<PAGE>
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1997.
COMMISSION FILE NO.: 333-15595
PHYSICIAN PARTNERS, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-1217068
- --------------------------------------------- ------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER ID NO.)
OR ORGANIZATION)
111 SW COLUMBIA STREET, SUITE 725
PORTLAND, OREGON 97201
- ---------------------------------------- ---------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 224-2249
------------------------
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
As of November 14, 1997, 6,473,961 shares of the Registrant's Class A
Common Stock, par value $0.01 per share, were outstanding.
<PAGE>
PHYSICIAN PARTNERS, INC.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
(All dollar amounts are expressed in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,870 $ 4
Patient accounts receivable, net of allowances for contractual discounts and uncollectible
accounts of $9,119 and $0 at September 30, 1997 and December 31, 1996, respectively 16,978 --
Healthcare and other receivables 4,585 --
Receivables from New PCs 3,081 --
Inventories of drugs and supplies 310 --
Prepaid expenses and deposits 1,241 --
Restricted investments 250 --
----------- -----------
Total current assets 28,315 4
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization of $23,812
and $9 at September 30, 1997 and December 31, 1996, respectively 43,445 89
OTHER ASSETS:
Investments in affiliates 1,118 --
Other 234 7
----------- -----------
1,352 7
----------- -----------
Total assets $ 73,112 $ 100
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,550 --
Current portion of long-term debt and capital and direct financing lease obligations 1,145 --
Drafts payable 2,672 --
Accounts payable and accrued expenses 3,391 $ 97
Accrued healthcare costs 6,234 --
Accrued compensation and related expenses 5,638 --
Deferred revenue 653 --
Deferred income tax liability 1,491 --
----------- -----------
Total current liabilities 22,774 97
DIVIDENDS PAYABLE 298 --
LONG-TERM DEBT, net of current portion 8,291 --
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current portion 17,867 --
DEFERRED COMPENSATION AND OTHER 5,221 --
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK - $0.01 par value; 50,000,000 shares authorized;
15,000 and 0 shares issued and outstanding at September 30, 1997 and
December 31, 1996, respectively 13,762 --
STOCKHOLDERS' EQUITY:
Common Stock -
Class A - - Voting; $0.01 par value; 20,000,000 shares authorized;
6,473,961 and 138,000 shares issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 65 1
Class B - - Voting; $0.01 par value; 30,000,000 shares authorized; no shares issued or outstanding -- --
Treasury stocks (677) --
Additional paid in capital 9,625 5,008
Accumulated deficit (3,335) (4,955)
Notes receivable from stockholders for purchase of stock (814) (51)
Unamortized value of restricted stock awards (964) --
Warrants outstanding 1,000 --
----------- -----------
Total stockholders' equity 4,900 3
----------- -----------
Total liabilities and stockholders' equity $ 73,112 $ 100
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(All dollar amounts are expressed in thousands,
except earnings per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Reimbursement of Manager's Expenses $ 27,820 -- $ 73,731 --
Management fees 1,567 -- 4,280 --
----------- ----------- ----------- -----------
Net revenues 29,387 -- 78,011 --
OPERATING EXPENSES:
Clinic salaries, wages and benefits 11,495 -- 30,981 --
Purchased medical services 5,545 -- 14,587 --
Medical and office supplies 4,668 -- 11,340 --
General and administrative expenses 3,058 -- 8,654 --
Lease and rent expense 945 -- 2,494 --
Depreciation and amortization 1,188 -- 3,123 --
Corporate costs 819 -- 1,784 --
----------- ----------- ----------- -----------
Total operating expenses 27,718 -- 72,963 --
----------- ----------- ----------- -----------
Operating income 1,669 -- 5,048 --
OTHER INCOME (EXPENSE):
Other income 65 -- 65 --
Interest income 133 -- 133 --
Interest expense (921) -- (2,552) --
Reorganization costs (42) (2,024) (719) (2,721)
----------- ----------- ----------- -----------
Net income (loss) before provision
for income taxes 904 (2,024) 1,975 (2,721)
----------- ----------- ----------- -----------
PROVISION FOR INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) 904 (2,024) 1,975 (2,721)
