PHYMATRIX CORP, 10-Q, 1996-12-12

PHYMATRIX CORP
10-Q, 1996-12-12
MISC HEALTH & ALLIED SERVICES, NEC

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 31, 1996

[ ] 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 0-27568

PhyMatrix Corp.
(Exact name of registrant as specified in its charter)

Delaware 65-0617076
(State of incorporation) (I.R.S. Employer Identification No.)

Phillips Point, Suite 1000E
777 S. Flagler Drive, West Palm Beach, Florida 33401
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (561) 655-3500

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $ 0.01 per share

Indicate by check mark whether the registrant (1) has filed all reports
required 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 [ ]

On December 6, 1996, the number of outstanding shares of the registrant's
Common Stock, par value $0.01 per share, was 22,238,144.

<PAGE>

PHYMATRIX CORP.

QUARTERLY REPORT ON FORM 10-Q

INDEX

PAGE
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Balance Sheets -- October 31, 1996 (unaudited),
January 31, 1996 (unaudited) and December 31, 1995 3

Statements of Operations-Three Months and
Nine Months Ended October 31, 1996 (unaudited),
One Month Ended January 31, 1996 (unaudited),
Three Months Ended September 30, 1995 (unaudited)
and Nine Months Ended September 30, 1995 4

Statements of Cash Flows-Nine Months Ended
October 31, 1996 (unaudited), One Month Ended
January 31, 1996 (unaudited) and Nine Months
Ended September 30, 1995 5

Notes to Financial Statements (unaudited) 6-11

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Information 12-23

PART II -OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 23

<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

PHYMATRIX CORPORATION

BALANCE SHEETS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
October 31, January 31, December 31,
1996 1996 1995
------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 91,836,567 $ 46,113,619 $3,596,913
Receivables:
Accounts receivable, net 32,589,968 21,562,477 20,710,846
Other receivables 873,831 678,411 569,923
Notes receivable 10,000,000 -- 516,000
Prepaid expenses and other current assets 5,140,178 1,202,399 1,276,535
----------- ---------- ----------
Total current assets 140,440,544 69,556,906 26,670,217

Property, plant and equipment, net 44,314,050 38,719,086 39,359,328
Notes receivable 1,931,000 100,000 170,400
Goodwill, net 59,227,195 44,979,865 31,931,453
Management service agreements, net 29,990,869 15,816,042 16,376,636
Investment in affiliates 3,335,180 3,256,783 12,925,129
Other assets (including restricted cash) 10,514,874 7,578,791 4,753,710
----------- ---------- ----------
Total assets $289,753,712 $180,007,473 $132,186,873
=========== ========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $2,886,155 $2,552,306 $26,662,510
Current portion of related party debt -- 4,740,588 4,740,588
Due to shareholder - current -- 5,376,000 --
Accounts payable 5,115,322 5,333,791 5,353,210
Accrued compensation 1,211,322 1,151,268 1,124,316
Accrued liabilities 13,717,993 6,194,108 9,367,532
Accrued interest - shareholder -- -- 1,708,174
----------- ---------- ----------
Total current liabilities 22,930,792 25,348,061 48,956,330

Due to shareholder, less current portion -- 10,147,287 36,690,180
Long-term debt and capital leases, less current portion 13,998,562 13,653,437 28,847,923
Convertible subordinated debentures 100,000,000 -- --
Other long term liabilities 7,657,441 2,314,544 2,511,122
Minority interest 647,667 1,335,167 2,502,970
----------- ---------- ----------
Total liabilities 145,234,462 52,798,496 119,508,525

Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000
Shares authorized; 22,238,144 Shares
issued and outstanding at October 31, 1996 222,381 215,300 --
Additional paid in capital 148,736,432 140,491,557 25,000,000
Retained earnings (deficit) (4,439,563) (13,497,880) (12,321,652)
----------- ---------- ----------
Total shareholders' equity 144,519,250 127,208,977 12,678,348
----------- ---------- ----------

Total liabilities and shareholders' equity $289,753,712 $180,007,473 $132,186,873
=========== ========== ==========

</TABLE>

The accompanying notes are an integral part of the financial statements.

3
<PAGE>
PHYMATRIX CORPORATION

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Consolidated Consolidated Consolidated Consolidated Combined
Three Three One Nine Nine
Months Months Month Months Months
Ended Ended Ended Ended Ended
October 31, September 30, January 31, October 31, September 30,
1996 1995 1996 1996 1995
----------- ----------- ----------- ----------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues from services $26,781,310 $13,078,968 $4,636,127 $67,888,832 $33,063,274
Net revenue from management service agreements 24,957,207 7,054,302 6,079,109 61,480,762 7,054,302
---------- --------- --------- ---------- ---------
Total revenue 51,738,517 20,133,270 10,715,236 129,369,594 40,117,576
---------- --------- --------- ---------- ---------

Operating costs and administrative expenses:
Cost of affiliated physician
management services 12,251,717 2,279,615 2,796,623 29,663,964 2,279,615
Salaries, wages and benefits 14,467,408 9,222,359 3,636,973 38,300,280 21,424,554
Professional fees 849,410 756,881 287,095 2,853,855 1,865,458
Supplies 7,345,718 3,712,482 1,916,013 18,926,161 6,484,118
Utilities 722,559 364,214 175,653 1,901,079 807,314
Depreciation and amortization 1,950,077 954,222 535,300 5,215,765 2,347,689
Rent 2,202,321 1,302,984 565,106 5,643,144 2,700,700
Earn out payment -- 159,889 -- -- 1,271,000
Provision for bad debts 457,044 282,849 256,989 1,777,821 538,260
Other 6,267,233 1,624,155 799,460 11,169,091 3,893,362
---------- --------- --------- ---------- ---------
Total operating costs and
administrative expenses 46,513,487 20,659,650 10,969,212 115,451,160 43,612,070
---------- --------- --------- ---------- ---------

Interest expense, net 283,102 968,322 551,607 723,514 1,731,138
Interest expense shareholder -- 688,345 259,888 369,366 1,035,187
Minority interest -- 272,320 81,135 58,234 564,384
Income from investment in affiliates (226,838) (122,560) 29,622 (495,836) (341,764)
---------- --------- --------- ---------- ---------
56,264 1,806,427 922,252 655,278 2,988,945
---------- --------- --------- ---------- ---------
Income (loss) before provision for income taxes 5,168,766 (2,332,807) (1,176,228) 13,263,156 (6,483,439)
Income tax expense 1,885,769 -- -- 4,917,650 --
---------- --------- --------- ---------- ---------

Net income (loss) $3,282,997 ($2,332,807) ($1,176,228) $8,345,506 ($6,483,439)
---------- --------- --------- ---------- ---------
Net income (loss) per weighted average share $0.15 ($0.08) $0.38
---------- --------- ----------
Weighted average number of shares outstanding 22,507,347 14,204,305 21,968,654
---------- --------- ----------
</TABLE>

The accompanying notes are an integral part of the financial statements.

