<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _________
Commission file number 333-15595
PHYSICIAN PARTNERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 93-1217068
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Address of Principal Executive Offices
Registrant's telephone number, including area code
111 SW Columbia Street, Suite 725
Portland, Oregon 97201
(503) 224-2249
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
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
<PAGE> 2
for the past 90 days. Yes No X
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10 K. [x]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing. (See definition of affiliate in Rule 405.)
$5,769,634
Note. If a determination as to whether a particular person or
entity is an affiliate cannot be made without involving unreasonable
effort and expense, the aggregate market value of the common stock
held by non-affiliates may be calculated on the basis of assumptions
reasonable under the circumstances, provided that the assumptions are
set forth in this form.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ________ No ________
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
7,475,174 shares of Class A Common Stock were outstanding as of April 3, 1997
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
This report contains only financial statements for fiscal 1996,
pursuant to Rule 15d-2 under the Securities Exchange Act of 1934, as amended.
<PAGE> 3
PHYSICIAN PARTNERS, INC.
INDEX TO FINANCIAL STATEMENTS
1. PHYSICIAN PARTNERS, INC.
Report of Independent Public Accountants
Balance Sheet as of December 31, 1996
Statement of Operations for the period from inception (June 20, 1996) to
December 31, 1996
Statement of Stockholders' Equity for the period from inception (June 20, 1996)
to December 31, 1996
Statement of Cash Flows for the period from inception (June 20, 1996) to
December 31, 1996
Notes to Financial Statements
2. HEALTHFIRST MEDICAL GROUP, P.C.:
Report of Independent Public Accountants
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Stockholders' Equity for the years ended December 31, 1996,
1995, and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994
Notes to Financial Statements
3. MEDFORD CLINIC, P.C.:
Report of Independent Public Accountants
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994
Notes to Financial Statements
<PAGE> 4
PHYSICIAN PARTNERS, INC.
INDEX TO FINANCIAL STATEMENTS
4. THE CORVALLIS CLINIC, P.C.:
Report of Independent Public Accountants
Balance Sheets as of December 31, 1996 and November 30, 1995
Statements of Operations for the thirteen months ended December 31, 1996 and the
years ended November 30, 1995 and 1994
Statements of Cash Flows for the thirteen months ended December 31, 1996 and the
years ended November 30, 1995 and 1994
Statements of Accumulated Deficit for the thirteen months ended December 31,
1996 and the years ended November, 1995 and 1994
Notes to Financial Statements
<PAGE> 5
PHYSICIAN PARTNERS, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 6
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 December 31, 1996, and the related statements of
operations, stockholders' equity and cash flows for the period from inception
(June 20, 1996) to December 31, 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
December 31, 1996, and the results of its operations and its cash flows for the
period from inception (June 20, 1996) to December 31, 1996 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
April 3, 1997
<PAGE> 7
PHYSICIAN PARTNERS, INC.
BALANCE SHEET--DECEMBER 31, 1996
ASSETS
------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Cash $ 4,267
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $8,603 88,387
OTHER ASSETS 7,318
-----------
Total assets $ 99,972
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Payable to clinics $ 96,953
COMMITMENTS AND CONTINGENCIES
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;
138,000 shares issued and outstanding 1,380
Class B--Voting; $0.01 par value; 30,000,000 shares authorized;
no shares issued or outstanding -
Additional paid in capital 5,007,865
Stock subscription receivable (51,030)
Accumulated deficit (4,955,196)
-----------
Total stockholders' equity 3,019
-----------
Total liabilities and stockholders' equity $ 99,972
===========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
<PAGE> 8
PHYSICIAN PARTNERS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
REVENUES $ -
-----------
OFFICER AND DIRECTOR COMPENSATION EXPENSE 692,820
REORGANIZATION COSTS 4,262,395
-----------
Operating loss (4,955,215)
OTHER INCOME (EXPENSE) 19
-----------
Net loss before income taxes (4,955,196)
-----------
INCOME TAXES -
-----------
NET LOSS $(4,955,196)
===========
LOSS PER SHARE $ (107.39)
===========
NUMBER OF SHARES USED IN LOSS PER SHARE CALCULATION 46,144
===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 9
PHYSICIAN PARTNERS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Class A
Common Stock
------------------ Additional Stock
Number Paid in Subscription Accumulated
of Shares Amount Capital Receivable Deficit Total
--------- ------ ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 20,
1996 (inception) - $ - $ - $ - $ - $ -
Issuance of common
stock 138,000 1,380 745,470 - - 746,850
Stock subscription
receivable - - - (51,030) - (51,030)
Reorganization
costs incurred
by Founding
Clinics - - 4,262,395 - - 4,262,395
Net loss - - - - (4,955,196) (4,955,196)
------- ------ ---------- -------- ----------- -----------
BALANCE,
December 31, 1996 138,000 $1,380 $5,007,865 $(51,030) $(4,955,196) $ 3,019
======= ====== ========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 10
PHYSICIAN PARTNERS, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JUNE 20, 1996) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C>
Net loss $(4,955,196)
Adjustments to reconcile net loss to net cash used in operating
activities-
Reorganization costs incurred by Founding Clinics 4,262,395
Compensation expense for stock issued to officers and directors 692,820
-----------
Net cash provided by operating activities 19
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (96,990)
Other assets (7,318)
-----------
Net cash used in investing activities (104,308)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 3,000
Borrowings from Founding Clinics 105,556
-----------
Net cash provided by financing activities 108,556
-----------
NET CHANGE IN CASH 4,267
CASH, beginning of period -
-----------
CASH, end of period $ 4,267
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ -
Cash paid for income taxes -
Noncash transactions-
Stock subscriptions receivable 51,030
Reduction in payable to Clinics related to depreciation 8,603
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 11
PHYSICIAN PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
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, which was consummated on February 1, 1997, resulted 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 were 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., cash,
receivables, inventories, prepaids, property, plant and equipment, payables,
accruals, debt, and certain contractual commitments, were transferred to PPI. As
consideration, the stockholders of the existing Founding Clinics received stock
of PPI.
An integral part of the reorganization is a 40-year management agreement that
calls for PPI to provide physician practice management services to the New PCs.
Services provided include management and administrative services, capital
resources, facilities, equipment and supplies. 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 provider compensation and benefits.
See Note 9 for information regarding the pro forma financial effects of the
reorganization transaction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and consists primarily of
office equipment and leasehold improvements. Depreciation is computed using the
straight-line method over the life of the lease or estimated useful lives, which
range from three to seven years. Upon sale or other disposition of assets, the
cost and the related accumulated depreciation are removed from the accounts and
a gain or loss, if any, is reflected in income.
Income Taxes
PPI accounts for income taxes using the liability method and deferred taxes are
determined based on the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities given the provisions
of the enacted tax laws.
<PAGE> 12
Use of Estimates
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of 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.
3. REORGANIZATION COSTS:
The Founding Clinics have incurred costs of $4,262,395 related to the
reorganization transaction through December 31, 1996. These costs have been
treated as expenses in the accompanying financial statements with a contra
credit to additional paid-in capital.
Costs to be incurred between December 31, 1996 and February 1, 1997, the
effective date of the reorganization transaction, are estimated to be
approximately $300,000 and will be accounted for in the PPI financial statements
in the same manner as the costs incurred through December 31, 1996.
4. INCOME TAXES:
A reconciliation between the actual benefit for income taxes for 1996 and the
benefit for income taxes at the federal statutory rate is as follows:
<TABLE>
<CAPTION>
<S> <C>
Income tax benefit at the federal statutory rate $1,734,319
State tax benefit, net of federal tax 70,438
Nondeductible reorganization costs (691,256)
Costs allocated to the Founding Clinics for tax purposes (432,590)
Valuation allowance (645,111)
Other (35,800)
----------
Income taxes per financial statements $ -
==========
</TABLE>
Differences between accounting rules and tax laws cause differences between the
bases of certain assets and liabilities for financial reporting purposes and tax
purposes. The tax effect of these differences, to the extent they are temporary,
are recorded as deferred tax assets and consisted of the following components as
of December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Deductible reorganization costs capitalized for tax
and expensed for financial reporting purposes $ 645,111
Less- Valuation allowance (645,111)
---------
Net deferred tax assets $ -
=========
</TABLE>
5. LOSS PER SHARE:
The loss per share was computed by dividing net loss by the weighted average
number of common shares outstanding during the period.
6. COMMON STOCK TRANSACTIONS:
The Founding Clinics were issued the initial 3,000 shares of PPI Class A common
stock for $3,000.
Stock awards aggregating 108,000 shares of PPI were granted to four officers of
the Company in October 1996. These awards were initially subject to a three-year
vesting requirement. In the case of three of the officers, the vesting
requirement was subsequently eliminated. The fourth officer is no longer
employed, but will be entitled to retain the stock award as long as the terms of
his separation agreement are adhered to. The estimated fair value of these
awards in the aggregate amount of $595,080 has been recognized as compensation
expense in 1996.
<PAGE> 13
A director of the Company purchased 27,000 shares of PPI Class A common stock
for $51,030 in the form of a stock subscription receivable. The price paid for
the shares was based upon an independent appraisal. However, the estimated fair
value of these shares for accounting purposes exceeded the purchase price by
$97,740 and this amount has been recognized as compensation expense in 1996.
7. STOCK OPTION PLANS:
The reorganization plan included 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 shares of PPI Class A common
stock for issuance under the plans. None of these options had been granted as
of December 31, 1996.
8. COMMITMENTS AND CONTINGENCIES:
Several officers of PPI have employment agreements which establish annual
compensation levels and also provide for an annual incentive bonuses. In the
event the officers are terminated by PPI without cause, they would be entitled
to termination benefits equivalent to one year of their base salary, and health
and disability insurance for one year.
