<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
------------------------------------------------
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--------------------------------------------------------
SECURITIES EXCHANGE ACT OF 1934
-------------------------------
FOR THE TRANSITION PERIOD FROM _____________________ TO ________________________
Commission File Number 0-11488
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.)
1200 NW Front Street
Portland, Oregon 97209
- --------------------------------------- -----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(503) 243-3525
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
- --------------------------------------------------------------------------------
(Title of Class)
None
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. []
The number of shares of the Registrant's Common Stock outstanding as of March
30, 1998 was 95.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I
<S> <C>
Item 1: Business
Item 2: Properties
Item 3: Legal Proceedings
Item 4: Submission of Matters to a Vote of Security Holders
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
Item 6: Selected Financial Data
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 8: Financial Statements and Supplementary Data
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10: Directors and Executive Officers of the Registrant
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and Management
Item 13: Certain Relationships and Related Transactions
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
</TABLE>
<PAGE> 3
PART I
ITEM 1: BUSINESS
OVERVIEW
HealthFirst, an Oregon professional corporation, is a multi-specialty medical
clinic. HealthFirst was founded in 1997 pursuant to certain reorganization and
merger transactions (the "Transactions") contemplated by the Amended and
Restated Agreement and Plan of Reorganization and Merger (the "Reorganization
and Merger Agreement") among 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 Corvallis, referred to
herein, collectively as "Old PCs", and Physician Partners, Inc. ("PPI"). Old
HealthFirst was formed in February 1996 in a merger between the Metropolitan
Clinic, P.C., formed in 1906, and Suburban Medical Clinic, P.C., formed in 1956.
The Transactions, which were consummated on February 1, 1997, resulted in a
separation of operations of 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). HealthFirst 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 HealthFirst enables HealthFirst to
retain significant control over its own operation and strategic direction.
Specifically, HealthFirst 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
HealthFirst 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 HealthFirst (physician members
of the HealthFirst Board) and three members appointed by PPI (one of whom must
be a local PPI group practice administrator). The Medical Director of
HealthFirst 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 HealthFirst's growth,
annual budgets, payor relations, local strategic initiatives and capital
improvements.
<PAGE> 4
GENERAL
HealthFirst 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 HealthFirst physicians as their
primary care provider on behalf of HealthFirst. Through contracts with various
health plans, HealthFirst physicians were responsible for the health care of
approximately 69,000 health plan members as of December 31, 1997.
Since its formation, HealthFirst has been the successor to a number of
individual physician practices and medical groups. The direct predecessor of
HealthFirst is Metropolitan Clinic, P.C. ("Metropolitan"). HealthFirst changed
its name from Metropolitan Clinic, P.C. in February 1996 as a result of a
business combination of Metropolitan and Suburban Medical Clinic, Inc.
("Suburban"). HealthFirst's growth is the result of acquisitions, mergers and
alliances over the past five years with medical groups that compliment its
market strategies.
Under capitated contracts, HealthFirst 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. HealthFirst
provides services on a prepaid basis to patients of HMO Oregon, PacificCare,
Providence Health Plans and others. Enrollment is categorized as "commercial"
for enrollees under the age of 65 whose health coverage is generally sponsored
by employers or "senior" for retired patients. Higher capitation rates are
generally received from senior patients because their medical needs are
generally greater and consequently the cost of covered care is higher. In the
years ending 1995, 1996 and 1997, $14.8 million, $27.8 million and $30.1
million, respectively, of net patient revenues came from prepaid or capitated
patients.
While HealthFirst obtains a significant and growing portion of its revenues from
managed care programs, the other main source of income is the result of a more
traditional form of business. HealthFirst is a Medicare provider and receives
fee-for-service payments from a significant percentage of patients and
traditional indemnity insurers. In the years ending 1995, 1996 and 1997, $22.8
million, $32.3 million and $35.5 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 HealthFirst:
<TABLE>
<CAPTION>
PAYOR 1995 1996 1997
- ----- ---- ---- ----
<S> <C> <C> <C>
Fee-For-Service:
Commercial and Private 52% 47% 47%
Medicare 8% 6% 6%
Medicaid 1% 1% 1%
Prepaid (1) 39% 46% 46%
</TABLE>
(1) Includes enrollees under Commercial, Medicare and Medicaid programs
SERVICES
HealthFirst offers a wide range of primary and specialty physician care and
ancillary services through an organized physician group. Approximately 73% of
the Company's providers are primary care providers and
<PAGE> 5
approximately 27% practice various medical and surgical specialties. The primary
care physicians are those concentrating in family practice, internal medicine,
and pediatrics.
The following professional services are offered by HealthFirst:
Allergy and Immunology Infectious Disease
Critical Care Internal Medicine
Dermatology Obstetrics
Dietician Oncology
Family Practice Otolaryngology, Head and Neck Surgery
Gastroenterology Pediatrics
General Surgery Podiatry
Gynecology Rheumatology
Hematology Urgent Care
Immediate Care
Furthermore, HealthFirst has numerous provider arrangements in the community so
that it can offer additional services to patients covered under capitated
contracts.
BUSINESS STRATEGY
HealthFirst believes that group practice offers the best means of promoting and
maintaining the highest standard of medical care. HealthFirst's strategy is to
position itself in a competitive network as the healthcare industry develops.
HealthFirst's relationship with PPI enhances its capacity to provide a high
quality of clinical care and to compete economically in both managed care and
fee-for-service markets.
To increase revenue, HealthFirst has been working with PPI to recruit additional
physicians and merge other physician groups in the area into their clinic. PPI
is working with HealthFirst on initiatives to reduce the Manager's Expenses of
HealthFirst (which are paid by PPI and reimbursed by HealthFirst) through
regional purchasing and insurance contracts, and through the consolidation of
various services.
GOVERNMENT REGULATION
HealthFirst is subject to federal and state laws regulating the relationships
among providers of health care services, physicians and other clinicians. These
laws include the fraud and abuse provisions of the Medicare and Medicaid
statutes, which prohibit the solicitation, payment, receipt or offering of any
direct or indirect remuneration for the referral of Medicare or Medicaid
patients or for the recommending, leasing, arranging, ordering or purchasing of
Medicare or Medicaid covered services. Other laws impose significant penalties
for false or improper billings for physician services and impose restrictions on
physician referrals for designated health services to entities with which they
have financial relationships. Violations of those laws may result in substantial
civil or criminal penalties for individuals or entities, including large civil
money penalties and exclusion from participation in the Medicare and Medicaid
programs. Significant laws applicable to the health care industry generally are
described in more detail below.
Fraud and Abuse Laws
Certain provisions of the Social Security Act, commonly referred to as the
"Anti-Kickback Statute," prohibit the offer, payment, solicitation, or receipt
of any form of remuneration in return for the recommendation, arrangement,
purchase, lease or order of items or services that are covered by Medicare or
state health programs. In recent years, there has been increasing scrutiny by
law enforcement authorities, the United States Department of Health and Human
Services, various state agencies, the federal and state courts and Congress, of
financial arrangements between health care providers and potential sources of
patient referrals to ensure that such arrangements are not disguised mechanisms
to pay for patient referrals. The Anti-Kickback Statute is broad in scope and
interpretations by various courts have been ambiguous or conflicting in certain
respects. To the extent PPI is deemed to be either a referral source or a
separate provider under the New PC Management
<PAGE> 6
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" apply to a variety
of physician-owned or physician-interested entities. The Stark statute (42
U.S.C. **1395nn) generally prohibits referrals by physicians for designated
health services reimbursable under the Medicare and Medicaid programs to
entities in which the referring physician or an immediate family member has an
ownership interest or compensation arrangement, unless an exception provided
under the statute applies. The Stark statute is broad and ambiguous in some
respects, and regulations clarifying the provisions have been issued only with
respect to clinical laboratory services (which was the subject of the "Stark I"
legislation). On January 8, 1998, Health Care Financing Administration published
proposed regulations (the "Proposed Legislation") implementing Stark II, the
legislation that expanded the federal self-referral legislation to cover ten
additional ancillary services (i.e., health care services other than clinical
laboratory services). The Proposed Regulations provide, in the case of
designated health care services provided by a group practice, that the overhead
expenses of and the income from the 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. A
determination that the sharing of overhead expenses and income of New PCs did
not comply with Stark would preclude referrals to certain designated health
services operated by PPI and could have a material adverse effect on PPI. While
management believes that the overhead expenses of and the income from each New
PC are distributed according to methods that indicate that such New PC is a
unified business, there can be no assurance that the distribution methodology
will not be challenged or scrutinized by governmental authorities. Future
clarification of existing Stark regulations could require PPI, HealthFirst and
related physicians to modify the form of their relationships.