4
<PAGE>

PHYMATRIX CORPORATION

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Consolidated Consolidated Combined
Nine Months One Month Nine Months
Ended Ended Ended
October 31, January 31, September 31,
1996 1996 1995
----------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $8,345,506 ($1,176,228) ($6,483,439)
Noncash items included in net income (loss):
Depreciation and amortization 5,215,765 535,300 2,347,689
Other (272,635) 430,334 80,088
Changes in receivables (8,493,399) (739,635) (2,127,701)
Changes in accounts payable and accrued liabilities 1,513,278 (796,011) 6,866,539
Changes in other assets (3,965,999) (19,072) (1,293,922)
----------- ----------- -----------
Net cash provided (used) by operating activities 2,342,516 (1,765,312) (610,746)
----------- ----------- -----------

Cash flows from investing activities:
Capital expenditures (4,613,077) (184,460) (803,899)
Sale of assets 1,500,000 24,794 --
Notes receivable (11,831,000) 686,400 (1,029,600)
Purchase of investments in affiliates -- -- (9,790,588)
Other investments (1,457,594) -- --
Acquisitions, net of cash acquired (14,906,916) 54,252 (38,915,647)
----------- ----------- -----------
Net cash provided (used) by investing activities (31,308,587) 580,986 (50,539,734)
----------- ----------- -----------

Cash flows from financing activities:
Capital contributions -- -- 12,036,287
Advances from (repayment to) shareholder (15,523,287) (23,123,170) 33,910,040
Proceeds from issuance of common stock 243,010 114,563,221 --
Proceeds from issuance of convertible subordinated debentures 96,661,882 -- --
Proceeds from issuance of debt -- -- 19,500,000
Release of cash collateral 1,996,786 1,000,000 --
Cash collateralizing notes payable -- (5,403,337) --
Offering costs and other (2,458,181) -- (288,939)
Repayment of debt (6,231,191) (43,335,682) (2,768,209)
----------- ----------- -----------
Net cash provided by financing activities 74,689,019 43,701,032 62,389,179
----------- ----------- -----------

Increase in cash and cash equivalents 45,722,948 42,516,706 11,238,699
Cash and cash equivalents, beginning of period 46,113,619 3,596,913 677,245
----------- ----------- -----------
Cash and cash equivalents, end of period $91,836,567 $46,113,619 $11,915,944
=========== =========== ===========

Supplemental disclosure of cash flow information
Cash paid during period for:
Interest $1,990,738 $2,876,636 $1,371,570
=========== =========== ===========
Taxes $2,270,557 $-- $--
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

5
<PAGE>

PHYMATRIX CORP.

NOTES TO FINANCIAL STATEMENTS
Three Months and Nine Months Ended October 31, 1996 (Unaudited)
One Month Ended January 31, 1996 (Unaudited)
and Three Months (Unaudited) and Nine Months Ended September 30, 1995

1. ORGANIZATION AND BASIS OF PRESENTATION

The accompanying unaudited interim financial statements include the accounts
of PhyMatrix Corp. ("the Company") and the combination of business entities
which had been operated under common control prior to the completion of the
initial public offering ("IPO"). These interim financial statements have been
prepared in accordance with generally accepted accounting principles and the
requirements of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is management's opinion that the accompanying interim
financial statements reflect all adjustments (which are normal and recurring)
necessary for a fair presentation of the results for the interim periods. These
interim financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Special Report
on Form 10-K for the year ended December 31, 1995. Operating results for the
three months and nine months ended October 31, 1996 are not necessarily
indicative of results that may be expected for the year. In January 1996, the
Company changed its fiscal year end from December 31 to January 31 and financial
statements as of and for the one month period ended January 31, 1996 are
included herein.

The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with the IPO which became effective
January 23, 1996. In connection with the IPO, the Company issued 8,222,500
shares of Common Stock. Net proceeds to the Company were $111,187,154, which was
net of underwriting discounts, commissions and other expenses. The Company used
approximately $71,500,000 from the net proceeds of the IPO to repay certain
indebtedness and obligations that arose from certain acquisitions. The remaining
net proceeds have and will continue to be used for general corporate purposes,
including future acquisitions and working capital.

During June 1996, the Company raised $100 million through the sale of its 6
3/4% Convertible Subordinated Debentures ( the "Debentures") to certain
institutional investors and non-U.S. investors. The Debentures will be
convertible into shares of the Company's Common Stock and are due in 2003. Net
proceeds to the Company from the Debentures, after deduction of the initial
purchasers' discounts, commissions and other expenses, were $96,661,882. The
Company used approximately $10,752,000 from the net proceeds of the Debenture
offering to repay advances from the principal shareholder. During July 1996, the
Company filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission to register the resale of the Debentures by the holders
thereof.

During July 1996, the Company also filed a Registration Statement on Form S-4
with the Securities and Exchange Commission with respect to the registration of
an aggregate of up to 5,000,000 shares of Common Stock which may be issued by
the Company from time to time in connection with various acquisitions that it
may make.

2. ACQUISITIONS

During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, a newly formed management services organization ("MSO")
that provides management services to an independent physician association
("IPA") composed of 45 physicians based in Georgia. The Company acquired this
interest in exchange for a payment of $550,000 to existing shareholders and a
capital contribution of $700,000 to the Company. The Company's balance sheet at
October 31, 1996 includes the 50% interest not owned by the Company as minority
interest. The owners of the other 50% interest in the MSO have a put option to
the Company to purchase their interests. This put option vests over a four-year
period. The price to the Company to purchase these interests equals 40% of the
MSO's net operating income as of the most recent fiscal year multiplied by the
price earnings ratio of the Company. The minimum price earnings ratio used in
such calculation will be 4 and the maximum 10.

During April 1996, the Company purchased the assets of and entered into an
employment agreement with one physician in Florida. The total purchase price,
which was paid in cash, for these assets was $1,683,190. The

6
<PAGE>

purchase price was allocated to these assets at their fair market value
including goodwill of $1,633,471. The resulting intangible is being amortized
over 20 years.

During May 1996, the Company purchased the stock of Atlanta Gastroenterology
Associates, P.C. pursuant to a tax free merger and entered into a 40-year
management agreement with the medical practice in exchange for 324,252 shares of
Common Stock of the Company having a value of approximately $6,100,000. The
transaction has been accounted for using the pooling-of-interests method of
accounting. Pursuant to the management agreement, the Company receives a base
management fee, an incentive management fee and a percentage of all net
ancillary service income.

During May 1996, the Company amended its existing management agreement with
Oncology Care Associates and extended the term of the agreement to 20 years.
Simultaneously, the Company expanded the Oncology Care Associates practice by
adding three oncologists the practices of whom the Company acquired for
$500,000. $200,000 of such purchase price was paid in cash and $300,000 was paid
in the form of a convertible note due in May 1997. The Company has the option to
make such $300,000 payment at its discretion in either cash or Common Stock of
the Company with such number of shares to be based upon the average price of the
stock during the five business days preceding the due date. The purchase price
has been allocated to the assets at their fair market value, including
management service agreements of approximately $500,000. The Company receives an
annual base management fee based upon a percentage of the net revenues of the
practice. The resulting intangible is being amortized over 20 years.

During May and June 1996, the Company entered into agreements to purchase the
assets of and enter into 20-year management agreements with three physician
practices consisting of four physicians. All of these acquisitions have since
been consummated, except that one of the acquisitions closed in escrow pending
the satisfaction of certain conditions. These practices are located in South
Florida, Bethesda, Maryland and Washington, D.C. The total purchase price for
the assets of these practices was $1,677,165. Of this amount $726,211 was paid
in cash and $950,954 of such purchase price is payable in Common Stock of the
Company to be issued during May and June 1997. The number of shares of Common
Stock of the Company to be issued is based upon the average price of the stock
during the five business days prior to the issuance. The value of the Common
Stock to be issued has been recorded in other long term liabilities at October
31, 1996. The purchase price has been allocated to the assets at their fair
market value, including management service agreements of $812,520. The Company
receives an annual base management fee and an incentive management fee under
each agreement. The resulting intangible is being amortized over 20 years.

During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase price
for these assets was approximately $937,909, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $318,137. The Company receives a
management fee under the management agreements based upon a percentage of the
net revenues of the practice. The resulting intangible is being amortized over
20 years.

During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $737,354. Of such purchase price $457,354
was paid in cash and $280,000 is payable during July 1997 in Common Stock of the
Company with such number of shares to be based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
October 31, 1996. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of $382,165. The
Company receives an annual base management fee and an incentive management fee.
The resulting intangible is being amortized over 20 years.