ACCRETION ON PREFERRED STOCK 57 -- 57 --
PREFERRED STOCK DIVIDENDS 298 -- 298 --
----------- ----------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS 549 (2,024) 1,620 (2,721)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
EARNINGS (LOSS) PER SHARE $ 0.07 $ (674.66) $ 0.26 $ (907.00)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING 8,075,922 3,000 6,294,348 3,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 904 (2,024) 1,975 (2,721)
Adjustment to reconcile net income (loss) to net
cash provided by (used in) in operating activities-
Depreciation and amortization 1,242 -- 3,179 --
Equity in income of affiliates (199) -- (561) --
Changes in operating assets and liabilities
(excluding asset and liabilities assumed
by Physician Partners, Inc.):
Patient accounts receivable, net (547) -- 275 --
Healthcare and other receivables (127) -- (99) --
Receivables from New PCs (1,569) -- (3,082) --
Inventories of drugs and supplies 8 -- 15 --
Prepaid expenses and deposits (282) -- (457) --
Other assets -- -- 83 --
Accounts payable and accrued expenses 1,453 -- 1,381 --
Accrued healthcare costs 72 -- (112) --
Deferred revenue 14 -- 63 --
Accrued compensation and related expenses (2,795) -- (1,904) --
Deferred compensation and other (13) -- (637) --
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities (1,839) (2,024) 119 (2,721)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,036) -- (1,833) --
Proceeds from investments -- -- 100 --
----------- ----------- ----------- -----------
Net cash used in investing activities (1,036) -- (1,733) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on borrowings under line of credit agreement (3,865) -- (4,550) --
Principal payments on long-term debt and direct
financing lease obligation (6,384) -- (7,654) --
Proceeds from repayments of notes receivable from
stockholders 156 -- 211 3
Cash assigned to Physician Partners, Inc. in merger -- -- 1,027 --
Proceeds from issuance of warrants 1,000 -- 1,000 --
Proceeds from issuance of preferred stock 13,705 -- 13,705 --
Purchase of treasury stock (233) -- (600) --
Reorganization costs paid by New PCs -- 2,024 342 2,721
----------- ----------- ------------ -----------
Net cash provided by financing activities 4,302 2,024 3,481 2,724
----------- ----------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,504 -- 1,866 3
CASH AND CASH EQUIVALENTS, beginning of period 366 3 4 --
----------- ----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,870 $ 3 $ 1,870 $ 3
----------- ----------- ------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 918 $ -- $ 2,743 $ --
Cash paid for income taxes -- -- -- --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS STATEMENT.
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (continued)
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<S> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On February 1, 1997, as a result of the Merger, PPI succeeded to the assets and liabilities of the Old PCs. The book value of
the Old PCs assets and liabilities, including $1 million of cash, at January 31, 1997 are presented below:
Current assets $ 23,769
Property, plant and equipment 44,722
Other long-term assets 1,597
Current liabilities 28,777
Long-term liabilities 38,975
Contributed Equity 2,336
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
PHYSICIAN PARTNERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(All amounts are expressed in thousands, except number of shares)
(Unaudited)
<TABLE>
<CAPTION>
Class A
Common Stock
------------ Unamortized
Number Additional Value of Stock
of Warrants Treasury Paid in Restricted Subscription Accumulated
Shares Amount Outstanding Stock Capital Stock Awards Receivable Deficit Total
--------- ------ ------------- -------- ----------- ------------ ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31, 1996 138,000 $ 1 $ -- $ -- $ 5,008 -- $ (51) $ (4,955) $ 3
Issuance of
common stock 6,338,961 64 -- -- -- -- -- -- 64
Retirement of
common stock (3,000) -- -- -- -- -- -- -- --
Forfeiture of
common stock -- -- -- -- (168) 111 -- -- (57)
Repurchase of
common stock -- -- -- (677) -- -- -- -- (677)
Assumption of
Old PC equity -- -- -- -- 4,785 (1,192) (974) -- 2,619
Repayment of stock
subscription -- -- -- -- -- -- 211 -- 211
Amortization of
stock awards -- -- -- -- -- 117 -- -- 117