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 HealthFirst 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 HealthFirst's billing arrangements may need to be
modified to comply with existing or modified regulations, there could be a
material adverse financial effect on the Company.
Oregon Insurance Law
The Oregon Department of Consumer and Business Affairs, Insurance Division (the
"Insurance Division"), regulates the transaction of insurance pursuant to the
Oregon Insurance Code. Pursuant to Insurance Division Bulletin 96-2 (the
"Bulletin") issued in April 1996 by the Oregon Insurance Commissioner, health
care providers that are compensated on a capitated basis by a health insurer or
health care service contractor ("HCSC") are not required to obtain a certificate
of authority to transact insurance if the capitation is internal to a policy of
insurance that is delivered by an authorized insurer of HCSC. The Bulletin also
states that discounted fee-for-service arrangements with reasonable limits on
discounts (i.e., not open-ended discounts) also do not require a certificate of
authority. HealthFirst arrangements should fall into these categories and
therefore are exempt from regulation as an insurance company. There is no
assurance, however, that the position of the Insurance Division will not change
in the future.
Proposed Legislation
In addition to current federal regulations, the Clinton Administration and
several members of Congress have proposed legislation for comprehensive reforms
affecting the payment for and availability of health care services. Aspects of
certain such health care proposals, such as reductions in Medicare and Medicaid
payments and additional prohibitions on direct or indirect physician ownership
of facilities to which they refer patients, if adopted, could have a significant
impact on the health care industry. There can be no assurance as to the ultimate
content, timing or effect of any health care reform legislation, nor is it
possible at this time to estimate the impact of potential legislation on the
industry.
<PAGE> 7
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.
HealthFirst operates in the Portland, Oregon area. Primary competitors of
HealthFirst include integrated medical groups such as MedPartners, Cascade
Medical Group, Providence Medical Group, The Portland Clinic, Portland Adventist
Medical Group and others. Competitors also include hospital systems which employ
primary care physicians, independent practice associations ("IPAs"), staff model
HMOs (such as Kaiser) and academic medical centers. In light of its size,
however, HealthFirst is a significant health care provider in its relevant
market. HealthFirst competes for contracts with certain national provider
entities (such as MedPartners) and many regional and local providers of
physician management services. Although the basis of competition may vary,
competition is generally based on cost and quality of care.
In terms of physician practice management ("PPM") companies, only three,
MedPartners, AORI and PhyCor, have a presence in HealthFirst's service area. All
of these publicly traded PPMs have holdings in the Portland, Oregon market.
MedPartners operates a multi-specialty group practice of approximately 70
physicians in the Portland market. MedPartners has been an aggressive suitor of
groups of physicians in the Portland area. AORI has oncology providers in the
Portland market. These practices are in direct competition with HealthFirst's
oncology practice. Further, PhyCor, another publicly traded PPM, has as indirect
presence in the Portland market at The Vancouver Clinic in Vancouver,
Washington.
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 110 full-time and 37 part-time
providers. HealthFirst physicians initially serve one-year associate employment
contracts. These contracts offer a signing bonus, a specified guaranteed salary
and eligibility for an incentive bonus. After two years of service at the
associate level, the shareholder physicians vote on whether to offer shares to
the associate physician. A rigorous peer review is completed prior to the
offering of shareholder status.
In addition, the Company employs 12 nurse practitioners. Shareholder contracts
with eligible non-physician employees generally are similar to the associate
version except for compensation and certain other provisions.
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 its 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
<PAGE> 8
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 HealthFirst (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 HealthFirst occupies. HealthFirst then reimburses PPI for all
manager's expenses incurred on its behalf.
The Company's executive offices, which are leased, are located at Suite 310,
1200 NW Front Street, Portland, Oregon 97209. The Company believes these
arrangements and the clinic locations are adequate for its current uses
and anticipated growth.
Currently, the Company occupies clinics in eleven locations in the Portland,
Oregon area.
ITEM 3: LEGAL PROCEEDINGS
HealthFirst is engaged in the defense of lawsuits arising in the ordinary course
and conduct of its business. The Company believes that such actions will not
have a material effect on its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 20, 1997, a meeting of shareholders of HealthFirst was held. Two new
directors, John Zelko, M.D. and Robert Bailey, M.D. were elected to the Board of
Directors of HealthFirst at such meeting. The term of the new directors
commences on January 1, 1998. Pete Perry, M.D., Resa Bradeen, M.D., James
Ritzenthaler, M.D., David Shute, M.D. and John Teller, M.D. continued as
directors after the November 20 meeting of shareholders. The following chart
tabulates the number of votes cast for and against each director nominated for
election at such annual meeting; there were no abstentions.
For Against
----------------- ----------------
John Zelko, M.D. 66 7
Robert Bailey, M.D. 73 0
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.
<PAGE> 9
ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Twelve Months Ended December 31,
(Thousands of dollars,
except earnings per share)
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
REVENUES:
Fee-For-Service, Net $ 13,505 $ 18,813 $ 22,834 $ 32,315 $ 35,575
Prepaid Health Care 10,893 13,463 14,818 27,800 30,055
---------- ---------- --------- ----------- ---------
Total Net Revenues 24,398 32,276 37,652 60,115 65,630
Less Provider Compensation
and Benefits (6,278) (8,375) (9,530) (21,610)(1) (14,369)
---------- ---------- --------- ----------- ---------
Net Revenue less Provider
Compensation and Benefits 18,120 23,901 28,122 38,505 51,261
OPERATING EXPENSES:
Total Operating Expenses 15,963 20,648 27,593 44,416 50,430
Total Operating Income (Loss) 2,157 3,253 529 (5,911) 831
Other Non-Operating Income
(Expenses) 46 101 (29) (103) (573)
---------- ---------- --------- ----------- ---------
Income (Loss) Before Taxes 2,203 3,354 500 (6,014) 258
---------- ---------- --------- ----------- ---------
Income Tax Expense (Benefit) 889 1,416 208 (1,899) --
---------- ---------- --------- ----------- ---------
Net Income (Loss) $ 1,314 $ 1,938 $ 292 $ (4,115) $ 258
========== ========== ========= =========== =========
Earnings Per Share $26,816.33 $39,551.02 $5,509.43 $(50,802.47) $2,866.67
========== ========== ========= =========== =========
BALANCE SHEET DATA:
Working Capital (Deficit) $ 1,882 $ 1,961 $ (1,507) $ (4,871) $ 3,176
Total Assets 11,742 16,848 21,075 30,910 3,176
Long Term Debt, Net 2,223 1,731 3,711 5,066 --
Capital and Direct Financing Lease
Obligation -- -- -- 4,663 --
Shareholders' Equity 5,344 7,253 7,597 2,364 1
</TABLE>
- -------------
(1) Includes $3.9 million of deferred compensation.
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 HealthFirst.
OVERVIEW
<PAGE> 10
HealthFirst, an Oregon professional corporation, is a multi-specialty medical
clinic. HealthFirst was founded in 1997 pursuant to certain reorganization and
merger transactions (the "Transactions") contemplated by the Amended and
Restated Agreement and Plan of Reorganization and Merger (the "Reorganization
and Merger Agreement") among Medford Clinic, P.C. ("Old Medford"), Old
HealthFirst, The Corvallis Clinic, P.C. ("Old Corvallis"), and, together with
Old Medford and Old Corvallis, referred to herein, collectively as ("Old PCs"),
and Physician Partners, Inc. ("PPI"). Old HealthFirst was formed in February
1996 in a merger between the Metropolitan Clinic, P.C., formed in 1906, and
Suburban Medical Clinic, P.C., formed in 1956. 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.
HealthFirst currently consists of 159 professional 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's operations are located in and around Portland, Oregon.
HealthFirst believes that group practice offers the best means of promoting and
maintaining the highest standard of medical care. HealthFirst's strategy is to
position itself in a competitive network as the healthcare industry develops.
HealthFirst's relationship with PPI enhances its capacity to provide a high
quality of clinical care and to compete economically in both managed care and
fee-for-service markets.
To increase revenue, HealthFirst is working with PPI to recruit additional
physicians and merge other physician groups in the area into their clinic. PPI
is working on initiatives to reduce the Manager's Expenses of HealthFirst (which
are paid by PPI and reimbursed by HealthFirst) through regional purchasing and
insurance contracts, and through the consolidation of various services.
In 1997, PPI began modifying the computer system programming at HealthFirst 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 HealthFirst's ongoing results of operations.