During July 1996, the Company purchased the assets of and entered into
employment agreements with two physicians in Florida. The total purchase price
for these assets was $1,506,400. Of this amount, $448,000 was

7
<PAGE>

paid in cash and $1,058,400 is payable during July 1997 in Common Stock of the
Company with such number of shares to be based upon the value of the stock
during the five business days prior to the issuance. The value of the Common
Stock to be issued has been recorded in other long term liabilities at October
31, 1996. The purchase price has been allocated to these assets at their fair
market value including goodwill of $1,204,755. The resulting intangible is being
amortized over 20 years.

During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,311,606. Of such purchase price, $1,391,606 was
paid in cash and $1,920,000 is payable during August 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at October 31, 1996. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $2,497,974.
The Company receives an annual base management fee and an incentive management
fee. The resulting intangible is being amortized over 40-years.

During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase price
for these assets was $1,529,419. Of such purchase price, $836,619 was paid in
cash and $692,800 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
October 31, 1996. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of approximately
$1,096,922. The Company receives an annual base management fee and an incentive
management fee. The resulting intangible is being amortized over 40 years.

During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase price
for these assets was $3,181,765. Of such purchase price, $807,365 was paid in
cash and $2,374,400 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
October 31, 1996. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of $3,048,457. The
Company receives an annual base management fee and an incentive management fee.
The resulting intangible is being amortized over 40 years.

During August 1996, the Company expanded the Osler Medical, Inc. practice by
adding three physicians, the practices of whom the Company acquired for
$248,273. The total purchase price was paid in cash. The purchase price has been
allocated to the assets at their fair market value, including management service
agreements of approximately $92,000. The resulting intangible is being amortized
over 20 years.

During September 1996, the Company acquired the remaining 56.25% ownership
interest in Physicians Choice Management, LLC, a management services
organization ("MSO") that provides management services to an independent
physician association ("IPA") composed of over 375 physicians in Connecticut.
The Company had acquired a 43.75% ownership interest in December 1995. The
Company acquired the remaining interests in exchange for a payment of $1,000,000
in cash plus 363,442 shares of Common Stock of the Company. The Company also
committed to loan the selling shareholders $2,800,000 to pay the tax liability
related to the sale. As of October 31, 1996, $1,581,000 of the loan amount
committed had been advanced to the selling shareholders by the Company. The
total purchase price for the 100% interest has been allocated to these assets at
their fair market value including goodwill of $11,262,231. The resulting
intangible is being amortized over 40 years.

8
<PAGE>

$10,000,000 based on PCMC's earnings before taxes during the next five years
which will be paid in cash and/or Common Stock of the Company. The purchase
price has been allocated to the assets at their fair market value including
goodwill of approximately $2,372,000. The resulting intangible is being
amortized over 30 years.

During September 1996, the Company acquired an 80% interest in New Jersey
Medical Management, LLC, a newly formed MSO that provides management services to
an IPA with more than 450 physicians in New Jersey. The Company acquired this
interest in exchange for a payment of $350,000. The Company's balance sheet at
October 31, 1996 includes the 20% interest not owned as minority interest.

During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,331,521. Of such purchase price $796,521 was paid
in cash and $535,000 is payable during October 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at October 31, 1996. The Company receives an annual base management fee and an
incentive management fee. The purchase price has been allocated to these assets
at their fair market value, including management service agreements of $660,000.
The resulting intangible is being amortized over 20 years.

During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease whereby
the surgical center was leased to a partnership with an initial term of 15
years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical center. The purchase price for these assets was
$3,035,196 plus the assumption of debt of $1,223,625 which consists of $717,557
in a mortgage payable and $506,068 in capital leases. The purchase price has
been allocated to the assets at their fair market value, including management
service agreements of $2,368,448. The resulting intangible is being amortized
over 20 years.

During the nine months ended October 31, 1996 and September 30, 1995, the
Company acquired the assets and assumed certain liabilities of physician
practices, medical support service companies, a medical facility development
company and management service organizations. The transactions had the following
non-cash impact on the balance sheets:

October 31, September 30,
1996 1995
---- ----
Current assets $2,910,958 $10,171,434
Property, plant and equipment 4,026,529 38,383,129
Intangibles 30,646,682 38,953,324
Other noncurrent assets 20,441 2,174,662
Current liabilities (5,204,234) (8,149,187)
Debt (1,526,077) (40,829,080)
Noncurrent liabilities (6,754,572) (1,788,635)
Equity (9,212,811) --

3. NOTES RECEIVABLE

During August 1996, the Company loaned $10 million to an unrelated healthcare
entity. The principal and interest are due in one installment on August 15,
1997. Interest on the loan accrues at the rate of prime plus 2%.

During October 1996, the Company loaned $1,581,000 to Physicians Choice, LLC
pursuant to the agreement under which the Company purchased the remaining
ownership interests in Physicians Choice Management, LLC (see Note 2).
The note has a variable rate of interest and a final maturity in April 2004.

9
<PAGE>

4. LONG TERM DEBT

During January 1996, the Company used approximately $71,500,000 from the
proceeds of the IPO, to repay the following indebtedness and obligations of the
Company that arose from certain acquisitions: (i) a promissory note to Aegis
Health Systems, Inc. in the amount of $3,796,503 (including interest); (ii) a
contingent note to the former shareholders of Nutrichem, Inc., net of a tax loan
receivable due from the shareholders, in the amount of $3,854,595 (including
interest); (iii) a note payable to a financing institution in connection with
the purchase of Oncology Therapies, Inc. in the amount of $15,585,023 (including
interest); (iv) a note payable to NationsBank of Florida, N.A. in the amount of
$19,586,531 (including interest); and (v) a partial payment of $28,676,743 on
the note payable to Abraham D. Gosman, the Company's President, Chief Executive
Officer, Chairman and principal shareholder.

During the nine months ended October 31, 1996, the Company repaid (i)
$4,610,588 of related party indebtedness to the former shareholders of DASCO
Development Corporation and (ii) $15,523,287 on the note payable to Mr. Gosman.

During May 1996, the Company received a commitment from PNC Bank, National
Association, for a $30 million revolving credit facility.

During June 1996, the Company issued $100,000,000 of the Debentures which are
due in 2003 and bear interest at the rate of 6 3/4% per annum. The Debentures
are convertible into Common Stock of the Company at any time after August 20,
1996 at a conversion price of $28.20 per share. The Debentures are not
redeemable by the Company prior to June 18, 1999. Offering costs of
approximately $3,338,118 have been deferred and are being amortized over the
life of the Debentures.

5. RELATED PARTY TRANSACTIONS

During the nine months ended October 31, 1996, the Company contracted with
entities principally owned by the Company's Chairman of the Board, President and
Chief Executive Officer to provide construction management, development,
marketing and consulting services for the medical facilities being constructed
by such entities. During the nine months ended October 31, 1996 the Company
recorded revenues in the amount of $2,374,000 related to such services.

6. NET INCOME PER SHARE

Net income per common share is based upon the weighted average number of
common shares outstanding (including stock required to be issued in the future
pursuant to acquisition agreements) during the period. For the three and nine
months ended October 31, 1996, the weighted average number of common shares
outstanding were 22,507,347 and 21,968,654, respectively. When dilutive, stock
options (less the number of treasury shares assumed to be purchased from the
proceeds) are included in the calculation of the weighted average number of
common shares outstanding. For the three and nine months ended October 31, 1996,
conversion of the 6-3/4% Convertible Subordinated Debentures issued in June
1996, is not assumed because the effect is anti-dilutive.