Warrants issued -- -- 1,000 -- -- -- -- -- 1,000
Preferred stock
dividends -- -- -- -- -- -- -- (298) (298)
Accretion on
preferred stock -- -- -- -- -- -- -- (57) (57)
Net income -- -- -- -- -- -- -- 1,975 1,975
---------- ------ ------------- -------- --------- ------------ ---------- ------------- -------
BALANCE,
September 30, 1997 6,473,961 $ 65 $ 1,000 $ (677) $ 9,625 $ (964) $ (814) $ (3,335) $ 4,900
---------- ------ ------------- -------- --------- ------------ ---------- ------------- -------
---------- ------ ------------- -------- --------- ------------ ---------- ------------- -------
</TABLE>
<PAGE>
PHYSICIAN PARTNERS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of the management of Physician Partners, Inc. ("PPI"), the
unaudited interim financial statements contained in this report reflect all
adjustments, consisting of only normal recurring accruals, which are
necessary for a fair presentation of the financial position and the results
of operations for the interim periods presented. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
These financial statements, footnote disclosures and other information should
be read in conjunction with the financial statements and the notes thereto
included in PPI's special filing under Form 10-K for the period ended
December 31, 1996.
2. REORGANIZATION AND MERGER AGREEMENT:
On February 1, 1997, certain reorganization and merger transactions (the
"Transactions") contemplated by the Amended and Restated Agreement and Plan
of Reorganization and Merger (the "Reorganization and Merger Agreement")
among Medford Clinic, P.C. ("Old Medford"), HealthFirst Medical Group, P.C.
("Old HealthFirst"), The Corvallis Clinic, P.C. ("Old Corvallis," and,
together with Old Medford and Old HealthFirst, referred to herein,
collectively as the "Old PCs"), and PPI, were consummated. Pursuant to the
terms of the Reorganization and Merger Agreement, each Old PC affected (a) a
reorganization (the "New PC Reorganization") of its corporate structure by
(i) incorporating a wholly-owned professional corporation subsidiary ( a "New
PC"), (ii) transferring to the New PC certain assets and liabilities relating
to the provider professional services business, (iii) making a pro rata
distribution to its shareholders of all of the capital stock of the New PC,
(iv) converting such Old PC from a professional corporation to a business
corporation and (v) entering into a 40 -year management agreement (the
"Management Agreement") with PPI and (b) a merger (the "Merger") with and
into PPI, resulting in consolidation of the operations (other than the
provider professional services businesses) of the Old PCs.
The Transactions resulted in a separation of operations of the Old PCs
between medical professional services activities (i.e., providers of medical
services), which were transferred to the New PCs prior to the Merger in the
New PC Reorganization, and the physician practice management activities of
the business, which were transferred to PPI in the Merger. In the Merger,
PPI succeeded to the ownership of substantially all of the assets and
liabilities of the three Old PCs, i.e., cash, receivables, inventories,
prepaids, property, plant and equipment, payables, accruals, debt, and
certain contractual commitments. As consideration in the Merger, the
shareholders of the Old PCs received stock of PPI.
Under the Management Agreement, PPI provides physician practice management
services to the New PCs. Services provided include management and
administrative services; capital resources, facilities, equipment and
supplies are also provided by PPI under the Management Agreement. As
consideration, PPI is entitled to (a) reimbursement of all managerial costs
and expenses ("Manager's Expenses") incurred by PPI and (b) a management fee
equal to 16% of (i) net revenues relating to services provided by the New PCs
less (ii) Manager's Expenses. The New PCs are responsible for providing
medical services and the related costs for compensation and benefits to the
providers employed thereby.
The Management Agreement was modified in the third quarter 1997 for a $1.2
million one-time payment to the New PCs. The payment will be made in
December 1997 or may be recorded against the receivables from New PCs
balance. The New PCs remain contractually obligated to pay any remaining
receivable balance in future periods.