RESULTS OF OPERATIONS
The following table shows the percentage of Net Revenue less Provider
Compensation represented by various expense categories reflected in the
Company's Statement of Operations. The following table represents twelve months
ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
December 31,
--------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Net Revenues, less Provider 100.0% 100.0% 100.0%
Compensation
Operating Expenses:
Clinic salaries, wages and 41.7% 47.1% 36.1%
benefits
Purchased medical services 15.1% 25.5% 20.6%
Medical and office supplies 15.6% 16.3% 12.8%
General and administrative 16.0% 13.3% 12.2%
expenses
Lease and rent expense 3.0% 4.1% 4.1%
Provision for uncollectible 4.1% 4.9% 4.0%
accounts
Depreciation and amortization 2.6% 4.1% 4.0%
Management fee -- -- 4.6%
------ ------ ------
Total operating expenses 98.1% 115.3% 98.4%
------ ------ ------
Operating income (loss) 1.9% (15.3%) 1.6%
Other Income (Expense)
Interest income 0.2% 0.3% 0.8%
Interest expense (0.7%) (3.7%) (3.1%)
</TABLE>
<PAGE> 11
<TABLE>
<S> <C> <C> <C>
Other income 0.4% 3.1% 1.2%
------ ------ ------
Net income (loss) before
income taxes 1.8% (15.6%) 0.5%
------ ------ ------
Income tax expense (benefit) 0.7% (4.9%) --
------ ------ ------
Net income (loss) 1.1% (10.7%) 0.5%
====== ====== ======
</TABLE>
Twelve Months ended December 31, 1997 Compared to Twelve Months Ended
December 31, 1996
Net Revenues less Provider Compensation increased $12.8 million or 33.2% to
$51.3 million in the twelve months ended December 31, 1997 from $38.5 million in
the twelve months ended December 31, 1996. Net Revenues less Provider
Compensation consists of both Fee-For-Service revenue net of contractual
discounts and Prepaid Healthcare revenues less Provider Compensation and
Benefits. Net Fee-For-Service revenues increased $3.3 million or 10.2% to $35.6
million in the twelve months ended December 31, 1997 compared to $32.3 million
in the twelve months ended December 31, 1996. Prepaid Healthcare revenues
increased $2.3 million or 8.3% to $30.1 million in the twelve months ended
December 31, 1997 compared to $27.8 million in 1996. The increase in Net
Fee-For-Service revenues in 1997 compared to 1996 is due to the addition of
several providers in late 1996 who became fully productive in 1997 and an
increase in the office hours beginning December 1996. The increase in Prepaid
Healthcare revenue is due to increased capitation rates which were offset by
increased hospital costs which led to lower risk pool returns. Management has
negotiated additional capitation rate increases in the 1998 managed care
contracts.
Provider Compensation and Benefits
Provider Compensation and Benefits decreased $7.2 million or 33.3% to $14.4
million in the twelve months ended December 31, 1997 from $21.6 million in 1996.
A significant portion of the decrease is due to a $5.3 million bonus
compensation plan of which $3.9 million of expense was recognized in May 1996.
The remaining difference is due to the decrease in the amount available for
provider compensation.
Operating Expenses
The operating expenses of HealthFirst represent the costs incurred by PPI and
reimbursed by the Company per the terms of the Management Agreement. As a
percentage of Net Revenues less Provider Compensation, most operating expenses
decreased in the year ended December 31, 1997 compared to 1996. The decreases
were the result of operating expenses remaining relatively stable while revenues
increased.
A management fee of $2.4 million for the twelve months ended December 31, 1997
was paid to PPI in accordance with the Management Agreement. As HealthFirst's
results improve, the management fee will increase in direct relation. There
was no such management fee in 1996 as the Management Agreement was not
effective until February 1, 1997.
Other Income and Expenses
In 1997, other income included a one-time transition payment of $.6 million
from PPI. In 1996, other income mainly consisted of rental income from
subleasing office space and other income from Blue Cross/Blue Shield.
Twelve Months Ended December 31, 1996 Compared to Twelve Months Ended
December 31, 1995
Net Revenues less Provider Compensation increased $10.4 million or 37.0% to
$38.5 million in the twelve months ended December 31, 1996 from $28.1 million in
the twelve months ended December 31, 1995. Net Revenues less Provider
Compensation consists of both Fee-For-Service revenue net of contractual
discounts and Prepaid Healthcare revenues less Provider Compensation and
Benefits. Net Fee-For-Service revenues increased $9.5 million or 41.7% to $32.3
million in the twelve months ended December 31, 1996 compared to $22.8 million
in twelve months ended December 31, 1995. Prepaid Healthcare revenues increased
$13.0 million or 87.8% to $27.8 million in the twelve months ended December 31,
1996 compared to $14.8 million in 1995. The increase in Net Fee-For-Service
income is attributable to the purchase of Suburban in February 1996 and the
addition of new providers. The increase in Prepaid Healthcare revenue correlates
with an increase in the number of capitated lives, offset in part by reduced
risk sharing revenues.
Provider Compensation and Benefits
<PAGE> 12
Provider Compensation and Benefits increased $12.1 million or 127.4% to $21.6
million in the twelve months ended December 31, 1996 from $9.5 million in 1995.
A significant portion of the increase was due to the purchase of Suburban in
February 1996. The remaining increase is due to a $5.5 million bonus
compensation plan of which $3.9 million of expense was recognized in May 1996.
Operating Expenses
Total operating expenses increased in the year ended December 31, 1996 compared
to 1995 due to the purchase of Suburban in February 1996. Significant
fluctuations not related to Suburban are discussed below. As a percentage of Net
Revenue less Provider Compensation, Clinic Salaries, Wages and Benefits
increased to 47.1% in 1996 from 41.7% in 1995. The increase was attributable to
the addition of staff required to support new providers added due to the
purchase of Suburban as well as the opening of the Tigard Clinic. As a
percentage of Net Revenue less Provider Compensation and Benefits, Purchased
Medical Services increased to 25.5% from 15.1% for 1996 and 1995, respectively.
This growth is due to Suburban having a high number of managed care contracts.
Depreciation and Amortization increased $0.9 million or 128.6% to $1.6 million
in the twelve months ended December 31,1996 from $0.7 million in 1995. The
increase relates to the purchase of Suburban, the completion of a new clinic
building and equipment to support the addition of new providers.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Transactions, PPI succeeded to the ownership of substantially
all assets and liabilities and PPI assumed all financing activities relating to
the working capital needs of HealthFirst. Per the Management Agreement, PPI will
purchase the necessary capital equipment to support HealthFirst's operations.
<PAGE> 13
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HEALTHFIRST MEDICAL GROUP, P.C.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE> 14
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 1997, and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. 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 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
February 20, 1998
<PAGE> 15
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1997
(All dollar amounts expressed in thousands)
ASSETS
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 895 $ 1
Patient accounts receivable, net of allowances for
contractual discounts and uncollectible accounts of
$2,465 at December 31, 1996 6,497 --
Healthcare and other receivables 2,848 --
Related party receivable 50 --
Income taxes receivable 58 --
Prepaid expenses and deposits 201 --
Prepaid provider compensation -- 3,175
------- ------
Total current assets 10,549 3,176
------- ------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
$5,769 at December 31, 1996 20,361 --
OTHER ASSETS -- --
------- ------
Total assets $30,910 $3,176
======= ======
</TABLE>
<PAGE> 16
HEALTHFIRST MEDICAL GROUP, P.C.
