-third of which restricted shares shall vest as of each of the first,
second and third anniversaries of the Effective Time, provided that Mr. Dupell
is still employed on each such anniversary. In connection with the grant of
restricted stock to Mr. Dupell, PPI and Mr. Dupell entered into a restricted
stock agreement, which agreement sets forth certain terms and conditions,
including, without limitation, restrictions on transfer of shares, requirements
of vesting and forfeiture, redemption of shares and the extension of a loan by
PPI to Mr. Dupell in an amount equal to the tax liability resulting from the
grant of such restricted stock not to exceed $25,000. Such loan shall accrue
interest at the adjusted federal rate, as determined by the IRS, and shall be
repaid in 120 equal consecutive monthly installments, which installments shall
be deducted from his pay; provided, however, that the loan shall be immediately
due and payable on the date Mr. Dupell's employment with PPI is terminated.
In the event Mr. Dupell's employment is terminated by PPI without cause, he
shall receive his base salary and medical, health and accident and disability
insurance for a term of 12 months after the date of such termination. In the
event the Merger fails to occur on or before January 31, 1997, Mr. Dupell would
be entitled to (i) be "made whole" by PPI for losses (if any) in purchasing a
home in Portland, Oregon (including closing and loan costs), provided Mr. Dupell
sells that home and relocates to a new home outside of Portland, Oregon, within
one year, (ii) severance compensation in the amount of $150,000 and (iii) health
and disability insurance coverage for 12 months. The obligations of PPI under
the PPI Employment Agreement of Mr. Dupell are guaranteed by the Companies. Mr.
Dupell is not entitled to receive any severance or termination payments
resulting from his termination of employment with
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Corvallis Clinic either in anticipation of the consummation of the Merger, or
upon consummation of the Merger.
3. Dr. Bonazzola is employed as Senior Vice President and Chief Medical
Officer of PPI for a term of three years. Commencing at the Effective Time, Dr.
Bonazzola will (a) be paid a base salary at an annual rate of $190,000, (b)
receive a bonus award of $25,000, (c) be eligible for an annual incentive bonus
of not less than $70,000 assuming achievement of the financial standards of
performance and 100% of the agreed non-financial objectives and (d) receive an
option to purchase 35,000 shares of PPI Class A Common Stock at the fair market
value of such shares as of the date such option is granted, which option shall
vest and become exercisable with respect to 20% of the shares subject to such
option on each anniversary of the date of such grant.
In the event Dr. Bonazzola's employment is terminated by PPI without cause,
he shall receive his base salary and medical, health and accident and disability
insurance for a term of 12 months after the date of such termination. In the
event the Merger fails to occur on or before January 31, 1997, Dr. Bonazzola
would be entitled to (i) be "made whole" by PPI for losses (if any) in
purchasing a home in Portland, Oregon (including closing and loan costs),
provided Dr. Bonazzola sells that home and relocates to a new home outside of
Portland, Oregon, within one year, (ii) severance compensation in the amount of
$190,000 and (iii) health and disability insurance coverage for 12 months. The
obligations of PPI under the PPI Employment Agreement of Dr. Bonazzola are
guaranteed by the Companies. Dr. Bonazzola is not entitled to receive any
severance or termination payments resulting from his termination of employment
with Medford Clinic either in anticipation of the consummation of the Merger, or
upon consummation of the Merger.
4. Mr. Ness is employed as Senior Vice President of PPI for a term of three
years. Commencing at the Effective Time, Mr. Ness will (a) be paid a base salary
at an annual rate of $175,000, (b) be eligible for an annual incentive bonus of
not less than $50,000 assuming achievement of the financial standards of
performance and 100% of the agreed non-financial objectives, and (c) receive an
option to purchase 35,000 shares of PPI Class A Common Stock at the fair market
value of such shares as of the date such option is granted, which option shall
vest and become exercisable with respect to 20% of such shares subject to such
option on each anniversary of the date of such grant.
Pursuant to his PPI Employment Agreement, Mr. Ness received on October 30,
1996 a restricted stock award for 27,000 shares of PPI Class A Common Stock,
one-third of which restricted shares shall vest as of each of the first, second
and third anniversaries of the Effective Time, provided that he is still
employed on each such anniversary. In connection with the grant of restricted
stock to Mr. Ness, PPI and Mr. Ness entered into a restricted stock agreement,
which agreement sets forth certain terms and conditions, including, without
limitation, restrictions on transfer of shares, requirements of vesting and
forfeiture, redemption of shares and extension of a loan by PPI to Mr. Ness in
an amount equal to the tax liability resulting from the grant of such restricted
stock, not to exceed $25,000. Such loan shall accrue interest at the adjusted
federal rate, as determined by the IRS, and shall be repaid in 120 equal
consecutive monthly installments, which installments shall be deducted from his
pay; provided, however, that the loan shall be immediately due and payable on
the date Mr. Ness' employment with PPI is terminated.
In the event Mr. Ness' employment is terminated by PPI without cause, he
shall be entitled to receive his base salary and medical, health and accident
and disability insurance for a term of 12 months after the date of termination.
Mr. Ness is not entitled to any severance compensation in the event the Merger
fails to occur. Mr. Ness is not entitled to receive any severance or termination
payments resulting from his termination of employment with Medford Clinic either
in anticipation of the consummation of the Merger, or upon consummation of the
Merger.
5. Mr. Erstgaard is employed as Senior Vice President of PPI for a term of
three years. Commencing at the Effective Time, Mr. Erstgaard will (a) be paid a
base salary at an annual rate of $132,000, (b) be eligible for an annual
incentive bonus of not less than $50,000 assuming achievement of the financial
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standards of performance and 100% of the agreed non-financial objectives, (c)
receive an option to purchase 35,000 shares of PPI Class A Common Stock at the
fair market value of such shares as of the date such option is granted, which
option shall vest and become exercisable with respect to 20% of such shares
subject to such option on each anniversary of the date of such grant.
In the event Mr. Erstgaard is terminated by PPI without cause, he shall be
entitled to receive his base salary and medical, health and accident and
disability insurance for a term of 12 months after the date of termination. Mr.
Erstgaard is not entitled to any severance compensation in the event the Merger
fails to occur. Mr. Erstgaard is not entitled to receive any severance or
termination payments resulting from his termination of employment with
HealthFirst either in anticipation of the consummation of the Merger, or upon
consummation of the Merger.
6. Prior to Mr. Kobriger's termination of employment with PPI on December
18, 1996, Mr. Kobriger received a restricted stock award of 27,000 shares of PPI
Class A Common Stock pursuant to the PPI Employment Agreement, dated as of
September 19, 1996, between PPI and Mr. Kobriger. The restricted stock so
awarded is contemplated to vest only so long as Mr. Kobriger was employed by
PPI. Since Mr. Kobriger's employment with PPI was terminated without cause,
under Mr. Kobriger's employment agreement, Mr. Kobriger would be entitled to
receive from PPI his agreed-upon annual base salary in the amount of $175,000
over a 12-month period and medical, health and accident and disability insurance
for a term of 12 months from the date of termination.
Certain of the executive officers and directors of HealthFirst, Corvallis
Clinic and Medford Clinic have been named as executive officers and directors of
the respective New PCs. Initially, the executive officers and directors of the
New PCs are expected to be identical or substantially the same as the executive
officers and directors of the respective Companies. For information regarding
current officers and directors of the New PCs, see "Operation, Management and
Business of HealthFirst New PC following the New PC Distribution--Management of
HealthFirst New PC", "Operation, Management and Business of Corvallis Clinic New
PC Following the New PC Distribution--Management of Corvallis Clinic New PC" and
"Operation, Management and Business of Medford Clinic New PC Following the New
PC Distribution--Management of Medford Clinic New PC."
SHAREHOLDER APPROVALS
HEALTHFIRST SHAREHOLDER APPROVAL
The affirmative vote of the holders of a majority of the outstanding
HealthFirst Class A Shares is required for the approval of the PC Reorganization
Proposal and the Merger Proposal.
CORVALLIS CLINIC SHAREHOLDER APPROVAL
The affirmative vote of the holders of two-thirds of the outstanding shares
of Corvallis Clinic Class A Stock and two-thirds of the outstanding shares of
Corvallis Clinic Class B Stock, in each case as a separate voting group, is
required for the approval of the PC Reorganization Proposal the Merger Proposal.
MEDFORD CLINIC SHAREHOLDER APPROVAL
The affirmative vote of the holders of a majority of the outstanding shares
of Medford Clinic Common Stock is required for approval of the PC Reorganization
Proposal and the Merger Proposal.
RIGHTS OF SECURITY HOLDERS
The shareholders of each of HealthFirst, Corvallis Clinic and Medford Clinic
should be aware that their rights as stockholders in PPI, unlike their rights as
shareholders in the Companies or the New PCs will be governed by the laws of the
State of Delaware, the state of incorporation of PPI, and will be governed by
the PPI Certificate and the PPI Bylaws. At the Effective Time, the rights of the
shareholders
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of each of HealthFirst, Corvallis Clinic and Medford Clinic will be changed,
possibly in adverse respects, due to differences between the articles and bylaws
of each such Company (the "Governance Documents"), on the one hand, and the PPI
Certificate and PPI Bylaws, on the other hand. Accordingly, the shareholders of
each of the Companies should carefully review the following, which the Companies
believe addresses all material differences in the rights of the shareholders
upon the Effective Time, to understand how certain of their rights as
shareholders of the Companies will be affected if they were to become
stockholders of PPI upon consummation of the Merger.
The following is a brief description of differences between the rights of
the stockholders of PPI and the shareholders of each of HealthFirst, Corvallis
Clinic and Medford Clinic, on the other hand. Such description does not purport
to be a complete explanation of all such differences. Furthermore, the
identification of specific differences is not meant to indicate that other
differences do not exist. The following summary is also qualified in its
entirety by reference to the DGCL, the Governance Documents, the PPI Certificate
and the PPI Bylaws.
SHAREHOLDER VOTING REQUIREMENTS
Under the Governance Documents, unless otherwise required by Oregon law, (i)
an action requiring HealthFirst shareholder approval must be approved by a
majority vote of HealthFirst Class A Shares, each as a voting group, present in
person or represented by proxy and entitled to vote on the subject matter at a
meeting at which a quorum is present, (ii) an action requiring Corvallis Clinic
shareholder approval must be approved in general by a two-thirds vote of
Corvallis Clinic Class A Stock, and in certain cases, the vote of two-thirds of
the Corvallis Clinic Class B Stock; except that the right to elect certain
committee members is relegated to the holders of Corvallis Clinic Class B Stock,
and in any case shareholders may be present in person or represented by proxy
and entitled to vote on the subject matter at a meeting at which a quorum is
present and (iii) an action requiring Medford Clinic shareholder approval must
be approved by a majority vote of Medford Clinic Common Stock present in person
or represented by proxy and entitled to vote on the subject matter at a meeting
at which a quorum is present. The Governance Documents of each Company permits
shareholders to take action by written consent without a meeting of
shareholders.
Under the PPI Certificate, unless specified therein to the contrary, an
action requiring PPI stockholder approval must be approved by a majority vote of
shares of Class A Common Stock present in person or by proxy and entitled to
vote on the subject matter at a meeting at which a quorum is present. The PPI
Certificate contains provisions which require the affirmative vote of 80% of the
outstanding shares of all classes and series of PPI Common Stock and a majority
of the outstanding shares of all classes and series of PPI Common Stock held by
"disinterested stockholders" (stockholders who are not an interested stockholder
or affiliated with an interested stockholder to approve certain business
transactions involving any "interested stockholder" (the owner of 15% or more of
the then outstanding shares of PPI Common Stock)). These provisions are designed
to discourage potential acquisition proposals, delay or prevent a change in
control of PPI and thus limit the price that certain investors might be willing
to pay in the future for shares of PPI Class A Common Stock. These provisions
include a staggered board of directors and authority of the PPI Board to
authorize the issuance, without further shareholder approval, of preferred stock
with rights and privileges senior to PPI Common Stock. PPI also is subject to
Section 203 of the DGCL, which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder.
NOTICE PROCEDURES FOR SHAREHOLDER PROPOSALS
Under the Governance Documents of each of the Companies, (i) any special
meeting of HealthFirst shareholders may be called for any purpose upon written
demand of the holders of not less than one-tenth of all of the outstanding
shares entitled to vote at such meeting and the notice of any such meeting is
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required to be delivered not less than 10 days nor more than 60 days before the
date of the meeting, (ii) any special meeting of Corvallis Clinic shareholders
may be called for any purpose upon written demand of the holders of not less
than one-tenth of all of the outstanding shares entitled to vote at such meeting
and the notice of any such meeting is required to be delivered not less than 10
days before the date of the meeting and (iii) any special meeting of Medford
Clinic shareholders may be called for any purpose upon written demand of the
holders of not less than one-third of all of the outstanding shares entitled to
vote at such meeting and the notice of any such meeting is required to be
delivered not less than 10 days nor more than 50 days before the date of the
meeting.
The PPI Certificate and the PPI Bylaws establish advance notice procedures
with regard to the nomination, other than by or at the direction of the Board of
Directors, of persons for election as directors. The PPI procedures require
nominations for the election of directors at an annual meeting to be in writing
and received by the Secretary of PPI, not less than 30 days nor more than 60
days prior to the meeting. If less than 40 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder must be received by the Secretary not later than the close of
business on the tenth day following the mailing of notice of the date the
meeting was made public. The notice of nomination must set forth certain
information with respect to the stockholder and each nominee for director.
Although these procedures do not give the PPI Board any power to approve or
disapprove stockholder nominations for election of directors, they may have the
effect of precluding a nomination for election of directors, if the proper
procedures are not followed, and could discourage or deter a third party from
conducting a solicitation of proxies to elect its own slate of directors, even
if such solicitation might be beneficial to PPI or its stockholders.
Accordingly, these provisions may have certain anti-takeover effects to which
the shareholders of each of HealthFirst, Corvallis Clinic and Medford Clinic are
not currently subject.
REDUCTIONS OR EXPANSION OF BOARD
The Governance Documents of each of the Companies provide that (i) the
number of directors on the HealthFirst Board may be increased or decreased by
the affirmative vote of the holders of a majority of the outstanding shares,
(ii) the number of directors on the Corvallis Clinic Board may be increased or
decreased by the affirmative vote of the holders of two-thirds of the
outstanding shares of Corvallis Clinic Class A Stock and (iii) the number of
directors on the Medford Clinic Board may be increased or decreased by the
affirmative vote of the holders of 60% of the outstanding shares.
In contrast, the PPI Bylaws provide that the number of directors on the PPI
Board may be increased or decreased only by the vote of a majority of the entire
PPI Board, provided that such number may not be reduced to less than three and
that any increase or decrease in the number of directors on the PPI Board be
apportioned among the three classes as to make all classes as nearly equal in
number as possible. A vote of the stockholders of PPI is not required for such
action.
REMOVAL OF DIRECTORS
The Governance Documents of each of the Companies provide that (i) a member
of the HealthFirst Board may be removed, with or without cause, by the
affirmative vote of the holders of not less than two-thirds of the outstanding
shares entitled to vote at an election of directors, (ii) a member of the
Corvallis Clinic Board may be removed, with or without cause, by the affirmative
vote of the holders of a majority of the outstanding shares entitled to vote at
an election of directors and (iii) a member of the Medford Clinic Board may be
removed, with or without cause, by the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote at an election of directors.
The DGCL provides that, except with respect to corporations with classified
or staggered boards of directors or cumulative voting, a director may be
removed, with or without cause, by the holders of the majority of the shares
entitled to vote at an election of directors. The PPI Certificate and the PPI
Bylaws
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allow for the removal of directors only for cause, by the affirmative vote of
the holders of two-thirds of the voting stock entitled to elect directors.
Accordingly, after the consummation of the Merger, the ability of PPI
stockholders to remove a director of PPI will be more restrictive than currently
is the case for HealthFirst, Corvallis Clinic and Medford Clinic.
AMENDMENTS TO THE PPI CERTIFICATE AND PPI BYLAWS
Under the Governance Documents of each of the Companies, (i) the Governance
Documents of HealthFirst may be amended by the affirmative vote of the holders
of a majority of the outstanding shares, (ii) the Governance Documents of
Corvallis Clinic may be amended by the affirmative vote of the holders of
two-thirds of the outstanding shares of Corvallis Clinic Class A Stock, except
that the affirmative vote of the holders of two-thirds of the outstanding shares
of Corvallis Clinic Class B Stock is required to approve certain specified
matters affecting the rights of such holders and (iii) the Governance Documents
of Medford Clinic may be amended by the affirmative vote of the holders of 60%
of the outstanding shares.
The PPI Certificate provides that certain provisions of the PPI Certificate
may not be amended without specified supermajority votes. The PPI Bylaws provide
that the PPI Board has the authority to amend the PPI Bylaws, in general, by an
affirmative vote of a majority of the entire PPI Board.
The vote of 80% of the stockholders of PPI and the vote of a majority of
"Disinterested Stockholders" is required for approval relating to certain
business transactions involving an "interested stockholder" (any holder of 15
percent or more of the outstanding shares of PPI Common Stock). Approval of
66 2/3 percent of the outstanding shares of PPI Common Stock is required for
amendment of any of the following provisions:
(i) the number, election and terms of directors,
(ii) stockholder nomination of director candidates and the introduction of
business at annual meetings,
(iii) filling newly created directorships and vacancies,
(iv) the removal of directors,
(v) calling special meetings,
(vi) the rights of the directors and officers of PPI with respect to
indemnification under Article 7 of the PPI Bylaws, and
(vii) the approval of new bylaws or the amendment or repeal of, or approval
of any provision inconsistent with, the provisions of the PPI Bylaws
described in clause (i) through (vi).
Accordingly, it may be more difficult for the stockholders of PPI to amend
certain sections of the PPI Certificate than currently is the case for
shareholders of HealthFirst, Corvallis Clinic and Medford Clinic with respect to
their Governance Documents. This could work to the benefit or detriment of
shareholders depending upon a shareholder's position with respect to a
particular issue.
SPECIAL MEETINGS
Under the Governance Documents of each of the Companies, (i) any special
meeting of HealthFirst shareholders may be called for any purpose by the
president of HealthFirst, the HealthFirst Board or upon written demand of the
holders of not less than one-tenth of all of the outstanding shares entitled to
vote at such meeting, (ii) any special meeting of Corvallis Clinic shareholders
may be called for any purpose by the president of Corvallis Clinic, the
Corvallis Clinic Board or upon written demand of the holders of not less than
one-tenth of all of the outstanding shares entitled to vote at such meeting and
(iii) any special meeting of Medford Clinic shareholders may be called for any
purpose by the president of Medford Clinic, the
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Medford Clinic Board or upon written demand of the holders of not less than
one-third of all of the outstanding shares entitled to vote at such meeting and
the notice of any such meeting.
Special meetings of the stockholders of a Delaware corporation may be called
by the board of directors or by the persons authorized in the corporation's
certificate of incorporation or bylaws. The PPI Bylaws provide that special
meetings of the stockholders may be called only by a majority of the entire PPI
Board.
Accordingly, each of the shareholders of HealthFirst and Corvallis Clinic
will be subject to a more restrictive standard as stockholders of PPI with
respect to the calling of special meetings of stockholders after the Merger.
SHAREHOLDER RIGHTS--THE NEW PCS COMPARED TO THE COMPANIES
The following is a brief description of the differences between the rights
shareholders of the Companies will have in the New PCs as compared to their
rights in the respective Companies. This description does not purport to be a
complete explanation of all such differences. Furthermore, the identification of
specific differences is not meant to indicate that other differences do not
exist. The following summary is also qualified in its entirety to Oregon Law,
the Governance Documents, the Restated Articles of each New PC and the Bylaws of
each New PC.
VOTING RIGHTS. Voting rights of the shareholders of each of HealthFirst New
PC, Corvallis Clinic New PC and Medford Clinic New PC will not be materially
different from those of the shareholders of HealthFirst, Corvallis Clinic or
Medford Clinic as the case may be.
LIQUIDATION AND REDEMPTION VALUES. The Restated Articles of each of the New
PCs do not set forth liquidation values for shares of the New PCs. Accordingly,
upon the dissolution of a New PC, Oregon Law would compel the distribution of
assets of such New PC on a pro rata basis among the shareholders of such New PC.
As discussed elsewhere in the Joint Proxy Statement/Prospectus, it is not
anticipated that any New PC will have or accumulate significant assets. Shares
of Common Stock of each New PC are redeemable in specified circumstances for a
nominal price, also consistent with the absence of value expected for such New
PC. See "The PC Reorganization Transactions and Related Transactions--
Characteristics of the New PCs." In contrast, under the Articles of
Incorporation of HealthFirst, redemption values range from $100 per share to
$23,000 per share when a shareholder dies, retires or relinquishes shares of
HealthFirst for any reason other than in conjunction with the formation of a
physician practice management company. The Articles of Incorporation of
Corvallis Clinic sets forth liquidation preferences of $100 per share of Class C
Stock of Corvallis Clinic and $23,000 per share of Class A Stock of Corvallis
Clinic, with the remaining assets and funds to be allocated among holders of
Class B Stock of Corvallis Clinic.
GOVERNMENT AND REGULATORY APPROVALS
It is a condition to the consummation of the transactions contemplated by
the Reorganization and Merger Agreement that each of the Companies must have
received necessary government and regulatory approvals prior to the Merger. At
any time before or after the Effective Time, the Federal Trade Commission or the
Antitrust Division of the United States Department of Justice or any state could
take action pursuant to the federal or state antitrust laws to seek to enjoin
the consummation of the Merger. Private parties may also seek to take legal
action under the antitrust laws. Based on information available to them,
HealthFirst, Corvallis Clinic and Medford Clinic believe that the Merger can be
effected in compliance with federal and state antitrust laws. PPI, HealthFirst,
Corvallis Clinic and Medford Clinic are aware of no governmental or regulatory
approvals required for the consummation of the Merger, other than compliance
with federal and applicable state securities and corporate laws, and the
required transfer of or amendment to certain of HealthFirst's, Corvallis
Clinic's and Medford Clinic's licenses and permits.
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FEDERAL INCOME TAX CONSIDERATIONS
PC DISTRIBUTIONS
If, for federal income tax purposes, each of the New PC Distributions
satisfies the requirements for tax-free treatment under Sections 355 and
368(a)(1)(D) of the Code, then the following tax treatment will result:
(i) no gain or loss will be recognized by (and no amount will be included in
the income of) a holder of Old PC Shares upon the receipt of shares of
capital stock in a New PC ("New PC Shares");
(ii) no gain or loss will be recognized by (and no amount will be included
in the income of) any Company or such Company's New PC upon the
distribution of the New PC Shares;
(iii) the aggregate tax basis of the New PC Shares and the Old PC Shares in
the hands of each shareholder of such Company after the New PC
Distribution will, in each instance, be the same as the basis of the
Old PC Shares held by such shareholder immediately before the New PC
Distribution, allocated in proportion to the fair market value of each;
and
(iv) assuming that the Old PC Shares are held as capital assets, the holding
period of the New PC Shares received in the New PC Distribution by a
holder of Old PC Shares will include the period during which such Old
PC Shares were held.
If any New PC Distribution does not qualify under Section 355 of the Code,
then:
(i) a corporate level tax would be payable based upon the amount by which
the fair market value of the New PC Shares distributed to the
shareholders of such Company exceeded such Company's adjusted tax basis
therein; and
(ii) each holder of Old PC Shares who receives New PC Shares in the New PC
Distribution will hold such shares at a fair market value basis and
will be treated as having received a taxable distribution, taxed first
as a dividend to the extent of such shareholder's pro rata share of
such Company's current and accumulated earnings and profits on the date
of the applicable New PC Distribution, and then as a nontaxable return
of capital to the extent of such shareholder's basis in the Old PC
Shares (with any remaining amount being taxed as capital gain). In such
event, the transaction may also be taxable for state and local tax
purposes.
It is the belief of the respective boards of directors of the Companies
that, based on the terms and conditions of the New PC Management Agreement
between PPI and each New PC and the limited nature of such New PC's business, as
a factual matter such New PC would have no more than a nominal value and as a
result the New PC Distribution would not involve any material tax exposure to
the shareholders of any of the Companies. This belief is based both on a
determination that the present value of the cash flows of each New PC would not
be material, taking into account provider compensation and benefits, and on an
assessment that the value of the assets to be held by each New PC is not
material. As a result, the respective boards of directors of the Companies
deemed it unnecessary and inadvisable to engage legal counsel to undertake the
rigorous factual review and analysis that would have been required before
counsel could consider delivering an opinion regarding whether the New PC
Distributions would satisfy the requirements for tax-free treatment under
Section 355 of the Code. McDermott, Will & Emery, counsel to PPI and the
Companies, has delivered a legal opinion to each of the Companies that the
amount of income produced by a taxable distribution at both the Company and
shareholder levels would be no more than the fair market value of the property
distributed. See "The PC Reorganization Transactions and Related Transactions --
Characteristics of the New PCs," "The PC Reorganization Transactions and Related
Transactions -- HealthFirst's Reasons for the HealthFirst Reorganization
Transactions," "The PC Reorganization Transactions and Related Transactions --
Corvallis Clinic's Reasons for the Corvallis Clinic Reorganization Transactions"
and "The PC Reorganization Transactions and Related Transactions -- Medford
Clinic's Reasons for the Medford Clinic Reorganization Transactions."
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Treasury regulations governing Section 355 of the Code require that each
shareholder of a Company who receives New PC Shares pursuant to the New PC
Distribution attach a statement to his or her federal income tax return for the
taxable year in which he or she received such stock, which statement shows the
applicability of Section 355 of the Code to the New PC Distribution. Each of the
Companies will provide each shareholder thereof with the information necessary
to comply with this requirement, if applicable.
MERGER
McDermott, Will & Emery, counsel to PPI and each of the Companies, has, upon
the basis of assumed consummation of the Merger, as described in this Joint
Proxy Statement/Prospectus and representations of the officers of each of the
Companies, rendered an opinion that, for federal income tax purposes, it is more
likely than not that the Merger will constitute a tax-free transaction. As a
result, as a tax-free transaction, the Merger will have the following general
federal income tax consequences: (i) no gain or loss will be recognized by the
shareholders of any of the Companies who exchange their Old PC Shares for PPI
Class A Common Stock pursuant to the Merger, (ii) the aggregate tax basis of PPI
Class A Common Stock received in the Merger will equal the aggregate tax basis
of the Old PC Shares exchanged therefor, (iii) no gain or loss will be
recognized by each of the Companies in connection with the Merger and (iv)
provided that the Old PC Shares are held as a capital asset at the Effective
Time, the holding period of PPI Class A Common Stock will include the holding
period of such Old PC Shares. An opinion of counsel is not binding on the IRS or
the courts. No assurance can be given that the tax-deferred characterization of
the Merger will not be challenged or, if challenged, will be defended
successfully. If the tax characterization of the Merger is successfully
challenged, there would be significant adverse tax consequences to the Companies
and their respective shareholders.
THE FOREGOING SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE PC
DISTRIBUTIONS AND THE MERGER AND RELATED TRANSACTIONS IS FOR GENERAL INFORMATION
ONLY. SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISERS AS TO THE
PARTICULAR CONSEQUENCES TO THEM OF THE APPLICABLE PC DISTRIBUTION AND THE
MERGER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS. THIS
SUMMARY MAY BE INAPPLICABLE TO SHAREHOLDERS WHO RECEIVED THEIR SHARES OF CAPITAL
STOCK OF THEIR RESPECTIVE COMPANIES PURSUANT TO THE EXERCISE OF OPTIONS OR AS
OTHER FORMS OF COMPENSATION (INCLUDING HOLDERS OF RESTRICTED STOCK) OR WHO ARE
NOT CITIZENS OR RESIDENTS OF THE UNITED STATES, WHO SHOULD CONSULT THEIR OWN TAX
ADVISERS AS TO THE CONSEQUENCES OF THE APPLICABLE PC DISTRIBUTION AND THE
MERGER.
ACCOUNTING TREATMENT
SAB 48 indicates that when a company acquires assets from promoters and
shareholders in exchange for stock just prior to, or at the time, of, its first
public offering, such assets should generally be recorded at the cost to each
such promoter or shareholder. Each of the Companies is involved as a promoter of
the Merger and the related first-time public registration of capital stock of
PPI. Accordingly, the assets and liabilities to be transferred from the
Companies to PPI in connection with the Merger Transactions will be recorded on
the PPI balance sheet in the same amounts as reflected on the balance sheets of
the Companies at the Effective Time.
As reflected in the "Unaudited Pro Forma Financial Statements of PPI", all
assets and liabilities reflected in the historic balance sheets of the Companies
are expected to be transferred to PPI in the Merger. In addition, it is expected
that certain of the intangible assets, contractual commitments and contingent
liabilities of the Companies, which are not set forth on the respective historic
balance sheets of the Companies, would also be transferred to PPI.
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DISSENTERS' RIGHTS REGARDING THE MERGER
Holders of record of HealthFirst Class A Shares, Corvallis Clinic Class A
Stock, Corvallis Clinic Class B Stock or Medford Clinic Common Stock who comply
with the applicable procedures summarized herein (collectively, the "Dissenting
Shareholders") will be entitled to receive fair value of the shares of the
Companies held by such Dissenting Shareholders under Sections 60.551 through
60.594 of the Oregon Business Corporation Act. A Dissenting Shareholder must
follow the steps summarized below properly and in a timely manner to properly
assert such Dissenting Shareholder's rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO DISSENTERS' RIGHTS UNDER THE OREGON BUSINESS CORPORATION ACT AND IS QUALIFIED
IN ITS ENTIRETY BY THE FULL TEXT OF SECTIONS 60.551 THROUGH 60.594 WHICH IS
REFERRED IN ITS ENTIRETY AS APPENDIX I TO THIS PROXY STATEMENT. ALL REFERENCES
IN SECTIONS 60.551 THROUGH 60.594 AND IN THIS SUMMARY TO A "SHAREHOLDER" ARE TO
A RECORD HOLDER OF HEALTHFIRST CLASS A SHARES, CORVALLIS CLINIC CLASS A STOCK,
CORVALLIS CLINIC CLASS B STOCK OR MEDFORD CLINIC COMMON STOCK AS TO WHICH
DISSENTERS' RIGHTS ARE ASSERTED. VOTING AGAINST, ABSTAINING FROM VOTING OR
FAILING TO VOTE ON APPROVAL AND ADOPTION OF THE PC REORGANIZATION PROPOSAL OR
THE MERGER PROPOSAL WILL NOT CONSTITUTE A DEMAND FOR FAIR VALUE WITHIN THE
MEANING OF SECTION 60.551 OF THE OREGON BUSINESS CORPORATION ACT.
Under the Oregon Business Corporation Act, Dissenting Shareholders who
follow the procedures set forth in Sections 60.551 through 60.594 will be
entitled to receive the fair value of the shares held thereby, plus accrued
interest. The term "fair value" is defined in Section 60.551(4) to mean the
value of the shares immediately before the consummation of the proposed merger
to which the Dissenting Shareholder objects, excluding "any appreciation or
depreciation in anticipation" of the proposed merger unless exclusion would be
inequitable.
Under Section 60.561, where a proposed merger is to be submitted for
approval at a meeting of shareholders, the notice of meeting must state that
shareholders are or may be entitled to assert dissenters' rights under Sections
60.551 through 60.594 and must include in such notice a copy of Sections 60.551
through 60.554. This Joint Proxy Statement/Prospectus constitutes such notice to
the holders of HealthFirst Series 1 Shares, HealthFirst Series 2 Shares,
Corvallis Clinic Class A Stock, Corvallis Clinic Class B Stock or Medford Clinic
Common Stock. The applicable statutory provisions of the Oregon Business
Corporation Act are attached to this Joint Proxy Statement/Prospectus as
Appendix G. Failure to timely and properly comply with the procedures specified
in the Oregon Business Corporation Act will result in the loss of dissenters'
rights.
A Dissenting Shareholder wishing to exercise such holder's dissenters'
rights (i) must not vote in favor of adoption of the Merger Proposal, and (ii)
must deliver, prior to the vote on the Merger Proposal, a written notice of such
Dissenting Shareholder's intent to demand payment for the shares held thereby.
The HealthFirst Special Meeting and vote will be held on January 21, 1997. The
Corvallis Clinic Special Meeting and vote will be held on January 20, 1997. The
Medford Clinic Special Meeting and vote will be held on January 19, 1997.
Notices should be delivered to HealthFirst at 10535 NE Glisan, Portland, Oregon
97220, Attention: Secretary; to Corvallis Clinic at 444 NW Elks Drive,
Corvallis, Oregon 97330, Attention: Secretary or to Medford Clinic at 555 Black
Oak Drive, Medford, Oregon 97504, Attention: Secretary. A Dissenting Shareholder
wishing to exercise dissenters' rights must be the record holder of such shares
before the date of the first announcement of the terms of the proposed merger to
news media or shareholders (the "Required Date") and must continue to hold such
shares of record until the Effective Time. Accordingly, a Dissenting Shareholder
who is the record holder of the shares on such date but who thereafter transfers
such shares prior to the Effective Time will lose any right to receive fair
value of such shares.
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HealthFirst, Corvallis Clinic and Medford Clinic shall, within 10 days after
the Effective Time, notify each Dissenting Shareholder who has complied with the
statutory requirements summarized above that the Merger has become effective.
Such notice from the Company shall set a date by which such Company must receive
the payment demand, which date may not be less than 30 days nor more than 60
days after such Company delivers such notice. Each Dissenting Shareholder who
has received the notice from HealthFirst, Corvallis Clinic or Medford Clinic
must make a written demand for payment of fair value held thereby within the
period specified in the Company's notice, certify whether such Dissenting
Shareholder acquired the shares before the Required Date and deposit such
Dissenting Shareholder's stock certificates with the Company in which such
Dissenting Shareholder is a shareholder. The written demands for payment of fair
value, the certification of the Dissenting Shareholder regarding the Required
Date and the stock certificates representing such shares shall be delivered to
(i) in the case of HealthFirst shareholders, to HealthFirst at 10535 NE Glisan,
Portland, Oregon 97220, Attention: Secretary, (ii) in the case of Corvallis
Clinic shareholders, to Corvallis Clinic at 444 NW Elks Drive, Corvallis, Oregon
97330, Attention: Secretary and (iii) in the case of Medford Clinic
shareholders, to Medford Clinic at 555 Black Oak Drive, Medford, Oregon 97504,
Attention: Secretary. A Dissenting Shareholder who demands payment and deposits
the stock certificates with the Company retains all of the rights of a
shareholder. After receiving such demand, certification and stock certificates
(the "Payment Demand Date"), such Company must pay the amount such Company
estimates to be the fair value of such shares plus accrued interest. The payment
must be accompanied by such Company's latest financial statements and a
statement of estimate of the fair value and accrued interest.
If the Company fails to pay the Dissenting Shareholder within 60 days after
the Payment Demand Date or if the Dissenting Shareholder disagrees with
Company's estimate of fair value, the Dissenting Shareholder may demand from the
Company payment of fair value of his or her shares based on his or her estimate
of fair value. If the Company disagrees with the Dissenting Shareholder's
estimate of fair value, such Company must commence a judicial proceeding within
60 days of the Payment Demand Date to determine the fair value of the shares and
accrued interest. If the Company does not commence a judicial proceeding within
the 60-day period, it must pay the Dissenting Shareholder's estimate of fair
value and accrued interest.
If a petition for an appraisal is timely filed by the Company, after a
hearing on such petition, the court will determine the shareholders who are
entitled to dissenters' rights and will appraise the "fair value" of their
shares, exclusive of any element of value arising from the Merger, together with
a fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. Dissenting Shareholders considering seeking appraisal should be
aware that the fair value of their shares as determined under Sections 60.551
through 60.594 could be more than, the same as or less than the consideration
they would receive pursuant to the Reorganization and Merger Agreement. The
court shall assess the costs of appraisal against the Company, except that the
court may assess all or a portion of the expenses incurred by the parties to the
proceeding in connection with an appraisal, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts utilized in the
appraisal proceeding, against a party that acted arbitrarily, vexatiously or not
in good faith.
If any shareholder who properly demands payment of fair value of such
shareholder's shares fails to perfect, or effectively withdraws or loses by
failing to demand payment or deposit the stock certificates with the Company,
such shareholder's right to receive fair value as provided in the Oregon
Business Corporation Act, the shares held by the shareholder will be converted
into the right to receive the consideration receivable with respect to such
shares under the Reorganization and Merger Agreement.
Dissenting shareholders are urged to consult legal counsel with respect to
dissenters' rights under the Oregon Business Corporation Act. HealthFirst,
Corvallis Clinic and Medford Clinic shareholders considering the exercise of
dissenters' rights should consider the information set forth under "The Merger
and Related Transactions--Federal Income Tax Aspects of the PC Distribution and
the Merger."
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BREAK-UP FEE
If the Reorganization and Merger Agreement is terminated as a result of any
material breach of a material obligation of any party or if the board of
directors of any Company shall have determined, in the exercise of its fiduciary
duties under applicable law, not to recommend the Reorganization and Merger
Agreement, the applicable PC Reorganization or the Merger or shall have
withdrawn such recommendation or resolved to do any of the foregoing, then, in
such event, such party shall forthwith pay, within five days of the date of the
termination of the Reorganization and Merger Agreement, to each of the other
Companies a breakup fee in an amount equal to all costs and expenses incurred by
each such party, including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants incurred by
each such Company or on its behalf in connection with or related to the
authorization, preparation, negotiation, execution and performance of the
Reorganization and Merger Agreement, the preparation, filing, printing and
mailing of this Joint Proxy Statement/Prospectus and the Registration Statement,
the solicitation of shareholder approvals and all other matters related to the
consummation of the transactions contemplated thereby (including, without
limitation, the PC Reorganization Transactions and the Merger).
EFFECTS OF THE MERGER
As of the Effective Time, the following will occur.
1. HealthFirst, Corvallis Clinic and Medford Clinic will be merged with
and into PPI, and after the Merger, the separate existence of each of
HealthFirst, Corvallis Clinic and Medford Clinic will cease.
2. Each outstanding HealthFirst Class A Share (except for those held by
shareholders who exercise their dissenters' rights under the Oregon Business
Corporation Act) will be converted into the right to receive 354 shares of
PPI Class A Common Stock.
3. Each outstanding share of Corvallis Clinic Class A Stock (except for
those held by shareholders who exercise their dissenters' rights under the
Oregon Business Corporation Act) will be converted into the right to receive
1,454 shares of PPI Class A Common Stock.(1)
4. Each outstanding share of Corvallis Clinic Class B Stock (except for
those held by shareholders who exercise their dissenters' rights under the
Oregon Business Corporation Act) will be converted into the right to receive
192 shares of PPI Class A Common Stock.(2)
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(1) The number of shares of PPI Class A Common Stock into which each share of
Corvallis Clinic Class A Stock and each share of Corvallis Clinic Class B
Stock will be converted pursuant to the Merger represents that number having
aggregate value of $23,000 and $100, respectively (the value of shares of
PPI Class A Common Stock for such purpose being based on the valuation
prepared by American Appraisal Associates, Inc. an independent valuation
firm, of the Companies as a combined entity, assuming the business
combination thereof as of June 30, 1996, which valuation is described in
more detail in "The Merger and Related Transactions--Corvallis Clinic's
Reasons for the Merger."
(2) The number of shares of PPI Class A Common Stock into which each share of
Corvallis Clinic Class B Stock will be converted pursuant to the Merger is
equal to the quotient obtained by dividing (a) 11,800 (the number of all
issued and outstanding shares of Corvallis Clinic Class B Stock at the
Effective Time) into (b) 2,269,194 (the excess of (i) 2,410,250 (the
aggregate number of shares of PPI Class A Common Stock which Corvallis
Clinic shareholders will receive at the Effective Time) over (ii) 141,250
(the aggregate number of shares of PPI Class A Common Stock into which all
of the issued and outstanding shares of Corvallis Clinic Class A Stock and
Corvallis Clinic Class C Stock will be converted at the Effective Time)).
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5. Each outstanding share of Corvallis Clinic Class C Stock (except for
those held by shareholders who exercise their dissenters' rights under the
Oregon Business Corporation Act) will be converted into the right to receive
6 shares of PPI Class A Common Stock.(1)
6. Each outstanding share of Medford Clinic Common Stock (except for
those held by shareholders who exercise their dissenters' rights under the
Oregon Business Corporation Act) will be converted into the right to receive
31,362 shares of PPI Class A Common Stock.
7. Each New Option will be assumed by PPI and converted into the right
to purchase or receive, on the same terms and conditions as were applicable
under the New Options, the number of shares of PPI Class A Common Stock
equal to the number of shares subject to the New Option, multiplied by the
applicable exchange ratio for the underlying shares of HealthFirst Class A
Shares, Corvallis Clinic Class B Stock or Medford Clinic Common Stock, at an
exercise price per share of PPI Class A Common Stock equal to the former
exercise price per share under the New Option divided by the applicable
exchange ratio.
The exchange ratios set forth above were determined on the basis of FTE of
each Company as of October 1, 1996, with full- or part-time equivalence
determined based on a work-week of at least four full-working days for full-time
equivalence. A specified number of shares of PPI Class A Common Stock, equal to
the product of 31,000(3) multiplied by the number of FTE of each Company
("Merger Shares"), was allocated to the shareholders of each of the Companies.
The exchange ratio for each share of capital stock of each of the Companies was
then computed by dividing the total outstanding number of shares of capital
stock of such Company into the number of Merger Shares.
The Reorganization and Merger Agreement also contemplates that PPI and the
Companies will, prior to the Effective Time of the Merger, enter into an escrow
agreement with an escrow agent reasonably acceptable to PPI and the Companies,
pursuant to which escrow agreement the shareholders of each of the Companies
will deposit into escrow certain number of shares of PPI Class A Common Stock
received in consideration of the Merger. The aggregate number of shares of PPI
Class A Common Stock deposited in escrow by shareholders of each of the
Companies as of the Effective Time of the Merger will be 1,926,000 (representing
8,000 shares for each FTE of each of the Companies as of October 1, 1996).
Shareholders of HealthFirst, Corvallis Clinic and Medford Clinic will deposit in
escrow 840,000 shares, 622,000 shares and 464,000 shares, respectively, of PPI
Class A Common Stock (again, representing 8,000 shares per FTE). On a per-share
basis, (i) 91 shares of PPI Class A Common Stock per share of HealthFirst Class
A Share will be deposited in escrow, (ii) 52 shares of PPI Class A Common Stock
per share of Corvallis Clinic Class B Stock will be depsoited in escrow and
(iii) 8,098 shares of PPI Class A Common Stock per share of Medford Clinic
Common Stock will be deposited in escrow. Since the shareholders of each of the
Companies, as a group, will be entitled to receive an aggregate of 31,000 shares
per FTE of such Company as consideration in the Merger, such shareholders, as a
group, will hold outside of escrow at least 23,000 shares per FTE of such
Company.
PPI Class A Common Stock will be released to such shareholders (referred to
herein as "Escrow Holders") from escrow based on the net shareholder equity per
FTE of the Companies as reflected on their audited balance sheets as of December
31, 1996 ("Net Shareholder Equity Per FTE"). If the Net Shareholder Equity Per
FTE of any Company (referred to herein as an "Excess Company") exceeds that of
any of the other Companies by more than 20 percent (a difference of greater than
20 percent being referred to herein as an "Excess Difference" and the Company
with the lowest Net Shareholder Equity Per
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(3) Although the number of shares of PPI Class A Common Stock initially
allocated to the shareholders of each of the Companies is based on 31,000
shares per FTE of such Company as of October 1, 1996, the escrow
arrangement, which will be adopted by PPI and the Companies prior to the
Merger, will result in a potential variation in the total number of shares
of PPI Class A Common Stock released to the shareholders of each Company.
See "Terms of the Reorganization and Merger -- Escrow Arrangement."
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FTE being referred to herein as the "Baseline Company"), the number of shares
released from escrow will be adjusted to reflect such Excess Difference. More
specifically, shares will be released to Escrow Holders so that the Escrow
Holders who had been shareholders of an Excess Company would receive out of
escrow, in the aggregate, such number of shares of PPI Class A Common Stock as
represents a value (measured assuming a $15.82 per share value of PPI Class A
Common Stock(4)) exceeding the aggregate value of shares of PPI Class A Common
Stock received by the Escrow Holders who had been shareholders of the other
Company or Companies by an amount equal to the product of the Excess Difference
of such Excess Company multiplied by the FTE of such Excess Company. In
contrast, if the Net Shareholder Equity Per FTE of each of the Companies is
within 20 percent of one another, each Escrow Holder will receive out of escrow
one-half of the shares deposited thereby (which would result in the shareholders
of each of the Companies receiving, in the aggregate, 27,000 shares per FTE of
such Company).
Thus, depending upon differences between net shareholder equity of the
Companies as of December 31, 1996, the shareholders of each of the Companies
might receive any portion of or none of the shares of PPI Class A Common Stock
deposited thereby in escrow. Balance sheets reflecting the December 31, 1996 net
shareholder equity of the Companies will be prepared and audited no later than
March 31, 1997; within five business days of delivery of such balance sheets,
the Escrow Holders will receive shares of PPI Class A Common Stock from escrow
as described above. Any PPI Class A Common Stock not so released from escrow
will be cancelled and retired. The aggregate number of shares of PPI Class A
Common Stock which the shareholders of each of the Companies, may receive, as a
group, as consideration in the Merger ranges from an aggregate of 23,000 shares
per FTE to an aggregate of 31,000 per FTE on a Company-by-Company basis,
provided that the aggregate number of shares released from escrow will not
result in the total number of shares issued to all of the shareholders of the
Companies as consideration in the Merger exceeding 27,000 shares per FTE of all
of the Companies. On a per-share basis, the ranges are (i) from 263 shares to
354 shares of PPI Class A Common Stock per HealthFirst Class A Share, (ii) from
140 shares to 192 shares of PPI Class A Common Stock per share of Corvallis
Clinic Class B Stock and (iii) from 23,269 shares to 31,362 shares of PPI Class
A Common Stock per share of Medford Clinic Common Stock.
Under the escrow arrangement described above, the shareholders of each of
the Companies will be receiving, in the aggregate, initially outside of escrow
23,000 shares per FTE of such Company as consideration in the Merger, since
8,000 shares per FTE will be deposited in escrow. Thus, regardless of the amount
of Excess Difference between the Companies, the shareholders of each of the
Companies will receive, in the aggregate, at least 23,000 shares per FTE of such
Company. On the other hand, the maximum number of shares the shareholders of a
Company with the highest Excess Difference will receive, regardless of the
amount of such Excess Difference, in the aggregate, is 31,000 shares per FTE of
such Company. For details regarding the material terms of the escrow
arrangement, see "Terms of the Reorganization and Merger--Escrow Arrangement" of
this Joint Proxy Statement/Prospectus.
The boards of directors of the Companies also determined that the FTE of
each Company represented a fair and reasonable basis for allocation of shares of
PPI Class A Common Stock to be issued by PPI as consideration in the Merger.
Each such board of directors believed that the relative economic value of each
of the Companies derives from the capacity of such Company to generate revenues
for the combined entity, PPI. Each board of directors determined that such
capacity was best measured by reference to the number of FTE providers employed
by a Company. The provision of the Reorganization and Merger Agreement
permitting a distribution to shareholders by a Company if such Company's net
equity per FTE exceeded that of either of the other Companies by a specified
threshold amount was also considered significant.
- ------------------------
(4) The $15.82 per share value is based on an appraisal of PPI that was prepared
by an independent valuation firm assuming the consummation of the Merger as
of June 30, 1996 and assuming that 6,635,250 shares of PPI Class A Common
Stock (reflecting 27,000 shares per FTE of the Companies and 135,000 shares
issued to former officers and one director of PPI, in the aggregate) are
outstanding after the release of shares from escrow.
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The valuation report prepared by American Appraisal is available for
inspection and copying at the principal executive offices of PPI during its
regular business hours by any holder of equity in the Companies or a
representative of such holder who is designated in writing.
EFFECT ON NEW STOCK OPTION PLANS
The Reorganization and Merger Agreement contemplates that each of the
Companies will, prior to the Effective Time, adopt a stock option plan for
certain of its employees and grant New Options to such employees. None of the
Companies had stock options outstanding before stock option plans were adopted
in contemplation of the Merger. In connection with the Merger and at the
Effective Time, PPI will assume the outstanding obligations of HealthFirst,
Corvallis Clinic and Medford Clinic under New Options to purchase HealthFirst
Series 1 Stock, Corvallis Clinic Class B Stock and Medford Clinic Common Stock.
No further options will be granted by the Companies under any stock option plans
assumed by PPI, except in connection with any repricing of New Options which the
Compensation Committee of the PPI Board may from time to time determine in its
sole discretion to implement. The stock plans to be adopted by the Companies
prior to the Effective Time and anticipated to be so assumed by PPI may be
summarized as follows:
HEALTHFIRST PLAN
1997 Provider Stock Option Plan. As of January 2, 1997, no stock options had
been granted by HealthFirst. It is anticipated that HealthFirst will grant,
prior to the Effective Time, options to its providers under the HealthFirst 1997
Provider Stock Option Plan (the "HealthFirst Plan") to purchase an aggregate of
up to 1704.5 HealthFirst Series 1 Shares. The HealthFirst Plan will be
administered by a committee appointed by the HealthFirst Board (the "HealthFirst
Committee"). Options granted to providers of HealthFirst cannot be exercised
prior to the Effective Time; in the event the Merger is not consummated, any
option or portion thereof which has not expired on or before the date the
HealthFirst Committee determines the Merger will not be consummated shall expire
automatically. The exercise price of such option will be based on the fair
market value of PPI Class A Common Stock as of the Effective Time.
At the Effective Time, each outstanding option to purchase HealthFirst
Series 1 Shares under the HealthFirst Plan will be converted into the right to
acquire on the same terms and conditions shares of PPI Class A Common Stock
equal to the number of shares subject to each option immediately prior to the
Effective Time multiplied by 308, with the exercise price per share being
adjusted by dividing the exercise price in effect for each option immediately
prior to the Effective Time by 308. See "The Merger and Related
Transactions--Effects of the Merger."
CORVALLIS CLINIC PLAN
1997 Provider Stock Option Plan. As of January 2, 1997, no stock options had
been granted by Corvallis Clinic. It is anticipated that Corvallis Clinic will
grant, prior to the Effective Time, options to its providers under the Corvallis
Clinic 1997 Provider Stock Option Plan (the "Corvallis Clinic Plan") to purchase
an aggregate of up to 2,385 shares of Corvallis Clinic Class B Stock. The
Corvallis Clinic Plan will be administered by a committee appointed by the
Corvallis Clinic Board (the "Corvallis Clinic Committee"). Options granted to
providers of Corvallis Clinic cannot be exercised prior to the Effective Time;
in the event the Merger is not consummated, any option or portion thereof which
has not expired on or before the date the Corvallis Clinic Committee determines
the Merger will not be consummated shall expire automatically. The exercise
price of such options will be based on the fair market value PPI Class A Common
Stock as of the Effective Time.
At the Effective Time, each outstanding option to purchase Corvallis Clinic
Class B Stock under the Corvallis Clinic Plan will be converted into the right
to acquire on the same terms and conditions shares of
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PPI Class A Common Stock equal to the number of shares subject to each option
immediately prior to the Effective Time multiplied by 192, with the exercise
price per share being adjusted by dividing the exercise price in effect for each
option immediately prior to the Effective Time by 163. See "The Merger and
Related Transactions--Effects of the Merger."
MEDFORD CLINIC PLAN
1997 EMPLOYEE STOCK OPTION PLAN. As of January 2, 1997, no stock options
had been granted by Medford Clinic. It is anticipated that Medford Clinic will
grant options to its employees under the Medford Clinic 1997 Employee Stock
Option Plan (the "Medford Clinic Plan") to purchase an aggregate of up to 10.6
shares of Medford Clinic Common Stock. The Medford Clinic Plan will be
administered by a committee appointed by the Medford Clinic Board (the "Medford
Clinic Committee"). Options granted to employees of Medford Clinic cannot be
exercised prior to the Effective Time; in the event the Merger is not
consummated, any option or portion thereof which has not expired or been
exercised on or before the date the Medford Clinic Committee determines the
Merger will not be consummated shall expire automatically. The exercise price of
such options will be based on the fair market value of PPI Class A Common Stock
as of the Effective Time.
At the Effective Time, each outstanding option to purchase Medford Clinic
Common Stock under the Medford Clinic Plan will be converted into the right to
acquire on the same terms and conditions shares of PPI Class A Common Stock
equal to the number of shares subject to such option immediately prior to the
Effective Time multiplied by 27,330, with the exercise price per share being
adjusted by dividing the exercise price in effect for such option immediately
prior to the Effective Time by 27,330. See "Terms of the Reorganization and
Merger--Effects of the Merger."
EFFECT ON EXISTING EMPLOYEE BENEFIT PLANS
At the Effective Time, the 1996 employee benefit programs of each of the
Companies in effect immediately prior to the Effective Time will be separately
maintained by PPI, with few modifications. Thus, after the Effective Time, all
individuals who are currently employees of a Company immediately prior to the
Effective Time will continue to receive substantially the same benefits as are
provided under such Company's employee benefit programs. Each individual
employed by PPI prior to the Effective Time will be offered an opportunity to
participate in the employee benefit programs of the Company with which such
individual has the closest pre-existing relationship. For example, a PPI
employee formerly employed by a Company will after the Effective Time, be able
to participate in the benefit program previously maintained by such Company. It
is anticipated that, in 1998, PPI will discontinue the three separate benefit
programs and adopt new and uniform benefit programs that cover the employees of
PPI and each New PC.
EXCHANGE/ISSUANCE OF STOCK CERTIFICATES IN THE MERGER
No later than the Effective Time, PPI will make available, and each holder
of Old PC Shares will be entitled to receive, upon surrender to PPI of one or
more certificates evidencing Old PC Shares for cancellation, certificates
evidencing the number of shares of PPI Class A Common Stock into which such Old
PC Shares are converted in the Merger. Shares of PPI Class A Common Stock into
which Old PC Shares are to be converted in the Merger shall be deemed to have
been issued at the Effective Time.
As soon as reasonably practicable after the Effective Time, PPI shall mail
to each holder of record of converted Old PC Shares (i) a letter of transmittal
(which shall specify that risk of loss of and title to certificates evidencing
Old PC shares shall pass only upon receipt of PPI certificates in such form as
PPI may reasonably specify) and (ii) instructions for exchange of certificates
of each Company for certificates evidencing PPI Class A Common Stock. Upon
surrender of a certificate evidencing Old PC Shares for cancellation to PPI
together with such letter of transmittal, duly executed, the holder of a
certificate of
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Company shares shall be entitled to receive in exchange therefor a certificate
evidencing such number equivalent shares of PPI Class A Common Stock.
In the event that any certificate evidencing Old PC Shares has been lost,
stolen or destroyed, the person or entity claiming such loss may give an
affidavit to PPI describing the loss. PPI will issue or cause to be issued in
exchange for such lost, stolen or destroyed certificate, a certificate
evidencing an equivalent number of shares of PPI Class A Common Stock.
PAYMENT IN LIEU OF FRACTIONAL SHARES
No certificates or scrip evidencing fractional shares of PPI Class A Common
Stock shall be issued upon the surrender for exchange of certificates evidencing
Old PC Shares. In lieu of any such fractional securities, each holder of Old PC
Shares which would otherwise have been entitled to a fraction of a share of PPI
Class A Common Stock upon surrender of certificates evidencing such Old PC
Shares for exchange shall be paid an amount in cash (without interest), rounded
to the nearest cent, equal to the product of (a) such fraction multiplied by (b)
the fair market value of a share of PPI Class A Common Stock as of the Effective
Time as determined by the PPI Board.
PPI'S RIGHT TO REPURCHASE PPI CLASS A COMMON STOCK
The PPI Certificate provides that PPI shall have the right, but not the
obligation, to repurchase all or any portion of a PPI stockholder's shares of
PPI Class A Common Stock only in the event a stockholder ceases to be an
employee or member of the board of directors of (i) PPI, (ii) any entity that,
directly or indirectly, controls or is controlled by or are under common control
with PPI or (iii) HealthFirst New PC, Corvallis Clinic New PC, Medford Clinic
New PC or any other professional corporation with which PPI has entered a
Management Agreement (each a "PPI Affiliate").
If PPI elects to repurchase any share of PPI Class A Common Stock from a
stockholder following the termination of employment with a PPI Affiliate, PPI
will pay a purchase price for each such share in an amount equal to the average
closing sale price of the PPI Class A Common Stock during the preceding
four-month period if the PPI Class A Common Stock was publicly traded or the
amount equal to the fair market value of the PPI Class A Common Stock as of
December 31 of the immediately preceding year, as determined by a
nationally-recognized independent valuation firm (the "Valuation Firm").
If PPI elects to repurchase any share of PPI Class A Common Stock from a
stockholder who, following the termination of employment with a PPI Affiliate,
undertakes certain activities in competition with PPI or a PPI Affiliate, PPI
will pay a purchase price for each such share in an amount equal to the lesser
of (i) the fair market value of such share of PPI Class A Common Stock at the
time of issuance thereof to such stockholder, as determined by the Valuation
Firm and (ii) (A) the average closing sales price of PPI Class A Common Stock or
any other common stock of PPI during the preceding four-month period if such PPI
Class A Common Stock was publicly traded during such period, or (B) otherwise,
the fair market value of such share of PPI Class A Common Stock at the time of
such repurchase, as determined by the Valuation Firm.
If PPI decides to exercise such right to repurchase any share of PPI Class A
Common Stock upon the occurrence of such event, PPI will comply with applicable
requirements of Rule 14e-1 promulgated under the Securities Exchange Act of
1934, as amended.
RESALES OF PPI CLASS A COMMON STOCK AND REGISTRATION RIGHTS
Subject to the registration right of PPI Class A Common Stockholders
described below, no stockholder of PPI may sell, assign, transfer, pledge or
otherwise encumber or dispose of any shares of PPI Class A Common Stock owned by
such stockholder or any interest in any such shares prior to the fifth
anniversary of the date of the Effective Time. Any attempted or purported sale,
assignment, transfer, pledge or other encumbrance or disposition of shares of
PPI Class A Common Stock by such stockholder shall be null and void and of no
force and effect.
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Stockholders of PPI who receive PPI Class A Common Stock in the Merger
("Class A PPI Stockholders") shall have the right to elect, at any time after
the second anniversary of the Effective Time, to require PPI to include up to
20% of the shares of PPI Class A Common Stock held by such Class A PPI
Stockholder in a registration statement (a "Subsequent Registration Statement")
relating to any proposed registered public offering of PPI Class A Common Stock
that occurs subsequent to the Effective Time and under which PPI expects to
receive proceeds in excess of $30 million, net of underwriters' commissions and
discounts (a "Registered Public Offering"). If, at any time after the second
anniversary of the Effective Time, PPI shall determine to register any of its
securities (any such registration being referred to herein as a "Registration")
under the Securities Act of 1933, as amended (the "Securities Act"), in
connection with any Registered Public Offering, PPI shall deliver to each Class
A PPI Stockholder a written notice. For a period of 30 days following the date
of any such notice, each Class A PPI Stockholder shall have the right, but not
the obligation, to elect to require PPI to include up to 20% of the shares of
PPI Class A Common Stock received by such Class A PPI Stockholder in connection
with the Merger (the "Registrable Shares") in the Subsequent Registration
Statement related to such Registration.
If the managing underwriter selected by PPI in connection with a
Registration (the "Managing Underwriter") determines, for any reason, that the
number of Registrable Shares to be included in a Registered Public Offering must
be reduced, the Managing Underwriter may reduce the number of such Registrable
Shares. The reduction in shares shall occur as described below. First, the
number of Registrable Shares owned by PPI Class A Common Stockholders who are
not Eligible Investors ("Ineligible Investors") shall be reduced pro rata (for
the definition of "Eligible Investors," see "Terms of the Reorganization and
Merger--PPI's Right to Repurchase PPI Class A Common Stock"). Second, if the
Managing Underwriter determines that the number of Registrable Shares must be
reduced despite the exclusion of all Registrable Shares owned by Ineligible
Investors, the number of Registrable Shares to be included in the Subsequent
Registration Statement that are owned by Eligible Investors shall be reduced pro
rata.
All expenses incurred in connection with any Subsequent Registration
Statement, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for PPI, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration shall be borne by PPI, provided
that, unless otherwise stated, all selling expenses relating to Registrable
Shares shall be borne by each Class A PPI Stockholder, pro rata on the basis of
the number of Registrable Shares included in the Subsequent Registration
Statement.
Each Class A PPI Stockholder will indemnify PPI, each of its directors and
officers, each person who controls PPI or such "underwriter" (within the meaning
of Section 15 of the Securities Act), and each other Class A PPI Stockholder,
each of its officers and directors and partners and each person controlling such
"Holder" (within the meaning of Section 15 of the Securities Act), against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such Subsequent Registration Statement,
prospectus, offering circular or other similar document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading.
PPI shall have the right to terminate or withdraw any Subsequent
Registration Statement initiated by PPI prior to the effectiveness of such
Subsequent Registration Statement, whether or not any Class A PPI Stockholder
has elected to include its shares of PPI Class A Common Stock in such Subsequent
Registration Statement.
CONVERSION OF PPI CLASS A COMMON STOCK
Upon the transfer of any share of PPI Class A Common Stock to a third party
unaffiliated with the original holder thereof, as permitted after the fifth
anniversary of the date of issuance of such share to such holder or, if earlier,
pursuant to an excercise of registration rights after the second anniversary of
such issuance date, such share shall convert into one fully paid non-assessable
share of Class B Common Stock,
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par value $0.01 per share ("PPI Class B Common Stock"). The conversion shall be
effected at the time the holder of PPI Class A Common Stock surrenders such
holder's certificate for PPI Class A Common Stock to be transferred, duly
endorsed, at the office of PPI or any transfer agent for PPI Class A Common
Stock. Promptly thereafter, PPI shall issue and deliver to the assignee, a
certificate or certificates for the number of shares of PPI Class B Common Stock
to which the assignee shall be entitled. The conversion shall be deemed to have
been made at the close of business on the date of the surrender and the person
entitled to receive shares of PPI Class B Common Stock issuable on the
conversion shall be treated for all purposes as the record holder of the shares
of PPI Class B Common Stock on that date.
The initial number of shares of PPI Class B Common Stock into which shares
of PPI Class A Common Stock are convertible shall be subject to adjustment in
order to, among other things, provide certain anti-dilution protections.
Adjustments would be made in the event that PPI shall (i) pay a dividend in, or
make distribution of, shares of PPI Class B Common Stock, (ii) subdivide its
outstanding shares of PPI Class B Common Stock into a greater number of such
shares, (iii) combine its outstanding shares of PPI Class B Common Stock into a
smaller number of such shares, (iv) consolidate or merge with or into another
corporation (other than a consolidation or merger which does not result in any
reclassification or change of PPI Class A Common Stock), or (v) sell or convey
all or substantially all of PPI's assets in their entirety to another
corporation (other than a consolidation or merger which does not result in any
reclassification or change of PPI Class A Common Stock). The total number of
shares of PPI Class B Common Stock into which shares of PPI Class A Common Stock
are convertible shall be adjusted so that the holder of PPI Class A Common Stock
that is surrendered for conversion after one of the events listed above is
entitled to receive the number of shares of PPI Class B Common Stock which such
holder would have been entitled to receive immediately following the occurrence
of such event had such PPI Class A Common Stock been converted immediately prior
to the occurrence of such event. Any such adjustment, in the case of a stock
dividend or distribution, becomes effective as of the record date therefor and,
in the case of a subdivision, combination, grant, conveyance or merger, as of
the effective date thereof.
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PHYSICIAN PRACTICE MANAGEMENT INDUSTRY
GENERAL
PPMs create vehicles through which physicians can join together in large
entities that are favorably positioned to contract and negotiate with managed
care organizations and other third-party payors. PPMs essentially manage the
business of group practices. The managed providers usually enter into long-term
exclusive contracts with the PPM and pay a percentage of their revenues to the
PPM.
Both medical groups and payors can benefit from the PPM structure. Providers
gain skilled and innovative management, sophisticated information systems and
capital resources, all of which give the providers time to practice medicine and
treat patients. Payors look to PPMs to help maintain quality outcomes,
management programs and patient care data, and to provide broader geographic
coverage for their enrollees.
THE INDUSTRY
The American Medical Association ("AMA") lists approximately 650,000
physicians in its data base of practicing physicians. According to the AMA's
Census of Medical Groups, as published in the AMA's 1996 edition of "Medical
Groups in the US: A Survey of Practice Characteristics" (the "AMA Report"),
there were 19,787 medical groups and 210,811 medical group physicians in 1995.
Over the past two to three decades, the medical group practice industry has
evolved and strengthened. Physicians have organized into increasingly large and
complex single- and multi-specialty group practices. According to data reported
in the AMA Report, between 1965 and 1995, the number of physicians in the U.S.
in group practices (versus solo practices) has more than quadrupled. Inasmuch as
current market trends indicate that physicians are joining medical groups to
deal effectively with managed care, among other things, there is a substantial
potential customer base for PPMs. However, relatively few PPMs are in a position
to tap into physician practice management on a national scale. The few PPMs that
can compete on a broad geographic basis tend to be publicly traded PPMs.
In addition, a large amount of revenue flows through the medical services
industry. Physician services in 1994 accounted for approximately $190 billion,
according to data collected by HCFA and the Office of National Health
Statistics. According to a projection of national health expenditures published
by the U.S. Department of Health and Human Services, there was an estimated $1
trillion spent on health care in the U.S. in 1995, approximately 14.2% of the
gross domestic product.
Despite the size of the industry, however, the potential financial leverage
of physicians generally has been diluted due to the way physicians have
traditionally organized. Health care in the United States historically has been
delivered through unrelated health care providers, including individual or small
groups of primary care physicians and specialists. In addition, many physicians
have joined together in informal group practices or affiliations--independent
physician associations ("IPAs"), PHOs and clinics-without-walls. While these
organizational structures do, in fact, bring physicians together, they generally
have failed to provide the market strength and benefits of truly integrated and
self-governed medical group practices. IPAs, PHOs and other such arrangements
may well be "way stations" as physicians move from solo and small groups to
larger integrated multi-specialty groups.
The migration of physicians into groups has paralleled other trends in
health care organization, finance and delivery in the U.S. The influence of
managed care and the size of HMOs have increased significantly. Managed care is
widely believed to be the most likely vehicle to deliver and spread the costs of
high quality and cost-efficient health care services. The emergence of and
popularity of managed care has had a dramatic effect on physician organizations.
The combination of the growth of HMOs and recent HMO industry consolidation has
resulted in fewer and larger HMO companies nationwide.
Managed care trends, aligned with other market forces such as consolidation
of the hospital industry, more sophisticated purchasing of health care by
employers and increasingly complex governmental
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regulations, have further contributed to the growth of physician groups and
PPMs. Concerns over the accelerating cost of health care have resulted in the
increasing prominence of managed care. Traditional physician practices generally
may be at a disadvantage in a managed care environment because they typically
have high operating costs, little purchasing power with suppliers and must
spread overhead over a relatively small revenue base. In addition, these
physician practices often have insufficient capital to purchase new technologies
and lack the sophisticated systems necessary to contract effectively with
larger, better-funded competitors. These trends have motivated successful
medical group practices to seek strong corporate strategic and capital partners.
Hence the emergence and growth of the PPM industry.
In the late 1980s PPMs emerged. These corporate entities are intended to
bring management talent, corporate structure, business discipline and acumen and
capital to their managed medical groups. To date, the industry has divided into
two dominant physician equity models of PPMs: (i) companies that manage
multi-specialty groups and (ii) companies which focus on the management of
single-specialty medical groups or networks. PPI is a PPM which will focus on
well-positioned primary care-based multi-specialty group practices.
Opportunities for growth may arise in other market segments, however, such as
acquiring groups of physicians from hospital systems, staff model HMOs or
academic medical groups. In spite of the growth trends referred to above,
organizing physicians and managing medical groups is a daunting task. To date,
PPMs manage less than 10% of the nation's physician practices and it is
uncertain that PPMs will become an attractive organizational model which will
capture any significant share of the physician revenue market. There is no
assurance that PPI as a PPM will be attractive to other physicians or physician
groups.
CAPITATION
HMOs typically pay their providers on a capitated or other prepaid basis.
Capitation revenue will be a significant source of revenue generated by the New
PCs after the Merger. Capitation arrangements between health plans and providers
typically involve a payment to the provider of a specific amount per assigned
member per month, in exchange for such provider's assumption of the obligation
to provide or arrange for all medically necessary covered services required by
each health plan member assigned to such provider. The aggregate capitation
payments made to capitated providers constitute the most significant portion of
the compensation to such providers. (Certain other payments, such as copayments
and risk pool distributions, are also typically made to capitated providers.)
This obligation to provide or arrange for all covered services applies to
providers (and will apply to PPI under the proposed arrangement with the New
PCs), regardless of whether any medical services are rendered to the HMO or
other health plan capitated members and regardless of the cost to the provider
of any covered services provided. If a capitated provider refers to an outside
specialist or outpatient ancillary service provider, the charges of such third-
party providers typically must be paid by the capitated provider. Capitation,
therefore, shifts the risk of the cost of providing covered services from the
payor to the capitated provider. Reinsurance and stop-loss protection are
typically maintained by providers to mitigate capitation risk. Nevertheless, if
revenue received by the provider is insufficient to cover the costs of covered
services provided to or arranged for patients, the provider's operating results
will suffer.
One of the challenging issues for providers, and therefore PPMs, to address
is how to effectively manage capitation risk with respect to relevant patient
populations. The capitation risk ideally should be well understood, managed and
spread over large numbers of insured HMO members. The ability to bear and manage
risk is a major factor in the growth of the number, size and complexity of
medical group practices.
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BENEFITS A PPM CAN PROVIDE A GROUP PRACTICE
The underlying rationale for the existence and growth of the PPM industry is
to add value to medical groups. Value is added in four interrelated ways:
- CAPITAL. PPMs provide needed capital for medical groups. Capital is
required to finance growth, to replace and enhance equipment and to manage
clinical and business data and information.
- MANAGEMENT EXPERTISE. As medical groups grow and enter into managed
care capitation arrangements, the need for management and business expertise
becomes more critical. PPMs can provide management and business discipline
to medical groups.
- COST MANAGEMENT. PPMs assist medical groups in achieving significant
economies of scale by consolidating medical groups. Medical groups can
benefit from the increased collective purchasing power and the increased
leverage with vendors. Significant savings can be expected in employee
benefits, medical and office supply purchasing and insurance costs.
- REVENUE ENHANCEMENT. PPMs have the ability to contract on behalf of
increasingly large numbers of groups and physicians. Representing large
numbers of providers gives the PPM increased leverage to negotiate
beneficial contracts with payors, as well as with hospitals, service vendors
and ancillary service providers.
GOVERNMENT REGULATION
Each of the Companies is subject to federal and state laws regulating the
relationships among providers of health care services, physicians and other
clinicians. These laws include the fraud and abuse provisions of the Medicare
and Medicaid statutes, which prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for the recommending, leasing, arranging, ordering or
purchasing of Medicare or Medicaid covered services. Other laws impose
significant penalties for false or improper billings for physician services and
impose restrictions on physician referrals for designated health services to
entities with which they have financial relationships. Violations of those laws
may result in substantial civil or criminal penalties for individuals or
entities, including large civil money penalties and exclusion from participation
in the Medicare and Medicaid programs. Significant laws applicable to the health
care industry generally are described in more detail below.
FRAUD AND ABUSE LAWS
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the referral of Medicare or state
health program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. In recent years, there has
been increasing scrutiny by law enforcement authorities, the United States
Department of Health and Human Services, various state agencies, the federal and
state courts and Congress, of financial arrangements between health care
providers and potential sources of patient referrals to ensure that such
arrangements are not disguised mechanisms to pay for patient referrals. The
Anti-Kickback Statute is broad in scope and interpretations by various courts
have been ambiguous or conflicting in certain respects. To the extent PPI is
deemed to be either a referral source or a separate provider under the New PC
Management Agreements that is in a position to influence referrals to or from
physicians, the financial arrangements under these agreements could be subject
to scrutiny and prosecution under the Anti-Kickback Statute.
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PHYSICIAN SELF-REFERRAL LAW
Significant prohibitions against physician "self-referrals" apply to a
variety of physician-owned or physician-interested entities. The Stark statute
(42 U.S.C. Section1395nn) generally prohibits referrals by physicians for
designated health services reimbursable under the Medicare and Medicaid programs
to entities in which the referring physician or an immediate family member has
an ownership interest or compensation arrangement, unless an exception provided
under the statute applies. The Stark statute is broad and ambiguous in some
respects, and regulations clarifying the provisions have been issued only with
respect to clinical laboratory services (which was the subject of the "Stark I"
legislation). Regulations interpreting the portion of the Stark statute known as
"Stark II" or future clarification of existing regulations could require PPI,
the New PCs and related physicians to modify the form of their relationships.
THE CORPORATE PRACTICE OF MEDICINE
Certain laws prohibit the practice of medicine by corporations other than
professional corporations. It is possible that the operations of PPI could be
challenged on the ground that PPI, a business corporation, will participate in
operations or revenues of the New PCs and other PPI-managed medical practices to
a prohibited extent. Oregon law regarding the corporate practice of medicine
does not specifically approve or forbid practice management companies from
contracting with professional corporations and has been subjected to limited
judicial and regulatory interpretation. In the event of a prohibition against
the PPI form of business, the relationship between PPI and each of the New PCs
may have to be modified, possibly resulting in a reduction of revenues received
by PPI for managing the New PCs.
FEE-SPLITTING LAWS
The laws of many states prohibit physicians from splitting fees with
non-physicians. Although Oregon currently does not have such a prohibition,
there is no assurance that Oregon will not enact new laws or interpret existing
laws in a manner that would require modifications to PPI's business in order to
comply with such a law. In addition, expansion of the operations of PPI to
jurisdictions that have laws that could be deemed to restrict or prohibit PPI's
form of arrangement with managed medical groups may require structural and
organizational modifications to PPI's form of management relationship, which
could have an adverse effect on PPI.
MEDICARE/MEDICAID REIMBURSEMENT
State and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, upon health care providers
who fraudulently or wrongfully bill governmental or other third-party payors for
health care services. The federal law prohibiting false billings allows a
private person to bring a civil action in the name of the United States
government for violations of its provisions. While management of each Company
has attempted to comply with billing requirements, there is no assurance that
PPI's or the New PCs' activities will not be challenged or scrutinized by
governmental authorities. Moreover, Medicare and other reimbursement rules
impact the fee structure of medical billing. To the extent PPI's or the New PCs'
billing arrangements may need to be modified to comply with existing or modified
regulations, there could be a material adverse financial effect on PPI.
OREGON INSURANCE LAW
The Oregon Department of Consumer and Business Affairs, Insurance Division
(the "Insurance Division"), regulates the transaction of insurance pursuant to
the Oregon Insurance Code. Pursuant to Insurance Division Bulletin 96-2 (the
"Bulletin") issued in April 1996 by the Oregon Insurance Commissioner, health
care providers that are compensated on a capitated basis by a health insurer or
health care service contractor ("HCSC") are not required to obtain a certificate
of authority to transact insurance if
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the capitation is internal to a policy of insurance that is delivered by an
authorized insurer or HCSC. The Bulletin also states that discounted
fee-for-service arrangements with reasonable limits on discounts (i.e., not
open-ended discounts) also do not require a certificate of authority. PPI
arrangements should fall into these categories and therefore be exempt from
regulation as an insurance company. There is no assurance, however, that the
position of the Insurance Division will not change in the future.
ANTITRUST LAWS
Antitrust laws apply to health care providers just as they do to other
businesses; however, certain exceptions specifically applicable to provider
entities are available under current law. Because the New PCs will remain
separate legal entities after the Merger, they may be deemed competitors subject
to a range of antitrust laws which prohibit anti-competitive conduct, including
price fixing, concerted refusals to deal and division of market.
PROPOSED LEGISLATION
In addition to current federal regulations, the Clinton Administration and
several members of Congress have proposed legislation for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain such health care proposals, such as reductions in Medicare and Medicaid
payments and additional prohibitions on direct or indirect physician ownership
of facilities to which they refer patients, if adopted, could have a significant
impact on the health care industry. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation on the
industry.
MANAGEMENT INFORMATION SYSTEMS
The emergence of managed care has increased the need for specific and
extensive information collection, analysis and management throughout the entire
health care industry. Sophisticated and timely data are required for managers
and providers to quantify the revenues and expenses associated with managed care
contracting and with the measurement and determination of efficient utilization
and quality clinical care. Thus, information management systems are moving from
the traditional billing functions to more complex clinical information
management. Increasingly, effective management of health care service delivery
will require the ability to collect, analyze and manage clinical as well as
financial information an a timely basis. Anticipated future developments which
may be required for successful PPMs include voice recognition systems,
electronic medical records, chart tracking systems and advanced actuarial
modeling capability.
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OPERATION, MANAGEMENT AND BUSINESS OF PPI FOLLOWING THE MERGER
BUSINESS OF PPI
The goal of PPI is to pioneer innovative health care delivery into the 21st
century as a leading primary care-based multi-specialty group PPM. To achieve
such goal, PPI endeavors to deliver health care with sound ethical standards by
involving physicians at every level of PPI, including clinical and business
policies and decisions. PPI will continuously seek innovation to enable the New
PCs and other multi-specialty group practices with which PPI has entered into a
practice management agreement to deliver quality patient care and services
efficiently. PPI also actively seeks opportunities to grow through acquisition
of quality primary care based multi-specialty group practices.
PPI will operate as a PPM organization, focusing on the long-term management
of high quality, well-positioned primary care based multi-specialty group
practices. PPI typically will acquire certain assets of established medical
groups, such as their equipment and accounts receivable, and manage such medical
group under a long-term management agreement. Because PPI does not employ
physicians and does not practice medicine, it will not acquire provider
professional services business assets such as Medicare provider numbers.
While PPI is similar to other multi-specialty group practice PPMs, PPI can
be distinguished and differentiated in several important aspects. PPI is the
first PPM to originate in the Pacific Northwest. At the Effective Time, PPI will
have significant geographical presence and strength in the State of Oregon with
nearly 300 providers practicing in three hub clinics (I.E., the New PCs) with 28
clinical delivery sites. PPI is also unique in that it will be owned by group
practice physicians and governed by a board of directors a majority of whom are
group practice physicians. PPI will employ a full-time Chief Medical Officer
responsible for managing the clinician and clinical issues with each group's
medical director. Because PPI will be the surviving corporation of a merger of
three successful primary care-based multi-specialty groups with collectively
more than 150 years of group practice and group practice management experience,
PPI business and clinical managers have extensive experience with managed care
under a variety of payment methodologies, including several forms of capitation.
PPI also has approved the advisory position of a Medical Ethicist to the PPI
Board in order for the physicians affiliated with PPI to adhere to the
fundamental principles of medical ethics, continue to act as advocates for their
patients and provide quality patient care. The Medical Ethicist will attend
board meetings of PPI and advise the PPI Board regarding ethical implications of
the issues with which the PPI Board must deal in the course of its management of
PPI.
THE PPI STRATEGY
PPI's business strategy involves integrating physician group practices into
networks of health care providers. Initially, PPI's operations will be
concentrated in the Pacific Northwest and will be affiliated with approximately
300 providers. PPI believes that there are numerous opportunities to extend its
network across the United States.
The key elements of PPI's strategy include:
- STRENGTHENING OPERATIONAL EFFICIENCIES. Cost reductions can be made
through economies of scale in purchasing supplies, equipment and services.
Operational efficiencies may also be achieved by expanding PPI's market
coverage and number of HMO enrollees, refining utilization management
programs, increasing standardization, developing additional in-house
specialty and ancillary services, increasing the emphasis on outpatient
care and utilizing sophisticated information systems to make available
detailed clinical data that can ensure both quality and cost containment.
- EXPANDING THE EXISTING MARKETS OF THE NEW PCS. Growth in greater Portland,
Corvallis and Medford, Oregon may occur through the acquisition of or
affiliation with physicians and medical groups
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within those markets. PPI will invest capital in each of its merged hub
primary care-based multi-specialty group practices and will assist these
practices in acquiring existing local medical groups. New groups will have
the opportunity to be incorporated into the governance and leadership
structure of the existing PPI hub clinic.
- EXPANSION INTO NEW HUB MARKETS. Expansion into new areas is anticipated to
occur primarily through the acquisition of physician groups. New PPI hub
clinics are expected to be primary care-based multi-specialty groups with
(i) more than 30 physicians, (ii) potential for a significant market
share, (iii) a strong group practice culture, (iv) experience or interest
in managed care and (v) high quality with a strong reputation in its
community. PPI hopes to acquire two additional hub groups in 1997.
- DEVELOPING AND ACQUIRING SMALL PHYSICIAN PRACTICE GROUPS. In markets
including the Pacific Northwest, many communities are too small to support
the typical PPI primary care-based multi-specialty group practice hub.
There are many primary care-based medical groups with fewer providers that
have significant market presence. Opportunities for growth may arise in
market segments other than the physician-owned, primary care-based
multi-specialty groups, such as IPAs and PHOs. PPI may consider
acquisitions such as purchasing groups of physicians from hospital
systems, HMOs or academic medical centers.
PRACTICE MANAGEMENT AGREEMENT
Under the respective New PC Management Agreements, PPI will provide a
variety of management services, and certain facilities and equipment, to the
managed New PCs. Further, PPI will provide certain leased equipment and space to
the managed practices and will employ and provide each managed New PC with
non-physician personnel (other than personnel required to be employed by the New
PCs in order for services rendered by such ancillary service providers "incident
to" physician services to be appropriately billed to and reimbursed by
Medicare). PPI also will enter into agreements directly with health plans and
will receive revenue directly from payors to the extent permissible, or
otherwise as an agent on behalf of the respective New PCs.
In exchange for the management services provided by PPI to a New PC, PPI
will be entitled to receive (a) reimbursement of all Manager's Expenses incurred
by PPI plus (b) 16% of the Distributable Profit Amount of such New PC.
"Distributable Profit Amount" is defined as (i) gross revenues, booked on an
accrual basis and subtracting specified contractual allowances and bad debt,
received by PPI or such New PC relating to services provided by such New PC,
less (ii) Manager's Expenses. Each New PC will be responsible for provider
compensation and benefits. The term "Manager's Expenses" is defined in the New
PC Management Agreement to mean the actual cost of all operating and
non-operating expenses incurred by PPI in the operation of respective New PC's
medical offices. Any allocation of costs (as opposed to a pass-through of actual
direct costs incurred by PPI in connection with the operation of such New PC's
medical offices, for which PPI shall be reimbursed in full) by PPI to such New
PC shall require approval of the joint management board (composed of PPI and
such New PC's representatives) of the proposed cost allocation for a defined
period of time prior to implementation of the function for which a cost
allocation is proposed. "Manager's Expenses" expressly will not include any
corporate overhead charges of PPI (other than as expressly agreed to in the New
PC Management Agreement), federal or state income taxes of PPI or such New PC,
any expenses which are expressly designated as obligations to be assumed solely
by PPI, and any amortization expense resulting from the amortization of costs in
connection with the execution of the New PC Management Agreement. The right of
PPI to receive reimbursement of Manager's Expenses and the management fee is
secured by a security interest in all accounts receivable (whether an account,
chattel paper or other right to payment for services rendered on behalf of
Medical Group) owned or created by the New PC, together with the proceeds
thereof, excluding accounts receivable which PPI legally cannot hold as
collateral.
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PPI's management structure will enable each managed New PC to retain
significant control over the operation and strategic direction of its respective
group practice. Specifically, each managed New PC will retain its own physician
board. The functions of this physician board will include:
(i) determination and management of physician compensation methodologies;
(ii) employing and reviewing (with the assistance of the PPI Chief Medical
Officer) the performance of the PC's Medical Director and compensation
for and appointment of physician managers (e.g., department chairs);
(iii) dealing with individual physician quality and behavioral issues;
(iv) approving all growth and acquisitions by being the only body which can
approve employment of physicians by such New PC; and
(v) appointing three members to the Joint Management Board and designating
its Medical Director as an ex officio member.
Subject to the rights of each New PC's physician board, the business of each
managed New PC will be governed by its Joint Management Board. The Joint
Management Board is designed to represent equally the clinical and physician
perspective and the management and business perspective. The Joint Management
Board is formed by each managed New PC appointing three members (presumably
physician members of the New PC Board) and PPI appointing three members (one of
whom must be the local PPI group practice administrator). The New PC's medical
director will serve as a seventh ex officio, non-voting member of the Joint
Management Board. The Joint Management Board will provide local expertise and
develop and approve all submissions to PPI regarding New PC growth, annual
budgets, payor relations, local strategic initiatives and capital improvements.
The New PC Management Agreements will contain certain significant
restrictions and liquidated damage assessments against the New PCs relating to
certain activities by its employed providers with respect to (a) solicitation of
employees, (b) disclosure or misappropriation of trade secrets by employees and
(c) competition. If the prohibition against the solicitation of employees is
violated, the New PC generally will be required to pay to PPI liquidated damages
in the amount equal to one year's salary of any person employed by PPI or the
New PC who is solicited by a provider (other than an "Unbound Provider") of the
New PC to leave such employment. If a provider other than an "Unbound Provider"
employed by a New PC (a) discloses or misappropriates trade secrets of such New
PC or PPI or (b) engages in prohibited competitive actions against a New PC
during the provider's term of employment by such New PC or at any time during
the 18 months thereafter, such New PC generally will be required to pay to PPI,
with respect to any such breach, liquidated damages in the amount equal to 50%
of such provider's gross compensation received from such New PC during its most
recent fiscal year. The New PC Management Agreements provide that no such
restrictions will apply to activities of providers employed by the New PCs who
were not bound by the employing Company under similar restrictive covenants as
of September 17, 1996. However, the New PC, will be obligated to make such
liquidated damages payments to PPI to the extent providers who are bound or
required (under the New PC Management Agreement) to be bound by such covenants
in their employment contracts or shareholder agreements with the New PCs take
prohibited actions. The New PC Management Agreements define an "Unbound
Provider" as any provider who (i) was employed by any Company as of September
17, 1996 without having been bound by a prohibition against solicitation,
disclosure or misappropriation of trade secrets or covenant not to compete, as
applicable, as of such date, (ii) although not employed by a Company as of
September 17, 1996, had entered into an employment agreement with a Company
without some or all such covenants prior to September 17, 1996, (iii) was
employed by a Company as of September 17, 1996, and was bound by a covenant not
to compete that shall have subsequently expired by its own terms (such provider
being an Unbound Provider only with respect to such noncompensation covenant
after the date of such expiration), or (iv) was employed by a Company as of
September 17, 1996 and is bound by a covenant not to compete,
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but whose employment by a Company or its successor New PC shall have been
subsequently terminated involuntarily by such Company or its successor (such
provider being an Unbound Provider only with respect to such noncompetition
covenant after the date of such termination). Each Company and each New PC will
be subject to liquidated damages for violations of the covenants against
solicitation and disclosure or misappropriation of trade secrets with respect to
any provider who is promoted to shareholder status on and after September 17,
1996. Similarly, each Company and each New PC will be obligated to make
liquidated damages payments to PPI with respect to violations of the covenant
not to compete by any Unbound Provider who became a shareholder of a Company or
a New PC after September 17, 1996, unless (x) such provider was or is required
to sign such a covenant at the time of such provider's promotion to shareholder
status and (y) the Company or New PC, as applicable, is unable to enforce such a
provision against such provider after exhausting all of its legal and equitable
remedies against such provider. PPI will have no direct right of enforcement
against, or right to receive liquidated damages from, any provider for any such
activities. To the extent any applicable covenant in a provider's employment or
shareholder agreement with the New PC is breached by a provider, liquidated
damages will be payable by the employing New PC to PPI. It is anticipated that
each New PC will require each provider employed by such New PC after September
17, 1996 to indemnify the New PC in the event the New PC becomes obligated to
make a payment to PPI due to such provider's actions. However, the New PCs will
not be required to seek to enforce any right to indemnity it may have against a
provider.
PROPERTIES AND FACILITIES OF PPI
As of the date of this Joint Proxy Statement/Prospectus, PPI owns no
properties. PPI has entered into a lease for an office suite in Portland,
Oregon. The lease is for a term of seven years and has an initial month rent of
$7,317, which will be adjusted annually by increases in inflation.
LEGAL PROCEEDINGS
There are currently no legal proceedings pending, or to the knowledge of
management of each of the Companies and PPI, threatened against PPI.
MANAGEMENT OF PPI
The following table sets forth certain information about the persons who
will serve as directors and officers of PPI:
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ------------------------------------- --- ----------------------------------------------------- -------------
<S> <C> <C> <C>
David M. Goldberg, M.H.A............. 48 President and Chief Executive Officer, Director July 2, 1996
Tim E. Dupell, C.P.A................. 34 Senior Vice President and Chief Financial Officer,
Director July 2, 1996
Michael F. Bonazzola, M.D............ 46 Senior Vice President and Chief Medical Officer,
Director July 2, 1996
Bruce E. Van Zee, M.D................ 51 Chairman of the Board, Director July 2, 1996
David H. Cutsforth, Jr. M.D.......... 49 Director July 2, 1996
Russell A. Dow, M.D.................. 48 Director July 2, 1996
Douglas M. Mancino, Esq.............. 47 Director July 2, 1996
Jerald W. Erstgaard.................. 48 Senior Vice President July 2, 1996
Jon D. Ness.......................... 40 Senior Vice President July 2, 1996
</TABLE>
PPI has a Board of Directors consisting of seven persons elected for
three-year staggered terms and holding office until their respective successors
are elected and qualified. Tim E. Dupell, C.P.A. and Michael F. Bonazzola, M.D.
belong to one class of directors whose term expires at the first annual meeting
of stockholders to be held in 1997; David M. Goldberg, M.H.A. and Douglas M.
Mancino, Esq. belong to
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another class whose term expires at the second annual meeting of stockholders,
to be held in 1998; and Bruce E. Van Zee, M.D., David H. Cutsforth, Jr., M.D.
and Russell A. Dow, M.D. belong to another class whose term expires at the third
annual meeting of stockholders, to be held in 1999.
Officers of PPI are appointed and serve at the discretion of the PPI Board.
MR. DAVID M. GOLDBERG joined PPI as its Chief Executive Officer in 1996. Mr.
Goldberg earned a B.A. degree in Sociology in 1970 from the University of
Colorado at Boulder and a Masters of Science degree in Health Care
Administration in 1977 from the University of Colorado Medical Center, Denver,
Colorado. From 1993 until joining PPI as its founding CEO, Mr. Goldberg was
employed as President of Simmonds Consulting, Inc., a national group practice
strategic planning and merger and acquisition consulting company which he helped
found. Mr. Goldberg was employed by Medical Management, Inc. as senior
consultant from 1986-1992. In this capacity he managed all group practice
management and strategic planning consulting and was instrumental in developing
standardized management, strategic and financial reporting systems for all of
the managed group practices, for the oldest (and then largest) contract group
practice management company in the U.S. The Companies engaged Mr. Goldberg as a
consultant through Simmonds Consulting, Inc. before he was employed by PPI. From
1983-1986, Mr. Goldberg served in a variety of senior management positions at
Lovelace Medical Center and Lovelace Health Plan, then a 250,000 member group
model HMO; Director of Planning for all of the Lovelace organizations and
Director of Primary Care and Associated Group Practices for Lovelace Medical
Center. Mr. Goldberg was the founding executive director of New Mexico Health
Resources, Inc., a private company which was the predecessor to the New Mexico
State Office of Rural Health. After receiving his graduate education under the
guidance of Dr. Leland Kaiser, Mr. Goldberg was a recipient of a Robert Wood
Johnson Foundation grant to co-found a model rural primary care group practice.
During the past 15 years, Mr. Goldberg has been a frequent speaker and lecturer
for the Medical Group Management Association as well as for other national and
regional professional and trade organizations.
MR. TIM E. DUPELL joined PPI as its Chief Financial Officer in 1996. Prior
to joining PPI, Mr. Dupell served as Chief Financial Officer for Corvallis
Clinic beginning in March, 1994. From 1988 to 1994, Mr. Dupell held concurrent
positions in Finance, Operations and Risk Sharing Plans with Blue Cross/Blue
Shield of Oregon and with the Blue Cross/Blue Shield health maintenance
organization, HMO Oregon. From 1984-1988, Mr. Dupell was a senior auditor in the
Portland, Oregon office of Ernst & Young, LLP. Mr. Dupell holds a Bachelor's
degree in Business from Pacific University. In addition, Mr. Dupell is a
Certified Public Accountant, Certified Management Accountant, and a Certified
Internal Auditor. He is a member of the Oregon Society of Certified Public
Accountants, The American Institute of Certified Public Accountants, The
Institute of Management Accountants, The Institute of Internal Auditors and the
National Association of Accountants.
MICHAEL F. BONAZZOLA, M.D. joined Physician Partners, Inc. as Senior Vice
President and Chief Medical Officer in 1996. Dr. Bonazzola practiced general
internal medicine at Medford Clinic from 1982 to 1996. Dr. Bonazzola holds a
Bachelor's degree in Natural Sciences from Lewis and Clark College and a Doctor
of Medicine degree from University of Oregon Medical School and served as chief
medical resident at St. Vincent Hospital and Medical Center (Portland, Oregon).
He is Board Certified in Internal Medicine. He was a member of the board of
directors of Medford Clinic from 1983-1991 and served as its President from
1989-1991. Since Dr. Bonazzola became Medford Clinic's Medical Director in 1991,
Medford Clinic has grown from 35 physicians, with no managed care contracts, to
64 physicians with approximately 35% of the overall business provided under
managed care contracts. Between 1992 and 1995, Dr. Bonazzola served on the board
of directors of HMO Oregon. He is a Trustee of the Oregon Medical Professional
Review Organization. In addition to his medical and administrative duties, Dr.
Bonazzola airs five nights weekly a medical report on local ABC affiliated
television stations in Medford, Klamath Falls and Eugene, Oregon and presents a
shorter report five mornings each week.
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BRUCE E. VAN ZEE, M.D. joined Physician Partners, Inc. as a founding member
of the Board of Directors in 1996. Dr. Van Zee is President and Chairman of the
Board of Medford Clinic. Dr. Van Zee is a practicing physician of Medford Clinic
committed to physician involvement in the governance and management of
innovative health care organizations. He received his medical degree magna cum
laude at the University of Oregon in 1970. He is Board Certified in Internal
Medicine and Nephrology, having completed his post graduate education at the
University of Rochester. Dr. Van Zee has served in a variety of medical
management roles which include chair of the department of medicine and president
of the medical society in his community. He has received advanced post graduate
training in physician management issues and in biomedical ethics.
DAVID H. CUTSFORTH, JR., M.D. joined Physician Partners, Inc. as a founding
member of the Board of Directors in 1996. He practiced as a Philomath Family
Medicine physician before that entity merged with Corvallis Clinic and currently
practices at Corvallis Clinic. Dr. Cutsforth is President and Chairman of the
Board of Corvallis Clinic. Dr. Cutsforth has been active in local and statewide
health forums. He served as a board director for Western Oregon IPA from
1989-1993. He served as an original committee member in the formulation of the
Oregon Health Plan, a national model for Medicaid reform. Dr. Cutsforth received
his medical degree from the University of Oregon in 1973. He is Board Certified
in Family Medicine, having completed his residency training at the University of
Texas in Houston. Dr. Cutsforth has served in a variety of management roles
including chair of the Department of Family Medicine and Peer Review Committee
of Good Samaritan Hospital, Corvallis. He received a superior service award from
the U.S. Public Health Service in 1977 and was recognized as America's Family
Doctor of the Year in 1994.
RUSSELL A. DOW, M.D. joined Physician Partners, Inc. as a founding member of
the Board of Directors in 1996. Dr. Dow serves as Chairman of the Board of
HealthFirst, in Portland, Oregon. Dr. Dow is a HealthFirst physician practicing
Obstetrics and Gynecology and has been involved in medical leadership and
governance for many years. He received his medical degree from Tufts University
School of Medicine in Boston, Massachusetts in 1974. He is Board Certified in
Obstetrics and Gynecology, having completed his post-graduate training at the
Oregon Health Sciences University. Dr. Dow is active in community, state and
regional health and medical policy issues.
DOUGLAS M. MANCINO, ESQ. joined Physician Partners, Inc. as a founding
outside member of the Board of Directors in 1996. Mr. Mancino is an attorney and
a partner in McDermott, Will & Emery's Los Angeles office. He has had more than
20 years of experience representing a broad variety of health care
organizations. Mr. Mancino has been recognized by THE NATIONAL LAW JOURNAL as
one of the country's leading managed care lawyers, and by the LOS ANGELES
BUSINESS JOURNAL as one of Southern California's top 100 health care executives.
Mr. Mancino is the author of a new book, TAXATION OF HOSPITALS AND HEALTH CARE
ORGANIZATIONS (Warren, Gorham & Lamont 1995) and a co-author of NAVIGATING YOUR
WAY THROUGH THE FEDERAL SELF-REFERRAL LAW: A GUIDEBOOK TO STARK II (Atlantic
Information Systems, Inc. 1995). He has also co-authored a 1987 Aspen Systems
book, JOINT VENTURES BETWEEN HOSPITALS AND PHYSICIANS and has written more than
30 articles on a variety of health care and taxation topics. Mr. Mancino
received his law degree, summa cum laude, from The Ohio State University of Law
in 1974. He is an active member and officer of several national legal
organizations and publications and is a Fellow of the American College of Tax
Counsel. Mr. Mancino also has served as a director of Health Systems
International, Inc., including acting on its Compensation Committee.
JON D. NESS holds the administrative position of chief executive officer of
Medford Clinic. Before employment by Medford Clinic in 1995, he acted as Vice
President of Deaconess-Billings Clinic Health System. Mr. Ness is a member of
MGMA and a member of the certified medical practice executive program. Mr. Ness
received his Master of Arts in Urban Planning from North Dakota State University
in 1984. He acted as a corporate planner of St. Luke's Hospital, affiliated with
Fargo Clinic, a 250 physician multi-specialty clinic, from 1986 to 1989.
JERALD W. ERSTGAARD obtained a Bachelor of Arts degree from the University
of South Dakota with a concentration in business. In 1973, he received a Masters
degree in Business Administration from the
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University of Wyoming. Mr. Erstgaard worked as an assistant administrator at
Corvallis Clinic from 1979 to 1986. He joined Metropolitan as an administrator
in 1986. Since February 1, 1996, at the time of the business combination of
Metropolitan and Suburban, Mr. Erstgaard has held the administrative position of
chief executive officer of HealthFirst. During Mr. Erstgaard's tenure,
HealthFirst has grown from an organization of 15 physicians to an entity with
approximately 120 physicians. In addition to his role in management at
HealthFirst, Mr. Erstgaard acts as a member of the board of directors of the
American Medical Group Association and of the Northwest Group Practices
Association. He is a Member of Medical Group Management Association. He
previously served as President of Oregon Medical Group Management Association.
COMPENSATION OF DIRECTORS
PPI directors are entitled to receive compensation for serving as directors
in an amount equal to $1,000 per board meeting or $5,000 per fiscal quarter of
PPI, whichever is greater. In addition, directors may be reimbursed for
reasonable and actual out-of-pocket expenses incurred in connection with their
duties as directors.
COMPENSATION OF EXECUTIVE OFFICERS
PPI was incorporated on June 20, 1996, and has not conducted any operations
to date. For details of the compensation of the executive officers of PPI under
their respective employment agreements with PPI, see "Interests of Certain
Persons in the Merger--Terms of the Reorganization and the Merger."
The following table sets forth information regarding the number of shares of
stock the executive officers and directors of the Companies hold in the
Companies and will hold in PPI after the PC Reorganization Transactions and the
Merger:
PRINCIPAL STOCKHOLDERS OF PPI
<TABLE>
<CAPTION>
HEALTHFIRST PPI CLASS A
CLASS A STOCK
SHARES BENEFICIALLY
BENEFICIALLY PERCENTAGE OWNED (PRO PERCENTAGE
OWNED OUTSTANDING FORMA) OUTSTANDING
------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C>
HEALTHFIRST
Leigh C. Dolin, M.D........................................ 100 1.1 %** 30,800*** *
Russell A. Dow, M.D........................................ 100 1.1 % 30,800 *
Barbara K. Ferre, M.D...................................... 100 1.1 % 30,800 *
Resa L. Hyzer, M.D......................................... 100 1.1 % 30,800 *
Malcolm L. McAninch, M.D................................... 100 1.1 % 30,800 *
Alar Mirka, M.D............................................ 100 1.1 % 30,800 *
Gloria J. Myers, M.D....................................... 100 1.1 % 30,800 *
James C. Ritzenthaler, M.D................................. 100 1.1 % 30,800 *
Matthew M. Shelley, M.D.................................... 100 1.1 % 30,800 *
John Teller, M.D........................................... 100 1.1 % 30,800 *
Vern R. Williams, M.D...................................... 100 1.1 % 30,800 *
--
----- ----- ------------
ALL OFFICERS AND DIRECTORS OF HEALTHFIRST
AS A GROUP............................................... 1,100 11.96 % 338,800 5.1 %
</TABLE>
- ------------------------
*Less than one percent (1%) of the total PPI Class A Common Stock outstanding
on a pro forma basis.
**Rounded to the nearest tenths.
***Assumes the adjusted exchange ratio applicable to HealthFirst Class A Shares
based on 27,000 shares of PPI Class A Common Stock per FTE.
105
<PAGE>
PRINCIPAL STOCKHOLDERS OF PPI
<TABLE>
<CAPTION>
CORVALLIS CLASS A CORVALLIS CLASS CORVALLIS CLASS
SHARES B SHARES C SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT BENEFICIALLY
OWNED OUTSTANDING OWNED OUTSTANDING OWNED
----------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
CORVALLIS CLINIC
Janice L. Frost, M.D.......... 1 1.6%** 100 0.8% 150
Jess W. Hickerson, M.D........ 1 1.6% 117 1.0% 190
Christopher P. Swan, M.D...... 1 1.6 % 100 0.8 % 50
David H. Cutsforth, Jr.,
M.D......................... 1 1.6 % 100 0.8 % 50
John R. Ladd, M.D............. 1 1.6 % 235 2.0 % 190
Darrel D. Bibler, M.D......... 1 1.6 % 239 2.0 % 190
- -- --
--- ---
ALL OFFICERS AND DIRECTORS OF
CORVALLIS CLINIC AS A
GROUP....................... 6 9.5 % 891 7.4 % 820
<CAPTION>
PPI CLASS A
STOCK
BENEFICIALLY
PERCENT OWNED (PRO PERCENT
OUTSTANDING FORMA) OUTSTANDING
--------------- ------------ ----------------
<S> <C> <C> <C>
CORVALLIS CLINIC
Janice L. Frost, M.D.......... 1.9%** 18,654*** *
Jess W. Hickerson, M.D........ 2.4% 21,165 *
Christopher P. Swan, M.D...... 0.6 % 18,054 *
David H. Cutsforth, Jr.,
M.D......................... 0.6 % 18,054 *
John R. Ladd, M.D............. 2.4 % 40,899 *
Darrel D. Bibler, M.D......... 2.4 % 41,551 *
--
--- ------------
ALL OFFICERS AND DIRECTORS OF
CORVALLIS CLINIC AS A
GROUP....................... 10.4 % 158,877 2.4 %
</TABLE>
- --------------------------
*Less than one percent (1%) of the total PPI Class A Common Stock outstanding
on a pro forma basis.
**Rounded to the nearest tenths.
***Assumes the adjusted exchange ratio applicable to the capital stock of
Corvallis Clinic based on 27,000 shares of PPI Class A Common Stock per FTE.
<TABLE>
<CAPTION>
PPI CLASS A
MEDFORD COMMON STOCK
SHARES BENEFICIALLY
BENEFICIALLY PERCENT OWNED (PRO PERCENT
OWNED OUTSTANDING FORMA) OUTSTANDING
----------------- --------------- ------------ ----------------
<S> <C> <C> <C> <C>
MEDFORD CLINIC
Bruce E. Van Zee, M.D...................................... 1 1.8%** 27,330*** *
Steven Schnugg, M.D........................................ 1 1.8% 27,330 *
Bruce E. Johnson, M.D...................................... 1 1.8 % 27,330 *
Daniel Brandenburg, M.D.................................... 1 1.8 % 27,330 *
John A. Schwartz, M.D...................................... 1 1.8 % 27,330 *
Daniel M. Wayman, M.D...................................... 1 1.8 % 27,330 *
Michael F. Bonazzola, M.D.................................. 1 1.8 % 27,330 *
- --
--- ------------
ALL OFFICERS AND DIRECTORS OF MEDFORD CLINIC
AS A GROUP............................................... 7 12.3 % 191,310 2.9 %
</TABLE>
- ------------------------
*Less than one percent (1%) of the total PPI Class A Common Stock outstanding
on a pro forma basis.
**Rounded off to the nearest tenths.
***Assumes the adjusted exchange ratio applicable to the Medford Clinic Common
Stock based on 27,000 shares of PPI Class A Common Stock per FTE.
INDEMNIFICATION AGREEMENTS
Pursuant to Article VII of the PPI Bylaws, PPI is obligated to indemnify
each of its directors and officers that could require PPI, among other things,
to indemnify them against certain liabilities that may arise by reason of their
status or service as directors and officers and to advance expenses incurred by
them as a result of any proceeding against them as to which they could be
indemnified.
106
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
PPI expects to adopt the Physician Partners, Inc. Change in Control Plan
(the "Change in Control Plan"). Pursuant to agreements entered into under the
Change in Control Plan, each employee selected to participate (including each of
the named executive officers) will be entitled to separation pay and benefits
following a change of control in PPI and the employee's subsequent termination
of employment unless such termination is voluntary and unprovoked or results
from death, disability, retirement or cause. The eligible termination must occur
within 24 months of the change in control or the agreement is void. Each
agreement will continue for three years from the date the agreement is executed
and automatically renew every three years from that date unless the employee
receives written notice of termination at least ninety days prior to the renewal
date. The separation pay under each agreement (including those for each of the
named executive officers) will equal three years' annualized base salary and
maximum target bonus. In addition, upon an eligible termination, all outstanding
options to purchase PPI Class A Common Stock shall immediately vest and become
exercisable. In the event that any payments to be made to an employee in
connection with a change in control of PPI under the Change in Control Plan or
any other plan or arrangement would not be deductible by PPI for federal income
tax purposes, then the payments under the Change in Control Plan and the
employee's agreement will be reduced as necessary to eliminate the disallowance
of the deduction.
CERTAIN TRANSACTIONS
In connection with the grant of restricted stock to Messrs. Goldberg, Dupell
and Ness under their respective employment agreements with PPI, it is
anticipated that PPI and each such executive officer of PPI will enter into a
restricted stock agreement, which agreement shall set forth certain terms and
conditions, including, without limitation, restrictions on transfer of shares,
requirements of vesting and forfeiture, redemption of shares and extension of a
loan by PPI to such executive officer in an amount equal to the tax liability
resulting from the grant of such restricted stock. Such loan shall accrue
interest at the adjusted federal rate, as determined by the IRS, and shall be
repaid on the tenth anniversary of the date of the loan; provided, however, that
the loan shall be immediately due and payable on the date such executive
officer's employment with PPI is terminated.
DESCRIPTION OF CAPITAL STOCK OF PPI
The authorized capital stock of PPI consists of (a) 50,000,000 shares of PPI
Common Stock, consisting of 20,000,000 PPI Class A Common Stock and 30,000,000
PPI Class B Common Stock, and (b) 50,000,000 shares of Preferred Stock, par
value $.01 per share ("PPI Preferred Stock"). As of November 1, 1996, there were
138,000 shares of PPI Class A Common Stock outstanding held of record by eight
stockholders, with (i) each of HealthFirst, Corvallis Clinic and Medford Clinic
holding 1,000 shares and (ii) each of Messrs. Goldberg, Dupell, Ness, Kobriger
and Mancino holding 27,000 shares. There is no established public trading market
for Class A Common Stock of PPI.
COMMON STOCK. The holders of PPI Class A Common Stock and PPI Class B
Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of stockholders. Subject to the prior rights of
holders of PPI Preferred Stock which may be issued in the future, the holders of
PPI Class A Common Stock and PPI Class B Common Stock are entitled to dividends,
when, as and if declared by the PPI Board, out of funds legally available
therefor. Neither holders of PPI Class A Common Stock nor holders of PPI Class B
Common Stock have preemptive rights.
RESTRICTION ON TRANSFER. No holder of PPI Class A Common Stock may sell,
assign, transfer, pledge or otherwise encumber or dispose of any share of PPI
Class A Common Stock or of any interest therein prior to the fifth anniversary
of the date of the issuance of such share (or, in the case of a share issued
pursuant to the exercise of a stock option granted by PPI, the date of grant of
such option) to such holder (in either case, such date being referred to herein
as the "Issuance Date").
107
<PAGE>
CONVERSION. Upon the transfer of any whole number or all of the shares of
PPI Class A Common Stock to a third party unaffiliated with the original holder
thereof permitted after the fifth anniversary of the Issuance Date or, if
earlier, pursuant to the exercize of registration rights after the second
anniversary of the Issuance Date, the transferred shares of PPI Class A Common
Stock will convert into fully paid and nonassessable shares of PPI Class B
Common Stock at the rate of one share of PPI Class B Common Stock for each share
of PPI Class A Common Stock so converted. The initial number of shares of Class
B Common Stock into which shares of PPI Class A Common Stock are convertible and
the number of votes the holder of each share of PPI Class A Common Stock is
entitled will be subject to adjustment from time to time, after the date hereof,
in case PPI will (i) pay a dividend in, or make distribution of, shares of Class
B Common Stock, (ii) subdivide its outstanding shares of Class B Common Stock
into a greater number of such shares, (iii) combine its outstanding shares of
Class B Common Stock into a smaller number of such shares or (iv) consolidate or
merge with or into another corporation (other than a consolidation or merger
which does not result in any reclassification or change of PPI Class A Common
Stock), or sell or convey all or substantially all of PPI's assets in their
entirety to another corporation.
REGISTRATION RIGHTS. A holder of PPI Class A Common Stock has the right to
elect, at any time after the second anniversary of the Issuance Date, to require
PPI to include up to 20 percent of the Registrable Shares in a Subsequent
Registration Statement relating to any proposed registered public offering of
(referred to herein as a "Registered Public Offering") PPI Common Stock under
which PPI receives proceeds in excess of $30 million (net of underwriters'
commissions and discounts), subject to a reduction in the Registrable Shares to
be included in the Subsequent Registration Statement determined by the managing
underwriter of such Registered Public Offering. (See "Terms of Reorganization
and Merger-- Resales of PPI Class A Common Stock and Registration Rights."
REPURCHASE RIGHT. PPI has the right, but not the obligation, to repurchase
all or any portion of shares of PPI Class A Common Stock held by a stockholder
in the event such stockholder ceases to be an employee or member of the PPI
Board or of an entity with which PPI has entered into a practice management
agreement, for reasons other than death, disability or retirement, at a certain
price. (See "Terms of Reorganization and Merger--PPI's Right to Repurchase PPI
Class A Common Stock.)
PREFERRED STOCK. Subject to the rights of the holders of Series A Junior
Participating Preferred Stock described below, the PPI Board has the authority,
without further stockholder approval, to issue authorized but unissued shares of
preferred stock in one or more series and to determine the preferences, rights,
privileges and restrictions of any series, including the dividend rights,
conversion rights, voting rights, rights and terms of redemption, liquidation
preferences and number of shares constituting, and designation of, such series.
Any such issuance of preferred stock may adversely affect, among other things,
the voting rights of existing stockholders. The PPI Board would retain the
flexibility to issue preferred stock in a variety of circumstances, including to
one or more venture capital investors or to a strategic investor in a negotiated
transaction.
There are no shares of Series A Junior Participating Stock currently
outstanding. PPI has no present plans to issue any shares of Series A Junior
Participating Preferred Stock or any other series or classes of preferred stock.
ANTITAKEOVER PROVISIONS. The PPI Certificate and PPI Bylaws provide for
three classes of directors, with directors in one class serving one-year terms,
the second class serving two-year terms and the third-class serving three-year
terms. Vacancies on the PPI Board may only be filled by the vote of a majority
of the members of the PPI Board then in office. Further, the PPI Certificate and
PPI Bylaws require a vote of holders of 80% or more of the outstanding shares
before certain business transactions with an "interested stockholder" (any
holder of 15 percent or more of shares of PPI Common Stock) may be effected,
including (i) mergers or consolidations of PPI, (ii) sales or leases of any
substantial part of PPI's assets, (iii) issuances of securities to another
corporation in exchange for cash, other stock or securities, (iv) the
dissolution or liquidation of PPI or (v) the amendment of certain provisions of
PPI Certificate and PPI
108
<PAGE>
Bylaws. The above provisions may have the effect of delaying or making it more
difficult for a stockholder or group of stockholders to take corporate actions
or gain control of PPI. Under the PPI Certificate, the PPI Board has the right
to declare a dividend distribution of a Right for each outstanding share of PPI
Common Stock to stockholders of record. Currently, PPI has no plans to declare
such a dividend distribution. Until a Right is exercised, the holder thereof
will have no rights as a stockholder of PPI, including, without limitation, the
right to vote or to receive dividends due to the ownership of such Right; such
PPI stockholder; rights with respect to the PPI Class A Common Stock held
thereby would remain intact, of course. While the distribution of the Rights
will not be taxable to stockholders or to PPI, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of PPI or for common stock
of the acquiring company as set forth above. The Rights have strong
anti-takeover effects. The Rights will cause substantial dilution to a person or
group that attempts to acquire PPI on terms not approved by PPI's Board. The
Rights should not interfere with any merger or other business combination
approved by the PPI Board since the PPI Board may, at its option, at any time
redeem all, but no less than all, of the then outstanding Rights at the
applicable redemption price.
CERTAIN PROVISIONS OF THE PPI CERTIFICATE AND PPI BYLAWS. Under the PPI
Certificate, after giving effect to the issuance of shares contemplated in the
Merger and accounting for shares reserved for issuance pursuant to the Merger
and the PPI Option Plans, there will be an aggregate of approximately 10,891,750
authorized but unissued and unreserved shares of PPI Class A Common Stock,
30,000,000 authorized but unissued and unreserved shares of PPI Class B Common
Stock and 50,000,000 authorized but unissued and unreserved shares of PPI
Preferred Stock. These additional authorized shares may be utilized for a
variety of corporate purposes, including future public offerings to raise
additional capital and to finance corporate acquisitions. Except pursuant to the
Merger and certain derivative securities described in this Joint Proxy
Statement/Prospectus, PPI currently has no plans to issue additional shares of
PPI Common Stock or PPI Preferred Stock. However, one of the effects of
authorized but unissued and unreserved shares of capital stock may be to render
more difficult or discourage an attempt by a potential acquiror to obtain
control of PPI by means of a merger, tender offer, proxy contest or otherwise,
and thereby protect the continuity of PPI's management. The issuance of such
shares of capital stock may have the effect of delaying, deferring or preventing
a change in control of PPI without any further action by the stockholders of
PPI.
109
<PAGE>
PPI MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in connection with the financial
statements of PPI and the PPI unaudited pro forma financial statements,
contained elsewhere in this Joint Proxy Statement/ Prospectus.
OVERVIEW
PPI has conducted no significant operations to date but will be acquiring,
in connection with the Reorganization and Merger, tangible and intangible assets
and liabilities of, and assuming the rights of the Companies under the Practice
Management Agreements with the New PCs. For a description of the Companies, see
"Business of HealthFirst", "Business of Corvallis Clinic", and "Business of
Medford Clinic". Under the New PC Management Agreements, PPI will provide
certain nonprovider personnel, equipment, space, supplies, and management and
administrative services necessary to operate the medical offices. The Companies
shall be solely and exclusively in control of all aspects of the practice of
medicine and the provision of professional medical services to their patients,
including all medical training and medical supervision of licensed personnel and
PPI shall neither have nor exercise any control or discretion over methods by
which the Companies or the providers shall practice medicine.
Through the Practice Management Agreements, PPI will provide management,
operational, and administrative services to the Companies in return for
management fees. The management fees payable to PPI under the New PC Management
Agreements will be an amount equal to:
(a) reimbursement of all Manager's Expenses, plus
(b) 16% of the Distributable Profit Amount of the managed New PC, where
"Distributable Profit Amount" is defined as
(i) gross revenues, booked on an accrual basis and subtracting specified
contractual allowances and bad debts, received by PPI or such New PC
relating to services provided by such New PC, less
(ii) Manager's Expenses (See "Operation, Management and Business of PPI
Following the Merger--Practice Management Agreement").
Each New PC will be responsible for provider compensation and benefits.
PPI will incur substantial costs and expenses in fulfilling its obligations
to the Companies. The expenses incurred by PPI in fulfilling its obligations
under the New PC Management Agreements are generally the same as the operating
costs and expenses that would have otherwise been incurred by the individual
clinic practices, including the salaries, wages, and benefits of practice
personnel, pharmaceutical and supply expenses involved in administering their
clinical practices, the office (general and administrative) expenses of the
practices, depreciation and amortization of assets acquired from the three
founding clinic practices as well as certain other income items. As further
described in "Business of PPI-- Business Strategy," PPI anticipates being able
to reduce these operating costs and expenses through purchase discounts,
economies of scale, benchmarking programs and more effective equipment
utilization. In addition to the operating costs and expenses discussed above,
PPI will be incurring personnel and administrative expenses in connection with
establishing and maintaining a corporate office, which will provide management,
administrative, marketing and acquisition services.
RESULTS OF OPERATIONS
HISTORICAL. PPI has conducted no significant operations to date and will
not conduct significant operations until the transaction is completed. PPI has
incurred and will continue to incur various legal, accounting, appraisal and
consulting costs in connection with the Reorganization and Merger.
110
<PAGE>
PRO FORMA
REVENUES. As discussed in the notes to the unaudited pro forma statement of
operations, the revenues of PPI will consist primarily of fees under the New PC
Management Agreements and reimbursement of direct clinic expenses paid on behalf
of the Companies. The revenues included in the pro forma financial statements of
$101,059,000, and $85,512,000 for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively, are those that would have been
earned if the management agreement would have been in effect as of January 1,
1995.
PROVIDER COMPENSATION AND BENEFITS. As discussed in the notes to the
unaudited pro forma statement of operations, Provider Compensation and Benefits
will be the responsibility of the New PCs; accordingly, no provider compensation
and benefit costs have been reflected in the PPI pro forma column.
OPERATING EXPENSES. The total pro forma operating expenses of $94,419,000
and $80,297,000 for the year ended December 31, 1995, and for the nine months
ended September 30, 1996, respectively, do not reflect any cost reductions
anticipated by PPI. The trends underlying the individual operating expenses are
discussed in the management's discussion and analysis of financial results for
the historical clinic operations.
PROVISION FOR INCOME TAXES. Pro forma income taxes assume that PPI had
operated as a tax-paying entity for the year ended December 31, 1995 and the
nine months ended September 30, 1996, subject to an effective combined tax rate
for state and federal income taxes of 40% for both periods.
LIQUIDITY AND CAPITAL RESOURCES.
Working Capital and Short-term Financing:
As of September 30, 1996, PPI had a pro forma working capital deficit of
$5,298,000. This deficit is due to accruals for excess provider compensation and
short-term financing used to invest in capital purchases. PPI will seek to
convert the $3,750,000 construction note related to HealthFirst into a long-term
note or mortgage. The accrual amounts for provider compensation will be paid
prior to the Effective Time. Future amounts due would be the responsibility of
the New PCs and would not be the responsibility of PPI. See "HealthFirst
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Corvallis Clinic Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Medford Clinic Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Management believes that working capital deficits are unlikely to continue
due to the receipt of management fees related to the New PC Management Agreement
and resulting financial discipline involved in governing the business aspects of
the New PCs through the Joint Management Board. See "Operation, Management and
Business of PPI Following the Merger."
Long-Term:
CAPITAL EXPENDITURES. Capital expenditures relating to HealthFirst,
Corvallis Clinic and Medford Clinic are described in "HealthFirst Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Corvallis Clinic Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Medford Clinic Management's Discussion and
Analysis of Financial Condition and Results of Operations." Capital expenditure
plans and projects will be approved by the Joint Management Boards of the New
PCs as part of the annual budgeting process. See "Operation, Management and
Business of PPI Following the Merger."
FINANCING ACTIVITIES. Management expects to obtain a combined short-term
working capital line of credit upon the Merger by combining the lines of credit
from each New PC. In addition, management is in the process of evaluating
various alternatives to financing the ongoing business needs of PPI and the
111
<PAGE>
Companies and potential acquisition strategies of PPI. Such alternatives include
but are not limited to, traditional commercial banks, private debt, private
equity, public equity or public debt. Any future acquisitions are expected to be
funded through a combination of existing cash and debt, new debt and the
issuance of new PPI stock.
The existing debt obligations of the Companies are described in "HealthFirst
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Corvallis Clinic Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Medford Clinic Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Management believes that additional financing will be required to fund
planned capital expenditures over the next several years and potential
acquisition strategies of PPI which include expanding the existing markets of
the New PCs, expansion into new hub markets and developing and acquiring small
physician practice groups. See "Operation, Management and Business of PPI
Following the Merger--The PPI Strategy."
PPI's efforts relating to potential acquisition targets are at a very
preliminary stage. PPI has held high-level nonbinding discussions and has
initiated other marketing efforts with numerous medical groups and PPMs in and
outside of its direct geographic service area regarding potential business
affiliations. It is not possible, at this time, to determine which, if any, of
these discussions might proceed to an actual transaction. None of these
discussions or meetings have resulted in letters of intent, memoranda of
understanding or other oral or written agreements with PPI. As a result, it is
not possible at this time to quantify the amount of additional financing which
will be required to fund PPI's strategy.
112
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF PPI,
INCLUDING NOTES THERETO
The following pro forma selected financial information does not project the
future financial position of PPI whose securities are being exchanged pursuant
to the Reorganization and Merger Agreement as described in this Proxy Statement.
Such financial information is provided to illustrate the effect of the PC
Reorganization Transactions as if they had occurred on the dates indicated.
The business of PPI is to acquire the assets of multi-specialty medical
groups and provide operational and administrative services and facilities to the
physicians practicing exclusively through such medical groups. The relationship
between PPI and each such medical group is structured through practice
management agreements which provide, in general, for PPI (which owns certain
assets, including equipment and accounts receivable) to provide offices and
facilities, inventory and supplies, equipment, management and administrative
services to such medical group. Each medical group, in return, agrees to conduct
its practice of medicine exclusively in affiliation with PPI.
113
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As explained elsewhere in this Joint Proxy Statement/Prospectus, the PC
Reorganization Transactions would result in a division of the current businesses
of HealthFirst Corvallis Clinic and Medford Clinic.
Various business support functions along with substantially all of the
assets and liabilities of the three existing Companies would be transferred to
PPI in exchange for PPI Class A Common Stock. Under accounting rules prescribed
by the staff of the Securities and Exchange Commission in SAB 48, when a company
acquires assets from promoters and shareholders in exchange for stock just prior
to, or at the time of, its first public offering, such assets should generally
be recorded at the cost to each such promoter or shareholder. Each of the three
existing Companies is involved as a promoter of the Merger and the related
first-time public registration of stock of PPI. Accordingly, the assets and
liabilities to be transferred from the Companies to PPI in connection with the
merger transactions will be recorded on the PPI balance sheet in the same
amounts as reflected on the balance sheets of the Companies at the effective
date of the merger and the PPI stock will be valued at the historic cost of the
net assets to be transferred.
The medical practice (i.e., physicians and medical service staff) would be
"spun off" to New PCs. The New PCs would then enter into New PC Management
Agreements with PPI for various management, finance and administrative support
services. PPI revenues under the Management Agreements would include (a)
reimbursement of all Manager's Expenses plus (b) a management fee equal to 16%
of the Distributable Profit Amount of the New PCs. "Distributable Profit Amount"
is defined as (i) New PC gross revenues, booked on an accrual basis, less
specified contractual discounts and bad debts, relating to services provided by
the New PCs, less (ii) Manager's Expenses. See "Operation, Management and
Business of PPI Following the Merger--Practice Management Agreement."
The amount available for provider compensation and benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by synergies resulting from the
Merger and management's ability to reduce costs or enhance revenues.
The pro forma financial statements include the unaudited pro forma condensed
balance sheet of PPI as of September 30, 1996 and the unaudited pro forma
condensed statements of operations of PPI for the year ended December 31, 1995
and the nine months ended September 30, 1996.
The unaudited condensed pro forma financial statements illustrate the
balance sheet of PPI as if the PC Reorganization Transactions and the Merger had
occurred on September 30, 1996. The unaudited condensed pro forma statements of
operations illustrate the operating results of PPI for the periods presented as
if the PC Reorganization Transactions and the Merger had occurred and the New PC
Management Agreements were in effect throughout the periods presented.
The unaudited condensed pro forma financial statements have been prepared by
PPI based on the historical financial statements of PPI and the Companies and
their predecessors included elsewhere in this Joint Proxy Statement/Prospectus
and assumptions deemed appropriate by PPI. These unaudited condensed pro forma
financial statements may not be indicative of actual results if the transactions
contemplated by the Reorganization and Merger Agreement had occurred on the
dates indicated or which may be realized in the future. No pro forma adjustments
for the potential positive impact on the management fee of higher revenues or
anticipated cost reductions related to operations of the New PCs have been
reflected as they are not factually supportable at the present time.
114
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS MEDFORD ADJUSTMENTS PPI PRO FORMA
----- ----------- --------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term
investments.................... $ 3 $ 1,195 $ 72 $ 878 $-- $ 2,148
Accounts receivable
Gross accounts receivable...... -- 9,500 8,555 10,872 -- 28,927
Reserves....................... -- 1,970 2,353 3,316 -- 7,639
Receivable, net.............. -- 7,530 6,202 7,556 -- 21,288
Other current assets........... -- 859 646 1,801 -- 3,306
----- ----------- --------- ------- ----------- -------------
Total current assets......... 3 9,584 6,920 10,235 -- 26,742
PROPERTY, PLANT AND EQUIPMENT:
Gross property................... -- 25,500 28,035 10,881 -- 64,416
Accumulated depreciation......... -- 5,523 8,811 5,275 -- 19,609
Property, plant and
equipment, net............. -- 19,977 19,224 5,606 -- 44,807
Other noncurrent assets.......... -- 307 750 321 -- 1,378
----- ----------- --------- ------- ----------- -------------
Total assets................. $ 3 $29,868 $ 26,894 $16,162 $-- $ 72,927
----- ----------- --------- ------- ----------- -------------
----- ----------- --------- ------- ----------- -------------
CURRENT LIABILITIES:
Accounts and notes payable....... $-- $ 2,711 $ 3,313 $ 1,363 $-- $ 7,387
Other current liabilities........ -- 13,068 4,541 7,044 -- 24,653
----- ----------- --------- ------- ----------- -------------
Total current liabilities.... -- 15,779 7,854 8,407 -- 32,040
LONG-TERM DEBT, net of current
portion.......................... -- 3,911 1,549 4,184 -- 9,644
CAPITAL AND DIRECT FINANCING LEASE
OBLIGATIONS, net of current
portion.......................... -- 4,167 14,026 -- -- 18,193
OTHER LONG-TERM LIABILITIES........ -- 4,034 2,028 1,215 -- 7,277
REDEEMABLE STOCK................... -- -- 6,744 -- (6,744)(A) --
STOCKHOLDERS' EQUITY:
Common stock..................... -- 570 -- 1 (506)(A) 65
Additional paid-in capital....... 2,724 122 -- -- 5,583(A) 8,429
Retained earnings (deficit)...... (2,721) 1,285 (5,307) 2,355 1,667(A) (2,721)
----- ----------- --------- ------- ----------- -------------
Total liabilities and
equity..................... $ 3 $29,868 $ 26,894 $16,162 $-- $ 72,927
----- ----------- --------- ------- ----------- -------------
----- ----------- --------- ------- ----------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
115
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS MEDFORD SUBTOTAL
----- ----------- SUBURBAN --------- ------- ----------- ADJUSTMENTS
----------- -----------
(HH) (II)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES....................... $-- $42,689 $ 1,232 $34,088 $30,268 $ 108,277 ($108,277)(AA)
85,512(BB)
Less Provider Compensation and
Benefits......................... -- 17,352 373 8,247 8,553 34,525 (34,525)(CC)
----- ----------- ----------- --------- ------- ----------- -----------
Net Revenues Less Provider
Compensation and Benefits...... -- 25,337 859 25,841 21,715 73,752 11,760
TOTAL OPERATING EXPENSES......... -- 32,440 1,036 24,928 21,893 80,297 --
OTHER (INCOME) EXPENSES............ -- (192) (11) 840 242 879 1,200(DD)
REORGANIZATION COSTS............... 2,721 -- -- -- -- 2,721 (2,721)(EE)
----- ----------- ----------- --------- ------- ----------- -----------
Income (Loss) Before Income
Taxes.......................... (2,721) (6,911) (166) 73 (420 ) (10,145) 13,281
INCOME TAX
(BENEFIT) 1,254(FF)
EXPENSE.......................... -- (2,272) -- -- (246 ) (2,518) 2,518(GG)
----- ----------- ----------- --------- ------- ----------- -----------
Net Income (Loss)................ $(2,721) $(4,639) $ (166) $ 73 $ (174 ) $ (7,627) $ 9,509
----- ----------- ----------- --------- ------- ----------- -----------
----- ----------- ----------- --------- ------- ----------- -----------
<CAPTION>
PPI PRO FORMA
-------------
<S> <C>
NET REVENUES....................... $ 85,512
Less Provider Compensation and
Benefits......................... --
-------------
Net Revenues Less Provider
Compensation and Benefits...... 85,512
TOTAL OPERATING EXPENSES......... 80,297
OTHER (INCOME) EXPENSES............ 2,079
REORGANIZATION COSTS............... --
-------------
Income (Loss) Before Income
Taxes.......................... 3,136
INCOME TAX
(BENEFIT)
EXPENSE.......................... 1,254
-------------
Net Income (Loss)................ $ 1,882
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
116
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS MEDFORD SUBTOTAL
----- ----------- SUBURBAN --------- ------- ----------- ADJUSTMENTS
----------- -----------
(HH) (II)
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES....................... $-- $37,652 $15,418 $39,174 $38,966 $ 131,210 ($131,210)(AA)
101,059(BB)
Less Provider Compensation and
Benefits......................... -- 9,530 3,916 13,209 11,239 37,894 (37,894)(CC)
----- ----------- ----------- --------- ------- ----------- -----------
Net Revenues Less Provider
Compensation and Benefits...... -- 28,122 11,502 25,965 27,727 93,316 7,743
TOTAL OPERATING EXPENSES........... -- 27,593 12,770 27,779 26,277 94,419 --
OTHER (INCOME) EXPENSES............ -- 29 185 293 390 897 1,600(DD)
----- ----------- ----------- --------- ------- ----------- -----------
Income (Loss) Before Income
Taxes.......................... -- 500 (1,453) (2,107) 1,060 (2,000) 6,143
INCOME TAX
(BENEFIT) 1,657(FF)
EXPENSE.......................... -- 208 (610) -- 408 6 (6)(GG)
----- ----------- ----------- --------- ------- ----------- -----------
Net Income (Loss)................ $-- $ 292 $ (843) $(2,107) $ 652 $ (2,006) $ 4,492
----- ----------- ----------- --------- ------- ----------- -----------
----- ----------- ----------- --------- ------- ----------- -----------
<CAPTION>
PPI PRO FORMA
-------------
<S> <C>
NET REVENUES....................... $101,059
Less Provider Compensation and
Benefits......................... --
-------------
Net Revenues Less Provider
Compensation and Benefits...... 101,059
TOTAL OPERATING EXPENSES........... 94,419
OTHER (INCOME) EXPENSES............ 2,497
-------------
Income (Loss) Before Income
Taxes.......................... 4,143
INCOME TAX
(BENEFIT)
EXPENSE.......................... 1,657
-------------
Net Income (Loss)................ $ 2,486
-------------
-------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
117
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The pro forma condensed balance sheet has been presented as if the proposed
PC Reorganization Transactions had taken place on September 30, 1996.
The pro forma condensed statements of operations have been presented as if
the proposed PC Reorganization Transactions had taken place and that the
proposed New PC Management Agreement was in effect throughout the periods
presented.
ADJUSTMENTS TO PRO FORMA BALANCE SHEET
Under accounting rules prescribed by the staff of the SEC in SAB 48, when a
company acquires assets from promoters and shareholders in exchange for stock
just prior to, or at the time of, its first public offering, such assets should
generally be recorded at the cost to each such promoter or shareholder. Each of
the three existing Companies is involved as a promoter of the Merger and the
related first-time public registration of stock of PPI. Accordingly, the assets
and liabilities to be transferred from the Companies to PPI in connection with
the Merger transactions will be recorded on the PPI balance sheet in the same
amounts as reflected on the balance sheets of the Companies at the Effective
Time of the Merger and the PPI stock will be valued at the historic cost of the
net assets to be transferred.
<TABLE>
<S> <C>
(A) The adjustments reflect the effect of the PC Reorganization Transactions on the
shareholders' equity accounts which includes the issuance of 7,463,250 shares of PPI
common stock in exchange for all classes of the stock of the Companies. These PPI
shares will be recorded at par value of $.01 per share and all of the remaining
balances in the Companies capital accounts will be reflected as paid-in-capital.
</TABLE>
ADJUSTMENTS TO PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<S> <C>
The unaudited condensed pro forma statements of operations reflect the following
adjustments:
(AA) The pro forma presentation includes the historic revenues of the Companies from
providing medical services. These revenues have been eliminated from PPI pro forma
revenues because they will be retained by the New PCs.
(BB) Represents the pro forma PPI management services revenues as calculated under the
terms of the proposed New PC Management Agreement as applied to the historical
operating results of the Companies.
