<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996 OR TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to _________
Commission file number 333-15595-01
HEALTHFIRST MEDICAL GROUP, P.C.,
FORMERLY PHYSICIAN PARTNERS HEALTHFIRST, P.C.
(Exact Name of Registrant as Specified in Its Charter)
Oregon 93-1221389
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
10535 N.E. Glisan
Portland, Oregon 97220
Address of Principal Executive Offices
(503) 408-2452
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or
<PAGE> 2
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing. (See definition of affiliate in Rule 405.)
The Registrant's shares have no market value.
Note. If a determination as to whether a particular person or
entity is an affiliate cannot be made without involving unreasonable
effort and expense, the aggregate market value of the common stock
held by non-affiliates may be calculated on the basis of assumptions
reasonable under the circumstances, provided that the assumptions are
set forth in this form.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
91 shares of Common Stock were outstanding as of April 3, 1997
DOCUMENTS INCORPORATED BY REFERENCE.
List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
This report contains only financial statements for fiscal 1996,
pursuant to Rule 15d-2 under the Securities Exchange Act of 1934, as amended.
<PAGE> 3
HEALTHFIRST MEDICAL GROUP, P.C.
(FORMERLY PHYSICIAN PARTNERS HEALTHFIRST, P.C.)
INDEX TO FINANCIAL STATEMENTS
1. HEALTHFIRST MEDICAL GROUP, P.C.
(FORMERLY PHYSICIAN PARTNERS HEALTHFIRST, P.C.)
Report of Independent Accountants
Balance Sheet as of December 31, 1996
Notes to Financial Statements
2. HEALTHFIRST MEDICAL GROUP, P.C.
Report of Independent Public Accountants
Balance Sheets as of December 31, 1996 and 1995
Statements of Operations for the years ended December 31, 1996, 1995 and 1994
Statements of Stockholders' Equity for the years ended December 31, 1996, 1995
and 1994
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Notes to Financial Statements
<PAGE> 4
HEALTHFIRST MEDICAL GROUP, P.C.
(FORMERLY PHYSICIAN PARTNERS HEALTHFIRST, PC)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
HealthFirst Medical Group, P.C.:
We have audited the accompanying balance sheet of HealthFirst Medical Group,
P.C., formerly Physician Partners HealthFirst, PC, (an Oregon corporation) as of
December 31, 1996. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of HealthFirst Medical Group, P.C.
as of December 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
April 3, 1997
<PAGE> 6
HEALTHFIRST MEDICAL GROUP, P.C.
(FORMERLY PHYSICIAN PARTNERS HEALTHFIRST, PC)
BALANCE SHEET AS OF DECEMBER 31, 1996
ASSETS
CASH $ 1
----
Total assets $ 1
====
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES $ -
STOCKHOLDERS' EQUITY:
Common stock voting; no par value; 1,000,000 shares authorized;
92 shares issued and outstanding 1
----
Total liabilities and stockholders' equity $ 1
====
The accompanying notes are an integral part of this statement.
<PAGE> 7
HEALTHFIRST MEDICAL GROUP, P.C.
(FORMERLY PHYSICIAN PARTNERS HEALTHFIRST, PC)
NOTES TO FINANCIAL STATEMENT
1. BUSINESS AND ORGANIZATION:
HealthFirst Medical Group, P.C. (HealthFirst), an Oregon professional
corporation, was incorporated on September 18, 1996 under the name Physician
Partners HealthFirst, P.C., 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). HealthFirst is one of the new PCs. The physician practice management
business, along with substantially all of the assets and liabilities of the
three Founding Clinics, i.e., cash, receivables, inventories, prepaids,
property, plant and equipment, other assets, payables, accruals, debt, and
certain contractual commitments were transferred to PPI. The New PCs are
responsible for providing medical services and the related costs for provider
compensation and benefits. The assets transferred to the New PCs, which had zero
carrying value, include the employment agreements between each Company and its
providers, certain provider contracts under which the New PCs will be receiving
fee-for-service compensation and patient medical records.
An integral part of the reorganization is a 40-year management agreement whereby
PPI provides physician practice management services to the New PCs. Services to
be provided include management and administrative services, capital resources,
facilities, equipment and supplies. As consideration, PPI is entitled to (a)
reimbursement of all managerial costs and expenses (Manager's Expenses) incurred
by PPI and (b) a management fee equal to 16% of (i) net revenues relating to
services provided by the New PCs less (ii) Manager's Expenses.
Essentially all of the cash remaining in the New PC after the payments to PPI
under the management agreement will fund the compensation and benefits of
providers employed by the New PCs.
2. STATEMENTS OF OPERATIONS AND CASH FLOWS:
No statements of operations and cash flows have been presented as PPHF did not
commence operations until February 1, 1997 and, accordingly, there has been no
operating or cash activities.