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> <C>
1997 $ 87,810
1998 87,810
1999 87,810
2000 87,810
2001 87,810
Thereafter 153,667
--------
Total $592,717
========
</TABLE>
There were six shareholders of the Founding Clinics who asserted their
dissenters rights. Accordingly, they will be entitled to receive the fair value
of the shares they own. In accordance with the Oregon Business Act, fair value
for these purposes means the value of the shares immediately before the
reorganization transaction was consummated, excluding any value arising from the
merger. The fair value of dissenters rights have not yet been determined,
however, if such rights are determined to be of significant value, the amount to
be paid to dissenters could have a material adverse effect on PPI's financial
position and liquidity.
9. PRO FORMA INFORMATION:
As discussed in Note 1, effective February 1, 1997, the reorganization
transaction between PPI and the Founding Clinics was consummated. Substantially
all of the assets and liabilities of the Founding Clinics were transferred to
PPI as a result of the transaction. Also, an integral part of the reorganization
is a 40-year management agreement that calls for PPI to provide physician
practice management services to the New PCs.
Summarized unaudited pro forma financial information is presented below. The pro
forma balance sheet information is presented as if the reorganization
transaction had occurred on December 31, 1996 and the pro forma income statement
information is presented as if the transaction had taken place on January 1,
1996.
<PAGE> 14
Pro Forma Unaudited Balance Sheet Information-
ASSETS:
Current assets $ 25,050,000
Property, plant and equipment 45,064,000
Other assets 1,032,000
-------------
Total assets $ 71,146,000
=============
LIABILITIES:
Current liabilities $ 33,945,000
Long-term debt and capital lease obligations 28,602,000
Other long-term liabilities 6,489,000
-------------
Total liabilities 69,036,000
SHAREHOLDERS' EQUITY 2,110,000
-------------
Total liabilities and shareholders' equity $ 71,146,000
=============
Summarized Unaudited Pro Forma Income Statement Information-
NET REVENUES FROM MANAGEMENT FEES $ 115,811,000
OPERATING EXPENSES (108,641,000)
OTHER INCOME (EXPENSE) (3,115,000)
-------------
INCOME BEFORE INCOME TAXES 4,055,000
INCOME TAXES (1,622,000)
-------------
NET INCOME $ 2,433,000
=============
EARNINGS PER SHARE $ .37
=============
This pro forma financial information has been prepared by PPI based on the
historical financial statements of PPI and the Founding Clinics. The pro forma
statement of income reflects the following adjustments to historical results:
a. Elimination of net revenues of Founding Clinics from providing medical
services as these revenues will be retained by the New PCs.
b. Elimination of historic 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 were adjusted to reflect the estimated
annual cost for its initial year of operations.
e. Elimination of nonrecurring costs related to the reorganization
transaction.
f. Elimination of historic income taxes and addition of income taxes based on
pro forma pretax income.
g. Shares used in computing earnings per share were 6,638,250 consisting of
the current 138,000 outstanding shares of PPI plus the 6,500,250 shares
to be issued in connection with the merger.
The pro forma statement of income may not be indicative of actual results if
the reorganization transaction had occurred on the dates indicated or which may
be realized in the future.
<PAGE> 15
HEALTHFIRST MEDICAL GROUP, P.C.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 16
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, 1996 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, 1996. 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 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 HealthFirst Medical Group, P.C.
as of December 31, 1996 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, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 18, 1997
<PAGE> 17
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1995
ASSETS
------
<TABLE>
<CAPTION>
1996 1995
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 894,973 $ 124,916
Patient accounts receivable, net of allowances for
contractual discounts and uncollectible accounts of
$2,465,000 and $1,562,000 at December 31, 1996 and
1995, respectively 6,496,945 4,363,353
Healthcare and other receivables 2,847,813 2,396,299
Related party receivable 50,183 -
Income taxes receivable 57,923 167,988
Inventories of drugs and supplies - 195,395
Prepaid expenses and deposits 201,037 281,378
----------- -----------
Total current assets 10,548,874 7,529,329
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $5,768,533 and $3,534,908 at
December 31, 1996 and 1995, respectively 20,361,220 13,422,672
OTHER ASSETS - 122,548
----------- -----------
Total assets $30,910,094 $21,074,549
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,500,000 $ -
Current portion of long-term debt and capital and direct
financing lease obligations 4,662,933 2,958,506
Drafts payable - 164,792
Accounts payable 2,122,969 1,373,803
Accrued expenses 702,601 241,743
Accrued healthcare costs 2,936,373 610,190
Accrued compensation and related expenses 3,312,547 1,825,822
Deferred revenue 182,745 17,686
Current deferred tax liability - 1,844,262
----------- -----------
Total current liabilities 15,420,168 9,036,804
----------- -----------
LONG-TERM DEBT, net of current portion 5,065,973 3,711,488
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of
current portion 4,265,068 -
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES 3,795,282 627,000
LONG-TERM DEFERRED TAX LIABILITY - 102,522
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
Series 1 Class A--Voting; no par value; 800,000 shares authorized; 7,000 and
5,650 shares issued and outstanding at December 31, 1996 and 1995,
respectively 700,000 565,000
Series 2 Class A--Voting; no par value; 200,000 shares
authorized; 2,200 and 0 shares issued and outstanding
at December 31, 1996 and 1995, respectively 330,000 -
Series 3, 4 and 5 Class A--Voting; no par value;
200,000, 100,000 and 100,000 shares authorized, none
issued or outstanding at December 31, 1996 and 1995 - -
Class B--Nonvoting; no par value; 300,000 shares
authorized; 0 shares issued and outstanding at
December 31, 1996 and 1995 - -
Additional paid-in capital 1,878,968 -
Retained earnings 1,149,093 7,201,035
Notes receivable from stockholders for purchase of stock (439,609) (169,300)
Unamortized value of restricted stock awards (1,254,849) -
----------- -----------
Total stockholders' equity 2,363,603 7,596,735
----------- -----------
Total liabilities and stockholders' equity $30,910,094 $21,074,549
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 18
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -------
REVENUES:
<S> <C> <C> <C>
Fee-for-service, net $32,314,913 $22,834,493 $18,813,260
Prepaid healthcare 27,800,204 14,817,480 13,463,161
----------- ----------- -----------
Net revenues 60,115,117 37,651,973 32,276,421
Less- Provider compensation and benefits 21,610,346 9,529,634 8,375,513
----------- ----------- -----------
Net revenue less provider
compensation and benefits 38,504,771 28,122,339 23,900,908
----------- ----------- -----------
OPERATING EXPENSES:
Clinic salaries, wages and benefits 18,156,738 11,736,735 8,613,746
Purchased medical services 9,812,372 4,253,473 3,529,743
Medical and office supplies 6,281,140 4,376,539 3,076,359
General and administrative expenses 5,114,781 4,490,872 3,199,543
Lease and rent expense 1,572,965 853,232 655,205
Provision for uncollectible accounts 1,911,014 1,146,381 935,650
Depreciation and amortization 1,566,719 736,097 637,782
----------- ----------- -----------
Total operating expenses 44,415,729 27,593,329 20,648,028
----------- ----------- -----------
Operating income (loss) (5,910,958) 529,010 3,252,880
OTHER INCOME (EXPENSE):
Interest income 99,780 38,820 97,767
Interest expense (1,413,852) (188,650) (185,921)
Other 1,211,378 120,538 189,064
----------- ----------- -----------
Net income (loss) before provision
(benefit) for income taxes (6,013,652) 499,718 3,353,790
----------- ----------- -----------
PROVISION (BENEFIT) FOR INCOME TAXES (1,898,953) 207,952 1,416,323
----------- ----------- -----------
NET INCOME (LOSS) $(4,114,699) $ 291,766 $ 1,937,467
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 19
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------
Series 1 Series 2
class A Class A
---------------- ----------------
Number Number
of of
Shares Amount Shares Amount
------ -------- ------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 4,050 $405,000 - $ -
Issuance of common stock 1,000 100,000 - -
Redemption of common stock (100) (10,000) - -
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 - - - -
Common stock issued to acquire Suburban - - 2,200 330,000
Issuance of common stock 1,400 140,000 - -
Redemption of common stock (50) (5,000) - -
Repayment of notes receivable from stockholders - - - -
Costs related to Physician Partners, Inc. transaction - - - -
Net loss - - - -
----- -------- ----- --------
BALANCE, December 31, 1996 7,000 $700,000 2,200 $330,000
===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
------------------
Class B
------------------- Unamortized
Number Additional Value of
of Paid-In Restricted
Shares Amount Capital Stock Awards
------ --------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 1,065 $ 106,508 $ - $ -
Issuance of common stock - - - -
Redemption of common stock (1,065) (106,508) - -
Repayment of notes receivable from stockholders - - - -
Net income - - - -
------ --------- ---------- -----------
BALANCE, December 31, 1994 - - - -
Issuance of common stock - - - -
Redemption of common stock - - - -
Repayment of notes receivable from stockholders - - - -
Net income - - - -
------ --------- ---------- -----------
BALANCE, December 31, 1995 - - - -
Notes receivable from stockholders acquired from Suburban - - - -
Common stock issued to acquire Suburban - - 122,180 -
Issuance of common stock - - 1,756,788 (1,254,849)
Redemption of common stock - - - -
Repayment of notes receivable from stockholders - - - -
Costs related to Physician Partners, Inc. transaction - - - -
Net loss - - - -
------ --------- ---------- -----------
BALANCE, December 31, 1996 - $ - $1,878,968 $(1,254,849)
====== ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
Retained From
Earnings Stockholders Total
----------- ------------ -----------
<S> <C> <C> <C>
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 - (194,597) (194,597)
Common stock issued to acquire Suburban - - 452,180
Issuance of common stock - (140,000) 501,939
Redemption of common stock (4,000) - (9,000)
Repayment of notes receivable from stockholders - 64,288 64,288
Costs related to Physician Partners, Inc. transaction (1,933,243) - (1,933,243)
Net loss (4,114,699) - (4,114,699)
----------- --------- -----------
BALANCE, December 31, 1996 $1,149,093 $(439,609) $ 2,363,603
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 20
