<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1997.
COMMISSION FILE NO.: 333-15595-03
MEDFORD CLINIC, P.C.
FORMERLY "PHYSICIAN PARTNERS MEDFORD, P.C."
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OREGON 93-1221063
- --------------------------------------------- ------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER ID NO.)
OR ORGANIZATION)
555 BLACK OAK DRIVE
MEDFORD, OREGON 97054
- -------------------------------------------- ------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (541) 734-3601
----------------------
NOT APPLICABLE
- ------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
As of November 13, 1997, 60 shares of the Registrant's Common Stock, no par
value, were outstanding.
<PAGE>
MEDFORD CLINIC, P.C.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
(All dollar amounts are expressed in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 201
Patient accounts receivable, net of allowances for
contractual discounts and uncollectible accounts of
$0 and $3,845 at September 30, 1997 and December 31,
1996, respectively - 6,125
Healthcare receivables - 487
Inventories of drugs and supplies - 203
Prepaid expenses and deposits 641 304
Restricted investments - 250
----------- -----------
Total current assets 642 7,570
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $0 and $5,304 at September 30,
1997 and December 31, 1996, respectively - 5,701
LONG-TERM DEFERRED TAX ASSET - 77
OTHER ASSETS:
Restricted investments - 250
Other - 43
----------- -----------
Total other assets - 293
----------- -----------
Total assets $ 642 $13,641
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 1,004
Drafts payable - 529
Accounts payable - 1,311
Payable to PPI 641 -
Accrued healthcare costs - 1,027
Accrued compensation and related expenses - 2,497
Current deferred tax liability - 1,568
----------- -----------
Total current liabilities 641 7,936
LONG-TERM DEBT, net of current portion - 3,924
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES - 939
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
$10 par value; 500 shares authorized; 0 and
57 shares outstanding at September 30, 1997 and
December 31, 1996, respectively - 1
No par value; 500 shares authorized, 62 and 0
shares outstanding at September 30, 1997 and
December 31, 1996, respectively 1 -
Additional paid-in capital - 1
Retained earnings - 840
----------- -----------
Total stockholders' equity 1 842
----------- -----------
Total liabilities and stockholders' equity $ 642 $13,641
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(All dollar amounts are expressed in thousands, except loss per share)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Fee-for-service, net $ 9,305 $ 7,670 $ 27,364 $ 24,831
Prepaid healthcare, net 2,355 2,092 6,675 5,437
----------- ----------- ---------- ----------
Net revenues 11,660 9,762 34,039 30,268
Less- Provider compensation and benefits 2,594 2,843 7,474 8,552
----------- ----------- ---------- ----------
Net revenue less provider
compensation and benefits 9,066 6,919 26,565 21,716
----------- ----------- ---------- ----------
OPERATING EXPENSES:
Clinic salaries, wages and benefits 3,649 3,769 11,078 10,020
Purchased medical services 1,180 1,193 3,579 2,960
Medical and office supplies 1,693 1,263 4,679 3,937
General and administrative expenses 954 650 2,783 2,555
Provision for uncollectible accounts 384 209 1,094 767
Depreciation and amortization 294 442 882 851
Rent and lease expense 345 282 1,003 804
----------- ----------- ---------- ----------
Total operating expenses 8,499 7,808 25,098 21,894
----------- ----------- ---------- ----------
Operating income (loss) 567 (889) 1,467 (178)
OTHER INCOME (EXPENSE):
Interest income 5 25 21 94
Interest expense (78) (134) (287) (336)
Management fee (494) - (1,247) -
----------- ----------- ---------- ----------
Net loss before benefit for income taxes - (998) (46) (420)
BENEFIT FOR INCOME TAXES - (477) - (246)
----------- ----------- ---------- ----------
NET LOSS $ - $ (521) $ (46) $ (174)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
LOSS PER SHARE $ - $ (9,303.57) $ (807.02) $ (3,107.14)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING 59 56 57 56
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss - $ (521) $ (46) (174)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation and amortization - 442 98 851
Deferred Taxes - (73) - (243)
Changes in operating assets and liabilities
(excluding assets and liabilities assigned
to Physician Partners, Inc.):
Patient accounts receivable, net - (47) (44) (266)
Healthcare receivables - (149) 95 (81)
PPI allocation receivable - (485) - (485)
Inventory - 2 - 34
Prepaid expenses and deposits (46) 224 (674) 443
Other assets - (21) 18 16
Drafts payable - - (529) -
Accounts payable - 573 (181) 919
Payable to PPI 46 - 641 -
Income taxes payable - (398) - 25
Accrued healthcare costs - 71 (13) 115
Accrued compensation and related expenses - 867 461 1,179
Other liabilities - (250) - (189)
Deferred compensation and long-term
liabilities - 619 29 616
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities - 854 (145) 2,761
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment - (383) (21) (1,114)
Purchases of investments - - - (37)
Net cash used in investing activities - (383) (21) (1,151)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings under line
of credit agreement - - 300 -
Principal payments on long-term debt - (236) (81) (695)
Cash contributed to Physician Partners, Inc. in
Merger - - (200 -
Costs incurred related to Physician Partners, Inc.