</TABLE>
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Reimbursement of Manager's Expenses incurred under the
terms of the New PC Management Agreement (includes
operating and other expenses)........................... $ 81,176 $ 95,316
Management fee as computed under the terms of the New PC
Management Agreement (16% of New PC revenues less the
amount of the Manager's Expenses to be reimbursed by the
New PCs)................................................ 4,336 5,743
------- --------
$ 85,512 $ 101,059
------- --------
------- --------
</TABLE>
118
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
(CC) Eliminates the previously recorded Provider Compensation and Benefits of the
Companies. Under the terms of the Merger and the PC Reorganization Transactions, the
medical practice of each Company would be spun off to the New PCs. The New PCs would
be responsible for the costs related to Provider Compensation and Benefits.
The amount available for Provider Compensation and Benefits will be directly
affected by the amount of the management fee to be paid to PPI. If the New PC
Management Agreement had been in effect during the periods presented below, the
amount available for Provider Compensation and Benefits would have been reduced by
the amount of the management fee as follows:
</TABLE>
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
HEALTHFIRST* CORVALLIS MEDFORD COMBINED
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1993........................................... $ 1,844 $ 1,450 $ 1,142 $ 4,436
------ ----------- ----------- -----------
------ ----------- ----------- -----------
1994........................................... $ 2,542 $ 1,992 $ 1,532 $ 6,066
------ ----------- ----------- -----------
------ ----------- ----------- -----------
1995........................................... $ 1,999 $ 1,776 $ 1,968 $ 5,743
------ ----------- ----------- -----------
------ ----------- ----------- -----------
Nine months ended September 30, 1996........... $ 1,704 $ 1,331 $ 1,301 $ 4,336
------ ----------- ----------- -----------
------ ----------- ----------- -----------
</TABLE>
* Includes Suburban for the period prior to acquisition by HealthFirst.
Although the impact cannot be determined at this time, the amount
available for Provider Compensation and Benefits may also be
positively effected by synergies from the Merger and management's
ability to reduce costs or enhance revenues.
<TABLE>
<S> <C>
In the periods presented in the pro forma financial statements, HealthFirst, Medford
Clinic and Corvallis Clinic recorded Provider Compensation and Benefits expense in
excess of amounts available from current operating profits. In the case of
HealthFirst, most of this excess is related to costs associated with a bonus
compensation plan which is to be paid out over a period of eight years. Payments to
date have been funded from operations. The remaining obligation at the Effective
Date will be transferred to PPI. The excess compensation expense for Corvallis
Clinic of $1.3 million and $2.1 million for 1994 and 1995, respectively, was funded
by operating cashflows in 1994 and by bank borrowings in 1995 which will be
transferred to PPI at the Effective Time. The excess Provider Compensation and
Benefits expense for Medford Clinic of $174,000 for the nine months ended September
30, 1996 was funded by operating cash flows. In the future, the Management Agreement
does not provide for, nor do the Companies intend to pay Provider Compensation and
Benefits in excess of amounts generated from operations on an annual basis.
</TABLE>
<TABLE>
<S> <C>
(DD) This represents the corporate overhead expenses of PPI which are currently estimated
to be approximately $1.6 million in its initial year of operations. These estimates
are supported by employment agreements with management personnel, a lease agreement
for corporate office space, compensation expense related to restricted stock awards
and budgeted amounts for other corporate overhead costs expected to be incurred.
Based on the nature of these costs, they would not be reimbursable Manager's
Expenses under the terms of the New PC Management Agreement.
</TABLE>
119
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
(EE) Eliminates the impact on operations of nonrecurring costs incurred in connection
with the PC Reorganization Transactions. Substantially all of these costs are
related to services from accountants, attorneys and other consultants to provide
legal documents, accounting and other information required for the Merger and PC
Reorganization Transactions. Additional PC Reorganization Transactions and Merger
costs of approximately $0.8 million are expected to be incurred between September
30, 1996 and the Effective Time of the Merger. Such costs have not been reflected in
the pro forma financial statements.
(FF) The pro forma income taxes of PPI at an estimated 40% combined federal and state tax
rate.
(GG) Represents the elimination of previously recorded income tax provision (benefit) of
the Companies.
(HH) Suburban was acquired by HealthFirst on February 1, 1996 in a purchase transaction.
Accordingly, Suburban's operating results subsequent to the purchase date are
included with HealthFirst. Suburban's revenues and expenses prior to that date are
shown in the Suburban column.
A reconciliation between the pro forma statements of operations and pro forma
results disclosed in Note 12 to the HealthFirst financial statements follows:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C> <C>
Net Revenues Less Provider Compensation and
Benefits--
Per pro forma statement of operations:
HealthFirst................................... $ 28,122 $ 25,337
Suburban...................................... 11,502 859
------- -------
Per Note 12................................... $ 39,624 $ 26,196
------- -------
------- -------
</TABLE>
<TABLE>
<S> <C>
(II) No pro forma adjustments for the potential positive impact on the management fee of
higher revenues or anticipated cost reductions related to operations of the New PCs
have been reflected as they are not factually supportable at the present time.
</TABLE>
120
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS OF
THE NEW PCS, INCLUDING NOTES THERETO
The following pro forma selected financial information does not project the
future financial position of the New PCs whose securities are being distributed
by the Companies to their respective shareholders pursuant to the Reorganization
and Merger Agreement as described in this Joint Proxy Statement/ Prospectus.
Such financial information is provided to illustrate the effect of the PC
Reorganization Transactions as if they had occurred on the dates indicated.
The business of the New PCs is to contract with physicians to provide
medical services. PPI will provide operational and administrative services and
facilities to the physicians practicing with the New PCs. The relationship
between the New PCs and PPI is structured through practice management agreements
which provide, in general, for PPI (which owns certain assets, including
equipment and accounts receivable) to provide office and facilities, inventory
and supplies, equipment, management and administrative services to the New PCs.
The New PCs, in return, agree to conduct practice of medicine exclusively in
affiliation with PPI.
121
<PAGE>
THE NEW PCS
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As explained elsewhere in this Joint Proxy Statement/Prospectus, the PC
Reorganization Transactions would result in a division of the current businesses
of HealthFirst Medical Group, P.C., The Corvallis Clinic, P.C. and Medford
Clinic, P.C.
The medical practice (i.e., physicians and medical service staff) will be
"spun off" to New PCs. Each of HealthFirst New PC, Corvallis Clinic New PC and
Medford Clinic New PC was incorporated under the laws of the state of Oregon on
September 18, 1996. Each of the three existing Companies will transfer certain
assets integral to its provider professional services business to the New PCs
and cause such New PC to assume liabilities of such Company relating to such
transferred assets. The assets and liabilities to be transferred to the New PCs
represent various intangible assets, e.g., medical records and certain
contractual rights and related contractual obligations. These assets and
liabilities have no carrying value on the books of the three existing Companies.
After such transfer of assets, HealthFirst and Medford Clinic will make a
distribution under which the then-current shareholders of each Company will
receive all of the issued and outstanding shares of the respective New PCs,
allocated on a pro rata basis in accordance with the fair market value of each
shareholders' then-current equity interest. Corvallis Clinic will instead make a
distribution under which the holders of Class A Preferred Stock of Corvallis
Clinic shall receive all of the issued and outstanding shares of Corvallis
Clinic New PC, allocated on pro rata basis in accordance with the percentage of
Class A Preferred Stock of Corvallis Clinic then held by each such holder.
Various business support functions along with substantially all of the
assets and liabilities of the three existing Companies would be transferred to
PPI. As discussed in the "Summary" section under "Accounting Treatment," the
assets and liabilities to be transferred from the Companies to PPI in connection
with the merger transactions will be recorded on the PPI balance sheet in the
same amounts as reflected on the balance sheets of the three existing Companies
at the Effective Time.
Subsequent to the Merger, the New PCs will receive revenues from providing
medical services and will pay for Provider Compensation and Benefits, as well as
expenses under Management Agreements to be entered into with PPI. The Management
Agreements will cover various management, finance and administrative support
services to be provided to the New PCs by PPI. The payments to be made to PPI
under the Management Agreements would include (a) reimbursement of all Manager's
Expenses plus (b) a management fee equal to 16% of the Distributable Profit
Amount of the New PCs. "Distributable Profit Amount" is defined as (i) New PC
gross revenues, booked on an accrual basis, less specified contractual discounts
and bad debts, relating to services provided by the New PCs, less (ii) Manager's
Expenses.
It is expected that the New PCs will generally operate on a break-even
basis. Accordingly, the amount available for future Provider Compensation and
Benefits will be directly effected by the amount of the management fee to be
paid to PPI. Although the impact cannot be determined at this time, the future
amounts available for Provider Compensation and Benefits may also be effected by
synergies resulting from the Merger and management's ability to reduce costs or
enhance revenues.
The pro forma financial statements include the unaudited pro forma condensed
balance sheets of the New PCs as of September 30, 1996 and the unaudited pro
forma condensed statements of operations of the New PCs for the year ended
December 31, 1995 and for the nine months ended September 30, 1996.
The unaudited condensed pro forma financial statements illustrate the
balance sheets of the New PCs as if the PC Reorganization Transactions and the
Merger had occurred on September 30, 1996. The unaudited condensed pro forma
statements of operations illustrate the operating results of the New PCs
122
<PAGE>
for the periods presented as if the PC Reorganization Transactions and the
Merger had occurred and the Management Agreements were in effect on January 1,
1995.
The unaudited condensed pro forma financial statements have been prepared by
the New PCs based on the historical financial statements of the Companies and
their predecessors included elsewhere in this Joint Proxy Statement/Prospectus
and assumptions as described in the footnotes to these unaudited condensed pro
forma financial statements. These unaudited condensed pro forma financial
statements may not be indicative of actual results if the transactions
contemplated by the Reorganization and Merger Agreement had occurred on the
dates indicated or which may be realized in the future. No pro forma adjustments
for the potential positive impact on the management fee of higher revenues or
anticipated cost reductions related to operations of the New PCs have been
reflected as they are not factually supportable at the present time.
123
<PAGE>
HEALTHFIRST NEW PC
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HEALTHFIRST
HEALTHFIRST NEW PC
NEW PC ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments....................................... $ -- $ -- $ --
Accounts receivable--
Gross accounts receivable........................................... -- -- --
Reserves............................................................ -- -- --
------------ ------------ ------------
Receivable, net................................................. -- -- --
Other current assets.................................................. 1 -- 1
------------ ------------ ------------
Total current asssets........................................... -- -- --
PROPERTY, PLANT AND EQUIPMENT:
Gross property........................................................ -- -- --
Accumulated depreciation.............................................. -- -- --
------------ ------------ ------------
Property, plant and equipment, net.............................. -- -- --
Other noncurrent assets............................................... -- -- --
------------ ------------ ------------
Total assets.................................................... $ 1 $ -- $ 1
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts and notes payable............................................ $ -- $ -- $ --
Other current liabilities............................................. -- -- --
------------ ------------ ------------
Total current liabilities....................................... -- -- --
LONG-TERM DEBT, net of current portion.................................. -- -- --
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
portion................................................................ -- -- --
OTHER LONG-TERM LIABILITIES............................................. -- -- --
STOCKHOLDERS' EQUITY:
Common stock.......................................................... 1 -- 1
Additional paid-in capital............................................ -- -- --
Retained earnings (deficit)........................................... -- -- --
------------ ------------ ------------
Total liabilities and stockholders' equity...................... $ 1 $ -- $ 1
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
124
<PAGE>
HEALTHFIRST NEW PC
PRO FORMA STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HEALTHFIRST
HEALTHFIRST NEW PC
NEW PC SUBURBAN HEALTHFIRST SUBTOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(E)
Net revenues.......................... $ -- $ 1,232 $ 42,689 $ 43,921 $ -- $ 43,921
Less-- Provider Compensation and
Benefits............................. -- 373 17,352 17,725 (8,781)(A) 8,944
----------- ----------- ----------- ----------- ------------- -----------
Net revenues less Provider
Compensation and Benefits............ -- 859 25,337 26,196 8,781 34,977
Total operating expenses.............. -- 1,036 32,440 33,476 (33,476)(B) --
Other (income) expenses............... -- (11) (192) (203) 203(B) --
Management fee........................ -- -- -- -- 34,977(C) 34,977
----------- ----------- ----------- ----------- ------------- -----------
Net income (loss) before income
taxes................................ -- (166) (6,911) (7,077) 7,077 --
Income tax (benefit) expense.......... -- -- (2,272) (2,272) 2,272(D) --
----------- ----------- ----------- ----------- ------------- -----------
Net income (loss)..................... $ -- $ (166) $ (4,639) $ (4,805) $ 4,805 $ --
----------- ----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ----------- ------------- -----------
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HEALTHFIRST
HEALTHFIRST NEW PC
NEW PC SUBURBAN HEALTHFIRST SUBTOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(E)
Net revenues.......................... $ -- $ 15,418 $ 37,652 $ 53,070 $ -- $ 53,070
Less-- Provider Compensation and
Benefits............................. -- 3,916 9,530 13,446 (2,952)(A) 10,494
----------- ----------- ----------- ----------- ------------- -----------
Net revenues less Provider
Compensation and Benefits............ -- 11,502 28,122 39,624 2,952 42,576
Total operating expenses.............. -- 12,770 27,593 40,363 (40,363)(B) --
Other (income) expenses............... -- 185 29 214 (214)(B) --
Management fee........................ -- -- -- -- 42,576(C) 42,576
----------- ----------- ----------- ----------- ------------- -----------
Net income (loss) before income
taxes................................ -- (1,453) 500 (953) 953 --
Income tax (benefit) expense.......... -- (610) 208 (402) 402(D) --
----------- ----------- ----------- ----------- ------------- -----------
Net income (loss)..................... $ -- $ (843) $ 292 $ (551) $ 551 $ --
----------- ----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ----------- ------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
125
<PAGE>
CORVALLIS CLINIC NEW PC
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
CORVALLIS
CORVALLIS CLINIC
CLINIC NEW PC
NEW PC ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments....................................... $ -- $ -- $ --
Accounts receivable--
Gross accounts receivable........................................... -- -- --
Reserves............................................................ -- -- --
------------ ------------ ------------
Receivable, net................................................. -- -- --
Other current assets.................................................. 1 -- 1
------------ ------------ ------------
Total current asssets........................................... -- -- --
PROPERTY, PLANT AND EQUIPMENT:
Gross property........................................................ -- -- --
Accumulated depreciation.............................................. -- -- --
------------ ------------ ------------
Property, plant and equipment, net.............................. -- -- --
Other noncurrent assets............................................... -- -- --
------------ ------------ ------------
Total assets.................................................... $ 1 $ -- $ 1
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts and notes payable............................................ $ -- $ -- $ --
Other current liabilities............................................. -- -- --
------------ ------------ ------------
Total current liabilities....................................... -- -- --
LONG-TERM DEBT, net of current portion.................................. -- -- --
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
portion................................................................ -- -- --
OTHER LONG-TERM LIABILITIES............................................. -- -- --
STOCKHOLDERS' EQUITY:
Common stock.......................................................... 1 -- 1
Additional paid-in capital............................................ -- -- --
Retained earnings (deficit)........................................... -- -- --
------------ ------------ ------------
Total liabilities and stockholders' equity...................... $ 1 $ -- $ 1
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
126
<PAGE>
CORVALLIS CLINIC NEW PC
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
CORVALLIS
CORVALLIS CLINIC
CLINIC CORVALLIS NEW PC
NEW PC CLINIC ADJUSTMENTS PRO FORMA
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.................................................... $ -- $ 34,088 $ -- $ 34,088
Less-- Provider Compensation and Benefits....................... -- 8,247 (1,258)(A) 6,989
--------- --------- ----------- -----------
Net revenues less Provider Compensation and Benefits............ -- 25,841 1,258 27,099
Total operating expenses........................................ -- 24,928 (24,928)(B) --
Other (income) expenses......................................... -- 840 (840)(B) --
Management fee.................................................. -- -- 27,099(C) 27,099
--------- --------- ----------- -----------
Net income (loss) before income taxes........................... -- 73 (73) --
Income tax (benefit) expense.................................... -- -- -- --
--------- --------- ----------- -----------
Net income (loss)............................................... $ -- $ 73 $ (73) $ --
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
CORVALLIS
CORVALLIS CLINIC
CLINIC CORVALLIS NEW PC
NEW PC CLINIC ADJUSTMENTS PRO FORMA
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.................................................... $ -- $ 39,174 $ -- $ 39,174
Less-- Provider Compensation and Benefits....................... -- 13,209 (3,883)(A) 9,326
--------- --------- ----------- -----------
Net revenues less Provider Compensation and Benefits............ -- 25,965 3,883 29,848
Total operating expenses........................................ -- 27,779 (27,779)(B) --
Other (income) expenses......................................... -- 293 (293)(B) --
Management fee.................................................. -- -- 29,848(C) 29,848
--------- --------- ----------- -----------
Net income (loss) before income taxes........................... -- (2,107) 2,107 --
Income tax (benefit) expense.................................... -- -- -- --
--------- --------- ----------- -----------
Net income (loss)............................................... $ -- $ (2,107) $ 2,107 $ --
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
127
<PAGE>
MEDFORD CLINIC NEW PC
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MEDFORD
MEDFORD CLINIC NEW
CLINIC NEW PC PRO
PC ADJUSTMENTS FORMA
---------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments........................................... $ -- $ -- $ --
Accounts receivable-
Gross accounts receivable............................................... -- -- --
Reserves................................................................ -- -- --
---------- ----------- -----------
Receivable, net....................................................... -- -- --
Other current assets...................................................... 1 -- 1
---------- ----------- -----------
Total current assets.................................................. -- -- --
PROPERTY, PLANT AND EQUIPMENT:
Gross property............................................................ -- -- --
Accumulated depreciation.................................................. -- -- --
---------- ----------- -----------
Property, plant and equipment, net.................................... -- -- --
Other noncurrent assets................................................... -- -- --
---------- ----------- -----------
Total assets.......................................................... $ 1 $ -- $ 1
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts and notes payable................................................ $ -- $ -- $ --
Other current liabilities................................................. -- -- --
---------- ----------- -----------
Total current liabilities............................................. -- -- --
LONG-TERM DEBT, net of current portion...................................... -- -- --
CAPITAL AND DIRECT FINANCING LEASE
OBLIGATIONS, net of current portion........................................ -- -- --
OTHER LONG-TERM LIABILITIES................................................. -- -- --
STOCKHOLDERS' EQUITY:
Common stock.............................................................. 1 -- 1
Additional paid-in capital................................................ -- -- --
Retained earnings (deficit)............................................... -- -- --
---------- ----------- -----------
Total liabilities and stockholders' equity............................ $ 1 $ -- $ 1
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
128
<PAGE>
MEDFORD CLINIC NEW PC
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MEDFORD
MEDFORD CLINIC NEW
CLINIC NEW MEDFORD PC PRO
PC CLINIC ADJUSTMENTS FORMA
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $ -- $ 30,268 $ -- $ 30,268
Less-Provider Compensation and Benefits....................... -- 8,553 (1,721)(A) 6,832
---------- ---------- ----------- -----------
Net revenue less Provider Compensation and Benefits........... -- 21,715 1,721 23,436
Total operating expenses...................................... -- 21,893 (21,893)(B) --
Other (income) expenses....................................... -- 242 (242)(B) --
Management fee................................................ -- -- 23,436(C) 23,436
---------- ---------- ----------- -----------
Net income (loss) before income taxes......................... -- (420) 420 --
Income tax (benefit) expense.................................. -- (246) 246(D) --
---------- ---------- ----------- -----------
Net income (loss)............................................. $ -- $ (174) $ 174 $ --
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
YEAR ENDED DECEMBER 31, 1995
<CAPTION>
MEDFORD
MEDFORD CLINIC NEW
CLINIC NEW MEDFORD PC PRO
PC CLINIC ADJUSTMENTS FORMA
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.................................................. $ -- $ 38,966 $ -- $ 38,966
Less-Provider Compensation and Benefits....................... -- 11,239 (908)(A) 10,331
---------- ---------- ----------- -----------
Net revenue less Provider Compensation and Benefits........... -- 27,727 908 28,635
Total operating expenses...................................... -- 26,277 (26,277)(B) --
Other (income) expenses....................................... -- 390 (390)(B) --
Management fee................................................ -- -- 28,635(C) 28,635
---------- ---------- ----------- -----------
Net income (loss) before income taxes......................... -- 1,060 (1,060) --
Income tax (benefit) expense.................................. -- 408 (408)(D) --
---------- ---------- ----------- -----------
Net Income loss............................................... $ -- $ 652 $ (652) $ --
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
129
<PAGE>
THE NEW PCS
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The pro forma condensed balance sheet has been presented as if the proposed
reorganization transaction had taken place on September 30, 1996.
The pro forma condensed statements of operations have been presented as if
the proposed reorganization had taken place and that the proposed Management
Agreement was in effect throughout the periods presented. The historic operating
revenues and expenses of each of the three existing Companies have been
incorporated into the pro forma statements of operations to illustrate how the
historic operations of the Clinics would be impacted by the Merger transaction.
ADJUSTMENTS TO PRO FORMA BALANCE SHEET
Under accounting rules prescribed by the staff of the Securities and
Exchange Commission in SAB 48, when a company acquires assets from promoters and
shareholders in exchange for stock just prior to, or at the time of, its first
public offering, such assets should generally be recorded at the cost to each
such promoter or shareholder. Each of the three existing Companies is involved
as a promoter of the Merger and the related first-time public registration of
stock.
The initial capitalization of $1 is reflected in the New PCs financial
statements. The assets and liabilities to be transferred to the New PCs have no
carrying value on the books of the three existing Companies. In accordance with
the provisions of SAB 48, they will also have no carrying value on the books of
the new PCs. Accordingly, no adjustments have been reflected in the pro forma
balance sheets for the New PCs.
130
<PAGE>
THE NEW PCS
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
ADJUSTMENTS TO PRO FORMA STATEMENTS OF OPERATIONS
The unaudited condensed pro forma statements of operations reflect the
following adjustments:
(A) Adjusts the amount that would be available for Provider Compensation and
Benefits. The amount available for Provider Compensation and Benefits on a
pro forma basis is calculated at 84% of the aggregate of Net Revenues less
Manager's Expenses.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
HEALTHFIRST NEW PC
Net Revenues......................................................... 43,921 53,070
Manager's Expenses................................................... (33,273) (40,577)
10,648 12,493
84% 84%
------- -------
Provider Compensation and Benefits................................... 8,944 10,494
------- -------
------- -------
CORVALLIS CLINIC NEW PC
Net Revenues......................................................... 34,088 39,174
Manager's Expenses................................................... (25,768) (28,072)
8,320 11,102
84% 84%
------- -------
Provider Compensation and Benefits................................... 6,989 9,326
------- -------
------- -------
MEDFORD CLINIC NEW PC
Net Revenues......................................................... 30,268 38,966
Manager's Expenses................................................... (22,135) (26,667)
8,133 12,299
84% 84%
------- -------
Provider Compensation and Benefits................................... 6,832 10,331
------- -------
------- -------
</TABLE>
Historically HealthFirst, Medford Clinic and Corvallis Clinic recorded
Provider Compensation and Benefits expense in excess of amounts available
from current operating profits. In the case of HealthFirst, most of this
excess is related to costs associated with a bonus compensation plan which
is to be paid out over a period of eight years. Payments to date have been
funded from operations. The remaining obligation at the Effective Date will
be transferred to PPI. The excess compensation expense for Corvallis Clinic
of $2.1 million in 1995, was funded by bank borrowings, which will be
transferred to PPI at the Effective Time. The excess Provider Compensation
and Benefits expense for Medford Clinic of $174,000 for the nine months
ended September 30, 1996 was funded by operating cash flows. In the future,
the Management Agreement does not provide for, nor do the Companies intend
to pay, Provider Compensation and Benefits in excess of amounts generated
from operations on an annual basis.
(B) Eliminates the previously recorded operating expenses and other (income)
expense. Under the terms of the Management Agreement, these costs will be
incurred by PPI and reimbursed by the New PCs as Manager's Expenses.
No pro forma adjustments for the impact on the amounts available for
Provider Compensation and Benefits have been included for potential changes
in revenues or costs related to operations of the New PCs have been
reflected as they are not factually supportable at the present time.
131
<PAGE>
THE NEW PCS
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(C) Represents the management services expenses calculated under the terms of
the proposed New PC Management Agreement as applied to the historical
operating results.
<TABLE>
<CAPTION>
REIMBURSEMENT
OF MANAGER'S MANAGEMENT
EXPENSES FEE* TOTAL
-------------- ------------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
HEALTHFIRST NEW PC
1996 (nine months ended September 30)............................ $ 33,273 $ 1,704 $ 34,977
1995............................................................. 40,577 1,999 42,576
CORVALLIS CLINIC NEW PC
1996 (nine months ended September 30)............................ 25,768 1,331 27,099
1995............................................................. 28,072 1,776 29,848
MEDFORD CLINIC NEW PC
1996 (nine months ended September 30)............................ 22,135 1,301 23,436
1995............................................................. 26,667 1,968 28,635
</TABLE>
* 16% of New PC revenues less Manager's Expenses to be reimbursed by the New
PCs.
(D) Represents the elimination of historical income tax provisions (benefits as
the New PCs are expected to be operated on a break-even basis.
(E) Suburban was acquired by HealthFirst on February 1, 1996 in a purchase
transaction. Accordingly, Suburban's operating results subsequent to the
purchase date are included with HealthFirst. Suburban's revenues and
expenses prior to that date are shown in the Suburban column.
A reconciliation between the pro forma statements of operations and pro forma
results disclosed in Note 12 to the HealthFirst financial statements
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Net revenues less Provider
Compensation and Benefits--
Per pro forma statements of
operations:
HealthFirst..................................................... $ 25,337 $ 28,122
Suburban........................................................ 859 11,502
------- -------
Per Note 12....................................................... $ 26,196 $ 39,624
------- -------
------- -------
</TABLE>
132
<PAGE>
OPERATION, MANAGEMENT AND BUSINESS OF
HEALTHFIRST NEW PC FOLLOWING THE NEW PC DISTRIBUTION
DEVELOPMENT OF BUSINESS OF HEALTHFIRST NEW PC
It is anticipated that after consummation of the PC Reorganization
Transactions and the Merger, HealthFirst New PC will conduct its business
substantially as HealthFirst conducted its professional services business. For a
discussion of functions and governance of HealthFirst New PC and the other New
PC, see "The PC Reorganization Transactions and Related
Transactions--Characteristics of the New PCs." The number of employees of
HealthFirst New PC will be substantially smaller than the number of employees of
HealthFirst because non-provider employees will be employed by PPI. Management
of HealthFirst New PC anticipates the entity will employ 121 individuals.
LEGAL PROCEEDINGS
Management of HealthFirst New PC knows of no pending or contemplated legal
or governmental proceedings against HealthFirst New PC.
MANAGEMENT OF HEALTHFIRST NEW PC
The following table sets forth certain information about the persons who
will serve as directors and officers of HealthFirst New PC:
MANAGEMENT OF HEALTHFIRST NEW PC
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ------------------------------------------------- --- ------------------------------------ ------------------
<S> <C> <C> <C>
Russell A. Dow................................... 48 Chairman of the Board and Director September 18, 1996
Vern R. Williams................................. 42 Secretary and Director September 18, 1996
Matthew Shelley.................................. 43 President and Director September 18, 1996
Leigh C. Dolin................................... 50 Director September 18, 1996
Resa Hyzer....................................... 35 Director September 18, 1996
Malcolm L. McAninch.............................. 42 Director September 18, 1996
Alar Mirka....................................... 44 Director September 18, 1996
Gloria J. Myers.................................. 50 Director September 18, 1996
James C. Ritzenthaler............................ 46 Director September 18, 1996
John D. Teller................................... 40 Director September 18, 1996
Barbara K. Ferre................................. 45 Director September 18, 1996
</TABLE>
HealthFirst New PC has a Board of Directors consisting of 11 persons elected
for one-year terms and holding office until their respective successors are
elected and qualified.
Officers of HealthFirst New PC are appointed and serve at the discretion of
the HealthFirst New PC Board.
RUSSELL A. DOW, M.D. is a director and serves as Chairman of the Board of
HealthFirst New PC. Dr. Dow practices Obstetrics and Gynecology and has been
involved in medical leadership and governance for many years. He received his
medical degree from Tufts University School of Medicine in Boston, Massachusetts
in 1974. He is Board Certified in Obstetrics and Gynecology, having completed
his post-graduate training at the Oregon Health Sciences University. Dr. Dow is
active in community, state and regional health and medical policy issues.
MATTHEW SHELLEY, M.D. is the President and a director of HealthFirst New PC
and Chair of its Executive Committee. Dr. Shelley is Board Certified in
Pediatrics, he received his undergraduate education at the University of Oregon
in Eugene in 1983. He attended medical school and completed his residency at
Oregon Health Sciences University, in Portland. He was President of Suburban
Medical Clinic for one and a half years before its merger with Metropolitan
Clinic and previously served on Metropolitan Clinic's
133
<PAGE>
executive committee. Dr. Shelley is also on the board of the Good Health Plan of
Oregon and is a member of the American College of Physician Executives.
LEIGH C. DOLIN, M.D. is a director of HealthFirst New PC. Dr. Dolin received
his undergraduate degree at Columbia University in 1967 and attended medical
school at SUNY Downstate College of Medicine, graduating in 1971. He
subsequently completed an internship and first-year medicine residency at Kings
County Hospital, Brooklyn, New York. A second-year medicine residency followed
at Tucson Medical Center, Tucson, Arizona, which was completed in 1974. After
completing his medical training, Dr. Dolin served as a Major in the United
States Air Force for three years, and was based in Japan. Certified by the
American Board of Internal Medicine, Dr. Dolin has been very active in the
state's medical community. He is a Past President of the Oregon Medical
Association (OMA), and currently serves as chair of its legislative committee.
In addition to serving on HealthFirst's board, he also serves on the boards of
the Foundation of Medical Excellence, Oregon Health Foundation and Oregon Health
Policy Institute.
BARBARA K. FERRE, M.D. is a director of HealthFirst New PC. Dr. Ferre has
been in practice since 1983 after earning a bachelor's degree from Northwestern
University in 1974 and her medical degree from the University of Illinois,
Chicago in 1980. An internship and residency followed at Oregon Health Sciences
University in Portland, which was completed in 1983. Certified by the American
Board of Pediatrics, Dr. Ferre served on the Board of Metropolitan Clinic for a
number of years before its merger with Suburban Medical Clinic.
THERESA (RESA) HYZER, M.D. is a director of HealthFirst New PC. Dr. Hyzer
attended the University of Tennessee in Chattanooga, where she received a
Bachelor's degree in elementary education in 1983 and a Master of Education
degree in Special Education in 1985. She earned her medical degree from the
University of Louisville School of Medicine, Louisville, Kentucky, in 1990, and
completed her postgraduate training in pediatrics at Oregon Health Sciences
University, Portland, Oregon, in 1993. She is the co-chair of the Pediatrics
Department at HealthFirst Medical Group and was the Chair of Suburban Medical
Clinic's Pediatrics Department in 1994. In addition to serving on HealthFirst's
board of directors, she is the medical site director at HealthFirst's Powell
Valley's Office and a representative on the Clinical Quality Committee for the
Good Health Plan of Oregon.
MALCOLM L. MCANINCH, M.D. is a director of HealthFirst New PC. Dr. McAninch
has been in practice since 1985 and is Certified by the American Board of
Internal Medicine. He earned his Bachelor of Science degree from the University
of Puget Sound, Tacoma, Washington in 1977 and his Medical Degree from Jefferson
Medical College, Philadelphia, Pennsylvania in 1981. He subsequently completed
his internship and residency in internal medicine at Good Samaritan Hospital,
Portland, Oregon in 1985, where he was Chief Resident. Prior to serving on
HealthFirst's board of directors, he was Secretary of Metropolitan.
GLORIA J. MYERS, M.D. is a director of HealthFirst New PC. Dr. Myers earned
her Bachelor of Arts degree from Hunter College, New York in 1981. Dr. Myers
completed her medical education at Mount Sinai School of Medicine, New York, in
1985. She went on to serve a residency in internal medicine at Good Samaritan
Hospital in Portland in 1988. Dr. Myers, who is Certified by the American Board
of Internal Medicine, serves on HealthFirst's board of directors.
ALAR MIRKA, M.D., PH.D. is a director of HealthFirst New PC. Dr. Mirka
received his bachelor's degree from the University of Akron, Akron, Ohio, in
1973. He went on to complete a doctorate in neurophysiology at Oregon Health
Sciences University, Portland in 1979, where he also earned a medical degree in
1982. Dr. Mirka completed his residency at Good Samaritan Hospital, Portland,
Oregon, in 1985. In addition to being Chief Resident at Good Samaritan, he was a
CIDA Research Associate for the hospital's Department of Neuro-Otology at Good
Samaritan Hospital from 1986 to 1989. He was the 1987 recipient of the Good
Samaritan Hospital, Department of Medicine Teaching Award and the 1991
Resident's Internist of the Year Recipient. Dr. Mirka is Board Certified in
Internal Medicine. Dr. Mirka serves on HealthFirst's board of directors.
134
<PAGE>
JAMES C. RITZENTHALER, M.D. is a director of HealthFirst New PC. Dr.
Ritzenthaler attended undergraduate and medical school at the University of
Colorado, Boulder, Colorado. After receiving his medical degree in 1981, he
completed a residency at Good Samaritan Hospital in 1984. Board Certified in
Internal Medicine, Dr. Ritzenthaler previously served as Medical Director for
Metropolitan Clinic. Dr. Ritzenthaler has served on HealthFirst's board of
directors for the past two years.
JOHN D. TELLER, M.D. is a director of HelathFirst New PC. Dr. Teller earned
a bachelor's degree from Oregon State University, Corvallis, Oregon, in 1978 and
his medical degree from Oregon Health Sciences University, Portland, Oregon, in
1982. An internship followed in 1983 at Hennepin County Medical Center in
Minneapolis, Minnesota. He also served a residency at Lutheran Medical Center,
Brooklyn, N.Y. in 1985, where he was Chief Resident. Prior to joining
HealthFirst, Dr. Teller was a physician with Tualatin Medical Center. Board
Certified in Family Practice, he has been in practice since 1985 and serves on
HealthFirst's board of directors and HealthFirst's Executive Committee. In
addition, he serves as Treasurer of HealthFirst.
VERN R. WILLIAMS, M.D. is the Secretary and a director of HealthFirst New
PC. Dr. Williams earned his undergraduate degree from the University of Oregon,
Eugene in 1976 and attended graduate and medical school at the University of
Hawaii, receiving his medical degree in 1984. His postgraduate medical training
was completed at Good Samaritan Hospital, Portland, Oregon in 1988. Dr. Williams
is Certified by the American Board of Internal Medicine. In addition to serving
on HealthFirst's board of directors, Dr. Williams also serves on the Executive
Committee.
COMPENSATION OF DIRECTORS
HealthFirst New PC directors are entitled to receive compensation for
serving as directors, in an annual amount equal to $10,000 per director. Russell
M. Dow, M.D. will be compensated in an annual amount equal to $30,000 for
serving as Chairman of the Board of Directors. Vern Williams, M.D. and John
Teller, M.D. are directors and members of the Executive Committee and are
entitled to be compensated at the annual amount equal to $25,000 in connection
with their duties. In addition, directors may be reimbursed for reasonable and
actual out-of-pocket expenses incurred in connection with their duties as
directors.
COMPENSATION OF EXECUTIVE OFFICERS
HealthFirst New PC was incorporated on September 18, 1996, and has not
conducted any operations to date. Matthew Shelley, M.D. will be compensated at
an annual rate of $90,000 for his duties as President of HealthFirst New PC.
Officers may be reimbursed for reasonable and actual out-of-pocket expenses
incurred in connection with their duties as officers.
135
<PAGE>
The following table sets forth information regarding the number of shares of
capital stock the executive officers and directors of HealthFirst New PC hold in
HealthFirst and will hold in HealthFirst New PC after the PC Reorganization
Transactions and the Merger:
PRINCIPAL SHAREHOLDERS OF HEALTHFIRST NEW PC
<TABLE>
<CAPTION>
HEALTHFIRST HEALTHFIRST NEW PC
CLASS A COMMON STOCK
SHARES BENEFICIALLY
BENEFICIALLY PERCENTAGE OWNED PERCENTAGE
OWNED OUTSTANDING (PRO FORMA) OUTSTANDING
------------- -------------- ----------------------- -------------
<S> <C> <C> <C> <C>
HEALTHFIRST
Leigh C. Dolin, M.D.................................. 100 1.1%* 1 1.1%
Russell A. Dow, M.D.................................. 100 1.1% 1 1.1%
Barbara K. Ferre, M.D................................ 100 1.1% 1 1.1%
Resa L. Hyzer, M.D................................... 100 1.1% 1 1.1%
Malcolm L. McAninch, M.D............................. 100 1.1% 1 1.1%
Alar Mirka, M.D...................................... 100 1.1% 1 1.1%
Gloria J. Myers, M.D................................. 100 1.1% 1 1.1%
James C. Ritzenthaler, M.D........................... 100 1.1% 1 1.1%
Matthew M. Shelley, M.D.............................. 100 1.1% 1 1.1%
John Teller, M.D..................................... 100 1.1% 1 1.1%
Vern R. Williams, M.D................................ 100 1.1% 1 1.1%
--
----- ----- ------
All Officers and Directors of HealthFirst as a
Group............................................... 1,100 11.96% 11 11.9%
</TABLE>
- ------------------------
* Rounded to the nearest tenths.
INDEMNIFICATION AGREEMENTS
Pursuant to Article X of the HealthFirst New PC Restated Articles of
Incorporation, HealthFirst New PC is obligated to indemnify each of its
directors and officers that could require HealthFirst New PC, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors and officers.
OWNERSHIP OF SHARES OF HEALTHFIRST NEW PC
<TABLE>
<CAPTION>
NAME AMOUNT
AND ADDRESS AND NATURE
TITLE OF OF BENEFICIAL OF BENEFICIAL PERCENT
CLASS OWNER OWNERSHIP OF CLASS
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Common HealthFirst 92 Shares 100% of issued
Stock 10535 N.E. Glisan and outstanding
Portland, OR shares
97220
</TABLE>
136
<PAGE>
OPERATION, MANAGEMENT AND BUSINESS OF
CORVALLIS CLINIC NEW PC FOLLOWING THE NEW PC DISTRIBUTION
DEVELOPMENT OF BUSINESS OF CORVALLIS CLINIC NEW PC
It is anticipated that after consummation of the PC Reorganization
Transactions and the Merger, Corvallis Clinic New PC will conduct its business
substantially as Corvallis Clinic conducted its professional services business.
For a discussion of functions and governance of Corvallis Clinic New PC and the
other new PCs, see "The PC Reorganization Transactions and Related
Transactions-- Characteristics of the New PCs." The number of employees of
Corvallis Clinic New PC will be substantially smaller than the number of
employees of Corvallis Clinic because non-provider employees will be employed by
PPI. Management of Corvallis Clinic New PC anticipates the entity will employ 77
individuals.
LEGAL PROCEEDINGS
Management of Corvallis Clinic New PC knows of no pending or contemplated
legal governmental proceedings against Corvallis Clinic New PC.
MANAGEMENT OF CORVALLIS CLINIC NEW PC
The following table sets forth certain information about the persons who
will serve as directors and officers of Corvallis Clinic New PC:
MANAGEMENT OF CORVALLIS CLINIC NEW PC
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- --------------------------------- --- ------------------------------------------------ ----------------------
<S> <C> <C> <C>
David H. Cutsforth, Jr........... 49 President and Director September 18, 1996
John R. Ladd..................... 59 Vice President and Director September 18, 1996
Darrel D. Bibler................. 61 Secretary and Director September 18, 1996
Janice L. Frost.................. 44 Director September 18, 1996
Jess W. Hickinson................ 44 Director September 18, 1996
Christopher P. Swan.............. 46 Director September 18, 1996
</TABLE>
Corvallis Clinic New PC has a Board of Directors consisting of six persons
elected for three year terms and holding office until their respective
successors are elected and qualified.
Officers of Corvallis Clinic New PC are appointed and serve at the
discretion of the Corvallis Clinic New PC Board.
DAVID H. CUTSFORTH, JR., M.D. is the President and a director of Corvallis
Clinic New PC. He practiced as a Philomath Family Medicine physician before that
entity merged with Corvallis Clinic. Dr. Cutsforth is President and Chairman of
the Board of Corvallis Clinic. Dr. Cutsforth has been active in local and
statewide health forums. He served as a board director for Western Oregon IPA
from 1989-1993. He served as an original committee member in the formulation of
the Oregon Health Plan, a national model for Medicaid reform. Dr. Cutsforth
received his medical degree from the University of Oregon in 1973. He is Board
Certified in Family Medicine, having completed his residency training at the
University of Texas in Houston. Dr. Cutsforth has served in a variety of
management roles including chair of the Department of Family Medicine and Peer
Review Committee of Good Samaritan Hospital, Corvallis. He received a superior
service award from the U.S. Public Health Service in 1977 and was recognized as
America's Family Doctor of the Year in 1994.
JOHN R. LADD, M.D. is Vice President and a director of Corvallis Clinic New
PC. Dr. Ladd is a physician practicing in Rheumatology and Internal Medicine. He
received his medical degree from the University of
137
<PAGE>
Michigan Medical School, Ann Arbor, Michigan, in 1962. He is Board Certified by
the American Board of Internal Medicine (1968) and Rheumatology (1972). He
received his undergraduate degree from the University of Michigan, Ann Arbor,
Michigan.
DARREL D. BIBLER, M.D. is the Secretary and a director of Corvallis Clinic
New PC. Dr. Bibler is a physician practicing in General Surgery. He received his
medical degree from Harvard Medical School, Boston, Massachusetts, in 1961. He
is Board Certified by the American Board of Surgery (1969) and recertified in
1980. He received his undergraduate degree from Denison University, Granville,
Ohio, in 1957.
JANICE L. FROST, M.D. is a director of Corvallis Clinic New PC. Dr. Frost is
a physician practicing Cardiology and Internal Medicine. She received her
medical degree from the University of Washington, Seattle, Washington, in 1983.
She is Board Certified by the American Board of Internal Medicine (1986) and
Cardiovascular Diseases (1990). She received her undergraduate degree from
Pomona College, Claremont, California, in 1974. Dr. Frost serves on the
Compensation Committee and Finance Committee.
JESS W. HICKERSON, M.D. is a director of Corvallis Clinic New PC. Dr.
Hickerson is a physician practicing Obstetrics and Gynecology. He received his
medical degree from Oregon Health Sciences University, Portland, Oregon, in
1981. He is Board Certified by the American Board of Obstetrics and Gynecology
(1988). He received his undergraduate degree from Oregon State University,
Corvallis, Oregon in 1976. He is a member of the Compensation Committee.
CHRISTOPHER P. SWAN, M.D. is a director of Corvallis Clinic New PC. Dr. Swan
is a physician practicing Family Medicine. He received his medical degree from
the University of Oregon Health Sciences Center, Portland, Oregon, in 1977. He
is Board Certified by the American Board of Family Practice (1981). He received
his undergraduate degree from Linfield College McMinnville, Oregon, in 1972.
COMPENSATION OF DIRECTORS
Corvallis Clinic New PC directors are entitled to receive compensation for
serving as directors in an amount equal to 4 percent of adjusted shareholder
income for that year. The monthly compensation payments are based on projected
budget estimate. Settlement for differences, if any, will be made at end of such
year. However, David M. Cutsforth, M.D., will be entitled to receive
compensation in connection with his duties as President and director in an
amount equal to 8 percent of the average shareholder income. In addition,
directors may be reimbursed for reasonable and actual out-of-pocket expenses
incurred in connection with their duties as directors.
COMPENSATION OF EXECUTIVE OFFICERS
Corvallis Clinic New PC was incorporated on September 18, 1996, and has not
conducted any operations to date. As stated previously, David M. Cutsforth, M.D.
will be entitled to receive compensation in connection with his duties as
President in an amount equal to 8 percent of the average shareholder income. No
compensation will be provided to the officers of Corvallis Clinic New PC other
than reimbursements for reasonable and actual out-of-pocket expenses incurred in
connection with their duties as officers.
138
<PAGE>
The following table sets forth information regarding the number of shares of
capital stock the executive officers and directors of Corvallis Clinic New PC
hold in Corvallis Clinic and will hold in Corvallis Clinic New PC after the PC
Reorganization Transactions and the Merger:
PRINCIPAL SHAREHOLDERS OF CORVALLIS CLINIC NEW PC
<TABLE>
<CAPTION>
CORVALLIS CORVALLIS CORVALLIS
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT BENEFICIALLY
OWNED OUTSTANDING OWNED OUTSTANDING OWNED
----------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
CORVALLIS CLINIC
Janice L. Frost, M.D................ 1 1.6% 100 0.8% 150
Jess W. Hickerson, M.D.............. 1 1.6% 117 1.0% 190
Christopher P. Swan, M.D............ 1 1.6% 100 0.8% 50
David H. Cutsforth, Jr., M.D........ 1 1.6% 100 0.8% 50
John R. Ladd, M.D................... 1 1.6% 235 2.0% 190
Darrel D. Bibler, M.D............... 1 1.6% 239 2.0% 190
-
-
--- --- --- ---
--- --- --- ---
All Officers and Directors of
Corvallis Clinic as a Group........ 6 9.4% 891 7.4% 820
<CAPTION>
CORVALLIS CLINIC
NEW PC
COMMON STOCK
BENEFICIALLY
PERCENT OWNED PERCENT
OUTSTANDING (PRO FORMA) OUTSTANDING
--------------- ---------------- -------------
<S> <C> <C> <C>
CORVALLIS CLINIC
Janice L. Frost, M.D................ 1.9%* 1 1.6*
Jess W. Hickerson, M.D.............. 2.4% 1 1.6
Christopher P. Swan, M.D............ 0.6% 1 1.6
David H. Cutsforth, Jr., M.D........ 0.6% 1 1.6
John R. Ladd, M.D................... 2.4% 1 1.6
Darrel D. Bibler, M.D............... 2.4% 1 1.6
----- --- -----
----- --- -----
All Officers and Directors of
Corvallis Clinic as a Group........ 10.4% 6 9.4%
</TABLE>
- ------------------------------
* Rounded to the nearest tenths.
INDEMNIFICATION AGREEMENTS
Pursuant to Article X of the Corvallis Clinic New PC Restated Articles of
Incorporation, Corvallis Clinic New PC is obligated to indemnify each of its
directors and officers that could require Corvallis Clinic New PC, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors and officers.
OWNERSHIP OF SHARES OF CORVALLIS CLINIC NEW PC
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
NAME AND ADDRESS OF
OF BENEFICIAL BENEFICIAL
TITLE OF CLASS OWNER OWNERSHIP PERCENT OF CLASS
- ----------------- ----------------------- ----------- ------------------------------------
<S> <C> <C> <C>
Common Stock Corvallis Clinic 64 shares 100% of issued and outstanding
444 NW Elks Drive shares
Corvallis, OR 97330
</TABLE>
139
<PAGE>
OPERATION, MANAGEMENT AND BUSINESS OF
MEDFORD CLINIC NEW PC FOLLOWING THE NEW PC DISTRIBUTION
DEVELOPMENT OF BUSINESS OF MEDFORD CLINIC NEW PC
It is anticipated that after consummation of the Reorganization Transactions
and the Merger, Medford Clinic New PC will conduct its business substantially as
Medford Clinic conducted its professional services. For a discussion of
functions and governance of Medford Clinic New PC and the other New PC's, see
"The PC Reorganization Transactions and Related Transactions--Characteristics of
the New PCs." The number of employees of Medford Clinic New PC will be
substantially smaller than the number of employees of Medford Clinic because
non-provider employees will be employed by PPI. Management of Medford Clinic New
PC anticipates the entity will employ 78 individuals.
LEGAL PROCEEDINGS
Management of Medford Clinic New PC knows of no pending or contemplated
legal or governmental proceedings against Medford Clinic New PC.
MANAGEMENT OF MEDFORD CLINIC NEW PC
The following table sets forth certain information about the persons who
will serve as directors and officers of Medford Clinic New PC:
MANAGEMENT OF MEDFORD CLINIC NEW PC
<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- -------------------------------------------------------- ----------- ------------------------- ----------------------
<S> <C> <C> <C>
Stephen J. Schnugg...................................... 47 President and Director September 18, 1996
Bruce E. Van Zee........................................ 51 Director September 18, 1996
Bruce E. Johnson........................................ 55 Director September 18, 1996
John A. Schwartz........................................ 44 Director September 18, 1996
Daniel R. Brandenberg................................... 42 Director September 18, 1996
Daniel M. Wayman........................................ 41 Director September 18, 1996
Jon D. Ness............................................. 40 Secretary September 18, 1996
Vicki S. Wagner......................................... 43 Treasurer September 18, 1996
</TABLE>
Medford Clinic New PC has a Board of Directors consisting of six persons
elected for one year terms and hold office until their respective successors are
elected and qualified.
Officers of Medford Clinic New PC are appointed and serve at the discretion
of the Medford Clinic New PC Board.
STEPHEN J. SCHNUGG, M.D. is the President and a director of Medford Clinic
New PC. He received a bachelor's degree at the University of California,
Berkeley (1971) and his medical degree at UCLA School of Medicine (1975). He
served his residency in Internal Medicine at and received a fellowship in
Cardiology from Wadsworth VA Hospital. Prior to joining Medford Clinic he was
with Cabrillo Cardiology Medical Group, Inc. in Oxnard, CA. Dr. Schnugg is Board
Certified by the Board of Internal Medicine in Internal Medicine (1980) and the
Board of Internal Medicine in Cardiovascular Diseases (1981). Dr. Schnugg has
been Chairman of Department of Medicine in Oxnard, Chairman of the Ethics
Committee and Director of the Coronary Care Unit at St. John's Regional Medical
Center in Oxnard, California. He is a Fellow of the American College of
Cardiology (1981).
BRUCE E. VAN ZEE, M.D. is a director of Medford Clinic New PC and a
practicing physician of Medford Clinic who has spent substantial time and energy
to achieve physician involvement in the governance and management of innovative
health care organizations. He received his medical degree magna cum laude at the
University of Oregon in 1970. He is Board Certified in Internal Medicine and
Nephrology, having completed his post graduate education at the University of
Rochester. Dr. Van Zee has served in a variety
140
<PAGE>
of medical management roles which include chair of the department of medicine
and president of the medical society in his community. He has received advanced
post graduate training in physician management issues and in biomedical ethics.
DANIEL R. BRANDENBURG, M.D. is a director of Medford Clinic New PC. He
received a bachelor's degree in 1976 from Lewis and Clark College and in 1980 a
medical degree from Oregon Health Sciences University. Dr. Brandenburg completed
his residency in Internal Medicine at Providence Medical Center from 1981 to
1983. He is Board Certified by the National Board of Medical Examiners and the
American Board of Internal Medicine. Prior to joining Medford Clinic he was a
partner with North Coast Internal Medicine in Eureka, CA. Dr. Brandenburg is a
member of the American College of Physicians and the Jackson County Medical
Association. He was the 1986 recipient of the "Service with Love Award" from the
St. Joseph Hospital Staff in Eureka, CA. Dr. Brandenburg is the author of "The
Intravenous Marijuana Syndrome" Western Journal of Medicine (July 1986).
BRUCE E. JOHNSON, M.D. received a bachelor's degree from Charleton College
in 1963 and medical degree from the University of Nebraska College of Medicine
in 1967. Dr. Johnson performed his family practice residency at San Bernadino
County Hospital in San Bernadino, California. He is Board Certified in family
practice. Prior to joining Medford Clinic, Dr. Johnson was in private practice
and was a partner with Southern Oregon Family Practice Group. Dr. Johnson
presently serves on the Ashland Community Hospital Board of Directors, the
Ashland Community Hospital Foundation, and is on the Executive Committee for
Jackson County Medical Society. Previously, he was a director of the Rogue
Valley Physicians Service, Health Masters of Oregon, Oregon Heart Association
and Prime Care (Southern Oregon Independent Physicians Association). He was past
president of the Jackson County Medical Society as well as past president of
Ashland Community Hospital Medical Staff. Presently, he is a member of the
American Medical Association, the American Academy of Family Practice, the
American Heart Association, the American Geriatrics Society, the Oregon Medical
Association, the Oregon Academy of Family Practice, the Jackson County Medical
Society and the Jackson County Academy of Family Practice.
JOHN A. SCHWARTZ, M.D., F.A.C.S. is a director of Medford Clinic New PC. He
received a bachelor's degree from Xavier University and his medical degree in
1978 from the University of Cincinnati College of Medicine. He served his
residency in General Surgery at the University of Illinois, West Side Virginia,
and Cook County Hospitals and a fellowship in Vascular Surgery at the University
of North Carolina Memorial Hospital George Johnson, Jr., M.D., Chief (1984-86).
He is Board Certified by the American Board of Surgery (1985), with Added
Qualifications in General Vascular Surgery (1988) and Added Qualifications in
Surgical Critical Care (1989). He was awarded the Peter B. Samuels Essay Award
from the Society for Clinical Vascular Surgery in 1986 and is a Representative
of the Oregon Chapter for the American College of Surgeons--Young Surgeons. He
currently serves as the Attending Surgeon (General and Vascular Surgery) for
Ashland Community Hospital, Providence Hospital and Rogue Valley Medical Center.
Dr. Schwartz also serves as a director with the Vascular Laboratory Medford
Clinic and is a member, Intensive Care Committee of the Providence Hospital and
Rogue Valley Medical Center.
DANIEL M. WAYMAN, M.D. is a director of Medford Clinic New PC. He received
his bachelor's degree from the University of California at Davis (1979) and his
medical degree from the University of Nevada in Reno, Nevada (1986). He served
his residency in surgery at the University of Nevada in 1986-1987. He was a
resident in Surgery at Kaiser San Francisco in San Francisco, California
(1987-1988) as well as a resident in Otolaryngology--Head and Neck Surgery at
Kaiser Oakland in California. Dr. Wayman was previously the supervising
paramedic in Reno, Nevada (1981-1982) and Staff Emergency Room Physician at
Kaiser Vallejo in Vallejo, California (1988-1991). He is a member of Alpha Omega
Alpha Honor Society, the American Academy of Facial Plastics and Reconstructive
Surgery, the American Academy of Otolaryngology--Head and Neck Surgery and the
American Medical Association. He is Board Certified in general surgery and
otolaryngology. He co-authored "THE AUDIOLOGIC MANIFESTATIONS OF RAMSAY HUNT
SYNDROME", The Journal of Laryngology and Otology (February 1990).
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<PAGE>
JON. D. NESS is the Secretary of Medford Clinic New PC. He also holds the
administrative position of chief executive officer of Medford Clinic New PC.
Before employment by Medford Clinic in 1995, he acted as Vice President of
Deaconess-Billings Clinic Health System. Mr. Ness is a member of MGMA and a
member of the certified medical practice executive program. Mr. Ness received
his Master of Arts in Urban Planning from North Dakota State University in 1984.
He acted as a corporate planner of St. Luke's Hospital, a 250-physician
multi-specialty clinic affiliated with Fargo Clinic from 1986 to 1989.
VICKI S. WAGNER is the Treasurer of Medford Clinic New PC. Ms. Wagner served
as Chief Financial Officer for Medford Clinic beginning October, 1994 and
Controller from 1993. Previously, Ms. Wagner worked for a defense electronics
manufacturer serving as the Director of Accounting and other various roles in
operations. From 1980 to 1985 Ms. Wagner served as Corporate Manager of
Financial Reporting for a publicly-held company in the entertainment industry.
From 1978 to 1980, she was an auditor with KPMG Peat Marwick in Los Angeles and
Miami. Ms. Wagner holds a bachelor's degree from California State University,
Northridge and an MBA from Pepperdine University in Malibu, California. In
addition, Ms. Wagner is a Certified Public Accountant in California, Florida and
Oregon. She is a member of the American Institute of Certified Public
Accountants and the Healthcare Financial Management Association.
COMPENSATION OF DIRECTORS
Medford Clinic New PC directors are entitled to receive compensation for
serving as directors in an amount equal to $500 per month. Stephen J. Schnugg,
M.D. will be entitled to receive $1,500 per month for serving as a director and
President of Medford Clinic New PC. In addition, directors may be reimbursed for
reasonable and actual out-of-pocket expenses incurred in connection with their
duties as directors.
COMPENSATION OF EXECUTIVE OFFICERS
Medford Clinic New PC was incorporated on September 18, 1996, and has not
conducted any operations to date. Other than the compensation provided to Dr.
Schnugg, in his capacity as President, no compensation will be provided to any
executive officer of Medford Clinic New PC. Reimbursements for reasonable and
actual out-of-pocket expenses incurred in connection with their duties as
officers will be made.
The following table sets forth information regarding the number of shares of
capital stock the executive officers and directors of Medford Clinic New PC hold
in Medford Clinic and will hold in Medford Clinic New PC after the PC
Reorganization Transactions and the Merger:
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<PAGE>
PRINCIPAL SHAREHOLDERS OF MEDFORD CLINIC NEW PC
<TABLE>
<CAPTION>
MEDFORD MEDFORD CLINIC NEW
COMMON PC COMMON STOCK
SHARES BENEFICIALLY
BENEFICIALLY PERCENT OWNED PERCENT
OWNED OUTSTANDING (PRO FORMA) OUTSTANDING
----------------- --------------- ------------------- -------------
<S> <C> <C> <C> <C>
MEDFORD CLINIC
Bruce E. Van Zee, M.D................................... 1 1.7%* 1 1.7%*
Steven J. Schnugg, M.D.................................. 1 1.7% 1 1.7%
Bruce E. Johnson, M.D................................... 1 1.7% 1 1.7%
Daniel R. Brandenburg, M.D.............................. 1 1.7% 1 1.7%
John A. Schwartz, M.D................................... 1 1.7% 1 1.7%
Daniel M. Wayman, M.D................................... 1 1.7% 1 1.7%
- -
--- ------
ALL OFFICERS AND DIRECTORS OF MEDFORD CLINIC AS A
GROUP.................................................. 6 10.3% 6 10.3%
</TABLE>
- ------------------------
* Rounded off to the nearest tenths.
INDEMNIFICATION AGREEMENTS
Pursuant to Article X of the Medford Clinic New PC Restated Articles of
Incorporation, Medford Clinic New PC is obligated to indemnify each of its
directors and officers that could require Medford Clinic New PC, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors and officers.
OWNERSHIP OF SHARES OF MEDFORD CLINIC NEW PC
<TABLE>
<CAPTION>
NAME AMOUNT
AND ADDRESS AND NATURE
TITLE OF OF BENEFICIAL OF BENEFICIAL PERCENT
CLASS OWNER OWNERSHIP OF CLASS
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Common Medford Clinic 58 shares 100% of issued
Stock 555 Black Oak Drive and outstanding
Medford, OR shares
97504
</TABLE>
143
<PAGE>
BUSINESS OF HEALTHFIRST
GENERAL
HealthFirst, an Oregon professional corporation founded in 1909, is a
multi-specialty group that provides a broad array of medical services in several
facilities in the Portland area. Medical specialties offered by HealthFirst
include critical care, dermatology, family practice, gastroenterology,
gynecology, hematology, infectious disease, internal medicine, oncology,
obstetrics, pediatrics, podiatry, rheumatology and surgery. In addition,
HealthFirst offers certain office-based ancillary services, such as basic
clinical laboratory and radiology services. HealthFirst currently operates in 11
practice sites located in Portland, Oregon and surrounding communities
(including Beaverton, Gresham, Lake Oswego, Tualatin and Tigard, Oregon). As of
November 1, 1996, HealthFirst employed 121 full-time and part-time physicians,
of which 91 are primary care physicians (internal medicine, family practice and
pediatrics) and 30 are specialists. HealthFirst's patient population consists in
large part of enrollees of HMOs, PPOs and other health plans, but HealthFirst
also provides a significant amount of services to patients covered by other
payors such as federal and state programs, self-insured employers and
traditional indemnity insurance payors.
Since its formation HealthFirst has been the successor to a number of
individual physician practices and medical groups; in particular, it has
acquired several medical groups over the past five years. HealthFirst has grown,
in part, by acquiring or affiliating with medical groups that complement
HealthFirst's market strategies. The direct predecessor of HealthFirst is
Metropolitan Clinic, P.C. ("Metropolitan"). HealthFirst changed its name from
Metropolitan Clinic, P.C. in February 1996 as a result of the business
combination of Metropolitan with another medical group, Suburban Medical Clinic,
Inc. ("Suburban"). In connection with the transaction, Metropolitan was renamed
"HealthFirst Medical Group, P.C.," Suburban was reorganized as "HealthFirst
Management Services, Inc.," an Oregon business corporation ("HealthFirst
Management"), and HealthFirst acquired all of the issued and outstanding shares
of HealthFirst Management. Also in connection with the transaction, all of the
physicians who were previously shareholders of Suburban became shareholders of
HealthFirst. All shareholders of Suburban received HealthFirst Series 2 Shares
in exchange for their Suburban shares.
HealthFirst owns all of the issued and outstanding shares of stock in
HealthFirst Management. HealthFirst Management currently provides various
management services to HealthFirst pursuant to a written Management Agreement.
Under such agreement, HealthFirst Management manages HealthFirst's agreements
and relationships with health plans, other payors and providers and HealthFirst
agrees to provide the necessary medical services under such agreements. The
current term of such agreement expires December 31, 1996. Such agreement will be
terminated in connection with the Merger. It is anticipated that HealthFirst
Management may be dissolved in connection with or after the Merger.
HealthFirst Properties, L.L.C., an Oregon limited liability company
("HealthFirst Properties"), was formed in January 1996 to acquire all of the
real property then owned by HealthFirst. Many of the current shareholders of
HealthFirst are members of HealthFirst Properties. Each member of HealthFirst
Properties purchased at least 500 units in such entity at a price of $20 per
unit. All funds received by HealthFirst Properties from the sale of the units,
net of costs, were used as a down payment for the purchase of such properties.
HealthFirst and HealthFirst Properties entered into a Land Sale Contract, dated
May 1, 1996, pursuant to which HealthFirst Properties holds equitable title to
three medical office buildings. Under the terms of the Land Sale Contract,
however, HealthFirst will retain legal title to the properties until a 20-year
installment note is paid in full by HealthFirst Properties. During the term of
such agreement, HealthFirst leases back office space from HealthFirst
Properties.
In May 1995, HealthFirst entered into a strategic alliance in the form of an
Oregon business corporation named Northwest Physician Alliance, Inc. (the
"Alliance"). The equity owners of the Alliance are Blue Cross/Blue Shield
("BCBS") of Oregon, Legacy Health Systems ("Legacy"), Portland Adventist Medical
Center, HealthFirst and two other Portland-area medical groups. The Alliance
contemplates that Legacy, HealthFirst and the other participating medical groups
will provide or arrange for substantially all
144
<PAGE>
of the professional, institutional and ancillary health care services required
by enrollees of BCBS' prepaid health plans in a defined service area.
The Alliance is intended to collaboratively manage "Alliance health plans,"
defined as all current and future HMO and HMO-type health plans offered by HMO
Oregon or Health Maintenance of Oregon, and all current and future managed care
plans offered by BCBS in which Legacy serves as the strategic institutional
health care provider. The Alliance service area includes Multnomah, Clackamas,
Washington, Yamhill, Columbia and North Marion counties in Oregon and Washington
State's Clark County.
In connection with the Alliance, HealthFirst also became a member of an
entity called Northwest Group Practices' Association, L.L.C., an Oregon limited
liability company ("NGPA"). NGPA is owned by three medical groups and was formed
to provide management services to the Alliance.
STRATEGY
HealthFirst's strategy is to provide high-quality, cost-effective medical
care in an expanding geographic area. HealthFirst's multi-specialty physician
clinics are designed to meet the medical needs of certain markets within the
Portland area. HealthFirst's strategy also involves affiliating with primary
care providers and physicians with specialties which are needed by HealthFirst.
Over the past five years, HealthFirst's strategy has involved increasing its
geographic service area to strengthen its position with managed care providers
and being a founding member of the Alliance with other local providers and BCBS.
HealthFirst believes, however, that its attractiveness to managed care payors
would increase if it served a wider geographic area rather than a larger
percentage of Portland-area managed care enrollees. Consequently, HealthFirst
has sought its current partners for the Merger described herein.
HealthFirst's operational goals for 1996 include the following: (1) remodel
the Powell Valley facility, the Lake Oswego facility and the Northwest Portland
facility to accommodate additional providers; (2) expand the office space in the
Albers Mill building; (3) expand technological capabilities, including expansion
of the telephone system and the computer system; (4) plan the implementation of
HealthFirst's electronic medical records system; and (5) achieve specified
retained earnings targets as a percentage of net revenues.
GOVERNMENT REGULATION
HealthFirst is subject to federal and state laws regulating the
relationships among providers of health care services, physicians and other
clinicians. These laws include the fraud and abuse provisions of the Medicare
and Medicaid statutes, which prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for the recommending, leasing, arranging, ordering or
purchasing of Medicare or Medicaid covered services. Other laws impose
significant penalties for false or improper billings for physician services and
impose restrictions on physician referrals for designated health services
reimbursable under the Medicare and Medicaid programs to entities with which
they have financial relationships. See "Physician Practice Management
Industry--Government Regulation". While HealthFirst believes it is in material
compliance with applicable laws and regulations, there is no assurance that
HealthFirst's present or past operations will not be subjected to scrutiny or
legal challenge.
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<PAGE>
SERVICES PROVIDED
HealthFirst provides the following professional services:
<TABLE>
<S> <C>
Critical Care Internal Medicine
Dermatology Obstetrics
Family Practice Oncology
Gastroenterology Pediatrics
Gynecology Podiatry
Hematology Rheumatology
Infectious Disease Surgery
</TABLE>
Under capitated and other prepaid contracts, HealthFirst provides or
arranges for all physician services and receives a fixed monthly capitation
payment (or similar prepayment) from health plans for each member who chooses a
HealthFirst physician as his or her primary care physician. HealthFirst serves
capitated patients through a number of health plans, including those operated by
HMO Oregon, PacifiCare, Providence Health Plans and others, including carriers
of Medicare-risk products and Oregon Health Plan. HealthFirst accepts assignment
from Medicare as full compensation for services provided to Medicare patients,
except for applicable deductibles and copayments. Other HealthFirst fee
arrangements include (a) contracts with providers based on fee schedules
(including Oregon Health Plan), (b) affiliations with certain PPOs and employers
which pay based on fee schedules or a specified percentage of ordinary and
customary charges of HealthFirst, and (c) fee-for-service payments from a small
percentage of patients and traditional indemnity insurers.
Most of HealthFirst's patients are covered under either commercial or senior
prepaid health plans. Enrollment is categorized as "commercial" for enrollees
under the age of 65 whose health coverage is generally sponsored by employees or
"senior" for retired enrollees over the age of 65 who are covered by Medicare.
Higher capitation rates are typically received for senior patients because their
medical needs are generally greater and, consequently, the cost of covered care
for such patients is higher. To the extent that enrollees require more care than
is anticipated or require supplemental medical care which is not otherwise
reimbursed by the health plans or other payors, aggregate capitation payments
may be insufficient to cover the costs associated with the treatment of
enrollees. If such revenue is insufficient, HealthFirst maintains stop-loss
coverage which mitigates the effect of occasional high utilization of health
care services.
Generally, HealthFirst's contracts with health plans and other payors come
up for renewal each year. Managed care contracting has become very competitive
and reimbursement schedules are being reduced to reimbursement levels at or
slightly above the amounts paid by Medicare. If such contracts are not renewed
or replaced by other programs that provide a large volume of business,
HealthFirst's revenues and profits could be adversely affected. HealthFirst's
management expects that its substantial payors will elect to renew their
contracts, but no assurances can be given in this regard.
In 1995, $14,817,480 (or approximately 39.4%) of HealthFirst net patient
revenues came from capitated (prepaid) arrangements; and $22,834,493 (or
approximately 60.6%) of net revenues derived from PPOs, other contractual
relationships, individuals or private insurance carriers (fee-for-service). In
1994, $13,463,161 (or approximately 41.7%) of HealthFirst net patient revenues
came from capitated (prepaid) arrangements; $18,813,260 (or approximately 58.3%)
of net revenues derived from PPOs, other contractual relationships, individuals
or private insurance carriers (fee-for-service).
Medically necessary services provided to participants in the federal
Medicare program are reimbursed only: (i) if such services have been approved
for reimbursement by HCFA, and (ii) in the amount authorized on a geographical
basis by Medicare intermediaries (contracted insurance companies). The services
currently provided by HealthFirst have been approved for reimbursement by HCFA.
There are significant differences in Medicare reimbursement rates for services
in different locations. Generally, Medicare reimbursement rates are lower than
the reimbursement rates paid by third-party insurance carriers.
146
<PAGE>
ENROLLEES OF AT-RISK HEALTH PLANS UNDER CONTRACT WITH
HEALTHFIRST OR HEALTHFIRST MANAGEMENT
(AS OF SEPTEMBER 30, 1996)
<TABLE>
<CAPTION>
ENROLLED % OF TOTAL
----------- -----------
<S> <C> <C>
Commercial.............................................................. 48,408 72.9
Medicaid................................................................ 6,203 9.4
Medicare................................................................ 11,753 17.7
----------- -----
TOTAL................................................................... 66,364 100.0%
----------- -----
----------- -----
</TABLE>
MARKETING AND DEVELOPMENT
HealthFirst markets its services by offering a wide variety of locations (11
in the Portland Metropolitan Area) and choice of 145 physicians in 11 medical
and surgical specialties. HealthFirst also offers two geographically dispersed
urgent care centers which are open on weekends and evenings.
In 1995, HealthFirst became fully accredited by the Medical Quality
Commission ("MQC") to become one of three physician practice groups in Oregon
and approximately 25 physician practice groups in the United States to be so
accredited. The accreditation process reviews 150 quality and service measures.
HealthFirst regularly measures patient satisfaction and has comprehensive
quality improvement programs.
HealthFirst offers its patients a variety of educational programs, including
programs on diet, diabetes, and hypertension, supported by both classes and
written materials.
A senior executive of HealthFirst is designated to seek and negotiate
managed care contracts as well as to further develop programs such as
occupational medicine. HealthFirst regularly evaluates adding new services as
well as providers in new specialties.
COMPETITION
The Portland, Oregon area is a highly competitive market for physician
services. Primary competitors of HealthFirst include integrated medical groups
such as MedPartners, Cascade Medical Group, Providence Medical Group, The
Portland Clinic, Portland Adventist Medical Group and others. Competitors also
include hospital systems which employ primary care physicians, IPAs, staff model
HMOs (such as Kaiser) and academic medical centers. In light of its size,
however, HealthFirst is a significant health care provider in its relevant
market. HealthFirst competes for contracts with certain national provider
entities (such as MedPartners) and many regional and local providers of
physician management services. Although the bases of competition may vary,
competition is generally based on cost and quality of care.
In terms of physician practice management companies, only two, MedPartners
and AORI have a presence in HealthFirst's service area. Both of these publicly
traded PPMs have holdings in the Portland, Oregon market. MedPartners operates a
growing multi-specialty group practice of approximately 70 physicians in the
Portland market. MedPartners has been an aggressive suitor of groups of
physicians in the Portland market, and recently acquired a group of OB/Gyn
physicians who might have joined HealthFirst. AORI has during the past several
years purchased two high-profile oncology providers in the Portland market.
These practices are in direct competition with HealthFirst's oncology practice.
Further, PhyCor, another publicly traded PPM, is attempting to enter the PPM
market in and around Portland.
EMPLOYEES
PROVIDER EMPLOYEES.
As of January 2, 1997, HealthFirst had 97 full-time and 24 part-time
physician employees. HealthFirst physicians typically initially sign one-year
associate employment contracts. Such contracts offer the physicians a specified
base salary, a signing bonus, and eligibility for an incentive bonus. The
physicians are
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<PAGE>
also eligible to receive benefits such as health, dental, life, and professional
liability insurance, paid time off, and an allowance for continuing medical
education and other professional expenses. HealthFirst shareholder physicians
vote on whether to offer shares to an associate physician after two years of
service as an associate physician. In order for an associate physician to become
a shareholder of HealthFirst, such physician must sign a new shareholder
employment agreement. HealthFirst physicians currently are not subject to a
covenant not to compete with medical services provided by HealthFirst.
As of January 2, 1997, there were 14 non-physician providers under contract
with HealthFirst. None have covenants not to compete. Shareholder contracts for
eligible non-physician employees generally are similar to the associate version
except for compensation and certain other provisions.
NON-PROVIDER EMPLOYEES.
As of January 2, 1997, HealthFirst had 577 full-time and 57 part-time
non-provider employees. Of the non-physician clinical and administrative support
personnel, 429 were full-time employees and 53 were part-time employees. The
remainder were corporate personnel, consisting of 148 full-time employees and
three part-time employees. None of HealthFirst's employees are represented by a
labor union. Management believes its employee relations to be satisfactory.
INSURANCE
The business of HealthFirst entails an inherent risk of claims of provider
professional liability. To protect its overall operations from such potential
liabilities, HealthFirst maintains professional liability insurance and general
liability insurance on a claims-made basis, with policy coverage of $5 million
per claim, and no annual aggregate maximum benefit, for claims made against
HealthFirst and its employees, except that the claims made professional
liability insurance policy maintained by the former physician-employees of
Suburban had coverage limits of $2 million per claim and $4 million aggregate
maximum benefit. HealthFirst also carries workers' compensation insurance and
maintains multiperil liability, fiduciary liability, employee dishonesty,
professional liability, general liability, excess professional liability and
director's and officers' insurance, with coverage limits HealthFirst believes to
be customary and reasonable for a business of its kind. Management does not
believe the related exposure is significant; however, there can be no assurance
that a future claim will not exceed the limits of available insurance coverage
or that such coverage will continue to be available.
PROPERTIES AND FACILITIES
HealthFirst conducts its operations out of offices located in locations in
the greater Portland area, identified as follows: Albers Mill, Broadway,
Gateway, Gresham, Hollywood, Northwest, Lake Oswego, Powell Valley, Tualatin,
Tigard, Beaverton and Wilshire. The administrative headquarters of HealthFirst
are located in Portland in the Gateway building, with certain administrative
functions located in the Albers Mill and other locations. HealthFirst and
HealthFirst Properties entered into a sale-leaseback transaction pursuant to a
Land Sale Contract, dated May 1, 1996, pursuant to which HealthFirst Properties
obtained equitable title to three medical office buildings (the Broadway,
Beaverton and Tualatin buildings) and leased such properties back to
HealthFirst. Under the terms of the Land Sale Contract, however, HealthFirst
will retain legal title to the properties until a 20-year installment note is
paid in full by HealthFirst Properties. HealthFirst leases each of its other
locations.
INFORMATION SYSTEMS
HealthFirst has developed and maintains integrated information systems to
support its growth and acquisition plans. HealthFirst's overall systems design
is open, modular and flexible. HealthFirst believes that it has configured its
systems to give physicians efficient and rapid access to complex clinical data.
HealthFirst is committed to the development of integrated and comprehensive
information systems. The
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current capabilities include the practice management functions of registration,
scheduling and appointments, electronic claims submission and remittance.
Managed care functions include referrals, eligibility, claims payment and
reporting.
Extensive efforts are underway to prepare for the implementation of an
electronic medical records system and a lab information system.
Effective and efficient access to key clinical patient data is critical in
improving cost and quality outcomes as HealthFirst enters into more capitation
contracts. HealthFirst attempts to utilize its existing information systems to
improve productivity, manage complex reimbursement procedures, measure patient
care satisfaction and outcomes of care, and integrate information from various
sources. These systems allow HealthFirst to analyze clinical and cost data so
that it is able to determine thresholds of profitability under various
capitation arrangements.
LEGAL PROCEEDINGS
HealthFirst is engaged in the defense of lawsuits arising in the ordinary
course and conduct of its business (including cases naming Suburban or
Metropolitan a defendant). These proceedings have all arisen out of the ordinary
course of its business and HealthFirst believes that none of these proceedings
will have a material adverse effect on HealthFirst.
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DESCRIPTION OF CAPITAL STOCK OF HEALTHFIRST
The authorized capital stock of HealthFirst as of January 2, 1997 consists
of 1,400,000 shares of Class A Common Voting Shares, no par value, of which
800,000 shares are Series 1 Class A Shares ("HealthFirst Series 1 Shares"),
200,000 shares are Series 2 Class A Shares ("HealthFirst Series 2 Shares"),
200,000 shares are Series 3 Class A Shares, 100,000 shares are Series 4 Class A
Shares and 100,000 shares are Series 5 Class A Shares. As of January 2, 1997
there are issued and outstanding 7,000 HealthFirst Series 1 Shares and 2,200
HealthFirst Series 2 Shares. All of the outstanding HealthFirst Series 1 Shares
and HealthFirst Series 2 Shares have been validly issued and are fully paid and
nonassessable. It is anticipated that HealthFirst will grant, prior to the
Effective Time, New Options exercisable for up to 1,704.5 shares of HealthFirst
Series 1 Shares. There are no outstanding options, warrants, subscriptions,
conversions or other rights, agreements or commitments obligating HealthFirst to
issue any additional HealthFirst Series 1 Shares or HealthFirst Series 2 Shares
or any other securities convertible into, exchangeable for or evidencing the
right to subscribe for any HealthFirst Series 1 Shares or HealthFirst Series 2
Shares. There are no voting trusts or other agreements or understandings to
which HealthFirst is a party with respect to the voting of HealthFirst Series 1
Shares or HealthFirst Series 2 Shares. Cash dividends were not declared on
common equity of HealthFirst in the 1995 or 1994 fiscal years.
The Restated Articles of HealthFirst provide that the shareholders do not
have any preemptive rights and that such shareholders cannot cumulate their
votes for the election of directors. HealthFirst Series 1 Shares, HealthFirst
Series 2 Shares and HealthFirst Series 3 Shares have identical voting rights but
different redemption rights. HealthFirst Series 1 Shares have a redemption value
of $100 per share, not to exceed $10,000 per holder of such share, HealthFirst
Series 2 Shares have a redemption value of $150, not to exceed $15,000 per
holder of such share, HealthFirst Series 3 Shares have a redemption value of
$230, not to exceed $23,000 per holder of such share. The redemption value is
paid when a shareholder dies, retires or relinquishes such shares for any reason
other than in connection with the formation of a physician practice management
company. Such redemption rights of shareholders of HealthFirst do not apply to
the Merger Transactions.
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SELECTED FINANCIAL DATA OF HEALTHFIRST
The following table sets forth selected financial data which have been
derived from the consolidated financial statements as of and for the years ended
December 31, 1991 through 1995. The Consolidated Balance Sheets as of December
31, 1994 and 1995 and the related Consolidated Statements of Operations,
Stockholders' Equity and Cash Flows for the years ended December 31, 1993
through 1995 have been audited by Arthur Andersen LLP. The financial statements
as of and for the nine months ended September 30, 1995 and 1996 have been
derived from the unaudited consolidated financial statements of HealthFirst
which, in the opinion of management, include all adjustments (which consist of
only normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The financial statements for the nine months
ended September 30, 1996 include the acquired business of Suburban. The
following data should be read in conjunction with "HealthFirst Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the notes thereto included elsewhere
in this document.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31 SEPTEMBER 30
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996(1)
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Fee-For-Service, net.............................. $ 7,868 $ 9,395 $ 13,505 $ 18,813 $ 22,835 $ 16,341 $ 24,200
Prepaid Health Care............................... 6,139 8,261 10,893 13,463 14,817 11,312 18,489
Total Net Revenues................................ 14,007 17,656 24,398 32,276 37,652 27,653 42,689
Less Provider Compensation and Benefits(2)........ (4,566) (5,586) (6,278) (8,375) (9,530) (8,522) (17,352)
Net Revenue Less Provider Compensation and
Benefits......................................... 9,441 12,070 18,120 23,901 28,122 19,131 25,337
OPERATING EXPENSES:
Clinic Salaries, Wages and Benefits............... $ 3,234 $ 3,879 $ 6,276 $ 8,614 $ 11,737 $ 7,441 12,786
Purchased Medical Services........................ 1,962 2,836 3,157 3,530 4,253 3,434 7,070
Medical and Office Supplies....................... 1,042 1,429 2,245 3,076 4,377 2,723 4,355
General and Administrative........................ 1,176 1,321 2,471 3,200 4,491 3,275 4,414
Lease and Rent Expense............................ 283 341 608 655 853 637 1,338
Provision for Uncollectible Accounts.............. 369 446 696 936 1,146 860 1,239
Depreciation and Amortization..................... 433 328 510 637 736 549 1,238
--------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses.......................... 8,499 10,580 15,963 20,648 27,593 18,919 32,440
Operating Income (Loss) (2)....................... 942 1,490 2,157 3,253 529 212 (7,103)
Other Non-Operating Income........................ 24 36 113 189 121 83 643
Interest Income................................... 34 51 115 98 39 34 87
Interest Expense.................................. 182 219 182 186 189 150 538
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) Before Taxes........................ 818 1,358 2,203 3,354 500 179 (6,911)
Income Tax Expense (Benefit)...................... 425 715 889 1,416 208 72 (2,272)
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss) (2)............................. 393 643 1,314 1,938 292 107 (4,639)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
AS OF SEPTEMBER 30
AS OF DECEMBER 31
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working Capital (Deficit)......................... $ 1,100 $ 1,339 $ 1,882 $ 1,961 $ (1,507) $ (739) $ (6,195)
Total Assets...................................... 9,048 10,407 11,742 16,848 21,075 18,726 29,868
Long-Term Debt, net............................... 2,836 2,252 2,223 1,731 3,711 2,935 3,911
Capital and Direct Financing Lease Obligations,
net.............................................. -- -- -- -- -- -- 4,167
Stockholders Equity............................... 3,229 3,984 5,344 7,253 7,597 7,404 1,977
</TABLE>
- ------------------------
(1) Includes Suburban, which was acquired in February 1996.
(2) Includes a charge of $3.9 million relating to a Deferred Compensation Plan
enacted in 1996 as discussed in Footnote 8 to the Financial Statements.
(3) In May 1996, HealthFirst entered into a direct financing lease obligation
with a related party. In addition, HealthFirst assumed a capital lease
obligation with a related party as part of the Suburban acquisition. See
Footnote 7 in the Financial Statements.
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HEALTHFIRST MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
HealthFirst is a primary care based multi-specialty medical clinic founded
in 1909. In February 1996, Metropolitan merged with Suburban and changed its
name to HealthFirst. The merger has been accounted for as a purchase of Suburban
by Metropolitan in the financial statements.
As of January 2, 1997, HealthFirst consisted of 681 employees and 145
providers who offer a wide range of primary and specialty care services
including allergy, dermatology, family practice, gastroenterology,
hematology/oncology, infectious disease, internal medicine, pediatrics,
geriatrics, obstetrics/gynecology, podiatry, rheumatology and surgery.
HealthFirst operates clinics in 11 Portland-area locations including:
Tualatin, Tigard, Beaverton, Lake Oswego, Broadway, Northwest Portland,
Wilshire, Gateway, Gresham, Hollywood and Powell Valley.
Historically, the operations of HealthFirst have included both the provision
of medical services that will be provided by the New PCs and the management
aspects of the practice that will be carried on in the future by PPI. It was not
necessary to, nor did the clinics, segregate their operating results by these
categories. Accordingly, the results discussed below will not reflect the
results that might have occurred had those businesses been operated separately.
HealthFirst earns its revenues by providing services to patients under
Fee-For-Service and Prepaid arrangements summarized as follows:
Fee-For-Service: Patient service revenues are recorded in the period in
which services are provided at established rates. HealthFirst has agreements
with third-party payors that provide payments to HealthFirst at amounts
different from its established rates. The difference between the established
rates and related payments amounts are reflected as contractual discounts.
Prepaid: HealthFirst contracts with various HMOs to provide care to plan
enrollees at prepaid monthly fixed capitation rates on a per member basis.
Under a prepaid contract, HealthFirst assumes the obligation of providing
all contractually defined health care services to enrollees and is obligated
to reimburse outside providers for services rendered to enrollees.
HealthFirst has entered into discounted fee-for-service and subcapitation
agreements with these outside providers. Additional limitation of risk is
provided by the payment of stop loss reinsurance premiums. In addition, the
prepaid contracts contain minimum threshold reimbursement levels which limit
the downside risk.
The table below indicates the payor mix of the aggregate net clinic revenue
earned by HealthFirst:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PAYOR SEPTEMBER 30, 1996
- ------------------------------------------------------------------------------------ ------------------
<S> <C>
Fee-For-Service:
Commercial and Private............................................................ 48.1%
Medicare.......................................................................... 6.6%
Medicaid.......................................................................... 1.6%
Prepaid (1)......................................................................... 43.7%
-------
100.0%
-------
-------
</TABLE>
- ------------------------
(1) Includes Commercial, Medicare and Medicaid prepaid programs.
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The table below summarizes certain operating statistics at the end of the
periods noted:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
------------------------------- ----------------------
1993 1994 1995 1995 1996 (1)
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Physicians........................................... 56 66 93 86 145
Other Providers...................................... 4 6 12 12 14
Employees............................................ 240 395 555 443 681
Capitated Lives...................................... 16,431 20,186 23,661 20,176 44,559
Clinical Sites....................................... 5 6 7 6 11
</TABLE>
- ------------------------
(1) Includes Suburban, which was acquired in February 1996.
The table below sets forth the percentages of Net Revenue Less Provider
Compensation and Benefits represented by certain items reflected in
HealthFirst's Consolidated Statements of Operations. The information that
follows should be read in conjunction with the Consolidated Financial Statements
and notes thereto contained elsewhere.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS
ENDED DECEMBER 31 ENDED SEPTEMBER 30
---------------------------------- -----------------------
1993 1994 1995 1995 1996 (1)
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net Revenue Less Provider Compensation and
Benefits........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Clinic Salaries and Wages, Benefits................. 34.6% 36.0% 41.7% 38.9% 50.5%
Purchased Medical Services.......................... 17.4% 14.8% 15.1% 18.0% 27.9%
Medical and Office Supplies......................... 12.4% 12.9% 15.6% 14.2% 17.2%
General and Administrative.......................... 13.6% 13.4% 16.0% 17.1% 17.4%
Lease and Rent Expense.............................. 3.4% 2.7% 3.0% 3.3% 5.3%
Provision for Uncollectible Accounts................ 3.8% 3.9% 4.1% 4.5% 4.9%
Depreciation and Amortization....................... 2.8% 2.7% 2.6% 2.9% 4.9%
---------- ---------- ---------- ---------- -----------
Total Operating Expenses............................ 88.0% 86.4% 98.1% 98.9% 128.1%
Operating Income (Loss)............................. 12.0% 13.6% 1.9% 1.1% (28.1)%
Interest Income..................................... 0.6% 0.4% 0.2% 0.2% 0.3%
Interest Expense.................................... 1.0% 0.8% 0.7% 0.8% 2.0%
Other Income (Expense).............................. 0.6% 0.8% 0.4% 0.4% 2.5%
---------- ---------- ---------- ---------- -----------
Income (Loss) Before Taxes.......................... 12.2% 14.0% 1.8% 0.9% (27.3)%
Income Tax Expense (Benefit)........................ 4.9% 5.9% 0.7% 0.3% (9.0)%
---------- ---------- ---------- ---------- -----------
Net Income (Loss) (2)............................... 7.3% 8.1% 1.0% 0.6% (18.3)%
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
</TABLE>
- ------------------------
(1) Includes Suburban, which was acquired in February 1996.
(2) Includes a charge of $3.9 million relating to a Deferred Compensation Plan
enacted in 1996 as discussed in Footnote 8 to the Financial Statements.
RESULTS OF OPERATIONS
The results of operations have been segregated between medical and
management services.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
MEDICAL SERVICES
Net revenues from providing Medical Services and related Provider
Compensation and Benefits comprise this aspect of the business.
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NET REVENUES
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-for Service, net increased from $16.3 million
for the nine months ended September 30, 1995 to $24.2 million for the
nine months ended September 30, 1996, an increase of $7.9 million or
48.5%. This was primarily due to the purchase of Suburban in February
1996 and the addition of new providers in the last six months of 1995.
PREPAID HEALTH CARE. Prepaid Health Care increased from $11.3 million
for the nine months ended September 30, 1995 to $18.5 million for the
nine months ended September 30, 1996, an increase of $7.2 million or
63.7%. This increase relates to an increase in capitated lives, offset in
part by reduced risk sharing incentive revenues.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by HealthFirst were
based upon arbitrary and subjective decisions made by HealthFirst's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
Compensation and Benefits increased from $8.5 million for the nine months
ended September 30, 1995 to $17.4 million for the nine months ended
September 30, 1996, an increase of $8.9 million or 105%. This increase was
partially the result of a charge of $3.9 million related to a bonus
compensation plan that was established in February 1996. The Plan
establishes a fixed amount to be paid to each participant. The benefit is
fully vested after five years of employment and is to be paid over a future
period of eight years. The present value of amounts to be paid is being
accrued over the vesting period. A substantial portion of the participants
were fully vested as of September 30, 1996. The increase in Provider
Compensation and Benefits is also the result of the increase in the number
of providers due to the merger with Suburban.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. If the New
PC Management Agreement had been in effect during these periods, the amount
available for Provider Compensation and Benefits would have been reduced by
the amount of the management fee of $1,704,000 in 1996 and $1,392,000 in
1995. Although the impact can not be determined at this time, the amount
available for Provider Compensation and Benefits may also be effected by
synergies resulting from the Merger and management's ability to reduce costs
or enhance revenues.
During 1996, HealthFirst recorded Provider Compensation and Benefits expense
in excess of amounts available from current operating profits. Most of the
excess is related to costs associated with a bonus compensation plan which
is to be paid out over a period of eight years. Any remaining obligations
for Provider Compensation and Benefits as of the Effective Time will be
transferred to PPI. In the future, the Management Agreement does not provide
for, nor do the Companies intend to pay, Provider Compensation and Benefits
in excess of amounts generated from operations on an annual basis.
MANAGEMENT SERVICES
The historical operating expenses of HealthFirst represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits
which includes the salaries, wages and benefits of all non-provider
personnel, increased from $7.4 million for the nine months ended September
30, 1995 to $12.8 million for the nine months ended September 30, 1996, an
increase of $5.4 million or 73.0%. The increase resulted from the additional
staff needed to support providers added through the last six months of 1995
and due to the staff added from the purchase of
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Suburban as well as the opening of the Tigard Clinic. Clinic Salaries, Wages
and Benefits, as a percentage of Net Revenues Less Provider Compensation and
Benefits adjusted for the non-recurring expense of $3.9 million relating to
Provider Deferred Compensation, increased from 38.9% for the nine months
ended September 30, 1995 to 43.7% for the nine months ended September 30,
1996.
PURCHASED MEDICAL SERVICES. Purchased Medical Services which include
professional and diagnostic services performed by third parties increased
from $3.4 million for the nine months ended September 30, 1995 to $7.0
million for the nine months ended September 30, 1996, an increase of $3.6
million or 105.9%. Purchased Medical Services as a percentage of Net
Revenues Less Provider Compensation and Benefits adjusted for the
non-recurring expense of $3.9 million relating to Provider Deferred
Compensation, increased from 18.0% for the nine months ended September 30,
1995 to 24.2% for the nine months ended September 30, 1996. The increase is
due an increase in capitated lives which is primarily attributable to the
purchase of Suburban in February 1996 and the addition of providers in the
last six months of 1995.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $2.7 million for the nine months ended September 30, 1995 to
$4.4 million for the nine months ended September 30, 1996, an increase of
$1.7 million or 63.0%. Medical and Office Supplies, as a percentage of Net
Revenues Less Provider Compensation and Benefits adjusted for the
non-recurring expense of $3.9 million relating to Provider Deferred
Compensation, remained relatively stable. The increase in supplies expenses
results from the additional use of internally provided services resulting
from the purchase of Suburban in February 1996 and the addition of other
providers in the last six months of 1995.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses increased
from $3.3 million for the nine months ended September 30, 1995 to $4.4
million for the nine months ended September 30, 1996, an increase of $1.1
million or 33.3%. General and Administrative expenses, as a percentage of
Net Revenues less Provider Compensation and Benefits adjusted for the
non-recurring expense of $3.9 million relating to Provider Deferred
Compensation, decreased from 17.1% for the nine months ended September 30,
1995 to 15.1% for the nine months ended September 30, 1996. The dollar
increase was the result of professional and promotional fees relating to the
purchase of Suburban and a concurrent change in the corporation's name to
HealthFirst in addition to the recruiting costs for new providers in 1996.
The decrease as a percentage of Net Revenues Less Provider Compensation is
due to economies in overhead services realized from the merger with Suburban
in February 1996.
LEASE AND RENT EXPENSE. Lease and Rent Expense increased from $637,000 for
the nine months ended September 30, 1995 to $1,338,000 for the nine months
ended September 30, 1996, an increase of $701,000 or 110.1%. Lease and Rent
Expense, as a percentage of Net Revenues Less Provider Compensation and
Benefits adjusted for the non-recurring expense of $3.9 million relating to
Provider Deferred Compensation, increased from 3.3% for the nine months
ended September 30, 1995 to 4.6% for the nine months ended September 30,
1996. The increase was the result of increasing leased square footage.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible Accounts
increased from $860,000 for the nine months ended September 30, 1995 to
$1,239,000 for the nine months ended September 30, 1996, an increase of
$379,000 or 44.0%. As a percentage of Net Revenues Less Provider
Compensation and Benefits, Provision for Uncollectible Accounts remained
relatively stable. The Provision for Uncollectible Accounts primarily
relates to the ability to collect for services provided to private parties.
The increase relates to the purchase of Suburban.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization increased from
$549,000 for the nine months ended September 30, 1995 to $1,238,000 for the
nine months ended September 30, 1996, an increase of $689,000 or 125.5%.
Depreciation and Amortization expense as a percentage of Net Revenues Less
Provider Compensation and Benefits, adjusted for the non-recurring expense
of
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$3.9 million relating to Provider Deferred Compensation, increased from 2.9%
for the nine months ended September 30, 1995 to 4.2% for the nine months
ended September 30, 1996. The increase relates to the purchase of Suburban,
the completion of the construction of a new clinic building and equipment to
support the addition of new providers.
OTHER NON-OPERATING INCOME. Other Non-Operating Income increased from
$83,000 for the nine months ended September 30, 1995 to $643,000 for the
nine months ended September 30, 1996, an increase of $560,000 or 674.7%.
This increase was primarily the result of subleasing office space and other
income received from the Northwest Physician Alliance.
INTEREST EXPENSE. Interest Expense increased from $150,000 for the nine
months ended September 30, 1995 to $538,000 for the nine months ended
September 30, 1996, an increase of $388,000 or 258.7%. This increase was the
result of additional debt related to the new Tualatin Clinic building and
equipment.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
MEDICAL SERVICES
Net revenues from providing Medical Services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-for-Service, net increased from $18.8 million
for the 12 months ended December 31, 1994 to $22.8 million for the 12
months ended December 31, 1995, an increase of $4.0 million or 21.3%.
This increase correlates with a increase in providers during the last six
months of 1995.
PREPAID HEALTH CARE. Prepaid Health Care increased from $13.5 million
for the 12 months ended December 31, 1994 to $14.8 million for the 12
months ended December 31, 1995, an increase of $1.3 million or 9.6%. This
increase is a result of an increase in the number of member lives during
the period.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by HealthFirst's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
Compensation and Benefits increased from $8.4 million for the year ended
December 31, 1994 to $9.5 million for the year ended December 31, 1995, an
increase of $1.1 million or 13%. This increase was the result of additional
providers that were recruited during 1995.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. If the New
PC Management Agreement had been in effect during these periods, the amount
available for Provider Compensation and Benefits would have been reduced by
the amount of the management fee of $1,999,000 in 1995 and $2,542,000 in
1994. Although the impact can not be determined at this time, the amount
available for Provider Compensation and Benefits may also be effected by
synergies resulting from the Merger and management's ability to reduce costs
or enhance revenues.
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MANAGEMENT SERVICES
The historical operating expenses of HealthFirst represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits
which include the salaries, wages and benefits of all non-provider
personnel, increased from $8.6 million for the 12 months ended December 31,
1994 to $11.7 million for the 12 months ended December 31, 1995, an increase
of $3.1 million of 36.0%. Clinic Salaries, Wages and Benefits, as a
percentage of Net Revenue less Provider Compensation and Benefits, increased
from 36.0% to 41.7% for the 12 months ended December 31, 1994 and 1995,
respectively. The increase resulted from additional employees hired to
support the 45.8% increase in providers.
PURCHASED MEDICAL SERVICES. Purchased Medical Services increased from $3.5
million for the 12 months ended December 31, 1994 to $4.3 million for the 12
months ended December 31, 1995, an increase of $800,000 or 22.9%. The
increase is due to the 17.2% increase in capitated lives and an increased
use of externally provided managed care services by existing members.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $3.1 million for the 12 months ended December 31, 1994 to
$4.4 million for the 12 months ended December 31, 1995, an increase of $1.3
million or 41.9%. Medical and Office Supplies, as a percentage of Net
Revenues less Provider Compensation and Benefits, increased from 12.9% to
15.6% for the 12 months ended December 31, 1994 and 1995, respectively, as a
result of setting up new provider practices in 1995.
GENERAL AND ADMINISTRATIVE. General and Administrative increased from $3.2
million for the 12 months ended December 31, 1994 to $4.5 million for the 12
months ended December 31, 1995, an increase of $1.3 million or 40.6%.
General and Administrative, as a percentage of Net Revenues Less Provider
Compensation and Benefits, increased from 13.4% to 16.0% for the 12 months
ended December 31, 1994 and 1995, respectively. The increase is due to the
additional costs incurred to add providers during the last six months of
1995.
LEASE AND RENT EXPENSE. Lease and Rent Expense increased from $655,000 for
the 12 months ended December 31, 1994 to $853,000 for the 12 months ended
December 31, 1995, an increase of $198,000 or 30.2%. The increase is due
primarily to the addition of an Immediate Care Clinic facility and the
assumption of new leases associated with the addition of new providers in
July 1995.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible Accounts
increased from $936,000 for the 12 months ended December 31, 1994 to $1.1
million for the 12 months ended December 31, 1995, an increase of $164,000
or 17.5%. This increase correlates to the increase in accounts receivable
offset by a reduction in the proportion due from private parties.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization increased from
$637,000 for the 12 months ended December 31, 1994 to $736,000 for the 12
months ended December 31, 1995, an increase of $99,000 or 15.5%. The
increase is due to the purchase of furniture and equipment for the new
Tualatin facility, and other leasehold improvements.
TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1993
MEDICAL SERVICES
Net revenues from providing Medical Services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES
Net revenues consist of revenues received from Fee-for-Services and Prepaid
Health Care activities as follows.
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<PAGE>
FEE-FOR-SERVICE, NET. Fee-for-Service, net increased from $13.5 million
for the 12 months ended December 31, 1993 to $18.8 million for the 12
months ended December 31, 1994, an increase of $5.3 million or 39.3%. The
increase is due to a new clinic location serving primarily fee-for-
service patients and new providers at existing clinics.
PREPAID HEALTH CARE. Prepaid Health Care increased from $10.9 million
for the 12 months ended December 31, 1993 to $13.5 million for the 12
months ended December 31, 1994, an increase of $2.6 million or 23.9%.
This increase correlates with a 22.9% increase in the number of capitated
lives by the end of the period.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by the HealthFirst's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
Compensation and Benefits increased from $6.3 million for the year ended
December 31, 1993 to $8.4 million for the year ended December 31, 1994, an
increase of $2.1 million or 33.3%. This increase was the result of the
addition of providers to support the new clinic location that was
established in 1994 and the addition of new providers at existing sites.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. If the New
PC Management Agreement had been in effect during these periods, the amount
available for Provider Compensation and Benefits would have been reduced by
the amount of the management fee of $2,542,000 in 1994 and $1,844,000 in
1993. Although the impact can not be determined at this time, the amount
available for Provider Compensation and Benefits may also be effected by
synergies resulting from the Merger and management's ability to reduce costs
or enhance revenues.
MANAGEMENT SERVICES
The historical operating expenses of HealthFirst represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits
which include the salaries, wages and benefits of all non-provider
personnel, increased from $6.3 million for the 12 months ended December 31,
1993 to $8.6 million for the 12 months ended December 31, 1994, an increase
of $2.3 million or 36.5%. The increase is due to employees hired to support
the increase in providers.
PURCHASED MEDICAL SERVICES. Purchased Medical Services increased from $3.2
million for the 12 months ended December 31, 1993 to $3.5 million for the 12
months ended December 31, 1994, an increase of $300,000 or 9.4%. The
increase is due to a 22.9% increase in capitated lives by the end of the
period which was offset by lower use of externally provided managed care
services by existing members.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $2.2 million for the 12 months ended December 31, 1993 to
$3.1 million for the 12 months ended December 31, 1994, an increase of
$900,000 or 40.9%. The increase is related to a 23.9% increase in office
visits and an increase in drug therapy for oncology patients.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses increased
from $2.5 million for the 12 months ended December 31, 1993 to $3.2 million
for the 12 months ended December 31, 1994, an increase of $700,000 or 28.0%.
This increase correlates to an increase in providers.
LEASE AND RENT EXPENSE. Lease and Rent Expense increased from $608,000 for
the 12 months ended December 31, 1993 to $655,000 for the 12 months ended
December 31, 1995, an increase of $47,000 or
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<PAGE>
7.7%. The increase is primarily due to the assumption of a new lease from
the addition of Tualatin Medical Center in January 1994.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible Accounts
increased from $696,000 for the 12 months ended December 31, 1993 to
$936,000 for the 12 months ended December 31, 1994, an increase of $240,000
or 34.5%. This increase correlates to an increase in accounts receivable.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization increased from
$510,000 for the 12 months ended December 31, 1993 to $637,000 for the 12
months ended December 31, 1994, an increase of $127,000 or 24.9%. This
relates to the equipment purchased to support new providers.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. At September 30, 1996, HealthFirst had a working capital
deficit of $7.1 million, compared to a $1.5 million deficit at December 31,
1995. The change is primarily due to additional current borrowings of $1.25
million on a construction loan for the Tualatin facility, an advance from a
health plan payor of $1 million that must be repaid within the next twelve
months, accrued provider compensation of $1 million payable at December 31,
1996, a $500,000 increase in the amount of accrued healthcare costs due to
higher utilization and the working capital deficit of $500,000 acquired from
Suburban. As a result of the Merger, PPI will assume the financing activities
relating to the working capital needs of HealthFirst. See "PPI Management's
Discussion and Analysis of Financial Condition and Results of Operations".
CAPITAL EXPENDITURES. Capital expenditures during the first nine months of
1996 required $2.5 million. Expenditures are related to the purchase of
furniture and medical equipment for the newly constructed Tualatin Facility and
leased Tigard Facility. PPI and HealthFirst will negotiate and agree upon the
annual capital budget and the related terms of providing the needed financing as
part of the activities of the Joint Management Board. See "PPI Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Operation, Management and Business of PPI Following the Merger-- Practice
Management Agreement."
FINANCING ACTIVITIES. In May 1996, HealthFirst negotiated a new $2.5
million Line of Credit with U.S. National Bank of Oregon, replacing the previous
$1.0 million line. HealthFirst has $1.5 million currently outstanding under this
line of credit including $1.4 million borrowed subsequent to September 30, 1996.
The Line of Credit is secured by substantially all of the assets of HealthFirst.
PPI will seek to combine HealthFirst's short-term line of credit into a
consolidated PPI line of credit. See "PPI Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Financing activities generated $0.3 million for the nine months ended
September 30, 1996. HealthFirst received $1.25 million in proceeds from the
construction loan for the Tualatin Facility and $1 million from HealthFirst
Properties, LLC as consideration related to the new direct financing lease
obligation of HealthFirst's clinic facilities. In addition, HealthFirst made
payments, in accordance with the Expense Sharing Agreement, of $1.3 million. In
July 1995, a Construction Note of $3.75 million with interest only payments for
18 months with U.S. National Bank of Oregon, was activated for the purpose of
partially funding the building of a new Tualatin Medical Clinic facility. In
December 1995, a 15 year mortgage on the Broadway Medical Clinic was created
with U.S. National Bank of Oregon to provide the remaining capital needed for
the new Tualatin facility. HealthFirst intends on converting the short-term
construction loan to a mortgage.
HealthFirst also has entered into a $2 million line of credit facility for
the purchase of furnishings and equipment. Indebtedness outstanding under such
line of credit totalled approximately $400,000 as of September 30, 1996; an
additional $1.6 million was borrowed thereunder subsequent to September 30,
1996.
HealthFirst believes that the funds available under lines of credit should
be sufficient to meet short-term working capital needs. HealthFirst recognizes
that in order to finance the continued operations and long-term growth of the
organization it needs to increase its ability to access capital. See "The Merger
and Related Transactions--HealthFirst's Reasons for the Merger."
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BUSINESS OF CORVALLIS CLINIC
GENERAL
Corvallis Clinic is a multi-specialty medical group which emphasizes
internal medicine and family medicine. It originally was founded in 1947 in
downtown Corvallis, Oregon but relocated to its current site, near Good
Samaritan Hospital Corvallis, in 1978. Corvallis Clinic maintains a strong
presence in the Corvallis, Oregon community with over 75 full-time and two
part-time physician employees.
Over the past five years, Corvallis Clinic has seen a growth in capitated
payment plans and has therefore concentrated on building alliances to serve its
capitated patients. Since 1991, Corvallis Clinic has made a concerted effort to
expand its primary care base and obtain the services of additional primary care
physicians. In 1993, Corvallis Clinic expanded by acquiring three medical groups
in the region--Albany Family Medicine, Corvallis Clinic Family Medicine and
Philomath Family Medicine. Since the three acquisitions, a total of 10
additional new primary care physicians have been recruited. The 1993 expansion
gave Corvallis Clinic access to the HMO Oregon Health Plan which significantly
increased Corvallis Clinic's patient base.
Under capitated contracts, Corvallis Clinic is paid a fixed fee per covered
life on a monthly basis throughout the contract period. Corvallis Clinic
provides services on a capitated basis to PacifiCare and SelectCare patients,
including patients that have Medicare coverage through these programs. Corvallis
Clinic is also at risk for HMO Oregon patients and patients enrolled in the
Oregon Health Plan. In addition, Corvallis Clinic has fee arrangements with
several outside providers based on fee schedules or a specified percentage of
ordinary and customary charges, including certain PPOs and certain employers.
While Corvallis Clinic obtains a substantial and growing portion of its
revenues from managed care programs, it continues to conduct more traditional
forms of business. Corvallis Clinic is a Medicare provider and it also receives
fee-for-service payments from a significant percentage of patients and
traditional indemnity insurers.
In 1995, $18,469,738 (or approximately 47%) of Corvallis Clinic net patient
revenues came from capitated (prepaid) arrangements; $20,704,589 (or
approximately 53%) derived from PPOs, other contractual relationships,
individuals or private insurance carriers (fee-for-service). In 1994,
$15,798,726 (or approximately 45%) of Corvallis Clinic net patient revenues came
from prepaid arrangements; $19,545,575 (or approximately 55%) derived from
fee-for-service work.
Corvallis Clinic is actively involved in the process of becoming accredited
through MQC under the auspices of American Medical Group Association ("AMGA").
Corvallis Clinic's Accreditation Plan was implemented in January of 1996. Site
review and completion is scheduled for April of 1997. Corvallis Clinic feels
that the accreditation certification will greatly enhance its reputation as a
premier provider of medical services.
In addition to receiving income from its primary business as a health care
provider, Corvallis Clinic participates in two joint ventures. Corvallis Clinic
is a 50% owner of a limited liability company of which Good Samaritan Hospital
Corvallis is the other owner. This limited liability company, HealthCare
Partners, LLC owns five buildings in which Corvallis Clinic leases space. In
addition, Corvallis Clinic is one of three equal partners, together with
Corvallis Radiology, P.C. and Samaritan Enterprises (a corporate affiliate of
Good Samaritan Hospital Corvallis) in the Corvallis MRI Joint Venture
("Corvallis MRI"), an entity which renders magnetic resonance imaging services.
The Corvallis Clinic Foundation is a non-profit Section 501(c)(3)
corporation formed by Corvallis Clinic in 1954, and of which Corvallis Clinic is
the sole member. Such foundation sponsors an ongoing scholarship program at
local high schools, community college and Oregon State University.
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BUSINESS STRATEGY
During the past five years, Corvallis Clinic's strategy involved increasing
its geographic service area to strengthen its position as a managed care
provider. In 1992, Corvallis Clinic had an exclusive relationship to serve
PacifiCare patients in Corvallis, Oregon and the surrounding areas. Noting the
growth of managed care generally and the increasing reliance on one HMO for
Corvallis Clinic capitation, Corvallis Clinic management decided to forego its
exclusive arrangement with PacifiCare and to diversify into three major health
plans. Corvallis Clinic chose to retain its contract with PacifiCare (on a
nonexclusive basis), and added SelectCare and HMO Oregon.
In 1995, Corvallis Clinic entered into a regional alliance with three local
PHOs through a corporation called HealthQuest, Inc. In 1996, Corvallis Clinic
continued to use the provider arrangements the regional alliance developed but
commenced procedures to enable it to withdraw from the alliance. Corvallis
Clinic management determined that its attractiveness and leverage with the major
health plans would increase if it affiliated with entities outside the region of
Corvallis, Oregon. Consequently, Corvallis Clinic has sought its current
partners for the Merger described herein. See "The Merger and Related
Transactions-- Corvallis Clinic's Reasons for the Merger" and "The PC
Reorganization Transactions and Related Transactions--Corvallis Clinic's Reasons
for the Corvallis Clinic's Reorganization Transactions."
Aside from the business combination with the other Companies, the current
business strategy of Corvallis Clinic involves cost reduction and control to
serve capitated patients more efficiently. While Corvallis Clinic will continue
to consider affiliations or combinations with primary care providers in the
greater Corvallis area in 1996 and 1997, it will be most likely to pursue
acquisitions of physicians or groups that already have a full complement of
patients. Corvallis Clinic is in the process of formulating a patient quality
customer satisfaction program that will be rolled out in 1997.
GOVERNMENT REGULATION
Corvallis Clinic is subject to federal and state laws regulating the
relationships among providers of health care services, physicians and other
clinicians. These laws include the fraud and abuse provisions of the Medicare
and Medicaid statutes, which prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for the recommending, leasing, arranging, ordering or
purchasing of Medicare or Medicaid covered services. Other laws impose
significant penalties for false or improper billings for physician services and
impose restrictions on physician referrals for designated health services
reimbursable under the Medicare or Medicaid programs to entities with which they
have financial relationships. See "Physician Practice Management Industry--
Government Regulation". There can be no assurance that Corvallis Clinic's
present or past operations will not be subjected to scrutiny or legal
challenges.
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SERVICES PROVIDED
Specialties offered by Corvallis Clinic include:
<TABLE>
<S> <C>
Allergy Neurology
Behavioral Health Obstetrics
Cardiology Occupational Medicine
Critical Care Oncology
Dermatology Ophthalmology
Endocrinology Optometry
Family Practice Orthopedics
Gastroenterology Otolaryngology
Gynecology Pediatrics
Hematology Podiatry
Immunology Rheumatology
Infectious Disease Surgery--General and Vascular
Internal Medicine Urgent Care
Nephrology Urology
</TABLE>
Corvallis Clinic has numerous provider arrangements in the community so that
it can offer additional services to patients covered under capitated contracts.
In addition to medical services, Corvallis Clinic offers a number of ancillary
services within its offices, including Cardiopulmonary and Clinical
Laboratories, Physical Therapy and Radiology Facilities, an Optical Dispensary
and a Pharmacy.
ENROLLEES OF AT-RISK HEALTH PLANS UNDER CONTRACT WITH
CORVALLIS CLINIC
(AS OF SEPTEMBER 30, 1996)
<TABLE>
<CAPTION>
ENROLLED % OF TOTAL
----------- -----------
<S> <C> <C>
Commercial.............................................................. 28,631 77.9
Medicaid................................................................ 3,784 10.3
Medicare................................................................ 4,318 11.8
----------- -----------
TOTAL................................................................... 36,733 100.0%
----------- -----------
----------- -----------
</TABLE>
MARKETING AND DEVELOPMENT
Corvallis Clinic actively seeks managed care contracts and enters into
contracts with regional employers in cases where it determines the volume of
patients and reimbursements it will obtain will allow for the cost-effective
provision of medical services. Because Corvallis Clinic is well known in the
communities in which it is based, it has not performed extensive local
marketing. Much of its business development is based upon relationships between
its physicians and the community at large. Several Corvallis Clinic physicians
hold leadership positions in the community. In addition, Corvallis Clinic
directly supports local youth and non-profit programs.
COMPETITION
The health care industry is highly competitive. The industry is also subject
to continuing changes in the services that are provided and how providers are
selected and paid. In the Corvallis market, Corvallis Clinic is the largest
physician-owned multi-specialty group in its service area. Corvallis Clinic's
main competition comes from three PHOs located in Corvallis, Albany and Lebanon,
Oregon. In addition, a multi-specialty IPA known as Quality Care Associates
competes with Corvallis Clinic's specialists in specialties such as orthopedics,
ophthalmology, surgery and dermology. At present, there is a significant
presence of PPMs in the Corvallis Clinic service area.
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EMPLOYEES
PROVIDER EMPLOYEES.
As of January 2, 1997, Corvallis Clinic had 75 full-time and two part-time
physician employees. New Corvallis Clinic physicians initially sign one-year
associate employment contracts. These contracts offer a specified guaranteed
salary and an incentive bonus. Physicians are also eligible to receive benefits
such as health, dental, life and professional liability insurance, paid time off
and an allowance for continuing medical education and other professional
expenses. At the end of the associate year, the physician becomes eligible to
become a shareholder. A rigorous peer review is completed prior to the offering
of shareholder status. The transition must be approved by both the individual
physician and a two-thirds vote of the shareholders.
Certain other Corvallis Clinic provider employees, including psychologists
and podiatrists, are eligible for shareholder status on terms similar to those
of physicians. In addition, Corvallis Clinic employs four nurse practitioners,
two physician assistants and one optometrist.
NON-PROVIDER EMPLOYEES.
As of January 2, 1997, Corvallis Clinic had approximately 390 full-time and
135 part-time non-provider employees. None of Corvallis Clinic's employees are
represented by a labor union. Management believes its employee relations to be
satisfactory.
Corvallis Clinic has invested heavily in its managed care functions. It
currently has a staff of 18 full-time employees and handles a full range of
services including enrollment data, customer service, vendor contracting, claims
adjudication, and claims payment.
INSURANCE
The business of Corvallis Clinic entails an inherent risk of claims of
provider professional liability. To protect its overall operations from such
potential liabilities, Corvallis Clinic maintains professional liability
insurance and general liability insurance on a claims-made basis. The current
policy provides coverage of $5 million per occurrence, with no aggregate maximum
limit for claims made against Corvallis Clinic and its employees. Accruals for
outstanding claims and associated deductibles are made in the period in which
the event becomes known. Management does not believe professional liability
exposure is significant; however, there can be no assurance that a future claim
will not exceed the limits of available insurance coverage or that such coverage
will continue to be available. Corvallis Clinic carries workers' compensation
insurance and maintains multiperil liability, fiduciary liability, employee
dishonesty, professional liability, general liability and directors and
officers' insurance. Corvalis Clinic believes these types of insurance to be
customary and reasonable for a business of its kind.
PROPERTIES AND FACILITIES
The main offices of Corvallis Clinic are two buildings located near one
another in Corvallis, Oregon. The Asbury Building, which was named after one of
the founding physicians of the clinic, consists of over 80,000 square feet of
medical office space. It houses the Immediate Care Center which is open 365 days
a year and the majority of Corvallis Clinic's primary care and specialty
physicians. The Aumann Building is located adjacent to the Asbury building and
consists of over 40,000 square feet with some medical offices as well as the
administrative offices. The Asbury and Aumann Buildings are located adjacent to
a medical campus on which Good Samaritan Hospital Corvallis, Good Samaritan's
Radiation Oncology Center, and the Samaritan Medical Group are located.
Corvallis Clinic also maintains an office dedicated to research in Corvallis,
Oregon.
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Corvallis Clinic maintains three geographically dispersed satellite offices.
Corvallis Family Medicine supports the practice of five family practice
physicians and one nurse practitioner. Philomath Family Medicine supports the
practice of four family practice physicians. Albany Family Medicine supports the
practice of six family practice physicians. Corvallis Clinic has the option to
contract for additional space in the Albany facility that would also support six
physicians.
Corvallis Clinic has an Occupational Medicine Facility located in Corvallis.
It is a full service Occupational Medicine Department which is open five days a
week. Other than a short-term lease agreement with Pacific Communities Hospital
in Newport, Oregon where Corvallis Clinic provides an oncologist two days per
week, all Corvallis Clinic facilities are leased through HealthCare Partners,
LLC. The ownership and control of HealthCare Partners,LLC are shared equally
between Corvallis Clinic and Good Samaritan Hospital Corvallis. Decisions
regarding the business of HealthCare Partners, LLC require an agreement of both
members. Pursuant to the Merger, the interest of Corvallis Clinic in HealthCare
Partners, LLC will be transferred to PPI.
INFORMATION SYSTEMS
Corvallis Clinic has invested significantly in capital equipment and in
information technologies. In the past, Corvallis Clinic has typically purchased
equipment directly rather than leasing it. Information technologies have been an
important component of the capital investments of Corvallis Clinic. Corvallis
Clinic uses a network of desktop computers with additional stand-alone computers
that are dedicated to specific tasks. Corvallis Clinic has purchased or licensed
appropriate software for these computers. Computer software significant to
Corvallis Clinic includes CyCare for patient billing and scheduling, SoftMed for
chart tracking and transcription, Kronos for payroll, Clarion for claims
payment, and ANSOS for physician and nurse scheduling. The laboratory, radiology
and accounting departments also use specialized computer software. The hardware
that the Corvallis Clinic utilizes for its main information system was converted
to the Hewlett-Packard 9000 in 1995, giving the information system network
significant additional capacity and speed.
LEGAL PROCEEDINGS
Corvallis Clinic is engaged in the defense of lawsuits arising in the
ordinary course and conduct of its business. Corvallis Clinic believes that such
actions will not have a material adverse effect on its business.
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DESCRIPTION OF CAPITAL STOCK OF CORVALLIS CLINIC
Corvallis Clinic is owned by 64 holders of Corvallis Clinic Class A Stock,
74 holders of Corvallis Clinic Class B Stock and 55 holders of Corvallis Clinic
Class C Stock. Most shareholders hold shares all three classes of capital stock
of Corvallis Clinic. As of January 2, 1997, shares of Corvallis Clinic Class A
Stock were held by 60 practicing Corvallis Clinic shareholder physicians, three
psychologists and one podiatrist. In addition, 13 retired or departed Corvallis
Clinic physicians hold shares of Corvallis Clinic Class B Stock.
Under the Corvallis Clinic Articles of Incorporation, the shares of
Corvallis Clinic Class A Stock have voting rights on all matters to be voted on
by the shareholders of Corvallis Clinic other than matters expressly reserved to
the holders of Corvallis Clinic Class B Stock. Approval by two-thirds of the
holders of Corvallis Clinic Class A Stock is required on matters on which they
vote. The only voting right expressly reserved to holders of Corvallis Clinic
Class B Stock is a right to vote with respect to the election of certain members
of an "LLC Committee" and each member of a "Restricted Fund Committee" (advisory
committees to the Corvallis Clinic Board regarding, respectively, management of
HealthCare Partners, LLC and the investment of certain funds including amounts
distributed by HealthCare Partners, LLC to Corvallis Clinic). Holders of
Corvallis Clinic Class B Stock have additional limited voting rights so that the
approval by two-thirds of the outstanding shares of each of Corvallis Clinic
Class A Stock and Corvallis Clinic Class B Stock is required on certain matters.
These matters include certain amendments to the Articles of Incorporation and
amendments to provisions in the Bylaws regarding the LLC Committee and the
Restricted Fund Committee. Holders of Corvallis Clinic Class B Stock are not
entitled to vote separately regarding a merger. Shares of Corvallis Clinic Class
C Stock are non-voting and convey additional equity in Corvallis Clinic.
Corvallis Clinic equity is not traded on an established public market.
Transfer of the shares of capital stock of Corvallis Clinic is currently
restricted by the terms of a Restrictive Stock Agreement dated February 26,
1990, as amended March 14, 1994. Pursuant to this Restrictive Stock Agreement
and the Articles of Incorporation, shares of Corvallis Clinic Class A Stock are
redeemable at $23,000 per share, shares of Corvallis Clinic Class B Stock are
redeemable at $595 per share and shares of Corvallis Clinic Class C Stock are
redeemable at $100 per share. Under the Articles of Incorporation, in the event
of any liquidation, dissolution or winding up of Corvallis Clinic, either
voluntary or involuntary, the assets of Corvallis Clinic will be distributed in
the following order of priority: (i) holders of Corvallis Clinic Class C Stock
shall be entitled to receive, pro rata based on the number of shares of
Corvallis Clinic Class C Stock held by each such holder, $100 per share, (ii)
holders of Corvallis Clinic Class A Stock shall be entitled to receive, pro rata
based on the ownership by each such holder of one share of Corvallis Clinic
Class A Stock, $23,000 per share and (iii) holders of Corvallis Clinic Class B
Stock shall be entitled to receive the remaining assets of Corvallis Clinic
legally available for distribution to shareholders, pro rata based on the number
of shares of Corvallis Clinic Class B Stock held by each such holder.
No persons are the beneficial owners of more than five percent of any class
of Corvallis Clinic shares. Cash dividends were not declared on the common
equity of Corvallis Clinic in the 1995 or 1994 fiscal years. All of the
outstanding Corvallis Clinic shares have been validly issued and are fully paid
and nonassessable. Other than the Corvallis Clinic Option Shares, there are no
outstanding options, warrants, subscriptions, conversions or other rights,
agreements or commitments obligating Corvallis Clinic to issue any additional
shares or any other securities convertible into, exchangeable for or evidencing
the right to subscribe for any Corvallis Clinic shares. There are no voting
trusts or other agreements or understandings to which Corvallis Clinic is a
party with respect to the voting of Corvallis Clinic shares.
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SELECTED FINANCIAL DATA OF CORVALLIS CLINIC
The following table sets forth selected financial data which have been
derived from the financial statements as of and for the years ended November 30,
1991 through 1995. The Balance Sheets as of November 30, 1994 and 1995, and the
related Statements of Operations, Shareholders' Equity and Cash Flows for each
of the years ended November 30, 1993 through 1995 have been audited by Arthur
Andersen L.L.P. The financial statements as of and for the ten month periods
ended September 30, 1995 and 1996 have been derived from the unaudited financial
statements of Corvallis Clinic which, in the opinion of management, include all
adjustments (which consist of only normal, recurring adjustments) necessary for
a fair presentation of the information set forth therein. The following data
should be read in conjunction with "Corvallis Clinic Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this document.
<TABLE>
<CAPTION>
FOR THE TEN MONTHS
ENDED SEPTEMBER 30,
FOR THE YEAR ENDED NOVEMBER 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Fee-For-Service, net.................................. $ 14,220 $ 15,262 $ 16,422 $ 19,545 $ 20,705 $ 17,097 $ 17,299
Prepaid Health Care, net.............................. 5,631 8,601 13,517 15,799 18,469 14,968 16,789
--------- --------- --------- --------- --------- --------- ---------
Total Net Revenues.................................... 19,851 23,863 29,939 35,344 39,174 32,065 34,088
Less Provider Compensation and Benefits............... (8,071) (8,094) (7,122) (13,729) (13,209) 11,186 8,247
--------- --------- --------- --------- --------- --------- ---------
Net Revenue Less Provider Compensation and Benefits... 11,780 15,769 22,817 21,615 25,965 20,879 25,841
OPERATING EXPENSES:
Clinic Salaries, Wages and Benefits................... 6,921 7,370 10,175 10,404 12,579 10,667 12,116
Purchased Medical Services............................ 1,252 2,096 2,656 3,081 4,717 3,352 4,445
Medical and Office Supplies........................... 1,314 2,610 3,014 3,327 3,843 2,921 3,454
General and Administrative............................ 2,155 2,136 2,436 3,157 3,560 2,509 2,573
Lease and Rent Expense................................ 173 177 177 178 198 168 217
Provision for Contractual Discounts and Uncollectible
Accounts............................................. 486 735 1,033 1,181 1,767 984 844
Depreciation and Amortization......................... 544 536 668 1,006 1,115 860 1,278
--------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses.............................. 12,845 15,660 20,159 22,334 27,779 21,461 24,927
Operating Income (Loss)............................... (1,065) 109 2,658 (719) (1,814) (582) 914
Other Non-Operating (Income) Expenses................. (269) (233) 80 (166) (738) (422) (555)
Interest Income....................................... -- -- -- 56 192 58 35
Interest Expense...................................... 275 350 639 780 1,223 1,015 1,431
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) Before Taxes............................ (1,071) (8) 1,939 (1,277) (2,107) (1,117) 73
--------- --------- --------- --------- --------- --------- ---------
Income Tax Expense (Benefit).......................... (455) (32) 759 0 0 0 0
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss)..................................... (616) 24 1,180 (1,277) (2,107) (1,117) 73
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
AS OF
AS OF NOVEMBER 30, SEPTEMBER 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital (Deficit)............................. 1,180 1,071 1,666 (296) (1,251) 94 (934)
Total Assets.......................................... 11,448 14,034 21,697 21,808 26,549 26,111 26,894
Long-Term Debt, net................................... 2,675 3,962 8,374 8,310 729 463 1,549
Capital and Direct Finance Lease Obligations, net..... -- -- 245 155 14,258 14,629 14,026
Redeemable Stocks and Accumulated Deficit............. 3,091 3,409 5,251 4,329 2,316 3,205 1,437
</TABLE>
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CORVALLIS CLINIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Corvallis Clinic is a primary care based multi-specialty medical clinic
founded in 1947. As of September 30, 1996, Corvallis Clinic consisted of 519
employees and 86 providers who offer a wide range of primary and specialty care.
In addition, Corvallis Clinic offers ancillary services such as physical
therapy, optical, pharmacy, laboratory and imaging.
The majority of Corvallis Clinic operations are located in two facilities in
Corvallis, Oregon. In addition, Corvallis Clinic operates four satellite
offices: Albany Family Medicine, Corvallis Family Medicine, Philomath Family
Medicine and Research Park.
Historically, the operations of Corvallis Clinic have included both the
provision of medical services that will be provided by the New PCs and the
management aspects of the practice that will be carried on in the future by PPI.
As such, it was not necessary to, nor did the clinics, segregate their operating
results by these categories. Accordingly, the results discussed below will not
reflect the results that might have occurred had those businesses been operated
separately.
The revenues are reported on a Fee-For-Service and Prepaid basis as follows:
FEE-FOR-SERVICE. Patient service revenues are recorded at
established rates in the period in which services are provided.
Corvallis Clinic has agreements with third-party payors that
provide payments to Corvallis Clinic at amounts different from its
established rates. The difference between the established rates
and the related payment amounts are reflected as contractual
discounts.
PREPAID. Corvallis Clinic contracts with various HMOs to provide
care to plan enrollees for prepaid monthly fixed capitation rates
on a per member basis. Under a prepaid contract, Corvallis Clinic
assumes the obligation of providing all contractually defined
health care services to enrollees and is obligated to reimburse
outside providers for services rendered to enrollees. Corvallis
Clinic has entered into discounted fee-for-service and
subcapitation agreements with many of these outside providers.
Additional limitation of risk is provided by the payment of stop
loss reinsurance premiums. In addition, prior to January 1, 1992,
Corvallis Clinic included minimum threshold reimbursement levels
in its Medicare-risk contracts; there are no longer such
provisions in any of Corvallis Clinic's prepaid contracts.
The following table indicates the payor mix of the aggregate net clinic
revenue earned by Corvallis Clinic:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
PAYOR SEPTEMBER 30, 1996
- ----------------------------------------------------------------------------------- ---------------------
<S> <C>
Fee-For-Service:
Commercial and Private........................................................... 41.9%
Medicare......................................................................... 7.6%
Medicaid......................................................................... 1.3%
Prepaid (5)........................................................................ 49.2%
-----
100%
-----
-----
</TABLE>
- ------------------------
(5) Includes enrollees under Commercial, Medicare and Medicaid programs.
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The table below summarizes certain operating statistics at the end of the
periods noted:
<TABLE>
<CAPTION>
AS OF
AS OF NOVEMBER 30, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Physicians....................................................... 74 73 84 80 79
Other Providers.................................................. 8 9 11 8 7
Employees........................................................ 392 469 526 503 519
Capitated Lives.................................................. 20,031 23,457 28,487 26,815 28,724
Clinical Sites................................................... 7 7 7 7 8
</TABLE>
The table below sets forth the percentages of net revenue less compensation
to providers represented by certain items reflected in Corvallis Clinic's
Statements of Income. The information that follows should be read in conjunction
with the Financial Statements and notes thereto contained elsewhere.
<TABLE>
<CAPTION>
FOR THE TEN MONTHS
FOR THE YEAR ENDED NOVEMBER 30, ENDED SEPTEMBER 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenue Less Provider Compensation and Benefits.... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Clinic Salaries, Wages and Benefits.................... 44.6% 48.1% 48.4% 51.1% 46.9%
Purchased Medical Services............................. 11.6% 14.2% 18.2% 16.1% 17.2%
Medical and Office Supplies............................ 13.2% 15.4% 14.8% 14.0% 13.4%
General and Administrative............................. 10.7% 14.6% 13.7% 12.0% 10.0%
Lease and Rent Expense................................. 0.8% 0.8% 0.8% 0.8% 0.8%
Provision for Uncollectible Accounts................... 4.5% 5.5% 6.8% 4.7% 3.3%
Depreciation and Amortization.......................... 2.9% 4.7% 4.3% 4.1% 4.9%
----- ----- ----- ----- -----
Total Operating Expenses............................... 88.3% 103.3% 107.0% 102.8% 96.5%
----- ----- ----- ----- -----
Operating Income (Loss)................................ 11.7% (3.3%) (7.0%) (2.8%) 3.5%
Other Non-Operating (Income) Expense................... (0.3%) (0.8%) 2.8% (2.0%) (2.1%)
Interest Income........................................ 0.0% 0.2% 0.7% 0.3% 0.2%
Interest Expense....................................... 2.8% 3.6% 4.7% 4.9% 5.5%
----- ----- ----- ----- -----
Income (Loss) Before Taxes............................. 8.5% (5.9%) (8.1%) (5.4%) 0.3%
Income Tax Expense..................................... 3.3% 0.0% 0.0% 0.0% 0.0%
----- ----- ----- ----- -----
Net Income (Loss)...................................... 5.2% (5.9%) (8.1%) (5.4%) 0.3%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
RESULTS OF OPERATIONS
The results of operations have been segregated between medical and
management services.
TEN MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO TEN MONTHS ENDED SEPTEMBER 30,
1995
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
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FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $17.1 million
for the ten months ended September 30, 1995 to $17.3 million for the ten
months ended September 30, 1996, an increase of $200,000 or 1.2%. This
increase is the result of increased production which was partially offset
by an increase in contractual adjustments, discounts and other
adjustments.
PREPAID HEALTH CARE, NET. Prepaid Health Care, net increased from $15.0
million for the ten months ended September 30, 1995 to $16.8 million for
the ten months ended September 30, 1996, an increase of $1.8 million or
12.0%. This increase correlates with a 7.1% increase in the number of
capitated lives which was offset by a decrease in certain capitation
rates.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by Corvallis Clinic's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
Compensation and Benefits decreased from $11.2 million for the ten months
ended September 30, 1995 to $8.2 million for the ten months ended September
30, 1996, a decrease of $3.0 million or 26.8%. This decrease was the result
of reduced compensation amounts paid per physician in 1996 compared to 1995
as a result of changes to the compensation plan calculation mechanics.
The amount available for Provider Compensation and Benefits will be directly
affected by the amount of the management fee to be paid to PPI. If the New
PC Management Agreement had been in effect during these periods, the amount
available for Provider Compensation and Benefits would have been reduced by
the amount of the management fee of $1,331,000 in 1996 and $1,611,000 in
1995. Although the impact can not be determined at this time, the amount
available for Provider Compensation and Benefits may also be affected by
synergies resulting from the Merger and management's ability to reduce costs
or enhance revenues. During 1995, Corvallis Clinic recorded Provider
Compensation and Benefits expense in excess of amounts available from
current operating profits. Any remaining obligations for Provider
Compensation and Benefits as of the Effective Time will be transferred to
PPI. In the future, the Management Agreement does not provide for, nor do
the Companies intend to pay, Provider Compensation and Benefits in excess of
amounts generated from operations on an annual basis.
MANAGEMENT SERVICES
The historical operating expenses of Corvallis Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC, SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and
Benefits, which includes the salaries, wages and benefits of all
non-provider personnel, increased from $10.7 million for the ten months
ended September 30, 1995 to $12.1 million for the ten months ended September
30, 1996, an increase of $1.4 million or 13.1%. The increase is the result
of the addition of new employees late in 1995 required to support the
increase in production and managed care lives. In addition, annual
compensation increases accounted for approximately 3% of the increase. As a
percentage of Net Revenues Less Provider Compensation and Benefits, clinic
salaries, wages and benefits decreased from 51.1% to 46.9% for the ten
months ended September 30, 1995 and 1996 respectively. This decrease is a
result of increased net revenues and decreased Provider Compensation and
Benefits.
PURCHASED MEDICAL SERVICES. Purchased Medical Services, which include
professional and diagnostic services performed by third parties, increased
from $3.4 million for the ten months ended September 30, 1995 to $4.4
million for the ten months ended September 30, 1996, an increase of $1.0
million or 29.4%. This increase results from the additional use of
externally provided managed care services resulting from an increase in
production and managed care lives.
