<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1997.
COMMISSION FILE NO.: 333-15595-02
THE CORVALLIS CLINIC, P.C.
FORMERLY "PHYSICIAN PARTNERS CORVALLIS, P.C."
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OREGON 93-1221257
- ---------------------------------------------- -----------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER ID NO.)
OR ORGANIZATION)
444 NW ELKS DRIVE
CORVALLIS, OREGON 97330
- ---------------------------------------- ----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (541) 754-1374
----------------------
NOT APPLICABLE
- ------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
As of November 13, 1997, 66 shares of the Registrant's Common Stock, no par
value, were outstanding.
<PAGE>
THE CORVALLIS CLINIC, P.C.
BALANCE SHEETS
AS OF SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
(All dollar amounts are expressed in thousands)
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1997 1996
------------ -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1 $ 187
Patient accounts receivable, net of allowances for
contractual discounts and uncollectable accounts of $0 and $2,544
at September 30, 1997 and December 31, 1996, respectively - 4,232
Healthcare and other receivables - 2,089
Inventories of drugs and supplies - 219
Prepaid expenses and deposits 1,204 196
------ --------
Total current assets 1,205 6,923
------ --------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation and
amortization of $0 and $9,221 at September 30, 1997 and
December 31, 1996, respectively - 18,914
------ --------
OTHER ASSETS:
Investments in affiliates - 654
------ --------
- 654
------ --------
Total assets $ 1,205 $ 26,491
=========== ===========
LIABILITIES, REDEEMABLE STOCK, COMMON STOCK AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt and capital and direct
financing lease obligations $ - $ 899
Line of credit - 3,330
Accounts payable and accrued expenses - 1,748
Payable to PPI 1,204 -
Accrued healthcare costs - 3,058
Accrued compensation and related expenses - 1,114
Deferred revenue - 339
-------- --------
Total current liabilities 1,204 10,488
-------- --------
LONG-TERM DEBT, net of current portion - 1,388
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of
current portion - 13,959
DEFERRED COMPENSATION AND OTHER - 1,755
COMMITMENTS AND CONTINGENCIES
REDEEMABLE STOCKS - 6,959
COMMON STOCK -
No par value; 500 shares authorized; 66 and 0 shares issued and
outstanding at September 30, 1997 and December 31, 1996,
respectively 1 -
ACCUMULATED DEFICIT - (8,058)
-------- ---------
Total liabilities, redeemable stock, common stock and
accumulated deficit $ 1,205 $26,491
=========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE BALANCE SHEETS.
</TABLE>
<PAGE>
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(All dollar amounts are expressed in thousands, except earnings per share)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
----------- ----------- ---------- ----------
REVENUES:
Fee-for-service, net $4,854 $ 6,269 $ 14,943 $ 15,569
Prepaid healthcare, net 5,509 3,813 16,896 15,110
----------- ----------- ---------- ----------
Net revenues 10,363 10,082 31,839 30,679
Less- Provider compensation and benefits 2,227 1,986 6,939 7,422
----------- ----------- ---------- ----------
Net revenues less provider
compensation and benefits 8,136 8,096 24,900 23,257
----------- ----------- ---------- ----------
EXPENSES:
Clinic salaries, wages and benefits 3,276 4,262 10,163 10,905
Purchased medical services 1,627 832 4,724 4,000
Medical and office supplies 1,151 891 3,301 3,109
General and administrative expenses 746 839 2,286 2,316
Lease and rent expense 67 138 203 195
Provision for uncollectible accounts 204 194 760 760
Depreciation and amortization 445 385 1,302 1,150
----------- ----------- ---------- ----------
Total operating expenses 7,516 7,541 22,739 22,435
----------- ----------- ---------- ----------
Operating income 620 555 2,161 822
OTHER INCOME (EXPENSE):
Interest income 9 10 27 32
Interest expense (453) (699) (1,418) (1,288)
Management fee (424) - (1,153) -
Other 248 261 607 500
----------- ----------- ---------- ----------
Net income before provision for
income taxes - 127 224 66
----------- ----------- ---------- ----------
PROVISION FOR INCOME TAXES - - - -
----------- ----------- ---------- ----------
NET INCOME $ - $ 127 $ 224 $ 66
=========== =========== =========== ===========
EARNINGS PER SHARE $ - $1,953.85 $3,555.56 $ 985.07
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 66 65 63 67
=========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS
</TABLE>
<PAGE>
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(All dollar amounts are expressed in thousands)
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- ---------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---- ---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income - $ 127 $ 224 $66
