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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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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 333-15595-02
THE CORVALLIS CLINIC, P.C.
FORMERLY "PHYSICIAN PARTNERS CORVALLIS, PC."
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-1221257
- --------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation 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
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. [X]
The number of shares of the Registrant's Common Stock outstanding as of March
30, 1998 was 63.
DOCUMENTS INCORPORATED BY REFERENCE
None
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
PART I
Item 1: Business 3
Item 2: Properties 7
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 8
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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ITEM 1: BUSINESS
OVERVIEW
The Corvallis Clinic, P.C. ("Corvallis" or "Company"), an Oregon Professional
corporation, is a multi-specialty medical clinic which emphasizes internal and
family medicine. Corvallis was founded 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 Medford and Old HealthFirst, referred to herein,
collectively as "Old PCs", and Physician Partners, Inc.("PPI"). Old Corvallis
was founded in 1947.
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). Corvallis is one
of the New PCs. The physician practice management business, along with
substantially all of the assets and liabilities of the Old 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 Corvallis enables Corvallis to retain
significant control over its own operation and strategic direction.
Specifically, Corvallis 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
Corvallis 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 Corvallis (physician members of the
Corvallis Board) and three members appointed by PPI (one of whom must be a local
PPI group practice administrator). The medical director of Corvallis 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 Corvallis' growth, annual budgets, payor relations,
local strategic initiatives and capital improvements.
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GENERAL
Corvallis 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 Corvallis physicians as their primary care
provider on behalf of Corvallis. Through contracts with various health plans,
Corvallis physicians were responsible for the health care of approximately
38,000 health plan members as of December 31, 1997.
Under capitated contracts, Corvallis 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. Corvallis
provides services on a capitated basis to PacificCare and Providence (formerly
known as SelectCare) patients, including patients that have Medicare coverage
through these programs. Corvallis is also at risk for HMO Oregon patients and
patients enrolled in the Oregon Health Plan. Corvallis has fee arrangements with
several outside providers based on fee schedules or a specified percentage of
ordinary and customary charges, including certain PPOs and certain employees. In
the periods ending November 30, 1995 and December 31,1996 and 1997, $18.5
million, $21.3 million and $22.9 million, respectively, of net patient revenues
came from prepaid or capitated patients.
While Corvallis obtains a significant and growing portion of its revenues from
managed care programs, it also continues to conduct more traditional forms of
business. Corvallis is a Medicare provider and also receives fee-for-service
payments from a significant percentage of patients and traditional indemnity
insurers. In the periods ending November 30, 1995 and December 31,1996 and 1997,
$20.7 million, $22.5 million and $20.2 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 Corvallis:
<TABLE>
<CAPTION>
PAYOR 1995 1996 1997
- ----- ---- ---- ----
<S> <C> <C> <C>
Fee-For-Service:
Commercial and Private 34% 42% 38%
Medicare 15% 8% 6%
Medicaid 3% 1% 1%
Prepaid (1) 48% 49% 55%
</TABLE>
(1) Includes enrollees under Commercial, Medicare and Medicaid programs
SERVICES
Corvallis offers a wide range of primary and specialty physician care and
ancillary services through an organized physician group. Approximately 42% of
the Company's physicians are primary care providers and approximately 58%
practice various medical and surgical specialties. The primary care physicians
are those concentrating in family practice, general internal medicine and
pediatrics.
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Medical and surgical specialties offered by Corvallis include:
Allergy and Immunology Neurology
Cardiology Obstetrics
Clinical Psychology Occupational Medicine
Dermatology Ophthalmology
Dietician Optometry
Endocrinology Orthopedics
Gastroenterology Otolaryngology
General Surgery Podiatry
Gynecology Pulmonary Disease
Hematology Rheumatology
Immediate Care Urology
Nephrology
Furthermore, Corvallis 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, Corvallis offers a number of
ancillary services within its offices, including cardiopulmonary and clinical
laboratories, physical therapy and radiology facilities, an optical dispensary
and a pharmacy.
BUSINESS STRATEGY
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 has been 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) through regional
purchasing and insurance contracts, and through the consolidation of various
services.
GOVERNMENT REGULATION
Corvallis 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
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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
the 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 physician 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 Corvallis 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 impact the fee structure of
medical billing. To the extent Corvallis' 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. Corvallis' 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
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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. In the Corvallis market, the Company is the largest
physician-owned multi-specialty group in its service area. The Company's main
competition comes from three provider hospital organizations ("PHOs") located in
Corvallis, Albany and Lebanon, Oregon. In addition, a multi-specialty
independent practice association ("IPA") known as Quality Care Associates
competes with the Company's specialists in specialties such as orthopedics,
ophthalmology, surgery and dermatology. 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 had 80 full-time and 3 part-time
professional providers. Corvallis physicians initially serve one-year associate
employment contracts. These contracts offer a specified 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 two-thirds vote of the shareholders. Certain other
Corvallis provider employees, including psychologists and podiatrists, are
eligible for shareholder status on terms similar to those of physicians.
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 Corvallis (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 Corvallis occupies. Corvallis reimburses PPI for all manager's
expenses incurred on its behalf.
The executive offices of Corvallis are located at 444 NW Elks Drive, Corvallis,
Oregon 97330. The Company believes these arrangements and other available space
mentioned below are adequate for its current uses and anticipated growth.
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The main offices of the Company are two buildings located near one another in
Corvallis, Oregon. The Asbury Building, which was named after one of the
founding physicians of the clinic, consists of over 80,000 square feet of
medical office space. It houses the Immediate Care Center which is open 360 days
a year and the majority of the Company's primary care and specialty physicians.
The Aumann Building is located adjacent to the Asbury building and consists of
over 40,000 square feet with some medical offices as well as the administrative
offices. The Asbury and Aumann Buildings are located adjacent to a medical
campus on which Good Samaritan Hospital Corvallis, Good Samaritan's Radiation
Oncology Center, and the Samaritan Medical Group are located.
The Company maintains two geographically dispersed satellite offices. Philomath
Family Medicine supports the practice of four family practice physicians. Albany
Family Medicine supports the practice of five family practice physicians. The
Company has recently exercised the option for additional space in the Albany
facility which will support six physicians.
The Company has an Occupational Medicine Facility located in Corvallis. It is a
full service Occupational Medicine Department which is open five days a week.
Other than a short-term lease agreement with Pacific Communities Hospital in
Newport, Oregon where the Company provides an oncologist one day per week, all
Corvallis facilities are leased through HealthCare Partners, LLC. The ownership
and control of HealthCare Partners, LLC are shared equally between PPI and Good
Samaritan Hospital Corvallis. Decisions regarding the business of HealthCare
Partners, LLC require an agreement of both members.