BALANCE SHEETS - AS OF DECEMBER 31, 1996 AND 1997 (CONTINUED)
(All dollar amounts expressed in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
1996 1997
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 1,500 $ --
Current portion of long-term debt and capital and direct
financing lease obligations 4,663 --
Accounts payable 2,123 --
Accrued expenses 703 --
Accrued healthcare costs 2,936 --
Accrued compensation and related expenses 3,313 --
Deferred revenue 182 --
-------- --------
Total current liabilities 15,420 --
-------- --------
PAYABLE TO PPI -- 3,175
LONG-TERM DEBT, net of current portion 5,066
CAPITAL AND DIRECT FINANCING LEASE OBLIGATIONS, net of current
portion 4,265 --
DEFERRED COMPENSATION AND OTHER LONG-TERM LIABILITIES 3,795 --
LONG-TERM DEFERRED TAX LIABILITY -- --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-
No par value; 1,000,000 shares authorized; 0 and 94 shares issued and
outstanding at December 31, 1996 and 1997,
respectively -- 1
Series 1 Class A--Voting; no par value; 800,000 shares
authorized; 7,000 and 0 shares issued and outstanding at
December 31, 1996 and 1997, respectively 700 --
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 1997, respectively 330 --
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 1997 -- --
Class B--Nonvoting; no par value; 300,000 shares authorized;
0 shares issued and outstanding at December 31, 1996 and 1997 -- --
Additional paid-in capital 1,879 --
Retained earnings 1,149 --
Notes receivable from stockholders for purchase of stock (439) --
Unamortized value of restricted stock awards (1,255) --
-------- --------
Total stockholders' equity 2,364 1
-------- --------
Total liabilities and stockholders' equity $ 30,910 $ 3,176
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE> 17
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts expressed in thousands, except earnings (loss) per share)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Fee-for-service, net $ 22,834 $ 32,315 $ 35,575
Prepaid healthcare 14,818 27,800 30,055
-------- -------- --------
Net revenues 37,652 60,115 65,630
Less- Provider compensation and benefits 9,530 21,610 14,369
-------- -------- --------
Net revenue less provider compensation
and benefits 28,122 38,505 51,261
-------- -------- --------
OPERATING EXPENSES:
Clinic salaries, wages and benefits 11,737 18,157 18,496
Purchased medical services 4,253 9,812 10,545
Medical and office supplies 4,377 6,281 6,536
General and administrative expenses 4,491 5,115 6,248
Lease and rent expense 853 1,573 2,125
Provision for uncollectible accounts 1,146 1,911 2,056
Depreciation and amortization 736 1,567 2,055
Management fee -- -- 2,369
-------- -------- --------
Total operating expenses 27,593 44,416 50,430
-------- -------- --------
Operating income (loss) 529 (5,911) 831
OTHER INCOME (EXPENSE):
Interest income 39 100 428
Interest expense (189) (1,414) (1,625)
Other 121 1,211 624
-------- ---------- --------
Net income (loss) before provision
(benefit) for income taxes 500 (6,014) 258
-------- ---------- --------
PROVISION (BENEFIT) FOR INCOME TAXES 208 (1,899) --
-------- ---------- --------
NET INCOME (LOSS) $ 292 $ (4,115) $ 258
======== ========== ========
EARNINGS (LOSS) PER SHARE 5,509.43 (50,802.47) 2,866.67
======== ========== ========
WEIGHTED AVERAGE SHARES OUTSTANDING 53 81 90
======== ========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 18
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 292 $(4,115) $ 258
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization 736 1,567 148
Gain on sale of property, plant and equipment -- -- --
Provision for deferred income taxes 71 (1,936) --
Compensation expense recognized for provider
stock awards -- 502 --
Changes in operating assets and liabilities
(excluding assets and liabilities purchased
from Suburban):
Patient accounts receivable, net (1,020) (1,380) (178)
Healthcare and other receivables 568 301 691
Related party receivable -- 277 --
Income taxes receivable (168) 147 --
Inventories of drugs and supplies (16) 251 --
Prepaid expenses and deposits (79) 192 (50)
Prepaid provider compensation -- -- (3,175)
Other assets (50) 225 (169)
Drafts payable (1,579) (165) --
Accounts payable 461 431 (119)
Accrued expenses (39) 430 --
PPI payable -- -- 3,175
Income taxes payable (359) -- --
Accrued healthcare costs 92 984 (748)
Accrued compensation and related expenses 108 669 154
Deferred revenue 3 166 68
Deferred compensation and other long-term
liabilities 201 2,787 108
------- ------- -------
Net cash provided by (used in) operating activities
(778) 1,333 163
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,690) (3,181) (92)
Cash proceeds received from short-term investments 2,616 -- --
Cash received in acquisition of Suburban -- 231 --
------- ------- -------
Net cash used in investing activities (4,074) (2,950) (92)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 4,940 2,763 1,000
Proceeds from issuance of line of credit -- 1,500 --
Principal payments on long-term obligations (17) (998) (734)
Proceeds from repayments of notes receivable from
stockholders 62 64 17
Payments for redemption of common stock (10) (9) --
Cash received from direct financing lease obligations -- 1,000 --
Cash contributed to Physician Partners, Inc. in merger -- -- (1,158)
</TABLE>
<PAGE> 19
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts expressed in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
------ ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES (Continued):
Proceeds from issuance of common stock $ -- $ -- $ 1
Costs incurred related to Physician Partners, Inc.
transaction -- (1,933) (91)
------ ------- -------
Net cash provided by (used in) financing activities
4,975 2,387 (965)
------ ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 123 770 (894)
CASH AND CASH EQUIVALENTS, beginning of year 2 125 895
------ ------- -------
CASH AND CASH EQUIVALENTS, end of year $ 125 $ 895 $ 1
====== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 186 $ 1,356 $ 1,620
Cash paid for income taxes 446 181 --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Notes receivable issued in exchange for common stock $ 80 $ 140 $ --
</TABLE>
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 of cash, and liabilities at the date of
acquisition are presented below:
<TABLE>
<S> <C>
Current assets $ 2,284
Property, plant and equipment 5,325
Other long-term assets 99
Current liabilities (2,833)
Long-term liabilities (4,617)
-------
Net equity acquired $ 258
=======
Reconciliation to equity accounts:
Common stock $ 330
Additional paid-in capital 122
Notes receivable from stockholders (194)
-------
$ 258
=======
</TABLE>
In February 1997, HealthFirst assigned all assets and liabilities to Physician
Partners, Inc. as part of the reorganization and merger transaction. The book
value of HealthFirst's assets and liabilities, including $1,200 of cash at the
date of the transaction are presented below:
<TABLE>
<S> <C>
Current assets $10,239
Property, plant and equipment 20,305
Other long-term assets 277
Current liabilities 11,112
Long-term liabilities 17,163
Contributed equity 2,546
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 20
HEALTHFIRST MEDICAL GROUP, P.C.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(All dollar amounts expressed in thousands)
<TABLE>
<CAPTION>
Common Stock
----------------------------------------------------------------------
Series 1 Series 2
No Par Class A Class A
------------------- ------------------- -------------------
Number Number Number Additional
Of Of Of Paid-In
Shares Amount Shares Amount Shares Amount Capital
------- ------- ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 -- $ -- 4,950 $ 495 -- $-- $ --
Issuance of common stock -- -- 800 80 -- -- --
Redemption of common stock -- -- (100) (10) -- -- --
Repayment of notes receivable from
stockholders -- -- -- -- -- -- --
Net income -- -- -- -- -- -- --
------- ------- ------ ----- ------ ----- -------
BALANCE, December 31, 1995 -- -- 5,650 565 -- -- --
Notes receivable from stockholders
acquired from Suburban -- -- -- -- -- -- --
Common stock issued to acquire
Suburban -- -- -- -- 2,200 330 122
Issuance of common stock -- -- 1,400 140 -- -- 1,757
Redemption of common stock -- -- (50) (5) -- -- --
Repayment of notes receivable from
stockholders -- -- -- -- -- -- --
Costs related to Physician
Partners, Inc. transaction -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
------- ------- ------ ----- ------ ----- -------
BALANCE, December 31, 1996 -- -- 7,000 700 2,200 330 1,879
Issuance of common stock 94 1 -- -- -- -- --
Redemption of common stock -- -- -- -- -- -- --
Repayment of notes receivable from
stockholders -- -- -- -- -- -- --
Net income -- -- -- -- -- -- --
Transfer of ownership to Physician
Partners, Inc. during merger
(see Note 1) -- -- (7,000) (700) (2,200) (330) (1,879)
------- ------- ------ ----- ------ ----- -------
BALANCE, December 31, 1997 94 $ 1 -- $-- -- $-- $ --
======= ======= ====== ===== ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Unamortized Notes
Value of Receivable
Restricted Retained From
Stock Awards Earnings Stockholders Total
------------ -------- ------------ -------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 $ -- $ 6,909 $(151) $ 7,253
Issuance of common stock -- -- (80) --
Redemption of common stock -- -- -- (10)
Repayment of notes receivable from
stockholders -- -- 62 62
Net income -- 292 -- 292
------- ------- ----- -------
BALANCE, December 31, 1995 -- 7,201 (169) 7,597
Notes receivable from stockholders
acquired from Suburban -- -- (194) (194)
Common stock issued to acquire
Suburban -- -- -- 452
Issuance of common stock (1,255) -- (140) 502
Redemption of common stock -- (4) -- (9)
Repayment of notes receivable from
stockholders -- -- 64 64
Costs related to Physician
Partners, Inc. transaction -- (1,933) -- (1,933)
Net loss -- (4,115) -- (4,115)
------- ------- ----- -------
BALANCE, December 31, 1996 (1,255) 1,149 (439) 2,364
Issuance of common stock -- -- -- 1
Redemption of common stock -- -- -- --
Repayment of notes receivable from
stockholders -- -- 17 17
Net income -- 258 -- 258
Transfer of ownership to Physician
Partners, Inc. during merger
(see Note 1) 1,255 (1,407) 422 (2,639)
------- ------- ----- -------
BALANCE, December 31, 1997 $ -- $ -- $ -- $ 1
======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 21
HEALTHFIRST MEDICAL GROUP, P.C.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
HealthFirst Medical Group, P.C. (HealthFirst), an Oregon professional
corporation, was incorporated on September 18, 1996 under the name Physician
Partners HealthFirst, 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). 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.
