<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
------------------------------------------------
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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.)
555 Black Oak Drive
Medford, Oregon 97054
- --------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(541) 734-3601
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
- --------------------------------------------------------------------------------
(Title of Class)
None
- --------------------------------------------------------------------------------
(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 for the past 90 days.
YES [ X ] NO [ ]
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. [ ]
The number of shares of the Registrant's Common Stock outstanding as of March
30, 1998 was 60.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
PART I
<S> <C> <C>
Item 1: Business 3
Item 2: Properties 8
Item 3: Legal Proceedings 8
Item 4: Submission of Matters to a Vote of Security Holders 8
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6: Selected Financial Data 9
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 8: Financial Statements and Supplementary Data
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15
PART III
Item 10: Directors and Executive Officers of the Registrant 15
Item 11: Executive Compensation 16
Item 12: Security Ownership of Certain Beneficial Owners and Management 17
Item 13: Certain Relationships and Related Transactions 17
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K 18
</TABLE>
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PART I
ITEM 1: BUSINESS
OVERVIEW
The Medford Clinic, P.C. ("Medford" or "Company"), an Oregon Professional
corporation, is a multi-specialty medical clinic which emphasizes internal
medicine and family medicine. Medford was founded in 1997 pursuant to certain
reorganization and merger transactions ("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 Corvallis and Old
HealthFirst, referred to herein, collectively as "Old PCs", and Physician
Partners, Inc. ("PPI"). Old Medford was founded in 1946.
This transaction, which was consummated on February 1, 1997, resulted in a
separation of operations of the Old PCs 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 New PCs, 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
("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.
Other benefits of the Merger include a greater access to capital, economies of
scale provided by the consolidated operations of the Old PCs, and shared
strengths of management expertise. 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 management structure between PPI and Medford enables Medford to retain
significant control over its own operation and strategic direction.
Specifically, Medford retains its own physician board of directors. The function
of the physician board includes:
(i) determining and managing physician compensation methodologies;
(ii) employing and reviewing (with the assistance of PPI's Chief
Medical Officer) the performance of its Medical Director and
compensation for and appointment of physician managers;
(iii) dealing with individual physician quality and behavioral issues;
(iv) approving all growth and acquisitions by being the only body
which can approve employment of physicians of the Company; and
(v) appointing three members to the Joint Management Board of
Directors and designating its Medical Director as an ex officio
member.
Subject to the rights of the Company's physician board, the business of Medford
is governed by the Joint Management Board. The Joint Management Board is
designed to represent equally the clinical and physician perspective and the
management and business perspective. The Joint Management Board consists of six
members, with three members appointed by Medford (physician members of the
Medford Board) and three members appointed by PPI (one of whom must be a local
PPI group practice administrator). The Medical Director of Medford serves as a
seventh ex officio, non-voting member of the Joint Management Board. The Joint
Management Board provides local expertise and develops and approves all
submissions to PPI regarding Medford's growth, annual budgets, payor relations,
local strategic initiatives and capital improvements.
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GENERAL
Medford is a multi-specialty group providing professional health care services
on both a prepaid and fee-for-service basis. PPI contracts directly with health
plans and preferred provider organizations ("PPOs") to provide medical services
to enrollees who have selected Medford physicians as their primary care provider
on behalf of Medford. Through contracts with various health plans, Medford
physicians were responsible for the health care of approximately 26,000 health
plan members as of December 31, 1997.
Medford has grown through a combination of acquisitions of medical practices
that complement its services and recruitment of individual associate physicians
in need of practice areas. In order for Medford to provide its patients with the
necessary specialty services, Medford contracts with providers of such
specialties that Medford physicians do not practice.
In 1993, Old Medford acquired all of the interest in Rogue Valley Medical Center
("RVMC") in an entity called Rogue Valley Dialysis Center ("RVDC"), a joint
venture that was organized by Old Medford and RVMC in 1987. The joint venture
with RVMC was terminated effective July 1, 1993, and Old Medford acquired RVMC's
share of the assets in the joint venture. Medford currently operates the RVDC
center under the name Rogue Valley Dialysis Services ("RVDS"). After the Merger,
PPI succeeded to financial liabilities associated with the acquisition of the
RVDS center.
Medford also operates another dialysis center under the name "Redwood Dialysis
Center" and manages dialysis units and provides dialysis services at three local
hospitals (Providence Medford Medical Center and RVMC in Medford, Oregon, and
Merle West Medical Center in Klamath Falls, Oregon.)
In addition, Medford is the sole member of Medford Clinic Foundation, an Oregon
nonprofit corporation (the "Foundation"). The Foundation was organized in 1979.
In February 1980, the Foundation obtained from the Internal Revenue Service a
determination of federal tax-exempt status as a Section 501(c)(3) organization
which is not a private foundation. The Foundation generally engages in raising
funds that are distributed to individuals or entities whose grant proposals are
approved. All grants must be used for worthy purposes that benefit the Medford
community.
Under capitated contracts, Medford is paid a fixed fee per covered life on a
monthly basis throughout the contract period. Under such agreements, the Company
is responsible for providing or arranging for the provision of covered benefits
to the applicable health maintenance organization ("HMO") member. Medford
provides services on a prepaid basis to PacificCare, Secure Horizons and Oregon
Health Plan patients. Enrollment is categorized as "commercial" for enrollees
under the age of 65 whose health coverage is generally sponsored by employers or
"senior" for retired patients. Higher capitation rates are generally received
from senior patients because their medical needs are generally greater and
consequently the cost of covered care is higher. In the years ending 1995, 1996
and 1997, $5.0 million, $7.0 million and $9.9 million, respectively, of net
patient revenues came from prepaid or capitated patients.
While Medford obtains a significant and growing portion of its revenues from
managed care programs, its main source of income is the result of a more
traditional form of business. Medford is a Medicare provider and receives
fee-for-service payments from a significant percentage of patients and
traditional indemnity insurers. In the years ending 1995, 1996 and 1997, $33.9
million, $33.4 million and $37.2 million, respectively, of net patient revenues
came from PPOs, other contractual relationships, individuals or private
insurance carriers (fee-for-service).
The following table indicates the percentage of payor mix of the Company's
aggregate net clinic revenue earned by Medford:
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<TABLE>
<CAPTION>
PAYOR 1995 1996 1997
- ----- ---- ---- ----
<S> <C> <C> <C>
Fee-For-Service:
Commercial and Private 58% 55% 51%
Medicare 27% 27% 26%
Medicaid 2% 1% 2%
Prepaid (1) 13% 17% 21%
</TABLE>
(1) Includes enrollees under Commercial, Medicare and Medicaid programs
SERVICES
Medford offers a wide range of primary and specialty physician care and
ancillary services through an organized physician group. Approximately 40% of
the Company's physicians are primary care providers and approximately 60%
practice various medical and surgical specialties. The primary care physicians
are those concentrating in family practice, general internal medicine, and
pediatrics. Medford also provides services, such as hemodialysis and
chemotherapy, through local hospitals. At certain locations, Medford operates
centers for ambulatory surgery, urgent care, cancer management, hemodialysis and
allergy treatment.
The following professional services are offered by Medford:
Allergy and Asthma Obstetrics
Cardiology Oncology and Hematology
Dermatology Orthopedics
Endocrinlogy Otolaryngology
Family Practice Pediatrics
Gastroenterology Podiatry
Gynecology Rheumatology
Infectious Disease Surgery- General and Vascular
Internal Medicine Urgent Care
Nephrology Urology
Furthermore, Medford has numerous provider arrangements in the community so that
it can offer additional services to patients covered under capitated contracts.
In addition to medical services, Medford offers a number of ancillary services
within its offices such as radiology, pharmacy, and laboratory. Medford also
provides clinical dialysis services through its Rogue Valley Dialysis Services
division.
BUSINESS STRATEGY
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 has been 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) through regional
purchasing and insurance contracts, and through the consolidation of various
services.
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<PAGE> 6
GOVERNMENT REGULATION
Medford is subject to federal and state laws regulating the relationships among
providers of health care services, physicians and other clinicians. These laws
include the fraud and abuse provisions of the Medicare and Medicaid statutes,
which prohibit the solicitation, payment, receipt or offering of any direct or
indirect remuneration for the referral of Medicare or Medicaid patients or for
the recommending, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services. Other laws impose significant penalties for false or
improper billings for physician services and impose restrictions on physician
referrals for designated health services to entities with which they have
financial relationships. Violations of those laws may result in substantial
civil or criminal penalties for individuals or entities, including large civil
money penalties and exclusion from participation in the Medicare and Medicaid
programs. Significant laws applicable to the health care industry generally are
described in more detail below.