ITEM 3: LEGAL PROCEEDINGS
Corvallis is engaged in the defense of lawsuits arising in the ordinary course
and conduct of its business. Corvallis 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.
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.
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ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Thirteen and
For the Twelve Months Ended Twelve Months Ended
November 30, December 31,
------------------------------------ ------------------------
(Thousands of dollars)
1993 1994 1995 1996 1997
---------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Fee-For-Service, net $ 16,422 $ 19,545 $ 20,704 $ 22,452 $ 20,231
Prepaid Health Care 13,517 15,799 18,470 21,257 22,883
-------- -------- -------- -------- --------
Total Net Revenues 29,939 35,344 39,174 43,709 43,114
Less Provider Compensation and Benefits (7,122) (13,729) (13,209) (11,419) (10,269)
-------- -------- -------- -------- --------
Net Revenue less Provider Compensation
and Benefits 22,817 21,615 25,965 32,290 32,845
Total Operating Expenses 20,159 22,334 27,779 32,991 32,357
Operating Income (Loss) 2,658 (719) (1,814) (701) 488
Other Non-Operating Income (Expense) (719) (558) (293) (1,103) (264)
-------- -------- -------- -------- --------
Income (Loss) Before Taxes 1,939 (1,277) (2,107) (1,804) 224
-------- -------- -------- -------- --------
Income Tax Expense 759 -- -- -- --
-------- -------- -------- -------- --------
Net Income (Loss) 1,180 (1,277) (2,107) (1,804) 224
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Working capital (deficit) 1,666 (296) (1,251) (3,565) 1
Total assets 21,697 21,808 26,549 26,491 805
Long term debt, net 8,374 8,310 729 1,388 -
Capital leases and direct financing
obligations, net 245 155 14,258 13,959 -
Shareholders' equity 5,251 4,329 2,316 (1,099) 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 Corvallis.
OVERVIEW
Corvallis, an Oregon professional corporation, is a multi-specialty medical
clinic. Corvallis 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 Medford and Old HealthFirst, referred to herein,
collectively as ("Old PCs"), and Physician Partners, Inc. ("PPI"). Old Corvallis
was founded 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 with and into PPI, resulting in
consolidation of the operations (other than the provider professional services
businesses) of the Old PCs.
Corvallis currently consists of 83 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 through regional purchasing and insurance contracts, and through the
consolidation of various services.
In 1997, PPI began modifying the computer system programming at Corvallis 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 Corvallis' 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 Statements of Operations. The
following table represents twelve months ending November 30, 1995 and thirteen
and twelve months ended December 31, 1996 and 1997, respectively.
<TABLE>
<CAPTION>
November 30, 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 48.45 48.38 41.42
Purchased medical services 18.17 19.15 19.49
Medical and office supplies 14.80 14.32 13.85
General and administrative expenses 13.71 10.27 9.71
Lease and rent expense 0.76 0.90 0.78
Provision for uncollectible accounts 6.81 3.93 3.29
Depreciation and amortization 4.29 5.22 4.88
Management fee -- -- 5.09
-------------- --------------- ---------------
Total operating expenses 106.99 102.17 98.51
-------------- --------------- ---------------
Operating income (loss) (6.99) (2.17) 1.49
Other Income (Expense)
Interest income 0.25 0.14 .22
Interest expense (4.71) (5.93) (5.47)
Equity in income of affiliates 0.90 0.93 1.14
Other 2.43 1.44 3.30
-------------- --------------- ---------------
Net income (loss) before income (8.12) (5.59) 0.68
taxes
-------------- --------------- ---------------
Income tax expense -- -- --
-------------- --------------- ---------------
Net income (loss) (8.12)% (5.59)% 0.68%
============== =============== ===============
</TABLE>
Twelve Months ended December 31, 1997 Compared to Thirteen Months Ended December
31, 1996
Net Revenues less Provider Compensation increased $0.5 million or 1.6% to $32.8
million in the twelve months ended December 31, 1997 from $32.3 million in the
thirteen months ended December 31, 1996. After annualizing 1996 to twelve
months, Net Revenues less Provider Compensation increased $3.0 million. Net for
Revenues less Provider Compensation consists of Fee-for-Service revenue net of
contractual discounts and Prepaid Healthcare revenues less Provider
Compensation. Net Fee-for-Service revenues decreased $2.3 million or 10.2% to
$20.2 million in the twelve months ended December 31, 1997 compared to $22.5
million in the thirteen months ended December 31, 1996. After annualizing 1996
to twelve months, Net Fee-for-Service revenues were $20.8 million compared to
$20.2 million in 1997. Prepaid Healthcare revenues increased $1.6 million or
7.6% to $22.9 million in the twelve months ended December 31, 1997 compared to
$21.3 million in the thirteen months ended December 31, 1996. The increase in
Prepaid Healthcare revenues is $3.2 million or 16.2% from 1996 to 1997 after
annualizing 1996 to twelve months. Net Fee-for-Service revenues decreased due to
4,600 Blue Cross/Blue Shield HMO Oregon members changing from fee-for-service to
a capitated plan in March 1997. The decrease was partially offset by an increase
in full time equivalent ("FTE") providers of 1.5% and increased production per
provider of 2.0%. The Blue Cross/Blue Shield HMO Oregon members change to a
capitated plan resulted in an increase in Prepaid Healthcare revenues. The
remaining increase in Prepaid Healthcare revenue is due to increased capitation
rates which were slightly offset by poor risk pool performance. Management has
negotiated additional capitation rate increases in the 1998 managed care
contracts.
11
<PAGE> 12
Provider Compensation and Benefits
Provider Compensation and Benefits decreased $1.1 million or 9.7% to $10.3
million in the twelve months ended December 31, 1997 from $11.4 million in the
thirteen months ended December 31, 1996. This decrease is due to 1996 results
including an additional month of activity compared to 1997.
Operating Expenses
The operating expenses of Corvallis represent the costs incurred by PPI and
reimbursed by the Company per the terms of the Management Agreement.
Operating expenses as a percentage of Net Revenues less Provider Compensation
decreased 3.7% in the year ended December 31, 1997 compared to the thirteen
months ended December 31, 1996. The decrease is primarily the result of a
decrease in Clinic Salaries, Wages and Benefits due to staff reductions through
attrition, staff consolidation and the loss of 20 employees in the fourth
quarter due to the five physician dissenters. Effective October 1, 1997, five
Corvallis physicians dissented from the PPI vote and separated from Corvallis.