HealthFirst consists of approximately 159 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.
<PAGE> 22
-2-
The accompanying financial statements reflect the assets and liabilities as of
December 31, 1996 and results of operations for the years ended December 31,
1995 and 1996, for the HealthFirst Medical Group, P.C. prior to the
reorganization transaction (Old HealthFirst). The Statements of Operations and
Cash Flows for the year ended December 31, 1997 include the results of
operations for Old HealthFirst from January 1 to January 31, 1997. The
remainder of the period represents the operations of HealthFirst Medical Group,
P.C. (New PC) subsequent to the effective date of the reorganization
transaction, February 1, 1997.
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.
Prepaid Provider Compensation
Prepaid provider compensation includes the amount paid to providers that is 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. 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.
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:
Buildings and leasehold improvements 7-45 years
Furniture and equipment 3-15 years
<PAGE> 23
-3-
Payable to PPI
HealthFirst signed a note payable to PPI, bearing interest at 7.6%. Interest
only monthly payments are due in 1998 and principal and interest monthly
payments are due beginning January 1999 for 36 months.
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.
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 HealthFirst in its transition to
the Management Agreement.
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 December 31, 1996
for the HealthFirst Medical Group, P.C. prior to the reorganization transaction
("Old HealthFirst"). The Statement of Operations and Cash Flows for the year
ended December 31,1997 include the results of operations for Old HealthFirst
from January 1 to January 31, 1997. The remainder of the period represents the
operations of HealthFirst Medical Group, P.C. ("New PC") subsequent to the
effective date of the reorganization transaction, February 1, 1997.
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:
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 delegated professional risk with limited
institutional risk based upon utilization parameters mutually agreed upon by
the hospital health plan and HealthFirst.
<PAGE> 24
-4-
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,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Fee-for-service, gross $29,384 $39,628 $47,415
Contractual discounts (6,550) (7,313) (11,840)
------- ------- -------
Fee-for-service, net $22,834 $32,315 $35,575
======= ======= =======
</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 8%, 6%, and 6% 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
1% of net patient service revenues were derived from services provided to
fee-for-service Medicaid patients in 1995, 1996 and 1997.
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.
<PAGE> 25
-5-
Major Customers
The following customers represented individually more than 10% of HealthFirst's
net revenue as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Pacificare - Secure Horizons 10% 12% 12%
Pacificare - Commercial 11 10 9
Blue Cross - HMO Oregon 16 12 12
Good Health Plan -- 11 12
Blue Cross - Commercial 10 -- --
</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 $ 2,012
Buildings and leasehold improvements 14,756
Furniture and equipment 9,362
-------
26,130
Less- Accumulated depreciation (5,769)
-------
$20,361
=======
</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.
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 at December 31,
1996:
<TABLE>
<S> <C>
Deferred tax assets:
Cash to accrual adjustments $ 4,570
Less- Valuation allowance (327)
-------
Net deferred tax asset 4,243
Deferred tax liabilities:
Cash to accrual adjustments (3,679)
Excess tax depreciation (564)
-------
Gross deferred tax liabilities (4,243)
-------
Net deferred tax asset $ --
=======
</TABLE>
<PAGE> 26
-6-
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------
1995 1996 1997
---- ------- -------
<S> <C> <C> <C>
Current:
Federal $119 $ -- $ --
State 17 -- --
--
Deferred: --
Federal 63 (1,614) --
State 9 (285) --
---- ------- -------
$208 $(1,899) $ --
==== ======= =======
</TABLE>
The differences between the provision (benefit) for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
taxes were as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996 1997
---- ------- -------
<S> <C> <C> <C>
Federal tax (benefit) at statutory rate $175 $(2,105) $ --
Add (deduct):
State income tax (benefit), net of federal benefit 17 (301) --
Change in valuation allowance -- 328 --
Other 16 179 --
---- ------- -------
Provision (benefit) for income taxes $208 $(1,899) $ --
==== ======= =======
</TABLE>
In 1996, HealthFirst recognized a valuation allowance in an amount equal to its
net deferred tax assets of $328 because of uncertainty with respect to the
realization of the related tax benefits in future years.
As of December 31, 1997, the net income before provision for income taxes
represents the results of operations for Old HealthFirst 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
the New PC for the remainder of the period have resulted in no net income and,
accordingly, no current tax expense is necessary.
<PAGE> 27
-7-
6. LONG-TERM DEBT:
Long-term debt at December 31, 1996 is as follows:
<TABLE>
<S> <C>
Note payable, due in monthly installments of principal and interest of $16
through July 2000, with a final payment of $1,636, bearing interest at
9.875%. The note is secured by a first mortgage on land, buildings, and
improvements. $1,714
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
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. 3,706
Note payable, due in annual principal installments of $115 through August 2011,
bearing interest at 7.9%. 1,650
Note payable due in monthly installments of $8 including interest through October
2000, bearing interest at 8.75% 314
Note payable due in monthly installments of $7 plus interest through January 1999,
bearing interest at 9.875% 177
Note payable, related party, due in monthly installments of $1 including interest
through 1998, bearing interest at 6% 8
------
Total long-term debt 9,533
Less- Current portion 4,467
------
Long-term debt, net of current portion $5,066
======
</TABLE>
Management converted the construction loan to a mortgage loan in 1997, extending
the maturity of the loan to February 2017.
HealthFirst maintained a revolving line-of-credit agreement with a bank
providing up to $2,500, secured by inventory, accounts receivable and equipment.
The line-of-credit bore 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 line-of-credit as a result of the
reorganization transaction (Note 1).
<PAGE> 28
-8-
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
12) for a term of 21 years. Leased capital assets included in property, plant
and equipment are as follows at December 31, 1996:
<TABLE>
<S> <C>
Buildings and leasehold improvements $3,574
Furniture and equipment 264
------
3,838
Less- Accumulated amortization (682)
-----
$3,156
======
</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 May 1996, HealthFirst sold three facilities to HealthFirst Properties LLC
(Note 12) under a sale/leaseback arrangement. The facilities were sold for
$12,550, of which $11,550 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 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 of which $76 is due within one year. The lease has a
term of 20 years and requires minimum annual rental payments of $1,318 in
1998, 1999, 2000, 2001 and 2002 and $17,680 thereafter. The financing
obligation and lease payments were assumed by PPI at February 1, 1997.
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 1997, 1996 and 1995. HealthFirst does not foresee making contributions to the
profit sharing plan in the future.
<PAGE> 29
-9-
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 $69 and $110 in 1995 and 1996, respectively.
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 at December 31, 1996),
plus a higher percentage of the amount in excess of the integration level for
the Plan year. Contributions in 1995 and 1996 were $1,133 and $1,523,
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 $176 for the plan at December 31, 1996.
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 contribution for 1996
was $390.
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 $3,900, 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,
of which $502 is included in current liabilities and the remainder is included
in deferred compensation. The liability was assumed by PPI at February 1, 1997.
<PAGE> 30
-10-
9. PROFESSIONAL LIABILITY:
HealthFirst maintained a claims-made professional liability insurance policy.
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 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.
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.
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 HealthFirst 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.
11. EARNINGS PER SHARE:
All share and per share data have been retroactively restated to give effect to
the recapitalization resulting from the Transactions.
12. 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, HealthFirst paid premiums to CHN
of $106 and CHN paid HealthFirst $622 in 1995 for claims. No premiums were paid
or received in 1996 or 1997. CHN was legally dissolved in 1996.
Northwest Physicians Alliance
In 1995, HealthFirst invested $52 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. The Alliance was legally dissolved in 1998.
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, to be paid under an installment sale contract with a 20-year term.
HPLLC made a $1,000 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.