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MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $2.9 million for the ten months ended September 30, 1995 to
$3.5 million for the ten months ended September 30, 1996, an increase of
$600,000 or 20.7%. This increase results from the additional use of
internally provided services resulting from an increase in production and
managed care lives and, to a lesser extent, the modification of drug
therapies for oncology patients.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses
increased from $2.5 million for the ten months ended September 30, 1995 to
$2.6 million for the ten months ended September 30, 1996, an increase of
$100,000 or 4.0%. This increase is primarily due to an increase in insurance
and other overhead costs associated with the addition of new providers in
1996. As a percentage of Net Revenue Less Provider Compensation and
Benefits, General and Administrative expenses decreased from 12.0% in 1995
to 9.9% in 1996. The decrease is due to the fixed cost component of general
and administrative expenses remaining consistent relative to increased
revenues and decreased Provider Compensation.
OTHER NON-OPERATING INCOME. Other Non-Operating Income increased from
$422,000 for the ten months ended September 30, 1995 to $555,000 for the ten
months ended September 30, 1996, an increase of $133,000 or 31.5%. The
increase in operating income was the result of higher losses experienced on
the sale of assets during the ten months ended September 30, 1995.
TWELVE MONTHS ENDED NOVEMBER 30, 1995 COMPARED TO TWELVE MONTHS ENDED NOVEMBER
30, 1994
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $19.5 million
for the 12 months ended November 30, 1994 to $20.7 million for the 12
months ended November 30, 1995, an increase of $1.2 million or 6.2%. The
increase is primarily attributable to the addition of 13 providers in the
last four months of 1995.
PREPAID HEALTH CARE, NET. Prepaid Health Care, net increased from $15.8
million for the 12 months ended November 30, 1994 to $18.5 million for
the 12 months ended November 30, 1995, an increase of $2.7 million or
17.0%. This increase correlates with the 21.4% increase in the number of
capitated lives. However, the addition of capitated lives from the new
senior plan were not added until October, 1995.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by Corvallis Clinic's Board of
Directors. Amounts of Provider Compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
Compensation and Benefits decreased from $13.7 million for the year ended
November 30, 1994 to $13.2 million for the year ended November 30, 1995, a
decrease of $500,000 or 3.6%. This decrease was the result of decreased
bonuses paid to the providers in 1995 versus 1994 due to reduced operating
results.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. If the New
PC Management Agreement had been in effect during these periods, the amount
available for Provider Compensation and Benefits would have been reduced by
the amount of the management fee of $1,776,000 in 1995 and $1,992,000 in
1994. Although
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<PAGE>
the impact can not be determined at this time, the amount available for
Provider Compensation and Benefits may also be effected by synergies
resulting from the Merger and management's ability to reduce costs or
enhance revenues.
During 1995 and 1994, Corvallis Clinic recorded Provider Compensation and
Benefits expense in excess of amounts available from current operating
profits. Any remaining obligations for Provider Compensation and Benefits as
of the Effective Time will be transferred to PPI. In the future, the
Management Agreement does not provide for, nor do the Companies intend to
pay, Provider Compensation and Benefits in excess of amounts generated from
operations on an annual basis.
MANAGEMENT SERVICES
The historical operating expenses of Corvallis Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and
Benefits which includes the salaries, wages and benefits of all non-provider
personnel, increased from $10.4 million for the 12 months ended November 30,
1994 to $12.6 million for the 12 months ended November 30, 1995, an increase
of $2.2 million or 21.2%. This change is due to the increased number of
employees in anticipation of increasing the number of providers.
PURCHASED MEDICAL SERVICES. Purchased Medical Services, which include
professional and diagnostic services performed by third parties, increased
from $3.1 million for the 12 months ended November 30, 1994 to $4.7 million
for the 12 months ended November 30, 1995, an increase of $1.6 million or
51.6%. Purchased Medical Services as a percentage of prepaid health care
increased from 19.5% for the 12 months ended November 30, 1994 to 25.5% for
the 12 months ended November 30, 1995. This increase results from the
additional use of externally provided managed care services, by existing
members, and from an increase in the number of providers and capitated
lives.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $3.3 million for the 12 months ended November 30, 1994 to
$3.8 million for the 12 months ended November 30, 1995, an increase of
$500,000 or 15.1%. This increase is due to the number of providers added in
the last four months of 1995 and increased number of office visits.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses
increased from $3.2 million for the twelve months ended November 30, 1994 to
$3.6 million for the 12 months ended November 30, 1995, an increase of
$400,000 or 12.5%. General and Administrative expenses as a percentage of
Net Revenue Less Provider Compensation and Benefits decreased from 14.6% for
the 12 months ended November 30, 1994 to 13.7% for the 12 months ended
November 30, 1995. The increase in General and Administrative expenses was
the result of increased recruiting costs for the addition of 13 new
providers and additional legal costs incurred for the creation of HealthCare
Partners, LLC.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible
Accounts increased from $1.2 million for the 12 months ended November 30,
1994 to $1.8 million for the 12 months ended November 30, 1995, an increase
of $600,000 or 50.0%. This increase was the result of changes in business
office personnel during the period which resulted in lower collection of
receivables generated during the period. New business office personnel put
in place at the end of 1995 implemented policies to improve the collection
rate on private pay patients.
OTHER NON-OPERATING INCOME. Other Non-Operating Income increased from
$166,000 for the 12 months ended November 30, 1994 to $738,000 for the 12
months ended November 30, 1995, an increase of $572,000 or 344.6%. The
increase is primarily due to increased income from Corvallis MRI, the
investment in HealthCare Partners, and fees received for processing claims
on behalf of third parties.
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<PAGE>
INTEREST EXPENSE. Interest Expense increased from $780,000 for the 12
months ended November 30, 1994 to $1.2 million for the 12 months ended
November 30, 1995, an increase of $420,000 or 53.8%. The increase in
interest expense was due to increased borrowings for new clinic space and
purchase of equipment, as well as interest cost related to a financing lease
obligation.
TWELVE MONTHS ENDED NOVEMBER 30, 1994 COMPARED TO TWELVE MONTHS ENDED NOVEMBER
30, 1993
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $16.4 million
for the 12 months ended November 30, 1993 to $19.5 million for the 12
months ended November 30, 1994, an increase of $3.1 million or 19.0%.
This increase was due to an increase in patient visits of 12% and the
addition of Philomath Family Medicine in May, 1993, which was composed of
substantially all fee-for-service providers.
PREPAID HEALTH CARE, NET. Prepaid Health Care, net increased from $13.5
million for the 12 months ended November 30, 1993, to $15.8 million for
the 12 months ended November 30, 1994, an increase of $2.3 million or
17.0%. This correlates with a 17.1% increase in capitated lives.
PROVIDER COMPENSATION AND BENEFITS. Historically, Provider Compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were
based upon arbitrary and subjective decisions made by the Corvallis
Clinic's Board of Directors. Amounts of Provider Compensation distributed
between providers were based on mixtures of productivity and salary based
formulas taking into consideration historical and projected provider
productivity. Provider Compensation and Benefits increased from $7.1
million for the year ended November 30, 1993 to $13.7 million for the
year ended November 30, 1994 an increase of $6.6 million or 93.0%. This
increase was the result of bonuses paid to providers in 1994 which
stemmed from a significant cash basis income.
The amount available for Provider Compensation and Benefits will be
directly effected by the amount of the management fee to be paid to PPI.
If the New PC Management Agreement had been in effect during these
periods, the amount available for Provider Compensation and Benefits
would have been reduced by the amount of the management fee of $1,992,000
in 1994 and $1,450,000 in 1993. Although the impact can not be determined
at this time, the amount available for Provider Compensation and Benefits
may also be effected by synergies resulting from the Merger and
management's ability to reduce costs or enhance revenues.
During 1994, Corvallis Clinic recorded Provider Compensation and Benefits
expense in excess of amounts available from current operating profits.
Any remaining obligations for Provider Compensation and Benefits as of
the Effective Time will be transferred to PPI. In the future, the
Management Agreement does not provide for, nor do the Companies intend to
pay, Provider Compensation and Benefits in excess of amounts generated
from operations on an annual basis.
MANAGEMENT SERVICES The historical operating expenses of Corvallis Clinic
represent the costs incurred in the Management Services portion of the business.
Such costs will be reimbursed to PPI in the future as a component of the
management fee.
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CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and
Benefits which include the salaries, wages and benefits of all non-provider
related personnel, increased from $10.2 million for the 12 months ended
November 30, 1993 to $10.4 million for the 12 months ended November 30,
1994, an increase of $200,000 or 2.0%. Clinic Salaries, Wages and Benefits,
as a percentage of Net Revenues Less Provider Compensation and Benefits,
increased from 44.6% in 1993 to 48.1% in 1994. This increase was the result
of increasing the number of employees in anticipation of future growth and
the addition of Philomath Family Medicine in May of 1993.
PURCHASED MEDICAL SERVICES. Purchased Medical Services, which include
professional and diagnostic services performed by third parties, increased
from $2.7 million for the 12 months ended November 30, 1993 to $3.1 million
for the 12 months ended November 30, 1994, an increase of $400,000 or 14.8%.
This increase is primarily the result of the growth in capitated lives.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies, which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $3.0 million for the 12 months ended November 30, 1993 to
$3.3 million for the 12 months ended November 30, 1994, an increase of
$300,000 or 10.0%. This increase is due to the 12% increase in patient
visits.
GENERAL AND ADMINISTRATIVE. General and Administrative expenses
increased from $2.4 million for the twelve months ended November 30, 1993 to
$3.2 million for the 12 months ended November 30, 1994, an increase of
$800,000 or 33.3%. As a percentage of Net Revenues Less Provider
Compensation and Benefits, General and Administrative expenses increased
from 10.7% in 1993 to 14.6% in 1994. The increase in General and
Administrative expenses resulted from higher costs incurred for professional
liability insurance, temporary employees, and consultant fees.
LIQUIDITY AND CAPITAL RESOURCES
The working deficit for Corvallis Clinic has decreased from $1.3 million at
November 30, 1995 to $900,000 at September 30, 1996. As a result of the Merger,
PPI will assume the financing activities relating to the working capital needs
of Corvallis Clinic. See "PPI Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Investing activities which consisted primarily of property, plant, and
equipment purchases in the first ten months of 1996 required $1,000,000 of cash.
For the 12 months ended November 30, 1995, capital expenditures required $3.2
million. These activities primarily consisted of payments to general contractors
and architects for the development, design and construction of the Asbury
building remodeling project and the initial construction of the Albany Family
Medicine Building. PPI and Corvallis Clinic will negotiate and agree upon the
annual capital budget and the related terms of providing the needed financing as
part of the activities of the Joint Management Board. See "PPI Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Operation, Management and Business of PPI Following the Merger."
Financing activities generated approximately $400,000 for the ten months
ended September 30, 1996, compared to $5.2 million for the 12 months ended
November 30, 1995. Corvallis Clinic's long-term borrowings produced $1.4 million
for the ten months ended September 30, 1996, and $1.2 million for the 12 months
ended November 30, 1995. Also in 1995, Corvallis Clinic received $2.7 million
from HealthCare Partners, LLC relating to the direct financing lease obligation.
In addition, Corvallis Clinic made payments, in accordance with the terms of the
Expense Sharing Agreement, of approximately $850,000 in 1996.
Corvallis Clinic has credit arrangements as of September 30, 1996 which are
summarized as follows: a short-term working capital line-of-credit in the
aggregate amount of $2.5 million and an equipment credit facility in the amount
of $1.4 million. PPI will seek to combine Corvallis Clinic's short-term line of
credit into a consolidated PPI line of credit. See "PPI Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Operation,
Management and Business of PPI Following Merger--Practice Management Agreement."
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Corvallis Clinic management believes it has sufficient funds and short-term
borrowing capacity to finance its operation through the end of 1996. Corvallis
Clinic recognizes that in order to finance the continued long-term growth of the
organization it needs to increase its ability to access capital. See "The Merger
and Related Transactions--Corvallis Clinic's Reasons for the Merger."
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BUSINESS OF MEDFORD CLINIC
GENERAL
Medford Clinic is a multi-specialty group formed in 1946 and now organized
as an Oregon professional corporation. Medford Clinic provides professional
health care services on both a prepaid and fee-for-service basis in the greater
Medford, Oregon area. Medford Clinic contracts directly with health plans and
PPOs to provide medical services to enrollees who have selected a Medford Clinic
physician as their primary health care provider. Through contracts with various
health plans, as of September 30, 1996, Medford Clinic physicians were
responsible for the health care of approximately 24,000 health plan members.
Medford Clinic operates nine clinical locations as well as several
hospital-based locations in the Medford area.
Medford Clinic has grown through a combination of acquisitions of medical
practices that complement its services and recruitment of individual associate
physicians in needed practice areas. In order for Medford Clinic to provide its
patients with the necessary specialty services, Medford Clinic contracts with
providers of such specialties that Medford Clinic physicians do not practice.
For example, Medford Clinic has contracts with independent orthopedics and
radiology groups to provide services to patients covered under capitated health
plan contracts.
In 1993, Medford Clinic acquired all of the interest of Rogue Valley Medical
Center ("RVMC") in an entity called Rogue Valley Dialysis Services ("RVDS"), a
joint venture that was organized by Medford Clinic and RVMC in 1987. The joint
venture with RVMC was terminated effective July 1, 1993, and Medford Clinic
acquired RVMC's share of the assets in the joint venture. Medford Clinic
currently operates the RVDS center under the marketing name "Rogue Valley
Dialysis Services." After the Merger, PPI will succeed to financial liabilities
associated with the acquisition of the RVDS center.
Medford Clinic also owns and operates another dialysis center under the name
"Redwood Dialysis Center" and manages dialysis units and provides dialysis
services at three local hospitals (Providence Medford Medical Center and RVMC in
Medford, and Merle West Medical Center in Klamath Falls, Oregon).
In addition, Medford Clinic is the sole member of Medford Clinic Foundation,
an Oregon nonprofit corporation (the "Foundation"). The Foundation was organized
in 1979. In February 1980, the Foundation obtained from the Internal Revenue
Service a determination of federal tax-exempt status as a Section 501(c)(3)
organization which is not a private foundation. The Foundation generally engages
in raising funds that are distributed to individuals or entities whose grant
proposals are approved. All grants must be used for worthy purposes that benefit
the Medford community.
STRATEGY
Medford Clinic's strategy is to continue penetration of its existing
markets, expand into other markets, create strategic alliances with hospitals,
increase the operational efficiency of, and reduce costs associated with, the
Medford Clinic operations.
The future growth of Medford Clinic in its existing markets is dependent in
part on the continued increase of health plan enrollees using Medford Clinic
providers for medical services on a capitated basis. This growth may come, with
respect to professional services, from the development or acquisition of
additional facilities; and the development of affiliations with medical groups
serving enrollees in existing markets, increased enrollment in health plans
currently contracting with Medford Clinic and its medical affiliates, and
contracts with new health plans. Medford Clinic has added ancillary services to
reduce dependence on outside providers. It actively recruits new providers and
seeks to enter into new managed care contracts in order to enlarge the potential
patient base in its service areas.
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Medford Clinic's principal strategy for expanding into new markets is
through acquisitions (through purchase, merger, or otherwise) of medical groups.
Medford Clinic generally seeks providers that provide needed specialties and
that have established reputations for providing quality medical care. Medford
Clinic has also sought to expand its existing operations through the development
of its clinics. Medford Clinic also will consider opportunities to enter into
contractual arrangements with providers of necessary physician or ancillary
services in existing or new markets.
Medford Clinic seeks to increase its operating efficiency through a variety
of factors, including refinement of its utilization management programs that
deliver information used by its providers to monitor and improve their practice
patterns, increased specialization and the development of additional in-house
services. Medford Clinic has implemented cost reductions in 1994 and 1995, and
such efforts are continuing. Cost reductions to date have included restructuring
of salary levels for professional staff, reorganization of certain ancillary
services and alternate approaches to purchasing specialty medical care services.
Medford Clinic's costs consist primarily of providers and non-provider
compensation and benefits.
Medford Clinic has recently launched the development of two new operating
technologies designed to increase productivity and improve service. The first is
a computerized nurse triage program launched in July 1996, which is operational
five days per week. The second is the AutoChart Electronic Medical Record
currently being piloted in the Specialty Medicine Department of the clinic. Both
technologies are somewhat unique in the local market and are being implemented
to increase productivity and improve service to patients.
Medford Clinic intends to pursue Medical Quality Commission accreditation
under the auspices of AMGA in 1997. Management believes that such accreditation
will further its marketability and business prospects.
GOVERNMENT REGULATION
Medford Clinic is subject to federal and state laws regulating the
relationships among providers of health care services, physicians and other
clinicians. These laws include the fraud and abuse provisions of the Medicare
and Medicaid statutes, which prohibit the solicitation, payment, receipt or
offering of any direct or indirect remuneration for the referral of Medicare or
Medicaid patients or for the recommending, leasing, arranging, ordering or
purchasing of Medicare or Medicaid covered services. Other laws impose
significant penalties for false or improper billings for physician services and
impose restrictions on physician referrals for designated health services
reimbursable under the Medicare or Medicaid programs to entities with which they
have financial relationships. See "Physician Practices Management Industry--
Government Regulation". While Medford Clinic believes it is in material
compliance with applicable laws, there is no assurance that its present or past
operations will not be subjected to scrutiny or legal challenges.
SERVICES PROVIDED
Medford Clinic operates seven clinics that are staffed by primary care
providers and various medical and surgical specialists. As of December 1, 1996,
Medford Clinic employed 36 primary care and 31 specialist providers. Medford
Clinic's providers and non-provider professionals provide a wide variety of
medical care. Medford Clinic's primary care services include family practice,
internal medicine and pediatrics. Medford Clinic also utilizes the services of
eight nurse practitioners and one physician assistant. Medford Clinic also
provides services, such as hemodialysis and chemotherapy, through local
hospitals. At certain locations, Medford Clinic also operates centers for
ambulatory surgery, urgent care, cancer
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management, hemodialysis and allergy treatment. Medford Clinic provides the
following professional services:
<TABLE>
<S> <C>
Allergy and Asthma Obstetries
Cardiology Oncology and Hematology
Dermatology Otolaryngology
Endoctinology Pediatrics
Family Practice Podiatry
Gastroenterology Rheumatology
Gynecology Surgery--General and Vascular
Infectious Disease Urgent Care
Internal Medicine Urology
Nephrology
</TABLE>
Under capitated contracts, Medford Clinic provides or arranges for all
physician services and Medford Clinic receives a fixed monthly capitation
payment from health plans for each member who chooses a Medford Clinic physician
as his or her primary care physician. Contracts with prepaid health plans
(including PacifiCare, Secure Horizons and Oregon Health Plan) accounted for
approximately 13% of Medford Clinic's consolidated operating revenue in fiscal
1995. To the extent that enrollees require more care than is anticipated or
require supplemental medical care which is not otherwise reimbursed by the
payors, aggregate capitation payments may be insufficient to cover the costs
associated with the treatment of enrollees. If such revenue is insufficient,
Medford Clinic maintains stop-loss coverage which mitigates the effect of
occasional high utilization of health care services. Enrollment is categorized
as "commercial" for enrollees under the age of 65 whose health coverage is
generally sponsored by employers or "senior" for retired enrollees over the age
of 65 covered by Medicare. Higher capitation rates are typically received for
senior patients, because their medical needs are generally greater and
consequently the cost of covered care is higher.
At September 30, 1996, over 24,000 managed care enrollees were covered
beneficiaries for professional services by Medford Clinic. Health plans
currently under contract with Medford Clinic include Blue Cross, HMO of Oregon,
Good Health Plan, MetraHealth, Vantage Health Services and others.
ENROLLEES OF AT-RISK HEALTH PLANS UNDER CONTRACT WITH
MEDFORD CLINIC
(AS OF SEPTEMBER 30, 1996)
<TABLE>
<CAPTION>
ENROLLED % OF TOTAL
--------------------------------- -----------
<S> <C> <C>
Commercial...................................... 11,937 58.2
Medicaid........................................ 4,806 23.4
Medicare........................................ 3,762 18.4
------ -----
TOTAL........................................... 20,505 100.0%
------ -----
------ -----
</TABLE>
Medford Clinic closely monitors the need of health plan enrollees to access
specialists and the utilization of outside providers to ensure efficient and
appropriate delivery of care on a day-to-day basis. The Medical Director and
Utilization Review Team review and authorize requests for referrals to outside
providers on a daily basis. Medford Clinic's utilization review staff monitors
enrollees receiving care outside of the Medford Clinic locations. Claims for
payment to outside providers are scrutinized through a similar process;
physicians and Medford Clinic's claims payments administrative staff routinely
examine claims for appropriate medical charges.
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MARKETING AND DEVELOPMENT
Medford Clinic developed a comprehensive strategic plan which delineates
target markets. Subsequent planning analyses indicate that there are 260,000
residents in the primary service area of Jackson and Josephine counties. The
strongest growth is in the City of Medford and its outlying development areas.
Medford Clinic is considering development of additional primary care satellites
to accommodate future population and managed care growth.
COMPETITION
The health care industry is highly competitive. The industry is also subject
to continuing changes in the services that are provided and how providers are
selected and paid.
Medford Clinic operates in the southern Oregon region and the northern
fringes of California and generally provides outpatient services to 30-40% of
the outpatient services market. The significant health care competitors in this
market are almost exclusively within the community of Medford. They include the
ASANTE Health System, which is comprised of one hospital in the city of Medford,
two hospitals in the city of Grants Pass, multiple subsidiaries related to
ancillary and support services, and a physician practice known as the Southern
Oregon Health Trust (with 35 primary care physicians).
A significant amount of competition comes from local hospitals. Medford
Clinic competes directly with the Southern Oregon Health Trust for primary care
services in the region. The Southern Oregon Health Trust is managed as a
department of Rogue Valley Medical Center in Medford. Although there is
increased competition with the Trust, Medford Clinic's primary care base
continues to grow in direct response to increasing patient demand. The existence
of the Southern Oregon Health Trust has apparently not inhibited Medford
Clinic's growth. Providence Medical Center also competes with Medford Clinic.
Providence Medford Medical Center owns and operates a primary care medical group
comprised of 15 primary care physicians.
In addition, Medford Clinic competes with a local IPA by the name of
PrimeCare with approximately 150 member physicians. This IPA is primarily
composed of specialists and competes directly with Medford Clinic.
EMPLOYEES
PROVIDER EMPLOYEES.
Medford Clinic physicians initially sign one-year associate employment
contracts. These contracts offer a specified guaranteed salary and an incentive
bonus. Physicians are also eligible to receive benefits such as health, dental
and life insurance, paid time off and an allowance for continuing medical
education and other professional expenses. At the end of the associate year, the
physician is eligible to become a shareholder. The transition must be approved
by both the individual physician and a 70% vote of the shareholders. A rigorous
peer review is completed prior to the offering of shareholder status. Medford
Clinic, as of December 1, 1996, employs 65 physicians (57 full-time and eight
part-time).
As of December 1, 1996, Medford Clinic employs eight nurse practitioners and
one physician assistant.
NON-PROVIDER EMPLOYEES
As of December 1, 1996, Medford Clinic had approximately 566 non-physician
employees (304 full time and 262 part-time), including approximately 60
employees working in the dialysis center. None of Medford Clinic's employees are
represented by a labor union. Management of Medford Clinic believes its employee
relations are good.
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INSURANCE
Medford Clinic maintains insurance coverage for various perils and from
various carriers. In addition to property and casualty, worker's compensation,
directors and officers liability and other coverage Medford Clinic believes to
be customary and reasonable for a business of its kind, Medford Clinic maintains
a general and professional liability insurance policy (the "Liability Policy")
with Norcal insurance. The Liability Policy provides for $1 million in coverage
per claim and $3 million aggregate annual coverage. Each professional of Medford
Clinic, at each location, is covered under the Liability Policy.
PROPERTIES AND FACILITIES
Medford Clinic owns two properties, the Redwood Dialysis Center and the
Rogue Valley Dialysis Center facilities. Medford Clinic leases its other
facilities from third parties. As of January 2, 1997, Medford Clinic leased real
estate for their clinics in eight locations in the Medford, Oregon area. Medford
Clinic leases an approximately 61,000 square foot building at 555 Black Oak
Drive in Medford which is occupied by its main administrative and clinical
facilities. In addition, Medford Clinic leases one other property used for
general administrative offices. Certain of Medford Clinic's leased facilities
are owned by shareholders of Medford Clinic.
INFORMATION SYSTEMS
Medford Clinic believes that the effective analysis of medical and financial
data is essential in today's managed care environment. Accordingly, Medford
Clinic is committed to the development of a fully-integrated management
information system ("MIS") for practice management. Medford Clinic's MIS
capabilities include nurse triage electronic medical charting and tracking
analysis of practice management information and financial data. Practice
management functions of the current MIS include registration, centralized
scheduling and appointments, electronic claims submission and remittance.
Managed care functions include referrals, eligibility, determination, claim
management and payment functions.
LEGAL PROCEEDINGS
Medford Clinic is engaged in the defense of lawsuits arising in the ordinary
course and conduct of its business. Medford Clinic believes that such actions
will not have a material adverse effect on Medford Clinic.
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DESCRIPTION OF CAPITAL STOCK OF MEDFORD CLINIC
As of January 2, 1997, the authorized capital stock of Medford Clinic
consists of 500 shares of Medford Clinic Common Stock held by 58 shareholders
holding all of the 57 1/3 issued and outstanding shares of Medford Clinic Common
Stock.
It is anticipated that Medford Clinic will grant, prior to the Effective
Time, New Options exercisable for an aggregate of 10.6 shares of Medford Clinic
Common Stock.
All of the outstanding Medford Clinic Common Stock has been validly issued
and is fully paid and nonassessable. There are no outstanding options, warrants,
subscriptions, conversions or other rights, agreements or commitments obligating
Medford Clinic to issue any additional shares of Medford Clinic Common Stock or
any other securities convertible into, exchangeable for or evidencing the right
to subscribe, for any Medford Clinic Common Stock. There are no voting trusts or
other agreements or understandings to which Medford Clinic is a party with
respect to the voting of Medford Clinic Common Stock. Cash dividends were not
declared on the common equity of Medford Clinic in the 1995 or 1994 fiscal
years.
Shareholders of Medford Clinic currently are subject to various rights,
privileges and restrictions with respect to their shares of common stock in
Medford Clinic. Medford Clinic's bylaws specify that only licensed physicians
may be shareholders, and require that shareholders dispose of their stock in the
event of disqualification from practice or termination of employment by Medford
Clinic. Each Medford Clinic shareholder's employment agreement sets forth the
terms of employment and grounds for termination. Each shareholder of Medford
Clinic is also bound by the terms of a buy-sell agreement, which restricts the
transfer of shares and sets forth the grounds and procedure for redemption of a
shareholder's shares by Medford Clinic.
Medford Clinic has two versions of shareholder buy-sell agreement -- the
first version for shareholders who were shareholders as of November 1995 (the
"Buy-Sell Agreement"), the second version for physicians who become shareholders
after that date (the "New Buy-Sell"). Both the Buy-Sell Agreement and the New
Buy-Sell prohibit the transfer of Medford Clinic Common Stock by a shareholder,
except as provided in such agreement. Upon the occurrence of death or permanent
and total disability, termination of employment, reduction of practice to less
than half-time or bankruptcy of a shareholder, Medford Clinic is required to
repurchase all of such shareholder's Medford Clinic Common Stock for $10.
The most significant difference between the two versions of the buy-sell
agreement is that, under the New Buy-Sell, the right of new shareholders to
receive "Dissolution" proceeds is subject to a vesting period of three years (33
percent per year over three years), whereas each shareholder subject to a Buy-
Sell Agreement is fully vested from the effective date of such agreement. A
"Dissolution" is defined in clause (i) of Section 7.A of both the Buy-Sell
Agreement and the New Buy-Sell as an event in which Medford Clinic "has merged
with another entity, has sold all of its shares to another entity, or has sold
substantially all of its assets to another entity."
Under Section 7.A. of both the Buy-Sell Agreement and the New Buy-Sell, a
retired shareholder (i.e., an individual who was retired from Medford Clinic and
whose Medford Clinic Common Stock has been redeemed by Medford Clinic) is deemed
to be a "Qualified Retiree" if all of the conditions set forth in such section
are satisfied.
Both the Buy-Sell Agreement and the New Buy-Sell provide that, upon the
occurrence of a Dissolution of Medford Clinic, the consideration to be received
by the holders of Medford Clinic Common Stock in connection therewith shall be
distributed in equal portions to all then-current shareholders, and that
Qualified Retirees are entitled to the following percentages of a shareholder
portion:
(A) a Qualified Retiree whose shareholder status terminated less than one
year prior to the closing date of the Dissolution transaction shall be
entitled to 100% of a shareholder portion;
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(B) a Qualified Retiree whose shareholder status terminated more than one
year and less than two years prior to the closing of the Dissolution
transaction shall be entitled to 66% of a shareholder's portion; and
(C) a Qualified Retiree whose shareholder status terminated more than two
years and less than three years prior to the closing date of a
Dissolution transaction shall be entitled to 33% of a shareholder's
portion.
The terms of the Buy-Sell Agreement and the New Buy-Sell, as the case may
be, will not apply to shares of PPI Class A Common Stock or to shares in Medford
Clinic New PC subsequent to the Merger.
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SELECTED FINANCIAL DATA OF MEDFORD CLINIC
The following table sets forth selected financial data which have been
derived from the financial statements as of and for the years ended December 31,
1991 through 1995. The accompanying Balance Sheets as of December 31, 1994 and
1995, and the related Statements of Operations, Stockholders' Equity and Cash
Flows as of and for the years ended December 31, 1993 through 1995 have been
audited by Arthur Andersen LLP. The financial statements as of and for the nine
month periods ended September 30, 1995 and 1996 have been derived from the
unaudited financial statements of Medford Clinic which, in the opinion of
management included all adjustments (which consist of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein.
The following data should be read in conjunction with "Medford Clinic's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this document.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
----------------------------------------------------- --------------------
STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues:
Fee-For-Service, net................................ $ 14,907 $ 17,925 $ 22,805 $ 29,920 $ 33,951 $ 25,022 $ 24,831
Prepaid Health Care................................. -- -- 269 2,407 5,015 3,271 5,437
--------- --------- --------- --------- --------- --------- ---------
Total Net Revenues.................................... 14,907 17,925 23,074 32,327 38,966 28,293 30,268
Less Provider Compensation and Benefits............... (4,735) (5,647) (7,009) (9,248) (11,239) (8,281) (8,552)
--------- --------- --------- --------- --------- --------- ---------
Net Revenue Less Provider Compensation and Benefits... 10,172 12,278 16,065 23,079 27,727 20,012 21,716
Clinic Salaries, Wages & Benefits..................... 4,428 5,124 7,683 10,900 11,838 8,679 10,020
Purchased Medical Services............................ 522 592 758 920 2,283 1,308 2,960
Medical and Office Supplies........................... 1,695 1,934 3,368 4,676 5,578 4,293 3,937
General & Administrative.............................. 1,444 1,988 2,306 2,959 3,446 2,463 2,555
Provision for Uncollectible Accounts.................. 308 288 396 1,027 868 651 767
Lease and Rent Expense................................ 622 669 702 1,057 1,139 834 804
Depreciation and Amortization......................... 708 641 592 918 1,125 792 851
--------- --------- --------- --------- --------- --------- ---------
Total Operating Expenses.............................. 9,727 11,236 15,805 22,457 26,277 19,020 21,894
Operating Income (Loss)............................... 445 1,042 260 622 1,450 992 (178)
Other Non-Operating (Income) Expenses................. (262) (242) (49) -- -- -- --
Interest Income....................................... 27 25 19 27 97 45 94
Interest Expense...................................... 194 143 200 324 487 380 336
--------- --------- --------- --------- --------- --------- ---------
Income (Loss) Before Taxes............................ 540 1,166 128 325 1,060 657 (420)
--------- --------- --------- --------- --------- --------- ---------
Income Tax Expense (Benefit).......................... 203 413 44 133 408 253 (246)
--------- --------- --------- --------- --------- --------- ---------
Net Income (Loss)..................................... 337 753 84 192 652 404 (174)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
AS OF SEPTEMBER 30
AS OF DECEMBER 31
----------------------------------------------------- --------------------
BALANCE SHEET DATA: 1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Working Capital....................................... 680 1,398 2,511 2,838 3,053 3,138 1,828
Total Assets.......................................... 6,311 7,600 10,969 14,534 15,245 16,387 16,162
Long-Term Debt, net................................... 1,419 1,067 3,128 5,459 4,932 5,090 4,184
Stockholder's Equity.................................. 1,484 2,237 2,322 2,514 3,166 2,918 2,355
</TABLE>
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MEDFORD CLINIC MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
OVERVIEW
Medford Clinic is a primary care based multi-specialty medical clinic.
Medford Clinic was founded in 1946 and at January 2, 1997 consisted of 588
employees and 73 professional providers who offer a wide range of primary and
specialty care services at nine different locations. In addition, Medford Clinic
offers ancillary services such as radiology, pharmacy and laboratory services.
In 1994, Medford Clinic expanded its dialysis operations, opening a new
facility in Josephine County. Medford Clinic now provides dialysis services
through its Rogue Valley Dialysis Center which was operated as a joint venture
with Rogue Valley Medical Center ("RVMC") until 1993 when Medford Clinic
purchased RVMC's interest in a transaction accounted for as a purchase.
Historically, the operations of Medford Clinic included both the provision
of medical services that will be provided by the New PCs and the management
aspects of the practice that will be carried on in the future by PPI. As such,
it was not necessary, nor did the Companies segregate their operating results by
these categories. Accordingly, the results discussed below will not reflect the
results that might have occurred had those businesses been operated separately.
The revenues are reported on a Fee-for-Service and Prepaid basis as follows:
FEE-FOR-SERVICE. Patient service revenues are recorded at established
rates in the period in which services are provided. Medford Clinic has
agreements with third-party payors that provide payments to Medford
Clinic at amounts different from its established rates. The difference
between charges generated from agreements with third party payors and the
related payment amounts are reflected as contractual discounts.
PREPAID. Medford Clinic contracts with various HMOs to provide care to
plan enrollees at prepaid monthly fixed capitation rates on a per member
basis. Under a prepaid contract, Medford Clinic assumes the obligation of
providing all contractually defined health care services to enrollees and
is obligated to reimburse outside Providers for services rendered to
enrollees. Included in some of these contracts is a provision that
Medford Clinic shares in risk for control of costs of inpatient hospital
services. Risk sharing contracts provide financial incentive to control
costs and provide financial penalties when costs exceed a predetermined
budget. To manage its liability to outside providers, Medford Clinic has
entered into contractual agreements with certain outside providers. These
arrangements are discounted fee for service arrangements. Additional
limitations on losses are provided by the payment of stop-loss
reinsurance premiums. In addition, the prepaid contracts contain minimum
threshold reimbursement levels which limit the downside risk.
The following table indicates the payor mix of the aggregate net clinic
revenue earned by Medford Clinic:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
PAYOR SEPTEMBER 30, 1996
- -------------------------------------------------------------------------- ---------------------
<S> <C>
Fee-For-Service:
Commercial and Private.................................................. 63.7%
Medicare................................................................ 17.3%
Medicaid................................................................ 1.0%
Prepaid(6)................................................................ 18.0%
-----
100.0%
-----
-----
</TABLE>
- ------------------------
(6) Includes Commercial, Medicare and Medicaid prepaid programs.
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The table below sets forth the percentages of net revenue less compensation
to providers represented by certain items reflected in Medford Clinic's
Statements of Income. The information that follows should be read in conjunction
with the Financial Statements and notes thereto contained elsewhere.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Revenue Less Provider Compensation and Benefits......... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Clinic Salaries, Wages and Benefits......................... 47.8% 47.2% 42.7% 43.3% 46.1%
Purchased Medical Services.................................. 4.7% 4.0% 8.2% 6.5% 13.6%
Medical and Office Supplies................................. 21.0% 20.3% 20.1% 21.5% 18.1%
General and Administrative.................................. 14.3% 12.8% 12.4% 12.3% 11.8%
Lease and Rent Expense...................................... 4.4% 4.6% 4.2% 4.2% 3.7%
Provision for Uncollectible Accounts........................ 2.5% 4.4% 3.1% 3.2% 3.5%
Depreciation and Amortization............................... 3.7% 4.0% 4.1% 4.0% 4.0%
--------- --------- --------- --------- ---------
Total Operating Expenses.................................. 98.4% 97.3% 94.8% 95.0% 100.8%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Operating Income (Loss)..................................... 1.6% 2.7% 5.2% 5.0% (0.8)%
Other Non-Operating Income.................................. 0.3% 0.0% 0.0% 0.0% 0.0%
Interest Income............................................. 0.1% 0.1% 0.3% 0.2% 0.4%
Interest Expense............................................ 1.2% 1.4% 1.7% 1.9% 1.5%
--------- --------- --------- --------- ---------
Income (Loss) Before Taxes.................................. 0.8% 1.4% 3.8% 3.3% (1.9)%
Income Tax Expense (Benefit)................................ 0.3% 0.6% 1.5% 1.3% (1.1)%
--------- --------- --------- --------- ---------
Net Income (Loss)......................................... 0.5% 0.8% 2.3% 2.0% (0.8)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
MEDICAL SERVICES
Net revenues from providing Medical Services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES
Net revenues consist of revenues received from Fee-for Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net decreased from $25.0 million
for the nine months ended September 30, 1995 to $24.8 million for the
nine months ended September 30, 1996, a decrease of $200,000 or 0.8%.
Although there were three fewer providers in the nine months ended
September 30, 1996, compared to the same period ended September 30, 1995,
this was offset by a 10% increase in provider productivity.
PREPAID HEALTH CARE. Prepaid Health Care increased from $3.3 million for
the nine months ended September 30, 1995 to $5.4 million for the nine
months ended September 30, 1996, an increase of $2.1 million or 63.6%.
This increase correlates with 26% increase in the number of capitated
lives and expansion of contracted services over the same period.
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PROVIDER COMPENSATION AND BENEFITS. Historically, provider compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by Medford Clinic were
based upon arbitrary and subjective decisions made by the Medford Clinic
Board of Directors. Amounts of provider compensation distributed between
providers were based on mixtures of productivity and salary based formulas
taking into consideration historical and projected provider productivity.
Provider compensation and benefits increased from $8.3 million for the nine
months ended September 30, 1995 to $8.6 million for the nine months ended
September 30, 1996, an increase of $300,000 or 3.6%.
The amount available for Provider Compensation and Benefits will be directly
affected by the amount of the management fee to be paid to PPI. If the New
PC Management Agreement had been in effect during these periods, the amount
available for Provider Compensation and Benefits would have been reduced by
the amount of the management fee of $1,301,000 in 1996 and $1,430,000 in
1995. Although the impact can not be determined at this time, the amount
available for Provider Compensation and Benefits may also be affected by
synergies resulting from the Merger and management's ability to reduce costs
or enhance revenues.
During 1996, Medford Clinic recorded Provider Compensation and Benefits
expense in excess of amounts available from current operating profits. Any
remaining obligations for Provider Compensation and Benefits as of the
Effective Time will be transferred to PPI. In the future, the Management
Agreement does not provide for, nor do the Companies intend to pay, Provider
Compensation and Benefits in excess of amounts generated from operations on
an annual basis.
MANAGEMENT SERVICES
The historical operating expenses of Medford Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits,
which includes the salaries, wages and benefits of all non-provider personnel
increased from $8.7 million in the nine months ended September 30, 1995 to
$10.0 million in the nine months ended September 30, 1996, an increase of
$1.3 million or 14.9%. As a percentage of Net Revenue Less Provider
Compensation and Benefits, salaries increased from 43.3% to 46.1% in the nine
months ended September 30, 1995 and 1996, respectively. The increase was due
to staff added to support increased provider productivity, a planned 7%
increase in salaries and benefits, and a staff bonus.
PURCHASED MEDICAL SERVICES. Purchased Medical Services which include
professional and diagnostic services performed by third parties, increased
from $1.3 million in the nine months ended September 30, 1995 to $3.0 million
in the nine months ended September 30, 1996, an increase of $1.7 million or
131.0%. As a percentage of Net Revenue Less Provider Compensation and
Benefits, Purchased Medical Services increased from 6.5% to 13.6% in the nine
months ended September 30, 1995 and 1996, respectively. The increase is due
to increased prepaid health care revenue and contractual changes with regard
to services covered. The majority of these newly covered services were
purchased from outside providers.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies which include
pharmaceuticals, medical supplies, offices supplies and diagnostic supplies,
decreased from $4.3 million in the nine months ended September 30, 1995 to
$3.9 million in the nine months ended September 30, 1996 for a decrease of
$400,000 or 9.3%. As a percentage of Net Revenues Less Providers Compensation
and Benefits, Medical and Office Supplies decreased from 21.5% to 18.1% for
the nine months ended September 30, 1995 and 1996, respectively. The decrease
was partially attributable to decreased
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pharmacy sales in 1996 relative to 1995 and a drug inventory management
program undertaken in 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and Administrative Expenses
increased from $2.5 million in the nine months ended September 30, 1995 to
$2.6 million in the nine months ended September 30, 1996 for an increase of
$100,000 or 4.0% due to costs incurred during 1996 with respect to the
recruitment of eight providers.
TWELVE MONTHS ENDED DECEMBER 31, 1995 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1994
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as
follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $29.9 million
for the 12 months ended December 31, 1994 to $34.0 million for the 12
months ended December 31, 1995, an increase of $4.1 million or 13.7%.
This increase was attributable to the addition of 10 new providers in
mid-1994.
PREPAID HEALTH CARE. Prepaid Health Care increased from $2.4 million for
the 12 months ended December 31, 1994 to $5.0 million for the twelve
months ended December 31, 1995, an increase of $2.6 million or 108.3%.
This increase correlates with the 79% increase in the number of capitated
lives over the same period combined with an expansion of contracted
covered services for certain plans.
PROVIDER COMPENSATION AND BENEFITS. Historically, provider compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by the clinic were based
upon arbitrary and subjective decisions made by the Medford Clinic Board of
Directors. Amounts of provider compensation distributed between providers
were based on mixtures of productivity and salary based formulas taking into
consideration historical and projected provider productivity. Provider
compensation and benefits increased from $9.2 million for the year ended
December 31, 1994 to $11.2 million for the year ended December 31, 1995, an
increase of $2.0 million or 21.7%. This increase was the result of the
addition of ten new providers in mid 1994.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. If the New
PC Management Agreement had been in effect during these periods, the amount
available for Provider Compensation and Benefits would have been reduced by
the amount of the management fee of $1,968,000 in 1995 and $1,532,000 in
1994. Although the impact can not be determined at this time, the amount
available for Provider Compensation and Benefits may also be effected by
synergies resulting from the Merger and management's ability to reduce costs
or enhance revenues.
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MANAGEMENT SERVICES
This historical operating expenses of Medford Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits,
which includes the salaries, wages and benefits of all non-provider personnel
increased from $10.9 million in 1994 to $11.8 million in 1995 for an increase
of $900,000 or 8.3%. The increase was attributable to the addition of new
support personnel related to the addition of 10 new providers in mid-1994. As
a percentage of revenue, salaries decreased from 47.2% to 42.7% in 1994 and
1995, respectively. This decrease is primarily due to implementation of an
administrative plan to reduce personnel cost per provider.
PURCHASED MEDICAL SERVICES. Purchased Medical Services which include
professional and diagnostic services performed by third parties, increased
from $900,000 in 1994 to $2.3 million 1995, an increase of $1.4 million or
155.6%. As a percentage of Net Revenue Less Provider Compensation and
Benefits, Purchased Medical Services increased from 4.0% to 8.2% in 1994 and
1995, respectively. The increase is attributed to a 108% increase in prepaid
health care revenues combined with an expansion of contracted covered
services for certain plans.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $4.7 million in 1994 to $5.6 million in 1995 an increase of
$900,000 or 19.1%. The increase correlates with the increase in total
revenues.
GENERAL AND ADMINISTRATIVE. General and Administrative Expenses increased
from $3.0 million in 1994 to $3.4 million in 1995, an increase of $400,000 or
13.3%. The increase is attributable to the increased activity due to the
addition of providers. As a percentage of Net Revenue Less Provider
Compensation and Benefits, General and Administrative expense remained
relatively stable.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for Uncollectible Accounts
decreased from $1,027,000 in 1994 to $868,000 in 1995, a decrease of $159,000
or 15.4%. As a percentage of Net Revenue Less Provider Compensation and
Benefits, Provision for Uncollectible Accounts remained relatively stable.
The decrease between years is due to improved collection experience as a
result of the completed implementation of a new patient accounting system
purchased in late 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization Expenses
increased from $918,000 in 1994 to $1,125,000 in 1995, an increase of
$207,000 or 22.5%. The increase is a result of additional capital
expenditures, including a new computer system purchased in late 1994.
INTEREST EXPENSE. Interest Expense increased from $324,000 in 1994 to
$487,000 in 1995, an increase of $163,000, or 50.3%. This increase was
attributable to increased debt obligations in 1995 incurred to fund computer
equipment purchases, another dialysis center building and the furnishings and
equipment for two new satellite locations.
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TWELVE MONTHS ENDED DECEMBER 31, 1994 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1993
MEDICAL SERVICES
Net revenues from providing medical services and related Provider
Compensation and Benefits comprise this aspect of the business.
NET REVENUES.
Net revenues consist of revenues received from Fee-for-Service and Prepaid
Health Care activities as follows.
FEE-FOR-SERVICE, NET. Fee-For-Service, net increased from $22.8 million
for the 12 months ended December 31, 1993 to $29.9 million for the 12
months ended December 31, 1994, an increase of $7.1 million or 31.1%. The
increase is primarily attributable to the increased number of patient
visits resulting from the addition of 22 new providers, the purchase of
the remaining interest in a 20 station dialysis center in mid-1993 and
the addition of 10 new providers in 1994.
PREPAID HEALTH CARE. Prepaid Health Care increased from $300,000 for the
12 months ended December 31, 1993 to $2.4 million for the 12 months ended
December 31 1994, an increase of $2.1 million or 700%. This increase
correlates with introduction of the Oregon Health Plan, the Oregon
managed Medicaid program.
PROVIDER COMPENSATION AND BENEFITS. Historically, provider compensation
available for distribution was the excess of modified cash basis revenues
less modified cash basis expenses. Amounts retained by Medford Clinic were
based upon arbitrary and subjective decisions made by the Medford Clinic
Board of Directors. Amounts of provider compensation distributed between
providers were based on mixtures of productivity and salary based formulas
taking into consideration historical and projected provider productivity.
Provider Compensation and Benefits increased from $7.0 million for the year
ended December 31, 1993 to $9.2 million for the year ended December 31, 1994,
an increase of $2.2 million or 31.4%. This increase was the result of the
addition of 22 new providers during 1994.
The amount available for Provider Compensation and Benefits will be directly
effected by the amount of the management fee to be paid to PPI. If the New
PC Management Agreement had been in effect during these periods, the amount
available for Provider Compensation and Benefits would have been reduced by
the amount of the management fee of $1,532,000 in 1994 and $1,142,000 in
1993. Although the impact can not be determined at this time, the amount
available for Provider Compensation and Benefits may also be effected by
synergies resulting from the Merger and management's ability to reduce costs
or enhance revenues.
MANAGEMENT SERVICES
The historical operating expenses of Medford Clinic represent the costs
incurred in the Management Services portion of the business. Such costs will be
reimbursed to PPI in the future as a component of the management fee.
CLINIC SALARIES, WAGES AND BENEFITS. Clinic Salaries, Wages and Benefits,
which includes the salaries, wages and benefits of all non-provider personnel
increased from $7.7 million in 1993 to $10.9 million in 1994 for an increase
of $3.2 million or 41.6%. The increase was attributable to the addition of
support personnel related to the increased number of Providers and the
addition of the dialysis centers mid-1993 and 1994. As a percentage of Net
Revenue Less Provider Compensation and Benefits, Salaries, Wages and Benefits
remained relatively stable.
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PURCHASED MEDICAL SERVICES. Purchased Medical Services which include
professional and diagnostic services performed by third parties increased
from $758,000 in 1993 to $920,000 in 1994, an increase of $162,000 or 21.4%.
This increase is attributed to the increase in prepaid healthcare revenue.
MEDICAL AND OFFICE SUPPLIES. Medical and Office Supplies which include
pharmaceuticals, medical supplies, office supplies and diagnostic supplies,
increased from $3.4 million in 1993 to $4.7 million in 1994, an increase of
$1.3 million or 38.2%. The increase was consistent with the increased
revenues attributable to the addition of Providers and the dialysis centers.
As a percentage of Net Revenue Less Provider Compensation and Benefits,
Medical and Office Supplies remained relatively stable.
GENERAL AND ADMINISTRATIVE. General and Administrative Expenses increased
from $2.3 million in 1993 to $3.0 million in 1994, an increase of $700,000 or
30.4%. This increase is attributable to the addition of providers in mid-1993
and 1994. As a percentage of Net Revenue Less Provider Compensation and
Benefits, General and Administrative expenses decreased from 14.3% to 12.8%
from 1993 to 1994, respectively. This percentage decrease is attributable to
cost containment programs in General and Administrative expenses and
economies of scale achieved through the 56% increase in providers without a
corresponding increase in the fixed component of general and administrative
expense.
LEASE AND RENT EXPENSE. Lease and rent expense increased from $700,000 in
1993 to $1.1 million in 1994, an increase of $400,000 or 57.1%. The increase
was attributable to the addition of a new satellite location in Talent,
Oregon and the addition of two facilities in Ashland, Oregon and an
orthopedic clinic in Medford, Oregon. As a percentage of Net Revenue Less
Provider Compensation and Benefits, Lease and Rent Expense remained
relatively stable.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased from $592,000 in 1993 to $918,000 in 1994, an increase of $326,000
or 55.1%. The increase is a result of additional capital expenditures
required to support the addition of providers and the acquisition of the
dialysis centers. As a percentage of Net Revenue Less Provider Compensation
and Benefits, Depreciation and Amortization remained relatively stable.
OTHER NONOPERATING INCOME. Prior to June 30, 1993, Medford Clinic owned a
50% partnership interest in the Rogue Valley Dialysis Center. The amount
reflected in other income represents the company's share of net income of the
dialysis center. This entity was acquired in its entirety as of July 1, 1993.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, Medford Clinic had $1.8 million in working capital,
down from $3.0 million as of December 31, 1995. This decrease is primarily due
to the acquisition of capital equipment without obtaining any corresponding
long-term debt. As a result of the Merger PPI will assume the financing
activities relating to the working capital needs of Medford Clinic. See "PPI
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Medford Clinic generated $2.8 million of cash flow from operations in the
nine months ended September 30, 1996 compared to $4.2 million for the nine
months ended September 30, 1995. At September 30, 1996, net accounts receivable
of $6.9 million amounted to 73 days of net clinic revenue compared to $6.7
million and 72 days at the end of the prior year.
Capital expenditures were $1.1 million in the first nine months of 1996 and
it is anticipated another $200,000 will be spent by year-end 1996. These
purchases include furnishings and equipment for a new medical facility opened in
August 1996. PPI and Medford Clinic will negotiate and agree upon the annual
capital budget and the related terms of providing the needed financing as part
of the activities of the Joint
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Management Board. See "PPI Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Operation, Management and Business of
PPI Following the Merger."
Medford Clinic has maintained a $500,000 Operating Line of Credit with U.S.
Bank, which has not been utilized since February 1995. A restricted investment
of $244,000 on deposit for the State of Oregon Medicaid program; due to a change
in contractual relations, will be released in April 1997. PPI will seek to
combine Medford Clinic's short-term line of credit into a consolidated PPI line
of credit. See "PPI Management's Discussion and Analysis of Financial Condition
and Results of Operations--Operation, Management and Business of PPI Following
the Merger--Practice Management Agreement". In addition Medford Clinic made
payments, in accordance with the terms of the Expense Sharing Agreement, of
approximately $635,000 in 1996.
Medford Clinic believes that the funds available from cash reserves and cash
flow from operations should be sufficient to meet the planned capital
expenditures and working capital needs through 1996. Medford Clinic recognizes
that in order to finance the continued long-term growth of the organization it
needs to increase its ability to access capital. See "The Merger and Related
Transactions--Medford Clinic's Reasons for the Merger."
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PROPOSAL NO. 3
APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL
The shareholders of each Company are being asked to approve the Physician
Partners, Inc. Employee Stock Option Plan (the "Employee Plan"), the Physician
Partners, Inc. Non-Employee Director Stock Option Plan (the "Director Plan"),
the Physician Partners, Inc. Non-Employee Provider Stock Option Plan (the
"Provider Plan") and the Physician Partners, Inc. Change in Control Plan (the
"Change in Control Plan"), pursuant to which an aggregate of up to 2,500,000
shares of PPI Class A Common Stock will be reserved for issuance. The
HealthFirst Board, the Corvallis Clinic Board and the Medford Clinic Board have
each authorized the implementation of the PPI Incentive Compensation Plans to
become effective at the Effective Time, provided shareholder approval of each
Company is obtained.
The following are summaries of the principal features of each of the PPI
Incentive Compensation Plans. Such summaries do not purport to be complete
descriptions of all of the provisions of each of the PPI Incentive Compensation
Plans and are qualified in their entirety by the full text of such plans, which
are attached as Appendices B, C and D to this Joint Proxy Statement/Prospectus.
EMPLOYEE STOCK OPTION PLAN
PURPOSE
The Employee Plan was established to (i) furnish incentives to eligible
employees chosen to receive options because they are considered capable of
responding by improving operations of PPI and increasing profits, (ii) encourage
selected employees to accept or continue employment with PPI and (iii) increase
the interest of selected employees and officers in PPI's welfare through their
participation in the growth in value of PPI Class A Common Stock. The Employee
Plan will become effective at the Effective Time (expected to occur on January
31, 1997) provided that shareholder approval of each Company is obtained.
ELIGIBLE PERSONS
Every person who is an employee or officer of PPI or of certain affiliates
of PPI or any individual subject to an acquisition or management agreement with
PPI is eligible to receive options. There will be approximately 1,600 eligible
participants.
ADMINISTRATION
The Employee Plan will be administered by a committee (the "Employee Plan
Committee") of not less than three members appointed by the PPI Board (or if no
such Employee Plan Committee shall have been formed, by the PPI Board).
Currently, no Employee Plan Committee has been constituted.
STOCK OPTION GRANTS
No more than 900,000 shares of PPI Class A Common Stock will be issued under
the Employee Plan. If options expire or are terminated for any reason prior to
being exercised in full, the shares for which such options are exercisable shall
become available for future grants.
Grants may be for "incentive stock options" pursuant to Section 422 of the
Code or non-statutory stock options. These two types of options are similar,
except for their tax consequences. Upon the grant of either a non-statutory
stock option or an incentive stock option, the recipient will not recognize any
income for tax purposes; the granting company will not be entitled to a tax
deduction. However, the tax consequences vary upon exercise. When a
non-statutory stock option is exercised, the holder recognizes ordinary income
in an amount equal to the excess of the fair market value of the shares acquired
over the option price; the company is entitled to a corresponding deduction. In
contrast, upon exercise of an incentive stock option, the holder does not
recognize income; the granting company is not entitled to a deduction.
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All stock options granted by PPI and the Employee Plan shall be evidenced by
written agreements between PPI and the optionee thereunder that are consistent
with the Employee Plan. The purchase or exercise price of such stock options
shall be determined by the Employee Plan Committee. The exercise price with
respect to incentive stock options shall not be less than the fair market value
of PPI Class A Common Stock on the date of grant thereof. The exercise price
with respect to all other stock options shall not be less than 85% of the fair
market value on the date of grant thereof (provided that such exercise price for
any person who owns, directly or indirectly (or is treated as owning by reason
of attribution rules currently set forth in Section 424 of the Code), capital
stock of PPI constituting more than 10% of the total combined voting power of
all classes of outstanding capital stock of PPI or of certain affiliates of PPI,
shall in no event be less than 100% of such fair market value). The term of each
option granted under the Employee Plan shall be fixed by the Employee Plan
Committee, provided that no option shall be granted with a term of more than 10
years. PPI shall not grant any options which may become exercisable at a rate in
excess of 20% per annum from the date of such grant without the written consent
of a majority of the members of the Employee Plan Committee. Options are granted
under the Employee Plan in consideration for services rendered, or to be
rendered, by the optionee thereunder.
PAYMENT
Payment of the exercise price with respect to stock options granted under
the Employee Plan may be made in cash or, with the consent of the Employee Plan
Committee, with a full-recourse promissory note, shares of PPI Class A Common
Stock then valued at fair market value, any other property acceptable to the
Employee Plan Committee or a combination of such forms of payment.
TRANSFERABILITY OF OPTIONS AND TERMINATION OF EMPLOYMENT
During the lifetime of an optionee holding stock options granted under the
Employee Plan, only such optionee or such optionee's guardian or legal
representative may exercise the option. No such option shall be assigned or
transferred other than by will or the laws of descent and distribution. Each
such option will expire on the date of termination of employment "for cause" of
the optionee. Each optionee holding stock options granted under the Employee
Plan will have the right to exercise such options within 90 days of termination
of employment without cause of such optionee. Each optionee holding stock
options granted under the Employee Plan, or such optionee's personal
representative, will have the right to exercise such option within 12 months
after the date of termination of employment by reason of the permanent
disability or death of such optionee.
AMENDMENT AND TERMINATION
The Employee Plan permits the PPI Board to at any time amend, alter, suspend
or discontinue such Employee Plan, provided that no such amendment may be
effected with respect to any outstanding option without the consent of the
optionee holding such option.
CHANGES IN CAPITALIZATION
Under the Employee Plan, if the capital stock of PPI is changed by reason of
a stock split, reverse stock split, stock dividend or recapitalization, or
converted into or exchanged for other securities as a result of a merger,
consolidation or reorganization, appropriate adjustments will be made in (i) the
number and class of shares of PPI Class A Common Stock subject to the Employee
Plan and each outstanding option granted thereunder and (ii) the exercise price
of each outstanding option granted thereunder. Any such adjustment shall be
determined by the Employee Plan Committee in its sole discretion, which
determination shall be final and binding.
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CORPORATE TRANSACTIONS
The Employee Plan provides that new option rights may be substituted for
options granted thereunder, or PPI's obligations as to any such outstanding
options may be assumed, by an employer corporation other than PPI in connection
with any merger, consolidation, acquisition, separation, reorganization,
dissolution, liquidation, sale or other similar transaction in which PPI is
involved and which the Employee Plan Committee, or if there is no such
Committee, the PPI Board, determines, in its sole discretion, would materially
alter the structure of PPI. If there is a successor corporation and replacement
options are not granted by the successor corporation, all outstanding options
shall become exercisable prior to the consummation of such transaction.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
PURPOSE
The purpose of the Director Plan is to provide to the directors of PPI who
are not either employees or officers of PPI added incentive to continue in the
service of PPI and a more direct interest in the future success of the
operations of PPI by granting to such directors options to purchase shares of
PPI Common Stock. The Director Plan will become effective at the Effective Time
(expected to occur on January 31, 1997), provided that shareholder approval of
each Company is obtained.
ADMINISTRATION
Under the Director Plan, non-employee directors are divided into two groups.
The first group of non-employee directors consists of providers whose practice
of medicine is associated with an entity or organization for which PPI performs
management services ("affiliated directors"). The second group consists of
directors who are not affiliated directors ("non-affiliated directors").
The Director Plan shall administered by the PPI Board or a committee
thereof. The PPI Board shall have no authority, discretion or power to select
the non-affiliated directors who will receive options, to set the number of
shares to be covered by each option granted to a non-affiliated director, to set
the exercise price or the exercise period of a non-affiliated director's
options, or to alter any other terms or conditions specified herein applicable
to a non-affiliated director.
The PPI Board shall have the authority, discretion or power to select the
affiliated directors who receive options, to set the number of shares covered by
each affiliated director's options, to set the exercise price or exercise period
of an affiliated director's options, or to alter any other term or conditions
specified herein.
Each non-affiliated director serving PPI as a director on the effective date
of the Director Plan and on each grant date shall be granted, as of such date,
an option to purchase 7,500 shares of Common Stock. The PPI Board shall
determine the number of shares of PPI Common Stock subject to an option granted
to an affiliated director who is serving PPI on the effective date of the
Director Plan and on each grant date. If, on any January 1 during the term of
the Director Plan, the number of options scheduled to be granted to
non-affiliated directors is greater than the number of shares of PPI Common
Stock then available for grant on that date, the available shares shall be
allocated pro rata in determining the number of shares of PPI Common Stock to be
subject to each option to be granted to each such non-affiliated director on
such date.
SHARES AVAILABLE FOR GRANT OF OPTIONS
The total number of shares of PPI Common Stock as to which options may be
granted pursuant to the Director Plan shall be 100,000, except as such number of
shares shall be adjusted from time to time. If any outstanding option under the
Director Plan shall expire or be terminated or forfeited for any reason, the
shares of PPI Common Stock allocable to the unexercised portion of such option
may again be subject to
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the Director Plan. PPI shall, at all times during the life of any outstanding
option, retain as authorized and unissued PPI Common Stock at least such number
of shares as may be from time to time included in the outstanding options or
shall otherwise assure itself of its ability to perform its obligations under
the Director Plan.
ELIGIBILITY AND TERMS OF THE GRANT OF OPTIONS
To be eligible for an option, the optionee must be a member of the PPI Board
who is not an officer or an employee of PPI. The exercise price for each option
shall be the fair market value of PPI Common Stock on the date of grant. Each
director serving on the PPI Board shall be granted an option to purchase 7,500
shares of PPI Common Stock at an exercise price per share equal to the fair
market value of PPI Common Stock on the date of grant. Each optionee shall agree
to remain in the service of PPI, at the pleasure of PPI's stockholders, for a
continuous period of at least one year after the date of the grant of any
option, at the retainer rate then in effect or at such changed rate as PPI from
time to time may establish. Each option shall be exercisable as to one-third of
the shares subject to the option as of each of the first, second and third
anniversaries of the grant date of the option. There are four persons currently
eligible to participate in the class as non-employed directors.
EXERCISE OF OPTIONS AND PAYMENT
An optionee may exercise all or any portion of an option by providing
specified notice and making payment of the exercise price in cash, in
outstanding shares of PPI Class A Common Stock at their fair market value (as
determined by the PPI Board) or by delivery of vested options with a value equal
to the exercise price (the difference between the fair market value on the
exercise date of PPI Class A Common Stock subject to such option and the
exercise price thereof).
TAX CONSEQUENCES AND TRANSFERABILITY OF OPTIONS
The options available under the Director Plan are not qualified under
Section 422 of the Code. Consequently, on the granting of the options, the
company will not be entitled to a tax deduction; on receipt the recipient will
not recognize any income. On exercise the holder recognizes ordinary income in
an amount equal to the excess of the fair market value of the shares acquired
over the option price; the company is entitled to a corresponding deduction. PPI
shall have the right to withhold, or require an optionee to remit, an amount
needed to satisfy any applicable federal, state, local or foreign withholding
tax requirements. Options granted shall be exercisable only by the optionee or
the optionee's guardian or legal representative and may not be transferred other
than by will or by the laws of descent and distribution.
ADJUSTMENTS
In the event PPI shall effect a split of PPI Class A Common Stock or
dividend payable in PPI Class A Common Stock, or in the event the outstanding
PPI Class A Common Stock shall be combined into a smaller number of shares, the
maximum number of shares as to which options may be granted under the Director
Plan shall be increased or decreased proportionately. In the event that before
delivery by PPI of all of the shares of PPI Class A Common Stock in respect of
which any option has been granted under the Director Plan, PPI shall have
effected such a split, dividend or combination, the shares subject to the option
and the purchase price per share shall be increased or decreased proportionately
so that the aggregate purchase price for all the then optioned shares shall
remain the same as immediately prior to such split, dividend or combination.
In the event of a reclassification of PPI Class A Common Stock not covered
by the foregoing or in the event of a liquidation or reorganization, (including
a merger, consolidation or sale of assets of PPI), the PPI Board shall make such
adjustment, if any, as it may deem appropriate in the number, purchase price
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and kind of shares covered by the unexercised portions of options theretofore
granted under the Director Plan.
CORPORATE TRANSACTIONS
New option rights may be substituted for options granted, or PPI's
obligations as to outstanding options may be assumed, by an employer corporation
other than PPI, or an affiliate thereof, in connection with any merger,
consolidation, acquisition, separation, reorganization, dissolution,
liquidation, sale or similar transaction in which PPI is involved and which the
PPI Board determines, in its absolute discretion, would materially alter the
structure. However, if there is a successor corporation and replacement options
are not granted by the successor corporation, all outstanding options shall
become exercisable prior to the consummation of such transaction.
ADOPTION, AMENDMENT, SUSPENSION AND TERMINATION
The PPI Board may at any time amend, suspend or terminate the Director Plan,
provided that no such amendment, suspension or termination shall (i) impair any
options previously granted under the Director Plan or deprive any holder of any
shares of PPI Common Stock which such holder might have acquired through or as a
result of the Director Plan or (ii) be made without the approval of the
stockholders of PPI where such change would increase the total number of shares
of PPI Common Stock which may be granted under the Director Plan. If not sooner
terminated by the PPI Board, the Director Plan terminates at the close of
business on December 31, 2005.
NON-EMPLOYEE PROVIDER STOCK OPTION PLAN
PURPOSE
The Provider Plan was established to (i) furnish incentives to eligible
physicians chosen to receive options because they are considered capable of
responding by improving operations of PPI and increasing profits and (ii)
increase the interest of selected physicians in PPI's welfare through their
participation in the growth in value of PPI Class A Common Stock. The Provider
Plan will become effective at the Effective Time (expected to occur on January
31, 1997), provided that shareholder approval of each Company is obtained.
ELIGIBLE PERSONS
Every person who is a non-employee provider affiliated with PPI or any
affiliate of PPI and certain non-employee providers subject to an acquisition or
management agreement with PPI are eligible to receive options. After the PC
Reorganization Transactions and the Merger approximately 300 providers will be
eligible to receive options under the Provider Plan.
ADMINISTRATION
The Provider Plan shall be administered by a committee (the "Provider Plan
Committee") of not less than three members appointed by the PPI Board (or if no
such committee has been formed, by the PPI Board). Currently, no Provider Plan
Committee has been constituted.
STOCK OPTION GRANTS
The number of shares of PPI Class A Common Stock that can be issued under
the Provider Plan shall not exceed an aggregate of 1,500,000 shares. If options
expire or are terminated for any reason prior to being exercised in full, the
remaining shares shall be available for future grants. Grants will be for non-
statutory stock options. All stock options granted shall be evidenced by written
agreements between PPI and the optionee that are consistent with the Provider
Plan. The purchase or exercise price shall be
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determined by the Provider Plan Committee, or, if no such committee has been
formed, by the PPI Board. The exercise price shall not be less than 85% of the
fair market value on the date of grant (except that such exercise price for any
person who owns, directly or indirectly (or is treated as owning by reason of
attribution rules currently set forth in Section 424 of the Code), capital stock
of PPI constituting more than 10% of the total combined voting power of all
classes of outstanding capital stock of PPI or of any affiliate of PPI, shall in
no event be less than 100% of such fair market value. The term of the option
granted shall be fixed by the Provider Plan Committee (or by the PPI Board if no
such committee has been formed), provided that no option shall be granted with a
term more than 10 years. PPI shall not grant any options which may become
exercisable at a rate in excess of 20% per year from the date of such grant
without the written consent of a majority of the members of the Provider Plan
Committee. Options are granted in consideration for services rendered, or to be
rendered, by the optionee.
PAYMENT
Payment of the exercise price, which shall be a price determined by the
Board of Directors but not less than the fair market value price of the PPI
Class A Common Stock, may be made in cash, or with the consent of the Provider
Plan Committee, with a full-recourse promissory note, shares of PPI Class A
Common Stock then valued at fair market value, any other property acceptable to
the Provider Plan Committee, or a combination of such forms of payment.
TRANSFERABILITY OF OPTIONS AND CESSATION OF AFFILIATION
During the lifetime of an optionee, only that optionee or the optionee's
guardian or legal representative may exercise an option. Options shall not be
assigned or transferred other than by will or the laws of descent and
distribution. In the event of termination of employment with an entity operating
under a management contract with PPI, the option will expire within 90 days of
cessation. In the event such termination of employment ceases by reason of
permanent disability or death, the optionee or the optionee's personal
representative would have the right to exercise the option within 12 months
after the date of cessation of employment.
TAX CONSEQUENCES AND TRANSFERABILITY OF OPTIONS
The options available under the Provider Plan are not qualified under
Section 422 of the Code. Consequently, on the granting of the options, PPI will
not be entitled to a tax deduction; on receipt the recipient will not recognize
any income. On exercise the holder recognizes ordinary income in an amount equal
to the excess of the fair market value of the shares acquired over the option
price; PPI is entitled to a corresponding deduction. PPI shall have the right to
withhold, or require an optionee to remit, an amount needed to satisfy any
applicable federal, state, local or foreign withholding tax requirements.
Options granted shall be exercisable only by the optionee or the optionee's
guardian or legal representative and may not be transferred other than by will
or by the laws of descent and distribution.
AMENDMENT AND TERMINATION
The PPI Board may at any time amend, alter, suspend or discontinue the
Provider Plan, provided that, with respect to outstanding options, the optionee
consents to such amendment.
CHANGES IN CAPITALIZATION
If the stock of PPI is altered by reason of a stock split, reverse stock
split, stock dividend or recapitalization, or converted into or exchanged for
other securities as a result of a merger, consolidation or reorganization,
appropriate adjustments shall be made in (i) the number and class of shares of
stock subject to the Provider Plan and each outstanding option and (ii) the
exercise price of each outstanding option (provided that PPI shall not be
required to issue fractional shares as a result of any such
196
<PAGE>
adjustment). Each adjustment in option rights related to an alteration in PPI
stock shall be determined by the Provider Plan Committee, or if no such
committee has been formed, by the PPI Board, in its discretion, which
determination shall be final and binding on all persons.
CORPORATE TRANSACTIONS
New option rights may be substituted for options granted, or PPI's
obligations as to outstanding options may be assumed, by an employer corporation
other than PPI or an affiliate thereof, in connection with any merger,
consolidation, acquisition, separation, reorganization, dissolution,
liquidation, sale or similar transaction in which PPI is involved and which the
Provider Plan Committee determines, in its absolute discretion, would materially
alter the structure of PPI. If there is a successor corporation and replacement
options are not granted by the successor corporation, all outstanding options
shall become exercisable prior to the consummation of such transaction.
CHANGE IN CONTROL PLAN
PURPOSE
The Change in Control Plan was established to enable PPI and its
subsidiaries and affiliates (collectively, the "PPI ERISA Parties") to provide
severance benefits to eligible executive or management employees whose
employment is terminated following a Change in Control of PPI ERISA Parties. It
is the intent of PPI that the Change in Control Plan constitute an "employee
welfare benefit plan" within the meaning of Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and comply with the
applicable requirements of ERISA.
DEFINITION OF CHANGE IN CONTROL
For purposes of the Change in Control Plan, a "Change in Control" shall have
occurred if any of the following occur:
(a) any "Person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act) other than PPI, any corporation owned, directly or
indirectly, by the stockholders of PPI in substantially the same proportions
as their ownership of stock in PPI, or any trustee or other fiduciary
holding securities under a company employee benefit plan or such
proportionately owned corporation, becomes the "beneficial owner" (as such
term is defined in rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of PPI representing 20% or more of the combined
voting power of PPI's then-outstanding securities;
(b) during any period of not more than 24 months, individuals who at the
beginning of such period constitute the PPI Board, and any new director
(other than a director designated by a Person who has entered into an
agreement with PPI to effect a transaction described in paragraphs (a), (c)
or (d) of this subsection) whose election was approved by a vote of at least
two-thirds of the directors then still in office, cease for any reason to
constitute at least a majority of the PPI Board;
(c) the stockholders of PPI approve a merger or consolidation of PPI
with any other entity or corporation, other than (i) a merger or
consolidation which would result in the voting securities of PPI outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 60% of the combined voting power of the voting securities
of PPI or such surviving entity outstanding immediately after such merger or
consolidation or (ii) a merger or consolidation effected to implement a
recapitalization of PPI (or similar transaction) in which no Person acquires
more than 20% of the combined voting power of PPI's then-outstanding
securities; or
197
<PAGE>
(d) the stockholders of PPI approve a plan of complete liquidation of
PPI or an agreement for the sale or disposition by PPI of all or
substantially all of its assets (or any transaction having a similar
effect).
PPI may also determine, in its discretion, that a sale of a substantial
portion of its assets or one of its businesses constitutes a "Change of Control"
with respect to any individual who may receive benefits under a Plan (a
"Participant") if the Participant is employed in the affected operation.
ADMINISTRATION
The Change in Control Plan shall be administered by a committee of the PPI
Board (the "Control Plan Committee") of not less than three members appointed by
the PPI Board, at least two of whom must be nonphysician disinterested directors
(the "Disinterested Directors") as defined under Rule 16b-3 ("Rule 16b-3")
promulgated under the Exchange Act, or if no such committee has been formed, by
the PPI Board.
PARTICIPATION
The Control Plan Committee shall designate from time to time those employees
of PPI employed in an executive or management position who shall participate in
the Change in Control Plan (a "Participant"). An employee who has been so
designated may participate by signing an agreement with PPI (a "Participation
Agreement"), which shall specify the benefits the Participant is entitled to
receive should the Participant's employment terminate following a Change in
Control of PPI and the terms and conditions under which those benefits will be
provided.
BENEFITS FOLLOWING A CHANGE IN CONTROL
If a Participant's employment with PPI terminates within 24 months following
a Change in Control, the Participant shall be entitled to the benefits specified
in the Participation Agreement.
NON-COMPETITION AND NON-SOLICITATION
In consideration for the benefits provided for under a Participant's
Agreement, the Participant shall agree that during the 24-month period following
the Participant's date of termination (the "Severance Period") such Participant
will comply with the non-competition and non-solicitation covenants set forth in
the Change in Control Plan. If a Participant fails to comply with the
non-competition covenant, the non-solicitation covenant or any covenant or
material condition in the Participation Agreement, participation in the Change
in Control Plan shall immediately terminate and the Participant shall forfeit
any remaining unpaid benefits.
FORM OF PAYMENT
Subject to the terms of a Participant's Agreement, benefits shall be paid in
equal installments according to PPI's normal payroll schedule. In the event of a
Participant's death before the Participant receives all benefits to which such
Participant otherwise would be entitled under the Change in Control Plan,
payment shall be made to the Participant's beneficiary in installments or a lump
sum, as determined by the Control Plan Committee, or if no such committee has
been formed, by the PPI Board.
OTHER EMPLOYMENT
A Participant shall not be required to act to mitigate the amount of any
payment or benefit provided for under the Change in Control Plan by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
provided for under the Change in Control Plan be reduced by any compensation
earned by the Participant as a result of other employment.
198
<PAGE>
FEES AND EXPENSES
PPI shall pay all reasonable legal fees and related expenses (including the
reasonable costs of experts, evidence and counsel), when and as incurred by a
Participant, as a result of contesting or disputing any termination of
employment of the Participant following a Change in Control whether or not such
contest or dispute is resolved in the Participant's favor but only if the
Participant was seeking in good faith to obtain or enforce any right or benefit
provided by the Change in Control Plan or the Participant's Agreement.
WITHHOLDING AND TRANSFERABILITY OF BENEFITS
PPI shall have the right to withhold, or require a Participant to remit, an
amount needed to satisfy any applicable federal, state, local or foreign
withholding tax requirements. The interests of persons entitled to benefits
under the Change in Control Plan are not subject to their debts or other
obligations and, except as may be required by the tax withholding provisions of
the Code or any state's income tax act or pursuant to an agreement between a
Participant and PPI, may not be voluntarily sold, transferred, alienated,
assigned or encumbered.
AMENDMENT AND TERMINATION
PPI has the right to amend or terminate the Change in Control Plan at any
time, provided that no such amendment or termination of the Change in Control
Plan shall affect the provisions of any Participant's Agreement then in force
under the Change in Control Plan.
PLAN BENEFITS TO OFFICERS AND DIRECTORS
The following chart indicates the benefits available to certain executive
officers and to certain groups as a whole under the PPI Incentive Compensation
Plans:
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
NUMBER OF OPTIONS NUMBER OF OPTIONS UNDER NUMBER OF OPTIONS UNDER
UNDER EMPLOYEE STOCK NON-EMPLOYEE DIRECTOR NON-EMPLOYEE PROVIDER
NAME AND POSITION OPTION PLAN STOCK OPTION PLAN STOCK OPTION PLAN
- --------------------------------------- -------------------- ------------------------- -------------------------
<S> <C> <C> <C>
David M. Goldberg, M.H.A. .............
President and Chief Executive
Officer, Director 50,000 -- --
Michael F. Bonazzola, M.D., ...........
Senior Vice President and Chief
Medical Officer, Director 35,000 -- --
Tim E. Dupell, C.P.A. .................
Senior Vice President and Chief
Financial Officer, Director 35,000 -- --
Jerald Erstgaard ......................
Senior Vice President 35,000 -- --
Jon Ness ..............................
Senior Vice President 35,000 -- --
Executive Group........................ 190,000 -- --
Non-Executive Director Group........... -- 7,500 --
</TABLE>
199
<PAGE>
SHAREHOLDER APPROVAL AND BOARD RECOMMENDATION
The shareholders of each Company must approve the PPI Incentive Compensation
Plans. The affirmative vote of two-thirds of the outstanding shares of each of
Corvallis Clinic Class A Stock and Corvallis Class B Stock, in each case as a
voting group, present in person or represented by proxy at the Corvallis Clinic
Special Meeting is required for Corvallis Clinic to approve the PPI Incentive
Compensation Plans. The affirmative vote of a majority of the outstanding
HealthFirst Class A Shares present in person or by proxy at the HealthFirst
Special Meeting is required for HealthFirst to approve the PPI Incentive
Compensation Plans. The affirmative vote of a majority of the outstanding shares
of Medford Clinic Common Stock present in person or represented by proxy at the
Medford Clinic Special Meeting is required for Medford Clinic to approve the PPI
Incentive Compensation Plans. If such approvals are obtained, each PPI Incentive
Compensation Plan will become effective as of the Effective Time. If, however,
all of such shareholder approvals are not obtained for this Proposal, none of
the PPI Incentive Compensation Plans will become effective.
Each of the HealthFirst Board, the Corvallis Clinic Board and the Medford
Clinic Board believes that it is in the best interests of their respective
Companies to approve the PPI Incentive Compensation Plans, which provide a
meaningful opportunity for officers, employees, non-employee directors and
physicians employed by entities with which PPI has entered into a practice
management agreement to acquire a substantial propriety interest in PPI and to
more closely align their interests to those of other stockholders of PPI.
ACCORDINGLY, THE HEALTHFIRST BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE PPI
INCENTIVE COMPENSATION PLANS PROPOSAL. THE CORVALLIS CLINIC BOARD UNANIMOUSLY
RECOMMENDS APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL. THE
MEDFORD CLINIC BOARD UNANIMOUSLY RECOMMENDS APPROVAL OF THE PPI INCENTIVE
COMPENSATION PLANS PROPOSAL.
FUTURE SHAREHOLDER PROPOSALS
If the Merger is consummated, the first annual meeting of the stockholders
of PPI after such consummation is expected to be held on or about May 9, 1997.
Depending upon whether the Merger and New PC Distributions occur, the 1997
Annual Meeting of Shareholders of HealthFirst or HealthFirst New PC is expected
to be held on or about September 8, 1997, the 1997 Annual Meeting of
Shareholders of Corvallis Clinic or Corvallis Clinic New PC is expected to be
held on or about March 10, 1997 and the 1997 Annual Meeting of Shareholders of
Medford Clinic or Medford Clinic New PC is expected to be held on or about
January 11, 1997.
Subject to the foregoing, if any PPI stockholder intends to present a
proposal at the 1997 Annual Meeting of Stockholders of PPI and wishes to have
such proposal considered for inclusion in the proxy materials for such meeting,
such holder must submit the proposal to the Secretary of PPI in writing so as to
be received at the principal executive offices of PPI by January 9, 1997. Such
proposals must also meet the other requirements of the rules of the SEC relating
to stockholders' proposals. The only shareholder proposals eligible to be
considered for inclusion in the proxy materials for the 1997 Annual Meeting of
Shareholders of HealthFirst or HealthFirst New PC will be those which have been
duly submitted to the Secretary of HealthFirst by April 11, 1997. The only
shareholder proposals eligible to be considered for inclusion in the proxy
materials for the 1997 Annual Meeting of Shareholders of Corvallis Clinic or
Corvallis Clinic New PC will be those which have been duly submitted to the
Secretary of Corvallis Clinic by November 10, 1996. The only shareholder
proposals eligible to be considered for inclusion in the proxy materials for the
1997 Annual Meeting of Shareholders of Medford Clinic will be those which have
been duly submitted to the Secretary of Medford Clinic or Medford Clinic New PC
by September 13, 1996.
200
<PAGE>
EXPERTS
The financial statements included in this Joint Proxy Statement/Prospectus,
to the extent and for the periods indicated in such financial statements, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports in respect of such financial statements and are
included herein in reliance upon the authority of said firm as such experts in
giving such reports.
The PPI valuation report referenced in this Joint Proxy Statement/Prospectus
has been prepared by American Appraisal Associates, Inc., and reference thereto
has been included herein in reliance upon the authority of such entity as an
expert in preparing such reports.
LEGAL MATTERS
The validity of shares of PPI Class A Common Stock to be issued in
connection with the Merger has been passed upon for PPI by McDermott, Will &
Emery and the validity of shares of Common Stock, no par value of HealthFirst
New PC, Common Stock, no par value of Corvallis Clinic New PC and Common Stock,
no par value of Medford Clinic New PC to be distributed as dividends in the New
PC Distributions has been passed upon by Peter F. Stoloff, P.C. McDermott, Will
& Emery has also issued legal opinions to HealthFirst, Corvallis Clinic and
Medford Clinic regarding certain federal income tax matters. Douglas Mancino is
a partner of McDermott, Will & Emery, a member of the PPI Board and holder of
PPI Class A Common Stock which, at the Effective Time, will represent less than
one percent of the outstanding PPI Class A Common Stock.
201
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
I. PHYSICIAN PARTNERS, INC.:
Report of Independent Public Accountants............................................. F-1
Balance Sheets as of June 30, 1996 and September 30, 1996............................ F-2
Statement of Operations for the period from inception (June 20, 1996) to June 30,
1996 and September 30, 1996........................................................ F-3
Statement of Stockholders' Equity for the period from inception (June 20, 1996) to
June 30, 1996 and September 30, 1996............................................... F-4
Statement of Cash Flows for the period from inception (June 20, 1996) to June 30,
1996 and September 30, 1996........................................................ F-5
Notes to Financial Statements........................................................ F-6
II. PHYSICIAN PARTNERS, INC.--PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED):
Headnote............................................................................. F-9
Unaudited Pro Forma Condensed Balance Sheet as of September 30, 1996................. F-10
Unaudited Pro Forma Condensed Statements of Operations for the year ended December
31, 1995 and the nine months ended September 30, 1996.............................. F-11
Notes to Unaudited Pro Forma Condensed Financial Statements.......................... F-13
III. PHYSICIAN PARTNERS HEALTHFIRST, P.C.
Report of Independent Accountants.................................................... F-16
Balance Sheet as of September 30, 1996............................................... F-17
Notes to Financial Statements........................................................ F-18
IV. PHYSICIAN PARTNERS CORVALLIS, P.C.
Report of Independent Accountants.................................................... F-19
Balance Sheet as of September 30, 1996............................................... F-20
Notes to Financial Statements........................................................ F-21
V. PHYSICIAN PARTNERS MEDFORD, P.C.
Report of Independent Accountants.................................................... F-22
Balance Sheet as of September 30, 1996............................................... F-23
Notes to Financial Statements........................................................ F-24
VI. THE NEW PCS--PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED):
HealthFirst New PC Pro Forma Condensed Balance Sheet as of September 30, 1996........ F-27
HealthFirst New PC Pro Forma Statements of Operations................................ F-28
Corvallis Clinic New PC Pro Forma Condensed Balance Sheet as of September 30, 1996... F-29
Corvallis Clinic New PC Pro Forma Condensed Statements of Operations................. F-30
Medford Clinic New PC Pro Forma Condensed Balance Sheet as of September 30, 1996..... F-31
Medford Clinic New PC Pro Forma Statements of Operations............................. F-32
The New PCs Notes to Unaudited Pro Forma Condensed Financial Statements.............. F-33
VII. HEALTHFIRST MEDICAL GROUP, P.C.:
HEALTHFIRST MEDICAL GROUP, P.C.:
Report of Independent Public Accountants............................................. F-36
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996............... F-37
Statements of Operations for the three years ended December 31, 1995 and the nine
months ended September 30, 1995 and 1996........................................... F-39
Statements of Stockholders' Equity for the three years ended December 31, 1995 and
the nine months ended September 30, 1996........................................... F-40
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
Statements of Cash Flows for the three years ended December 31, 1995 and the nine
months ended September 30, 1995 and 1996........................................... F-41
Notes to Financial Statements........................................................ F-43
HEALTHFIRST MEDICAL GROUP, P.C.--ACQUISITION
(THE SUBURBAN MEDICAL CLINIC, INC.):
Report of Independent Public Accountants............................................. F-57
Balance Sheets as of December 31, 1994 and 1995...................................... F-58
Statements of Operations for the three years ended December 31, 1995 and the nine
months ended September 30, 1995.................................................... F-59
Statements of Stockholders' Equity for the three years ended December 31, 1995 and
the nine months ended September 30, 1995........................................... F-60
Statements of Cash Flows for the three years ended December 31, 1995 and the nine
months ended September 30, 1995.................................................... F-61
Notes to Financial Statements........................................................ F-62
VIII. THE CORVALLIS CLINIC, P.C.:
THE CORVALLIS CLINIC, P.C.
Report of Independent Public Accountants............................................. F-73
Balance Sheets as of November 30, 1994 and 1995 and September 30, 1996............... F-74
Statements of Operations for the three years ended November 30, 1995 and the ten
months ended September 30, 1995 and 1996........................................... F-75
Statements of Accumulated Deficit for the three years ended November 30, 1995 and the
ten months ended September 30, 1996................................................ F-76
Statements of Cash Flows for the three years ended November 30, 1995 and the ten
months ended September 30, 1995 and 1996........................................... F-77
Notes to Financial Statements........................................................ F-78
THE CORVALLIS CLINIC, P.C.--SIGNIFICANT INVESTMENT
INTEREST (CORVALLIS MRI):
Report of Independent Public Accountants............................................. F-93
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996............... F-94
Statements of Operations for the three years ended December 31, 1995 and the nine
months ended September 30, 1995 and 1996........................................... F-95
Statements of Partners' Equity for the three years ended December 31, 1995 and the
nine months ended September 30, 1996............................................... F-96
Statements of Cash Flows for the three years ended December 31, 1995 and the nine
months ended September 30, 1995 and 1996........................................... F-97
Notes to Financial Statements........................................................ F-98
IX. MEDFORD CLINIC, P.C.:
Report of Independent Public Accountants............................................. F-102
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996............... F-103
Statements of Operations for the three years ended December 31, 1995 and the nine
months ended September 30, 1995 and 1996........................................... F-104
Statements of Stockholders' Equity for the three years ended December 31, 1995 and
the nine months ended September 30, 1996........................................... F-105
Statements of Cash Flows for the three years ended December 31, 1995 and the nine
months ended September 30, 1995 and 1996........................................... F-106
Notes to Financial Statements........................................................ F-107
</TABLE>
<PAGE>
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
X. SUPPLEMENTARY SCHEDULES:
SCHEDULES OF CHANGES IN THE ALLOWANCES FOR CONTRACTUAL DISCOUNTS AND UNCOLLECTIBLE
ACCOUNTS
Report of Independent Public Accountants............................................. F-118
HealthFirst Medical Group, P.C....................................................... F-119
The Suburban Medical Clinic, Inc..................................................... F-120
The Corvallis Clinic, P.C............................................................ F-121
Corvallis MRI........................................................................ F-122
Medford Clinic, P.C.................................................................. F-123
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Physician Partners, Inc.:
We have audited the accompanying balance sheet of Physician Partners, Inc.
(a Delaware corporation) as of September 30, 1996, and the related statements of
operations, stockholders' equity and cash flows for the period from inception to
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physician Partners, Inc. as
of September 30, 1996, and the results of its operations and its cash flows for
the period from inception to September 30, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
November 22, 1996
F-1
<PAGE>
PHYSICIAN PARTNERS, INC.
BALANCE SHEET--SEPTEMBER 30, 1996
ASSETS
<TABLE>
<S> <C>
ASSETS:
Cash...................................................................... $ 3,000
--------------
Total assets............................................................ $ 3,000
--------------
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES................................................................. $ --
STOCKHOLDERS' EQUITY:
Preferred stock--$0.01 par value; 50,000,000 shares authorized; no shares
issued or outstanding................................................... --
Common stock--
Class A--Voting; $0.01 par value; 20,000,000 shares authorized; 3,000
shares issued and outstanding......................................... 30
Class B--Voting; $0.01 par value; 30,000,000 shares authorized; no
shares issued or outstanding.......................................... --
Additional paid in capital................................................ 2,724,135
Accumulated deficit....................................................... (2,721,165)
--------------
Total stockholders' equity.............................................. 3,000
--------------
Total liabilities and stockholders' equity.............................. $ 3,000
--------------
--------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-2
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO SEPTEMBER 30, 1996
<TABLE>
<S> <C>
REVENUES.................................................................... $ --
--------------
REORGANIZATION COSTS........................................................ 2,721,165
--------------
Operating loss............................................................ (2,721,165)
OTHER INCOME (EXPENSE)...................................................... --
--------------
Net loss before income taxes.............................................. (2,721,165)
--------------
INCOME TAX BENEFIT.......................................................... --
--------------
NET LOSS.................................................................... $ (2,721,165)
--------------
--------------
LOSS PER SHARE.............................................................. $ 907
--------------
--------------
NUMBER OF SHARES USED IN LOSS PER SHARE CALCULATION......................... 3,000
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK
------------------------
ADDITIONAL
NUMBER PAID IN ACCUMULATED
OF SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, June 20, 1996 (inception)... -- $ -- $ -- $ -- $ --
Issuance of common stock........... 3,000 30 2,970 -- 3,000
Reorganization costs incurred by
Founding Clinics................. -- -- 2,721,165 -- 2,721,165
Net loss........................... -- -- -- (2,721,165) (2,721,165)
----- ----- ----------- ---------- ----------
BALANCE, September 30, 1996.......... 3,000 $ 30 $2,724,135 $(2,721,165) $ 3,000
----- ----- ----------- ---------- ----------
----- ----- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO SEPTEMBER 30, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $ (2,721,165)
Reorganization costs incurred by Founding Clinics......................... 2,721,165
--------------
Net cash from operating activities........................................ --
CASH FLOWS FROM INVESTING ACTIVITIES........................................ --
--------------
Net cash from investing activities........................................ --
--------------
CASH FLOWS FROM FINANCING ACTIVITIES........................................ --
--------------
Proceeds from payments of stock subscriptions receivable.................. 3,000
Net cash from financing activities........................................ 3,000
--------------
NET CHANGE IN CASH.......................................................... 3,000
CASH, beginning of period................................................... --
--------------
CASH, end of period......................................................... $ 3,000
--------------
--------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................................... $ --
Cash paid for income taxes................................................ --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Stock subscriptions receivable issued for common stock.................... $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIOD)
1. BUSINESS AND ORGANIZATION:
Physician Partners, Inc. (PPI), is a Delaware corporation formed on June 20,
1996 for the purpose of effecting a reorganization transaction between PPI and
HealthFirst Medical Group, PC., The Corvallis Clinic, PC. and The Medford
Clinic, PC., (collectively, The Founding Clinics).
This transaction would result in a separation of operations of the three
Founding Clinics between medical professional services activities (i.e.,
providers of medical services) and the physician practice management activities
of the business. The professional services activities would be spun off into
newly formed professional corporations (New PCs). The physician practice
management business, along with substantially all of the assets and liabilities
of the three Founding Clinics, i.e., accounts receivable, property, plant,
equipment, contracts, payables, accruals and debt, would be transferred to PPI.
When the transaction becomes effective, the stockholders of the existing
Founding Clinics will become the original stockholders of PPI.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis, less contractual allowances
and bad debts, received by PPI or the New PCs relating to services provided by
the New PCs less (ii) Manager's Expense).
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
2. UNAUDITED INTERIM FINANCIAL INFORMATION:
The financial information for the interim period ended September 30, 1996
has not been audited by independent accountants. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted from the unaudited interim financial information. In the opinion of
PPI's management, the unaudited interim financial information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation. Results of operations for the interim period is not
necessarily indicative of the results of operations for the full year.
3. REORGANIZATION COSTS:
The Founding Clinics have incurred costs of $2,721,165 related to the
reorganization transaction through September 30, 1996. These costs have been
treated as expenses in the accompanying financial statements with a contra
credit to paid-in capital.
Costs to be incurred between September 30, 1996 and the effective date of
the reorganization transaction are estimated to be approximately $0.8 million
and will be accounted for in the PPI financial statements in the same manner as
the costs incurred to date.
F-6
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIOD)
4. LOSS PER SHARE:
The loss per share was computed by dividing net losses by the weighted
average number of common shares outstanding during the period.
5. SUBSEQUENT EVENTS:
REORGANIZATION TRANSACTION
On July 29, 1996, the Board of Directors of each party approved the
reorganization plan described in Note 1 subject to the approval of the
stockholders of the three Founding Clinics.
EMPLOYMENT AGREEMENTS
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and restricted
stock awards, termination benefits and, in certain cases, severance compensation
in the event the transaction is not consummated prior to January 31, 1997. The
stock options will be granted when the reorganization and merger become
effective. The restricted stock awards will be granted during the third quarter
of 1996. A summary of these Employment Agreements follows:
Restricted stock awards aggregating 108,000 shares of PPI Class A common
stock would be granted. One-third of the shares will vest at the first,
second and third anniversaries of the effective date of the merger. Shares
issued will be recorded at their fair market value on the date of grant with
a corresponding charge to stockholders' equity representing the unearned
portion of the awards. The unearned portion will be amortized as
compensation expense on a straight-line basis over the related vesting
period.
Stock options would be granted for 225,000 shares of PPI Class A common
stock. The exercise price will be the fair market value of the shares at the
date of grant. These options will vest and become exercisable at a rate of
20 percent on each anniversary date of the grant.
In the event the merger fails to occur on or before January 31, 1997,
PPI would be obligated to pay severance costs to certain of these
individuals in an aggregate amount of $475,000 to $640,000. Other
termination benefits would also be required such as health and disability
insurance and indemnification of any losses related to the executives'
primary residences.
The obligations of PPI under certain of these agreements are guaranteed by
the three Founding Clinics.
STOCK OPTION PLANS
The reorganization plan will include a proposal to establish various stock
option plans for PPI employees and directors, as well as providers employed by
the New PCs. These plans would reserve a total of 2,500,000 options for PPI
Class A common stock. This includes the options for the 225,000 shares covered
by the Employment Agreements discussed above.
F-7
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIOD)
5. SUBSEQUENT EVENTS: (CONTINUED)
OTHER STOCK TRANSACTIONS
Subsequent to September 30, 1996 an additional 27,000 shares were issued to
a director of the Company.
LEASE COMMITMENTS
On August 28, 1996, the Company entered into a seven year lease for office
space. Future minimum rental payments under this lease are as follows:
<TABLE>
<S> <C>
1996...................................................... $ 21,953
1997...................................................... 87,810
1998...................................................... 87,810
1999...................................................... 87,810
2000...................................................... 87,810
Thereafter................................................ 241,477
---------
Total................................................... $ 614,670
---------
---------
</TABLE>
F-8
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As explained elsewhere in this Joint Proxy Statement/Prospectus, the PC
Reorganization Transactions would result in a division of the current businesses
of HealthFirst Medical Group, P.C., The Corvallis Clinic, P.C. and Medford
Clinic, P.C.
Various business support functions along with substantially all of the
assets and liabilities of the three existing Companies would be transferred to
PPI in exchange for PPI Class A Common Stock. Under accounting rules prescribed
by the staff of the Securities and Exchange Commission in SAB 48, when a company
acquires assets from promoters and shareholders in exchange for stock just prior
to, or at the time of, its first public offering, such assets should generally
be recorded at the cost to each such promoter or shareholder. Each of the three
existing Companies is involved as a promoter of the Merger and the related
first-time public registration of stock of PPI. Accordingly, the assets and
liabilities to be transferred from the Companies to PPI in connection with the
merger transactions will be recorded on the PPI balance sheet in the same
amounts as reflected on the balance sheets of the Companies at the effective
date of the merger and the PPI stock will be valued at the historic cost of the
net assets to be transferred.
The medical practice (i.e., physicians and medical service staff) would be
"spun off" to New PCs. The New PCs would then enter into Management Agreements
with PPI for various management, finance and administrative support services.
PPI revenues under the Management Agreements would include (a) reimbursement of
all Manager's Expenses plus (b) a management fee equal to 16% of the
Distributable Profit Amount of the New PCs. "Distributable Profit Amount" is
defined as (i) New PC gross revenues, booked on an accrual basis, less specified
contractual discounts and bad debts, relating to services provided by the New
PCs, less (ii) Manager's Expenses.
The amount available for provider compensation and benefits will be directly
effected by the amount of the management fee to be paid to PPI. Although the
impact can not be determined at this time, the amount available for Provider
Compensation and Benefits may also be effected by synergies resulting from the
Merger and management's ability to reduce costs or enhance revenues.
The pro forma financial statements include the unaudited pro forma condensed
balance sheet of PPI as of September 30, 1996 and the unaudited pro forma
condensed statements of operations of PPI for the year ended December 31, 1995
and for the nine months ended September 30, 1996.
The unaudited condensed pro forma financial statements illustrate the
balance sheet of PPI as if the PC Reorganization Transactions and the Merger had
occurred on September 30, 1996. The unaudited condensed pro forma statements of
operations illustrate the operating results of PPI for the periods presented as
if the PC Reorganization Transactions and the Merger had occurred and the
Management Agreements were in effect throughout the periods presented.
The unaudited condensed pro forma financial statements have been prepared by
PPI based on the historical financial statements of PPI and the Companies and
their predecessors included elsewhere in this Joint Proxy Statement/Prospectus
and assumptions deemed appropriate by PPI. These unaudited condensed pro forma
financial statements may not be indicative of actual results if the transactions
contemplated by the Reorganization and Merger Agreement had occurred on the
dates indicated or which may be realized in the future. No proforma adjustments
for the potential positive impact on the management fee of higher revenues or
anticipated cost reductions related to operations of the New PCs have been
reflected as they are not factually supportable at the present time.
F-9
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST CORVALLIS
--------- ------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments................. $ 3 $ 1,195 $ 72
Accounts receivable--
Gross accounts receivable..................... -- 9,500 8,555
Reserves...................................... -- 1,970 2,353
--------- ------------- -------------
Receivable, net............................. -- 7,530 6,202
Other current assets............................ -- 859 646
--------- ------------- -------------
Total current assets........................ 3 9,584 6,920
PROPERTY, PLANT AND EQUIPMENT:
Gross property.................................. -- 25,500 28,035
Accumulated depreciation........................ -- 5,523 8,811
--------- ------------- -------------
Property, plant and equipment, net.......... -- 19,977 19,224
Other noncurrent assets......................... -- 307 750
--------- ------------- -------------
Total assets................................ $ 3 $ 29,868 $ 26,894
--------- ------------- -------------
--------- ------------- -------------
CURRENT LIABILITIES:
Accounts and notes payable...................... $ -- $ 2,711 $ 3,313
Other current liabilities....................... -- 13,068 4,541
--------- ------------- -------------
Total current liabilities................... -- 15,779 7,854
LONG-TERM DEBT, net of current portion............ -- 3,911 1,549
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS,
net of current portion.......................... -- 4,167 14,026
OTHER LONG-TERM LIABILITIES....................... -- 4,034 2,028
REDEEMABLE STOCK.................................. -- -- 6,744
STOCKHOLDERS' EQUITY:
Common stock.................................... -- 570 --
Additional paid-in capital...................... 2,724 122 --
Retained earnings (deficit)..................... (2,721) 1,285 (5,307)
--------- ------------- -------------
Total liabilities and equity................ $ 3 $ 29,868 $ 26,894
--------- ------------- -------------
--------- ------------- -------------
<CAPTION>
MEDFORD ADJUSTMENTS PPI PRO FORMA
------------- ------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments................. $ 878 $ -- $ 2,148
Accounts receivable--
Gross accounts receivable..................... 10,872 -- 28,927
Reserves...................................... 3,316 -- 7,639
------------- ------ -------------
Receivable, net............................. 7,556 -- 21,288
Other current assets............................ 1,801 -- 3,306
------------- ------ -------------
Total current assets........................ 10,235 -- 26,742
PROPERTY, PLANT AND EQUIPMENT:
Gross property.................................. 10,881 -- 64,416
Accumulated depreciation........................ 5,275 -- 19,609
------------- ------ -------------
Property, plant and equipment, net.......... 5,606 -- 44,807
Other noncurrent assets......................... 321 -- 1,378
------------- ------ -------------
Total assets................................ $ 16,162 $ -- $ 72,927
------------- ------ -------------
------------- ------ -------------
CURRENT LIABILITIES:
Accounts and notes payable...................... $ 1,363 $ -- $ 7,387
Other current liabilities....................... 7,044 -- 24,653
------------- ------ -------------
Total current liabilities................... 8,407 -- 32,040
LONG-TERM DEBT, net of current portion............ 4,184 -- 9,644
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS,
net of current portion.......................... -- -- 18,193
OTHER LONG-TERM LIABILITIES....................... 1,215 -- 7,277
REDEEMABLE STOCK.................................. -- (6,744)(A) --
STOCKHOLDERS' EQUITY:
Common stock.................................... 1 (506)(A) 65
Additional paid-in capital...................... -- 5,583(A) 8,429
Retained earnings (deficit)..................... 2,355 1,667(A) (2,721)
------------- ------ -------------
Total liabilities and equity................ $ 16,162 $ -- $ 72,927
------------- ------ -------------
------------- ------ -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-10
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST SUBURBAN CORVALLIS
--------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(HH)
NET REVENUES.............................. $ -- $ 42,689 $ 1,232 $ 34,088
Less--Provider compensation and
benefits.............................. -- 17,352 373 8,247
--------- ------------- ------ -------------
Net revenues less provider
compensation and benefits......... -- 25,337 859 25,841
TOTAL OPERATING EXPENSES.................. -- 32,440 1,036 24,928
OTHER (INCOME) EXPENSES................... -- (192) (11) 840
REORGANIZATION COSTS...................... 2,721 -- -- --
--------- ------------- ------ -------------
Income (loss) before income taxes... (2,721) (6,911) (166) 73
INCOME TAX (BENEFIT) EXPENSE.............. -- (2,272) -- --
--------- ------------- ------ -------------
Net income (loss)................... $ (2,721) $ (4,639) $ (166) $ 73
--------- ------------- ------ -------------
--------- ------------- ------ -------------
<CAPTION>
MEDFORD SUBTOTAL ADJUSTMENTS PPI PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(II)
NET REVENUES.............................. $ 30,268 $ 108,277 $ (108,277)(AA) $ 85,512
85,512(BB)
Less--Provider compensation and
benefits.............................. 8,553 34,525 (34,525) (CC) --
------------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... 21,715 73,752 11,760 85,512
TOTAL OPERATING EXPENSES.................. 21,893 80,297 -- 80,297
OTHER (INCOME) EXPENSES................... 242 879 1,200(DD) 2,079
REORGANIZATION COSTS...................... -- 2,721 (2,721)(EE) --
------------- ------------- ------------- -------------
Income (loss) before income taxes... (420) (10,145) 13,281 3,136
1,254(FF)
INCOME TAX (BENEFIT) EXPENSE.............. (246) (2,518) 2,518(GG) 1,254
------------- ------------- ------------- -------------
Net income (loss)................... $ (174) $ (7,627) $ 9,509 $ 1,882
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-11
<PAGE>
PHYSICIAN PARTNERS, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PPI HEALTHFIRST SUBURBAN CORVALLIS
--------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(HH)
NET REVENUES.............................. $ -- $ 37,652 $ 15,418 $ 39,174
Less--Provider compensation and
benefits.............................. -- 9,530 3,916 13,209
--------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... -- 28,122 11,502 25,965
TOTAL OPERATING EXPENSES.................. -- 27,593 12,770 27,779
OTHER (INCOME) EXPENSES................... -- 29 185 293
--------- ------------- ------------- -------------
Income (loss) before income taxes... -- 500 (1,453) (2,107)
INCOME TAX (BENEFIT) EXPENSE.............. -- 208 (610) --
--------- ------------- ------------- -------------
Net income (loss)................... $ -- $ 292 $ (843) $ (2,107)
--------- ------------- ------------- -------------
--------- ------------- ------------- -------------
<CAPTION>
MEDFORD SUBTOTAL ADJUSTMENTS PPI PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(II)
NET REVENUES.............................. $ 38,966 $ 131,210 $ (131,210)(AA) $ 101,059
101,059(BB)
Less--Provider compensation and
benefits.............................. 11,239 37,894 (37,894)(CC) --
------------- ------------- ------------- -------------
Net revenues less provider
compensation and benefits......... 27,727 93,316 7,743 101,059
TOTAL OPERATING EXPENSES.................. 26,277 94,419 -- 94,419
OTHER (INCOME) EXPENSES................... 390 897 1,600(DD) 2,497
------------- ------------- ------------- -------------
Income (loss) before income taxes... 1,060 (2,000) 6,143 4,143
1,657(FF)
INCOME TAX (BENEFIT) EXPENSE.............. 408 6 (6)(GG) 1,657
------------- ------------- ------------- -------------
Net income (loss)................... $ 652 $ (2,006) $ 4,492 $ 2,486
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-12
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The pro forma condensed balance sheet has been presented as if the proposed
reorganization transaction had taken place on September 30, 1996.
The pro forma condensed statements of operations have been presented as if
the proposed reorganization had taken place and that the proposed Management
Agreement was in effect throughout the periods presented.
ADJUSTMENTS TO PRO FORMA BALANCE SHEET
Under accounting rules prescribed by the staff of the Securities and
Exchange Commission in SAB 48, when a company acquires assets from promoters and
shareholders in exchange for stock just prior to, or at the time of, its first
public offering, such assets should generally be recorded at the cost to each
such promoter or shareholder. Each of the three existing Companies is involved
as a promoter of the Merger and the related first-time public registration of
stock of PPI. Accordingly, the assets and liabilities to be transferred from the
Companies to PPI in connection with the merger transactions will be recorded on
the PPI balance sheet in the same amounts as reflected on the balance sheets of
the Companies at the effective date of the merger and the PPI stock will be
valued at the historic cost of the net assets to be transferred.
(A) The adjustments reflect the effect of the PC Reorganization Transactions
on the shareholders' equity accounts which includes the issuance of
7,463,250 shares of PPI common stock in exchange for all classes of the
stock of the Companies. These PPI shares will be recorded at par value of
$.01 per share and all of the remaining balances in the Companies capital
accounts will be reflected as paid-in-capital.
ADJUSTMENTS TO PRO FORMA STATEMENTS OF OPERATIONS
The unaudited condensed pro forma statements of operations reflect the
following adjustments:
(AA) The pro forma presentation includes the historic revenues of the Companies
from providing medical services. These revenues have been eliminated from
PPI pro forma revenues because they will be retained by the New PCs.
F-13
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(BB) Represents the pro forma PPI management services revenues as calculated
under the terms of the proposed New PC Management Agreement as applied to
the historical operating results of the Companies.
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Reimbursement of Manager's Expenses incurred under the
terms of the New PC Management Agreement (includes
operating and other expenses)....................... $ 81,176 $ 95,316
Management fee as computed under the terms of the New
PC Management Agreement (16% of New PC revenues less
the amount of the Manager's Expenses to be
reimbursed by the New PCs).......................... 4,336 5,743
------- --------
$ 85,512 $ 101,059
------- --------
------- --------
</TABLE>
(CC) Eliminates the previously recorded Provider Compensation and Benefits of
the Companies. Under the terms of the Merger and the PC Reorganization
Transactions, the medical practice of each Company would be spun off to
the New PCs. The New PCs would be responsible for the costs related to
Provider Compensation and Benefits.
The amount available for Provider Compensation and Benefits will be
directly affected by the amount of the management fee to be paid to PPI.
If the New PC Management Agreement has been in effect during the periods
presented below, the amount available for Provider Compensation and
Benefits would have been reduced by the amount of the management fee as
follows:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
HEALTHFIRST* CORVALLIS MEDFORD COMBINED
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1993........................................... $ 1,844 $ 1,450 $ 1,142 $ 4,436
------ ----------- ----------- -----------
------ ----------- ----------- -----------
1994........................................... $ 2,542 $ 1,992 $ 1,532 $ 6,066
------ ----------- ----------- -----------
------ ----------- ----------- -----------
1995........................................... $ 1,999 $ 1,776 $ 1,968 $ 5,743
------ ----------- ----------- -----------
------ ----------- ----------- -----------
Nine months ended September 30, 1996........... $ 1,704 $ 1,331 $ 1,301 $ 4,336
------ ----------- ----------- -----------
------ ----------- ----------- -----------
</TABLE>
* Includes Suburban for period prior to acquisition by HealthFirst.
Although the impact cannot be determined at this time, the amount
available for Provider Compensation and Benefits may also be
positively effected by synergies from the Merger and management's
ability to reduce costs or enhance revenues.
In the periods presented in the pro forma, HealthFirst, Medford and
Corvallis Clinic recorded Provider Compensation and Benefits expense in
excess of amounts available from current operating profits. In the case of
HealthFirst, most of this excess is related to costs associated with a
bonus compensation plan which is to be paid out over a period of eight
years. Payments to date have been funded from operations. The remaining
obligation at the Effective Time will be transferred to PPI. The excess
compensation expense for Corvallis Clinic of $1.3 million and $2.1 million
for 1994 and 1995, respectively, was funded by operating cash flows in
1994 and by bank borrowings in 1995 which will be transferred to PPI at
the Effective Time. The excess Provider Compensation and
F-14
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Benefits expense for Medford Clinic of $174,000 for the nine months ended
September 30, 1996 was funded by operating cash flows. In the future, the
Management Agreement does not provide for, nor do the Companies intend to
pay, Provider Compensation and Benefits in excess of amounts generated
from operations on an annual basis.
(DD) This represents the corporate overhead expenses of PPI which are currently
estimated to be approximately $1.6 million in its initial year of
operations. These estimates are supported by employment agreements with
management personnel, a lease agreement for corporate office space,
compensation expense related to restricted stock awards and budgeted
amounts for other corporate overhead costs expected to be incurred. Based
on the nature of these costs, they would not be reimbursable Manager's
Expenses under the terms of the New PC Management Agreement.
(EE) Eliminates the impact on operations of nonrecurring costs incurred in
connection with the PC Reorganization Transactions. Substantially all of
these costs are related to services from accountants, attorneys and other
consultants to provide legal documents, accounting and other information
required for the Merger and PC Reorganization Transactions. Additional
reorganization and Merger costs of approximately $0.8 million are expected
to be incurred between September 30, 1996 and the Effective Time of the
Merger. Such costs have not been reflected in the pro forma financial
statements.
(FF) The pro forma income taxes of PPI at an estimated 40% combined federal and
state tax rate.
(GG) Represents the elimination of previously recorded income tax provision
(benefit) of the participating clinics.
(HH) Suburban was acquired by HealthFirst on February 1, 1996 in a purchase
transaction. Accordingly, Suburban's operating results subsequent to the
purchase date are included with HealthFirst. Suburban's revenues and
expenses prior to that date are shown in the Suburban column.
A reconciliation between the pro forma statements of operations and pro
forma results disclosed in Note 12 to the HealthFirst financial statements
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Net revenues less provider compensation and benefits--
Per pro forma statement of operations:
HealthFirst........................................ $ 28,122 $ 25,337
Suburban........................................... 11,502 859
------- -------
Per Note 12.......................................... $ 39,624 $ 26,196
------- -------
------- -------
</TABLE>
(II) No pro forma adjustments for the potential positive impact on the
management fee of higher revenues or anticipated cost reductions related to
operations of the New PCs have been reflected as they are not factually
supportable at the present time.
F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Physician Partners HealthFirst, P.C.
We have audited the accompanying balance sheet of Physician Partners
HealthFirst, P.C. (an Oregon professional corporation) as of September 30, 1996.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Physician Partners
HealthFirst, P.C. as of September 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 2, 1997
F-16
<PAGE>
PHYSICIAN PARTNERS HEALTHFIRST, P.C.
BALANCE SHEET AS OF SEPTEMBER 30, 1996
ASSETS
<TABLE>
<CAPTION>
STOCK SUBSCRIPTION RECEIVABLE........................................................ $ 1
<S> <C>
---------
Total assets................................................................... $ 1
---------
---------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
LIABILITIES.......................................................................... $ --
<S> <C>
STOCKHOLDERS' EQUITY:................................................................
Common stock voting; no par value; 1,000,000 shares authorized;
92 shares issued................................................................. 1
---------
Total liabilities and stockholder's equity..................................... $ 1
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-17
<PAGE>
PHYSICIAN PARTNERS HEALTHFIRST, P.C.
NOTES TO FINANCIAL STATEMENT
1. BUSINESS AND ORGANIZATION:
Physician Partners HealthFirst, P.C. is an Oregon professional corporation
which was incorporated on September 18, 1996 by its sole shareholder,
HealthFirst Medical Group, P.C., for the purpose of effecting a reorganization
transaction among Physician Partners, Inc. (PPI), the New PCs and HealthFirst
Medical Group, P.C., the Corvallis Clinic, P.C. and Medford Clinic, P.C.
(collectively, the Founding Clinics).
This transaction would result in a separation of operations of the three
Founding Clinics between medical professional services activities (i.e.,
providers of medical services) and the physician practice management activities
of the business. The professional services activities would be spun off into
newly formed professional corporation (New PCs). The physician practice
management business, along with substantially all of the assets and liabilities
of the three Founding Clinics, i.e., account receivable, property, plant,
equipment, contracts, payables, accruals and debt, would be transferred to PPI.
The New PCs would be responsible for providing medical services and the related
costs for provider compensation and benefits. The assets to be transferred to
the New PCs include the employment agreements between each Company and its
providers, certain provider contracts under which the New PCs will be receiving
fee-for-service compensation and patient medical records.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies. As consideration, PPI
would be entitled to (a) reimbursement of all managerial costs and expenses
(Manager's Expenses) incurred by PPI and (b) a management fee equal to 16
percent of the Distributable Profit Amount (defined as (i) gross revenues,
booked on an accrual basis, less contractual allowances and bad debts, received
by PPI or the New PCs relating to services provided by the New PCs less (ii)
Manager's Expense).
Essentially all of the cash remaining in the New PC after the payments to
PPI under the management agreement will fund the compensation and benefits of
providers employed by the New PCs.
2. STATEMENTS OF OPERATIONS AND CASH FLOWS:
No statements of operations and cash flows have been presented as Physician
Partners HealthFirst, P.C. has not yet commenced operations and, accordingly,
there has been no operating or cash activities.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Physician Partners Corvallis, P.C.:
We have audited the accompanying balance sheet of Physician Partners
Corvallis, P.C. (an Oregon professional corporation) as of September 30, 1996.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial statement position of Physician Partners
Corvallis, P.C. as of September 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
January 2, 1997
F-19
<PAGE>
PHYSICIAN PARTNERS CORVALLIS, P.C.
BALANCE SHEET AS OF SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
STOCK SUBSCRIPTION RECEIVABLE $ 1
---------
Total Assets $ 1
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES $ --
STOCKHOLDERS' EQUITY:
Common stock voting; no par value; 500 shares authorized; 64 shares issued and
outstanding 1
---------
Total liabilities and stockholders' equity $ 1
---------
---------
</TABLE>
The accompanying notes are an integral part of this statement.
F-20
<PAGE>
PHYSICIAN PARTNERS CORVALLIS, P.C.
NOTES TO FINANCIAL STATEMENT
1. BUSINESS AND ORGANIZATION:
Physician Partners Corvallis, P.C. is an Oregon professional corporation
which was incorporated on September 18, 1996 by its sole shareholder, The
Corvallis Clinic, P.C. for the purpose of effecting a reorganization transaction
among Physician Partners, Inc. (PPI), the New PCs and HealthFirst Medical Group,
P.C., The Corvallis Clinic, P.C. and Medford Clinic, P.C. (collectively, the
Founding Clinics).
This transaction would result in a separation of operations of the three
Founding Clinics between medical professional services activities (i.e.,
providers of medical services) and the physician practice management activities
of the business. The professional services activities would be spun off into
newly formed professional corporation (New PCs). The physician practice
management business, along with substantially all of the assets and liabilities
of the three Founding Clinics, i.e., account receivable, property, plant,
equipment, contracts, payables, accruals and debt, would be transferred to PPI.
The New PCs would be responsible for providing medical services and the related
costs for provider compensation and benefits. The assets to be transferred to
the New PCs include the employment agreements between each Company and its
providers, certain provider contracts under which the New PCs will be receiving
fee-for-service compensation and patient medical records.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies. As consideration, PPI
would be entitled to (a) reimbursement of all managerial costs and expenses
(Manager's Expenses) incurred by PPI and (b) a management fee equal to 16
percent of the Distributable Profit Amount (defined as (i) gross revenues,
booked on an accrual basis, less contractual allowances and bad debts, received
by PPI or the New PCs relating to services provided by the New PCs less (ii)
Manager's Expenses).
Essentially all of the cash remaining in the New PC after the payments to
PPI under the management agreement will fund the compensation and benefits of
providers employed by the New PCs
2. STATEMENTS OF OPERATIONS AND CASH FLOWS:
No statements of operations and cash flows have been presented as Physician
Partners Corvallis, P.C. has not yet commenced operations and, accordingly,
there has been no operating or cash activities.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Physician Partners Medford, P.C.:
We have audited the accompanying balance sheet of Physician Partners
Medford, P.C. (an Oregon professional corporation) as of September 30, 1996.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Physician Partners Medford,
P.C. as of September 30, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 2, 1997
F-22
<PAGE>
PHYSICIAN PARTNERS MEDFORD, P.C.
BALANCE SHEET AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
STOCK SUBSCRIPTION RECEIVABLE......................................................... $ 1
---
Total assets...................................................................... $ 1
---
---
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES........................................................................... $ --
STOCKHOLDERS' EQUITY:
Common stock voting; no par value; 500 shares authorized; 57 1/3 shares issued and
outstanding....................................................................... 1
---
Total liabilities and stockholders' equity........................................ $ 1
---
---
</TABLE>
The accompanying notes are an integral part of this statement.
F-23
<PAGE>
PHYSICIAN PARTNERS MEDFORD, P.C.
NOTES TO FINANCIAL STATEMENT
1. BUSINESS AND ORGANIZATION:
Physician Partners Medford, P.C. is an Oregon professional corporation which
was incorporated on September 18, 1996 by its sole shareholder, Medford Clinic,
P.C., for the purpose of effecting a reorganization transaction among Physician
Partners, Inc. (PPI), the New PCs and HealthFirst Medical Group, P.C., The
Corvallis Clinic, P.C, and Medford Clinic, P.C. (collectively, the Founding
Clinics).
This transaction would result in a separation of operations of the three
Founding Clinics between medical professional services activities (i.e.,
providers of medical services) and the physician practice management activities
of the business. The professional services activities would be spun off into
newly formed professional corporation (New PCs). The physician practice
management business, along with substantially all of the assets and liabilities
of the three Founding Clinics, i.e., account receivable, property, plant,
equipment, contracts, payables, accruals and debt, would be transferred to PPI.
The New PCs would be responsible for providing medical services and the related
costs for provider compensation and benefits. The assets to be transferred to
the New PCs include the employment agreements between each Company and its
providers, certain provider contracts under which the New PCs will be receiving
fee-for-service compensation and patient medical records.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies. As consideration, PPI
would be entitled to (a) reimbursement of all managerial costs and expenses
(Manager's Expenses) incurred by PPI and (b) a management fee equal to 16
percent of the Distributable Profit Amount (defined as (i) gross revenues,
booked on an accrual basis, less contractual allowances and bad debts, received
by PPI or the New PCs relating to services provided by the New PCs less (ii)
Manager's Expense).
Essentially all of the cash remaining in the New PC after the payments to
PPI under the management agreement will fund the compensation and benefits of
providers employed by the New PCs.
2. STATEMENTS OF OPERATIONS AND CASH FLOWS:
No statements of operations and cash flows have been presented as Physician
Partners Medford, P.C. has not yet commenced operations and, accordingly, there
has been no operating or cash activities.
F-24
<PAGE>
THE NEW PCS
PRO FORMA CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As explained elsewhere in this Joint Proxy Statement/Prospectus, the PC
Reorganization Transactions would result in a division of the current businesses
of HealthFirst Medical Group, P.C., The Corvallis Clinic, P.C. and Medford
Clinic, P.C.
The medical practice (i.e., physicians and medical service staff) will be
"spun off" to New PCs. Each of Physician Partners HealthFirst, P.C. (HealthFirst
New PC), Physician Partners Corvallis, P.C. (Corvallis Clinic New PC) and
Physician Partners Medford, P.C. (Medford Clinic New PC) was incorporated under
the laws of the state of Oregon on September 18, 1996. Each of the three
existing Companies will transfer certain assets integral to its provider
professional services business to the New PCs and cause such New PC to assume
liabilities of such Company relating to such transferred assets. The assets and
liabilities to be transferred to the New PCs represent various intangible
assets, e.g., medical records and certain contractual rights and related
contractual obligations. These assets and liabilities have no carrying value on
the books of the three existing Companies.
After such transfer of assets, HealthFirst and Medford Clinic will make a
distribution under which the then-current shareholders of each Company will
receive all of the issued and outstanding shares of the respective New PCs,
allocated on a pro rata basis in accordance with the fair market value of each
shareholders' then-current equity interest. Corvallis Clinic will instead make a
distribution under which the holders of Class A Preferred Stock of Corvallis
Clinic shall receive all of the issued and outstanding shares of Corvallis
Clinic New PC, allocated on pro rata basis in accordance with the percentage of
Class A Preferred Stock of Corvallis Clinic then held by each such holder.
Various business support functions along with substantially all of the
assets and liabilities of the three existing Companies would be transferred to
PPI. As discussed in the "Summary" section under "Accounting Treatment," the
assets and liabilities to be transferred from the Companies to PPI in connection
with the merger transactions will be recorded on the PPI balance sheet in the
same amounts as reflected on the balance sheets of the three existing Companies
at the Effective Time.
Subsequent to the Merger, the New PCs will receive revenues from providing
medical services and will pay for Provider Compensation and Benefits, as well as
expenses under Management Agreements to be entered into with PPI. The Management
Agreements will cover various management, finance and administrative support
services to be provided to the New PCs by PPI. The payments to be made to PPI
under the Management Agreements would include (a) reimbursement of all Manager's
Expenses plus (b) a management fee equal to 16% of the Distributable Profit
Amount of the New PCs. "Distributable Profit Amount" is defined as (i) New PC
gross revenues, booked on an accrual basis, less specified contractual discounts
and bad debts, relating to services provided by the New PCs, less (ii) Manager's
Expenses.
It is expected that the New PCs will generally operate on a break-even
basis. Accordingly, the amount available for future Provider Compensation and
Benefits will be directly effected by the amount of the management fee to be
paid to PPI. Although the impact cannot be determined at this time, the future
amounts available for Provider Compensation and Benefits may also be effected by
synergies resulting from the Merger and management's ability to reduce costs or
enhance revenues.
The pro forma financial statements include the unaudited pro forma condensed
balance sheets of the New PCs as of September 30, 1996 and the unaudited pro
forma condensed statements of operations of the New PCs for the year ended
December 31, 1995 and for the nine months ended September 30, 1996.
The unaudited condensed pro forma financial statements illustrate the
balance sheets of the New PCs as if the PC Reorganization Transactions and the
Merger had occurred on September 30, 1996. The unaudited condensed pro forma
statements of operations illustrate the operating results of the New PCs
F-25
<PAGE>
for the periods presented as if the PC Reorganization Transactions and the
Merger had occurred and the Management Agreements were in effect on January 1,
1995.
The unaudited condensed pro forma financial statements have been prepared by
the New PCs based on the historical financial statements of the Companies and
their predecessors included elsewhere in this Joint Proxy Statement/Prospectus
and assumptions as described in the footnotes to these unaudited condensed pro
forma financial statements. These unaudited condensed pro forma financial
statements may not be indicative of actual results if the transactions
contemplated by the Reorganization and Merger Agreement had occurred on the
dates indicated or which may be realized in the future. No pro forma adjustments
for the potential positive impact on the management fee of higher revenues or
anticipated cost reductions related to operations of the New PCs have been
reflected as they are not factually supportable at the present time.
F-26
<PAGE>
HEALTHFIRST NEW PC
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
HEALTHFIRST
HEALTHFIRST NEW PC
NEW PC ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments....................................... $ -- $ -- $ --
Accounts receivable--
Gross accounts receivable........................................... -- -- --
Reserves............................................................ -- -- --
------------ ------------ ------------
Receivable, net................................................. -- -- --
Other current assets.................................................. -- -- --
------------ ------------ ------------
Total current assets............................................ 1 -- 1
PROPERTY, PLANT AND EQUIPMENT:
Gross property........................................................ -- -- --
Accumulated depreciation.............................................. -- -- --
------------ ------------ ------------
Property, plant and equipment, net.............................. -- -- --
Other noncurrent assets............................................... -- -- --
------------ ------------ ------------
Total assets.................................................... $ 1 -- $ 1
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts and notes payable............................................ $ -- $ -- $ --
Other current liabilities............................................. -- -- --
------------ ------------ ------------
Total current liabilities....................................... -- -- --
LONG-TERM DEBT, net of current portion.................................. -- -- --
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
portion................................................................ -- -- --
OTHER LONG-TERM LIABILITIES............................................. -- -- --
STOCKHOLDERS' EQUITY:
Common stock.......................................................... 1 -- 1
Additional paid-in capital............................................ -- -- --
Retained earnings (deficit)........................................... -- -- --
------------ ------------ ------------
Total liabilities and stockholders' equity...................... $ 1 $ -- $ 1
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
F-27
<PAGE>
HEALTHFIRST NEW PC
PRO FORMA STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
HEALTHFIRST
HEALTHFIRST NEW PC
NEW PC SUBURBAN HEALTHFIRST SUBTOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(E)
Net revenues.......................... $ -- $ 1,232 $ 42,689 $ 43,921 $ -- $ 43,921
Less-- Provider Compensation and
Benefits............................. -- 373 17,352 17,725 (8,781)(A) 8,944
----------- ----------- ----------- ----------- ------------- -----------
Net revenues less Provider
Compensation and Benefits............ -- 859 25,337 26,196 8,781 34,977
Total operating expenses.............. -- 1,036 32,440 33,476 (33,476)(B) --
Other (income) expenses............... -- (11) (192) (203) 203(B) --
Management fee........................ -- -- -- -- 34,977(C) 34,977
----------- ----------- ----------- ----------- ------------- -----------
Net income (loss) before income
taxes................................ -- (166) (6,911) (7,077) 7,077 --
Income tax (benefit) expense.......... -- -- (2,272) (2,272) 2,272(D) --
----------- ----------- ----------- ----------- ------------- -----------
Net income (loss)..................... $ -- $ (166) $ (4,639) $ (4,805) $ 4,805 $ --
----------- ----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ----------- ------------- -----------
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HEALTHFIRST
HEALTHFIRST NEW PC
NEW PC SUBURBAN HEALTHFIRST SUBTOTAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(E)
Net revenues.......................... $ -- $ 15,418 $ 37,652 $ 53,070 $ -- $ 53,070
Less-- Provider Compensation and
Benefits............................. -- 3,916 9,530 13,446 (2,952)(A) 10,494
----------- ----------- ----------- ----------- ------------- -----------
Net revenues less Provider
Compensation and Benefits............ -- 11,502 28,122 39,624 2,952 42,576
Total operating expenses.............. -- 12,770 27,593 40,363 (40,363)(B) --
Other (income) expenses............... -- 185 29 214 (214)(B) --
Management fee........................ -- -- -- -- 42,576(C) 42,576
----------- ----------- ----------- ----------- ------------- -----------
Net income (loss) before income
taxes................................ -- (1,453) 500 (953) 953 --
Income tax (benefit) expense.......... -- (610) 208 (402) 402(D) --
----------- ----------- ----------- ----------- ------------- -----------
Net income (loss)..................... $ -- $ (843) $ 292 $ (551) $ 551 $ --
----------- ----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ----------- ------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-28
<PAGE>
CORVALLIS CLINIC NEW PC
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(DOLLARS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
CORVALLIS
CORVALLIS CLINIC
CLINIC NEW PC
NEW PC ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments....................................... $ -- $ -- $ --
Accounts receivable--
Gross accounts receivable........................................... -- -- --
Reserves............................................................ -- -- --
------------ ------------ ------------
Receivable, net................................................. -- -- --
Other current assets.................................................. 1 -- 1
------------ ------------ ------------
Total current assets............................................ -- -- --
PROPERTY, PLANT AND EQUIPMENT:
Gross property........................................................ -- -- --
Accumulated depreciation.............................................. -- -- --
------------ ------------ ------------
Property, plant and equipment, net.............................. -- -- --
Other noncurrent assets............................................... -- -- --
------------ ------------ ------------
Total assets.................................................... $ 1 $ -- $ 1
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts and notes payable............................................ $ -- $ -- $ --
Other current liabilities............................................. -- -- --
------------ ------------ ------------
Total current liabilities....................................... -- -- --
LONG-TERM DEBT, net of current portion.................................. -- -- --
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
portion................................................................ -- -- --
OTHER LONG-TERM LIABILITIES............................................. -- -- --
STOCKHOLDERS' EQUITY:
Common stock.......................................................... 1 -- 1
Additional paid-in capital............................................ -- -- --
Retained earnings (deficit)........................................... -- -- --
------------ ------------ ------------
Total liabilities and stockholders' equity...................... $ 1 $ -- $ 1
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
F-29
<PAGE>
CORVALLIS CLINIC NEW PC
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
CORVALLIS
CORVALLIS CLINIC
CLINIC CORVALLIS NEW PC
NEW PC CLINIC ADJUSTMENTS PRO FORMA
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.................................................... $ -- $ 34,088 $ -- $ 34,088
Less-- Provider Compensation and Benefits....................... -- 8,247 (1,258)(A) 6,989
--------- --------- ----------- -----------
Net revenues less Provider Compensation and Benefits............ -- 25,841 1,258 27,099
Total operating expenses........................................ -- 24,928 (24,928)(B) --
Other (income) expenses......................................... -- 840 (840)(B) --
Management fee.................................................. -- -- 27,099(C) 27,099
--------- --------- ----------- -----------
Net income (loss) before income taxes........................... -- 73 (73) --
Income tax (benefit) expense.................................... -- -- -- --
--------- --------- ----------- -----------
Net income (loss)............................................... $ -- $ 73 $ (73) $ --
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
CORVALLIS
CORVALLIS CLINIC
CLINIC CORVALLIS NEW PC
NEW PC CLINIC ADJUSTMENTS PRO FORMA
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.................................................... $ -- $ 39,174 $ -- $ 39,174
Less-- Provider Compensation and Benefits....................... -- 13,209 (3,883)(A) 9,326
--------- --------- ----------- -----------
Net revenues less Provider Compensation and Benefits............ -- 25,965 3,883 29,848
Total operating expenses........................................ -- 27,779 (27,779)(B) --
Other (income) expenses......................................... -- 293 (293)(B) --
Management fee.................................................. -- -- 29,848(C) 29,848
--------- --------- ----------- -----------
Net income (loss) before income taxes........................... -- (2,107) 2,107 --
Income tax (benefit) expense.................................... -- -- -- --
--------- --------- ----------- -----------
Net income (loss)............................................... $ -- $ (2,107) $ 2,107 $ --
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-30
<PAGE>
MEDFORD CLINIC NEW PC
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(DOLLARS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MEDFORD
MEDFORD CLINIC NEW
CLINIC NEW PC PRO
PC ADJUSTMENTS FORMA
---------- ----------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short-term investments........................................... $ -- $ -- $ --
Accounts receivable-
Gross accounts receivable............................................... -- -- --
Reserves................................................................ -- -- --
---------- ----------- -----------
Receivable, net....................................................... -- -- --
Other current assets...................................................... 1 -- 1
---------- ----------- -----------
Total current assets.................................................. -- -- --
PROPERTY, PLANT AND EQUIPMENT:
Gross property............................................................ -- -- --
Accumulated depreciation.................................................. -- -- --
---------- ----------- -----------
Property, plant and equipment, net.................................... -- -- --
Other noncurrent assets................................................... -- -- --
---------- ----------- -----------
Total assets.......................................................... $ 1 $ -- $ 1
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts and notes payable................................................ $ -- $ -- $ --
Other current liabilities................................................. -- -- --
---------- ----------- -----------
Total current liabilities............................................. -- -- --
LONG-TERM DEBT, net of current portion...................................... -- -- --
CAPITAL AND DIRECT FINANCING LEASE
OBLIGATIONS, net of current portion........................................ -- -- --
OTHER LONG-TERM LIABILITIES................................................. -- -- --
STOCKHOLDERS' EQUITY:
Common stock.............................................................. 1 -- 1
Additional paid-in capital................................................ -- -- --
Retained earnings (deficit)............................................... -- -- --
---------- ----------- -----------
Total liabilities and stockholders' equity............................ $ 1 $ -- $ 1
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed balance sheet.