<PAGE> 8
HEALTHFIRST MEDICAL GROUP, P.C.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE> 9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of HealthFirst Medical Group, P.C.:
We have audited the accompanying balance sheets of HealthFirst Medical Group,
P.C. (an Oregon professional corporation) as of December 31, 1996 and 1995, and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of HealthFirst's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HealthFirst Medical Group, P.C.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 18, 1997
<PAGE> 10
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1995
ASSETS
------
<TABLE>
<CAPTION>
1996 1995
----------- -----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 894,973 $ 124,916
Patient accounts receivable, net of allowances for
contractual discounts and uncollectible accounts of
$2,465,000 and $1,562,000 at December 31, 1996 and
1995, respectively 6,496,945 4,363,353
Healthcare and other receivables 2,847,813 2,396,299
Related party receivable 50,183 -
Income taxes receivable 57,923 167,988
Inventories of drugs and supplies - 195,395
Prepaid expenses and deposits 201,037 281,378
----------- -----------
Total current assets 10,548,874 7,529,329
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $5,768,533 and $3,534,908 at
December 31, 1996 and 1995, respectively 20,361,220 13,422,672
OTHER ASSETS - 122,548
----------- -----------
Total assets $30,910,094 $21,074,549
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,500,000 $ -
Current portion of long-term debt and capital and direct
financing lease obligations 4,662,933 2,958,506
Drafts payable - 164,792
Accounts payable 2,122,969 1,373,803
Accrued expenses 702,601 241,743
Accrued healthcare costs 2,936,373 610,190
Accrued compensation and related expenses 3,312,547 1,825,822
Deferred revenue 182,745 17,686
Current deferred tax liability - 1,844,262
----------- -----------
Total current liabilities 15,420,168 9,036,804
----------- -----------
LONG-TERM DEBT, net of current portion 5,065,973 3,711,488
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of
current portion 4,265,068 -
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES 3,795,282 627,000
LONG-TERM DEFERRED TAX LIABILITY - 102,522
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
Series 1 Class A--Voting; no par value; 800,000 shares authorized; 7,000 and
5,650 shares issued and outstanding at December 31, 1996 and 1995,
respectively 700,000 565,000
Series 2 Class A--Voting; no par value; 200,000 shares
authorized; 2,200 and 0 shares issued and outstanding
at December 31, 1996 and 1995, respectively 330,000 -
Series 3, 4 and 5 Class A--Voting; no par value;
200,000, 100,000 and 100,000 shares authorized, none
issued or outstanding at December 31, 1996 and 1995 - -
Class B--Nonvoting; no par value; 300,000 shares
authorized; 0 shares issued and outstanding at
December 31, 1996 and 1995 - -
Additional paid-in capital 1,878,968 -
Retained earnings 1,149,093 7,201,035
Notes receivable from stockholders for purchase of stock (439,609) (169,300)
Unamortized value of restricted stock awards (1,254,849) -
----------- -----------
Total stockholders' equity 2,363,603 7,596,735
----------- -----------
Total liabilities and stockholders' equity $30,910,094 $21,074,549
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 11
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
REVENUES:
<S> <C> <C> <C>
Fee-for-service, net $32,314,913 $22,834,493 $18,813,260
Prepaid healthcare 27,800,204 14,817,480 13,463,161
----------- ----------- -----------
Net revenues 60,115,117 37,651,973 32,276,421
Less- Provider compensation and benefits 21,610,346 9,529,634 8,375,513
----------- ----------- -----------
Net revenue less provider
compensation and benefits 38,504,771 28,122,339 23,900,908
----------- ----------- -----------
OPERATING EXPENSES:
Clinic salaries, wages and benefits 18,156,738 11,736,735 8,613,746
Purchased medical services 9,812,372 4,253,473 3,529,743
Medical and office supplies 6,281,140 4,376,539 3,076,359
General and administrative expenses 5,114,781 4,490,872 3,199,543
Lease and rent expense 1,572,965 853,232 655,205
Provision for uncollectible accounts 1,911,014 1,146,381 935,650
Depreciation and amortization 1,566,719 736,097 637,782
----------- ----------- -----------
Total operating expenses 44,415,729 27,593,329 20,648,028
----------- ----------- -----------
Operating income (loss) (5,910,958) 529,010 3,252,880
OTHER INCOME (EXPENSE):
Interest income 99,780 38,820 97,767
Interest expense (1,413,852) (188,650) (185,921)
Other 1,211,378 120,538 189,064
----------- ----------- -----------
Net income (loss) before provision
(benefit) for income taxes (6,013,652) 499,718 3,353,790
----------- ----------- -----------
PROVISION (BENEFIT) FOR INCOME TAXES (1,898,953) 207,952 1,416,323
----------- ----------- -----------
NET INCOME (LOSS) $(4,114,699) $ 291,766 $ 1,937,467
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 12
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(4,114,699) $ 291,766 $ 1,937,467
Adjustment to reconcile net income (loss)
to net cash provided by (used in)
operating activities-
Depreciation and amortization 1,566,719 736,097 637,782
Gain on sale of property, plant and
equipment - - (32,334)
Provision for deferred income taxes (1,935,784) 71,551 330,383
Compensation expense recognized for
provider stock awards 501,939 - -
Changes in operating assets and
liabilities (excluding assets and
liabilities purchased from Suburban)
Patient accounts receivable, net (1,380,592) (1,020,526) (813,916)
Healthcare and other receivables 301,337 568,116 (682,512)