Fraud and Abuse Laws
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the recommendation, arrangement,
purchase, lease or order of items or services that are covered by Medicare or
state health programs. In recent years, there has been increasing scrutiny by
law enforcement authorities, the United States Department of Health and Human
Services, various state agencies, the federal and state courts and Congress, of
financial arrangements between health care providers and potential sources of
patient referrals to ensure that such arrangements are not disguised mechanisms
to pay for patient referrals. The Anti-Kickback Statute is broad in scope and
interpretations by various courts have been ambiguous or conflicting in certain
respects. To the extent PPI is deemed to be either a referral source or a
separate provider under the New PC Management Agreement that is in a position to
influence referrals to or from physicians, the financial arrangements under
these agreements could be subject to scrutiny and prosecution under the
Anti-Kickback Statute.
Physician Self-Referral Law
Significant prohibitions against physician self-referrals for services covered
by Medicare and Medicaid programs were enacted, subject to certain exceptions,
by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician self-referral
legislation known as Stark I (which applied only to clinical laboratory
referrals) by enlarging the list of services and investment interests to which
the self-referral prohibitions apply. Effective January 1, 1995, Stark II
prohibits a physician, or a member of his or her immediate family, from making
referrals for certain "Designated Health Services" to entities in which the
physician has an ownership or investment interest, or with which the physician
has a compensation arrangement. In addition to the conduct directly prohibited
by the law, the statute also prohibits schemes that are designed to obtain
referrals indirectly that cannot be made directly. The penalties for violating
the law include (i) a refund of any Medicare or Medicaid payments for services
that resulted from an unlawful referral, (ii) civil fines, and (iii) exclusion
from the Medicare and Medicaid programs. "Designated Health Services" include,
among other things, clinical laboratory services, radiology and other
diagnostic services, radiation therapy services, durable medical equipment,
prosthetics, outpatient prescription drugs, home health services and inpatient
and outpatient hospital services. Stark II prohibitions include referrals
within the physician's own group practice (unless the practice satisfies the
"in-office ancillary services" exception) and referrals in connection with
physicians' employment arrangements (unless the arrangement satisfies the
"in-office ancillary services" or "employment" exceptions). In addition, Stark
II applies to indirect financial arrangements. To the extent physicians managed
by the Company are determined to have an indirect financial relationship with
physicians in separate practices which are managed by the Company, absent a
Stark II exception, referrals for Designated Health Services between physicians
in different practices could be prohibited. Stark II also prohibits billing the
Medicare or Medicaid programs for services rendered in conjunction with
prohibited referrals. Noncompliance with, or violation of, Stark II can result
in exclusion from the Medicare and Medicaid programs and civil penalties. The
Company believes that its operations and those of PPI and other New PCs as
presently conducted do not pose a material risk of liability under Stark II,
primarily because PPI does not currently provide "Designated Health Services."
Nevertheless, there can be no assurance that Stark II will not be interpreted
or hereafter amended in a manner that has a material adverse effect on the
Company's or PPI's operations as presently conducted.
In this regard, on January 9, 1998, the Health Care Financial Administration
published proposed regulations interpreting the scope and refining the
application of the Stark II law. These regulations provide, in the case of
Designated Health Services provided by a "group practice," that the
overhead expenses and income from such group practice must be distributed
according to methods that indicate that the practice is a unified business and
not based on each satellite office operating as if it were a separate
enterprise. Only "group practices" as defined by Stark II can utilize the
general exception under the law for "in-office ancillary services." There can
be no assurance that the distribution methodology of the Company and other New
PCs will meet the unified business requirement or that each of the Company and
other New PCs otherwise will be deemed to be a "group practice" if challenged.
A determination that sharing of overhead expenses and income by the Company and
other New PCs does not comply with Stark II or failure to satisfy any other
criteria necessary to qualify for the "in-office ancillary services" exception
to the Stark II prohibition would preclude physcian owners of the Company from
referring Medicare/Medicaid patients to the Company for Designated Health
Services, and could have a material adverse effect on the Company or PPI.
In addition, the proposed regulations contemplate that the issuance to
physicians of stock in a company prior to such company being publicly traded
may not satisfy the Stark exception for ownership interests in publicly traded
companies. Thus, to the extent PPI becomes a provider of Designated Health
Services, the Company physicians who have received stock in PPI before it is
public may be precluded from them making Medicare/Medicaid referrals to PPI and,
under certain circumstances, to other affiliated medical groups, for Designated
Health Services, which could have a material adverse impact on the Company and
PPI.
Medicare/Medicaid Reimbursement
State and federal civil and criminal statutes impose substantial penalties,
including civil and criminal fines and imprisonment, upon health care providers
who fraudulently or wrongfully bill governmental or other third-party payors for
health care services. The federal law prohibiting false billings allows a
private person to bring a civil action in the name of the United States
government for violations of its provisions. While management of Medford has
attempted to comply with billing requirements, there is no assurance that the
Company will not be challenged or scrutinized by governmental authorities.
Moreover, Medicare and other reimbursement rules
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impact the fee structure of medical billing. To the extent Medford's billing
arrangements may need to be modified to comply with existing or modified
regulations, there could be a material adverse financial effect on the Company.
Oregon Insurance Law
The Oregon Department of Consumer and Business Affairs, Insurance Division (the
"Insurance Division"), regulates the transaction of insurance pursuant to the
Oregon Insurance Code. Pursuant to Insurance Division Bulletin 96-2 (the
"Bulletin") issued in April 1996 by the Oregon Insurance Commissioner, health
care providers that are compensated on a capitated basis by a health insurer or
health care service contractor ("HCSC") are not required to obtain a certificate
of authority to transact insurance if the capitation is internal to a policy of
insurance that is delivered by an authorized insurer of HCSC. The Bulletin also
states that discounted fee-for-service arrangements with reasonable limits on
discounts (i.e., not open-ended discounts) also do not require a certificate of
authority. Medford arrangements should fall into these categories and therefore
are exempt from regulation as an insurance company. There is no assurance,
however, that the position of the Insurance Division will not change in the
future.
Proposed Legislation
In addition to current federal regulations, the Clinton Administration and
several members of Congress have proposed legislation for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain such health care proposals, such as reductions in Medicare and Medicaid
payments and additional prohibitions on direct or indirect physician ownership
of facilities to which they refer patients, if adopted, could have a significant
impact on the health care industry. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation on the
industry.
COMPETITION
The health care industry is highly competitive. The industry is also subject to
continuing changes in the services that are provided and how providers are
selected and paid.
Medford operates in the southern Oregon region and northern California and
generally provides outpatient services to 30-40% of the outpatient services
market. The significant health care competitors in this market are almost
exclusively within the community of Medford. Major competitors include the
ASANTE Health System, which is comprised of one hospital in the city of Medford,
two hospitals in the city of Grants Pass, multiple subsidiaries related to
ancillary and support services, and a physician practice known as the Southern
Oregon Health Trust.
A significant amount of competition comes from local hospitals. Medford competes
directly with the Southern Oregon Health Trust for primary care services in the
region. The Southern Oregon Health Trust is managed as a department of the Rogue
Valley Medical Center in Medford. Although there is increased competition with
the Trust, Medford's primary care base continues to grow in direct response to
increasing patient demand. The existence of Southern Oregon Health Trust has
apparently not inhibited Medford's growth. Providence Medical Center and a local
independent practice association ("IPA") by the name of PrimeCare also compete
with the Company. Providence Medical Center owns and operates a primary care
medical group and the IPA is composed primarily of specialists.
There can be no assurance that the Company will be able to compete effectively,
that additional competitors will not enter the market, or that such competition
will not make it more difficult for the Company to maintain its current
financial condition.
