<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 333-15595-03
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 (I.R.S. Employer
incorporation or organization Identification No.)
Address of Principal Executive Offices
Registrant's telephone number, including area code
555 Black Oak Drive
Medford, Oregon 97504
(541) 734-3601
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
<PAGE> 2
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 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.)
The Registrant's shares have no market value.
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.
57 1/3 shares of 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
MEDFORD CLINIC, P.C.
(FORMERLY PHYSICIAN PARTNERS MEDFORD, P.C.)
INDEX TO FINANCIAL STATEMENTS
1. MEDFORD CLINIC, P.C.
(FORMERLY PHYSICIAN PARTNERS MEDFORD, P.C.)
Report of Independent Accountants
Balance Sheet as of December 31, 1996
Notes to Financial Statements
2. 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
THE MEDFORD CLINIC, PC
(FORMERLY PHYSICIAN PARTNERS MEDFORD, PC)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
The Medford Clinic, PC:
We have audited the accompanying balance sheet of The Medford Clinic, PC,
formerly Physician Partners Medford, PC, an Oregon professional corporation as
of December 31, 1996. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of The Medford Clinic, PC as of
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
April 3, 1997
<PAGE> 6
THE MEDFORD CLINIC, PC
(FORMERLY PHYSICIAN PARTNERS MEDFORD, PC)
BALANCE SHEET AS OF DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
CASH $ 1
----
Total assets $ 1
====
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
LIABILITIES $ -
STOCKHOLDERS' EQUITY:
Common stock voting; no par value;
500 shares authorized; 57-1/3 shares
issued and outstanding 1
----
Total liabilities and stockholders' equity $ 1
====
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
THE MEDFORD CLINIC, PC
(FORMERLY PHYSICIAN PARTNERS MEDFORD, PC)
NOTES TO FINANCIAL STATEMENT
1. BUSINESS AND ORGANIZATION:
The Medford Clinic, PC (Medford), an Oregon professional corporation, was
incorporated on September 18, 1996 under the name Physician Partners Medford,
PC for the purpose of effecting a reorganization transaction between Physician
Partners, Inc. (PPI) and three Oregon professional corporations (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). Medford is one of the 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, other assets, payables, accruals, debt, and
certain contractual commitments were transferred to PPI. The New PCs are
responsible for providing medical services and the related costs for provider
compensation and benefits. The assets transferred to the New PCs, which had
zero carrying value, include the employment agreements between each Company and
its providers, certain provider contracts under which the New PCs will be
receiving fee-for-service compensation and patient medical records.
An integral part of the reorganization is a 40-year management agreement whereby
PPI 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.
Essentially all of the cash remaining in the New PC after the payments to PPI
under the management agreement will fund the compensation and benefits of
providers employed by the New PCs.
2. STATEMENTS OF OPERATIONS AND CASH FLOWS:
No statements of operations and cash flows have been presented as PPM did not
commence operations until February 1, 1997 and, accordingly, there has been no
operating or cash activities.
<PAGE> 8
MEDFORD CLINIC, P.C.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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> 15
-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> 16
-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> 17
-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> 18
-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> 19
-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> 20
-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> 21
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> 22
-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> 23
-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> 24
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.
MEDFORD CLINIC, P.C.
(Registrant)
By /s/ Stephen J. Schnugg, M.D.
Stephen J. Schnugg, M.D.
President, 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/ Bruce Van Zee, M.D.
Bruce Van Zee, M.D.
Director
4/3/97
By /s/ Dan Wayman, M.D.
Dan Wayman, M.D.
Vice President, Director
4/3/97
By /s/ Bruce E. Johnson, M.D.
Bruce E. Johnson, M.D.
Director
4/3/97
By /s/ Paul Schroeder
Paul Schroeder
Director
4/3/97
By /s/ Peter Adesman, M.D.
Peter Adesman, M.D.
Director
4/3/97
By /s/ Daniel R. Brandenburg
Daniel R. Brandenburg
Director
4/3/97
By /s/ Vicki Wagner
Vicki Wagner
Chief Financial Officer
4/3/97