The employees who worked directly for these physicians also separated from the
Company. 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. However, it is anticipated that the
subcapitation arrangement will result in little or no impact to Corvallis'
operating results.
A management fee of $1.7 million for the twelve months ended December 31, 1997
was paid to PPI in accordance with the Management Agreement. There was no such
management fee in 1996 as the Management Agreement was not effective until
February 1, 1997. As Corvallis' results improve, the management fee will
increase in direct relation.
Other Income and Expenses
Other Income increased as a result of rental income charged to the
Corvallis Family Medicine physicians who dissented from the PPI merger for the
building they currently occupy and income received from the buy-out of a
physician restrictive covenant (covenant not to compete) from a physician who
left the Company in 1997.
In 1997, other income included a $0.6 million one-time transition payment from
PPI.
Thirteen Months Ended December 31, 1996 Compared to Twelve Months Ended
November 30, 1995
Net Revenues less Provider Compensation increased $6.3 million or 24.2% to $32.3
million in the thirteen months ended December 31, 1996 from $26.0 million in the
twelve months ended November 30, 1995. After annualizing 1996 to twelve months,
Net Revenues less Provider Compensation increased $3.8 million. 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 $1.8 million or 8.7% to
$22.5 million in the thirteen months ended December 31, 1996 compared to $20.7
million in twelve months ended November 30, 1995. After annualizing 1996 to
twelve months, Net Fee-for-Service revenues were $20.8 million compared to $20.7
million in 1995. Prepaid Healthcare revenues increased $2.8 million or 15.1% to
$21.3 million in the thirteen months ended December 31, 1996 compared to $18.5
million in 1995. Prepaid Healthcare revenues increased $1.2 million or 6.5% in
1996 from 1995 after annualizing 1996 to twelve months. The increase in
Fee-for-Service income is attributable to an increase in production which was
partially offset by an increase in contractual adjustments. The increase in
Prepaid Healthcare revenue correlates with an increase in the number of
capitated lives partially offset by a decrease in certain capitation rates.
Provider Compensation and Benefits
Provider Compensation and Benefits decreased $1.8 million or 13.6% to $11.4
million in the thirteen months ended December 31, 1996 from $13.2 million in the
twelve months ended November 30,1995. The decrease is the result of changes to
the compensation plan calculation mechanics.
12
<PAGE> 13
Operating Expenses
Total operating expenses as a percentage of Net Revenue less Provider
Compensation decreased 4.82% in the thirteen months ended December 31, 1996
compared to the twelve months ended 1995. The decrease was primarily
attributable to decreases in General and Administrative expenses and Provision
for Uncollectible Accounts which were offset by an increase in Purchased
Medical Services. The decrease in Provision for Uncollectible Accounts is due
to a large volume of write-offs that occurred in the prior year. The decrease
in General and Administrative expenses was due to high legal costs in the
prior year associated with the formation of HealthCare Partners, LLC and
increased recruitment costs. The increase in Purchased Medical Services was a
result of the additional use of externally provided managed cares services
which was caused by an increase in production and managed care lives.
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.
13
<PAGE> 14
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE CORVALLIS 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
The Corvallis Clinic, P.C.:
We have audited the accompanying balance sheets of The Corvallis Clinic, P.C.
(an Oregon professional corporation) as of December 31, 1996 and 1997, and the
related statements of operations, accumulated deficit and cash flows for the
year ended November 30, 1995, the thirteen-month period ended December 31, 1996
and the year ended December 31, 1997. These financial statements are the
responsibility of Corvallis' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Corvallis Clinic, P.C. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the year ended November 30, 1995, the thirteen-month period ended
December 31, 1996, and the year ended December 31, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
February 12, 1998
<PAGE> 16
THE CORVALLIS CLINIC, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 187 $ 1
Patient accounts receivable, net of allowances for contractual
discounts and uncollectible accounts of $2,544 at December 31,
1996 4,232 -
Healthcare and other receivables 2,089 -
Inventories of drugs and supplies 219 -
Prepaid expenses and deposits 196 -
Prepaid provider compensation - 804
------- ----
Total current assets 6,923 805
------- ----
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
and amortization of $9,220 at December 31, 1996 18,914 -
------- ----
OTHER ASSETS:
Investments in affiliates 654 -
------- ----
654 -
------- ----
Total assets $26,491 $805
======= ====
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 -
Accrued healthcare costs 3,058 -
Accrued compensation and related expenses 1,114 -
Deferred revenue 339 -
------- ----
Total current liabilities 10,488 -
------- ----
PAYABLE TO PPI - 804
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; 0 and 63 shares
issued and outstanding at December 31, 1996 and 1997, respectively - 1
ACCUMULATED DEFICIT (8,058) -
------- ----
Total liabilities, redeemable stock, common stock and
accumulated deficit $26,491 $805
======= ====
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 17
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1995, THE THIRTEEN MONTHS
ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 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 $ 20,704 $ 22,452 $ 20,231
Prepaid healthcare, net 18,470 21,257 22,883
----------- ----------- ---------
Net revenues 39,174 43,709 43,114
Less- Provider compensation and benefits 13,209 11,419 10,269
----------- ----------- ---------
Net revenues less provider
compensation and benefits 25,965 32,290 32,845
----------- ----------- ---------
EXPENSES:
Clinic salaries, wages and benefits 12,579 15,620 13,604
Purchased medical services 4,717 6,183 6,402
Medical and office supplies 3,842 4,623 4,550
General and administrative expenses 3,560 3,315 3,190
Lease and rent expense 198 290 255
Provision for uncollectible accounts 1,768 1,270 1,079
Depreciation and amortization 1,115 1,690 1,604
Management fee - - 1,673
----------- ----------- ---------
Total operating expenses 27,779 32,991 32,357
----------- ----------- ---------
Operating income (loss) (1,814) (701) 488
OTHER INCOME (EXPENSE):
Interest income 66 46 72
Interest expense (1,223) (1,916) (1,798)
Equity in income of affiliates 232 301 376
Other 632 466 1,086
----------- ----------- ---------
Net income (loss) before provision
for income taxes (2,107) (1,804) 224
----------- ----------- ---------
PROVISION FOR INCOME TAXES - - -
----------- ----------- ---------
NET INCOME (LOSS) $(2,107) $(1,804) $ 224
=========== =========== =========
EARNINGS PER SHARE $(30,985.29) $(27,333.33) $3,555.56
=========== =========== =========
WEIGHTED AVERAGE SHARES OUTSTANDING 68 66 63
== == ==
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 18
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED NOVEMBER 30, 1995, THE THIRTEEN MONTHS
ENDED DECEMBER 31, 1996 AND THE YEAR ENDED DECEMBER 31, 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) $(2,107) $(1,804) $ 224
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 1,115 1,690 144
Equity in income of affiliates (232) (301) (29)
Equity in income of affiliate offset against
operating expenses - 69 -
Equity in income of affiliate offset against
interest expense (289) (547) (34)
Loss on sale of equity interest in affiliate - 18 -
Changes in operating assets and liabilities:
Patient accounts receivable, net 364 72 (179)
Healthcare and other receivables 426 (910) 252
Inventories of drugs and supplies 33 5 97
Prepaid expenses and deposits (72) 283 8
Prepaid provider compensation - - (804)
Other assets (66) 90 -
Accounts payable and accrued expenses 423 (440) (293)
Income taxes payable 32 (32) -
Payable to PPI - - 804
Accrued healthcare costs 799 1,777 (413)
Accrued compensation and related expenses (3,002) (794) 3
Deferred revenue 50 (58) -
Deferred compensation and other 140 125 (68)
------- ------- -------
Net cash used in operating activities (2,386) (757) (288)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,203) (1,070) (24)
Purchases of investments (123) - -
Cash distributions received from investments 400 615 -
Cash distributions received from sale of equity
interest in affiliate - 53 -
------- ------- -------
Net cash used in investing activities (2,926) (402) (24)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from borrowings under line of
credit nt 1,409 1,921 (30)
Proceeds from issuance of long-term debt 1,200 1,400 -
Principal payments on long-term debt and direct
financing lease obligation (239) (674) (98)
Proceeds from issuance of common stock - 10 1
Payments for redemption of common stock (23) (123) -
Payments for redemption of preferred stock (19) (57) -
Proceeds from repayments of notes receivable from
stockholders 136 81 8
Cash received in formation of HealthCare Partners, LLC 2,734 - -
Costs incurred related to Physician Partners, Inc.