<PAGE> 31
-11-
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
$144. The terms of the note include monthly installments of principal and
interest of $5 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.
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 ten
providers 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 is to be recognized as compensation expense. Of this amount, $502 and
$348 has been recognized as compensation expense in 1996 and 1997, respectively.
The remaining amount will be amortized ratably to income over the next
five years.
13. 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,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Net revenues less provider compensation and benefits $ 39,625 $ 39,364
Operating expenses (40,364) (45,452)
Other expenses, net (215) (92)
-------- --------
Net loss before income taxes (954) (6,180)
Benefit for income taxes 403 1,899
-------- --------
Net loss $ (551) $ (4,281)
======== ========
</TABLE>
<PAGE> 32
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>
Current Age Title Term
- ------- --- ----- ----
<S> <C> <C> <C> <C> <C>
Pete Perry, M.D. 56 Board President March 18, 1997 to Present
Resa Bradeen, M.D. 36 Director September 18, 1996 to Present
James Ritzenthaler, M.D. 47 Director September 18, 1996 to Present
David Shute, M.D. 39 Director and Secretary March 18, 1997 to Present
John Teller, M.D. 41 Director September 18, 1996 to Present
John Zelko, M.D. 43 Director January 1, 1998 to Present
Robert Bailey, M.D. 47 Director January 1, 1998 to Present
Malcolm McAninch, M.D. 43 Prior Director and Treasurer March 18, 1997 to January 1, 1998
Keith Hansen, M.D. 52 Prior Director March 18, 1997 to January 1, 1998
</TABLE>
PETE PERRY, M.D. is the Board President at HealthFirst. Dr. Perry attended
Princeton University and received his bachelor's degree in Religion and
Literature in 1963 and he earned his medical degree from Stanford University in
1968. An internship followed from 1968 to 1970 at the University of Pennsylvania
Hospital. He also served a residency at Good Samaritan Hospital in Portland,
Oregon. Dr. Perry was Board Certified in Internal Medicine in 1974. Prior to
joining HealthFirst, Dr. Perry was in private practice.
RESA BRADEEN, M.D. is a Director of HealthFirst. Dr. Bradeen attended the
University of Tennessee in Chattanooga, where she received a bachelor's degree
in Elementary Education in 1983 and a master of Education degree in Special
Education in 1985. She earned her medical degree from the University of
Louisville School of Medicine, Louisville, Kentucky, in 1990, and completed her
postgraduate training in Pediatrics in 1993 at Oregon Health Sciences University
in Portland, Oregon. She is the co-chair of the Pediatrics Department at
HealthFirst and was the Chair of Suburban Medical Clinic's Pediatrics Department
in 1994. In addition to serving on HealthFirst's Board of Directors, she is the
medical site Director at HealthFirst's Powell Valley Office and a representative
on the Clinical Quality Committee for the Good Health Plan of Oregon.
JAMES RITZENTHALER, M.D. is a Director of HealthFirst. Dr. Ritzenthaler attended
undergraduate and medical school at the University of Colorado, in Boulder,
Colorado. After receiving his medical degree in 1981, he completed a residency
at Good Samaritan Hospital in 1984. Board Certified in Internal Medicine, Dr.
Ritzenthaler previously served as Medical Director for Metropolitan Clinic.
DAVID SHUTE, M.D. is a Director of HealthFirst. He received his bachelor's
degree and his medical degree from the University of Illinois in 1980 and 1984,
respectively. Dr. Schute served a residency at Oregon Health Sciences University
in Portland, Oregon, from 1985 to 1987. He was Board Certified by the American
Board of Internal Medicine in 1987. In addition, Dr. Schute is also a member of
the Multnomah County Medical Society and the Oregon Medical Association.
JOHN TELLER, M.D. is a Director of HealthFirst. Dr. Teller earned a bachelor's
degree from Oregon State University, Corvallis, Oregon, in 1978 and his medical
degree from Oregon Health Sciences University, Portland, Oregon, in 1982. An
internship followed in 1983 at Hennepin County Medical Center in Minneapolis,
Minnesota. He also served a residency at Lutheran Medical Center, Brooklyn, New
York, in 1985, where he was Chief Resident. Prior to joining HealthFirst, Dr.
Teller was a physician with Tualatin Medical Center. Board Certified in Family
Practice, Dr. Teller has been in practice since 1985.
<PAGE> 33
JOHN ZELKO, M.D. is a Director of HealthFirst. Dr. Zelko received his bachelor's
degree from the University of Hawaii in 1974 and earned his medical degree from
the University of Hawaii, John A. Burns School of Medicine in 1978. Dr. Zelko
completed an internship and residency at University of Colorado Health Sciences
Center in General Surgery. He was Board Certified by the American Board of
Surgeons in 1984. Prior to joining HealthFirst, Dr. Zelko was a surgeon at
Metropolitan Clinic, P.C.
ROBERT BAILEY, M.D. is a Director of HealthFirst. He received his undergraduate
degree in Humanities and Chemistry from Eastern Oregon State College. He
received his medical degree from Oregon Health Sciences University in 1985. Dr.
Bailey was Board Certified in Internal Medicine in 1986 and completed an
internship and residency at Good Samaritan Hospital and Medical Center in
Portland, Oregon in 1988.
MALCOLM MCANINCH, M.D. was a Director of HealthFirst. Dr. McAninch earned a
bachelor of science degree in Biology from the University of Puget Sound in 1977
and a doctor of medicine from Jefferson Medical College of Thomas Jefferson
University in 1981. Dr. McAninch completed an internship and residency at Good
Samaritan Hospital and Medical Center in 1985 where he was the Chief Resident in
Internal Medicine. He is Board Certified in Internal Medicine from the American
Board of Internal Medicine. Prior to joining HealthFirst, Dr. McAninch was a
physician with Elma Family Practice Clinic from 1985 to 1987. Dr. McAninch had
been a physician with Metropolitan Clinic, the direct predecessor of
HealthFirst, since 1987 and was on its Board of Directors from 1990 to 1996. Dr.
McAninch's term as Board Director ended on January 1, 1998.
KEITH HANSEN, M.D. was a Director of HealthFirst. Dr. Hansen graduated from the
University of California, Berkeley in 1967 with a degree in Physiology. In 1971,
Dr. Hansen received his medical degree from Bowman Gray School of Medicine, Wake
Forest University. A residency in Internal Medicine followed from 1971 through
1974 at UCLA Hospital and Clinics in Los Angeles, California. He was Board
Certified in Internal Medicine in 1974 and Hematology in 1978. Dr. Hansen is a
Director of the Columbia River Oncology Program's Adult Autologous Bone Marrow
Transplantation Program and has been a physician with the Metropolitan Clinic,
P.C., the predecessor of HealthFirst, since 1978. Dr. Hansen's term as Director
of HealthFirst ended on January 1, 1998.
ITEM 11: EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Currently, HealthFirst Directors are entitled to receive compensation for
serving on the Board of Directors an amount equal to $10,000 per year. An
additional $2,000 per year was paid to Dr. Ritzenthaler and Dr. Teller for
serving on the Joint Management Board. Prior to the Merger, Directors received
compensation of $8,500 per year. Directors are also reimbursed for reasonable
and actual out-of-pocket expenses incurred in connection with duties performed
as Directors.
Since March 1997, Pete Perry, M.D. has served as President, Director, and
Provider of HealthFirst. For those duties, Dr. Perry received an annual salary.
Pete Perry, M.D. equally divides his time between his responsibilities as a
Provider of the Company and Board President. Other then the compensation
provided to Dr. Perry as President, no compensation was provided to any
executive officer of HealthFirst for their duties as officers in the years ended
1995, 1996 and 1997.
<PAGE> 34
The following table summarizes the compensation received by the Company's
Executive Officers:
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
Annual ------------------------
Compensation Restricted Securities
Name and Principal ------------------- Stock Underlying All Other
Position Year Salary(1) Bonus Awards Options Compensation(2)
- ------------------ ---- --------- ----- ------ ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Pete Perry, M.D. 1997 150,000 -- -- -- 950
President and Director
</TABLE>
(1) Salary information is disclosed on a calendar year basis. The Officer may
receive certain perquisites and personal benefits, the dollar amounts of
which are below current Securities and Exchange Commission thresholds for
reporting requirements.
(2) This column includes Company contributions and allocations under the
Company's 401(k) retirement plan.