<PAGE>
The parties to the Transactions have received an opinion from tax counsel
that for federal income tax purposes, it is more likely than not that the
Merger will be a tax-free transaction. If the IRS or tax court were to
determine that the merger was not tax free, there would be significant
adverse tax consequences to the parties to the Transaction and their
respective shareholders. No opinion was requested from tax counsel with
respect to the New PC Reorganization. No ruling was requested from the
Internal Revenue Service ("IRS") regarding the tax consequences of the Merger
or the New PC Reorganization.
In connection with the Transactions, the Old PCs entered into an expense
sharing agreement, which established the basis upon which certain costs
incurred in connection with the Transactions are to be allocated among the
Old PCs. The New PCs have assumed the obligations of the respective Old PCs
under the expense sharing agreement.
3. NET REVENUES:
The following represents amounts included in the determination of net revenue
from the effective date of Transactions (in thousands):
Corvallis HealthFirst Medford Combined
--------- ----------- -------- ---------
Net Clinic Revenue $ 28,056 $ 42,954 $ 29,468 $ 100,478
Less: Manager's Expenses 20,850 31,205 21,676 73,731
--------- ----------- -------- ---------
Adjusted Revenue 7,260 11,749 7,792 26,747
X 16% X 16% X 16% X 16%
--------- ----------- -------- ---------
Management Fee 1,153 1,880 1,247 4,280
Reimbursement of
Manager's Expenses 73,731
--------
PPI Net Revenue $78,011
--------
--------
4. INCOME TAXES:
During 1997, PPI anticipates improved operations and will be reversing a
portion of the valuation reserve against the deferred tax assets. Therefore,
the current period tax provision will be offset by a tax benefit recognized
upon the reversal of the valuation allowance resulting in no tax provision
being reflected in the accompanying statement of operations.
5. TREASURY STOCK:
Six shareholders of the Old PCs exercised their dissenters rights under the
Oregon Business Corporation Act. Accordingly, they were entitled to receive
the fair value of the shares they owned. PPI repurchased the dissenters'
shares for an aggregate amount of $677,000.
6. LINE OF CREDIT:
Effective August 25, 1997, PPI's line of credit was increased from $7.5
million to $15.0 million. PPI, at its discretion, may make borrowings at
prime rate or in $.5 million increments at LIBOR plus LIBOR margin. At
September 30, 1997, $1.5 million was outstanding under the line of credit
with an effective interest rate of 8.5%. The line of credit contains certain
financial covenants, which, among other things, require PPI to meet certain
financial goals. PPI was in compliance with those covenants at September 30,
1997. The line has an annual commitment fee on the unused portion of .25%.
7. PREFERRED REDEEMABLE STOCK:
On July 10, 1997, PPI and First Union Capital Partners, Inc. ("First Union")
entered into the Preferred Stock and Warrant Purchase Agreement (the
"Purchase Agreement"). Pursuant to the Purchase Agreement, First Union
purchased from PPI, for a total purchase price of $15 million (i) 15,000
shares of Series B Cumulative Redeemable Preferred Stock of PPI ("Preferred
Shares") and (ii) a Common Stock Purchase Warrant (the "Warrant") to purchase
up to 1,799,893 shares (the "Warrant Shares") of Class B Common Stock of PPI
at an exercise price of $.01 per share. The Preferred Shares rank senior to
all other classes of capital stock of PPI as to liquidation, dividends,
redemptions and any other payment or distribution with respect to capital
stock. Any portion of the Preferred Shares may be redeemed at any time at a
price equal to $1,000 per share plus accrued and unpaid dividends, which
accrue at the annual rate of 9%, provided that all Preferred Shares must be
redeemed by June 30, 2005 or earlier upon the occurrence of certain
enumerated events (including change in control of PPI , public offering by
PPI, failure by PPI to meet certain financial covenants or a material breach
under the Purchase Agreement).