F-31
<PAGE>
MEDFORD CLINIC NEW PC
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MEDFORD
MEDFORD CLINIC NEW
CLINIC NEW MEDFORD PC PRO
PC CLINIC ADJUSTMENTS FORMA
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $ -- $ 30,268 $ -- $ 30,268
Less-Provider Compensation and Benefits....................... -- 8,553 (1,721)(A) 6,832
---------- ---------- ----------- -----------
Net revenue less Provider Compensation and Benefits........... -- 21,715 1,721 23,436
Total operating expenses...................................... -- 21,893 (21,893)(B) --
Other (income) expenses....................................... -- 242 (242)(B) --
Management fee................................................ -- -- 23,436(C) 23,436
---------- ---------- ----------- -----------
Net income (loss) before income taxes......................... -- (420) 420 --
Income tax (benefit) expense.................................. -- (246) 246(D) --
---------- ---------- ----------- -----------
Net income (loss)............................................. $ -- $ (174) $ 174 $ --
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
YEAR ENDED DECEMBER 31, 1995
<CAPTION>
MEDFORD
MEDFORD CLINIC NEW
CLINIC NEW MEDFORD PC PRO
PC CLINIC ADJUSTMENTS FORMA
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.................................................. $ -- $ 38,966 $ -- $ 38,966
Less-Provider Compensation and Benefits....................... -- 11,239 (908)(A) 10,331
---------- ---------- ----------- -----------
Net revenue less Provider Compensation and Benefits........... -- 27,727 908 28,635
Total operating expenses...................................... -- 26,277 (26,277)(B) --
Other (income) expenses....................................... -- 390 (390)(B) --
Management fee................................................ -- -- 28,635(C) 28,635
---------- ---------- ----------- -----------
Net income (loss) before income taxes......................... -- 1,060 (1,060) --
Income tax (benefit) expense.................................. -- 408 (408)(D) --
---------- ---------- ----------- -----------
Net Income loss............................................... $ -- $ 652 $ (652) $ --
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-32
<PAGE>
THE NEW PCS
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The pro forma condensed balance sheet has been presented as if the proposed
New PC Reorganization Transaction had taken place on September 30, 1996.
The pro forma condensed statements of operations have been presented as if
the proposed reorganization had taken place and that the proposed Management
Agreement was in effect throughout the periods presented. The historic operating
revenues and expenses of each of the three existing Companies have been
incorporated into the pro forma statements of operations to illustrate how the
historic operations of the Clinics would be impacted by the Merger transaction.
ADJUSTMENTS TO PRO FORMA BALANCE SHEET
Under accounting rules prescribed by the staff of the Securities and
Exchange Commission in SAB 48, when a company acquires assets from promoters and
shareholders in exchange for stock just prior to, or at the time of, its first
public offering, such assets should generally be recorded at the cost to each
such promoter or shareholder. Each of the three existing Companies is involved
as a promoter of the Merger and the related first-time public registration of
stock.
The assets and liabilities to be transferred to the New PCs have no carrying
value on the books of the three existing Companies. In accordance with the
provisions of SAB 48, they will also have no carrying value on the books of the
new PCs. Accordingly, no adjustments have been reflected in the pro forma
balance sheets for the New PCs.
F-33
<PAGE>
THE NEW PCS
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
ADJUSTMENTS TO PRO FORMA STATEMENTS OF OPERATIONS
The unaudited condensed pro forma statements of operations reflect the
following adjustments:
(A) Adjusts the amount that would be available for Provider Compensation and
Benefits. The amount available for Provider Compensation and Benefits on a
pro forma basis is calculated at 84% of the aggregate of Net Revenues less
Manager's Expenses.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 20, 1996
------------------ -----------------
<S> <C> <C>
HEALTHFIRST NEW PC
- ----------------------------------------------------------------------
Net Revenues........................................................ 43,921 53,070
Managers Expenses................................................... (33,273) (40,577)
10,648 12,493
84% 84%
------- -------
Provider Compensation and Benefits.................................. 8,944 10,494
------- -------
------- -------
CORDALLIS CLINIC NEW PC
- ----------------------------------------------------------------------
Net Revenues........................................................ 34,088 39,174
Manager's Expenses.................................................. (25,768) (28,072)
8,320 11,102
84% 84%
------- -------
Provider Compensation and Benefits.................................. 6,989 9,326
------- -------
------- -------
MEDFORD CLINIC NEW PC
- ----------------------------------------------------------------------
Net Revenues........................................................ 30,268 38,966
Manager's Expenses.................................................. (22,135) (26,667)
8,133 12,299
84% 84%
------- -------
Provider Compensation and Benefits.................................. 6,832 10,331
------- -------
------- -------
</TABLE>
Historically HealthFirst, Medford Clinic and Corvallis Clinic recorded
Provider Compensation and Benefits expense in excess of amounts available
from current operating profits. In the case of HealthFirst, most of this
excess is related to costs associated with a bonus compensation plan which
is to be paid out over a period of eight years. Payments to date have been
funded from operations. The remaining obligation at the Effective Date will
be transferred to PPI. The excess compensation expense for Corvallis Clinic
of $2.1 million in 1995, was funded by bank borrowings, which will be
transferred to PPI at the Effective Time. The excess Provider Compensation
and Benefits expense for Medford Clinic of $174,000 for the nine months
ended September 30, 1996 was funded by operating cash flows. In the future,
the Management Agreement does not provide for, nor do the Companies intend
to pay, Provider Compensation and Benefits in excess of amounts generated
from operations on an annual basis.
(B) Eliminates the previously recorded operating expenses and other (income)
expense. Under the terms of the Management Agreement, these costs will be
incurred by PPI and reimbursed by the New PCs as Manager's Expenses.
F-34
<PAGE>
THE NEW PCS
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS (CONTINUED)
No pro forma adjustments for the impact on the amounts available for
Provider Compensation and Benefits have been included for potential changes
in revenues or costs related to operations of the New PCs have been
reflected as they are not factually supportable at the present time.
(C) Represents the management services expenses calculated under the terms of
the proposed New PC Management Agreement as applied to the historical
operating results.
<TABLE>
<CAPTION>
REIMBURSEMENT
OF MANAGER'S MANAGEMENT
EXPENSES FEE* TOTAL
-------------- ------------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
HEALTHFIRST NEW PC
1996 (nine months ended September 30)............................ $ 33,273 $ 1,704 $ 34,977
1995............................................................. 40,577 1,999 42,576
CORVALLIS CLINIC NEW PC
1996 (nine months ended September 30)............................ 25,768 1,331 27,099
1995............................................................. 28,072 1,776 29,848
MEDFORD CLINIC NEW PC
1996 (nine months ended September 30)............................ 22,135 1,301 23,436
1995............................................................. 26,667 1,968 28,635
</TABLE>
* 16% of New PC revenues less Manager's Expenses to be reimbursed by the New
PCs.
(D) Represents the elimination of historical income tax provisions (benefits as
the New PCs are expected to be operated on a break-even basis.
(E) Suburban was acquired by Health First on February 1, 1996 in a purchase
transaction. Accordingly, Suburban's operating results subsequent to the
purchase date are included with HealthFirst. Suburban's revenues and
expenses prior to that date are shown in the Suburban column.
A reconciliation between the pro forma statements of operations and pro forma
results disclosed in Note 12 to the HealthFirst financial statements
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Net revenues less Provider
Compensation and Benefits--
Per pro forma statements of
operations:
HealthFirst..................................................... $ 25,337 $ 28,122
Suburban........................................................ 859 11,502
------- -------
Per Note 12....................................................... $ 26,196 $ 39,624
------- -------
------- -------
</TABLE>
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
HealthFirst Medical Group, P.C.:
We have audited the accompanying balance sheets of HealthFirst Medical
Group, P.C. (an Oregon professional corporation) as of December 31, 1994 and
1995, and the related statements of operations, stockholders equity and cash
flows for each of the years in the three year period ended December 31, 1995.
These financial statements are the responsibility of HealthFirst's management.
Our responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of HealthFirst Medical Group,
P.C. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996
F-36
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- SEPTEMBER 30,
1994 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,975 $ 124,916 $ 1,195,169
Short-term investments.................................... 2,616,566 -- --
Patient accounts receivable, net of allowances for
contractual discounts and uncollectible accounts of
$1,110,193, $1,561,609 and $1,969,955 at December 31,
1994 and 1995 and September 30, 1996, respectively...... 3,342,827 4,363,353 5,367,472
Healthcare and other receivables.......................... 2,964,415 2,396,299 2,162,742
Related party receivable.................................. -- -- 397,964
Income taxes receivable................................... -- 167,988 49,774
Inventories of drugs and supplies......................... 179,059 195,395 --
Prepaid expenses and deposits............................. 202,576 281,378 411,181
-------------- -------------- --------------
Total current assets.................................. 9,307,418 7,529,329 9,584,302
-------------- -------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $2,802,561, $3,534,908 and $5,522,557 at
December 31, 1994 and 1995 and September 30, 1996,
respectively.............................................. 7,468,108 13,422,672 19,977,198
-------------- -------------- --------------
OTHER ASSETS................................................ 72,102 122,548 306,604
-------------- -------------- --------------
Total assets.......................................... $ 16,847,628 $ 21,074,549 $ 29,868,104
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-37
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------- SEPTEMBER 30,
1994 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Line of credit............................................ $ -- $ -- $ 100,000
Current portion of long-term debt and capital and direct
financing lease obligations............................. 15,727 2,958,506 4,321,604
Drafts payable............................................ 1,743,989 164,792 1,112,374
Accounts payable.......................................... 912,492 1,373,803 1,499,041
Related party payable..................................... -- -- 541,462
Income taxes payable...................................... 358,992 -- --
PPI allocation payable.................................... -- -- 270,754
Accrued expenses.......................................... 280,282 241,743 1,039,060
Accrued healthcare costs.................................. 518,438 610,190 2,433,720
Accrued compensation...................................... 1,717,640 1,825,822 4,292,026
Deferred revenue.......................................... 15,000 17,686 168,789
Deferred income tax liability............................. 1,784,151 1,844,262 --
-------------- -------------- --------------
Total current liabilities............................. 7,346,711 9,036,804 15,778,830
-------------- -------------- --------------
LONG-TERM DEBT, net of current portion...................... 1,731,359 3,711,488 3,911,408
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of
current portion........................................... -- -- 4,166,723
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES....... 425,464 627,000 4,034,216
LONG-TERM DEFERRED TAX LIABILITY............................ 91,081 102,522 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock--
Series 1 Class A--Voting; no par value; 800,000 shares
authorized; 4,950, 5,650 and 5,800 shares issued and
outstanding at December 31, 1994 and 1995 and
September 30, 1996, respectively...................... 495,000 565,000 576,000
Series 2 Class A--Voting; no par value; 200,000 shares
authorized; 0, 0 and 2,200 shares issued and
outstanding at December 31, 1994 and 1995 and
September 30, 1996, respectively...................... -- -- 330,000
Series 3, 4 and 5 Class A--Voting; no par value;
200,000, 100,000 and 100,000 shares authorized,
respectively, none issued or outstanding at December
31, 1994 and 1995 and September 30, 1996.............. -- -- --
Class B--Nonvoting; no par value; 300,000 shares
authorized; all shares repurchased in 1994............ -- -- --
Additional paid-in capital................................ -- -- 122,180
Retained earnings......................................... 6,909,269 7,201,035 1,285,097
Notes receivable from stockholders for purchase of
stock................................................... (151,256) (169,300) (336,350)
-------------- -------------- --------------
Total stockholders' equity............................ 7,253,013 7,596,735 1,976,927
-------------- -------------- --------------
Total liabilities and stockholders' equity............ $ 16,847,628 $ 21,074,549 $ 29,868,104
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-38
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Fee-for-service, net............ $ 13,504,882 $ 18,813,260 $ 22,834,493 $ 16,341,383 $ 24,199,735
Prepaid healthcare.............. 10,893,470 13,463,161 14,817,480 11,311,472 18,489,156
------------- ------------- ------------- ------------- -------------
Net revenues.................. 24,398,352 32,276,421 37,651,973 27,652,855 42,688,891
Less--Provider compensation and
benefits...................... 6,278,413 8,375,513 9,529,634 8,521,869 17,352,016
------------- ------------- ------------- ------------- -------------
Net revenue less provider
compensation and benefits... 18,119,939 23,900,908 28,122,339 19,130,986 25,336,875
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Clinic salaries, wages and
benefits...................... 6,276,081 8,613,746 11,736,735 7,440,854 12,785,972
Purchased medical services...... 3,157,020 3,529,743 4,253,473 3,434,336 7,069,769
Medical and office supplies..... 2,245,295 3,076,359 4,376,539 2,722,533 4,354,508
General and administrative
expenses...................... 2,470,559 3,199,543 4,490,872 3,275,551 4,414,349
Lease and rent expense.......... 607,619 655,205 853,232 636,853 1,338,456
Provision for uncollectible
accounts...................... 696,364 935,650 1,146,381 859,786 1,238,833
Depreciation and
amortization.................. 509,925 637,782 736,097 549,260 1,238,062
------------- ------------- ------------- ------------- -------------
Total operating expenses...... 15,962,863 20,648,028 27,593,329 18,919,173 32,439,949
------------- ------------- ------------- ------------- -------------
Operating profit (loss)....... 2,157,076 3,252,880 529,010 211,813 (7,103,074)
OTHER INCOME (EXPENSES):
Interest income................. 115,201 97,767 38,820 33,714 87,027
Interest expense................ (182,738) (185,921) (188,650) (149,491) (538,426)
Other........................... 113,331 189,064 120,538 83,047 643,436
------------- ------------- ------------- ------------- -------------
Net income (loss) before
income taxes................ 2,202,870 3,353,790 499,718 179,083 (6,911,037)
------------- ------------- ------------- ------------- -------------
INCOME TAX (BENEFIT) EXPENSE...... 888,547 1,416,323 207,952 71,633 (2,272,139)
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)................. $ 1,314,323 $ 1,937,467 $ 291,766 $ 107,450 $ (4,638,898)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------------------------------------------------------
SERIES 1 SERIES 2
CLASS A CLASS A CLASS B
--------------------------- --------------------------- ---------------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992......... 3,450 $ 345,000 -- $ -- 1,065 $ 106,508
Issuance of common stock......... 600 60,000 -- -- -- --
Repayment of notes receivable
from stockholders.............. -- -- -- -- -- --
Net income....................... -- -- -- -- -- --
----- ------------ ----- ------------ ------ ------------
BALANCE, December 31, 1993......... 4,050 405,000 -- -- 1,065 106,508
Issuance of common stock......... 1,000 100,000 -- -- -- --
Redemption of common stock....... (100) (10,000) -- -- (1,065) (106,508)
Repayment of notes receivable
from stockholders.............. -- -- -- -- -- --
Net income....................... -- -- -- -- -- --
----- ------------ ----- ------------ ------ ------------
BALANCE, December 31, 1994......... 4,950 495,000 -- -- -- --
Issuance of common stock......... 800 80,000 -- -- -- --
Redemption of common stock....... (100) (10,000) -- -- -- --
Repayment of notes receivable
from stockholders.............. -- -- -- -- -- --
Net income....................... -- -- -- -- -- --
----- ------------ ----- ------------ ------ ------------
BALANCE, December 31, 1995......... 5,650 565,000 -- -- -- --
Notes receivable from
stockholders acquired from
Suburban (unaudited)........... -- -- -- -- -- --
Common stock issued to acquire
Suburban (unaudited)........... -- -- 2,200 330,000 -- --
Issuance of common stock
(unaudited).................... 200 20,000 -- -- -- --
Redemption of common stock
(unaudited).................... (50) (9,000) -- -- -- --
Repayment of notes receivable
from shareholders
(unaudited).................... -- -- -- -- -- --
Costs incurred related to
Physician Partners, Inc.
transaction (unaudited)........ -- -- -- -- -- --
Net loss (unaudited)............. -- -- -- -- -- --
----- ------------ ----- ------------ ------ ------------
BALANCE, September 30, 1996
(unaudited)...................... 5,800 $ 576,000 2,200 $ 330,000 -- $ --
----- ------------ ----- ------------ ------ ------------
----- ------------ ----- ------------ ------ ------------
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
PAID-IN RETAINED FROM
CAPITAL EARNINGS STOCKHOLDERS TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992......... $ -- $ 3,657,479 $ (124,834) $ 3,984,153
Issuance of common stock......... -- -- (60,000) --
Repayment of notes receivable
from stockholders.............. -- -- 45,389 45,389
Net income....................... -- 1,314,323 -- 1,314,323
------------ ------------ ------------ ------------
BALANCE, December 31, 1993......... -- 4,971,802 (139,445) 5,343,865
Issuance of common stock......... -- -- (100,000) --
Redemption of common stock....... -- -- -- (116,508)
Repayment of notes receivable
from stockholders.............. -- -- 88,189 88,189
Net income....................... -- 1,937,467 -- 1,937,467
------------ ------------ ------------ ------------
BALANCE, December 31, 1994......... -- 6,909,269 (151,256) 7,253,013
Issuance of common stock......... -- -- (80,000) --
Redemption of common stock....... -- -- -- (10,000)
Repayment of notes receivable
from stockholders.............. -- -- 61,956 61,956
Net income....................... -- 291,766 -- 291,766
------------ ------------ ------------ ------------
BALANCE, December 31, 1995......... -- 7,201,035 (169,300) 7,596,735
Notes receivable from
stockholders acquired from
Suburban (unaudited)........... -- -- (194,597) (194,597)
Common stock issued to acquire
Suburban (unaudited)........... 122,180 -- -- 452,180
Issuance of common stock
(unaudited).................... -- -- (20,000) --
Redemption of common stock
(unaudited).................... -- -- -- (9,000)
Repayment of notes receivable
from shareholders
(unaudited).................... -- -- 47,547 47,547
Costs incurred related to
Physician Partners, Inc.
transaction (unaudited)........ -- (1,277,040) -- (1,277,040)
Net loss (unaudited)............. -- (4,638,898) -- (4,638,898)
------------ ------------ ------------ ------------
BALANCE, September 30, 1996
(unaudited)...................... $ 122,180 $ 1,285,097 $ (336,350) $ 1,976,927
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-40
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 1,314,323 $ 1,937,467 $ 291,766 $ 107,450 $ (4,638,898)
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating
activities--
Depreciation and amortization.................. 509,925 637,782 736,097 549,260 1,263,509
Gain on sale of property, plant and
equipment.................................... -- (32,334) -- -- --
Deferred taxes................................. 591,817 330,383 71,551 230,624 (1,935,784)
Changes in operating assets and liabilities:
Patient accounts receivable, net............. (522,101) (813,916) (1,020,526) (422,405) (251,119)
Healthcare and other receivables............. (802,077) (682,512) 568,116 353,116 990,557
Related party receivable..................... -- -- -- -- (69,964)
Income taxes receivable...................... -- -- (167,988) -- 155,214
Inventories of drugs and supplies............ (83,301) 33,174 (16,336) (59,720) 251,395
Prepaid expenses and deposits................ (82,457) (10,330) (78,802) 20,924 (17,803)
Other assets................................. 48,577 (31,240) (50,446) 3,435 (85,473)
Drafts payable............................... -- 1,743,989 (1,579,197) (1,657,737) 947,582
Accounts payable............................. (713,735) 670,417 461,312 1,380,264 (192,762)
Income taxes payable......................... 62,061 233,334 (358,992) (358,992) --
Accrued expenses............................. 185,821 94,461 (38,539) (280,282) 766,317
Related party payable........................ -- -- -- -- 541,462
PPI allocation payable....................... -- -- -- -- 270,754
Accrued healthcare costs..................... (30,646) 109,643 91,752 59,552 481,530
Accrued compensation......................... (177,477) 94,003 108,182 999,463 1,648,204
Deferred revenue............................. 8,300 6,700 2,686 2,686 151,103
Deferred compensation and other long-term
liabilities................................ 61,581 (11,197) 201,536 163,916 3,025,216
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities............................... 370,611 4,309,824 (777,828) 1,091,554 3,301,040
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..... (1,346,473) (2,469,749) (6,690,661) (4,913,135) (2,494,035)
Proceeds from sale of property, plant and
equipment.................................... -- 40,261 -- -- --
Purchases of investments....................... (149,977) (2,465,167) -- -- --
Cash proceeds received from short-term
investments.................................. 1,719,508 -- 2,616,566 2,616,566 --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities............................... 223,058 (4,894,655) (4,074,095) (2,296,596) (2,494,035)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt....... -- -- 4,939,909 1,200,000 1,249,286
Principal payments on long-term debt........... (12,823) (14,362) (17,001) (11,745) (978,545)
Proceeds from repayments of notes receivable
from stockholders............................ 35,389 38,188 33,046 24,785 47,547
Payments for redemption of common stock........ -- (116,508) (10,000) (10,000) (9,000)
Proceeds from issuance of common stock......... 10,000 50,000 28,910 -- --
Cash received in acquisition of Suburban....... -- -- -- -- 231,000
Cash received from direct financing lease
obligation................................... -- -- -- -- 1,000,000
Costs incurred related to Physician Partners,
Inc. transaction............................. -- -- -- -- (1,277,040)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) financing
activities............................... 32,566 (42,682) 4,974,864 1,203,040 263,248
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH.................... 626,235 (627,513) 122,941 (1,975) 1,070,253
CASH AND CASH EQUIVALENTS, beginning of period..... 3,253 629,488 1,975 1,975 124,916
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period........... $ 629,488 $ 1,975 $ 124,916 $ 0 $ 1,195,169
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-41
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................... $ 176,203 $ 178,928 $ 186,330 $ 169,753 $ 453,875
Cash paid for income taxes....................... 322,997 1,012,033 445,724 -- 181,220
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations with related parties
assumed in the acquisition of Suburban......... $ -- $ -- $ -- $ -- $3,575,000
Notes receivable issued in exchange for common
stock.......................................... 60,000 100,000 80,000 31,090 20,000
HealthFirst acquired all of the outstanding stock
of Suburban in exchange for 2,200 shares of
HealthFirst Series 2 Class A stock. The
acquisition was recorded under the purchase
method of accounting. The fair values of
Suburban's assets and liabilities at the date
of acquisition are presented below:
</TABLE>
<TABLE>
<S> <C>
Current assets................................................ $ 2,284,000
Property, plant and equipment................................. 5,325,000
Other long-term assets........................................ 99,000
Current liabilities........................................... (2,833,000)
Long-term liabilities......................................... (4,617,000)
--------------
Net equity acquired........................................... $ 258,000
--------------
--------------
Reconciliation to equity accounts:
Common stock................................................ $ 330,000
Additional paid-in capital.................................. 122,000
Notes receivable from stockholders.......................... (194,000)
--------------
$ 258,000
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. DESCRIPTION OF BUSINESS:
HealthFirst Medical Group, P.C. (HealthFirst), an Oregon professional
corporation, is a multi-specialty medical clinic founded in 1909. In February
1996, The Metropolitan Clinic, P.C. (Metropolitan) merged with The Suburban
Medical Clinic, P.C. (Suburban). Effective February 1996, Metropolitan changed
its name to HealthFirst and Suburban changed its name to HealthFirst Medical
Services Organization and became a 100 percent owned subsidiary of HealthFirst.
The merger has been accounted for as a purchase of Suburban by Metropolitan in
the accompanying financial statements for the nine months ended September 30,
1996. The unaudited September 30, 1996 results include Suburban's operating
results from the date of acquisition.
As of September 30, 1996, HealthFirst consisted of approximately 681
employees and 145 providers who offer a wide range of primary and specialty care
services including allergy, dermatology, gastroenterology, hematology/oncology,
infectious disease, pediatrics, geriatrics, obstetrics/gynecology, podiatry,
rheumatology and surgery.
HealthFirst operates clinics in eleven locations in and around Portland,
Oregon including: Tualatin, Tigard, Westside, Lake Oswego, Broadway, Northwest
Portland, Wilshire, Gateway, Gresham, Hollywood and Powell Valley, four of these
clinics were acquired as a part of the purchase of Suburban. A significant
change in the demographics of this area may have an adverse impact on the
business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with
original maturities of three months or less.
CONCENTRATION OF CREDIT RISK
HealthFirst extends credit to patients covered by insurance programs such as
governmental programs (Medicare and Medicaid) and private programs. HealthFirst
manages credit risk with the various public and private insurance providers, as
deemed appropriate by management. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
INVENTORIES OF DRUGS AND SUPPLIES
Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method. In 1996, HealthFirst began using a
just-in-time method with its major supply vendors.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance, repairs and
minor replacements are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss on disposition is recorded as
other income or expense.
F-43
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Equipment under capital lease is
amortized using straight-line methods over the shorter of the period of the
lease term or the estimated useful life of the equipment. Estimated lives are as
follows:
<TABLE>
<S> <C>
Buildings and leasehold improvements.............. 7-45 years
Furniture and equipment........................... 3-15 years
</TABLE>
PROVIDER COMPENSATION AND BENEFITS
Provider compensation and benefits consists of the direct costs of patient
care providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, short-term investments,
patient receivables, accounts payable and accrued liabilities are a reasonable
estimate of their fair value based on the short maturities of these instruments.
Interest rates that are currently available to HealthFirst for issuance of
debt with similar terms and remaining maturities were used to estimate fair
value for debt issues. The current carrying value of debt approximates fair
value.
HealthFirst does not hold or issue financial instruments or derivative
financial instruments for trading purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard Number 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, as well as for long-lived assets and certain identifiable intangibles to
be disposed of. HealthFirst adopted the new standard in 1996. The effect of the
adoption was not material to HealthFirst's financial position or results of
operations.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended September 30, 1995
and 1996 has not been audited by independent accountants. Certain information
and footnote disclosures normally included in
F-44
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted from the unaudited interim
financial information. In the opinion of HealthFirst's management, the unaudited
interim financial information includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for the respective full years.
3. REVENUES:
HealthFirst reports its revenues in accordance with the methodologies
discussed below:
PREPAID HEALTHCARE
HealthFirst contracts with various Health Maintenance Organizations (HMOs)
to provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to HealthFirst by the HMO for
plan enrollees.
The majority of the HMO contracts are full-risk or modified full-risk
contracts. Under a full-risk contract, HealthFirst assumes the obligation of
providing all healthcare services to enrollees and is obligated to reimburse
outside providers for services rendered to enrollees. Generally, such payments
to outside providers are limited to out-of-area services, emergency services and
services not currently offered by HealthFirst. Modified full-risk contracts are
similar to full-risk contracts except that the HMO is obligated to pay for
out-of-area services.
HealthFirst has entered into subcapitation agreements with certain of these
outside providers. Under these agreements, HealthFirst prepays the outside
provider based upon enrollee/participant formulas in which the subprovider
assumes the risk of providing patient care. Additional limitations on losses are
provided by the payment of stop loss reinsurance premiums and through a
percentage limitation on overall savings or losses of the programs.
HealthFirst has accrued the claims associated with services provided by
outside providers for which HealthFirst is responsible, and an estimate of
incurred but not reported claims is included in accrued healthcare cost in the
accompanying financial statements.
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. HealthFirst has agreements with third-party
payors that provide payments to HealthFirst at amounts different from its
established rates. The difference between the established rates and the related
payment amounts are reflected as contractual discounts, as shown below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fee-for-service, gross............... $ 16,832,271 $ 24,173,543 $ 29,384,296 $ 21,785,874 $ 32,035,180
Contractual discounts................ 3,327,389 5,360,283 6,549,803 5,444,491 7,835,445
------------- ------------- ------------- ------------- -------------
Fee-for-service, net............... $ 13,504,882 $ 18,813,260 $ 22,834,493 $ 16,341,383 $ 24,199,735
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-45
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
3. REVENUES: (CONTINUED)
A summary of the most significant fee-for-service arrangements is as
follows:
MEDICARE
A significant portion of HealthFirst's services are provided to Medicare
patients. Payments for Medicare outpatient services which are not covered
under capitated contracts are based on a prevailing fee schedule.
Approximately 9, 9, 8 and 6 (unaudited) percent of net patient service
revenues were derived from services provided to fee-for-service Medicare
patients in 1993, 1994 and 1995, and the nine months ended September 30,
1996, respectively.
MEDICAID
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule. Approximately 2
percent of net patient service revenues were derived from services provided
to fee-for-service Medicaid patients in 1993, 1994 and 1995, and the nine
months ended September 30, 1996.
OTHER PAYORS
HealthFirst has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment under these agreements includes discounts from established
charges.
MAJOR CUSTOMERS
Four customers individually represented more than 10 percent of
HealthFirst's total net revenue as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS
------------------------------- ENDED
1993 1994 1995 SEPTEMBER 30,
--------- --------- --------- 1996
------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pacificare--Secure Horizons............................. 14% 11% 10% 12%
Pacificare--Commercial.................................. 11 11 11 11
Blue Cross--HMO Oregon.................................. 10 13 16 12
Blue Cross--Commercial.................................. 9 10 10 6
</TABLE>
F-46
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment includes the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and land improvements...................... $ 1,898,512 $ 1,988,712 $ 2,001,164
Buildings and leasehold improvements............ 4,397,615 9,796,611 11,601,935
Furniture and equipment......................... 3,777,567 5,172,257 8,058,172
Construction in progress........................ 196,975 -- --
Building and equipment under capital lease...... -- -- 3,838,484
------------- ------------- -------------
10,270,669 16,957,580 25,499,755
Less--Accumulated depreciation.................. (2,802,561) (3,534,908) (5,522,557)
------------- ------------- -------------
$ 7,468,108 $ 13,422,672 $ 19,977,198
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INCOME TAX EXPENSE:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that HealthFirst
follow the liability method of accounting for deferred income taxes. Differences
between financial reporting and tax basis results are due primarily to the use
of the cash method of accounting for income tax purposes.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
HealthFirst's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Cash to accrual adjustments........................................ $ 1,081,021 $ 1,516,422 $ 3,798,938
Valuation Allowance................................................ -- -- (500,971)
------------- ------------- -------------
Net deferred tax assets.......................................... 1,081,021 1,516,422 3,297,967
Deferred tax liabilities:
Cash to accrual adjustments........................................ (2,744,181) (3,181,474) (3,085,393)
Excess tax depreciation............................................ (212,073) (281,732) (212,574)
------------- ------------- -------------
Gross deferred tax liabilities................................... (2,956,254) (3,463,206) (3,297,967)
------------- ------------- -------------
Net deferred tax liability........................................... $ (1,875,233) $ (1,946,784) $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-47
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
5. INCOME TAX EXPENSE: (CONTINUED)
The net deferred tax liability is reflected in the accompanying balance
sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax liability................... $ (1,784,151) $ (1,844,262) $ --
Long term deferred tax liability................. (91,082) (102,522) --
------------- ------------- -------------
$ (1,875,233) $ (1,946,784) $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996
---------- ------------ ---------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal.......................... $ 329,700 $ 1,003,419 $ 119,351 $ (43,552)
State............................ 47,100 143,346 17,050 (6,222)
Deferred:
Federal.......................... 447,779 235,864 62,607 (1,832,569)
State............................ 63,968 33,694 8,944 (261,796)
---------- ------------ ---------- ------------------
$ 888,547 $ 1,416,323 $ 207,952 $ (2,144,139)
---------- ------------ ---------- ------------------
---------- ------------ ---------- ------------------
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996
---------- ------------ ---------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal tax at statutory rate...... $ 771,005 $ 1,173,826 $ 174,902 $ (2,418,863)
Add (deduct):
State income tax, net of federal
benefit........................ 72,194 115,077 16,896 (269,530)
Other............................ 45,348 127,420 16,154 43,283
Change in Valuation Allowance.... -- -- -- 500,971
---------- ------------ ---------- ------------------
$ 888,547 $ 1,416,323 $ 207,952 $ (2,144,139)
---------- ------------ ---------- ------------------
---------- ------------ ---------- ------------------
</TABLE>
In 1996, HealthFirst recognized a valuation allowance in an amount equal to
its net deferred tax asset due to uncertainty regarding HealthFirst's ability to
recognize the benefit of those assets in future years.
F-48
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, due in monthly installments of principal and interest of
$15,630 through July 2000, with a final payment of $1,635,845,
bearing interest at 9.875%.The note is secured by a first mortgage on
land, buildings, and improvements.................................... $ 1,747,086 $ 1,731,467 $ 1,700,165
Note payable, due in monthly installments of principal and interest of
$15,827 through December 1998, bearing interest at 8.4%. The note is
secured by inventory, furniture, and equipment....................... -- 500,000 387,143
Construction loan payable, due in monthly installments of interest only
through January 1997 with a final payment of all outstanding
principal and accrued unpaid interest on January 1997, bearing
interest at prime plus 1% (7.75% at December 31, 1995). The note is
secured by building and land......................................... -- 2,538,527 3,687,813
Note payable, due in monthly installments of interest only beginning
January 31, 1996 with a principal payment of $250,000 on August 31,
1996 and annual principal installments of $115,000 through August
2011, bearing interest at 7.9%....................................... -- 1,900,000 1,750,000
Note payable, due in monthly installments of $7,066 plus interest
through January 1999, bearing interest at 9.875%..................... -- -- 197,841
Note payable, due in monthly installments of $8,060 including interest
through October 2000, bearing interest at 8.75%...................... -- -- 325,790
Note payable, related party, due in monthly installments of $428
including interest through August 1998, bearing interest at 6%....... -- -- 9,260
------------ ------------ -------------
Total long-term debt................................................. 1,747,086 6,669,994 8,058,012
Less--Current portion.................................................. 15,727 2,958,506 4,146,604
------------ ------------ -------------
Long-term debt, net of current portion............................... $ 1,731,359 $ 3,711,488 $ 3,911,408
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-49
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT: (CONTINUED)
Maturities of long-term debt for the next five years are as follows:
<TABLE>
<S> <C>
1996.......................... $ 2,958,506
1997.......................... 301,369
1998.......................... 316,748
1999.......................... 138,499
2000.......................... 1,764,872
Thereafter.................... 1,190,000
-------------
Total....................... $ 6,669,994
-------------
-------------
</TABLE>
Management intends to convert the construction loan to a mortgage loan in
1997, which would extend the maturity of the loan.
HealthFirst has borrowed an additional $1,600,000 on the note payable
secured by inventory, furniture, and equipment subsequent to September 30, 1996.
In June 1996, HealthFirst increased an existing credit agreement with a bank
to $2,500,000. The line of credit is secured by inventory, receivables and
equipment of HealthFirst which matures April 30, 1997. The agreement includes
interest at the U.S. National Bank prime rate plus .5 percent. HealthFirst had
$0, $0, and $100,000 outstanding under the line of credit at December 31, 1994,
1995 and September 30, 1996, respectively. HealthFirst has borrowed an
additional $1,400,000 under the line of credit subsequent to September 30, 1996.
7. LEASE COMMITMENTS:
CAPITAL LEASES
HealthFirst leases certain medical equipment and facilities under agreements
which are classified as capital leases. The equipment leases have original terms
of five years and have either a bargain purchase option or a transfer of title
at the end of the lease. The building lease is with Gateway Properties LLC (see
Note 11) for a term of 21 years. Leased capital assets included in property,
plant and equipment at December 31, 1994 and 1995, and September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Buildings and leasehold improvements.................. $ -- $ -- $ 3,574,605
Furniture and equipment............................... -- -- 263,879
---------- ---------- -------------
-- -- 3,838,484
Less--Accumulated amortization...................... -- -- 512,105
---------- ---------- -------------
$ -- $ -- $ 3,326,379
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
F-50
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
7. LEASE COMMITMENTS: (CONTINUED)
OPERATING LEASES
Such lease commitments are primarily for facilities and equipment. Certain
facility leases provide for adjustments relating to the consumer price index and
operating expenses.
MINIMUM LEASE PAYMENTS
Future minimum lease payments, by year and in the aggregate, under
noncancellable operating leases with initial or remaining terms of one year or
more consist of the following at December 31, 1995.
<TABLE>
<S> <C>
1996.......................... $ 697,291
1997.......................... 544,105
1998.......................... 530,467
1999.......................... 446,100
2000.......................... 466,440
Thereafter.................... 2,378,310
-------------
$ 5,062,713
-------------
-------------
</TABLE>
Due to the acquisition of Suburban in February 1996, HealthFirst assumed
operating leases with estimated future minimum lease payments of $324,715,
$324,715, $333,195, $333,965, $228,570 and $604,333 for the years ending
December 31, 1996, 1997, 1998, 1999, 2000 and thereafter, respectively.
HealthFirst also assumed capital lease obligations in the aggregate amount of
$3,648,220 with estimated future minimum lease payments, including interest of
$4,457,408, are $463,771, $463,770, $457,582, $426,635, $416,787 and $5,877,083
for the years ending December 31, 1996, 1997, 1998, 1999, 2000 and thereafter,
respectively.
DIRECT FINANCING LEASE OBLIGATION
In May 1996, HealthFirst sold three facilities to HealthFirst Properties LLC
(see Note 11) under a sale/leaseback arrangement. The facilities were sold for
$12,550,000, $11,550,000 of which is due in the form of an 8 percent
interest-bearing note receivable due in monthly installments through April 2016.
The remainder was received in cash. The transaction has been accounted for as a
financing, wherein the property and related debt remains on the books and will
continue to be depreciated. A financing obligation representing the proceeds of
$1 million has been recorded and will be reduced based on payments under the
lease. As sales proceeds are received from the LLC, they will be credited to a
financing obligation, and amortized as a reduction of operating expenses over
the remaining life of the lease. The lease has a term of 20 years and requires
minimum annual rental payments of $878,504 in 1996, $1,317,756 in 1997, 1998,
1999 and 2000, and $20,205,592 thereafter.
8. EMPLOYEE BENEFIT PLANS:
RETIREMENT PLAN
HealthFirst has a noncontributory profit sharing plan covering all employees
who are eligible subject to certain requirements. HealthFirst, at the discretion
of the Board of Directors, contributes an annual amount not to exceed the
maximum allowed under the Internal Revenue Code. In the year ended
F-51
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
8. EMPLOYEE BENEFIT PLANS: (CONTINUED)
December 31, 1993, HealthFirst contributed $440,044 to the Plan. Subsequent to
1993, no contributions to the Plan have been made. HealthFirst does not foresee
making contributions to the profit sharing plan in the future.
In 1994, HealthFirst added a 401(k) plan covering employees who are eligible
subject to certain requirements. Employees contribute between 2 to 10 percent of
their annual compensation. HealthFirst matches employee contributions at a rate
of 10 percent plus a discretionary percentage determined by the Board of
Directors. The contributions to the Plan were $0, $215,190, $68,823, $50,430
(unaudited) and $85,304 (unaudited) in the years ended December 31, 1993, 1994,
and 1995, and in the nine months ended September 30, 1995 and 1996,
respectively.
HealthFirst also has a defined contribution money purchase pension plan
which is a plan in which all employees are eligible to participate subject to
certain requirements. HealthFirst contributes 8 percent of employees'
compensation which does not exceed the Social Security integration level, plus a
higher percentage of the amount in excess of the integration level for the Plan
year. The contributions in the years ended December 31, 1993, 1994, and 1995 and
the nine months ended September 30, 1995 and 1996 were $743,487, $942,286,
$1,132,887, $976,495 (unaudited) and $1,377,061 (unaudited), respectively.
SUPPLEMENTAL PENSION PLAN
In 1987, HealthFirst entered into a supplemental pension plan with eight of
its physicians providing for fixed monthly payments over five years commencing
with the physicians' retirements or terminations. The physicians receive
payments upon retirement or termination if certain vesting requirements have
been met. The liability under this agreement is being accrued over the
physicians' estimated remaining service periods before becoming fully vested. On
the vesting date, the present value of the future benefit payments will have
been accrued. HealthFirst has accrued $163,509, $169,606 and $174,360 for the
plan at December 31, 1994 and 1995 and September 30, 1996, respectively.
SUBURBAN PROFIT-SHARING PLAN
As part of the 1996 acquisition of Suburban, HealthFirst assumed a
profit-sharing plan in which all former employees of Suburban are eligible to
participate subject to certain eligibility criteria. The plan is funded by
discretionary employer contributions as determined by the Board of Directors on
an annual basis. The amount of employer contributions, if any, is allocated to
eligible employees based on employee compensation. HealthFirst's contributions
for the first nine months of 1996 was $31,500.
HEALTHFIRST BONUS COMPENSATION PLAN
In February 1996, HealthFirst established a bonus compensation plan for
eligible employees. Employees are vested after five years of employment with
credit for prior service. A substantial portion of the participants were fully
vested as of September 30, 1996. The total payout of approximately $5.25 million
will be over a period of eight years. HealthFirst is accruing for the estimated
present value of the bonus compensation over the estimated period of the
employees' active employment from the date the contract was signed until the
date they are fully vested. Compensation expense recognized during the nine
months ended September 30, 1996 was approximately $3.9 million, a portion of
which has been paid. The expense was recorded to provider compensation and
benefits. The amount accrued at September 30, 1996 is
F-52
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
8. EMPLOYEE BENEFIT PLANS: (CONTINUED)
$3,400,871, of which $501,653 is included in current liabilities and the
remainder is included in deferred compensation.
9. PROFESSIONAL LIABILITY:
HealthFirst maintains a claims-made professional liability insurance policy.
The policy coverage for the healthcare providers formerly employed by
Metropolitan is $5,000,000 per claim, with no aggregate maximum limit, for
claims made against HealthFirst and its employees. The policy coverage for the
healthcare providers formerly employed by Suburban is $2,000,000 per claim,
$4,000,000 aggregate maximum benefit, for claims made against HealthFirst and
its employees. Accruals for outstanding claims and the associated deductibles
are made in the period in which the event becomes known. HealthFirst also
accrues an actuarial estimate of the future liability for claims incurred but
not reported prior to the end of the accounting period.
10. LEGAL PROCEEDINGS:
HealthFirst is subject to various legal proceedings and claims which arise
in the ordinary course of business. In the opinion of management, although the
ultimate dispositions of these proceedings are not determinable, adverse
determinations in any or all of such proceedings would not have a material
adverse effect upon the financial position or results of operations of
HealthFirst.
11. RELATED PARTY TRANSACTIONS:
COORDINATED HEALTH NETWORK, INC.
In December 1993, HealthFirst became a one-third shareholder in Coordinated
Health Network, Inc. (CHN). CHN was formed to obtain patient contracts under the
Oregon Health Plan and generate purchasing discounts. The investment in CHN has
been accounted for under the equity method. In 1993, 1994 and 1995, HealthFirst
paid premiums to CHN of $0, $57,167 and $106,204, respectively, and CHN paid
HealthFirst $0, $154,711 and $621,654 in 1993, 1994 and 1995, respectively, for
claims. CHN legally dissolved in 1996.
NORTHWEST PHYSICIANS ALLIANCE
In 1995, HealthFirst invested $52,000 for a one-third share in Northwest
Physicians Alliance (the Alliance), which was formed with Blue Cross/Blue Shield
of Oregon, two local hospital systems and several physician groups. The Alliance
has been accounted for under the equity method. The Alliance is intended to be
the primary delivery network for Blue Cross/Blue Shield's HMO Oregon product in
the Portland area.
HEALTHFIRST PROPERTIES, LLC
HealthFirst Properties, LLC (HPLLC) was formed by certain shareholders of
HealthFirst in 1996 to acquire three clinic buildings from HealthFirst. HPLLC
purchased these properties from HealthFirst for an aggregate purchase price of
$12,550,000, to be paid under an installment sale contract with a 20-year term.
In addition, HPLLC made a $1 million down payment to HealthFirst. Simultaneous
with the execution of the installment sale contract, HealthFirst agreed to lease
back the three buildings from
F-53
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
11. RELATED PARTY TRANSACTIONS: (CONTINUED)
HPLLC under a 20-year lease agreement. This transaction has been recorded as a
direct financing lease. Accordingly, the monies received from HPLLC have been
recorded as a direct financing lease obligation and the related property is
included in property, plant and equipment in the accompanying financial
statements.
GATEWAY PROPERTIES LLC
Gateway Properties LLC (Gateway) is owned by several former shareholders of
Suburban. Throughout 1995, Suburban recorded notes receivable for various
payments made on behalf of Gateway. The note receivable at September 30, 1996
was $155,307. The terms of the note include monthly installments of principal
and interest of $4,878 through August 1999 with interest accruing at 7 percent.
HealthFirst has signed a capital lease to occupy the new clinic building for a
term expiring in August 2015.
STOCK SUBSCRIPTIONS
HealthFirst maintains various agreements with stockholders for their
purchase of common stock. The notes mature at various stages through the year
2008.
12. BUSINESS ACQUISITION:
On February 1, 1996, HealthFirst acquired all of the outstanding stock of
the Suburban Medical Clinic, Inc. in exchange for 2,200 shares of HealthFirst
Series 2 Class A stock. Following the acquisition, the name of Suburban was
changed to HealthFirst Management Services Organization, P.C. (HealthFirst
M.S.O.).
Results of operations after the acquisition date are included in the
September 30, 1996 statement of income. The following pro forma information has
been prepared assuming that this acquisition had taken place at the beginning of
1995. Because fair values of purchased assets approximated their carrying
values, no material pro forma adjustment was necessary to adjust historical
depreciation and amortization.
The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the acquisition been
consummated on the assumed dates.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED --------------------------------------
DECEMBER 31, 1995 SEPTEMBER 30, 1995 SEPTEMBER 30, 1996
----------------- ------------------ ------------------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues less provider
compensation and benefits........ $ 39,624,916 $ 27,662,465 $ 26,195,935
Operating expenses................. (40,363,520) (28,246,704) (33,476,122)
Other income (expenses)............ (215,228) (98,371) 203,148
----------------- ------------------ ------------------
Income (loss) before income
taxes.......................... (953,832) (682,610) (7,077,039)
Income tax (benefit) expense....... (402,438) (285,286) (2,272,139)
----------------- ------------------ ------------------
Net income (loss)................ $ (551,394) $ (397,324) $ (4,804,900)
----------------- ------------------ ------------------
----------------- ------------------ ------------------
</TABLE>
F-54
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
13. SUBSEQUENT EVENTS:
PHYSICIAN PARTNERS, INC.
The Board of Directors of HealthFirst has approved a Reorganization and
Merger Agreement (the Agreement) dated July 29, 1996 together with the Boards of
The Corvallis Clinic, P.C. and the Medford Clinic, P.C.; and Physician Partners,
Inc. (PPI), a newly formed company. This Agreement is subject to the approval of
the shareholders of the three medical groups.
This transaction would result in a separation of operations of the three
founding medical groups between medical professional services activities (i.e.,
providers and medical service staff) and the physician practice management
activities of the business. The professional services activities would be spun
off into newly formed professional corporations (New PCs). The physician
practice management business, along with substantially all of the assets and
liabilities of the three founding medical groups, i.e., accounts receivable,
property, plant, equipment, contracts, payables, accruals and debt, would be
transferred to PPI. When the transaction becomes effective, the shareholders of
the existing founding clinics will become the original shareholders of PPI.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis and subtracting contractual
discounts and bad debts, received by PPI or the New PCs relating to services
provided by the New PCs less (ii) Manager s Expense).
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
The parties to the reorganization transaction will receive an opinion from
tax counsel that for federal income tax purposes, it is more likely than not
that the reorganization will be a tax-free transaction. No ruling will be
requested from the Internal Revenue Service regarding the tax consequences of
the transaction. If the IRS or tax court were to determine that the transactions
were not tax free, there would be significant adverse tax consequence to the
parties to the transaction and their respective shareholders.
The reorganization Agreement contemplates that each of the three founding
medical groups will adopt a stock option plan for certain of its employees and
grant new options to purchase shares of its capital stock. Such options would
then be converted into options to purchase PPI stock.
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and awards,
termination benefits and, in certain cases, severance compensation in the event
the transaction is not consummated prior to January 31, 1997. The obligations of
PPI under certain of these agreements are guaranteed by the three founding
medical groups.
In connection with the reorganization transaction, the three founding
medical groups have entered into an Expense Sharing Agreement which establishes
the basis upon which certain costs incurred in connection with the transactions
are to be allocated between the three groups.
F-55
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
13. SUBSEQUENT EVENTS: (CONTINUED)
In accordance with the terms of the reorganization Agreement, if one of the
parties terminates the Agreement, in certain circumstances, it may be liable to
the other parties to pay all of their expenses incurred in connection with the
transaction.
F-56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
The Suburban Medical Clinic, Inc.:
We have audited the accompanying balance sheets of The Suburban Medical
Clinic, Inc. (an Oregon professional corporation) as of December 31, 1994 and
1995, and the related statements of operations, cash flows and stockholders'
equity for each of the years in the three year period ended December 31, 1995.
These financial statements are the responsibility of Suburban's management. Our
responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of The Suburban Medical Clinic,
Inc. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the years in the three year period ended December 31,
1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996
F-57
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
BALANCE SHEETS--DECEMBER 31, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 258,542 $ 394,849
Patient accounts receivable, net of allowances for contractual discounts and
uncollectible accounts of $313,719 and $307,053 in 1994 and 1995,
respectively................................................................ 922,373 752,526
Healthcare and other receivables.............................................. 1,565,792 756,784
Related party receivables..................................................... 88,631 328,060
Inventories of drugs and supplies............................................. 41,608 55,992
Prepaid expenses and deposits................................................. 143,109 112,106
Current deferred tax asset.................................................... -- 10,585
------------- -------------
Total current assets...................................................... 3,020,055 2,410,902
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $829,560 and
$648,028 for 1994 and 1995, respectively...................................... 1,017,182 5,286,997
------------- -------------
LONG-TERM DEFERRED TAX ASSET.................................................... 11,160 37,246
OTHER ASSETS, related parties................................................... 596,046 136,740
------------- -------------
Total assets.............................................................. $ 4,644,443 $ 7,871,885
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt and capital lease obligations............... $ 113,341 $ 324,096
Accounts payable.............................................................. 479,750 348,960
Accrued healthcare costs...................................................... 636,705 1,341,663
Accrued compensation.......................................................... 823,738 818,433
Deferred income tax liability................................................. 624,607 --
------------- -------------
Total current liabilities................................................. 2,678,141 2,833,152
------------- -------------
LONG-TERM DEBT, net of current portion.......................................... 281,124 697,260
------------- -------------
CAPITAL LEASE OBLIGATIONS, net of current portion............................... 90,833 3,537,350
OTHER LONG TERM LIABILITIES..................................................... 355,655 382,000
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock--
Class A--Voting; no par value; 2,000 shares authorized; 1,400 and 2,200
shares issued and outstanding at December 31, 1994 and 1995,
respectively.............................................................. 210,000 330,000
Retained earnings............................................................. 1,129,779 286,619
Notes receivable from stockholders for the purchase of stock.................. (101,089) (194,496)
------------- -------------
Total stockholders' equity................................................ 1,238,690 422,123
------------- -------------
Total liabilities and stockholders' equity................................ $ 4,644,443 $ 7,871,885
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-58
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1995
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Fee-for-service, net..................... $ 2,736,076 $ 3,556,688 $ 4,013,507 $ 2,713,813
Prepaid healthcare....................... 10,461,020 11,136,889 11,404,888 8,558,474
------------- ------------- ------------- -------------
Net revenues........................... 13,197,096 14,693,577 15,418,395 11,272,287
Less--Provider compensation and
benefits............................... 3,293,586 3,513,863 3,915,818 2,740,808
------------- ------------- ------------- -------------
Net revenue less compensation to
providers............................ 9,903,510 11,179,714 11,502,577 8,531,479
OPERATING EXPENSES:
Clinic salaries, wages and benefits...... 3,088,539 3,270,221 3,832,011 3,186,962
Purchased medical services............... 4,263,041 3,662,967 4,718,905 3,551,346
Medical and office supplies.............. 1,052,076 937,493 1,094,804 862,205
Clinic general and administrative
expenses............................... 1,166,248 1,790,545 2,232,909 1,041,793
Lease and rent expense................... 352,486 450,679 434,470 339,780
Provision for uncollectible accounts..... 124,620 309,038 182,274 135,702
Depreciation and amortization............ 126,315 167,819 274,818 209,743
------------- ------------- ------------- -------------
Total operating expenses............... 10,173,325 10,588,762 12,770,191 9,327,531
------------- ------------- ------------- -------------
Operating profit (loss)................ (269,815) 590,952 (1,267,614) (796,052)
OTHER INCOME (EXPENSE):
Interest income.......................... 25,013 33,721 48,716 33,885
Interest expense......................... (8,953) (19,257) (239,896) (125,869)
Equity in loss of affiliate.............. (7,878) (9,324) (26,816) --
Other.................................... 14,639 49,288 32,060 26,343
------------- ------------- ------------- -------------
Net income (loss) before income
taxes................................ (246,994) 645,380 (1,453,550) (861,693)
------------- ------------- ------------- -------------
INCOME TAX (BENEFIT) EXPENSE............... (98,988) 262,667 (610,390) (356,919)
------------- ------------- ------------- -------------
NET INCOME (LOSS).......................... $ (148,006) $ 382,713 $ (843,160) $ (504,774)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK NOTES
----------------------- RECEIVABLE
NUMBER OF RETAINED FROM
SHARES AMOUNT EARNINGS STOCKHOLDERS TOTAL
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992...................... 1,400 $ 210,000 $ 895,072 $ (198,877) $ 906,195
Issuance of common stock...................... 200 30,000 -- (30,000) --
Redemption of common stock.................... (200) (30,000) -- -- (30,000)
Repayment of notes receivable from
stockholders................................ -- -- -- 24,182 24,182
Forgiveness of notes receivable from
stockholders................................ -- -- -- 59,114 59,114
Net loss...................................... -- -- (148,006) -- (148,006)
----- ---------- ------------ ------------ ------------
BALANCE, December 31, 1993...................... 1,400 210,000 747,066 (145,581) 811,485
Repayment of notes receivable from
stockholders................................ -- -- -- 44,492 44,492
Net income.................................... -- -- 382,713 -- 382,713
----- ---------- ------------ ------------ ------------
BALANCE, December 31, 1994...................... 1,400 210,000 1,129,779 (101,089) 1,238,690
Issuance of common stock...................... 800 120,000 -- (120,000) --
Repayment of notes receivable from
stockholders................................ -- -- -- 26,593 26,593
Net loss...................................... -- -- (843,160) -- (843,160)
----- ---------- ------------ ------------ ------------
BALANCE, December 31, 1995...................... 2,200 $ 330,000 $ 286,619 $ (194,496) $ 422,123
----- ---------- ------------ ------------ ------------
----- ---------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-60
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ (148,006) $ 382,713 $ (843,160) $ (504,774)
Adjustment to reconcile net income (loss) to net cash provided
by (used in) operating activities--
Depreciation................................................. 126,315 167,819 274,818 209,743
Equity in loss of affiliates................................. 7,878 9,324 26,816 --
Loss on sale of property, plant and equipment................ -- -- 33,953 --
Noncash compensation for provider services................... 59,114 -- -- --
Deferred income taxes........................................ (76,398) 279,178 (661,278) (363,184)
Changes in operating assets and liabilities:
Patient accounts receivable, net........................... (138,596) (277,344) 169,847 521,955
Healthcare and other receivables........................... 246,024 189,075 809,008 5,972
Related party receivables.................................. -- (88,631) (239,429) 17,118
Inventories of drugs and supplies.......................... (44,346) 24,068 (14,384) 30,651
Prepaid expenses and deposits.............................. (80,674) (19,272) 31,003 66,540
Other assets, related parties.............................. (54,467) (468,091) 24,703 (423,566)
Accounts payable........................................... (161,880) 235,923 (130,790) 175,081
Income taxes payable....................................... 1,692 (1,692) -- 389
Accrued healthcare costs................................... 176,433 (586,896) 704,958 289,442
Accrued compensation....................................... 633,495 (321,060) (5,305) (127,675)
Other long-term liabilities................................ 52,235 52,688 26,345 26,345
------------- ------------- ------------- -------------
Net cash provided by (used in) operating activities...... 598,819 (422,198) 207,105 (75,963)
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment..................... (203,212) (536,310) (994,102) (585,308)
Cash distributions received from liquidation of partnership
interest..................................................... -- -- 407,787 407,787
------------- ------------- ------------- -------------
Net cash used in investing activities.................... (203,212) (536,310) (586,315) (177,521)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt....................... 75,932 339,156 688,550 313,550
Principal payments on long-term debt and capital lease
obligations.................................................. (37,664) (86,126) (199,626) (130,021)
Proceeds from repayments of notes receivable from
stockholders................................................. 24,182 44,492 26,593 18,505
------------- ------------- ------------- -------------
Net cash provided by financing activities................ 62,450 297,522 515,517 202,034
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH.................................. 458,057 (660,986) 136,307 (51,450)
CASH, beginning of period........................................ 461,471 919,528 258,542 258,542
------------- ------------- ------------- -------------
CASH, end of period.............................................. $ 919,528 $ 258,542 $ 394,849 $ 207,092
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................................... $ 7,597 $ 11,937 $ 65,493 $ 27,778
Cash paid for income taxes..................................... -- -- 41,223 --
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Capital lease obligations issued to a related party in
exchange for property, plant and equipment................. 164,000 -- 3,396,735 3,396,735
Notes receivable issued in exchange for common stock......... 30,000 -- 120,000 90,000
Notes payable issued for redemption of common stock.......... 30,000 -- -- --
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. BUSINESS AND ORGANIZATION:
The Suburban Medical Clinic, Inc. (Suburban), an Oregon professional
corporation, is a multi-specialty medical clinic founded in 1956.
Suburban consists of approximately 200 employees and 29 physicians who offer
a wide range of primary care medical services, including internal medicine,
pediatrics, geriatrics, podiatry and dermatology.
Suburban operates clinics in four locations in and around Portland, Oregon
including: Gateway, Gresham, Hollywood and Powell Valley. A significant change
in the demographics of this area may have an adverse impact on the business.
Effective February 1, 1996, Suburban merged with HealthFirst Medical Group,
P.C. (HealthFirst) and was renamed HealthFirst Management Services Organization,
Inc. The stockholders of Suburban exchanged their stock for stock of
HealthFirst, Inc. Suburban became a wholly owned subsidiary of HealthFirst
Medical Group, P.C. and will operate as a management company providing
contracting services for prepaid medical plans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.
CONCENTRATION OF CREDIT RISK
Suburban extends credit to patients covered by insurance programs such as
governmental programs (Medicare and Medicaid) and private programs. Suburban
manages credit risk with the various public and private insurance providers, as
deemed appropriate by management. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
INVENTORIES OF DRUGS AND SUPPLIES
Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance, repairs and
minor replacements are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any resulting gain or loss is recorded as other
income or expense.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Equipment under capital lease is
amortized using straight-line methods over the shorter of the period of the
lease term or the estimated useful life of the equipment. Estimated lives are as
follows:
<TABLE>
<S> <C>
Buildings and building improvements......................... 7-40 years
Furniture and equipment..................................... 5-7 years
</TABLE>
F-62
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROVIDER COMPENSATION AND BENEFITS
Provider compensation and benefits consists of the direct costs of patient
care providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, patient receivables,
amounts payable and accrued liabilities are a reasonable estimate of their fair
value based on the short maturities of these instruments.
Interest rates that are currently available to Suburban for issuance of debt
with similar terms and remaining maturities were used to estimate fair value for
debt issues. The current carrying value of debt approximates fair value.
Suburban does not hold or issue financial instruments or derivative
financial instruments for trading purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, as well as for long-lived assets and certain identifiable intangibles to
be disposed of. Suburban adopted the new Standard in 1996 as part of
HealthFirst. The effect of the adoption was not material to Suburban's financial
position or results of operations.
3. REVENUES:
Suburban reports its revenues in accordance with the methodologies discussed
below:
PREPAID HEALTHCARE
Suburban contracts with various Health Maintenance Organizations (HMOs) to
provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to Suburban by the HMO for plan
enrollees.
The majority of the HMO contracts are full-risk or modified full-risk
contracts. Under a full-risk contract, Suburban assumes the obligation of
providing all healthcare services to enrollees and is obligated
F-63
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
3. REVENUES: (CONTINUED)
to reimburse outside providers for services rendered to enrollees. Generally,
such payments to outside providers are limited to out-of-area services,
emergency services and services not currently offered by Suburban. Modified
full-risk contracts are similar to full-risk contracts except that the HMO is
obligated to pay for out-of-area services.
Suburban has entered into subcapitation agreements with certain of these
outside providers. Under these agreements, Suburban prepays the outside provider
based upon enrollee/participant formulas in which the subprovider assumes the
risk of providing patient care. Additional limitations on losses are provided by
the payment of stop loss reinsurance premiums and through a percentage
limitation on overall savings or losses of the programs.
Suburban has accrued the claims associated with services provided by outside
providers for which Suburban is responsible, and an estimate of incurred but not
reported claims is included in accrued healthcare cost in the accompanying
financial statements.
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. Suburban has agreements with third-party payors
that provide payments to Suburban at amounts different from its established
rates. The difference between the established rates and the related payment
amounts are reflected as contractual discounts, as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Fee-for-service, gross.............................. $ 3,434,751 $ 4,464,911 $ 5,038,382
Contractual discounts............................... 698,675 908,223 1,024,875
------------ ------------ ------------
Fee-for-service, net................................ $ 2,736,076 $ 3,556,688 $ 4,013,507
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
A summary of the most significant fee-for-service arrangements is as
follows:
MEDICARE
A significant portion of Suburban's services are provided to Medicare
patients. Payments for Medicare outpatient services which are not
covered under capitated contracts are based on a prevailing fee
schedule. Approximately 3 percent of net patient service revenues were
derived from services provided to fee-for-service Medicare patients in
1993, 1994 and 1995.
MEDICAID
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 2 percent of net patient service revenues were derived
from services provided to fee-for-service Medicaid patients in 1993,
1994 and 1995.
F-64
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
3. REVENUES: (CONTINUED)
OTHER PAYORS
Suburban has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment to Suburban under these agreements includes discounts
from established charges.
MAJOR CUSTOMERS
Three customers individually represented more than 10 percent of Suburban's
total net revenue as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Pacificare--Secure Horizons........................................... 26% 26% 26%
Pacificare--Commercial................................................ 12 12 12
Blue Cross--Commercial................................................ 10 10 10
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Buildings and building improvements................................... $ 535,399 $ 912,029
Furniture and equipment............................................... 1,147,343 1,184,512
Building and equipment under capital lease............................ 164,000 3,838,484
------------ ------------
1,846,742 5,935,025
Less--Accumulated depreciation........................................ 829,560 648,028
------------ ------------
$ 1,017,182 $ 5,286,997
------------ ------------
------------ ------------
</TABLE>
5. INCOME TAX EXPENSE:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that Suburban follow
the liability method of accounting for deferred income taxes. Differences
between financial reporting and income tax net operating losses are due
primarily to the use of the cash method of accounting for income tax purposes.
F-65
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
5. INCOME TAX EXPENSE: (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Suburban's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1994 1995
------------- -----------
<S> <C> <C>
Deferred tax assets:
Patient accounts receivable, net................................ $ -- $ 125,300
Allowance for uncollectible accounts............................ 100,102 97,435
Healthcare and other receivables................................ 135,962 24,774
Related party receivables....................................... 104,472 80,192
Accounts payable and accrued expenses........................... -- 41,638
Accrued compensation and related expenses....................... 140,753 157,073
Accrued healthcare costs........................................ -- 101,429
Professional liability.......................................... 142,262 152,800
------------- -----------
Gross deferred tax assets..................................... 623,551 780,641
Deferred tax liabilities:
Prepaid expenses and deposits................................... (35,218) --
Healthcare and other receivables................................ (661,769) (446,516)
Excess tax depreciation......................................... (13,776) (45,073)
Investments..................................................... (165,777) (74,117)
Accrued healthcare costs........................................ (266,824) --
Accounts payable and accrued expenses........................... (53,554) (122,699)
Capital lease................................................... (40,080) (44,405)
------------- -----------
Gross deferred tax liabilities................................ (1,236,998) (732,810)
------------- -----------
Net deferred tax (liability) asset............................ $ (613,447) $ 47,831
------------- -----------
------------- -----------
</TABLE>
The net deferred tax liability is reflected in the accompanying balance
sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
----------- ---------
<S> <C> <C>
Long-term deferred tax asset.......................................... $ 11,160 $ 37,246
Current deferred tax (liability) asset................................ (624,607) 10,585
----------- ---------
$ (613,447) $ 47,831
----------- ---------
----------- ---------
</TABLE>
F-66
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
5. INCOME TAX EXPENSE: (CONTINUED)
The provision (benefit) for income taxes for the three years ended December
31, is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal................................................ $ (19,766) $ (14,447) $ 44,527
State.................................................. (2,824) (2,064) 6,361
Deferred:
Federal................................................ (66,848) 244,281 (578,618)
State.................................................. (9,550) 34,897 (82,660)
---------- ---------- -----------
$ (98,988) $ 262,667 $ (610,390)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Federal tax at statutory rate............................ $ (86,448) $ 225,883 $ (508,743)
Add (deduct):
State income tax, net of federal benefit............... (8,043) 21,341 (49,594)
Other.................................................. (4,497) 15,443 (52,053)
---------- ---------- -----------
$ (98,988) $ 262,667 $ (610,390)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-67
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
UNRELATED 1994 1995
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Note payable, due in monthly installments of $7,066 plus interest through January 1999,
bearing interest at 9.875%............................................................... $ 339,156 $ 261,433
Note payable, due in monthly installments of $5,250 including interest through February
2000, bearing interest at 9.5%; collateralized by accounts receivable and equipment...... -- 218,692
Note payable, due in monthly installments of $1,032 including interest through May 2000,
bearing interest at prime plus 1.5%; collateralized by accounts receivable and
equipment................................................................................ -- 42,958
Note payable, due in monthly installments of $8,060 including interest through October
2000, bearing interest at 8.75%.......................................................... -- 374,799
RELATED PARTY
- ------------------------------------------------------------------------------------------
Note payable, related party, due in monthly installments of $428 including interest
through August 1998, bearing interest at 6%.............................................. 16,835 12,604
---------- ----------
Total long-term debt.................................................................. 355,991 910,486
Less--Current portion..................................................................... 74,867 213,226
---------- ----------
Long-term debt, net of current portion................................................ $ 281,124 $ 697,260
---------- ----------
---------- ----------
</TABLE>
Maturities of long-term debt for the next five years, including current
maturities, are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 213,226
1997.............................................................. 219,088
1998.............................................................. 229,933
1999.............................................................. 162,305
2000.............................................................. 85,934
Thereafter........................................................ --
---------
Total......................................................... $ 910,486
---------
---------
</TABLE>
7. LEASE COMMITMENTS:
CAPITAL LEASES
Suburban leases certain medical equipment and facilities under agreements
which are classified as capital leases. The equipment leases have original terms
of five years and have either a bargain purchase option or a transfer of title
at the end of the lease. The building lease is with Gateway Properties LLC (see
F-68
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
7. LEASE COMMITMENTS: (CONTINUED)
Note 11) for a term of 21 years. Leased capital assets included in property,
plant and equipment at December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
---------- ------------
<S> <C> <C>
Buildings and leasehold improvements................................ $ -- $ 3,574,605
Furniture and equipment............................................. 164,000 263,879
---------- ------------
164,000 3,838,484
Less--Accumulated amortization...................................... 38,267 162,915
---------- ------------
$ 125,733 $ 3,675,569
---------- ------------
---------- ------------
</TABLE>
OPERATING LEASES
Such lease commitments are primarily for facilities and equipment. Certain
facility leases provide for adjustments relating to the consumer price index and
operating expenses.
MINIMUM LEASE PAYMENTS
Future minimum lease payments, by year and in the aggregate, under
noncancellable capital leases and operating leases with initial or remaining
terms of one year or more consist of the following at December 31, 1995.
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
1996........................................................ $ 463,771 $ 324,715
1997........................................................ 463,770 324,715
1998........................................................ 457,582 333,195
1999........................................................ 426,635 333,965
2000........................................................ 416,787 228,570
Thereafter.................................................. 5,877,083 604,333
------------- ----------------
Total minimum lease payments................................ 8,105,628 $ 2,149,493
Amounts representing interest............................... 4,457,408 ----------------
----------------
-------------
Present value of net minimum payments....................... 3,648,220
Current portion............................................. 110,870
-------------
Long-term capitalized lease obligations..................... $ 3,537,350
-------------
-------------
</TABLE>
8. RETIREMENT PLANS:
Suburban has a Profit Sharing Plan (the Plan) in which all employees are
eligible to participate subject to certain eligibility criteria. The Plan is
funded by discretionary employer contributions as determined by the Board of
Directors on an annual basis. The amount of employer contributions, if any, is
allocated to eligible employees based on employee compensation. Suburban's
contributions for the years ended December 31, 1993, 1994 and 1995 were
approximately $340,329, $341,045 and $343,618, respectively.
F-69
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
9. PROFESSIONAL LIABILITY:
Suburban maintains a claims-made professional liability insurance policy.
The policy coverage is $2,000,000 per claim, $4,000,000 aggregate maximum
benefit, for claims made against Suburban and its employees. Accruals for
outstanding claims and the associated deductibles are made in the period in
which the event becomes known. Suburban also accrues an actuarial estimate of
the future liability for claims incurred but not reported prior to the end of
the accounting period.
10. LEGAL PROCEEDINGS:
Suburban is subject to various legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, although the
ultimate dispositions of these proceedings are not determinable, adverse
determinations in any or all of such proceedings would not have a material
adverse effect upon the financial position or results of operations of Suburban.
11. OTHER ASSETS, RELATED PARTIES:
The following are the components of other assets at December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Investment in and loans to Suburban Properties Partnership............ $ 434,603 $ --
Note receivable from Gateway Properties LLC........................... 250,074 185,292
Less--Current portion................................................. (88,631) (48,552)
---------- ----------
$ 596,046 $ 136,740
---------- ----------
---------- ----------
</TABLE>
SUBURBAN PROPERTIES PARTNERSHIP
In 1992, Suburban became a 10 percent equity partner in Suburban Properties
Partnership (SPP). The remaining 90 percent was owned by various shareholders of
Suburban. The investment at December 31, 1994 and 1995 was $146,603 and $0,
respectively. The investment in SPP has been accounted for under the equity
method.
In 1994 Suburban loaned SPP $288,000 to pay off a mortgage. These funds were
repaid upon sale of the partnership assets in 1995. Subsequent to the sale of
the assets, the partnership was liquidated. Suburban realized a capital loss of
$28,624 in 1995 as a result of the liquidation.
GATEWAY PROPERTIES LLC
Gateway Properties LLC (Gateway) is owned by several stockholders of
Suburban. Gateway's assets consist of land and a new building. Throughout 1994
and 1995, Suburban recorded notes receivable for various payments made on behalf
of Gateway. The note receivable at December 31, 1994 and 1995 was $250,074 and
$185,292, respectively. The terms of the note include monthly installments of
principal and interest of $4,878 through August 1999 with interest accruing at 7
percent. Suburban has signed a capital lease to occupy the new clinic building
for a term expiring in August 2015 (see Note 7).
F-70
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
11. OTHER ASSETS, RELATED PARTIES: (CONTINUED)
COORDINATED HEALTH NETWORK, INC.
In December 1993, Suburban became a one-third shareholder in Coordinated
Health Network, Inc. (CHN). CHN was formed to obtain patient contracts under the
Oregon Health Plan and generate materials purchases discounts and has been
accounted for under the equity method. In 1993, 1994, and 1995 Suburban paid
premiums to CHN of $0, $138,823 and $665,755, respectively and CHN paid Suburban
$0, $6,911 and $87,144 in 1993, 1994, and 1995, respectively, for claims. CHN
legally dissolved in 1996.
STOCK SUBSCRIPTIONS
Suburban maintains various agreements with stockholders for their purchase
of common stock. The notes mature at various stages through the year 2008.
12. SUBSEQUENT EVENTS:
PHYSICIAN PARTNERS, INC.
The Board of Directors of HealthFirst has approved a Reorganization and
Merger Agreement (the Agreement) dated July 29, 1996 together with the Boards of
The Corvallis Clinic, P.C. and the Medford Clinic, P.C.; and Physician Partners,
Inc. (PPI), a newly formed company. This Agreement is subject to the approval of
the shareholders of the three medical groups.
This transaction would result in a separation of operations of the three
founding medical groups between medical professional services activities (i.e.,
providers and medical service staff) and the physician practice management
activities of the business. The professional services activities would be spun
off into newly formed professional corporations (New PCs). The physician
practice management business, along with substantially all of the assets and
liabilities of the three founding medical groups, i.e., accounts receivable,
property, plant, equipment, contracts, payables, accruals and debt, would be
transferred to PPI. When the transaction becomes effective, the shareholders of
the existing founding clinics will become the original shareholders of PPI.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis and subtracting contractual
discounts and bad debts, received by PPI or the New PCs relating to services
provided by the New PCs less (ii) Manager's Expense).
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
The parties to the reorganization transaction will receive an opinion from
tax counsel that for federal income tax purposes, it is more likely than not
that the reorganization will be a tax-free transaction. No ruling will be
requested from the Internal Revenue Service regarding the tax consequences of
the
F-71
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1994 AND 1995
12. SUBSEQUENT EVENTS: (CONTINUED)
transaction. If the IRS or tax court were to determine that the transactions
were not tax free, there would be significant adverse tax consequence to the
parties to the transaction and their respective shareholders.
The reorganization Agreement contemplates that each of the three founding
medical groups will adopt a stock option plan for certain of its employees and
grant new options to purchase shares of its capital stock. Such options would
then be converted into an option to purchase PPI stock.
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and awards,
termination benefits and, in certain cases, severance compensation in the event
the transaction is not consummated prior to January 31, 1997. The obligations of
PPI under certain of these agreements are guaranteed by the three founding
medical groups.
In connection with the reorganization transaction, the three founding
medical groups have entered into an Expense Sharing Agreement which establishes
the basis upon which certain costs incurred in connection with the transactions
are to be allocated between the three groups.
In accordance with the terms of the reorganization Agreement, if one of the
parties terminates the Agreement, in certain circumstances, it may be liable to
the other parties to pay all of their expenses incurred in connection with the
transaction.
F-72
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
The Corvallis Clinic, P.C.:
We have audited the accompanying balance sheets of The Corvallis Clinic,
P.C. (an Oregon professional corporation) as of November 30, 1994 and 1995, and
the related statements of operations, accumulated deficit and cash flows for
each of the years in the three year period ended November 30, 1995. These
financial statements are the responsibility of Corvallis' management. Our
responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of The Corvallis Clinic, P.C.
as of November 30, 1994 and 1995, and the results of its operations and its cash
flows for each of the years in the three year period ended November 30, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996 (except with respect to the matter
discussed under "Employment Obligations" in Note 11,
as to which the date is December 18, 1996)
F-73
<PAGE>
THE CORVALLIS CLINIC, P.C.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30,
------------------------------- SEPTEMBER 30,
1994 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 291,561 $ 176,812 $ 72,206
Patient accounts receivable, net of allowances for contractual
discounts and uncollectible accounts of $2,062,000, $1,992,000
and $2,352,636 at November 30, 1994 and 1995, and September 30,
1996, respectively.............................................. 4,667,634 4,303,960 4,827,301
Healthcare and other receivables.................................. 1,605,116 1,179,380 1,374,622
Inventories of drugs and supplies................................. 256,843 224,065 251,755
Prepaid expenses and deposits..................................... 407,325 479,264 393,834
-------------- -------------- --------------
Total current assets.......................................... 7,228,479 6,363,481 6,919,718
-------------- -------------- --------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and
amortization of $6,989,970, $7,533,789 and $8,811,013 at November
30, 1994 and 1995, and September 30, 1996, respectively........... 14,157,004 19,533,621 19,224,685
-------------- -------------- --------------
OTHER ASSETS:
Property held for future expansion................................ 211,958 -- --
Investments in affiliates......................................... 186,421 561,668 749,698
Other............................................................. 23,884 89,882 --
-------------- -------------- --------------
422,263 651,550 749,698
-------------- -------------- --------------
Total assets.................................................. $ 21,807,746 $ 26,548,652 $ 26,894,101
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES, REDEEMABLE STOCK AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt, and capital lease and direct
finance lease obligation........................................ $ 153,534 $ 531,934 $ 882,581
Line of credit.................................................... -- 1,409,000 1,800,000
Drafts payable.................................................... -- -- 384,626
Accounts payable and accrued expenses............................. 1,631,842 2,055,262 1,128,134
Intercompany payable.............................................. -- -- 213,892
Income taxes payable.............................................. -- 32,215 --
Accrued healthcare costs.......................................... 481,435 1,280,367 2,297,473
Accrued compensation and related expenses......................... 4,911,353 1,909,124 795,939
Deferred revenue.................................................. 346,615 396,747 351,392
-------------- -------------- --------------
Total current liabilities..................................... 7,524,779 7,614,649 7,854,037
-------------- -------------- --------------
LONG-TERM DEBT, net of current portion.............................. 8,309,588 729,453 1,548,947
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
portion........................................................... 155,449 14,258,343 14,026,098
DEFERRED COMPENSATION AND OTHER..................................... 1,489,317 1,629,848 2,028,274
COMMITMENTS AND CONTINGENCIES
REDEEMABLE STOCKS................................................... 4,787,559 5,659,948 6,743,636
ACCUMULATED DEFICIT................................................. (458,946) (3,343,589) (5,306,891)
-------------- -------------- --------------
Total liabilities, redeemable stock and accumulated deficit... $ 21,807,746 $ 26,548,652 $ 26,894,101
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-74
<PAGE>
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS ENDED SEPTEMBER
YEAR ENDED NOVEMBER 30, 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Fee-for-service, net............................ $ 16,422,001 $ 19,545,575 $ 20,704,589 $ 17,096,714 $ 17,298,942
Prepaid healthcare, net......................... 13,516,634 15,798,726 18,469,738 14,967,953 16,788,837
------------- ------------- ------------- ------------- -------------
Net revenues................................ 29,938,635 35,344,301 39,174,327 32,064,667 34,087,779
Less--Provider compensation and benefits........ 7,121,963 13,729,125 13,209,215 11,185,542 8,246,936
------------- ------------- ------------- ------------- -------------
Net revenues less compensation to
providers................................. 22,816,672 21,615,176 25,965,112 20,879,125 25,840,843
------------- ------------- ------------- ------------- -------------
EXPENSES:
Clinic salaries, wages and benefits............. 10,175,248 10,403,834 12,579,457 10,666,658 12,116,458
Purchased medical services...................... 2,656,090 3,081,120 4,716,727 3,351,919 4,444,890
Medical and office supplies..................... 3,014,285 3,327,093 3,842,572 2,921,183 3,453,739
General and administrative expenses............. 2,435,511 3,157,030 3,560,219 2,509,094 2,573,211
Lease and rent expense.......................... 176,708 177,594 197,603 167,666 217,003
Provision for uncollectible accounts............ 1,032,860 1,181,471 1,767,545 984,371 843,900
Depreciation and amortization................... 668,210 1,005,715 1,114,947 860,023 1,278,343
------------- ------------- ------------- ------------- -------------
Total operating expenses.................... 20,158,912 22,333,857 27,779,070 21,460,914 24,927,544
------------- ------------- ------------- ------------- -------------
Operating profit (loss)..................... 2,657,760 (718,681) (1,813,958) (581,789) 913,299
OTHER INCOME (EXPENSE):
Interest income................................. -- 55,468 65,776 57,589 35,242
Interest expense................................ (639,397) (780,123) (1,223,370) (1,015,260) (1,430,585)
Equity in income of affiliates.................. 92,738 107,332 232,428 281,392 211,989
Other........................................... (171,884) 58,852 631,945 140,806 343,301
------------- ------------- ------------- ------------- -------------
Net income (loss) before income taxes....... 1,939,217 (1,277,152) (2,107,179) (1,117,262) 73,246
------------- ------------- ------------- ------------- -------------
INCOME TAX (BENEFIT) EXPENSE...................... 759,374 -- -- -- --
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)................................. $ 1,179,843 $ (1,277,152) $ (2,107,179) $ (1,117,262) $ 73,246
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-75
<PAGE>
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF ACCUMULATED DEFICIT
<TABLE>
<S> <C>
BALANCE, November 30, 1992...................................................... $ 651,031
Redemption of common stock.................................................... (7,760)
Accretion of common stock..................................................... (449,348)
Net income.................................................................... 1,179,843
--------------
BALANCE, November 30, 1993...................................................... 1,373,766
Redemption of common stock.................................................... (44,000)
Accretion of common stock..................................................... (511,560)
Net loss...................................................................... (1,277,152)
--------------
BALANCE, November 30, 1994...................................................... (458,946)
Accretion of common stock..................................................... (777,464)
Net loss...................................................................... (2,107,179)
--------------
BALANCE, November 30, 1995...................................................... (3,343,589)
Accretion of common stock (unaudited)......................................... (1,184,042)
Costs incurred related to PPI transaction (unaudited)......................... (852,506)
Net income (unaudited)........................................................ 73,246
--------------
BALANCE, September 30, 1996 (unaudited)......................................... $ (5,306,891)
--------------
--------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-76
<PAGE>
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED NOVEMBER 30, SEPTEMBER 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 1,179,843 $ (1,277,152) $ (2,107,179) $ (1,117,262) $ 73,246
Adjustment to reconcile net income (loss) to net
cash provided by operating activities--
Depreciation and amortization................. 668,210 1,005,715 1,114,947 860,023 1,278,343
Equity in income of affiliates................ (92,738) (107,332) (232,428) (281,392) (211,989)
Equity in income of affiliate offset against
interest expense............................ -- -- (288,927) (192,618) (350,986)
Loss on sale of property, plant and
equipment................................... -- 164,366 -- -- --
Deferred taxes................................ 698,864 -- -- -- --
Changes in operating assets and liabilities:
Patient accounts receivable, net............ (654,098) (327,642) 363,674 56,899 (523,341)
Healthcare and other receivables............ (1,032,621) 110,955 425,736 727,853 (123,950)
Inventories of drugs and supplies........... (5,571) (13,138) 32,778 (86,257) (27,690)
Prepaid expenses and deposits............... (70,945) (66,424) (71,939) 25,957 85,429
Other assets................................ -- (23,884) (65,998) (14,197) 89,882
Drafts payable.............................. -- -- -- 197,265 384,626
Accounts payable and accrued expenses....... 269,608 417,478 423,420 (612,751) (713,236)
Income taxes payable........................ -- -- 32,215 -- (32,215)
Intercompany payable........................ -- -- -- -- --
Accrued healthcare costs.................... (84,561) 371,470 798,932 418,691 1,017,106
Accrued compensation and related expenses... (425,290) 1,319,217 (3,002,229) (3,371,485) (1,113,185)
Deferred revenue............................ 82,009 (28,163) 50,132 53,561 (45,355)
Deferred compensation....................... 566,284 100,218 (1,969) (1,969) 48,426
Professional liability...................... -- 27,450 142,500 142,500 350,000
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities................................ 1,098,994 1,673,134 (2,386,335) (3,195,182) 185,111
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment...... (6,820,505) (3,105,891) (3,203,644) (2,491,560) (969,407)
Purchases of investments........................ -- -- (123,673) (70,874) (96,348)
Cash distributions received from investments.... 48,000 19,408 400,000 115,000 400,000
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities....... (6,772,505) (3,086,483) (2,927,317) (2,447,434) (665,755)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings under line of
credit agreement.............................. -- -- 1,409,000 1,600,000 391,000
Proceeds from issuance of long-term debt........ 4,710,591 -- 1,200,000 1,200,000 1,400,000
Principal payments on long-term debt and direct
financing lease obligation.................... (70,960) (140,712) (239,408) (199,507) (462,104)
Proceeds from issuance of common stock.......... 393,432 18,000 -- -- --
Proceeds from issuance of preferred stock....... 235,000 310,000 -- -- --
Payments for redemption of common stock......... (79,972) (69,000) (23,000) (23,000) (115,000)
Payments for redemption of preferred stock...... (23,000) (48,000) (19,000) (19,000) (57,000)
Proceeds from repayments of notes receivable
from stockholders............................. 137,266 143,549 136,925 124,034 71,646
Cash received in formation of HealthCare
Partners, LLC................................. -- -- 2,734,386 2,734,386 --
Costs incurred related to PPI transaction....... -- -- -- -- (852,504)
------------- ------------- ------------- ------------- -------------
Net cash provided by financing activities... 5,302,357 213,837 5,198,903 5,416,913 376,038
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH................... (371,154) (1,199,512) (114,749) (225,703) (104,606)
CASH, beginning of year........................... 1,862,227 1,491,073 291,561 291,561 176,812
------------- ------------- ------------- ------------- -------------
CASH, end of year................................. $ 1,491,073 $ 291,561 $ 176,812 $ 65,858 $ 72,206
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 680,280 $ 780,123 $ 891,190 $ 742,658 $ 1,434,449
Cash paid (received) for income taxes........... -- 74,420 (41,558) -- 56,306
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1995, Corvallis formed a limited liability company by contributing
certain real property and associated debt in exchange for a 50 percent ownership
interest in the new entity. See Notes 7 and 12.
Notes receivable from shareholders for purchase of stock during 1993, 1994
and 1995 were $315,324, $399,150 and $23,000, respectively.
During 1996, Corvallis sold its 32% interest of Healthquest for a receivable
of $64,464.
The accompanying notes are an integral part of these statements.
F-77
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. BUSINESS AND ORGANIZATION:
The Corvallis Clinic, P.C. (Corvallis), an Oregon professional corporation,
is a multi-specialty medical clinic. Corvallis was founded in 1947 with the
belief that group practice offers the best means of promoting and maintaining
the highest standards of medical care.
As of September 30, 1996, Corvallis consists of approximately 519 employees
and 86 professional providers who offer a wide range of primary and specialty
care. In addition, Corvallis offers ancillary services such as Physical Therapy,
Optical, Pharmacy, Laboratory and Imaging.
The majority of Corvallis operations are located in two facilities in
Corvallis, Oregon. In addition, Corvallis operates four satellite offices:
Albany Family Medicine, Corvallis Family Medicine, Philomath Family Medicine and
Research Park. A significant change in the demographics of this area may have an
adverse impact on the business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.
CONCENTRATION OF CREDIT RISK
Corvallis extends credit to patients covered by insurance programs such as
governmental programs (Medicare and Medicaid) and private programs. Corvallis
manages credit risk with the various public and private insurance providers, as
deemed appropriate by management. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
INVENTORIES OF DRUGS AND SUPPLIES
Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance, repairs and
minor replacements are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss on disposition is recorded as
other income or expense.
Depreciation is computed using both accelerated and straight-line methods
over the estimated useful lives of the respective assets. Equipment under
capital lease is amortized using both accelerated and straight-line methods over
the shorter of the period of the lease term or the estimated useful life of the
equipment. Estimated lives are as follows:
<TABLE>
<S> <C>
Building and building improvements.................................... 7-40 years
Furniture and equipment............................................... 5-15 years
</TABLE>
F-78
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROVIDER COMPENSATION AND BENEFITS
Provider compensation and benefits consists of the direct costs of patient
care providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, patient receivables,
accounts payable and accrued liabilities are a reasonable estimate of their fair
value based on the short maturities of these instruments.
Interest rates that are currently available to Corvallis for issuance of
debt with similar terms and remaining maturities were used to estimates fair
value for debt issues. The current carrying value of debt approximates fair
value.
Corvallis does not hold or issue financial instruments or derivative
financial instruments for trading purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard Number 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used, as well as for long-lived assets and certain identifiable intangibles to
be disposed of. Corvallis adopted the new standard in 1996. The effect of the
adoption was not material to Corvallis' financial position or results of
operations.
NOTES RECEIVABLE FROM STOCKHOLDERS
Corvallis maintains various agreements with stockholders for their purchase
of common stock. The notes bear interest at 8.66 percent and mature at various
stages through the year 2006.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended September 30, 1995
and 1996 has not been audited by independent accountants. Certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted from the unaudited interim financial information. In the opinion of
Corvallis' management, the unaudited interim financial information includes all
adjustments, consisting only of
F-79
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
normal recurring adjustments, necessary for a fair presentation. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for the respective full years.
3. REVENUES:
Corvallis reports its revenues in accordance with the methodologies as
discussed below:
PREPAID HEALTHCARE
Corvallis contracts with various Health Maintenance Organizations (HMOs) to
provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to Corvallis by the HMO for plan
enrollees.
The majority of the HMO contracts are full-risk or modified full-risk
contracts. Under a full-risk contract, Corvallis assumes the obligation of
providing all healthcare services to enrollees and is obligated to reimburse
outside providers for services rendered to enrollees. Generally, such payments
to outside providers are limited to out-of-area services, emergency services and
services not currently offered by Corvallis. Modified full-risk contracts are
similar to full-risk contracts except that the HMO is obligated to pay for
out-of-area services.
Corvallis has entered into subcapitation agreements with certain of these
outside providers. Under these agreements, Corvallis prepays the outside
provider based upon enrollee/participant formulas in which the subprovider
assumes the risk of providing patient care. Additional limitations on losses are
provided by the payment of stop loss reinsurance premiums and through a
percentage limitation on overall savings or losses of the programs.
Corvallis has accrued the claims associated with services provided by
outside providers for which Corvallis is responsible, and an estimate of
incurred but not reported claims is included in accrued healthcare cost in the
accompanying financial statements.
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. Corvallis has agreements with third-party payors
that provide payments to Corvallis at amounts different from its established
rates. The difference between the established rates and the related payment
amounts are reflected as contractual discounts, as shown below:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
NOVEMBER 30, SEPTEMBER 30,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fee-for-service, gross............... $ 21,434,661 $ 25,129,788 $ 25,778,976 $ 20,973,627 $ 21,831,202
Contractual discounts................ 5,012,660 5,584,213 5,074,387 3,876,913 4,532,260
------------- ------------- ------------- ------------- -------------
Fee-for-service, net................. $ 16,422,001 $ 19,545,575 $ 20,704,589 $ 17,096,714 $ 17,298,942
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-80
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
3. REVENUES: (CONTINUED)
A summary of the most significant fee-for-service arrangements is as
follows:
MEDICARE
A significant portion of Corvallis' services are provided to Medicare
patients. Payments for Medicare outpatient services which are not
covered under capitated contracts are based on a prevailing fee
schedule. Approximately 17, 18, 15 and 7 (unaudited) percent of net
patient service revenues were derived from services provided to
fee-for-service Medicare patients in 1993, 1994, 1995 and for the ten
months ended September 30, 1996, respectively.
MEDICAID
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 6, 5, 3 and 1 (unaudited) percent of net patient service
revenues were derived from services provided to fee-for-service Medicaid
patients in 1993, 1994, 1995 and the ten months ended September 30,
1996, respectively.
OTHER PAYORS
Corvallis has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment to Corvallis under these agreements includes discounts
from established charges.
MAJOR CUSTOMERS
Four customers individually represented more than 10 percent of
Corvallis' total net revenue as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
------------------------------------- TEN MONTHS ENDED
1993 1994 1995 SEPTEMBER 30, 1996
----- ----- ----- -------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pacificare--Commercial.............................. 23% 19% 23% 20%
Pacificare--Secure Horizons......................... 15 13 16 11
SelectCare.......................................... -- -- 10 12
Oregon Health Plan.................................. -- -- 11 7
</TABLE>
F-81
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment includes the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and land improvements............................ $ 454,609 $ 666,565 $ 666,565
Buildings and leasehold improvements.................. 14,289,703 14,109,506 19,400,904
Furniture and equipment............................... 5,706,704 7,016,184 7,968,229
Construction in progress.............................. 695,958 5,275,155 --
------------- ------------- -------------
21,146,974 27,067,410 28,035,698
Less--Accumulated depreciation........................ (6,989,970) (7,533,789) (8,811,013)
------------- ------------- -------------
$ 14,157,004 $ 19,533,621 $ 19,224,685
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INCOME TAXES:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that Corvallis follow
the liability method of accounting for deferred income taxes. Differences
between financial reporting and income tax net operating losses are due
primarily to the use of the cash method of accounting for income tax purposes.
Corvallis has adopted a December 31 year-end for income tax purposes.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Corvallis' deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Cash to accrual adjustments......................... $ 4,578,708 $ 4,201,341 $ 4,307,379
Property related book to tax differences............ 183,553 -- --
Net operating loss.................................. -- 1,134,819 1,105,521
Other............................................... 30,250 35,564 37,713
------------- ------------- -------------
Gross deferred tax assets......................... 4,792,511 5,371,724 5,450,613
Less--Valuation allowance............................. (1,318,932) (2,417,167) (2,388,673)
------------- ------------- -------------
Net deferred tax asset............................ 3,473,579 2,954,557 3,061,940
------------- ------------- -------------
Deferred tax liabilities:
Cash to accrual adjustments......................... (3,473,579) (2,435,644) (2,543,027)
Property related book to tax differences............ -- (518,913) (518,913)
------------- ------------- -------------
Gross deferred tax liabilities.................... (3,473,579) (2,954,557) (3,061,940)
------------- ------------- -------------
Net deferred tax (liability) asset................ $ -- $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-82
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
5. INCOME TAXES: (CONTINUED)
Due to the differing fiscal periods, the federal and state net operating
loss carryforwards reported on the respective tax returns will differ from the
amounts reported above.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED NOVEMBER 30, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal................................. $ -- $ -- $ -- $ -- $ --
State................................... -- -- -- -- --
Deferred:
Federal................................. 664,453 -- -- -- --
State................................... 94,921 -- -- -- --
--------- --------- --------- --------- ---------
$ 759,374 $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The differences between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate to income
before taxes were as follows:
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED NOVEMBER 30, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal tax at statutory rate.......... $ 678,726 $(447,003) $(737,513) $(391,042) $ 25,637
Add (deduct):
State income tax, net of federal
benefit............................ 61,699 -- -- -- 2,857
Investments.......................... 17,940 (730,133) (214,896) (179,080) --
Other................................ 1,009 (141,796) (145,826) (121,522) --
Change in valuation allowance........ -- 1,318,932 1,098,235 691,644 (28,494)
--------- --------- --------- --------- ---------
$ 759,374 $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-83
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Unrelated
Note payable interest at 10%, payable in monthly
installments of $30,551 through February 1999, secured
by equipment........................................... $ -- $ 1,007,818 $ 777,793
Note payable interest at 9%, payable in monthly
installments of $35,097 through August 2000 secured by
equipment.............................................. -- -- 1,379,216
Mortgage payable, interest at 9.5%, payable in monthly
installments of $55,403 through February 2018, secured
by real property....................................... 6,182,436 -- --
Mortgage payable, interest at 8.875%, payable in monthly
installments of $12,045 through July 2017, secured by
real property.......................................... 1,409,086 -- --
Mortgage payable, interest at 9.75%, payable in monthly
installments of $5,703 through January 2003 at which
time principal amount of $540,995 is due, secured by
real and personal property............................. 629,118 -- --
Mortgage payable, interest at 9.75%, payable in monthly
installments of $1,913 through May 2017, secured by
real property.......................................... 195,256 -- --
------------- ------------- -------------
8,415,896 1,007,818 2,157,009
Less--Current portion.................................... (106,308) (278,365) (608,062)
------------- ------------- -------------
Long-term debt, net of current portion................. $ 8,309,588 $ 729,453 $ 1,548,947
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Scheduled principal repayments on long-term debt as of November 30, 1995 are
as follows:
<TABLE>
<S> <C>
1996.......................... $ 278,365
1997.......................... 307,514
1998.......................... 339,714
1999.......................... 82,225
2000.......................... --
Thereafter.................... --
-------------
$ 1,007,818
-------------
-------------
</TABLE>
F-84
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT: (CONTINUED)
LINES OF CREDIT
Corvallis maintains a revolving line-of-credit agreement with a bank
providing up to $2,500,000, secured by accounts receivable and inventory.
Corvallis maintains a second revolving line-of-credit agreement with a bank
providing up to $1,400,000 secured by business equipment. At September 30, 1996,
borrowings outstanding were $1,800,000. These lines of credit bear interest at
the lender's prime rate (8.25 percent at September 30, 1996) and are due on
demand.
7. LEASE COMMITMENTS:
CAPITAL LEASE
Corvallis leases certain equipment under an agreement which is classified as
a capital lease. The lease has an original term of five years and includes a
bargain purchase option. Lease equipment included in property, plant and
equipment at November 30, 1994 and 1995 and September 30, 1996 is as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------- SEPTEMBER 30,
1994 1995 1996
---------- ----------- -------------
<S> <C> <C> <C>
Equipment............................................ $ 260,255 $ 260,255 $ 260,255
Less--Accumulated amortization....................... (69,401) (121,452) (164,827)
---------- ----------- -------------
$ 190,854 $ 138,803 $ 95,428
---------- ----------- -------------
---------- ----------- -------------
</TABLE>
OPERATING LEASES
Leases that do not meet the criteria for capitalization are classified as
operating leases. Such lease commitments are primarily for facilities and
equipment and the related rentals are charged to operations as incurred.
F-85
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
7. LEASE COMMITMENTS: (CONTINUED)
FUTURE MINIMUM LEASE PAYMENTS
Future minimum lease payments by year and in the aggregate, under
noncancellable capital leases and operating leases with initial or remaining
terms of one year or more consist of the following at November 30, 1995:
<TABLE>
<CAPTION>
CAPITAL LEASE OPERATING LEASES
------------- ----------------
<S> <C> <C>
1996......................................................... $ 67,864 $ 77,977
1997......................................................... 67,864 74,897
1998......................................................... 39,588 74,897
1999......................................................... -- 27,215
2000......................................................... -- 22,880
Thereafter................................................... -- 45,380
------------- --------
Total minimum lease payments................................. 175,316 $ 323,246
Amounts representing interest................................ (19,867) --------
--------
-------------
Present value of minimum payments............................ 155,449
Current portion.............................................. (52,841)
-------------
Long-term capitalized lease obligations...................... $ 102,608
-------------
-------------
</TABLE>
DIRECT FINANCING LEASE OBLIGATION
In June of 1995, Corvallis contributed land, buildings, construction in
process and related notes payable to HealthCare Partners, LLC (see Note 12). At
the date of transfer, Corvallis entered into 30-year lease agreements for the
Asbury, Aumann, CFM and PFM buildings and a 5-year lease agreement for the
Albany building. Monthly rental payments under these leases are $191,581. The
assets were sold under a sale/leaseback arrangement and, therefore, this is
being accounted for as a financing transaction wherein the assets remain on the
books and continue to be depreciated. Corvallis recorded a direct financing
lease obligation representing the underlying obligations assumed by the LLC as
part of the transaction.
The liability for this lease obligation was $14,356,463 at November 30, 1995
and $14,193,390 at September 30, 1996. Scheduled principal payments at November
30, 1995 are as follows:
<TABLE>
<S> <C>
1996.......................... $ 200,728
1997.......................... 219,252
1998.......................... 240,779
1999.......................... 264,423
2000.......................... 290,394
Thereafter.................... 13,140,887
-------------
$ 14,356,463
-------------
-------------
</TABLE>
8. PROFESSIONAL LIABILITY:
Corvallis maintains a claims-made professional liability insurance policy.
The policy coverage is $5,000,000 per claim, with no aggregate maximum limit for
claims made against Corvallis and its
F-86
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
8. PROFESSIONAL LIABILITY: (CONTINUED)
employees. Accruals for outstanding claims and the associated deductibles are
made in the period in which the event becomes known. Corvallis also accrues an
actuarial estimate of the future liability for claims incurred but not reported
prior to the end of the accounting period.
9. REDEEMABLE STOCK:
Corvallis has three classes of stock which are redeemable at the option of
the shareholders upon retirement, termination of employment and certain other
events. A summary of the activity in these stock accounts for the period
November 30, 1992 through September 30, 1996, together with other information,
is presented below:
<TABLE>
<CAPTION>
CLASS A CLASS B
VOTING PREFERRED VOTING COMMON
-------------------------- --------------------------
SHARES CARRYING SHARES CARRYING
ISSUED VALUE ISSUED VALUE
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, November 30, 1992........................ 48 $ 718,851 9,755 $ 1,944,638
Stock issued.................................... 16 368,000 1,954 340,756
Stock redeemed.................................. (2) (46,000) (374) (26,212)
Accretion....................................... -- 76,785 -- 372,563
Payments of notes receivable.................... -- -- -- --
--- ------------- ---------- -------------
BALANCE, November 30, 1993........................ 62 1,117,636 11,335 2,631,745
Stock issued.................................... 9 207,000 700 210,150
Stock redeemed.................................. (3) (25,000) -- --
Accretion....................................... -- 58,817 -- 452,743
Payments of notes receivable.................... -- -- -- --
--- ------------- ---------- -------------
BALANCE, November 30, 1994........................ 68 1,358,453 12,035 3,294,638
Stock issued.................................... 1 23,000 -- --
Stock redeemed.................................. (1) (23,000) -- --
Accretion....................................... -- 5,661 -- 771,803
Payments of notes receivable.................... -- -- -- --
--- ------------- ---------- -------------
BALANCE, November 30, 1995........................ 68 1,364,114 12,035 4,066,441
Stock redeemed.................................. (5) (115,000) -- --
Accretion....................................... -- 75,085 -- 1,108,956
Payments of notes receivable.................... -- -- -- --
--- ------------- ---------- -------------
BALANCE, September 30, 1996....................... 63 $ 1,324,199 12,035 $ 5,175,397
--- ------------- ---------- -------------
--- ------------- ---------- -------------
Current redemption value per share................ $ 23,000 $ 595
------------- -------------
------------- -------------
Redemption value for shares issued................ $ 1,449,000 $ 7,160,825
------------- -------------
------------- -------------
Total authorized shares........................... 200 25,000
--- ----------
--- ----------
<CAPTION>
CLASS C
NONVOTING PREFERRED
NOTES
------------------------- RECEIVABLE
SHARES CARRYING FROM
ISSUED VALUE STOCKHOLDERS TOTAL
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
BALANCE, November 30, 1992........................ 4,020 $ 402,000 $ (307,873) $ 2,757,616
Stock issued.................................... 2,350 235,000 (315,324) 628,432
Stock redeemed.................................. (230) (23,000) -- (95,212)
Accretion....................................... -- -- -- 449,348
Payments of notes receivable.................... -- -- 137,266 137,266
---------- ------------ ------------- ------------
BALANCE, November 30, 1993........................ 6,140 614,000 (485,931) 3,877,450
Stock issued.................................... 3,100 310,000 (399,150) 328,000
Stock redeemed.................................. (480) (48,000) -- (73,000)
Accretion....................................... -- -- -- 511,560
Payments of notes receivable.................... -- -- 143,549 143,549
---------- ------------ ------------- ------------
BALANCE, November 30, 1994........................ 8,760 876,000 (741,532) 4,787,559
Stock issued.................................... -- -- (23,000) --
Stock redeemed.................................. (190) (19,000) -- (42,000)
Accretion....................................... -- -- -- 777,464
Payments of notes receivable.................... -- -- 136,925 136,925
---------- ------------ ------------- ------------
BALANCE, November 30, 1995........................ 8,570 857,000 (627,607) 5,659,948
Stock redeemed.................................. (570) (57,000) -- (172,000)
Accretion....................................... -- -- -- 1,184,041
Payments of notes receivable.................... -- -- 71,647 71,647
---------- ------------ ------------- ------------
BALANCE, September 30, 1996....................... 8,000 $ 800,000 $ (555,960) $ 6,743,636
---------- ------------ ------------- ------------
---------- ------------ ------------- ------------
Current redemption value per share................ $ 100
------------
------------
Redemption value for shares issued................ $ 800,000
------------
------------
Total authorized shares........................... 100,000
----------
----------
</TABLE>
The carrying value of the Class A and Class B shares are being increased
(accreted) to the redemption price using the effective interest rate through the
earliest estimated redemption date. Currently, none of the shares are redeemable
at a date certain. Accordingly, no determination can be made of redemption
requirements for specific years in the future.
F-87
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
10. DEFERRED COMPENSATION:
Corvallis provides compensation to eligible shareholders who retire based
upon average shareholder income, as defined in the Employment Agreement, for the
first three years following retirement. Provider/ shareholder retirees who have
20 1/2 years of service and attain age 65 while in service with Corvallis are
eligible to receive deferred retirement compensation.
11. COMMITMENTS AND CONTINGENCIES:
LEGAL PROCEEDINGS
Corvallis is subject to various legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, although the
ultimate dispositions of these proceedings are not determinable, adverse
determinations in any or all of such proceedings would not have a material
adverse effect upon the financial position or results of operations of
Corvallis.
EMPLOYMENT OBLIGATIONS
Effective December 18, 1996, the chief executive officer's employment with
Corvallis was terminated. In conjunction therewith, Corvallis may have certain
obligations which are not determinable at this time. These obligations may have
a material adverse impact on Corvallis' financial position and operating
results.
12. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates consist of investments in various
entities which are accounted for on the equity method. The names of these
entities, carrying values and the percent of ownership held by Corvallis are
summarized below:
<TABLE>
<CAPTION>
CARRYING VALUE AT
------------------------------------------
NOVEMBER 30,
---------------------- SEPTEMBER 30,
INVESTEE PERCENT OWNED 1994 1995 1996
- ---------------------------------------- ------------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Corvallis MRI........................... 33% $ 186,421 $ 231,058 $ 343,046
HealthCare Partners, LLC................ 50 -- 259,319 406,652
Healthquest............................. 32 -- 71,291 --
---------- ---------- --------
$ 186,421 $ 561,668 $ 749,698
---------- ---------- --------
---------- ---------- --------
</TABLE>
Additional information regarding these investments is discussed below.
CORVALLIS MRI:
Corvallis holds a one-third interest in Corvallis MRI, a partnership
organized in 1988 which owns and operates a magnetic resonance imaging (MRI)
scanner. The MRI unit is housed in facilities leased from Good Samaritan
Hospital, another partner, and operated by Corvallis Radiology, P.C., the third
partner.
F-88
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
12. INVESTMENTS IN AFFILIATES: (CONTINUED)
Summarized financial information of Corvallis MRI for its December 31 fiscal
year and September 30 interim period is presented below:
BALANCE SHEET DATA--
<TABLE>
<CAPTION>
AS OF
---------------------------------------------
DECEMBER 31,
-----------------------------
SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets............................... $ 527,386 $ 618,677 $ 828,317
Fixed assets................................. 1,554,328 1,288,043 1,146,808
------------- ------------- -------------
Total assets............................. $ 2,081,714 $ 1,906,720 $ 1,975,125
------------- ------------- -------------
------------- ------------- -------------
Current liabilities.......................... $ 325,163 $ 346,383 $ 371,331
Long-term debt............................... 1,132,782 796,735 574,652
Partners' equity............................. 623,769 763,602 1,029,138
------------- ------------- -------------
Total liabilities and Partners' equity... $ 2,081,714 $ 1,906,720 $ 1,975,121
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
OPERATIONS DATA--
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 937,736 $ 1,303,800 $ 1,657,619 $ 1,238,095 $ 1,308,311
Operating expenses................ (683,263) (746,580) (834,435) (611,918) (696,438)
Other income (expense)............ 4,008 (83,592) (83,351) (64,864) (46,337)
----------- ------------ ------------ ------------ ------------
$ 258,481 $ 473,628 $ 739,833 $ 561,313 $ 565,536
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
</TABLE>
During 1993, 1994 and 1995, payments to Corvallis MRI for services provided
to Corvallis were $32,401, $65,504 and $61,785, respectively, and $103,985 for
the ten months ended September 30, 1996 and are included in purchased services.
HEALTHCARE PARTNERS, LLC
During the year ended November 30, 1995, Corvallis entered into a joint
venture agreement with Good Samaritan Hospital Corvallis to form a limited
liability company to own and manage Corvallis' buildings and real properties and
to serve as a vehicle for financing future property expansion for Corvallis.
Corvallis contributed assets and liabilities in exchange for a 50 percent
membership interest in the limited liability company.
The net book value of assets and liabilities contributed by Corvallis was
$13,804,704 for buildings, land and construction in progress and $8,363,298 for
related debt. In addition, Corvallis received $2,734,386 in
F-89
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
12. INVESTMENTS IN AFFILIATES: (CONTINUED)
cash reimbursements for the market value of the above contributed net assets in
excess of the Hospital's contributed equity, as measured at the date of
formation of the limited liability company.
This transaction has been accounted for as a financing due to the continuing
involvement of Corvallis in the assets through its ownership interest in the
limited liability company. Accordingly, the contributed property remains as an
asset of Corvallis. The debt at the transaction date, together with the cash
received for the excess value of the contributed net assets, has been included
in the related financing obligations (see Note 7).
Summarized financial information of HealthCare Partners, LLC for its
December 31, fiscal year and September 30 interim period is presented below:
BALANCE SHEET DATA--
<TABLE>
<CAPTION>
AS OF
-----------------------------
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets............................................. $ 276,548 $ 359,101
Financing lease receivable................................. 18,095,340 18,027,296
Property and improvements.................................. 5,357,704 6,323,597
Other assets............................................... 175,414 112,200
------------- -------------
Total assets........................................... $ 23,905,006 $ 24,822,194
------------- -------------
------------- -------------
Current liabilities........................................ $ 1,211,560 $ 2,017,938
Long-term debt............................................. 8,014,916 8,023,754
Members' equity............................................ 14,678,530 14,780,502
------------- -------------
Total liabilities and Members' equity.................. $ 23,905,006 $ 24,822,194
------------- -------------
------------- -------------
</TABLE>
OPERATIONS DATA--
<TABLE>
<CAPTION>
INCEPTION
(JUNE 1 NINE MONTHS
THROUGH ENDED
DECEMBER 31, SEPTEMBER 30,
1995) 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues........................................... $ 1,257,835 $ 1,881,989
Expenses........................................... 679,981 1,180,018
------------- -------------
Net income..................................... $ 577,854 $ 701,971
------------- -------------
------------- -------------
</TABLE>
Interest income includes $1,149,055 for the 1995 period and $1,472,720 for
the nine months ended September 30, 1996 relating to the financing lease with
Corvallis. As a substantial portion of the joint venture's income is derived
from this interest income, Corvallis' share of earnings from the joint venture
is offset against interest expense in the accompanying statements of income.
F-90
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
12. INVESTMENTS IN AFFILIATES: (CONTINUED)
Concurrent with the formation of the limited liability company, Corvallis
has entered into a lease agreement relating to buildings and properties which
were contributed to the limited liability company and are occupied by Corvallis.
Future minimum rental commitments under the agreement are approximately
$2,203,000 per year for the first 5 years and approximately $2,054,000 per year
for the next 25 years, subject to fair market value adjustments after the first
five years.
Corvallis has guaranteed approximately $6,100,000 of long-term debt
associated with the above joint venture.
13. RETIREMENT PLANS:
Corvallis has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all
employees are eligible to participate subject to certain eligibility criteria.
The 401(k) Plan permits employees to contribute up to 16 percent of their annual
compensation (not to exceed certain annual limits imposed by the Internal
Revenue Code). Corvallis is required to make matching contributions equal to 50
percent of employee contributions up to 8 percent of the employee's
compensation. Corvallis may also make discretionary contributions. Clinic
contributions are 100 percent vested. Corvallis also has a Money-Purchase
Pension Plan (the Pension) in which all employees are eligible to participate
subject to certain eligibility criteria. Corvallis contributes 5.4 percent of
the employee's eligible earnings up to $48,481 and 10.8 percent of eligible
earnings in excess of $48,481. These contributions are 100 percent vested upon
eligibility.
Corvallis' contributions for these plans for the years ended November 30,
1993, 1994 and 1995 and the ten months ended September 30, 1995 and 1996 were
approximately $2,093,000, $1,813,000, $2,010,000, $1,677,140 (unaudited) and
$1,036,970 (unaudited), respectively.
14. SUBSEQUENT EVENTS:
STOCK TRANSACTIONS
In November 1996 a shareholder sold 235 shares of Class B stock for $139,825
and received a retirement benefit of $48,750 to be paid out through 1999.
PHYSICIAN PARTNERS, INC.
The Board of Directors of Corvallis has approved a Reorganization and Merger
Agreement (the Agreement) dated July 29, 1996 together with the Boards of
HealthFirst Medical Group P.C. and the Medford Clinic P.C.; and Physician
Partners, Inc. (PPI), a newly formed company. This Agreement is subject to the
approval of the shareholders of the three medical groups.
This transaction would result in a separation of operations of the three
founding medical groups between medical professional services activities (i.e.,
providers and medical service staff) and the physician practice management
activities of the business. The professional services activities would be spun
off into newly formed professional corporations (New PCs). The physician
practice management business, along with substantially all of the assets and
liabilities of the three founding medical groups, i.e., accounts receivable,
property, plant, equipment, contracts, payables, accruals and debt, would be
transferred to PPI. When the transaction becomes effective, the shareholders of
the existing founding clinics will become the original shareholders of PPI.
F-91
<PAGE>
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
14. SUBSEQUENT EVENTS: (CONTINUED)
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis and subtracting contractual
discounts and bad debts, received by PPI or the New PCs relating to services
provided by the New PCs less (ii) Manager's Expense).
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
The parties to the reorganization transaction will receive an opinion from
tax counsel that for federal income tax purposes, it is more likely than not
that the reorganization will be a tax-free transaction. No ruling will be
requested from the Internal Revenue Service regarding the tax consequences of
the transaction. If the IRS or tax court were to determine that the transactions
were not tax free, there would be significant adverse tax consequence to the
parties to the transaction and their respective shareholders.
The reorganization Agreement contemplates that each of the three founding
medical groups will adopt a stock option plan for certain of its employees and
grant new options to purchase shares of its capital stock. Such options would
then be converted into options to purchase PPI stock.
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and awards,
termination benefits and, in certain cases, severance compensation in the event
the transaction is not consummated prior to January 31, 1997. The obligations of
PPI under certain of these agreements are guaranteed by the three founding
medical groups.
In connection with the reorganization transaction, the three founding
medical groups have entered into an Expense Sharing Agreement which establishes
the basis upon which certain costs incurred in connection with the transactions
are to be allocated between the three groups.
In accordance with the terms of the reorganization Agreement, if one of the
parties terminates the Agreement, in certain circumstances, it may be liable to
the other parties to pay all of their expenses incurred in connection with the
transaction.
F-92
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Corvallis MRI:
We have audited the accompanying balance sheets of Corvallis MRI (an Oregon
Partnership) as of December 31, 1995 and 1994, and the related statements of
operations, partners' equity and cash flows for each of the years in the three
year period ended December 31, 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Corvallis MRI as of December
31, 1995 and 1994, and the results of its operations and its cash flows for each
of the years in the three year period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 18, 1996
F-93
<PAGE>
CORVALLIS MRI
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 196,610 $ 140,235 $ 492,253
Accounts receivable (net of allowance for contractual discounts and
doubtful accounts of approximately $94,000, $120,000 and $80,000
at December 31, 1994, 1995 and September 30, 1996,
respectively)..................................................... 330,776 444,095 318,152
Related party receivable............................................ -- 22,244 --
Prepaid expenses.................................................... -- 12,103 2,912
Other............................................................... -- -- 15,000
------------ ------------ -------------
Total current assets.............................................. 527,386 618,677 828,317
------------ ------------ -------------
EQUIPMENT............................................................. 1,977,791 1,979,258 2,000,363
Less--Accumulated depreciation...................................... (423,463) (691,215) (897,305 )
------------ ------------ -------------
1,554,328 1,288,043 1,103,058
------------ ------------ -------------
OTHER ASSETS.......................................................... -- -- 43,750
------------ ------------ -------------
Total assets...................................................... $ 2,081,714 $ 1,906,720 $ 1,975,125
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................... $ 11,278 $ 10,336 $ 2,851
Current portion of contribution payable............................. -- -- 15,000
Current portion of long-term debt................................... 313,885 336,047 353,480
------------ ------------ -------------
Total current liabilities......................................... 325,163 346,383 371,331
------------ ------------ -------------
LONG-TERM DEBT, LESS CURRENT PORTION.................................. 1,132,782 796,735 529,656
LONG-TERM CONTRIBUTION PAYABLE, LESS CURRENT PORTION.................. -- -- 45,000
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY:
Equity--Corvallis Radiology P.C..................................... 207,923 254,534 343,046
Equity--The Corvallis Clinic P.C.................................... 207,923 254,534 343,046
Equity--Samaritan Enterprises....................................... 207,923 254,534 343,046
------------ ------------ -------------
Total partners' equity............................................ 623,769 763,602 1,029,138
------------ ------------ -------------
Total liabilities and partners' equity............................ $ 2,081,714 $ 1,906,720 $ 1,975,125
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-94
<PAGE>
CORVALLIS MRI
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET PATIENT SERVICE REVENUE.................. $ 937,736 $ 1,303,800 $ 1,657,619 $ 1,238,095 $ 1,308,311
EXPENSES:
Operating expenses reimbursed to a related
party.................................... 218,435 208,245 231,205 165,839 212,226
Supplies................................... 78,704 129,474 159,126 116,244 101,470
Repairs and maintenance.................... 74,693 50,005 136,864 100,352 118,212
Depreciation............................... 189,537 265,278 267,752 200,814 206,090
Other administrative expenses.............. 121,894 93,578 39,488 28,666 58,440
---------- ------------ ------------ ------------ ------------
Total expenses........................... 683,263 746,580 834,435 611,915 696,438
---------- ------------ ------------ ------------ ------------
OPERATING INCOME............................. 254,473 557,220 823,184 626,180 611,873
OTHER INCOME (EXPENSES):
Interest income............................ 6,096 6,519 6,038 4,401 5,781
Interest expense........................... (2,088) (90,111) (89,389) (69,265) (52,118)
---------- ------------ ------------ ------------ ------------
Other income (expenses), net............. 4,008 (83,592) (83,351) (64,864) (46,337)
---------- ------------ ------------ ------------ ------------
Net income............................... $ 258,481 $ 473,628 $ 739,833 $ 561,316 $ 565,536
---------- ------------ ------------ ------------ ------------
---------- ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-95
<PAGE>
CORVALLIS MRI
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
CORVALLIS THE
FRANK RADIOLOGY CORVALLIS SAMARITAN
MOORE M.D. P.C. CLINIC P.C. ENTERPRISES TOTAL
---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992...................... $ 57,071 $ 114,142 $ 114,143 $ 95,119 $ 380,475
Allocation of net income...................... 38,772 77,544 77,545 64,620 258,481
Purchase of partnership interest.............. (95,843) (22,332) (22,333) (9,492) (150,000)
---------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1993...................... -- 169,354 169,355 150,247 488,956
Allocation of net income...................... -- 157,876 157,876 157,876 473,628
Cash distribution............................. -- (119,307) (119,308) (100,200) (338,815)
---------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1994...................... -- 207,923 207,923 207,923 623,769
Allocation of net income...................... -- 246,611 246,611 246,611 739,833
Cash distribution............................. -- (200,000) (200,000) (200,000) (600,000)
---------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1995...................... -- 254,534 254,534 254,534 763,602
Allocation of net income (unaudited).......... -- 188,512 188,512 188,512 565,536
Cash distribution (unaudited)................. -- (100,000) (100,000) (100,000) (300,000)
---------- ----------- ----------- ----------- ------------
BALANCE, September 30, 1996 (unaudited)......... $ -- $ 343,046 $ 343,046 $ 343,046 $ 1,029,138
---------- ----------- ----------- ----------- ------------
---------- ----------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-96
<PAGE>
CORVALLIS MRI
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 258,481 $ 473,628 $ 739,833 $ 561,316 $ 565,536
Amortization of contribution payable.................... -- -- -- -- 1,250
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation.......................................... 189,537 265,278 267,752 200,814 206,090
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.......... 127,329 (205,775) (113,319) (86,367) 125,943
Decrease (increase) in prepaid expenses............. 8,208 -- (12,103) (2,905) 9,191
Decrease (increase) in related party receivable..... -- -- (22,244) (22,244) 22,244
(Decrease) increase in accounts payable............. -- 11,278 (942) 564 (7,485)
------------- ----------- ----------- ----------- -----------
Net cash provided by operating activities............. 583,555 544,409 858,977 651,178 922,769
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment.................................. (1,739,276) (80,535) (1,467) -- (21,105)
------------- ----------- ----------- ----------- -----------
Net cash used by investing activities................. (1,739,276) (80,535) (1,467) -- (21,105)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments of long-term debt.................. (98,009) (278,865) (313,885) (233,436) (249,646)
New borrowings of long-term debt........................ 1,600,000 -- -- -- --
Purchase of partnership interest........................ (20,000) -- -- -- --
Distributions to partners............................... -- (338,815) (600,000) (225,000) (300,000)
------------- ----------- ----------- ----------- -----------
Net cash provided (used) by financing activities.... 1,481,991 (617,680) (913,885) (458,436) (549,646)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...... 326,270 (153,806) (56,375) 192,742 352,018
CASH AND CASH EQUIVALENTS, beginning of period............ 24,146 350,416 196,610 196,610 140,235
------------- ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................. $ 350,416 $ 196,610 $ 140,235 $ 389,352 $ 492,253
------------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 2,088 $ 90,111 $ 89,389 $ 64,864 $ 52,118
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Purchase of partnership interest in exchange for note
payable............................................... $ 130,000 $ -- $ -- $ -- $ --
Pledge of contribution payable.......................... -- -- -- -- 60,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-97
<PAGE>
CORVALLIS MRI
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Corvallis MRI (the Partnership) is an Oregon joint venture engaged in
providing Magnetic Resonance Imaging (MRI) services to patients in Corvallis,
Oregon and surrounding communities. The Partnership is owned equally by
Corvallis Radiology P.C. (CRPC), an Oregon professional corporation, The
Corvallis Clinic (TCC), an Oregon professional corporation and Samaritan
Enterprises (Enterprises), an Oregon corporation whose sole shareholder is
Samaritan, Inc.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with a
maturity of three months or less from the date of purchase.
EQUIPMENT
Equipment is recorded at cost including setup and installation. Maintenance
and repairs are expensed as incurred. Additions, which result in betterment of
operating performance or increased useful life of assets, are capitalized and
depreciated over the expected useful life. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss on disposition is recorded as
other income or expense. Depreciation is computed on the straight-line method
over the estimated useful lives of the respective assets generally, five to
seven years.
INCOME TAXES
Corvallis MRI is a partnership; therefore, the partners are individually
responsible for their respective share of taxes based upon the partners
respective taxable income. Accordingly, no income taxes have been provided in
the accompanying financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Partnership's financial instruments consist of cash and cash
equivalents, accounts receivable and debt instruments. At December 31, 1995 and
1994, the fair value of the Partnership's financial instruments approximated the
carrying value.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended September 30, 1995
and 1996 has not been audited by independent accountants. Certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been
F-98
<PAGE>
CORVALLIS MRI
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
condensed or omitted from the unaudited interim financial information. In the
opinion of the Partnership's management, the unaudited interim financial
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. Results of operations for the
interim periods are not necessarily indicative of the results of operations for
the respective full years.
2. NET PATIENT SERVICE REVENUE:
Net patient service revenue include amounts due from third-party payors
under agreements that provide for payments to the Partnership at rates different
from standard fees. These third-party payors include certain commercial
insurance companies, health maintenance organizations (HMOs) and preferred
provider organizations, as well as certain government programs such as Medicare
and Medicaid. Payments to the Partnership under these agreements are based on
prospectively determined rates and discounts from established charges.
A summary of the payment arrangements with major third-party payors follows:
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. The Partnership has agreements with third-party
payors that provide payments to the Partnership at amounts different from its
established rates. The difference between changes generated from agreements with
third-party payors and the related payment amounts are reflected as contractual
discounts.
MEDICARE AND MEDICAID
A significant portion of the Partnership's services is provided to Medicare
and Medicaid patients. Payments for these services are based on a prevailing fee
schedule.
OTHER PAYORS
The Partnership has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The basis
for payment to the Partnership under these agreements includes discounts from
established charges.
The following are the components of net patient service revenue:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross charges................... $ 1,191,787 $ 1,460,336 $ 1,953,303 $ 1,460,816 $ 1,590,449
Less--Contractual discounts..... (254,051) (156,536) (295,684) (222,721) (282,138)
------------ ------------ ------------ ------------ ------------
Net patient service revenue..... $ 937,736 $ 1,303,800 $ 1,657,619 $ 1,238,095 $ 1,308,311
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
F-99
<PAGE>
CORVALLIS MRI
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
3. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable, 6.78%; payable in monthly installments
of $31,339, including interest, due at January 1,
1999................................................. $ 1,338,098 $ 1,043,717 $ 809,495
Note payable to former partner, 6.5%; payable in
monthly installments of $2,185, including interest,
due at November 1, 1999.............................. 108,569 89,065 73,641
------------- ------------- -------------
1,446,667 1,132,782 883,136
Less--Current portion................................. (313,885) (336,047) (353,480)
------------- ------------- -------------
$ 1,132,782 $ 796,735 $ 529,656
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The notes have minimum payment schedules that call for the following
principal payments:
<TABLE>
<CAPTION>
DECEMBER 31,
- ------------------------------
<S> <C>
1996........................ $ 336,047
1997........................ 359,490
1998........................ 384,568
1999........................ 52,677
------------
$ 1,132,782
------------
------------
</TABLE>
4. RELATED PARTY TRANSACTIONS:
OPERATING LEASE
The Partnership leases facilities from Good Samaritan Hospital Corvallis
(the Hospital), a division of Samaritan, Inc., on a month-to-month basis. Rent
expense for the years ended December 31, 1993, 1994 and 1995 was $36,207,
$28,237 and $31,344, respectively, and $23,805 and $23,040 for the nine months
ended September 30, 1995 and 1996, respectively.
MANAGEMENT FEES
Beginning in 1994, the Partnership paid a management fee to the Hospital for
the day-to-day management of Corvallis MRI. Prior to 1995, CRPC provided
management services. Management fees for the years ended December 31, 1993, 1994
and 1995 and the nine months ended September 30, 1995 and 1996 were $23,125,
$22,663, $26,170, $26,603 and $26,903.
SALARIES, WAGES AND BENEFITS
The Hospital employs personnel for the operations of the Corvallis MRI. All
salary, wages and benefits are paid by the Hospital and reimbursed by the
Partnership. Salaries, wages and benefits for the
F-100
<PAGE>
CORVALLIS MRI
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. RELATED PARTY TRANSACTIONS: (CONTINUED)
years ended December 31, 1993, 1994 and 1995 were $159,103, $157,345 and
$173,691, respectively, and $115,431 and $162,283 for the nine months ended
September 30, 1995 and 1996, respectively.
5. SUBSEQUENT EVENT:
During August 1996, the Partnership made a pledge to a charity in the amount
of $75,000, payable in annual installments of $15,000 over 5 years beginning in
1996.
F-101
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Medford Clinic, P.C.:
We have audited the accompanying balance sheets of Medford Clinic, P.C. (an
Oregon professional service corporation) as of December 31, 1994 and 1995, and
the related statements of operations, cash flows and stockholders' equity for
each of the years in the three year period ended December 31, 1995. These
financial statements are the responsibility of Medford's management. Our
responsibility is to express an opinion on these 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Medford Clinic, P.C. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996
F-102
<PAGE>
MEDFORD CLINIC, P.C.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 415,332 $ 598,313 $ 878,292
Short-term investments.............................................. -- 1,000,000 1,000,000
Patient accounts receivable, net of allowances for contractual
discounts and uncollectible acounts of $3,709,893, $3,430,087 and
$3,315,699 at December 31, 1994 and 1995, and September 30, 1996,
respectively...................................................... 7,107,738 6,681,655 6,947,108
Healthcare receivables.............................................. 753,635 528,351 609,206
PPI Allocation Receivable........................................... -- -- 484,646
Inventories of drugs and supplies................................... 228,486 290,061 256,011
Prepaid expenses and deposits....................................... 267,554 502,463 59,345
------------- ------------- -------------
Total current assets.......................................... 8,772,745 9,600,843 10,234,608
------------- ------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$3,400,228, $4,432,795 and $5,274,706 at December 31, 1994 and 1995,
and September 30, 1996, respectively................................ 5,601,768 5,342,641 5,605,785
------------- ------------- -------------
LONG-TERM DEFERRED TAX ASSET.......................................... 120,807 22,213 25,399
------------- ------------- -------------
OTHER ASSETS:
Restricted investments.............................................. -- 206,802 243,574
Other............................................................... 38,433 72,476 53,021
------------- ------------- -------------
Total other assets............................................ 38,433 279,278 296,595
------------- ------------- -------------
Total assets.................................................. $ 14,533,753 $ 15,244,975 $ 16,162,387
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................... $ 680,934 $ 932,123 $ 985,312
Line of credit...................................................... 350,000 -- --
Accounts payable.................................................... 475,286 444,050 1,362,762
Income taxes payable................................................ -- -- 25,000
Accrued healthcare costs............................................ 105,852 486,183 600,659
Accrued compensation................................................ 1,961,743 2,090,690 3,269,459
Current deferred tax liability...................................... 2,157,624 2,406,068 2,163,590
Other liabilities................................................... 203,181 188,945 --
------------- ------------- -------------
Total current liabilities..................................... 5,934,620 6,548,059 8,406,782
------------- ------------- -------------
LONG-TERM DEBT, net of current portion................................ 5,459,011 4,931,980 4,183,975
------------- ------------- -------------
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES................. 626,268 599,347 1,215,668
------------- ------------- -------------
STOCKHOLDERS' EQUITY:
Common stock--
$10 stated value; 500 shares authorized; 57, 56 and 56 shares
outstanding at December 31, 1994 and 1995 and September 30,
1996, respectively.............................................. 570 560 560
Additional paid-in capital.......................................... 618 618 618
Retained earnings................................................... 2,512,666 3,164,411 2,354,794
Notes receivable from stockholders for purchase of stock............ -- -- (10)
------------- ------------- -------------
Total stockholders' equity.................................... 2,513,854 3,165,589 2,355,962
------------- ------------- -------------
Total liabilities and stockholders' equity.................... $ 14,533,753 $ 15,244,975 $ 16,162,387
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-103
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Fee-for-service, net........................... $ 22,805,323 $ 29,920,212 $ 33,950,789 $ 25,022,343 $ 24,830,671
Prepaid healthcare............................. 268,854 2,407,238 5,014,747 3,270,556 5,437,352
------------- ------------- ------------- ------------- -------------
Net revenues................................. 23,074,177 32,327,450 38,965,536 28,292,899 30,268,023
Less--Provider compensation and benefits....... 7,008,886 9,248,234 11,239,198 8,281,355 8,552,483
------------- ------------- ------------- ------------- -------------
Net revenue less compensation to providers... 16,065,291 23,079,216 27,726,338 20,011,544 21,715,540
------------- ------------- ------------- ------------- -------------
OPERATING EXPENSES:
Clinic salaries, wages and benefits............ 7,683,369 10,900,534 11,837,774 8,678,467 10,019,842
Purchased medical services..................... 757,687 919,621 2,282,558 1,307,426 2,959,750
Medical and office supplies.................... 3,368,179 4,676,022 5,577,638 4,293,271 3,936,746
General and administrative expenses............ 2,306,128 2,959,495 3,446,487 2,463,269 2,554,974
Provision for uncollectible accounts........... 395,950 1,026,983 868,441 651,331 766,895
Depreciation and
amortization................................. 592,479 917,626 1,124,753 791,803 851,085
Rent and lease expense......................... 701,675 1,056,982 1,139,027 834,154 803,971
------------- ------------- ------------- ------------- -------------
Total operating expenses..................... 15,805,467 22,457,263 26,276,678 19,019,721 21,893,263
------------- ------------- ------------- ------------- -------------
Operating income (loss)...................... 259,824 621,953 1,449,660 991,823 (177,723)
OTHER INCOME (EXPENSE):
Interest income................................ 19,032 27,549 96,899 45,250 94,290
Interest expense............................... (200,119) (324,378) (486,776) (379,863) (336,213)
Equity in income of affiliate.................. 49,614 -- -- -- --
------------- ------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES................ 128,351 325,124 1,059,783 657,210 (419,646)
INCOME TAX EXPENSE (BENEFIT)..................... 44,179 132,949 408,038 253,051 (245,664)
------------- ------------- ------------- ------------- -------------
NET INCOME (LOSS)................................ $ 84,172 $ 192,175 $ 651,745 $ 404,159 $ (173,982)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-104
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE
NUMBER PAID-IN RETAINED FROM
OF SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDERS TOTAL
------------- ----------- ------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992............. 34 $ 340 $ 670 $ 2,236,319 -- $ 2,237,329
Issuance of common stock............. 13 130 -- -- -- 130
Net income........................... -- -- -- 84,172 -- 84,172
-- --
----- ----- ------------ ------------
BALANCE, December 31, 1993............. 47 470 670 2,320,491 -- 2,321,631
Issuance of common stock............. 12 120 -- -- -- 120
Redemption of common stock........... (2) (20) (52) -- -- (72)
Net income........................... -- -- -- 192,175 -- 192,175
-- --
----- ----- ------------ ------------
BALANCE, December 31,1994.............. 57 570 618 2,512,666 -- 2,513,854
Issuance of common stock............. 5 50 -- -- -- 50
Redemption of common stock........... (6) (60) -- -- -- (60)
Net income........................... -- -- -- 651,745 -- 651,745
-- --
----- ----- ------------ ------------
BALANCE, December 31, 1995............. 56 560 618 3,164,411 -- 3,165,589
Net loss (unaudited)................. -- -- -- (173,982) -- (173,982)
Issuance of common stock
(unaudited)........................ 1 10 -- -- (10) --
Redemption of common stock
(unaudited)........................ (1) (10) -- -- -- (10)
Costs incurred related to Physician
Partners, Inc. transaction
(unaudited)........................ -- -- -- (635,635) -- (635,635)
-- --
----- ----- ------------ ------------
BALANCE, September 30, 1996
(unaudited).......................... 56 $ 560 $ 618 $ 2,354,794 (10) $ 2,355,962
-- --
-- --
----- ----- ------------ ------------
----- ----- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-105
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 84,172 $ 192,175 $ 651,745 $ 404,159 $ (173,982)
Adjustment to reconcile net income to
net cash provided by (used in)
operating activities--
Depreciation and amortization....... 592,479 917,626 1,124,753 791,803 851,085
Equity in income of affiliates...... (49,614) -- -- -- --
Deferred taxes...................... 89,937 153,943 347,038 154,244 (242,478)
Changes in operating assets and
liabilities:
Patient accounts receivable,
net............................. (1,866,122) (855,225) 426,083 586,827 (265,453)
Healthcare receivables............ -- (753,635) 225,284 429,467 (80,855)
PPI allocation receivable......... -- -- -- -- (484,646)
Inventories of drugs and
supplies........................ (46,428) (88,393) (61,575) (46,267) 34,050
Prepaid expenses and deposits..... 356,402 (54,838) (234,909) 59,768 443,118
Other assets...................... (707,226) 92,384 (34,043) 26,297 16,269
Accounts payable.................. 549,327 (119,659) (31,236) 580,635 918,712
Income taxes payable.............. -- -- -- -- 25,000
Accrued healthcare costs.......... -- 105,852 380,331 459,707 114,476
Accrued compensation and related
expenses........................ 688,832 (14,540) 128,947 972,158 1,178,769
Other liabilities................. (254,788) 116,057 (14,236) (203,181) (188,945)
Deferred compensation and other
long-term liabilities........... 64,123 61,742 (26,921) (20,505) 616,321
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities.......... (498,906) (246,511) 2,881,261 4,195,112 2,761,441
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment........................... (197,428) (3,288,103) (865,626) (532,409) (1,114,229)
Purchases of short-term investments... -- -- (1,206,802) (2,000,000) (36,772)
Proceeds from receipt of Rogue Valley
Dialysis dividends.................. 50,000 -- -- -- --
Cash received in purchase of Rogue
Valley Dialysis..................... 378,699 -- -- -- --
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
investing activities.......... 231,271 (3,288,103) (2,072,428) (2,532,409) (1,151,001)
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of
credit agreement.................... -- 350,000 -- -- --
Repayments under line of credit
agreement........................... -- -- (350,000) (350,000) --
Proceeds from issuance of long-term
debt................................ 2,706,997 2,999,055 467,224 -- --
Principal repayments of long-term
debt................................ (2,000,335) (259,834) (743,066) (144,148) (694,816)
Proceeds from issuance of common
stock............................... 130 120 50 -- --
Payments for redemption of common
stock............................... -- (72) (60) 30 (10)
Costs incurred related to Physician
Partners, Inc. transaction.......... -- -- -- -- (635,635)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities.......... 706,792 3,089,269 (625,852) (494,118) (1,330,461)
------------- ------------- ------------- ------------- -------------
INCREASE (DECREASE) IN CASH............. 439,157 (445,345) 182,981 1,168,585 279,979
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 421,520 860,677 415,332 415,332 598,313
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 860,677 $ 415,332 $ 598,313 $ 1,583,917 $ 878,292
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest................ $ 184,964 $ 311,965 $ 492,280 $ 378,394 $ 325,148
Cash paid (received) for income
taxes............................... (10,704) (20,994) 36,000 36,000 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-106
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During
1993, Medford purchased the remaining 50 percent ownership of Rogue Valley
Dialysis. In conjunction with the acquisition, assets acquired and liabilities
were assumed as follows:
<TABLE>
<S> <C>
Accounts receivable................................................... $ 308,036
Intangibles........................................................... 25,000
Property, plant and equipment......................................... 1,237,158
Long-term debt........................................................ (1,300,000)
Partnership interest.................................................. (648,893)
-------------
Cash received......................................................... $ 378,699
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-107
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. BUSINESS AND ORGANIZATION:
Medford Clinic, P.C. (Medford), an Oregon professional service corporation,
is a primary-care based, multi-specialty medical clinic. Medford was founded in
1946 with the belief that group practice offers the best means of promoting and
maintaining the highest standards of medical care.