Transaction - (443) (53) (635)
----------- ----------- ----------- -----------
Net cash used in financing activities - (679) (34) (1,330)
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - (208) (200) 280
CASH AND CASH EQUIVALENTS, beginning of period 1 1,086 201 598
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1 $ 878 $ 1 $ 878
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
</TABLE>
<PAGE>
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (CONTINUED)
(All dollar amounts are expressed in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---- ---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $80 $104 $286 $325
Cash paid for income tax - - - -
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In February 1997, Medford assigned all assets and liabilities to Physician
Partners, Inc. as part of the reorganization and merger transaction. The
book value of Medford's assets and liabilities, including $200 cash, at the
date of the transaction are presented below:
Current assets $ 7,300
Property, plant and equipment 5,625
Other long-term assets 603
Current liabilities 7,974
Long-term liabilities 4,811
Contributed equity 743
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
MEDFORD CLINIC, P.C.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of the management of Medford Clinic, P.C. ("Medford"), the
unaudited interim financial statements contained in this report reflect all
adjustments, consisting of only normal recurring accruals, which are
necessary for a fair presentation of the financial position and the results
of operations for the interim periods presented. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
The accompanying financial statements reflect the assets and liabilities as
of December 31, 1996 and results of operations for the three and nine months
ended September 30, 1996 for the Medford Clinic, P.C. prior to the
reorganization transaction ("Old Medford"). The Statement of Operations and
Cash Flows for the three and nine month period ended September 30, 1997,
include the results of operations for Old Medford from January 1 to January
31, 1997. The remainder of the period represents the operations of Medford
Clinic, P.C. ("New PC") subsequent to the effective date of the
reorganization transaction, February 1, 1997.
These financial statements, footnote disclosures and other information should
be read in conjunction with the financial statements and the notes thereto
included in Medford's special filing under Form 10-K for the year ended
December 31, 1996.
2. REORGANIZATION AND MERGER AGREEMENT:
On February 1, 1997, certain reorganization and merger transactions (the
"Transactions") contemplated by the Amended and Restated Agreement and Plan
of Reorganization and Merger (the "Reorganization and Merger Agreement")
among Medford Clinic, P.C. ("Old Medford"), HealthFirst Medical Group, P.C.
("Old HealthFirst"), The Corvallis Clinic, P.C. ("Old Corvallis," and,
together with Old Medford and Old HealthFirst, referred to herein,
collectively as "Old PCs"), and Physician Partners, Inc. ("PPI"), were
consummated. Pursuant to the terms of the Reorganization and Merger
Agreement, each Old PC affected (a) a reorganization (the "New PC
Reorganization") of its corporate structure by (i) incorporating a
wholly-owned professional corporation subsidiary (a "New PC"), (ii)
transferring to the New PC certain assets and liabilities (including
physician employment agreements) relating to the provider professional
services business, (iii) making a pro rata distribution to its shareholders
of all of the capital stock of the New PC, (iv) converting such Old PC from a
professional corporation to a business corporation and (v) entering into a
40-year management agreement (the "Management Agreement") with PPI and (b) a
merger (the "Merger") with and into PPI, resulting in consolidation of the
operations (other than the provider professional services businesses) of the
Old PCs. Medford is the New PC incorporated by the Old Medford prior to the
Merger pursuant to the Reorganization and Merger Agreement.