Related party receivable 277,817 - -
Income taxes receivable 147,065 (167,988) -
Inventories of drugs and supplies 251,395 (16,336) 33,174
Prepaid expenses and deposits 192,341 (78,802) (10,330)
Other assets 225,281 (50,446) (31,240)
Drafts payable (164,792) (1,579,197) 1,743,989
Accounts payable 431,166 461,312 670,417
Accrued expenses 429,858 (38,539) 94,461
Income taxes payable - (358,992) 233,334
Accrued healthcare costs 984,184 91,752 109,643
Accrued compensation and related expenses 668,725 108,182 94,003
Deferred revenue 165,059 2,686 6,700
Deferred compensation and other
long-term liabilities 2,786,282 201,536 (11,197)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 1,333,301 (777,828) 4,309,824
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,181,269) (6,690,661) (2,469,749)
Proceeds from sale of property, plant
and equipment - - 40,261
Purchases of investments - - (2,465,167)
Cash proceeds received from short-term
investments - 2,616,566 -
Cash received in acquisition of Suburban 231,000 - -
----------- ----------- -----------
Net cash used in investing activities
(2,950,269) (4,074,095) (4,894,655)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 2,763,537 4,939,909 -
Proceeds from issuance of line of credit 1,500,000 - -
Principal payments on long-term obligations (998,557) (17,001) (14,362)
Proceeds from repayments of notes
receivable from stockholders 64,288 61,956 88,188
Payments for redemption of common stock (9,000) (10,000) (116,508)
Cash received from direct financing
lease obligations 1,000,000 - -
Costs incurred related to Physician
Partners, Inc. transaction (1,933,243) - -
----------- ----------- -----------
Net cash provided by (used in) financing
activities 2,387,025 4,974,864 (42,682)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 770,057 122,941 (627,513)
CASH AND CASH EQUIVALENTS, beginning of
year 124,916 1,975 629,488
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 894,973 $ 124,916 $ 1,975
=========== =========== ===========
</TABLE>
<PAGE> 13
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
<S> <C> <C> <C>
Cash paid for interest $ 1,355,638 $ 186,330 $ 178,928
Cash paid for income taxes 181,220 445,724 1,012,033
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Notes receivable issued in exchange
for common stock $ 140,000 $ 80,000 $ 100,000
In 1996, HealthFirst acquired all of the outstanding stock of Suburban in
exchange for 2,200 shares of HealthFirst Series 2 Class A stock. The acquisition
was recorded under the purchase method of accounting. The fair values of
Suburban's assets, including $231,000 of cash, and liabilities at the date of
acquisition are presented below:
</TABLE>
<TABLE>
<S> <C>
Current assets $ 2,284,000
Property, plant and equipment 5,325,000
Other long-term assets 99,000
Current liabilities (2,833,000)
Long-term liabilities (4,617,000)
-----------
Net equity acquired $ 258,000
===========
Reconciliation to equity accounts:
Common stock $ 330,000
Additional paid-in capital 122,000
Notes receivable from stockholders (194,000)
-----------
$ 258,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 14
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock
----------------------------------------
Series 1 Series 2
class A Class A
------------------- ------------------
Number Number
of of
Shares Amount Shares Amount
------ -------- ------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 4,050 $405,000 - $ -
Issuance of common stock 1,000 100,000 - -
Redemption of common stock (100) (10,000) - -
Repayment of notes receivable from stockholders - - - -
Net income - - - -
----- -------- ----- --------
BALANCE, December 31, 1994 4,950 495,000 - -
Issuance of common stock 800 80,000 - -
Redemption of common stock (100) (10,000) - -
Repayment of notes receivable from stockholders - - - -
Net income - - - -
----- -------- ----- --------
BALANCE, December 31, 1995 5,650 565,000 - -
Notes receivable from stockholders acquired from Suburban - - - -
Common stock issued to acquire Suburban - - 2,200 330,000
Issuance of common stock 1,400 140,000 - -
Redemption of common stock (50) (5,000) - -
Repayment of notes receivable from stockholders - - - -
Costs related to Physician Partners, Inc. transaction - - - -
Net loss - - - -
----- -------- ----- --------
BALANCE, December 31, 1996 7,000 $700,000 2,200 $330,000
===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
------------------
Class B
------------------- Unamortized
Number Additional Value of
of Paid-In Restricted
Shares Amount Capital Stock Awards
------ --------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 1,065 $ 106,508 $ - $ -
Issuance of common stock - - - -
Redemption of common stock (1,065) (106,508) - -
Repayment of notes receivable from stockholders - - - -
Net income - - - -
------ --------- ---------- -----------
BALANCE, December 31, 1994 - - - -
Issuance of common stock - - - -
Redemption of common stock - - - -
Repayment of notes receivable from stockholders - - - -
Net income - - - -
------ --------- ---------- -----------
BALANCE, December 31, 1995 - - - -
Notes receivable from stockholders acquired from Suburban - - - -
Common stock issued to acquire Suburban - - 122,180 -
Issuance of common stock - - 1,756,788 (1,254,849)
Redemption of common stock - - - -
Repayment of notes receivable from stockholders - - - -
Costs related to Physician Partners, Inc. transaction - - - -
Net loss - - - -
------ --------- ---------- -----------
BALANCE, December 31, 1996 - $ - $1,878,968 $(1,254,849)
====== ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Notes
Receivable