EMPLOYEES
Provider Employees
As of December 31, 1997, the Company employed 66 full-time and 2 part-time
physicians. Medford physicians initially serve one-year associate employment
contracts. These contracts offer a specified
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guaranteed salary and an incentive bonus. At the end of the associate year, the
physician becomes eligible to become a shareholder. A rigorous peer review is
completed prior to the offering of shareholder status. The transition must be
approved by both the individual physician and a 70% vote of the shareholders. In
addition, the Company employs 7 nurse practitioners.
Non-Provider Employees
According to the terms of the Reorganization and Merger Agreement, all
non-provider staff is employed by PPI.
The Company considers its relations with its employees to be excellent.
INSURANCE
The business of the Company entails an inherent risk of claims of provider
professional liability. To protect the Company's overall operations from such
potential liabilities, PPI maintains professional liability insurance and
general liability insurance on a claims-made basis. Management does not believe
professional liability exposure is significant; however, there can be no
assurance that a future claim will not exceed the limits of available insurance
coverage or that such coverage will continue to be available. PPI carries
worker's compensation insurance and maintains multiperil liability, fiduciary
liability, employee dishonesty, professional liability, general liability and
directors and officers' insurance. The Company believes these types of insurance
to be customary and reasonable for a business of its kind.
ITEM 2: PROPERTIES
All assets and liabilities of Old Medford (other than physician-related assets)
were transferred to PPI pursuant to the Reorganization and Merger Agreement. PPI
is, therefore, responsible for all lease payments on real properties that
Medford occupies. Medford then reimburses PPI for all manager's expenses
incurred on its behalf.
The Company's main executive office is located at 555 Black Oak Drive in
Medford, Oregon and is approximately 60,000 square feet in size. This building
occupies the main administrative and clinical facilities. In addition, two other
properties are leased for the use of general and administrative purposes. The
Company believes these arrangements and the additional locations discussed below
are adequate for its current uses and anticipated growth.
Currently, the Company occupies clinics in seven locations in the Medford,
Oregon area. Two other properties occupied by the Company, the Redwood Dialysis
Center and the Rogue Valley Dialysis Center facilities, are owned by PPI.
ITEM 3: LEGAL PROCEEDINGS
Medford is engaged in the defense of lawsuits arising in the ordinary course and
conduct of its business. Medford believes that such actions will not have a
material effect on its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
There is no public trading market for the Company's common stock.
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Thousands of dollars)
1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Fee-For-Service, net $ 22,805 $ 29,920 $ 33,951 $ 33,445 $ 37,167
Prepaid Health Care 269 2,407 5,015 6,996 9,886
-------- -------- -------- -------- --------
Total Net Revenues 23,074 32,327 38,966 40,441 47,053
Less Provider Compensation and Benefits (7,009) (9,248) (11,239) (12,202) (11,157)
-------- -------- -------- -------- --------
Net Revenue less Provider Compensation
and Benefits 16,065 23,079 27,727 28,239 35,896
Total Operating Expenses 15,805 22,457 26,277 30,198 35,995
Operating Income (Loss) 260 622 1,450 (1,959) (99)
Other Non-Operating Income (Expenses) (132) (297) (390) (321) 53
-------- -------- -------- -------- --------
Income (Loss) Before Taxes 128 325 1,060 (2,280) (46)
-------- -------- -------- -------- --------
Income Tax Expense (Benefit) 44 133 408 (913) --
-------- -------- -------- -------- --------
Net Income (Loss) $ 84 $ 192 $ 652 $ (1,367) $ (46)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital (deficit) 2,511 2,838 3,053 (368) 1
Total assets 10,969 14,534 15,245 13,641 1
Long term debt, net 3,128 5,459 4,932 3,924 --
Shareholders' equity 2,322 2,514 3,166 842 1
</TABLE>
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ITEM 7: 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 founded 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 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 currently consists of 75 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 and increase revenues.
In 1997, PPI began modifying the computer system programming at Medford to
process transactions in the year 2000. Anticipated spending for this
modification will be expensed as incurred and is not expected to have a
significant impact on Medford's ongoing results of operations.
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RESULTS OF OPERATIONS
The following table shows the percentage of net revenue represented by various
expense categories reflected in the Company's Statement of Operations. The
following table represents twelve months ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
December 31,
1995 1996 1997
<S> <C> <C> <C>
-------- -------- --------
Net Revenues, less Provider Compensation 100.0% 100.0% 100.0%
Operating Expenses:
Clinic salaries, wages and benefits 42.7% 47.9% 42.0%
Purchased medical services 8.2% 14.8% 13.7%
Medical and office supplies 20.1% 20.9% 17.9%
General and administrative expenses 12.4% 11.9% 10.7%
Lease and rent expense 4.2% 4.2% 3.9%
Provision for uncollectible accounts 3.1% 3.8% 3.8%
Depreciation and amortization 4.1% 3.4% 3.1%
Management fee -- -- 5.2%
-------- -------- --------
Total operating expenses 94.8% 106.9% 100.3%
-------- -------- --------
Operating income 5.2% (6.9%) (0.3%)
Other Income (Expense)
Other income -- -- 0.9%
Interest income 0.3% 0.4% 0.2%
Interest expense (1.7%) (1.5%) (0.9%)
-------- -------- --------
Net income (loss) before income 3.8% (8.0%) (0.1%)
taxes
-------- -------- --------
Income tax expense (benefit) 1.5% (3.2%) --
======== ======== ========
Net income (loss) 2.3% (4.8%) (0.1%)
======== ======== ========
</TABLE>
Twelve Months ended December 31, 1997 Compared to Twelve Months Ended December
31, 1996
Net Revenues less Provider Compensation increased $7.7 million or 27.3% to $35.9
million in the twelve months ended December 31, 1997 from $28.2 million in the
twelve months ended December 31, 1996. Net Revenues less Provider Compensation
consists of Fee-for-Service revenue net of contractual discounts and Prepaid
Healthcare revenues less Provider Compensation and Benefits. Net Fee-for-Service
revenues increased $3.8 million or 11.4% to $37.2 million in 1997 compared to
$33.4 million in 1996. Prepaid Healthcare revenues increased $2.9 million or
41.4% to $9.9 million in the twelve months ended December 31, 1997 compared to
$7.0 million in 1996. Net Fee-for-Service revenues increased as a result of the
addition of several providers in late 1996 who became fully productive in 1997.
The increase in Prepaid Healthcare revenues is due to increases in capitation
rates, specifically in the Oregon Health Plan. Management has negotiated
additional capitation rate increases in the 1998 managed care contracts.
Provider Compensation and Benefits
Provider Compensation and Benefits decreased $1.0 million or 8.2% to $11.2
million in 1997 from $12.2 million in 1996. This decrease was in part due to the
introduction of the Management Fee paid to PPI and also the result of the
discipline of the Management Agreement which does not allow the Company to over
distribute provider compensation, putting the Company in a loss position.
Operating Expenses
The operating expenses of Medford represent the costs incurred by PPI and
reimbursed by the Company per the terms of the Management Agreement.
11
<PAGE> 12
As a percentage of Net Revenues less Provider Compensation, total operating
expenses decreased 6.6% in 1997 compared to 1996. Clinic Salaries, Wages and
Benefits, which includes the salaries of all non-provider personnel, increased
$1.6 million to $15.1 million in 1997 from $13.5 million in 1996. The increase
was attributable to the addition of personnel to support the addition of ten new
providers in late 1996. As a percentage of Net Revenue less Provider
Compensation, Clinic Salaries, Wages and Benefits decreased to 42.0% in 1997
from 47.9% in 1996. This decrease is primarily due to the implementation of an
administrative plan to reduce personnel cost per provider.
Purchased Medical Services which include professional and diagnostic services
performed by third parties, increased $0.7 million or 16.7% to $4.9 million in
the twelve months ended December 31, 1997 from $4.2 million in 1996. The
increase is attributable to an expansion of contracted covered services for
certain plans and a full twelve months of participation in certain plans. As a
percentage of Net Revenue less Provider Compensation and Benefits, Purchased
Medical Services decreased to 13.7% in 1997 from 14.8% in 1996. This decrease is
due to increases in Prepaid Healthcare Revenues and an improvement in the
management of Purchased Medical Services.
Medical and Office Supplies which include pharmaceuticals, medical supplies,
office supplies and diagnostic supplies, decreased 3.0% as a percentage of Net
Revenues less Provider Compensation from 20.9% in 1996 to 17.9% in 1997. The
decrease is due to improved purchasing contracts negotiated by management.