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(4,114,699) $ 291,766 $ 1,937,467
Adjustment to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Depreciation and amortization 1,566,719 736,097 637,782
Gain on sale of property, plant and
equipment - - (32,334)
Provision for deferred income taxes (1,935,784) 71,551 330,383
Compensation expense recognized for
provider stock awards 501,939 - -
Changes in operating assets and
liabilities (excluding assets and
liabilities purchased from Suburban):
Patient accounts receivable, net (1,380,592) (1,020,526) (813,916)
Healthcare and other receivables 301,337 568,116 (682,512)
Related party receivable 277,817 - -
Income taxes receivable 147,065 (167,988) -
Inventories of drugs and supplies 251,395 (16,336) 33,174
Prepaid expenses and deposits 192,341 (78,802) (10,330)
Other assets 225,281 (50,446) (31,240)
Drafts payable (164,792) (1,579,197) 1,743,989
Accounts payable 431,166 461,312 670,417
Accrued expenses 429,858 (38,539) 94,461
Income taxes payable - (358,992) 233,334
Accrued healthcare costs 984,184 91,752 109,643
Accrued compensation and related expenses 668,725 108,182 94,003
Deferred revenue 165,059 2,686 6,700
Deferred compensation and other
long-term liabilities 2,786,282 201,536 (11,197)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 1,333,301 (777,828) 4,309,824
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,181,269) (6,690,661) (2,469,749)
Proceeds from sale of property, plant
and equipment - - 40,261
Purchases of investments - - (2,465,167)
Cash proceeds received from short-term
investments - 2,616,566 -
Cash received in acquisition of Suburban 231,000 - -
----------- ----------- -----------
Net cash used in investing activities
(2,950,269) (4,074,095) (4,894,655)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 2,763,537 4,939,909 -
Proceeds from issuance of line of credit 1,500,000 - -
Principal payments on long-term obligations (998,557) (17,001) (14,362)
Proceeds from repayments of notes
receivable from stockholders 64,288 61,956 88,188
Payments for redemption of common stock (9,000) (10,000) (116,508)
Cash received from direct financing
lease obligations 1,000,000 - -
Costs incurred related to Physician
Partners, Inc. transaction (1,933,243) - -
----------- ----------- -----------
Net cash provided by (used in) financing
activities 2,387,025 4,974,864 (42,682)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 770,057 122,941 (627,513)
CASH AND CASH EQUIVALENTS, beginning of
year 124,916 1,975 629,488
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 894,973 $ 124,916 $ 1,975
=========== =========== ===========
</TABLE>
<PAGE> 21
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
<S> <C> <C> <C>
Cash paid for interest $ 1,355,638 $ 186,330 $ 178,928
Cash paid for income taxes 181,220 445,724 1,012,033
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Notes receivable issued in exchange
for common stock $ 140,000 $ 80,000 $ 100,000
In 1996, 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, including $231,000 of cash, 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.
<PAGE> 22
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
HealthFirst Medical Group, P.C. (HealthFirst), an Oregon professional
corporation, is a multi-specialty medical clinic founded in 1996. In February
1996, The Metropolitan Clinic, P.C. (Metropolitan), founded in 1906, merged with
The Suburban Medical Clinic, P.C. (Suburban), founded in 1956. Effective
February 1996, Metropolitan changed its name to HealthFirst and Suburban changed
its name to HealthFirst Medical Services Organization, P.C. and became a 100%
owned subsidiary of HealthFirst. The merger has been accounted for as a purchase
of Suburban by Metropolitan in the accompanying financial statements as of and
for the year ended December 31, 1996. The December 31, 1996 results include
Suburban's operating results from the date of acquisition.
HealthFirst consists 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. A significant
change in the demographics of this area may have an adverse impact on the
business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION:
Selected accounting policies are discussed below. Other significant accounting
policies regarding revenues, income taxes, professional liability and deferred
compensation are discussed in specific notes that follow.
Cash Equivalents
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 commercial insurance, Medicare
and Medicaid. HealthFirst manages credit risk with the various public and
private insurance providers, as deemed appropriate by management. Allowances for
contractual discounts and uncollectible 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.
<PAGE> 23
-2-
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>
Accrued Healthcare Costs
Accrued healthcare costs are calculated based on reported claims and an estimate
based on historical data of incurred but not reported claims. These accrued
healthcare cost estimates may vary from actual results and the differences may
be significant.
Fair Value of Financial Instruments
The carrying amounts of cash equivalents, patient accounts receivable, accounts
payable and accrued expenses 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.
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.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. REVENUES:
HealthFirst reports its revenues according to two principal types of payment
methodologies as discussed below:
<PAGE> 24
-3-
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 (subprovider). Under these agreements, HealthFirst prepays the
subprovider 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>
Year Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -------
<S> <C> <C> <C>
Fee-for-service, gross $39,627,729 $29,384,296 $24,173,543
Contractual discounts 7,312,816 6,549,803 5,360,283
----------- ----------- -----------
Fee-for-service, net $32,314,913 $22,834,493 $18,813,260
=========== =========== ===========
</TABLE>
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 6%, 8%, and 9% of net patient service revenues were derived
from services provided to fee-for-service Medicare patients in 1996, 1995
and 1994, respectively.
<PAGE> 25
-4-
Medicaid
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule. Approximately
1% of net patient service revenues were derived from services provided to
fee-for-service Medicaid patients in 1996, 1995 and 1994.
Other Payors
HealthFirst has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment to HealthFirst under these agreements includes discounts
from established charges.
Major Customers
Three customers in 1996 and four customers in 1995 and 1994 represented
individually more than 10% of HealthFirst's net revenue as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pacificare - Secure Horizons 12% 10% 11%
Pacificare - Commercial 10 11 11
Blue Cross - HMO Oregon 12 16 13
Blue Cross - Commercial - 10 10
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land and land improvements $ 2,012,073 $ 1,988,712
Buildings and leasehold improvements 14,755,615 9,796,611
Furniture and equipment 9,362,065 5,172,257
----------- -----------
26,129,753 16,957,580
Less- Accumulated depreciation (5,768,533) (3,534,908)
----------- -----------
$20,361,220 $13,422,672
=========== ===========
</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 HealthFirst
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.
<PAGE> 26
-5-
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,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustments $ 4,570,154 $ 1,516,422
Less- Valuation allowance (327,598) -
----------- -----------
Net deferred tax asset 4,242,556 1,516,422
Deferred tax liabilities:
Cash to accrual adjustments (3,679,253) (3,181,474)
Excess tax depreciation (563,303) (281,732)
----------- -----------
Gross deferred tax liabilities (4,242,556) (3,463,206)
----------- -----------
Net deferred tax liability $ - $(1,946,784)
=========== ===========
</TABLE>
The net deferred tax liability is reflected in the accompanying balance sheet as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Current deferred tax liability $ - $(1,844,262)
Long term deferred tax liability - (102,522)
----------- -----------
$ - $(1,946,784)
=========== ===========
</TABLE>
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
----------- -------- ----------
Current:
<S> <C> <C> <C>
Federal $ - $119,351 $1,003,419
State - 17,050 143,346
Deferred:
Federal (1,614,110) 62,607 235,864
State (284,843) 8,944 33,694
----------- -------- ----------
$(1,898,953) $207,952 $1,416,323
=========== ======== ==========
</TABLE>
<PAGE> 27
-6-
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>
December 31,
---------------------------------------
1996 1995 1994
---------- -------- -----------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $(2,104,779) $174,902 $1,173,826
Add (deduct):
State income tax (benefit), net of federal
benefit (300,681) 16,896 115,077
Change in valuation reserve 327,598 - -
Other 178,909 16,154 127,420
----------- -------- ----------
Provision (benefit) for income taxes $(1,898,953) $207,952 $1,416,323
=========== ======== ==========
</TABLE>
In 1996, HealthFirst recognized a valuation allowance in an amount equal to its
net deferred tax assets of $327,598 because of uncertainty with respect to the
realization of the related tax benefits in future years.
<PAGE> 28
-7-
6. LONG-TERM DEBT:
Long-term debt at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- -------
<S> <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. $1,713,734 $1,731,467
Note payable, due in monthly installments of principal and interest
through January 2002, bearing interest at 8.4%. The note is secured by
inventory, furniture, and equipment. 1,964,251 500,000
Construction loan payable, final payment of principal and interest due in
January 1997, bearing interest at prime plus 1% (8.25% at December 31, 1996).
The note is secured by building and land. 3,705,816 2,538,527
Note payable, due in annual principal installments of $115,000 through
August 2011, bearing interest at 7.9%. 1,650,000 1,900,000
Note payable due in monthly installments of $8,060 including interest
through October 2000, bearing interest at 8.75% 314,017 -
Note payable due in monthly installments of $7,066 plus interest through
January 1999, bearing interest at 9.875% 176,644 -
Note payable, related party, due in monthly installments of $428 including
interest through 1998, bearing interest at 6% 8,111 -
---------- ----------
Total long-term debt 9,532,573 6,669,994
Less- Current portion 4,466,600 2,958,506
---------- ----------
Long-term debt, net of current portion $5,065,973 $3,711,488
========== ==========
</TABLE>
Maturities of long-term debt for the next five years, including current
maturities, are as follows:
<TABLE>
<S> <C> <C>
1997 $4,466,600
1998 806,368
1999 555,730
2000 2,164,141
2001 438,200
Thereafter 1,101,534
----------
Total $9,532,573
==========
</TABLE>
Management converted the construction loan to a mortgage loan in 1997, extending
the maturity of the loan to February 2017.