Retained From
Earnings Stockholders Total
----------- ------------ -----------
<S> <C> <C> <C>
BALANCE, December 31, 1993 $ 4,971,802 $(139,445) $ 5,343,865
Issuance of common stock - (100,000) -
Redemption of common stock - - (116,508)
Repayment of notes receivable from stockholders - 88,189 88,189
Net income 1,937,467 - 1,937,467
----------- --------- -----------
BALANCE, December 31, 1994 6,909,269 (151,256) 7,253,013
Issuance of common stock - (80,000) -
Redemption of common stock - - (10,000)
Repayment of notes receivable from stockholders - 61,956 61,956
Net income 291,766 - 291,766
----------- --------- -----------
BALANCE, December 31, 1995 7,201,035 (169,300) 7,596,735
Notes receivable from stockholders acquired from Suburban - (194,597) (194,597)
Common stock issued to acquire Suburban - - 452,180
Issuance of common stock - (140,000) 501,939
Redemption of common stock (4,000) - (9,000)
Repayment of notes receivable from stockholders - 64,288 64,288
Costs related to Physician Partners, Inc. transaction (1,933,243) - (1,933,243)
Net loss (4,114,699) - (4,114,699)
----------- --------- -----------
BALANCE, December 31, 1996 $1,149,093 $(439,609) $ 2,363,603
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 15
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
HealthFirst Medical Group, P.C. (HealthFirst), an Oregon professional
corporation, is a multi-specialty medical clinic founded in 1996. In February
1996, The Metropolitan Clinic, P.C. (Metropolitan), founded in 1906, merged with
The Suburban Medical Clinic, P.C. (Suburban), founded in 1956. Effective
February 1996, Metropolitan changed its name to HealthFirst and Suburban changed
its name to HealthFirst Medical Services Organization, P.C. and became a 100%
owned subsidiary of HealthFirst. The merger has been accounted for as a purchase
of Suburban by Metropolitan in the accompanying financial statements as of and
for the year ended December 31, 1996. The December 31, 1996 results include
Suburban's operating results from the date of acquisition.
HealthFirst consists of approximately 681 employees and 145 providers who offer
a wide range of primary and specialty care services including allergy,
dermatology, gastroenterology, hematology/oncology, infectious disease,
pediatrics, geriatrics, obstetrics/gynecology, podiatry, rheumatology and
surgery.
HealthFirst operates clinics in eleven locations in and around Portland, Oregon
including: Tualatin, Tigard, Westside, Lake Oswego, Broadway, Northwest
Portland, Wilshire, Gateway, Gresham, Hollywood and Powell Valley. A significant
change in the demographics of this area may have an adverse impact on the
business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION:
Selected accounting policies are discussed below. Other significant accounting
policies regarding revenues, income taxes, professional liability and deferred
compensation are discussed in specific notes that follow.
Cash Equivalents
Cash equivalents consist of all highly liquid investments with original
maturities of three months or less.
Concentration of Credit Risk
HealthFirst extends credit to patients covered by commercial insurance, Medicare
and Medicaid. HealthFirst manages credit risk with the various public and
private insurance providers, as deemed appropriate by management. Allowances for
contractual discounts and uncollectible accounts have been made for potential
losses, where appropriate.
Inventories of Drugs and Supplies
Inventories are stated at the lower of cost or market, determined by the
first-in, first-out (FIFO) method. In 1996, HealthFirst began using a
just-in-time method with its major supply vendors.
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.
<PAGE> 16
-2-
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Equipment under capital lease is
amortized using straight-line methods over the shorter of the period of the
lease term or the estimated useful life of the equipment. Estimated lives are as
follows:
<TABLE>
<S> <C>
Buildings and leasehold improvements 7-45 years
Furniture and equipment 3-15 years
</TABLE>
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 may vary from actual results and the differences may
be significant.
Fair Value of Financial Instruments
The carrying amounts of 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 HealthFirst 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.
HealthFirst does not hold or issue financial instruments or derivative financial
instruments for trading purposes.
Provider Compensation and Benefits
Provider compensation and benefits consists of the direct costs of patient care
providers such as physicians and other allied health professionals. A
substantial portion of these costs are paid to providers who are stockholders.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. REVENUES:
HealthFirst reports its revenues according to two principal types of payment
methodologies as discussed below:
<PAGE> 17
-3-
Prepaid Healthcare
HealthFirst 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 HealthFirst by the HMO for
plan enrollees.
The majority of the HMO contracts are full-risk or modified full-risk contracts.
Under a full-risk contract, HealthFirst assumes the obligation of providing all
healthcare services to enrollees and is obligated to reimburse outside providers
for services rendered to enrollees. Generally, such payments to outside
providers are limited to out-of-area services, emergency services and services
not currently offered by HealthFirst. Modified full-risk contracts are similar
to full-risk contracts except that the HMO is obligated to pay for out-of-area
services.