The number of Warrant Shares that First Union may purchase under the Warrant
may be reduced to 687,919 shares if the Preferred Shares are redeemed in full
by June 30, 1998, to 942,784 if redeemed in full by June 30, 1999, and to
1,212,228 if redeemed in full by June 30, 2000. First Union has the right to
sell to PPI the Warrant and the Warrant Shares at a price equal to fair
market value after June 30, 2002 or, if earlier, upon the occurrence of
certain enumerated events, which events are similar to those that require PPI
to redeem Preferred Shares in full. First Union has certain demand, piggyback
and other registration rights. The Warrant has been assigned a value of $1.0
million per the Purchase Agreement. However, a valuation is being completed
during the fourth quarter on the Warrant and the value may be subsequently
adjusted. First Union and any subsequent holders of Preferred Shares, the
Warrant and Warrant Shares are prohibited from transferring such securities
to any competitor of PPI.
8. EARNINGS PER SHARE:
Common stock equivalents were calculated assuming full exercise of the Warrant
Shares described in Footnote 7. If the Warrant Shares are reduced due to early
redemption of the Preferred Shares, weighted shares outstanding would decrease.
Fully diluted earnings per share is equal to primary earnings per share as of
September 30, 1997.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes some forward-looking statements that involve
a number of risks and uncertainties. Actual results may differ materially
from historical results or from the results discussed in such forward-looking
statements or outcomes otherwise currently expected or sought by Physician
Partners, Inc. ("PPI").
OVERVIEW
PPI is a physician practice management company ("PPM") that operates primary
care and multi-specialty clinics in the Pacific Northwest. PPI was formed in
June 1996 in connection with certain reorganization and merger transactions
(the "Transactions") contemplated by the Amended and Restated Agreement and
Plan of Reorganization and Merger (the "Reorganization and Merger Agreement")
among Medford Clinic, P.C. ("Old Medford"), HealthFirst Medical Group, P.C.
("Old HealthFirst"), The Corvallis Clinic, P.C. ("Old Corvallis," and,
together with Old Medford and Old HealthFirst, referred to herein,
collectively as the "Old PCs"), and PPI, which transactions were consummated
on February 1, 1997. Pursuant to the terms of the Reorganization and Merger
Agreement, each Old PC affected (a) a reorganization (the "New PC
Reorganization") of its corporate structure by (i) incorporating a
wholly-owned professional corporation subsidiary ( a "New PC"), (ii)
transferring to the New PC certain assets and liabilities relating to the
provider professional services business, (iii) making a pro rata distribution
to its shareholders of all of the capital stock of the New PC, (iv)
converting such Old PC from a professional corporation to a business
corporation and (v) entering into a 40 -year management agreement (the
"Management Agreement") with PPI and (b) a merger (the "Merger") with and
into PPI, resulting in consolidation of the operations (other than the
provider professional services businesses) of the Old PCs.
In exchange for providing management services under the Management Agreement,
and certain facilities and equipment to the managed clinics, PPI is
reimbursed for all managerial costs and expenses ("Manager's Expenses")
incurred by PPI and is paid a management fee. The management fee is 16% of
(i) net revenues relating to services provided by the New PCs less (ii)
Manager's Expenses. PPI has a Management Agreement with each of the three
New PCs, i.e., HealthFirst Medical Group, P.C., Medford Clinic, P.C. and The
Corvallis Clinic, P.C.
The three New PCs have 28 clinical delivery sites and nearly 300 providers.
PPI's strategy is to pioneer innovative health care delivery into the 21st
century as a leading primary care-based multi-specialty group PPM. PPI
endeavors to deliver high quality health care by involving physicians at
every level of the organization. The majority of PPI's common stock is owned
by physicians and the Board of Directors maintains a physician majority.
To increase revenues, PPI is working with the New PCs to recruit additional
physicians, merge other physician groups in the area into the New PCs, and aid
in the negotiation of managed care contracts. PPI is working on initiatives
anticipated to reduce the New PCs' Manager's Expenses through regional
purchasing and insurance contracts and through the consolidation of various
services. PPI intends to expand its presence in the Pacific Northwest through
acquisitions of physician groups in new areas.