General and Administrative expenses decreased 1.2% as a percentage of Net
Revenues less Provider Compensation to 10.7% in 1997 from 11.9% in 1996. The
decrease is attributable to various consulting projects completed during 1997.
A management fee of $1.9 million for the twelve months ended December 31, 1997
was paid to PPI in accordance with the Management Agreement. As Medford's
results improve, the management fee will increase in direct relation. There was
no such management fee in 1996 as the Management Agreement was not effective
until February 1, 1997.
Other Income and Expenses
In 1997, other income included a one-time transition payment of $0.3 million
from PPI.
Twelve Months Ended December 31, 1996 Compared to Twelve Months Ended December
31, 1995
Net Revenues less Provider Compensation increased $0.5 million or 1.8% to $28.2
million in the twelve months ended December 31, 1996 from $27.7 million in the
twelve months ended December 31, 1995. Net Revenues less Provider Compensation
consists of both Fee-for-Service revenue net of contractual discounts and
Prepaid Healthcare revenues less Provider Compensation and Benefits. Net
Fee-for-Service revenues decreased $0.5 million or 1.5% to $33.4 million in the
twelve months ended December 31, 1996 compared to $33.9 million in the twelve
months ended December 31, 1995. Prepaid Healthcare revenues increased $2.0
million or 40.0% to $7.0 million in the twelve months ended December 31, 1996
compared to $5.0 million in 1995. The decrease in Net Fee-for-Service revenues
is mainly attributable to three fewer providers in 1996 compared to 1995. This
decrease was partially offset by an increase in provider productivity. The
increase in Prepaid Healthcare revenue correlates with an increase in the number
of capitated lives and expansion of contracted services over the year ended
December 31, 1996 compared to 1995.
Provider Compensation and Benefits
Provider Compensation and Benefits increased $1.0 million or 8.9% to $12.2
million in the twelve months ended December 31, 1996 from $11.2 million in 1995.
The increase is due to the addition of ten providers in late 1996.
Operating Expenses
Total operating expenses, as a percentage of Net Revenue less Provider
Compensation increased 12.1% to 106.9% in the twelve months ended December 31,
1996 compared to 94.8% in the twelve months ended December 31, 1995. Clinic
Salaries, Wages and Benefits increased $1.7 million or 14.4% to $13.5 million in
the twelve months ended December 31, 1996 from $11.8 million in 1995. As a
percentage of Net Revenues
12
<PAGE> 13
less Provider Compensation, Clinic Salaries, Wages and Benefits increased to
47.9% in 1996 from 42.7% in 1995. The increase was attributable to the addition
of staff which was required to support increased provider productivity, a
planned 7% increase in salaries and benefits, and a staff bonus.
Purchased Medical Services which include professional and diagnostic services
performed by third parties, increased $1.9 million or 82.6% to $4.2 million in
the twelve months ended December 31, 1996 from $2.3 million in 1995. As a
percentage of Net Revenue less Provider Compensation and Benefits, Purchased
Medical Services increased to 14.8% in 1996 from 8.2% in 1995. This growth is
attributable to an increase in prepaid health care revenue and contractual
changes with regard to services covered. The majority of these newly covered
services were purchased from outside providers.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Transactions, PPI succeeded to the ownership of substantially
all assets and liabilities 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.
13
<PAGE> 14
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MEDFORD CLINIC, P.C.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE> 15
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 1997, and
the related statements of operations, cash flows and stockholders' equity for
each of the years in the three-year period ended December 31, 1997. 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 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
February 13, 1998
<PAGE> 16
MEDFORD CLINIC, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1997
(All dollar amounts are expressed in thousands)
ASSETS
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 201 $ 1
Patient accounts receivable, net of allowances for contractual discounts
and uncollectible accounts of $3,430 at December 31, 1996 6,124 -
Healthcare receivables 487 -
Inventories of drugs and supplies 203 -
Prepaid expenses and deposits 304 -
Restricted investments 250 -
------- ----
Total current assets 7,569 1
------- ----
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $5,303 at
December 31, 1996 5,701 -
------- ----
LONG-TERM DEFERRED TAX ASSET 77 -
------- ----
OTHER ASSETS:
Restricted investments 250 -
Other 44 -
------- ----
Total other assets 294 -
------- ----
Total assets $13,641 $ 1
======= ====
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,004 $ -
Drafts payable 530 -
Accounts payable 1,306 -
Income taxes payable 5 -
Accrued healthcare costs 1,027 -
Accrued compensation and related expenses 2,497 -
Current deferred tax liability 1,568 -
Total current liabilities ------- ----
7,937 -
LONG-TERM DEBT, net of current portion ------- ----
3,924 -
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES ------- ----
938 -
COMMITMENTS AND CONTINGENCIES ------- ----
STOCKHOLDERS' EQUITY:
Common stock-
$10 stated value; 500 shares authorized; 57 and 0 shares outstanding at
December 31, 1996 and 1997,respectively 1 -
No par value; 500 shares authorized, 0 and 61 shares outstanding
at December 31, 1996 and 1997, respectively - 1
Additional paid-in capital 1 -
Retained earnings 840 -
------- ----
Total stockholders' equity 842 1
------- ----
Total liabilities and stockholders' equity $13,641 $ 1
======= ====
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 17
MEDFORD CLINIC, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts are expressed in thousands, except earnings per share)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Fee-for-service, net $33,951 $33,445 $37,167
Prepaid healthcare 5,015 6,996 9,886
------- ------- -------
Net revenues 38,966 40,441 47,053
Less- Provider compensation and benefits 11,239 12,202 11,157
------- ------- -------
Net revenue less provider compensation
and benefits 27,727 28,239 35,896
------- ------- -------
OPERATING EXPENSES:
Clinic salaries, wages and benefits 11,838 13,543 15,063
Purchased medical services 2,283 4,174 4,920
Medical and office supplies 5,578 5,909 6,431
General and administrative expenses 3,446 3,362 3,844
Provision for uncollectible accounts 868 1,069 1,349
Depreciation and amortization 1,125 966 1,108
Rent and lease expense 1,139 1,175 1,389
Management fee - - 1,891
------- ------- -------
Total operating expenses 26,277 30,198 35,995
------- ------- -------
Operating income (loss) 1,450 (1,959) (99)
OTHER INCOME (EXPENSE):
Interest income 97 104 56
Interest expense (487) (425) (334)
Other - - 331
------- ------- -------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES 1,060 (2,280) (46)
PROVISION (BENEFIT) FOR INCOME TAXES 408 (913) -
------- ------- -------
NET INCOME (LOSS) $ 652 $(1,367) $ (46)
======= ======= =======
EARNINGS PER SHARE $11,642.86 $(24,410.71) $(807.02)
========== =========== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 56 56 57
== == ==
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 18
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 652 $(1,367) $ (46)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization 1,125 966 98
Deferred taxes 347 (893) -
Changes in operating assets and liabilities:
Patient accounts receivable, net 426 557 (44)
Healthcare receivables 225 41 95
Inventories of drugs and supplies (62) 87 -
Prepaid expenses and deposits (235) 198 (33)
Other assets (34) 29 18
Drafts payable - 530 (529)
Accounts payable (56) 887 (181)
Income taxes payable 25 (20) -
Accrued healthcare costs 380 541 (13)
Accrued compensation and related expenses 129 406 461
Other liabilities (14) (189) -
Deferred compensation and other long-term
liabilities (27) 339 29
------- ------- ------
Net cash provided by (used in) operating
activities 2,881 2,112 (145)
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (865) (1,324) (21)
Purchases of restricted investments (1,207) (293) -
Proceeds from sale of short-term investments - 1,000 -
------- ------- ------
Net cash used in investing activities (2,072) (617) (21)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under line of credit agreement - - 300
Repayments under line of credit agreement (350) - -
Proceeds from issuance of long-term debt 467 - -
Principal repayments of long-term debt (743) (935) (82)
Payments for redemption of common stock - (17) -
Proceeds from issuance of common stock - - 1
Cash contributed for Physician Partners, Inc. in merger - - (200)
Costs incurred related to Physician Partners, Inc.