As of September 30, 1996, Medford consists of approximately 588 employees
and 73 professional providers who offer a wide range of primary and specialty
care. In addition, Medford offers ancillary services such as radiology, pharmacy
and laboratory.
Medford also provides clinical dialysis services through its Rogue Valley
Dialysis Center division which was operated as a joint venture with Rogue Valley
Medical Center (RVMC) until 1993 when Medford purchased RVMC's interest in a
transaction accounted for as a purchase. Medford's sites are located in Southern
Oregon. A significant change in the demographics of this area may have an
adverse impact on the business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.
INVESTMENTS
Short-term and restricted investments are readily convertible to cash and
have original maturity dates that exceed three months. They are classified as
held-to-maturity and mature within one year of the financial statement date.
These investments are in commercial paper and the carrying value approximates
the fair value.
CONCENTRATION OF CREDIT RISK
Medford extends credit to patients covered by insurance programs such as
governmental programs (Medicare and Medicaid) and private insurers. Medford
manages credit risk with the various public and private insurance providers, as
deemed appropriate by management. Allowances for doubtful accounts have been
made for potential losses, where appropriate.
INVENTORIES OF DRUGS AND SUPPLIES
Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Maintenance, repairs and
minor replacements are expensed as incurred. When properties are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts and any gain or loss on disposition is recorded as
other income or expense. There were no disposals in 1993, 1994 and 1995.
F-108
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Estimated lives are as follows:
<TABLE>
<S> <C>
Building and building improvements............................... 7-30 years
Furniture and equipment.......................................... 5-12 years
</TABLE>
PROVIDER COMPENSATION AND BENEFITS
Provider compensation and benefits consists of the direct costs of patient
care providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, restricted investments,
short-term investments, patient receivables, amounts payable and accrued
liabilities are a reasonable estimate of their fair value based on the short
maturities of these instruments.
Interest rates that are currently available to Medford for issuance of debt
with similar terms and remaining maturities were used to estimate fair value for
debt issues. The current carrying value of debt approximates fair value.
Medford does not hold or issue financial instruments or derivative financial
instruments for trading purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ACCOUNTING FOR LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used, as well as for long-lived assets and certain identifiable intangibles
to be disposed of. Medford adopted the new standard in 1996. The effect of the
adoption was not material to Medford's financial position or results of
operations.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information for the interim periods ended September 30, 1995
and 1996 has not been audited by independent accountants. Certain information
and footnote disclosures normally included in the financial statements prepared
in accordance with generally accepted accounting principles have been
F-109
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
condensed or omitted from the unaudited interim financial information. In the
opinion of Medford's management, the unaudited interim financial information
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation. Results of operations for the interim periods
are not necessarily indicative of the results of operations for the respective
full years.
3. REVENUES:
Medford reports its revenues according to two principal types of payment
methodologies discussed below:
PREPAID HEALTHCARE
Medford contracts with various Health Maintenance Organizations (HMOs) to
provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to Medford by the HMO for plan
enrollees.
The majority of the HMO contracts are full-risk or modified full-risk
contracts. Under a full-risk contract, Medford assumes the obligation of
providing all healthcare services to enrollees and is obligated to reimburse
outside providers for services rendered to enrollees. Generally, such payments
to outside providers are limited to out-of-area services, emergency services and
services not currently offered by Medford. Modified full-risk contracts are
similar to full-risk contracts except that the HMO is obligated to pay for
out-of-area services.
Medford has entered into subcapitation agreements with certain of these
outside providers. Under these agreements, Medford prepays the outside provider
based upon enrollee/participant formulas in which the subprovider assumes the
risk of providing patient care. Additional limitations on losses are provided by
the payment of stop loss reinsurance premiums and through a percentage
limitation on overall savings or losses of the programs.
Medford has accrued the claims associated with services provided by outside
providers for which Medford is responsible, and an estimate of incurred but not
reported claims is included in accrued healthcare cost in the accompanying
financial statements.
FEE-FOR-SERVICE
Patient service revenues are recorded in the period in which services are
provided at established rates. Medford has agreements with third-party payors
that provide payments to Medford at amounts different from its established
rates. The difference between charges generated from agreements with third-party
payors and the related payment amounts are reflected as contractual discounts,
as shown below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
--------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fee-for-service, gross........ $ 27,067,613 $ 40,975,385 $ 43,299,335 $ 33,677,598 $ 34,677,681
Contractual discounts......... 4,262,290 11,055,173 9,348,546 8,655,255 9,847,010
------------- ------------- ------------- ------------- -------------
Fee-for-service, net.......... $ 22,805,323 $ 29,920,212 $ 33,950,789 $ 25,022,343 $ 24,830,671
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
F-110
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
3. REVENUES: (CONTINUED)
A summary of the most significant fee-for-service arrangements is as
follows:
MEDICARE
A significant portion of Medford's services are provided to Medicare
patients. Payments for Medicare outpatient services which are not
covered under capitated contracts are based on a prevailing fee
schedule. Approximately 37, 22, 27 and 21 (unaudited) percent of net
patient service revenues were derived from services provided to
fee-for-service Medicare patients in 1993, 1994 and 1995, and the nine
months ended September 30, 1996, respectively.
MEDICAID
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 4, 2, 2 and 1 (unaudited) percent of net patient service
revenues were derived from services provided to fee-for-service Medicaid
patients in 1993, 1994 and 1995, and the nine months ended September 30,
1996, respectively.
OTHER PAYORS
Medford has also entered into payment agreements with certain commercial
insurance carriers and preferred provider organizations. The basis for
payment to Medford under these agreements includes discounts from
established charges.
MAJOR CUSTOMER
One customer represented individually more than ten percent of Medford's net
revenue as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
--------- --------- --------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Blue Cross/Blue Shield of Oregon......... 16% 14% 16% 22%
</TABLE>
F-111
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and land improvements............................. $ 204,134 $ 204,134 $ 204,134
Buildings and leasehold improvements................... 1,881,703 1,910,507 2,151,135
Furniture and equipment................................ 6,913,547 7,647,654 8,471,555
Construction in progress............................... 2,612 13,141 53,667
------------- ------------- -------------
9,001,996 9,775,436 10,880,491
Less--Accumulated depreciation......................... (3,400,228) (4,432,795) (5,274,706)
------------- ------------- -------------
$ 5,601,768 $ 5,342,641 $ 5,605,785
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
5. INCOME TAX EXPENSE:
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109). SFAS 109 requires that Medford follow
the liability method of accounting for deferred income taxes. Differences
between financial reporting and tax basis is primarily due to the use of the
cash method of accounting for income tax purposes. At December 31, 1995, Medford
has approximately $400,000 and $800,000 of net operating loss carryforwards for
federal and state income tax purposes, respectively, that expire in the year
2009.
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Medford's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Cash to accrual adjustments.......................... $ 788,030 $ 918,656 $ 2,350,531
Net operating loss and credit carryforwards.......... 962,046 329,478 329,478
Other................................................ 10,502 10,507 25,399
------------- ------------- -------------
Gross deferred tax assets.......................... 1,760,578 1,258,641 2,705,408
Less--Valuation allowance.............................. (329,478) (329,478) (329,478)
------------- ------------- -------------
Net deferred tax asset............................. 1,431,100 929,163 2,375,930
Deferred tax liabilities:
Cash to accrual adjustments.......................... (3,334,218) (3,174,258) (4,514,121)
Property related book to tax differences............. (133,699) (138,760) --
------------- ------------- -------------
Gross deferred tax liabilities..................... (3,467,917) (3,313,018) (4,514,121)
------------- ------------- -------------
Net deferred tax liability......................... $ (2,036,817) $ (2,383,855) $ (2,138,191)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-112
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
5. INCOME TAX EXPENSE: (CONTINUED)
The net deferred tax liability is reflected in the accompanying balance
sheet as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax liability..................... $ (2,157,624) $ (2,406,068) $ (2,163,590)
Long-term deferred tax asset....................... 120,807 22,213 25,399
------------- ------------- -------------
$ (2,036,817) $ (2,383,855) $ (2,138,191)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal................................ $ -- $ -- $ -- $ -- $ --
State.................................. -- -- 61,000 45,000 --
Deferred:
Federal................................ 38,657 116,330 303,658 182,045 (214,956)
State.................................. 5,522 16,619 43,380 26,006 (30,708)
--------- --------- --------- --------- ----------
$ 44,179 $ 132,949 $ 408,038 $ 253,051 $ (245,664)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal tax at statutory rate............. $ 44,923 $ 113,793 $ 370,924 $ 230,046 $(146,877)
Add (deduct):
State income tax, net of federal
benefit............................... 3,589 10,802 67,828 32,864 (20,982)
Utilization of net operating loss and
other................................. (4,333) 8,354 (30,714) (9,859) (77,805)
--------- --------- --------- --------- ---------
$ 44,179 $ 132,949 $ 408,038 $ 253,051 $(245,664)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-113
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT:
Long-term debt at December 31, 1994 and 1995, and September 30, 1996 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Equipment loan with bank, interest at 7.25%, payable in
monthly installments of $22,169, maturing July 1, 2014,
secured by equipment, furniture and fixtures and
accounts receivable.................................... $ 944,572 $ 865,254 $ 711,894
Note payable with title company, interest at 7.90%,
payable in monthly installments of $6,227, maturing
July 1, 2013, secured by equipment, furniture and
fixtures............................................... 726,890 708,954 694,545
Equipment loan with bank, interest at 7.25%, payable in
monthly installments of $25,868, maturing June 1, 2002,
secured by equipment, furniture and fixtures, and
accounts receivable.................................... 1,295,347 1,585,450 1,437,690
Equipment loan with bank, interest at 7.75%, interest due
monthly, maturing May 1, 1999, secured by equipment and
accounts receivable.................................... 2,025,036 1,626,095 1,303,451
Facilities loan with bank, interest at 9.00%, payable in
monthly installments of $3,651, maturing September 1,
1998, secured by equipment, furniture and fixtures, and
accounts receivable.................................... 169,645 140,118 115,776
Mortgage with bank, interest at 8.25%, payable in monthly
installments of $4,987, maturing September 1, 2007,
secured by first deed on real property and equipment,
and furniture and fixtures............................. 494,315 474,520 458,568
Mortgage with bank, interest at 8.25%, recalculated on a
three year basis on a predetermined interest rate
formula, payable in monthly installments of principal
plus interest of $1,820, maturing December 15, 2014,
secured by first deed on real property and equipment,
furniture and fixtures................................. 228,750 225,639 223,234
Mortgage with bank, interest at 8.25%, recalculated on a
three year basis on a predetermined interest rate
formula, payable in monthly installments of principal
plus interest of $3,145, maturing December 15, 2001,
secured by second deed on real property and equipment,
furniture and fixtures................................. 255,390 238,073 224,129
------------- ------------- -------------
Total long-term debt................................. 6,139,945 5,864,103 5,169,287
Less--Current portion.................................... (680,934) (932,123) (985,312)
------------- ------------- -------------
Long-term debt, net of current portion............... $ 5,459,011 $ 4,931,980 $ 4,183,975
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-114
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
6. LONG-TERM DEBT: (CONTINUED)
Maturities of long-term debt for the next five years, including current
maturities, are as follows:
<TABLE>
<S> <C>
1996.......................... $ 932,123
1997.......................... 1,014,576
1998.......................... 1,094,935
1999.......................... 771,116
2000.......................... 357,609
Thereafter.................... 1,693,744
-------------
Total..................... $ 5,864,103
-------------
-------------
</TABLE>
In 1994, Medford arranged a borrowing agreement with a bank providing a line
of credit for short-term working capital needs of up to $1,000,000 secured by
accounts receivable. The line of credit bears interest at the lender's prime
rate plus .25 percent. At December 31, 1994, Medford had drawn $350,000 on this
line of credit. The line of credit was due May 1995 and paid in February 1995.
In May 1995, Medford renewed the above line of credit agreement with the
bank providing a line of credit for short-term working capital needs of up to
$500,000 secured by accounts receivable. At December 31, 1995 and September 30,
1996, Medford had no outstanding balance related to this line of credit. The
Agreement expires January 15, 1997 and is expected to be renewed.
7. RETIREMENT PLANS:
Medford has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all
employees are eligible to participate subject to certain eligibility criteria.
The 401(k) Plan permits employees to contribute up to 15 percent of their annual
compensation (not to exceed certain annual limits imposed by the Internal
Revenue Code). Medford may also make discretionary contributions, which are
immediately 100 percent vested. Medford also has a Money-Purchase Pension Plan
in which all employees are eligible to participate subject to certain
eligibility criteria. Medford contributes 5.7 percent of the employee's eligible
earnings up to $62,481 and 11.4 percent of eligible earnings in excess of
limitations imposed by the Internal Revenue Service, $62,481 at December 31,
1995. These contributions are 100 percent vested upon eligibility.
Medford's contributions for these plans for the years ended December 31,
1993, 1994 and 1995, and the nine months ended September 30, 1996 were
approximately $1,245,844, $830,635, $1,529,030 and $1,242,712 (unaudited),
respectively.
8. PROFESSIONAL LIABILITY:
Medford maintains a claims-made professional liability insurance policy. The
policy coverage is $1,000,000 per claim per physician, with an aggregate maximum
benefit of $3,000,000 per year. Accruals for outstanding claims and the
associated deductibles are made in the period in which the event becomes known.
Medford also accrues an actuarial estimate of the future liability for claims
incurred but not made prior to the end of the accounting period.
F-115
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
9. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
Future minimum rental payments under operating leases that have initial or
remaining noncancellable lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1996.......................... $ 1,115,432
1997.......................... 1,037,686
1998.......................... 822,101
1999.......................... 693,037
2000.......................... 643,597
Thereafter.................... 3,217,985
-------------
Total..................... $ 7,529,838
-------------
-------------
</TABLE>
LEGAL PROCEEDINGS
Medford is subject to various legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, although the
ultimate dispositions of these proceedings are not determinable, adverse
determinations in any or all of such proceedings would not have a material
adverse effect upon the financial position or results of operations of Medford.
10. SUBSEQUENT EVENTS:
PHYSICIAN PARTNERS, INC.
The Board of Directors of Medford has approved a Reorganization and Merger
Agreement (the Agreement) dated July 29, 1996 together with the Boards of
HealthFirst Medical Group, P.C.; The Corvallis Clinic, P.C.; and Physician
Partners, Inc. (PPI), a newly formed company. This Agreement is subject to the
approval of the shareholders of the three medical groups.
This transaction would result in a separation of operations of the three
founding medical groups between medical professional services activities (i.e.,
providers of medical services) and the physician practice management activities
of the business. The professional services activities would be spun off into
newly formed professional corporations (New PCs). The physician practice
management business, along with substantially all of the assets and liabilities
of the three founding medical groups, i.e., accounts receivable, property,
plant, equipment, contracts, payables, accruals and debt, would be transferred
to PPI. When the transaction becomes effective, the shareholders of the existing
founding clinics will become the original shareholders of PPI.
An integral part of the reorganization is a 40-year management agreement
whereby PPI would provide physician practice management services to the New PCs.
Services to be provided would include management and administrative services,
capital resources, facilities, equipment and supplies.
As consideration, PPI would be entitled to (a) reimbursement of all
managerial costs and expenses (Manager's Expenses) incurred by PPI and (b) a
management fee equal to 16 percent of the Distributable Profit Amount (defined
as (i) gross revenues, booked on an accrual basis and subtracting contractual
discounts and bad debts, received by PPI or the New PCs relating to services
provided by the New PCs less (ii) Manager's Expense).
F-116
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
10. SUBSEQUENT EVENTS: (CONTINUED)
The New PCs would be responsible for providing medical services and the
related costs for provider compensation and benefits.
The parties to the reorganization transaction will receive an opinion from
tax counsel that for federal income tax purposes, it is more likely than not
that the reorganization will be a tax-free transaction. No ruling will be
requested from the Internal Revenue Service regarding the tax consequences of
the transaction. If the IRS or tax court were to determine that the transactions
were not tax free, there would be significant adverse tax consequence to the
parties to the transaction and their respective shareholders.
The Agreement contemplates that each of the three founding medical groups
will adopt a stock option plan for certain of its employees and grant new
options to purchase shares of its capital stock. Such options would then be
converted into an option to purchase PPI stock.
In anticipation of the consummation of the reorganization transaction,
various individuals have entered into Employment Agreements with PPI which
provide for base compensation, incentive bonuses, stock options and awards,
termination benefits and, in certain cases, severance compensation in the event
the transaction is not consummated prior to January 31, 1997. The obligations of
PPI under certain of these agreements are guaranteed by the three founding
medical groups.
In connection with the reorganization transaction, the three founding
medical groups have entered into an Expense Sharing Agreement which establishes
the basis upon which certain costs incurred in connection with the transactions
are to be allocated between the three groups.
In accordance with the terms of the reorganization Agreement, if one of the
parties terminates the Agreement, in certain circumstances, it may be liable to
other parties to pay all of their expenses incurred in connection with the
transaction.
F-117
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited, in accordance with generally accepted auditing standards,
the financial statements of HealthFirst Medical Group, P.C., The Suburban
Medical Clinic, Inc., The Corvallis Clinic, P.C., Corvallis MRI and Medford
Clinic, P.C. included in this registration statement and have issued our reports
thereon dated September 6, 1996. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The schedules of
analysis of changes in the allowance for contractual discounts and uncollectible
accounts are the responsibility of each Company's management and are presented
for purposes of complying with the requirements of the Securities and Exchange
Commission s rules and are not a required part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statement and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon,
September 6, 1996
F-118
<PAGE>
HEALTHFIRST MEDICAL GROUP, P.C.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ----------- --------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ----------- --------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ------------
<S> <C> <C> <C> <C> <C>
1993 $ 580,000 $ 4,023,753 $ (3,061,044) $ (640,340) $ 902,369
1994 902,369 6,295,933 (5,180,981) (907,128) 1,110,193
1995 1,110,193 7,696,184 (6,165,298) (1,079,470) 1,561,609
</TABLE>
F-119
<PAGE>
THE SUBURBAN MEDICAL CLINIC, INC.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ----------- --------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ----------- --------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ------------
<S> <C> <C> <C> <C> <C>
1993 $ 174,591 $ 823,295 $ (607,011) $ (107,960) $ 282,915
1994 282,915 1,217,261 (885,097) (301,360) 313,719
1995 313,719 1,207,149 (1,030,529) (183,286) 307,053
</TABLE>
F-120
<PAGE>
THE CORVALLIS CLINIC, P.C.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ------------- --------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ------------- --------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ------------
<S> <C> <C> <C> <C> <C>
1993 $1,337,325 $ 6,045,520 $ (4,434,830) $ (914,784) $ 2,033,231
1994 2,033,231 6,765,684 (5,557,955) (1,178,960) 2,062,000
1995 2,062,000 6,841,932 (5,128,654) (1,783,278) 1,992,000
</TABLE>
F-121
<PAGE>
CORVALLIS MRI
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ----------- --------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ----------- --------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ------------
<S> <C> <C> <C> <C> <C>
1993 $ 50,139 $ 245,051 $ (168,675) $ -- $ 126,515
1994 126,515 156,536 (188,709) -- 94,342
1995 94,342 295,684 (269,739) -- 120,287
</TABLE>
F-122
<PAGE>
MEDFORD CLINIC, P.C.
ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CONTRACTUAL DISCOUNTS
AND UNCOLLECTIBLE ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ------------------- ------------ ------------------------- -------------
BALANCE AT BALANCE AT
DESCRIPTION BEGINNING OF PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
- ----------- ------------------- ------------ ------------------------- -------------
CONTRACTUAL BAD DEBT
DISCOUNTS WRITE-OFFS
------------ ----------
<S> <C> <C> <C> <C> <C>
1993 $1,359,451 $ 4,658,240 $ (4,110,378) $ (381,839) $1,525,474
1994 1,525,474 12,082,156 (9,056,430) (841,307) 3,709,893
1995 3,709,893 10,216,987 (9,604,566) (892,227) 3,430,087
</TABLE>
F-123
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION AND MERGER, dated
as of September 19, 1996 (this "Agreement"), among PHYSICIAN PARTNERS, INC., a
newly-formed Delaware corporation ("PPI"), THE CORVALLIS CLINIC, P.C., an Oregon
professional corporation ("Corvallis"), HEALTHFIRST MEDICAL GROUP, P.C., an
Oregon professional corporation ("HealthFirst"), and MEDFORD CLINIC, P.C., an
Oregon professional corporation ("Medford" and, together with Corvallis and
HealthFirst, referred to herein, collectively, as the "Companies").
WHEREAS, each of Corvallis, Medford and HealthFirst is a professional
medical corporation which employs physicians and other professionals, all of
whom are duly licensed and authorized to practice, in the case of physicians,
medicine or, in the case of other professionals, the respective professions of
such other professionals in the State of Oregon and who are experienced in the
rendering of medical services treatment;
WHEREAS, the board of directors of Corvallis has concluded that it would be
in the best interests of Corvallis and its shareholders to effect a
reorganization of its corporate structure and a business combination resulting
in a consolidation of certain of its operations with those of HealthFirst and
Medford, upon the terms and subject to the conditions set forth herein;
WHEREAS, the board of directors of HealthFirst has concluded that it would
be in the best interests of HealthFirst and its shareholders to effect a
reorganization of its corporate structure and a business combination resulting
in a consolidation of certain of its operations with those of Corvallis and
Medford, upon the terms and subject to the conditions set forth herein;
WHEREAS, the board of directors of Medford has concluded that it would be in
the best interests of Medford and its shareholders to effect a reorganization of
its corporate structure and a business combination resulting in a consolidation
of certain of its operations with those of Corvallis and HealthFirst, upon the
terms and subject to the conditions set forth herein;
WHEREAS, the board of directors of PPI has concluded that it would be in the
best interests of PPI to effect a business combination with Corvallis,
HealthFirst and Medford pursuant to a merger of such entities with and into PPI
(referred to herein as the "Merger") on the terms and subject to the conditions
set forth herein;
WHEREAS, it is intended that the PC Reorganizations (as such term is defined
in Section 1.2(c) hereof) and the Merger constitute, for federal income tax
purposes, "tax-free" reorganizations under Section 355 and Section 368 of the
Internal Revenue Code of 1986, as amended (referred to herein as the "Code"),
and the regulations promulgated thereunder;
WHEREAS, PPI, Corvallis, HealthFirst and Medford have entered into the
Agreement and Plan of Reorganization and Merger, dated as of July 29, 1996 (the
"Old Reorganization and Merger Agreement"), to effect the PC Reorganizations and
the Merger;
WHEREAS, pursuant to the Old Reorganization and Merger Agreement, (i)
Corvallis has incorporated, as a wholly-owned subsidiary thereof, a professional
corporation ("Corvallis New PC") under the Oregon Professional Corporation Act,
(ii) HealthFirst has incorporated, as a wholly-owned subsidiary thereof, a
professional corporation ("HealthFirst New PC") under the Oregon Professional
Corporation Act and (iii) Medford has incorporated, as a wholly-owned subsidiary
thereof, a professional corporation ("Medford New PC"); and
WHEREAS, PPI and the Companies wish to amend and restate the Old
Reorganization and Merger Agreement upon the terms and subject to the conditions
set forth herein;
A-1
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE I
PROFESSIONAL CORPORATION TRANSACTIONS
SECTION 1.1 PC INCORPORATION AND DISTRIBUTIONS. (a)(i) Prior to the
Effective Time (as such term is defined in Section 2.2 hereof), Corvallis shall
amend and restate the Articles of Incoporation of Corvallis New PC under the
Oregon Professional Corporation Act by filing the Restated Articles of
Incorporation of Corvallis New PC, substantially in the form attached hereto as
Exhibit A-1 or with such changes therein as are reasonably acceptable to PPI and
the other Companies, with the Secretary of State of the State of Oregon, and
adopt Bylaws of Corvallis New PC, substantially in the form attached hereto as
Exhibit A-2 or with such changes therein as are reasonably acceptable to PPI and
the other Companies (referred to herein, collectively, as the "Corvallis New PC
Incorporation").
(ii) As promptly as practicable after the approval of the Corvallis
Reorganization (as such term is defined in Section 1.2(a) hereof) and the Merger
by the requisite number of shareholders of Corvallis and upon satisfaction of
other closing conditions set forth in Article VII hereof, except for the
consummation of the PC Reorganizations and the execution and delivery of the
Management Agreements (as such term is defined in Section 1.3 hereof) by the
parties thereto, Corvallis shall (A) transfer certain of its assets (referred to
herein, collectively, as the "Corvallis New PC Assets") relating to the provider
professional services business of Corvallis, which assets are set forth on
Schedule 1.1(a)(ii) attached hereto, to Corvallis New PC, and cause Corvallis
New PC to assume the liabilities of Corvallis relating to the Corvallis New PC
Assets, and (B) make a distribution in accordance with Section 60.181 of the
Oregon Business Corporation Act under which the then-current shareholders of
Corvallis shall receive all of the issued and outstanding shares of Corvallis
New PC, allocated on a pro rata basis in accordance with the fair market value
of each such shareholder's then current equity interest in Corvallis (such
transfer and distribution being referred to herein, collectively, as the
"Corvallis Distribution"); PROVIDED, HOWEVER, that, at the option of Corvallis,
such allocation may be made on a basis other than in accordance with the fair
market value of each such shareholder's then-current equity in Corvallis so long
as such distribution would not cause adverse tax or other consequences for the
other Companies or their respective shareholders with respect to (y) the
qualification of the HealthFirst Distribution or the Medford Distribution as a
"reorganization" within the meaning of Section 355 of the Code or (z) the
qualification of the Merger as a "reorganization" within the meaning of Section
368 of the Code.
(b)(i) Prior to the Effective Time, HealthFirst shall amend and restate the
Articles of Incorporation of HealthFirst New PC under the Oregon Professional
Corporation Act by filing the Restated Articles of Incorporation of HealthFirst
New PC, substantially in the form attached hereto as Exhibit A-1 or with such
changes therein as are reasonably acceptable to PPI and the other Companies,
with the Secretary of State of the State of Oregon, and adopt Bylaws of
HealthFirst New PC, substantially in the form attached hereto as Exhibit A-2 or
with such changes therein as are reasonably acceptable to PPI and the other
Companies (referred to herein, collectively, as the "HealthFirst New PC
Incorporation").
(ii) As promptly as practicable after the approval of the HealthFirst
Reorganization (as such term is defined in Section 1.2(b) hereof) and the Merger
by the requisite number of shareholders of HealthFirst and upon satisfaction of
other closing conditions set forth in Article VII hereof, except for the
consummation of the PC Reorganizations and the execution and delivery of the
Management Agreements by the parties thereto, HealthFirst shall (A) transfer
certain of its assets (referred to herein, collectively, as the "HealthFirst New
PC Assets") relating to the provider professional services business of
HealthFirst, which assets are set forth on Schedule 1.1(b)(ii) attached hereto,
to HealthFirst New PC, and cause HealthFirst New PC to assume the liabilities of
HealthFirst relating to the HealthFirst New PC Assets, and (B) make a
distribution in accordance with Section 60.181 of the Oregon Business
Corporation Act under which the
A-2
<PAGE>
then-current shareholders of HealthFirst shall receive all of the issued and
outstanding shares of HealthFirst New PC, allocated on a pro rata basis in
accordance with the fair market value of each such shareholder's then-current
equity interest in HealthFirst (such transfer and distribution being referred to
herein, collectively, as the "HealthFirst Distribution").
(c)(i) Prior to the Effective Time, Medford shall amend and restate the
Articles of Incoporation of Medford New PC under the Oregon Professional
Corporation Act by filing the Restated Articles of Incorporation of Medford New
PC, substantially in the form attached hereto as Exhibit A-1 or with such
changes therein as are reasonably acceptable to PPI and the other Companies,
with the Secretary of State of the State of Oregon, and adopt Bylaws of Medford
New PC, substantially in the form attached hereto as Exhibit A-2 or with such
changes therein as are reasonably acceptable to PPI and the other Companies
(referred to herein, collectively, as the "Medford New PC Incorporation").
(ii) As promptly as practicable after the approval of the Medford
Reorganization (as such term is defined in Section 1.2(c) hereof) and the Merger
by the requisite number of shareholders of Medford and upon satisfaction of
other closing conditions set forth in Article VII hereof, except for the
consummation of the PC Reorganizations and the execution and delivery of the
Management Agreements by the parties thereto, Medford shall (A) transfer certain
of its assets (referred to herein, collectively, as the "Medford New PC Assets")
relating to the provider professional services business of Medford, which assets
are set forth on Schedule 1.1(c)(ii) attached hereto, to Medford New PC, and
cause Medford New PC to assume the liabilities of Medford relating to the
Medford New PC Assets, and (B) make a distribution in accordance with Section
60.181 of the Oregon Business Corporation Act under which the then-current
shareholders of Medford shall receive all of the issued and outstanding shares
of Medford New PC, allocated on a pro rata basis in accordance with the fair
market value of each such shareholder's then-current equity interest in Medford
(such transfer and distribution being referred to herein, collectively, as the
"Medford Distribution").
SECTION 1.2 PC CONVERSIONS. (a) As promptly as practicable after the
approval of the Corvallis Reorganization and the Merger by the requisite number
of shareholders of Corvallis, and upon satisfaction of other closing conditions
set forth in Article VII, hereof, the consummation of the Corvallis New PC
Incorporation and the Corvallis Distribution described in Section 1.1(a) hereof
and upon satisfaction of other closing conditions set forth in Article VII
hereof, except for the execution and delivery of the Management Agreements by
the parties thereto, Corvallis shall convert from an Oregon professional
corporation to an Oregon business corporation (such conversion being referred to
herein as the "Corvallis Conversion" and, together with the Corvallis New PC
Incorporation and the Corvallis Distribution, collectively, as the "Corvallis
Reorganization") by filing Restated Articles of Incorporation, substantially in
the form attached hereto as Exhibit B or with such changes therein as are
reasonably acceptable to PPI and the other Companies, together with the required
fee, with the Secretary of State of the State of Oregon in accordance with
Section 58.125(2) of the Oregon Professional Corporation Act and Section 60.451
of the Oregon Business Corporation Act (the Oregon Business Corporation Act and
the Oregon Professional Corporation Act are referred to herein, collectively, as
"Oregon Law").
(b) As promptly as practicable after the approval of the HealthFirst
Reorganization and the Merger by the requisite number of shareholders of
HealthFirst, the consummation of the HealthFirst New PC Incorporation and the
HealthFirst Distribution described in Section 1.1(b) hereof upon satisfaction of
other closing conditions set forth in Article VII hereof, except for the
execution and delivery of the Management Agreements by the parties thereto,
HealthFirst shall convert from an Oregon professional corporation to an Oregon
business corporation (such conversion being referred to herein as the
"HealthFirst Conversion" and, together with the HealthFirst New PC Incorporation
and the HealthFirst Distribution, collectively, as the "HealthFirst
Reorganization") by filing Restated Articles of Incorporation, substantially in
the form attached hereto as Exhibit B or with such changes therein as are
reasonably acceptable to PPI and the other Companies, together with the required
fee, with the Secretary of State of
A-3
<PAGE>
the State of Oregon in accordance with Section 58.125(2) of the Oregon
Professional Corporation Act and Section 60.451 of the Oregon Business
Corporation Act.
(c) As promptly as practicable after the approval of the Medford
Reorganization and the Merger by the requisite number of shareholders of
Medford, the consummation of the Medford New PC Incorporation and the Medford
Distribution described in Section 1.1(c) hereof and upon satisfaction of other
closing conditions set forth in Article VII hereof, except for the execution and
delivery of the Management Agreements by the parties thereto, Medford shall
convert from an Oregon professional corporation to an Oregon business
corporation (such conversion being referred to herein as the "Medford
Conversion" and, together with the Medford New PC Incorporation and the Medford
Distribution, collectively, as the "Medford Reorganization") by filing Restated
Articles of Incorporation, substantially in the form attached hereto as Exhibit
B or with such changes therein as are reasonably acceptable to PPI and the other
Companies, together with the required fee, with the Secretary of State of the
State of Oregon in accordance with Section 58.125(2) of the Oregon Professional
Corporation Act and Section 60.451 of the Oregon Business Corporation Act. The
Corvallis Reorganization, the HealthFirst Reorganization and the Medford
Reorganization are referred to herein, collectively, as the "PC
Reorganizations."
SECTION 1.3 MANAGEMENT AGREEMENTS. As promptly as practicable after the
approval of the respective PC Reorganizations and the Merger by the requisite
number of shareholders of Corvallis, HealthFirst and Medford, the consummation
of the PC Reorganizations described in Sections 1.1 and 1.2 hereof and upon
satisfaction of other closing conditions set forth in Article VII, (a) Corvallis
shall enter into a Practice Management Agreement, in substantially the form
attached hereto as Exhibit C or with such changes therein as are reasonably
acceptable to PPI and the other Companies (referred to herein as the "Corvallis
Management Agreement"), with Corvallis New PC, (b) HealthFirst shall enter into
a Practice Management Agreement, in substantially the form attached hereto as
Exhibit C or with such changes therein as are reasonably acceptable to PPI and
the other Companies (referred to herein as the "HealthFirst Management
Agreement"), with HealthFirst New PC and (c) Medford shall enter into a Practice
Management Agreement, in substantially the form attached hereto as Exhibit C
(referred to herein as the "Medford Management Agreement" and, together with the
Corvallis Management Agreement and the HealthFirst Management Agreement,
referred to herein, collectively, as the "Management Agreements"), with Medford
New PC.
ARTICLE II
MERGER
SECTION 2.1 MERGER. Subject to and upon the terms and conditions of this
Agreement, Oregon Law and the General Corporation Law of the State of Delaware
(referred to herein as "Delaware Law"), at the Effective Time, Corvallis,
HealthFirst and Medford shall be merged with and into PPI, the separate
corporate existence of each of Corvallis, HealthFirst and Medford shall cease
and PPI shall continue under Delaware Law as the surviving corporation
(hereinafter sometimes referred to as the "Surviving Corporation").
SECTION 2.2 EFFECTIVE TIME. As promptly as practicable after the approval
of the respective PC Reorganizations and the Merger by the requisite number of
shareholders of Corvallis, HealthFirst and Medford, the consummation of the PC
Reorganizations described in Sections 1.1 and 1.2 hereof, the execution of the
Management Agreements described in Section 1.3 hereof and upon satisfaction of
all other closing conditions set forth in Article VII hereof, the Surviving
Corporation shall file (a) a certificate of merger relating to the Merger
(referred to herein as the "Certificate of Merger") with the Secretary of State
of the State of Delaware and (b) articles of merger relating to the Merger
(referred to herein as the "Articles of Merger") with the Secretary of State of
the State of Oregon. For purposes of this Agreement, the term "Effective Time,"
with respect to the Merger, means the date and time at which the Certificate of
Merger is successfully filed.
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SECTION 2.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all of the property, rights, privileges and powers of each of
Corvallis, HealthFirst and Medford shall vest in the Surviving Corporation, and
all debts, liabilities and obligations of each of Corvallis, HealthFirst and
Medford shall become the debts, liabilities and obligations of the Surviving
Corporation.
SECTION 2.4 PPI CERTIFICATE OF INCORPORATION; BYLAWS. At the Effective
Time, the Amended and Restated Certificate of Incorporation and the Bylaws of
PPI, as in effect immediately prior to the Effective Time (copies of which are
attached hereto as Exhibits D-1 and D-2, respectively) shall be the Certificate
of Incorporation and the Bylaws of the Surviving Corporation until thereafter
amended as provided by Delaware Law and such Certificate of Incorporation and
Bylaws.
SECTION 2.5 PPI DIRECTORS AND OFFICERS. At the Effective Time, the
directors and officers of PPI immediately prior to the Effective Time shall be
the directors and officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
SECTION 2.6 PPI EMPLOYMENT AGREEMENTS AND OPTION PLANS. Simultaneously
with the execution of this Agreement, PPI is entering into the Amended and
Restated Employment Agreements with each of David Goldberg, Tim Dupell and David
Kobriger, substantially in the forms attached hereto as Exhibit E-1, E-2 and
E-5, respectively, and Employment Agreements with Michael Bonazzola, M.D., Jerry
Erstgaard and Jon Ness, substantially in the forms attached hereto as Exhibit
E-3, E-4 and E-6. Prior to the Effective Time, each of the Companies shall use
all reasonable efforts to recommend to its shareholders for the approval and
adoption of (a) the Employee Stock Option Plan, substantially in the form
attached hereto as Exhibit F-1 or with such changes therein as are reasonably
acceptable to PPI and each of the Companies (referred to herein as the "PPI
Employee Option Plan"), (b) the Non-Employee Director Stock Option Plan,
substantially in the form attached hereto as Exhibit F-2 or with such changes
therein as are reasonably acceptable to PPI and each of the Companies (referred
to herein as the "PPI Non-Employee Director Option Plan"), (c) the Non-Employee
Provider Stock Option Plan, substantially in the form attached hereto as Exhibit
F-3 or with such changes therein as are reasonably acceptable to PPI and each of
the Companies (referred to herein as the "PPI Non-Employee Provider Option
Plan") and (d) the Change in Control Plan, substantially in the form attached
hereto as Exhibit F-4 or with such changes therein as are reasonably acceptable
to PPI and each of the Companies (referred to herein as the "PPI Change in
Control Plan").
SECTION 2.7 CONVERSION OF OLD PC SHARES IN MERGER. (a) At the Effective
Time, by virtue of the Merger and without any action on the part of any of
Corvallis, HealthFirst or Medford or any of their respective shareholders,
shares of capital stock of Corvallis, HealthFirst and Medford (referred to
herein, collectively, as "Old PC Shares") issued and outstanding immediately
prior to the Effective Time shall be converted at the Effective Time into the
right to receive shares of Class A Common Stock, par value $0.01 per share ("PPI
Class A Shares"), of PPI, in accordance with the following exchange ratios
(referred to herein as the "Exchange Ratios"), as applicable:
(i)(A) Each share of Class C Preferred Stock of Corvallis shall be
converted into the right to receive such number of PPI Class A Shares as
shall have an aggregate value of $100, with the value of each PPI Class A
Share being equal to the quotient obtained by dividing (I) the aggregate
number of PPI Shares to be issued pursuant to the Merger into (II) the
combined value of Corvallis, HealthFirst and Medford as a merged entity
based on the assumption that the Merger had occurred on June 30, 1996, as
determined by an independent valuation firm designated by Corvallis;
(B) Each share of Class A Preferred Stock of Corvallis shall be
converted into the right to receive such number of PPI Class A Shares as
shall have an aggregate value of $23,000, with the value of each PPI Class A
Share being equal to the quotient obtained by dividing (I) the aggregate
number of PPI
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Shares to be issued pursuant to the Merger into (II) the combined value of
Corvallis, HealthFirst and Medford as a merged entity based on the
assumption that the Merger had occurred on June 30, 1996, as determined by
an independent valuation firm designated by Corvallis; and
(C) Each share of Class B Common Stock of Corvallis shall be converted
into the right to receive such number of PPI Class A Shares as is equal to
the quotient obtained by dividing (I) the number of all issued and
outstanding shares of Class B Preferred Stock of Corvallis at the Effective
Time into (II) the excess of 2,247,750 PPI Class A Shares (which is equal to
the product of the Corvallis FTE as of June 1, 1996 multiplied by 27,000)
over the aggregate number of PPI Class A Shares into which all of the issued
and outstanding shares of Class A Preferred Stock of Corvallis and Class C
Preferred Stock of Corvallis are converted under paragraphs (A) and (B) in
this Section 2.7(a)(i);
PROVIDED, HOWEVER, that in the event of a reduction in the number of
Corvallis FTE (as such term is defined in Section 3.3(a) hereof) as of
October 1, 1996 from the Corvallis FTE as of June 1, 1996 only, the total
number of PPI Class A Shares allocated to Corvallis set forth in Clause II
of this Section 2.7(a)(i)(C) shall be reduced by an amount equal to the
product of the number of such reduction in the Corvallis FTE multiplied by
27,000 PPI Class A Shares;
(ii) Each Class A Share of HealthFirst shall be converted into the right
to receive 354 PPI Class A Shares; PROVIDED, HOWEVER, that (A) in the event
of a reduction in the number of HealthFirst FTE (as such term is defined in
Section 3.3(b) hereof) as of October 1, 1996 from the HealthFirst FTE as of
June 1, 1996 only, the Exchange Ratio for each Class A Share of HealthFirst
shall be reduced by an amount equal to the excess of (a) 354 over (b) the
quotient obtained by dividing (i) the total number of the issued and
outstanding shares of capital stock of HealthFirst into (ii) the product of
27,000 multiplied by the HealthFirst FTE as of October 1, 1996 and (B) in
the event any Class A shares of HealthFirst (collectively, the "New HF
Shares") are issued, at any time prior to the Effective Time, to any of the
12 non-shareholder provider employees of HealthFirst designated by
HealthFirst, the Exchange Ratio for each of Class A Shares of HealthFirst
and New HF Shares shall be reduced by an amount equal the excess of (a) 354
over (b) the quotient obtained by dividing (i) the aggregate number of all
issued and outstanding Class A Shares of Healthfirst and the New HF Shares
into (ii) the product of the HealthFirst FTE effective as of such date
multiplied by 27,000; and
(iii) Each share of Common Stock of Medford shall be converted into the
right to receive 27,474 PPI Class A Shares; PROVIDED, HOWEVER, that (A) in
the event of a reduction in the Medford FTE (as such term is defined in
Section 3.3(c) hereof) as of October 1, 1996 from the Medford FTE as of June
1, 1996 only, the Exchange Ratio for each share of Common Stock of Medford
shall be reduced by an amount equal to the excess of (a) 27,474 over (b) the
quotient obtained by dividing (i) the total number of the issued and
outstanding shares of Common Stock of Medford into (ii) the product of
27,000 multiplied by the Medford FTE as of October 1, 1996 and (B) in the
event any shares of Common Stock of Medford (collectively, the "New Medford
Shares") are issued, at any time prior to the Effective Time, to any of the
two non-shareholder provider employees of Medford designated by Medford, the
Exchange Ratio for each share of Common Stock of Medford and the New Medford
Shares shall be reduced by an amount equal the excess of (a) 27,474 over (b)
the quotient obtained by dividing (i) the aggregate number of all issued and
outstanding shares of Common Stock of Medford and the New Medford Shares
into (ii) the product of the Medford FTE effective as of such date
multiplied by 27,000.
(b) At the Effective Time, all Old PC Shares shall no longer be outstanding
and shall automatically be canceled and retired and shall cease to exist, and
each certificate previously evidencing any such Old PC Shares shall thereafter
evidence PPI Class A Shares. Each certificate evidencing Old PC Shares shall be
exchanged for one or more certificates evidencing PPI Class A Shares issued in
consideration therefor upon the surrender of such certificate evidencing Old PC
Shares in accordance with the provisions hereof.
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(c) Each share of Corvallis, HealthFirst or Medford held in the treasury
thereof immediately prior to the Effective Time shall be canceled and retired
and cease to exist, and no PPI Class A Shares shall be issued in exchange
therefor.
(d) At the Effective Time, all PPI Class Shares owned by Corvallis,
HealthFirst or Medford shall become treasury stock of PPI.
SECTION 2.8 STOCK OPTIONS. (a) At the Effective Time, Corvallis'
obligations with respect to each outstanding Corvallis Stock Option (as such
term is defined in Section 3.3(a) hereof), as amended pursuant to the following
sentence, shall be assumed by PPI. The Corvallis Stock Options so assumed by PPI
shall continue to have, and be subject to, the same terms and conditions set
forth in the stock option plans and agreements pursuant to which such Corvallis
Stock Options were issued as in effect immediately prior to the Effective Time,
except that (i) each such Corvallis Stock Option shall be exercisable for such
number of PPI Class A Shares as is equal to the product of (A) the number of
Class B Common Stock of Corvallis covered by such Corvallis Stock Option
immediately prior to the Effective Time multiplied by (B) Class B Common Stock
of Corvallis and (ii) the per share exercise price for PPI Class A Shares
issuable upon the exercise of such Corvallis Stock Option shall be equal to the
quotient determined by (A) dividing the exercise price per share of Class B
Common Stock of Corvallis into (B) the Exchange Ratio applicable to Class B
Common Stock of Corvallis. The date of the grant shall be deemed to be the
Effective Time. PPI shall (y) reserve for issuance the number of PPI Class A
Shares that will become issuable upon the exercise of such Corvallis Stock
Options pursuant to this Section 2.8(a) and (z) at the Effective Time, issue to
each holder of an outstanding Corvallis Stock Option a document evidencing the
assumption by PPI of the obligations of Corvallis with respect thereto under
this Section 2.8(a). Nothing in this Section 2.8(a) shall affect the schedule of
vesting with respect to the Corvallis Stock Options to be assumed by PPI as set
forth herein.
(b) At the Effective Time, HealthFirst's obligations with respect to each
outstanding HealthFirst Stock Option (as such term is defined in Section 3.3(b)
hereof), as amended pursuant to the following sentence, shall be assumed by PPI.
The HealthFirst Stock Options so assumed by PPI shall continue to have, and be
subject to, the same terms and conditions set forth in the stock option plans
and agreements pursuant to which such HealthFirst Stock Options were issued as
in effect immediately prior to the Effective Time, except that (i) each such
HealthFirst Stock Option shall be exercisable for such number of PPI Class A
Shares as is equal to the product of (A) the number of Old PC Shares of
HealthFirst covered by such HealthFirst Stock Option immediately prior to the
Effective Time multiplied by (B) 354 and (ii) the per share exercise price for
PPI Class A Shares issuable upon the exercise of such HealthFirst Stock Option
shall be equal to the quotient determined by (A) dividing the exercise price per
share of Old PC Shares of HealthFirst into (B) 354. The date of the grant shall
be deemed to be the Effective Time. PPI shall (y) reserve for issuance the
number of PPI Class A Shares that will become issuable upon the exercise of such
HealthFirst Stock Options pursuant to this Section 2.8(b) and (z) at the
Effective Time, issue to each holder of an outstanding HealthFirst Stock Option
a document evidencing the assumption by PPI of the obligations of HealthFirst
with respect thereto under this Section 2.8(b). Nothing in this Section 2.8(b)
shall affect the schedule of vesting with respect to the HealthFirst Stock
Options to be assumed by PPI as set forth herein.
(c) At the Effective Time, Medford's obligations with respect to each
outstanding Medford Stock Option (as such term is defined in Section 3.3(c)
hereof), as amended pursuant to the following sentence, shall be assumed by PPI.
The Medford Stock Options so assumed by PPI shall continue to have, and be
subject to, the same terms and conditions set forth in the stock option plans
and agreements pursuant to which such Medford Stock Options were issued as in
effect immediately prior to the Effective Time, except that (i) each such
Medford Stock Option shall be exercisable for such number of PPI Class A Shares
as is equal to the product of (A) the number of Old PC Shares of Medford covered
by such Medford Stock Option immediately prior to the Effective Time multiplied
by (B) 27,474 and (ii) the per share exercise price for PPI Class A Shares
issuable upon the exercise of such Medford Stock Option shall be equal to the
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quotient determined by (A) dividing the exercise price per share of Old PC
Shares of Medford into (B) 27,474. The date of the grant shall be deemed to be
the Effective Time. PPI shall (y) reserve for issuance the number of PPI Class A
Shares that will become issuable upon the exercise of such Medford Stock Options
pursuant to this Section 2.8(c) and (z) at the Effective Time, issue to each
holder of an outstanding Medford Stock Option a document evidencing the
assumption by PPI of the obligations of Medford with respect thereto under this
Section 2.8(c). Nothing in this Section 2.8(c) shall affect the schedule of
vesting with respect to the Medford Stock Options to be assumed by PPI as set
forth herein.
SECTION 2.9 EXCHANGE OF OLD PC SHARES. (a) No later than the Effective
Time, PPI shall make available, and each holder of Old PC Shares will be
entitled to receive, upon surrender to PPI of one or more certificates
evidencing such Old PC Shares for cancellation, certificates evidencing the
number of PPI Class A Shares into which such Old PC Shares are converted in the
Merger. PPI Class A Shares into which Old PC Shares are to be converted in the
Merger shall be deemed to have been issued at the Effective Time.
(b) As soon as reasonably practicable after the Effective Time, PPI shall
mail to each holder of record of a certificate or certificates evidencing
outstanding Old PC Shares which Old PC Shares were converted into PPI Class A
Shares pursuant to Section 2.7 hereof (i) a letter of transmittal (which shall
specify that risk of loss and title to such certificate or certificates
evidencing Old PC Shares shall pass only upon receipt of such certificates by
PPI in such form as PPI may reasonably specify) and (ii) instructions for use in
effecting the surrender of such certificates in exchange for certificates
evidencing PPI Class A Shares. Upon surrender of a certificate evidencing Old PC
Shares for cancellation to PPI together with such letter of transmittal, duly
executed, the holder of such certificate shall be entitled to receive in
exchange therefor a certificate evidencing such number of whole PPI Class A
Shares as such holder has the right to receive in respect of such certificate
evidencing Old PC Shares surrendered pursuant to the provisions of this Section
2.9.
(c) In the event that any certificate evidencing Old PC Shares shall have
been lost, stolen or destroyed, upon the making of an affidavit with respect
thereto by the person or entity claiming such certificate to be lost, stolen or
destroyed, as the case may be, PPI will issue or cause to be issued in exchange
for such lost, stolen or destroyed certificate the number of PPI Class A Shares
into which such Old PC Shares evidenced by such certificate are converted in the
Merger in accordance with Section 2.7 hereof. When authorizing any such
issuance, the board of directors of PPI may, in its discretion and as a
condition precedent to such issuance, require the owner of any such lost, stolen
or destroyed certificate to provide the Surviving Corporation a bond in such sum
as the Surviving Corporation may direct as indemnity, or provide such other form
of indemnity as the Surviving Corporation shall direct, with respect to any
claim that may be made against the Surviving Corporation with respect to such
certificate evidencing Old PC Shares alleged to have been lost, stolen or
destroyed.
SECTION 2.10 DIVIDENDS; TRANSFER TAXES. No dividends that are declared on
PPI Class A Shares will be paid to any person or entity entitled to receive
certificates evidencing PPI Class A Shares until such person or entity
surrenders its certificate or certificates evidencing Old PC Shares. Upon such
surrender, there shall be paid to such person or entity in which name the
certificates evidencing such PPI Class A Shares shall be issued any such
dividends which shall have become payable, but shall not have been paid, with
respect to such PPI Class A Shares between the Effective Time and the time of
such surrender. In no event shall any person or entity entitled to receive any
such dividends be entitled to receive interest on such dividends. If any
certificate for any PPI Class A Shares is to be issued in a name other than that
in which the certificate evidencing Old PC Shares surrendered in exchange
therefor is registered, it shall be a condition of such issuance that the person
or entity requesting such issuance shall (a) pay to PPI any transfer or other
taxes required by reason of the issuance of such certificate for such PPI Class
A Shares in a name other than that of the registered holder of such certificate
evidencing Old PC Shares so surrendered or (b) establish to the satisfaction of
PPI that such tax has been paid or that no such tax is payable. Notwithstanding
the foregoing, neither PPI nor the Surviving Corporation shall be liable to a
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holder of Old PC Shares for any PPI Class A Shares or dividends thereon or any
cash payment for fractional interests payable under Section 2.11 hereof
delivered to a public official pursuant to applicable escheat laws.
SECTION 2.11 NO FRACTIONAL SECURITIES. No certificates or scrip evidencing
fractional PPI Class A Shares shall be issued upon the surrender for exchange of
certificates evidencing Old PC Shares under this Article II. In lieu of any such
fractional securities, each holder of Old PC Shares which would otherwise have
been entitled to a fraction of a PPI Common Share upon surrender of certificates
evidencing such Old PC Shares for exchange pursuant to this Article II shall be
paid an amount in cash (without interest), rounded to the nearest cent, equal to
the product of (a) such fraction multiplied by (b) the fair market value of a
PPI Common Share as of the Effective Time as determined by the board of
directors of PPI.
SECTION 2.12 CLOSING OF TRANSFER BOOKS. At the Effective Time, the stock
transfer books of Corvallis, HealthFirst and Medford shall be closed and no
transfer of Old PC Shares shall thereafter be made. If, after the Effective
Time, certificates evidencing Old PC Shares are presented to the Surviving
Corporation, such certificates shall be canceled and exchanged for certificates
evidencing PPI Class A Shares in accordance with the terms hereof. From and
after the Effective Time, the holders of Old PC Shares to be converted into PPI
Class A Shares pursuant to this Agreement shall cease to have any rights as
shareholders of Corvallis, HealthFirst or Medford, as the case may be, except
for the right to surrender stock certificates evidencing such Old PC Shares in
exchange for PPI Class A Shares and cash consideration for fractional interests
as described in this Article II.
SECTION 2.13 DISSENTING SHARES. If any shareholder of Corvallis,
HealthFirst or Medford (referred to herein as the "Dissenting Shareholder") is
entitled to dissent from the Merger and delivers a written demand for the fair
value of Old PC Shares held by such Dissenting Shareholder in accordance with
the provisions of Section 60.554 of the Oregon Business Corporation Act
concerning the right of such Dissenting Shareholder to dissent from the Merger
and demand payment of the fair value of such Old PC Shares, such Old PC Shares
shall not be converted to PPI Class A Shares as described in Section 2.7 hereof
but shall, from and after the Effective Time, represent only the right to
receive payment of the fair value of such Old PC Shares, plus accrued interest,
determined in accordance with Section 60.557 of the Oregon Business Corporation
Act; PROVIDED, HOWEVER, that Old PC Shares held by a Dissenting Shareholder
which shall, after the Effective Time, withdraw such Dissenting Shareholder's
demand for the fair value of such Old PC Shares or otherwise lose such
Dissenting Shareholder's right to receive the fair value thereof by failing to
demand payment of the fair value of such Old PC Shares or deposit such
Dissenting Shareholder's stock certificates with Corvallis, HealthFirst or
Medford, as the case may be, by the dates set forth in the written notice of
Corvallis, HealthFirst or Medford provided to such Dissenting Shareholder in
accordance with Section 60.567 of the Oregon Business Corporation Act shall be
deemed to be converted, as of the Effective Time, into the right to receive PPI
Class A Shares in accordance with the Exchange Ratio applicable to such Old PC
Shares.
SECTION 2.14 CLOSING. The consummation of the PC Reorganizations and the
Merger contemplated by this Agreement shall take place at the offices of
McDermott, Will & Emery, 2049 Century Park East--Suite 3400, Los Angeles,
California 90067, at 9:00 a.m., Pacific Standard Time, on the business day
immediately following the day on which all of the conditions set forth in
Article VII hereof are satisfied or waived or as soon as practicable thereafter,
or at such other date, time and place as the Companies shall agree.
SECTION 2.15 SUPPLEMENTARY ACTION. If, at any time after the Effective
Time, any further assignment or other action is necessary or desirable to vest
or to perfect or confirm or record in the Surviving Corporation the title to any
property or rights of Corvallis, HealthFirst or Medford, or otherwise to carry
out the provisions of this Agreement, the officers and directors of the
Surviving Corporation shall be authorized and empowered, in the name of and on
behalf of Corvallis, HealthFirst or Medford, as the case may be, to execute and
deliver any and all documents and instruments necessary or desirable to so vest
or
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to so perfect or confirm or record the title to such property or rights in the
Surviving Corporation and otherwise to carry out the provisions of this
Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
CORVALLIS, HEALTHFIRST AND MEDFORD
Each of Corvallis, HealthFirst and Medford hereby represents and warrants
(except (a) in the case of Corvallis, as set forth in the Disclosure Schedule
(the "Corvallis Disclosure Schedule") delivered by Corvallis to the other
Companies simultaneously with the execution of this Agreement, which Corvallis
Disclosure Schedule shall identify exceptions to the representations and
warranties set forth herein by reference to such Section numbers, (b) in the
case of HealthFirst, as set forth in the Disclosure Schedule (the "HealthFirst
Disclosure Schedule") delivered by HealthFirst to the other Companies
simultaneously with the execution of this Agreement, which HealthFirst
Disclosure Schedule shall identify exceptions to the representations and
warranties set forth herein by reference to such Section numbers and (c) in the
case of Medford, as set forth in the Disclosure Schedule (the "Medford
Disclosure Schedule") delivered by Medford to the other Companies simultaneously
with the execution of this Agreement, which Medford Disclosure Schedule shall
identify exceptions to the representations and warranties set forth herein by
reference to such Section numbers), with respect to itself only, to PPI and the
other Companies, as follows:
SECTION 3.1 ORGANIZATION. Such Company is a professional corporation duly
organized, validly existing and in good standing under the laws of the State of
Oregon and is qualified or licensed to do business and is in good standing in
each jurisdiction in which the ownership or leasing of property thereby or the
conduct of its business requires such qualification or license.
SECTION 3.2 AUTHORITY. (a) Such Company has all requisite corporate power
and authority to own, operate and lease its properties and to carry on its
business as it is now being conducted.
(b) Such Company has all requisite corporate power and authority to enter
into this Agreement. The execution and delivery of this Agreement by such
Company and the performance by such Company of its obligations hereunder have
been duly authorized by such Company's board of directors and no other corporate
proceeding on the part of such Company is necessary for the execution and
delivery of this Agreement by such Company or the performance by such Company of
its obligations hereunder (except for approval by the requisite votes cast by
such Company's shareholders at the meeting of such shareholders provided for in
Section 6.4 hereof). This Agreement has been duly and validly executed and
delivered by such Company and constitutes a valid and binding obligation of such
Company, enforceable in accordance with its terms (except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the enforcement of creditors' rights generally and by
equitable principles).
SECTION 3.3 CAPITALIZATION. (a) As of July 29, 1996, (i) the authorized
capital stock of Corvallis consists of 200 shares of Class A Voting Preferred
Stock ("Corvallis Class A Shares"), 25,000 shares of Class B Voting Common Stock
("Corvallis Class B Shares") and 100,000 shares of Class C Non-Voting Preferred
Stock ("Corvallis Class C Shares") and (ii) there are issued and outstanding 67
Corvallis Class A Shares, 11,964 Corvallis Class B Shares and 8,420 Corvallis
Class C Shares. It is anticipated that, between the date hereof and the
Effective Time, Corvallis will issue employee stock options (the "Corvallis
Stock Options") exercisable for an aggregate of such number of Corvallis Class B
Shares (collectively, "Corvallis Option Shares") as is equal to the quotient
obtained by dividing (A) the Exchange Ratio applicable to Corvallis Class B
Shares into (B) 416,250; PROVIDED, HOWEVER, that in the event of a reduction in
the number of Corvallis FTE as of October 1, 1996 from the Corvallis FTE as of
June 1, 1996 only, the total number of Corvallis Option Shares shall be reduced
by an amount equal to the excess of (a) the then-current total number of
Corvallis Option Shares over (b) the quotient obtained by dividing (i) the
then-current Exchange Ratio for each Corvallis Class B Share determined after
giving effect to such reduction in the
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Corvallis FTE into (ii) the product of 5,000 multiplied by the Corvallis FTE as
of October 1, 1996. As of June 1, 1996, the aggregate number of full-time
equivalent providers who worked at Corvallis ("Corvallis FTE"), with
full-time-equivalence determined based on a workweek of at least four
full-working days, was 83.25. All of the outstanding Corvallis Class A Shares,
Corvallis Class B Shares and Corvallis Class C Shares have been validly issued
and are fully paid and nonassessable. There are no outstanding options,
warrants, subscriptions, conversions or other rights, agreements or commitments
obligating Corvallis to issue any additional Corvallis Class A Shares, Corvallis
Class B Shares or Corvallis Class C Shares or any other securities convertible
into, exchangeable for or evidencing the right to subscribe for any Corvallis
Class A Shares, Corvallis Class B Shares or Corvallis Class C Shares. There are
no voting trusts or other agreements or understandings to which Corvallis is a
party with respect to the voting of Corvallis Class A Shares, Corvallis Class B
Shares or Corvallis Class C Shares. The Corvallis Disclosure Schedule sets forth
(i) the names of persons who are shareholders of Corvallis as of July 29, 1996
and the number of shares of capital stock of Corvallis held by each such person
as of July 29, 1996 and to be held by such person as of the Effective Time, (ii)
the names of persons who are or will be eligible to become shareholders of
Corvallis between July 29, 1996 and the Effective Time and the number of shares
of capital stock of Corvallis to be held by each such person as of the Effective
Time and (iii) the names and number of full-time equivalent providers of
Corvallis as of June 1, 1996. On or before October 15, 1996, Corvallis shall
provide the other Companies an updated list of full-time equivalent providers of
Corvallis as of October 1, 1996.
(b) As of July 29, 1996, (i) the authorized capital stock of HealthFirst
consists of 1,400,000 shares of Class A Common Voting Shares, no par value, of
which 800,000 shares are Series 1 Class A Shares, 200,000 shares are Series 2
Class A Shares, 200,000 shares are Series 3 Class A Shares, 100,000 shares are
Series 4 Class A Shares and 100,000 shares are Series 5 Class A Shares, and (ii)
there are issued and outstanding 5,800 Series 1 Class A Shares and 2,200 Series
2 Class A Shares. It is anticipated that, between the date hereof and the
Effective Time, HealthFirst will issue employee stock options (the "HealthFirst
Stock Options") exercisable for an aggregate of 1,483 Series 1 Class A Shares of
HealthFirst (collectively, "HealthFirst Option Shares"); PROVIDED, HOWEVER, that
in the event of a reduction in the HealthFirst FTE as of October 1, 1996 from
the HealthFirst FTE as of June 1, 1996 only, the total number of HealthFirst
Option Shares shall be reduced by an amount equal to the excess of (a) 1,483
over (b) the quotient obtained by dividing (i) the then-current Exchange Ratio
for each Class A Share of HealthFirst determined after giving effect to such
reduction in the HealthFirst FTE into (ii) the product of 5,000 multiplied by
the HealthFirst FTE as of October 1, 1996. As of June 1, 1996, the aggregate
number of full-time equivalent providers who worked at HealthFirst ("HealthFirst
FTE"), with full-time-equivalence determined based on a workweek of at least
four full-working days, was 105. All of the outstanding Class A Shares of
HealthFirst have been validly issued and are fully paid and nonassessable. There
are no outstanding options, warrants, subscriptions, conversions or other
rights, agreements or commitments obligating HealthFirst to issue any additional
Class A Share of HealthFirst or any other securities convertible into,
exchangeable for or evidencing the right to subscribe for any Class A Share of
HealthFirst. There are no voting trusts or other agreements or understandings to
which HealthFirst is a party with respect to the voting of Class A Shares of
HealthFirst. The HealthFirst Disclosure Schedule sets forth (i) the names of
persons who are shareholders of HealthFirst as of July 29, 1996 and the number
of shares of capital stock of HealthFirst held by each such person as of July
29, 1996 and to be held by such person as of the Effective Time, (ii) the names
of persons who are or will be eligible to become shareholders of HealthFirst
between July 29, 1996 and the Effective Time and the number of shares of capital
stock of HealthFirst to be held by each such person as of the Effective Time and
(iii) the names and number of full-time equivalent providers of HealthFirst as
of June 1, 1996. On or before October 15, 1996, HealthFirst shall provide the
other Companies an updated list of full-time equivalent providers of HealthFirst
as of October 1, 1996.
(c) As of July 29, 1996, (i) the authorized capital stock of Medford
consists of 500 shares of par value common stock ("Medford Shares") and (ii)
there are issued and outstanding 57 Medford Shares. It is
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anticipated that, between the date hereof and the Effective Time, Medford will
issue employee stock options (the "Medford Stock Options") exercisable for an
aggregate of 10.6 Medford Shares (collectively, "Medford Option Shares");
PROVIDED, HOWEVER, that in the event of a reduction in the Medford FTE as of
October 1, 1996 from the Medford FTE as of June 1, 1996 only, the total number
of Medford Option Shares shall be reduced by an amount equal to the excess of
(a) 10.6 over (b) the quotient obtained by dividing (i) the then-current
Exchange Ratio for each share of Common Stock of Medford determined after giving
effect to such reduction in the Medford FTE into (ii) the product of 5,000
multiplied by the Medford FTE as of October 1, 1996. As of June 1, 1996, the
aggregate number of full-time-equivalent providers who worked at Medford
("Medford FTE"), with full-time-equivalence determined based on a workweek of at
least four full-working days, was 58. All of the outstanding Medford Shares have
been validly issued and are fully paid and nonassessable. There are no
outstanding options, warrants, subscriptions, conversions or other rights,
agreements or commitments obligating Medford to issue any additional Medford
Shares or any other securities convertible into, exchangeable for or evidencing
the right to subscribe for any Medford Shares. There are no voting trusts or
other agreements or understandings to which Medford is a party with respect to
the voting of Medford Shares. The Medford Disclosure Schedule sets forth (i) the
names of persons who are shareholders of Medford as of July 29, 1996 and the
number of shares of capital stock of Medford held by each such person as of July
29, 1996 and to be held by such person as of the Effective Time, (ii) the names
of persons who are or will be eligible to become shareholders of Medford between
July 29, 1996 and the Effective Time and the number of shares of capital stock
of Medford to be held by each such person as of the Effective Time and (iii) the
names and number of full-time equivalent providers of Medford as of June 1,
1996. On or before October 15, 1996, Medford shall provide the other Companies
an updated list of full-time equivalent providers of Medford as of October 1,
1996.
SECTION 3.4 SUBSIDIARIES. (a) Except as set forth on the Corvallis
Disclosure Schedule, Corvallis does not own, directly or indirectly, any
outstanding capital stock of or other ownership interest in (or securities,
rights or other interests convertible into capital stock or other ownership
interests) any person or entity and is not a member of a nonprofit corporation.
(b) Except as set forth on the HealthFirst Disclosure Schedule, HealthFirst
does not own, directly or indirectly, any outstanding capital stock of or other
ownership interest in (or securities, rights or other interests convertible into
capital stock or other ownership interests) any person or entity and is not a
member of a nonprofit corporation.
(c) Except as set forth on the Medford Disclosure Schedule, Medford does not
own, directly or indirectly, any outstanding capital stock of or other ownership
interest in (or securities, rights or other interests convertible into capital
stock or other ownership interests) any person or entity and is not a member of
a nonprofit corporation.
SECTION 3.5 NO CONFLICT. (a) Except as set forth on the Corvallis
Disclosure Schedule, the execution, delivery and performance of this Agreement
by Corvallis do not, or at the Effective Time will not, (i) conflict with or
violate any presently existing law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award applicable to Corvallis or by which
any of the assets or properties of Corvallis are bound or affected, (ii) violate
or conflict with the Articles of Incorporation or the Bylaws of Corvallis or
(iii) except as would not have a Material Adverse Effect (as such term is
hereinafter defined) with respect to Corvallis, result in any breach of, or
constitute a default (or event which with notice or lapse of time, or both,
would become a default) under, or accelerate the performance required by, or
require a prepayment or payment subject to premium or penalty under, or result
in the creation of any lien or other encumbrance on any of the assets or
properties of Corvallis pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument to
which Corvallis is a party or by which any of the assets or properties of
Corvallis are bound or affected. For purposes of this Agreement, the term
"Material Adverse Effect" means, with respect to any person or entity, a
material
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adverse effect on the business, assets, results of operations or financial
condition of such person or entity or in the ability of such person or entity to
perform its obligations under this Agreement.
(b) Except as set forth on the HealthFirst Disclosure Schedule, the
execution, delivery and performance of this Agreement by HealthFirst do not, or
at the Effective Time will not, (i) conflict with or violate any presently
existing law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award applicable to HealthFirst or by which any of the assets
or properties of HealthFirst are bound or affected, (ii) violate or conflict
with the Articles of Incorporation or the Bylaws of HealthFirst or (iii) except
as would not have a Material Adverse Effect (as such term is hereinafter
defined) with respect to HealthFirst, result in any breach of, or constitute a
default (or event which with notice or lapse of time, or both, would become a
default) under, or accelerate the performance required by, or require a
prepayment or payment subject to premium or penalty under, or result in the
creation of any lien or other encumbrance on any of the assets or properties of
HealthFirst pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument to which
HealthFirst is a party or by which any of the assets or properties of
HealthFirst are bound or affected.
(c) Except as set forth on the Medford Disclosure Schedule, the execution,
delivery and performance of this Agreement by Medford do not, or at the
Effective Time will not, (i) conflict with or violate any presently existing
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award applicable to Medford or by which any of the assets or properties of
Medford are bound or affected, (ii) violate or conflict with the Articles of
Incorporation or the Bylaws of Medford or (iii) except as would not have a
Material Adverse Effect (as such term is hereinafter defined) with respect to
Medford, result in any breach of, or constitute a default (or event which with
notice or lapse of time, or both, would become a default) under, or accelerate
the performance required by, or require a prepayment or payment subject to
premium or penalty under, or result in the creation of any lien or other
encumbrance on any of the assets or properties of Medford pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument to which Medford is a party or by which any of the
assets or properties of Medford are bound or affected.
SECTION 3.6 CONSENTS AND APPROVALS. Except for applicable requirements of
the Securities Act of 1933, as amended (referred to herein as the "Securities
Act"), the Securities Exchange Act of 1934, as amended (referred to herein as
the "Exchange Act"), state or foreign laws relating to takeovers, if applicable,
state securities or blue sky laws and, as applicable, filing and recordation by
the Surviving Corporation of the Certificate of Merger with the Secretary of
State of the State of Delaware as required by Delaware Law and the Articles of
Merger with the Secretary of State of the State of Oregon as required by the
Delaware Oregon, the execution and delivery of this Agreement by such Company do
not, and the performance of this Agreement by such Company will not, require any
consent, approval, authorization or other action by, or filing with or
notification to, any governmental authority, except such consents, approvals,
authorizations or actions the failure of which to obtain, or such filings or
notifications the failure of which to make, would not have a Material Adverse
Effect with respect to such Company.
SECTION 3.7 FINANCIAL STATEMENTS. (a) Corvallis has previously delivered
to the other Companies true and complete copies of the audited balance sheets of
Corvallis as at November 30, 1991, November 30, 1992, November 30, 1993,
November 30, 1994 and November 30, 1995 and the related audited statements of
income of Corvallis for the fiscal period ended on each such date, in each case
together with related notes thereto and accountant's reports thereon, true and
complete copies of which were included in the Corvallis Disclosure Schedule
(referred to herein, collectively, as the "Corvallis Financial Statements").
Each of the Corvallis Financial Statements presents fairly, in all material
respects, the financial position of Corvallis as of its date and the results of
operations and cash flow of Corvallis for the period indicated, and except for
the Corvallis Financial Statements as at November 30, 1991, November 30, 1992
and November 30, 1993 which have been prepared on the cash basis, all of the
other Corvallis Financial Statements have been prepared in accordance with
generally accepted accounting principles consistently
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applied ("GAAP"). Since November 30, 1995, there has been no material adverse
change in the business, condition (financial or otherwise), operations,
performance, properties or prospects of Corvallis.
(b) HealthFirst has previously delivered to the other Companies true and
complete copies of (i) the unaudited and unreviewed balance sheets of Suburban
Medical Clinic, Inc. ("Suburban") as at December 31, 1991, December 31, 1992,
December 31, 1993 and the related unaudited and reviewed statements of income of
Suburban for the fiscal year ended on each such date, (ii) the unaudited but
reviewed balance sheets of Suburban as at December 31, 1994 and December 31,
1995 in each case together with related notes thereto and accountant's reports
thereon and (iii) the unaudited but reviewed balance sheets of Metropolitan
Clinic, P.C. ("Metropolitan") as at December 31, 1991, December 31, 1992,
December 31, 1993, December 31, 1994 and December 31, 1995 and the related
unaudited and reviewed statements of income of Metropolitan for the fiscal year
ended on each such date, together with related notes thereto and accountant's
reports thereon true and complete copies of which were included in the
HealthFirst Disclosure Schedule (referred to herein, collectively, as the
"HealthFirst Financial Statements"). Each of the HealthFirst Financial
Statements presents fairly, in all material respects, the assets and liabilities
arising from cash transactions of Suburban, Metropolitan or HealthFirst, as the
case may be, as of its date and the results of operations of Suburban,
Metropolitan or HealthFirst, as the case may be, for the period indicated, and
all of the HealthFirst Financial Statements relating to Suburban have been
prepared on the accrual basis, all of the HealthFirst Financial Statements
relating to Metropolitan have been prepared on the modified cash basis and the
HealthFirst Financial Statements relating to HealthFirst have been prepared in
accordance with GAAP. Since November 30, 1995, there has been no material
adverse change in the business, condition (financial or otherwise), operations,
performance, properties or prospects of HealthFirst.
(c) Medford has previously delivered to the other Companies true and
complete copies of (i) the unaudited and unreviewed balance sheets of Medford as
at December 31, 1991, December 31, 1992, December 31, 1993 and December 31, 1995
and the related unaudited and unreviewed statements of income of Medford for the
fiscal year ended on each such date and (ii) the unaudited but reviewed balance
sheet of Medford as at December 31, 1994 and the related unaudited but reviewed
statements of income of Medford for the fiscal year ended on such date, together
with related notes thereto and accountant's reports thereon, true and complete
copies of which were included in the Medford Disclosure Schedule (referred to
herein, collectively, as the "Medford Financial Statements" and, together with
the Corvallis Financial Statements and the HealthFirst Financial Statements,
referred to herein, collectively, as the "PC Company Financial Statements").
Each of the Medford Financial Statements presents fairly, in all material
respects, the assets and liabilities arising from cash transactions of Medford
as of its date and the results of operations of Medford for the period
indicated, and all of the Medford Financial Statements have been prepared on the
income tax basis. Since November 30, 1995, there has been no material adverse
change in the business, condition (financial or otherwise), operations,
performance, properties or prospects of Medford.
SECTION 3.8 LITIGATION. (a) Except as set forth on the Corvallis
Disclosure Schedule, there are no claims, actions, proceedings or investigations
pending or, to the best of Corvallis' knowledge, threatened against Corvallis or
any of the assets or properties of Corvallis before any court, arbitrator or
administrative, governmental or regulatory authority or body that would have a
Material Adverse Effect with respect to Corvallis. Except as set forth on the
Corvallis Disclosure Schedule, there are no orders, writs, judgments,
injunctions, decrees, determinations or awards having a Material Adverse Effect
to which Corvallis is subject.
(b) Except as set forth on the HealthFirst Disclosure Schedule, there are no
claims, actions, proceedings or investigations pending or, to the best of
HealthFirst's knowledge, threatened against HealthFirst or any of the assets or
properties of HealthFirst before any court, arbitrator or administrative,
governmental or regulatory authority or body that would have a Material Adverse
Effect with respect to HealthFirst. Except as set forth on the HealthFirst
Disclosure Schedule, there are no orders, writs,
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judgments, injunctions, decrees, determinations or awards having a Material
Adverse Effect to which HealthFirst is subject.
(c) There are no claims, actions, proceedings or investigations pending or,
to the best of Medford's knowledge, threatened against Medford or any of the
assets or properties of Medford before any court, arbitrator or administrative,
governmental or regulatory authority or body that would have a Material Adverse
Effect with respect to Medford. There are no orders, writs, judgments,
injunctions, decrees, determinations or awards having a Material Adverse Effect
to which Medford is subject.
SECTION 3.9 LICENSES AND PERMITS. Such Company has all governmental
licenses, permits and authorizations necessary to carry on its business as it is
now being conducted, except for such governmental licenses, permits and
authorizations the absence of which would not have a Material Adverse Effect
with respect to such Company.
SECTION 3.10 PROPERTIES. (a) PC COMPANY REAL PROPERTY. (i) The Corvallis
Disclosure Schedule sets forth a complete list of all real property owned by
Corvallis ("Corvallis Real Property"). Corvallis Real Property is owned by
Corvallis free and clear of all liens, security interests, claims and other
charges and encumbrances, except (A) as set forth on the Corvallis Disclosure
Schedule, (B) liens for Taxes (as such term is defined in Section 3.17 hereof)
not yet payable and (C) liens for Taxes and other claims the validity of which
Corvallis is contesting in good faith, the existence of which, in the aggregate,
could not have a Material Adverse Effect with respect to Corvallis.
(ii) The HealthFirst Disclosure Schedule sets forth a complete list of all
real property owned by HealthFirst ("HealthFirst Real Property"). HealthFirst
Real Property is owned by HealthFirst free and clear of all liens, security
interests, claims and other charges and encumbrances, except (A) as set forth on
the HealthFirst Disclosure Schedule, (B) liens for Taxes (as such term is
defined in Section 3.17 hereof) not yet payable and (C) liens for Taxes and
other claims the validity of which HealthFirst is contesting in good faith, the
existence of which, in the aggregate, could not have a Material Adverse Effect
with respect to HealthFirst.
(iii) The Medford Disclosure Schedule sets forth a complete list of all real
property owned by Medford ("Medford Real Property" and, together with Corvallis
Property and HealthFirst Property, referred to herein, collectively, as the "PC
Company Real Property"). Medford Real Property is owned by Medford free and
clear of all liens, security interests, claims and other charges and
encumbrances, except (A) as set forth on the Medford Disclosure Schedule, (B)
liens for Taxes (as such term is defined in Section 3.17 hereof) not yet payable
and (C) liens for Taxes and other claims the validity of which Medford is
contesting in good faith, the existence of which, in the aggregate, could not
have a Material Adverse Effect with respect to Medford.
(b) PC COMPANY LEASES. (i) The Corvallis Disclosure Schedule sets forth a
complete list of all leases and subleases of real or personal property to which
Corvallis is a party ("Corvallis Leases"). Corvallis Leases are valid and
Corvallis is not, and to the best of Corvallis' knowledge no other party to any
Corvallis Lease is, in violation of, or in default under, any Corvallis Lease,
and no event or circumstance has occurred which constitutes or, after notice or
lapse of time or both would constitute, a violation or default thereunder on the
part of Corvallis or, to the best of Corvallis' knowledge, on the part of any
other party thereto.
(ii) The HealthFirst Disclosure Schedule sets forth a complete list of all
leases and subleases of real or personal property to which HealthFirst is a
party ("HealthFirst Leases"). HealthFirst Leases are valid and HealthFirst is
not, and to the best of HealthFirst's knowledge no other party to any
HealthFirst Lease is, in violation of, or in default under, any HealthFirst
Lease, and no event or circumstance has occurred which constitutes or, after
notice or lapse of time or both would constitute, a violation or default
thereunder on the part of HealthFirst or, to the best of HealthFirst's
knowledge, on the part of any other party thereto.
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(iii) The Medford Disclosure Schedule sets forth a complete list of all
leases and subleases of real or personal property to which Medford is a party
("Medford Leases"). Medford Leases are valid and Medford is not, and to the best
of Medford's knowledge no other party to any Medford Lease is, in violation of,
or in default under, any Medford Lease, and no event or circumstance has
occurred which constitutes or, after notice or lapse of time or both would
constitute, a violation or default thereunder on the part of Medford or, to the
best of Medford's knowledge, on the part of any other party thereto.
(c) PC COMPANY OTHER ASSETS. (i) The Corvallis Disclosure Schedule sets
forth a complete list of all tangible properties and assets owned, operated and
leased by Corvallis, other than Corvallis Real Property and Corvallis Leases.
(ii) The HealthFirst Disclosure Schedule sets forth a complete list of all
tangible properties and assets owned, operated and leased by HealthFirst, other
than HealthFirst Real Property and HealthFirst Leases.
(iii) The Medford Disclosure Schedule sets forth a complete list of all
tangible properties and assets owned, operated and leased by Medford, other than
Medford Real Property and Medford Leases.
(d) CONDITION AND COMPLIANCE. (i) Corvallis Real Property and Corvallis
Leases are (A) maintained in a state of repair and operating condition
consistent with good business practices, (B) to the best of Corvallis'
knowledge, in material compliance with all applicable laws, regulations and
ordinances, including, without limitation, building and zoning laws and (C)
suitable for the uses intended therefor.
(ii) HealthFirst Real Property and HealthFirst Leases are (A) maintained in
a state of repair and operating condition consistent with good business
practices, (B) to the best of HealthFirst's knowledge, in material compliance
with all applicable laws, regulations and ordinances, including building and
zoning laws, and (C) suitable for the uses intended therefor.
(iii) Medford Real Property and Medford Leases are (A) maintained in a state
of repair and operating condition consistent with good business practices, (B)
to the best of Medford's knowledge, in material compliance with all applicable
laws, regulations and ordinances, including building and zoning laws, and (C)
suitable for the uses intended therefor.
SECTION 3.11 MATERIAL CONTRACTS. (a) The Corvallis Disclosure Schedule
sets forth a list of all contracts, agreements and commitments to which
Corvallis is a party or by which Corvallis is bound, copies of which were
previously delivered to the other companies (referred to herein, collectively,
as the "Corvallis Material Contracts"), including, without limitation (i) all
contracts, partnership agreements, joint venture agreements and all other
agreements between Corvallis, on the one hand, and any provider, hospital,
health maintenance organization, other managed care organization or other
third-party provider, on the other hand, relating to the provision of medical or
consulting services, treatments, patient referrals or other similar activities,
(ii) Corvallis Leases, (iii) Corvallis Intellectual Property (as such term is
defined in Section 3.18(a) hereof), (iv) all indentures, mortgages, notes, loan
or credit agreements and other agreements and obligations relating to the
borrowing of money or to the direct or indirect guarantee or assumption of
obligations of third parties requiring Corvallis to make, or setting forth
conditions under which Corvallis would be required to make, aggregate future
payments in excess of $50,000 in any fiscal year or $100,000 in the aggregate,
(v) all agreements for capital improvements or acquisitions involving an amount
in excess of $25,000 in any fiscal year or $100,000 in the aggregate, (vi) all
written employment and consulting agreements providing benefits for directors,
officers or employees of Corvallis, (vii) all agreements not entered into in the
ordinary course of business involving an amount in excess of $25,000 in any
fiscal year or $100,000 in the aggregate, (viii) all agreements containing a
covenant limiting the freedom of Corvallis (or any provider employee of
Corvallis) to compete in any line of business with any person or entity or in
any geographic area or (ix) all written contracts and commitments to which
Corvallis is a party that require, in accordance with their respective terms,
aggregate future payments by Corvallis in excess of $50,000 in any fiscal year
or $100,000 in the aggregate and that are not cancelable by providing notice of
60 days or less. Each Corvallis Material Contract is in full force and effect
and Corvallis is not, nor, to the
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best of Corvallis' knowledge, is any other party to any such Corvallis Material
Contract, in violation of, or default under, any material provision of any such
Corvallis Material Contract, and no event or circumstance has occurred which
constitutes, or after notice or lapse of time or both would constitute, and the
consummation of the transactions contemplated hereby (including the Corvallis
Reorganization and the Merger) will not constitute, a violation or default
thereunder on the part of Corvallis or, to the best of Corvallis' knowledge, on
the part of any other party thereto.
(b) The HealthFirst Disclosure Schedule sets forth a list of all contracts,
agreements and commitments to which HealthFirst is a party or by which
HealthFirst is bound, copies of which were previously delivered to the other
Companies (referred to herein, collectively, as the "HealthFirst Material
Contracts"), including, without limitation (i) all contracts, partnership
agreements, joint venture agreements and all other agreements between
HealthFirst, on the one hand, and any provider, hospital, health maintenance
organization, other managed care organization or other third-party provider, on
the other hand, relating to the provision of medical or consulting services,
treatments, patient referrals or other similar activities, (ii) HealthFirst
Leases, (iii) HealthFirst Intellectual Property (as such term is defined in
Section 3.18(b) hereof), (iv) all indentures, mortgages, notes, loan or credit
agreements and other agreements and obligations relating to the borrowing of
money or to the direct or indirect guarantee or assumption of obligations of
third parties requiring HealthFirst to make, or setting forth conditions under
which HealthFirst would be required to make, aggregate future payments in excess
of $50,000 in any fiscal year or $100,000 in the aggregate, (v) all agreements
for capital improvements or acquisitions involving an amount in excess of
$25,000 in any fiscal year or $100,000 in the aggregate, (vi) all written
employment and consulting agreements providing benefits for directors, officers
or employees of HealthFirst, (viii) all agreements not entered into in the
ordinary course of business involving an amount in excess of $25,000 in any
fiscal year or $100,000 in the aggregate, (viii) all agreements containing a
covenant limiting the freedom of HealthFirst (or any provider employee of
HealthFirst) to compete in any line of business with any person or entity or in
any geographic area or (ix) all written contracts and commitments to which
HealthFirst is a party that require, in accordance with their respective terms,
aggregate future payments by HealthFirst in excess of $50,000 in any fiscal year
or $100,000 in the aggregate and that are not cancelable by providing notice of
60 days or less. Each HealthFirst Material Contract is in full force and effect
and HealthFirst is not, nor, to the best of HealthFirst's knowledge, is any
other party to any such HealthFirst Material Contract, in violation of, or
default under, any material provision of any such HealthFirst Material Contract,
and no event or circumstance has occurred which constitutes, or after notice or
lapse of time or both would constitute, and the consummation of the transactions
contemplated hereby (including the HealthFirst Reorganization and the Merger)
will not constitute, a violation or default thereunder on the part of
HealthFirst or, to the best of HealthFirst's knowledge, on the part of any other
party thereto.
(c) The Medford Disclosure Schedule sets forth a list of all contracts,
agreements and commitments to which Medford is a party or by which Medford is
bound, copies of which were previously delivered to the other Companies
(referred to herein, collectively, as the "Medford Material Contracts"),
including, without limitation (i) all contracts, partnership agreements, joint
venture agreements and all other agreements between Medford, on the one hand,
and any provider, hospital, health maintenance organization, other managed care
organization or other third-party provider or payor, on the other hand, relating
to the provision of medical or consulting services, treatments, patient
referrals or other similar activities, (ii) Medford Leases, (iii) Medford
Intellectual Property (as such term is defined in Section 3.18(c) hereof), (iv)
all indentures, mortgages, notes, loan or credit agreements and other agreements
and obligations relating to the borrowing of money or to the direct or indirect
guarantee or assumption of obligations of third parties requiring Medford to
make, or setting forth conditions under which Medford would be required to make,
aggregate future payments in excess of $50,000 in any fiscal year or $100,000 in
the aggregate, (v) all agreements for capital improvements or acquisitions
involving an amount in excess of $25,000 in any fiscal year or $100,000 in the
aggregate, (vi) all written employment and consulting agreements providing
benefits for directors, officers or employees of Medford, (vii) all agreements
not entered into in the ordinary course of business involving an amount in
excess of $25,000 in any fiscal year
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or $100,000 in the aggregate, (viii) all agreements containing a covenant
limiting the freedom of Medford (or any provider employee of Medford) to compete
in any line of business with any person or entity or in any geographic area or
(ix) all written contracts and commitments to which Medford is a party that
require, in accordance with their respective terms, aggregate future payments by
Medford in excess of $50,000 in any fiscal year or $100,000 in the aggregate and
that are not cancelable by providing notice of 60 days or less. Each Medford
Material Contract is in full force and effect and Medford is not, nor, to the
best of Medford's knowledge, is any other party to any such Medford Material
Contract, in violation of, or default under, any material provision of any such
Medford Material Contract, and no event or circumstance has occurred which
constitutes, or after notice or lapse of time or both would constitute, and the
consummation of the transactions contemplated hereby (including the Medford
Reorganization and the Merger) will not constitute, a violation or default
thereunder on the part of Medford or, to the best of Medford's knowledge, on the
part of any other party thereto.
SECTION 3.12 LABOR MATTERS. (a) Except as set forth on the Corvallis
Disclosure Schedule, in the event of termination of the employment of any of the
current officers, directors, employees or agents of Corvallis, neither Corvallis
nor any other Company or the Surviving Corporation will, pursuant to any
agreement or by reason of anything done prior to the Effective Time by
Corvallis, be liable to any of said officers, directors, employees or agents for
so-called "severance pay" or any other similar payments or benefits, including,
without limitation, post-employment health care or insurance benefits. As of the
date hereof, there is no slow-down or work stoppage. Corvallis is and has been
in compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, including, without limitation, the Immigration Reform Control
Act, the Worker Adjustment and Retraining Notification Act and such laws
respecting employment discrimination, equal opportunity, affirmative action,
workers' compensation, occupational safety and health requirements and
unemployment insurance and related matters, and are not engaged in and have not
engaged in any unfair labor practice. To the best knowledge of Corvallis, no
investigation or review by or before any governmental authority concerning any
violations of any such applicable laws is pending, nor is any such investigation
threatened or has any such investigation occurred during the last three years,
and no governmental authority has provided any notice to Corvallis or otherwise
asserted an intention to conduct any such investigation. Corvallis is not a
party to any collective bargaining agreement or other labor union contract.
Since December 31, 1992, there has not been any labor strike involving employees
of Corvallis.
(b) In the event of termination of the employment of any of the current
officers, directors, employees or agents of HealthFirst, neither HealthFirst nor
any other Company or the Surviving Corporation will, pursuant to any agreement
or by reason of anything done prior to the Effective Time by HealthFirst, be
liable to any of said officers, directors, employees or agents for so-called
"severance pay" or any other similar payments or benefits, including, without
limitation, post-employment health care or insurance benefits. As of the date
hereof, there is no slow-down or work stoppage. HealthFirst is and has been in
compliance in all material respects with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, including, without limitation, the Immigration Reform Control
Act, the Worker Adjustment and Retraining Notification Act and such laws
respecting employment discrimination, equal opportunity, affirmative action,
workers' compensation, occupational safety and health requirements and
unemployment insurance and related matters, and are not engaged in and have not
engaged in any unfair labor practice. To the best knowledge of HealthFirst, no
investigation or review by or before any governmental authority concerning any
violations of any such applicable laws is pending, nor is any such investigation
threatened or has any such investigation occurred during the last three years,
and no governmental authority has provided any notice to HealthFirst or
otherwise asserted an intention to conduct any such investigation. HealthFirst
is not a party to any collective bargaining agreement or other labor union
contract. Since December 31, 1992, there has not been any labor strike involving
employees of HealthFirst.
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(c) Except as set forth on the Medford Disclosure Schedule, in the event of
termination of the employment of any of the current officers, directors,
employees or agents of Medford, neither Medford nor any other Company or the
Surviving Corporation will, pursuant to any agreement or by reason of anything
done prior to the Effective Time by Medford, be liable to any of said officers,
directors, employees or agents for so-called "severance pay" or any other
similar payments or benefits, including, without limitation, post-employment
health care or insurance benefits. As of the date hereof, there is no slow-down
or work stoppage. Medford is and has been in compliance in all material respects
with all applicable laws respecting employment and employment practices, terms
and conditions of employment and wages and hours, including, without limitation,
the Immigration Reform Control Act, the Worker Adjustment and Retraining
Notification Act and such laws respecting employment discrimination, equal
opportunity, affirmative action, workers' compensation, occupational safety and
health requirements and unemployment insurance and related matters, and are not
engaged in and have not engaged in any unfair labor practice. To the best
knowledge of Medford, no investigation or review by or before any governmental
authority concerning any violations of any such applicable laws is pending, nor
is any such investigation threatened or has any such investigation occurred
during the last three years, and no governmental authority has provided any
notice to Medford or otherwise asserted an intention to conduct any such
investigation. Medford is not a party to any collective bargaining agreement or
other labor union contract. Since December 31, 1992, there has not been any
labor strike involving employees of Medford.
SECTION 3.13 EMPLOYEE BENEFIT PLANS. (a) None of the Employee Plans (as
such term is hereinafter defined) of such Company is a multi-employer plan (as
such term is defined in Section 3(37) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")). To the best of such Company's knowledge,
since December 31, 1992, all of such Company's Employee Plans have been
maintained, operated and administered in compliance in all material respects
with the requirements prescribed by any and all applicable statutes, orders and
governmental rules and regulations currently in effect with respect thereto, and
such Company has performed all material obligations required to be performed
thereby under, and is not in any material respect in default or in violation of,
any of its Employee Plans. Each of the Employee Plans of such Company intended
to be qualified under Section 401(m) of the Code has heretofore been determined
by the Internal Revenue Service to be so qualified, and each trust created
thereunder has heretofore been determined by the Internal Revenue Service to be
exempt from tax under the provisions of Section 501(a) of the Code and nothing
has occurred since the date of such determination of qualification that would
result in the loss of such exemption. There exists no accumulated funding
deficiency, whether or not waived, with respect to any of the Employee Plans of
such Company. To the best of such Company's knowledge, there have been no
prohibited transactions with respect to any of the Employee Plans of such
Company that would result in any material liability or excise tax under ERISA or
the Code. Such Company has not incurred, and does not reasonably expect to incur
(i) any material liability to the Pension Benefit Guaranty Corporation, (ii) any
liability to a trustee under Section 4049 of ERISA or (iii) any "withdrawal
liability" (within the meaning of Section 4201 of ERISA), in each case with
respect to events occurring on or prior to the Effective Time. Since December
31, 1992, there has been no change in the financial condition of any of the
Employee Plans of such Company which is a "funded defined benefit plan" (within
the meaning of Section 3(35) of ERISA), other than changes which would not have
a Material Adverse Effect with respect to such Company. All benefits, expenses
and other amounts due and payable under any Employee Plan of such Company, and
all contributions, transfers and payments required to be made to any Employee
Plan of such Company, have been, or shall be prior to the Effective Time, paid
or made, or accrued and booked, on or before the Effective Time. There are no
"leased employees" (within the meaning of Section 414(n) of the Code) who
perform services for such Company. There are no actions, suits or claims pending
or, to the best of such Company's knowledge, threatened with respect to any
Employee Plan of such Company, other than routine claims for benefits. To the
best of such Company's knowledge, there has not occurred, nor is there
continuing, any transaction or breach of fiduciary duty under applicable law
which could have a Material Adverse Effect with respect to such Company or a
material adverse effect on any Employee Plan of such
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Company. For purposes of this Agreement, the term "Employee Plans" of a person
or entity means (A) all "employee benefit plans" (as such term is defined in
Section 3(3) of ERISA) in which employees or former employees of such person or
entity participate and (B) all other deferred compensation, excess benefit,
stock and severance programs in which employees or former employees of such
person or entity presently participate.
(b) Such Company has delivered or made available to the other Companies full
and complete copies of all of the Employee Plans of such Company.
SECTION 3.14 COMPLIANCE WITH APPLICABLE LAW. (a) Except as set forth on
the Corvallis Disclosure Schedule, to the best of Corvallis' knowledge,
Corvallis is not, nor since December 31, 1992 has Corvallis been, engaged in an
activity, nor has Corvallis omitted to take any action, as a result of which
Corvallis is or has been in violation of any law, ordinance, regulation or other
requirement of any governmental authority applicable to Corvallis, including,
without limitation, all applicable health care laws, rules and regulations
relating to the payment or receipt of illegal remuneration (referred to herein,
collectively, as the "Fraud and Abuse Laws") and physician self-referral
prohibitions (e.g., the "Stark" law), which would have a Material Adverse Effect
with respect to Corvallis, nor has there been a pattern of violation of any law,
ordinance, regulation or other requirement of any governmental authority
applicable to Corvallis. No investigation or review by any governmental
authority concerning any possible such violation by Corvallis is pending or, to
the best of Corvallis' knowledge, threatened, nor has any governmental authority
indicated an intention to conduct any such investigation or review.
(b) Except as set forth on the HealthFirst Disclosure Schedule, to the best
of HealthFirst's knowledge, HealthFirst is not, nor since December 31, 1992 has
HealthFirst been, engaged in an activity, nor has HealthFirst omitted to take
any action, as a result of which HealthFirst is or has been in violation of any
law, ordinance, regulation or other requirement of any governmental authority
applicable to HealthFirst, including, without limitation, the Fraud and Abuse
Laws and physician self-referral prohibitions (e.g., the "Stark" law), which
would have a Material Adverse Effect with respect to HealthFirst, nor has there
been a pattern of violation of any law, ordinance, regulation or other
requirement of any governmental authority applicable to HealthFirst. No
investigation or review by any governmental authority concerning any possible
such violation by HealthFirst is pending or, to the best of HealthFirst's
knowledge, threatened, nor has any governmental authority indicated an intention
to conduct any such investigation or review.
(c) Except as set forth on the Medford Disclosure Schedule, to the best of
Medford's knowledge, Medford is not, nor since December 31, 1992 has Medford
been, engaged in an activity, nor has Medford omitted to take any action, as a
result of which Medford is or has been in violation of any law, ordinance,
regulation or other requirement of any governmental authority applicable to
Medford, including, without limitation, the Fraud and Abuse Laws and physician
self-referral prohibitions (e.g., the "Stark" law), which would have a Material
Adverse Effect with respect to Medford, nor has there been a pattern of
violation of any law, ordinance, regulation or other requirement of any
governmental authority applicable to Medford. No investigation or review by any
governmental authority concerning any possible such violation by Medford is
pending or, to the best of Medford's knowledge, threatened, nor has any
governmental authority indicated an intention to conduct any such investigation
or review.
SECTION 3.15 ABSENCE OF CERTAIN CHANGES AND UNDISCLOSED LIABILITIES. Since
November 30, 1995, such Company has not (a) suffered any Material Adverse
Effect, (b) except for the transactions contemplated by this Agreement, entered
into any material commitment or transaction, or conducted its business and
operations other than in the ordinary course of business and consistent with
past practice, (c) made any declaration, set aside or paid any dividend or other
distribution (whether in cash, property or any combination thereof) in respect
of shares of its capital stock or redeemed or otherwise acquired any shares of
its capital stock, (d) incurred any liabilities or obligations ("Liabilities")
that would be required to be included on a balance sheet, or in the notes
thereto, prepared in accordance with GAAP or on the basis of cash receipts and
disbursements, as applicable, except (i) Liabilities incurred in the ordinary
course of
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business and consistent with past practice and (ii) Liabilities incurred in
connection with or as a result of the transactions contemplated hereunder, (e)
amended or modified its Articles of Incorporation or Bylaws, (f) granted or
become obligated to grant any increase in compensation to its employees except
in the ordinary course of business, or (g) agreed to take, whether in writing or
otherwise, any action which, if taken prior to the date hereof, would have made
any representation or warranty described in this Article III untrue or incorrect
in any material respect.
SECTION 3.16 TAXES. (a) All federal, state, county and other tax returns,
reports and declarations of every nature, including, without limitation, income,
employment, payroll, excise, property, sales and use taxes and unemployment
contributions imposed by any federal, state or local governmental authority
(referred to herein, collectively, as "Taxes"), required to be filed by or on
behalf of, or with respect to, Corvallis have been duly and timely filed, or
will be filed prior to the Effective Time and within the time periods required
by law by Corvallis. Copies of all such returns or reports have been provided to
the other Companies. Except as set forth on the Corvallis Disclosure Schedule,
all such returns or reports (a) are, or will be at the time of filing thereof,
in accordance with the tax laws applicable thereto and (b) accurately reflect,
or will accurately reflect at the time of filing thereof, all such Taxes
required to be paid by Corvallis for the periods covered thereby. No extension
of time, or request therefor or waiver thereof, has been made or are presently
pending or effective with respect to any such return, report or Taxes. All Taxes
shown to be due and payable on such returns and reports and all deficiencies,
assessments, penalties and interest thereon have been paid. All required tax
estimates, deposits and prepayments for current periods have been properly made.
There are no tax liens on any of the assets of Corvallis and, to the best of
Corvallis' knowledge, no basis exists for the imposition of any such liens.
Corvallis has no dispute with any taxing authority as to Taxes of any nature.
Except as set forth on the Corvallis Disclosure Schedule, there is no unassessed
tax deficiency proposed or, to the best of Corvallis' knowledge, threatened
against Corvallis, and no action, proceeding or audit with respect to any of
Corvallis' returns or reports by any governmental authority is pending or, to
the best of Corvallis' knowledge, threatened by any governmental authority for
assessment, reassessment or collection of any Taxes against Corvallis or its
operations.
(b) Except as set forth on the HealthFirst Disclosure Schedule, all federal,
state, county and other tax returns, reports and declarations of every nature,
including Taxes, required to be filed by or on behalf of, or with respect to,
HealthFirst have been duly and timely filed, or will be filed prior to the
Effective Time and within the time periods required by law by HealthFirst.
Copies of all such returns or reports have been provided to the other Companies.
Except as set forth on the HealthFirst Disclosure Schedule, all such returns or
reports (a) are, or will be at the time of filing thereof, in accordance with
the tax laws applicable thereto and (b) accurately reflect, or will accurately
reflect at the time of filing thereof, all such Taxes required to be paid by
HealthFirst for the periods covered thereby. No extension of time, or request
therefor or waiver thereof, has been made or are presently pending or effective
with respect to any such return, report or Taxes. All Taxes shown to be due and
payable on such returns and reports and all deficiencies, assessments, penalties
and interest thereon have been paid. All required tax estimates, deposits and
prepayments for current periods have been properly made. There are no tax liens
on any of the assets of HealthFirst and, to the best of HealthFirst's knowledge,
no basis exists for the imposition of any such liens. HealthFirst has no dispute
with any taxing authority as to Taxes of any nature. Except as set forth on the
HealthFirst Disclosure Schedule, there is no unassessed tax deficiency proposed
or, to the best of HealthFirst's knowledge, threatened against HealthFirst, and
no action, proceeding or audit with respect to any of HealthFirst's returns or
reports by any governmental authority is pending or, to the best of
HealthFirst's knowledge, threatened by any governmental authority for
assessment, reassessment or collection of any Taxes against HealthFirst or its
operations.
(c) All federal, state, county and other tax returns, reports and
declarations of every nature, including Taxes, required to be filed by or on
behalf of, or with respect to, Medford have been duly and timely filed, or will
be filed prior to the Effective Time and within the time periods required by law
by Medford. Copies of all such returns or reports have been provided to the
other Companies. Except as set forth on the
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Medford Disclosure Schedule, all such returns or reports (a) are, or will be at
the time of filing thereof, in accordance with the tax laws applicable thereto
and (b) accurately reflect, or will accurately reflect at the time of filing
thereof, all such Taxes required to be paid by Medford for the periods covered
thereby. No extension of time, or request therefor or waiver thereof, has been
made or are presently pending or effective with respect to any such return,
report or Taxes. All Taxes shown to be due and payable on such returns and
reports and all deficiencies, assessments, penalties and interest thereon have
been paid. All required tax estimates, deposits and prepayments for current
periods have been properly made. There are no tax liens on any of the assets of
Medford and, to the best of Medford's knowledge, no basis exists for the
imposition of any such liens. Medford has no dispute with any taxing authority
as to Taxes of any nature. Except as set forth on the Medford Disclosure
Schedule, there is no unassessed tax deficiency proposed or, to the best of
Medford's knowledge, threatened against Medford, and no action, proceeding or
audit with respect to any of Medford's returns or reports by any governmental
authority is pending or, to the best of Medford's knowledge, threatened by any
governmental authority for assessment, reassessment or collection of any Taxes
against Medford or its operations.
SECTION 3.17 HEALTH AND ENVIRONMENTAL MATTERS.
(a) COMPLIANCE WITH ENVIRONMENTAL LAWS. Such Company is in compliance with
all applicable "Environmental Laws" (as such term is hereinafter defined) in
connection with the ownership, operation and condition of all aspects of its
properties and businesses and otherwise, except for any such noncompliance which
would not have a Material Adverse Effect with respect to such Company. For
purposes of this Agreement, "Environmental Laws" means any and all laws,
statutes, ordinances, rules, regulations, orders and determinations of any
governmental authority of the United States, any state or any political
subdivision of any state or political subdivision thereof pertaining to health
or the environment (including, without limitation (i) the Clean Air Act, as
amended, (ii) the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, (iii) the Resource Conservation and Recovery
Act of 1976, as amended, (iv) the Federal Water Pollution Control Act, as
amended, (v) the Safe Drinking Water Act, as amended, and (vi) the Toxic
Substances Control Act, as amended.
(b) VIOLATIONS OF ENVIRONMENTAL LAWS. Such Company has not (i) generated,
treated, stored, disposed of, transported or handled any hazardous substance,
hazardous waste, solid waste or pollutant or contaminant or (ii) released into
the environment any hazardous substance, hazardous waste, solid waste or
pollutant or contaminant, in any case in violation of any applicable
Environmental Law or under circumstances which have subjected, or may subject,
such Company to any indemnity or remedial obligation under any Environmental Law
or any contract or agreement with another party.
(c) EXISTING CONDITIONS. There is and has been no (i) soil, surface water
or groundwater contamination affecting any PC Company Real Property of such
Company, (ii) asbestos-containing material installed in any such PC Company Real
Property, (iii) polychlorinated biphenyls deposited at any such PC Company Real
Property or (iv) illness, disability, injury or death of any person or entity
(including, without limitation, any employee or former employee of such Company
or any person or entity employed at any such PC Company Real Property) in any
way arising out of exposure to substances or conditions present at any such PC
Company Real Property which would have a Material Adverse Effect with respect to
such Company.
SECTION 3.18 INTELLECTUAL PROPERTY. (a) The Corvallis Disclosure Schedule
sets forth a full and complete list of all patents, trademarks, service marks,
trade names and franchises with third parties, all applications therefor and all
permits, grants and licenses and other rights to intellectual property involving
Corvallis that are material to the business of Corvallis (referred to herein,
collectively, as "Corvallis Intellectual Property"). Corvallis has free and
unencumbered rights to use all of such Corvallis Intellectual Property, except
for rights the failure of which to possess would not have a Material Adverse
Effect with respect to Corvallis. Corvallis has not received notice of any claim
challenging the free and unencumbered right of Corvallis to use such Corvallis
Intellectual Property.
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(b) The HealthFirst Disclosure Schedule sets forth a full and complete list
of all patents, trademarks, service marks, trade names and franchises with third
parties, all applications therefor and all permits, grants and licenses and
other rights to intellectual property involving HealthFirst that are material to
the business of HealthFirst (referred to herein, collectively, as "HealthFirst
Intellectual Property"). HealthFirst has free and unencumbered rights to use all
of such HealthFirst Intellectual Property, except for rights the failure of
which to possess would not have a Material Adverse Effect with respect to
HealthFirst. HealthFirst has not received notice of any claim challenging the
free and unencumbered right of HealthFirst to use such HealthFirst Intellectual
Property.
(c) The Medford Disclosure Schedule sets forth a full and complete list of
all patents, trademarks, service marks, trade names and franchises with third
parties, all applications therefor and all permits, grants and licenses and
other rights to intellectual property involving Medford that are material to the
business of Medford (referred to herein, collectively, as "Medford Intellectual
Property"). Medford has free and unencumbered rights to use all of such Medford
Intellectual Property, except for rights the failure of which to possess would
not have a Material Adverse Effect with respect to Medford. Medford has not
received notice of any claim challenging the free and unencumbered right of
Medford to use such Medford Intellectual Property.
SECTION 3.19 INSURANCE.
(a) The Corvallis Disclosure Schedule sets forth a full and complete list of
all insurance policies naming Corvallis as an insured or beneficiary or as a
loss payee or with respect to which Corvallis has paid all or part of the
premium in force on July 29, 1996. All of such policies are in full force and
effect, and no such policy has been interrupted during the past two years.
(b) The HealthFirst Disclosure Schedule sets forth a full and complete list
of all insurance policies naming HealthFirst as an insured or beneficiary or as
a loss payee or with respect to which HealthFirst has paid all or part of the
premium in force on July 29, 1996. All of such policies are in full force and
effect, and no such policy has been interrupted during the past two years.
(c) The Medford Disclosure Schedule sets forth a full and complete list of
all insurance policies naming Medford as an insured or beneficiary or as a loss
payee or with respect to which Medford has paid all or part of the premium in
force on July 29, 1996. All of such policies are in full force and effect, and
no such policy has been interrupted during the past two years.
SECTION 3.20. INFORMATION IN DISCLOSURE DOCUMENTS AND REGISTRATION
STATEMENT. None of the information to be supplied by such Company to be
included in (a) the Registration Statement on Form S-4 to be filed with the
Securities and Exchange Commission (referred to herein as the "SEC") by PPI
under the Securities Act for the purpose of registering PPI Class A Shares to be
issued in the Merger or pursuant to this Agreement (referred to herein as the
"Registration Statement") and (b) the joint proxy statement/ prospectus to be
distributed in connection with the meetings of shareholders of the Companies to
vote upon this Agreement (referred to herein as the "Joint Proxy Statement"),
will, in the case of the Registration Statement, at the time it becomes
effective and at the Effective Time, or, in the case of the Joint Proxy
Statement or any amendments thereof or supplements thereto, at the time of the
mailing of the Joint Proxy Statement and any amendments or supplements thereto,
and at the time of each of the meetings of shareholders to be held in connection
with the Merger, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. The Registration Statement insofar as it pertains to such
Company will comply as to form in all material respects with the provisions of
the Securities Act, and the rules and regulations promulgated thereunder. The
Joint Proxy Statement insofar as it pertains to such Company will comply as to
form in all material respects with the provisions of the Exchange Act, and the
rules and regulations promulgated thereunder.
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SECTION 3.21 CORPORATE RECORDS OF COMPANY. Such Company has caused to be
delivered to the other Companies true, accurate and complete copies of (a) the
Articles of Incorporation and Bylaws of such Company, as currently in effect,
and (b) records of all proceedings of incorporators, shareholders, directors and
committees of directors of such Company during the past five years. The books
and records of such Company have been maintained in accordance with good
business practices.
SECTION 3.22 NO FINDERS. No broker, finder or investment banker is
entitled to any fee or commission from such Company in connection with the
transactions contemplated by this Agreement.
SECTION 3.23 TAX REPRESENTATIONS. (a)(i) No part of the consideration to
be distributed by Corvallis to its shareholders in connection with the Corvallis
Distribution will be received by any such shareholder as a creditor, employee or
in any capacity other than that of a shareholder of Corvallis.
(ii) The Corvallis Financial Statements are representative of the present
operations of Corvallis and there have been no substantial operational changes
since the date of each of the Corvallis Financial Statements.
(iii) Following the Corvallis Distribution, Corvallis (except in connection
with the Merger as contemplated by this Agreement) and Corvallis New PC will
each continue the active conduct of its business, independently and with its
separate employees.
(iv) There is no plan or intention by either Corvallis or Corvallis New PC,
directly or through any subsidiary thereof, to purchase any of the outstanding
shares of its capital stock after the Corvallis Distribution.
(v) There is no plan or intention on the part of Corvallis New PC to issue
any additional shares of its capital stock or securities subsequent to the
distribution of the shares of capital stock of Corvallis New PC.
(vi) Immediately after the distribution of the shares of capital stock of
Corvallis New PC, neither Corvallis nor Corvallis New PC will have any
outstanding warrants, options, convertible securities or any other type of right
pursuant to which any person will be entitled to acquire shares of capital stock
of Corvallis New PC.
(vii) There is no plan or intention (except in connection with the Merger
contemplated by this Agreement) to liquidate either Corvallis or Corvallis New
PC, to merge either entity with any other entity, or to sell or otherwise
dispose of the assets of either entity after the transaction, except in the
ordinary course of business.
(viii) The total adjusted basis and fair market value of the assets to be
transferred to Corvallis New PC by Corvallis will each equal or exceed the sum
of the liabilities to be assumed by Corvallis New PC plus any liabilities to
which the transferred assets will be subject.
(ix) The liabilities to be assumed in the Corvallis Distribution and the
liabilities to which the transferred assets will be subject will have been
incurred in the ordinary course of business and will be associated with the
assets to be transferred.
(x) No intercorporate debt will exist between Corvallis and Corvallis New PC
at the time of, or immediately subsequent to, the distribution of the shares of
capital stock of Corvallis New PC.
(xi) All transactions between Corvallis and Corvallis New PC will be for
arm's length consideration.
(xii) No two parties to the Corvallis Distribution are investment companies
as defined in Section 368(a)(2)(F)(iii) and (v) of the Code.
(xiii) The cost savings to be achieved by the Corvallis Distribution are not
federal tax savings.
(b)(i) No part of the consideration to be distributed by HealthFirst to its
shareholders in connection with the HealthFirst Distribution will be received by
any such shareholder as a creditor, employee or in any capacity other than that
of a shareholder of HealthFirst.
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(ii) The HealthFirst Financial Statements are representative of the present
operations of HealthFirst and there have been no substantial operational changes
since the date of each of the HealthFirst Financial Statements.
(iii) Following the HealthFirst Distribution, HealthFirst (except in
connection with the Merger as contemplated by this Agreement) and HealthFirst
New PC will each continue the active conduct of its business, independently and
with its separate employees.
(iv) There is no plan or intention by either HealthFirst or HealthFirst New
PC, directly or through any subsidiary thereof, to purchase any of the
outstanding shares of its capital stock after the HealthFirst Distribution.
(v) There is no plan or intention on the part of HealthFirst New PC to issue
any additional shares of its capital stock or securities subsequent to the
distribution of the shares of capital stock of HealthFirst New PC.
(vi) Immediately after the distribution of the shares of capital stock of
HealthFirst New PC, neither HealthFirst nor HealthFirst New PC will have any
outstanding warrants, options, convertible securities or any other type of right
pursuant to which any person will be entitled to acquire shares of capital stock
of HealthFirst New PC.
(vii) There is no plan or intention (except in connection with the Merger
contemplated by this Agreement) to liquidate either HealthFirst or HealthFirst
New PC, to merge either entity with any other entity, or to sell or otherwise
dispose of the assets of either entity after the transaction, except in the
ordinary course of business.
(viii) The total adjusted basis and fair market value of the assets to be
transferred to HealthFirst New PC by HealthFirst will each equal or exceed the
sum of the liabilities to be assumed by HealthFirst New PC plus any liabilities
to which the transferred assets will be subject.
(ix) The liabilities to be assumed in the HealthFirst Distribution and the
liabilities to which the transferred assets will be subject will have been
incurred in the ordinary course of business and will be associated with the
assets to be transferred.
(x) No intercorporate debt will exist between HealthFirst and HealthFirst
New PC at the time of, or immediately subsequent to, the distribution of the
shares of capital stock of HealthFirst New PC.
(xi) All transactions between HealthFirst and HealthFirst New PC will be for
arm's length consideration.
(xii) No two parties to the HealthFirst Distribution are investment
companies as defined in Section 368(a)(2)(F)(iii) and (v) of the Code.
(xiii) The cost savings to be achieved by the HealthFirst Distribution are
not federal tax savings.
(c)(i) No part of the consideration to be distributed by Medford to its
shareholders in connection with the Medford Distribution will be received by any
such shareholder as a creditor, employee or in any capacity other than that of a
shareholder of Medford.
(ii) The Medford Financial Statements are representative of the present
operations of Medford and there have been no substantial operational changes
since the date of each of the Medford Financial Statements.
(iii) Following the Medford Distribution, Medford (except in connection with
the Merger as contemplated by this Agreement) and Medford New PC will each
continue the active conduct of its business, independently and with its separate
employees.
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(iv) There is no plan or intention by either Medford or Medford New PC,
directly or through any subsidiary thereof, to purchase any of the outstanding
shares of its capital stock after the Medford Distribution.
(v) There is no plan or intention on the part of Medford New PC to issue any
additional shares of its capital stock or securities subsequent to the
distribution of the shares of capital stock of Medford New PC.
(vi) Immediately after the distribution of the shares of capital stock of
Medford New PC, neither Medford nor Medford New PC will have any outstanding
warrants, options, convertible securities or any other type of right pursuant to
which any person will be entitled to acquire shares of capital stock of Medford
New PC.
(vii) There is no plan or intention (except in connection with the Merger
contemplated by this Agreement) to liquidate either Medford or Medford New PC,
to merge either entity with any other entity, or to sell or otherwise dispose of
the assets of either entity after the transaction, except in the ordinary course
of business.
(viii) The total adjusted basis and fair market value of the assets to be
transferred to Medford New PC by Medford will each equal or exceed the sum of
the liabilities to be assumed by Medford New PC plus any liabilities to which
the transferred assets will be subject.
(ix) The liabilities to be assumed in the Medford Distribution and the
liabilities to which the transferred assets will be subject will have been
incurred in the ordinary course of business and will be associated with the
assets to be transferred.
(x) No intercorporate debt will exist between Medford and Medford New PC at
the time of, or immediately subsequent to, the distribution of the shares of
capital stock of Medford New PC.
(xi) Payments made in connection with all continuing transactions between
Medford and Medford New PC will be for arm's length consideration.
(xii) No two parties to the Medford Distribution are investment companies as
defined in Section 368(a)(2)(F)(iii) and (v) of the Code.
(xiii) The cost savings to be achieved by the Medford Distribution are not
federal tax savings.
ARTICLE IV
REPRESENTATION AND WARRANTIES OF PPI
PPI hereby represents and warrants to Corvallis, HealthFirst and Medford as
follows:
SECTION 4.1 ORGANIZATION. PPI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. PPI has
neither engaged in any business activity nor entered into any contract or
assumed any liability since the date of its incorporation other than in
connection with transactions contemplated hereby.
SECTION 4.2 AUTHORITY. PPI has all requisite corporate power and authority
to enter into this Agreement. The execution and delivery of this Agreement by
PPI and the performance by PPI of its obligations hereunder have been duly
authorized by PPI's board of directors and no other corporate proceeding on the
part of PPI is necessary for the execution and delivery of this Agreement by PPI
and the performance by PPI of its obligations hereunder. This Agreement has been
duly and validly executed and delivered by PPI and constitutes a valid and
binding obligation of PPI, enforceable in accordance with its terms (except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by equitable principles).
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SECTION 4.3 CAPITALIZATION. As of the date hereof, the authorized capital
stock of PPI consists of 100,000,000 shares (collectively, "PPI Shares")
consisting of: (a) 50,000,000 shares of Common Stock, par value $0.01 par share
("Common Stock"), of which 20,000,000 shares are designated as Class A Common
Stock and 30,000,000 shares of which are designated as Class B Common Stock, and
(b) 50,000,000 shares of Preferred Stock, par value $0.01 per share. As of the
date hereof, 3,000 PPI Class A Shares have been issued and are outstanding, with
each of the Companies holding 1,000 PPI Class A Shares. There are no outstanding
options, warrants, subscriptions, conversions or other rights, agreements or
commitments obligating PPI to issue any additional PPI Shares or any other
securities convertible into, exchangeable for or evidencing the right to
subscribe for any PPI Shares. There are no voting trusts or other agreements or
understandings to which PPI is a party with respect to the voting of PPI Shares.
SECTION 4.4 NO FINDERS. No broker, finder or investment banker is entitled
to any fee or commission from PPI in connection with the transactions
contemplated by this Agreement.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.1 CONDUCT OF BUSINESS BY CORVALLIS, HEALTHFIRST AND
MEDFORD. (a) Except as contemplated by this Agreement, during the period from
the date of this Agreement until the Effective Time, each of Corvallis,
HealthFirst and Medford shall (i) conduct its operations only in, and not take
any action except in, the ordinary course of business and consistent with past
practice and (ii) use all reasonable efforts to (A) preserve intact its business
organization, (B) keep available the services of its officers and employees and
(C) maintain satisfactory relationships with licensors, licensees, suppliers,
contractors, distributors, customers, business partners and others with which it
has business relationships.
(b) Without limiting the generality of the foregoing, other than as
contemplated by this Agreement or as set forth on each Company's Disclosure
Schedule, each of Corvallis, HealthFirst and Medford agrees that it shall not,
prior to the Effective Time, without the prior written consent of the other
Companies:
(i) split, combine or reclassify, or directly or indirectly redeem,
purchase or otherwise acquire, shares of its capital stock;
(ii) declare, pay or set aside for payment any distribution in respect
of shares of its capital stock; PROVIDED, HOWEVER, that in the event that
the quotient obtained by dividing (A) the Corvallis FTE, the HealthFirst FTE
or the Medford FTE as of June 1, 1996 into (B) the excess of total assets
over total liabilities of Corvallis, HealthFirst or Medford, as applicable
(such Company's "FTE Net Shareholder Equity"), as reflected on the balance
sheet thereof as at June 30, 1996, reviewed by Arthur Andersen LLP and
delivered to the Companies no later than November 15, 1996, which reviewed
balance sheet shall be adjusted (except in the case of HealthFirst) by
changing the value of any real estate specified thereon from book value to
fair market value based on fair market value appraisals prepared by
appraisers reasonably acceptable to the other Companies during the past
20-month period, exceeds the FTE Net Shareholder Equity of any other Company
by more than 20 percent (the "Minimum Net Equity Threshold"), such Company
may make a distribution to its shareholders in an amount equal to the
product of (y) the amount of such excess of such Company's FTE Net
Shareholder Equity over the Minimum Net Equity Threshold multiplied by (z)
such Company's FTE as of June 1, 1996. Such reviewed balance sheets and such
fair market appraisals shall, absent manifest error, be conclusive and
binding for purposes of determining each Company's FTE Net Shareholder
Equity;
(iii) authorize for issuance, issue, sell, pledge, dispose of or
encumber, deliver or agree or commit to issue, sell, pledge or deliver
(whether through the issuance or granting of any options, warrants,
commitments, subscriptions, rights to purchase or otherwise) shares of its
capital stock or any securities convertible into or exercisable or
exchangeable for shares of its capital stock; PROVIDED, HOWEVER, that (A)(I)
Corvallis may issue the Corvallis Stock Options, (II) HealthFirst may issue
the
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HealthFirst Stock Options and (III) Medford may issue the Medford Stock
Options and (B)(I) HealthFirst may issue up to 100 Class A Shares to each of
the 12 non-shareholder providers of HealthFirst designated by HealthFirst
and (II) Medford may issue 1 share of its Common Stock to each of the two
non-shareholder providers of Medford designated by Medford;
(iv) except in the ordinary course of business and consistent with past
practice (A) acquire, dispose of, transfer, lease, license, mortgage, pledge
or encumber any assets, (B) incur, assume or prepay any material
indebtedness, liability or obligation or issue any debt securities, (C)
assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any
other person or entity, (D) make any material loan, advance or capital
contribution to, or investment in, any other person or entity or enter into
any contract, agreement, commitment or arrangement with respect to any of
the matters described in clauses (A) through (D) of this Section 5.1(b)(iv);
PROVIDED, HOWEVER, that the cumulative amount of obligations incurred under
any contract, agreement commitment or arrangement in the ordinary course of
business (y) after December 1, 1995 through the Effective Time shall not,
without the prior approval of PPI and the other Companies, exceed $1,300,000
in the case of Corvallis and (z) after January 1, 1996 through the Effective
Time shall not, without the prior approval of PPI and the other companies,
exceed $4,300,000 in the case of HealthFirst and $1,600,000 in the case of
Medford;
(v) except in the ordinary course of business and consistent with past
practice (A) adopt or amend any Employee Plan or other employee welfare
arrangement, (B) grant, or become obligated to grant, any general increase
in the compensation of its officers or employees or any increase in the
compensation payable or to become payable to any individual officer or (C)
enter into any employment or similar agreement or arrangement with any
employee; PROVIDED, HOWEVER, that the cumulative amount of compensations and
benefits received by providers employed thereby in the ordinary of course of
business (y) after December 1, 1995 through the Effective Time shall not,
without the prior approval of PPI and the other Companies, exceed
$12,500,000 in the case of Corvallis and (z) after January 1, 1996 through
the Effective Time shall not, without the prior approval of PPI and the
other companies, exceed $20,000,000 in the case of HealthFirst and
$12,500,000 in the case of Medford;
(vi) amend its Articles of Incorporation or Bylaws;
or
(viii) take any action or agree, in writing or otherwise, to take any
action which would make any representation or warranty described in Article
III hereof untrue or incorrect.
SECTION 5.2 CONDUCT OF BUSINESS BY PPI. Except as contemplated by this
Agreement, during the period from the date of this Agreement until the Effective
Time, PPI shall not, other than as contemplated by this Agreement, prior to the
Effective Time, without the prior written consent of the Companies, (a) split,
combine or reclassify, declare, pay or set aside for payment any distribution in
respect of, or directly or indirectly redeem, purchase or otherwise acquire, PPI
Shares; (b) authorize for issuance, issue, sell, pledge, dispose of or encumber,
deliver or agree or commit to issue, sell, pledge or deliver (whether through
the issuance or granting of any options, warrants, commitments, subscriptions,
rights to purchase or otherwise) PPI Shares, or any securities convertible into
or exercisable or exchangeable for PPI Shares, provided that PPI may issue
employee stock options to David Goldberg, Tim Dupell, Michael Bonazzola, M.D.,
Jerry Erstgaard, David Kobriger and Jon Ness upon the terms and conditions
contemplated by the respective employment agreements with PPI; or (c) amend its
Amended and Restated Certificate of Incorporation or Bylaws.
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ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 ACCESS TO INFORMATION; ADVICE OF CHANGES. (a) During the
period from the date of this Agreement until the Effective Time, each of the
Companies shall (i) upon reasonable notice, provide the other Companies and
their respective authorized officers, employees, accountants, counsel, financial
advisors and other representatives (including, without limitation, McDermott,
Will & Emery, Davis Wright Tremaine, Peter F. Stoloff, Esq., Brackhurst,
Hornecker, Hassen & Hogan, Arthur Andersen LLP and Symonds, Evans & Larson)
access during normal business hours to all of its properties, books, contracts,
commitments and records and promptly furnish any other information concerning
its businesses and properties as such other Company or Companies may reasonably
request and (ii) confer on a regular and frequent basis with the other
Companies, report on operational matters and promptly advise the other parties
orally and in writing of (A) any material change in the normal course of
business or in its properties and (B) any change or event having, or which,
insofar as can reasonably be foreseen, could have a Material Adverse Effect with
respect to such Company or which would cause or constitute a material breach of
any of the representations, warranties or agreements of such Company contained
herein.
(b) All information furnished by any Company to another Company pursuant
hereto shall be held in confidence by the Company receiving such information to
the extent required by, and in accordance with, the confidentiality agreement
previously entered into among Corvallis, HealthFirst and Medford.
SECTION 6.2 ACQUISITION PROPOSALS. Except as described in the
confidentiality agreement referred to in Section 6.1(b) hereof, each of the
parties hereto agrees that it shall not, and shall use its best efforts to cause
its officers, directors, employees, advisors and agents to not, initiate or
solicit, directly or indirectly, any inquiries or the making of any proposal
with respect to, or engage in negotiations concerning, provide any confidential
information or data to, or have any discussions with, any person (as such term
is defined in Section 13(d) of the Exchange Act) other than the other parties
hereto relating to any acquisition, business combination or purchase of all or
any significant portion of the assets of, or any equity interest in, such party.
Such party shall immediately notify the other parties if any such inquiries are
received, and shall provide details with respect thereto.
SECTION 6.3 JOINT PROXY STATEMENTS; REGISTRATION STATEMENT; SHAREHOLDER
APPROVALS. Each of Corvallis, HealthFirst and Medford, acting through its board
of directors, shall, as promptly as practicable, in accordance with Oregon Law
and its Articles of Incorporation and Bylaws:
(a) prepare and file with the SEC a preliminary Joint Proxy Statement
and, after consultation with the other Companies, respond to any comments of
the SEC with respect to such preliminary Joint Proxy Statement and, as soon
as practicable following the date upon which the Registration Statement
becomes effective, cause a definitive Joint Proxy Statement to be mailed to
its shareholders. Whenever any event occurs which should be described in an
amendment or a supplement to the Joint Proxy Statement under the Exchange Act
and the rules and regulations promulgated thereunder or which requires a
filing to be made with the SEC, such Company will promptly inform the other
Companies and will cooperate in filing with the SEC and mailing to its
shareholders such amendment or supplement. The Joint Proxy Statement, and all
amendments and supplements thereto, shall comply with applicable law and be
in form and substance reasonably satisfactory to each such Company.
(b) prepare and file with the SEC the Registration Statement with
respect to PPI Class A Shares to be issued in the Merger hereunder and use
all reasonable efforts to have the Registration Statement declared
effective. The Companies shall also use all reasonable efforts to obtain a
"no action" ruling from the Department of Consumer and Business Services of
the State of Oregon and take any other action required to be taken under
securities or blue sky laws of the State of Oregon and take any other action
required to be taken under securities or blue sky laws of the State of
Oregon in connection with the PC Reorganizations. Each of the Companies
shall furnish all information
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concerning such Company and its shareholders and shall take all such other
action as may be reasonably requested by the other Companies in connection
with such Registration Statement, the PC Reorganizations and the issuance of
PPI Class A Shares;
(c) promptly and duly call, give notice of, convene and hold as soon as
practicable following the date upon which the Registration Statement becomes
effective a meeting of its shareholders for the purpose of voting to approve
and adopt this Agreement and the transactions contemplated hereby (including
the applicable PC Reorganization and the Merger) and shall use all
reasonable efforts, unless the board of directors thereof reasonably
determines that such efforts would involve a breach of its fiduciary duty,
to obtain such shareholders' approval; and
(d) recommend approval and adoption of this Agreement and the
transactions contemplated hereby (including the applicable PC Reorganization
and the Merger) by the shareholders of such Company, and include in the
Joint Proxy Statement such recommendation and undertake all reasonable
actions in soliciting such approval, unless the board of directors thereof
reasonably determines that such recommendation or such actions would involve
a breach of its fiduciary duty.
SECTION 6.4 AFFILIATE AGREEMENTS. Prior to the mailing to the shareholders
of each Company of the Joint Proxy Statement, each Company shall deliver to the
other Companies a letter identifying all persons or entities which are, at the
time this Agreement and the transactions contemplated hereby (including the PC
Reorganizations and the Merger) are submitted for approval to the shareholders
of such Company, "affiliates" of such Company for purposes of Rule 145 under the
Securities Act. Each Company shall use all reasonable efforts to cause each
person and entity named in such letter to deliver to the other Companies at
least 10 days prior to the Effective Time a written "affiliates" agreement, in
customary form, restricting the disposition by such person or entity of PPI
Class A Shares to be received by such person or entity in the Merger, as
contemplated by Rule 145 under the Securities Act and as required to cause such
person or entity to be an owner of PPI Class A Shares immediately after the
Merger for purposes of Section 351 of the Code. Certificates surrendered for
exchange by any person or entity constituting an "affiliate" of a Company within
the meaning of Rule 145 under the Securities Act shall not be exchanged by PPI
for PPI Class A Shares pursuant to Section 2.8 hereof until PPI has received
such agreement described in this Section 6.4.
SECTION 6.5 DIRECTOR AND OFFICER INDEMNIFICATION. All rights to
indemnification and advancement of expenses existing in favor of the directors,
officers and agents of any party hereto (referred to herein, collectively, as
the "Indemnified Parties") under the provisions existing on the date hereof of
the Articles of Incorporation, Bylaws or indemnification agreements of such
party shall survive the Effective Time for six years thereafter (including any
directors' and officers' liability insurance theretofore maintained), and PPI
agrees to indemnify and advance expenses to the Indemnified Parties to the full
extent required or permitted by any party under the provisions existing on the
date hereof of the Articles of Incorporation, Bylaws or indemnification
agreements of such party.
SECTION 6.6 PUBLIC ANNOUNCEMENTS. So long as this Agreement is in effect,
each of the parties hereto shall consult with the other parties before issuing
any press release or otherwise making any public statement with respect to any
of the transactions contemplated hereunder (including the PC Reorganizations and
the Merger) and shall not issue any such press release or make any such public
statement prior to such consultation.