RESULTS OF OPERATIONS
1997 RESULTS
Reorganization costs of $.7 million in the first nine months of 1997 and $2.0
million and $2.7 million in the third quarter and first nine months of 1996,
respectively, were incurred to complete the Transactions. These costs
consisted of legal, accounting, and printing expenses and will not continue
after 1997. Corporate costs of $.8 million and $1.8 million in the third
quarter and first nine months of 1997, respectively, consisted of the
salaries, wages and benefits of PPI management, outside professional
expenses, and the operating expenses of the corporate office. These costs
will increase during the remainder of 1997 and 1998 as PPI continues to build
its management team. The Management Agreement was modified in the third
quarter 1997 for a $1.2 million one-time payment to the New PCs. The payment
will be made in December 1997 or will be recorded against the receivables
from New PCs balance.
<PAGE>
PRO FORMA INFORMATION
As previously discussed, the Merger of the Old PCs with and into PPI became
effective February 1, 1997. As a result of the Merger, PPI succeeded to the
ownership of substantially all of the assets and liabilities of the Old PCs.
Also, an integral part of the Merger was the Management Agreement that calls
for PPI providing physician practice management services to each of the three
New PCs.
The actual results reflect only eight months of post Merger operating
activities in the first nine months of 1997 and no operating activities for the
third quarter and first nine months of 1996. Summarized unaudited pro forma
financial information is presented below. The pro forma balance sheet is
presented as if the Merger had occurred on December 31, 1996 and the pro forma
income statements are presented as if the Merger had taken place on January 1,
1996.
Summarized Unaudited Pro Forma Balance Sheet as of December 31, 1996 (all
amounts are in thousands):
ASSETS:
Current assets $ 25,050
Property, plant and equipment 45,064
Other assets 1,032
---------
Total assets 71,146
---------
---------
LIABILITIES:
Current liabilities 33,945
Long-term debt and capital lease obligations 28,602
Other long-term liabilities 6,489
---------
Total liabilities 69,036
---------
SHAREHOLDERS' EQUITY 2,110
---------
Total liabilities and shareholders' equity 71,146
---------
---------
Summarized Unaudited Pro Forma Income Statements (all amounts are in
thousands, except earnings per share):
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Reimbursement of Manager's Expenses $ 27,820 $ 27,573 $ 82,717 $ 77,163
Management fee 1,567 939 4,853 4,203
---------- ---------- --------- ---------
Net revenues 29,387 28,512 87,570 81,366
Manager's Expenses 27,820 27,573 82,717 78,163
Other income (198) -- (198) --
Corporate costs 819 819 1,899 1,899
---------- ---------- --------- ---------
Net income before provision for income taxes 946 120 3,152 2,304
Provision for income taxes 378 48 1,261 922
---------- ---------- --------- ---------
NET INCOME 568 72 1,891 1,372
Accretion and Dividends 355 -- 355 --
---------- ---------- --------- ---------
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS 213 72 1,536 1,372
---------- ---------- --------- ---------
EARNINGS PER SHARE $ 0.03 $ 0.01 $ 0.19 $ 0.21
---------- ---------- --------- ---------
---------- ---------- --------- ---------
WEIGHTED SHARES OUTSTANDING 8,075,922 6,473,961 7,013,816 6,473,961
</TABLE>
<PAGE>
This pro forma financial information has been prepared by PPI based on the
historical financial statements of PPI and the Old PCs. The pro forma income
statements reflects the following adjustments to historical results:
a. Elimination of net revenues of the Old PCs from providing medical services
as these revenues will be retained by the New PCs.
b. Elimination of historical costs for provider compensation and benefits as
such costs will be the responsibility of the New PCs.
c. Addition of the revenues to be earned by PPI under the terms of the
Management Agreement.
d. PPI's corporate overhead costs in 1997 were adjusted to include the costs
in January 1997. The 1996 results were adjusted to reflect corporate
overhead costs similar to 1997.
e. Elimination of nonrecurring costs related to the New PC Reorganization
and Merger.
f. Elimination of historical provision for income taxes and addition of
provision for income taxes based on pro forma pretax net income.
The pro forma income statements may not be indicative of actual results if
the Transactions had occurred on the dates indicated or which may be realized
in the future.