transaction - (1,389) (85)
Drafts payable assumed by Physician Partners, Inc.
in merger - - 330
------- ------- -------
Net cash provided by financing activities 5,198 1,169 126
------- ------- -------
</TABLE>
(continued)
<PAGE> 19
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED NOVEMBER 30, 1995, FOR THE THIRTEEN MONTHS
ENDED DECEMBER 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (114) $ 10 $ (186)
CASH AND CASH EQUIVALENTS, beginning of period 291 177 187
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 177 $ 187 $ 1
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 891 $ 2,327 $ 2,164
Cash paid (received) for income taxes (42) 54 -
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1995, Corvallis formed a limited liability company by contributing
certain real property and associated debt in exchange for a 50% ownership
interest in the new entity (Note 13).
Notes receivable from shareholders for purchase of stock during 1995 and 1996
were $23 and $13, respectively.
Corvallis received a noncash distribution from an affiliate during 1996 of
$69.
Redemption of common stock in exchange for a payable of $132 during 1996.
In February 1997, Corvallis assigned all assets and liabilities to PPI 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:
<TABLE>
<S> <C>
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)
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 20
THE CORVALLIS CLINIC, P.C.
STATEMENTS OF ACCUMULATED DEFICIT
FOR THE YEAR ENDED NOVEMBER 30, 1995, THE THIRTEEN MONTHS
ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1997
(All dollar amounts are expressed in thousands)
<TABLE>
<S> <C>
BALANCE, November 30, 1994 $ (459)
Accretion of common stock (778)
Net loss (2,107)
-------
BALANCE, November 30, 1995 (3,344)
Accretion of common stock (1,520)
Costs incurred related to Physician Partners, Inc. transaction (1,390)
Net loss (1,804)
-------
BALANCE, December 31, 1996 (8,058)
Net income 224
Transfer of ownership to Physician Partners, Inc., during merger
(Note 1) 7,834
-------
BALANCE, December 31, 1997 $ -
=======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 21
THE CORVALLIS CLINIC, P.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(All dollar amounts are expressed in thousands)
1. BUSINESS AND ORGANIZATION:
The Corvallis Clinic, PC (Corvallis), an Oregon professional corporation, was
incorporated on September 18, 1996 under the name Physician Partners Corvallis,
PC for the purpose of effecting a reorganization transaction between Physician
Partners, Inc. (PPI) and three Oregon professional corporations (the Founding
Clinics).
This transaction, which was consummated on February 1, 1997, resulted in a
separation of operations of the three Founding Clinics between medical
professional services activities (i.e., providers of medical services) and the
physician practice management activities of the business. The professional
services activities were spun off into newly formed professional corporations
(New PCs). Corvallis 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.
Corvallis consists of approximately 83 professional providers who offer a wide
range of primary and specialty care. In addition, Corvallis offers ancillary
services such as physical therapy, optical, pharmacy, laboratory and imaging.
The majority of Corvallis operations are located in two facilities in Corvallis,
Oregon. In addition, Corvallis operates four satellite offices: Albany Family
Medicine, Corvallis Family Medicine, Philomath Family Medicine and Research
Park. A significant change in the demographics of this area may have an adverse
impact on the business.
<PAGE> 22
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION:
Selected accounting policies are discussed below. Other significant accounting
policies regarding revenues, income taxes, professional liability, deferred
compensation and investments in affiliates are discussed in specific notes that
follow.
Change in Fiscal Year End
Effective December 1, 1995, Corvallis changed its fiscal year end from November
30 to December 31. Accordingly, the 1996 fiscal year ended December 31, includes
the results of operations for thirteen months.
Cash Equivalents
Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.
Concentration of Credit Risk
Corvallis extends credit to patients covered by commercial insurance, Medicare
and Medicaid. Corvallis manages credit risk with the various public and private
insurance providers, as deemed appropriate by management. Allowances for
contractual discounts and uncollectible accounts have been made for potential
losses, where appropriate.
Prepaid Provider Compensation
Prepaid provider compensation includes the amount paid to providers which are in
excess of the earned amount computed in accordance with the Management Agreement
(Note 1). The balance will be reversed in future years when the amount paid is
less than the earned amount.
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.
Depreciation is computed using both accelerated and straight-line methods over
the estimated useful lives of the respective assets. Equipment under capital
lease is amortized using the straight-line method over the shorter of the period
of the lease term or the estimated useful life of the equipment. Estimated lives
are as follows:
Building and building improvements 7-40 years
Furniture and equipment 5-15 years
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.