<PAGE> 29
-8-
HealthFirst maintains a revolving line-of-credit agreement with a bank providing
up to $2,500,000, secured by inventory, accounts receivable and equipment. At
December 31, 1996, borrowings outstanding were $1,500,000. The line-of-credit
bears interest at the lender's prime rate (8.25% at December 31, 1996) plus .5%
and matures April 30, 1997. At February 1, 1997, the line-of-credit was
consolidated into a $7,500,000 line-of-credit as a result of the reorganization
transaction (Note 13).
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,
(Note 11), for a term of 21 years. Leased capital assets included in
property, plant and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- -------
<S> <C> <C>
Buildings and leasehold improvements $3,574,605 $ -
Furniture and equipment 263,879 -
---------- ----------
3,838,484 -
Less- Accumulated amortization 682,802 -
---------- ----------
$3,155,682 $ -
========== ==========
</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.
<PAGE> 30
-9-
Future Minimum Lease Payments
Future minimum lease payments, by year and in the aggregate, under
noncancellable capital and operating leases with initial or remaining terms of
one year or more consist of the following at December 31, 1996.
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ------------
<S> <C> <C>
1997 $ 463,767 $ 1,835,140
1998 457,578 1,858,264
1999 426,631 1,773,501
2000 416,783 1,467,369
2001 402,996 2,018,451
Thereafter 5,469,657 8,312,987
---------- -----------
Total minimum lease payments 7,637,412 $17,265,712
Amounts representing interest 4,105,252 ===========
----------
Present value of net minimum payments 3,532,160
Current portion 120,095
----------
Long-term capitalized lease obligations $3,412,065
==========
</TABLE>
Direct Financing Lease Obligation
In May 1996, HealthFirst sold three facilities to HealthFirst Properties LLC
(Note 11) under a sale/leaseback arrangement. The facilities were sold for
$12,550,000, of which $11,550,000 is due in the form of an 8% 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 amount owed on the financing obligation at
December 31, 1996 was $929,241 of which $76,238 is due within one year. The
lease has a term of 20 years and requires minimum annual rental payments of
$1,317,756 in 1997, 1998, 1999, 2000 and 2001 and $18,997,649 thereafter.
8. EMPLOYEE BENEFIT PLANS:
Retirement Plans
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. No contributions to the Plan were made
in 1996, 1995 and 1994. HealthFirst does not foresee making contributions to the
profit sharing plan in the future.
HealthFirst has a 401(k) plan covering all employees who are eligible subject to
certain requirements. Employees contribute between 2% to 10% of their annual
compensation. HealthFirst matches employee contributions at a rate of 10% plus a
discretionary percentage determined by the Board of Directors. The contributions
to the Plan were $109,991, $68,823 and $215,190 in 1996, 1995 and 1994,
respectively.
<PAGE> 31
-10-
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% of employees' compensation which does
not exceed the Social Security integration level ($62,070 at December 31, 1996),
plus a higher percentage of the amount in excess of the integration level for
the Plan year. Contributions in 1996, 1995 and 1994 were $1,522,540, $1,132,887
and $942,286, 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 $175,945 and $169,606 for the plan at December 31, 1996
and 1995, 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 requirements. 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 1996
were $389,653.
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
December 31, 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 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 December 31, 1996, is
$3,502,067, 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.
<PAGE> 32
-11-
At February 1, 1997, HealthFirst's professional liability insurance policy was
consolidated into a Physician Partners, Inc. policy as a result of the
reorganization transaction (Note 13). The consolidated claims-made policy has no
deductible. The policy coverage is $2,000,000 per claim, with an aggregate limit
of $4,000,000 and includes full prior acts coverage.
10. COMMITMENTS AND CONTINGENCIES:
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 was
accounted for under the equity method. In 1995 and 1994, HealthFirst paid
premiums to CHN of $106,204 and $57,167, respectively, and CHN paid HealthFirst
$621,654 and $154,711 in 1995 and 1994, respectively, for claims. No premiums
were paid or received in 1996. CHN was 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.
HPLLC made a $1,000,000 down payment to HealthFirst. Simultaneous with the
execution of the installment sale contract, HealthFirst agreed to lease back the
three buildings from 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 December 31, 1996 was
$143,589. The terms of the note include monthly installments of principal and
interest of $4,878 through August 1999 with interest accruing at 7%. HealthFirst
has signed a capital lease to occupy a new clinic building for a term expiring
in August 2015.
<PAGE> 33
-12-
Stock Subscriptions
HealthFirst has notes receivable from certain stockholders for their purchase of
common stock. The notes mature at various stages through the year 2008.
Restricted Stock Awards
During 1996, HealthFirst sold shares of Series 1 Class A common stock to
selected employees at prices below their estimated fair value for accounting
purposes. The terms of the related Restricted Stock Agreements require
forfeiture of the stock unless the grantee remains employed by HealthFirst until
February 1, 2002.
The excess of the estimated fair value of the stock over the amount to be paid
of $1,756,788 is to be recognized as compensation expense. Of this amount,
$501,939 has been recognized as compensation expense in 1996. The remaining
amount of $1,254,849 will be amortized ratably to income over the next five
years.
12. BUSINESS ACQUISITION:
On February 1, 1996, HealthFirst acquired all of the outstanding stock of
Suburban 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.
Results of operations after the acquisition date are included in the December
31, 1996 statement of operations. 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>
Year Ended December 31,
------------------------------
1996 1995
------------- ------------
<S> <C> <C>
Net revenues less provider compensation and benefits $ 39,364,000 $ 39,625,000
Operating expenses (45,452,000) (40,364,000)
Other expenses, net (92,000) (215,000)
------------- ------------
Net income (loss) before income taxes (6,180,000) (954,000)
Benefit for income taxes 1,899,000 (403,000)
------------- ------------
Net loss $ (4,281,000) $ (551,000)
============= ============
</TABLE>
13. SUBSEQUENT EVENTS:
The shareholders and Board of Directors of HealthFirst approved a Reorganization
and Merger Agreement (the Agreement) dated February 1, 1997 together with the
shareholders and Board of Directors of The Corvallis Clinic, P.C.; the Medford
Clinic, P.C.; and Physician Partners, Inc. (PPI), a newly formed company.
<PAGE> 34
-13-
The transaction resulted 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 were 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; cash, receivables, prepaids, property, plant and equipment,
payables, accruals, debt and contractual commitments was transferred to PPI. The
shareholders of the three founding clinics became the original shareholders of
PPI.
An integral part of the reorganization is a 40-year management agreement whereby
PPI provides physician practice management services to the New PCs. Services to
be provided include management and administrative services, capital resources,
facilities, equipment and supplies.
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 the Distributable Profit Amount (defined as (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 provider compensation and benefits.
The parties to the reorganization transaction received 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.
In connection with the reorganization transaction, the three founding medical
groups 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. HealthFirst's share of such costs are
reflected as a charge to equity in the accompanying statement of stockholders'
equity. At December 31, 1996, HealthFirst owed $241,175 related to this
agreement, which was included in accounts payable in the accompanying financial
statements.