PRO FORMA RESULTS:
The increase in the reimbursement of Manager's Expenses of $5.5 million from
$77.2 million for the first nine months of 1996 to $82.7 million for the
first nine months of 1997 is mainly attributable to increases in clinic
salaries, wages and benefits, purchased medical services, and medical and
office supplies. Clinic salaries and wages increased $.9 million in the first
nine months of 1997 compared to 1996 due to increases in clinic employees to
support providers added in late 1996. Purchased medical services increased
$1.9 million for the first nine months of 1997 compared to 1996 due to an
increase in capitated lives in the various managed care plans and higher
utilization. The $1.3 million increase in medical and office supplies is due
to higher production and increased use of oncology drugs in Medford.
Manager's Expenses will continue to increase as the New PCs' revenues
increase during the fourth quarter 1997 and into 1998; however, they are
expected to remain relatively stable as a percentage of net revenues.
The $.7 million increase in management fees for the nine months ended
September 30, 1997 compared to 1996 is due to an increase in the New PCs'
revenues of $10.4 million only partially offset by the increase in Manager's
Expenses of $5.5 million. PPI anticipates that management fee revenue will
continue to increase during the fourth quarter 1997 and throughout 1998 as
the New PCs' operating results improve and PPI purchases additional clinics.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Working capital increased from a $.1 million deficit at December 31, 1996 to
a surplus of $5.5 million at September 30, 1997. Based on the pro forma
December 31, 1996 balance sheet, working capital increased $14.4 million from
an $8.9 million deficit at December 31, 1996. The increase is due to the use
of the proceeds from the sale of preferred stock to reduce current
liabilities and a $3.9 million construction loan classified as short-term at
December 31, 1996 being converted to long-term debt in the second quarter
1997. Cash flows from operations used $1.8 million in the third quarter of
1997 and generated $.1 million in the first nine months of 1997. The use of
funds in the third quarter is due to the increase in the Receivable from New
PCs of $1.6 million and the $2.9 million decrease in accrued compensation
which were partially offset by an increase in accounts payable and accrued
expenses. The decrease in accrued compensation is due to funding the 1996
employer's portion of HealthFirst's and Medford's defined contribution plans
with proceeds from the sale of preferred stock to First Union (see subsequent
section - "Redeemable Preferred Stock").
<PAGE>
At September 30, 1997, PPI had cash and cash equivalents of approximately
$1.9 million and $13.5 million available under its operating line of credit.
PPI believes that the cash and cash equivalents, combined with the line of
credit and cash flows from operations, is sufficient to meet PPI's planned
capital expenditures and working capital needs for the next 12 months.
CAPITAL EXPENDITURES
Capital expenditures in the third quarter of 1997 and first nine months of
1997 were $1.0 million and $1.8 million, respectively. Capital expenditures
during the remainder of 1997 are estimated to be approximately $2.0 million
and are mainly for purchases of medical and office equipment. 1998 capital
expenditures could increase if certain investments are made in ancillary
services.
LINE OF CREDIT
The Transactions resulted in PPI assuming all debt obligations of the Old
PCs. The Old PCs previously had separate lines of credit with an aggregate
$5.5 million limit. In February 1997, the individual lines of credit were
consolidated into one operating line of credit with a $7.5 million limit. In
August 1997, the line of credit was increased to $15.0 million in
anticipation of potential acquisitions. PPI, at it's discretion, may make
borrowings at prime rate or in $.5 million increments at LIBOR plus LIBOR
margin. At September 30, 1997, $1.5 million was outstanding under the line
of credit with an effective interest rate of 8.5%. The line has an annual
commitment fee on the unused portion of .25%. The line of credit contains
certain covenants, which, among other things, require PPI to meet certain
financial goals. PPI was in compliance with those covenants at September 30,
1997. At September 30, 1997 PPI had approximately $13.5 million available on
the operating line of credit.