The following table summarizes the compensation received by the Company's Board
of Directors:
<TABLE>
<CAPTION>
Name 1995 1996 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Resa Bradeen, M.D. -- 8,500 10,000
James Ritzenthaler, M.D. 8,500 8,500 12,000
David Shute, M.D. -- -- 8,333
John Teller, M.D. 8,500 8,500 12,000
Malcolm McAninch, M.D. 8,500 8,500 8,333
Keith Hansen, M.D. -- -- 8,333
</TABLE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is current 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
HEALTHFIRST Stock Beneficially Owned Percent Outstanding *
- ----------- ------------------------ ---------------------
<S> <C> <C>
Pete Perry, M.D. 1 1.1%
John Zelko, M.D. 1 1.1%
Resa Bradeen, M.D. 1 1.1%
Robert Bailey, M.D. 1 1.1%
James Ritzenthaler, M.D. 1 1.1%
David Shute, M.D. 1 1.1%
John Teller, M.D. 1 1.1%
All directors and executive officers
of the Company as a group 7 7.4%
</TABLE>
* Rounded to the nearest tenths.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE> 35
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 HealthFirst Medical Group, PC are
included in Part II, Item 8 of this report:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants
Balance Sheets - December 31, 1996 and 1997
Statements of Operations - Years ended December 31, 1995, 1996 and 1997
Statements of Shareholders' Equity - Years ended December 31, 1995, 1996
and 1997
Statements of Cash Flows - Years ended December 31, 1995, 1996 and 1997
</TABLE>
(2) Financial Statement Schedules
None required.
(3) Exhibits
2.1* Amended and Restated Agreement and Plan of Reorganization and
Merger, dated as of September 19, 1996, as amended on November 4,
1996, November 29, 1996 and December 31, 1996, among Physician
Partners, Inc., The Corvallis Clinic, P.C., HealthFirst Medical
Group, P.C. and Medford Clinic, P.C.
3.1** Amended and Restated Articles of Incorporation of HealthFirst
Medical Group, P.C.
3.2** Bylaws of HealthFirst Medical Group, P.C.
10.1 Amended and Restated 1997 Stock Option Plan for all Non-Employee
Providers Affiliated with PPI dated November 12, 1997
27.1 Financial Data Schedule
- ----------
* Previously filed connection with Registration Statement No.
333-15595 and hereby incorporated by reference
** Previously filed and hereby incorporated by reference
<PAGE> 36
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.
HealthFirst Medical Group, P.C.
(Registrant)
By /s/ David L. Perry, M.D.
-----------------------------------
David L. Perry, 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/ David L. Perry, M.D. By /s/ David Shute, M.D.
--------------------------------- ------------------------------------
David L. Perry, M.D. David Shute, M.D.
President and Director Secretary and Director
3/30/98 3/30/98
By /s/ Karen M. Shepard By /s/ Resa Bradeen, M.D.
--------------------------------- ------------------------------------
Karen M. Shepard Resa Bradeen, M.D.
Chief Financial Officer and Director
Controller
3/30/98 3/30/98
By /s/ James Ritzenthaler, M.D. By /s/ John Teller, M.D.
--------------------------------- ------------------------------------
James Ritzenthaler, M.D. John Teller, M.D.
Director Director
3/30/98 3/30/98
By /s/ John Zelko, M.D. By /s/ Robert Bailey, M.D.
--------------------------------- ------------------------------------
John Zelko, M.D. Robert Bailey, M.D.
Director Director
3/30/98 3/30/98
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
FOR NON-EMPLOYEE PROVIDERS AFFILIATED WITH
PHYSICIAN PARTNERS, INC.
1. PURPOSE OF THE PLAN
The Amended and Restated 1997 Stock Option Plan for Non-Employee
Providers Affiliated with Physician Partners, Inc. (the "Plan") was established
by Physician Partners, Inc. (the "Company"), effective as of the effective time
(the "Effective Date") of the transaction contemplated under the Amended and
Restated Agreement and Plan of Reorganization and Merger, dated as of September
19, 1996, as amended on November 4, 1996, November 29, 1996 and December 31,
1996 (referred to herein, as so amended, as the "Reorganization and Merger
Agreement") to:
1.1 furnish incentives to eligible physicians chosen to receive
options because they are considered capable of responding by improving
operations and increasing profits;
1.2 increase the interest of selected physicians in the Company's
welfare through their participation in the growth in value of Class A Common
Stock, $.01 par value, of the Company ("Class A Common Stock").
To accomplish the foregoing objectives, this Plan provides a means
whereby physicians may receive options to purchase Class A Common Stock. Options
granted under this Plan ("Options") will be nonqualified options ("NQOs")
subject to federal income taxation upon exercise.
2. ELIGIBLE PERSONS
2.1 General. Every person who at the date on which an Option granted
to the person becomes effective (the "Grant Date") and who is a non-employee
provider affiliated with the Company or any Affiliate or any non-employee
provider subject to an acquisition or management agreement with the Company is
eligible to receive Options under this Plan.
2.2 Definition of Affiliate. The term "Affiliate," as used in this
Plan, means a "parent corporation" or "subsidiary corporation," as defined in
Section 424 of the Internal Revenue Code of 1986 (the "Code"). The term
"employee" shall have the meaning ascribed for purposes of Section 3401(c) of
the Code and the Treasury Regulations promulgated thereunder and shall include
an officer who is also an employee.
<PAGE> 2
3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock reserved for issuance upon the
exercise of Options is 1,500,000 shares of Class A Common Stock. The shares
covered by the portion of any grant that expires unexercised under this Plan
shall become available again for grants under this Plan. The number of shares
reserved for issuance under this Plan is subject to adjustment in accordance
with the provisions for adjustment in this Plan.
4. ADMINISTRATION
This Plan shall be administered by a committee (the "Committee") of not
less than three (3) members appointed by the Board of Directors of the Company,
at least two (2) of which must be nonemployee disinterested Directors
("Disinterested Directors") as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Committee may delegate
nondiscretionary administrative duties to other employees of the Company as it
deems proper. Subject to the approval of the Board of Directors and the
provisions of this Plan, the Committee shall have the authority to select the
persons to receive Options under this Plan, to fix the number of shares that
each optionee may purchase, to set the terms and conditions of each Option, and
to determine all other matters relating to this Plan. Any act approved in
writing by a majority of the members of the Committee shall be a valid act of
the Committee. Such determinations shall be final and binding on all persons. No
member of the Board of Directors or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any option
granted under the Plan.
5. GRANTING OF THE RIGHTS
5.1 Ten Year Limitation. No Options shall be granted under this Plan
after ten years from the date the Board of Directors of the Company adopts this
Plan.
5.2 Written Agreement; Effect. Each Option shall be evidenced by a
written agreement (the "Option Agreement"), in a form satisfactory to the
Committee, executed by the Company and by the person to whom such Option is
granted. Failure of the grantee to execute an Option Agreement shall not void or
invalidate the grant of any Option; the Option may not be exercised, however,
until the Option Agreement is executed.
-2-
<PAGE> 3
6. TERMS AND CONDITIONS OF OPTIONS
Each Option shall be subject to the terms and conditions set forth in
this Section 6.1.
6.1 Terms and Conditions to Which Options Are Subject. Options shall
be subject to the following terms and conditions:
(a) Changes in Capital Structure. Subject to Section 6.1(b),
if the stock of the Company is changed by reason of a stock split,
reverse stock split, stock dividend, or recapitalization, or converted
into or exchanged for other securities as a result of a merger,
consolidation, or reorganization, appropriate adjustments shall be made
in (A) the number and class of shares of stock subject to this Plan and
each outstanding Option, and (B) the exercise price of each outstanding
Option; provided, however, that the Company shall not be required to
issue fractional shares as a result of any such adjustment. Each such
adjustment shall be determined by the Committee in its sole discretion,
which determination shall be final and binding on all persons.