transaction - (940) (53)
------- ------- ------
Net cash used in financing activities (626) (1,892) (34)
------- ------- ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 183 (397) (200)
CASH AND CASH EQUIVALENTS, beginning of year 415 598 201
------- ------- ------
CASH AND CASH EQUIVALENTS, end of year $ 598 $ 201 $ 1
======= ======= ======
</TABLE>
<PAGE> 19
MEDFORD CLINIC, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $492 $424 $330
Cash paid for income taxes 36 19 -
</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:
<TABLE>
<S> <C>
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
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 20
MEDFORD CLINIC, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
Common Stock
-----------------------------
$10 Stated
No Par Value Value
-------------- --------------
Number Number Additional
of of Paid-in Retained
Shares Amount Shares Amount Capital Earnings Total
------ ------ ------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,1994 - $ - 57 $ 1 $ 1 $ 2,512 $ 2,514
Issue of common stock - - 5 - - - -
Redemption of common stock - - (6) - - - -
Net income - - - - - 652 652
-- --- -- ---- ---- ------- -------
BALANCE, December 31, 1995 - - 56 1 1 3,164 3,166
Redemption of common stock - - (1) - - (17) (17)
Issuance of common stock - - 2 - - - -
Costs incurred
related to
Physician
Partners, Inc.
transaction - - - - - (940) (940)
Net loss - - - - - (1,367) (1,367)
-- --- -- ---- ---- ------- -------
BALANCE, December 31, 1996
- - 57 1 1 840 842
Issuance of common
stock 61 1 - - - - 1
Net loss - - - - - (46) (46)
Transfer of
ownership to
Physician
Partners, Inc. - - (57) (1) (1) (794) (796)
-- --- -- ---- ---- ------- -------
BALANCE, December 31, 1997 61 $ 1 - $ - $ - $ - $ 1
== === == ==== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 21
MEDFORD CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts are expressed in thousands)
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, 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.
Medford consists of approximately 75 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.
<PAGE> 22
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 1995, 1996 and 1997.
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 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 lapsed 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.
<PAGE> 23
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.
Other Income
Other income includes a $300 one time payment from PPI. The payment was part of
a transition plan developed by PPI to assist Medford in its transition to the
Management Agreement.
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.
Financial Statement Presentation
The accompanying financial statements reflect the assets and liabilities
as of December 31, 1996 and results of operations for the years
ended December 31, 1995 and 1996 for the Medford Clinic, P.C. prior to the
reorganization transaction ("Old Medford"). The Statement of Operations and
Cash Flows for the year ended December 31, 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.
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 delegated professional risk with limited
institutional risk based upon utilization parameters mutually agreed upon by
the hospital health plan and Medford.
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.
<PAGE> 24
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 and $2,233 for 1996 and 1997, respectively. There
was no revenue associated with these contracts for 1995.
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,
-------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Fee-for-service, gross $43,299 $45,465 $51,699
Contractual discounts (9,348) (12,020) (14,532)
------- ------- -------
Fee-for-service, net $33,951 $33,445 $37,167
======= ======= =======
</TABLE>
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 26% of net patient service revenues
were derived from services provided to fee-for-service Medicare patients
in 1995, 1996 and 1997, respectively.
Medicaid
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule.
Approximately 2%, 1% and 2% of net patient service revenues were derived
from services provided to fee-for-service Medicaid patients in 1995,
1996 and 1997, respectively.
Other Payors
Medford has also entered into payment agreements with certain commercial
insurance carriers and preferred provider organizations. The basis for
payment to Medford under these agreements includes discounts from
established charges.
Major Customer
The following customers represented individually more than 10% of Medford's
net revenue as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Blue Cross/Blue Shield of Oregon 16% 14% 12%
Oregon Health Plan - 12% 16%
</TABLE>
<PAGE> 25
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following as of December 31, 1996:
<TABLE>
<S> <C>
Land and land improvements $ 204
Buildings and leasehold improvements 2,167
Furniture and equipment 8,633
-------
11,004
Less- Accumulated depreciation (5,303)
-------
$ 5,701
=======
</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 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
had approximately $326 and $733 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 at December 31,
1996:
<TABLE>
<S> <C>
Deferred tax assets:
Cash to accrual adjustments $ 1,655
Net operating loss and credit carryforwards 294
Other 35
-------
Gross deferred tax assets 1,984
Less- Valuation allowance (293)
-------
Net deferred tax asset 1,691
Deferred tax liabilities:
Cash to accrual adjustments (2,946)
Property related book to tax differences (236)
-------
Gross deferred tax liabilities (3,182)
-------
Net deferred tax liability $(1,491)
=======
</TABLE>
<PAGE> 26
The net deferred tax liability is reflected in the accompanying balance sheet as
follows at December 31, 1996:
<TABLE>
<S> <C>
Current deferred tax liability $(1,568)
Long-term deferred tax asset 77
-------
$(1,491)
=======
</TABLE>
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1995 1996 1997
---- - ----- - ----
<S> <C> <C> <C>
Current:
Federal $ - $ 5 $ -
State 61 - -
Deferred:
Federal 304 (803) -
State 43 (115) -
---- ----- -----
$408 $(913) $ -
==== ===== =====
</TABLE>
The differences between the provision (benefit) for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes were as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1995 1996 1997
---- ----- ----
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $371 $(771) $ -
Add (deduct):
State income tax (benefit), net of federal benefit 68 (142) -
Other (31) - -
---- ----- -----
Provision (benefit) for income taxes $408 $(913) $ -
==== ===== =====
</TABLE>
As of December 31, 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.
<PAGE> 27
6. LONG-TERM DEBT:
Long-term debt at December 31, 1996 was as follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment loan with bank, interest at 7.25%, payable in monthly installments of $22,
maturing April 2000, secured by equipment, furniture and fixtures and accounts
receivable $ 656
Note payable with title company, interest at 7.90%, payable in monthly
installments of $6, maturing July 1, 2013, secured by equipment and furniture
and fixtures 689
Equipment loan with bank, interest at 7.25%, payable in monthly installments of $26,
maturing June 1, 2002, secured by equipment, furniture and fixtures and accounts
receivable 1,384
Equipment loan with bank, interest at 7.75%, payable in monthly installments of
$45, maturing May 1, 1999, secured by equipment and accounts receivable 1,195
Facilities loan with bank, interest at 9.00%, payable in monthly installments of
$4, maturing September 30, 1999, secured by equipment, furniture and fixtures
and accounts receivable 108
Mortgage with bank, interest at 8.25%, payable in monthly installments of $5
maturing November 1, 2008, secured by first deed on real property and
equipment and furniture and fixtures 453
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 $2, maturing December 15, 2014, secured by first
deed on real property and equipment and furniture and fixtures 223
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,
maturing December 15, 2001, secured by second deed on real property and
equipment and furniture and fixtures 220
-------
Total long-term debt 4,928
Less- Current portion (1,004)
-------
Long-term debt, net of current portion $ 3,924
=======
</TABLE>
Medford maintained a revolving line-of-credit agreement with a bank providing up
to $500 secured by accounts receivable. The line-of-credit bore interest at the
lender's prime rate (8.5% at December 31, 1997) plus .25%.
At February 1, 1997, the long-term debt was assumed by Physician Partners, Inc.
and the $500 revolving line-of-credit was consolidated into a $7,500
line-of-credit as a result of the reorganization transaction (Note 1).
<PAGE> 28
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 $63
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, 1995,
1996 and 1997 were $1,529, $1,656 and $0, respectively.
8. PROFESSIONAL LIABILITY:
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 1). The consolidated claims-made policy has no
deductible and includes full prior acts coverage. Management believes the
coverage is adequate to cover any potential claims.
9. COMMITMENTS AND CONTINGENCIES:
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.
Compliance with Rules and Regulations
The healthcare industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
healthcare program participation requirements, reimbursement for patient
services and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and regulations by
healthcare providers. Violations of these laws and regulations could result in
expulsion from government healthcare programs, together with the imposition of
significant fines and penalties, as well as significant repayments for patient
services previously billed. Management believes that Medford is in compliance
with the fraud and abuse regulations as well as other applicable government laws
and regulations. Compliance with such laws and regulations can be subject to
future government review and interpretation as well as regulatory actions
unknown or unasserted at this time.
10. EARNINGS PER SHARE:
All share and per share data have been retroactively restated to give effect to
the recapitalization resulting from the transactions.