7. SUBSEQUENT EVENTS

During November 1996, the Company established New York Network Management,
L.L.C. ("Network"), which is 51% owned by the Company, to purchase the assets
and stock of various entities which comprise Brooklyn Medical Systems ("BMS").
BMS arranges for the delivery of health care services to members through
affiliations with more than 600 physicians in the New York City area. The base
purchase price for Network was $1,200,000 and an additional payment not
exceeding $1,000,000 may be required to be made during the next three years if
certain pre-tax earnings thresholds are achieved. The Company has committed to
fund approximately $2,400,000

10
<PAGE>

to Network during the next three years. Such advances can be in the form of a
demand loan or for additional ownership interests if the other owners do not
elect to contribute their pro-rata share of any additional capital contribution
($100,000 of additional capital contribution for an additional 1% interest) in
Network. During the first three years the Company has the option to purchase up
to an additional 29% ownership interest. During years four and five the owners
of 29% of Network have the right to require the Company to purchase their
interests at the option price.

11
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

The Company is a physician practice management company that provides
management services to disease specialty and primary care physicians and
provides related medical support services. The Company's strategy is to develop
networks of disease specialty and primary care physicians supported by related
diagnostic and therapeutic medical support services in order to provide a
continuum of health care services in specific geographic locations. The Company
also provides medical facility development services to related and unrelated
third parties in connection with the establishment of health parks, medical
malls and medical office buildings.

Since the Company commenced operations in June 1994, it has developed its
current business primarily through the acquisition of the businesses and assets
of physician practices and medical support service companies. More recently the
Company has also focused on expanding its physician affiliations through the
management of IPA's by management service organizations ("MSO's") in which the
Company has ownership interests. As of October 31, 1996, the Company had
affiliated through management and/or employment agreements with 174 physicians,
acquired several medical support service companies, acquired a medical facility
development company, and acquired a management services organization in
Connecticut with 375 physicians, a 50% interest in a management services
organization with 45 physicians in Georgia and an 80% interest in a management
services organization with 450 physicians in New Jersey (collectively, the
"Acquisitions").

In January 1996, the Company changed its fiscal year end from December 31 to
January 31.

Acquisition Summary

The following table sets forth the acquisitions made by the Company as of
October 31, 1996 with the respective purchase dates, purchase prices, and
amounts allocated to intangibles:

<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
-----------------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
- ----------------- ----------------- ------------ ----------- -------------
<S> <C> <C> <C>
Employed physicians (A) Various through $ 7,300,995 $5,965,807 --
October 1996

Medical support service companies:
- - Uromed Technologies, Inc. September 1994 3,681,718 2,395,881 --
- - Nutrichem, Inc. November 1994 12,924,371 9,799,793 --
- - First Choice Home Care Services of Boca November 1994 2,910,546 2,622,061 --
Raton, Inc.
- - First Choice Health Care Services of
Ft.Lauderdale, Inc.
- - First Choice Health Care Services, Inc.
- - Mobile Lithotripter of Indiana Partners December 1994 2,663,000 -- --
- - Radiation Care, Inc. and Subsidiaries March 1995 41,470,207 8,623,239 --
- - Aegis Health Systems, Inc. April 1995 7,163,125 6,228,126 --
- - Phylab/Miramer Lab October 1995 133,081 118,649 --
- - Pinnacle Associates, Inc. November 1995 --(B) 471,967 --
Managed physician practices:
- - Georgia Oncology-Hematology Clinic, P.C. April 1995 2,099,353 -- 645,448
- - Oncology-Hematology Associates P.A. and July 1995 1,542,953 -- 314,170
- - Oncology-Hematology Infusion Therapy, Inc.
- - Cancer Specialists of Georgia, Inc. August 1995 6,101,671 -- 2,739,611

12
<PAGE>

- - Oncology & Radiation Associates, P.A. September 1995 11,120,500 -- 10,719,105
- - Osler Medical, Inc. September 1995/ 7,040,129 -- 4,484,304
August 1996
- - West Shore Urology October 1995 556,005 -- 28,761
- - Whittle, Varnell and Bedoya, P.A. November 1995 1,006,472 -- 310,325
- - Oncology Care Associates November 1995/ 1,067,705 -- 582,653
May 1996
- - Symington December 1995 121,667 -- 29,566
- - Venkat Mani December 1995 443,429 -- 140,839
- - Atlanta Gastroenterology May 1996 6,100,000 -- --
- - Busch May 1996 782,738 -- 452,646
- - Kelley June 1996 500,000 -- 500,000
- - Dal Yoo June 1996 394,427 -- 259,874
- - Koerner, Taub & Flaxman July 1996 937,909 -- 318,137
- - Atlanta Metro Urology July 1996 737,354 -- 382,165
- - Ankle & Foot Center of Tampa Bay, P.A. August 1996 3,181,765 -- 3,048,457
- - Insignia Care for Women, P.A. August 1996 3,311,606 -- 2,497,974
- - Georgia Surgical Associates, P.C. August 1996 1,529,419 -- 1,096,922
- - Physicians Consultant and Management September 1996 2,000,000(C) 2,371,910 --
Corporation
- - Boynton GI Group October 1996 1,331,521 -- 660,000
- - Outpatient Center of Boynton Beach, LTD October 1996 4,258,821 -- 2,368,448

Medical facility development:
- - DASCO Development Corporation and May 1995/ 9,813,856(D) 9,813,856 --
Affiliate January 1996

Management Services Organization:
- - Physicians Choice Management, LLC December 1995 13,350,000 11,262,231 --
- - Central Georgia Medical Management, April 1996 1,263,573 913,573 --
LLC
- - New Jersey Medical Management, LLC September 1996 420,861 508,360 --
</TABLE>

(A) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer, Cano,
Herman, Barza, Novoa, Lawler, Cutler and Surowitz.

(B) Entire purchase price is contingent and is based on earnings with a maximum
purchase price of $5.2 million.

(C) In addition to the $2,000,000 purchase price, there is a contingent payment
up to a maximum of $10,000,000 based on the earnings before taxes during the
next five years.

(D) The Company acquired 50% of DASCO in May 1995 and the remaining 50% was
acquired simultaneous with the initial public offering in January 1996. See
Medical Facility Development Acquisitions.

Physician Practice Acquisitions

During the year ended December 31, 1995, the Company purchased the assets of
Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer, Cano, Herman,
Barza and Novoa and in conjunction with those purchases entered into employment
agreements with 14 physicians in Florida. The total purchase price for these
assets was $4,111,404. The purchase price was allocated to these assets at their
fair market value, including goodwill of $3,127,580. During the nine months
ended October 31, 1996, the Company purchased the assets of and entered into
employment agreements with Drs. Lawler, Cutler and Surowitz. The total purchase
price for these assets was $2,131,191 in cash and $1,058,400 payable in Common
Stock of the Company to be issued during the second

13
<PAGE>

quarter of 1997. The Common Stock to be issued is based upon the average price
of the stock during the five business days prior to the issuance and was
allocated to the assets at their fair market value including goodwill of
$2,838,227. The resulting goodwill is being amortized over 20 years.

During July 1995, the Company purchased the assets of and entered into a
15-year management agreement with Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc. a medical oncology practice in
Baltimore, Maryland with three medical oncologists. The purchase price for these
assets was approximately $1,542,953 in cash. An affiliate of the Company
guarantees the performance of the Company's obligations under the management
agreement. For its management services, the Company will receive 41.6% of the
net revenues of the practice less the salaries and benefits of medical personnel
whose services are billed incident to the practice of medicine and which are
employed by the practice. The Company has guaranteed that the minimum amount
that will be retained by the practice for each of the first eight years will be
$1,627,029 and for each of years nine and ten will be $1,301,619. The purchase
price was allocated to the assets at their fair market value, including
management service agreements of approximately $314,170. The resulting
intangible is being amortized over 15 years.