<PAGE> 35
MEDFORD CLINIC, P.C.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 36
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, 1996 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, 1996. 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 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 Medford Clinic, P.C. as of
December 31, 1996 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, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 5, 1997
<PAGE> 37
MEDFORD CLINIC, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 200,563 $ 598,313
Short-term investments - 1,000,000
Patient accounts receivable, net of allowances for contractual discounts and
uncollectible accounts of $3,845,000 and $3,430,000 at December 31, 1996 and
1995, respectively 6,124,471 6,681,655
Healthcare receivables 487,189 528,351
Inventories of drugs and supplies 203,137 290,061
Prepaid expenses and deposits 304,154 502,463
Restricted investments 250,000 -
----------- -----------
Total current assets 7,569,514 9,600,843
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $5,303,600 and $4,432,795 at
December 31, 1996 and 1995, respectively 5,700,859 5,342,641
----------- -----------
LONG-TERM DEFERRED TAX ASSET 77,200 22,213
----------- -----------
OTHER ASSETS:
Restricted investments 250,000 206,802
Other 43,397 72,476
----------- -----------
Total other assets 293,397 279,278
----------- -----------
Total assets $13,640,970 $15,244,975
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,004,088 $ 932,123
Drafts payable 529,552 -
Accounts payable 1,305,994 419,050
Income taxes payable 5,048 25,000
Accrued healthcare costs 1,026,779 486,183
Accrued compensation and related expenses 2,496,726 2,090,690
Current deferred tax liability 1,568,333 2,406,068
Other liabilities - 188,945
----------- -----------
Total current liabilities 7,936,520 6,548,059
----------- -----------
LONG-TERM DEBT, net of current portion 3,924,215 4,931,980
----------- -----------
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES 938,857 599,347
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
$10 stated value; 500 shares authorized; 57 and 56 shares outstanding at
December 31, 1996 and 1995,
respectively 570 560
Additional paid-in capital 618 618
Retained earnings 840,190 3,164,411
----------- -----------
Total stockholders' equity 841,378 3,165,589
----------- -----------
Total liabilities and stockholders' equity $13,640,970 $15,244,975
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 38
MEDFORD CLINIC, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -------
REVENUES:
<S> <C> <C> <C>
Fee-for-service, net $33,444,943 $33,950,789 $29,920,212
Prepaid healthcare 6,996,534 5,014,747 2,407,238
----------- ----------- -----------
Net revenues 40,441,477 38,965,536 32,327,450
Less- Provider compensation and benefits 12,202,419 11,239,198 9,248,234
----------- ----------- -----------
Net revenue less provider
compensation and benefits 28,239,058 27,726,338 23,079,216
----------- ----------- -----------
OPERATING EXPENSES:
Clinic salaries, wages and benefits 13,542,734 11,837,774 10,900,534
Purchased medical services 4,173,602 2,282,558 919,621
Medical and office supplies 5,909,671 5,577,638 4,676,022
General and administrative expenses 3,361,704 3,446,487 2,959,495
Provision for uncollectible accounts 1,069,347 868,441 1,026,983
Depreciation and amortization 966,121 1,124,753 917,626
Rent and lease expense 1,175,147 1,139,027 1,056,982
----------- ----------- -----------
Total operating expenses 30,198,326 26,276,678 22,457,263
----------- ----------- -----------
Operating income (loss) (1,959,268) 1,449,660 621,953
OTHER INCOME (EXPENSE):
Interest income 104,447 96,899 27,549
Interest expense (425,177) (486,776) (324,378)
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES (2,279,998) 1,059,783 325,124
PROVISION (BENEFIT) FOR INCOME TAXES (912,674) 408,038 132,949
----------- ----------- -----------
NET INCOME (LOSS) $(1,367,324) $ 651,745 $ 192,175
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 39
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(1,367,324) $ 651,745 $ 192,175
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 966,121 1,124,753 917,626
Deferred taxes (892,722) 347,038 153,943
Changes in operating assets and
liabilities:
Patient accounts receivable, net 557,184 426,083 (855,225)
Healthcare receivables 41,162 225,284 (753,635)
Inventories of drugs and supplies 86,924 (61,575) (88,393)
Prepaid expenses and deposits 198,309 (234,909) (54,838)
Other assets 29,079 (34,043) 92,384
Drafts payable 529,552 - -
Accounts payable 886,944 (56,236) (119,659)
Income taxes payable (19,952) 25,000 -
Accrued healthcare costs 540,596 380,331 105,852
Accrued compensation and related
expenses 406,036 128,947 (14,540)
Other liabilities (188,945) (14,236) 116,057
Deferred compensation and other
long-term liabilities 339,510 (26,921) 61,742
----------- ----------- -----------
Net cash provided by (used in)
operating activities 2,112,474 2,881,261 (246,511)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (1,324,339) (865,626) (3,288,103)
Purchases of restricted investments (293,198) (1,206,802) -
Proceeds from sale of short-term
investments 1,000,000 - -
----------- ----------- -----------
Net cash used in investing
activities (617,537) (2,072,428) (3,288,103)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of
credit agreement - - 350,000
Repayments under line of credit agreement - (350,000) -
Proceeds from issuance of long-term debt - 467,224 2,999,055
Principal repayments of long-term debt (935,800) (743,066) (259,834)
Proceeds from issuance of common stock 20 50 120
Payments for redemption of common stock (17,020) (60) (72)
Costs incurred related to Physician
Partners, Inc. transaction (939,887) - -
----------- ----------- -----------
Net cash provided by (used in)
financing activities (1,892,687) (625,852) 3,089,269
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (397,750) 182,981 (445,345)
CASH AND CASH EQUIVALENTS, beginning of
year 598,313 415,332 860,677
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 200,563 $ 598,313 $ 415,332
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 424,126 $ 492,280 $ 311,965
Cash paid (received) for income taxes 19,952 36,000 (20,994)
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 40
MEDFORD CLINIC, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
--------- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
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
Issuance of common stock 2 20 - - 20
Redemption of common
stock (1) (10) - (17,010) (17,020)
Costs incurred related
to Physician Partners,
Inc. transaction - - - (939,887) (939,887)
Net loss - - - (1,367,324) (1,367,324)
-- ---- ---- ----------- -----------
BALANCE, December 31, 1996 57 $570 $618 $ 840,190 $ 841,378
== ==== ==== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 41
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
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.
Medford consists of approximately 566 employees and 72 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. 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 AND OTHER INFORMATION:
Selected accounting policies are discussed below. Other significant accounting
policies, regarding revenues, income taxes and professional liability are
discussed in specific notes that follow.
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 commercial insurance, Medicare and
Medicaid. Medford manages credit risk with the various public and private
insurance providers, as deemed appropriate by management. Allowances for
contractual discounts and uncollectible 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 1996, 1995 and 1994.
<PAGE> 42
-2-
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>
Restricted Investments
Under the agreements with Oregon Health Plan (OMAP) and Oregon Health Management
System (OHMS), Medford is required to maintain $250,000 in a restricted or
segregated account for each agreement. Medford can use these funds for purchased
medical services only with approval by OMAP or OHMS as appropriate. The
restriction for the OMAP agreement lapses in 1997.
Accrued Healthcare Costs
Accrued healthcare costs are calculated based on reported claims and an estimate
based on historical data of incurred but not reported claims. These accrued
healthcare cost estimates will vary from actual results and the differences may
be significant.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
patient accounts receivable, restricted investments, 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 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.
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.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
<PAGE> 43
-3-
3. REVENUES:
Medford reports its revenues according to two principal types of payment
methodologies as 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 (subprovider). Under these agreements, Medford prepays the subprovider
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 costs in the accompanying
financial statements.
Medford follows the policy of netting prepaid healthcare revenues and purchased
medical services expenses for the institutional portion of capitated agreements.
Liabilities associated with these contracts are included in accrued healthcare
costs in the accompanying financial statements. Medford's revenue associated
with these contracts was $553,008 for 1996. There was no revenue associated with
these contracts for 1995 and 1994.
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>
Year Ended December 31,
--------------------------------------
1996 1995 1994
----------- ----------- -------
<S> <C> <C> <C>
Fee-for-service, gross $45,464,745 $43,299,335 $40,975,385
Contractual discounts 12,019,802 9,348,546 11,055,173
----------- ----------- -----------
Fee-for-service, net $33,444,943 $33,950,789 $29,920,212
=========== =========== ===========
</TABLE>
<PAGE> 44
-4-
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 27%, 27% and 22% of net patient service revenues
were derived from services provided to fee-for-service Medicare patients
in 1996, 1995 and 1994, respectively.
Medicaid
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 2% of net patient service revenues were derived from
services provided to fee-for-service Medicaid patients in 1995 and 1994,
respectively. The net fee-for-service Medicaid revenue in 1996 was less
than 1% of net patient service revenues.
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
Two customers in 1996 and one in 1995 and 1994 represented individually more
than 10% of Medford's net revenue as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Blue Cross/Blue Shield of Oregon 14% 16% 14%
Oregon Health Plan 12% - -
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- -------
<S> <C> <C>
Land and land improvements $ 204,134 $ 204,134
Buildings and leasehold improvements 2,167,310 1,910,507
Furniture and equipment 8,633,015 7,647,654
Construction in progress - 13,141
----------- -----------
11,004,459 9,775,436
Less- Accumulated depreciation (5,303,600) (4,432,795)
----------- -----------
$ 5,700,859 $ 5,342,641
=========== ===========
</TABLE>
<PAGE> 45
-5-
5. INCOME TAXES:
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, 1996, Medford
has approximately $325,500 and $733,400 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,
-----------------------------
1996 1995
----------- ------------
Deferred tax assets:
<S> <C> <C>
Cash to accrual adjustments $ 1,654,791 $ 918,656
Net operating loss and credit carryforwards 293,926 329,478
Other 35,778 10,507
----------- -----------
Gross deferred tax assets 1,984,495 1,258,641
Less- Valuation allowance (293,926) (329,478)
----------- -----------
Net deferred tax asset 1,690,569 929,163
Deferred tax liabilities:
Cash to accrual adjustments (2,945,852) (3,174,258)
Property related book to tax differences (235,850) (138,760)
----------- -----------
Gross deferred tax liabilities (3,181,702) (3,313,018)
----------- -----------
Net deferred tax liability $(1,491,133) $(2,383,855)
=========== ===========
</TABLE>
The net deferred tax liability is reflected in the accompanying balance sheet as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current deferred tax liability $(1,568,333) $(2,406,068)
Long-term deferred tax asset 77,200 22,213
----------- -----------
$(1,491,133) $(2,383,855)
=========== ===========
</TABLE>
<PAGE> 46
-6-
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995 1994
---------- -------- --------
Current:
<S> <C> <C> <C>
Federal $ 5,048 $ - $ -
State - 61,000 -
Deferred:
Federal (803,006) 303,658 116,330
State (114,716) 43,380 16,619
--------- -------- --------
$(912,674) $408,038 $132,949
========= ======== ========
</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>
December 31,
------------------------------
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $(770,515) $370,924 $113,793
Add (deduct):
State income tax (benefit), net of federal
benefit (142,159) 67,828 10,802
Other - (30,714) 8,354
--------- -------- --------
Provision (benefit) for income taxes $(912,674) $408,038 $132,949
========= ======== ========
</TABLE>
<PAGE> 47
-7-
6. LONG-TERM DEBT:
Long-term debt at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- ----------
<S> <C> <C>
Equipment loan with bank, interest at 7.25%, payable in monthly installments of
$22,169, maturing April 2000, secured by equipment, furniture and fixtures
and accounts receivable $ 656,005 $ 865,254
Note payable with title company, interest at 7.90%, payable in monthly
installments of $6,227, maturing July 1, 2013, secured by equipment and
furniture and fixtures 689,548 708,954
Equipment loan with bank, interest at 7.25%, payable in monthly installments of
$25,960, maturing June 1, 2002, secured by equipment, furniture and fixtures
and accounts receivable 1,384,442 1,585,450
Equipment loan with bank, interest at 7.75%, payable in monthly installments of
$45,343, maturing May 1, 1999, secured by equipment
and accounts receivable 1,195,003 1,626,095
Facilities loan with bank, interest at 9.00%, payable in monthly
installments of $3,651, maturing September 30, 1999, secured by
equipment, furniture and fixtures and accounts receivable 107,815 140,118
Mortgage with bank, interest was 9.25% and 8.25%, respectively, payable in
monthly installments of $5,242 and $4,987, respectively, maturing November 1,
2008, secured by first deed on real property and equipment and furniture and
fixtures 453,278 474,520
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 and furniture and fixtures 222,611 225,639
Mortgage with bank, interest at 8.25%, recalculated on a three year basis on a
predetermined interest rate formula, payable in monthly installments of
$3,145, maturing December 15, 2001, secured by second deed on real property
and equipment and furniture and fixtures 219,601 238,073
----------- ----------
Total long-term debt 4,928,303 5,864,103
Less- Current portion (1,004,088) (932,123)
----------- ----------
Long-term debt, net of current portion $ 3,924,215 $4,931,980
=========== ==========
</TABLE>
<PAGE> 48
Maturities of long-term debt for the next five years, including current
maturities, are as follows:
<TABLE>
<S> <C> <C>
1997 $1,004,088
1998 1,093,602
1999 772,908
2000 356,607
2001 483,247
Thereafter 1,217,851
----------
Total $4,928,303
==========
</TABLE>
Medford maintains a revolving line-of-credit agreement with a bank providing up
to $500,000 secured by accounts receivable. The line-of-credit bears interest at
the lender's prime rate (8.25% at December 31, 1996) plus .25%. At December 31,
1996, Medford had no outstanding balance related to this line of credit. The
line-of-credit agreement expired January 15, 1997 and was renewed by Medford.