<PAGE> 29
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Title Term
<S> <C> <C> <C> <C> <C>
Stephen Schnugg, M.D. 48 Director and September 18, 1996 to Present
President
Dan Wayman, M.D. 42 Director and Vice September 18, 1996 to Present
President
Peter Adesman, M.D. 43 Director January 20, 1997 to Present
Paul Schroeder, M.D. 44 Director January 20, 1997 to Present
Bruce VanZee, M.D. 52 Director September 18, 1996 to Present
Clark Cullen, M.D. 42 Director January 19, 1998 to Present
Todd Winter. M.D. 32 Director January 19, 1998 to Present
Daniel Brandenburg, M.D. 43 Prior Director September 18, 1996 to January 19, 1998
Bruce Johnson, M.D. 56 Prior Director September 18, 1996 to January 19, 1998
</TABLE>
STEPHEN SCHNUGG, M.D. is the President and a Director of Medford. He received a
bachelor's degree at the University of California, Berkeley (1971) and his
medical degree at UCLA School of Medicine (1975). He served his residency in
Internal Medicine at and received a fellowship in Cardiology from Wadsworth VA
Hospital. Prior to joining Medford, Dr. Schnugg was with Cabrillo Cardiology
Medical Group, Inc. in Oxnard, California. Dr. Schnugg is Board Certified by the
Board of Internal Medicine in Internal Medicine (1980) and the Board of Internal
Medicine in Cardiovascular Diseases (1981). Dr. Schnugg has been Chairman of the
Department of Medicine in Oxnard, Chairman of the Ethics Committee and Director
of the Coronary Care Unit at St. John's Regional Medical Center in Oxnard,
California. He is a Fellow of the American College of Cardiology (1981).
DAN WAYMAN, M.D. is a Director and Vice President of Medford. He received his
bachelor's degree from the University of California, Davis (1979) and his
medical degree from the University of Nevada in Reno, Nevada (1986). He served
his residency in Surgery at the University of Nevada from 1986 to 1987. He was a
resident in Surgery at Kaiser San Francisco in San Francisco, California
(1987-1988) as well as a resident in Otolarngology - Head and Neck Surgery at
Kaiser Oakland in California. Dr. Wayman was previously the supervising
paramedic in Reno, Nevada and Staff Emergency Room Physician at Kaiser Vallejo
in Vallejo, California from 1988 to 1991. He is a member of Alpha Omega Alpha
Honor Society, the American Academy of Facial Plastics and Reconstructive
Surgery, the American Academy of Otolaryngology- Head and Neck Surgery and the
American Medical Association. He is Board Certified in General Surgery and
Otolarngology. He co-authored "The Audiologic Manifestations of Ramsy Hunt
Syndrome", The Journal of Laryngology and Otology (February 1990).
PETER ADESMAN, M.D. is a Director of Medford. He received his medical degree
from the University of Illinois at Chicago in 1979. He was a resident in
Internal Medicine at Oregon Health Sciences University from 1980 to 1982 as well
as a resident in Gastroenterology at Oregon Health Sciences University from 1983
to 1985. Dr. Adesman was Board Certified in Internal Medicine in 1982 and in
Gastroenterology in 1985.
PAUL SCHROEDER, M.D. is a Director of Medford. He received his medical degree
from the University of Oregon Health Sciences Center in 1979. He was a resident
in Obstetrics and Gynecology at Stanford University School of Medicine from 1980
to 1983. Dr. Schroeder was Board Certified in Obstetrics and Gynecology in 1985.
15
<PAGE> 30
BRUCE VAN ZEE, M.D. is a Director of Medford and a practicing physician of the
Company who has spent substantial time and energy to achieve physician
involvement in the governance and management of innovative health care
organizations. He received his medical degree magna cum lada at the University
of Oregon in 1970. He is Board Certified in Internal Medicine and Nephrology,
having completed his post graduate education at the University of Rochester. Dr.
Van Zee has served in a variety of medical management roles which include chair
of the department of medicine and president of the medical society in his
community. He has received advanced post-graduate training in physician
management issues and in biomedical ethics.
CLARK CULLEN, M.D. is a Director of Medford. He received his medical degree from
the University of California in San Diego in 1982. He was a resident in Internal
Medicine at Mercy Hospital and Medical Center of San Diego from 1983 to 1985.
Dr. Cullen was Board Certified in Internal Medicine in 1985.
TODD WINTER, M.D. is a Director of Medford. He received his medical degree from
the University of Washington in 1993. He completed an internship and residency
in Internal Medicine at the Medical Center Hospital of Vermont in 1994 and 1996,
respectively. Dr. Winter was Board Certified in Internal Medicine in 1996.
DANIEL BRANDENBURG, M.D. was a Director of Medford. His term as a Director of
Medford ended January 1, 1998. He received his bachelor's degree in 1976 from
Lewis and Clark College and in 1980 a medical degree from Oregon Health Sciences
University. Dr. Brandenburg completed his residency in Internal Medicine at
Providence Medical Center from 1981 to 1983. He is Board Certified by the
National Board of Medical Examiners and the American Board of Internal Medicine.
Prior to joining Medford he was a partner with North Coast Internal Medicine in
Eureka, California. Dr. Brandenburg is a member of the American College of
Physicians and the Jackson County Medical Association. He was the 1986 recipient
of the "Service with Love Award" from the St. Joseph Hospital Staff in Eureka,
California. Dr. Brandenburg is the author of "The Intravenous Marijuana
Syndrome" Western Journal of Medicine (July 1986).
BRUCE JOHNSON, M.D. was a Director of Medford. His term as a Director of Medford
ended January 1, 1998. He received his bachelor's degree from Charleton College
in 1963 and medical degree from the University of Nebraska College of Medicine
in 1967. Dr. Johnson performed his Family Practice residency at San Bernadino
County Hospital in San Bernadino, California. He is Board Certified in Family
Practice. Prior to joining Medford, Dr. Johnson was in private practice and was
a partner with Southern Oregon Family Practice Group. Dr. Johnson presently
serves on the Ashland Community Hospital Board of Directors, the Ashland
Community Hospital Foundation, and is on the Executive Committee for Jackson
County Medical Society. Previously, he was a Director of the Rogue Valley
Physicians Service, Health Masters of Oregon, Oregon Heart Association, and
Prime Care (Southern Oregon Independent Physicians Association). He was past
president of the Jackson County Medical Society as well as past president of
Ashland Community Hospital Medical Staff. Presently, he is a member of the
American Medical Association, the American Academy of Family Practice, the
American Heart Association, the American Geriatrics Society, the Oregon Medical
Association, the Oregon Academy of Family Practice, the Jackson County Medical
Society and the Jackson County Academy of Family Practice.
ITEM 11: EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Medford Directors are entitled to receive compensation of $375 per month for
serving on the Board of Directors. An additional $200 per month was paid to
Daniel Brandenburg and Dan Wayman for serving on the Executive Committee and an
extra $375 per month was paid to Peter Adesman, Bruce Johnson and Paul Schroeder
for duties as Department Chairmen. Stephen Schnugg also received an additional
$925 per month for serving as President of Medford. Furthermore, Directors are
reimbursed for reasonable and actual out-of-pocket expenses incurred in
connection with duties performed as Directors.
The following table summarizes the compensation received by the Company's Board
of Directors:
16
<PAGE> 31
<TABLE>
<CAPTION>
Name 1995 1996 1997
- ---- ------- ------- -------
<S> <C> <C> <C>
Stephen Schnugg, M.D., $ 9,000 $11,250 $18,000
President
Dan Wayman, M.D., 6,900 6,900 6,900
Vice President
Peter Adesman, M.D -- -- 9,000
Daniel Brandenburg, M.D 6,900 6,900 6,900
Bruce Johnson, M.D 9,000 9,000 9,000
Paul Schroeder, M.D -- -- 9,000
Bruce Van Zee, M.D 18,000 14,625 4,500
</TABLE>
COMPENSATION OF EXECUTIVE OFFICERS
Other then the compensation provided to Dr. Schnugg as President, no
compensation was provided to any executive officer of Medford for their duties
as officers in the years ended 1995, 1996 and 1997. Reimbursements for
reasonable and actual out-of-pocket expenses incurred in connection with their
duties as officers were made.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information concerning beneficial ownership of the Company
Common Stock as of March 30, 1998 by (i) each of the nominees and current
Directors, (ii) each of the named executive officers, (iii) all current
Directors and executive officers of the Company as a group, and (iv) all persons
known by the Company to be the beneficial owners of five percent or more of
Company Common Stock.