(b) Corporate Transactions. Notwithstanding any contrary
waiting period or installment period in any Option Agreement or in the
Plan, each outstanding Option granted under the Plan shall become
exercisable in full for the aggregate number of shares covered thereby,
in the event (a) the Board of Directors (or, if approval of the Board of
Directors is not required as a matter of law, the stockholders of the
Company) shall approve (i) any consolidation or merger of the Company in
which the Company is not the continuing or surviving corporation or
pursuant to which shares of Common Stock would be converted into cash,
securities or other property, other than any merger of the Company in
which the holders of Common Stock immediately prior to the merger have
the same proportionate ownership of common stock of the surviving
corporation immediately after such merger, (ii) any sale, lease,
exchange, or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company
or (iii) the adoption of any plan or proposal for the liquidation or
dissolution of the Company, or (b) any person (as such term is defined
in Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of
1934, as amended from time to time (the "Exchange Act")), corporation or
other entity (other than the Company or any employee benefit plan
sponsored by the Company or any subsidiary of the Company) (i) shall
purchase any Common Stock of the Company (or securities convertible into
the Company's Common Stock) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the
prior consent of
-3-
<PAGE> 4
the Board of Directors and (ii) shall become the "beneficial owner" (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 20 percent or more
of the combined voting power of the then outstanding securities of the
Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors
(calculated as provided in paragraph (d) of such Rule 13d-3 in the case
of rights to acquire the Company's securities), or (c) during any period
of two consecutive years, individuals who at the beginning of such
period constitute the entire Board of Directors shall cease for any
reason to constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
Any transaction referred to in the foregoing clause (a) is herein called
an Approved Transaction, any purchase pursuant to a tender offer or
exchange offer or otherwise as described in the foregoing clause (b) is
herein called a Control Purchase and the cessation of individuals
constituting a majority of the Board as described in the foregoing
clause (c) is herein called a Board Change.
(c) Option Grant Date. Each Option Agreement shall specify the
date as of which it shall be effective, which date shall be the Grant
Date (determined pursuant to Section 5.4 in the case of advance
approvals).
(d) Fair Market Value. For purposes of this Plan, the fair
market value of the Company's Class A Common Stock shall be determined
as follows:
(1) if the stock is listed on any established stock
exchange or a national market system, including without
limitation the National Market System of the National Association
of Securities Dealers Automated Quotation System, its fair market
value shall be the closing sales price for the stock, or the mean
between the high bid and low asked prices if no sales were
reported, as quoted on such system or exchange (or the largest
such exchange) for the date the value is to be determined (or if
there are no sales or bids for such date, then for the last
preceding business day on which there were sales or bids), as
reported in the Wall Street Journal or similar publication;
(2) if the stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its fair
market value shall be the mean
-4-
<PAGE> 5
between the high bid and low asking prices for the stock on the
date the value is to be determined (or if there are no quoted
prices for the date of grant, then for the last preceding
business day on which there were quoted prices);
(3) in the absence of an established market for the
stock, the fair market value shall be determined in "good faith"
by the Committee, with reference to the Company's net worth,
prospective earning power, dividend-paying capacity, and other
relevant factors, including sales for the most recent 12 month
period, the goodwill of the Company, the economic outlook in the
Company's industry, the Company's position in the industry and
its management and the values of stock of other corporations in
the same or a similar line of business.
(e) Time of Option Exercise. The Company shall not grant any
Options which may become exercisable at a rate in excess of 20% per
annum from the date of such grant without the written consent of a
majority of the Disinterested Directors.
(f) Nonassignability of Option Rights. No Option shall be
assignable or otherwise transferable by the optionee except by will or
by the laws of descent and distribution. During the life of the
optionee, an Option shall be exercisable only by the optionee or the
optionee's guardian or legal representative.
(g) Payment. Except as provided below, payment in full, in
cash, shall be made for all stock purchased at the time written notice
of exercise of an Option is given to the Company, and proceeds of any
payment shall constitute general funds of the Company. At the time an
Option is granted or before it is exercised, the Committee, in the
exercise of its absolute discretion, may authorize any one or more of
the following additional methods of payment:
(1) acceptance of the optionee's full recourse promissory
note for some or all of the aggregate exercise price of the
shares being acquired (except for the aggregate par value of the
shares being acquired, which must be paid in cash or other
lawful consideration under applicable law), payable on such
terms and bearing such interest rate as determined by the
Committee, and secured in such manner as the Committee shall
approve; including, without limitation, by a security interest
in Class A Common Stock or other securities of the Company;
-5-
<PAGE> 6
(2) delivery by the optionee of Class A Common Stock or
other securities of the Company already owned by the optionee for
all or part of the aggregate exercise price of the shares being
acquired, provided the fair market value of such Class A Common
Stock or securities is equal on the date of exercise to the
aggregate exercise price of the shares being acquired, or such
portion thereof as the optionee is authorized to pay by delivery
of such Class A Common Stock or securities; and
(3) any other property, so long as such property is
acceptable to the Committee and constitutes valid consideration
under applicable law for the shares being acquired and is
surrendered in good form for transfer.
(h) Affiliation.
(1) Any Option or portion thereof which has not expired
or been exercised on or before the date on which an optionee
ceases to be affiliated with the Company shall expire ninety (90)
days after the date of cessation of such affiliation.
(2) Notwithstanding the foregoing, if the optionee ceases
to be affiliated with the Company due to the permanent disability
or death of the optionee, the optionee, the optionee's personal
representative or any other person who acquires option rights
from the optionee by will or the applicable laws of descent and
distribution, may, within twelve months after the date of
cessation, exercise such option rights to the extent they were
exercisable on the date of cessation.
(i) Other Provisions. Each Option Agreement may contain such
other terms, provisions, and conditions not inconsistent with this Plan,
including rights of repurchase, as may be determined by the Committee.
(j) Exercise Price. The exercise price of an NQO shall not be
less than 85 percent of the fair market value of the stock subject to
the Option on the Grant Date; provided, however, that the exercise price
of an NQO granted to any person who owns, directly or indirectly (or is
treated as owning by reason of attribution rules, currently set forth in
Code Section 424), stock of the Company constituting more than ten
percent of the total combined voting power of all classes of outstanding
stock of the Company or of any Affiliate of the Company, shall in no
event be less than 100 percent of such fair market value.
-6-
<PAGE> 7
(k) Option Term. Unless an earlier expiration date is
specified by the Committee at the Grant Date in the Option Agreement,
each NQO shall expire ten years from its Grant Date.
7. MANNER OF EXERCISE
An optionee wishing to exercise an Option shall give written notice to
the Company at its principal executive office, to the attention of the Secretary
of the Company, accompanied by an executed stock purchase agreement in form and
substance satisfactory to the Company, by payment of the exercise price and by
such other documents as the Committee may request. The date the Company receives
written notice of an exercise hereunder accompanied by payment of the exercise
price and all such other documents will be considered the date the Option was
exercised. Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or any
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or transferee of an Option shall not have any privileges as
stockholder with respect to any stock covered by the Option until the date of
issuance of a stock certificate.
8. RELATIONSHIP WITH THE COMPANY
Nothing in this Plan or any Option granted hereunder shall interfere
with or limit in any way the right of the Company to terminate any optionee's
affiliation or other relationship with the Company at any time.
9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Board of Directors may at any time amend, alter, suspend or
discontinue this Plan. The Board of Directors may amend this Plan and the terms
of any Option outstanding hereunder if the amendment is designed to maximize
federal income tax benefits accorded to Options; provided, that with respect to
outstanding Options, the optionee consents to such amendment.
10. LIABILITY AND INDEMNIFICATION OF COMMITTEE
No member of the Committee shall be liable for any act or omission on
such member's own part, including but not limited to the exercise of any power
or discretion given to such member under
-7-
<PAGE> 8
this Plan, except for those acts or omissions resulting from such member's own
gross negligence or willful misconduct. The Company shall indemnify each present
and future member of the Committee against, and each member of the Committee
shall be entitled without further act on his or her part to indemnity from the
Company for, all expenses (including attorney's fees and the amount of judgments
and the amount of approved settlements made with a view to the curtailment of
costs of litigation, other than amounts paid to the Company itself) reasonably
incurred by such person in connection with or arising out of any action, suit,
or proceeding to which the Committee or any member of the Committee may be a
party by reason of any action taken or failure to act under or in connection
with the Plan or any option granted under the Plan to the full extent permitted
by law and by the Certificate of Incorporation and Bylaws of the Company. The
right of indemnity described in this Section 10 shall be in addition to such
other rights of indemnification as the members of the Committee shall otherwise
be entitled because of their serving on the Board of Directors of the Company or
as an employee of the Company.
11. EFFECTIVE DATE OF THIS PLAN
This Plan shall become effective as of the Effective Date; provided,
that the Plan is approved by the affirmative votes of the holders of a majority
of the share of Class A Common Stock present, or represented, and entitled to
vote at a meeting of the stockholders duly held not later than January 31, 1997.
-8-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,176
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,176
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,176
<SALES> 0
<TOTAL-REVENUES> 65,630
<CGS> 0
<TOTAL-COSTS> 62,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,056
<INTEREST-EXPENSE> 1,625
<INCOME-PRETAX> 258
<INCOME-TAX> 0
<INCOME-CONTINUING> 258
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 258
<EPS-PRIMARY> 2,866.67
<EPS-DILUTED> 2,866.67
</TABLE>