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities-
Depreciation and amortization - 385 144 1,150
Equity in income of affiliates - (105) (63) (506)
Changes in operating assets and liabilities
(excluding asset and liabilities assigned
to Physician Partners, Inc.):
Patient accounts receivable, net - 303 (179) (471)
Healthcare and other receivables - (511) 252 (112)
Inventories of drugs and supplies - (59) 97 (25)
Prepaid expenses and deposits $(554) (207) (1,196) 77
Other assets - 29 - 81
Drafts payable - 266 - 346
Accounts payable and accrued expenses - 201 (293) (835)
Income tax payable - (1) - (29)
Payable to PPI 554 169 1,204 193
Accrued healthcare costs - 69 (413) 915
Accrued compensation and related expenses - 62 3 (1,002)
Deferred revenue - (35) - (41)
Deferred compensation and other - 66 (68) 349
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities - 759 (288) 156
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment - (186) (24) (873)
Purchase of investments - (87) - (87)
Cash distributions received from investments - 274 - 360
Net cash provided by (used in) investing ----------- ----------- ----------- -----------
activities - 1 (24) (600)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) from borrowings
under line of credit agreement - (1,200) (30) 352
Proceeds from issuance of long-term debt - 1,260 - 1,260
Principal payments on long-term debt and direct
financing lease obligation - (154) (97) (416)
Payment for redemption of preferred stock - (35) - (51)
Proceeds from repayments of notes receivable from
stockholders - 33 8 65
Payments for redemption of common stock - (84) - (104)
Drafts payable assumed by Physician Partners, Inc. in
Merger - - 330 -
Costs incurred related to Physician Partners, Inc.
Transaction - (579) (85) (767)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities - (759) 126 339
----------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS - 1 (186) (105)
CASH AND CASH EQUIVALENTS, beginning of period 1 71 187 177
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $1 $72 $1 $72
=========== =========== =========== ===========
<PAGE>
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (CONTINUED)
(All dollar amounts are expressed in thousands)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 508 $ 224 $ 1,613 $ 1,291
Cash paid for income taxes - 31 - 51
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In February 1997, Corvallis assigned all assets and liabilities to Physician
Partners, Inc. as part of the reorganization and merger transaction. The
book value of Corvallis' assets and liabilities at the date of the
transaction are presented below:
Current assets $ 6,230
Property, plant and equipment 18,792
Other long-term assets 717
Current liabilities 9,691
Long-term liabilities 7,001
Contributed equity (953)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
THE CORVALLIS CLINIC, P.C.
Notes to Unaudited Financial Statements
Three and nine months ended September 30, 1997 and 1996
1. BASIS OF PRESENTATION:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial reporting
and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of the management of The Corvallis Clinic, P.C. ("Corvallis"),
the unaudited interim financial statements contained in this report reflect all
adjustments, consisting of only normal recurring accruals, which are necessary
for a fair presentation of the financial position and the results of operations
for the interim periods presented. The results of operations for any interim
period are not necessarily indicative of results for the full year.
The accompanying financial statements reflect the assets and liabilities as of
December 31, 1996 and results of operations for the three and nine months ended
September 30, 1996 for The Corvallis Clinic, P.C. prior to the reorganization
transaction ("Old Corvallis"). The Statement of Operations and Cash Flows for
the three and nine month period ended September 30, 1997, include results of
operations for Old Corvallis from January 1 to January 31, 1997. The remainder
of the period represents the operations of The Corvallis Clinic, P.C. ("New PC")
subsequent to the effective date of the reorganization transaction, February 1,
1997.
These financial statements, footnote disclosures and other information should be
read in conjunction with the financial statements and the notes thereto included
in Corvallis' special filing under Form 10-K for the thirteen month period ended
December 31, 1996.
2. REORGANIZATION AND MERGER AGREEMENT:
On February 1, 1997, certain reorganization and merger transactions (the
"Transactions") contemplated by the Amended and Restated Agreement and Plan
of Reorganization and Merger (the "Reorganization and Merger Agreement")
among Medford Clinic, P.C. ("Old Medford"), HealthFirst Medical Group, P.C.