During August 1995, the Company purchased the assets of Cancer Specialists of
Georgia, Inc. a medical oncology practice with 11 oncologists in Atlanta,
Georgia. The purchase price for these assets was approximately $6,101,674 in
cash. In addition, during April 1995, the Company purchased the assets of and
entered into a 10-year management agreement with Georgia Oncology-Hematology
Clinic, P.C. a medical oncology practice with eight oncologists in Atlanta,
Georgia. The purchase price for these assets was approximately $2,099,353 in
cash. During August 1995, these two medical oncology practices consolidated and
formed a new entity, Georgia Cancer Specialists, Inc. The Company entered into a
new 10-year management agreement with the consolidated practice during August
1995. For its services under this management agreement, the Company receives
41.5% of the net practice revenues less the cost of pharmaceutical and/or
ancillary products. In each of the second through fifth years of the term of
this agreement, the fee payable to the Company is decreased by 1%. The Company
also purchased for $180,000 a 46% interest in I Systems, Inc., a company
affiliated with one of the practices which is engaged in the business of claims
processing and related services. The purchase of this 46% interest is being
accounted for by the equity method. The Company has the option to purchase up to
an additional 30% interest in the affiliated Company for $33,333 in cash for
each additional one percent of ownership interest purchased. The Company and the
affiliated company entered into a three-year service agreement pursuant to which
certain billing and collection services will be provided to the Company. The
purchase price of the above acquisitions was allocated to the assets at their
fair market value, including management service agreements of $3,385,059. The
resulting intangible is being amortized over 10 years.

During September 1995, the Company purchased the assets of and entered into a
20-year management agreement with Osler Medical, Inc., a 22 physician
multi-specialty group practice in Melbourne, Florida. The purchase price for
these assets was approximately $4,414,582 plus the assumption of debt of
$1,490,272. The Company also entered into a 20-year capital lease for the main
offices of the practice with a total obligation of $6,283,483. An affiliate of
the Company has provided a guarantee of such payments under the lease. During
the first five years of the management agreement, the Company will receive a
management fee equal to 45% of the annual net revenues of the practice.
Thereafter, the management fee increases to 47% of annual net revenues. The
management fee percentage for net revenues of the initial physician group will
be reduced based upon a set formula to a minimum of 31% based upon the
achievement of certain predetermined benchmarks. The management agreement also
provides that, during the period from January 1, 1996 through December 31, 2005,
to the extent annual net revenues of the practice are less than $10,838,952, the
Company's management fee is reduced up to a maximum reduction of $1,500,000 per
year. The Company has agreed to expend up to $1,500,000 per year for each of the
first three years of the management agreement to assist in the expansion
activities of the practice. During the second quarter of 1996, the Company also
acquired certain copyright and trademark interests for a purchase price of
$887,000. During August 1996, the Company purchased the assets and entered into
a management agreement with Atlantic Pediatrics. The purchase price for these
assets was $248,273. Simultaneous with the closing, Atlantic Pediatrics was
merged into Osler Medical, Inc. The total purchase price for the assets acquired
was allocated to such assets at their fair market value, including management
service agreements of $4,484,304. The resulting intangible is being amortized
over 20 years.

14
<PAGE>

During September 1995, the Company purchased the assets of and entered into a
20-year management agreement with Oncology & Radiation Associates, P.A. a
medical oncology practice with 19 oncologists in South Florida. The purchase
price for these assets was $5,717,163 in cash plus the assumption of debt of
$5,403,337. The debt is collateralized by an irrevocable letter of credit issued
by NationsBank of Florida, N.A. ("NationsBank"), the collateral for which had
been provided by Mr. Gosman prior to the Company's initial public offering. The
management fee paid to the Company for services rendered has two components: a
base management fee and a variable management fee. The base management fee is
$2,100,000 per year, subject to adjustment to an amount not less than $1,350,000
during the first five years of the agreement and not less than $700,000
thereafter. The variable management fee is equal to 35.5% of certain revenues,
subject to increase in certain circumstances. The purchase price for the
practice's assets was allocated to the assets at their fair market value,
including management service agreements of $10,719,105. The resulting intangible
is being amortized over 20 years.

During the fourth quarter of 1995, the Company purchased the assets of and
entered into management service agreements with West Shore Urology; Whittle,
Varnell and Bedoya, P.A.; Oncology Care Associates; Venkat Mani; and Symington
consisting of 14 physicians including two oncologists. The total purchase price
for these assets was $2,695,278 in cash. The Company also entered into a 15-year
capital lease with a total obligation of $1,569,171. The purchase price for the
practices' assets was allocated to assets at their fair market value, including
management service agreements of $592,144. The resulting intangible is being
amortized over ten to 20 years.

During May 1996, the Company purchased the stock of Atlanta Gastroenterology
Associates, P.C. pursuant to a tax free merger and entered into a 40-year
management agreement with the medical practice in exchange for 324,252 shares of
Common Stock of the Company having a value of approximately $6,100,000. The
transaction has been accounted for using the pooling-of-interests method of
accounting. Pursuant to the management agreement, the Company will receive a
base management fee, an incentive management fee, and a percentage of all net
ancillary service income.

During May 1996, the Company amended its existing management agreement with
Oncology Care Associates and extended the term of the agreement to 20 years.
Simultaneously, the Company expanded the Oncology Care Associates practice by
adding three oncologists the practices of whom the Company acquired for
$500,000. $200,000 of such purchase price was paid in cash and $300,000 was paid
in the form of a convertible note with a maturity in May 1997. The Company has
the option to make such $300,000 payment at its discretion in either cash or
Common Stock of the Company with such number of shares to be based upon the
average price of the stock during the five business days preceding such date.
The purchase price has been allocated to the assets at their fair market value,
including management service agreements of approximately $500,000. The Company
will receive an annual base management fee based upon a percentage of the net
revenues of the practice. The resulting intangible is being amortized over 20
years.

During May and June 1996, the Company entered into agreements to purchase the
assets of and enter into 20-year management agreements with three physician
practices consisting of four physicians. All of the acquisitions have since been
consummated, except that one of the acquisitions closed in escrow pending the
satisfaction of certain conditions. These practices are located in South
Florida, Bethesda, Maryland and Washington, D.C. The total purchase price for
the assets of these practices was $1,677,165. Of this amount, $726,211 was paid
in cash and $950,954 of such purchase price is payable in Common Stock of the
Company to be issued during May and June 1997. The number of shares of Common
Stock of the Company to be issued is based upon the average price of the stock
during the five business days prior to the issuance. The value of the Common
Stock to be issued has been recorded in other long term liabilities at October
31, 1996. The purchase price has been allocated to the assets at their fair
market value, including management service agreements of $812,520. The Company
will receive an annual base management fee and an incentive management fee under
each agreement. The resulting intangible is being amortized over 20 years.

During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase price
for these assets was approximately $937,909, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $318,137. The Company will receive a
management fee under the management agreements

15
<PAGE>

based upon a percentage of the net revenues of the practice. The resulting
intangible is being amortized over 20 years.

During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $737,354. Of such purchase price, $457,354
was paid in cash and $280,000 is payable during July 1997 in Common Stock of the
Company with such number of shares to be based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
October 31, 1996. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of approximately
$382,165. The Company will receive an annual base management fee and an
incentive management fee. The resulting intangible is being amortized over 20
years.

During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,311,606. Of such purchase price, $1,391,606 was
paid in cash and $1,920,000 is payable during August 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The purchase
price has been allocated to these assets at their fair market value, including
management service agreements of $2,497,974. The Company receives an annual base
management fee and an incentive management fee. The resulting intangible is
being amortized over 40 years.

During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase price
for these assets was $1,529,419. Of such purchase price, $836,619 was paid in
cash and $692,800 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The purchase price
has been allocated to these assets at their fair market value, including
management service agreements of $1,096,922. The Company receives an annual base
management fee and an incentive management fee. The resulting intangible is
being amortized over 40 years.

During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase price
for these assets was $3,181,765. Of such purchase price, $807,365 was paid in
cash and $2,374,400 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The purchase price
has been allocated to these assets at their fair market value, including
management service agreements of $3,048,457. The Company receives an annual base
management fee and an incentive management fee. The resulting intangible is
being amortized over 40 years.