HealthFirst has entered into subcapitation agreements with certain of these
outside providers (subprovider). Under these agreements, HealthFirst prepays the
subprovider based upon enrollee/participant formulas in which the subprovider
assumes the risk of providing patient care. Additional limitations on losses are
provided by the payment of stop loss reinsurance premiums and through a
percentage limitation on overall savings or losses of the programs.
HealthFirst has accrued the claims associated with services provided by outside
providers for which HealthFirst is responsible, and an estimate of incurred but
not reported claims is included in accrued healthcare cost in the accompanying
financial statements.
Fee-For-Service
Patient service revenues are recorded in the period in which services are
provided at established rates. HealthFirst has agreements with third-party
payors that provide payments to HealthFirst 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 December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -------
<S> <C> <C> <C>
Fee-for-service, gross $39,627,729 $29,384,296 $24,173,543
Contractual discounts 7,312,816 6,549,803 5,360,283
----------- ----------- -----------
Fee-for-service, net $32,314,913 $22,834,493 $18,813,260
=========== =========== ===========
</TABLE>
A summary of the most significant fee-for-service arrangements is as follows:
Medicare
A significant portion of HealthFirst's services are provided to Medicare
patients. Payments for Medicare outpatient services which are not covered
under capitated contracts are based on a prevailing fee schedule.
Approximately 6%, 8%, and 9% of net patient service revenues were derived
from services provided to fee-for-service Medicare patients in 1996, 1995
and 1994, respectively.
<PAGE> 18
-4-
Medicaid
Payments for Medicaid outpatient services which are not covered under
capitated contracts are based on a prevailing fee schedule. Approximately
1% of net patient service revenues were derived from services provided to
fee-for-service Medicaid patients in 1996, 1995 and 1994.
Other Payors
HealthFirst has also entered into payment agreements with certain
commercial insurance carriers and preferred provider organizations. The
basis for payment to HealthFirst under these agreements includes discounts
from established charges.
Major Customers
Three customers in 1996 and four customers in 1995 and 1994 represented
individually more than 10% of HealthFirst's net revenue as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pacificare - Secure Horizons 12% 10% 11%
Pacificare - Commercial 10 11 11
Blue Cross - HMO Oregon 12 16 13
Blue Cross - Commercial - 10 10
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land and land improvements $ 2,012,073 $ 1,988,712
Buildings and leasehold improvements 14,755,615 9,796,611
Furniture and equipment 9,362,065 5,172,257
----------- -----------
26,129,753 16,957,580
Less- Accumulated depreciation (5,768,533) (3,534,908)
----------- -----------
$20,361,220 $13,422,672
=========== ===========
</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 HealthFirst
follow the liability method of accounting for deferred income taxes. Differences
between financial reporting and tax basis is primarily due to the use of the
cash method of accounting for income tax purposes.
<PAGE> 19
-5-
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
HealthFirst's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustments $ 4,570,154 $ 1,516,422
Less- Valuation allowance (327,598) -
----------- -----------
Net deferred tax asset 4,242,556 1,516,422
Deferred tax liabilities:
Cash to accrual adjustments (3,679,253) (3,181,474)
Excess tax depreciation (563,303) (281,732)
----------- -----------
Gross deferred tax liabilities (4,242,556) (3,463,206)
----------- -----------
Net deferred tax liability $ - $(1,946,784)
=========== ===========
</TABLE>
The net deferred tax liability is reflected in the accompanying balance sheet as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Current deferred tax liability $ - $(1,844,262)
Long term deferred tax liability - (102,522)
----------- -----------
$ - $(1,946,784)
=========== ===========
</TABLE>
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
----------- -------- ----------
Current:
<S> <C> <C> <C>
Federal $ - $119,351 $1,003,419
State - 17,050 143,346
Deferred:
Federal (1,614,110) 62,607 235,864
State (284,843) 8,944 33,694
----------- -------- ----------
$(1,898,953) $207,952 $1,416,323
=========== ======== ==========
</TABLE>
<PAGE> 20
-6-
The differences between the provision (benefit) for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1996 1995 1994
---------- -------- -----------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $(2,104,779) $174,902 $1,173,826
Add (deduct):
State income tax (benefit), net of federal
benefit (300,681) 16,896 115,077
Change in valuation allowance 327,598 - -
Other 178,909 16,154 127,420
----------- -------- ----------
Provision (benefit) for income taxes $(1,898,953) $207,952 $1,416,323
=========== ======== ==========
</TABLE>
In 1996, HealthFirst recognized a valuation allowance in an amount equal to its
net deferred tax assets of $327,598 because of uncertainty with respect to the
realization of the related tax benefits in future years.
<PAGE> 21
-7-
6. LONG-TERM DEBT:
Long-term debt at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- -------
<S> <C> <C>
Note payable, due in monthly installments of principal and interest of $15,630
through July 2000, with a final payment of $1,635,845, bearing interest at
9.875%. The note is secured by a first mortgage on land, buildings, and
improvements. $1,713,734 $1,731,467
Note payable, due in monthly installments of principal and interest
through January 2002, bearing interest at 8.4%. The note is secured by
inventory, furniture, and equipment. 1,964,251 500,000
Construction loan payable, final payment of principal and interest due in
January 1997, bearing interest at prime plus 1% (8.25% at December 31, 1996).