("Old HealthFirst"), The Corvallis Clinic, P.C. ("Old Corvallis," and,
together with Old Medford and Old HealthFirst, referred to herein,
collectively as "Old PCs"), and Physician Partners, Inc. ("PPI"), were
consummated. Pursuant to the terms of the Reorganization and Merger
Agreement, each Old PC affected (a) a reorganization (the "New PC
Reorganization") of its corporate structure by (i) incorporating a
wholly-owned professional corporation subsidiary (a "New PC"), (ii)
transferring to the New PC certain assets and liabilities (including
physician employment agreements) relating to the provider professional
services business, (iii) making a pro rata distribution to its shareholders
of all of the capital stock of the New PC, (iv) converting such Old PC from a
professional corporation to a business corporation and (v) entering into a 40
- -year management agreement (the "Management Agreement") with PPI and (b) a
merger (the "Merger") with and into PPI, resulting in consolidation of the
operations (other than the provider professional services businesses) of the
Old PCs. Corvallis is the New PC incorporated by Old Corvallis pursuant to
the Reorganization and Merger Agreement.
The Transactions resulted in a separation of operations of Old Corvallis between
medical professional services activities (i.e., providers of medical services),
which were transferred to Corvallis in the New PC Reorganization, and the
physician practice management activities of the business, which were transferred
to PPI in the Merger. In the Merger, PPI succeeded to the ownership of
substantially all of the assets and liabilities of the three Old PCs, i.e.,
cash, receivables, inventories, prepaids, property, plant and equipment,
payables, accruals, debt, and certain contractual commitments. As
consideration, the shareholders of the Old PCs received stock of PPI.
<PAGE>
Under the Management Agreement, PPI provides physician practice management
services to Corvallis. Services provided include management and administrative
services; capital resources, facilities, equipment and supplies are also
provided by PPI under the Management Agreement. As consideration, PPI is
entitled to (a) reimbursement of all managerial costs and expenses ("Manager's
Expenses") incurred by PPI and (b) a management fee equal to 16% of (i) net
revenues relating to services provided by Corvallis less (ii) Manager's
Expenses. In the accompanying financial statements, the reimbursement of
Manager's Expenses is identified by the various types of expenses. Corvallis is
responsible for providing medical services and the related costs for provider
compensation and benefits to the providers employed thereby.
The parties to the Transactions have received an opinion from tax counsel that
for federal income tax purposes, it is more likely than not that the Merger will
be a tax-free transaction. No opinion was requested from tax counsel with
respect to the New PC Reorganization. If the IRS or tax court were to determine
that the Merger was not tax free, there would be significant adverse tax
consequence to the parties to the Transactions and their respective
shareholders. No ruling was requested from the Internal Revenue Service ("IRS")
regarding the tax consequences of the Merger or the New PC Reorganization.
In connection with the Transactions, the three Old PCs entered into an
expense sharing agreement, which establishes the basis upon which certain
costs incurred in connection with the Transactions are to be allocated among
the three Old PCs. Corvallis and other New PCs have assumed the obligations
of their respective Old PCs under the expense sharing agreement. Corvallis'
share of such costs are reflected as a charge to retained earnings.
3. INCOME TAXES:
As of September 30, 1997, the net income before provision for income taxes
represents the results of operations for Old Corvallis 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 expense, resulting in no tax provision being
reflected in the 1997 Statement of Operations. The operations of Corvallis for
the remainder of the period have resulted in no net income and accordingly, no
current tax expense is necessary.
4. EARNING PER SHARE:
All share and per share data have been retroactively restated to give effect to
the recapitalization resulting from the Transactions.
5. EQUITY ROLLFORWARD:
The Transactions resulted in the shares of Corvallis being distributed by Old
Corvallis to its shareholders in the New PC Reorganization and the Old
Corvallis' Common Stock being converted into the right to receive PPI Common
Stock in the Merger. In addition, as a result of the Merger, PPI succeeded to
the ownership of Old Corvallis' equity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes some forward-looking statements that involve a
number of risks and uncertainties. Actual results may differ materially from
historical results or from the results discussed in such forward-looking
statements or outcomes otherwise currently expected or sought by Corvallis.
OVERVIEW
Corvallis, an Oregon professional corporation, is a multi-specialty medical
clinic. Corvallis was formed 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"), Old Corvallis, and, together with
Old Medford and Old HealthFirst, referred to herein, collectively as "Old
PCs", and Physician Partners, Inc. ("PPI"). Old Corvallis was formed in
1947. 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.