-2-
<PAGE> 23
Payable to PPI
Corvallis signed a note payable to PPI, bearing interest at 7.6%. Interest only
payments are due in 1998 and monthly installments of principal and interest
payments are due beginning January 1999 for three years.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, patient accounts receivable,
accounts payable and accrued expenses are a reasonable estimate of their fair
value based on the short maturities of these instruments.
Interest rates that are currently available to Corvallis for issuance of debt
with similar terms and remaining maturities were used to estimate fair value for
debt issues. The current carrying value of debt approximates fair value.
Corvallis does not hold or issue financial instruments or derivative financial
instruments for trading purposes.
Notes Receivable from Stockholders
Corvallis maintains various agreements with stockholders for their purchase of
common stock. The notes bear interest at 6.52% and mature at various stages
through the year 2006.
Other Income
Other income includes a $600 one time payment from PPI. The payment was part of
a transition plan developed by PPI to assist Corvallis in its transition to the
Management Agreement.
Provider Compensation and Benefits
Provider compensation and benefits consist 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.
Financial Statement Presentation
The accompanying financial statements reflect the assets and liabilities as of
December 31, 1996 and results of operations for the year ended November 30,
1995, the thirteen months ended December 31, 1996 for The Corvallis Clinic,
P.C. prior to the reorganization transaction ("Old Corvallis"). The Statement
of Operations and Cash Flows for the year ended December 31, 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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. REVENUES:
Corvallis reports its revenues according to two principal types of payment
methodologies as discussed below:
Prepaid Healthcare
Corvallis contracts with various Health Maintenance Organizations (HMOs) to
provide care to plan enrollees. These programs provide for a prepaid monthly
fixed capitation payment on a per member basis to Corvallis by the HMO for plan
enrollees.
The majority of the HMO contracts are delegated professional risk with limited
institutional risk based upon utilization parameters mutually agreed upon by
the hospital health plan and Corvallis.
-3-
<PAGE> 24
Corvallis has accrued the claims associated with services provided by outside
providers for which Corvallis is responsible, and an estimate of incurred but
not reported claims is included in accrued healthcare cost in the accompanying
financial statements.
Corvallis follows the policy of netting prepaid healthcare revenues and
purchased medical services expenses for the institutional portion of capitated
agreements. Liabilities associated with these contracts are included in accrued
healthcare costs in the accompanying financial statements. Corvallis' revenue
associated with these contracts was approximately $11,945, $16,699 and $16,235
for the year ended November 30, 1995, thirteen months ended December 31, 1996
and the year ended December 31, 1997, respectively.
Fee-For-Service
Patient service revenues are recorded in the period in which services are
provided at established rates. Corvallis has agreements with third-party payors
that provide payments to Corvallis at amounts different from its established
rates. The difference between the established rates and the related payment
amounts are reflected as contractual discounts, as shown below:
<TABLE>
<CAPTION>
Year Ended 13 Months Ended Year Ended
November 30, 1995 December 31, 1996 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Fee-for-service, gross $25,778 $28,801 $26,043
Contractual discounts (5,074) (6,349) (5,812)
------- ------- -------
Fee for service, net $20,704 $22,452 $20,231
======= ======= =======
</TABLE>
A summary of the most significant fee-for-service arrangements is as follows:
Medicare
A significant portion of Corvallis' services are provided to Medicare
patients. Payments for Medicare outpatient services which are not
covered under capitated contracts are based on a prevailing fee
schedule. Approximately 15%, 16% and 14% 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 3%, 2% and 2% of net patient service revenues were derived
from services provided to fee-for-service Medicaid patients in 1995,
1996 and 1997, respectively.
-4-
<PAGE> 25
Other Payors
Corvallis has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment to Corvallis under these agreements includes discounts
from established charges.
Major Customers
The following customers represented individually more than 10% of Corvallis' net
revenue as follows:
<TABLE>
<CAPTION>
Year Ended 13 Months Ended Year Ended
November 30, 1995 December 31, 1996 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Pacificare - Commercial 23% 21% 22%
PacifiCare - Secure Horizons 16 10 10
HMO Oregon - - 10
SelectCare 10 - -
Oregon Health Plan 11 - -
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Land and land improvements $ 667
Buildings and leasehold improvements 19,448
Furniture and equipment 8,019
-------
28,134
Less- Accumulated depreciation (9,220)
-------
$18,914
=======
</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 Corvallis follow
the liability method of accounting for deferred income taxes. Differences
between financial reporting and income tax net operating losses are due
primarily to the use of the cash method of accounting for income tax purposes.
Corvallis has adopted a December 31 year-end for income tax purposes.
-5-
<PAGE> 26
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of
Corvallis' deferred tax assets and liabilities are as follows at December 31,
1996:
<TABLE>
<S> <C>
Deferred tax assets:
Cash to accrual adjustments $4,261
Net operating loss 832
Other 306
-------
Gross deferred tax assets 5,399
Less- Valuation allowance (1,778)
-------
Net deferred tax asset 3,621
Deferred tax liabilities:
Cash to accrual adjustments (3,621)
-------
Net deferred tax asset $ -
=======
</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 13 Months Ended Year Ended
November 30, 1995 December 31, 1996 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal tax at statutory rate $(716) $(604) $-
Add (deduct):
State income tax, net of federal
benefit (126) (107) -
Future tax benefits not recognized
849 699 -
Other (7) 12 -
----- ----- -----
Provision for income taxes $ - $ - $ -
===== ===== =====
</TABLE>
Nonrealized future tax benefits referred to above represent tax benefits related
to net operating loss (NOL) carryforwards. These benefits have not been
recognized in the accompanying financial statements because there is no
assurance these NOLs can be utilized in the future.
As of December 31, 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.
-6-
<PAGE> 27
6. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1996:
<TABLE>
<S> <C>
Note payable interest at 10%, payable in monthly installments of $31 through February
1999, secured by equipment $ 707
Note payable, interest at 9%, payable in monthly installments of $35 through August 2000,
secured by real equipment 1,304
------
Total long-term debt 2,011
Less- Current portion (623)
------
Long-term debt, net of current portion $1,388
======
</TABLE>
Lines of Credit
Corvallis maintained a revolving line-of-credit agreement with a bank providing
up to $2,500, secured by accounts receivable and inventory. At February 1, 1997,
the revolving line of credit was consolidated into a $7,500 line-of-credit as a
result of the reorganization transaction (Note 1).
7. LEASE COMMITMENTS:
Capital Lease
Corvallis leases certain equipment under an agreement which is classified as a
capital lease. The lease has an original term of five years and includes a
bargain purchase option. The lease was assigned to PPI on February 1, 1997.