At February 1, 1997, the long-term debt was assumed by Physician Partners, Inc.
and the $500,000 revolving line-of-credit was consolidated into a $7,500,000
line-of-credit as a result of the reorganization transaction (Note 10).
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% of their annual
compensation (not to exceed certain annual limits imposed by the Internal
Revenue Service). Medford may also make discretionary contributions, which are
immediately 100% 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% of the employee's eligible earnings up to
$62,700 and 11.4% of eligible earnings in excess of limitations imposed by the
Internal Revenue Service. These contributions are 100% vested upon eligibility.
Medford's contributions for these plans for the years ended December 31, 1996,
1995 and 1994 were $1,655,730, $1,529,030 and $830,635, 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 reported prior to the end of the accounting period.
At February 1, 1997, Medford's professional liability insurance policy was
consolidated into a Physician Partners, Inc. policy as a result of the
reorganization transaction (Note 10). The consolidated claims-made policy has no
deductible. The policy coverage is $2,000,000 per claim, with an aggregate limit
of $4,000,000 and includes full prior acts coverage.
<PAGE> 49
-9-
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> <C>
1997 $1,076,474
1998 789,377
1999 697,937
2000 643,597
2001 643,597
Thereafter 3,551,768
----------
Total $7,402,750
==========
</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:
The shareholders and Board of Directors of Medford approved a Reorganization and
Merger Agreement (the Agreement) dated February 1, 1997 together with the
shareholders and Board of Directors of HealthFirst Medical Group, P.C.; The
Corvallis Clinic, P.C.; and Physician Partners, Inc. (PPI), a newly formed
company.
The transaction resulted 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 were 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; cash, receivables, property, plant and equipment, other assets,
payables, accruals, debt, and contractual commitments was transferred to PPI.
The shareholders of the three founding clinics became the original shareholders
of PPI.
An integral part of the reorganization is a 40-year management agreement whereby
PPI provides physician practice management services to the New PCs. Services to
be provided include management and administrative services, capital resources,
facilities, equipment and supplies.
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 provider compensation and benefits.
<PAGE> 50
-10-
The parties to the reorganization transaction have received 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.
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. Medford's share of such costs are
reflected as a charge to equity in the accompanying statement of stockholders'
equity. At December 31, 1996, Medford owed $85,544 related to this agreement,
which was included in accounts payable in the accompanying financial statements.
<PAGE> 51
THE CORVALLIS CLINIC, P.C.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND NOVEMBER 30, 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 52
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 December 31, 1996 and November 30,
1995, and the related statements of operations, accumulated deficit and cash
flows for the thirteen-month period ended December 31, 1996, and each of the
years in the two-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 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 The Corvallis Clinic, P.C. as
of December 31, 1996 and November 30, 1995, and the results of its operations
and its cash flows for the thirteen-month period ended December 31, 1996, and
each of the years in the two-year period ended November 30, 1995 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 5, 1997
<PAGE> 53
THE CORVALLIS CLINIC, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND NOVEMBER 30, 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 186,572 $ 176,812
Patient accounts receivable, net of allowances for
contractual discounts and uncollectible accounts of
$2,544,000 and $1,992,000 at December 31, 1996 and
November 30, 1995, respectively 4,232,274 4,303,960
Healthcare and other receivables 2,089,043 1,179,380
Inventories of drugs and supplies 219,245 224,065
Prepaid expenses and deposits 196,134 479,264
----------- -----------
Total current assets 6,923,268 6,363,481
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and amortization
of $9,220,560 and $7,533,789 at December 31, 1996 and November 30, 1995,
respectively 18,913,428 19,533,621
----------- -----------
OTHER ASSETS:
Investments in affiliates 654,225 561,668
Other - 89,882
----------- -----------
654,225 651,550
----------- -----------
Total assets $26,490,921 $26,548,652
=========== ===========
LIABILITIES, REDEEMABLE STOCK AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt and capital and direct
financing lease obligations $ 898,941 $ 531,934
Line of credit 3,330,000 1,409,000
Accounts payable and accrued expenses 1,747,593 2,055,262
Income taxes payable - 32,215
Accrued healthcare costs 3,057,806 1,280,367
Accrued compensation and related expenses 1,114,538 1,909,124
Deferred revenue 338,800 396,747
----------- -----------
Total current liabilities 10,487,678 7,614,649
----------- -----------
LONG-TERM DEBT, net of current portion 1,387,713 729,453
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of
current portion 13,958,827 14,258,343
DEFERRED COMPENSATION AND OTHER 1,755,025 1,629,848
COMMITMENTS AND CONTINGENCIES
REDEEMABLE STOCKS 6,959,412 5,659,948
ACCUMULATED DEFICIT (8,057,734) (3,343,589)
----------- -----------
Total liabilities, redeemable stock and
accumulated deficit $26,490,921 $26,548,652
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 54
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF OPERATIONS
FOR THE THIRTEEN MONTHS ENDED DECEMBER 31, 1996 AND
THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
REVENUES:
<S> <C> <C> <C>
Fee-for-service, net $22,451,664 $20,704,589 $19,545,575
Prepaid healthcare, net 21,257,480 18,469,738 15,798,726
----------- ----------- -----------
Net revenues 43,709,144 39,174,327 35,344,301
Less- Provider compensation and benefits 11,419,464 13,209,215 13,729,125
----------- ----------- -----------
Net revenues less provider
compensation and benefits 32,289,680 25,965,112 21,615,176
----------- ----------- -----------
EXPENSES:
Clinic salaries, wages and benefits 15,620,339 12,579,457 10,403,834
Purchased medical services 6,182,411 4,716,727 3,081,120
Medical and office supplies 4,623,283 3,842,572 3,327,093
General and administrative expenses 3,315,234 3,560,219 3,157,030
Lease and rent expense 289,825 197,603 177,594
Provision for uncollectible accounts 1,270,141 1,767,545 1,181,471
Depreciation and amortization 1,689,791 1,114,947 1,005,715
----------- ----------- -----------
Total operating expenses 32,991,024 27,779,070 22,333,857
----------- ----------- -----------
Operating loss (701,344) (1,813,958) (718,681)
OTHER INCOME (EXPENSE):
Interest income 46,037 65,776 55,468
Interest expense (1,916,251) (1,223,370) (780,123)
Equity in income of affiliates 301,630 232,428 107,332
Other 465,812 631,945 58,852
----------- ----------- -----------
Net loss before provision for
income taxes (1,804,116) (2,107,179) (1,277,152)
----------- ----------- -----------
PROVISION FOR INCOME TAXES - - -
----------- ----------- -----------
NET LOSS $(1,804,116) $(2,107,179) $(1,277,152)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 55
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN MONTHS ENDED DECEMBER 31, 1996 AND
THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(1,804,116) $(2,107,179) $(1,277,152)
Adjustment to reconcile net loss to net
cash provided by (used in) operating
activities-
Depreciation and amortization 1,689,791 1,114,947 1,005,715
Equity in income of affiliates (301,630) (232,428) (107,332)
Equity in income of affiliate offset
against operating expenses 69,498 - -
Equity in income of affiliate offset
against interest expense (546,716) (288,927) -
Loss on sale of property, plant and
equipment 310 - 164,366
Loss on sale of equity interest in
affiliate 18,036 - -
Changes in operating assets and
liabilities:
Patient accounts receivable, net 71,686 363,674 (327,642)
Healthcare and other receivables (909,663) 425,736 110,955
Inventories of drugs and supplies 4,820 32,778 (13,138)
Prepaid expenses and deposits 283,130 (71,939) (66,424)
Other assets 89,882 (65,998) (23,884)
Accounts payable and accrued
expenses (439,726) 423,420 417,478
Income taxes payable (32,215) 32,215 -
Accrued healthcare costs 1,777,439 798,932 371,470
Accrued compensation and related
expenses (794,586) (3,002,229) 1,319,217
Deferred revenue (57,947) 50,132 (28,163)
Deferred compensation and other 125,177 140,531 127,668
----------- ----------- -----------
Net cash provided by (used in)
operating activities (756,830) (2,386,335) 1,673,134
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,070,187) (3,203,644) (3,105,891)
Purchases of investments - (123,673) -
Cash distributions received from
investments 615,000 400,000 19,408
Cash distributions received from sale of
property, plant and equipment 279 - -
Cash distributions received from sale of
equity interest in affiliate 53,255 - -
----------- ----------- -----------
Net cash used in investing
activities (401,653) (2,927,317) (3,086,483)
----------- ----------- -----------
(continued)
</TABLE>
<PAGE> 56
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THIRTEEN MONTHS ENDED DECEMBER 31, 1996 AND
THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Net proceeds from borrowings under line of
credit agreement $ 1,921,000 $ 1,409,000 $ -
Proceeds from issuance of long-term debt 1,400,000 1,200,000 -
Principal payments on long-term debt and
direct financing lease obligation (674,249) (239,408) (140,712)
Proceeds from issuance of common stock 10,000 - 18,000
Proceeds from issuance of preferred stock - - 310,000
Payments for redemption of common stock (122,768) (23,000) (69,000)
Payments for redemption of preferred stock (57,000) (19,000) (48,000)
Proceeds from repayments of notes receivable from stockholders
81,081 136,925 143,549
Cash received in formation of HealthCare
Partners, LLC - 2,734,386 -
Costs incurred related to Physician
Partners, Inc. transaction (1,389,821) - -
----------- ----------- -----------
Net cash provided by financing
activities 1,168,243 5,198,903 213,837
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 9,760 (114,749) (1,199,512)
CASH AND CASH EQUIVALENTS, beginning of period 176,812 291,561 1,491,073
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 186,572 $ 176,812 $ 291,561
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 2,326,795 $ 891,190 $ 780,123
Cash paid (received) for income taxes 53,717 (41,558) 74,420
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% ownership
interest in the new entity (Note 13).