During September 1996, the Company purchased the stock of Physicians
Consultant and Management Corporation ("PCMC"), a company based in Florida that
provides the managed health care industry with assistance in provider relations,
utilization review and quality assurance. The base purchase price was $2,000,000
with $1,000,000 of such amount due on February 1, 1997. There is also a
contingent payment up to a maximum of $10,000,000 based on PCMC's earnings
before taxes during the next five years which shall be paid in cash and/or
Common Stock of the Company. The purchase price has been allocated to the assets
at their fair market value including goodwill of approximately $2,372,000. The
resulting intangible is being amortized over 30 years.

During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,331,521. Of such purchase price $796,521 was paid
in cash and $535,000 is payable during October 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The Company
will receive an annual base management fee and an incentive management fee. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $660,000. The resulting intangible is
being amortized over 20 years.

16
<PAGE>

Company receives a management fee which is based upon the performance of the
surgical center. The purchase price for these assets was $3,035,196 plus the
assumption of debt of $1,223,625 which consists of $717,557 in a mortgage
payable and $506,068 in capital leases. The purchase price has been allocated to
the assets at their fair market value, including management service agreements
of $2,368,448. The resulting intangible is being amortized over 20 years.

Medical Support Service Companies Acquisitions

During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc. ("Uromed"), a
provider of lithotripsy services in Florida, for a Base Purchase Price of
$2,584,103 plus the assumption of capital lease obligations of $1,097,614. The
Final Purchase Price equals the Base Purchase Price plus the amount by which
Stockholders' Equity exceeded $450,000 on the Closing Date. A Final Purchase
Price payment of $283,000 was accrued at December 31, 1994 and paid during May
1995. The former shareholders of Uromed also received an earnings contingency
payment of $274,000 during the third quarter of 1996. The acquisition was
accounted for under the purchase method of accounting. The purchase price was
allocated to assets at their fair market value including goodwill of $2,395,881.
The resulting intangible is being amortized over 20 years. The Company intends
to acquire the outstanding 20% interest in the subsidiary.

During November 1994, the Company purchased 80% of the stock of Nutrichem,
Inc. ("Nutrichem"), an infusion therapy company doing business in Maryland,
Virginia and the District of Columbia, for $3,528,704 in cash and a contingent
note in the amount of $6,666,667, subject to adjustments. During the year ended
December 31, 1995, the Company made payments on the contingent note of
$2,657,732 (including interest of $435,510). Subsequent to the Company's initial
public offering, the contingent note (which had an outstanding principal balance
of $4,444,444 at December 31, 1995) was paid from the net proceeds of the
offering. A charge of $1,271,000 related to this contingent note was recorded
during the year ended December 31, 1995. The remaining $5,395,667 was allocated
to goodwill at December 31, 1995 and is being amortized. The purchase price was
allocated to assets at the fair market value including total goodwill of
$7,007,833. The resulting intangible is being amortized over 40 years.
Subsequent to the initial public offering, the Company acquired the outstanding
20% interest in Nutrichem in exchange for 266,666 shares of Common Stock
resulting in additional purchase price and goodwill of $4,000,000 and
$2,791,960, respectively.

During November 1994, the Company acquired all of the assets and assumed
certain liabilities of First Choice Health Care Services of Ft. Lauderdale,
Inc., First Choice Health Care Services, Inc. and First Choice Home Care
Services of Boca Raton, Inc., home health care companies doing business in
Florida, for a total purchase price of $2,910,546 in cash. The purchase price
was allocated to assets at the fair market value, including goodwill of
$2,622,061. The resulting intangible is being amortized over 20 years.

During December 1994, the Company purchased a 36.8% partnership interest in
Mobile Lithotripter of Indiana Partners, a provider of lithotripsy services in
Indiana, from Mobile Lithotripter of Indiana, Limited, for $2,663,000 in cash.
This investment is being accounted for by the equity method.

During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation Care,
Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns and
operates outpatient radiation therapy centers utilized in the treatment of
cancer and diagnostic imaging centers. OTI's centers are located in Alabama,
California, Florida, Georgia, North Carolina, South Carolina, Tennessee and
Virginia. The total purchase price for the stock (not including transaction
costs and 26,800 shares subject to appraisal rights) was approximately
$41,470,207. The purchase price was paid by a combination of cash on hand, loans
from Mr. Gosman and net proceeds from long term debt financing of approximately
$17,278,000. The long term debt financing was paid in full during January 1996
with the proceeds of the Company's initial public offering. The Company closed
five of OTI's radiation therapy centers and has accrued approximately $3,134,028
primarily as a reserve for the estimated amount of the remaining lease
obligation. Of this amount $2,188,635 was recorded as an adjustment to the
purchase price and $945,393 was recorded as a charge in the fourth quarter of
1995. In addition, the Company also recorded a charge during the fourth quarter
of 1995 of $1,554,607, which represents the writedown of assets to their
estimated fair market value. The purchase price paid in connection with the OTI
merger was allocated to assets at their fair market value, including goodwill of
$8,623,239. The resulting intangible is being amortized over 40 years.

17
<PAGE>

During April 1995, the Company purchased from Aegis Health Systems, Inc. for
$7,163,126 all of the assets used in its lithotripsy services business. The
purchase price consisted of approximately $3,592,718 in cash and $3,570,408 in a
promissory note. The outstanding principal balance and any unpaid interest
became due and payable upon the closing of the Company's initial public offering
and was paid in full during January 1996. The obligations, evidenced by the
promissory note, were secured by $1,000,000 which was in escrow and included in
other assets at December 31, 1995. The purchase price was allocated to assets at
their fair market value including goodwill of $6,228,126. The resulting
intangible is being amortized over 20 years.

During November 1995 the Company acquired by merger Pinnacle Associates, Inc.
("Pinnacle"), an Atlanta, Georgia infusion therapy services company. In
connection with the Pinnacle merger there is a $5,200,000 maximum payment that
may be required to be paid that is based on earnings and will be made in the
form of shares of Common Stock of the Company valued as of the earnings
measurement date. The amount of such contingent payment has not yet been
determined, however, the Company believes that the impact on the financial
statements is immaterial. The contingent consideration represents the full
purchase price. On the merger date, the liabilities assumed exceeded the fair
market value of the assets acquired by approximately $471,967 and such amount
was recorded as goodwill and is being amortized over 40 years.

Management Services Organization

During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, a newly formed management services organization ("MSO")
that provides management services to an independent physician association
("IPA") composed of over 375 physicians based in Connecticut. The Company
acquired this interest in exchange for a payment of $1.5 million to existing
shareholders, ($1.0 million paid during 1995 and $.5 million paid during the
second quarter of 1996) and a capital contribution of $2.0 million to the
Company ($1.5 million paid during 1995 and $.5 million paid during the second
quarter of 1996). In addition, upon the IPO the Company granted options to
purchase 300,000 shares of Common Stock to certain MSO employees in conjunction
with their employment agreements. These options vest over a two year period with
the exercise price equaling the fair market value of the Company's stock on the
date such shares become exercisable. During September 1996, the Company acquired
the remaining 56.25% ownership interest in Physicians Choice Management, LLC.
The Company acquired the remaining interests in exchange for a payment of
$1,000,000 in cash plus 363,442 shares of Common Stock of the Company. The
Company also committed to loan the selling shareholders $2,800,000 to pay the
tax liability related to the sale. As of October 31, 1996, $1,581,000 of the
loan amount committed had been advanced to the selling shareholders by the
Company. The total purchase price for the 100% interest has been allocated to
these assets at their fair market value including goodwill of $11,262,231. The
resulting intangible is being amortized over 40 years.