The note is secured by building and land. 3,705,816 2,538,527
Note payable, due in annual principal installments of $115,000 through
August 2011, bearing interest at 7.9%. 1,650,000 1,900,000
Note payable due in monthly installments of $8,060 including interest
through October 2000, bearing interest at 8.75% 314,017 -
Note payable due in monthly installments of $7,066 plus interest through
January 1999, bearing interest at 9.875% 176,644 -
Note payable, related party, due in monthly installments of $428 including
interest through 1998, bearing interest at 6% 8,111 -
---------- ----------
Total long-term debt 9,532,573 6,669,994
Less- Current portion 4,466,600 2,958,506
---------- ----------
Long-term debt, net of current portion $5,065,973 $3,711,488
========== ==========
</TABLE>
Maturities of long-term debt for the next five years, including current
maturities, are as follows:
<TABLE>
<S> <C> <C>
1997 $4,466,600
1998 806,368
1999 555,730
2000 2,164,141
2001 438,200
Thereafter 1,101,534
----------
Total $9,532,573
==========
</TABLE>
Management converted the construction loan to a mortgage loan in 1997, extending
the maturity of the loan to February 2017.
<PAGE> 22
-8-
HealthFirst maintains a revolving line-of-credit agreement with a bank providing
up to $2,500,000, secured by inventory, accounts receivable and equipment. At
December 31, 1996, borrowings outstanding were $1,500,000. The line-of-credit
bears interest at the lender's prime rate (8.25% at December 31, 1996) plus .5%
and matures April 30, 1997. At February 1, 1997, the line-of-credit was
consolidated into a $7,500,000 line-of-credit as a result of the reorganization
transaction (Note 13).
7. LEASE COMMITMENTS:
Capital Leases
HealthFirst leases certain medical equipment and facilities under agreements
which are classified as capital leases. The equipment leases have original terms
of five years and have either a bargain purchase option or a transfer of title
at the end of the lease. The building lease is with Gateway Properties LLC,
(Note 11), for a term of 21 years. Leased capital assets included in
property, plant and equipment are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---------- -------
<S> <C> <C>
Buildings and leasehold improvements $3,574,605 --
Furniture and equipment 263,879 --
---------- ----------
3,838,484 --
Less- Accumulated amortization 682,802 --
---------- ----------
$3,155,682 --
========== ==========
</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.
<PAGE> 23
-9-
Future Minimum Lease Payments
Future minimum lease payments, by year and in the aggregate, under
noncancellable capital and operating leases with initial or remaining terms of
one year or more consist of the following at December 31, 1996.
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ------------
<S> <C> <C>
1997 $ 463,767 $ 1,835,140
1998 457,578 1,858,264
1999 426,631 1,773,501
2000 416,783 1,467,369
2001 402,996 2,018,451
Thereafter 5,469,657 8,312,987
---------- -----------
Total minimum lease payments 7,637,412 $17,265,712
Amounts representing interest 4,105,252 ===========
----------
Present value of net minimum payments 3,532,160
Current portion 120,095
----------
Long-term capitalized lease obligations $3,412,065
==========
</TABLE>
Direct Financing Lease Obligation
In May 1996, HealthFirst sold three facilities to HealthFirst Properties LLC
(Note 11) under a sale/leaseback arrangement. The facilities were sold for
$12,550,000, of which $11,550,000 is due in the form of an 8% interest-bearing
note receivable due in monthly installments through April 2016. The remainder
was received in cash. The transaction has been accounted for as a financing,
wherein the property and related debt remains on the books and will continue to
be depreciated. A financing obligation representing the proceeds of $1,000,000
has been recorded and will be reduced based on payments under the lease. As
sales proceeds are received from the LLC, they will be credited to a financing
obligation, and amortized as a reduction of operating expenses over the
remaining life of the lease. The amount owed on the financing obligation at
December 31, 1996 was $929,241 of which $76,238 is due within one year. The
lease has a term of 20 years and requires minimum annual rental payments of
$1,317,756 in 1997, 1998, 1999, 2000 and 2001 and $18,997,649 thereafter.
8. EMPLOYEE BENEFIT PLANS:
Retirement Plans
HealthFirst has a noncontributory profit sharing plan covering all employees who
are eligible subject to certain requirements. HealthFirst, at the discretion of
the Board of Directors, contributes an annual amount not to exceed the maximum
allowed under the Internal Revenue Code. No contributions to the Plan were made
in 1996, 1995 and 1994. HealthFirst does not foresee making contributions to the
profit sharing plan in the future.
HealthFirst has a 401(k) plan covering all employees who are eligible subject to
certain requirements. Employees contribute between 2% to 10% of their annual
compensation. HealthFirst matches employee contributions at a rate of 10% plus a
discretionary percentage determined by the Board of Directors. The contributions
to the Plan were $109,991, $68,823 and $215,190 in 1996, 1995 and 1994,
respectively.