Lease equipment included in property, plant and equipment is as follows at
December 31, 1996:
<TABLE>
<S> <C>
Equipment $ 260
Less- Accumulated amortization (178)
-----
$ 82
=====
</TABLE>
Operating Leases
Leases that do not meet the criteria for capitalization are classified as
operating leases. Such lease commitments are primarily for facilities and
equipment and the related rentals are charged to operations as incurred.
Direct Financing Lease Obligation
In June of 1995, Corvallis contributed land, buildings, construction in process
and related notes payable to HealthCare Partners, LLC (Note 13). At the date of
transfer, Corvallis entered into 30-year lease agreements for the Asbury,
Aumann, CFM and PFM buildings and a 5-year lease agreement for the Albany
building. Monthly rental payments under these leases are $184. The assets were
sold under a sale/leaseback arrangement and, therefore, this is being accounted
for as a financing transaction wherein the assets remain on the books and
continue to be depreciated. Corvallis recorded a direct financing lease
obligation for cash received by Corvallis and obligations assumed by the LLC as
part of the transaction.
-7-
<PAGE> 28
The liability for this lease obligation was $14,142 at December 31, 1996 and was
assumed by PPI at February 1, 1997.
8. RETIREMENT PLANS:
401(k) Profit Sharing Plan
Corvallis has a 401(k) Profit-Sharing Plan (the 401(k) Plan) in which all
employees are eligible to participate subject to certain eligibility criteria.
The 401(k) Plan permits employees to contribute up to 10% of their annual
compensation (not to exceed certain annual limits imposed by the Internal
Revenue Code). Corvallis is required to make matching contributions equal to 50%
of employee contributions up to 8% of the employee's compensation. Corvallis may
also make discretionary contributions. Clinic contributions are 100% vested.
Money-Purchase Pension Plan
Corvallis also has a Money-Purchase Pension Plan in which all employees are
eligible to participate subject to certain eligibility criteria. Corvallis
contributes 5.4% of the employee's eligible earnings up to $48 and 10.8% of
eligible earnings in excess of $48. These contributions are 100% vested upon
eligibility.
Corvallis' contributions for these plans for the year ended November 30, 1995
and the 13-month period ended December 31, 1996 were approximately $2,010 and
$1,494, respectively.
9. PROFESSIONAL LIABILITY:
At February 1, 1997, Corvallis' professional liability insurance policy was
consolidated into a PPI 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.
-8-
<PAGE> 29
10. REDEEMABLE STOCK:
Corvallis has three classes of stock which are redeemable at the option of the
shareholders upon retirement, termination of employment and certain other
events. A summary of the activity in these stock accounts for the period
November 30, 1995 through December 31, 1997, together with other information, is
presented below:
<TABLE>
<CAPTION>
Class A Class B Class C Notes
Voting Preferred Voting Common Nonvoting Preferred Receivable
---------------------------------- -------------------
Shares Carrying Shares Carrying Shares Carrying From
Issued Value Issued Value Issued Value Stockholders Total
------ ----- ------ ----- ------ ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, November 30, 1994 68 $1,358 12,035 $3,295 8,760 $876 $(742) $4,787
Stock issued 1 23 - - - - (23) -
Stock redeemed (1) (23) - - (190) (19) - (42)
Accretion - 6 - 772 - - - 778
Payments of notes - - - - - - 137 137
receivable
--- ------- ------- ------- ------ ----- ----- -------
BALANCE, November 30, 1995 68 1,364 12,035 4,067 8,570 857 (628) 5,660
Stock issued 1 23 - - - - (13) 10
Stock redeemed (5) (115) (235) (140) (570) (57) - (312)
Accretion - 79 - 1,441 - - - 1,520
Payments of notes - - - - - - 81 81
receivable
--- ------- ------- ------- ------ ----- ----- -------
BALANCE, December 31, 1996 64 1,351 11,800 5,368 8,000 800 (560) 6,959
Stock issued - - - - - - - -
Stock redeemed - - - - - - - -
Accretion - - - - - - - -
Payments of notes - - - - - - 8 8
receivable
PPI stock exchange (64) (1,351) (11,800) (5,368) (8,000) (800) 552 (6,967)
--- ------- ------- ------- ------ ----- ----- -------
BALANCE, December 31, 1997 - $ - - $ - - $ - $ - $ -
=== ======= ======= ======= ====== ===== ===== =======
</TABLE>
The carrying value of the Class A and Class B shares were being increased
(accreted) to the redemption price using the effective interest rate through the
earliest estimated redemption date. At February 1, 1997, Corvallis' stock was
exchanged for PPI stock.
In 1997, Corvallis issued 63 shares of no par value common stock with a total
value of $1.
11. DEFERRED COMPENSATION:
Corvallis provides compensation to eligible shareholders who retire based upon
average shareholder income, as defined in the Employment Agreement, for the
first three years following retirement. Provider/shareholder retirees who have
20-1/2 years of service while in service with Corvallis are eligible to receive
such deferred retirement compensation. The deferred compensation recorded in the
accompanying financial statements is the net present value of the future
obligations recognized for the years of service.
12. COMMITMENTS AND CONTINGENCIES:
Legal Proceedings
Corvallis is subject to various legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, although the ultimate
dispositions of these proceedings are not determinable, adverse determinations
in any or all of such proceedings would not have a material adverse effect upon
the financial position or results of operations of Corvallis.
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
Corvallis 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.
-9-
<PAGE> 30
Other Commitments
References of other commitments are made in the discussion of various lease
commitments and related debt guarantees in Notes 7 and 13.
13. INVESTMENTS IN AFFILIATES:
The Company's investments in affiliates consist of investments in various
entities which are accounted for on the equity method. The names of these
entities, carrying values and the percent of ownership held by Corvallis are
summarized below:
<TABLE>
<CAPTION>
Percent Carrying Value at
Investee Owned December 31, 1996
-------- ----- -----------------
<S> <C> <C>
Corvallis MRI 33% $218
HealthCare Partners, LLC 50 436
----
$654
====
</TABLE>
Additional information regarding these investments is discussed below.