During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, a newly formed MSO that provides management services to
an IPA composed of 45 physicians based in Georgia. The Company acquired this
interest in exchange for a payment of $550,000 to existing shareholders and a
capital contribution of $700,000 to the MSO. The Company's balance sheet as of
October 31, 1996 includes the 50% interest not owned by the Company as minority
interest. The owners of the other 50% interest in the MSO have a put option to
the Company to purchase their interests. This put option vests over a four year
period. The price to the Company to purchase these interests shall equal 40% of
the MSO's net operating income as of the most recent fiscal year multiplied by
the price earnings ratio of the Company. The minimum price earnings ratio used
in such calculation will be 4 and the maximum 10.

During September 1996, the company purchased an 80% interest in New Jersey
Medical Management, LLC, a newly formed MSO that provides management services to
an IPA with more than 450 physicians in New Jersey. The Company acquired this
interest in exchange for a payment of $350,000 to existing shareholders. The
Company's balance sheet at October 31, 1996 includes the 20% interest not owned
by the Company as minority interest.

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<PAGE>

Medical Facility Development Acquisitions

On May 31, 1995, Mr. Gosman purchased a 50% ownership interest in DASCO
Development Corporation and DASCO Development West, Inc. (collectively,
"DASCO"), a medical facility development services company providing such
services to related and unrelated third parties in connection with the
development of medical malls, health parks and medical office buildings. The
purchase price consisted of $5.2 million in cash and $4.6 million in notes,
which were guaranteed by Mr. Gosman. Upon the closing of the Company's initial
public offering, Messrs. Gosman, Sands and Rendina, the Company's principal
promoters, and certain management and founder stockholders exchanged their
ownership interests in DASCO for shares of Common Stock equal to a total of $55
million or 3,666,667 shares. The Company believes that its medical facility
development services and project finance strategy are a significant component of
the Company's overall business strategy. The historical book value of Messrs.
Sands and Rendina's interest in DASCO is $22,735. The initial 50% purchase price
was allocated to assets at their fair market value, primarily goodwill of $9.8
million with the exchange recorded at historical value. At December 31, 1995
DASCO was being accounted for using the equity method.

Accounting Treatment

Each of the Acquisitions was accounted for under the purchase method of
accounting, except where noted otherwise above.

The Company's relationships with its affiliated physicians are set forth in
various asset and stock purchase agreements, management service agreements, and
employment and consulting agreements. Through the asset and/or stock purchase
agreement, the Company acquires the equipment, furniture, fixtures, supplies
and, in certain instances, service agreements, of a physician practice at the
fair market value of the assets. The accounts receivable are typically purchased
at the net realizable value. The purchase price of the practice generally
consists of cash, notes and/or Common Stock of the Company and the assumption of
certain debt, leases and other contracts necessary for the operation of the
practice. The management services or employment agreements delineate the
responsibilities and obligations of each party.

Net revenues from management service agreements include the revenues
generated by the physician practices. The Company is contractually responsible
and at risk for the operating costs of medical groups under certain agreements.
Expenses include the reimbursement of all medical practice operating costs and
all payments to physicians (which are reflected as cost of affiliated physician
management services) as required under the various management agreements.

Results of Operations

Three Months and Nine Months Ended October 31, 1996 Compared to Three Months
and Nine Months Ended September 30, 1995

The following discussion reviews the results of operations for the three and
nine months ended October 31, 1996 (the "1996 Quarter" and "1996 Period"),
respectively, compared to the three and nine months ended September 30, 1995
(the "1995 Quarter" and "1995 Period"), respectively.

Revenues

The Company derives revenues from health care services and medical facility
development services. Within the health care segment, the Company distinguishes
between revenues from cancer services, non-cancer physician services and other
medical support services. Cancer services include physician practice management
services to oncology practices and certain medical support services, including
radiation therapy, diagnostic imaging and infusion therapy. Non-cancer physician
services include physician practice management services to all practices managed
by the Company other than oncology practices. Other medical support services
include home health care services and lithotripsy.

Net revenues were $20.1 million and $40.1 million for the 1995 Quarter and
the 1995 Period, respectively. Of these amounts, $13.8 million and $24.5 million
or 68.5% and 61.1% of such revenues was attributable to cancer services; $1.5
million and $2.6 million or 7.4% and 6.5% was related to non-cancer physician
services; and $4.8 million and $13.0 million or 24.1% and 32.4% of such revenues
was attributable to other medical support services for the 1995 Quarter and the
1995 Period, respectively.

19
<PAGE>

Net revenues were $51.7 million and $129.4 million for the 1996 Quarter and
the 1996 Period, respectively. Such revenues during this period consisted of
$25.3 million and $69.6 million or 48.9% and 53.8% related to cancer services;
$16.7 million and $32.6 million or 32.2% and 25.2% related to non-cancer
physician services; $5.1 million and $15.2 million or 9.9% and 11.7% related to
other medical support services; and $4.6 million and $12.0 million or 9.0% and
9.3% related to medical facility development. As of October 31, 1996, the
Company had affiliations with 62 physicians providing cancer related services,
19 employed primary care physicians, 93 other multigroup or specialty physicians
and 870 physicians through the management of IPA's by MSO's.

Expenses

For the 1996 Quarter, the 1996 Period, the 1995 Quarter and the 1995 Period,
expressed as a percentage of net revenues, general corporate expenses were 4.2%,
4.4%, 5.4% and 11.0%, respectively. General corporate expenses, as a percentage
of net revenues, were higher during the 1995 Quarter and the 1995 Period than
the 1996 Quarter and the 1996 Period due to the commencement of operations of
the Company during the 1995 Quarter and the 1995 Period.

The Company's cost of affiliated physician management services was $2.3
million for the 1995 Quarter and the 1995 Period. The cost of affiliated
physician management services was $12.3 million and $29.7 million during the
1996 Quarter and the 1996 Period, respectively. Cost of affiliated physician
management services represents the fixed and variable contractual management
fees as defined and stipulated in the management agreements. Revenue for these
managed physician practices was $7.1 million for the 1995 Quarter and 1995
Period and $24.9 million and $61.5 million for the 1996 Quarter and the 1996
Period, respectively.

The Company's depreciation and amortization expense increased by $1.0 million
from the 1995 Quarter to the 1996 Quarter and $2.9 million from the 1995 Period
to the 1996 Period. The increase is a result of the Acquisitions and the
allocation of the purchase prices as required per purchase accounting.

The Company's rent expense increased by $.9 million from the 1995 Quarter to
the 1996 Quarter and $2.9 million from the 1995 Period to the 1996 Period. Rent
and lease expenses as a percentage of net revenue will vary based on the size of
each of the affiliated practice offices, the number of satellite offices and the
current market rental rate for medical office space in the particular geographic
markets.

The Company's earn-out payment during the 1995 Period of $1.3 million
represents a payment to Nutrichem on the contingent note entered into in
conjunction with the acquisition of Nutrichem. During the 1996 Quarter the
Company sold its Nashville radiation therapy center to a third party for $1.5
million which resulted in a gain on sale of approximately $260,000. In addition,
during the 1996 Quarter the Company recorded a charge of $250,000 related to the
termination of an employment agreement with a physician. These two nonrecurring
items have been included in other expenses on the statements of operations
during the 1996 Quarter and the 1996 Period.

The Company's net interest expense decreased by $1.4 million from the 1995
Quarter to the 1996 Quarter and $1.7 million from the 1995 Period to the 1996
Period. Interest income of $1.5 million and $2.7 million was earned during the
1996 Quarter and the 1996 Period, respectively, on the remaining proceeds from
the Company's 1996 initial public offering and Convertible Subordinated
Debenture offering.

No income tax provision was required during the 1995 Quarter or the 1995
Period due to the Company's tax loss and the inability of the Company to use the
benefits which prior to the completion of the initial public offering primarily
accrued to Mr. Gosman.