SECTION 6.7 FURTHER ACTION. Upon the terms and subject to the conditions
hereof, each of the parties hereto agrees to use all reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement (including the PC Reorganizations and the Merger) and shall use
all reasonable efforts to obtain all waivers, permits, consents and approvals
and to effect all registrations, filings and notices with or to third parties or
governmental authorities which are necessary or desirable in connection with
such transactions. None of the parties hereto shall take any action that will
have the effect of delaying, impairing
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or impeding the receipt of any such approvals. Each party will keep the other
parties apprised of the status of any inquiries made of such party by the SEC or
any other governmental agency or authority or members of their respective staffs
with respect to this Agreement or such transactions.
SECTION 6.8 ACCOUNTING METHODS. Each of the parties hereto agrees that it
shall not change its (a) methods of accounting in effect at December 31, 1995,
except as required by GAAP (as concurred in by its independent auditors), or (b)
fiscal year.
SECTION 6.9 TAX TREATMENT. Each of the parties hereto agrees that it shall
not take or cause to be taken any action, whether before or after the Effective
Time, that would disqualify any of the Corvallis Distribution, the HealthFirst
Distribution and the Medford Distribution as a "reorganization" within the
meaning of Section 355 of the Code or the Merger as a "reorganization" within
the meaning of Section 368 of the Code; PROVIDED, HOWEVER, that, at the option
of Corvallis, the Corvallis Distribution may be made on a basis other than in
accordance with the fair market value of each such shareholder's then-current
equity in Corvallis so long as such distribution would not cause adverse tax or
other consequences for the other Companies or their respective shareholders with
respect to (i) the qualification of the HealthFirst Distribution or the Medford
Distribution as a "reorganization" within the meaning of Section 355 of the Code
or (ii) the qualification of the Merger as a "reorganization" within the meaning
of Section 368 of the Code.
ARTICLE VII
CONDITIONS OF CONSUMMATION OF TRANSACTIONS
SECTION 7.1 CONDITIONS TO OBLIGATION OF THE PARTIES TO EFFECT THE
MERGER. The respective obligations of the parties hereto to consummate the PC
Reorganizations and the Merger shall be subject to the fulfillment at or prior
to the Effective Time of the following conditions, unless waived by all of the
parties in writing:
(a) SHAREHOLDER APPROVAL. (i) This Agreement and the transactions
contemplated hereby (including, without limitation, the Corvallis
Reorganization and the Merger) shall have been approved and adopted by the
vote of the holders of two-thirds of the Corvallis Class A Shares and the
vote of the holders of two-thirds of the Corvallis Class B Shares, in each
case as a voting group, in accordance with Oregon Law.
(ii) This Agreement and the transactions contemplated hereby (including,
without limitation, the HealthFirst Reorganization and the Merger) shall
have been approved and adopted by the vote of the holders of a majority of
Class A Shares of HealthFirst in accordance with Oregon Law.
(iii) This Agreement and the transactions contemplated hereby
(including, without limitation, the Medford Reorganization and the Merger)
shall have been approved and adopted by the vote of the holders of a
majority of Medford Shares in accordance with Oregon Law.
(b) BLUE SKY NO ACTION RULING. The Department of Consumer and Business
Services of the State of Oregon shall have issued a "no action" ruling with
respect to (i) the distribution of shares of capital stock of Corvallis New
PC to the shareholders of Corvallis in connection with the Corvallis
Distribution, (ii) the distribution of shares of capital stock HealthFirst
New PC to the shareholders of HealthFirst in connection with the HealthFirst
Distribution and (iii) the distribution of shares of capital stock of
Medford New PC to the shareholders of Medford in connection with the Medford
Distribution.
(c) REGISTRATION STATEMENT. The SEC shall have declared the
Registration Statement effective. No stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose, and no similar proceeding in respect of the
Joint Proxy Statement, shall have been initiated or threatened in writing by
the SEC.
(d) NO INJUNCTION OR ORDER. No preliminary or permanent injunction or
other order by any federal, state or foreign court of competent jurisdiction
which prohibits the consummation of the
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Merger shall have been issued and remain in effect. No statute, rule,
regulation, executive order, stay, decree or judgment shall have been
enacted, issued, promulgated, enforced or entered by any court or
governmental authority which prohibits or restricts the consummation of the
Merger or other transactions contemplated hereunder. Other than the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware and the Articles of Merger with the Secretary of State of the State
of Oregon, all authorizations, consents, orders or approvals of, or
declarations or filings with, and all expirations of waiting periods imposed
by, any government authority (referred to herein, collectively, as the
"Regulatory Consents") which are necessary for the consummation of the
Merger, other than those Regulatory Consents which, if not obtained, would
have a material adverse effect on the consummation of the Merger or a
Material Adverse Effect with respect to the Surviving Corporation, shall
have been filed, occurred or been obtained and such Regulatory Consents
shall be in full force and effect. All securities or blue sky permits and
other authorizations of the State of Oregon necessary to effect the PC
Reorganizations, to issue PPI Class A Shares in exchange for Old PC Shares
and to consummate the Merger shall have been received.
(e) OPTION PLANS. PPI shall have taken all necessary action to adopt
the PPI Employee Option Plan, the PPI Non-Employee Director Option Plan, the
PPI Non-Employee Provider Option Plan and the PPI Change in Control Plan.
(f) RIGHTS AGREEMENT. PPI shall have taken all necessary action to
adopt a Rights Agreement, substantially in the form attached hereto as
Exhibit G, for a dividend distribution of one right for each PPI Common
Share to purchase a certain number of shares of a class of preferred stock
of PPI.
(g) TAX OPINION. PPI and each of the Companies shall have received the
opinion of McDermott, Will & Emery, dated on or about the date that is two
business days prior to the date the Joint Proxy Statement is first mailed to
shareholders of each of the Companies, with such assumptions and
qualifications as are reasonably satisfactory to the Companies and based on
such certificates of officers of each of the Companies as requested by
McDermott, Will & Emery, to the effect that (i) each of the Corvallis
Distribution, the HealthFirst Distribution and the Medford Distribution
will, more likely than not, be treated for federal income tax purposes as a
"reorganization" within the meaning of Section 355 of the Code and (ii) the
Merger will, more likely than not, be treated for federal income tax
purposes as a "reorganization" within the meaning of Section 368 of the
Code, except that no such opinion shall be provided to Corvallis in the
event that the Corvallis Distribution is effected in a manner that adversely
affects (i) the qualification thereof as a "reorganization" within the
meaning of Section 355 of the Code or (ii) the qualification of the Merger
as a "reorganization" within the meaning of Section 368 of the Code.
(h) APPROVALS; PROVIDER NUMBERS. Each of Corvallis New PC, HealthFirst
New PC and Medford New PC shall have obtained all material approvals,
licenses and provider numbers from governmental authorities, in form and
substance reasonably satisfactory to the Companies, necessary or appropriate
for the operation following the Effective Time of the respective businesses
of Corvallis, HealthFirst and Medford as currently operated thereby,
including the receipt of confirmation from all applicable governmental
agencies that at the Effective Time all licenses required by law to operate
such businesses as currently operated will be transferred to, or reissued in
the name of, Corvallis New PC, HealthFirst New PC and Medford New PC, as the
case may be. Further, each of Corvallis New PC, HealthFirst New PC and
Medford New PC shall have received all material approvals, consents or
commitments satisfactory to the Companies from Medicare and other
third-party payors of certification effective as of the Effective Time for
the continued participation by Corvallis New PC, HealthFirst New PC and
Medford New PC in each such program and the right of Corvallis New PC,
HealthFirst New PC and Medford New PC to receive reimbursement with respect
thereto.
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SECTION 7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PPI. The obligation of
PPI to consummate the Merger is subject to the following conditions, in addition
to the conditions described in Section 7.1 hereof, unless waived in writing by
PPI:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each of Corvallis, HealthFirst and Medford (other than such
representations and warranties as are made as of a specific date) contained
in Article III of this Agreement shall be true and correct in all material
respects at and as of the Effective Time, with the same force and effect as
if made at and as of the Effective Time and PPI shall have received a
certificate of the chairman of the board or the president of each of the
Companies as to the satisfaction of this condition.
(b) AGREEMENTS AND COVENANTS. Each of Corvallis, HealthFirst and
Medford shall have performed or complied in all material respects with all
agreements and covenants required by this Agreement to be performed or
complied with thereby at or prior to the Effective Time.
(c) CONSENT AND APPROVALS. Each of Corvallis, HealthFirst and Medford
shall have obtained the consent or approval of each person or entity the
consent or approval of which shall be required in connection with the
transactions contemplated hereby under any loan or credit agreement, note,
mortgage, indenture, lease, license or other agreement or instrument, except
for such consents and approvals the failure of which to obtain would not,
individually or in the aggregate, have a Material Adverse Effect with
respect to such Company or upon the consummation of the transactions
contemplated hereunder.
(d) PC REORGANIZATIONS. The respective Restated Articles of
Incorporation of Corvallis, HealthFirst and Medford shall have been made
effective and the PC Reorganizations shall have been consummated in
accordance with Oregon Law.
(e) MANAGEMENT AGREEMENTS. (i) Corvallis shall have entered into the
Corvallis Management Agreement with Corvallis New PC, (ii) HealthFirst shall
have entered into the HealthFirst Management Agreement with HealthFirst New
PC and (iii) Medford shall have entered into the Medford Management
Agreement with Medford New PC.
SECTION 7.3 ADDITIONAL CONDITIONS TO OBLIGATION OF CORVALLIS. The
obligation of Corvallis to consummate the Merger is subject to the following
conditions, in addition to the conditions described in Section 7.1 hereof,
unless waived in writing by Corvallis:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each of the other parties hereto (other than such representations and
warranties as are made as of a specific date) contained in Articles III and
IV of this Agreement shall be true and correct in all material respects at
and as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time and Corvallis shall have received a certificate
of the chairman of the board or the president of each of the other parties
hereto as to the satisfaction of this condition.
(b) AGREEMENTS AND COVENANTS. Each of the other parties hereto shall
have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with
thereby at or prior to the Effective Time.
(c) CONSENT AND APPROVALS. Each of the other parties hereto shall have
obtained the consent or approval of each person or entity the consent or
approval of which shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument, except for such
consents and approvals the failure of which to obtain would not,
individually or in the aggregate, have a Material Adverse Effect with
respect to such party or upon the consummation of the transactions
contemplated hereunder.
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(d) PC REORGANIZATIONS. The respective Restated Articles of
Incorporation of HealthFirst and Medford shall have been made effective and
the HealthFirst Reorganization and the Medford Reorganization shall have
been consummated in accordance with Oregon Law.
(e) MANAGEMENT AGREEMENTS. HealthFirst shall have entered into the
HealthFirst Management Agreement with HealthFirst New PC and (ii) Medford
shall have entered into the Medford Management Agreement with Medford New
PC.
(f) DISSENTING SHAREHOLDERS. Unless waived in writing by Corvallis,
(a) the aggregate number of shares held by shareholders of HealthFirst
dissenting from the Merger and demanding fair value of such shares in
accordance with the provisions of Section 60.554 of the Oregon Business
Corporation Act shall not exceed 15 percent all issued and outstanding
shares of capital stock of HealthFirst and (b) the aggregate number of
shares held by shareholders of Medford dissenting from the Merger and
demanding fair value of such shares in accordance with the provisions of
Section 60.554 of the Oregon Business Corporation Act shall not exceed 15
percent all issued and outstanding shares of capital stock of Medford.
SECTION 7.4 ADDITIONAL CONDITIONS TO OBLIGATION OF HEALTHFIRST. The
obligation of HealthFirst to consummate the Merger is subject to the following
conditions, in addition to the conditions described in Section 7.1 hereof,
unless waived in writing by HealthFirst:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each of the other parties hereto (other than such representations and
warranties as are made as of a specific date) contained in Articles III and
IV of this Agreement shall be true and correct in all material respects at
and as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time and HealthFirst shall have received a
certificate of the chairman of the board or the president of each of the
other parties hereto as to the satisfaction of this condition.
(b) AGREEMENTS AND COVENANTS. Each of the other parties hereto shall
have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with
thereby at or prior to the Effective Time.
(c) CONSENT AND APPROVALS. Each of the other parties hereto shall have
obtained the consent or approval of each person or entity the consent or
approval of which shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument, except for such
consents and approvals the failure of which to obtain would not,
individually or in the aggregate, have a Material Adverse Effect with
respect to such Company or upon the consummation of the transactions
contemplated hereunder.
(d) PC REORGANIZATIONS. The respective Restated Articles of
Incorporation of Corvallis and Medford shall have been made effective and
the Corvallis Reorganization and the Medford Reorganization shall have been
consummated in accordance with Oregon Law.
(e) MANAGEMENT AGREEMENTS. (i) Corvallis shall have entered into the
Corvallis Management Agreement with Corvallis New PC and (ii) Medford shall
have entered into the Medford Management Agreement with Medford New PC.
(f) DISSENTING SHAREHOLDERS. Unless waived in writing by HealthFirst,
(a) the aggregate number of shares held by shareholders of Corvallis
dissenting from the Merger and demanding fair value of such shares in
accordance with the provisions of Section 60.554 of the Oregon Business
Corporation Act shall not exceed 15 percent all issued and outstanding
shares of capital stock of Corvallis and (b) the aggregate number of shares
held by shareholders of Medford dissenting from the Merger and demanding
fair value of such shares in accordance with the provisions of Section
60.554 of the Oregon Business Corporation Act shall not exceed 15 percent
all issued and outstanding shares of capital stock of Medford.
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<PAGE>
SECTION 7.5 ADDITIONAL CONDITIONS TO OBLIGATION OF MEDFORD. The obligation
of Medford to consummate the Merger is subject to the following conditions, in
addition to the conditions described in Section 7.1 hereof, unless waived in
writing by Medford:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each of the other parties hereto (other than such representations and
warranties as are made as of a specific date) contained in Articles III and
IV of this Agreement shall be true and correct in all material respects at
and as of the Effective Time, with the same force and effect as if made at
and as of the Effective Time and Medford shall have received a certificate
of the chairman of the board or the president of each of the other parties
hereto as to the satisfaction of this condition.
(b) AGREEMENTS AND COVENANTS. Each of the other parties hereto shall
have performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with
thereby at or prior to the Effective Time.
(c) CONSENT AND APPROVALS. Each of the other parties hereto shall have
obtained the consent or approval of each person or entity the consent or
approval of which shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument, except for such
consents and approvals the failure of which to obtain would not,
individually or in the aggregate, have a Material Adverse Effect with
respect to such party or upon the consummation of the transactions
contemplated hereunder.
(d) PC REORGANIZATIONS. The respective Restated Articles of
Incorporation of Corvallis and HealthFirst shall have been made effective
and the Corvallis Conversion and the HealthFirst Conversion shall have been
consummated in accordance with Oregon Law.
(e) MANAGEMENT AGREEMENTS. (i) Corvallis shall have entered into the
Corvallis Management Agreement with Corvallis New PC and (ii) HealthFirst
shall have entered into the HealthFirst Management Agreement with
HealthFirst New PC.
(f) DISSENTING SHAREHOLDERS. Unless waived in writing by Medford, (a)
the aggregate number of shares held by shareholders of Corvallis dissenting
from the Merger and demanding fair value of such shares in accordance with
the provisions of Section 60.554 of the Oregon Business Corporation Act
shall not exceed 15 percent all issued and outstanding shares of capital
stock of Corvallis and (b) the aggregate number of shares held by
shareholders of HealthFirst dissenting from the Merger and demanding fair
value of such shares in accordance with the provisions of Section 60.554 of
the Oregon Business Corporation Act shall not exceed 15 percent all issued
and outstanding shares of capital stock of HealthFirst.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated and the
transactions contemplated hereby (including, without limitation, the PC
Reorganizations and the Merger) abandoned at any time prior to the Effective
Time, whether before or after approval by the shareholders of any of the
Companies:
(a) by mutual written consent of all of the parties hereto;
(b) by any party (referred to herein as the "Notice Party") if there
shall have been any material breach of a material obligation of any other
party (referred to herein as the "Breaching Party") hereunder and, if such
breach is curable, such default shall have not been remedied within 10 days
after receipt by the Breaching Party of notice in writing from the Notice
Party specifying such breach and requesting that such breach be remedied;
PROVIDED, HOWEVER, that such 10-day period shall be extended for so long as
the Breaching Party shall be making diligent attempts to cure such default
and such default remains curable;
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(c) by any party (referred to herein as the "Withdrawing Party") if the
board of directors of such party shall have (i) determined, in the exercise
of its fiduciary duties under applicable law, not to recommend this
Agreement, the applicable PC Reorganization or the Merger or shall have
withdrawn such recommendation or (ii) resolved to do any of the foregoing;
(d) by any party if any court of competent jurisdiction in the United
States or any governmental authority shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or otherwise
prohibiting any PC Reorganization or the Merger and such order, decree,
ruling or other action shall have become final and non-appealable;
(e) by any party upon written notice to the other parties if any
approval of the shareholders of such party required for the consummation of
the transactions submitted for their approval shall not have been obtained
by reason of the failure to obtain the required vote at a duly held meeting
of shareholders at any adjournment thereof; or
(f) by any party if the Effective Time shall not have taken place on or
before January 31, 1997 (which date may be extended by agreement of the
parties hereto), unless the party desiring to so terminate pursuant to this
Section 8.1(f) is in default hereunder.
SECTION 8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement in accordance with Section 8.1 hereof, written notice of such
termination shall forthwith be provided by the party so terminating this
Agreement to the other parties hereto and this Agreement shall become void and
have no effect, and the transactions contemplated hereunder shall be abandoned
without further action by any of the parties hereto, without any liability or
obligation on the part of any party, other than as set forth in this Section 8.2
and Section 9.2 hereof and except to the extent that such termination results
from a breach of this Agreement. If this Agreement is terminated as provided
herein, each party hereto shall, upon request therefor by any other party
hereto, shall destroy all documents, workpapers and other materials of such
other party hereto relating to the transactions contemplated hereunder, whether
obtained before or after the execution hereof.
SECTION 8.3 AMENDMENT. This Agreement may be amended by action taken at
any time before or after approval hereof by the shareholders of the parties
hereto, but, after any such approval, no amendment shall be made which alters
any of the Exchange Ratios or which in any way materially adversely affects the
rights of such shareholders, without the further approval of such shareholders.
This Agreement may not be amended except by an instrument in writing signed on
behalf of each party.
SECTION 8.4 WAIVER. At any time prior to the Effective Time, the parties
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties of the other parties hereto contained herein or
in any document delivered by such other parties hereto pursuant hereto and (c)
waive compliance with any of the agreements or conditions of the other parties
hereto contained herein. Such extension or waiver (i) shall be valid if set
forth in an instrument in writing granting such waiver signed by each party and
(ii) shall not operate as a waiver of, or estoppel with respect, any subsequent
or other failure.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. No
representations, warranties or agreements contained herein shall survive beyond
the Effective Time except that the agreements contained in Sections 2.5, 2.6,
2.7, 2.8, 2.9, 2.10, 6.5, 6.6, 6.7, 6.10, 9.1, 9.4, 9.6, 9.7 and 9.8 hereof, and
all other agreements of PPI, shall survive beyond the Effective Time.
SECTION 9.2 EXPENSES AND BREAKUP FEE. (a) All costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereunder
(including, without limitation, the PC
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Reorganizations and the Merger) shall be paid by the parties hereto in
accordance with the Amended and Restated Expense Sharing Agreement, dated as of
September 19, 1996, entered into among the parties.
(b) Notwithstanding the provisions of paragraph (a) of this Section 9.2, if
this Agreement is terminated by the Breaching Party under Sections 8.1(b) or the
Withdrawing Party under 8.1(c) hereof, then, in such event, such Breaching Party
or such Withdrawing Party, as the case may be, shall forthwith pay, within five
days of the date of the termination of this Agreement, to each of the other
parties hereto a breakup fee in an amount equal to all costs and expenses
incurred by such party, including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants incurred by
each such party or on its behalf in connection with or related to the
authorization, preparation, negotiation, execution and performance of this
Agreement, the preparation, filing, printing and mailing the Joint Proxy
Statement and the Registration Statement, the solicitation of shareholders'
approvals and all other matters related to the consummation of the transactions
contemplated hereby (including, without limitation, the PC Reorganizations and
the Merger).
SECTION 9.3 NOTICES. All notices and other communications to be provided
pursuant hereto shall be in writing and shall be deemed to have been duly
provided as of the date delivered if sent by telecopier or delivered personally
(including, without limitation, delivery by commercial carrier warranting
next-day delivery) or as of the third day after mailing if mailed by registered
or certified mail (postage prepaid, return receipt requested) to each party at
such party's address set forth herein (or at such other address for a party as
shall be specified by similar notice):
(a) if to PPI:
Physician Partners, Inc.
111 SW Columbia Street, Suite 725
Portland, Oregon 97201
Attention: President
with a copy to:
McDermott, Will & Emery
2049 Century Park East--Suite 3400
Los Angeles, California 90067
Attention: Douglas M. Mancino, Esq.
Telecopier No.: (310) 277-4730
(b) if to Corvallis:
The Corvallis Clinic, P.C.
444 NW Elks Drive
Corvallis, Oregon 97330
Attention: David Kobriger
Telecopier No.: (541) 757-1847
(c) if to HealthFirst:
HealthFirst Medical Group, P.C.
10535 N.E. Glisan
Portland, Oregon 97220
Attention: Jerry Erstgaard
Telecopier No.: (503) 256-6825
(d) if to Medford:
Medford Clinic, P.C.
555 Black Oak Drive
Medford, Oregon 97504
Attention: Jon Ness
Telecopier No.: (541) 734-3598
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<PAGE>
SECTION 9.4 HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 9.5 SEVERABILITY. If any term or provision of this Agreement, or
the application thereof to any person or entity or property or circumstance,
shall to any extent be, or be deemed to be, invalid or unenforceable, the
remainder of this Agreement, or the application of such term or provision to
persons or entities or property or circumstances other than those as to which
such term or provision is, or is deemed to be, invalid or unenforceable, shall
not be affected thereby, and each term and provision of this Agreement shall be
valid and enforced to the fullest extent permitted by law.
SECTION 9.6 ENTIRE AGREEMENT. This Agreement (including the Schedules and
Exhibits and other documents and instruments referred to herein) and the
confidentiality agreement referenced in Section 6.1(b) hereof (a) constitute the
entire agreement, and supersedes all prior agreements and undertakings, both
written and oral, among the parties hereto or any of such parties hereto, with
respect to the subject matter hereof, (b) are not intended to confer upon any
other person or entity any rights or remedies hereunder. In this regard, each of
Corvallis, HealthFirst and Medford represents and warrants that such party has
no arrangement or understanding with an entity not a party to this Agreement
with respect to a merger or similar transaction in the event this Agreement is
terminated.
SECTION 9.7 ASSIGNMENT. Neither this Agreement nor any of the rights set
forth herein shall be assigned by any of the parties hereto (by operation of law
or otherwise) without the prior written consent of the other parties hereto.
SECTION 9.8 GOVERNING LAW. (a) This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Oregon.
(b) Each party hereby irrevocably submits to the jurisdiction of any Oregon
state court or United States federal court sitting in the State of Oregon over
any suit, action or other proceeding arising out of or relating to this
Agreement and hereby irrevocably agrees that all claims with respect to any such
suit, action or proceeding may be heard and determined in such courts.
SECTION 9.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which when executed shall be deemed to be an original and
all of which taken together shall constitute one and the same agreement.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by such party's officer thereunto
duly authorized.
PHYSICIAN PARTNERS, INC.
By: /s/ DAVID M. GOLDBERG
-----------------------------------------
Title: PRESIDENT
THE CORVALLIS CLINIC, P.C.
By: /s/ DAVID H. CUTSFORTH, JR., M.D.
-----------------------------------------
Title:
HEALTHFIRST MEDICAL GROUP, P.C
By: /s/ MATTHEW M. SHELLEY, M.D.
-----------------------------------------
Title: PRESIDENT
MEDFORD CLINIC, P.C.
By: /s/ BRUCE E. VAN ZEE, M.D.
-----------------------------------------
Title: PRESIDENT
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<PAGE>
AMENDMENT TO
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Amendment, dated as of November 4, 1996, is entered into by and among
PHYSICIAN PARTNERS, INC., a newly-formed Delaware corporation ("PPI"), THE
CORVALLIS CLINIC, P.C., an Oregon professional corporation ("Corvallis"),
HEALTHFIRST MEDICAL GROUP, P.C., an Oregon professional corporation
("HealthFirst"), and MEDFORD CLINIC, P.C., an Oregon professional corporation
("Medford" and, together with Corvallis and HealthFirst, referred to herein,
collectively, as the "Companies").
RECITALS
WHEREAS, PPI, Corvallis, HealthFirst and Medford have entered into the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996 (the "Reorganization and Merger Agreement"; terms defined
in the Reorganization and Merger Agreement and not otherwise defined herein have
the same respective meanings when used herein, and the rules of construction set
forth in the Reorganization and Merger Agreement are incorporated herein by
reference), to effect the PC Reorganizations and the Merger;
WHEREAS, PPI and the Companies wish to amend the Reorganization and Merger
Agreement upon the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO REORGANIZATION AND MERGER AGREEMENT. The
Reorganization and Merger Agreement is, effective as of the date hereof, hereby
amended as follows:
(a) Section 5.1(b)(ii) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
"(ii) declare, pay or set aside for payment any distribution in respect
of shares of its capital stock; PROVIDED, HOWEVER, that in the event that
the quotient obtained by dividing (A) the Corvallis FTE, the HealthFirst FTE
or the Medford FTE as of June 1, 1996 into (B) the excess of total assets
over total liabilities of Corvallis, HealthFirst or Medford, as applicable
(such Company's "FTE Net Shareholder Equity"), as reflected on the balance
sheet thereof as at June 30, 1996, reviewed by Arthur Andersen LLP and
delivered to the Companies no later than November 15, 1996 (or, if available
on the date the Joint Proxy Statement is first mailed to shareholders of
each of the Companies, as reflected on the balance sheet thereof as at
September 30, 1996, reviewed by Arthur Andersen LLP and delivered to the
Companies no later than December 1, 1996), which reviewed balance sheet
shall be adjusted (except in the case of HealthFirst) by changing the value
of any real estate specified thereon from book value to fair market value
based on fair market value appraisals prepared by appraisers reasonably
acceptable to the other Companies during the past 20-month period, exceeds
the FTE Net Shareholder Equity of any other Company by more than 20 percent
(the "Minimum Net Equity Threshold"), such Company may make a distribution
to its shareholders in an amount equal to the product of (y) the amount of
such excess of such Company's FTE Net Shareholder Equity over the Minimum
Net Equity Threshold multiplied by (z) such Company's FTE as of June 1,
1996. Such reviewed balance sheets and such fair market appraisals shall,
absent manifest error, be conclusive and binding for purposes of determining
each Company's FTE Net Shareholder Equity;"
(b) Section 7.1(g) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
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<PAGE>
"(g) TAX OPINION. PPI and each of the Companies shall have received the
opinion of McDermott, Will & Emery, dated on or about the date that is two
business days prior to the date the Joint Proxy Statement is first mailed to
shareholders of each of the Companies, with such assumptions and qualifications
as are reasonably satisfactory to the Companies and based on such certificates
of officers of each of the Companies as requested by McDermott, Will & Emery, to
the effect that the Merger will, more likely than not, be treated for federal
income tax purposes as a 'reorganization' within the meaning of Section 368 of
the Code."
SECTION 2. REFERENCE TO AND EFFECT ON THE REORGANIZATION AND MERGER
AGREEMENT. On and after the date hereof, each reference in the Reorganization
and Merger Agreement to "this Agreement," "hereunder," "hereof," "herein" or
words of like import, and each reference in the other agreements, documents and
instruments relating to the Reorganization and Merger Agreement (the
"Transaction Documents") to the Reorganization and Merger Agreement, shall mean
and be a reference to the Reorganization and Merger Agreement as amended hereby.
Except as hereby expressly amended, the Reorganization and Merger Agreement
shall remain in full force and effect, and is hereby ratified and confirmed in
all respects on and as of the date hereof.
SECTION 3. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute one and the same
instrument.
SECTION 4. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF OREGON.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by
their duly authorized representatives.
PHYSICIAN PARTNERS, INC.
By: /s/ DAVID M. GOLDBERG
--------------------------------------
Title: President
THE CORVALLIS CLINIC, P.C.
By: /s/ DAVID H. CUTSFORTH, JR. M.D.
--------------------------------------
Title: President
HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ MATTHEW M. SHELLEY, M.D.
--------------------------------------
Title: President
MEDFORD CLINIC, P.C.
By: /s/ BRUCE VAN ZEE, M.D.
--------------------------------------
Title: President
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<PAGE>
SECOND AMENDMENT AND WAIVER OF
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Second Amendment and Waiver, dated as of November 29, 1996, is entered
into by and among PHYSICIAN PARTNERS, INC., a newly-formed Delaware corporation
("PPI"), THE CORVALLIS CLINIC, P.C., an Oregon professional corporation
("Corvallis"), HEALTHFIRST MEDICAL GROUP, P.C., an Oregon professional
corporation ("HealthFirst"), and MEDFORD CLINIC, P.C., an Oregon professional
corporation ("Medford" and, together with Corvallis and HealthFirst, referred to
herein, collectively, as the "Companies").
RECITALS
WHEREAS, PPI, Corvallis, HealthFirst and Medford have entered into the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996, as amended by an Amendment to Amended and Restated
Agreement and Plan of Reorganization and Merger, dated as of November 4, 1996
(as so amended, the "Reorganization and Merger Agreement"; terms defined in the
Reorganization and Merger Agreement and not otherwise defined herein having the
same respective meanings when used herein, and the rules of construction set
forth in the Reorganization and Merger Agreement being incorporated herein by
reference), to effect the PC Reorganizations and the Merger; and WHEREAS, PPI
and the Companies wish to amend the Reorganization and Merger Agreement with
respect to the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO REORGANIZATION AND MERGER AGREEMENT. The
Reorganization and Merger Agreement is, effective as of the date hereof, hereby
amended as follows:
(a) Section 1.1(a) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
"(a)(i) Prior to the Effective Time (as such term is defined in Section
2.2 hereof), Corvallis shall amend and restate the Articles of Incorporation
of Corvallis New PC under the Oregon Professional Corporation Act by filing
the Restated Articles of Incorporation of Corvallis New PC, substantially in
the form attached hereto as Exhibit A-1 or with such changes therein as are
reasonably acceptable to PPI and the other Companies, with the Secretary of
State of the State of Oregon (referred to herein as the 'Corvallis New PC
Incorporation').
(ii) As promptly as practicable after the approval of the Corvallis
Reorganization (as such term is defined in Section 1.2(a) hereof) and the
Merger by the requisite number of shareholders of Corvallis and upon
satisfaction of other closing conditions set forth in Article VII hereof,
except for the consummation of the PC Reorganizations and the execution and
delivery of the Management Agreements by the parties thereto, Corvallis
shall (A) transfer certain of its assets (referred to herein, collectively,
as the 'Corvallis New PC Assets') relating to the provider professional
services business of Corvallis, which assets are set forth on Schedule
1.1(a)(ii) attached to the Reorganization and Merger Agreement, to Corvallis
New PC, and cause Corvallis New PC to assume the liabilities of Corvallis
relating to the Corvallis New PC Assets, and (B) make a distribution in
accordance with Section 60.181 of the Oregon Business Corporation Act under
which the then-current holders of Class A Preferred Stock of Corvallis shall
receive all of the issued and outstanding shares of Corvallis New PC,
allocated on a pro rata basis in accordance with the percentage of Class A
Preferred Stock of Corvallis then held by each such shareholder (such
transfer and distribution being referred to herein, collectively, as the
'Corvallis Distribution'); PROVIDED, HOWEVER, that such allocation may be
made only so long as such distribution would not cause adverse tax or other
consequences for the other Companies or their respective shareholders with
respect to (y) the qualification of the HealthFirst Distribution or
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the Medford Distribution as a 'reorganization' within the meaning of Section
355 of the Code or (z) the qualification of the Merger as a 'reorganization'
within the meaning of Section 368 of the Code."
(b) Section 1.1(b)(i) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
"(b)(i) Prior to the Effective Time, HealthFirst shall amend and restate
the Articles of Incorporation of HealthFirst New PC under the Oregon
Professional Corporation Act by filing the Restated Articles of
Incorporation of HealthFirst New PC, substantially in the form attached
hereto as Exhibit A-1 or with such changes therein as are reasonably
acceptable to PPI and the other Companies, with the Secretary of State of
the State of Oregon (referred to herein as the 'HealthFirst New PC
Incorporation')."
(c) Section 1.1(c)(i) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
"(c)(i) Prior to the Effective Time, Medford shall amend and restate the
Articles of Incorporation of Medford New PC under the Oregon Professional
Corporation Act by filing the Restated Articles of Incorporation of Medford
New PC, substantially in the form attached hereto as Exhibit A-1 or with
such changes therein as are reasonably acceptable to PPI and the other
Companies, with the Secretary of State of the State of Oregon (referred to
herein as the 'Medford New PC Incorporation')."
(d) Exhibit A-2 to the Reorganization and Merger Agreement (Form of Bylaws
of Each of Corvallis New PC, HealthFirst New PC and Medford New PC) shall be
deleted in its entirety and all references to Exhibit A-2 in the Reorganization
and Merger Agreement shall be deleted.
(e) Exhibit C to the Reorganization and Merger Agreement (Form of Practice
Management for Each of Corvallis, HealthFirst and Medford) is hereby amended and
restated to read in its entirety in the form attached hereto as Exhibit C. On
and after the date hereof, each reference in the Reorganization and Merger
Agreement and the other agreements, documents and instruments relating to the
Reorganization and Merger Agreement to "Exhibit C," "Practice Management
Agreement," "Management Agreement" or words of like import shall mean and be a
reference to Exhibit C attached hereto.
(f) Section 2.7(a) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
"SECTION 2.7 CONVERSION OF OLD PC SHARES IN MERGER. (a) At the
Effective Time, by virtue of the Merger and without any action on the part
of any of Corvallis, HealthFirst or Medford or any of their respective
shareholders, shares of capital stock of Corvallis, HealthFirst and Medford
(referred to herein, collectively, as 'Old PC Shares') issued and
outstanding immediately prior to the Effective Time shall be converted at
the Effective Time into the right to receive shares of Class A Common Stock,
par value $0.01 per share ('PPI Class A Shares'), of PPI, in accordance with
the following exchange ratios (referred to herein as the 'Exchange Ratios'),
as applicable:
(i)(A) Each share of Class C Preferred Stock of Corvallis shall be
converted into the right to receive such number of PPI Class A Shares as
shall have an aggregate value of $100, with the value of each PPI Class A
Share being equal to the quotient (the 'Appraised Per Share Value') obtained
by dividing (I) the aggregate number of PPI Class A Shares contemplated to
be outstanding, immediately after and assuming the release to the holders of
Class B Common Stock of Corvallis and the shareholders of each of
HealthFirst and Medford of 50 percent of PPI Class A Shares in the Escrow
Deposits (as such term is hereinafter defined) in aggregate, with the
remaining 50 percent thereof being cancelled and retired, into (II) the
combined value of Corvallis, HealthFirst and Medford as a merged entity
based on the assumption that the Merger had occurred on June 30, 1996, as
determined by an independent valuation firm designated by Corvallis (the
'Combined Enterprise Value');
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(B) Each share of Class A Preferred Stock of Corvallis shall be
converted into the right to receive such number of PPI Class A Shares as
shall have an aggregate value of $23,000, with the value of each PPI Class A
Share being equal to the Appraised Per Share Value; and
(C) Each share of Class B Common Stock of Corvallis shall be converted
into the right to receive such number of PPI Class A Shares as is equal to
the quotient obtained by dividing (I) the number of all issued and
outstanding shares of Class B Common Stock of Corvallis at the Effective
Time into (II) the excess of (x) 2,410,250 PPI Class A Shares over (y) the
aggregate number of PPI Class A Shares into which all of the issued and
outstanding shares of Class A Preferred Stock of Corvallis and Class C
Preferred Stock of Corvallis are converted under paragraphs (A) and (B) in
this Section 2.7(a)(i);
(ii) Each Class A Share of HealthFirst shall be converted into the right
to receive 354 PPI Class A Shares; and
(iii) Each share of Common Stock of Medford shall be converted into the
right to receive 31,544 PPI Class A Shares;
PROVIDED, HOWEVER, that on the Effective Time, (A) each holder of Class B
Common Stock of Corvallis as of Effective Time (each, a 'Corvallis Class B
Shareholder') shall deposit into escrow (the 'Corvallis Escrow Deposit')
such number of PPI Class A Shares as is equal to 27.41 percent of all PPI
Class A Shares issued to such Corvallis Class B Shareholder in the Merger,
which would result in a total amount of 621,986 PPI Class A Shares being
deposited by all Corvallis Class B Shareholders in the Corvallis Escrow
Deposit, (B) each holder of Class A Shares of HealthFirst (each, a
'HealthFirst Shareholder') shall deposit into escrow as of the Effective
Time (the 'HealthFirst Escrow Deposit') such number of PPI Class A Shares as
is equal to 25.81 percent of all PPI Class A Shares issued to such
HealthFirst Shareholder in the Merger, which would result in a total amount
of 839,960 PPI Class A Shares being deposited by all HealthFirst
Shareholders in the HealthFirst Escrow Deposit and (C) each holder of Common
Stock of Medford as of the Effective Time (each, a 'Medford Shareholder')
shall deposit into escrow (the 'Medford Escrow Deposit' and, together with
the Corvallis Escrow Deposit and the HealthFirst Escrow Deposit, referred to
herein, collectively, as the 'Escrow Deposits'), such number of PPI Class A
Shares as is equal to 25.81 percent of all PPI Class A Shares issued to such
Medford Shareholder in the Merger, which would result in a total of 464,000
PPI Class A Shares being deposited by all Medford Shareholders in the
Medford Escrow Deposit. The Escrow Deposits shall be maintained by an escrow
agent (the 'Escrow Agent') reasonably acceptable to PPI and the Companies
pursuant to an escrow agreement to be entered into among PPI, the Companies
and the Escrow Agent (the 'Escrow Agreement'), prior to the Effective Time,
in such form as is reasonably acceptable to the parties thereto.
The PPI Class A Shares in the Corvallis Escrow Deposit, the HealthFirst
Escrow Deposit and the Medford Escrow Deposit shall be held by the Escrow
Agent until the occurrence of either of the following events:
(A) In the event that the quotient obtained by dividing (1) the
Corvallis FTE, the HealthFirst FTE or the Medford FTE as of October 1, 1996
into (2) the excess of total assets over total liabilities of Corvallis,
HealthFirst or Medford, as applicable (such Company's 'FTE Net Shareholder
Equity'), as reflected on the balance sheet thereof as at December 31, 1996,
audited by Arthur Andersen LLP and delivered to PPI no later than March 31,
1997, which audited balance sheet shall be adjusted (except in the case of
HealthFirst) by changing the value of any real estate specified thereon from
book value to fair market value if any fair market value appraisals have
been prepared by appraisers reasonably acceptable to the other Companies
during the 30-month period prior to December 31, 1996 (such audited balance
sheets and such fair market appraisals, absent manifest error, being
conclusive and binding for purposes of determining each Company's FTE Net
Shareholder Equity), does not exceed the FTE Net Shareholder Equity of any
other Company by more than 20 percent (the
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'Minimum Net Equity Threshold'), the Escrow Agent shall release from the
Escrow Deposits to each of the Corvallis Class B Shareholders, HealthFirst
Shareholders and Medford Shareholders such number of PPI Class A Shares as
is equal to 50 percent of the number of PPI Class A Shares deposited by each
such shareholder in the Corvallis Escrow Deposit, the HealthFirst Escrow
Deposit or the Medford Escrow Deposit, as applicable, so as to achieve
issuance by PPI of shares of PPI Class A Common Stock as consideration in
the Merger on the basis of 27,000 shares per FTE of each Company. Any PPI
Class A Shares remaining in the Escrow Deposits will be cancelled and
retired and cease to exist; or
(B) In the event that the FTE Net Shareholder Equity of a Company or
Companies (each, the 'Excess Company') exceeds the FTE Net Shareholder
Equity of any other Company by more than the Minimum Net Equity Threshold
(such excess, referred to herein, as the 'FTE Excess Amount'), the Escrow
Agent shall release from the Escrow Deposits to each of the Corvallis Class
B Shareholders, HealthFirst Shareholders and Medford Shareholders as of, as
the case may be, such number of PPI Class A Shares as is determined by the
following procedure:
(1) Multiply the FTE Excess Amount of the Excess Company by the FTE of
such Company and multiply the FTE Excess Amount of any other Excess Company,
if any, by the FTE of such Company (each, the 'Excess Company's True-Up
Amount');
(2) If more than one True-Up Amount is available, add both amounts (the
'Total True-Up Adjustment Amount');
(3) Multiply the Appraised Per Share Value (i.e., $15.82) by the
aggregate number of restricted PPI Class A Shares issued to the four
executive officers and one director of PPI (i.e., 135,000), the product of
which is $2,135,700 (the 'Restricted Stock Adjustment');
(4) Add the True-Up Adjustment and the Restricted Stock Adjustment (the
'Total Adjustment');
(5) Subtract the Total Adjustment from the Combined Enterprise Value
(the 'Adjusted Combined Enterprise Value');
(6) Multiply the Adjusted Combined Enterprise Value by a fraction, the
numerator of which is the FTE of each of the Companies and the denominator
of which is the total FTE (i.e., 240.75) (such Company's 'FTE-Based Value');
(7) Divide each Company's FTE-Based Value by $15.82 (such Company's
'FTE-based Share Allocation');
(8) Divide each Company's FTE-Based Share Allocation by the FTE of such
Company (such Company's 'Share Allocation per FTE');
(9) Divide each Company's True-Up Adjustment Amount by $15.82 (such
Company's 'PPI Share Equivalency');
(10) Divide each Company's PPI Share Equivalency by the FTE of such
Company (such Company's 'True-Up Share Allocation per FTE');
(11) Add Share Allocation per FTE to True-Up Share Allocation per FTE of
each Company (such Company's 'Final Share Allocation per FTE');
(12) If any Company's Final Share Allocation per FTE exceeds 27,000
(such excess referred to herein as 'FTE Differential'), the Escrow Agent
will release to each of the shareholders of such Company such number of PPI
Class A Shares as is equal to (a) 50 percent of the number of PPI Class A
Shares deposited in the applicable Escrow Deposit by such shareholder, PLUS
(b) such number of PPI Class A Shares as is equal to the product of the FTE
Excess Differential multiplied by a fraction, (x) the numerator of which is
the number of PPI Class Shares deposited by such shareholder in the
applicable Escrow Deposit and (y) the denominator of which is the aggregate
number of PPI
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Class A Shares deposited by all of the shareholders of such Company in the
applicable Escrow Deposit; and
(13) If any Company's Final Share Allocation per FTE is less than 27,000
(such shortfall referred to herein as 'FTE Shortfall'), the Escrow Agent
will release to each of the shareholders of such Company such number of PPI
Class A Shares as is equal to (a) 50 percent of the number of PPI Class A
Shares deposited in the applicable Escrow Deposit by such shareholder, MINUS
(b) such number of PPI Class A Shares as is equal to the product of the FTE
Shortfall multiplied by a fraction, (x) the numerator of which is the number
of PPI Class Shares deposited by such shareholder in the applicable Escrow
Deposit and (y) the denominator of which is the aggregate number of PPI
Class A Shares deposited by all of the shareholders of such Company in the
applicable Escrow Deposit; and
(14) Any PPI Class A Shares remaining in the Escrow Deposits will be
cancelled and retired and cease to exist."
(g) Section 5.1(b)(ii) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
"(ii) declare, pay or set aside for payment any distribution in respect
of shares of its capital stock;"
(h) Section 7.1 of the Reorganization and Merger Agreement is hereby amended
by adding the following provision as paragraph (i) thereof:
"(i) ESCROW AGREEMENT. PPI and the Companies shall have entered into the
Escrow Agreement with the Escrow Agent."
SECTION 2. WAIVER FOR CORVALLIS. PPI, HealthFirst and Medford hereby waive
the prohibition set forth in Section 5.1(b)(iii) of the Reorganization and
Merger Agreement to permit the issuance by Corvallis of one (1) share of Class A
Preferred Stock of Corvallis to Dr. E. Bruce Bynum between the date hereof and
the Effective Time. PPI, HealthFirst and Medford hereby waive any rights to
assert that the Reorganization and Merger Agreement has been breached by
Corvallis based on the issuance of such share of Class A Preferred Stock of
Corvallis. The waiver set forth in this Section 2 shall not operate as a waiver
of, or estoppel with respect to, any subsequent failure by any of the parties to
comply with the terms and conditions of the Reorganization and Merger Agreement.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF CORVALLIS, HEALTHFIRST AND
MEDFORD WITH RESPECT TO CAPITALIZATION. Each of Corvallis, HealthFirst and
Medford hereby amends and restates the representations and warranties set forth
in Section 3.3 of the Reorganization and Merger Agreement, with respect to
itself only, as follows:
SECTION 3.3 CAPITALIZATION. (a) As of November 29, 1996, (i) the
authorized capital stock of Corvallis consisted of 200 shares of Class A
Voting Preferred Stock ("Corvallis Class A Shares"), 25,000 shares of Class
B Voting Common Stock ("Corvallis Class B Shares") and 100,000 shares of
Class C Non-Voting Preferred Stock ("Corvallis Class C Shares") and (ii)
there were issued and outstanding 64 Corvallis Class A Shares, 11,800
Corvallis Class B Shares and 8,000 Corvallis Class C Shares. It is
anticipated that, between the date hereof and the Effective Time, Corvallis
will issue employee stock options (the "Corvallis Stock Options")
exercisable for 2,024.7 shares of Corvallis Class B Shares (collectively,
"Corvallis Option Shares"), which is equal to the quotient obtained by
dividing (A) the Exchange Ratio applicable to Corvallis Class B Shares into
(B) 388,750. As of June 1, 1996, the aggregate number of full-time
equivalent providers who worked at Corvallis ("Corvallis FTE") was 83.25,
with full- or part-time equivalence determined based on a workweek of at
least four full-working days for full-time equivalence, and as of October 1,
1996, the Corvallis FTE had decreased to 77.25. All of the outstanding
Corvallis Class A Shares, Corvallis Class B Shares and Corvallis Class C
Shares have been validly issued and are fully paid and nonassessable. Other
than Corvallis Stock Options anticipated to be issued prior to the Effective
Time, there are no outstanding
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options, warrants, subscriptions, conversions or other rights, agreements or
commitments obligating Corvallis to issue any additional Corvallis Class A
Shares, Corvallis Class B Shares or Corvallis Class C Shares or any other
securities convertible into, exchangeable for or evidencing the right to
subscribe for any Corvallis Class A Shares, Corvallis Class B Shares or
Corvallis Class C Shares. There are no voting trusts or other agreements or
understandings to which Corvallis is a party with respect to the voting of
Corvallis Class A Shares, Corvallis Class B Shares or Corvallis Class C
Shares. The Corvallis Disclosure Schedule sets forth (i) the names of
persons who are shareholders of Corvallis as of November 29, 1996 and the
number of shares of capital stock of Corvallis held by each such person as
of November 29, 1996 and to be held by such person as of the Effective Time
and the names and number of full-time equivalent providers of Corvallis as
of June 1, 1996.
(b) As of November 29, 1996, (i) the authorized capital stock of
HealthFirst consisted of 1,400,000 shares of Class A Common Voting Shares,
no par value, of which 800,000 shares are Series 1 Class A Shares, 200,000
shares are Series 2 Class A Shares, 200,000 shares are Series 3 Class A
Shares, 100,000 shares are Series 4 Class A Shares and 100,000 shares are
Series 5 Class A Shares, and (ii) there were issued and outstanding 7,000
Series 1 Class A Shares and 2,200 Series 2 Class A Shares. It is anticipated
that, between the date hereof and the Effective Time, HealthFirst will issue
employee stock options (the "HealthFirst Stock Options") exercisable for an
aggregate of 1,483 Series 1 Class A Shares of HealthFirst (collectively,
"HealthFirst Option Shares"). As of June 1, 1996, the aggregate number of
full-time equivalent providers who worked at HealthFirst ("HealthFirst FTE")
was 105, with full- or part-time equivalence determined based on a workweek
of at least four full-working days for full-time equivalence, and as of
October 1, 1996, the HealthFirst FTE had not decreased. All of the
outstanding Class A Shares of HealthFirst have been validly issued and are
fully paid and nonassessable. Other than the HealthFirst Stock Options
anticipated to be issued prior to the Effective Date, there are no
outstanding options, warrants, subscriptions, conversions or other rights,
agreements or commitments obligating HealthFirst to issue any additional
Class A Share of HealthFirst or any other securities convertible into,
exchangeable for or evidencing the right to subscribe for any Class A Share
of HealthFirst. There are no voting trusts or other agreements or
understandings to which HealthFirst is a party with respect to the voting of
Class A Shares of HealthFirst. The HealthFirst Disclosure Schedule sets
forth (i) the names of persons who are shareholders of HealthFirst as of
November 29, 1996 and the number of shares of capital stock of HealthFirst
held by each such person as of November 29, 1996 and to be held by such
person as of the Effective Time and (ii) the names of persons who are or
will be eligible to the names and number of full-time equivalent providers
of HealthFirst as of October 1, 1996.
(c) As of November 29, 1996, (i) the authorized capital stock of Medford
consisted of 500 shares of par value common stock ("Medford Shares") and
(ii) there were issued and outstanding 57 Medford Shares. It is anticipated
that, between the date hereof and the Effective Time, Medford will issue
employee stock options (the "Medford Stock Options") exercisable for an
aggregate of 9.2 Medford Shares (collectively, "Medford Option Shares"). As
of June 1, 1996, the aggregate number of full-time-equivalent providers who
worked at Medford ("Medford FTE") was 58, with full- or part-time
equivalence determined based on a workweek of at least four full-working
days for full-time equivalence, and as of October 1, 1996, the Medford FTE
had not decreased. All of the outstanding Medford Shares have been validly
issued and are fully paid and nonassessable. Other than the Medford Stock
Options anticipated to be issued prior to the Effective Date, there are no
outstanding options, warrants, subscriptions, conversions or other rights,
agreements or commitments obligating Medford to issue any additional Medford
Shares or any other securities convertible into, exchangeable for or
evidencing the right to subscribe for any Medford Shares. There are no
voting trusts or other agreements or understandings to which Medford is a
party with respect to the voting of Medford Shares. The Medford Disclosure
Schedule sets forth (i) the names of persons who are shareholders of Medford
as of November 29, 1996 and the number of shares of capital stock of Medford
held by each
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<PAGE>
such person as of July 29, 1996 and to be held by such person as of the
Effective Time and (ii) the names and number of full-time equivalent
providers of Medford as of October 1, 1996.
SECTION 4. REFERENCE TO AND EFFECT ON THE REORGANIZATION AND MERGER
AGREEMENT. On and after the date hereof, each reference in the Reorganization
and Merger Agreement to "this Agreement," "hereunder," "hereof," "herein" or
words of like import, and each reference in the other agreements, documents and
instruments relating to the Reorganization and Merger Agreement (the
"Transaction Documents") to the Reorganization and Merger Agreement, shall mean
and be a reference to the Reorganization and Merger Agreement as amended hereby.
Except as hereby expressly amended or waived, the Reorganization and Merger
Agreement shall remain in full force and effect, and is hereby ratified and
confirmed in all respects on and as of the date hereof.
SECTION 5. EXECUTION IN COUNTERPARTS. This Second Amendment and Waiver may
be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute one
and the same instrument.
SECTION 6. GOVERNING LAW. THIS SECOND AMENDMENT AND WAIVER SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF OREGON.
IN WITNESS WHEREOF, the parties have caused this Second Amendment and Waiver
to be executed by their duly authorized representatives.
PHYSICIAN PARTNERS, INC.
By: /s/ DAVID M. GOLDBERG
--------------------------------------
Title: President
THE CORVALLIS CLINIC, P.C.
By: /s/ DAVID H. CUTSFORTH, JR.
M.D.
--------------------------------------
Title: President
HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ MATTHEW M. SHELLLEY, M.D.
--------------------------------------
Title: President
MEDFORD CLINIC, P.C.
By: /s/ STEVEN SCHNUGG, M.D.
--------------------------------------
Title: President
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<PAGE>
EXECUTION COPY
THIRD AMENDMENT TO
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
This Third Amendment, dated as of December 31, 1996, is entered into by and
among PHYSICIAN PARTNERS, INC., a Delaware corporation ("PPI"), THE CORVALLIS
CLINIC, P.C., an Oregon professional corporation ("Corvallis"), HEALTHFIRST
MEDICAL GROUP, P.C., an Oregon professional corporation ("HealthFirst"), and
MEDFORD CLINIC, P.C., an Oregon professional corporation ("Medford" and,
together with Corvallis and HealthFirst, referred to herein, collectively, as
the "Companies").
RECITALS
WHEREAS, PPI, Corvallis, HealthFirst and Medford have entered into the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996, as amended by the Amendment to Amended and Restated
Agreement and Plan of Reorganization and Merger, dated as of November 4, 1996
and the Second Amendment and Waiver to Amended and Restated Agreement and Plan
of Reorganization and Merger, dated as of November 29, 1996 (as so amended, the
"Reorganization and Merger Agreement"; terms defined in the Reorganization and
Merger Agreement and not otherwise defined herein having the same respective
meanings when used herein, and the rules of construction set forth in the
Reorganization and Merger Agreement being incorporated herein by reference), to
effect the PC Reorganizations and the Merger; and
WHEREAS, PPI and the Companies wish to further amend the Reorganization and
Merger Agreement with respect to the terms and subject to the conditions set
forth herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO REORGANIZATION AND MERGER AGREEMENT. The
Reorganization and Merger Agreement is, effective as of the date hereof, hereby
amended as follows:
(a) Exhibit C to the Reorganization and Merger Agreement (Form of Practice
Management for Each of Corvallis, HealthFirst and Medford) is hereby amended and
restated to read in its entirety, in the form attached hereto as Exhibit C. On
and after the date hereof, each reference in the Reorganization and Merger
Agreement and the other agreements, documents and instruments relating to the
Reorganization and Merger Agreement to "Exhibit C," "Practice Management
Agreement," "Management Agreement" or words of like import shall mean and be a
reference to Exhibit C attached hereto.
(b) Section 2.7(a)(iii) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
"(iii) Each share of Common Stock of Medford shall be converted into the
right to receive 31,362 PPI Class A Shares;"
(c) Section 5.1(b)(iii) of the Reorganization and Merger Agreement is hereby
amended to read in full as follows:
"(iii) authorize for issuance, issue, sell, pledge, dispose of or
encumber, deliver or agree or commit to issue, sell, pledge or deliver
(whether through the issuance or granting of any options, warrants,
commitments, subscriptions, rights to purchase or otherwise) shares of its
capital stock or any securities convertible into or exercisable or
exchangeable for shares of its capital stock; PROVIDED, HOWEVER, that (A)(I)
Corvallis may issue the Corvallis Stock Options, (II) HealthFirst may issue
the
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<PAGE>
HealthFirst Stock Options and (III) Medford may issue the Medford Stock
Options and (B)(I) HealthFirst may issue up to 100 Class A Shares to each of
the 12 non-shareholder providers of HealthFirst designated by HealthFirst,
(II) Corvallis may issue 1 share of Class A Preferred Stock of Corvallis to
Dr. E. Bruce Bynum and (III) Medford may issue 1 share of its Common Stock
to each of the two non-shareholder providers and 1/3 share of its Common
Stock to a non-shareholder provider all designated by Medford;"
SECTION 3. REFERENCE TO AND EFFECT ON THE REORGANIZATION AND MERGER
AGREEMENT. On and after the date hereof, each reference in the Reorganization
and Merger Agreement to "this Agreement," "hereunder," "hereof," "herein" or
words of like import, and each reference in the other agreements, documents and
instruments relating to the Reorganization and Merger Agreement (the
"Transaction Documents") to the Reorganization and Merger Agreement, shall mean
and be a reference to the Reorganization and Merger Agreement as amended hereby.
Except as hereby expressly amended, the Reorganization and Merger Agreement
shall remain in full force and effect, and is hereby ratified and confirmed in
all respects on and as of the date hereof.
SECTION 4. EXECUTION IN COUNTERPARTS. This Third Amendment may be executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute one and the same
instrument.
SECTION 5. GOVERNING LAW. THIS THIRD AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF OREGON.
IN WITNESS WHEREOF, the parties have caused this Third Amendment to be
executed by their duly authorized representatives.
PHYSICIAN PARTNERS, INC.
By:
--------------------------------------
Title:
THE CORVALLIS CLINIC, P.C.
By:
--------------------------------------
Title:
HEALTHFIRST MEDICAL GROUP, P.C.
By:
--------------------------------------
Title:
MEDFORD CLINIC, P.C.
By:
--------------------------------------
Title:
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<PAGE>
APPENDIX B
1997 STOCK OPTION PLAN
FOR EMPLOYEES OF
PHYSICIAN PARTNERS, INC.
1. PURPOSE OF THE PLAN
The 1997 Stock Option Plan for Employees of Physician Partners, Inc. (the
"Plan") was established by Physician Partners, Inc. (the "Company"), effective
as of the effective time (the "Effective Date") of the transaction contemplated
under the Amended and Restated Agreement and Plan of Reorganization and Merger,
dated as of September 19, 1996, as amended on November 4, 1996, November 29,
1996 and December 31, 1996 (referred to herein, as so amended, as the
"Reorganization and Merger Agreement") to:
1.1 furnish incentives to eligible employees chosen to receive options
because they are considered capable of responding by improving operations and
increasing profits;
1.2 encourage selected employees to accept or continue employment with the
Company or its Affiliates; and
1.3 increase the interest of selected employees and officers in the
Company's welfare through their participation in the growth in value of Class A
Common Stock, $.01 par value, of the Company ("Class A Common Stock").
To accomplish the foregoing objectives, this Plan provides a means whereby
employees may receive options to purchase Class A Common Stock. Options granted
under this Plan ("Options") will be either nonqualified options ("NQOs") subject
to federal income taxation upon exercise or Options intended to be incentive
stock options ("ISOs") not subject to immediate federal income taxation upon
exercise.
2. ELIGIBLE PERSONS
2.1 GENERAL. Every person who at the date on which an Option granted to
the person becomes effective (the "Grant Date") and who is an employee or
officer of the Company or of any Affiliate.
2.2 DEFINITION OF AFFILIATE. The term "Affiliate," as used in this Plan,
means a "parent corporation" or "subsidiary corporation," as defined in Section
424 of the Internal Revenue Code of 1986 (the "Code"). The term "employee" shall
have the meaning ascribed for purposes of Section 3401(c) of the Code and the
Treasury Regulations promulgated thereunder and shall include an officer who is
also an employee.
3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock reserved for issuance upon the exercise
of Options is 900,000 shares of Class A Common Stock. The shares covered by the
portion of any grant that expires unexercised under this Plan shall become
available again for grants under this Plan. The number of shares reserved for
issuance under this Plan is subject to adjustment in accordance with the
provisions for adjustment in this Plan.
4. ADMINISTRATION
This Plan shall be administered by a committee (the "Committee") of not less
than three (3) members appointed by the Board of Directors of the Company. The
Committee may delegate nondiscretionary administrative duties to other employees
of the Company as it deems proper. Subject to the approval of the Board of
Directors and the provisions of this Plan, the Committee shall have the
authority to select the persons to receive Options under this Plan, to fix the
number of shares that each optionee may purchase, to set the terms and
conditions of each Option and to determine all other matters relating to this
Plan. Any act approved in writing by a majority of the members of the Committee
shall be a valid act of the
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<PAGE>
Committee. Such determinations shall be final and binding on all persons. No
member of the Board of Directors or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any option
granted under the Plan.
5. GRANTING OF THE RIGHTS
5.1 TEN YEAR LIMITATION. No Options shall be granted under this Plan after
ten years from the date the Board of Directors of the Company adopts this Plan.
5.2 WRITTEN AGREEMENT; EFFECT. Each Option shall be evidenced by a written
agreement (the "Option Agreement"), in a form satisfactory to the Committee,
executed by the Company and by the person to whom such Option is granted. The
Option Agreement shall specify whether each Option it evidences is a NQO or an
ISO. Failure of the grantee to execute an Option Agreement shall not void or
invalidate the grant of any Option; the Option may not be exercised, however,
until the Option Agreement is executed. Each optionee who is or is expected to
become an employee shall contemporaneously with the grant of an option execute
an Employee Noncompetition, Nondisclosure and Developments Agreement in a form
satisfactory to the Committee.
5.3 ANNUAL $100,000 LIMITATION ON ISOS. To the extent required by Section
422(d) of the Code, the aggregate fair market value of the shares of the Class A
Common Stock with respect to which ISOs are exercisable for the first time by
any individual during any calendar year shall not exceed $100,000. For this
purpose, fair market value shall be the fair market value of the shares covered
by the ISOs when the ISOs were granted. If by their terms, such ISOs taken
together would first become exercisable at a faster rate, this $100,000
limitation shall be applied by deferring the exercisability of those ISOs or
portions of ISOs which have the highest per share exercise prices. The ISOs or
portions of ISOs, the exercisability of which is so deferred, shall become
exercisable on the first day of the first subsequent calendar year during which
they may be exercised, as determined by applying these same principles of this
Section and all other provisions of this Section and all other provisions of
this Plan, including those relating to the expiration and termination of ISOs.
5.4 ADVANCE APPROVALS. The Board of Directors may approve the grant of
Options to persons who are expected to become employees of the Company, but are
not employees at the date of approval. In such cases, the Option shall be deemed
granted, without further approval, on the date the grantee becomes an employee
and must satisfy all requirements of this Plan for Options granted on that date.
6. TERMS AND CONDITIONS OF OPTIONS
Each Option shall be designated as an ISO or a NQO and shall be subject to
the terms and conditions set forth in Section 6.1 NQOs shall also be subject to
the terms and conditions set forth in Section 6.2, but not those set forth in
Section 6.3. ISOs shall also be subject to the terms and conditions set forth in
Section 6.3, but not those set forth in Section 6.2.
6.1 TERMS AND CONDITIONS TO WHICH ALL OPTIONS ARE SUBJECT. All Options
shall be subject to the following terms and conditions:
(a) CHANGES IN CAPITAL STRUCTURE. Subject to Section 6.1(b), if the
stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, or converted into or exchanged
for other securities as a result of a merger, consolidation, or
reorganization, appropriate adjustments shall be made in (A) the number and
class of shares of stock subject to this Plan and each outstanding Option,
and (B) the exercise price of each outstanding Option; provided, however,
that the Company shall not be required to issue fractional shares as a
result of any such adjustment. Each such adjustment shall be determined by
the Committee in its sole discretion, which determination shall be final and
binding on all persons.
(b) CORPORATE TRANSACTIONS. New options rights may be substituted for
Options granted, or the Company's obligations as to outstanding Options may
be assumed, by an employer corporation other
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than the Company, or an Affiliate thereof, in connection with any merger,
consolidation, acquisition, separation, reorganization, dissolution,
liquidation, sale or like occurrence in which the Company is involved and
which the Committee determines, in its absolute discretion, would materially
alter the structure. Substitution shall be done in such manner that the then
outstanding Options which are ISOs will continue to be "incentive stock
options" within the meaning of Section 422 of the Code to the full extent
permitted thereby. Notwithstanding the foregoing or the provisions of
Section 6.1(a), if such an event occurs and if such employer corporation, or
an Affiliate thereof, does not substitute new option rights for, and
substantially equivalent to, the outstanding Options granted hereunder, or
assume the outstanding Options granted hereunder, or if there is no employer
corporation, or if the Committee determines, in its sole discretion, that
outstanding Options should not then continue to be outstanding, the
Committee may upon ten days prior written notice to optionees in its
absolute discretion (A) shorten the period during which Options are
exercisable (provided they remain exercisable, to the extent otherwise
exercisable, for at least ten days after the date the notice is given), or
(B) cancel Options upon payment to the optionee in cash, with respect to
each Option to the extent then exercisable, of an amount which, in the
absolute discretion of the Committee, is determined to be equivalent to any
excess of the fair market value (at the effective time of the dissolution,
liquidation, merger, consolidation, acquisition, separation, reorganization,
sale or other event) of the consideration that the optionee would have
received if the Option had been exercised before the effective time, over
the exercise price of the Option; provided, however, if there is a successor
corporation and replacement options are not granted by the successor
corporation, all outstanding Options shall become exercisable prior to the
consummation of the transaction such that the optionees shall have not less
than ten days to exercise the Options and become stockholders of record
entitled to receive the consideration paid to the other stockholders of the
Company. If an optionee fails to exercise his option within any exercise
period described in this paragraph and the dissolution, liquidation, merger,
consolidation, sale or other event is consummated, his option shall no
longer be exercisable. Any unexercised option shall be cancelled and
terminated. Notwithstanding anything herein to the contrary, nothing shall
extend an optionee's right to exercise (1) an ISO after the expiration of
ten (10) years from the date it is granted or (2) a NQO after the expiration
of ten (10) years from the date it is granted. The actions described in this
Section may be taken without regard to any resulting tax consequences to the
optionee.
(c) OPTION GRANT DATE. Each Option Agreement shall specify the date as
of which it shall be effective, which date shall be the Grant Date
(determined pursuant to Section 5.4 in the case of advance approvals).
(d) FAIR MARKET VALUE. For purposes of this Plan, the fair market
value of the Company's Class A Common Stock shall be determined as follows:
(1) if the stock is listed on any established stock exchange or a
national market system, including without limitation the National Market
System of the National Association of Securities Dealers Automated
Quotation System, its fair market value shall be the closing sales price
for the stock, or the mean between the high bid and low asked prices if
no sales were reported, as quoted on such system or exchange (or the
largest such exchange) for the date the value is to be determined (or if
there are no sales or bids for such date, then for the last preceding
business day on which there were sales or bids), as reported in the Wall
Street Journal or similar publication;
(2) if the stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its fair market value shall
be the mean between the high bid and low asking prices for the stock on
the date the value is to be determined (or if there are no quoted prices
for the date of grant, then for the last preceding business day on which
there were quoted prices);
(3) in the absence of an established market for the stock, the fair
market value shall be determined in "good faith" by the Committee, with
reference to the Company's net worth, prospective earning power,
dividend-paying capacity, and other relevant factors, including sales
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for the most recent 12 month period, the goodwill of the Company, the
economic outlook in the Company's industry, the Company's position in the
industry and its management and the values of stock of other corporations
in the same or a similar line of business.
(e) TIME OF OPTION EXERCISE. The Company shall not grant any Options
which may become exercisable at a rate in excess of 20% per annum from the
date of such grant without the written consent of a majority of the members
of the Committee.
(f) NONASSIGNABILITY OF OPTION RIGHTS. No Option shall be assignable
or otherwise transferable by the optionee except by will or by the laws of
descent and distribution. During the life of the optionee, an Option shall
be exercisable only by the optionee or the optionee's guardian or legal
representative.
(g) PAYMENT. Except as provided below, payment in full, in cash, shall
be made for all stock purchased at the time written notice of exercise of an
Option is given to the Company, and proceeds of any payment shall constitute
general funds of the Company. At the time an Option is granted or before it
is exercised, the Committee, in the exercise of its absolute discretion, may
authorize any one or more of the following additional methods of payment:
(1) acceptance of the optionee's full recourse promissory note for
some or all of the aggregate exercise price of the shares being acquired
(except for the aggregate par value of the shares being acquired, which
must be paid in cash or other lawful consideration under applicable law),
payable on such terms and bearing such interest rate as determined by the
Committee, and secured in such manner as the Committee shall approve;
including, without limitation, by a security interest in Class A Common
Stock or other securities of the Company;
(2) delivery by the optionee of Class A Common Stock or other
securities of the Company already owned by the optionee for all or part
of the aggregate exercise price of the shares being acquired, provided
the fair market value of such Class A Common Stock or securities is equal
on the date of exercise to the aggregate exercise price of the shares
being acquired, or such portion thereof as the optionee is authorized to
pay by delivery of such Class A Common Stock or securities; and
(3) any other property, so long as such property is acceptable to the
Committee and constitutes valid consideration under applicable law for
the shares being acquired and is surrendered in good form for transfer.
(h) TERMINATION.
(1) Any Option or portion thereof which has not expired or been
exercised on or before the date on which an optionee ceases to be an
employee or officer ("Termination") for cause, shall expire upon
Termination.
(2) Any Option or portion thereof which has not expired or been
exercised on or before the date of Termination without cause, shall
expire ninety (90) days after the date of Termination or a break in
continuous employment.
(3) Notwithstanding the foregoing, if Termination is due to the
permanent disability or death of the optionee, the optionee, the
optionee's personal representative or any other person who acquires
option rights from the optionee by will or the applicable laws of descent
and distribution, may, within twelve months after the date of
Termination, exercise such option rights to the extent they were
exercisable on the date of Termination.
(i) OTHER PROVISIONS. Each Option Agreement may contain such other
terms, provisions, and conditions not inconsistent with this Plan, including
rights of repurchase, as may be determined by the Committee, and each ISO
granted under this Plan shall include such provisions and conditions as are
necessary to qualify such option as an "incentive stock option" within the
meaning of Section 422 of the Code.
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(j) WITHHOLDING AND EMPLOYMENT TAXES. At the time of exercise of an
Option, the optionee shall remit to the Company in cash all applicable
federal and state withholding and employment taxes. If and to the extent
authorized and approved by the Committee in its sole discretion, an optionee
may elect, by means of a form of election to be prescribed by the Committee,
to have shares which are acquired upon exercise of an Option withheld by the
Company or tender other shares of Class A Common Stock or other securities
of the Company owned by the optionee to the Company at the time the amount
of such taxes is determined in order to pay the amount of such tax
obligations. Any Class A Common Stock or other securities so withheld or
tendered will be valued by the Company as of the date they are withheld or
tendered. Unless the Committee otherwise determines, the optionee shall pay
to the Company in cash, promptly when the amount of such obligation becomes
determinable, all applicable federal and state withholding taxes resulting
from the lapse of restrictions imposed on exercise of any Option, for a
transfer or other disposition of shares acquired upon exercise of an Option
or otherwise related to the Option or the shares acquired upon exercise of
the Option.
6.2 TERMS AND CONDITIONS TO WHICH ONLY NQOS ARE SUBJECT. Options granted
under this Plan which are designated as NQOs shall be subject to the following
terms and conditions:
(a) EXERCISE PRICE. The exercise price of an NQO shall not be less
than 85 percent of the fair market value of the stock subject to the Option
on the Grant Date; provided, however, that the exercise price of an NQO
granted to any person who owns, directly or indirectly (or is treated as
owning by reason of attribution rules, currently set forth in Code Section
424), stock of the Company constituting more than ten percent of the total
combined voting power of all classes of outstanding stock of the Company or
of any Affiliate of the Company, shall in no event be less than 100 percent
of such fair market value.
(b) OPTION TERM. Unless an earlier expiration date is specified by the
Committee at the Grant Date in the Option Agreement, each NQO shall expire
ten years from its Grant Date.
6.3 TERMS AND CONDITIONS TO WHICH ONLY ISOS ARE SUBJECT. Options granted
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:
(a) EXERCISE PRICE. The exercise price of an ISO shall be determined
in accordance with the applicable provisions of the Code and shall in no
event be less than the fair market value of the stock covered by the ISO at
the Grant Date; provided, however, that the exercise price of an ISO granted
to any person who owns, directly or indirectly (or is treated as owning by
reason of attribution rules, currently set forth in Code Section 424), stock
of the Company constituting more than ten percent of the total combined
voting power of all classes of outstanding stock of the Company or of any
Affiliate of the Company, shall in no event be less than 110 percent of such
fair market value.
(b) OPTION TERM. Unless an earlier expiration date is specified by the
Committee at the Grant Date in the Option Agreement, each ISO shall expire
ten (10) years from its Grant Date; except that an ISO granted to any person
who owns, directly or indirectly (or is treated as owning by reason of
applicable attribution rules currently set forth in Section 424 of the Code)
stock of the Company constituting more than ten percent of the total
combined voting power of the Company's outstanding stock, or the stock of
any Affiliate of the Company, shall expire five years from its Grant Date.
(c) DISQUALIFYING DISPOSITIONS. If stock acquired by exercise of an
ISO is disposed of within two years from the Grant Date or within one year
after the transfer of the stock to the optionee, the holder of the stock
immediately prior to the disposition shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such
other information regarding the disposition as the Company may reasonably
require. Such holder shall pay to the Company any withholding and employment
taxes which the Company in its sole discretion deems applicable. The Company
may instruct its stock transfer agent by appropriate means, including
placement of legends on stock certificates, not to transfer stock acquired
by exercise of an ISO unless it has been advised by the Company that the
requirements of this Section have been satisfied.
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7. MANNER OF EXERCISE
An optionee wishing to exercise an Option shall give written notice to the
Company at its principal executive office, to the attention of the Secretary of
the Company, accompanied by an executed stock purchase agreement in form and
substance satisfactory to the Company, by payment of the exercise price and by
such other documents as the Committee may request. The date the Company receives
written notice of an exercise hereunder accompanied by payment of the exercise
price and all such other documents will be considered the date the Option was
exercised. Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or any
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or transferee of an Option shall not have any privileges as
stockholder with respect to any stock covered by the Option until the date of
issuance of a stock certificate.
8. RELATIONSHIP WITH THE COMPANY
Nothing in this Plan or any Option granted hereunder shall interfere with or
limit in any way the right of the Company to terminate any optionee's
employment, affiliation or other relationship with the Company at any time, nor
confer upon any optionee any right to continue in the employ of the Company.
9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Board of Directors may at any time amend, alter, suspend or discontinue
this Plan. The Board of Directors may amend this Plan and the terms of any
Option outstanding hereunder if the amendment is designed to maximize federal
income tax benefits accorded to Options; provided, that with respect to
outstanding Options, the optionee consents to such amendment.
10. LIABILITY AND INDEMNIFICATION OF COMMITTEE
No member of the Committee shall be liable for any act or omission on such
member's own part, including but not limited to the exercise of any power or
discretion given to such member under this Plan, except for those acts or
omissions resulting from such member's own gross negligence or willful
misconduct. The Company shall indemnify each present and future member of the
Committee against, and each member of the Committee shall be entitled without
further act on his or her part to indemnity from the Company for, all expenses
(including attorney's fees and the amount of judgments and the amount of
approved settlements made with a view to the curtailment of costs of litigation,
other than amounts paid to the Company itself) reasonably incurred by such
person in connection with or arising out of any action, suit, or proceeding to
which the Committee or any member of the Committee may be a party by reason of
any action taken or failure to act under or in connection with the Plan or any
option granted under the Plan to the full extent permitted by law and by the
Certificate of Incorporation and Bylaws of the Company. The right of indemnity
described in this Section 10 shall be in addition to such other rights of
indemnification as the members of the Committee shall otherwise be entitled
because of their serving on the Board of Directors of the Company or as an
employee of the Company.
11. EFFECTIVE DATE OF THIS PLAN
This Plan shall become effective as of the Effective Time; provided, that
the Plan is approved by the affirmative votes of the holders of a majority of
the share of Class A Common Stock present, or represented, and entitled to vote
at a meeting of the stockholders duly held not later than January 31, 1997.
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APPENDIX C
1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS OF
PHYSICIAN PARTNERS, INC.
R E C I T A L S:
The purpose of this 1996 Stock Option Plan for Non-Employee Directors of
Physician Partners, Inc. (the "Plan") is to provide the directors of Physician
Partners, Inc. (the "Company") who are not either employees or officers of the
Company, added incentive to continue in the service of the Company and a more
direct interest in the future success of the operations of the Company by
granting to such directors options (the "Options", or individually, the
"Option"), to purchase shares of the common stock, par value $0.01 per share
(the "Common Stock"), of the Company subject to the terms and conditions
described below. The Plan shall be effective as of the effective time (the
"Effective Date") of the transaction contemplated under the Amended and Restated
Agreement and Plan of Reorganization and Merger, dated as of September 19, 1996,
as amended on November 4, 1996, November 29, 1996 and December 31, 1996
(referred to herein, as so amended, as the "Reorganization and Merger
Agreement").
ARTICLE I
GENERAL
1.01 DEFINITIONS. For Purposes of the Plan and as used herein,
"non-employee director" shall mean an individual who (a) is now, or hereafter
becomes, a member of the Board of Directors of the Company by virtue of an
election by the stockholders of the Company, (b) is neither an employee nor an
officer of the Company and (c) has not elected to decline to participate in the
Plan pursuant to the next succeeding sentence. A director otherwise eligible to
participate in the Plan may make an irrevocable, one-time election, by written
notice to the Company within 30 days after his initial election to the Board of
Directors of the Company or, in the case of a director in office on the
Effective Date, prior to the Effective Date, to decline to participate in the
Plan. For purposes of this Plan, "employee" shall mean an individual whose wages
are subject to the withholding of federal income tax under Section 3401 of the
Internal Revenue Code of 1986, as amended from time to time (the "Code"), and
"officer" shall mean an individual elected or appointed by the Board of
Directors of the Company or chosen in such other manner as may be prescribed in
the Bylaws of the Company to serve as such except that for the purposes of this
Plan any individual serving as the Chairman of the Board, but in no other
capacity as an officer or employee, will not be deemed to be an officer of the
Company.
For purposes of this Plan, and as used herein, non-employee directors shall
be divided into two groups. The first group of non-employee directors consists
of providers whose practice of medicine is associated with an entity or
organization for which the Company performs management services ("affiliated
directors"). The second group consists of directors who are not affiliated
directors ("non-affiliated directors").
For purposes of this Plan, and as used herein, the "fair market value" of a
share of Common Stock is the closing sales price on the date in question (or, if
there was no reported sale on such date, on the last preceding day on which any
reported sale occurred) of the Common Stock as reported on NASDAQ.
1.02. OPTIONS. The Options granted hereunder shall be options that are not
qualified under Section 422 of the Code.
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ARTICLE II
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company or a
committee thereof. The Board of Directors shall have no authority, discretion or
power to select the non-affiliated directors who will receive Options, to set
the number of shares to be covered by each Option granted to a non-affiliated
director, to set the exercise price or the exercise period of a non-affiliated
director's Options, or to alter any other terms or conditions specified herein
applicable to a non-affiliated director, except in the sense of administering
the Plan subject to the express provision of the Plan and except in accordance
with Sections 3.02 and 5.02 hereof. The Board of Directors shall have the
authority, discretion or power to select the affiliated directors who receive
Options, to set the number of shares covered by each affiliated director's
Options, to set the exercise price or exercise period of an affiliated
director's Options, or to alter any other term or conditions specified herein,
except in the sense of administering the Plan subject to the express Plan
provisions and in accordance with Sections 3.02 and 5.02 hereof. Subject to the
foregoing limitations, the Board of Directors or such committee shall have
authority and power to adopt such rules and regulations and to take such action
as it shall consider necessary or advisable for the administration of the Plan,
and to construe, interpret and administer the Plan. The decisions of the Board
of Directors or committee relating to the Plan shall be final and binding upon
the Company, the Holders (as such term is defined in Section 3.02 hereof) and
all other persons. No member of the Board of Directors shall incur any liability
by reason of any action or determination made in good faith with respect to the
Plan or any stock option agreement entered into pursuant to the Plan.
ARTICLE III
OPTIONS
3.01. PARTICIPATION. A non-employee director shall be granted Options to
purchase the Common Stock under the Plan on the terms and conditions herein
described.
3.02. STOCK OPTION AGREEMENTS. Each Option granted under the Plan shall be
evidenced by a written stock option agreement, which agreement shall be entered
into by the Company and the non-employee director to whom the Option is granted
(the "Holder"), and which agreement shall include, incorporate or conform to the
following terms and conditions, and such other terms and conditions of this Plan
as the Board of Directors considers appropriate in each case:
(a) OPTION GRANT DATE. Options shall be granted initially as of the
Effective Date to each non-affiliated director serving the Company as a
director on such date. Options may be granted initially as of the Effective
Date to each affiliated director as the Board of Directors determines.
Thereafter, on each January 1 during this term of the Plan, Options shall be
granted automatically to the non-affiliated directors serving the Company as
directors on such date. As of each January 1 during the term of the Plan,
the Board of Directors will determine each affiliated director who will
receive Options on such date. The date of grant of an Option pursuant to the
Plan shall be referred to hereinafter as the "Grant Date" of such Option.
Notwithstanding anything herein to the contrary, the Board of Directors may
revoke, on or prior to each January 1, the next automatic grant of Options
otherwise provided for by the Plan if no options have been granted to
employees since the preceding January 1 under the 1996 Stock Option Plan for
Employees of Physician Partners, Inc. or any other employee stock option
plan that the Company may adopt.
(b) NUMBER. Each non-affiliated director serving the Company as a
director on the Effective Date and on each Grant Date shall be granted, as
of such date, an Option to purchase 7,500 shares of Common Stock, subject to
adjustment in accordance with Section 4.02 hereof. The Board of Directors
shall determine the number of Common Shares subject to an Option granted to
an affiliated director who is serving the Company on the Effective Date and
on each Grant Date, subject to adjustment in
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accordance with Section 4.02 hereof. If, on any January 1 during the term of
the Plan, the number of Options scheduled to be granted to non-affiliated
directors is greater than the number of shares of Common Stock (subject to
adjustment in accordance with Section 4.02 hereof) then available for grant
on that date, the available shares shall be allocated pro rata in
determining the number of shares of Common Stock to be subject to each
Option to be granted to each such non-affiliated director on such date.
(c) PRICE. The price at which each share of Common Stock covered by a
non-affiliated director's Option may be purchased pursuant to this Plan
shall be the fair market value of the shares on the Grant Date of such
Option. The Board of Directors shall determine the price at which each share
of Common Stock covered by an affiliated director's Option may be purchased
pursuant to this Plan.
(d) OPTION PERIOD. The period during which each non-affiliated
director's Option may be exercised shall expire, in all cases, ten years
from the Grant Date of such Option (the "Option Period"), unless terminated
sooner pursuant to Section 3.02(e) below. The Board of Directors shall
determine the exercise period during which each affiliated director's Option
may be exercised provided that in no event shall such period exceed ten
years from the Grant Date of such Option.
(e) TERMINATION OF SERVICE, DEATH, ETC. Each stock option shall
provide as follows with respect to the exercise of the Option granted
thereby in the event that the Holder ceases to be a non-employee director
for the reasons described in this Section 3.02(e):
(i) If the directorship of the Holder is terminated within the Option
Period on account of fraud, dishonesty or other acts detrimental to the
interests of the Company or any direct or indirect majority-owned
subsidiary of the Company, the Option shall automatically terminate as of
the date of such termination of directorship;
(ii) If the Holder shall die during the Option Period while a
director of the Company (or during the additional three-month period
provided by paragraph (iii) of this Section 3.02(e)), the Option may be
exercised, to the extent that the Holder was entitled to exercise it at
the date of Holder's death, within one year after such date (if otherwise
within the Option Period), but not thereafter, by the executor or
administrator of the estate of Holder, or by any person or person who
shall have acquired the Option directly from the Holder by bequest or
inheritance; or
(iii) If the directorship of a Holder is terminated for any reason
(other than the circumstances specified in paragraphs (i) and (ii) of
this Section 3.02(e)) within the Option Period, the Option may be
exercised, to the extent the Holder was able to do so at the date of
termination of the directorship, within three months after such
termination (if otherwise within the Option Period), but not thereafter.
(f) TRANSFERABILITY. No Option shall be assignable or otherwise
transferable by the Holder except by will or by the laws of descent and
distribution. During the life of the Holder, an Option shall be exercisable
only by the Holder or the Holder's guardian or legal representative.
(g) AGREEMENT TO CONTINUE IN SERVICE. Each Holder shall agree to
remain in the service of the Company, at the pleasure of the Company's
stockholders, for a continuous period of at least one year after the date of
the grant of any Option, at the retainer rate then in effect or at such
changed rate as the Company from time to time may establish.
(h) EXERCISE, PAYMENTS, ETC. Each stock option agreement shall provide
that the method for exercising the Option granted thereby shall be by
delivery to the Company of, or by sending by United States registered or
certified mail, postage prepaid, addressed to the Company (for the attention
of its secretary) of, written notice signed by Holder specifying the number
of shares of Common Stock with respect to which such Option is being
exercised. Such notice shall be accompanied by the full amount
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of the purchase price of such shares. Payment may be made at the election of
the holder of the Option as follows: (i) in cash; (ii) in outstanding shares
of Common Stock at their fair market value, as determined by the Board of
Directors, on the date of exercise; or (iii) by delivery of vested Options
with a value equal to the exercise price (i.e., the difference between the
fair market value of the Common Stock on the exercise date subject to such
Option and the exercise price thereof). Any such notice shall be deemed to
be given three (3) days after the same was deposited in a regularly
maintained receptacle for the deposit of United States mail, addressed and
sent as above stated. In addition to the foregoing, promptly after demand by
the Company, the exercising Holder shall pay to the Company an amount equal
to applicable withholding taxes, if any, due in connection with such
exercise.
(i) EXERCISE PERIOD. Each non-affiliated director's Option shall be
exercisable as to one-third ( 1/3) of the shares subject to the Option as of
each of the first, second and third anniversaries of the Grant Date. The
Board of Directors shall determine the exercise period for the shares
subject to an affiliated director's Option.
ARTICLE IV
AUTHORIZED COMMON STOCK
4.01 AVAILABLE SHARES OF COMMON STOCK. The total number of shares of
Common Stock as to which Options may be granted pursuant to the Plan shall be
100,000, except as such number of shares shall be adjusted from and after the
Effective Date in accordance with the provisions of Section 4.02 hereof. If any
outstanding Option under the Plan shall expire, be terminated, or forfeited for
any reason before the end of the Option Period, the shares of Common Stock
allocable to the unexercised portion of such Option may again be subject to the
Plan. The Company shall, at all times during the life of any outstanding
Options, retain as authorized and unissued Common Stock at least the number of
shares from time to time included in the outstanding Options or otherwise assure
itself of its ability to perform its obligations under the Plan.
4.02 ADJUSTMENTS UPON CHANGES IN COMMON STOCK. In the event the Company
shall effect a split of the Common Stock or dividend payable in Common Stock, or
in the event the outstanding Common Stock shall be combined into a smaller
number of shares, the maximum number of shares as to which Options may be
granted under the Plan shall be increased or decreased proportionately. In the
event that before delivery by the Company of all of the shares of Common Stock
in respect of which any Option has been granted under the Plan, the Company
shall have effected such a split, dividend or combination, the shares still
subject to the Option shall be increased or decreased proportionately and the
purchase price per share shall be increased or decreased proportionately so that
the aggregate purchase price for all the then optioned shares shall remain the
same as immediately prior to such split, dividend or combination.
In the event of a reclassification of the Common Stock not covered by the
foregoing provisions of this Section 4.02, or in the event of a liquidation or
reorganization, including a merger, consolidation or sale of assets, the Board
of Directors of the Company shall make such adjustment, if any, as it may deem
appropriate in the number, purchase price and kind of shares covered by the
unexercised portions of Options theretofore granted under the Plan. The
provisions of this Section 4.02 shall only be applicable if, and only to the
extent that, the application thereof does not conflict with any valid
governmental statute, regulation or rule.
4.03 CORPORATE TRANSACTIONS. New options rights may be substituted for
Options granted, or the Company's obligations as to outstanding Options may be
assumed, by an employer corporation other than the Company, or an Affiliate
thereof, in connection with any merger, consolidation, acquisition, separation,
reorganization, dissolution, liquidation, sale or like occurrence in which the
Company is involved and which the Board of Directors determines, in its absolute
discretion, would materially alter the structure. Notwithstanding the foregoing
or the provisions of Section 4.02, if such an event occurs and if such
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employer corporation, or an Affiliate thereof, does not substitute new option
rights for, and substantially equivalent to, the outstanding Options granted
hereunder, or assume the outstanding Options granted hereunder, or if there is
no employer corporation, or if the Board of Directors determines, in its sole
discretion, that outstanding Options should not then continue to be outstanding,
the Board of Directors may upon 10 days prior written notice to non-employee
directors in its absolute discretion (a) shorten the period during which Options
are exercisable (provided they remain exercisable, to the extent otherwise
exercisable, for at least 10 days after the date the notice is given), or (b)
cancel Options upon payment to the non-employee director in cash, with respect
to each Option to the extent then exercisable, of an amount which, in the
absolute discretion of the Board of Directors, is determined to be equivalent to
any excess of the fair market value (at the effective time of the dissolution,
liquidation, merger, consolidation, acquisition, separation, reorganization,
sale or other event) of the consideration that the non-employee director would
have received if the Option had been exercised before the effective time, over
the exercise price of the Option; PROVIDED, HOWEVER, if there is a successor
corporation and replacement options are not granted by the successor
corporation, all outstanding Options shall become exercisable prior to the
consummation of the transaction such that the non-employee directors shall have
not less than 10 days to exercise the Options and become stockholders of record
entitled to receive the consideration paid to the other stockholders of the
Company. If a non-employee director fails to exercise his option within any
exercise period described in this Section 4.03 and the dissolution, liquidation,
merger, consolidation, sale or other event is consummated, his option shall no
longer be exercisable. Any unexercised option shall be cancelled and terminated.
The actions described in this Section 4.03 may be taken without regard to any
resulting tax consequences to the non-employee director.
ARTICLE V
GENERAL PROVISIONS
5.01. TERMINATION OF PLAN. The Plan shall terminate whenever the Board of
Directors adopts a resolution to that effect. If not sooner terminated under the
preceding sentence, the Plan shall expire at the close of business on December
31, 2005. After termination of the Plan, no Options shall be granted but the
Company shall continue to recognize Options previously granted.
5.02. AMENDMENT OF PLAN. The Board of Directors may from time to time
amend, modify, suspend or terminate the Plan. Nevertheless, no such amendment,
modification, suspension or termination shall (a) impair any Options theretofore
granted under the Plan or deprive any Holder of any shares of Common Stock which
he might have acquired through or as a result of the Plan, or (b) be made
without the approval of the stockholders of the Company where such change would
increase the total number of shares of Common Stock which may be granted under
the Plan.
5.03 TREATMENT OF PROCEEDS. Proceeds from the sale of Common Stock
pursuant to Options granted under the Plan shall constitute general funds of the
Company.
5.04 EFFECTIVENESS. The Plan shall become effective as of the Effective
Date, subject to the conditions stated in the following sentence. The Plan and
each Option granted or to be granted hereunder is conditional on and shall be of
no force and effect, and no Option shall be exercised, unless and until,
stockholders have approved the Plan by the affirmative votes of the holders of a
majority of the shares of Common Stock present, or represented, and entitled to
vote at a meeting of stockholders duly held not later than January 31, 1997.
5.05 PARAGRAPH HEADINGS. The paragraph headings included here are only for
convenience, and they shall have no effect on the interpretation of the Plan.
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APPENDIX D
1996 STOCK OPTION PLAN
FOR NON-EMPLOYEE PROVIDER AFFILIATED WITH
PHYSICIAN PARTNERS, INC.
1. PURPOSE OF THE PLAN
The 1996 Stock Option Plan for Non-Employee Physicians Affiliated with
Physician Partners, Inc. (the "Plan") was established by Physician Partners,
Inc. (the "Company"), effective as of the effective time (the "Effective Date")
of the transaction contemplated under the Amended and Restated Agreement and
Plan of Reorganization and Merger, dated as of September 19, 1996, as amended on
November 4, 1996, November 29, 1996 and December 31, 1996 (referred to herein,
as so amended, as the "Reorganization and Merger Agreement") to:
1.1 furnish incentives to eligible physicians chosen to receive options
because they are considered capable of responding by improving operations and
increasing profits;
1.2 increase the interest of selected physicians in the Company's welfare
through their participation in the growth in value of Class A Common Stock, $.01
par value, of the Company ("Class A Common Stock").
To accomplish the foregoing objectives, this Plan provides a means whereby
physicians may receive options to purchase Class A Common Stock. Options granted
under this Plan ("Options") will be nonqualified options ("NQOs") subject to
federal income taxation upon exercise.
2. ELIGIBLE PERSONS
2.1 GENERAL. Every person who at the date on which an Option granted to
the person becomes effective (the "Grant Date") and who is a non-employee
provider affiliated with the Company or any Affiliate or any non-employee
provider subject to an acquisition or management agreement with the Company is
eligible to receive Options under this Plan.
2.2 DEFINITION OF AFFILIATE. The term "Affiliate," as used in this Plan,
means a "parent corporation" or "subsidiary corporation," as defined in Section
424 of the Internal Revenue Code of 1986 (the "Code"). The term "employee" shall
have the meaning ascribed for purposes of Section 3401(c) of the Code and the
Treasury Regulations promulgated thereunder and shall include an officer who is
also an employee.
3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock reserved for issuance upon the exercise
of Options is 1,500,000 shares of Class A Common Stock. The shares covered by
the portion of any grant that expires unexercised under this Plan shall become
available again for grants under this Plan. The number of shares reserved for
issuance under this Plan is subject to adjustment in accordance with the
provisions for adjustment in this Plan.
4. ADMINISTRATION
This Plan shall be administered by a committee (the "Committee") of not less
than three (3) members appointed by the Board of Directors of the Company, at
least two (2) of which must be nonemployee disinterested Directors
("Disinterested Directors") as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Committee may delegate
nondiscretionary administrative duties to other employees of the Company as it
deems proper. Subject to the approval of the Board of Directors and the
provisions of this Plan, the Committee shall have the authority to select the
persons to receive Options under this Plan, to fix the number of shares that
each optionee may purchase, to set the terms and conditions of each Option, and
to determine all other matters relating to this Plan.
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Any act approved in writing by a majority of the members of the Committee shall
be a valid act of the Committee. Such determinations shall be final and binding
on all persons. No member of the Board of Directors or the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any option granted under the Plan.
5. GRANTING OF THE RIGHTS
5.1 TEN YEAR LIMITATION. No Options shall be granted under this Plan after
ten years from the date the Board of Directors of the Company adopts this Plan.
5.2 WRITTEN AGREEMENT; EFFECT. Each Option shall be evidenced by a written
agreement (the "Option Agreement"), in a form satisfactory to the Committee,
executed by the Company and by the person to whom such Option is granted.
Failure of the grantee to execute an Option Agreement shall not void or
invalidate the grant of any Option; the Option may not be exercised, however,
until the Option Agreement is executed.
6. TERMS AND CONDITIONS OF OPTIONS
Each Option shall be subject to the terms and conditions set forth in this
Section 6.1.
6.1 TERMS AND CONDITIONS TO WHICH OPTIONS ARE SUBJECT. Options shall be
subject to the following terms and conditions:
(a) CHANGES IN CAPITAL STRUCTURE. Subject to Section 6.1(b), if the
stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, or converted into or exchanged
for other securities as a result of a merger, consolidation, or
reorganization, appropriate adjustments shall be made in (A) the number and
class of shares of stock subject to this Plan and each outstanding Option,
and (B) the exercise price of each outstanding Option; provided, however,
that the Company shall not be required to issue fractional shares as a
result of any such adjustment. Each such adjustment shall be determined by
the Committee in its sole discretion, which determination shall be final and
binding on all persons.
(b) CORPORATE TRANSACTIONS. New options rights may be substituted for
Options granted, or the Company's obligations as to outstanding Options may
be assumed, by an employer corporation other than the Company, or an
Affiliate thereof, in connection with any merger, consolidation,
acquisition, separation, reorganization, dissolution, liquidation, sale or
like occurrence in which the Company is involved and which the Committee
determines, in its absolute discretion, would materially alter the
structure. Notwithstanding the foregoing or the provisions of Section
6.1(a), if such an event occurs and if such employer corporation, or an
Affiliate thereof, does not substitute new option rights for, and
substantially equivalent to, the outstanding Options granted hereunder, or
assume the outstanding Options granted hereunder, or if there is no employer
corporation, or if the Committee determines, in its sole discretion, that
outstanding Options should not then continue to be outstanding, the
Committee may upon ten days prior written notice to optionees in its
absolute discretion (A) shorten the period during which Options are
exercisable (provided they remain exercisable, to the extent otherwise
exercisable, for at least ten days after the date the notice is given), or
(B) cancel Options upon payment to the optionee in cash, with respect to
each Option to the extent then exercisable, of an amount which, in the
absolute discretion of the Committee, is determined to be equivalent to any
excess of the fair market value (at the effective time of the dissolution,
liquidation, merger, consolidation, acquisition, separation, reorganization,
sale or other event) of the consideration that the optionee would have
received if the Option had been exercised before the effective time, over
the exercise price of the Option; provided, however, if there is a successor
corporation and replacement options are not granted by the successor
corporation, all outstanding Options shall become exercisable prior to the
consummation of the transaction such that the optionees shall have not less
than ten days to exercise the Options and become stockholders of record
entitled to receive
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the consideration paid to the other stockholders of the Company. If an
optionee fails to exercise his option within any exercise period described
in this paragraph and the dissolution, liquidation, merger, consolidation,
sale or other event is consummated, his option shall no longer be
exercisable. Any unexercised option shall be cancelled and terminated.
Notwithstanding anything herein to the contrary, nothing shall extend an
optionee's right to exercise a NQO after the expiration of ten (10) years
from the date it is granted. The actions described in this Section may be
taken without regard to any resulting tax consequences to the optionee.
(c) OPTION GRANT DATE. Each Option Agreement shall specify the date as
of which it shall be effective, which date shall be the Grant Date
(determined pursuant to Section 5.4 in the case of advance approvals).
(d) FAIR MARKET VALUE. For purposes of this Plan, the fair market
value of the Company's Class A Common Stock shall be determined as follows:
(1) if the stock is listed on any established stock exchange or a
national market system, including without limitation the National Market
System of the National Association of Securities Dealers Automated
Quotation System, its fair market value shall be the closing sales price
for the stock, or the mean between the high bid and low asked prices if
no sales were reported, as quoted on such system or exchange (or the
largest such exchange) for the date the value is to be determined (or if
there are no sales or bids for such date, then for the last preceding
business day on which there were sales or bids), as reported in the Wall
Street Journal or similar publication;
(2) if the stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its fair market value shall
be the mean between the high bid and low asking prices for the stock on
the date the value is to be determined (or if there are no quoted prices
for the date of grant, then for the last preceding business day on which
there were quoted prices);
(3) in the absence of an established market for the stock, the fair
market value shall be determined in "good faith" by the Committee, with
reference to the Company's net worth, prospective earning power,
dividend-paying capacity, and other relevant factors, including sales for
the most recent 12 month period, the goodwill of the Company, the
economic outlook in the Company's industry, the Company's position in the
industry and its management and the values of stock of other corporations
in the same or a similar line of business.
(e) TIME OF OPTION EXERCISE. The Company shall not grant any Options
which may become exercisable at a rate in excess of 20% per annum from the
date of such grant without the written consent of a majority of the
Disinterested Directors.
(f) NONASSIGNABILITY OF OPTION RIGHTS. No Option shall be assignable
or otherwise transferable by the optionee except by will or by the laws of
descent and distribution. During the life of the optionee, an Option shall
be exercisable only by the optionee or the optionee's guardian or legal
representative.
(g) PAYMENT. Except as provided below, payment in full, in cash, shall
be made for all stock purchased at the time written notice of exercise of an
Option is given to the Company, and proceeds of any payment shall constitute
general funds of the Company. At the time an Option is granted or before it
is exercised, the Committee, in the exercise of its absolute discretion, may
authorize any one or more of the following additional methods of payment:
(1) acceptance of the optionee's full recourse promissory note for
some or all of the aggregate exercise price of the shares being acquired
(except for the aggregate par value of the shares being acquired, which
must be paid in cash or other lawful consideration under applicable law),
payable on such terms and bearing such interest rate as determined by the
Committee, and
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secured in such manner as the Committee shall approve; including, without
limitation, by a security interest in Class A Common Stock or other
securities of the Company;
(2) delivery by the optionee of Class A Common Stock or other
securities of the Company already owned by the optionee for all or part
of the aggregate exercise price of the shares being acquired, provided
the fair market value of such Class A Common Stock or securities is equal
on the date of exercise to the aggregate exercise price of the shares
being acquired, or such portion thereof as the optionee is authorized to
pay by delivery of such Class A Common Stock or securities; and
(3) any other property, so long as such property is acceptable to the
Committee and constitutes valid consideration under applicable law for
the shares being acquired and is surrendered in good form for transfer.
(h) AFFILIATION.
(1) Any Option or portion thereof which has not expired or been
exercised on or before the date on which an optionee ceases to be
affiliated with the Company shall expire ninety (90) days after the date
of cessation of such affiliation.
(2) Notwithstanding the foregoing, if the optionee ceases to be
affiliated with the Company due to the permanent disability or death of
the optionee, the optionee, the optionee's personal representative or any
other person who acquires option rights from the optionee by will or the
applicable laws of descent and distribution, may, within twelve months
after the date of cessation, exercise such option rights to the extent
they were exercisable on the date of cessation.
(i) OTHER PROVISIONS. Each Option Agreement may contain such other
terms, provisions, and conditions not inconsistent with this Plan, including
rights of repurchase, as may be determined by the Committee.
(j) EXERCISE PRICE. The exercise price of an NQO shall not be less
than 85 percent of the fair market value of the stock subject to the Option
on the Grant Date; provided, however, that the exercise price of an NQO
granted to any person who owns, directly or indirectly (or is treated as
owning by reason of attribution rules, currently set forth in Code Section
424), stock of the Company constituting more than ten percent of the total
combined voting power of all classes of outstanding stock of the Company or
of any Affiliate of the Company, shall in no event be less than 100 percent
of such fair market value.
(k) OPTION TERM. Unless an earlier expiration date is specified by the
Committee at the Grant Date in the Option Agreement, each NQO shall expire
ten years from its Grant Date.
7. MANNER OF EXERCISE
An optionee wishing to exercise an Option shall give written notice to the
Company at its principal executive office, to the attention of the Secretary of
the Company, accompanied by an executed stock purchase agreement in form and
substance satisfactory to the Company, by payment of the exercise price and by
such other documents as the Committee may request. The date the Company receives
written notice of an exercise hereunder accompanied by payment of the exercise
price and all such other documents will be considered the date the Option was
exercised. Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or any
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or transferee of an Option shall not have any privileges as
stockholder with respect to any stock covered by the Option until the date of
issuance of a stock certificate.
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8. RELATIONSHIP WITH THE COMPANY
Nothing in this Plan or any Option granted hereunder shall interfere with or
limit in any way the right of the Company to terminate any optionee's
affiliation or other relationship with the Company at any time.
9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Board of Directors may at any time amend, alter, suspend or discontinue
this Plan. The Board of Directors may amend this Plan and the terms of any
Option outstanding hereunder if the amendment is designed to maximize federal
income tax benefits accorded to Options; provided, that with respect to
outstanding Options, the optionee consents to such amendment.
10. LIABILITY AND INDEMNIFICATION OF COMMITTEE
No member of the Committee shall be liable for any act or omission on such
member's own part, including but not limited to the exercise of any power or
discretion given to such member under this Plan, except for those acts or
omissions resulting from such member's own gross negligence or willful
misconduct. The Company shall indemnify each present and future member of the
Committee against, and each member of the Committee shall be entitled without
further act on his or her part to indemnity from the Company for, all expenses
(including attorney's fees and the amount of judgments and the amount of
approved settlements made with a view to the curtailment of costs of litigation,
other than amounts paid to the Company itself) reasonably incurred by such
person in connection with or arising out of any action, suit, or proceeding to
which the Committee or any member of the Committee may be a party by reason of
any action taken or failure to act under or in connection with the Plan or any
option granted under the Plan to the full extent permitted by law and by the
Certificate of Incorporation and Bylaws of the Company. The right of indemnity
described in this Section 10 shall be in addition to such other rights of
indemnification as the members of the Committee shall otherwise be entitled
because of their serving on the Board of Directors of the Company or as an
employee of the Company.
11. EFFECTIVE DATE OF THIS PLAN
This Plan shall become effective as of the Effective Date; provided, that
the Plan is approved by the affirmative votes of the holders of a majority of
the share of Class A Common Stock present, or represented, and entitled to vote
at a meeting of the stockholders duly held not later than January 31, 1997.
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APPENDIX E
PHYSICIAN PARTNERS, INC. CHANGE IN CONTROL PLAN
SECTION 1
INTRODUCTION
1.1. PURPOSE. Physician Partners, Inc. ("PPI") has established the
Physician Partners, Inc. Change In Control Plan (the "Plan") to enable PPI and
its Subsidiaries and Affiliates (as such terms are defined in Section 1.3
hereof) (collectively, the "Company") to provide severance benefits to eligible
executive or management employees whose employment is terminated following a
Change in Control of the Company. It is the intent of the Company that the Plan,
as set forth herein, constitute an "employee welfare benefit plan" within the
meaning of Section 3(1) of the Employee Retirement Income Act of 1974 ("ERISA")
and comply with the applicable requirements of ERISA.
1.2. EFFECTIVE DATE, PLAN YEAR. The "Effective Date" of the Plan is
December 31, 1996. A "Plan Year" is the 12-month period beginning on October 1
and ending on the following September 30.
1.3. EMPLOYERS. Any Subsidiary or Affiliate of PPI employing an employee
who has been designated as a Participant by the Committee shall be deemed to
have adopted the Plan. A "Subsidiary" of PPI is any corporation more than 50
percent of the voting stock of which is owned, directly or indirectly, by PPI.
An "Affiliate" of PPI is any corporation more than 50 percent of the voting
stock of which is owned, directly or indirectly, by the owner or owners of more
than 50 percent of the voting stock of PPI.
1.4. ADMINISTRATION. The Plan is administered by the Compensation
Committee of the Board of Directors of PPI (the "Committee"). The Committee,
from time to time, may adopt such rules and regulations as may be necessary or
desirable for the proper and efficient administration of the Plan and as are
consistent with the terms of the Plan. The Committee, from time to time, may
also appoint such individuals to act as its representatives as the Committee
considers necessary or desirable for the effective administration of the Plan.
Any notice or document required to be given or filed with the committee will be
properly given or filed if delivered or mailed, by registered mail, postage
prepaid, to the Committee at 111 SW Columbia Street, Suite 725, Portland, Oregon
97201.
SECTION 2
PARTICIPATION
The Committee shall designate from time to time those employees of the
Company employed in an executive or management position who shall participate in
the plan (a "Participant"). An employee who has been so designated shall
participate by signing an agreement with the Company, substantially in the form
attached hereto as Exhibit A ("Participant's Agreement"), which shall specify
the benefits the Participant is entitled to receive should the Participant's
employment terminate following a Change in Control of the Company and the terms
and conditions under which those benefits will be provided. A Participant's
Agreement implements and forms a part of the Plan as respects the Participant's
participation in the Plan. To the extent there are any inconsistencies between
the Plan document and a Participant's Agreement, the terms of the Participant's
Agreement shall be controlling. No employee other those designated by the
Committee shall be eligible to participate in the Plan.
SECTION 3
PLAN BENEFITS
3.1. BENEFITS FOLLOWING A CHANGE IN CONTROL. If a Participant's employment
with the Company terminates within twenty-four (24) months following a Change in
Control, the Participant shall be entitled to the benefits specified in the
Participant's Agreement and such benefits shall be paid at such time, in such
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manner and subject to such conditions as are specified in the Agreement. A
Participant's entitlement to benefits as specified in the Participant's
Agreement shall depend upon whether the Participant's termination is voluntary
or involuntary and whether for Cause (as such term is defined below), if
involuntary, or for Good Reason (as such term is defined below), if voluntary.
3.2. NON-COMPETITION AND NON-SOLICITATION. In consideration for the
benefits provided for under a Participant's Agreement, the Participant shall
agree that during the 24-month period following the Participant's date of
termination (the "Severance Period"), the Participant:
(a) will not, without the prior written consent of Company, either
jointly or individually, directly or indirectly, whether as an employee,
officer, director, agent, consultant or otherwise (i) compete with PPI, any
Subsidiary or Affiliate of PPI, [New Corvallis PC Sub, New HealthFirst PC
Sub, New Medford PC Sub] or any entity that, directly or indirectly,
controls or is controlled by or is under common control with the Company
(collectively, "Company Affiliates") or any of the facilities (the
"Facilities") operated by the Company or any of the Company Affiliates at
the time of termination within the twenty-five (25) mile radius of each such
Facility (the "Restricted Area"), (ii) own, manage, operate, join, control,
advise, consult with, provide services to, or be employed by or participate
in the ownership, operation, management or control (other than as a
stockholder owning less than five percent of the capital stock of a company
whose stock is publicly traded on a national securities exchange) of any
business engaged in the provision of services provided by the Company or any
of the Company Affiliates or at any of the Facilities (a "Competing
Business") within the Restricted Area or (iii) advise, assist, consult with,
lease or sell real property to or aid in the establishment or operation of a
Competing Business in the Restricted Area and
(b) will not, without the prior written consent of Company, alone or in
association with others, solicit on behalf of the Participant, or any
Competing Business, any employee of Company, or any of the Company
Affiliates, for employment with a Competing Business.
If a Participant fails to comply with the restrictions of this subsection 2.2
and the Participant's Agreement, participation in the Plan shall immediately
terminate and the Participant shall forfeit any remaining unpaid benefits.
3.3. CHANGE IN CONTROL. For purposes of the Plan a "Change in Control"
shall have occurred if: (a) any "Person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")
other than PPI, any corporation owned, directly or indirectly, by the
stockholders of PPI in substantially the same proportions as their ownership of
stock in PPI, or any trustee or other fiduciary holding securities under a
Company employee benefit plan or such proportionately owned corporation),
becomes the "beneficial owner" (as such term is defined in rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of PPI representing 20% or
more of the combined voting power of PPI's then outstanding securities; (b)
during any period of not more than 24 months, individuals who at the beginning
of such period constitute the Board of Directors of PPI, and any new director
(other than a director designated by a Person who has entered into an agreement
with PPI to effect a transaction described in paragraph (a), (c), or (d) of this
Section 6) whose election by the board or nomination for election by PPI's
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the period or
whose election or nomination for election was previously so approved, cease for
any reason to constitute at least a majority thereof; (c) the stockholders of
PPI approve a merger or consolidation of PPI with any other corporation, other
than (i) a merger or consolidation which would result in the voting securities
of PPI outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 60% of the combined voting power of the voting
securities of PPI or such surviving entity outstanding immediately after such
merger or consolidation, or (ii) a merger or consolidation effected to implement
a recapitalization of PPI (or similar transaction) in which no Person acquires
more than 20% of the combined voting power of PPI's then outstanding securities;
or (d) the
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stockholders of PPI approve a plan of complete liquidation of PPI or an
agreement for the sale or disposition by PPI of all or substantially all of its
assets (or any transaction having a similar effect). PPI may also determine, in
its discretion, that a sale of a substantial portion of its assets or one of its
businesses constitutes a "Change of Control" with respect to any Participant if
the Participant is employed in the affected operation.
3.4. TERMINATIONS FOR CAUSE AND GOOD REASON. A Participant will be
considered to have been terminated for "Cause" if the termination is by reason
of the Participant willfully engaging in conduct demonstrably and materially
injurious to the Company, the Participant being convicted of or confessing to a
crime involving dishonesty or moral turpitude or the Participant's willful and
continued failure for a significant period of time to perform the Participant's
duties after a demand for substantial performance has been delivered to the
Participant by the Board of Directors of PPI which demand specifically
identifies the manner in which the Board believes that the Participant has not
substantially performed his duties. A Participant's termination shall be
considered to have been for "Good Reason" if the Participant's termination is by
reason of the occurrence of any of the following events within twenty-four (24)
months following a Change in Control without the Participant's express written
consent:
(a) any change in the Participant's title, authorities, responsibilities
(including reporting responsibilities) which, in the Participant's judgment,
represents an adverse change; the assignment to the Participant of any
duties or work responsibilities which, in his reasonable judgment, are
inconsistent with such title, authorities or responsibilities; or any
removal of the Participant from, or failure to reappoint or reelect him to
any of such positions, except if any such changes are because of disability,
retirement or Cause;
(b) a reduction in or failure to pay any portion of the Participant's
annual base salary as in effect on the date of the Change in Control or as
the same may be increased from time to time thereafter;
(c) the failure by the Company to provide the Participant with
compensation and benefits (including, without limitation, incentive, bonus
and other compensation plans and any vacation, medical, hospitalization,
life insurance, dental or disability benefit plan), or cash compensation in
lieu thereof, which are, in the aggregate, no less favorable than those
provided by the Company to the Participant immediately prior to the
occurrence of the Change in Control;
(d) any breach by the Company of any provision of a Participant's
Agreement; and
(e) the failure of the Company to obtain a satisfactory agreement from
any successor or assign of the Company to assume and agree to perform the
Participant's Agreement.
SECTION 4
PAYMENT OF BENEFITS
4.1. AGREEMENT GOVERNS. Any benefits under the Plan shall be payable at
such time, and pursuant to the terms and conditions of each Participant's
Agreement.
4.2. FORM OF PAYMENT. Subject to the terms of a Participant's Agreement,
benefits shall be paid in equal installments according to the Company's normal
payroll schedule. In the event of a Participant's death before the Participant
receives all benefits to which he otherwise would be entitled under the Plan,
payment shall be made to the Participant's beneficiary in installments or a lump
sum, as determined by the Committee.
4.3. DESIGNATION OF BENEFICIARY. By signing a form furnished by the
Committee, each Participant may designate any person or persons to whom his
benefits are to be paid if he dies before he receives all of his benefits. A
beneficiary designation form will be effective only when the form is filed with
the Committee while the Participant is still alive and will cancel all
beneficiary designation forms previously filed by the Participant with respect
to this Plan. If a deceased Participant has failed to designate a beneficiary as
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provided above, or if the designated beneficiary predeceases the participant,
payment of the Participant's benefits shall be made to the Participant's estate.
If a designated beneficiary dies before complete payment of any benefits
attributable to a Participant, remaining benefits shall be paid to the
beneficiary's estate.
SECTION 5
FINANCING PLAN BENEFITS
All benefits payable under the Plan shall be paid directly by the Company
out of general assets. The Company shall not be required to segregate on its
books or otherwise any amount to be used for the payment of benefits under the
Plan.
SECTION 6
OTHER EMPLOYMENT
A Participant shall not be required to mitigate the amount of any payment or
benefit provided for under the Plan by seeking other employment or otherwise nor
shall the amount of any payment or benefit provided for under the Plan be
reduced by any compensation earned by the Participant as a result of other
employment.
SECTION 7
MISCELLANEOUS
7.1. INFORMATION TO BE FURNISHED BY PARTICIPANTS. Each Participant must
furnish to the Committee such documents, evidence, data or other information as
the Committee consider necessary or desirable for the purpose of administering
the Plan. Benefits under the Plan for each Participant are provided on the
condition that he furnish full, true and complete data, evidence or other
information, and that he will promptly sign any document related to the Plan,
requested by the Committee.
7.2. CLAIMS REVIEW. Any claim for benefits under the Plan or a
Participant's Agreement by a Participant shall be made in writing and delivered
to the Committee. If a Participant, or any beneficiary following the
Participant's death (collectively, the "Claimant"), believes he has been denied
any benefits or payments under the Plan or Agreement, either in total or in an
amount less than the full benefit or payment to which the Claimant would
normally be entitled, the Committee shall advise the Claimant in writing of the
amount of the benefit, or payment, if any, and the specific reasons for the
denial. The Committee shall also furnish the Claimant at that time with a
written notice containing:
(a) A specific reference to pertinent provisions of the Plan or the
Participant's Agreement;
(b) A description of any additional material or information necessary
for the Claimant to perfect the claim if possible, and an explanation of why
such material or information is needed; and
(c) An explanation of the claim review procedure set forth below. Within
60 days of receipt of the information described above, a Claimant shall, if
further review is desired, file a written request for reconsideration with
the Committee. So long as the Claimant's request for review is pending
(including such 60-day period), Claimant or his duly authorized
representative may review pertinent documents and may submit issues and
comments in writing to the Committee. A final and binding decision shall be
made by the Committee within 60 days of the filing by the Claimant of the
request for reconsideration; provided, however, that if the Committee, in
its discretion, feels that a hearing with the Claimant or his representative
present is necessary or desirable, this period shall be extended an
additional 60 days. The decision by the Committee shall be conveyed to the
Claimant in writing and shall include specific reasons for the decision,
written in a manner calculated to be understood by the Claimant, which
specifically references to the pertinent provisions of the Plan or the
Participant's
E-4
<PAGE>
Agreement on which the decision is based. The Committee shall use ordinary
care and diligence in the performance of its duties.
7.3. EVIDENCE. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person relying
thereon considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
7.4. FEES AND EXPENSES. The Company shall pay all reasonable legal fees
and related expenses (including the reasonable costs of experts, evidence and
counsel), when and as incurred by a Participant, as a result of contesting or
disputing any termination of employment of the Participant following a Change in
Control whether or not such contest or dispute is resolved in the Participant's
favor but only if the Participant was seeking in good faith to obtain or enforce
any right or benefit provided by the Plan or the Participant's Agreement or by
any other plan or arrangement maintained by the Employers under which the
Participant is or may be entitled to receive benefits.
7.5. ACTION BY EMPLOYER. Any action required of or permitted by the
Company under the Plan shall be by resolution of its Board of Directors, by
resolution of a duly authorized committee of its Board of Directors, or by a
person or persons authorized by resolutions of its Board of Directors or such
committee.
7.6. CONTROLLING LAWS. Except to the extent superseded by laws of the
United States, the laws of Oregon shall be controlling in all matters relating
to the Plan.
7.7. INTERESTS NOT TRANSFERABLE. The interests of persons entitled to
benefits under the Plan are not subject to their debts or other obligations and,
except as may be required by the tax withholding provisions of the Internal
Revenue Code or any state's income tax act, or pursuant to an agreement between
a Participant and the Employers, may not be voluntarily sold, transferred,
alienated, assigned or encumbered.
7.8. MISTAKE OF FACT. Any mistake of fact or misstatement of fact shall be
corrected when it becomes known and proper adjustment made by reason thereof.
7.9. SEVERABILITY. In the event any provision of the Plan or an Agreement
shall be held to be illegal or invalid for any reason, such illegality or
invalidity shall not affect the remaining parts of the Plan or Agreement, and
the Plan or Agreement shall be construed and enforced as if such illegal or
invalid provisions had never been con-tained in the Plan or Agreement.
7.10. WITHHOLDING. The Company will withhold from any amounts payable
under the Plan all federal, state, city and local taxes as shall be legally
required and any applicable insurance premiums, as well as any other amounts
authorized or required by Company policy including, but not limited to,
withholding for garnishments and judgments or other court orders.
7.11. EFFECT ON OTHER PLANS OR AGREEMENTS. Payments or benefits provided
to a Participant under any Company stock, deferred compensation, savings,
retirement or other employee benefit plan are governed solely by the terms of
such plan. Any obligations or duties of a Participant pursuant to any
non-competition or other agreement with the Company shall not be affected by the
receipt of benefits under this Plan.
SECTION 8
AMENDMENT AND TERMINATION
8.1. AMENDMENT AND TERMINATION. PPI reserves the right, to amend the Plan
at any time or to terminate the Plan at any time provided that no such amendment
or termination of the Plan shall affect the provisions of any Participant's
Agreement then in force under the Plan.
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<PAGE>
EXHIBIT A
AGREEMENT
UNDER
PHYSICIAN PARTNERS, INC. CHANGE IN CONTROL PLAN
(CAPP)
THIS AGREEMENT is made as of
- ------------, 199
- -by and between
- ---------, a
- ---------corporation (the "Company") and
- --------- (the "Employee") under the Physician Partners, Inc. Change in Control
Plan (the "Plan").
WHEREAS, Company considers the maintenance of a vital management group to be
essential to protecting and enhancing the best interests of Company and its
stockholders and to that end Company has established the Plan to provide
benefits to certain management employees in the event their employment is
terminated following a change in control of Company, participation in which Plan
is evidenced by an individual agreement between Company and each participating
employee; and
WHEREAS, Employee is a member of Company's management group and Company has
determined that to reinforce and encourage the continued attention and
dedication of Employee to his duties free from distractions which could arise in
anticipation of or subsequent to a Change in Control of the Company, it should
extend participation in the Plan to Employee;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Company and Employee agree that Employee shall become a Participant in the
Plan subject to the following terms which form a part of the Plan with respect
to Employee's participation therein.
1. TERM AND NATURE OF AGREEMENT. This Agreement and Employee's
participation in the Plan shall commence as of the date hereof and shall
continue in effect until
- ---------,
- ----. As of
- ---------,
- ---- and each third
- --------- occurring thereafter, this Agreement shall be automatically renewed
for a term of three (3) years unless Company gives written notice to Employee at
least 90 days prior to the renewal date that this Agreement will not be
extended. Notwithstanding the foregoing, if a Change in Control (as hereinafter
defined) occurs during the last two (2) years of any term of this Agreement, the
term of this Agreement and Employee's Plan participation shall automatically be
extended for a period of twenty-four (24) months after the end of the month in
which the Change in Control occurs. If Employee's employment with Company
terminates prior to a Change in Control, this Agreement and Employee's
participation in the Plan shall automatically expire. Furthermore, Employee may
terminate this Agreement and his participation in the Plan at any time by giving
Company 30 days' advance written notice. This Agreement which evidences
Employee's participation in the Plan shall be construed and enforced under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") as an
unfunded welfare benefit plan. The Plan and this Agreement shall be administered
by the Compensation Committee of the Board of Directors of the Company (the
"Committee").
2. SEVERANCE BENEFITS FOLLOWING A CHANGE IN CONTROL. If Employee's
employment with the Company is terminated within twenty-four (24) months
following a Change in Control, Employee shall be entitled to the following
severance benefits (in addition to any non-severance compensation and benefits
provided for under any of Company's employee benefit plans, policies and
practices or under the terms of any other contracts, but in lieu of any
severance pay under any Company employee benefit plan, policy and practice or
under the terms of any other contract including any employment contract):
(a) If Employee's employment is terminated by reason of Employee's
disability, retirement or death or by Employee other than for Good Reason,
the Company shall pay Employee his full base salary through the Date of
Termination at the rate in effect at the time of termination (or the date of
death in the case of Employee's death), plus any bonus or incentive
compensation award which, pursuant to the terms of any compensation or
incentive plan, Employee is entitled to receive but which has not yet been
paid.
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<PAGE>
(b) If Employee's employment is terminated for Cause, the Company shall
pay Employee his full base salary through the Date of Termination at the
rate in effect at the time Notice of Termination is given plus any bonus or
incentive compensation award which, pursuant to the terms of any
compensation or incentive plan, Employee is entitled to receive but which
has not yet been paid.
(c) If Employee's employment is terminated by Company other than for
Cause or by Employee for Good Reason, then:
(i) Within five (5) days after the Date of Termination, Company shall
pay Employee his full base salary through the Date of Termination at the
greater of the rate in effect at the time the Change in Control occurred
or the rate in effect when the Notice of Termination was given plus an
amount equal to 100% of Employee's Target Annual Bonus (as such term is
defined below).
(ii) Company shall pay Employee a gross severance benefit equal to
the product of three (3) times the sum of (A) Employee's Annual Base
Salary at the greater of the rate in effect at the time the Change in
Control occurred or the rate in effect when Notice of Termination was
given and (B) Employee's Target Annual Bonus. The severance benefit shall
be paid during the ensuing 36-month period in equal installments
according to Company's normal payroll schedule beginning with the first
payroll period in which Employee's Date of Termination occurs. Employee's
"Annual Base Salary" shall mean the yearly salary rate established from
time to time by the Company as Employee's regular salary for the next
succeeding twelve (12) month period, payable pursuant to the Company's
payroll on a periodic basis and Employee's "Target Annual Bonus" shall
mean the maximum bonus Employee could earn under Company's Short Term
Incentive Plan for the year in which his Date of Termination occurs.
(iii) Any outstanding options to purchase stock of Company held by
Employee shall immediately vest and become exercisable in full in
accordance with their terms and the provisions of Company's omnibus
incentive plan.
(iv) Company shall pay the costs of a reasonable outplacement service
until Employee is employed on a full time basis.
3. SECTION 280G LIMITATIONS. Notwithstanding any other provisions of this
Agreement, in the event that any payment or benefit received or to be received
by Employee in connection with a Change in Control or the termination of
Employee's employment (whether pursuant to the terms of this Agreement or any
other plan, arrangement or agreement with Company, with any person whose actions
result in a Change in Control of Company or with any person affiliated with
Company or such person) (all such payments and benefits, including the severance
payments and benefits provided herein, being hereinafter called "Total
Payments") would not be deductible (in whole or in part) as a result of Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the
payments and benefits required under this Agreement shall be reduced to the
extent necessary to eliminate the disallowance of the deduction under Code
Section 280G after taking into account any reduction in the Total Payments
required by such other plans, arrangements or agreements because of Code Section
280G. For purposes of this limitation there shall not be taken into account any
payment or benefit which in the opinion of tax counsel selected by Company does
not constitute a "parachute payment" within the meaning of Code Section
280G(b)(2). The value of any non-cash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by Company's independent
auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the
Code. If it is established pursuant to a final determination of a court or an
Internal Revenue Service proceeding that, notwithstanding the good faith of
Employee and Company in applying the terms of this Section 3, any portion of the
Total Payments are not deductible by reason of Code Section 280G, Employee shall
have an obligation to pay Company upon demand an amount equal to the excess of
the Total Payments provided to Employee over the payments and benefits that can
provide to Employee on a fully deductible basis.
E-7
<PAGE>
4. NON-COMPETITION AND NON-SOLICITATION. In consideration for the
severance benefits called for under paragraph 2(c) above, Employee agrees that
during the 24-month period following his Date of Termination (the "Severance
Period"), Employee:
(a) will not, without the prior written consent of Company, either
jointly or individually, directly or indirectly, whether as an employee,
officer, director, agent, consultant or otherwise (i) compete with the
Company Physician Partners Subsidiary, Corvallis P.C. Subsidiary,
HealthFirst P.C. Subsidiary, Medford P.C. Subsidiary or any entity that,
directly or indirectly, controls or is controlled by or is under common
control with the Company ("Company Affiliates") or any of the facilities
(the "Facilities") operated by the Company or any of the Company Affiliates
at the time of termination within the twenty-five (25) mile radius of each
such Facility (the "Restricted Area"), (ii) own, manage, operate, join,
control, advise, consult with, provide services to, or be employed by or
participate in the ownership, operation, management or control (other than
as a stockholder owning less than five percent of the capital stock of a
company whose stock is publicly traded on a national securities exchange) of
any business engaged in the provision of services provided by the Company or
any of the Company Affiliates or at any of the Facilities (a "Competing
Business") within the Restricted Area or (iii) advise, assist, consult with,
lease or sell real property to or aid in the establishment or operation of a
Competing Business in the Restricted Area.
(b) will not, without the prior written consent of Company, alone or in
association with others, solicit on behalf of Employee, or any Competing
Business, any employee of Company, or any of the Company Affiliates, for
employment with a Competing Business.
Should Employee fail to comply with the restrictions contained in this Section
3, this Agreement shall immediately terminate and Employee shall forfeit any
remaining unpaid benefits under this Agreement.
5. OTHER EMPLOYMENT. Employee shall not be required to mitigate the amount
of any payment or benefit provided for under this Agreement by seeking other
employment or otherwise nor shall the amount of any payment or benefit provided
for in this Agreement be reduced by any compensation earned by Employee as a
result of other employment. Payment to Employee pursuant to this Agreement shall
constitute the entire obligation of the Company for severance pay and full
settlement of any claim for severance pay under law or in equity that Employee
might otherwise assert against the Company or any of its employees, officers or
directors on account of Employee's termination.
6. CHANGE IN CONTROL. For purposes of this Agreement a "Change in Control"
shall have occurred if: (a) any "Person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act")
other than Company, any corporation owned, directly or indirectly, by the
stockholders of Company in substantially the same proportions as their ownership
of stock of Company, and any trustee or other fiduciary holding securities under
a Company employee benefit plan or such proportionately owned corporation),
becomes the "beneficial owner" (as such term is defined in rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of Company representing 20%
or more of the combined voting power of Company's then outstanding securities;
(b) during any period of not more than 24 months, individuals who at the
beginning of such period constitute the Board of Directors of Company, and any
new director (other than a director designated by a Person who has entered into
an agreement with Company to effect a transaction described in paragraphs (a),
(c) or (d) of this Section 6) whose election by the board or nomination for
election by the Company's stockholders was approved by a vote of at least
two-thirds of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at least a majority
of the PPI Board; (c) the stockholders of Company approve a merger or
consolidation of Company with any other entity or corporation, other than (i) a
merger or consolidation which would result in the voting securities of Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 60% of the combined voting power of the voting
securities of Company or such surviving
E-8
<PAGE>
entity outstanding immediately after such merger or consolidation, or (ii) a
merger or consolidation effected to implement a recapitalization of Company (or
similar transaction) in which no Person acquires more than 20% of the combined
voting power of Company's then outstanding securities; or (d) the stockholders
of Company approve a plan of complete liquidation of Company or an agreement for
the sale or disposition by Company of all or substantially all of its assets (or
any transaction having a similar effect). Company may also determine, in its
discretion, that a sale of a substantial portion of its assets or one of its
businesses constitutes a "Change of Control" with respect to Employee if
Employee is employed in the affected operation.
7. TERMINATIONS FOR CAUSE AND GOOD REASON. Employee will be considered to
have been terminated for "Cause" if the termination is by reason of Employee
willfully engaging in conduct demonstrably and materially injurious to the
Company, Employee being convicted of or confessing to a crime involving
dishonesty or moral turpitude or Employee's willful and continued failure for a
significant period of time to perform Employee's duties after a demand for
substantial performance has been delivered to Employee by the Board of Directors
of Company which demand specifically identifies the manner in which the Board
believes that Employee has not substantially performed his duties. Employee's
termination shall be considered to have been for "Good Reason" if Employee's
termination is be reason of the occurrence of any of the following events within
24 months following a Change in Control without Employee's express written
consent:
(a) any change in Employee's title, authorities, responsibilities
(including reporting responsibilities) which, in Employee's reasonable
judgment, represents an adverse change; the assignment to Employee of any
duties or work responsibilities which, in his reasonable judgment, are
inconsistent with such title, authorities or responsibilities; or any
removal of Employee from, or failure to reappoint or reelect him to any of
such positions, except if any such changes are because of disability,
retirement or Cause;
(b) a reduction in or failure to pay any portion of Employee's Annual
Base Salary as in effect on the date of the Change in Control or as the same
may be increased from time to time thereafter;
(c) the failure by Company to provide Employee with compensation and
benefits (including, without limitation, incentive, bonus and other
compensation plans and any vacation, medical, hospitalization, life
insurance, dental or disability benefit plan), or cash compensation in lieu
thereof, which are, in the aggregate, no less favorable than those provided
by Company to Employee immediately prior to the occurrence of the Change in
Control;
(d) any breach by Company of any provision of this Agreement; and
(e) the failure of Company to obtain a satisfactory agreement from any
successor or assign of Company to assume and agree to perform this
Agreement, as required in Section 9 of this Agreement.
Employee's continued employment after the expiration of 60 days from any action
which would constitute Good Reason under paragraph 7(a) above shall constitute a
waiver of rights with respect to such action constituting Good Reason under this
Agreement.
8. NOTICE OF TERMINATION. Any purported termination of employment by the
Company or by Employee shall be communicated by a written Notice of Termination
to the other party which notice is given in accordance with Section 11 of this
Agreement. No purported termination shall be effective without such a Notice of
Termination. The Notice of Termination shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of Employee's
employment and shall specify the Date of Termination. The "Date of Termination"
shall mean the date specified in the Notice of Termination provided that in no
case shall the date be less than thirty (30) days or more than sixty (60) days
after the date the Notice of Termination is given. If within thirty (30) days
after any Notice of Termination is given the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally
E-9
<PAGE>
determined either by mutual written agreement of the parties, or by the final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been taken).
9. SUCCESSORS. Company will require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Company to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
Company would be required to perform if no such succession or assignment had
taken place. As used in this Agreement, "Company" shall include any successor or
assign to its business and/or assets which assumes and agrees to perform this
Agreement by operation of law, or otherwise. This Agreement shall inure to the
benefit of and be enforceable by Employee's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If Employee should die while any amounts would still be payable to him
hereunder if he had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
Employee's beneficiary and if there is no such beneficiary, to Employee's estate
in a lump sum.
10. FEES AND EXPENSES. Company shall pay all reasonable legal fees and
related expenses (including the reasonable costs of experts, evidence and
counsel), when and as incurred by Employee, as a result of contesting or
disputing any termination of employment of Employee following a Change in
Control whether or not such contest or dispute is resolved in Employee's favor
but only if Employee was seeking in good faith to obtain or enforce any right or
benefit provided by this Agreement or by any other plan or arrangement
maintained by the Company under which Employee is or may be entitled to receive
benefits.
11. NOTICE. Any notice or other communication provided for or required by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective addresses last given by each party
to the other or to such other address as either party may have furnished to the
other in writing.
12. MODIFICATIONS, WAIVERS AND SURVIVAL OF OBLIGATIONS. No provision of
this Agreement may be modified, waived or discharged unless such modification,
waiver or discharge is agreed to in writing and signed by Employee and the
Company. A waiver of any condition or provision of this Agreement shall be
limited to the terms and conditions of such waiver and shall be not be construed
as a waiver of any similar or dissimilar provisions or condition at any time.
The obligations of the Company under Section 2 shall survive the expiration of
the term of this Agreement.
13. CLAIMS PROCEDURE. Any claim for benefits under this Agreement by
Employee shall be made in writing pursuant to the claims procedure stated in the
Plan.
14. GOVERNING LAW. The laws of Oregon shall be controlling in all matters
relating to this Agreement and the Plan to the extent not preempted by ERISA.
15. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, understandings
and arrangements, oral or written, between the parties hereto with respect to
the subject matter hereof.
17. ACTION BY COMPANY. Any action required of or permitted by Company
under this Agreement shall be by resolution of its Board of Directors, by
resolution of a duly authorized committee of its Board of Directors, or by a
person or persons authorized by resolutions of its Board of Directors or such
committee.
18. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
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<PAGE>
19. NON-EXCLUSIVELY OF RIGHTS. Nothing in this Agreement shall prevent or
limit Employee's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by Company and for which Employee
may qualify, nor shall anything herein limit or reduce such rights as Employee
may have under any other agreements with Company. Amounts which are vested
benefits or which Employee is otherwise entitled to receive under any plan or
program of the Company shall be payable in accordance with such plan or program,
except as explicitly modified by this Agreement.
PHYSICIAN PARTNERS, INC.
By:
----------------------------------------
Its:
-------------------------------------
---------------------------------------------
Employee
SSN:
----------------------------------------
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<PAGE>
APPENDIX G
RESTATED ARTICLES OF INCORPORATION
OF
-------------------------------------------
THE FOLLOWING RESTATED ARTICLES OF INCORPORATION WERE ADOPTED AT A MEETING
OF THE SHAREHOLDERS OF , AN OREGON PROFESSIONAL
CORPORATION, ON , 1996 TO CONVERT SUCH CORPORATION FROM A PROFESSIONAL
CORPORATION TO A BUSINESS CORPORATION IN ACCORDANCE WITH THE OREGON PROFESSIONAL
CORPORATION ACT AND THE OREGON BUSINESS CORPORATION ACT.
ARTICLE I
NAME
The name of this corporation (the "Corporation") is
.
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Oregon is
, Oregon , in the County of
. The name of the Corporation's registered agent at such address
is .
ARTICLE III
PURPOSE
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be organized under the Oregon
Business Corporation Act (the "Oregon Act").
[ALL OTHER PROVISIONS WILL BE IDENTICAL TO THOSE OF THE EXISTING ARTICLES OF
INCORPORATION OF CORVALLIS, HEALTHFIRST OR MEDFORD.]
G-1
<PAGE>
APPENDIX H
FORM OF RESTATED ARTICLES OF INCORPORATION
OF
PHYSICIAN PARTNERS [CORVALLIS][HEALTHFIRST][MEDFORD], P.C.
THE FOLLOWING RESTATED ARTICLES OF INCORPORATION WERE ADOPTED AT A MEETING
OF THE SHAREHOLDERS OF PHYSICIAN PARTNERS [CORVALLIS][HEALTHFIRST][MEDFORD],
P.C., AN OREGON PROFESSIONAL CORPORATION, ON , 1996 IN ACCORDANCE
WITH THE OREGON PROFESSIONAL CORPORATION ACT AND THE OREGON BUSINESS CORPORATION
ACT.
ARTICLE I
NAME
The name of this corporation (the "Corporation") is Physician Partners
[Corvallis][HealthFirst][Medford], P.C.
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Oregon is
, Oregon . The name of the Corporation's
registered agent at such address is , M.D.
ARTICLE III
PURPOSE
The professional service to be rendered by the Corporation is the practice
of medicine. The purpose for which the Corporation is organized is to engage in
any lawful act or activity for which corporations may be organized under the
Oregon Professional Corporation Act, including, without limitation, the
operation of medical offices, laboratories and other facilities necessary or
incidental to the practice of medicine.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
The Corporation shall have the authority to issue shares of [
, no par value ("Common Stock")].
ARTICLE V
SOLE SHAREHOLDER
The name and address of the sole shareholder of the Corporation is:
-------------------------------------------
-------------------------------------------
-------------------------------------------
[The Corvallis][HealthFirst Medical Group][Medford] Clinic, P.C., an Oregon
professional corporation and the sole shareholder of the Corporation, is
incorporating the Corporation solely for the purpose of effecting a
"reorganization" (as defined in the Internal Revenue Code of 1986, as amended)
pursuant to ORS 58.108(6).
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<PAGE>
ARTICLE VI
COMPOSITION OF BOARD OF DIRECTORS
AND SHAREHOLDER MEETINGS
SECTION 1. The number of directors of the Corporation shall be as specified
in the Bylaws of the Corporation (the "Bylaws"), and such number may from time
to time be increased or decreased in accordance with the provisions thereof. The
directors of the Corporation shall be elected at meetings of the shareholders of
the Corporation, as such meetings are convened pursuant to the Bylaws, and shall
serve until their respective successors have been duly elected and qualified in
accordance with the Bylaws. The names and addresses of the initial directors of
the Corporation, all of whom are licensed to practice medicine in the State of
Oregon, are as follows:
<TABLE>
<CAPTION>
NAMES ADDRESSES
- --------------------------------------------- ------------------------------------------------------------------
<S> <C>
- ------------------------------------ ----------------------------------------------------
- ------------------------------------ ----------------------------------------------------
- ------------------------------------ ----------------------------------------------------
- ------------------------------------ ----------------------------------------------------
- ------------------------------------ ----------------------------------------------------
- ------------------------------------ ----------------------------------------------------
- ------------------------------------ ----------------------------------------------------
- ------------------------------------ ----------------------------------------------------
</TABLE>
SECTION 2. Newly-created directorships resulting from any increase in the
number of directors of the Corporation may be filled by the Board of Directors
of the Corporation (the "Board of Directors"), or as otherwise provided in the
Bylaws, and any vacancies on the Board of Directors resulting from death,
resignation, removal or other cause shall be filled by the affirmative vote of a
majority of the remaining directors of the Corporation then in office, even if
such directors constitute less than a quorum of the Board of Directors, or by a
sole remaining director of the Corporation, or as otherwise provided in the
Bylaws.
SECTION 3. Any action required or permitted to be taken by the shareholders
of the Corporation may be effected (a) at an annual or special meeting of
shareholders of the Corporation duly called in accordance with the Bylaws or (b)
by a unanimous written consent of such shareholders of the Corporation.
ARTICLE VII
RESTRICTIONS ON TRANSFER OF SHARES BY
SHAREHOLDERS
SECTION 1. Except as otherwise expressly provided in these Restated
Articles, no shareholder may sell, assign, transfer, pledge or otherwise
encumber or dispose of (collectively, "Transfer") any shares of Common Stock or
of any interest therein held by such shareholder. Any attempted or purported
Transfer of shares of Common Stock by such shareholder in contravention of these
Restated Articles shall be null and void and of no force and effect.
SECTION 2. (a) Notwithstanding the provisions of Section 1 hereof, each
shareholder shall have the right, but not the obligation, to offer to sell to
the Corporation up to an aggregate number of shares equal to 10 percent of the
number of shares of Common Stock then held by such shareholder at the price set
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forth in paragraph (d) of this Section 2. Any shareholder that elects to offer
to sell any shares of Common Stock to the Corporation in accordance with this
Section 2(a) (the "Offering Shareholder") shall deliver a notice to the
Corporation (the "Offer Notice"), which Offer Notice shall indicate the number
of shares of Common Stock (the "Offered Shares") being offered to the
Corporation by such Offering Shareholder pursuant to the Offer Notice. Such
Offer Notice shall be effective upon the date of actual receipt thereof by the
Corporation (the "Offer Notice Date") and the Offer Notice Date shall be noted
on such Offer Notice by the Secretary of the Corporation.
(b) For a period of 15 days following the Offer Notice Date (the "Option
Period"), the Corporation shall have the right, but not the obligation, to elect
to purchase all or any portion of the Offered Shares of such Offering
Shareholder at the price set forth in paragraph (d) of this Section 2. If the
Corporation elects to purchase any Offered Shares from any Offering Shareholder,
the Corporation shall deliver to such Offering Shareholder a notice (the
"Election Notice") that indicates the total number of such Offering
Shareholder's Offered Shares that the Corporation elects to purchase pursuant to
this Section 2(b); PROVIDED, HOWEVER, that if the Corporation elects to purchase
any Offered Shares from any Offering Shareholder pursuant to this Section 2(b),
then the Corporation must purchase from each other Offering Shareholder, the
same percentage of Offered Shares as the Corporation has purchased from such
Offering Shareholder. If the Corporation fails to deliver an Election Notice to
any Offering Shareholder during the Option Period, the Corporation shall be
deemed to have elected not to purchase any Offered Shares from such Offering
Shareholder.
(c) Any transactions necessary for the Corporation to purchase Offered
Shares from Offering Shareholders in accordance with paragraph (b) of this
Section 2 shall be consummated at a closing (the "Company Transfer Closing"),
which, unless otherwise agreed upon by the Corporation and the Offering
Shareholder, shall take place at the principal office of the Corporation at
10:00 a.m. on the 20th day next following (or, if such 20th day falls on a
Saturday, Sunday or legal holiday, the next business day thereafter) the date of
the Election Notice (the "Company Transfer Closing Date"). At the Corporation
Transfer Closing (i) such Offering Shareholder shall deliver to the Corporation
all certificates evidencing the Offered Shares being purchased by the
Corporation in accordance with paragraph (b) of this Section 2, duly endorsed
for transfer, free and clear of all liens and encumbrances, with no further act
required to be taken by the Offering Shareholder or by the Corporation, and (ii)
the Corporation shall pay to such Offering Shareholder cash in an amount equal
to the aggregate purchase price of such Offered Shares being purchased by the
Corporation in accordance with paragraph (b) of this Section 2, as determined in
accordance with paragraph (d) of this Section 2; PROVIDED, HOWEVER, that the
Corporation may, at its sole option, pay the full amount of such purchase price
in cash to the Offering Shareholder or deliver to such Offering Shareholder or
to such Offering Shareholder's representative, as the case may be, an amount
equal to 10 percent of such purchase price in cash and a 10-year installment
note in the principal amount equal to the balance of the amount of such purchase
price, bearing interest at the prime rate of interest, as announced or in effect
at United States National Bank of Oregon, plus one percent, for the principal
amount of such installment note.
(d) The purchase price of each Offered Share purchased by the Corporation
pursuant to paragraph (c) of this Section 2 shall be equal to the Fair Market
Value (as such term is hereinafter defined) of each such Offered Share. For
purposes hereof, "Fair Market Value" shall mean the amount agreed upon by such
Offering Shareholder and the Corporation or, in the absence of any such
agreement, the amount determined by an independent appraiser, selected by the
Board of Directors and reasonably acceptable to such Offering Shareholder, as
the value of the distribution rights with respect to the Offered Shares being
sold by such shareholder upon consummation of such sale.
(e) In the event the Corporation fails to purchase all of the Offered Shares
offered by any Offering Shareholder pursuant to this Section 2, then each
Offering Shareholder shall have the right, but not the obligation, to sell any
Offered Shares not purchased by the Corporation pursuant to this Section 2 (the
"Unpurchased Shares") to any other shareholder or to any Eligible Investor (as
such term is hereinafter
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defined), provided that the purchase price of each such Unpurchased Share is not
less than the Fair Market Value thereof previously offered to the Corporation.
For purposes hereof, the term "Eligible Investor" shall mean (i) any provider
employed by the Corporation pursuant to an employment contract in the form
required by the Corporation (the "Employment Contract") who is licensed in the
State of Oregon to practice medicine, is in good standing with the Board of
Medical Examiners or its successor in the State of Oregon and has obtained
approval to become a shareholder by a vote, by secret ballot, of the
shareholders holding at least two-thirds of the shares of Common Stock, (ii) any
Retired Shareholder (as such term is hereinafter defined) or (iii) any
individual that has acquired shares of Common Stock from the Corporation in
connection with any acquisition by the Corporation of any stock or assets of
another entity.
SECTION 3. Notwithstanding any other provision of these Restated Articles
to the contrary, any shareholder ("Retired Shareholder") who, pursuant to such
shareholder's Employment Contract, retired from the Corporation (a) after more
than 20.5 years of employment by the Corporation or by [The Corvallis
Clinic][HealthFirst Medical Group][Medford Clinic], P.C., with full credit given
for the period employment by [The Corvallis Clinic][HealthFirst Medical
Group][Medford Clinic], P.C., or (b) at age 62 or older, may cause the shares of
Common Stock held thereby to be Transferred to a trust upon satisfaction of all
of the following conditions:
(i) until death or incompetency of such Retired Shareholder, such
Retired Shareholder shall at all times be a trustee of the trust and the
trust shall be, by its terms, revocable under any circumstance by such
Retired Shareholder and any co-trustor (a "Permitted Trust");
(ii) the Corporation is given an opportunity, prior to the Transfer to
the trust, to review all relevant documentation, including the trust
agreement, to determine whether the trust qualifies as a Permitted Trust;
(iii) after giving effect to such Transfer, the total number of shares of
Common Stock held by providers licensed to practice medicine in the State of
Oregon or render any other professional services for which the Corporation
is organized would exceed 50 percent of the then-outstanding shares of
Common Stock.
ARTICLE VIII
RIGHT OF THE CORPORATION TO ISSUE NEW SHARES
The Corporation shall have the right to issue new shares of Common Stock or
to offer or otherwise Transfer, pursuant to any stock option plan or otherwise,
additional shares of Common Stock to any shareholder or Eligible Investor.
ARTICLE IX
REPURCHASE OF SHARES
SECTION 1. In the event that a shareholder ceases to be an Eligible
Investor due to termination of the Employment Contract of such shareholder (the
"Trigger Event"), including upon death or incompetency, the Corporation has the
right, but not the obligation, within 90 days following the Trigger Event, to
repurchase all of the shares of Common Stock held by such shareholder (the
"Non-Eligible Investor") or such Non-Eligible Investor's representative, as the
case may be, at the price set forth in Section 3 hereof. The Non-Eligible
Investor or such Non-Eligible Investor's representative, as the case may be,
shall deliver to the Corporation a written notice which shall state the event
that triggered such Non-Eligible Investor's loss of Eligible Investor status and
the date of such Trigger Event.
SECTION 2. Any transactions necessary for the Corporation to repurchase
shares of Common Stock from the Non-Eligible Investor in accordance with this
Section 2 shall be consummated at a closing (the
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"Company Repurchase Closing") which shall take place at the principal office of
the Corporation. At the Corporation Repurchase Closing (i) such Non-Eligible
Investor or the Non-Eligible Investor's representative, as the case may be,
shall deliver to the Corporation all certificates evidencing the shares of
Common Stock being repurchased by the Corporation in accordance with Section 1
hereof, duly endorsed for transfer, free and clear of all liens and
encumbrances, with no further act required to be taken by the Corporation, and
(ii) the Corporation shall pay to such Non-Eligible Investor or to such
Non-Eligible Investor's representative, as the case may be, cash in an amount
equal to the aggregate purchase price of such shares of Common Stock being
repurchased by the Corporation at the price per such share set forth in Section
3 hereof; PROVIDED, HOWEVER, that the Corporation may, at its sole option, pay
the full amount of such purchase price in cash to such Non-Eligible Investor or
deliver to such Non-Eligible Investor or to such Non-Eligible Investor's
representative, as the case may be, an amount equal to 10 percent of such
purchase price in cash and a 10-year installment note in the principal amount
equal to the balance of the amount of such purchase price, bearing interest at
the prime rate of interest, as announced or in effect at United States National
Bank of Oregon, plus one percent, for the principal amount of such installment
note.
SECTION 3. The purchase price for each share repurchased by the Corporation
in accordance with Section 1 hereof shall be equal to the fair market value of
each such share on the date of the Triggering Event as reasonably determined by
the Board of Directors.
ARTICLE X
INDEMNIFICATION
SECTION 1. 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, by reason of the fact that such person is or was a director or an
officer of the Corporation, against expenses (including, without limitation,
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, as the case may be, to the fullest extent and in the manner set
forth in and permitted by the Oregon Professional Corporation Act, the Oregon
Business Corporation Act and any other applicable law as may be from time to
time in effect (collectively, "Oregon Law"). Such right of indemnification shall
not be deemed to be exclusive of any other rights to which such director or
officer may be entitled apart therefrom. The foregoing provisions of this
Section 1 shall be deemed to be a contract between the Corporation and each
director and officer of the Corporation who serves in such capacity at any time
while this Section 1 and the relevant provisions of Oregon Law, if any, are in
effect, and no repeal or modification thereof shall affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought or
threatened based in whole or in part upon any such state of facts.
SECTION 2. The Corporation may 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, by reason of the fact that such person is or was an employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, as the case may be, to the extent and in the manner set
forth in and permitted by Oregon Law as may be from time to time in effect. Such
right of indemnification shall not be deemed to be exclusive of any other rights
to which any such person may be entitled apart therefrom.
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ARTICLE XI
LIABILITY FOR BREACH OF FIDUCIARY DUTY
To the fullest extent permitted by Oregon Law, a director of the Corporation
shall not be liable to the Corporation or its shareholders for monetary damages
for breach of fiduciary duty as such a director. A director of the Corporation
shall not be personally liable to the Corporation or its shareholders for
monetary damages for breach of fiduciary duty as such a director, except for
liability (i) for any breach of such director's duty of loyalty to the
Corporation or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
ORS 60.367 or (iv) for any transaction from which such director derived an
improper personal benefit. If Oregon Law is hereafter amended to authorize the
further elimination or limitation of the liability of directors of the
Corporation, then the liability of directors shall be eliminated or limited to
the fullest extent authorized by Oregon Law, as so amended.
DATED: ______________________, 1996
________________________________, P.C.
By: __________________________________
Title:
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APPENDIX I
FORM OF ESCROW AGREEMENT
This Escrow Agreement (this "Agreement") is made and entered into as of
January , 1997, by and among DAVID H. CUTSFORTH, JR., M.D., an individual (the
"Corvallis Representative"), as representative of the holders of Class B Common
Stock of The Corvallis Clinic, P.C., an Oregon professional corporation
("Corvallis"), RUSSELL A. DOW, M.D., an individual (the "HealthFirst
Representative"), as representative of the holders of Class A Shares of
HealthFirst Medical Group, P.C., an Oregon professional corporation
("HealthFirst"), JON NESS, an individual (the "Medford Representative" and,
together with the Corvallis Representative and the HealthFirst Representative,
referred to herein, collectively, as the "Representatives"), as representative
of the holders of Common Stock of Medford Clinic, P.C., an Oregon professional
corporation ("Medford"), PHYSICIAN PARTNERS, INC., a Delaware corporation
("PPI"), and HARRIS TRUST AND SAVINGS BANK, N.A., an Illinois banking
corporation (the "Escrow Agent").
RECITALS
WHEREAS, PPI, Corvallis, HealthFirst and Medford have entered into the
Amended and Restated Agreement and Plan of Reorganization and Merger, dated as
of September 19, 1996, as amended by the Amendment to Amended and Restated
Agreement and Plan of Reorganization and Merger, dated as of November 4, 1996
and the Second Amendment and Waiver of Amended and Restated Agreement and Plan
of Reorganization and Merger, dated as of November 29, 1996 (as so amended, as
the "Reorganization and Merger Agreement");
WHEREAS, the Reorganization and Merger Agreement contemplates that (i)
Corvallis, HealthFirst and Medford (collectively, the "Companies") will merge
with and into PPI (the "Merger") and (ii) the shareholders of each of Corvallis,
HealthFirst and Medford will receive shares of Class A Common Stock, par value
$0.01 per share ("PPI Shares"), of PPI in exchange for the shares of capital
stock of Corvallis, HealthFirst and Medford held thereby, respectively, as
consideration in the Merger in accordance with the exchange ratios set forth
therein; and
WHEREAS, the Reorganization and Merger Agreement also contemplates that,
prior to the Effective Time (as such term is defined in the Reorganization and
Merger Agreement), the holders of Class B Common Stock of Corvallis (the
"Corvallis Class B Shareholders"), the holders of Class A Shares of HealthFirst
(the "HealthFirst Shareholders") and the holders of Common Stock of Medford (the
"Medford Shareholders" and, together with the Corvallis Class B Shareholders and
the HealthFirst Shareholders, referred to herein, collectively, as the "Escrow
Holders"), the names and addresses of which Escrow Holders are set forth in
Schedule 1 attached hereto, will deposit into escrow a certain number of PPI
Shares for a total of 1,926,000 PPI Shares in escrow;
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements contained herein, the parties hereto hereby agree as follows:
1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed thereto in the Reorganization and Merger
Agreement.
2. APPOINTMENT OF ESCROW AGENT. Each of the Representatives and PPI hereby
appoint the Escrow Agent as the escrow agent under this Agreement, and the
Escrow Agent hereby accepts such appointment.
3. COMPENSATION. PPI shall compensate the Escrow Agent for its services
hereunder in the amount of $3,000.
4. CONSENT OF COMPANY SHAREHOLDERS. By virtue of the approval of the
transactions contemplated by the Reorganization and Merger Agreement by the
shareholders of each of the Companies, the Escrow
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Holders shall be deemed to have consented to be bound by the terms of this
Agreement and to be parties hereto with the same force and effect as if they
were signatories hereto, including, without limitation, the appointment of the
respective Representative as their representatives for purposes of this
Agreement and the taking by such Representatives of any and all actions required
or permitted to be taken thereby under this Agreement.
5. DEPOSIT INTO ESCROW. At the Effective Time, (a) each Corvallis Class B
Shareholder shall deposit with the Escrow Agent 52 PPI Shares received thereby
as consideration in the Merger (such shares, referred to herein, collectively,
as the "Corvallis Escrow Shares") per share of Class B Common Stock of Corvallis
(which would result in a total of 622,000 PPI Shares deposited by all of the
Corvallis Class B Shareholders as Corvallis Escrow Shares), (b) each HealthFirst
Shareholder shall deposit with the Escrow Agent 91 PPI Shares received thereby
as consideration in the Merger (such shares, referred to herein collectively, as
the "HealthFirst Escrow Shares") per share of Class A Share of HealthFirst
(which would result in a total of 840,000 PPI Shares deposited by all of the
HealthFirst Shareholders as the HealthFirst Escrow Shares) and (c) each Medford
Shareholder shall deposit with the Escrow Agent 8,141 PPI Shares received
thereby as consideration in the Merger (such shares, referred to herein,
collectively, as the "Medford Escrow Shares" and, together with the Corvallis
Escrow Shares and the HealthFirst Escrow Shares, referred to herein,
collectively, as the "Escrow Shares") per share of Common Stock of Medford
(which would result in a total of 464,000 PPI Shares deposited by all of the
Medford Shareholders as the Medford Escrow Shares). Subject to and in accordance
with the terms and conditions hereof, the Escrow Agent shall hold the Escrow
Shares in escrow and release the Escrow Shares in accordance with Section 6
hereof.
6. ESCROW RELEASE INSTRUCTIONS. PPI shall arrange for the delivery on or
before March 31, 1997 of the balance sheets of Corvallis, HealthFirst and
Medford as at December 31, 1996 (collectively, the "Audited Balance Sheets"),
audited by Arthur Andersen LLP. On the same day of receipt of the Audited
Balance Sheets, PPI shall deliver written instructions (the "Escrow Release
Instructions") to the Escrow Agent to release, and the Escrow Agent shall
release, within five (5) business days of receipt of the Escrow Release
Instructions by the Escrow Agent, the Escrow Shares in accordance with the
Escrow Release Instructions. The Escrow Release Instructions shall set forth,
among other things, PPI's calculations of the Net Shareholder Equity Per FTE and
the Final Share Allocation per FTE (as such terms are defined below) of the
Companies, which calculations shall, absent manifest error, be conclusive and
binding for all purposes. The Escrow Release Instructions shall be prepared by
PPI as follows:
(a) In the event the quotient obtained by dividing (i) each of the
Corvallis FTE, the HealthFirst FTE and the Medford FTE (as such terms are
defined in the Reorganization and Merger Agreement) as of October 1, 1996
into (ii) the excess of total assets over total liabilities of Corvallis,
HealthFirst or Medford, as applicable (such Company's "Net Shareholder
Equity Per FTE"), as reflected on the Audited Balance Sheet thereof, which
Audited Balance Sheets shall be adjusted (except in the case of HealthFirst)
by changing the value of any real estate specified thereon from book value
to fair market value based on fair market value appraisals prepared by
appraisers reasonably acceptable to the other Companies during the 30-month
period prior to December 31, 1996 (such Audited Balance Sheets and such fair
market value appraisals, absent manifest error, being conclusive and binding
for purposes of determining each Company's Net Shareholder Equity Per FTE),
does not exceed the Net Shareholder Equity Per FTE of any other Company by
more than 20 percent (the "Minimum Net Equity Threshold"), PPI shall
instruct the Escrow Agent to release from escrow (A) 26 PPI Shares to each
Corvallis Class B Shareholder, (B) 45.5 PPI Shares to each HealthFirst
Shareholder and (C) 4,070 PPI Shares to each Medford Shareholder (which, in
each case, equals 50 percent of the number of Escrow Shares deposited in
escrow by each such Escrow Holder pursuant hereto; or
(b) In the event that the Net Shareholder Equity Per FTE of a Company or
Companies (each, the "Excess Company") exceeds the Net Shareholder Equity
Per FTE of any other Company by more
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than the Minimum Net Equity Threshold (such excess, referred to herein, as
the "Excess Difference"), PPI shall instruct the Escrow Agent to release
from escrow such number of Escrow Shares to such Escrow Holders as
determined in accordance with the following procedure:
(1) Multiply the Excess Difference of the Excess Company by the FTE
of such Excess Company and multiply the Excess Difference of any other
Excess Company, if any, by the FTE of such other Excess Company (each,
the "Excess Company's True-Up Amount");
(2) If there is more than one Excess Company's True-Up Amount
(because more than one Company is an Excess Company), add both Excess
Company's True-Up Amounts (collectively, the "Total True-Up Adjustment");
(3) Multiply (A) $15.82 (the appraised value per PPI Share) by (B)
135,000 (the aggregate number of restricted PPI Shares issued to certain
individuals), which product equals $2,135,700 (the "Restricted Stock
Adjustment");
(4) Add the Excess Company's True-Up Amount, or if there is more
than one Excess Company, the Total True-Up Adjustment and the Restricted
Stock Adjustment (the "Total Adjustment");
(5) Subtract the Total Adjustment from $105,000,000 (the appraised
value of the Companies as a combined entity, assuming such combination as
of June 30, 1996) (the resulting amount is referred to herein as the
"Adjusted Combined Enterprise Value");
(6) Multiply the Adjusted Combined Enterprise Value by each of the
three fractions, the numerator of which is the FTE of each of the
Companies and the denominator of which is 240.75 (the total FTE of the
Companies) (each product is referred to herein as such Company's "FTE-
Based Value");
(7) Divide each Company's FTE-Based Value by $15.82 (each quotient
is referred to herein as such Company's "FTE-Based Share Allocation");
(8) Divide each Company's FTE-Based Share Allocation by the FTE of
such Company (each quotient is referred to herein as such Company's
"Share Allocation per FTE");
(9) Divide any Excess Company's True-Up Amount by $15.82 (each
quotient is referred to herein as such Excess Company's "PPI Share
Equivalency");
(10) Divide any Excess Company's PPI Share Equivalency by the FTE of
such Excess Company (each quotient is referred to herein as such Excess
Company's "True-Up Share Allocation per FTE"); and
(11) Add Share Allocation per FTE to True-Up Share Allocation per FTE
of each Company (such Company's "Final Share Allocation per FTE").
In the event that the amount by which a Company's Final Share Allocation per
FTE exceeds 27,000 (such excess referred to herein as the "FTE
Differential"), PPI shall instruct the Escrow Agent to release to each of
the Escrow Holders of such Company such number of Escrow Shares as is equal
to (i) 50 percent of the number of PPI Shares deposited in escrow by such
Escrow Holder, PLUS (ii) such number of PPI Shares as is equal to the
product of the FTE Differential multiplied by a fraction (x) the numerator
of which is the number of PPI Shares deposited by such Escrow Holder in
escrow and (y) the denominator of which is the aggregate number of PPI
Shares deposited by all of the Escrow Holders of such Company in Escrow. In
the alternative, if any Company's Final Share Allocation per FTE is less
than 27,000 (the "FTE Shortfall"), PPI shall instruct the Escrow Agent to
release to each of the Escrow Holders of such Company such number of PPI
Shares as is equal to (i) 50 percent of the number of PPI Shares deposited
in escrow by such Escrow Holder, MINUS (ii) such number of PPI Shares as is
equal to the product of the FTE Shortfall multiplied by a fraction (x) the
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numerator of which is the number of PPI Shares deposited by such Escrow
Holder in escrow and (y) the denominator of which is the aggregate number of
PPI Shares deposited by all of the Escrow Holders of such Company in escrow.
(c) If any Company's Final Share Allocation Per FTE equals 27,000, PPI
shall instruct the Escrow Agent to release to each of the Escrow Holders of
such Company such number of PPI Shares as is equal to 50 percent of the
number of PPI Shares deposited by each such Escrow Holder in escrow.
(d) If any Escrow Shares remain in escrow subsequent to the releases by
the Escrow Agent to the Escrow Holders pursuant to paragraphs (a), (b) or
(c) of this Section 6, PPI shall instruct the Escrow Agent to release all
such Escrow Shares to PPI which shares shall be cancelled and retired by
PPI.
7. SCOPE OF UNDERTAKING. The Escrow Agent's duties and responsibilities in
connection with this Agreement shall be limited to those set forth in this
Agreement. The Escrow Agent is not a principal, participant or beneficiary in
any transaction underlying this Agreement. The Escrow Agent shall not be liable
for any error in judgment, any act or omission, any mistake of law or fact, or
for anything it may do or refrain from doing in accordance with this Agreement,
except for its own willful misconduct or negligence. The Escrow Agent may rely
on, and shall not be liable for following the Escrow Release Instructions or any
other instructions contained in any written notice, instruction or request
furnished to it hereunder or pursuant hereto and reasonably believed thereby it
to have been signed or presented by the proper party or parties. The Escrow
Agent shall be responsible for holding and releasing the Escrow Shares pursuant
to this Agreement. Escrow Agent is not responsible or liable in any manner
whatsoever for the transaction or transactions requiring or underlying the
execution of this Agreement.
8. INDEMNIFICATION. PPI hereby indemnifies the Escrow Agent against, and
hold the Escrow Agent harmless from, any and all expenses reasonably suffered or
incurred by the Escrow Agent in connection with or arising from or out of this
Agreement, except such acts or omissions as may result from any breach of this
Agreement by the Escrow Agent or its willful misconduct or negligence.
9. NOTICES. Any notice or other communication required or permitted to be
given under this Agreement by any party hereto to any other party hereto shall
be considered as properly given if in writing and (a) delivered by hand, (b)
mailed by registered or certified mail, return receipt requested and postage
prepaid, or (c) sent by telex, telefax machine or prepaid telegram, in each case
addressed as follows:
If to Corvallis Representative:
David H. Cutsforth, Jr., M.D.
444 NW Elks Drive
Corvallis, Oregon 97330
Telephone: (541) 754-1374
Telecopy: (541) 757-1847
If to Medford Representative:
Jon Ness
555 Black Oak Drive
Medford, Oregon 97504
Telephone: (541) 734-3601
Telecopy: (541) 734-3598
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If to HealthFirst Representative:
Russell A. Dow, M.D.
10535 N.E. Glisan
Portland, Oregon 97220
Telephone: (503) 229-7538
Telecopy: (503) 790-1248
If to PPI:
Mr. David Goldberg
Physician Partners, Inc.
111 SW Columbia Street, Suite 725
Portland, Oregon 97220
Telephone: (503) 224-2249
Telecopy: (503) 224-4713
If to Escrow Agent:
Harris Trust and Savings Bank
311 West Monroe Street, 14th Floor
Chicago, Illinois 60606
Attention: Mr. Keith Bradley
Telephone: (312) 461-2121
Telecopy: (312) 461-1530
Delivery of any communication given in accordance herewith shall be effective
only upon actual receipt thereof by the party or parties to whom such
communication is directed. Any party to this Agreement may change the address to
which communications hereunder are to be directed by giving written notice to
the other party or parties hereto in the manner provided in this Section 9.
10. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Oregon.
11. RESIGNATION. The Escrow Agent may resign at any time by delivering
written notice at least 30 days prior to the date upon which such resignation is
to become effective to the parties hereto, who hereby agree to designate, by a
written instrument delivered to the Escrow Agent, a successor Escrow Agent.
After the effective date of such resignation, the Escrow Agent shall be under no
further obligation to perform any of the duties of the Escrow Agent under the
terms of this Agreement other than to deliver the entire Escrow Shares to a
properly designated successor Escrow Agent. Any successor Escrow Agent shall
have all of the duties, powers, rights and immunities conferred upon the Escrow
Agent hereby.
12. ASSIGNMENT. The rights and obligations of the parties hereto under
this Agreement cannot be assigned by any of such parties without the prior
written consent of the other parties hereto.
13. SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
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14. TERMINATION. This Agreement shall terminate upon (a) release of all of
the Escrow Shares in accordance with Section 6 hereof and (b) unless the Escrow
Agent shall otherwise elect, full and final payment of all amounts required to
be paid to the Escrow Agent hereunder (whether fees, expenses, costs or
otherwise); PROVIDED, HOWEVER, that in the event all such amounts required to be
paid to the Escrow Agent hereunder are not fully and finally paid prior to
termination, the provisions of Section 7 hereof shall survive the termination
hereof.
15. GENERAL. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement and any affidavit, certificate,
instrument, agreement or other document required to be provided hereunder may be
executed in two or more counterparts, each of which shall be deemed an original,
but all of which taken together shall constitute one and the same instrument.
Unless the context shall otherwise require, the singular shall include the
plural and each pronoun in any gender shall include all other genders. The terms
and provisions of this Agreement and the Reorganization and Merger Agreement
constitute the entire agreement among the parties hereto in respect of the
subject matter hereof. This Agreement, or any provision hereof, may be amended,
modified, waived or terminated only by written instrument duly signed by the
parties hereto. This Agreement shall inure to the benefit of, and be binding
upon, the parties hereto and their respective heirs, devisees, executors,
administrators, personal representatives, successors, trustees and receivers.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be
effective as of the date first above written.
HARRIS TRUST AND SAVINGS BANK, N.A.,
as
Escrow Agent
By:
--------------------------------------
Title:
PHYSICIAN PARTNERS, INC.
By:
--------------------------------------
Title:
--------------------------------------
DAVID H. CUTSFORTH, M.D.,
as Corvallis Representative
--------------------------------------
RUSSELL A. DOW, M.D.,
as HealthFirst Representative
--------------------------------------
JON NESS,
as Medford Representative
I-6
<PAGE>
SCHEDULE 1
NAMES AND ADDRESSES OF ESCROW HOLDERS
I-7
<PAGE>
APPENDIX J
DISSENTERS' RIGHTS
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
60.551 DEFINITIONS FOR 60.551 TO 60.594.--As used in ORS 60.551 to 60.594:
(1) "Beneficial shareholder" means the person who is a beneficial owner of
shares held IN A VOTING TRUST or a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under ORS 60.554 and who exercises that right when and in the
manner required by ORS 60.561 to 60.587.
(4) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder. (Last amended by Ch. 1040, L. '89, eff. 10-3-89.)
- ------------------------------
Ch. 1040, L. '89, eff. 10-3-89, added matter in italic.
.1 FAIR VALUE; USE OF MARKETABILITY AND MINORITY INTEREST DISCOUNTS.--In
action to determine fair value of dissenting shareholder's shares, trial court
correctly applied marketability discount, but should not have applied minority
interest discount. Marketability discount sufficiently reflected difference
between the shares' proportion of the enterprise value and their fair value. A
minority discount, however, would have penalized the dissenter for exercising
his statutory rights, while allowing corporation to buy his shares cheaply.
COLUMBIA MANAGEMENT CO V WYSS, 765 P2D 207 (CT APP 1988).
60.554 RIGHT TO DISSENT.--(1) Subject to subsection (2) of this section, a
shareholder is entitled to dissent from, and obtain payment of the fair value of
the shareholder's shares in the event of, any of the following corporate acts:
(a) Consummation of a plan of merger to which the corporation is a party
if shareholder approval is required for the merger by ORS 60.487 or the
articles of incorporation and the shareholder is entitled to vote on the
merger or if the corporation is a subsidiary that is merged with its parent
under ORS 60.491;
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, if the shareholder
is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all or substantially all of
the property of the corporation other than in the usual and regular course
of business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale;
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<PAGE>
(d) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities; or
(B) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be acquired
for cash under ORS 60.141; or
(e) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under ORS 60.551 to 60.594 may not challenge the corporate
action creating the shareholder's entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(3) Dissenters' rights shall not apply to the holders of shares of any class
or series if the shares of the class or series were registered on a national
securities exchange or (1) quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System as a National Market System issue on
the RECORD date (2) FOR the meeting of shareholders at which (3) THE CORPORATE
ACTION DESCRIBED IN SUBSECTION (1) OF THIS SECTION IS TO BE APPROVED OR ON THE
DATE A COPY OR SUMMARY OF THE PLAN OF MERGER IS MAILED TO SHAREHOLDERS UNDER ORS
60.491, UNLESS THE ARTICLES OF INCORPORATION OTHERWISE PROVIDE. (Last amended by
Ch. 403, L. '93, eff. 11-4-93.)
- ------------------------------
Ch. 403, L. '93, eff. 11-4-93, added matter in italic and deleted
(1) "prices were"; (2) "fixed to determine the shareholders entitled to vote
at"; and (3) "the amendment to the articles of incorporation, plan of merger,
exchange or proposed sale or exchange of property and assets is to be acted upon
unless the articles of incorporation of the corporation shall otherwise
provide".
60.557 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.--(1) A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in the
shareholder's name only if the shareholder dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf the shareholder asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares regarding which the shareholder dissents and the
shareholder's other shares were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares held
on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder submits to the corporation the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder does so with respect to all shares of
which such shareholder is the beneficial shareholder or over which such
shareholder has power to direct the vote.
PROCEDURE FOR EXERCISE OF RIGHTS
60.561 NOTICE OF DISSENTERS' RIGHTS.--(1) If proposed corporate action
creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under ORS 60.551 to 60.594 and be
accompanied by a copy of ORS 60.551 to 60.594.
(2) If corporate action creating dissenters' rights under ORS 60.554 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send the shareholders entitled to assert dissenters' rights the dissenters'
notice described in ORS 60.567.
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<PAGE>
60.564 NOTICE OF INTENT TO DEMAND PAYMENT.--(1) If proposed corporate
action creating dissenters' rights under ORS 60.554 is submitted to a vote at a
shareholders' meeting, a shareholder who wishes to assert dissenters' rights
shall deliver to the corporation before the vote is taken written notice of the
shareholder's intent to demand payment for the shareholder's shares if the
proposed action is effectuated and shall not vote such shares in favor of the
proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) of
this section is not entitled to payment for the shareholder's shares under this
chapter.
60.567 DISSENTERS' NOTICE.--(1) If proposed corporate action creating
dissenters' rights under ORS 60.554 is authorized at a shareholders' meeting,
the corporation shall deliver a written dissenters' notice to all shareholders
who satisfied the requirements of ORS 60.564.
(2) The dissenters' notice shall be sent no later than 10 days after the
corporate action was taken, and shall:
(a) State where the payment demand shall be sent and where and when
certificates for certificated shares be deposited;
(b) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement of the terms of the proposed corporate action to news
media or to share holders and requires that the person asserting dissenters'
rights certify whether or not the person acquired beneficial ownership of
the shares before that date;
(d) Set a date by which the corporation must receive the payment demand.
This date may not be fewer than 30 nor more than 60 days after the date the
subsection (1) of this section notice is delivered; and
(e) Be accompanied by a copy of ORS 60.551 to 60.594.
60.571 DUTY TO DEMAND PAYMENT.--(1) A shareholder sent a dissenters' notice
described in ORS 60.567 must demand payment, certify whether the shareholder
acquired beneficial ownership of the shares before the date required to be set
forth in the dissenters' notice pursuant to ORS 60.567(2)(c), and deposit the
shareholder's certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and deposits the shareholder's
shares under subsection (1) of this section retains all other rights of a
shareholder until these rights are canceled or modified by the taking of the
proposed corporate action.
(3) A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
chapter.
60.574 SHARE RESTRICTIONS.--(1) The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is received
until the proposed corporate action is taken or the restrictions released under
ORS 60.581.
(2) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are canceled
or modified by the taking of the proposed corporate action.
60.577 PAYMENT.--(1) Except as provided in ORS 60.584, as soon as the
proposed corporate action is taken, or upon receipt of a payment demand, the
corporation shall pay each dissenter who complied with ORS 60.571, the amount
the corporation estimates to be the fair value of the shareholder's shares, plus
accrued interest.
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<PAGE>
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than 16 months before the date of payment, an income
statement for that year and the latest available interim financial
statements, if any;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under ORS
60.587; and
(e) A copy of ORS 60.551 to 60.594. (Last amended by Ch. 579, L. '87.)
60.581 FAILURE TO TAKE ACTION.--(1) If the corporation does not take the
proposed action within 60 days after the date set for demanding payment and
depositing share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under ORS 60.567 and repeat the payment demand procedure.
60.584 AFTER-ACQUIRED SHARES.--(1) A corporation may elect to withhold
payment required by ORS 60.577 from a dissenter unless the dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate action, it
shall estimate the fair value of the shares plus accrued interest and shall pay
this amount to each dissenter who agrees to accept it in full satisfaction of
such demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares an explanation of how the interest was
calculated and a statement of the dissenter's right to demand payment under ORS
60.587.
60.587 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.--(1) A
dissenter may notify the corporation in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and amount of interest due, and
demand payment of the dissenter's estimate, less any payment under ORS 60.577 or
reject the corporation's offer under ORS 60.584 and demand payment of the
dissenter's estimate of the fair value of the dissenter's shares and interest
due, if:
(a) The dissenter believes that the amount paid under ORS 60.577 or
offered under ORS 60.584 is less than the fair value of the dissenter's
shares or that the interest due is incorrectly calculated;
(b) The corporation fails to make payment under ORS 60.577 within 60
days after the date set for demanding payment; or
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within 60 days after the date set for
demanding payment.
(2) A dissenter waives the right to demand payment under this section unless
the dissenter notifies the corporation of the dissenter's demand in writing
under subsection (1) of this section within 30 days after the corporation made
or offered payment for the dissenter's shares.
J-4
<PAGE>
JUDICIAL APPRAISAL OF SHARES
60.591 COURT ACTION.--(1) If a demand for payment under ORS 60.587 remains
unsettled, the corporation shall commence a proceeding within 60 days after
receiving the payment demand under ORS 60587 and petition the court under
subsection (2) of this section to determine the fair value of the shares and
accrued interest. If the corporation does not commence the proceeding within the
60-day period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the county where a corporation's principal office is located, or if the
principal office is not in this state, where the corporation's registered office
is located. If the corporation is a foreign corporation without a registered
offce in this state, it shall commence the proceeding in the county in this sue
where the registered office of the domestic corporation merged with or whose
shares were acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not resident of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares. All parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the circuit court in which the proceeding is
commenced under subsection (2) of this section is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive evidence and
recommend decision on the question of fair value. The appraisers have the powers
described in the court order appointing them, or in any amendment to the order.
The dissenters are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment
for:
(a) The amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the
corporation; or
(b) The fair value, plus accrued interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under ORS 60384.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to counsel reasonable fees to be paid out of the amount awarded the
dissenters who were benefited.
60.594 COURT COSTS AND COUNSEL FEES.--(1) The court in an appraisal
proceeding commenced under ORS 60.591 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under ORS 60.587.
(2) The court may also assess the fees and expenses of counsel and expels of
the respective parties in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the
requirements of ORS 60.561 to 60.587; or
(b) Against either the corporation or a dissenter in favor of any other
party, if the court finds that the party against whom the fees and expenses
art assessed acted arbitrarily, vexatiously or not in good faith with
respect to the rights provided by this chapter.
J-5
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20
INDEMNIFICATION OF DIRECTORS AND OFFICERS.
PPI is incorporated in the State of Delaware. Under Section 145 of the
General Corporation Law of the State of Delaware (the "DGCL"), a Delaware
corporation generally has the power to indemnify its present and former
directors and officers against expenses and liabilities incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in those positions so long as (a) they acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
the best interests of the company, and (b) with respect to any criminal action,
they had no reasonable cause to believe their conduct was unlawful. Section 145
expressly provides that the power to indemnify authorized therein is not
exclusive of any rights granted under any bylaw, agreement, vote of stockholders
or disinterested directors, or otherwise. The PPI Certificate and the By-laws of
PPI provide that PPI (i) will 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 (a
"proceeding"), by reason of the fact that such person is or was a director or
officer of PPI and (ii) may indemnify any person who was or is threatened to be
made a party to any proceeding by reason of the fact that such person is or was
an employee or agent of PPI, or is or was serving at the request of PPI as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, in each case specified in clauses (i) and
(ii), against expenses (including, without limitation, attorneys' fees)
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such proceeding to the extent and in the manner permitted by
the DGCL, and any other applicable law, as from time to time in effect. PPI may
therefore incur liability on behalf of its directors and officers in the event
of a lawsuit against such persons in their capacity as directors or officers.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for such 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 (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock) of
the DGCL, or (iv) for any transactions from which the director derived an
improper personal benefit. The PPI Certificate contains such a provision.
The preceding discussion of the PPI Certificate and Section 145 of the DGCL
is not intended to be exhaustive and is qualified in its entirety by reference
to the complete text of the PPI Certificate which is included in this
Registration Statement at Exhibit 3.1 and by Section 145 of the DGCL.
Each of the New PCs is incorporated in the State of Oregon. Under Section
60.391 of the Oregon Business Corporation Act of the State of Oregon (the
"OBCA"), an Oregon corporation, including a professional corporation, generally
has the power to indemnify its present and former directors and officers against
expenses and liabilities incurred by them in connection with any suit to which
they are, or are threatened to be made, a party by reason of their serving in
those positions so long as (a) they acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
company, and (b) with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. Section 60.414 expressly provides
that the power to indemnify authorized therein is not exclusive of any rights
granted under any bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise. The Articles of Incorporation of each of the New PCs
provide that such New PC (i) will indemnify any person who was or is a party or
is threatened to be made a party to any
II-1
<PAGE>
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was a director or an officer of the Corporation, against expenses
(including, without limitation, attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding, as the case may be, to the fullest extent
and in the manner set forth in and permitted by the Oregon Professional
Corporation Act, the OBCA and any other applicable law as may be from time to
time in effect. Each New PC may therefore incur liability on behalf of its
directors and officers in the event of a lawsuit against such persons in their
capacity as directors or officers.
Section 60.047(1)(d) of the OBCA provides that articles of incorporation may
contain a provision eliminating or limiting the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that such provision shall not eliminate
or limit the liability of a director for any act or omission occurring prior to
the date when such provision becomes effective and such provision shall not
eliminate or limit the liability of a director for (i) for any breach of such
director's duty of loyalty to the corporation or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under ORS 60.367 or (iv) for any transaction
from which such director derived an improper personal benefit. The Articles of
Incorporation of each New PC contain such a provision.
The preceding discussion of the Articles of Incorporation of each New PC and
Section 60.391 of the OBCA is not intended to be exhaustive and is qualified in
its entirety by reference to the complete text of the Articles of Incorporation
of each New PC which is included in the accompanying Joint Proxy
Statement/Prospectus as Appendix I and by Section 60.391 of the OBCA.
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<PAGE>
ITEM 21
EXHIBIT AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
(a) The following Exhibits as filed herewith unless otherwise indicated:
2.1 Amended and Restated Agreement and Plan of Reorganization and Merger,
dated as of September 19, 1996, as amended on November 4, 1996, November
29, 1996 and December 31, 1996, among Physician Partners, Inc., The
Corvallis Clinic, P.C., HealthFirst Medical Group, P.C. and Medford
Clinic, P.C. (filed herewith as Appendix A to the Joint Proxy
Statement/Prospectus).
3.1 Amended and Restated Certificate of Incorporation of PPI.
3.2* By-Laws of PPI.
3.3 Amended and Restated Articles of Incorporation of Physician Partners
HealthFirst, P.C.
3.4 Bylaws of Physician Partners HealthFirst, P.C.
3.5 Amended and Restated Articles of Incorporation of Physician Partners
Corvallis, P.C.
3.6 Bylaws of Physician Partners Corvallis, P.C.
3.7 Amended and Restated Articles of Incorporation of Physician Partners
Medford, P.C.
3.8 Bylaws of Physician Partners Medford, P.C.
4.1* Form of Class A Common Stock Certificate of PPI.
4.2* Continuing Unlimited Commercial Guaranty, dated May 24, 1995, by The
Corvallis Clinic, P.C. in favor of United States National Bank of Oregon
on behalf of HealthCare Partners, L.L.C.
4.3* Letter, dated November 4, 1996, from PPI to the Securities and Exchange
Commission.
4.4 Form of Common Stock Certificate of Physician Partners HealthFirst, P.C.
4.5 Form of Common Stock Certificate of Physician Partners Corvallis, P.C.
4.6 Form of Common Stock Certificate of Physician Partners Medford, P.C.
5.1* Opinion of McDermott, Will & Emery.
5.2 Opinion of Peter F. Stoloff, Esq.
5.3 Opinion of Peter F. Stoloff, Esq.
5.4 Opinion of Peter F. Stoloff, Esq.
8.1* Opinion of McDermott, Will & Emery.
8.2 Opinion of McDermott, Will & Emery
10.1* Amended and Restated Employment Agreement, dated as of September 19, 1996,
between PPI and David M. Goldberg.
10.2* Amended and Restated Employment Agreement, dated as of September 19, 1996,
between PPI and Tim E. Dupell.
10.3* Employment Agreement, dated as of September 19, 1996, between PPI and
Michael F. Bonazzola, M.D.
10.4 Employment Agreement, dated as of September 19, 1996, between PPI and
Jerald Erstgaard as amended as of December 31, 1996.
10.5* Amended and Restated Employment Agreement, dated as of September 19, 1996,
between PPI and David Kobriger.
10.6* Employment Agreement, dated as of September 19, 1996, between PPI and Jon
Ness.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.7* Management Agreement, dated February 1, 1996, between HealthFirst
Management Services, Inc. and HealthFirst Medical Group, P.C.
10.8* Land Sale Contract, dated May 1, 1996, between HealthFirst Medical Group,
P.C. and HealthFirst Properties, L.L.C.
10.9* Medical Office Lease, dated May 1, 1996, between HealthFirst Properties,
L.L.C. and HealthFirst Medical Group, P.C. (Broadway).
10.10* Medical Office Lease, dated May 1, 1996, between HealthFirst Properties,
L.L.C. and HealthFirst Medical Group, P.C. (Tualatin).
10.11* Medical Office Lease, dated May 1, 1996, between HealthFirst Properties,
L.L.C. and HealthFirst Medical Group, P.C. (Westside).
10.12* Building Lease Agreement, dated December 15, 1994, between Legacy Health
System and Suburban Medical Clinic, Inc.
10.13* Office Lease, dated September 30, 1996, between Albers Mill Building
Partnership and HealthFirst Medical Group, P.C.
10.14* Commercial Lease, dated October 14, 1994, between Gateway Properties,
L.L.C. and Suburban Medical Clinic, Inc.
10.15* Lease Agreement, dated as of June 1, 1995, between HealthCare Partners,
L.L.C. and The Corvallis Clinic, P.C.
10.16* Lease, dated June 13, 1989, between Rogue Valley Health Services, Inc. and
Medford Clinic, P.C.
10.17* Lease Agreement, dated December 1, 1993, between Southern Oregon Family
Practice Building Partnership and Medford Clinic, P.C.
10.18* Medical Group Services Agreement, dated July 8, 1996, as amended August 6,
1996 and September 16, 1996, between The Corvallis Clinic, P.C. and
PacifiCare of Oregon, Inc.
10.19 1997 Stock Option Plan for Non-Employee Directors of PPI (filed herewith
as Appendix C to the Joint Proxy Statement/Prospectus).
10.20* Physician Partners, Inc. Change in Control Plan, effective December 31,
1996 (filed herewith as Appendix E to the Joint Proxy
Statement/Prospectus).
10.21 Administrator's Employment Agreement, dated January 1, 1995, between The
Corvallis Clinic, P.C. and David L. Kobriger.
23.1 Written Consent of Arthur Andersen, L.L.P., dated January 3, 1997.
23.2* Written Consent of American Appraisal Associates, Inc., dated December 23,
1996.
23.3* Written Consent of McDermott, Will & Emery, dated November 29, 1996
(included in the opinion filed as Exhibit 5.1).
23.4 Written Consent of Peter F. Stoloff, P.C., dated January 3, 1997 (included
in the opinions filed as Exhibits 5.2, 5.3 and 5.4)
24.1 Powers of Attorney (included on signature pages).
Financial Data Schedules:
27.1* Physician Partners, Inc.
99.1* Appraisal Report of Physician Partners, Inc., dated as of June 30, 1996
</TABLE>
All other Schedules have been omitted because they are not applicable or not
required or the information is included elsewhere in financial statements or on
notes thereto.
- ------------------------
* Previously filed.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS
(a) Each of PPI and Physician Partners HealthFirst, P.C., Physician Partners
Corvallis, P.C. and Physician Partners Medford, P.C. (collectively, the "New
PCs") hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "1933 Act");
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) Each of PPI and each of the New PCs hereby undertakes that, for purposes
of determining any liability under the 1933 Act, each filing of the annual
report thereof pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities after that time shall be deemed to
be the initial bona fide offering thereof.
(c) (1) Each of PPI and each of the New PCs hereby undertakes as follows:
that prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this Registration Statement, by
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
(2) Each of PPI and each of the New PCs undertakes that every prospectus (i)
that is filed pursuant to paragraph (1) immediately preceding or (ii) that
purports to meet the requirements of Section 10(a)(3) of the 1933 Act and is
used in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the Registration Statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the 1933 Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the 1933 Act
may be permitted to directors, officers and controlling persons of PPI,
Physician Partners HealthFirst, P.C., Physician Partners Corvallis, P.C. and
Physician Partners Medford, P.C., as applicable, pursuant to the foregoing
provisions, or otherwise, PPI, Physician Partners HealthFirst, P.C., Physicians
Partners Corvallis, P.C. and Physician Partners Medford, P.C., as applicable,
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the 1933 Act and
is, therefore,
II-5
<PAGE>
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by PPI, Physician Partners HealthFirst,
P.C., Physician Partners Corvallis, P.C. and Physician Partners Medford, P.C.,
as applicable, of expenses incurred or paid by a director, officer or
controlling person of PPI, Physician Partners HealthFirst, P.C., Physician
Partners Corvallis, P.C. and Physician Partners Medford, P.C., as applicable, in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, PPI, Physician Partners HealthFirst, P.C., Physician Partners
Corvallis, P.C. and Physician Partners Medford, P.C., as applicable, will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to the court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
(e) PPI Physician Partners HealthFirst, P.C., Physician Partners Corvallis,
P.C., and Physician Partners Medford, P.C. as applicable, hereby undertake to
respond to requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one business
day of receipt of such request, and to send the incorporated documents by
first-class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
(f) PPI Physician Partners HealthFirst, P.C., Physician Partners Corvallis,
P.C. Physician Partners Medford, P.C., as applicable, hereby undertake to supply
by means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, PPI
has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on January 3, 1997.
PHYSICIAN PARTNERS, INC.
By: /s/ DAVID M. GOLDBERG
----------------------------------
David M. Goldberg
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
Each of the undersigned hereby constitutes and appoints David M. Goldberg
and Tim E. Dupell as attorneys and agents for the undersigned, or any of them,
with full power of substitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign and file any and all amendments,
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and exhibits to the
Registration Statement and all applications, instruments and other documents to
be filed with the Securities and Exchange Commission pertaining to the
registration of the securities covered hereby, with full power and authority to
do and perform any and all acts and things whatsoever requisite or desirable,
and hereby ratifies and conforms all that such attorneys-in-fact, or either of
them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated above.
By: /s/ TIM E. DUPELL
----------------------------------
Tim E. Dupell
Chief Financial Officer,
Director
By: /s/ MICHAEL F. BONAZZOLA, M.D.
----------------------------------
Michael F. Bonazzola, M.D.
Director
By: /s/ BRUCE E. VAN ZEE, M.D.
----------------------------------
Bruce E. Van Zee, M.D.
Chairman of the Board, Director
II-7
<PAGE>
By: /s/ DAVID H. CUTSFORTH, JR., M.D.
----------------------------------
David H. Cutsforth, Jr., M.D.
Director
By: /s/ RUSSELL A. DOW, M.D.
----------------------------------
Russell A. Dow, M.D.
Director
By: /s/ DOUGLAS M. MANCINO, ESQ.
----------------------------------
Douglas M. Mancino, Esq.
Director
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the 1933 Act, Physician Partners
HealthFirst, P.C. has duly caused this Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Portland, Oregon on January 3, 1997.
PHYSICIAN PARTNERS HEALTHFIRST, P.C.
By: /s/ RUSSELL A. DOW, M.D.
----------------------------------
Russell A. Dow, M.D.,
Chairman of the Board, Director
POWER OF ATTORNEY
Each of the undersigned hereby constitutes and appoints Jerry Erstgaard and
Russell A. Dow, M.D. as attorneys and agents for the undersigned or any of them,
with full power of substitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign and file any and all amendments,
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, and exhibits to the
Registration Statement and all applications, instruments and other documents to
be filed with the Securities and Exchange Commission pertaining to the
registration of the securities covered hereby, with full power and authority to
do and perform any and all acts and things whatsoever requisite or desirable,
and hereby ratifies and confirms all that such attorneys-in-fact or either of
them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the 1933 Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated above.
/s/ MATTHEW M. SHELLEY, M.D.
----------------------------------
Matthew M. Shelley, M.D.,
President, Director
/s/ VERN R. WILLIAMS, M.D.
----------------------------------
Vern R. Williams, M.D.,
Secretary, Director
/s/ ALAR MIRKA, M.D.
----------------------------------
Alar Mirka, M.D., Director
/s/ JAMES C. RITZENTHALER, M.D.
----------------------------------
James C. Ritzenthaler, M.D.,
Director
/s/ JOHN D. TELLER, M.D.
----------------------------------
John D. Teller, M.D.,
Director
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the 1933 Act, Physician Partners Medford,
P.C. has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Medford,
Oregon on January 3, 1997.
PHYSICIAN PARTNERS MEDFORD, P.C.
By: /s/ BRUCE E. VAN ZEE, M.D.
----------------------------------
Bruce E. Van Zee, M.D.
Director
POWER OF ATTORNEY
Each of the undersigned hereby constitutes and appoints Bruce E. Van Zee and
Stephen J. Schnugg, M.D. as attorneys and agents for the undersigned or any of
them, with full power of substitution, for and in the name, place and stead of
the undersigned, in any and all capacities, to sign and file any and all
amendments (including post-effective amendments), to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, and
exhibits to the Registration Statement and all applications, instruments and
other documents to be filed with the Securities and Exchange Commission
pertaining to the registration of the securities covered hereby, with full power
and authority to do and perform any and all acts and things whatsoever requisite
or desirable, and hereby ratifies and confirms all that such attorneys-in-fact
or either of them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the 1933 Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated above.
/s/ STEPHEN J. SCHNUGG, M.D.
----------------------------------
Stephen J. Schnugg, M.D.,
President, Director
/s/ BRUCE E. JOHNSON, M.D.
----------------------------------
Bruce E. Johnson, M.D.,
Director
/s/ JOHN A. SCHWARTZ, M.D.
----------------------------------
John A. Schwartz, M.D.,
Director
/s/ DANIEL R. BRANDENBURG, M.D.
----------------------------------
Daniel R. Brandenburg, M.D.,
Director
II-10
<PAGE>
/s/ DANIEL M. WAYMAN, M.D.
----------------------------------
Daniel M. Wayman, M.D.,
Director
/s/ JON NESS
----------------------------------
Jon Ness, Secretary
/s/ VICKI WAGNER
----------------------------------
Vicki Wagner
Treasurer
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the 1933 Act, Physician Partners Corvallis,
P.C. has duly caused this Registration Statement on Form S-4 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Corvallis,
Oregon on January 3, 1997.
PHYSICIAN PARTNERS CORVALLIS, P.C.
By: /s/ DAVID H. CUTSFORTH, JR., M.D.
-----------------------------------------
David H. Cutsforth, Jr., M.D.
Chairman of the Board, President, Director
POWER OF ATTORNEY
Each of the undersigned hereby constitutes and appoints David H. Cutsforth,
Jr., M.D. and John R. Ladd, M.D. as attorneys and agents for the undersigned or
any of them, with full power of substitution, for and in the name, place and
stead of the undersigned, in any and all capacities, to sign and file any and
all amendments, (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, and
exhibits to the Registration Statement and all applications, instruments and
other documents to be filed with the Securities and Exchange Commission
pertaining to the registration of the securities and hereby, with full power and
authority to do and perform any and all acts and things whatsoever requisite or
desirable, and hereby ratifies and confirms all that such attorneys-in-fact or
either of them, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the 1933 Act, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated above.
/s/ JOHN R. LADD, M.D.
----------------------------------
John R. Ladd, M.D., Director
/s/ DARREL D. BIBLER, M.D.
----------------------------------
Darrel D. Bibler, M.D., Director,
Secretary
/s/ JANICE L. FROST, M.D.
----------------------------------
Janice L. Frost, M.D., Director
/s/ JESS W. HICKERSON, M.D.
----------------------------------
Jess W. Hickerson, M.D., Director
/s/ CHRISTOPHER P. SWAN, M.D.
----------------------------------
Christopher P. Swan, M.D., Director
II-12
<PAGE>
PROXY
HEALTHFIRST MEDICAL GROUP, P.C. SPECIAL MEETING OF SHAREHOLDERS JANUARY
21, 1997
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (1) acknowledges receipt of the Notice, dated January ,
1997, of the Special Meeting of Shareholders of HealthFirst Medical Group, P.C.
(the "Company") to be held on January 21, 1997, and the Joint Proxy
Statement/Prospectus, dated January , 1997, in connection therewith (herein
called the "Proxy Statement") and (2) constitutes and appoints Matthew M.
Shelley, M.D. and Vern R. Williams, M.D. and each of them, as his or her
attorneys and proxies, with full power of substitution and revocation to each,
for and in the name, place and stead of the undersigned, to vote and act as
designated below with respect to all of the Class A Shares of the Company
standing in name of the undersigned, or with respect to which the undersigned is
entitled to vote and act, at said meeting and any adjournment(s) thereof.
1. APPROVAL OF THE HEALTHFIRST REORGANIZATION PROPOSAL as set forth in the
Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
2. APPROVAL OF THE MERGER PROPOSAL as set forth in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
3. APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL as set forth in
the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL PROPOSALS
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
PROXY
(CONTINUED FROM OTHER SIDE)
Proxy No.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSALS 1, 2 AND 3 ABOVE. A VOTE TO "ABSTAIN" WILL HAVE THE SAME
EFFECT AS VOTE "AGAINST" A PROPOSAL.
Dated: _________________________________________ , 1997
_______________________________________________________
_______________________________________________________
PLEASE SIGN HERE
PLEASE DATE THIS PROXY AND SIGN YOUR NAME EXACTLY AS IT
APPEARS HEREON.
IF THERE IS MORE THAN ONE OWNER, EACH SHOULD SIGN. WHEN
SIGNING AS AN AGENT, ATTORNEY, ADMINISTRATOR, EXECUTOR,
GUARDIAN, OR TRUSTEE, PLEASE ADD YOUR TITLE AS SUCH. IF
EXECUTED BY A CORPORATION, THE PROXY SHOULD BE SIGNED
BY A DULY AUTHORIZED OFFICER WHO SHOULD INDICATE
HIS/HER TITLE.
PLEASE DATE, SIGN AND MAIL THIS PROXY CARD IN THE
ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
<PAGE>
PROXY THE CORVALLIS CLINIC, P.C. SPECIAL MEETING OF SHAREHOLDERS JANUARY
20, 1997
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CLASS A PREFERRED STOCK
The undersigned hereby (1) acknowledges receipt of the Notice, dated January ,
1997, of the Special Meeting of Shareholders of The Corvallis Clinic, P.C. (the
"Company") to be held on January 20, 1997 and the Joint Proxy
Statement/Prospectus, dated January , 1997, in connection therewith (herein
called the "Proxy Statement") and (2) constitutes and appoints David Cutsforth,
Jr., M.D. and David Kobriger and each of them, as his or her attorneys and
proxies, with full power of substitution and revocation to each, for and in the
name, place and stead of the undersigned, to vote and act as designated below
with respect to all of the shares of Class A Preferred Stock of the Company
standing in name of the undersigned, or with respect to which the undersigned is
entitled to vote and act, at said meeting and any adjournment(s) thereof.
1. APPROVAL OF THE CORVALLIS CLINIC REORGANIZATION PROPOSAL as set forth in the
Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
2. APPROVAL OF THE MERGER PROPOSAL as set forth in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
3. APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL as set forth in
the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL PROPOSALS
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
PROXY(CONTINUED FROM OTHER SIDE)
Proxy No.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSALS 1, 2, AND 3 ABOVE. A VOTE TO "ABSTAIN" WILL HAVE THE SAME
EFFECT AS A VOTE "AGAINST" A PROPOSAL.
Dated: _____________________________________________, 1997
__________________________________________________________
__________________________________________________________
PLEASE SIGN HERE
PLEASE DATE THIS PROXY AND SIGN YOUR NAME EXACTLY AS IT
APPEARS HEREON.
IF THERE IS MORE THAN ONE OWNER, EACH SHOULD SIGN. WHEN
SIGNING AS AN AGENT, ATTORNEY, ADMINISTRATOR, EXECUTOR,
GUARDIAN, OR TRUSTEE, PLEASE ADD YOUR TITLE AS SUCH. IF
EXECUTED BY A CORPORATION, THE PROXY SHOULD BE SIGNED BY A
DULY AUTHORIZED OFFICER WHO SHOULD INDICATE HIS/HER TITLE.
PLEASE DATE, SIGN AND MAIL THIS PROXY CARD IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
<PAGE>
PROXY
THE CORVALLIS CLINIC, P.C. SPECIAL MEETING OF SHAREHOLDERS JANUARY 20,
1997
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
CLASS B COMMON STOCK
The undersigned hereby (1) acknowledges receipt of the Notice, dated January ,
1997, of the Special Meeting of Shareholders of The Corvallis Clinic, P.C. (the
"Company") to be held on January 20, 1997 and the Joint Proxy
Statement/Prospectus, dated January , 1997, in connection therewith (herein
called the "Proxy Statement") and (2) constitutes and appoints David Cutsforth,
Jr., M.D. and David Kobriger and each of them, as his or her attorneys and
proxies, with full power of substitution and revocation to each, for and in the
name, place and stead of the undersigned, to vote and act as designated below
with respect to all of the shares of Class B Common Stock of the Company
standing in name of the undersigned, or with respect to which the undersigned is
entitled to vote and act, at said meeting and any adjournment(s) thereof.
1. APPROVAL OF THE CORVALLIS CLINIC REORGANIZATION PROPOSAL as set forth in the
Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
2. APPROVAL OF THE MERGER PROPOSAL as set forth in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
3. APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL as set forth in
the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL PROPOSALS
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
PROXY
(CONTINUED FROM OTHER SIDE)
Proxy No.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSALS 1, 2, AND 3 ABOVE. A VOTE TO "ABSTAIN" WILL HAVE THE SAME
EFFECT AS A VOTE "AGAINST" A PROPOSAL.
Dated: _____________________________________________, 1997
__________________________________________________________
__________________________________________________________
PLEASE SIGN HERE
PLEASE DATE THIS PROXY AND SIGN YOUR NAME EXACTLY AS IT
APPEARS HEREON.
IF THERE IS MORE THAN ONE OWNER, EACH SHOULD SIGN. WHEN
SIGNING AS AN AGENT, ATTORNEY, ADMINISTRATOR, EXECUTOR,
GUARDIAN, OR TRUSTEE, PLEASE ADD YOUR TITLE AS SUCH. IF
EXECUTED BY A CORPORATION, THE PROXY SHOULD BE SIGNED BY A
DULY AUTHORIZED OFFICER WHO SHOULD INDICATE HIS/HER TITLE.
PLEASE DATE, SIGN AND MAIL THIS PROXY CARD IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
<PAGE>
PROXY
MEDFORD CLINIC, P.C. SPECIAL MEETING OF SHAREHOLDERS JANUARY 19, 1997
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby (1) acknowledges receipt of the Notice, dated January ,
1997, of the Special Meeting of Shareholders of Medford Clinic, P.C. (the
"Company") to be held on January 19, 1997 and the Joint Proxy
Statement/Prospectus, dated January , 1997, in connection therewith (herein
called the "Proxy Statement") and (2) constitutes and appoints Steven Schnugg,
M.D. and Jon Ness and each of them, as his or her attorneys and proxies, with
full power of substitution and revocation to each, for and in the name, place
and stead of the undersigned, to vote and act as designated below with respect
to all of the shares of Common Stock of the Company standing in name of the
undersigned, or with respect to which the undersigned is entitled to vote and
act, at said meeting and any adjournment(s) thereof.
1. APPROVAL OF THE MEDFORD CLINIC REORGANIZATION PROPOSAL as set forth in the
Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
2. APPROVAL OF THE MERGER PROPOSAL as set forth in the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
3. APPROVAL OF THE PPI INCENTIVE COMPENSATION PLANS PROPOSAL as set forth in
the Proxy Statement.
FOR / / AGAINST / / ABSTAIN / /
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL PROPOSALS
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
<PAGE>
PROXY
(CONTINUED FROM OTHER SIDE)
Proxy No.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED "FOR" PROPOSALS 1, 2 AND 3 ABOVE. A VOTE TO "ABSTAIN" WILL HAVE THE SAME
EFFECT AS A VOTE "AGAINST" A PROPOSAL.
Dated: ____________________________________________ , 1997
__________________________________________________________
__________________________________________________________
PLEASE SIGN HERE
PLEASE DATE THIS PROXY AND SIGN YOUR NAME EXACTLY AS IT
APPEARS HEREON.
IF THERE IS MORE THAN ONE OWNER, EACH SHOULD SIGN. WHEN
SIGNING AS AN AGENT, ATTORNEY, ADMINISTRATOR, EXECUTOR,
GUARDIAN, OR TRUSTEE, PLEASE ADD YOUR TITLE AS SUCH. IF
EXECUTED BY A CORPORATION, THE PROXY SHOULD BE SIGNED BY A
DULY AUTHORIZED OFFICER WHO SHOULD INDICATE HIS/HER TITLE.
PLEASE DATE, SIGN AND MAIL THIS PROXY CARD IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED
STATES.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PHYSICIAN PARTNERS, INC.
------------------------------------------
PHYSICIAN PARTNERS, INC., A CORPORATION ORGANIZED AND EXISTING UNDER THE
LAWS OF THE STATE OF DELAWARE, HEREBY CERTIFIES AS FOLLOWS:
1. THE ORIGINAL CERTIFICATE OF INCORPORATION WAS FILED WITH THE SECRETARY
OF STATE OF THE STATE OF DELAWARE ON JUNE 20, 1996.
2. THIS CORPORATION HAS NOT RECEIVED ANY PAYMENT FOR ANY OF ITS STOCK.
3. THIS AMENDED AND RESTATED CERTIFICATE OF INCORPORATION WAS DULY
ADOPTED IN ACCORDANCE WITH THE PROVISIONS OF SECTIONS 241 AND 245 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE.
4. THE CERTIFICATE OF INCORPORATION OF PHYSICIAN PARTNERS, INC. IS HEREBY
AMENDED AND RESTATED TO READ IN ITS ENTIRETY AS FOLLOWS:
ARTICLE I
NAME
The name of this corporation (the "Corporation") is Physician Partners,
Inc.
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, in
the County of New Castle. The name of the Corporation's registered agent at
such address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose for which the Corporation is organized is to engage in any
lawful act or activity for which corporations may be
<PAGE>
organized under the General Corporation Law of the State of Delaware (the
"Delaware Law").
ARTICLE IV
AUTHORIZED CAPITAL STOCK
SECTION 1. The total number of shares of all classes of capital stock
which the Corporation shall have the authority to issue is 100,000,000 shares,
consisting of: (a) 50,000,000 shares of Common Stock, par value $0.01 per share
("Common Stock"), of which 20,000,000 shares are designated as Class A Common
Stock, par value $0.01 par value ("Class A Common Stock"), and 30,000,000 shares
of which are designated as Class B Common Stock, par value $0.01 per share
("Class B Common Stock"), and (b) 50,000,000 shares of Preferred Stock, par
value $0.01 per share ("Preferred Stock").
SECTION 2. The powers, preferences, rights, qualifications, limitations
and restrictions relating to each class of capital stock of the Corporation are
as follows:
(A) CLASS A COMMON STOCK
(1) DIVIDENDS. Subject to the provisions of the Delaware Law and the
rights of holders of Preferred Stock and any other series of capital stock then
outstanding having a preference as to dividends over Class A Common Stock,
holders of Class A Common Stock shall be entitled to receive such dividends and
other distributions in cash, stock or property of the Corporation as may be
declared thereon from time to time by the Board of Directors of the Corporation
(the "Board of Directors") out of the assets or funds of the Corporation legally
available therefor.
(2) VOTING. At every meeting of stockholders (the "Stockholders") of
the Corporation, every holder of Class A Common Stock shall be entitled to one
vote in person or by proxy for each share of Class A Common Stock standing in
such Stockholder's name on the transfer books of the Corporation.
(3) RESTRICTION ON TRANSFER. No holder of Class A Common Stock may
sell, assign, transfer, pledge or otherwise encumber or dispose of any share of
Class A Common Stock or of any interest therein prior to the fifth anniversary
of the date of the issuance (the "Issuance Date") of such share to such holder.
(4) CONVERSION. (a) Upon the transfer of any whole number or all of
the shares of Class A Common Stock to a third party unaffiliated with the
original holder thereof, the transferred shares of Class A Common Stock shall
convert into fully paid and nonassessable shares of Class B Common Stock at the
rate of one share of Class B Common Stock for each share of Class A Common Stock
so converted. The conversion shall be effected at the time the holders of Class
A Common Stock surrender such
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holders' certificates for Class A Common Stock to be transferred, duly endorsed,
at the office of the Corporation or any transfer agent for Class A Common Stock.
Promptly thereafter, the Corporation shall issue and deliver to the assignee, a
certificate or certificates for the number of shares of Class B Common Stock to
which the assignee shall be entitled. The conversion shall be deemed to have
been made at the close of business on the date of the surrender and the person
or persons entitled to receive shares of Class B Common Stock issuable on the
conversion shall be treated for all purposes as the record holder or holders of
the shares of Class B Common Stock on that date.
(b) The initial number of shares of Class B Common Stock into
which shares of Class A Common Stock are convertible shall be subject to
adjustment from time to time, after the date hereof, in case the Corporation
shall (i) pay a dividend in, or make distribution of, shares of Class B Common
Stock, (ii) subdivide its outstanding shares of Class B Common Stock into a
greater number of such shares, (iii) combine its outstanding shares of Class B
Common Stock into a smaller number of such shares or (iv) consolidate or merge
with or into another corporation (other than a consolidation or merger which
does not result in any reclassification or change of Class A Common Stock), or
sell or convey all or substantially all of the Corporation's assets in their
entirety to another corporation. The total number of shares of Class B Common
Stock and the number of shares of Class A Common Stock convertible into Class B
Common Stock shall be adjusted so that the holder of Class A Common Stock
thereafter surrendered for conversion shall be entitled to receive the number of
shares of Class B Common Stock which it would have been entitled to receive
immediately following the happening of any of the events described above had
such Class A Common Stock been converted immediately following the happening of
such event. Any adjustment made pursuant to this Section 2(A)(4)(b) shall, in
the case of a stock dividend or distribution, become effective as of the record
date therefor and, in the case of a subdivision, combination, grant, conveyance
or merger, be made as of the effective thereof.
(5) DILUTION. No holder of Class A Common Stock shall have any right
to maintain such holder's proportionate share of ownership of the Corporation or
other rights to purchase any newly issued and offered shares of Class A Common
Stock or Class B Common Stock, and each holder of Class A Common Stock hereby
expressly acknowledges that any newly issued and offered shares may dilute the
percentage of total number of shares of Class A Common Stock held by such
holder.
(6) REGISTRATION RIGHT. (a) A holder of Class A Common Stock shall
have the right to elect, at any time after the second anniversary of the
Issuance Date to require the Corporation to include up to 20 percent of the
shares of Class A Common Stock held by such holder (the "Registrable Shares") in
a registration statement ("Registration Statement") relating to any proposed
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registered public offering of Common Stock under which the Corporation receives
proceeds in excess of $30 million (net of underwriters' commissions and
discounts) ("Registered Public Offering"). If, at any time after the second
anniversary of the Issuance Date, the Corporation shall determine to register
any of its securities (any such registration being referred to herein as a
"Registration") under the Securities Act of 1933, as amended (the "Securities
Act"), in connection with any Registered Public Offering, the Corporation shall
deliver to each holder of Class A Common Stock a written notice with respect
thereto at least 30 days prior to the filing with the Securities Exchange
Commission of the Registration Statement relating to such Registered Public
Offering. Any holder of Class A Common Stock that elects to require the
Corporation to include such holder of Registrable Shares in the Registration
Statement shall, within 30 days following the receipt of a written notice with
respect to a Registration from the Corporation, deliver to the Corporation a
written notice, which notice shall indicate (i) such holder's intent to include
such Registrable Shares in the Registration Statement and (ii) the total number
of such holder's Registrable Shares. In addition, as a condition to any
Registered Public Offering involving such Registrable Shares, such holder of
Class A Common Stock shall (y) enter into an underwriting agreement in customary
form with the managing underwriter selected by the Corporation with respect to
such Registered Public Offering (the "Managing Underwriter") and perform its
obligations under such underwriting agreement and (z) furnish to the Corporation
such information as the Corporation may request in writing and as shall be
required in connection with such Registration Statement.
(b) Notwithstanding the provisions of paragraph (a) of this
Section 2(A)(6), if the Managing Underwriter determines, for any reason, that
the number of Registrable Shares to be included in such Registered Public
Offering must be reduced, the Managing Underwriter may reduce the number of such
Registrable Shares (an "Underwriter's Reduction") by, first, reducing the number
of Registrable Shares owned by Non-Eligible Investors (as such term is
hereinafter defined) to be included in such Registered Public Offering on a pro
rata basis in accordance with each such Non-Eligible Investor's percentage
ownership in all such Registrable Shares owned by Non-Eligible Investors and, if
the exclusion of all Registrable Shares owned by Non-Eligible Investors is
insufficient to meet the Underwriter's Reduction, then by reducing the number of
Registrable Shares owned by holders of Class A Common Stocks other than
Non-Eligible Investors to be included in such Registration Statement on a pro
rata basis in accordance with all such Registrable Shares owned by such holders
of Class A Common Stocks. For purposes hereof, the term "Non-Eligible Investor"
means any Stockholder who is not: (i) an employee or member of the Board of
Directors or an entity (an "Affiliated Entity") with which the Corporation has
entered into a practice management agreement, (ii) a Stockholder who, pursuant
to such Stockholder's employment contract with the Corporation or any Affiliated
Entity, has retired (A) after more than 20 years of
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employment by the Corporation or such Affiliated Entity, with full credit given
for the period employment with such Affiliated Entity, or (B) at age 62 or
older, (iii) a Stockholder, or such Stockholder's representative, as the case
may be, whose employment contract with the Corporation or any Affiliated Entity
was terminated as a result of death or disability or (iv) any person or entity
that has received shares of Common Stock from the Corporation in connection with
any acquisition by the Corporation of any stock or assets of another entity.
(c) All expenses incurred in connection with any Registration
Statement, including, without limitation, all registration, qualification and
filing fees, printing expenses, escrow fees, fees and disbursements of counsel
for the Corporation, blue sky fees and expenses, and the expense of any special
audits incident to or required by any such registration shall be borne by the
Corporation; PROVIDED, HOWEVER, that unless otherwise stated, all selling
expenses relating to Registrable Shares, including, without limitation, all
underwriting discounts, selling commissions and stock transfer taxes applicable
thereto and all fees and disbursements of counsel for any holder of Class A
Common Stock, shall be borne by each holder of Class A Common Stock, pro rata on
the basis of the number of Registrable Shares included in the Registration
Statement.
(d) In the case of each Registered Public Offering, the
Corporation will keep each holder of Class A Common Stock advised in writing as
to the initiation and completion of such Registered Public Offering.
Additionally, the Corporation will, at its own expense:
(i) Furnish to such holder of Class A Common Stock, such
numbers of copies of the prospectus (including the preliminary prospectus)
that is part of the Registration Statement in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the
Registrable Shares owned by such holder; and
(ii) Notify each such holder at any time when a prospectus
relating to the Registered Public Offering is required to be delivered
under the Securities Act, of the occurrence of any event as a result of
which the prospectus included in the Registration Statement, as then in
effect, includes an untrue statement of a material fact or omits to make
the statements therein not misleading in the light of the circumstances
then existing.
(e) In connection with any Registered Public Offering:
(i) The Corporation will indemnify each such holder, each
of its officers and directors and partners, and each person "controlling"
such holder (within the meaning of
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Section 15 of the Securities Act), if any, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including
any of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in the Registration
Statement or in any prospectus, offering circular or other similar
document, or any amendment or supplement thereto, incident to any such
Registration Statement, or based on any omission (or alleged omission) to
therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they
were made, not misleading, or any violation by the Corporation of the
Securities Act applicable to the Corporation in connection with any such
Registration Statement, and the Corporation will reimburse each such
holder, each of its officers and directors and partners, and each person
controlling such holder, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, provided that the Corporation
will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in
reliance upon and in conformity with written information furnished to the
Corporation by an instrument duly executed by such holder or a controlling
person thereof and stated to be specifically for use therein.
(ii) Each such holder will indemnify the Corporation, each
of its directors and officers, each person who controls the Corporation or
such "underwriter" (within the meaning of Section 15 of the Securities
Act), and each such other holder, each of its officers and directors and
partners and each person controlling such "Holder" (within the meaning of
Section 15 of the Securities Act), against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in any such Registration Statement, prospectus, offering circular or other
similar document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading, and will reimburse the Corporation, such holder, such
directors, officers, partners, persons, underwriters or control persons for
any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such Registration Statement, prospectus, offering
circular or
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other document in reliance upon and in conformity with written information
furnished to the Corporation by an instrument duly executed by such holder
and stated to be specifically for use therein.
(iii) Each party entitled to indemnification under this
Section 2(A)(6)(e) (each an "Indemnified Party") shall give notice to any
party required to provide indemnification (an "Indemnifying Party")
promptly after such Indemnified Party has actual knowledge of any claim as
to which indemnity may be sought, and each Indemnified Party shall permit
the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; PROVIDED, HOWEVER, that (A) counsel for the
Indemnifying Party, who shall conduct the defense of any such claim or
litigation, shall be approved by the Indemnified Party (whose approval
shall not unreasonably be withheld) and (B) the Indemnified Party may
participate in such defense at such Indemnified Party's expense, and
PROVIDED, FURTHER, that the failure of any Indemnified Party to give notice
as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 2(A)(6)(e) except to the extent that the
failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action, and PROVIDED, FURTHER, that the
Indemnifying Party shall not assume the defense for matters as to which
there is a conflict of interest or separate and different defenses but
shall continue to be liable for the costs of such defense. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with
the consent of each Indemnified Party, consent to entry of any judgment or
enter into any settlement that does not include as an unconditional term
thereof, the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation.
(f) Notwithstanding anything to the contrary herein, the
Corporation shall have the right to terminate or withdraw any Registration
Statement initiated by the Corporation prior to the effectiveness of such
Registration Statement, whether or not any holder of Class A Common Stock has
elected to include its Registrable Shares in such Registration Statement.
(7) REPURCHASE RIGHT. (a) The Corporation shall have the right, but
not the obligation, to repurchase all or any portion of shares of Class A Common
Stock held by a Stockholder in the event such Stockholder ceases to be an
employee or member of the Board of Directors of the Corporation or of an
Affiliated Entity, for reasons other than death, disability or retirement, at
the purchase price equal to (i) equal to the average closing sale price of the
Common Stock during the four-month period immediately preceding the date of the
repurchase by the Corporation, if the Common Stock was publicly traded
throughout such four-month period or (ii) otherwise, equal to the fair market
value of the Common
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Stock as of December 31st of the year immediately preceding the date of the
repurchase by the Corporation, as determined by a nationally-recognized
independent valuation firm or investment bank with experience in valuing
privately-held physician practice management companies or other companies
engaged in similar businesses (the "Valuation Firm"); PROVIDED, HOWEVER, that,
upon the occurrence of a Noncompetition Breaching Event (as such term is
hereinafter defined), such purchase price shall be equal to the lesser of (A)
the Original Issuance Price (as such term is hereinafter defined) of such shares
of Class A Common Stock as are being so repurchased and (B) (1) the average
closing sales price of the Class A Common Stock during the four-month period
immediately preceding the date of the occurrence of such Noncompetition
Breaching Event, if the Class A Common Stock was publicly traded throughout such
four-month period, or (2) otherwise, the fair market value of such shares as of
December 31st of the year immediately preceding the date of the occurrence of
such Noncompetition Breaching Event as determined by a Valuation Firm.
(b) For purposes hereof, (i) the term "Original Issuance Price"
shall mean the fair market value of such shares of Class A Common Stock as are
being repurchased by the Corporation from a Stockholder at the time of issuance
of such shares to such Stockholder, as determined by the Valuation Firm and (ii)
the term "Noncompetition Breaching Event" shall refer to a holder of Class A
Common Stock, either jointly or individually, directly or indirectly, whether as
an employee, officer, director, agent, consultant or otherwise, during the
period ending two years after termination of employment thereof with the
Corporation or any Affiliated Entity (A) competing with the Corporation or an
Affiliated Entity or any of the facilities (collectively, the "Facilities")
operated by the Corporation or an Affiliated Entity at the time of such
termination within a 25-mile radius of any such Facility (referred to herein as
the "Restricted Area"), (B) owning, managing, operating, joining, controlling,
advising, consulting with, providing services to, or being employed by or
participating in the ownership, operation, management or control (other than as
a stockholder owning less than five percent of the capital stock of a company
the capital stock of which is publicly traded on a national securities exchange)
of any entity or business engaged in the provision of services provided by the
Corporation or any Affiliate or at any of the Facilities (referred to herein as
a "Competing Business") within the Restricted Area or (C) advising, assisting,
consulting with, leasing or selling real property to or aiding in the
establishment or operation of a Competing Business in the Restricted Area.
(c) The repurchase by the Corporation of any Class A Common
Stock from a Stockholder pursuant to this Section 2(A)(7) shall be consummated
at a closing (the "Corporation Repurchase Closing"), which, unless otherwise
agreed upon by the Corporation and such Stockholder, shall take place at the
principal office of the Corporation at 10:00 a.m. on the 20th day next following
(or,
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if such 20th day falls on a Saturday, Sunday or legal holiday, the next business
day thereafter) the date of the written notice by the Corporation to such
Stockholder of its election to repurchase such shares. At the Corporation
Repurchase Closing (i) such Stockholder shall deliver to the Corporation all
certificates evidencing the shares of Class A Common Stock being repurchased by
the Corporation, duly endorsed for transfer, free and clear of all liens and
encumbrances, with no further act required to be taken by the Corporation and
(ii) the Corporation shall pay to such Stockholder cash in an amount equal to
the purchase price of such Common Shares being repurchased by the Corporation;
PROVIDED, HOWEVER, that in the case of payment of the purchase price in
connection with the repurchase following the Noncompetition Breaching Event,
instead of paying the full amount thereof in cash, the Corporation may, at its
sole option, deliver to such Stockholder an amount equal to 10 percent of such
purchase price in cash and a 10-year installment note in the principal amount
equal to the balance of the amount of such purchase price, bearing interest at
the prime rate of interest, as announced or in effect at United States National
Bank of Oregon, plus one percent, for the principal amount of such installment
note.
(B) CLASS B COMMON STOCK
(1) DIVIDENDS. Subject to the provisions of the Delaware Law and the
rights of holders of Preferred Stock and any other series of capital stock then
outstanding having a preference as to dividends over Class B Common Stock,
holders of Class B Common Stock shall be entitled to receive such dividends and
other distributions in cash, stock or property of the Corporation as may be
declared on Class A Common Stock from time to time by the Board of Directors out
of the assets or funds of the Corporation legally available therefor.
(2) VOTING. At every meeting of Stockholders of the Corporation,
every holder of Class B Common Stock shall be entitled to one vote in person or
by proxy for each share of Class B Common Stock standing in such Stockholder's
name on the transfer books of the Corporation.
(3) DILUTION. No holder of Class B Common Stock shall have any right
to maintain such holder's proportionate share of ownership of the Corporation or
other rights to purchase any newly issued and offered shares of Class A Common
Stock or Class B Common Stock, and each holder of Class B Common Stock hereby
expressly acknowledges that any newly issued and offered shares may dilute the
percentage of total number of shares of Class B Common Stock held by such
holder.
(C) SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
(1) DESIGNATION. The shares of a series of Preferred Stock shall be
designated as "Series A Junior Participating
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Preferred Stock" and the number of shares constituting such series shall be
200,000.
(2) DIVIDENDS. (a) Subject to the prior and superior rights of the
holders of any shares of any series of Preferred Stock issued from time to time
ranking prior and superior to the shares of Series A Junior Participating
Preferred Stock with respect to dividends, the holders of shares of Series A
Junior Participating Preferred Stock shall be entitled to receive, when, as and
if declared by the Board of Directors out of funds legally available therefor,
quarterly dividends payable in cash on the 15th day of January, April, July and
October in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date
after the initial issuance of a share of Series A Junior Participating Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (i) $1.00 or (ii) subject to the provision for adjustment hereinafter set
forth, the sum of (A) the product of 1,000 multiplied by the aggregate per share
amount of all cash dividends and (B) the product of 1,000 multiplied by the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions (other than a dividend payable in shares of Class A Common Stock
or a subdivision of the outstanding shares of Class A Common Stock (by
reclassification or otherwise)), declared on Common Stock since the immediately
preceding Quarterly Dividend Payment Date or, with respect to such first
Quarterly Dividend Payment Date, since the initial issuance of any share of
Series A Junior Participating Preferred Stock; PROVIDED, HOWEVER, that, in the
event the Corporation shall, at any time after July 31, 1996 (the "Rights
Declaration Date"), declare any dividend on Common Stock payable in shares of
Common Stock, subdivide outstanding Common Stock or combine outstanding Common
Stock into a smaller number of shares, then, in each such case, the amount to
which holders of shares of Series A Junior Participating Preferred Stock were
entitled immediately prior to such event under clause (ii) of this Section
2(C)(2)(a) shall be adjusted by multiplying such amount by a fraction, the
numerator of which shall be the number of shares of Class A Common Stock
outstanding immediately after such event and the denominator of which shall be
the number of shares of Class A Common Stock that were outstanding immediately
prior to such event.
(b) The Corporation shall declare a dividend or distribution on
Series A Junior Participating Preferred Stock as provided in paragraph (a) of
this Section 2(C)(2) immediately after the Corporation declares a dividend or
distribution on Common Stock (other than a dividend payable in shares of Common
Stock), PROVIDED that, in the event no dividend or distribution shall have been
declared on Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Divided Payment Date, a dividend
of $1.00 per share (as such amount may be adjusted pursuant to paragraph (a) of
this Section 2(C)(2)) on Series A Junior Participating Preferred Stock
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shall nevertheless be payable on such subsequent Quarterly Dividend Payment
Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Junior Participating Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of issuance of such
shares of Series A Junior Participating Preferred Stock, unless (i) such date of
issuance of such shares is prior to the record date for the first Quarterly
Dividend Payment Date (in which case dividends on such shares shall begin to
accrue from such date of issuance of such shares) or (ii) such date of issuance
is a Quarterly Dividend Payment Date or a date after the record date for the
determination of holders of shares of Series A Junior Participating Preferred
Stock entitled to receive quarterly dividend payable on such Quarterly Dividend
Payment Date but prior to such Quarterly Dividend Payment Date (in either of
which events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date). Accrued but unpaid dividends shall not bear
interest. Dividends paid on shares of Series A Junior Participating Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 60 days prior to the date fixed for such payment.
(3) VOTING RIGHTS. (a) Subject to the provision for adjustment
hereinafter set forth, each share of Series A Junior Participating Preferred
Stock shall entitle the holder thereof to 1,000 votes on all matters submitted
to a vote of the Stockholders of the Corporation. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
Class A Common Stock payable in shares of Class A Common Stock, (ii) subdivide
the outstanding Class A Common Stock or (iii) combine the outstanding Class A
Common Stock into a smaller number of shares, then in each such case the number
of votes per share to which holders of shares of Series A Junior Participating
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction the numerator of which shall be the
number of shares of Class A Common Stock outstanding immediately after such
event and the denominator of which shall be the number of shares of Class A
Common Stock that were outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders
of shares of Series A Junior Participating Preferred Stock and the holders of
shares of Class A Common Stock shall vote together as one class on all matters
submitted to a vote of Stockholders of the Corporation.
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(c)(i) If at any time dividends on any Series A Junior
Participating Preferred Stock shall be in arrears in an amount equal to six
quarterly dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (referred to herein as a "default period") which shall
extend until such time as all accrued and unpaid dividends for all previous
quarterly dividend periods and for the then-current quarterly dividend period on
all shares of Series A Junior Participating Preferred Stock then outstanding
shall have been declared and paid or set apart for payment. During each default
period, all holders of Series A Junior Participating Preferred Stock with
dividends in arrears in an amount equal to six quarterly dividends thereon,
voting as a class, shall have the right to elect two directors ("Directors") of
the Corporation.
(ii) During any default period, voting rights of the holders
of Series A Junior Participating Preferred Stock may be exercised initially
at a special meeting of the Stockholders of the Corporation called pursuant
to subparagraph (iii) of this Section 2(C)(3)(c) or at any annual meeting
of the Stockholders of the Corporation, and thereafter at annual meetings
of the Stockholders of the Corporation, provided that such voting rights
shall not be exercised unless the holders of shares constituting at least
10 percent of the then-outstanding shares of Series A Junior Participating
Preferred Stock shall be present in person or by proxy. The absence of a
quorum of the holders of Class A Common Stock shall not affect the exercise
by the holders of Series A Junior Participating Preferred Stock of such
voting rights. At any meeting of the Stockholders of the Corporation at
which the holders of Series A Junior Participating Preferred Stock shall
exercise such voting rights initially during an existing default period,
such Stockholders shall have the right, voting as a class, to elect up to
two Directors to fill such vacancies, if any, in the Board of Directors as
may then exist or, if such rights are exercised at an annual meeting of the
Stockholders of the Corporation, to elect two Directors. If the number of
Directors which may be so elected at any special meeting of the
Stockholders of the Corporation is less than two, the holders of Series A
Junior Participating Preferred Stock shall have the right to make such
increase in the number of Directors as shall be necessary to permit the
election by them of two Directors. After the holders of Series A Junior
Participating Preferred Stock shall have exercised their right to elect
Directors in any default period and during the continuance of such period,
the number of Directors shall not be increased or decreased except by vote
of the holders of Series A Junior Participating Preferred Stock as herein
provided or pursuant to the rights of any equity securities ranking senior
to or pari passu with Series A Junior Participating Preferred Stock.
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(iii) Unless the holders of Series A Junior Participating
Preferred Stock shall, during an existing default period, have previously
exercised their rights to elect Directors, the Board of Directors may
order, or any Stockholder or Stockholders owning in the aggregate not less
than 10 percent of the aggregate number of shares of Series A Junior
Participating Preferred Stock outstanding, may request, the calling of a
special meeting of the holders of Series A Junior Participating Preferred
Stock, which meeting shall thereupon be called by the President, a Vice
President or the Secretary of the Corporation. Notice of any such meeting
and of any annual meeting of the Stockholders of the Corporation at which
holders of Series A Junior Participating Preferred Stock are entitled to
vote pursuant to this Section 2(C)(3)(c)(iii) shall be given to each holder
of record of Series A Junior Participating Preferred Stock by mailing a
copy of such notice to him or her at his or her last address as the same
appears on the books of the Corporation. Such meeting shall be called for
a time not earlier than 20 days and not later than 60 days after such order
or request or in default of the calling of such meeting within 60 days
after such order or request, such meeting may be called on similar notice
by any Stockholder or Stockholders owning in the aggregate not less than 10
percent of the aggregate number of shares of Series A Junior Participating
Preferred Stock outstanding. Notwithstanding the provisions of this
Section 2(C)(3)(c)(iii), no such special meeting shall be called during the
period within 60 days immediately preceding the date fixed for the next
annual meeting of the Stockholders of the Corporation.
(iv) In any default period, the holders of Class A Common
Stock, and other classes of stock of the Corporation if applicable, shall
continue to be entitled to elect the whole number of Directors until the
holders of Series A Junior Participating Preferred Stock shall have
exercised their right to elect two Directors voting as a class, after the
exercise of which right (A) the Directors so elected by the holders of
Series A Junior Participating Preferred Stock shall continue in office
until their successors shall have been elected by such holders or until the
expiration of the default period and (B) any vacancy in the Board of
Directors may (except as provided in subparagraph (ii) of this Section
2(C)(3)(c)) be filled by vote of a majority of the remaining Directors
theretofore elected by the holders of the class of stock which elected the
Director whose office shall have become vacant. References in this Section
2(C)(3)(c) to Directors elected by the holders of a particular class of
stock shall include Directors elected by such Directors to fill vacancies
as provided in clause (B) of the foregoing sentence.
(v) Immediately upon the expiration of a default period,
(A) the right of the holders of Series A
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Junior Participating Preferred Stock as a class to elect Directors shall
cease, (B) the term of any Directors elected by the holders of Series A
Junior Participating Preferred Stock as a class shall terminate and (C) the
number of Directors shall be such number as may be provided for in this
Certificate of Incorporation or Bylaws irrespective of any increase made
pursuant to the provisions of subparagraph (ii) of this Section 2(C)(3)(c)
(such number being subject, however, to change thereafter in any manner
provided by law or in this Certificate of Incorporation or Bylaws). Any
vacancies in the Board of Directors effected by the provisions of clauses
(B) and (C) in the preceding sentence may be filled by a majority of the
remaining Directors.
(d) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Class A Common Stock as set forth herein) for taking any
corporate action.
(4) CERTAIN RESTRICTIONS. (a) Whenever quarterly dividends or other
dividends or distributions payable on Series A Junior Participating Preferred
Stock as provided in Section 2(c)(2) are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series A Junior Participating Preferred Stock outstanding shall have
been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other
distributions on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to Series A Junior
Participating Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with Series A
Junior Participating Preferred Stock, except dividends paid ratably on
Series A Junior Participating Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with Series A
Junior Participating Preferred Stock, provided that the Corporation may at
any time redeem, purchase or otherwise acquire shares of any such parity
stock in exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution,
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liquidation or winding up) to Series A Junior Participating Preferred
Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series A Junior Participating Preferred Stock, or any shares of
stock ranking on a parity with Series A Junior Participating Preferred
Stock, except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section 2(C)(4), purchase or otherwise acquire such shares at such time and
in such manner.
(5) REQUIRED SHARES. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Series A Junior Participating Preferred Stock and may be
reissued as part of a new series of Series A Junior Participating Preferred
Stock to be created by resolution or resolutions of the Board of Directors,
subject to the conditions and restrictions on issuance set forth herein.
(6) LIQUIDATION, DISSOLUTION AND WINDING UP. (a) Upon any
liquidation (voluntary or otherwise), dissolution or winding up of the
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received $1,000 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment (the "Series A Liquidation Preference"). Following the payment of
the full amount of Series A Liquidation Preference, no additional distributions
shall be made to the holders of shares of Series A Junior Participating
Preferred Stock unless, prior thereto, the holders of shares of Class A Common
Stock shall have received an amount per share (the "Common Adjustment") equal to
the quotient obtained by dividing (i) Series A Liquidation Preference by (ii)
1,000 (as appropriately adjusted as set forth in paragraph (c) of this Section
2(C)(6) to reflect such events as stock splits, stock dividends and
recapitalization with respect to the Class A Common
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Stock) (such number in clause (ii), the "Adjustment Number"). Following the
payment of the full amount of Series A Liquidation Preference and the Common
Adjustment in respect of all outstanding shares of Series A Junior Participating
Preferred Stock and Class A Common Stock, respectively, holders of Series A
Junior Participating Preferred Stock and holders of shares of Class A Common
Stock shall receive their ratable and proportionate share of the remaining
assets to be distributed in the ratio of the Adjustment Number to 1 with respect
to such Series A Junior Participating Preferred Stock and Class A Common Stock,
on a per share basis, respectively.
(b) In the event, however, that there are not sufficient assets
available to permit payment in full of Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with Series A Junior Participating Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Class A Common Stock.
(c) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on Class A Common Stock payable
in shares of Class A Common Stock, (ii) subdivide the outstanding Class A Common
Stock or (iii) combine the outstanding Class A Common Stock into a smaller
number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Adjustment
Number by a fraction the numerator of which is the number of shares of Class A
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Class A Common Stock that were outstanding
immediately prior to such event.
(7) CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Class A Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as the
case may be, into which or for which each share of Class A Common Stock is
changed or exchanged. In the event the Corporation shall at any time after the
Rights Declaration Date (a) declare any dividend on Common Stock payable in
shares of Common Stock, (b) subdivide the outstanding Common Stock or (c)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount set forth in the
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preceding sentence with respect to the exchange or change of shares of Series A
Junior Participating Preferred Stock shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(8) NO REDEMPTION. The shares of Series A Junior Participating
Preferred Stock shall not be redeemable.
(9) RANKING. Series A Junior Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock which may
be issued from time to time as to the payment of dividends and the distribution
of assets, unless the terms of any such series shall provide otherwise.
(10) AMENDMENT. This Certificate of Incorporation shall not be
further amended in any manner which would materially alter or change the powers,
preferences or special rights of Series A Junior Participating Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of a
majority or more of the outstanding shares of Series A Junior Participating
Preferred Stock, voting separately as a class.
(11) FRACTIONAL SHARES. Series A Junior Participating Preferred Stock
may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
(D) PREFERRED STOCK
The Board of Directors is authorized to provide, by resolution, for
additional series of Preferred Stock to be comprised of authorized but unissued
shares of Preferred Stock. Except as may be required by law, the shares in any
series of Preferred Stock or any shares of capital stock of any other class need
not be identical to any other series of Preferred Stock or any other shares of
capital stock of any other class. Before any shares of any such series are
issued, the Board of Directors shall fix, and is hereby expressly empowered to
fix, by resolution, rights, preferences and privileges of, and qualifications,
restrictions and limitations applicable to, such series, including the
following:
(1) The designation of such series, the number of shares to
constitute such series and the stated value thereof (if different from the par
value thereof);
(2) Whether the shares of such series shall have voting rights, and,
if so, the terms of such voting rights, which may be general or limited;
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(3) The dividends, if any, payable on such series, whether any such
dividends shall be cumulative, and, if so, from what dates, the conditions and
dates upon which such dividends shall be payable, the preference or relation
which such dividends shall bear to the dividends payable on any shares of
capital stock of any other class or any other series of Preferred Stock;
(4) Whether the shares of such series shall be subject to redemption
by the Corporation and, if so, the times, prices and other conditions relating
to such redemption;
(5) The amounts payable in respect of shares of such series, and the
other rights of the holders of such shares, in the event of the voluntary or
involuntary liquidation, dissolution or winding up, or upon any distribution of
the assets, of the Corporation;
(6) Whether the shares of such series shall be subject to a
retirement or sinking fund, and, if so, the extent to and manner in which any
such retirement or sinking fund shall be applied to the purchase or redemption
of the shares of such series for retirement or other corporate purposes and the
other terms and provisions relating thereto;
(7) Whether the shares of such series shall be convertible into, or
exchangeable for, shares of Class A Common Stock or any other series of
Preferred Stock or any other securities (whether or not issued by the
Corporation), and, if so, the price or prices or the rate or rates of conversion
or exchange and the method, if any, of adjustment thereof, and any other terms
and conditions of conversion or exchange;
(8) The limitations and restrictions, if any, to be effective upon
the payment of dividends or the making of other distributions on, or upon the
purchase, redemption or other acquisition by the Corporation of, Class A Common
Stock or shares of capital stock of any other class or any other series of
Preferred Stock; and
(9) The conditions (if any) applicable to, or restrictions (if any)
on, the creation of indebtedness of the Corporation or upon the issuance of any
additional capital stock, including additional shares of such series or any
other series of Preferred Stock or any other class of capital stock.
ARTICLE V
COMPOSITION OF BOARD OF DIRECTORS
AND STOCKHOLDER MEETINGS
SECTION 1. Except as may otherwise be provided by the terms of any
series of Preferred Stock or any other securities of the Corporation, the number
of Directors of the Corporation shall be as specified in the Bylaws of the
Corporation (the "Bylaws"),
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and such number may from time to time be increased or decreased in accordance
with the provisions thereof. The Directors of the Corporation shall be elected
at annual meetings of the Stockholders of the Corporation, as such are convened
by or pursuant to the Bylaws, and shall serve until the annual meeting of
Stockholders at which their respective successors are elected and until such
successors have been duly elected and qualified. The election of Directors need
not be by written ballot.
SECTION 2. The Directors of the Corporation, other than those who may
be elected pursuant to the terms of any series of Preferred Stock or any other
securities of the Corporation, shall be classified, with respect to the time for
which they hold office, into three classes, as nearly equal in number as
possible, as shall be provided in the Bylaws. The terms of the initial
Directors of the Corporation shall be determined by the Board of Directors at
the first organizational meeting of the Board of Directors with one class
designated as elected for a one-year term, the second class designated as
elected for a two-year term and the third class designated as elected for a
three-year term. At the annual meeting of the Stockholders of the Corporation
in the year following such organizational meeting of the Board of Directors and
at each subsequent annual meeting of Stockholders, the successors of the
Directors whose term expires at such meeting shall be elected to hold office for
a term expiring at the annual meeting of Stockholders held in the third year
following the year of election of such Directors. No decrease in the number of
Directors constituting the Board of Directors shall shorten the term of any
incumbent Director. Any Director elected to fill a newly-created directorship
of the Corporation or any vacancy on the Board of Directors resulting from any
death, resignation, removal or other cause shall hold office for the remainder
of the current term of the class of Directors in which such new directorship was
created or such vacancy occurred and until such Director's successor shall have
been elected and qualified.
SECTION 3. Except as otherwise provided by the terms of any series of
Preferred Stock or any other securities of the Corporation, newly-created
Directorships resulting from any increase in the number of Directors may be
filled by the Board of Directors, or as otherwise provided in the Bylaws, and
any vacancies on the Board of Directors resulting from death, resignation,
removal or other cause shall be filled by the affirmative vote of a majority of
the remaining Directors then in office, voting as a single class, even though
less than a quorum of the Board of Directors, or by a sole remaining Director,
or as otherwise provided in the Bylaws.
SECTION 4. Except as otherwise provided by the terms of any series of
Preferred Stock or any other securities of the Corporation, any Director of the
Corporation may be removed from office only for cause, and only by the
affirmative vote of the holders of 66-2/3 percent of the then outstanding shares
of Class A Common Stock. For purposes of this Section 4, "cause" shall
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mean the willful and continuous failure of a Director to substantially perform
such Director's duties to the Corporation (other than any such failure resulting
from incapacity because of physical or mental illness) or the willful engaging
by a Director in gross misconduct materially and demonstrably injurious to the
Corporation.
SECTION 5. Subject to the terms of any series of Preferred Stock or any
other securities of the Corporation, any action required or permitted to be
taken by the Stockholders of the Corporation may be effected at an annual or
special meeting of Stockholders of the Corporation duly called in accordance
with the Bylaws. Subject to the terms of any series of Preferred Stock or any
other securities of the Corporation, special meetings of Stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors or as
otherwise provided in the Bylaws of the Corporation. Notwithstanding anything
contained in this Certificate of Incorporation or the Bylaws to the contrary, no
action required or permitted to be taken at any meeting of Stockholders of this
Corporation may be taken by written consent without a meeting of Stockholders.
ARTICLE VI
PROCEDURES FOR CERTAIN BUSINESS TRANSACTIONS
SECTION 1. The provisions of Sections 2, 3, 4 and 5 of this Article VI
shall become effective at such time, but only from and after such time, as any
Interested Stockholder (as such term is defined in Section 6 hereof) shall have
acquired 15 percent of the combined Voting Power (as such term is defined in
Section 6 hereof) of all classes of Voting Stock (as such term is defined in
Section 6 hereof) then outstanding.
SECTION 2. In addition to any affirmative vote required by the Delaware
Law or by this Certificate of Incorporation or the terms of any series of
Preferred Stock or any other securities of the Corporation, and except as
otherwise expressly provided in Section 3 of this Article VI, the transactions
set forth below shall not be consummated without both the affirmative vote of
the holders of at least 80 percent of the combined Voting Power of the then
outstanding shares of all classes and series of Voting Stock and the affirmative
vote of a majority of the combined Voting Power of the then outstanding shares
of all classes and series of Voting Stock held by Disinterested Stockholders (as
such term is defined in Section 6 hereof), in each case voting together as a
single class. Such affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that a lesser percentage may be specified, by
law or by this Certificate of Incorporation or the terms of any series of
Preferred Stock or any other securities of the Corporation or in any agreement
with any national securities exchange or otherwise. The following transactions
shall be subject to the limitation in this Section 2:
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(A) Any merger or consolidation of the Corporation with any Interested
Stockholder or with any other corporation, whether or not itself an Interested
Stockholder, which is, or after such merger or consolidation would be, an
Affiliate or Associate (as such terms are defined in Section 6 hereof) of an
Interested Stockholder;
(B) Any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder of all or substantially all of the assets of the Corporation or the
assets of its Subsidiaries (as such term is defined in Section 6 hereof)
representing in the aggregate more than 75 percent of the total value of the
assets of the Corporation's consolidated Subsidiaries as reflected on the most
recent consolidated balance sheet of the Corporation and its consolidated
Subsidiaries, prepared in accordance with generally accepted accounting
principles then in effect;
(C) Any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder of any assets of the Corporation or of any Subsidiary of the
Corporation having an aggregate Fair Market Value (as such term is defined in
Section 6 hereof) of $1,000,000 or more, but less than the amount referred to in
the preceding paragraph (B) of this Section 2, and any merger or consolidation
of any Subsidiary of the Corporation having assets with an aggregate Fair Market
Value of $1,000,000 or more with any Interested Stockholder or with any other
corporation, whether or not itself an Interested Stockholder, which is, or after
such merger or consolidation would be, an Affiliate or Associate of an
Interested Stockholder;
(D) The issuance or transfer by the Corporation or any Subsidiary of the
Corporation (in one transaction or a series of transactions) to any Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder of any
securities of the Corporation or any Subsidiary of the Corporation in exchange
for cash, securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $1,000,000 or more, other than the issuance of
securities upon the conversion of convertible securities of the Corporation or
any Subsidiary of the Corporation which were not acquired by such Interested
Stockholder (or such Affiliate or Associate) from the Corporation or a
Subsidiary of the Corporation;
(E) The adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Stockholder or by any Affiliate or Associate of any Interested Stockholder; and
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(F) Any reclassification of securities (including any reverse stock split)
or recapitalization of the Corporation, or any merger or consolidation of the
Corporation with any of its Subsidiaries, or any other transaction (whether or
not with or into or otherwise involving any Interested Stockholder, Affiliate or
Associate), which in any such case has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding shares of any class or
series of capital stock or securities convertible into capital stock of the
Corporation or any Subsidiary of the Corporation which is directly or indirectly
beneficially owned by any Interested Stockholder or any Affiliate or Associate
of any Interested Stockholder.
SECTION 3. Notwithstanding anything to the contrary contained in this
Article VI, the provisions of Section 2 of this Article VI shall not be
applicable to any business transaction referred to in paragraphs (A) through (F)
of Section 2 above (hereinafter referred to as a "Business Combination") and any
such Business Combination shall require only such affirmative vote as is
required by law and by any other provision of this Certificate of Incorporation
and by the terms of any class or series of Preferred Stock or any other
securities of the Corporation, if the conditions specified in the applicable
provisions of the following have been met:
(A) The Business Combination has been approved by a majority of the
Disinterested Directors (as such term is defined in Section 6 hereof), and the
Interested Stockholder involved in such Business Combination had acquired the
status of an Interested Stockholder in a manner substantially consistent with an
agreement or memorandum of understanding approved by the Board of Directors
prior to the time such Interested Stockholder acquired such status and the
Interested Stockholder has complied with all requirements imposed by such
agreement or memorandum of understanding; or
(B) In the case of any Business Combination described in subsections (A),
(B), (D) or (F) of Section 2 of this Article VI, such Business Combination shall
have been approved by a majority of the Disinterested Directors; or
(C) All of the conditions specified in the following clauses (1) through
(6) shall have been met:
(1) The transaction constituting the Business Combination shall
provide for a consideration to be received by holders of the then outstanding
Common Stock in exchange for all of their shares in an amount equal to the
highest of the following:
(a) If applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid to
acquire any shares of Common Stock in question directly or indirectly
beneficially owned by the Interested Stockholder or its Affiliates or Associates
which were
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acquired within the two-year period immediately prior to the Announcement Date
(as such term is defined in Section 6 hereof) or in the transaction in which it
became an Interested Stockholder, whichever is higher; or
(b) The Fair Market Value per share of the class of Common Stock
in question on the Announcement Date or on the Determination Date (as such term
is defined in Section 6 hereof), whichever is higher; and
(2) If the transaction constituting the Business Combination shall
provide for a consideration to be received by holders of any class or series of
outstanding Voting Stock other than Common Stock, the aggregate amount as of the
date of the consummation of the Business Combination of all consideration to be
received by holders of shares of such Voting Stock shall be at least equal to
the highest of the following (it being intended that the requirements of this
clause shall be required to be met with respect to every class and series of
such outstanding Voting Stock, whether or not the Interested Stockholder
beneficially owns any shares of a particular class or series of Voting Stock):
(a) If applicable, the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid to
acquire any shares of such class or series of Voting Stock which are directly or
indirectly beneficially owned by the Interested Stockholder which were acquired
within the two-year period immediately prior to the Announcement Date or in the
transaction in which it became an Interested Stockholder, whichever is higher;
or
(b) If applicable, the highest preferential amount per share to
which the holders of shares of such class or series of Voting Stock are entitled
in the event of any voluntary or involuntary liquidation, dissolution or winding
up of the Corporation; or
(c) The Fair Market Value per share of such class or series of
Voting Stock on the Announcement Date or on the Determination Date, whichever is
higher; and
(3) The consideration to be received by holders of a particular class
or series of outstanding Voting Stock (including holders of Common Stock) shall
be in cash or in the same form as was previously paid to acquire shares of such
class or series of Voting Stock which are directly or indirectly beneficially
owned by the Interested Stockholder or its Affiliates or Associates, and, if the
Interested Stockholder directly or indirectly beneficially owns shares of any
class or series of Voting Stock which were acquired with varying forms of
consideration, the form of consideration to be received by holders of such class
or series of Voting Stock shall be either cash or the form used to acquire the
largest number of shares of such class or series of Voting Stock directly or
indirectly beneficially owned by it, it being
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understood that the prices determined in accordance with this Section 3(C)(3)
shall be appropriately adjusted in the event of any stock dividend, stock split
or subdivision or combination of shares or any similar event; and
(4) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business Combination:
(a) Except as approved by a majority of the Disinterested
Directors, there shall have been no failure to declare and pay at the regular
dates therefor the full amount of any dividends (whether or not cumulative)
payable on Preferred Stock or any class or series of capital stock having a
preference over Common Stock as to dividends or upon liquidation; and
(b) There shall have been no reduction in the annual rate of
dividends paid on Common Stock (except as necessary to reflect any subdivision
of such class of Common Stock) or as approved by a majority of the Disinterested
Directors, and no increase in such annual rate of dividends (as necessary to
prevent any such reduction) in the event of any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding shares of
Common Stock, unless the failure to so increase such annual rate is approved by
a majority of the Disinterested Directors; and
(c) Such Interested Stockholder shall not have become the direct
or indirect beneficial owner of any additional shares of Voting Stock, except as
part of the transaction in which it became an Interested Stockholder; and
(5) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the benefit,
directly or indirectly (except proportionately as a Stockholder), of any loan,
advance, guarantee, pledge or other arrangement provided by the Corporation or
any Subsidiary, whether in anticipation of or in connection with such Business
Combination or otherwise; and
(6) If applicable, a proxy or information statement describing the
proposed Business Combination and complying with the requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder (or any subsequent provisions replacing
the Exchange Act or such rules or regulations), shall be mailed to public
Stockholders of the Corporation at least 30 calendar days prior to the
consummation of such Business Combination (whether or not such proxy or
information statement is required to be mailed pursuant to the Exchange Act or
subsequent provisions).
SECTION 4. A majority of the Disinterested Directors of the Corporation
shall have the power and duty to determine, on the
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basis of information known to them after reasonable inquiry, all facts necessary
to determine compliance with this Article VI, and the good faith determination
of a majority of the Disinterested Directors on such matters shall be conclusive
and binding for all thereof.
SECTION 5. Nothing contained in this Article VI shall relieve any
Interested Stockholder from any fiduciary obligation imposed by law upon him to
the Corporation, its Stockholders or otherwise.
SECTION 6. The following definitions shall apply for purposes of this
Article VI:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act, as in effect on January 1, 1990.
"Announcement Date" shall mean the date of first public announcement
of the proposed Business Combination.
"Beneficial Owner" shall be a person or any of its Affiliates or
Associates who beneficially owns, directly or indirectly, any Common Stock or
other security or interest, or which such other person or any of its Affiliates
or Associates has the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or the right to vote or to direct the
vote pursuant to any agreement, arrangement or understanding, or which are
beneficially owned, directly or indirectly, by any other person with which such
person or any of its Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
shares of Voting Stock or such other security or interest.
"Determination Date" shall mean the date on which the Interested
Stockholder became an Interested Stockholder.
"Disinterested Director" shall mean any member of the Board of
Directors of the Corporation who is unaffiliated with, and not a nominee of, the
Interested Stockholder or any Affiliate or Associate of the Interested
Stockholder and who was a member of the Board of Directors prior to the time
that the Interested Stockholder became an Interested Stockholder, and any
successor of a Disinterested Director who is unaffiliated with, and not a
nominee of, the Interested Stockholder or any Affiliate or Associate of the
Interested Stockholder and who is recommended for election or elected to succeed
a Disinterested Director by a majority of Disinterested Directors then on the
Board of Directors.
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"Disinterested Stockholder" shall mean a Stockholder of the
Corporation who is not an Interested Stockholder or an Affiliate or an Associate
of an Interested Stockholder.
"Fair Market Value" shall mean, in the case of capital stock, the
highest closing sales price during the ten (10) business day period immediately
preceding the date in question of a share of such capital stock as reported (i)
in the consolidated transaction reporting system for the principal United States
of America securities exchange registered under the Exchange Act on which such
capital stock is listed, or, (ii) if such capital stock is not listed on any
such exchange, the highest closing sales price or bid quotation with respect to
a share of such capital stock during the ten (10) business period preceding the
date in question on the National Association of Securities Dealers, Inc.,
Automated Quotations System, or any system then in use, or, (iii) if neither (i)
and (ii) are available, then on the principal exchange in Canada on which such
capital stock is listed and, (iv) if no such quotations are available, the fair
market value on the date in question of a share of such capital stock as
determined by a majority of the Disinterested Directors in good faith, and in
the case of capital stock of any class or series which is not traded on any
securities exchange or in the over-the-counter market, or in the case of
property other than cash or capital stock, the fair market value of such capital
stock or property, as the case may be, on the date in question as determined by
a majority of the Disinterested Directors in good faith.
"Interested Stockholder" shall mean any person who is the beneficial
owner, directly or indirectly, of 15 percent or more of the then outstanding
shares of Common Stock, or is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the date in question was the
Beneficial Owner, directly or indirectly, of 15 percent or more of the then
outstanding shares of Common Stock, or is an assignee of or has otherwise
succeeded to the beneficial ownership of any shares of Common Stock which were
at any time within the two-year period immediately prior to the date in question
beneficially owned by any Interested Stockholder, if such assignment or
succession shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), or other public
distribution regardless of whether registered under the Securities Act.
Notwithstanding the foregoing, an Interested Stockholder shall not include
(i) any corporation of which the Corporation is a wholly owned subsidiary,
(ii) the Corporation or any Subsidiary of the Corporation or (iii) any employee
benefit plan of the Corporation or of any Subsidiary of the Corporation or any
person holding any Common Stock for or pursuant to the terms of any such
employee benefit plan. For the purposes of determining whether a person is an
Interested Stockholder, the number of shares of Common Stock deemed to be
outstanding shall include shares deemed to be owned by such person and the
Affiliate or Associate of such person, but
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<PAGE>
shall not include any other shares of Common Stock which may be issuable to
other persons pursuant to any agreement, arrangement or understanding, or upon
the exercise of conversion rights, exchange rights, warrants or options, or
otherwise.
"Subsidiary" shall mean a person of which the majority of the total
outstanding Voting Power is owned directly or indirectly, by another person or
by one or more other Subsidiaries of such other person or by such person and one
or more other Subsidiaries of such other person; PROVIDED, that for the purposes
of the definition of Interested Stockholder set forth in this Article VI, the
term "Subsidiary" shall mean only a person of which the majority of the total
outstanding Voting Power is owned by the Corporation, a Subsidiary of the
Corporation or by the Corporation and one or more of its Subsidiaries.
"Voting Power" when used with reference to the capital stock of, or
units of equity interests in, any person shall mean the power under ordinary
circumstances (or as a result of the occurrence of a contingency) to vote in the
election of Directors of such person (if such person is a corporation) or to
participate in the management and control of such person (if such person is not
a corporation).
"Voting Stock" shall mean capital stock of the Corporation of all
classes and series entitled to vote generally in the election of Directors of
the Corporation.
ARTICLE VII
ADDITIONAL STATUTORY PROCEDURES FOR BUSINESS
COMBINATIONS WITH INTERESTED STOCKHOLDERS
The Corporation does hereby adopt and incorporate herein by this reference
all of the provisions of Section 203 of the Delaware Law, except for the
provisions of Section 203(b)(4) of the Delaware Law, and such adopted provisions
shall govern and be applicable to the Corporation, notwithstanding any fact or
circumstance where the Corporation does not have a class of Voting Stock that is
(i) listed on a national securities exchange, (ii) authorized for quotation on
an interdealer quotation system of a registered national securities association
or (iii) held of record by more than 2,000 Stockholders.
ARTICLE VIII
INDEMNIFICATION
SECTION 1. 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, by reason of the fact that such person is or was a Director or an
officer of the Corporation, against expenses (including, without
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<PAGE>
limitation, attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred thereby in connection with such action, suit or
proceeding to the fullest extent permitted by the Delaware Law and any other
applicable law as from time to time in effect. Such right of indemnification
shall not be deemed to be exclusive of any rights to which any such Director or
officer may otherwise be entitled. The foregoing provisions of this Section 1
shall be deemed to be a contract between the Corporation and each Director and
officer of the Corporation serving in such capacity at any time while this
Section 1 is 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
theretofore existing or any action, suit or proceeding theretofore or thereafter
brought or threatened based in whole or in part upon any such state of facts.
SECTION 2. The Corporation may 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, by reason of the fact that such person is or was an employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a Director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred thereby in connection with such action, suit or
proceeding to the extent permitted by and in the manner set forth in and
permitted by the Delaware Law and any other applicable law as from time to time
in effect. Such right of indemnification shall not be deemed to be exclusive of
any other rights to which any such person may otherwise be entitled.
ARTICLE IX
LIABILITY FOR BREACH OF FIDUCIARY DUTY
To the fullest extent permitted by the Delaware Law, a Director of the
Corporation shall not be liable to the Corporation or its Stockholders for
monetary damages for breach of fiduciary duty as a Director. In furtherance
thereof, a Director of the Corporation shall not be personally liable to the
Corporation or its Stockholders for monetary damages for breach of fiduciary
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 Law, as the same
exists or hereafter may be amended, or (iv) for any transaction from which the
Director derived an improper personal benefit. If the Delaware Law hereafter is
amended to authorize the further elimination or limitation of the liability of
Directors, then the liability of Directors shall be eliminated or limited to the
full extent authorized by the Delaware Law, as so amended.
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<PAGE>
ARTICLE X
RIGHT TO AMEND CERTIFICATE OF INCORPORATION
Subject to the provisions of this Certificate of Incorporation, the
Corporation reserves the right to amend, alter 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 subject to
this reservation except that irrespective of any requirements of law and any
other provisions of this Certificate of Incorporation, or the terms of any
series of Preferred Stock, or any other securities of the Corporation (and
notwithstanding the fact that a lesser percentage may be specified by law, this
Certificate of Incorporation or the terms of any series of Preferred Stock or
any other securities of the Corporation), the affirmative vote of the holders of
66-2/3 percent or more of the then outstanding shares of Common Stock shall be
required to amend, alter, repeal or adopt any provision inconsistent with
Articles V, VI, VII, VIII, IX or X of this Certificate of Incorporation.
-29-
<PAGE>
This Amended and Restated Certificate of Incorporation has been duly
adopted in accordance with Delaware Law.
IN WITNESS WHEREOF, Physician Partners, Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed by David Goldberg, its
President, and attested to by Tim Dupell, its Secretary, this 18th day of
September, 1996.
PHYSICIAN PARTNERS, INC.
By: /s/ David Goldberg
-------------------
David Goldberg
ATTEST:
By: /s/Tim Dupell
-----------------------------
Tim Dupell
Secretary
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<PAGE>
CERTIFICATE OF CORRECTION FILED TO CORRECT
CERTAIN ERRORS IN THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE
ON SEPTEMBER 20, 1996
PHYSICIAN PARTNERS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
1. The name of the corporation is Physician Partners, Inc.
2. That an Amended and Restated Certificate of Incorporation of Physician
Partners, Inc. was filed by the Secretary of State of Delaware on September 20,
1996 and that said Certificate requires correction as permitted by Section 103
of the General Corporation Law of the State of Delaware.
3. The inaccuracies or defects of said Certificate to be corrected are
ARTICLE IV, SECTION 2 (A)(3), to read as follows:
"(3) RESTRICTION ON TRANSFER. No holder of Class A Common Stock may
sell, assign, transfer, pledge or otherwise encumber or dispose of any share of
Class A Common Stock or of any interest therein prior to the fifth anniversary
of the date of the issuance (the "Issuance Date") of such share to such holder;
PROVIDED, HOWEVER, that with respect to the shares of Class A Common Stock held
by holders who acquired such shares pursuant to exercise of stock options issued
by the Corporation, the date of grant of such stock options to such holders
shall be deemed to be the Issuance Date of such shares."; and
ARTICLE IV, SECTION 2 (A)(4)(b), to read as follows:
"(b) The initial number of shares of Class B Common Stock into which
shares of Class A Common Stock are convertible shall be subject to adjustment in
order to, among other things, provide certain anti-dilution protections.
Adjustments would be made in the event that the Corporation shall (i) pay a
dividend in, or make distribution of shares, of Class B Common Stock, (ii)
subdivide its outstanding shares of Class B Common Stock into a greater number
of such shares, (iii) combine its outstanding shares of Class B Common Stock
into a smaller number of such shares, (iv) consolidate or merge with or into
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of Class A Common Stock), or (v) sell or
convey all or substantially all of the Corporation's assets in their entirety to
another corporation (other than a consideration or merger which does not result
in any reclassification or change of Class A Common Stock). The total number of
shares of Class B Common Stock into which shares of Class A Common Stock are
convertible shall be adjusted so that
<PAGE>
the holder of Class A Common Stock that is surrendered for conversion after
one of the events listed above is entitled to receive the number of shares of
Class B Common Stock which such holder would have been entitled to receive
immediately following the occurrence of such event had such Class A Common
Stock been converted immediately prior to the occurrence of such event. Any
such adjustment made pursuant to this Section 2(A)(4)(b) shall, in the case
of a stock dividend or distribution, become effective as of the record date
therefor and, in the case of a subdivision, combination, grant, conveyance or
merger, be made as of the effective date thereof."
IN WITNESS WHEREOF, Physician Partners, Inc. has caused this Certificate to
be signed by David M. Goldberg, its President and Chief Executive Officer, this
2nd day of December, 1996.
PHYSICIAN PARTNERS, INC.
By: /s/ David M. Goldberg
---------------------------
David M. Goldberg
President and CEO
<PAGE>
CERTIFICATE OF CORRECTION FILED TO CORRECT
CERTAIN ERRORS IN THE AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE
ON SEPTEMBER 20, 1996
PHYSICIAN PARTNERS, INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
1. The name of the corporation is Physician Partners, Inc.
2. That an Amended and Restated Certificate of Incorporation of Physician
Partners, Inc. was filed by the Secretary of State of Delaware on September 20,
1996 and that said Certificate requires correction as permitted by Section 103
of the General Corporation Law of the State of Delaware.
3. The inaccuracies or defects of said Certificate to be corrected are
ARTICLE IV, SECTION 2 (A)(2), to read as follows:
"(2) VOTING. Subject to the provision for adjustment hereinafter set
forth below, at every meeting of stockholders (the "Stockholders") of the
Corporation, every holder of Class A Common Stock shall be entitled to one vote
in person or by proxy for each share of Class A Common Stock standing in such
Stockholder's name on the transfer books of the Corporation. In the event that
the Corporation shall (i) pay a dividend in, or make distribution of shares, of
Class B Common Stock, (ii) subdivide its outstanding shares of Class B Common
Stock into a greater number of such shares or (iii) combine its outstanding
shares of Class B Common Stock into a smaller number of such shares, then, in
each such event, the number of votes per share to which holders of shares of
Class A Common Stock were entitled immediately prior to such event shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Class B Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Class B Common
Stock that were outstanding immediately prior to such event. The holders of
shares of Class A Common Stock and the holders of shares of Class B Common Stock
shall vote together as one class on all matters submitted to a vote of
shareholders of the Corporation."
<PAGE>
ARTICLE X, to read as follows:
"Subject to the provisions of this Certificate of Incorporation, the
Corporation reserves the right to amend, alter 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 subject to this reservation except that irrespective of any
requirements of law and any other provisions of this Certificate of
Incorporation, or the terms of any series of Preferred Stock, or any other
securities of the Corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, this Certificate of Incorporation or the
terms of any series of Preferred Stock or any other securities of the
Corporation), the affirmative vote of the holders of 66-2/3 percent or more
of the then outstanding shares of Common Stock shall be required to amend,
alter, repeal or adopt any provision inconsistent with Articles V, VI, VII,
VIII, IX or X of this Certificate of Incorporation; PROVIDED, HOWEVER, that
in the event any such provision requires the affirmative vote of the holders
of more than 66-2/3 percent of Articles V, VI, VII, VIII, IX, or X of this
Certificate of Incorporation of the then outstanding shares of Common Stock
to take any action thereunder, such super-majority vote shall be required
to amend, alter, repeal or adopt any such provision."
<PAGE>
IN WITNESS WHEREOF, Physician Partners, Inc. has caused this Certificate to
be signed by David M. Goldberg, its President and Chief Executive Officer, this
2nd day of January, 1997.
PHYSICIAN PARTNERS, INC.
By:/s/David M. Goldberg
----------------------
David M. Goldberg
President and Chief
Executive Officer
<PAGE>
ARTICLES OF INCORPORATION
OF
PHYSICIAN PARTNERS HEALTHFIRST, P.C.
--------------------------------------------
ARTICLE I
NAME
The name of this corporation (the "Corporation") is Physician Partners
HealthFirst, P.C.
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Oregon
is 10535 NE Glisan, Portland, Oregon 97220. The name of the Corporation's
registered agent at such address is Russell A. Dow, M.D.
ARTICLE III
PURPOSE
The professional service to be rendered by the Corporation is the practice
of medicine. The purpose for which the Corporation is organized is to engage in
any lawful act or activity for which corporations may be organized under the
Oregon Professional Corporation Act, including, without limitation, the
operation of medical offices, laboratories and other facilities necessary or
incidental to the practice of medicine.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
SECTION 1. The Corporation shall have the authority to issue 1,000,000
shares of common stock, no par value ("Common Stock").
<PAGE>
ARTICLE V
SOLE SHAREHOLDER
The name and address of the sole shareholder of the Corporation is:
HealthFirst Medical Group, P.C.
10535 NE Glisan
Portland, Oregon 97220
HealthFirst Medical Group, P.C., an Oregon professional corporation and the
sole shareholder of the Corporation, is incorporating the Corporation solely for
the purpose of effecting a "reorganization" (as defined in the Internal Revenue
Code of 1986, as amended) pursuant to ORS 58.108(6).
ARTICLE VI
COMPOSITION OF BOARD OF DIRECTORS
AND SHAREHOLDER MEETINGS
SECTION 1. The number of directors of the Corporation shall be as
specified in the Bylaws of the Corporation (the "Bylaws"), and such number may
from time to time be increased or decreased in accordance with the provisions
thereof. The directors of the Corporation shall be elected at annual meetings
of the shareholders of the Corporation, as such meetings are convened pursuant
to the Bylaws, and shall serve until the annual meeting of the shareholders of
the Corporation at which their respective successors are elected and until such
successors have been duly elected and qualified. The names and addresses of the
initial directors of the Corporation, all of whom are licensed to practice
medicine in the State of Oregon, are as follows:
Names Addresses
----- ---------
Matthew M. Shelley, M.D. 2 Jefferson Parkway, #H10
Lake Oswego, OR 97035
Russell A. Dow, M.D. 2580 NW Westover Road
Portland, OR 97210
Leigh C. Dolin, M.D. 3444 NE Alameda
Portland, OR 97212
Resa L. Hyzer, M.D. 1309 SE Condor Place
Gresham, OR 97080
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<PAGE>
Malcolm L. McAninch, M.D. 6750 SW Mariah
Portland, OR 97225
Alar Mirka, M.D. 8715 NW Hazeltine Street
Portland, OR 97229
Gloria J. Myers, M.D. 18655 SW Gassner Road
Aloha, OR 97007
James C. Ritzenthaler, M.D. 7825 Linden Road
Portland, OR 97225
John D. Teller, M.D. 2210 SW Schaeffer Road
West Linn, OR 97068
Vern R. Williams, M.D. 14244 SW Yearling Way
Beaverton, OR 97005
Barbara K. Ferre, M.D. 3215 NE US Grant Place
Portland, OR 97212
SECTION 2. Newly-created directorships resulting from any increase in the
number of directors of the Corporation may be filled by the Board of Directors
of the Corporation (the "Board of Directors"), or as otherwise provided in the
Bylaws, and any vacancies on the Board of Directors resulting from death,
resignation, removal or other cause shall be filled by the affirmative vote of a
majority of the remaining directors of the Corporation then in office, even if
such directors constitute less than a quorum of the Board of Directors, or by a
sole remaining director of the Corporation, or as otherwise provided in the
Bylaws.