<TABLE>
<CAPTION>
Shares of Company
Common Stock
MEDFORD Beneficially Owned Percent Outstanding
- -------- ------------------ -------------------
<S> <C> <C>
Stephen Schnugg, M.D. 1 1.6%
Dan Wayman, M.D. 1 1.6%
Peter Adesman, M.D. 1 1.6%
Clark Cullen, M.D. 1 1.6%
Todd Winter, M.D. 1 1.6%
Paul Schroeder, M.D. 1 1.6%
Bruce Van Zee 1 1.6%
All directors and executive
officers of the Company as a 7 11.7%
group
</TABLE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
17
<PAGE> 32
w
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements
The following financial statements of Medford Clinic, PC are included in
Part II, Item 8 of this report:
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Independent Public Accountant
Balance Sheets - December 31, 1996 and 1997
Statements of Operations - Years ended December 31, 1995, 1996 and 1997
Statements of Shareholders' Equity - Years ended December 31, 1995, 1996
and 1997
Statements of Cash Flows - Years ended December 31, 1995, 1996 and 1997
</TABLE>
(2) Financial Statement Schedules
None required.
(3) Exhibits
2.1* Amended and Restated Agreement and Plan of Reorganization and
Merger, dated as of September 19, 1996, as amended on November 4,
1996, November 29, 1996 and December 31, 1996, among Physician
Partners, Inc., The Corvallis Clinic, P.C., HealthFirst Medical
Group, P.C. and Medford Clinic, P.C.
3.1** Amended and Restated Articles of Incorporation of Medford Clinic,
P.C.
3.2** Bylaws of Medford Clinic, P.C.
10.1 Amended and Restated 1997 Stock Option Plan for all Non-Employee
Providers Affiliated with PPI dated November 12, 1997
27.1 Financial Data Schedule
* Previously filed connection with Registration Statement
No. 333-15595 and hereby incorporated by reference
** Previously filed and hereby incorporated by reference
18
<PAGE> 33
SIGNATURES
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.
The Medford Clinic, P.C.
(Registrant)
By /s/ Stephen Schnugg, M.D.
------------------------------------
Stephen Schnugg, M.D.
President and Director
3/30/98
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/ Stephen Schnugg, M.D. By /s/ Dan Wayman, M.D.
--------------------------------- ------------------------------------
Stephen Schnugg, M.D. Dan Wayman, M.D.
President and Director Vice President and Director
3/30/98 3/30/98
By /s/ Vicki S. Wagner By /s/ Peter Adesman, M.D.
--------------------------------- ------------------------------------
Vicki S. Wagner Peter Adesman, M.D.
Chief Financial Officer and Director
Controller
3/30/98 3/30/98
By /s/ Paul Schroeder, M.D. By /s/ Bruce Van Zee, M.D.
--------------------------------- ------------------------------------
Paul Schroeder, M.D. Bruce Van Zee, M.D.
Director Director
3/30/98 3/30/98
By /s/ Clark Cullen, M.D. By /s/ Todd Winter, M.D.
--------------------------------- ------------------------------------
Clark Cullen, M.D. Todd Winter, M.D.
Director Director
3/30/98 3/30/98
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
FOR NON-EMPLOYEE PROVIDERS AFFILIATED WITH
PHYSICIAN PARTNERS, INC.
1. PURPOSE OF THE PLAN
The Amended and Restated 1997 Stock Option Plan for Non-Employee
Providers Affiliated with Physician Partners, Inc. (the "Plan") was established
by Physician Partners, Inc. (the "Company"), effective as of the effective time
(the "Effective Date") of the transaction contemplated under the Amended and
Restated Agreement and Plan of Reorganization and Merger, dated as of September
19, 1996, as amended on November 4, 1996, November 29, 1996 and December 31,
1996 (referred to herein, as so amended, as the "Reorganization and Merger
Agreement") to:
1.1 furnish incentives to eligible physicians chosen to receive
options because they are considered capable of responding by improving
operations and increasing profits;
1.2 increase the interest of selected physicians in the Company's
welfare through their participation in the growth in value of Class A Common
Stock, $.01 par value, of the Company ("Class A Common Stock").
To accomplish the foregoing objectives, this Plan provides a means
whereby physicians may receive options to purchase Class A Common Stock. Options
granted under this Plan ("Options") will be nonqualified options ("NQOs")
subject to federal income taxation upon exercise.
2. ELIGIBLE PERSONS
2.1 General. Every person who at the date on which an Option granted
to the person becomes effective (the "Grant Date") and who is a non-employee
provider affiliated with the Company or any Affiliate or any non-employee
provider subject to an acquisition or management agreement with the Company is
eligible to receive Options under this Plan.
2.2 Definition of Affiliate. The term "Affiliate," as used in this
Plan, means a "parent corporation" or "subsidiary corporation," as defined in
Section 424 of the Internal Revenue Code of 1986 (the "Code"). The term
"employee" shall have the meaning ascribed for purposes of Section 3401(c) of
the Code and the Treasury Regulations promulgated thereunder and shall include
an officer who is also an employee.
<PAGE> 2
3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock reserved for issuance upon the
exercise of Options is 1,500,000 shares of Class A Common Stock. The shares
covered by the portion of any grant that expires unexercised under this Plan
shall become available again for grants under this Plan. The number of shares
reserved for issuance under this Plan is subject to adjustment in accordance
with the provisions for adjustment in this Plan.
4. ADMINISTRATION
This Plan shall be administered by a committee (the "Committee") of not
less than three (3) members appointed by the Board of Directors of the Company,
at least two (2) of which must be nonemployee disinterested Directors
("Disinterested Directors") as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Committee may delegate
nondiscretionary administrative duties to other employees of the Company as it
deems proper. Subject to the approval of the Board of Directors and the
provisions of this Plan, the Committee shall have the authority to select the
persons to receive Options under this Plan, to fix the number of shares that
each optionee may purchase, to set the terms and conditions of each Option, and
to determine all other matters relating to this Plan. Any act approved in
writing by a majority of the members of the Committee shall be a valid act of
the Committee. Such determinations shall be final and binding on all persons. No
member of the Board of Directors or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any option
granted under the Plan.
5. GRANTING OF THE RIGHTS
5.1 Ten Year Limitation. No Options shall be granted under this Plan
after ten years from the date the Board of Directors of the Company adopts this
Plan.
5.2 Written Agreement; Effect. Each Option shall be evidenced by a
written agreement (the "Option Agreement"), in a form satisfactory to the
Committee, executed by the Company and by the person to whom such Option is
granted. Failure of the grantee to execute an Option Agreement shall not void or
invalidate the grant of any Option; the Option may not be exercised, however,
until the Option Agreement is executed.
-2-
<PAGE> 3
6. TERMS AND CONDITIONS OF OPTIONS
Each Option shall be subject to the terms and conditions set forth in
this Section 6.1.
6.1 Terms and Conditions to Which Options Are Subject. Options shall
be subject to the following terms and conditions:
(a) Changes in Capital Structure. Subject to Section 6.1(b),
if the stock of the Company is changed by reason of a stock split,
reverse stock split, stock dividend, or recapitalization, or converted
into or exchanged for other securities as a result of a merger,
consolidation, or reorganization, appropriate adjustments shall be made
in (A) the number and class of shares of stock subject to this Plan and
each outstanding Option, and (B) the exercise price of each outstanding
Option; provided, however, that the Company shall not be required to
issue fractional shares as a result of any such adjustment. Each such
adjustment shall be determined by the Committee in its sole discretion,
which determination shall be final and binding on all persons.