Notes receivable from shareholders for purchase of stock during 1996, 1995
and 1994 were $13,000, $23,000 and $399,150, respectively.
Corvallis received a noncash distribution from an affiliate during 1996 of
$69,498.
Redemption of common stock in exchange for a payable of $132,057 during 1996.
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 57
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF ACCUMULATED DEFICIT
FOR THE THIRTEEN MONTHS ENDED DECEMBER 31, 1996 AND
THE YEARS ENDED NOVEMBER 30, 1995 AND 1994
<TABLE>
<CAPTION>
<S> <C>
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 (1,520,208)
Costs incurred related to Physician Partners, Inc. transaction (1,389,821)
Net loss (1,804,116)
-----------
BALANCE, December 31, 1996 $(8,057,734)
===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 58
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
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.
Corvallis consists of approximately 509 employees and 96 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 AND OTHER INFORMATION:
Selected accounting policies are discussed below. Other significant accounting
policies regarding revenues, income taxes, professional liability, deferred
compensation and investments in affiliates are discussed in specific notes that
follow.
Change in Fiscal Year End
Effective December 1, 1995, Corvallis changed its fiscal year end from
November 30 to December 31. Accordingly, the 1996 fiscal year ended December 31,
includes the results of operations for thirteen months, whereas the previous two
fiscal years ended on November 30.
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 commercial insurance, Medicare
and Medicaid. Corvallis manages credit risk with the various public and private
insurance providers, as deemed appropriate by management. Allowances for
contractual discounts and uncollectible 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.
<PAGE> 59
-2-
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 the straight-line method 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>
Accrued Healthcare Costs
Accrued healthcare costs are calculated based on reported claims and an estimate
based on historical data of incurred but not reported claims. These accrued
healthcare cost estimates will vary from actual results and the differences may
be significant.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, patient accounts receivable,
accounts payable and accrued expenses 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 estimate 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.
Notes Receivable from Stockholders
Corvallis maintains various agreements with stockholders for their purchase of
common stock. The notes bear interest at 6.52% and mature at various stages
through the year 2006.
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.
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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
<PAGE> 60
-3-
3. REVENUES:
Corvallis reports its revenues according to two principal types of payment
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.
Corvallis follows the policy of netting prepaid healthcare revenues and
purchased medical services expenses for the institutional portion of capitated
agreements. Liabilities associated with these contracts are included in accrued
healthcare costs in the accompanying financial statements. Corvallis' revenue
associated with these contracts was approximately $16,699,000 and $11,945,000
for the thirteen months ended December 31, 1996 and the year ended November 30,
1995, respectively.
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 November 30,
13 Months Ended ------------------------------
December 31, 1996 1995 1994
----------------- ----------- -----------
<S> <C> <C> <C>
Fee-for-service, gross $28,801,033 $25,778,976 $25,129,788
Contractual discounts 6,349,369 5,074,387 5,584,213
----------- ----------- -----------
Fee for service, net $22,451,664 $20,704,589 $19,545,575
=========== =========== ===========
</TABLE>
<PAGE> 61
-4-
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 16%, 15%, and 18% of net patient service
revenues were derived from services provided to fee-for-service
Medicare patients in 1996, 1995 and 1994, respectively.
Medicaid
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 2%, 3% and 5% of net patient service revenues were
derived from services provided to fee-for-service Medicaid patients in
1996, 1995 and 1994, 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
Two customers in 1996, four customers in 1995 and two customers in 1994
represented individually more than 10% of Corvallis' net revenue as follows:
<TABLE>
<CAPTION>
13 Months Year Ended
Ended November 30,
December 31, ------------
1996 1995 1994
----------- --------------
<S> <C> <C> <C>
Pacificare - Commercial 21% 23% 19%
Pacificare - Secure Horizons 10 16 13
SelectCare - 10 -
Oregon Health Plan - 11 -
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, November 30,
1996 1995
----------- ------------
<S> <C> <C>
Land and land improvements $ 666,565 $ 666,565
Buildings and leasehold improvements 19,448,346 14,109,506
Furniture and equipment 8,019,077 7,016,184
Construction in progress - 5,275,155
----------- -----------
28,133,988 27,067,410
Less- Accumulated depreciation (9,220,560) (7,533,789)
----------- -----------
$18,913,428 $19,533,621
=========== ===========
</TABLE>
<PAGE> 62
-5-
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>
December 31, November 30,
1996 1995
----------- -----------
Deferred tax assets:
<S> <C> <C>
Cash to accrual adjustments $ 4,261,000 $ 4,254,000
Net operating loss 832,000 1,135,000
Other 306,000 4,000
----------- -----------
Gross deferred tax assets 5,399,000 5,393,000
Less- Valuation allowance (1,778,000) (2,161,000)
----------- -----------
Net deferred tax asset 3,621,000 3,232,000
Deferred tax liabilities:
Cash to accrual adjustments (3,621,000) (3,232,000)
----------- -----------
Net deferred tax (liability) asset $ - $ -
=========== ===========
</TABLE>
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 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>
13 Months Year Ended
Ended November 30,
December 31, ---------------------------
1996 1995 1994
------------- ----------- ------------
<S> <C> <C> <C>
Federal tax at statutory rate $(604,000) $(716,000) $(434,000)
Add (deduct):
State income tax, net of federal
benefit (107,000) (126,000) (77,000)
Future tax benefits not recognized 699,000 849,000 510,000
Other 12,000 (7,000) 1,000
--------- --------- ---------
Provision for income taxes $ - $ - $ -
========= ========= =========
</TABLE>
<PAGE> 63
-6-
Nonrealized future tax benefits referred to above represent tax benefits related
to net operating loss (NOL) carryforwards. These benefits have not been
recognized in the accompanying financial statements because there is no
assurance these NOLs can be utilized in the future.
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, November 30,
1996 1995
------------- -----------
<S> <C> <C>
Note payable interest at 10%, payable in monthly installments of $30,551 through
February 1999, secured by equipment $ 706,641 $1,007,818
Notepayable, interest at 9%, payable in monthly installments of $35,097 through
August 2000, secured by real equipment 1,303,972 -
---------- ----------
Total long-term debt 2,010,613 1,007,818
Less- Current portion (622,900) (278,365)
---------- ----------
Long-term debt, net of current portion $1,387,713 $ 729,453
========== ==========
</TABLE>
Scheduled maturities of long-term debt, including current maturity, are as
follows:
<TABLE>
<S> <C> <C>
1997 $ 622,900
1998 685,795
1999 430,654
2000 271,264
----------
$2,010,613
==========
</TABLE>
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 December 31, 1996, borrowings
outstanding were $3,330,000. These lines of credit bear interest at the lender's
prime rate (8.25% at December 31, 1996) and are due on demand. At February 1,
1997, the $2,500,000 revolving line of credit was consolidated into a $7,500,000
line-of-credit as a result of the reorganization transaction (Note 14).
<PAGE> 64
-7-
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 is as follows:
<TABLE>
<CAPTION>
December 31, November 30,
1996 1995
-------- --------
<S> <C> <C>
Equipment $ 260,255 $ 260,255
Less- Accumulated amortization (177,841) (121,452)
--------- ---------
$ 82,414 $ 138,803
========= =========
</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.
Future Minimum Lease Payments
Future minimum lease payments, by year and in the aggregate, under
noncancellable capital and operating leases with initial or remaining terms of
one year or more consist of the following at December 31, 1996:
<TABLE>
<CAPTION>
Capital Operating
Lease Leases
-------- --------
<S> <C> <C>
1997 $ 67,864 $180,620
1998 34,880 180,390
1999 - 183,640
2000 - 22,680
2001 - 22,680
Thereafter - 13,230
-------- --------
Total minimum lease payments 102,744 $603,240
Amounts representing interest (9,541) ========
--------
Present value of minimum payments 93,203
Current portion (55,071)
--------
Long-term capitalized lease obligations $ 38,132
========
</TABLE>
<PAGE> 65
-8-
Direct Financing Lease Obligation
In June of 1995, Corvallis contributed land, buildings, construction in process
and related notes payable to HealthCare Partners, LLC (Note 13). 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 $183,576. 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 for cash received by Corvallis and obligations assumed by the LLC as
part of the transaction.