Medical Facility Development

The Company, through its investment in DASCO, provides medical facility
development services to related and unrelated third parties in connection with
the establishment of health parks, medical malls and medical office buildings.
The Company believes that the development of such facilities, in certain
markets, will aid in the integration of its affiliated physicians and medical
support services and will provide future opportunities to affiliate with
physicians and acquire future physician practices or support services. Further,
the Company believes that the

20
<PAGE>

development of health parks, medical malls and medical office buildings in
certain markets will aid in the integration of its affiliated physicians and
medical support services.

The Company derives its medical facility development service revenues from
the provision of a variety of services. In rendering such services, the Company
generates income without bearing the costs of construction, expending
significant capital or incurring substantial indebtedness. Generally, revenues
are recognized at the time services are performed, except for development fees
which are recognized in accordance with the related development agreements.

The Company typically receives the following compensation for its services:
development fees (including management of land acquisition, subdivision, zoning,
surveying, site planning, permitting and building design), general contracting
management fees, leasing and marketing fees, project cost savings income (based
on the difference between total budgeted project costs and actual costs) and
consulting fees.

The amount of development fees and leasing and marketing fees are stated in
the development and marketing agreements. Those agreements also provide the
basis for payment of the fees. The financing fees and consulting fees are
generally not included in specific agreements but are negotiated and disclosed
in project pro formas provided to the owners of the buildings and hospital
clients. Specific agreements usually incorporate those pro formas and provide
that the projects will be developed in conformity therewith. General contracting
management fees and project cost savings income are included in guaranteed
maximum cost contracts entered into with the general contractor. These contracts
are usually approved by the owners which in many cases include hospital clients
and prospective tenants. During the 1996 Quarter and the 1996 Period, the
Company's medical facility development generated revenues of $4.6 million and
$12.0 million and pre-tax income (prior to allocation of general corporate
expenses) of $2.3 million and $6.2 million, respectively.

21
<PAGE>

Liquidity and Capital Resources

Cash provided by operating activities was $2.3 million for the 1996 Period.
Cash used by operating activities was $.6 million for the 1995 Period. During
the 1995 Period the Company had a loss of $6.5 million which included $2.3
million of depreciation and amortization. In addition, during the 1995 Period
accounts receivables increased by approximately $2.1 million. During the 1996
Period the Company had net income of $8.3 million which included $5.2 million of
depreciation and amortization. In addition, during the 1996 Period accounts
receivable and other assets increased by approximately $12.5 million and
accounts payables and accrued liabilities increased by approximately $1.5
million.

Cash used by investing activities was $31.3 million and $50.5 million for the
1996 Period and 1995 Period, respectively. This primarily represents the funds
required by the Company for the acquisition of physician practices and medical
support service companies. In addition, during the 1996 Period the Company
loaned $10 million to an unrelated healthcare entity and $1.6 million to the
selling shareholders of Physicians Choice Management, LLC to pay the tax
liability related to the sale.

Cash provided by financing activities was $74.7 million for the 1996 Period
and represents (i) net proceeds from the issuance of Convertible Subordinated
Debentures of $96.7 million; (ii) proceeds from the issuance of Common Stock
pursuant to stock options and offering costs and other primarily related to the
initial public offering of $.2 million and $2.5 million, respectively; (iii)
repayment of debt and amounts due to shareholder of $6.2 million and $15.5
million, respectively; and (iv) the release of restricted cash collateralizing
debt of $2.0 million. Cash provided by financing activities was $62.4 million
for the 1995 Period which primarily represents the $45.9 million in capital
contributions and advances from shareholder, the $19.5 million proceeds from the
issuance of debt offset by the repayment of $2.8 million in debt outstanding.

At October 31, 1996, the Company's principal source of liquidity consisted of
$91.8 million in cash. Working capital of $117.5 million increased by $139.8
million from December 31, 1995 to October 31, 1996 primarily as a result of the
$207.9 million of net proceeds received from the Company's initial public
offering and Convertible Subordinated Debenture offering, offset by the
repayment of approximately $91.6 million of indebtedness and certain obligations
arising from the Acquisitions. The Company also had $22.9 million of current
liabilities, including approximately $2.9 million of indebtedness maturing
before October 31, 1997. Further, the Company also has completed Acquisitions
subsequent to October 31, 1996 which required approximately $.9 million in cash
to complete.

During 1995, the Company entered into a management agreement with a
22-physician multi-specialty group practice pursuant to which the Company has
agreed to expend up to $1.5 million per year in each of the next three years to
assist in the expansion activities of the practice. In addition, the Company
agreed to acquire certain copyright and trademark interests of the practice for
$.9 million. These interests were acquired during June 1996.

During 1996, the Company purchased the stock of a company based in Florida
that provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. In conjunction with this
acquisition, the Company may be required to make a contingent payment up to a
maximum of $10 million based on the acquired company's earnings before taxes
during the next five years. The payment, if required, shall be paid in cash
and/or Common Stock of the Company.

In conjunction with the acquisition of Physicians Choice Management, LLC the
Company has committed to loan the selling shareholders $2.8 million to pay the
tax liability related to the sale. As of October 31, 1996, $1.6 million of the
loan amount committed had been advanced to the selling shareholders by the
Company.

In conjunction with certain of its acquisitions the Company has agreed to
make payments in shares of Common Stock of the Company which are generally
issued one year from the closing date of such acquisitions with the number of
shares generally determined based upon the average price of the stock during the
five business days prior to the date of issuance. As of October 31, 1996 the
Company had committed to issue $7.4 million of Common Stock of the Company using
the methodology discussed above.

22
<PAGE>

The Company's acquisition and expansion programs will require substantial
capital resources. In addition, the operation of physician groups, integrated
networks and related medical support service companies, and the development and
implementation of the Company's management information systems, will require
ongoing capital expenditures. The Company expects that its capital needs over
the next several years will substantially exceed capital generated from
operations. To finance its capital needs, the Company plans both to incur
indebtedness and to issue, from time to time, additional debt or equity
securities, including Common Stock or convertible notes, in connection with its
acquisitions and affiliations. The Company currently has a commitment from a
bank to fund $30 million of working capital and acquisition financing needs.

The Company expects that the working capital and cash generated from
operations and amounts available under an acquisition/working capital line for
which the Company has received a commitment from a bank together with the
proceeds of the Convertible Subordinated Debenture offering will be adequate to
satisfy the Company's cash requirements for the next 12 months. However, there
can be no assurance that the Company will not be required to seek additional
financing during this period. The failure to raise the funds necessary to
finance its future cash requirements would adversely affect the Company's
ability to pursue its strategy and could adversely affect its results of
operations for future periods.

PART II--OTHER INFORMATION

Item 2. Changes in Securities

As described more fully above, in September 1996, in reliance on Section 4(2)
and Regulation D under the Securities Act of 1933, as amended, the Company
issued 363,442 shares of Common Stock in connection with the acquisition of the
remaining 56.25% ownership interest in Physicians Choice Management, LLC. The
shares were issued to Eric Moskow, Richard Lipton, Wayne Lipton and Physicians
Choice, LLC.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 27 Financial Data Schedule

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated September 30, 1996 with the
Securities and Exchange Commission reporting under Item 2 the acquisition of the
remaining 56.25% interest in Physicians Choice Management, LLC ("PhyChoice"),
a Connecticut limited liability corporation. The Company acquired a 43.75%
interest in PhyChoice during December 1995.

23
<PAGE>

SIGNATURES

Pursuant to the requirements 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, on the 12th day of December, 1996.

PHYMATRIX CORP.

By: /s/ Frederick R. Leathers
Chief Financial Officer, Treasurer
and Principal Accounting Officer

24
<PAGE>

SIGNATURES

PHYMATRIX CORP.

By:

Chief Financial Officer, Treasurer
and Principal Accounting Officer

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