(b) Corporate Transactions. Notwithstanding any contrary
waiting period or installment period in any Option Agreement or in the
Plan, each outstanding Option granted under the Plan shall become
exercisable in full for the aggregate number of shares covered thereby,
in the event (a) the Board of Directors (or, if approval of the Board of
Directors is not required as a matter of law, the stockholders of the
Company) shall approve (i) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or
pursuant to which shares of Common Stock would be converted into cash,
securities or other property, other than any merger of the Company in
which the holders of Common Stock immediately prior to the merger have
the same proportionate ownership of common stock of the surviving
corporation immediately after such merger, (ii) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company
or (iii) the adoption of any plan or proposal for the liquidation or
dissolution of the Company, or (b) any person (as such term is defined
in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of
1934, as amended from time to time (the "Exchange Act")), corporation or
other entity (other than the Company or any employee benefit plan
sponsored by the Company or any subsidiary of the Company) (i) shall
purchase any Common Stock of the Company (or securities convertible into
the Company's Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the
prior consent of
-3-
<PAGE> 4
the Board of Directors and (ii) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20 percent or more
of the combined voting power of the then outstanding securities of the
Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case
of rights to acquire the Company's securities), or (c) during any period
of two consecutive years, individuals who at the beginning of such
period constitute the entire Board of Directors shall cease for any
reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
Any transaction referred to in the foregoing clause (a) is herein called
an Approved Transaction, any purchase pursuant to a tender offer or
exchange offer or otherwise as described in the foregoing clause (b) is
herein called a Control Purchase and the cessation of individuals
constituting a majority of the Board as described in the foregoing
clause (c) is herein called a Board Change.
(c) Option Grant Date. Each Option Agreement shall specify the
date as of which it shall be effective, which date shall be the Grant
Date (determined pursuant to Section 5.4 in the case of advance
approvals).
(d) Fair Market Value. For purposes of this Plan, the fair
market value of the Company's Class A Common Stock shall be determined
as follows:
(1) if the stock is listed on any established stock
exchange or a national market system, including without
limitation the National Market System of the National Association
of Securities Dealers Automated Quotation System, its fair market
value shall be the closing sales price for the stock, or the mean
between the high bid and low asked prices if no sales were
reported, as quoted on such system or exchange (or the largest
such exchange) for the date the value is to be determined (or if
there are no sales or bids for such date, then for the last
preceding business day on which there were sales or bids), as
reported in the Wall Street Journal or similar publication;
(2) if the stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its fair
market value shall be the mean
-4-
<PAGE> 5
between the high bid and low asking prices for the stock on the
date the value is to be determined (or if there are no quoted
prices for the date of grant, then for the last preceding
business day on which there were quoted prices);
(3) in the absence of an established market for the
stock, the fair market value shall be determined in "good faith"
by the Committee, with reference to the Company's net worth,
prospective earning power, dividend-paying capacity, and other
relevant factors, including sales for the most recent 12 month
period, the goodwill of the Company, the economic outlook in the
Company's industry, the Company's position in the industry and
its management and the values of stock of other corporations in
the same or a similar line of business.
(e) Time of Option Exercise. The Company shall not grant any
Options which may become exercisable at a rate in excess of 20% per
annum from the date of such grant without the written consent of a
majority of the Disinterested Directors.
(f) Nonassignability of Option Rights. No Option shall be
assignable or otherwise transferable by the optionee except by will or
by the laws of descent and distribution. During the life of the
optionee, an Option shall be exercisable only by the optionee or the
optionee's guardian or legal representative.
(g) Payment. Except as provided below, payment in full, in
cash, shall be made for all stock purchased at the time written notice
of exercise of an Option is given to the Company, and proceeds of any
payment shall constitute general funds of the Company. At the time an
Option is granted or before it is exercised, the Committee, in the
exercise of its absolute discretion, may authorize any one or more of
the following additional methods of payment:
(1) acceptance of the optionee's full recourse promissory
note for some or all of the aggregate exercise price of the
shares being acquired (except for the aggregate par value of the
shares being acquired, which must be paid in cash or other
lawful consideration under applicable law), payable on such
terms and bearing such interest rate as determined by the
Committee, and secured in such manner as the Committee shall
approve; including, without limitation, by a security interest
in Class A Common Stock or other securities of the Company;
-5-
<PAGE> 6
(2) delivery by the optionee of Class A Common Stock or
other securities of the Company already owned by the optionee for
all or part of the aggregate exercise price of the shares being
acquired, provided the fair market value of such Class A Common
Stock or securities is equal on the date of exercise to the
aggregate exercise price of the shares being acquired, or such
portion thereof as the optionee is authorized to pay by delivery
of such Class A Common Stock or securities; and
(3) any other property, so long as such property is
acceptable to the Committee and constitutes valid consideration
under applicable law for the shares being acquired and is
surrendered in good form for transfer.
(h) Affiliation.
(1) Any Option or portion thereof which has not expired
or been exercised on or before the date on which an optionee
ceases to be affiliated with the Company shall expire ninety (90)
days after the date of cessation of such affiliation.
(2) Notwithstanding the foregoing, if the optionee ceases
to be affiliated with the Company due to the permanent disability
or death of the optionee, the optionee, the optionee's personal
representative or any other person who acquires option rights
from the optionee by will or the applicable laws of descent and
distribution, may, within twelve months after the date of
cessation, exercise such option rights to the extent they were
exercisable on the date of cessation.
(i) Other Provisions. Each Option Agreement may contain such
other terms, provisions, and conditions not inconsistent with this Plan,
including rights of repurchase, as may be determined by the Committee.
(j) Exercise Price. The exercise price of an NQO shall not be
less than 85 percent of the fair market value of the stock subject to
the Option on the Grant Date; provided, however, that the exercise price
of an NQO granted to any person who owns, directly or indirectly (or is
treated as owning by reason of attribution rules, currently set forth in
Code Section 424), stock of the Company constituting more than ten
percent of the total combined voting power of all classes of outstanding
stock of the Company or of any Affiliate of the Company, shall in no
event be less than 100 percent of such fair market value.
-6-
<PAGE> 7
(k) Option Term. Unless an earlier expiration date is
specified by the Committee at the Grant Date in the Option Agreement,
each NQO shall expire ten years from its Grant Date.
7. MANNER OF EXERCISE
An optionee wishing to exercise an Option shall give written notice to
the Company at its principal executive office, to the attention of the Secretary
of the Company, accompanied by an executed stock purchase agreement in form and
substance satisfactory to the Company, by payment of the exercise price and by
such other documents as the Committee may request. The date the Company receives
written notice of an exercise hereunder accompanied by payment of the exercise
price and all such other documents will be considered the date the Option was
exercised. Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or any
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or transferee of an Option shall not have any privileges as
stockholder with respect to any stock covered by the Option until the date of
issuance of a stock certificate.
8. RELATIONSHIP WITH THE COMPANY
Nothing in this Plan or any Option granted hereunder shall interfere
with or limit in any way the right of the Company to terminate any optionee's
affiliation or other relationship with the Company at any time.
9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Board of Directors may at any time amend, alter, suspend or
discontinue this Plan. The Board of Directors may amend this Plan and the terms
of any Option outstanding hereunder if the amendment is designed to maximize
federal income tax benefits accorded to Options; provided, that with respect to
outstanding Options, the optionee consents to such amendment.
10. LIABILITY AND INDEMNIFICATION OF COMMITTEE
No member of the Committee shall be liable for any act or omission on
such member's own part, including but not limited to the exercise of any power
or discretion given to such member under
-7-
<PAGE> 8
this Plan, except for those acts or omissions resulting from such member's own
gross negligence or willful misconduct. The Company shall indemnify each present
and future member of the Committee against, and each member of the Committee
shall be entitled without further act on his or her part to indemnity from the
Company for, all expenses (including attorney's fees and the amount of judgments
and the amount of approved settlements made with a view to the curtailment of
costs of litigation, other than amounts paid to the Company itself) reasonably
incurred by such person in connection with or arising out of any action, suit,
or proceeding to which the Committee or any member of the Committee may be a
party by reason of any action taken or failure to act under or in connection
with the Plan or any option granted under the Plan to the full extent permitted
by law and by the Certificate of Incorporation and Bylaws of the Company. The
right of indemnity described in this Section 10 shall be in addition to such
other rights of indemnification as the members of the Committee shall otherwise
be entitled because of their serving on the Board of Directors of the Company or
as an employee of the Company.
11. EFFECTIVE DATE OF THIS PLAN
This Plan shall become effective as of the Effective Date; provided,
that the Plan is approved by the affirmative votes of the holders of a majority
of the share of Class A Common Stock present, or represented, and entitled to
vote at a meeting of the stockholders duly held not later than January 31, 1997.
-8-
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