<PAGE> 24
-10-
HealthFirst also has a defined contribution money purchase pension plan which is
a plan in which all employees are eligible to participate subject to certain
requirements. HealthFirst contributes 8% of employees' compensation which does
not exceed the Social Security integration level ($62,070 at December 31, 1996),
plus a higher percentage of the amount in excess of the integration level for
the Plan year. Contributions in 1996, 1995 and 1994 were $1,522,540, $1,132,887
and $942,286, respectively.
Supplemental Pension Plan
In 1987, HealthFirst entered into a supplemental pension plan with eight of its
physicians providing for fixed monthly payments over five years commencing with
the physicians' retirements or terminations. The physicians receive payments
upon retirement or termination if certain vesting requirements have been met.
The liability under this agreement is being accrued over the physicians'
estimated remaining service periods before becoming fully vested. On the vesting
date, the present value of the future benefit payments will have been accrued.
HealthFirst has accrued $175,945 and $169,606 for the plan at December 31, 1996
and 1995, respectively.
Suburban Profit-Sharing Plan
As part of the 1996 acquisition of Suburban, HealthFirst assumed a
profit-sharing plan in which all former employees of Suburban are eligible to
participate subject to certain requirements. The plan is funded by discretionary
employer contributions as determined by the Board of Directors on an annual
basis. The amount of employer contributions, if any, is allocated to eligible
employees based on employee compensation. HealthFirst's contributions for 1996
were $389,653.
Bonus Compensation Plan
In February 1996, HealthFirst established a bonus compensation plan for eligible
employees. Employees are vested after five years of employment with credit for
prior service. A substantial portion of the participants were fully vested as of
December 31, 1996. The total payout of approximately $5.25 million will be over
a period of eight years. HealthFirst is accruing for the estimated present value
of the bonus compensation over the estimated period of the employees' active
employment from the date the contract was signed until the date they are fully
vested. Compensation expense recognized during 1996 was approximately $3.9
million, a portion of which has been paid. The expense was recorded to provider
compensation and benefits. The amount accrued at December 31, 1996, is
$3,502,067, of which $501,653 is included in current liabilities and the
remainder is included in deferred compensation.
9. PROFESSIONAL LIABILITY:
HealthFirst maintains a claims-made professional liability insurance policy. The
policy coverage for the healthcare providers formerly employed by Metropolitan
is $5,000,000 per claim, with no aggregate maximum limit, for claims made
against HealthFirst and its employees. The policy coverage for the healthcare
providers formerly employed by Suburban is $2,000,000 per claim, $4,000,000
aggregate maximum benefit, for claims made against HealthFirst and its
employees. Accruals for outstanding claims and the associated deductibles are
made in the period in which the event becomes known. HealthFirst also accrues an
actuarial estimate of the future liability for claims incurred but not reported
prior to the end of the accounting period.
<PAGE> 25
-11-
At February 1, 1997, HealthFirst's professional liability insurance policy was
consolidated into a Physician Partners, Inc. policy as a result of the
reorganization transaction (Note 13). The consolidated claims-made policy has no
deductible. The policy coverage is $2,000,000 per claim, with an aggregate limit
of $4,000,000 and includes full prior acts coverage.
10. COMMITMENTS AND CONTINGENCIES:
Legal proceedings
HealthFirst 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
HealthFirst.
11. RELATED PARTY TRANSACTIONS:
Coordinated Health Network, Inc.
In December 1993, HealthFirst became a one-third shareholder in Coordinated
Health Network, Inc. (CHN). CHN was formed to obtain patient contracts under the
Oregon Health Plan and generate purchasing discounts. The investment in CHN was
accounted for under the equity method. In 1995 and 1994, HealthFirst paid
premiums to CHN of $106,204 and $57,167, respectively, and CHN paid HealthFirst
$621,654 and $154,711 in 1995 and 1994, respectively, for claims. No premiums
were paid or received in 1996. CHN was legally dissolved in 1996.
Northwest Physicians Alliance
In 1995, HealthFirst invested $52,000 for a one-third share in Northwest
Physicians Alliance (the Alliance), which was formed with Blue Cross/Blue Shield
of Oregon, two local hospital systems and several physician groups. The Alliance
has been accounted for under the equity method. The Alliance is intended to be
the primary delivery network for Blue Cross/Blue Shield's HMO Oregon product in
the Portland area.
HealthFirst Properties LLC
HealthFirst Properties LLC (HPLLC) was formed by certain shareholders of
HealthFirst in 1996 to acquire three clinic buildings from HealthFirst. HPLLC
purchased these properties from HealthFirst for an aggregate purchase price of
$12,550,000, to be paid under an installment sale contract with a 20-year term.
HPLLC made a $1,000,000 down payment to HealthFirst. Simultaneous with the
execution of the installment sale contract, HealthFirst agreed to lease back the
three buildings from HPLLC under a 20-year lease agreement. This transaction has
been recorded as a direct financing lease. Accordingly, the monies received from
HPLLC have been recorded as a direct financing lease obligation and the related
property is included in property, plant and equipment in the accompanying
financial statements.