SECTION 3. Any director of the Corporation may be removed from office only
for cause, and only by the affirmative vote of the holders of two-thirds of the
then-outstanding shares of Common Stock. For purposes of this Section 3,
"cause" shall mean the willful and continuous failure of a director of the
Corporation to substantially perform such director's duties to the Corporation
(other than any such failure resulting from incapacity because of physical or
mental illness) or the willful engaging by a director of the Corporation in
gross misconduct materially and demonstrably injurious to the Corporation.
SECTION 4. Any action required or permitted to be taken by the
shareholders of the Corporation may be effected (a) at an annual or special
meeting of shareholders of the Corporation duly called in accordance with the
Bylaws or (b) by a unanimous written consent of such shareholders of the
Corporation.
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<PAGE>
ARTICLE VII
INDEMNIFICATION
SECTION 1. 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, by reason of the fact that such person is or was a director or an
officer of the Corporation, against expenses (including, without limitation,
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, as the case may be, to the fullest extent and in the manner set
forth in and permitted by the Oregon Professional Corporation Act, the Oregon
Business Corporation Act and any other applicable law as may be from time to
time in effect (collectively, "Oregon Law"). Such right of indemnification
shall not be deemed to be exclusive of any other rights to which such director
or officer may be entitled apart therefrom. The foregoing provisions of this
Section 1 shall be deemed to be a contract between the Corporation and each
director and officer of the Corporation who serves in such capacity at any time
while this Section 1 and the relevant provisions of Oregon Law, if any, are in
effect, and no repeal or modification thereof shall affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought or
threatened based in whole or in part upon any such state of facts.
SECTION 2. The Corporation may 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, by reason of the fact that such person is or was an employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, as the case may be, to the extent and in the manner set
forth in and permitted by Oregon Law as may be from time to time in effect.
Such right of indemnification shall not be deemed to be exclusive of any other
rights to which any such person may be entitled apart therefrom.
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<PAGE>
ARTICLE VIII
LIABILITY FOR BREACH OF FIDUCIARY DUTY
To the fullest extent permitted by Oregon Law, a director of the
Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for breach of fiduciary duty as such a director. A director of
the Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as such a
director, except for liability (i) for any breach of such director's duty of
loyalty to the Corporation or its shareholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under ORS 60.367 or (iv) for any transaction from which such director
derived an improper personal benefit. If Oregon Law is hereafter amended to
authorize the further elimination or limitation of the liability of directors of
the Corporation, then the liability of directors shall be eliminated or limited
to the fullest extent authorized by Oregon Law, as so amended.
DATED: September __, 1996
HEALTHFIRST MEDICAL GROUP, P.C.
By:/s/Russel A. Dow, M.D.
----------------------
Title: Sole Incorporator
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<PAGE>
BYLAWS
OF
PHYSICIAN PARTNERS HEALTHFIRST, P.C.
These Bylaws are intended to conform to the requirements of the Oregon
Professional Corporation Act (the "Act").
ARTICLE I
BUSINESS OF THE CORPORATION
Section 1. - The Business.
The business of the Corporation is to render the professional service of
the practice of medicine and to provide facilities and services necessary and
incidental to the practice of medicine. The professional service in Oregon
shall be rendered only through individuals who are licensed to practice medicine
in the state of Oregon and who are Shareholders, Directors, officers, employees
or agents of the Corporation.
Section 2. - Disqualification of an Employee.
If an employee or agent engaged in any part of the Corporation's practice
in Oregon is legally disqualified from practicing medicine in the state of
Oregon or assumes a public office which prohibits him from practicing medicine
in the state of Oregon, the employee or agent shall immediately sever his
employment relationship with the Corporation.
Section 3. - Restriction on Corporate Acts.
The Corporation shall commit no act in Oregon which is prohibited to a
person licensed to practice medicine in the state of Oregon.
Section 4. - Compliance with Rules.
The Corporation shall comply with all rules and regulations of Oregon
applicable to professional corporations practicing medicine in Oregon and shall
not perform any services without first filing articles of incorporation with the
office of the Secretary of State.
Page 1 - BYLAWS
<PAGE>
ARTICLE II
SHAREHOLDERS
Section 1. - Place.
Shareholders meetings shall be held at the registered office of this
Corporation unless a different place shall be designated by the Board of
Directors.
Section 2. - Annual Meeting.
The annual meeting of the Shareholders shall be held on the third Thursday
of September unless otherwise designated by the Board of Directors. The meeting
shall be held for the purpose of electing Directors and for the transaction of
such other business as may come before the meeting. If the day fixed for the
annual meeting is a legal holiday, the meeting shall be held on the next
succeeding business day. If the election of Directors is not held on the day
designated herein, the Board of Directors shall cause the election to be held at
a special meeting of the Shareholders on the next convenient day.
Section 3. - Special Meetings.
Special meetings of the Shareholders may be called by the President, the
Board of Directors or the written demand of the holders of not less than one-
tenth (1/10) of all the Shares entitled to vote at the meeting.
Section 4. - Notice.
Written or printed notice stating the place, hour and day of the meeting
and, in case of a special meeting, the purpose or purposes for which the meeting
is called, shall be delivered not less than ten (10) days nor more than sixty
(60) days before the date of the meeting, either personally or by mail, by or at
the direction of the President, the Secretary, or the officer or persons calling
the meeting to each Shareholder of record entitled to vote at the meeting. The
notice and the effective date of the notice shall be determined as provided in
the Act.
Section 5. - Quorum.
Except for the proposes of removing of a Director, a majority of the Shares
issued, outstanding and entitled to vote upon the subject matter at the time of
the meeting, represented in person or by proxy, shall constitute a quorum for
the transaction of business at any meeting of the Shareholders. For the
purposes of removing a Director, a quorum shall consist of seventy-five percent
(75%) of the Shares issued, outstanding and entitled to vote, represented in
person or by proxy.
Page 2 - BYLAWS
<PAGE>
Section 6. - Adjourned Meetings.
If there is no quorum present at any annual or special meeting the
Shareholders present may adjourn to such time and place as may be decided upon
by the holders of the majority of the Shares present, in person or by proxy, and
notice of such adjournment shall be given in accordance with Section 4 of this
Article. If a quorum is present, the meeting may be adjourned to such time and
place as may be decided and announced by a majority of the Shareholders present,
and no notice of such adjournment need be given. At any adjourned meeting at
which a quorum is present, any business may be transacted which could have been
transacted at the meeting originally called.
Section 7. - Voting.
Each Shareholder entitled to vote on the subject matter shall be entitled
to one vote for each Share of stock standing in the name of the Shareholder on
the books of the Corporation at the time of the closing of the Transfer Books
for the meeting, whether represented and present in persons or by proxy. Except
as otherwise specified in the Articles of Incorporation or these Bylaws, the
affirmative vote of the holders of a majority of the Shares of each class
represented at the meeting and entitled to vote on the subject matter shall be
the act of the Shareholders. The Shareholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Shareholders to leave less than a quorum.
Section 8. - Proxies.
At all meetings of Shareholders, a Shareholder may vote in person or by
proxy executed in writing by the Shareholder or by his duly authorized attorney
in fact, provided such proxy may only be given to a Shareholder of this
Corporation. No proxy shall be valid after eleven (11) months from the date of
its execution, unless otherwise provided in the proxy and coupled with an
interest as provided in the Act.
Section 9. - Closing of Transfer Books.
The Stock Transfer Books shall be closed for the meetings of the
Shareholders and for the payment of dividends during such periods (not to exceed
50 days) as from time to time may be fixed by the Board of Directors. During
such periods, no stock shall be transferred.
Section 10. - Approval of New Shareholder Physicians.
Upon recommendation of the Board of Directors, new shareholder physicians
shall be admitted as Shareholders with the concurrence of a simple majority of
the existing Shareholders.
Page 3 - BYLAWS
<PAGE>
Section 11. - Nominations for Directors.
For terms beginning on or after January 1, 1997, Shareholders may submit
nominations for Director positions. Shareholders shall submit written
nominations no later than thirty (30) days in advance of any special or
annual meeting at which the Shareholders will vote on the election of
Directors.
ARTICLE III
DIRECTORS
Section 1. - In General, Number.
The business and affairs of the Corporation shall be managed by a Board
consisting of a minimum of nine (9) Directors and maximum of twelve (12)
Directors, as established by resolution of the Board. Until January 1, 1998,
the Board shall be composed of eleven (11) Directors, of which seven (7) shall
be former shareholder physicians in Metropolitan Clinic, P.C., and four (4)
shall be former shareholder physicians in Suburban Medical Clinic, Inc. The
members of the initial Board of Directors shall hold office until December 31,
1997. Beginning January 1, 1998, the Board of Directors shall consist of a
minimum of nine (9) Directors and a maximum of eleven (11) Directors, as
established by resolution of the Board.
Section 2. - Qualifications.
2.1 Eligibility to be a Director.
Each Director shall have been a Shareholder of the Corporation, a
Shareholder of Suburban Medical Clinic, Inc., or a Shareholder of The Children's
Clinic, P.C. for a period of at least two (2) years, and shall be and
continuously remain a Shareholder of the Corporation. A person may be a
Director of the Corporation even if that person is not licensed to practice
medicine in the State of Oregon, provided that a majority of the Directors are
so licensed.
2.2 Nominations
The Board of Directors shall nominate persons to serve as Directors no less
than fifteen (15) days in advance of any special or annual meeting at which the
Shareholders will vote on the election of Directors.
Section 3. - Terms.
The term of initial Directors shall be one (1) year. Beginning January 1,
1998, the Board of Directors shall be composed of a minimum of nine (9) and a
maximum of eleven (11) Directors. There shall be three (3) groups of Directors,
Group A, Group B, and Group
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<PAGE>
C. Group A shall be composed of a minimum of two (2) and a maximum of four (4)
Directors; Group B shall be composed of three (3) Directors; Group C shall be
composed of a minimum of two (2) and a maximum of four (4) Directors. The terms
of the Group A Directors expire on December 31 after the first annual
Shareholders' meeting after their election. The terms of the Group B Directors
shall expire on December 31 after the second annual Shareholders' meeting after
their election. The terms of the Group C Directors shall expire on December 31
after the third annual Shareholders' meeting after their election. At each
annual Shareholders' meeting thereafter, Directors shall be chosen for terms of
three (3) years, to succeed those whose terms expire. There shall be no
limitation upon the number of successive terms which a Director may serve.
The term of each Director shall begin on January 1 after his or her
election by Shareholders as provided in Article II, Section 7 above, and shall
continue until his or her successor has been elected and qualified.
Section 4. - Powers.
4.1 General Powers.
The corporate powers, business, property and interests of this
Corporation shall be exercised, conducted and controlled by the Board of
Directors, which shall have all power necessary to conduct, manage and
control its affairs, including, but not limited to, appointing committees,
and to make such rules and regulations as it may deem necessary as provided
by the Act; to appoint and remove all officers, agents and employees; to
prescribe their duties and fix their compensation; to call special meetings
of Shareholders whenever it is deemed necessary by the Board, to incur
indebtedness and give securities, notes and mortgages for same.
4.1 Records.
It shall be the duty of the Board to cause a complete record to be kept of
all the minutes, acts and proceedings of its meetings.
4.3 Compensation Plan.
The Board shall have the power to adopt annual Compensation Plan for the
Corporation. In adopting the Compensation Plan, the Board may take into account
the mix of compensation received from fee-for-service payments and from
capitation or other risk sharing payments, and shall have the authority to
retain consultants or other experts. The Board may seek input from the
Shareholders of the Corporation, to assist it in the development of a
Compensation Plan which, in its sole discretion, properly compensates physicians
and recognizes incentives contained in payment agreements between the
Corporation and various payors, including managed care plans.
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4.4 Financial Affairs.
The Board shall have the power to set policies and benefit levels for the
Corporation's benefit and retirement plans. The Board shall have the power to
declare dividends out of the surplus profits of this Corporation when such
profits shall, in the opinion of the Board, warrant the same.
4.5 Sale of Stock or Assets, Merger.
The Board shall have the power to submit resolutions calling for the sale
of the Corporation's stock or all or substantially all of its assets, or a plan
of merger, to the Shareholders for their approval.
4.6 Participation in Business Relationships.
The Board shall have the power to determine whether the Corporation shall
participate in business ventures appropriate to furthering its objectives. The
Board shall also have the power to determine participation in managed care plans
and other contractual relationships with payors and insurers.
4.7 Quality Assurance and Utilization Management.
The Board shall have the power to set policies for quality and utilization
management.
4.8 Site Operations.
Except as limited by the Compensation Plan, the Board, in conjunction with
site physician and administrative management, shall have the power to prescribe
the operational structures and policies for the various sites at which medical
services are provided by the Corporation. These duties shall include, but not
be limited to, implementing staffing and management plans at each site,
reassigning personnel to different sites to meet needs, and hiring of additional
staff, including physician extenders.
4.9 Appointment, Supervision of Medical Director.
The Board shall have the power to appoint, and supervise the duties of, the
Medical Director. In the event that the Board does not appoint a Medical
Director, or in the event of a vacancy in that position, the President shall
serve until a replacement is appointed. The Board shall set the compensation,
if any, of the Medical Director. The Board shall supervise the Medical Director
in the performance of his or her duties.
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4.10 Approval of Additional Physicians.
The Board of Directors shall determine whether additional physicians will
be hired. The Board may delegate this responsibility to the Executive Committee
or other committee of the Board.
Section 5. - Vacancies.
Vacancies in the Board of Directors shall be temporarily filled by the
affirmative vote of a majority of the remaining Directors. A temporary Director
or Directors shall hold office until the first meeting of the Shareholders held
thereafter, at which time such vacancy or vacancies shall be permanently filled
by persons nominated by the Board and elected according to the procedure
specified in Section 1 of this Article III. During the existence of any vacancy
or vacancies, the surviving or remaining Directors, though less than a quorum,
shall possess and may exercise all of the powers vested in the Board of
Directors.
Section 6. - Annual Meeting.
There shall be an annual meeting of the Board of Directors which shall be
held within thirty (30) days after the annual meeting of the Shareholders.
Section 7. - Special Meetings.
Special meetings may be called from time to time by the President or any
two (2) of the Directors. Any business may be transacted at any special
meeting.
Section 8. - Quorum, Manner of Acting.
A majority of the Directors in office immediately before a meeting begins
shall constitute a quorum. The act of a majority of the Directors present at a
meeting at which a quorum is present shall be the act of the Board of Directors.
If less than a quorum is present at a meeting, a majority of the Directors
present may adjourn the meeting without further notice, other than announcement
at the meeting, until a quorum is present. Interested Directors may be counted
for quorum purposes.
Section 9. - Notice.
Notice of all Directors meetings shall be given in accordance with the Act.
Notice shall be given of the annual meeting of the Board of Directors. One day
prior notice shall be given for all special meetings of the Board, but the
purpose of special meetings need not be stated in the notice.
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Section 10. - Compensation.
By resolution of the Board of Directors, each Director may be reimbursed
for his expenses, if any, for attending each meeting of the Board of Directors,
or may be paid a fixed fee for attending each meeting of the Board of Directors.
No such payment shall preclude any Director from serving the Corporation in any
other capacity.
Section 11. - Removal or Resignation of Directors.
Any Director may resign by delivering written notice of the resignation to
the Board of Directors or an officer of the Corporation. All or any number of
the Directors may be removed, with or without cause, at a meeting expressly
called for that purpose by a vote of the holders of not less than two-thirds
(2/3) of the Shares then entitled to vote at an election of Directors.
Section 12. - Presumption of Assent.
A Director of the Corporation who is present at a meeting of the Board of
Directors at which action on any corporate matter is taken shall be presumed to
have assented to the action taken, unless he objects at the beginning of the
meeting or upon his arrival to holding the meeting or transacting business at
the meeting, or his dissent is entered in the minutes of the meeting, or he
delivers written notice of his dissent to the Corporation during or immediately
after the meeting. Such right to dissent shall not apply to a Director who
voted in favor of an action.
Section 13. - Board Committees.
13.1 - Executive Committee.
13.1.1 - General Purposes.
The Executive Committee of the Board of Directors is intended to
streamline and facilitate the management function of the Board. The
responsibilities of the Executive Committee will include: the evaluation of
recommendations coming from other committees in order to assure compatibility
with planned corporate goals, after which the Committee will accept, modify or
suggest modification of those recommendations; negotiations with third parties
and responsibility for budgeting, accounting, planning and finance. The
Committee will meet at least monthly to review the Corporation's financial
statements.
13.1.2 - Membership, Term, and Elections.
The Committee will be comprised of four (4) members. The Officers of
the Corporation shall serve as the Executive Committee.
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13.1.3 - Meeting Attendance; Special Limitations.
In addition to regular Executive Committee members, the Chief
Administrative Officer and the Medical Director shall attend each meeting, but
shall have no vote. Other administrative staff, Department Heads, and Site
Medical Directors may attend at the invitation of the Executive Committee, but
shall have no vote.
13.2 - Standing Committees.
Standing Committees will be formed and overseen by the Board of Directors
with members appointed by the Board.
13.2.1. - Quality Assurance Committee.
The Quality Assurance Committee will review performance issues
relative to patient satisfaction, as well as the overall patient satisfaction
program. The Committee will develop review criteria, and will review patient
care based on these criteria.
13.2.2 - Compensation Committee.
The Compensation Committee shall propose an Annual Compensation
Plan to the Board of Directors for its adoption. In developing the Compensation
Plan, the Compensation Committee may take into account the mix of compensation
received from fee-for-service payments and from capitation or other risk sharing
payments, and shall have the authority to retain consultants or other experts
with the approval of the Board of Directors.
ARTICLE IV
OFFICERS AND AGENTS - GENERAL PROVISIONS
Section 1. - Number, Election and Term.
Officers of the Corporation shall be a President, a Secretary, a
Treasurer, and a Chairman. Officers shall be appointed by the Board of
Directors at its first meeting, and at each regular annual meeting of the
Board of Directors thereafter. Each officer shall hold office until the next
succeeding annual meeting of the Directors and until his successor shall be
appointed. Any one person may hold more than one office if it is deemed
advisable by the Board of Directors.
Section 2. - Qualifications.
Until January 1, 1998, two officers each shall be former physician
shareholders in Metropolitan Clinic, P.C. and two officers each shall be
former physician shareholders in Suburban Medical Clinic, Inc. Each officer
shall be and continuously remain a Shareholder
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<PAGE>
of the Corporation. To be eligible for appointment as an officer, a Shareholder
must be eligible for election as a Director pursuant to the provisions of
Article III, Section 2 of these Bylaws.
Section 3. - Additional Officers and Agents.
The Board of Directors may appoint and create such other officers and
agents as it deems advisable and may prescribe their duties.
Section 4. - Resignation or Removal.
Any officer or agent of the Corporation may resign from such position by
delivering written notice of the resignation to the Board of Directors, but
such resignation shall be without prejudice to the contract rights, if any,
of the Corporation. Any officer or agent appointed by the Board of Directors
may be removed by the Board of Directors whenever in its judgment the best
interests of the Corporation would be served thereby, but such removal shall
be without prejudice to the contract rights, if any, of the person so
removed. Appointment of an officer or agent shall not of itself create
contract rights.
Section 5. - Vacancies.
Vacancies in any office caused by any reason shall be filled by the Board
of Directors at any meeting by selecting a suitable and qualified person to act
during the unexpired term.
Section 6. - Salaries.
The Board of Directors may establish salaries of all the officers, agents
and other employees of the Corporation, and may change such salaries from time
to time. The Medical Director shall receive a salary. No officer shall be
prevented from receiving such salary by reason of the fact that he is also a
Director of the Corporation. All Directors, including interested Directors, are
specifically authorized to participate in the voting of such compensation
irrespective of their interest.
ARTICLE V
DUTIES OF THE OFFICERS
Section 1. - President.
The President shall be a member of the Board of Directors and shall have
general charge and control of the affairs of the Corporation subject to the
direction of the Board of Directors; sign as President all Certificates of Stock
of this Corporation; perform all duties required by the Bylaws of this
Corporation, and as may be assigned from time to time by the Board of Directors;
and shall make such reports to the Board of Directors and
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Shareholders as may be required. The President shall vote all Shares of stock
which the Corporation holds in any other corporation.
Section 2. - Secretary.
The Secretary shall perform such duties as shall be assigned by the
Board of Directors. The Secretary shall keep a record of the proceedings at
the meetings of the Shareholders and the Board of Directors and shall give
notice as required in these Bylaws of all such meetings; have custody of all
the books, records and papers of the Corporation, except such as shall be in
charge of the Treasurer or some other person authorized to have custody or
possession thereof by the Board of Directors; sign all Certificates of Stock
of this Corporation; from time to time make such reports to the officers,
Board of Directors and Shareholders as may be required and shall perform such
other duties as the Board of Directors may from time to time delegate.
Section 3. - Treasurer.
The Treasurer shall keep accounts of all monies of the Corporation
received or disbursed; from time to time make such reports to the officers,
Board of Directors and Shareholders as may be required, and perform such
other duties as the Board of Directors prescribe.
Section 4. - Chairman.
The Chairman shall preside at all meetings of the Shareholders and
Directors; in the case of absence, disability or death of the President,
shall perform and be vested with all the duties and powers of the President,
until the President has resumed such duties or the President's successor is
appointed; and shall perform such other duties as the Board of Directors
prescribes.
ARTICLE VI
STOCK
Section 1. - Certificates.
The Shares of stock of this Corporation shall be represented by Stock
Certificates in a form adopted by the Board of Directors and every person who
becomes a Shareholder shall be entitled to a Certificate of Stock. All
Certificates shall be consecutively numbered by class.
Section 2. - Transfer of Certificates.
All Certificates of Stock transferred by endorsement shall be
surrendered, canceled and new Certificates issued to the purchaser or
assignee.
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Section 3. - Transfer of Shares.
Shares of stock shall be transferred only on the books of the Corporation
by the holder thereof, in person or by his attorney, and no transfers of
Certificates of Stock shall be binding upon this Corporation until this
Section and Sections 2 and 7 of this Article have been satisfied.
Section 4. - Lost Certificates.
In the case of loss, mutilation or destruction of a Certificate of Stock,
a duplicate Certificate may be issued upon such terms as the Board of
Directors shall prescribe.
Section 5. - Dividends.
The Board of Directors may from time to time declare, and the Corporation
may then pay, dividends on its outstanding Shares in the manner and upon the
terms and conditions provided by the Act and in its Articles of Incorporation.
Section 6. - Working Capital.
Before the payment of any dividends or the making of any distributions of
the net profits, the Board of Directors may set aside out of the net profits
or other fund of the Corporation such sum or sums as in their discretion they
think proper, as a working capital or as a reserve fund to meet
contingencies. The Board of Directors may increase, diminish or vary the
capital of such reserve fund in their discretion.
Section 7. - Restrictions on Transfer, Redemption.
7.1 GENERAL. No shares of stock of this Corporation or Certificates
representing such Shares shall be transferred in violation of any law or of
any restriction on such transfer (1) set forth in the Articles of
Incorporation or amendments thereto, or these Bylaws; or (2) contained in any
right of first refusal or other Agreement restricting such transfer which
Agreement has been filed with the Corporation, and, if Certificates have been
issued, reference to which restriction is made on the Certificates
representing such shares. The Corporation may rely in good faith upon the
opinion of its counsel as to such legal or contractual violation unless the
issue has been finally determined by a court of competent jurisdiction. The
Corporation and any party to any such agreement shall have the right to have
a restrictive legend imprinted upon any such Certificates and any Certificate
issued in replacement or exchange thereof or with respect thereto.
7.1.1 RESTRICTIONS ON ENCUMBRANCES DURING LIFE. No Shareholder
shall encumber his Shares in any manner whatsoever without the prior written
consent of each of the other Shareholders of the Corporation. For purposes of
this Section, the term "encumber" shall mean the voluntary or involuntary
creation of any form of security interest in the Shares by the
Shareholder on behalf of any other party or the attachment,
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sequestration, garnishment, foreclosure of judgment or levy of or upon the
Shares by any other person. Any attempt by any Shareholder to encumber his
Shares except as provided in this section or any attempt by any person to
obtain possession of the Shares by any means or method shall be considered an
election by such Shareholder to sell such Shares. In such event, the terms of
Section 7.1.2 hereinafter shall apply, and such Shareholder shall be deemed
to have offered his Shares for sale as required in said Paragraph on the date
the Corporation has actual knowledge of the Shareholder's attempt to encumber
such Shares or of another party's attempt to obtain possession of such
Shares.
7.1.2 RESTRICTIONS ON SALE OF SHARES DURING LIFE. Any Shareholder
who, during such Shareholder's lifetime, attempts to sell, transfer or
otherwise dispose of all or any part of his Shares, with or without
consideration, shall be deemed to have offered the Shares for sale to the
Corporation at the price hereafter determined, and the Corporation shall
purchase all the offered Shares within sixty (60) days after the offer.
7.1.3 REDEMPTION OF SHARES UPON LOSS OR REVOCATION OF PROFESSIONAL
LICENSE. Upon the loss or revocation of a Shareholder's license with the
State of Oregon to render professional medical service, a Shareholder shall
be deemed to have offered the Shares for sale to the Corporation at a price
hereafter determined, and the Corporation shall purchase all of the offered
Shares within sixty (60) days after the offer.
7.1.4 REDEMPTION OF SHARES UPON TERMINATION OF EMPLOYMENT. If a
Shareholder's employment with Corporation is terminated for any reason, or if
Corporation redeems the Shareholder's shares in Corporation, the Shareholder
shall be deemed to have offered the Shares for sale to the Corporation at a
price hereafter determined, and the Corporation shall purchase all of the
offered Shares within sixty (60) days after the offer.
7.1.5 REDEMPTION OF SHARES AT DEATH. Thirty (30) days after the
death of any Shareholder the Personal Representative of the deceased
Shareholder's estate or the successor in interest of such Shares shall be
deemed to have offered all of the decedent's Shares for sale to the
Corporation at the price determined hereafter. The Corporation shall purchase
the Shares within sixty (60) days after the offer.
7.1.6 BANKRUPTCY. In the event that any Shareholder (a "Bankrupt
Shareholder") files a voluntary petition in bankruptcy, is adjudicated a
bankrupt, makes an assignment for the benefit of creditors, or consents to
the appointment of a receiver or trustee with respect to all or a substantial
part of such Shareholder's assets (an "Event of Bankruptcy"), the Corporation
shall purchase all Shares owned by the Bankrupt Shareholder at the price set
forth in Section 7.2. Promptly after the occurrence of an Event of Bankruptcy,
the Bankrupt Shareholder shall give to the Corporation written notice of such
Event of Bankruptcy. Within sixty (60) days of the receipt of notice of such
Event of Bankruptcy, the Corporation shall purchase the Bankrupt
Shareholder's Shares.
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Section 7.2. - Price
The purchase price of each Share shall be one dollar ($1).
Section 7.3. - Terms of Payment.
7.3.1 LUMP SUM PAYMENT OF PURCHASE PRICE. The Corporation shall pay
the purchase price for the Shares in a single lump sum in cash. Such payment,
if elected, shall be made on the Closing Date as defined in this Section 7.3.
7.3.2 DELIVERY OF CERTIFICATES. On the Closing Date, the selling
Shareholder shall deliver to the Corporation Stock Certificates with proper
endorsements necessary to complete transfer on the Corporation's Stock
Transfer Books and also shall execute and deliver all documents which are
required to transfer Shares to the Corporation. Any Shareholder who fails to
timely execute and deliver Stock Certificates as required shall be deemed to
have properly transferred his Shares, and the Corporation shall be entitled
to treat the Shares as fully redeemed upon its tender of the purchase price
to the Shareholder.
7.3.3 PLACE AND TIME OF CLOSING. Sales shall be closed at the home
office of the Corporation at a time (during its ordinary business hours)
fixed by the Corporation, on or before the expiration of the applicable time
period for purchase of the Shares set forth in Section 7.1 (the "Closing
Date").
7.3.4 FAILURE OF THE CORPORATION TO PURCHASE SHARES. In the event
the Corporation fails to make any payment when due, the selling Shareholder
shall give the Corporation written notice of such default, and the
Corporation shall have ten (10) days after its receipt of such notice within
which to remedy the default; if such default is not cured within the ten (10)
day period, the unpaid principal balance and any unpaid accrued interest
thereon shall become immediately due and collectible at the option of the
selling Shareholder.
Section 8. - Insurance.
The Corporation shall have the option to purchase life or disability
insurance on its Shareholders to insure its liabilities for the purchase of
their stock pursuant to this Article.
ARTICLE VII
SEAL
There shall be no corporate seal.
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<PAGE>
ARTICLE VIII
WAIVER OF NOTICE
Whenever any notice is required to be given to any Shareholder or
Director of this Corporation, a waiver signed by the person or persons
entitled to such notice, whether before or after the time stated therein,
shall be equivalent to the giving of such notice.
ARTICLE XI
ACTION BY SHAREHOLDERS OR DIRECTORS
WITHOUT A MEETING
Any action required to be taken at a meeting of the Shareholders or
Directors of this Corporation, or any other action which may be taken at a
meeting of the Shareholders or Directors, may be taken without a meeting if a
consent in writing setting forth the actions so taken shall be signed by all
the Shareholders or Directors entitled to vote with respect to the subject
matter thereof. Such consent shall have the same effect and force as a
unanimous vote of said Shareholders or Directors.
ARTICLE X
AMENDMENTS
Any and all of these Bylaws may be altered, amended, repealed or
suspended by the affirmative vote of a majority of the Shareholders.
ARTICLE XI
INDEMNIFICATION
Section 1. - Indemnification.
The Corporation shall indemnify to the fullest extent not prohibited by
law any person who was or is a party or is threatened to be made a party to
any Proceeding against all expenses (including attorney fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by the
person in connection with such Proceeding.
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Section 2. - Advancement of Expenses.
Expenses incurred by a Director or officer of the Corporation in defending
a Proceeding shall in all cases be paid by the Corporation in advance of the
final disposition of such Proceeding at the written request of such person, if
the person:
1. Furnishes the Corporation a written affirmation of the person's
good faith belief that such person has met the standard of
conduct described in the Oregon Business Corporation Act or is
entitled to be indemnified by the Corporation under any other
indemnification rights granted by the Corporation to such person;
and
2. Furnishes the Corporation a written undertaking to repay such
advance to the extent it is ultimately determined by a court that
such person is not entitled to be indemnified by the Corporation
under this Article or under any other indemnification rights
granted by the Corporation to such person.
Such advances shall be made without regard to the person's ability to repay
such advances and without regard to the person's ultimate entitlement to
indemnification under this Article or otherwise.
Section 3. - Definition of Proceeding.
The term "Proceeding" shall include any threatened, pending, or completed
action, suit, or proceeding, whether brought in the right of the Corporation or
otherwise and whether of a civil, criminal, administrative, or investigative
nature, in which a person may be or may have been involved as a party or
otherwise by reason of the fact that the person is or was a Director or officer
of the Corporation or a fiduciary within the meaning of the Employee Retirement
Income Security Act of 1974 with respect to any employee benefit plan of the
Corporation, or is or was serving at the request of the Corporation as a
Director, officer, or fiduciary of an employee benefit plan or another
corporation, partnership, joint venture, trust, or other enterprise, whether or
not serving in such capacity at the time any liability or expense is incurred
for which indemnification or advancement of expenses can be provided under this
Article.
Section 4. - Non-Exclusivity and Continuity of Rights.
This Article: (i) shall not be deemed exclusive of any other rights to
which those indemnified may be entitled under any statute, agreement, general or
specific action of the Board of Directors, vote of Stockholders or otherwise,
both as to action in the official capacity of the person indemnified and as to
action in another capacity while holding office, (ii) shall continue as to a
person who has ceased to be a Director or officer,
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(iii) shall inure to the benefit of the heirs, executors, and administrators of
such person, and (iv) shall extend to all claims for indemnification or
advancement of expenses made after the adoption of this Article.
Section 5. - Amendments.
Any repeal of this Article shall only be prospective and no repeal or
modification hereof shall adversely affect the rights under this Article in
effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any Proceeding.
Section 6. - Insurance.
The Corporation may, in its sole discretion, purchase insurance to fund the
costs of indemnification or advancement of expenses undertaken pursuant to this
Article XI. The purchase of such insurance shall in no way obligate the
Corporation to indemnify a person who is not entitled to indemnification under
the provisions of this Article XI or the Oregon Business Corporation Act.
IDENTIFICATION
I hereby certify that I was the Secretary of the Corporation for its
meeting of the Shareholders of Physician Partners HealthFirst, P.C. on December
23, 1996, and that the foregoing Bylaws in seventeen typewritten pages numbered
consecutively from 1 to 17 were and are the Bylaws adopted by the Shareholders
of the Corporation at that meeting.
/s/ Vern A. Williams, M.D.
---------------------------------------
Vern A. Williams, M.D., Secretary
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RESTATED ARTICLES OF INCORPORATION
OF
PHYSICIAN PARTNERS CORVALLIS, P.C.
--------------------------------------------
THE FOLLOWING RESTATED ARTICLES OF INCORPORATION WERE ADOPTED BY THE SOLE
SHAREHOLDER OF PHYSICIAN PARTNERS CORVALLIS, P.C., AN OREGON PROFESSIONAL
CORPORATION, ON DECEMBER 19, 1996 IN ACCORDANCE WITH THE OREGON PROFESSIONAL
CORPORATION ACT AND THE OREGON BUSINESS CORPORATION ACT.
ARTICLE I
NAME
The name of this corporation (the "Corporation") is Physician Partners
Corvallis, P.C.
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Oregon
is 3680 NW Samaritan Drive, Corvallis, Oregon 97330. The name of the
Corporation's registered agent at such address is David H. Cutsforth, Jr., M.D.
ARTICLE III
PURPOSE
The professional service to be rendered by the Corporation is the practice
of medicine. The purpose for which the Corporation is organized is to engage in
any lawful act or activity for which corporations may be organized under the
Oregon Professional Corporation Act, including, without limitation, the
operation of medical offices, laboratories and other facilities necessary or
incidental to the practice of medicine.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
The Corporation shall have the authority to issue 500 shares of Common
Stock, no par value ("Common Stock").
<PAGE>
ARTICLE V
SOLE SHAREHOLDER
The name and address of the sole shareholder of the Corporation is:
The Corvallis Clinic, P.C.
3680 NW Samaritan Drive
Corvallis, Oregon 97330.
The Corvallis Clinic, P.C., an Oregon professional corporation and the sole
shareholder of the Corporation, is incorporating the Corporation solely for the
purpose of effecting a "reorganization" (as defined in the Internal Revenue Code
of 1986, as amended) pursuant to ORS 58.108(6).
ARTICLE VI
COMPOSITION OF BOARD OF DIRECTORS
AND SHAREHOLDER MEETINGS
SECTION 1. The number of directors of the Corporation shall be as
specified in the Bylaws of the Corporation (the "Bylaws"), and such number may
from time to time be increased or decreased in accordance with the provisions
thereof. The directors of the Corporation shall be elected at meetings of the
shareholders of the Corporation, as such meetings are convened pursuant to the
Bylaws, and shall serve until their respective successors have been duly elected
and qualified in accordance with the Bylaws. The names and addresses of the
initial directors of the Corporation, all of whom are licensed to practice
medicine in the State of Oregon, are as follows:
Names Addresses
----- ---------
David H. Cutsforth, Jr., M.D. 3284 Chapel Drive
Philomath, Oregon 97370
John R. Ladd, M.D. 3265 NW Roosevelt
Corvallis, Oregon 97330
Darrel D. Bibler, M.D. 3300 NW Crest Drive
Corvallis, Oregon 97330
Janice L. Frost, M.D. 6707 NW Niagra Place
Corvallis, Oregon 97330
Jess W. Hickerson, M.D. 6841 NW Grandview Drive
Corvallis, Oregon 97330
-2-
<PAGE>
Christopher P. Swan, M.D. 2455 Marion SE
Albany, Oregon 97321
SECTION 2. Newly-created directorships resulting from any increase in the
number of directors of the Corporation may be filled by the Board of Directors
of the Corporation (the "Board of Directors"), or as otherwise provided in the
Bylaws, and any vacancies on the Board of Directors resulting from death,
resignation, removal or other cause shall be filled by the affirmative vote of a
majority of the remaining directors of the Corporation then in office, even if
such directors constitute less than a quorum of the Board of Directors, or by a
sole remaining director of the Corporation, or as otherwise provided in the
Bylaws.
SECTION 3. Any action required or permitted to be taken by the
shareholders of the Corporation may be effected (a) at an annual or special
meeting of shareholders of the Corporation duly called in accordance with the
Bylaws or (b) by a unanimous written consent of such shareholders of the
Corporation.
ARTICLE VII
INDEMNIFICATION
SECTION 1. 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, by reason of the fact that such person is or was a director or an
officer of the Corporation, against expenses (including, without limitation,
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, as the case may be, to the fullest extent and in the manner set
forth in and permitted by the Oregon Professional Corporation Act, the Oregon
Business Corporation Act and any other applicable law as may be from time to
time in effect (collectively, "Oregon Law"). Such right of indemnification
shall not be deemed to be exclusive of any other rights to which such director
or officer may be entitled apart therefrom. The foregoing provisions of this
Section 1 shall be deemed to be a contract between the Corporation and each
director and officer of the Corporation who serves in such capacity at any time
while this Section 1 and the relevant provisions of Oregon Law, if any, are in
effect, and no repeal or modification thereof shall affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought or
threatened based in whole or in part upon any such state of facts.
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SECTION 2. The Corporation may 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, by reason of the fact that such person is or was an employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, as the case may be, to the extent and in the manner set
forth in and permitted by Oregon Law as may be from time to time in effect.
Such right of indemnification shall not be deemed to be exclusive of any other
rights to which any such person may be entitled apart therefrom.
ARTICLE VIII
LIABILITY FOR BREACH OF FIDUCIARY DUTY
To the fullest extent permitted by Oregon Law, a director of the
Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for breach of fiduciary duty as such a director. A director of
the Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as such a
director, except for liability (i) for any breach of such director's duty of
loyalty to the Corporation or its shareholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under ORS 60.367 or (iv) for any transaction from which such director
derived an improper personal benefit. If Oregon Law is hereafter amended to
authorize the further elimination or limitation of the liability of directors of
the Corporation, then the liability of directors shall be eliminated or limited
to the fullest extent authorized by Oregon Law, as so amended.
DATED: December 19, 1996
PHYSICIAN PARTNERS CORVALLIS, P.C.
By: /s/ David H. Cursforth, Jr., M.D.
---------------------------------
David H. Cutsforth, Jr., M.D.
President
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BYLAWS
OF
PHYSICIAN PARTNERS CORVALLIS, P.C.
<PAGE>
BYLAWS
OF
PHYSICIAN PARTNERS CORVALLIS, P.C.
ARTICLE ITEM PAGE NUMBER
I Offices. . . . . . . . . . . . . . . . . . . . . . . . . 1
II Business of the Corporation. . . . . . . . . . . . . . . 1
III Meetings of Shareholders . . . . . . . . . . . . . . . . 1
IV Directors. . . . . . . . . . . . . . . . . . . . . . . . 3
V Notices: Written Action by Directors
or Shareholders. . . . . . . . . . . . . . . . . . . . 5
VI Officers . . . . . . . . . . . . . . . . . . . . . . . . 5
VII President. . . . . . . . . . . . . . . . . . . . . . . . 6
VIII Vice President . . . . . . . . . . . . . . . . . . . . . 6
IX Secretary. . . . . . . . . . . . . . . . . . . . . . . . 6
X Treasurer. . . . . . . . . . . . . . . . . . . . . . . . 7
XI Employment Contracts . . . . . . . . . . . . . . . . . . 7
XII Certificate for Shares . . . . . . . . . . . . . . . . . 8
XIII General Provisions . . . . . . . . . . . . . . . . . . . 8
XIV Board Committees . . . . . . . . . . . . . . . . . . . . 9
XV Peer Review Committee;
Professional Standards Committee. . . . . . . . . . . . 9
XVI Indemnification. . . . . . . . . . . . . . . . . . . . . 14
XVII Amendments . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
BYLAWS
OF
PHYSICIAN PARTNERS CORVALLIS, P.C.
ARTICLE I
OFFICES
Sec. 1. The corporation's registered office shall be located at 3680 N.W.
Samaritan Drive, Corvallis, Oregon.
Sec. 2. The corporation may also have offices at other locations within
the State of Oregon, as the Board of Directors may from time to time determine
or as the business of the corporation may require.
ARTICLE II
BUSINESS OF THE CORPORATION
Sec. 1. The business of the corporation is to conduct the professional
practice of medicine and to provide other services and perform other functions
necessary and incidental thereto. The professional services shall be rendered
only through individuals who are licensed to render that particular service
within the State of Oregon and who are shareholders, directors, officers,
employees, or agents of the corporation.
Sec. 2. The corporation shall not do any act which is prohibited to a
person licensed to practice medicine in the State of Oregon.
Sec. 3. The corporation shall comply with all rules and regulations of the
Oregon State Board of Medical Examiners applicable to professional medical
corporations and shall not perform any services without first obtaining a
Certificate of Registration from the Oregon State Board of Medical Examiners.
Sec. 4. The corporation shall conduct its business in accordance with ORS
Chapter 58.
ARTICLE III
MEETINGS OF SHAREHOLDERS
Sec. 1. Meetings of the shareholders shall be held at the office of the
corporation in Corvallis, Oregon, or at such other place as shall be designated
in the notice of meeting.
Sec. 2. An annual meeting of shareholders shall be held in March of each
year at which time the shareholders shall elect officers, elect members of the
Board of Directors
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and transact other business which is properly brought before the meeting.
Sec. 3. Special meetings of the shareholders for any purpose may be called
by the President or the Board of Directors and shall be called by the President
upon the written demand of the holders of not less than one-tenth of all the
votes entitled to be cast on any issue proposed to be considered at the meeting.
The demand shall describe the purposes for which the meeting is to be held and
shall be signed, dated and delivered to the Secretary.
Sec. 4. Notice shall be given of the annual meeting time and place not
less than ten (10) days before the meeting date. Notice of a special meeting
shall be given by the Secretary by delivering a written notice of said meeting
to each shareholder not less than ten (10) days before the meeting date. The
attendance of any shareholder at a meeting shall be deemed a waiver of any
defect in the giving of notice to said shareholder of said meeting except as
otherwise provided by law.
Sec. 5. An agenda of topics to be discussed at any meeting of shareholders
shall be included with any notice of a meeting, but other topics may be added to
the agenda at the meeting.
Sec. 6. A majority of the votes entitled to be cast on the matter by the
shareholders present in person or represented by proxy constitutes a quorum for
action on that matter. Once a share is represented for any purpose at a
meeting, it shall be present for quorum purposes for the remainder of the
meeting and for any adjournment of that meeting unless a new record date is or
must be set for the adjourned meeting. If a quorum is not present or
represented at any shareholders' meeting, the shareholders present in person or
represented by proxy shall have the power, without notice other than an
announcement at the meeting, to adjourn the meeting from time to time until a
quorum is present or represented. A new record date must be set if the meeting
is adjourned to a date more than 120 days after the date fixed for the original
meeting.
Sec. 7. If a quorum exists, action on a matter, other than on the election
of directors, actions on matters concerning the Common Stock of the corporation,
amendments to the Articles of Incorporation or these Bylaws, or as otherwise
hereinafter provided, is approved if the votes cast favoring the action exceed
the votes cast opposing the action, unless a greater number of affirmative votes
is required by law, the Articles of Incorporation or these Bylaws. Unless
otherwise provided in the Articles of Incorporation, directors are elected by a
plurality of the votes cast by the shares entitled to vote in the election at a
meeting at which a quorum is present. The vote of the holders of two-thirds of
the outstanding Common Stock shall be required to approve any actions or matters
concerning the Common Stock of the corporation, amendments to the Articles of
Incorporation or these Bylaws, and the election of directors.
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Sec. 8. A shareholder may vote either in person or by a proxy. Prior to
the time the proxy is to be exercised, a notification of proxy must be
communicated by the grantor of the proxy in writing to the Administrator or to
any member of the Board. A proxy may be given only to another shareholder of
the corporation. No proxy shall be valid after thirty (30) days from the date
of its execution, unless otherwise provided in the proxy. A voting trust may
not be created to vote the shares of the corporation.
ARTICLE IV
DIRECTORS
Sec. 1. The Board of Directors shall consist of six (6) directors, each
serving a three (3) year term. A director elected at an annual meeting shall
hold office until the annual meeting of shareholders at which the director's
term of office expires and until the director's successor shall have been
elected. Each director shall be and continuously remain a shareholder during
the director's term of office. Directors must be persons licensed to practice
medicine in the State of Oregon.
Sec. 2. The Board of Directors shall manage and control the business and
affairs of the corporation, but the Board may delegate certain duties to the
Administrator hired by the corporation.
Sec. 3. The Board shall approve recruiting, and set the employment
contract terms for shareholder physicians, for non-shareholder physicians, and
other professional providers.
Sec. 4. Any vacancy occurring in the Board of Directors may be filled by
the affirmative vote of a majority of the remaining directors though less than a
quorum of the Board of Directors. A director so elected to fill a vacancy shall
be elected to serve until the next annual meeting of the shareholders; at the
next annual meeting of shareholders, the shareholders shall elect a director to
serve the remainder of the term to which the original vacating director was
elected. Any directorship to be filled by reason of an increase in the number
of directors shall be filled by election at an annual meeting or at a special
meeting of shareholders called for that purpose.
Sec. 5. Meetings of the Board of Directors, regular or special, may be
held either within or without the State of Oregon, at such place as is
designated by the President or by the Board.
Sec. 6. The regular annual meeting of the Board of Directors shall be held
immediately following the annual meeting of the shareholders, at the time and
place determined by the Board of Directors.
Sec. 7. Special meetings of the Board of Directors may be called by the
President
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alone, or by the President or Secretary on the written request of two directors.
Sec. 8. A notice of any meeting of the Board of Directors, together with
an agenda of topics scheduled to be discussed at such meeting, shall be
delivered to each director and shareholder not less than twenty-four (24) hours
prior to such meeting. Other items may be added to the agenda at the meeting.
Sec. 9. A majority of the total number of directors shall constitute a
quorum for the transaction of business at a meeting of the Board of Directors.
The act of two-thirds of the directors present and voting at a meeting attended
by a quorum shall be the act of the Board of Directors.
Sec. 10. A director's attendance at a meeting shall constitute a waiver of
notice of the meeting, except where a director attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting was
not lawfully convened.
Sec. 11. Executive session shall be in effect upon declaration by the
Presiding Officer at any time the Board is considering peer review information
and may be declared in other circumstances upon action of two-thirds of the
directors present and voting at a meeting at which a quorum is present.
Executive session will be called only for the purpose of discussing sensitive or
peer review matters. No action will be taken in executive session except with
respect to peer review matters. "Executive session" means any meeting or part
of a meeting in which attendance and participation is closed to persons who are
not voting members of the Board or otherwise required for deliberation or
consideration of the matter for which executive session was called.
Sec. 12. Any shareholder may attend any meeting of the Board of Directors
other than an executive session, but a shareholder shall not be entitled to
participate in the proceedings at said meeting unless granted permission to do
so by the Board of Directors.
Sec. 13. Minutes of all meetings of the Board of Directors, except
executive session, shall be prepared and delivered to each shareholder within
five (5) working days after the meeting. Within ten (10) working days following
the adoption of actions by the Board of Directors, such actions may be
challenged by the holders of not less than twenty percent of the outstanding
Common Stock. Such challenge shall be presented to the President. The Board
action in question shall then be held in abeyance until resolved by a meeting of
the shareholders. The President shall call a special meeting of shareholders to
hear the objection and to resolve the issue. If any action of the Board of
Directors is not challenged in the foregoing manner within said period, the
action shall be conclusively binding upon the corporation on the tenth day after
such action was adopted.
Sec. 14. The Board of Directors shall be compensated for their services as
follows:
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The President shall be paid annual compensation equal to eight (8%)
percent of the average gross salary and bonuses from the corporation
of all shareholders for the year.
The other members of the Board of Directors shall be paid annual
compensation equal to four (4%) percent of the average gross salary
and bonuses from the corporation of all shareholders for that year.
Sec. 15. Any director elected by the shareholders or appointed by the
Board of Directors may be removed by the shareholders whenever in their
judgement the best interest of the corporation will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed.
ARTICLE V
NOTICES; WRITTEN ACTION BY DIRECTORS OR SHAREHOLDERS
Sec. 1. Whenever, under the provisions of the Oregon Professional
Corporation Act or of these Bylaws, notice is required to be given to any
director or shareholder, it shall not be construed to mean personal notice, but
such notice may be given in writing and delivered to that director or
shareholder.
Sec. 2. Whenever any notice is required to be given to any shareholder or
director under the provisions of the Oregon Professional Corporation Act or by
these Bylaws, a waiver signed at any time by the person entitled to this notice
shall be deemed equivalent to the giving of this notice.
Sec. 3. Any action required by the Oregon Professional Corporation Act to
be taken at a meeting of directors or shareholders, or any other action which
may be taken at such a meeting, may be taken without a meeting if a quorum is
represented by written ballot, and the number of votes required to pass such an
action is received.
ARTICLE VI
OFFICERS
Sec. 1. The principal officers of the corporation shall consist of a
President, a President-Elect who will also serve as the Vice President, a
Secretary and a Treasurer, each of whom shall be elected by the shareholders.
The President-Elect shall have a minimum of one year's experience as a member of
the Board of Directors. The offices of Secretary and Treasurer may be held by
the same person.
Sec. 2. The shareholders at their annual meeting shall choose a President,
a Vice President, who will be the President-Elect, a Secretary and a Treasurer,
each of whom must be a member of the Board of Directors who has served as a
director for at least one
5
<PAGE>
year at the time of election. Each officer shall be and continuously remain a
shareholder.
Sec. 3. The Board of Directors may elect or appoint other officers.
Except as specifically provided in these Bylaws, the salaries, the term of
office, the duties and the authority of such other officers of the corporation
shall be fixed by the Board of Directors.
Sec. 4. The officers of the corporation shall hold office until their
successors are elected and qualified. Any officer elected by the shareholders
or appointed by the Board of Directors may be removed by the shareholders
whenever in their judgment the best interests of the corporation will be served
thereby, but such removal shall be without prejudice to the contract rights, if
any, of the person so removed. If the office of any of the officers becomes
vacant for any reason, the vacancy shall be filled by the Board of Directors.
ARTICLE VII
PRESIDENT
Sec. 1. The President shall be the chief executive officer of the
corporation. The President shall preside at all meetings of the shareholders
and Board of Directors, shall have general and active management of the business
of the corporation, and shall supervise the execution of all orders and
resolutions of the Board of Directors. The President may delegate the day to
day operation and management of the corporation to an Administrator hired by the
Board of Directors.
Sec. 2. The President shall execute all documents, except when the law or
when the Board of Directors requires or authorizes another agent to execute a
document, either jointly with the President or solely, or when the President
designates another person to execute the document.
ARTICLE VIII
VICE PRESIDENT
Sec. 1. The Vice President shall have the same powers as, and may be
required to perform all of the duties of, the President in the absence of the
President or in the event of the President's disability or inability to act or
refusal to act. The Vice President shall also serve as the President-Elect.
ARTICLE IX
SECRETARY
Sec. 1. The Secretary shall attend all meetings of the shareholders and
Board of Directors and record and sign the minutes of all proceedings in a book
to be kept for that purpose. The Secretary shall give, or cause to be given,
notice of all meetings to the
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shareholders and members of the Board of Directors and shall perform such other
duties as may be prescribed by the Board of Directors or President, who shall
supervise the Secretary. The Secretary shall execute any documents on behalf of
the corporation when the law or the Board of Directors requires the Secretary to
do so or when the President designates that the Secretary shall do so. The
Secretary may delegate duties to the Administrator hired by the Board of
Directors.
ARTICLE X
TREASURER
Sec. 1. The Treasurer shall have the custody of the corporate funds and
securities, shall keep full and accurate accounts of receipts and disbursements
in the corporate books, and shall deposit all monies and other valuables in the
name and to the credit of the corporation in the depositories designated by the
Board of Directors.
Sec. 2. The Treasurer shall disburse the funds of the corporation when
proper to do so and obtain receipts for the disbursements. The Treasurer shall
render to the President and directors, at the regular meetings of the Board or
whenever they may require, an account of all the Treasurer's transactions as
Treasurer and of the financial condition of the corporation.
Sec. 3. The Treasurer may delegate duties to the Administrator hired by
the Board of Directors.
ARTICLE XI
EMPLOYMENT CONTRACTS
Sec. 1. Subject to Article IV, Section 3, the Board of Directors may
employ persons who are licensed medical practitioners in the State of Oregon to
provide medical services to patients of the corporation, regardless of whether
said persons are shareholders of the corporation. The Board of Directors shall
negotiate the terms of said contracts. Unless otherwise provided by the Board
of Directors, the Employment Contracts shall be signed in behalf of the
corporation by the President.
Sec. 2. The Board of Directors may employ an Administrator as general
manager of the corporation and may fix the Administrator's compensation, term of
service, duties and powers. The Administrator need not be licensed to practice
medicine in the State of Oregon. Unless otherwise directed by the Board of
Directors, the Employment Contract for the Administrator shall be signed on
behalf of the corporation by the President. Alternatively, the corporation may
enter into a practice management agreement for the management of the
corporation.
Sec. 3. The Board of Directors may employ a Medical Director for the
corporation,
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and may set the responsibilities and compensation for the Medical Director.
ARTICLE XII
CERTIFICATE FOR SHARES
Sec. 1. The shares of the corporation shall be represented by certificates
signed by the President and Secretary.
Sec. 2. A new stock certificate shall be issued to the person entitled to
the certificate upon surrender to the corporation or its transfer agent of a
stock certificate, duly endorsed or accompanied by proper evidence of
succession, assignment, or authority to transfer; the old certificate shall be
canceled and the transaction shall be recorded upon the books of the
corporation.
Sec. 3. The Board of Directors may direct a new certificate to be issued
in place of any certificate previously issued by the corporation and which is
alleged to have been lost or destroyed if the person making the allegations
supplies the corporation with an affidavit of the alleged facts. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of the alleged lost or destroyed certificate, or the owner's legal
representative, to advertise the same in a manner required by the Board of
Directors and/or to give the corporation an indemnity bond in an amount
sufficient to indemnify the corporation against any claim that may be made
against it with respect to the certificate alleged to have been lost or
destroyed.
ARTICLE XIII
GENERAL PROVISIONS
Sec. 1. All checks or demands for money and notes of the corporation shall
be signed by the officer or officers or other person or persons that the Board
of Directors designates.
Sec. 2. The corporation shall not have a corporate seal.
Sec. 3. Proper books of account shall be kept of all business transactions
of the corporation. The books shall be kept on an accrual basis of accounting.
Each shareholder or the shareholder's duly authorized representative shall have
free access to examine the business records at any time during normal business
hours. The books of account shall be audited as of the close of each calendar
fiscal year by an independent certified public accountant. A copy of the report
of the examination shall be delivered to each of the shareholders.
Sec. 4. Such books of account, all correspondence, papers and documents
shall
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belong to the corporation and shall be kept at the main office of the
corporation, unless a practice management agreement has been adopted pursuant to
Article XI, Section 2, in which case appropriate documents may be maintained by
the manager appointed pursuant to the practice management agreement.
ARTICLE XIV
BOARD COMMITTEES
Sec. 1. The Board of Directors may create one or more Board committees and
appoint members of the Board of Directors to serve on them. Each Board
committee shall have two or more members. The creation of a committee and
appointment of members to it must be approved by a majority of all directors in
office when the action is taken. By resolution of the Board of Directors, Board
committee members may be paid reasonable compensation for services on committees
and their expenses of attending committee meetings. Subject to any limitation
imposed by the Board of Directors or by law, each committee may exercise all the
authority of the Board of Directors in the management of the corporation except
that a committee may not take any action that a committee is prohibited from
taking by the Oregon Business Corporation Act.
Sec. 2. Subject to the provisions of law, the Board of Directors shall
have the power at any time to change the number of Board committee members, fill
Board committee vacancies, change any Board committee members and change the
functions and terminate the existence of a Board committee.
Sec. 3. Each Board committee shall conduct its meetings in accordance with
the applicable provisions of these Bylaws relating to meetings and action
without meetings of the Board of Directors. Each Board committee shall adopt
any further rules regarding its conduct, keep minutes and other records and
appoint subcommittees and assistants as it deems appropriate.
ARTICLE XV
PEER REVIEW COMMITTEE; PROFESSIONAL STANDARDS COMMITTEE
Sec. 1. The following standing committees, to be known respectively as the
Peer Review Committee and the Professional Standards Committee, are hereby
established:
a. The Peer Review Committee shall consist of eleven members, five of
whom shall be the members of the Professional Standards Committee appointed by
the Board of Directors in accordance with subsection (b) of this Section 1 (who
shall also serve on the Peer Review Committee by reason of and for the duration
of their membership on the Professional Standards Committee), and six of whom
shall be appointed directly to the Peer Review Committee by the Board of
Directors to terms of three years that shall be staggered so that the terms of
two such members expire each year. The Board of
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Directors shall also annually appoint a member of the Peer Review Committee to
serve as Chairman of the committee. Notwithstanding the fact that a member of
the Peer Review Committee appointed under this subsection (a) of this Section 1
may be appointed for a specific term, the Board of Directors, at its discretion,
may replace any such appointed member at any time during that member's term for
any reason satisfactory to the Board. Any such members may also be reappointed
to serve consecutive terms. The members of the Peer Review Committee may, in
the discretion of the Board of Directors, be compensated annually for their
service on the committee.
b. The Professional Standards Committee shall consist of five members,
each appointed by the Board of Directors to serve a three-year term. Initially,
one member shall be appointed to a one-year term; two members shall be appointed
to serve a two-year term; and two members shall be appointed to serve a
three-year term. The Board of Directors shall also annually appoint a member of
the Professional Standards Committee to serve as Chairman of the committee.
Notwithstanding the fact that a member of the committee may be appointed for a
specific term, the Board of Directors, at its discretion, may replace any such
member at any time during that member's term for any reason satisfactory to the
Board and any such replacement member shall serve on both the Peer Review
Committee and the Professional Standards Committee in accordance with this
Article XV. Any member of the committee may be reappointed, except that any
member who has served two consecutive terms shall not be eligible for
reappointment until at least one year has elapsed after the member ceases to
serve on the Professional Standards Committee. The members of the Professional
Standards Committee may, in the discretion of the Board of Directors, be
compensated annually for their service on the committee.
Sec. 2. The duties of the Peer Review Committee are to perform the
following activities and functions relating to issues of (i) quality or
efficiency of care, (ii) professional competence or judgment, (iii) breach of
patient confidence, (iv) inappropriate behavior related to patients, other
clinical personnel or occurring in clinical situations, (v) unprofessional
conduct which may disrupt clinical operations or relationships necessary to
quality clinical care, (vi) adequacy and appropriateness of clinical records,
(vii) conformance to professional practice standards, (viii) matters of ethics,
or (ix) practice impairments or limitations, including those due to issues of
physical or mental health, or potential addiction:
a. conduct the corporation's quality assurance or CQI program;
b. conduct utilization review;
c. gather information and make recommendations regarding credentialing of
the corporation's personnel and contractors (including investigation of
performance of candidates at other practice sites through communication with
other peer review committees and personnel and gathering of professional
performance information from
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corporate sources);
d. conduct and evaluate patient surveys relating to professional
performance;
e. conduct, implement and oversee individual remedial education,
proctoring, monitoring or other oversight accepted by clinic personnel or
imposed by peer review or other authorized corporate processes;
f. conduct research regarding practice patterns and outcomes of treatment
rendered, authorized or recommended by the corporation's clinical personnel;
g. make recommendations to the Board of Directors concerning training,
supervision or discipline of clinical providers within corporation programs;
h. determine and provide to the involved practitioner and the Board of
Directors an annual summary of its conclusions regarding the relative level of
individual practitioner conformance to corporation practice standards and
initiate processes for remedial education or other appropriate action for those
not meeting the standards;
i. conduct investigations of alleged nonconformance, deficiencies or
deviations in clinical practitioners' professional activities;
j. conduct informal conferences with clinical personnel, mediation and
hearings as provided in the corporation's Peer Review Policy and Procedures; and
k. make recommendations to the Board of Directors concerning grant,
denial, restriction or termination of clinical practice authority within
corporation programs for individual health care providers.
Sec. 3. The Peer Review Committee is and shall be conducted as a committee
within the scope of the Oregon Peer Review Statute (ORS 41.675, as amended from
time to time). All shareholders, employees, clinical contractors and officers
of the corporation, by accepting those positions, accept and agree to abide by
the statutory immunity and privileges which attach to peer review data and
proceedings, and further agree to maintain the confidentiality of all peer
review information and proceedings, including information submitted to the Peer
Review Committee or other committee which constitutes a peer review committee or
body under the statute, or their agents, and information concerning the
proceedings and recommendations of a peer review committee or body or their
agents. In gathering information for or submitting information to a peer review
committee or carrying out any directive of the Peer Review Committee, its
subcommittees, hearing panels, officials or other agents (including but not
limited to acts specified by policy or procedure), all officers, employees and
agents of the corporation shall be deemed to be acting on behalf of the Peer
Review Committee and under its authority and umbrella, and
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shall be subject to the same immunity and privilege as provided by law for
appointees to the committee. Any person requested to divulge information which
may be subject to the peer review privilege shall decline the request and refer
the person or entity making the request to the corporation's Administrator.
Sec. 4. The corporation's Peer Review Policy and Procedures shall be
designed to comply with provisions of the federal Health Care Quality
Improvement Act (as it is amended from time to time) relating to group medical
practices providing health care services and following a formal peer review
process for the purpose of furthering quality health care. The peer review
activities of the corporation shall be conducted in accordance with the
principles of that Act and the corporation shall make reports to the data bank
as required by that Act. The corporation's Peer Review Policy and Procedures
shall be adopted, amended, repealed or replaced only in the manner provided for
amendment of these Bylaws. The corporation's Peer Review Policy and Procedures
shall be reviewed periodically by the Board to determine conformity with the
federal Health Care Quality Improvement Act (as amended) and the Oregon peer
review statute (as amended) and other relevant law. The Board shall recommend
to the shareholders revisions to the Peer Review Policy and Procedures as
necessary to maintain such conformity. Copies of revised Peer Review Policy and
Procedures shall promptly be made available to all corporate shareholders,
employees and clinical contractors. At their next renewal or award after the
enactment of this provision and at all times thereafter, the employment or other
contracts of all such personnel shall contain provisions to implement and
enforce the requirements of this Article XV and the Peer Review Policy and
Procedures.
Sec. 5. In addition to the immunity provided by law, and in order to
encourage and secure candid, thorough and unhampered investigation, discussion
and review of professional qualifications and conduct in a professional setting
rather than by judges, jurors, and other lay persons, all clinical personnel who
are shareholders or employees of the corporation or who perform clinical
services on its behalf pursuant to a contract or other agreement, hereby agree
as follows: (i) that the processes, procedures and safeguards provided in the
Peer Review Policy and Procedures are fair and adequate to protect the rights of
all persons subject to peer review, and the processes for approval of changes to
such Policy and Procedures are adequate to assure that they remain so; (ii) to
submit all disputes and issues within the scope of the Peer Review Committee's
authority, as defined in the corporation's bylaws at the time, to the
corporation's Peer Review Committee for resolution in the manner specified in
the Peer Review Policy and Procedures in effect at the time the issue arises and
not to initiate, pursue or permit any form of legal action, complaint, review or
remedy by any other entity or person until all review and procedures available
under the corporation's Peer Review Policy and Procedures have been exhausted;
and (iii) that all participants in the corporation's peer review processes
permitted or required by its Peer Review Policy and Procedures to give or
receive information, take action or make decisions or recommendations of any
kind (including witnesses and other sources of information, members of the
committees, subcommittees,
12
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boards, hearing panels or other groups specified in the Policy and Procedures
and the consultants, officials, and agents of such groups) shall be absolutely
immune from any claim for civil damages by reason of their acts or failure to
act in carrying out the corporation's peer review activities, whether such acts
are asserted to be negligent, intentional, malicious or otherwise wrongful o
unlawful.
Sec. 6. The Professional Standards Committee, acting separately from the
participation of its members in the functions of the Peer Review Committee,
shall develop and propose for approval by the shareholders and adoption by the
Board of Directors Professional Standards for application in clinical and
professional practices in the corporation's facilities and programs.
Professional Standards approved and adopted in accordance with Section 7 shall
be in effect for the fiscal year for which approved and adopted. The
Professional Standards Committee shall also develop and propose for adoption by
the Board of Directors mechanisms for scoring and measuring conformance to the
adopted standards and weighing various conformance measures ("application
methods and policies"). Professional Standards may include, but are not limited
to:
a. preferred clinical practices and approaches based on outcomes
research, professional criteria, or standards proposed or implemented by other
professional groups or considered advantageous by the committee for trial by the
corporation;
b. indicators of good patient communications and relationships;
c. standards for implementation of specified preventive medicine
practices and procedures;
d. measures of conformance to independent accreditation, legal or other
external standards relating to professional conduct;
e. indicators of appropriate medical records practices;
f. standards for expected complication rates or outcomes; and
g. any other indicators of quality professional performance relevant to
the corporation's practice.
Sec. 7. The Professional Standards Committee shall annually present the
Professional Standards recommended by the Professional Standards Committee for
such fiscal year (or, if Professional Standards have already been approved and
adopted for such fiscal year, for the fiscal year immediately following) to the
shareholders and seek the approval of the Professional Standards by a majority
of the shareholders. Upon any such approval by the shareholders, the
Professional Standards, as approved, shall be referred to the Board of Directors
for adoption for the fiscal year for which proposed. If the
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Professional Standards proposed by the Professional Standards Committee are not
approved by the shareholders or, notwithstanding any such approval, not adopted
by the Board of Directors, any Professional Standards then in effect shall cease
to be of force and effect as of the end of the fiscal year for which such
Professional Standards are effective. The Board of Directors shall have
authority to adopt any application methods and policies proposed from time to
time by the Professional Standards Committee. Promptly following the adoption
by the Board of Directors of any Professional Standards or of any application
methods and policies, the Professional Standards Committee shall distribute
written copies of the resulting standards and information regarding application
methods and policies to all affected personnel. The Professional Standards
Committee shall periodically solicit and receive suggestions from departments
and clinical administrative personnel concerning revision and supplementation of
the Professional Standards and application methods and policies. The
Professional Standards Committee may from time to time propose modifications to
Professional Standards then in effect in response to suggestions received from a
department or from clinical administrative personnel. The Board of Directors
may adopt any such modification and cause it to be effective immediately upon
adoption with respect to the Professional Stadards then in effect
notwithstanding that, generally, Professional Standards may be adopted only with
the approval by a majority of the shareholders.
ARTICLE XVI
INDEMNIFICATION
Sec. 1. The corporation shall indemnify and hold harmless the following
persons:
Any member of the Board of Directors
Any member of the Peer Review Committee and any
consultant, hearings officer or panel member, assistant or agent
of the Peer Review Committee whose appointment has been approved
by the corporation's President (or person acting in capacity of
President)
Any other person employed by the corporation who is
appointed by the Board of Directors to review
a matter for the Board
Any administrator or medical director of the corporation from any
liability incurred by that person while that person is acting
reasonably in good faith in the scope of the person's authority on
behalf of the corporation.
As part of this indemnification policy, the corporation will hire counsel,
provide and pay for the cost of defense and pay any judgment against a covered
person not otherwise covered by insurance so that said person will not be
out-of-pocket for expenses incurred while
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serving the interests of the corporation. The Board of Directors shall
determine whether a person is acting reasonably and in good faith. This
agreement shall not apply if the person acts outside the scope of the person's
authority, acts in bad faith, acts in a clearly unreasonable manner or
intentionally intends to harm a person in some manner. Indemnification may only
be paid out of the assets of the corporation and may not be collected out of the
individual assets of the stockholders of the corporation. Indemnification will
not be made to the extent the loss is covered by insurance unless the insurance
was procured by the corporation and covers the relevant conduct to the extent
the corporation is required to or has voluntarily paid or advanced
indemnification (including defense costs). At any time the corporation is
required or consents to advance defense costs or provide indemnity, it shall be
entitled to approve or appoint legal counsel, settle the matter on terms not
requiring payment from the personal noninsurance assets of the individual
indemnified, and approve any settlement or other major defense strategy in
advance, including but not limited to decisions concerning appeal, cross or
counterclaims, joinder of other parties, removal or other change of forum and
any other matter required for it to avail itself of the benefits of
corporation-procured insurance.
ARTICLE XVII
AMENDMENTS
Sec. 1. The power to amend these Bylaws is expressly reserved to the
shareholders by the Articles of Incorporation. These Bylaws may be altered,
amended, or repealed and new Bylaws may be adopted by the affirmative vote of
the holders of two-thirds of the outstanding shares of Common Stock of the
corporation.
Sec. 2. These Bylaws are amended and restated effective as of December 31,
1996.
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**************************************************************************
ORS 41.675
(AS REVISED, 1995)
"41.675 INADMISSIBILITY OF CERTAIN HEALTH CARE FACILITY AND TRAINING DATA. (1)
As used in subsection (2) of this section, "data" means written reports, notes
or records of tissue committees, governing bodies or committees including
medical staff committees of a health care facility licensed under ORS chapter
441, medical staff committees of the Department of Corrections and similar
committees of professional societies, a health care service contractor as
defined in ORS 750.005, an emergency medical service provider as defined in ORS
41.685 or any other medical group in connection with bona fide medical research,
quality assurance, utilization review, credentialing, education, training,
supervision or discipline of physicians or other health care providers, or in
connection with the grant, denial, restriction or termination of clinical
privileges at a health care facility. The term also includes the written
reports, notes or records of utilization review and peer review organizations.
(2) All data shall be privileged and shall not be admissible in evidence
in any judicial, administrative, arbitration or mediation proceeding, but this
section shall not affect the admissibility in evidence of a party's medical
records dealing with a party's hospital care and treatment.
(3) A person serving on or communicating information to any governing body
or committee described in subsection (1) of this section shall not be examined
as to any communication to that committee or the findings thereof.
(4) A person serving on or communicating information to any governing body
or committee described in subsection (1) of this section shall not be subject to
an action for civil damages for affirmative actions taken or statements made in
good faith.
(5) Subsection (2) of this section shall not apply to proceeding in which
a health care practitioner contests the denial, restriction or termination of
clinical privileges by a health care facility or the denial, restriction or
termination of membership in a professional society or any other health care
group. However, any data so disclosed in such proceedings shall not be
admissible in any other judicial, administrative, arbitration or mediation
proceeding.
[ORS 41.675, AS MODIFIED BY THE OREGON LEGISLATURE, EFFECTIVE 9-9-1995]
16
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ARTICLES OF INCORPORATION
OF
PHYSICIAN PARTNERS MEDFORD, P.C.
--------------------------------------------
ARTICLE I
NAME
The name of this corporation (the "Corporation") is Physician Partners
Medford, P.C.
ARTICLE II
REGISTERED OFFICE
The address of the Corporation's registered office in the State of Oregon
is 555 Black Oak Drive, Medford, Oregon 97504. The name of the Corporation's
registered agent at such address is Bruce Van Zee, M.D.
ARTICLE III
PURPOSE
The professional service to be rendered by the Corporation is the practice
of medicine. The purpose for which the Corporation is organized is to engage in
any lawful act or activity for which corporations may be organized under the
Oregon Professional Corporation Act, including, without limitation, the
operation of medical offices, laboratories and other facilities necessary or
incidental to the practice of medicine.
ARTICLE IV
AUTHORIZED CAPITAL STOCK
The Corporation shall have the authority to issue 500 shares of common
stock, no par value ("Common Stock").
ARTICLE V
SOLE SHAREHOLDER
The name and address of the sole shareholder of the Corporation is:
Medford Clinic, P.C.
555 Black Oak Drive
Medford, Oregon 97504
<PAGE>
Medford Clinic P.C., an Oregon professional corporation and the sole
shareholder of the Corporation, is incorporating the Corporation solely for the
purpose of effecting a "reorganization" (as defined in the Internal Revenue Code
of 1986, as amended) pursuant to ORS 58.108(6).
ARTICLE VI
COMPOSITION OF BOARD OF DIRECTORS
AND SHAREHOLDER MEETINGS
SECTION 1. The number of directors of the Corporation shall be as
specified in the Bylaws of the Corporation (the "Bylaws"), and such number may
from time to time be increased or decreased in accordance with the provisions
thereof. The directors of the Corporation shall be elected at meetings of the
shareholders of the Corporation, as such meetings are convened pursuant to the
Bylaws, and shall serve until their respective successors have been duly elected
and qualified. The names and addresses of the initial directors of the
Corporation, all of whom are licensed to practice medicine in the State of
Oregon, are as follows:
Names Addresses
----- ---------
Bruce E. Van Zee, M.D. 555 Black Oak Drive
Medford, OR 97504
Bruce E. Johnson, M.D. 241 Maple Street
Ashland, OR 97520
John A. Schwartz, M.D. 555 Black Oak Drive
Medford, OR 97504
Stephen J. Schnugg, M.D. 555 Black Oak Drive
Medford, OR 97504
Daniel R. Brandenburg, M.D. 1698 E. McAndrews, 3rd Floor
Medford, OR 97504
Daniel M. Wayman, M.D. 555 Black Oak Drive
Medford, OR 97504
SECTION 2. Newly-created directorships resulting from any increase in the
number of directors of the Corporation may be filled by the Board of Directors
of the Corporation (the "Board of Directors"), or as otherwise provided in the
Bylaws, and any vacancies on the Board of Directors resulting from death,
resignation, removal or other cause shall be filled by the affirmative vote of a
majority of the remaining directors of the Corporation then in office, even if
such directors constitute less
-2-
<PAGE>
than a quorum of the Board of Directors, or by a sole remaining director of the
Corporation, or as otherwise provided in the Bylaws.
SECTION 3. Any action required or permitted to be taken by the
shareholders of the Corporation may be effected (a) at an annual or special
meeting of shareholders of the Corporation duly called in accordance with the
Bylaws or (b) by a unanimous written consent of such shareholders of the
Corporation.
ARTICLE VII
INDEMNIFICATION
SECTION 1. 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, by reason of the fact that such person is or was a director or an
officer of the Corporation, against expenses (including, without limitation,
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, as the case may be, to the fullest extent and in the manner set
forth in and permitted by the Oregon Professional Corporation Act, the Oregon
Business Corporation Act and any other applicable law as may be from time to
time in effect (collectively, "Oregon Law"). Such right of indemnification
shall not be deemed to be exclusive of any other rights to which such director
or officer may be entitled apart therefrom. The foregoing provisions of this
Section 1 shall be deemed to be a contract between the Corporation and each
director and officer of the Corporation who serves in such capacity at any time
while this Section 1 and the relevant provisions of Oregon Law, if any, are in
effect, and no repeal or modification thereof shall affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter brought or
threatened based in whole or in part upon any such state of facts.
SECTION 2. The Corporation may 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, by reason of the fact that such person is or was an employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including, without
limitation, attorneys' fees), judgments, fines and amounts paid in settlement
-3-
<PAGE>
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, as the case may be, to the extent and in the manner set
forth in and permitted by Oregon Law as may be from time to time in effect.
Such right of indemnification shall not be deemed to be exclusive of any other
rights to which any such person may be entitled apart therefrom.
ARTICLE VIII
LIABILITY FOR BREACH OF FIDUCIARY DUTY
To the fullest extent permitted by Oregon Law, a director of the
Corporation shall not be liable to the Corporation or its shareholders for
monetary damages for breach of fiduciary duty as such a director. A director of
the Corporation shall not be personally liable to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as such a
director, except for liability (i) for any breach of such director's duty of
loyalty to the Corporation or its shareholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under ORS 60.367 or (iv) for any transaction from which such director
derived an improper personal benefit. If Oregon Law is hereafter amended to
authorize the further elimination or limitation of the liability of directors of
the Corporation, then the liability of directors shall be eliminated or limited
to the fullest extent authorized by Oregon Law, as so amended.
DATED: September __, 1996
MEDFORD CLINIC, P.C.
By: /s/ Bruce Van Zee, M.D.
-----------------------
Title:
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<PAGE>
BYLAWS
OF
PHYSICIAN PARTNERS MEDFORD, P.C.
ARTICLE ONE
OFFICES
1.1 The corporation's registered office shall be located at 555 Black Oak
Dr., Medford, OR 97504.
1.2 The corporation may also have offices at other locations within or
without the State of Oregon, as the Board of Directors may from time to time
determine or as the business of the corporation may require.
ARTICLE TWO
BUSINESS OF THE CORPORATION
2.1 The business of the corporation is to render the professional service
of medicine, and to provide, maintain, OR MAKE ARRANGEMENTS FOR THE PROVISION
AND MAINTENANCE OF, offices, laboratories and other facilities necessary and
incidental thereto.
2.2 The corporation shall not perform any act which is prohibited to a
person licensed to practice medicine in the State of Oregon.
2.3 The corporation shall comply with all rules and regulations of the
Oregon State Board of Medical Examiners applicable to professional medical
corporations.
2.4 The corporation, without any action by the shareholders, directors or
officers, shall automatically become a business corporation governed only by the
Oregon Business Corporation Act when the corporation fails to have a majority of
shares held by persons licensed to practice medicine in the State of Oregon.
ARTICLE THREE
MEETING OF THE SHAREHOLDERS
3.1 Meetings of the shareholders shall be held at the office of the
corporation in Medford, Oregon or at such other place as shall be designated in
the notice of meeting.
3.2 An annual meeting of shareholders shall be held in January of each
year at which time the shareholders shall conduct elections for those positions
on the Board of Directors and Compensation Committee which are due to be filled
that year, and transact other business which is properly brought before the
meeting.
<PAGE>
Page 2
3.3 Special meetings of the shareholders may be called by either the
President of the corporation or the Board of Directors. Special meetings may be
called by any practitioner or shareholder upon presentation of a petition signed
by the holders of not less than one-third (33%) of all the shares entitled to
vote at the meeting. The President must schedule a general shareholder meeting
for consideration of the matter(s) presented in the petition, such meeting to
take place within thirty (30) days of the receipt of the petition.
3.4 Meetings of the shareholders shall be held regularly on a date to be
set by the Board of Directors. The primary purpose of meetings shall be
informational; however, business may be transacted at regular meetings if the
notice provisions herein for special meetings are followed. The Board shall set
the agenda for shareholder meetings. In addition, a shareholder may place an
issue on the agenda for discussion purposes only, upon presentation of a
petition signed by ten percent or more of the shareholders of the Corporation.
3.5 Written or printed notice stating the place, day and hour of the
meeting and, in case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) or more than fifty
(50) days before the date of the meeting, by or at the direction of the officer
or person calling the meeting, to each shareholder at the shareholder's office
address as it appears on the corporation's records. Notice of the annual
meeting shall be delivered not less than forty five (45) days before the
meeting.
3.6 Business transacted at any special meeting or monthly meeting shall be
confined to the purpose stated in the notice.
3.7 The holders of a majority of the outstanding shares, represented
either in person or by proxy, shall constitute a quorum at all shareholders'
meetings for the transaction of business. If a quorum is not present or
represented at any shareholders' meeting, the shareholders present in person or
represented by proxy shall have the power, without notice other than an
announcement at the meeting, to adjourn the meeting from time to time until a
quorum is present or represented. At an adjourned meeting in which a quorum is
present or represented, any business may be transacted which might have been
transacted at the original meeting.
3.8 When there is a quorum at any meeting, the vote of a majority of the
shares, represented either in person or by proxy, shall decide any question
brought before that meeting except amendment of the Corporation Bylaws which
shall be accomplished pursuant to the procedure in Article Ten of these Bylaws,
and termination of an employee shareholder without cause which shall be
accomplished pursuant to the procedure of section 3.11 of these Bylaws.
3.9 Each outstanding share shall be entitled to one vote on each matter
submitted to a vote at a meeting of the shareholders. A shareholder may vote
either in person or by a proxy appointed in writing by the shareholder. A proxy
may be
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Page 3
given only to another shareholder of this corporation. No proxy shall be valid
after three (3) months from the date of its execution. If not time is specified
in proxy it shall be effective for 30 days. A voting trust may not be created
to vote the shares of this corporation.
3.10 Any action required by the Oregon Professional Corporation Act to be
taken at a meeting of shareholders, or any other action which may be taken at
such a meeting, may be taken without a meeting if all of the shareholders
entitled to vote on the question consent in writing to the action.
3.11 Any employee shareholder may be terminated without cause, and without
reference to the Peer Review Protocol, upon the vote of seventy percent (70%) or
more of the shareholders of the Corporation.
ARTICLE FOUR
DEPARTMENTS
4.1 There shall be three departments of the Corporation: Specialty
Internal Medicine, Surgery and Primary Care. All shareholders will be members
of one and only one of the three departments. Shareholders will be assigned to
a department by the Board. Each department shall be comprised of various
numbers and sizes of Sections. Each Section shall be comprised of shareholders
of a single practice area. The Section shall be responsible for scheduling and
other day to day practice issues.
4.2 Each department shall have one Department Head, who shall be a
shareholder member of such Department. The Department Heads shall be elected in
the following manner. Each Department shall, at least 30 days before the annual
shareholder meeting at which that department's Department Head will be elected,
nominate two shareholders who have agreed to serve if elected as Department
Head. If a Department nominates only one candidate, shareholders from other
departments may, at least 15 days prior to such annual shareholder meeting,
nominate one or more shareholders for Department Head of such Department. All
shareholders present or represented by proxy at the shareholder meeting may vote
for each Department Head position among the candidates nominated. The winner
shall be the candidate receiving the highest number of votes.
4.3 Each Department Head shall be a member of both the Board of Directors
and the Compensation Committee. He/she shall delineate the Sections within
his/her Department and shall appoint section heads, subject to ratification by a
majority vote of those voting in person or by proxy at a department meeting
noticed for the purposes of voting on the division of sections.
3
<PAGE>
Page 4
4.4 All three Department Heads shall be elected at the ANNUAL shareholder
meeting at the end of the representative's previous term and shall begin serving
immediately after being elected. Each newly elected Department Head shall serve
for three years, and an election shall be held for one of the three Department
Head positions each year.
ARTICLE FIVE
THE BOARD OF DIRECTORS
5.1 The Board of Directors ("Board") shall be comprised of the Department
Heads of the three departments, two at large members, the President and either
the Past President or President Elect as provided in Section 6.2 of these
Bylaws. The Medical Director and Chief Executive Officer shall also be
non-voting, ex officio members of the Board. A Board member, except the Chief
Executive Officer and the Medical Director, must be a shareholder. The Board of
Directors shall have the following powers:
FIRST: To conduct, manage and control the affairs and business of the
corporation and to make such rules and regulations therefor, not
inconsistent with law or with the articles of incorporation or with the
by-laws, as they may deem best;
SECOND: To elect and remove without cause the officers of the
corporation except the President. The Board may terminate shareholder
employees for cause in conformance with the Peer Review Protocol which
shall be proposed by the Board and approved by the shareholders;
THIRD: To authorize the issuance of shares of THE CORPORATION stock
from time to time upon such terms as may be lawful, in consideration of
money paid, labor done, services actually rendered to the corporation or
for its benefit or in its formation or reorganization, debts or securities
canceled, and tangible or intangible property actually received;
FOURTH: To borrow money and incur indebtedness for the purposes of
the corporation and to cause to be executed and delivered therefore, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and
securities therefor; and
FIFTH: By resolution adopted by a majority of the authorized number
of directors, to designate various committees, each consisting of two or
more shareholders, to serve at the pleasure of the Board, and to prescribe
the manner in which proceedings of such committee shall
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Page 5
be conducted. Any such committee shall have only the powers delegated to
it by the Board, and shall in no case have any of the following powers:
(i) The approval of any action for which the General
Corporation Law or the articles of incorporation also require
shareholder approval;
(ii) The filling of vacancies on the Board or in any committee;
(iii) The fixing of compensation of the directors for serving
on the Board or on any committee;
(iv) The adoption, amendment or repeal of by-laws;
(v) The amendment or repeal of any resolution of the Board;
(vi) Any distribution to the shareholders, except at a rate or
in a periodic amount or within a price range determined by the Board;
and
(vii) The appointment of other committees of the Board or the
members thereof.
5.2.1 The Executive Committee shall be comprised of five members, who
shall be the President, two other Board members elected by the Board, the Chief
Executive Officer and the Medical Director. The Medical Director and the Chief
Executive Officer shall be ex officio non-voting members of the Executive
Committee. A quorum of the Executive Committee shall consist of at least two
Board Members.
5.2.2 The Executive Committee shall be responsible for executive decisions
of the Corporation which require action on short notice, and such other matters
as are determined by the Board. The Executive Committee shall keep the Board
informed of its activities and shall be accountable to the Board in all
respects. In no event shall the Executive Committee take action which will
result in an expenditure which exceeds one quarter of one percent (.25%) of the
annual gross billings of the Corporation for the previous year.
5.3 Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the shareholders present at a special meeting
of the shareholders, called for the purpose of filling the vacancy. The vacancy
shall be filled according to the same procedure as would be used to fill the
particular position during a regular election. A director elected to fill a
vacancy shall be elected for the unexpired portion of the term of the
predecessor in office. Any directorship to be
5
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Page 6
filled by reason of an increase in the number of directors shall be filled by
election at an annual meeting or at a special meeting of shareholders called for
that purpose.
5.4 Meetings of the Board shall be held regularly each month at a place and
time determined by the Board. Special meetings of the Board may be called by
the President on at least one day's notice to each director, either personally,
or by mail or by voice mail; special meetings shall be called by the President
or Secretary in the same manner and with similar notice on the written request
of two directors.
5.5 A majority of the total number of directors shall constitute a quorum
for the transaction of business at a meeting of the Board of Directors.
5.6 NOMINATIONS FOR DIRECTORS WILL BE OPENED AT LEAST 30 DAYS PRIOR TO THE
ANNUAL SHAREHOLDER ELECTION, AND WILL REMAIN OPEN UNTIL THE ELECTION. At large
members of the Board of Directors may be nominated by any shareholder. Those
shareholders nominated who have indicated their willingness to serve will be
placed on the ballot at the annual shareholder meeting. Each newly elected at
large Board member will serve a three year term. The two at large members shall
not be from the same Department. Only candidates from a Department other than
the sitting at large Board member's Department shall be eligible to fill the
open position.
5.7 Whenever any notice is required to be given to any shareholder or
director under the provisions of the Oregon Professional Corporation Act or by
these Bylaws, a waiver signed at any time by the person entitled to this notice
shall be deemed equivalent to the giving of this notice.
5.8 Any action required by the Oregon Professional Corporation Act to be
taken at a meeting of directors, or any other action which may be taken at such
a meeting, may be taken without a meeting if all of the directors entitled to
vote on the question consent in writing to the action.
5.9 A director's attendance at a meeting shall constitute a waiver of
notice of the meeting, except where a director attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting was
not lawfully convened. Neither the business to be transacted at, nor the
purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice of the meeting.
5.10 The Board shall enact job descriptions for the President, Board
Members, the Medical Director, Compensation Committee Members and such other
officers and agents as it desires.
5.11 THE BOARD IS RESPONSIBLE EACH YEAR TO ELECT TWO OF THE FIVE BOARD
REPRESENTATIVES TO SERVE A ONE YEAR TERM ON THE JOINT MANAGEMENT BOARD (JMB),
CONTEMPLATED UNDER THE PRACTICE MANAGEMENT AGREEMENT (MANAGEMENT AGREEMENT) THAT
MAY BE IN EFFECT BETWEEN PHYSICIAN PARTNERS, INC. (THE MANAGER) AND THE
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Page 7
CORPORATION FROM TIME TO TIME. The JMB shall have the powers and
responsibilities set forth in the Management Agreement, subject to the ultimate
authority of the Board of Directors.
ARTICLE SIX
OFFICERS
6.1 The President shall be Chairman of the Board of Directors and shall
lead and conduct all Board and Shareholder meetings. The President shall vote
on the Board only in the case of a tie.
6.2 The President's term shall be three years. The President shall be
elected by the shareholders at the annual shareholder meeting one year in
advance of serving as President. NOMINATIONS FOR PRESIDENT WILL BE OPEN AT
LEAST 30 DAYS PRIOR TO THE ANNUAL SHAREHOLDER ELECTION, AND WILL REMAIN OPEN
UNTIL THE ELECTION. Immediately upon election, the President Elect shall become
a voting member of the Board of Directors and shall serve in that capacity for
one year until he/she assumes the Presidency. When the President Elect takes
office as President, the preceding President ("Past President") shall become a
voting member of the Board of Directors. The Past President shall remain on the
Board of Directors for two years until the next Presidential election. If the
then current President is re-elected President, the Board position for President
Elect/Past President will remain vacant until the next Presidential election.
6.3 The Board of Directors shall elect a Vice President, a Secretary and a
Treasurer. The Vice President shall be a Board member. Any two or more offices
may be held by the same person, except that the offices of President and Vice
President and of President and Secretary shall not be held by the same person.
All officers of the Corporation, except the Treasurer and Secretary, shall be
licensed to practice medicine in the State of Oregon. If an officer is legally
disqualified from practicing medicine or assumes a public office which prohibits
him/her from practicing medicine, he/she shall immediately cease to be an
officer on the date of disqualification or assumption of office and his/her
office shall become vacant without the necessity of corporate action.
6.4 The Board of Directors may elect or appoint other agents and officers.
The salaries, term of office, duties and authority of all officers and agents of
the corporation shall be fixed by the Board of Directors.
6.5 The officers of the corporation shall hold office until their
successors are elected and qualified. Any officer or agent elected or appointed
by the Board of Directors may be removed by the Board of Directors whenever, in
its judgment, the best interests of the corporation will be served thereby, but
such removal shall be without prejudice to the contract rights, if any, of the
person so removed. If the office of any of the officers except the President
becomes vacant for any reason, the
7
<PAGE>
Page 8
vacancy shall be filled by the Board of Directors.
6.6 In the absence or disability of the President, the Vice President
shall perform the duties and exercise the powers of the President and such
other duties as the Board of Directors shall prescribe.
6.7 The Secretary shall be responsible for attending all meetings of the
shareholders and Board of Directors and recording the minutes of all proceedings
in a book to be kept for that purpose and shall perform similar duties for any
committee when required. The Secretary shall give, or cause to be given, notice
of all meetings to the shareholders and members of the Board of Directors and
shall perform such other duties as may be prescribed by the Board of Directors
or President.
6.8 The Treasurer shall have the custody of the corporate funds and
securities, and shall be responsible for keeping full and accurate accounts of
receipts and disbursements in the corporate book and depositing all monies and
other valuables in the name and to the credit of the corporation in the
depositories designated by the Board of Directors. The Treasurer shall be
responsible for disbursing the funds of the corporation when proper to do so and
obtaining receipts for the disbursements. The Treasurer shall render to the
President and directors, at the regular meetings of the Board, or whenever they
may require, an account of all transactions as Treasurer and of the financial
condition of the corporation.
6.9 The Board shall hire, OR PURSUANT TO THE MANAGEMENT AGREEMENT SHALL
ARRANGE FOR THE PROVISION OF such administrative staff as it deems necessary to
conduct the business operations of the Corporation. The Board shall be entitled
to arrange for the provision or subcontracting of administrative and other
staff. The head administrator shall be called the Chief Executive Officer. The
Chief Executive Officer shall be responsible for directing the business and
fiscal affairs of the Corporation, managing the administration of the
Corporation, and such other duties and responsibilities as are specified by the
Board of Directors.
ARTICLE SEVEN
COMPENSATION COMMITTEE
7.1 There shall be established a Compensation Committee whose
responsibility it shall be to determine the method and amount of compensation
for all Shareholder Employees, and, at the Board's discretion, other
non-shareholder providers. The responsibility for determining how much
aggregate Corporate revenue in a certain period shall be allocated for
compensation to the Shareholder Employees shall be determined solely by the
Board. The Compensation Committee shall only be responsible for determining how
such aggregate amount is to be divided and allocated among the Shareholder
Employees. Decisions of the Compensation Committee shall be submitted to the
Board for its review. The Board may at its
8
<PAGE>
Page 9
discretion, overrule or modify the prospective application of any decision of
the Compensation Committee.
7.2 The Compensation Committee shall be comprised of six members, all of
whom will be elected by the Shareholders. Three of the members shall be the
Department Heads. The other three members shall be elected at large.
7.3 Any vacancy occurring in the Compensation Committee may be filled by
the affirmative vote of a majority of the shareholders present at a special
meeting of the shareholders, called for the purpose of filling the vacancy. A
member elected to fill a vacancy shall be elected for the unexpired portion of
the term of the predecessor in office.
7.4 A majority of the members of the Committee shall constitute a quorum
for the transaction of business at a meeting of the Compensation Committee.
7.5 At large members of the Compensation Committee may be nominated by
any shareholder. NOMINATIONS WILL BE OPENED AT LEAST THIRTY DAYS PRIOR TO
THE ANNUAL SHAREHOLDER ELECTION AND WILL BE OPEN UNTIL THE ANNUAL ELECTION.
Those shareholders nominated who have indicated their willingness to serve
will be placed on the ballot at the annual shareholder meeting. Each newly
elected at large Committee member will serve a three year term. If the two
at large Committee members not up for election are from the same department,
then the open position must be filled with a Shareholder from a different
department. ANY VACANCY OCCURRING IN THE COMPENSATION COMMITTEE MAY BE FILLED
BY THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHAREHOLDERS PRESENT AT A
SPECIAL MEETING OF THE SHAREHOLDERS, CALLED FOR THE PURPOSE OF FILLING THE
VACANCY. THE VACANCY SHALL BE FILLED ACCORDING TO THE SAME PROCEDURE AS
WOULD BE USED TO FILL THE PARTICULAR POSITION DURING A REGULAR ELECTION. A
MEMBER ELECTED TO FILL A VACANCY SHALL BE ELECTED FOR THE UNEXPIRED PORTION
OF THE TERM OF THE PREDECESSOR IN OFFICE. ANY MEMBERSHIP TO BE FILLED BY
REASON OF AN INCREASE IN THE NUMBER OF MEMBERS SHALL BE FILLED BY ELECTION AT
AN ANNUAL MEETING OR AT A SPECIAL MEETING OF SHAREHOLDERS CALLED FOR THAT
PURPOSE.
7.6 At the first meeting following the election of new members each year,
the Committee shall elect a chairperson who shall continue to be a voting member
of the Committee.
7.7 A member's attendance at a meeting shall constitute a waiver of notice
of the meeting, except where a member attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting was not
lawfully convened. Neither the business to be transacted at, nor the purpose
of, any meeting of the Compensation Committee need be specified in the notice or
waiver of notice of the meeting.
9
<PAGE>
Page 10
ARTICLE EIGHT
RECALL ELECTIONS
8.1 The President, any Board Member, any Compensation Committee Member or
any combination thereof may be subject to a recall election if i) a petition is
submitted signed by the holders of twenty-five percent (25%) or more of the
shares of the Corporation requesting that the person(s) be removed from office,
or ii) the Board of Directors votes to recommend that the person(s) be removed
from office. A special shareholder meeting shall be scheduled within twenty-one
(21) days of receipt of the recall petition for the purposes of the recall
election. The vote of the holders of more than fifty percent (50%) of the
shares of the Corporation shall be required to remove the subject person from
office.
ARTICLE NINE
SHAREHOLDERS
9.1 The holders of all of the shares of the Corporation must be licensed
to practice medicine within the State of Oregon by the Oregon Board of Medical
Examiners. A physician may become a shareholder upon the vote of a majority of
the shareholders of the corporation.
9.2 If a shareholder is legally disqualified from practicing medicine, the
shareholder shall dispose of the shareholder's shares within thirty (30) days of
the disqualification in the manner stated in paragraph 9.3 herein.
9.3 No shareholder may sell, transfer, assign, pledge, give or otherwise
dispose of his/her share, including disposition by operation of law, except the
Shareholder shall transfer his/her share to the Corporation at the par value
thereof at the termination of regular employment of the shareholder.
ARTICLE TEN
AMENDMENT OF BYLAWS
10.1 A resolution to amend the Bylaws may be brought before the
shareholders by a majority vote of the Board of Directors or by a petition
signed by one third (33%) or more of the active shareholders of the Corporation.
Upon such action, all shareholders will be notified that the proposed resolution
will be discussed at the next regularly scheduled shareholder meeting. The
proposed resolution will then be scheduled for a vote at the second regularly
scheduled shareholder meeting, following submission of the proposed resolution.
A sixty percent (60%) vote of all shares will be required to pass a resolution
amending the Bylaws.
10
<PAGE>
Page 11
ARTICLE ELEVEN
CERTIFICATE FOR SHARES
11.1 The shares of the corporation shall be represented by certificates
signed by the President and Secretary.
11.2 A new stock certificate shall be issued to the person entitled to the
certificate upon surrender to the corporation or its transfer agent of a stock
certificate, duly endorsed; the old certificate shall be canceled and the
transaction shall be recorded upon the books of the corporation.
11.3 The Board of Directors may direct a new certificate to be issued in
place of any certificate previously issued by the corporation and which is
alleged to have been lost or destroyed, if the person making the allegation
supplies the corporation with an affidavit of the alleged facts. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of the alleged lost or destroyed certificate, or the owner's legal
representative, to advertise the same in a manner required by the Board of
Directors and/or give the corporation an indemnity bond in an amount sufficient
to indemnify the corporation against any claim that may be made against it with
respect to the certificate alleged to have been lost or destroyed.
ARTICLE TWELVE
PRACTITIONER RIGHTS
12.1 Each physician has the right to an audience with the President. In
the event a practitioner is unable to resolve a difficulty working with his/her
respective department chair, that physician may, upon presentation of a written
notice, meet with the President to discuss the issue.
12.2 Any shareholder may propose that action be taken, and/or raise a
challenge to any action taken, by the Board of Directors or any committee
appointed by the Board by submitting a petition signed by the holders of at
least 10% of the shares of the Corporation. When such petition has been
received by the Board, it will schedule a meeting with the petitioners to
discuss the issue. Shareholders may address written memoranda to the Board for
the Board's consideration. It shall be within the discretion of the Board
whether such communications should be placed on the agenda for discussion at a
Board meeting.
12.3 The two at large Board members shall serve as ombudsmen to the
shareholders and employees of the Corporation. Shareholders and employees may
submit ideas and problems which are not being addressed through other channels
to the at large Board members.
11
<PAGE>
Page 12
12.4 Any section may request a department meeting when a majority of the
section members believe that the department has not acted in an appropriate
manner.
12.5 All Corporation meetings may be attended by any shareholder; however,
the President and Committee chairman, respectively, may exclude non-members of
the relevant governing body for periods of executive session at their sole
discretion.
12.6 The minutes to all Board and Committee meetings shall be made
available to all shareholders of the Corporation.
ARTICLE THIRTEEN
INDEMNIFICATION
13.1 The Corporation shall indemnify, to the fullest extent permitted by
the Oregon Business Corporation Act, its Directors, officers, committee members,
agents, the Medical Director and the Chief Executive Officer, whether then
presently serving or who have so served, and the Corporation may purchase and
maintain appropriate insurance coverage's to provide said indemnification.
12
<PAGE>
September 18, 1996
Incorporated under the laws of the State of Oregon
NUMBER SHARES
* * 0 * * * * 0 * *
PHYSICIAN PARTNERS HEALTHFIRST, P.C.
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT * * * S * P * E * C * I * M * E * N * * * IS THE REGISTERED
HOLDER OF * * * * COMMON STOCK * * * * SHARES OF THE ABOVE NAMED CORPORATION
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON
OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED
THIS DAY OF A.D.
--------- ------ -------
- ----------------------------------- ---------------------------------------
, Secretary , President
<PAGE>
Except as otherwise expressly provided in the Restated Articles of
Incorporation of Physician Partners HealthFirst, P.C., an Oregon professional
corporation (the "Corporation"), no shareholder may sell, assign, transfer,
pledge or otherwise encumber or dispose of (collectively "Transfer") any shares
of Common Stock of the Corporation or of any interest therein held by such
shareholder. Any attempted or purported Transfer of shares of Common Stock of
the Corporation by such shareholder in contravention of such Restated Articles
of Incorporation shall be null and void and of no force and effect.
[SEAL]
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER
----------
UNTO
--------------------------------------------------------------------------
- -------------------------------------------------------------------------SHARES
REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND
APPOINT
- ---------------------------------------------------------------------ATTORNEY
TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED
------------------------------------
IN PRESENCE OF
- ----------------------------------- ---------------------------------------
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
September 18, 1996
Incorporated under the laws of the State of Oregon
NUMBER SHARES
* * 0 * * * * 0 * *
PHYSICIAN PARTNERS CORVALLIS, P.C.
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT * * * S * P * E * C * I * M * E * N * * * IS THE REGISTERED
HOLDER OF * * * * COMMON STOCK * * * * SHARES OF THE ABOVE NAMED CORPORATION
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON
OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED
THIS DAY OF A.D.
--------- ------ -------
- ----------------------------------- ---------------------------------------
, Secretary , President
<PAGE>
Except as otherwise expressly provided in the Restated Articles of
Incorporation of Physician Partners Corvallis, P.C., an Oregon professional
corporation (the "Corporation"), no shareholder may sell, assign, transfer,
pledge or otherwise encumber or dispose of (collectively "Transfer") any shares
of Common Stock of the Corporation or of any interest therein held by such
shareholder. Any attempted or purported Transfer of shares of Common Stock of
the Corporation by such shareholder in contravention of such Restated Articles
of Incorporation shall be null and void and of no force and effect.
[SEAL]
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER
----------
UNTO
--------------------------------------------------------------------------
- ------------------------------------------------------------------------SHARES
REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND
APPOINT
- ---------------------------------------------------------------------ATTORNEY
TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED
------------------------------------
IN PRESENCE OF
- ----------------------------------- ---------------------------------------
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
September 18, 1996
Incorporated under the laws of the State of Oregon
NUMBER SHARES
* * 0 * * * * 0 * *
PHYSICIAN PARTNERS MEDFORD, P.C.
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT * * * S * P * E * C * I * M * E * N * * * IS THE REGISTERED
HOLDER OF * * * * COMMON STOCK * * * * SHARES OF THE ABOVE NAMED CORPORATION
TRANSFERABLE ONLY ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON
OR BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY ITS DULY AUTHORIZED OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO
AFFIXED
THIS DAY OF A.D.
--------- ------ -------
- ----------------------------------- ---------------------------------------
, Secretary , President
<PAGE>
Except as otherwise expressly provided in the Restated Articles of
Incorporation of Physician Partners Medford, P.C., an Oregon professional
corporation (the "Corporation"), no shareholder may sell, assign, transfer,
pledge or otherwise encumber or dispose of (collectively "Transfer") any shares
of Common Stock of the Corporation or of any interest therein held by such
shareholder. Any attempted or purported Transfer of shares of Common Stock of
the Corporation by such shareholder in contravention of such Restated Articles
of Incorporation shall be null and void and of no force and effect.
[SEAL]
FOR VALUE RECEIVED, HEREBY SELL, ASSIGN AND TRANSFER
----------
UNTO
--------------------------------------------------------------------------
- -------------------------------------------------------------------------SHARES
REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND
APPOINT
- -----------------------------------------------------------------------ATTORNEY
TO TRANSFER THE SAID SHARES ON THE BOOKS OF THE WITHIN NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED
------------------------------------
IN PRESENCE OF
- ----------------------------------- ---------------------------------------
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
[LETTERHEAD]
January 3, 1997
Physician Partners, Inc.
111 S.W. Columbia St., Ste. 725
Portland, OR 97201
Physician Partners HealthFirst, P.C.
10535 N.E. Glisan
Portland, OR 97220
Gentlemen:
I have acted as special counsel to Physician Partners HealthFirst, P.C., an
Oregon professional corporation (the "Company"), and, at the Company's request
have examined Amendment No. 3 to Registration Statement on Form S-4 (the
"Registration Statement") as filed with the Securities and Exchange Commission
on January 3, 1997, in connection with the registration under the Securities
Act of 1933, as amended, of 92 shares of Common Stock, no par value (the
"Shares"), issued by the Company to HealthFirst Medical Group, P.C., the
Company's sole shareholder ("HealthFirst"), in connection with the dividend
distribution of the Shares to the shareholders of HealthFirst, which dividend
distribution is described in the Joint Proxy Statement/Prospectus (the
"Prospectus") constituting a part of the Registration Statement.
As such counsel, I have examined such documents and records of the Company
as I deemed necessary as a basis for the opinion set forth herein, and I am
familiar with actions taken by the Company in connection with the authorization
and issuance of the Shares.
Based on such examination and subject to compliance with applicable state
securities laws, I am of the opinion that the Shares have been legally issued,
fully paid and nonassessable.
I consent to the use of this opinion as an Exhibit to the Registration
Statement and to the reference to the undersigned appearing under the caption
"Legal Matters" in the Prospectus.
Sincerely
Peter F. Stoloff, P.C.
By:/s/Peter F. Stoloff
---------------------------------
Peter F. Stoloff
President
<PAGE>
[LETTERHEAD]
January 3, 1997
Physician Partners, Inc.
111 S.W. Columbia St., Ste. 725
Portland, OR 97201
Physician Partners Corvallis, P.C.
444 N.W. Elks Dr.
Corvallis, OR 97330
Gentlemen:
I have acted as special counsel to Physician Partners Corvallis, P.C., an
Oregon professional corporation (the "Company"), and, at the Company's
request, have examined Amendment No. 3 to Registration Statement on Form S-4
(the "Registration Statement") as filed with the Securities and Exchange
Commission on January 3, 1997, in connection with the registration under
the Securities Act of 1933, as amended, of 64 shares of Common Stock, no par
value (the "Shares"), issued by the Company to The Corvallis Clinic, P.C.,
the Company's sole shareholder ("Corvallis"), in connection with the
dividend distribution of the Shares to the shareholders of Corvallis, which
dividend distribution is described in the Joint Proxy Statement/Prospectus
(the "Prospectus") constituting a part of the Registration Statement.
As such counsel, I have examined such documents and records of the Company
as I deemed necessary as a basis for the opinion set forth herein, and I am
familiar with actions taken by the Company in connection with the authorization
and issuance of the Shares.
Based on such examination and subject to compliance with applicable state
securities laws, I am of the opinion that the Shares have been legally issued,
fully paid and nonassessable.
I consent to the use of this opinion as an Exhibit to the Registration
Statement and to the reference to the undersigned appearing under the caption
"Legal Matters" in the Prospectus.
Sincerely
Peter F. Stoloff, P.C.
By:/s/Peter F. Stoloff
---------------------------------
Peter F. Stoloff
President
<PAGE>
[LETTERHEAD]
January 3, 1997
Physician Partners, Inc.
111 S.W. Columbia St., Ste. 725
Portland, OR 97201
Physician Partners Medford, P.C.
555 Black Oak Dr.
Medford, OR 97504
Gentlemen:
I have acted as special counsel to Physician Partners Medford, P.C., an
Oregon professional corporation (the "Company"), and, at the Company's
request, have examined Amendment No. 3 to Registration Statement on Form S-4
(the "Registration Statement") as filed with the Securities and Exchange
Commission on January 3, 1997, in connection with the registration under
the Securities Act of 1933, as amended, of 57 1/3 shares of Common Stock, no par
value (the "Shares"), issued by the Company to Medford Clinic, P.C., the
Company's sole shareholder ("Medford"), in connection with the dividend
distribution of the Shares to the shareholders of Medford, which dividend
distribution is described in the Joint Proxy Statement/Prospectus (the
"Prospectus") constituting a part of the Registration Statement.
As such counsel, I have examined such documents and records of the Company
as I deemed necessary as a basis for the opinion set forth herein, and I am
familiar with actions taken by the Company in connection with the authorization
and issuance of the Shares.
Based on such examination and subject to compliance with applicable state
securities laws, I am of the opinion that the Shares have been legally issued,
fully paid and nonassessable.
I consent to the use of this opinion as an Exhibit to the Registration
Statement and to the reference to the undersigned appearing under the caption
"Legal Matters" in the Prospectus.
Sincerely
Peter F. Stoloff, P.C.
By:/s/Peter F. Stoloff
---------------------------------
Peter F. Stoloff
President
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF McDERMOTT, WILL & EMERY]
January 3, 1997
HealthFirst Medical Group, P.C.
10535 N.E. Glisan
Portland, Oregon 97220
Attn: President
The Corvallis Clinic, P.C.
444 N.W. Elks Drive
Corvallis, Oregon 97330
Attn: President
Medford Clinic, P.C.
555 Black Oak Drive
Medford, Oregon 95704
Attn: President
Dear Sirs:
We are of the opinion that the amount of taxable income produced by a
distribution of property by a corporation to its shareholders will, at the
corporate and shareholder levels, be no more than the fair market value of the
property distributed. Internal Revenue Code Sections 301(b), (c) and 311(b).
Very truly yours,
/s/ MCDERMOTT, WILL & EMERY
--------------------------------------
McDermott, Will & Emery
<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), is made and entered into as of the 19th day
of September, 1996, by and between Physician Partners, Inc., a Delaware
corporation (the "Company"), and Jerry Erstgaard (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive and the Company deem it to be in their respective
best interests to enter into an agreement providing for the Company's employment
of Executive pursuant to the terms herein stated.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements contained herein, it is hereby agreed as follows:
1. DUTIES. The Company hereby agrees to employ Executive as its Senior
Vice President for the "Term of Employment" (as herein defined). Executive in
this capacity agrees to use his best efforts during the Term of Employment to
protect, encourage, and promote the interests of the Company. During the Term
of Employment, Executive shall also perform such other duties consistent with
the office held by Executive as may be reasonably assigned to him from time to
time by the Chief Executive Officer of the Company, and will devote substantial
time and attention to such duties, except while on sick leave, reasonable
vacations, and excused leaves of absence. During such period, Executive may
also be required to perform services for one or more affiliates of the Company.
2. COMPENSATION.
(a) BASE SALARY. Effective on the date (the "Merger Date") of the
merger of the Company with the Corvallis Clinic, P.C., HealthFirst Medical
Group, P.C. and Medford Clinic, P.C. (the "Merger"), the Company agrees to pay
to Executive a minimum base salary during the Term of Employment equal to one
hundred seventy five thousand dollars ($175,000) per year ("Base Salary"),
payable in regular installments in accordance with the Company's normal payroll
procedures. Executive's Base Salary shall be increased at the discretion of the
Compensation Committee of the Board of Directors of the Company (the
"Committee") to maintain or bring Executive to the 35th percentile of peer
companies selected by the Committee.
(b) ANNUAL INCENTIVE. Effective on the Merger Date, Executive will
be eligible to participate in the Company's annual management incentive plan (or
such other incentive plan established in place of the Company's annual
management incentive plan) at a
<PAGE>
target bonus equal to such percentage of Base Salary as determined each year by
the Committee in its discretion. The actual amount of the annual bonus award,
if any, for a fiscal year shall be dependent upon the achievement of certain
financial standards of performance for the operations of the Company, the
achievement of certain non-financial objectives mutually agreed upon by
Executive and the Company at the beginning of the fiscal year and a
discretionary component for performance above targets. For the 1997 fiscal
year, the incentive standards and target goals for Executive shall be mutually
agreed upon by Executive and the Company within sixty (60) days after the Merger
Date and Executive shall be entitled to receive a bonus award not less than
fifty thousand dollars ($50,000) assuming achievement of the financial standards
of performance and 100% of the agreed upon non-financial objectives. No bonus
award for the 1997 fiscal year shall be awarded if Executive fails to achieve at
least 85% of the agreed upon non-financial objectives. The Committee will
review Executive's performance from time to time and assuming satisfactory
performance, additional bonus awards as the Committee may determine in its sole
discretion shall be made sufficient to maintain Executive's short-term
compensation package (i.e, Base Salary plus annual bonus awards) at a level
equal to the 60th percentile of peer companies selected by the Committee.
(c) LONG-TERM INCENTIVES. Executive shall not be entitled to any
long-term incentive for any period prior to the Merger. However, effective on
the Merger Date, Executive shall be granted an option to purchase 35,000 shares
of the Common Stock of the Company at the fair market value of a share of the
common stock, par value $0.01 per share (the "Common Stock"), of the Company as
of the date such option is granted. The option shall vest and become
exercisable with respect to twenty percent (20%) of the shares subject to the
option on each anniversary of the date the option is granted. The option grant
specified above shall be subject to such other terms and conditions as may be
specified in a separate agreement providing for the award or grant as the case
may be. The Committee will review Executive's performance from time to time and
assuming satisfactory performance, additional awards of long term incentives in
such form and in such amounts as the Committee may determine in its sole
discretion, shall be made sufficient to maintain Executive's total compensation
(i.e., Base Salary, annual bonus awards and long-term incentives) at a level
that is within the 60th to 70th percentile of compensation ranges for peer
companies selected by the Committee.
3. BENEFITS. During the Term of Employment:
(a) The Company shall furnish Executive with, and Executive shall be
allowed full use of, office facilities, automobiles, secretarial and clerical
assistance, and other Company property and services of a quality, nature and to
the extent made
-2-
<PAGE>
available to senior executive employees of the Company from time to time;
(b) Executive shall be eligible to participate in life, health, long-
term disability insurance and severance programs, stock purchase programs, stock
option plans, qualified and non-qualified pension and retirement plans,
incentive compensation programs and other fringe benefit programs, if any,
available to other senior executive employees of the Company and physicians
employed by medical clinics that are party to a practice management
agreement with the Company or any Subsidiary thereof;
(c) Executive shall be allowed 4 weeks of vacation and paid leaves of
absence on the same basis as other senior executive employees of the Company;
and
(d) Company will reimburse Executive for reasonable business expenses
in performing Executive's duties and promoting the business of Company,
including, without limitation, reasonable entertaining expenses, automobile
expenses, and travel and lodging, when incurred. The cost of these items shall
be borne by the Company upon presentation of an itemized expense voucher.
4. TERM OF EMPLOYMENT. As used herein, the phrase "Term of Employment"
shall mean the period commencing on the Merger Date and ending three (3) years
from the Merger Date. Company shall provide Executive with at least ninety (90)
days notice of its intent not to renew this Agreement. Notwithstanding the
foregoing, the Term of Employment shall expire on the first to occur of the
following:
(a) TERMINATION WITHOUT CAUSE. Notwithstanding anything to the
contrary in this Agreement, whether express or implied, the Company may at any
time terminate Executive's employment with the Company by giving Executive at
least sixty (60) days prior written notice of the effective date of termination.
In the event of such termination, Executive shall be entitled to receive his
Base Salary (at the rate in effect immediately prior to such notice) during the
period commencing on the effective date of such termination and ending on the
first anniversary of such date (the "Severance Period") as though Executive's
employment had continued. Executive shall also be entitled to continue to be
covered by all medical, health and accident and disability insurance, at the
same coverage level maintained for Executive's benefit immediately prior to the
date of Executive's termination, until the end of the Severance Period. In the
event Executive is ineligible under the terms of such insurance to continue to
be so covered, the Company shall provide Executive with substantially equivalent
coverage through other sources or will provide the Executive with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages to which Executive is entitled under this Section 4(a).
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<PAGE>
(b) TERMINATION FOR CAUSE. Company shall have the right to terminate
Executive's employment at any time for Cause by giving Executive written notice
of the effective date of termination (which effective date may, except as
otherwise provided below, be the date of such notice). For purposes of this
Agreement, Cause shall mean:
(i) fraud, misappropriation, embezzlement or other act of
material misconduct against the Company or any of its affiliates thereof or an
act contrary to their best interests;
(ii) substantial and willful failure to render services in
accordance with the terms of this Agreement, provided that (A) a demand for
performance of services had been delivered to the Executive by the Chief
Executive Officer of the Company at least thirty (30) days prior to termination
identifying the manner in which such Chief Executive Officer believes that the
Executive has failed to perform and (B) the Executive has thereafter failed to
remedy such failure to perform;
(iii) willful and knowing violation of any rules or regulations
of any governmental or regulatory body material to the business of the Company;
or
(iv) conviction of or plea of guilty or nolo contendere to a
felony.
If Company terminates Executive's employment for any of the reasons set forth in
this Section 4(b), Company shall have no further obligations hereunder from and
after the effective date of termination and shall have all other rights and
remedies available under this or any other agreement and at law or in equity.
If Executive's employment is terminated for Cause (as defined above) and
Executive does not consent to such termination, such termination shall not be
considered effective and Executive's rights under this Agreement during the Term
of Employment (including, without limitation, the provisions of Sections 2 and 3
hereof) shall continue until the existence of such Cause has been determined by
an independent arbitrator appointed by the American Arbitration Association and
either party's rights to petition a court of law for a decision in the matter
have been exhausted. In connection with the appointment of an arbitrator, both
parties agree to submit the question to final and binding arbitration by an
appointee of the American Arbitration Association and to cooperate with the
arbitrator, with all costs of arbitration paid by the Company. If the
arbitrator determines that the Executive's termination was for Cause, then the
Executive shall repay to the Company all compensation received pursuant to
Section 2 during the period commencing upon the Executive's termination and
ending upon the arbitrator's final determination. The Executive shall also
repay to the Company all amounts that it paid or reimbursed the Executive
pursuant to Section 6.
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<PAGE>
(c) TERMINATION ON ACCOUNT OF DEATH. In the event of Executive's
death while in the employ of the Company, the Company shall pay to the
Executive's Designated Beneficiaries (as defined below) one hundred percent
(100%) of Executive's Base Salary as in effect immediately prior to Executive's
death, payable to Executive's Designated Beneficiary at the beginning of each
month for a period of twelve (12) months following Executive's death or until
the end of the Term of Employment, whichever is sooner. In addition,
Executive's surviving spouse, if any, shall continue to be covered by all
medical, health and accident insurance, and for the same coverage, maintained
for Executive's benefit immediately prior to the date of Executive's death, for
a period of twelve (12) months thereafter. In the event Executive's surviving
spouse is ineligible under the terms of such insurance to continue to be so
covered, the Company shall provide substantially equivalent coverage through
other sources or will provide the Executive's surviving spouse with a lump sum
payment equal to the agreed upon present value of the continuation of such
insurance coverages under this Section 4(c).
(d) VOLUNTARY TERMINATION BY EXECUTIVE. In the event that
Executive's employment with the Company is voluntarily terminated by Executive,
the Company shall have no further obligations hereunder from and after the
effective date of such termination and shall have all other rights and remedies
available under this or any other agreement and at law or in equity.
5. CHANGE IN CONTROL. In the event of a Change in Control of the
Company, Executive shall be entitled to benefits provided under the Company's
Change in Control Plan and the agreement Employee has executed pursuant to that
plan.
6. EXPENSES. Company will pay or reimburse the Executive for all costs
and expenses (including court costs and reasonable attorneys' fees) incurred by
the Executive as a result of any claim, action or proceeding arising out of, or
challenging the validity or enforceability of, this Agreement or any provision
hereof.
7. MITIGATION. In the event of a termination of Executive's employment
for any reason, Executive shall not be required to seek other employment; in
addition, no amount payable under Section 4 of this Agreement shall be reduced
by any compensation earned by Executive as a result of employment by another
employer after such termination of employment with the Company.
8. DESIGNATED BENEFICIARY. In the event of the death of Executive while
in the employ of the Company, or at any time thereafter during which amounts
remain payable to the Executive under Section 4(a) or (c) hereof, such payments
shall thereafter be made to such person or persons as the Executive may
specifically designate (successively or contingently) to receive payments under
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<PAGE>
this Agreement following the Executive's death by filing a written beneficiary
designation with the Company during the Executive's lifetime. Such beneficiary
designation shall be in such form as may be prescribed by the Company and may be
amended from time to time or may be revoked by the Executive pursuant to written
instruments filed with the Company during his lifetime. Beneficiaries
designated by Executive may be any natural or legal person or persons, including
a fiduciary, such as a trustee or a trust or the legal representative of an
estate. Unless otherwise provided by the beneficiary designation filed by
Executive, if all of the persons so designated die before Executive on the
occurrence of a contingency not contemplated in such beneficiary designation,
then the amount payable under this Agreement shall be paid to the Executive's
estate.
9. MISCELLANEOUS. This Agreement shall also be subject to the following
miscellaneous considerations:
(a) The Company represents and warrants to Executive that it has the
authorization, power and right to deliver, execute and fully perform its
obligations under this Agreement in accordance with its terms.
(b) Except as provided in Section 5, this Agreement contains a
complete statement of all the arrangements between the parties with respect to
Executive's employment by the Company, this Agreement supersedes all prior and
existing negotiations and agreements between them concerning the Executive's
employment, and this Agreement can only be changed or modified pursuant to a
written instrument executed by each of the parties hereto.
(c) If any provisions of this Agreement or any portion hereof is
declared invalid, illegal or incapable of being enforced by any court of
competent jurisdiction, the remainder of such provisions and all of the
remaining provisions of this Agreement shall continue in full force and effect.
(d) This Agreement shall be governed by and construed in accordance
with the laws of the State of Oregon, except to the extent governed by federal
law.
(e) All compensation payable hereunder shall be subject to such
withholding taxes as may be required by law.
(f) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Company. Company will require any successor,
whether direct or indirect, by purchase, merger, consolidation or otherwise, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Except as expressly provided
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herein, Executive may not sell, transfer, assign, or pledge any of his rights or
interests pursuant to this Agreement.
(g) Except as otherwise provided in Section 4(b) hereof, in the event
of any dispute between the Company and the Executive with respect to any of the
provisions of this Agreement, the Company and the Executive agree that either
party may request that the dispute be resolved by submitting the issue to
arbitration or such other form of alternative dispute resolution as the parties
may agree upon (collectively, "Alternative Dispute Resolution"). The parties
expressly agree and acknowledge, however, that except as otherwise provided in
Section 4(b) hereof, nothing in this Agreement (whether express or implied)
shall under any circumstances require either party to consent to Alternative
Dispute Resolution.
(h) Any rights of Executive hereunder shall be in addition to any
rights Executive may otherwise have under benefit plans or agreements of the
Company to which he is a party or in which he is a participant, including,
without limitation, any Company sponsored employee benefit plans. Provisions of
this Agreement shall not in any way abrogate Executive's rights under such other
plans and agreements.
(i) The Company shall, to the maximum extent permitted by law,
indemnify Executive against expenses (including, without limitation, reasonable
attorneys' fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceedings arising by reason of the
fact that Executive is or was an employee, officer, or agent of the Company.
Company shall advance to Executive expenses incurred in defending any such
proceedings to the maximum extent permitted by law. Company's obligations under
this provision shall not cease upon termination of this Agreement.
(j) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement.
10. GUARANTEE BY CLINICS. Each of The Corvallis Clinic, P.C., HealthFirst
Medical Group, P.C. and Medford Clinic, P.C., by signing this Agreement in the
space provided below, hereby agrees to guarantee in favor of the Executive its
pro rata share of the aggregate value of compensation and benefits provided to
the Executive under this Agreement, such pro rata shares of The Corvallis
Clinic, P.C., HealthFirst Medical Group, P.C. and Medford Clinic, P.C. being
33.8%, 42.6% and 23.6%, respectively.
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IN WITNESS WHEREOF, the parties hereto have read, understood, and
voluntarily executed this Agreement as of the day and year first above written.
PHYSICIAN PARTNERS, INC.
/s/ Jerry Erstgaard By: /s/ David M. Goldberg
- ----------------------------------- --------------------------------
JERRY ERSTGAARD Title: President, Chief
Executive Officer and
Director
AGREED AND ACKNOWLEDGED:
THE CORVALLIS CLINIC, P.C.
By: /s/ David H. Cutsforth, Jr.
----------------------------
Title: President
HEALTHFIRST MEDICAL GROUP, P.C.
By: /s/ Matthew Shelley
----------------------------
Title: President
MEDFORD CLINIC, P.C.
By: /s/ Bruce E. Van Zee
---------------------------
Title: President
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EXECUTION COPY
AMENDMENT TO
EMPLOYMENT AGREEMENT
This Amendment, dated as of December 31, 1996, is entered into by and
between Physician Partners, Inc., a Delaware corporation (the "Company"), and
Jerry Erstgaard (the "Executive").
RECITALS
A. The Company and the Executive have entered into the Employment
Agreement, dated as of September 19, 1996 (the "Employment Agreement").
Capitalized terms used but not defined herein shall be used herein as defined in
the Employment Agreement.
B. PPI and the Companies have agreed to amend the Employment Agreement as
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual promises
and agreements contained herein, it is hereby agreed as follows:
SECTION 1. AMENDMENT TO EMPLOYMENT AGREEMENT. Section 2(a) of the
Employment Agreement is, effective as of the date hereof, hereby amended in full
to read as follows:
"2. COMPENSATION.
(a) BASE SALARY. Effective on the date (the 'Merger Date') of
the merger of the Company with The Corvallis Clinic, P.C., HealthFirst
Medical Group, P.C. and Medford Clinic, P.C. (the 'Merger'), the Company
agrees to pay to Executive a minimum base salary during the Term of
Employment equal to one hundred thirty-two thousand dollars ($132,000) per
year ('Base Salary'), payable in regular installments in accordance with
the Company's normal payroll procedures. Executive's Base Salary shall be
increased at the discretion of the Compensation Committee of the Board of
Directors of the Company (the 'Committee') to maintain or bring Executive
to the 35th percentile of peer companies selected by the Committee."
SECTION 2. REFERENCE TO AND EFFECT ON THE EMPLOYMENT AGREEMENT. On and
after the date hereof, each reference in the Employment Agreement to "this
Agreement," "hereunder," "hereof," "herein" or words of like import shall mean
and be a reference to the Employment Agreement as amended hereby. Except as
hereby expressly amended, the Employment Agreement shall remain in full
<PAGE>
force and effect, and is hereby ratified and confirmed in all respects on and as
of the date hereof.
SECTION 3. GOVERNING LAW. This Amendment shall be governed by, and
construed in accordance with, the laws of the State of Oregon.
SECTION 4. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which when executed shall be deemed to be an original and
all of which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have read, understood, and
voluntarily executed this Amendment as of the day and year first above written.
PHYSICIAN PARTNERS, INC.
- ---------------------------- By: ---------------------------
JERRY ERSTGAARD Title:
AGREED AND ACKNOWLEDGED:
THE CORVALLIS CLINIC, P.C.
By:
----------------------
Title:
HEALTHFIRST MEDICAL GROUP, P.C.
By:
----------------------
Title:
MEDFORD CLINIC, P.C.
By:
----------------------
Title:
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ADMINISTRATOR'S EMPLOYMENT AGREEMENT
January 1, 1995
The parties to this Agreement are THE CORVALLIS CLINIC, P.C., an
Oregon Professional Corporation ("the Clinic") and DAVID L. KOBRIGER
("Kobriger").
In consideration of the promises and covenants exchanged and under the
conditions set forth, the Clinic agrees to employ Kobriger and Kobriger agrees
to serve as CEO/Administrator of The Corvallis Clinic, P.C.
1. TERM.
The term of this Agreement shall be for the period January 1, 1995
through December 31, 1995, unless extended as provided in paragraph 2 or
terminated as provided in paragraph 11.
2. AUTOMATIC RENEWAL OF AGREEMENT.
This Agreement will be automatically renewed from year-to-year unless
the Clinic or Kobriger gives the other party notice of an intent not to renew or
to modify the Agreement at least 180 days before the end of the calendar year.
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3. PERFORMANCE.
As CEO/Administrator of the Clinic, Kobriger agrees to devote his full
time, effort, ability and knowledge to the general management of the Clinic. He
agrees to faithfully represent the Clinic in the community and in various
professional and non-professional associations.
4. RESPONSIBILITY.
Kobriger shall be responsible for management of all business affairs,
development of goals, growth planning and long-range planning for the Clinic and
its related organizations. Kobriger shall be directly responsible to the Board
of Directors of the Clinic, and he shall receive from them direction and policy
statements and guidelines for the overall management of the Clinic.
5. AUTHORITY.
In performing the above-described responsibilities, Kobriger's
authority shall include:
A. Employment and termination of all non-physician employees.
Establishment and administration of
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personnel policies and salary scales for all non-physician
employees.
B. Installation and maintenance of proper accounting systems;
payment of all financial obligations when due; preparation and
presentation of financial reports; and preparation of all tax
returns for timely filing.
C. General financial management including the procurement of
necessary loans and other financing, and the management of
corporate stock ownership.
D. Consultation with auditors, attorneys and other consultants
concerning business matters of the Clinic.
E. Establishment and administration of patient billing systems and
procedures, and credit and collection policies.
F. Purchasing of all supplies and equipment; maintenance of Clinic
property in a clean condition and good state of repair.
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G. Negotiations and interactions with hospitals, insurance
companies, state agencies and other third party payors.
Kobriger may delegate responsibilities to subordinate personnel as he
sees fit, however, he shall remain ultimately responsible to the Clinic for the
total business management. Notwithstanding any provision of this Agreement, the
Board of Directors may, at its discretion, assign responsibilities to other
individuals.
6. PROFESSIONAL ASSOCIATIONS AND EXPENSES.
Kobriger shall be accorded the same educational meeting time and
expense allowance as is provided for the Shareholder Employees of the Clinic.
He shall maintain his own automobile and shall carry liability insurance in the
minimum amount of $250,000/$500,000 bodily injury limits and $50,000 property
damage limits. Such policies are to be written with insurance companies and in
such forms as may be approved by the Clinic. The Clinic will reimburse Kobriger
for business use of his automobile at the prevailing rate per mile. Kobriger
shall also be reimbursed for all other out-of-pocket expenses incurred while
representing the Clinic or conducting Clinic business.
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7. COMPENSATION AND BENEFITS.
Kobriger shall receive total compensation of 100 percent of Average
Shareholder Income, ("ASI") as defined in the Master Employment Agreement for
Shareholder Employees. Total compensation shall be paid as follows:
A. Monthly compensation shall be equal to the budgeted ASI divided
by 12 months.
B. At the end of the fiscal year, a bonus equal to the difference
between budgeted ASI and actual ASI will be reconciled.
C. Beginning with the 25th month of employment, employer
contributions to the Money-Purchase Pension Plan on behalf of
Kobriger will be deducted from the monthly compensation and any
bonuses.
Kobriger may make voluntary qualified contributions to the Clinic 401(k)
Profit-Sharing Plan and to the Voluntary Tax-Sheltered Medical Reimbursement
Plan. Kobriger may authorize deduction from income of 50 percent of the total
premium cost for health insurance; the Clinic will provide the remaining
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<PAGE>
cost of health insurance premiums. Other than the required payroll tax
withholdings, there shall be no additional deductions from compensation, except
as authorized by Kobriger.
8. VACATION.
Kobriger shall receive four weeks vacation per year.
9. SICK LEAVE/DISABILITY LEAVE/LONG-TERM DISABILITY INSURANCE.
Kobriger shall receive the same sick leave, disability leave and
long-term disability insurance as is provided to Shareholder Employees.
10. OTHER BENEFITS.
Kobriger shall receive all of the other benefits provided by the
Clinic to other non-Shareholder employees of the Clinic under the then current
Employee Welfare Benefit Plan.
11. TERMINATION.
Kobriger may terminate this Agreement by giving the Clinic Board of
Directors 180 days written notice of his
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<PAGE>
intent. The Clinic may terminate this Agreement at any time for cause. As
used in this paragraph, "cause" includes a material breach of this Agreement,
fraud, gross negligence or dishonesty.
12. SEVERANCE BENEFIT.
If within six months following a Change of Control (as defined below)
(a) Kobriger is terminated by the Clinic or its successor in interest without
material cause or (b) the Clinic or its successor in interest makes any material
adverse change in Kobriger's duties or compensation and Kobriger elects to
terminate his employment hereunder by giving written notice to the Clinic or its
successor in interest, then the Clinic or its successor in interest shall pay to
Kobriger a lump sum severance benefit equal to nine months of his then salary
(excluding any incentive compensation). Such payment shall be made within
thirty days after the effective date of Kobriger's employment termination.
For purposes of this paragraph 12, a "Change of Control" shall mean:
(i) The completion of any merger of consolidation of the Clinic with
any other organization if, following the merger or consolidation,
those persons who were
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shareholders of the Clinic immediately before the transaction own less
than fifty percent of the equity interests in the surviving
organization immediately after the transaction,
(ii) A sale or other transfer of the outstanding shares of the Clinic
in one transaction with the result that those persons who were
shareholders of the Clinic immediately before the transaction own less
than fifty percent of the equity interests in the Clinic or the entity
purchasing the Clinic's shares immediately after the transaction, or
(iii) The sale or other disposition of all or substantially all of
the assets of the Clinic.
13. FUTURE DISPUTES.
In the event that any dispute arises related to Kobriger's employment
or the termination of that employment, the parties agree to submit the dispute
to mediation. If mediation is not successful, the parties agree to submit the
dispute to binding arbitration under the American Arbitration Association rules
for employment disputes.
14. COMPLETE AGREEMENT.
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This Agreement is the complete and final agreement between the parties and
supersedes all prior oral and written Agreements. Any modification to this
Agreement must be in writing and signed by the Chairman of the Board of
Directors.
15. ASSIGNMENT.
The rights and obligations of the parties under this Agreement shall inure
to the benefit of and shall be binding upon their respective successors and
permitted assigns. Kobriger may not assign any of his rights or obligations
under this Agreement. The Clinic may assign this Agreement and its rights and
obligations hereunder in any transaction which constitutes a Change of Control
within the meaning of paragraph 12.
/s/ illegible /s/ David L. Kobriger
- ----------------------------------- ---------------------------------------
For the Corvallis David L. Kobriger
Clinic, P.C.
Date: 3/9/95 Date: 3/9/95
------------------------------ ----------------------------------
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
--------------------------------------
ARTHUR ANDERSEN LLP
Portland, Oregon
January 3, 1996