The liability for this lease obligation was $14,141,665 at December 31, 1996 and
$14,356,463 at November 30, 1995. Scheduled principal payments at December 31,
1996 are as follows:
<TABLE>
<S> <C> <C>
1997 $ 220,970
1998 242,667
1999 266,496
2000 286,655
2001 244,027
Thereafter 12,880,850
-----------
$14,141,665
===========
</TABLE>
8. RETIREMENT PLANS:
401(k) Profit Sharing Plan
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 10% 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%
of employee contributions up to 8% of the employee's compensation. Corvallis may
also make discretionary contributions. Clinic contributions are 100% vested.
Money-Purchase Pension Plan
Corvallis also has a Money-Purchase Pension Plan in which all employees are
eligible to participate subject to certain eligibility criteria. Corvallis
contributes 5.4% of the employee's eligible earnings up to $48,481 and 10.8% of
eligible earnings in excess of $48,481. These contributions are 100% vested upon
eligibility.
Corvallis' contributions for these plans for the 13-month period ended December
31, 1996 and the years ended November 30, 1995 and 1994 were approximately
$1,494,000, $2,010,000 and $1,813,000, respectively.
9. 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 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.
<PAGE> 66
-9-
At February 1, 1997, Corvallis' professional liability insurance policy was
consolidated into a Physician Partners, Inc. policy as a result of the
reorganization transaction (Note 14). The consolidated claims-made policy has no
deductible. The policy coverage is $2,000,000 per claim, with an aggregate limit
of $4,000,000 and includes full prior acts coverage.
10. 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, 1993 through December 31, 1996, together with other information, is
presented below:
<TABLE>
<CAPTION>
Class A Class B Class C
Voting Preferred Voting Common Nonvoting Preferred Notes
------------------ ----------------- ------------------- Receivable
Shares Carrying Shares Carrying Shares Carrying From
Issued Value Issued Value Issued Value Stockholders Total
------ ----- ------ ----- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, November 30, 1993 62 $1,117,636 11,335 $2,631,745 6,140 $614,000 $(485,931) $3,877,450
Stock issued 9 207,000 700 210,150 3,100 310,000 (399,150) 328,000
Stock redeemed (3) (25,000) - - (480) (48,000) - (73,000)
Accretion - 58,817 - 452,743 - - - 511,560
Payments of notes receivable - - - - - - 143,549 143,549
--- ---------- ------ ---------- ------- -------- --------- ----------
BALANCE, November 30, 1994 68 1,358,453 12,035 3,294,638 8,760 876,000 (741,532) 4,787,559
Stock issued 1 23,000 - - - - (23,000) -
Stock redeemed (1) (23,000) - - (190) (19,000) - (42,000)
Accretion - 5,661 - 771,803 - - - 777,464
Payments of notes receivable - - - - - - 136,925 136,925
--- ---------- ------ ---------- ------- -------- --------- ----------
BALANCE, November 30, 1995 68 1,364,114 12,035 4,066,441 8,570 857,000 (627,607) 5,659,948
Stock issued 1 23,000 - - - - (13,000) 10,000
Stock redeemed (5) (115,000) (235) (139,825) (570) (57,000) - (311,825)
Accretion - 78,566 - 1,441,642 - - - 1,520,208
Payments of notes receivable - - - - - - 81,081 81,081
--- ---------- ------ ---------- ------- -------- --------- ----------
BALANCE, December 31, 1996 64 $1,350,680 11,800 $5,368,258 8,000 $800,000 $(559,526) $6,959,412
=== ========== ====== ========== ======= ======== ========== ==========
Current redemption value per share $ 23,000 $ 595 $ 100
========== ========== ========
Redemption value for shares issued $1,472,000 $7,021,000 $800,000
========== ========== ========
Total authorized shares 200 25,000 100,000
=== ====== =======
</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 certain date. Accordingly, no determination can be made of redemption
requirements for specific years in the future.
<PAGE> 67
-10-
11. 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 such deferred retirement compensation. The deferred
compensation recorded in the accompanying financial statements is the net
present value of the future obligations recognized for the years of service.
12. 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. The severance agreement costs have been expensed in
1996.
Other Commitments
References of other commitments are made in the discussion of various lease
commitments and related debt guarantees in Notes 7 and 13.
13. 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
------------------
Percent December 31, November 30,
Investee Owned 1996 1995
---------------------------- ------- ------------ -------------
<S> <C> <C> <C>
Corvallis MRI 33% $217,688 $231,058
HealthCare Partners, LLC 50 436,537 259,319
Healthquest - - 71,291
-------- --------
$654,225 $561,668
======== ========
</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.
Summarized financial information of Corvallis MRI for its December 31 fiscal
year is presented below:
<PAGE> 68
-11-
Balance sheet data-
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1996 1995
---------- ----------
<S> <C> <C>
Current assets $ 461,072 $ 618,677
Fixed assets 1,034,361 1,288,043
Other assets 40,000 -
---------- ----------
Total assets $1,535,433 $1,906,720
========== ==========
Current liabilities $ 399,787 $ 346,383
Long-term debt 437,584 796,735
Other long-term liabilities 45,000 -
Partners' equity 653,062 763,602
---------- ----------
Total liabilities and Partners' equity $1,535,433 $1,906,720
========== ==========
</TABLE>
Operations data-
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $1,827,753 $1,657,619 $1,303,800
Operating expenses (936,558) (834,435) (746,580)
Other income (expense) (56,734) (83,351) (83,592)
---------- ---------- ----------
$ 834,461 $ 739,833 $ 473,628
========== ========== ==========
</TABLE>
During 1996, 1995 and 1994, payments to Corvallis MRI for services provided to
Corvallis were $143,072, $61,785 and $65,504, respectively, 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% 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 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.
<PAGE> 69
-12-
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 (Note 7).
Summarized financial information of HealthCare Partners, LLC for its fiscal year
is presented below:
Balance sheet data-
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current assets $ 271,240 $ 276,548
Financing lease receivable 17,993,030 18,095,340
Property and improvements 6,267,652 5,357,704
Other assets 145,494 175,414
----------- -----------
Total assets $24,677,416 $23,905,006
=========== ===========
Current liabilities $ 2,053,542 $ 1,211,560
Long-term debt 7,842,940 8,014,916
Members' equity 14,780,934 14,678,530
----------- -----------
Total liabilities and Members' equity $24,677,416 $23,905,006
=========== ===========
</TABLE>
Operations data-
<TABLE>
<CAPTION>
Inception
December 31, (June 1) through
1996 December 31, 1995
------------ -----------------
<S> <C> <C>
Revenues $2,506,116 $1,257,835
Expenses 1,664,715 679,981
---------- ----------
Net income $ 841,401 $ 577,854
========== ==========
</TABLE>
Revenues include interest income of $1,962,385 for the year ended
December 31, 1996 and $1,149,055 for the 1995 period relating to the financing
lease with Corvallis. As a substantial portion of the joint venture's income is
derived from payments made by Corvallis for this interest income, Corvallis'
share of earnings from the joint venture is offset against interest expense in
the accompanying statements of income.
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
$2,159,000 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.
<PAGE> 70
-13-
Healthquest
During 1996, Corvallis' sold their interest in Healthquest to one of the other
partners. Corvallis recognized a loss on the sale of their investment of $18,036
included in the accompanying financial statements.
14. SUBSEQUENT EVENTS:
The shareholders and Board of Directors of Corvallis approved a Reorganization
and Merger Agreement (the Agreement) dated February 1, 1997 together with the
shareholders and Board of Directors of HealthFirst Medical Group P.C.; the
Medford Clinic P.C.; and Physician Partners, Inc. (PPI), a newly formed company.
The transaction resulted 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 were 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: cash, receivables, inventory, prepaids, property, plant and
equipment, other assets, payables, accruals, debt and contractual commitments,
was transferred to PPI. The shareholders of the three founding clinics became
the original shareholders of PPI.
An integral part of the reorganization is a 40-year management agreement whereby
PPI provides physician practice management services to the New PCs. Services
provided include management and administrative services, capital resources,
facilities, equipment and supplies.
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 provider compensation and benefits.
The parties to the reorganization transaction have received 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.
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. Corvallis' share of such costs are
reflected as a charge to equity in the accompanying statement of accumulated
deficit. At December 31, 1996, Corvallis owed $328,626 related to this
agreement, which was included in accounts payable in the accompanying financial
statements.
<PAGE> 71
SIGNATURES
See General Instruction D
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PHYSICIAN PARTNERS, INC.
(Registrant)
By /s/ David Goldberg
David Goldberg
President, Chief Executive Officer and
Director
4/3/97
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Tim E. Dupell
Tim E. Dupell
Chief Financial Officer,
Director, Senior Vice President
4/3/97
By /s/ Anna Loomis
Anna Loomis
Controller
4/3/97
By /s/ Michael F. Bonazzola, M.D.
Michael F. Bonazzola, M.D.
Senior Vice President, Director
4/4/97
By /s/ Bruce E. Van Zee, M.D.
Bruce E. Van Zee, M.D.
Chairman of the Board, Director
<PAGE> 72
4/4/97
By /s/ David H. Cutsforth, Jr., M.D.
David H. Cutsforth, Jr., M.D.
Director
4/4/97
By /s/ Russell A. Dow, M.D.
Russell A. Dow, M.D.
Director
4/4/97
By /s/ Douglas M. Mancino, Esq.
Douglas M. Mancino, Esq.
Director
4/4/97