Corvallis MRI:
Corvallis held a one-third interest in Corvallis MRI which was transferred to
PPI on February 1, 1997. The partnership was organized in 1988 and owns and
operates a magnetic resonance imaging (MRI) scanner. The MRI unit is housed in
facilities leased from Good Samaritan Hospital, another partner, and operated by
Corvallis Radiology, P.C., the third partner. Summarized financial information
of Corvallis MRI as of and for the year ended December 31, 1996 is presented
below:
<TABLE>
<S> <C>
Balance sheet data-
Current assets $ 461
Fixed assets 1,034
Other assets 40
------
Total assets $1,535
======
Current liabilities $ 400
Long-term debt 437
Other long-term liabilities 45
Partners' equity 653
------
Total liabilities and Partners' equity $1,535
======
</TABLE>
-10-
<PAGE> 31
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Operations data-
Revenues $1,657 $1,828
Operating expenses (834) (937)
Other income (expense) (83) (57)
------ ------
$740 $834
====== ======
</TABLE>
During 1995 and 1996, payments to Corvallis MRI for services provided to
Corvallis were $62 and $143, respectively, and are included in purchased
services.
HealthCare Partners, LLC
During the year ended November 30, 1995, Corvallis entered into a joint venture
agreement with Good Samaritan Hospital, Corvallis to form a limited liability
company to own and manage Corvallis' buildings and real properties and to serve
as a vehicle for financing future property expansion for Corvallis. Corvallis
contributed assets and liabilities in exchange for a 50% membership interest in
the limited liability company. On February 1, 1997, Corvallis transferred their
membership interest in HealthCare Partners, LLC to PPI.
The net book value of assets and liabilities contributed by Corvallis was
$13,805 for buildings, land and construction in progress and $8,363 for related
debt. In addition, Corvallis received $2,734 in cash reimbursements for the
market value of the above contributed net assets in excess of the Hospital's
contributed equity, as measured at the date of formation of the limited
liability company.
This transaction has been accounted for as a financing due to the continuing
involvement of Corvallis in the assets through its ownership interest in the
limited liability company. Accordingly, the contributed property remains as an
asset of Corvallis. The debt at the transaction date, together with the cash
received for the excess value of the contributed net assets, has been included
in the related financing obligations (Note 7).
Summarized financial information of HealthCare Partners, LLC as of and for the
year ended December 31, 1996 is presented below:
<TABLE>
<S> <C>
Balance sheet data-
Current assets $ 336
Financing lease receivable 20,840
Property and improvements 3,356
Other assets 145
-------
Total assets $24,677
=======
Current liabilities $ 2,053
Long-term debt 7,843
Members' equity 14,781
-------
Total liabilities and Members' equity $24,677
=======
</TABLE>
-11-
<PAGE> 32
Operations data-
<TABLE>
<CAPTION>
Inception,
(June 1)
Through
December 31, December 31,
1995 1996
-------------- ----------
<S> <C> <C>
Revenues $1,258 $2,445
Expenses 680 1,604
------ ------
Net income $ 578 $ 841
====== ======
</TABLE>
Revenues include interest income of $1,149 for the period ended December 31,
1995 and $1,902 for the year ended December 31, 1996, relating to the financing
lease with Corvallis. As a substantial portion of the joint venture's income is
derived from payments made by Corvallis for this interest income, Corvallis'
share of earnings from the joint venture is offset against interest expense in
the accompanying statements of income.
Concurrent with the formation of the limited liability company, Corvallis has
entered into a lease agreement relating to buildings and properties which were
contributed to the limited liability company and are occupied by Corvallis.
PPI has guaranteed approximately $6,100 of long-term debt associated with the
above joint venture.
Healthquest
During 1996, Corvallis' sold their interest in Healthquest to one of the other
partners. Corvallis recognized a loss on the sale of their investment of $18
included in the accompanying financial statements.
14. EARNING PER SHARE:
All share and per share data have been retroactively restated to give effect to
the recapitalization resulting from the transactions.
<PAGE> 33
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>
John Ladd, M.D. 60 Prior Director and September 18, 1996 to March 15,1998
President
Darrel Bibler, M.D. 62 Prior Director September 18, 1996 to March 15,1998
Jess Hickerson, M.D. 45 Director and President September 18, 1996 to Present
Nick Benton, M.D. 36 Director, Treasurer and March 15, 1997 to Present
Secretary
Christopher Swan, M.D. 47 Director September 18, 1996 to Present
Markham Giblin, M.D. 34 Director March 15, 1997 to Present
William Ferguson, M.D. 50 Director March 15, 1998 to Present
Peter Hudson, M.D. 43 Director March 15, 1998 to Present
David Cutsforth, Jr., M.D. 50 Prior Director September 18, 1996 to March 15, 1997
Janice Frost, M.D. 45 Prior Director September 18, 1996 to March 15, 1997
</TABLE>
JOHN LADD, M.D. was a Director and President of Corvallis. Dr. Ladd is a
physician practicing in Rheumatology and Internal Medicine. He received his
medical degree from the University of Michigan Medical School, Ann Arbor,
Michigan, in 1962. He is Board Certified by the American Board of Internal
Medicine (1968) and Rheumatology (1972). He received his undergraduate degree
from the University of Michigan, Ann Arbor, Michigan. His term as President and
Board Director ended in March 1998.
DARREL BIBLER, M.D. was a Director of Corvallis. Bibler is a physician
practicing in General Surgery. He received his medical degree from Harvard
Medical School, Boston, Massachusetts, in 1961. He is Board Certified by the
American Board of Surgery (1969) and was recertified in 1980. He received his
undergraduate degree from Denison University, Granville, Ohio, in 1957. His term
as Board Director ended in March 1998.
JESS HICKERSON, M.D. is a Director and the current President of Corvallis.
Hickerson is a physician practicing Obstetrics and Gynecology. He received his
medical degree from Oregon Health Sciences University, Portland, Oregon, in
1981. He is Board Certified by the American Board of Obstetrics and Gynecology
(1988). He received his undergraduate degree from Oregon State University,
Corvallis, Oregon in 1976.
NICK BENTON, M.D. is a Director and current Treasurer and Secretary of
Corvallis. Benton is a physician practicing in Otolaryngology- Head and Neck
Surgery. He received his bachelor's degree from Portland State University in
Portland, Oregon, 1982. Dr. Benton received his medical degree from Oregon
Health Sciences University in 1986, and he is Board Certified by the American
Board of Otolaryngology (1992). Dr. Benton was a resident in Otolaryngology and
General Surgery at Kaiser Hospital in Oakland, California. Dr. Benton joined
Corvallis in 1992.
CHRISTOPHER SWAN, M.D. is a Director of Corvallis. Dr. Swan is a physician
practicing Family Medicine. He received his medical degree from the University
of Oregon Health Sciences Center, Portland, Oregon, in 1977. He is Board
Certified by the American Board of Family Practice (1981). He received his
undergraduate degree from Linfield College, McMinnville, Oregon, in 1972.