The Transactions resulted in a separation of operations of Old Medford
between medical professional services activities (i.e., providers of medical
services), which were transferred to Medford prior to the Merger in the New
PC Reorganization, and the physician practice management activities of the
business, which were transferred to PPI in the Merger. In the Merger, PPI
succeeded to the ownership of substantially all of the assets and liabilities
of the three Old PCs, i.e., cash, receivables, inventories, prepaids,
property, plant and equipment, payables, accruals, debt, and certain
contractual commitments. As consideration, the shareholders of the Old PCs
received stock of PPI.
<PAGE>
Under the Management Agreement, PPI provides physician practice management
services to Medford. Services provided include management and administrative
services; capital resources, facilities, equipment and supplies are also
provided by PPI under the Management Agreement. As consideration, PPI is
entitled to (a) reimbursement of all managerial costs and expenses
("Manager's Expenses") incurred by PPI and (b) a management fee equal to 16%
of (i) net revenues relating to services provided by Medford less (ii)
Manager's Expenses. In the accompanying financial statements, the
reimbursement of Manager's Expenses are identified by the various types of
expenses. Medford is responsible for providing medical services and the
related costs for compensation and benefits to the providers employed thereby.
The parties to the Transactions have received an opinion from tax counsel
that for federal income tax purposes, it is more likely than not that the
Merger will be a tax-free transaction. No opinion was requested from tax
counsel with respect to the New PC Reorganization. If the Internal Revenue
service ("IRS") or tax court were to determine that the Merger was not tax
free, there would be significant adverse tax consequence to the parties to
the Transactions and their respective shareholders. No ruling was requested
from the Internal Revenue Service regarding the tax consequences of the
Merger or the New PC Reorganization.
In connection with the Transactions, the three Old PCs entered into an
expense sharing agreement, which establishes the basis upon which certain
costs incurred in connection with the Transactions are to be allocated among
the three Old PCs. Medford and other New PCs have assumed the obligations of
their respective Old PCs under the expense sharing agreement. Medford's share
of such costs are reflected as a charge to retained earnings.
3. INCOME TAXES:
As of September 30, 1997 the net income before provision for income taxes
represents the results of operations for Old Medford from January 1 to
January 31, 1997. The valuation reserve against the deferred tax assets was
reversed in an amount equal to the current tax benefit, resulting in no tax
benefit being reflected in the 1997 Statement of Operations. The operations
of the New PC for the remainder of the period have resulted in no net income
and accordingly, no current tax expense is necessary.
4. EARNINGS PER SHARE:
All share and per share data have been retroactively restated to give effect
to the recapitalization resulting from the Transactions.
5. EQUITY ROLLFORWARD:
The Transactions resulted in Old Medford's Common Stock being converted into
the right to receive PPI Common Stock in the Merger. In addition, as a
result of the Merger, PPI succeeded to the ownership of Old Medford's equity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion includes some forward-looking statements that
involve a number of risks and uncertainties. Actual results may differ
materially from historical results or from the results discussed in such
forward-looking statements or outcomes otherwise currently expected or sought
by Medford.
OVERVIEW
Medford, an Oregon professional service corporation, is a primary-care based,
multi-specialty medical clinic. Medford was formed in 1997 pursuant to
certain reorganization and merger transactions (the "Transactions")
contemplated by the Amended and Restated Agreement and Plan of Reorganization
and Merger (the "Reorganization and Merger Agreement") among Medford Clinic,
P.C. ("Old Medford"), HealthFirst Medical Group, P.C. ("Old HealthFirst"),
The Corvallis Clinic, P.C. ("Old Corvallis," and, together with Old Medford
and Old HealthFirst, referred to herein, collectively as "Old PCs"), and
Physician Partners, Inc. ("PPI"). Old Medford was formed in 1946. Pursuant
to the terms of the Reorganization and Merger Agreement, each Old PC affected
(a) a reorganization (the "New PC Reorganization") of its corporate structure
by (i) incorporating a wholly-owned professional corporation subsidiary ( a
"New PC"), (ii) transferring to the New PC certain assets and liabilities
(including physician employment agreements) relating to the provider
professional services business, (iii) making a pro rata distribution to its
shareholders of all of the capital stock of the New PC, (iv) converting such
Old PC from a professional corporation to a business corporation and (v)
entering into a 40-year management agreement (the "Management Agreement")
with PPI and (b) a merger (the "Merger") with and into PPI, resulting in
consolidation of the operations (other than the provider professional
services businesses) of the Old PCs.