Gateway Properties LLC
Gateway Properties LLC (Gateway) is owned by several former shareholders of
Suburban. Throughout 1995, Suburban recorded notes receivable for various
payments made on behalf of Gateway. The note receivable at December 31, 1996 was
$143,589. The terms of the note include monthly installments of principal and
interest of $4,878 through August 1999 with interest accruing at 7%. HealthFirst
has signed a capital lease to occupy a new clinic building for a term expiring
in August 2015.
<PAGE> 26
-12-
Stock Subscriptions
HealthFirst has notes receivable from certain stockholders for their purchase of
common stock. The notes mature at various stages through the year 2008.
Restricted Stock Awards
During 1996, HealthFirst sold shares of Series 1 Class A common stock to
selected employees at prices below their estimated fair value for accounting
purposes. The terms of the related Restricted Stock Agreements require
forfeiture of the stock unless the grantee remains employed by HealthFirst until
February 1, 2002.
The excess of the estimated fair value of the stock over the amount to be paid
of $1,756,788 is to be recognized as compensation expense. Of this amount,
$501,939 has been recognized as compensation expense in 1996. The remaining
amount of $1,254,849 will be amortized ratably to income over the next five
years.
12. BUSINESS ACQUISITION:
On February 1, 1996, HealthFirst acquired all of the outstanding stock of
Suburban in exchange for 2,200 shares of HealthFirst Series 2 Class A stock.
Following the acquisition, the name of Suburban was changed to HealthFirst
Management Services Organization, P.C.
Results of operations after the acquisition date are included in the December
31, 1996 statement of operations. The following pro forma information has been
prepared assuming that this acquisition had taken place at the beginning of
1995. Because fair values of purchased assets approximated their carrying
values, no material pro forma adjustment was necessary to adjust historical
depreciation and amortization.
The pro forma financial information is not necessarily indicative of the results
of operations as they would have been had the acquisition been consummated on
the assumed dates.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1996 1995
------------ -------------
<S> <C> <C>
Net revenues less provider compensation and benefits $ 39,364,000 $ 39,625,000
Operating expenses (45,452,000) (40,364,000)
Other expenses, net (92,000) (215,000)
------------ ------------
Net income (loss) before income taxes (6,180,000) (954,000)
Benefit for income taxes 1,899,000 403,000
------------ ------------
Net loss $ (4,281,000) $ (551,000)
============ ============
</TABLE>
13. SUBSEQUENT EVENTS:
The shareholders and Board of Directors of HealthFirst approved a Reorganization
and Merger Agreement (the Agreement) dated February 1, 1997 together with the
shareholders and Board of Directors of The Corvallis Clinic, P.C.; the Medford
Clinic, P.C.; and Physician Partners, Inc. (PPI), a newly formed company.
<PAGE> 27
-13-
The transaction resulted in a separation of operations of the three founding
medical groups between medical professional services activities (i.e., providers
of medical services) and the physician practice management activities of the
business. The professional services activities were spun off into newly formed
professional corporations (New PCs). The physician practice management business,
along with substantially all of the assets and liabilities of the three founding
medical groups; cash, receivables, prepaids, property, plant and equipment,
payables, accruals, debt and contractual commitments was transferred to PPI. The
shareholders of the three founding clinics became the original shareholders of
PPI.
An integral part of the reorganization is a 40-year management agreement whereby
PPI provides physician practice management services to the New PCs. Services to
be provided include management and administrative services, capital resources,
facilities, equipment and supplies.
As consideration, PPI is entitled to (a) reimbursement of all managerial costs
and expenses (Manager's Expenses) incurred by PPI and (b) a management fee equal
to 16% of the Distributable Profit Amount (defined as (i) net revenues relating
to services provided by the New PCs less (ii) Manager's Expenses).
The New PCs are responsible for providing medical services and the related costs
for provider compensation and benefits.
The parties to the reorganization transaction received an opinion from tax
counsel that for federal income tax purposes, it is more likely than not that
the reorganization will be a tax-free transaction. No ruling will be requested
from the Internal Revenue Service regarding the tax consequences of the
transaction. If the IRS or tax court were to determine that the transactions
were not tax free, there would be significant adverse tax consequence to the
parties to the transaction and their respective shareholders.
In connection with the reorganization transaction, the three founding medical
groups entered into an Expense Sharing Agreement which establishes the basis
upon which certain costs incurred in connection with the transactions are to be
allocated between the three groups. HealthFirst's share of such costs are
reflected as a charge to equity in the accompanying statement of stockholders'
equity. At December 31, 1996, HealthFirst owed $241,175 related to this
agreement, which was included in accounts payable in the accompanying financial
statements.
<PAGE> 28
SIGNATURES
SEE GENERAL INSTRUCTION D
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEALTHFIRST MEDICAL GROUP, P.C.
(Registrant)
By /s/ David Perry, M.D.
David Perry, M.D.
Director, President
4/2/97
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ James Ritzenthaler, M.D.
James Ritzenthaler, M.D.
Director, Vice President
4/3/97
By /s/ Malcolm McAninch, M.D.
Malcolm McAninch, M.D.
Director, Treasurer
4/3/97
By /s/ David Shute, M.D.
David Shute, M.D.
Director, Secretary
4/3/97
By /s/ John D. Teller, M.D.
John D. Teller, M.D.
4/3/97