15
<PAGE> 34
MARKHAM GIBLIN, PH.D. is a Director of Corvallis. Giblin is a Clinical
Psychologist. He received his bachelor's and master's degree in Clinical
Psychology from the University of Georgia in 1984 and 1986, and his PhD from the
University of Georgia in 1988. He has been a licensed psychologist in the state
of Oregon since 1990.
WILLIAM FERGUSON, M.D. is a current Director of Corvallis. Dr. Ferguson is a
physician specializing in Family Practice and Occupational Medicine. Dr.
Ferguson received his bachelor's degree and medical degree from the University
of North Carolina at Chapel Hill in 1969 and 1973, respectively. Dr. Ferguson
was an intern at McKay-Dee Hospital, University of Utah Affiliated Hospital and
completed a residency in Family Practice at McKay-Dee Hospital. Dr. Ferguson was
Board Certified by the American Board of Family Practice in 1976. Dr. Ferguson
joined Corvallis in 1993.
PETER HUDSON, M.D. is a current Director of Corvallis. Dr. Hudson is a physician
specializing in General Surgery. He received his undergraduate degree from
Florida Atlantic University in Boca Raton, Florida in 1974. He received his
medical degree from the University of Kansas Medical School in 1977. Dr. Hudson
completed an internship and residency at the University of Kansas Medical
Center. He was Board Certified by the American Board of Surgery in 1983 and
recertified in 1991. Dr. Hudson joined Corvallis in 1982.
DAVID CUTSFORTH, JR., M.D. was a Director and prior President of Corvallis. His
term as Director and President ended in March 1997. He practiced as a Philomath
Family Medicine physician before that entity merged with Corvallis. Dr.
Cutsforth has been active in local and statewide health forums. He served as a
Director for Western Oregon IPA from 1989-1993. He served as an original
committee member in the formulation of the Oregon Health Plan, a national model
for Medicaid reform. Dr. Cutsforth received his medical degree from the
University of Oregon in 1973. He is Board Certified in Family Medicine, having
completed his residency training at the University of Texas in Houston. Dr.
Cutsforth has served in a variety of management roles including chair of the
Department of Family Medicine and Peer Review Committee of Good Samaritan
Hospital, Corvallis. He received a superior service award from the U.S. Public
Health Service in 1977 and was recognized as America's Family Doctor of the Year
in 1994.
JANICE FROST, M.D. was a Director of Corvallis. Her term as Director ended in
March 1997. Dr. Frost is a physician practicing Cardiology and Internal
Medicine. She received her medical degree from the University of Washington,
Seattle, Washington, in 1983. She is Board Certified by the American Board of
Internal Medicine (1986) and Cardiovascular Diseases (1990). She received her
undergraduate degree from Pomona College, Claremont, California, in 1974. Dr.
Frost served on the Compensation Committee and Finance Committee.
ITEM 11: EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Corvallis Directors are entitled to receive compensation for serving on the
Board of Directors an amount equal to 4% of adjusted shareholder income per
year. The monthly compensation payments are based on a projected budget
estimate. Settlement for differences, if any, are made at the end of each year.
John Ladd, M.D. received an additional 4% of the average shareholder income per
year for his duties as President and Director of Corvallis. Furthermore,
Directors are reimbursed for reasonable and actual out-of-pocket expenses
incurred in connection with duties performed as Directors.
16
<PAGE> 35
The following table summarizes the compensation received by the Company's Board
of Directors:
<TABLE>
<CAPTION>
Name 1995 1996 1997
---- ---- ---- ----
<S> <C> <C> <C>
John Ladd, M.D. $4,915 $5,191 $9,474
Nick Benton, M.D. -- -- 3,928
Darrel Bibler, M.D. 4,915 5,191 5,546
Jess Hickerson, M.D. -- 3,676 5,546
Christopher Swan, M.D. -- 3,676 5,546
Markham Giblin, M.D. -- -- 3,928
David Cutsforth, Jr., M.D. 6,939 8,867 3,236
Janice Frost, M.D. 6,939 5,191 1,618
</TABLE>
COMPENSATION OF EXECUTIVE OFFICERS
Other then the compensation provided to Dr. Ladd as President, no compensation
was provided to any executive officer of Corvallis for their duties as officers
in the periods 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
CORVALLIS Beneficially Owned Percent Outstanding
- ---------- ------------------ -------------------
<S> <C> <C>
Jess Hickerson, M.D. 1 1.6%
Nick Benton, M.D. 1 1.6%
Christopher Swan, M.D. 1 1.6%
Markham Giblin, M.D. 1 1.6%
William Ferguson, M.D. 1 1.6%
Peter Hudson, M.D. 1 1.6%
All directors and executive
officers of the Company as a 6 9.5%
group
</TABLE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
17
<PAGE> 36
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 Corvallis Clinic, PC are included
in Part II, Item 8 of this report:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants
Balance Sheets - December 31, 1996 and 1997
Statements of Operations - Twelve months ended November 30,
1995, thirteen months ended December 31, 1996 and twelve months ended
December 31 1997
Statements of Shareholders' Equity - Twelve months ended November 30,
1995, thirteen months ended December 31, 1996 and twelve months ended
December 31, 1997
Statements of Cash Flows - Twelve months ended November 30, 1995,
thirteen months ended December 31, 1996 and twelve months ended
December 31, 1997
</TABLE>
(2) Financial Statement Schedules
None required.
(3) Exhibits
<TABLE>
<S> <C>
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 Corvallis Clinic, P.C.
3.2** Bylaws of Corvallis 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
</TABLE>
- -----------------------
* Previously filed connection with Registration Statement No.
333-15595 and hereby incorporated by reference
** Previously filed and hereby incorporated by reference
18
<PAGE> 37
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 Corvallis Clinic, P.C.
(Registrant)
By /s/ Jess Hickerson, M.D.
------------------------------------
Jess Hickerson, 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/ Jess Hickerson, M.D. By /s/ Nick Benton, M.D.
--------------------------------- ------------------------------------
Jess Hickerson, M.D. Nick Benton, M.D.
President and Director Secretary, Treasurer and Director
3/30/98 3/30/98
By /s/ Gerald Brickey By /s/ Peter Hudson, M.D.
--------------------------------- ------------------------------------
Gerald Brickey Peter Hudson, M.D.
Chief Financial Officer and Director
Controller
3/30/98 3/30/98
By /s/ William Ferguson, M.D. By /s/ Markham Giblin, M.D.
--------------------------------- ------------------------------------
William Ferguson, M.D. Markham Giblin, M.D.
Director Director
3/30/98 3/30/98
By /s/ Christopher Swan, M.D.
---------------------------------
Christopher Swan, M.D.
Director
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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0
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