Medford consists of 76 professional providers who offer a wide range of
primary and specialty care services. In addition, Medford offers ancillary
services such as radiology, pharmacy, and laboratory. Medford also provides
clinical dialysis services through its Rogue Valley Dialysis Services
division. Medford's operations are located in Southern Oregon.
Medford believes that group practice offers the best means of promoting and
maintaining the highest standard of medical care. Medford's strategy is to
position itself in a competitive network as the healthcare industry develops.
Medford's relationship with PPI enhances its capacity to provide a high
quality of clinical care and to compete economically in both managed care and
fee-for-service markets.
To increase revenue, Medford is working with PPI to recruit additional
physicians and merge other physician groups in the area into their clinic.
PPI is working with Medford on initiatives to reduce the Manager's Expenses
of Medford (which are paid by PPI and reimbursed by Medford) and increase
revenues.
RESULTS OF OPERATIONS
Net fee-for-service revenue increased from $7.7 million for the third quarter
of 1996 to $9.3 million for the third quarter of 1997, an increase of $1.6
million, and from $24.8 million to $27.4 million for the first nine months of
1996 compared to the first nine months of 1997, an increase of $2.6 million.
The increases in 1997 are due to the addition of providers in late 1996 who
are at higher production levels in 1997. Prepaid healthcare revenue
increased $.3 million from $2.1 million for the third quarter of 1996 to $2.4
million for the third quarter of 1997 and increased $1.3 million from $5.4
million to $6.7 million for the first nine months of 1996 compared to 1997.
The increases in prepaid healthcare revenue are due to an increase in managed
care lives and an increase in the capitation rate for the Oregon Health Plan
contract. Management is negotiating the 1998 managed care contracts and
anticipates improvement over 1997. In the fourth quarter, Medford will
receive a $.3 million one time payment from PPI which may be offset
against the payable to PPI.
<PAGE>
Total operating expenses increased $.7 million from $7.8 million for the
third quarter of 1996 to $8.5 million for the third quarter of 1997 and
increased $3.2 million, from $21.9 million for the first nine months of 1996
to $25.1 million for the first nine months of 1997. Clinic salaries, wages
and benefits increased $1.1 million for the first nine months of 1997 due to
an increase in employees to support the addition of ten providers in the last
half of 1996. Purchased medical services increased $.6 million for the first
nine months of 1997 due to an increase in capitated lives and increased PMPM
costs on certain plans. Medical and office supplies increased $.7 million and
$.4 million during the first nine months of 1997 compared to 1996 and third
quarter 1997 compared to 1996, respectively, due to higher production levels
and higher usage of oncology drugs. General and administrative expenses
increased $.3 million in the third quarter 1997 compared to 1996 due to
special consulting projects completed in 1997.
The management fee of $.5 million for the third quarter 1997 and $1.2 million
for the first nine months of 1997 was paid to PPI in accordance with the
Management Agreement. There was no such management fee in 1996 as the
Management Agreement was not effective until February 1, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Transactions, PPI succeeded to the ownership of
substantially all assets and liabilities of Old Medford and PPI assumed all
financing activities relating to the working capital needs of Medford. Per
the Management Agreement, PPI will purchase the necessary capital equipment
to support Medford's operations.
<PAGE>
MEDFORD CLINIC, P.C.
PART II -- OTHER INFORMATION
ITEM 1: Legal Proceddings
None.
ITEM 2: Changes in Securities
None.
ITEM 3: Defaults Upon Senior Securities
None.
ITEM 4: Submission of Matters to a Vote of Security Holders
None.
ITEM 5: Other Information
None.
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
<PAGE>
MEDFORD CLINIC, P.C.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MEDFORD CLINIC, P.C.
(Registrant)
Date: November 13, 1997 By: /s/ STEPHEN J. SCHNUGG, M.D.
----------------------------
Stephen J. Schnugg, M.D.
President
Date: November 13, 1997 By: /s/ VICKI S. WAGNER
----------------------------
Vicki S. Wagner
Chief Financial Officer and
Treasurer
<TABLE> <S> <C>
<PAGE>
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<NAME> MEDFORD CLINIC, P.C.
<MULTIPLIER> 1,000
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1
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0
0
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