Corvallis consists of 90 professional providers who offer a wide range of
primary and specialty care services. In addition, Corvallis offers ancillary
services such as physical therapy, optical, pharmacy, laboratory and imaging.
Corvallis' operations are located in and around Corvallis, Oregon.
Corvallis believes that group practice offers the best means of promoting and
maintaining the highest standard of medical care. Corvallis' strategy is to
position itself in a competitive network as the healthcare industry develops.
Corvallis' 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, Corvallis is working with PPI to recruit additional
physicians and merge other physician groups in the area into their clinic. PPI
is working with Corvallis on initiatives to reduce the Manager's Expenses of
Corvallis (which are paid by PPI and reimbursed by Corvallis) and increase
revenues.
RESULTS OF OPERATIONS
Net fee-for-service revenues decreased $1.4 million in the third quarter 1997
compared to the third quarter of 1996 and $.6 million for the first nine
months of 1997 compared to the first nine months of 1996. Prepaid healthcare
revenues increased $1.7 million in the third quarter 1997 compared to the
third quarter of 1996 and $1.8 million for the nine months ended September
30, 1997 compared to 1996. A significant portion of the decrease in
fee-for-service revenues is offset by an increase in prepaid healthcare
revenues related to 4,600 Blue Cross/Blue Shield HMO Oregon members changing
from fee-for-service to a capitated plan in the second quarter 1997.
Additional decreases in fee-for-service revenues in the third quarter 1997
are due to lower production. The increase in prepaid healthcare revenue is
also due to increased capitation rates which were slightly offset by poor
risk pool performance. Management is currently negotiating the 1998 managed
care contracts and anticipates improvement over 1997. In the fourth quarter,
Corvallis will receive a $.6 million one time payment from PPI which will be
offset against the payable to PPI.
<PAGE>
Operating expenses remained relatively stable in the three and nine months ended
September 30, 1997 compared to 1996. However, clinic salaries, wages and
benefits decreased $1.0 million for the third quarter 1997 compared to 1996 and
$.7 million for the first nine months of 1997 compared to 1996 which was offset
by purchased medical services increasing $.8 million for the third quarter 1997
compared to 1996 and $.7 million for the first nine months of 1997 compared to
1996. The decrease in clinic salaries, wages and benefits is due to staff
attrition and the offsetting increase in purchased medical services is due to
higher utilization.
Effective October 1, 1997, five Corvallis physicians who dissented from the PPI
vote separated from Corvallis. The employees who worked directly for these
physicians also separated from the Corvallis. Corvallis has entered into a form
of subcapitation arrangement with the separated physicians. The arrangement
will result in decreased fee-for-service revenues, provider compensation and
clinic salaries wages and benefits and increased purchased medical services.
The management fee of $.4 million and $1.2 million for the third quarter 1997
and the first nine months of 1997, respectively, was paid to PPI in accordance
with the Management Agreement. As Corvallis' 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.
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 Corvallis. Per the
Management Agreement, PPI will purchase the necessary capital equipment to
support Corvallis' operations.
<PAGE>
THE CORVALLIS CLINIC, P.C.
PART II -- OTHER INFORMATION
ITEM 1: Legal Proceedings
None.
ITEM 2: Changes in Securities
None.
ITEM 3: Defaults Upon Senior Securities
None.
ITEM 4: Submission of Matters to a Vote of Security Holders
None.
ITEM 5: Other Information.
None.
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None.
<PAGE>
THE CORVALLIS CLINIC, P.C.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
ameneded, the Registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
THE CORVALLIS CLINIC, P.C.
(Registrant)
Date: November 13, 1997 By: /s/ JOHN R. LADD
--------------------------------
John R. Ladd, M.D.,
President
Date: November 13, 1997 By: /s/ GUNNAR HANSEN
--------------------------------
Gunnar Hansen
Chief Financial Officer and
Controller
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,205
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,205
<CURRENT-LIABILITIES> 1,204
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,205
<SALES> 0
<TOTAL-REVENUES> 31,839
<CGS> 0
<TOTAL-COSTS> 29,678
<OTHER-EXPENSES> 1,153
<LOSS-PROVISION> 760
<INTEREST-EXPENSE> 1,418
<INCOME-PRETAX> 224
<INCOME-TAX> 0
<INCOME-CONTINUING> 224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224
<EPS-PRIMARY> 3,555.56
<EPS-DILUTED> 3,555.56
</TABLE>