REDEEMABLE PREFERRED STOCK
On July 10, 1997, PPI and First Union Capital Partners, Inc. ("First Union")
entered into the Preferred Stock and Warrant Purchase Agreement (the
"Purchase Agreement"). Pursuant to the Purchase Agreement, First Union
purchased from PPI, for a total purchase price of $15 million (i) 15,000
shares of Series B Cumulative Redeemable Preferred Stock of PPI ("Preferred
Shares") and (ii) a Common Stock Purchase Warrant (the "Warrant") to purchase
up to 1,799,893 shares (the "Warrant Shares") of Class B Common Stock of PPI
at an exercise price of $.01 per share. The Preferred Shares rank senior to
all other classes of capital stock of PPI as to liquidation, dividends,
redemptions and any other payment or distribution with respect to capital
stock. Any portion of the Preferred Shares may be redeemed at any time at a
price equal to $1,000 per share plus accrued and unpaid dividends, which
accrue at the annual rate of 9%, provided that all Preferred Shares must be
redeemed by June 30, 2005 or earlier upon the occurrence of certain
enumerated events (including change in control of PPI, public offering by
PPI, failure by PPI to meet certain financial covenants or a material breach
under the Purchase Agreement).
The number of Warrant Shares that First Union may purchase under the Warrant
may be reduced to 687,919 shares if the Preferred Shares are redeemed in full
by June 30, 1998, to 942,784 if redeemed in full by June 30, 1999, and to
1,212,228 if redeemed in full by June 30, 2000. First Union has the right to
sell to PPI the Warrant and the Warrant Shares at a price equal to fair
market value after June 30, 2002 or, if earlier, upon the occurrence of
certain enumerated events, which events are similar to those that require PPI
to redeem Preferred Shares in full. First Union has certain demand, piggyback
and other registration rights. The Warrant has been assigned a value of $1.0
million per the Purchase Agreement. However, a valuation is being completed
during the fourth quarter on the Warrant and the value may be subsequently
adjusted. First Union and any subsequent holders of Preferred Shares, the
Warrant and Warrant Shares are prohibited from transferring such securities
to any competitor of PPI.
$13.3 million of the available proceeds of $14.7 million (net of $.3 million
of transaction costs) were used during the third quarter 1997 to retire debt
of $9.9 million and fund accrued pension contributions of $3.4 million
assumed by PPI in the Transactions. The retirement of debt will reduce
future interest expense and principal payments by $2.8 million. The
remaining proceeds will be used to make a $1.2 million one-time payment to
the New PCs in the fourth quarter 1997.
It is uncertain at this time what funds will be used to redeem the preferred
stock. Management will continue to evaluate the various sources of financing
available, including but not limited to, traditional commercial bank debt,
private debt, private equity, public equity and public debt.
<PAGE>
ACQUISITIONS
PPI is currently involved in acquisition discussions with various medical
clinics. PPI has entered into an initial agreement with one clinic and is
currently negotiating letters of intent with two other clinics. Management
anticipates consummating a transaction in late 1997 or early 1998.
Management believes the existing line of credit of $15.0 million, with
availability of $13.5 million as of September 30, 1997, is adequate to fund
these acquisitions. Management continues to evaluate various alternatives to
finance potential acquisitions which may exceed the existing available
funding. Such alternatives include but are not limited to, traditional
commercial bank debt, private debt, private equity, public equity and public
debt. The availability and timing of these alternatives depend on market and
other conditions and the acceptability of the terms of such financing
alternatives to PPI.
<PAGE>
PHYSICIAN PARTNERS, INC.
PART II -- OTHER INFORMATION
ITEM 1: Legal Proceedings
None.
ITEM 2: Changes in Securities
None.
ITEM 3: Defaults Upon Senior Securities
None.
ITEM 4: Submission of Matters to a vote of Security Holders
None.
ITEM 5: Other Information
None.
ITEM 6: Exhibit and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None.
<PAGE>
PHYSICIAN PARTNERS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has caused this report to be signed on its behalf by
the undersigned there onto duly authorized.
PHYSICIAN PARTNERS, INC.
(Registrant)
Date: November 14, 1997 By: /s/ David Goldberg
--------------------------------
David Goldberg,
President and Chief Executive
Officer
Date: November 14, 1997 By: /s/ Tim E. Dupell
--------------------------------
Tim E. Dupell,
Chief Financial Officer,
Senior Vice President
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