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
July 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 September 6, 1996, the number of outstanding shares of the
registrant's Common Stock, par value $0.01 per share, was 21,864,202.
<PAGE>
PHYMATRIX CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Balance Sheets -- July 31, 1996 (unaudited), January 31,
1996 (unaudited) and December 31, 1995 3
Statements of Operations (unaudited) -Three Months and Six
Months Ended July 31, 1996, One Month Ended January 31, 1996
and Three Months and Six Months Ended June 30, 1995 4
Statements of Cash Flows (unaudited) -Six Months Ended July
31, 1996, One Month Ended January 31, 1996 and Six Months
Ended June 30, 1995 5
Notes to Financial Statements (unaudited) 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Information 11-20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
PHYMATRIX CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
July 31, January 31, December 31,
1996 1996 1995
---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $111,666,194 $46,113,619 $3,596,913
Receivables:
Accounts receivable, net 29,433,626 21,562,477 20,710,846
Other receivables 229,282 678,411 569,923
Notes receivable - - 516,000
Prepaid expenses and other current assets 3,587,884 1,202,399 1,276,535
--------- --------- ----------
Total current assets- 144,916,986 69,556,906 26,670,217
Property, plant and equipment, net 40,011,263 38,719,086 39,359,328
Notes receivable 350,000 100,000 170,400
Goodwill, net 47,913,972 44,979,865 31,931,453
Management service agreements, net 19,107,669 15,816,042 16,376,636
Investment in affiliates 3,237,531 3,256,783 12,925,129
Other assets (including restricted cash) 9,083,769 7,578,791 4,753,710
--------- --------- ----------
Total assets $264,621,190 $180,007,473 $132,186,873
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $2,649,963 $2,552,306 $26,662,510
Current portion of related party debt 130,000 4,740,588 4,740,588
Due to shareholder--current 76,528 5,376,000 -
Accounts payable 5,630,748 5,333,791 5,353,210
Accrued compensation 884,033 1,151,268 1,124,316
Accrued liabilities 3,979,954 6,194,108 9,367,532
Accrued interest--shareholder - - 1,708,174
------------- ----------- -----------
Total current liabilities 13,351,226 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 13,646,202 13,653,437 28,847,923
current portion
Convertible subordinated debentures 100,000,000 - -
Other long term liabilities 3,066,951 2,314,544 2,511,122
Minority interest 1,743,402 1,335,167 2,502,970
--------- --------- -----------
Total liabilities 131,807,781 52,798,496 119,508,525
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000
shares authorized; 21,864,202 shares
issued and outstanding at July 31, 1996 218,642 215,300 -
Additional paid in capital 140,317,327 140,491,557 25,000,000
Retained earnings (deficit) (7,722,560) (13,497,880) (12,321,652)
----------- ------------ ------------
Total shareholders' equity 132,813,409 127,208,977 12,678,348
----------- ----------- ----------
Total liabilities and shareholders' equity $264,621,190 $180,007,473 $132,186,873
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Combined Consolidated Consolidated Combined
Three Three One Six Six
Months Months Month Months Months
Ended Ended Ended Ended Ended
July 31, June 30, January 31, July 31, June 30,
1996 1995 1996 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenue from services $21,055,244 $13,315,206 $4,636,127 $41,107,522 $19,984,306
Net revenue from management
service agreements 19,368,739 - 6,079,109 36,523,555 -
---------- ---------- ---------- ---------- ----------
Total revenue 40,423,983 13,315,206 10,715,236 77,631,077 19,984,306
---------- ---------- ---------- ---------- ----------
Operating costs and administrative
expenses:
Cost of affiliated physician
management services 8,879,136 - 2,796,623 17,412,247 -
Salaries, wages and benefits 12,172,957 7,692,060 3,636,973 23,832,872 12,202,195
Professional fees 1,102,847 661,241 287,095 2,004,445 1,108,577
Supplies 6,097,539 2,170,157 1,916,013 11,580,443 2,771,636
Utilities 593,915 307,446 175,653 1,178,520 443,100
Depreciation and amortization 1,672,977 1,055,410 535,300 3,265,688 1,393,467
Rent 1,734,748 1,071,320 565,106 3,440,823 1,397,716
Earn out payment - - - - 1,111,111
Provision for bad debts 740,529 220,790 256,989 1,320,777 255,411
Other 2,593,179 1,225,450 799,460 4,901,858 2,269,207
--------- --------- ------- --------- ---------
Total operating costs and
administrative expenses 35,587,827 14,403,874 10,969,212 68,937,673 22,952,420
---------- ---------- ---------- ---------- ----------
Interest expense, net 399,421 475,336 551,607 440,412 762,816
Interest expense, shareholder 140,886 314,241 259,888 369,366 346,842
Minority interest 24,193 186,787 81,135 58,234 292,064
Income from investment in affiliates (127,051) (219,204) 29,622 (268,998) (219,204)
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes 4,398,707 (1,845,828) (1,176,228) 8,094,390 (4,150,632)
Income tax expense 1,627,856 - - 3,031,881 -
--------- --------- ------- --------- ---------
Net income (loss) $2,770,851 $(1,845,828 $(1,176,228) $5,062,509 $(4,150,632)
========== =========== =========== ========== ===========
Net income (loss) per weighted
average share $0.13 $(0.08) $0.23
===== ====== =====
Weighted average number of shares
outstanding 21,845,841 14,204,305 21,689,631
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
Six Months One Month Six Months
Ended Ended Ended
July 31, January 31, June 30,
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $5,062,509 $(1,176,228) $(4,150,632)
Noncash items included in net income (loss):
Depreciation and amortization 3,265,688 535,300 1,393,467
Other 19,252 430,334 -
Changes in receivables (6,493,010) (739,635) 465,332
Changes in accounts payable and accrued (1,012,392) (796,011) 1,489,758
liabilities
Changes in other assets (1,879,705) (19,072) (479,393)
----------- -------- ---------
Net cash used by operating activities (1,037,658) (1,765,312) (1,281,468)
----------- ----------- -----------
Cash flows from investing activities
Capital expenditures (1,684,607) (184,460) (929,512)
Sale of assets - 24,794 -
Notes receivable (250,000) 686,400 (1,029,600)
Other assets (84,285) - -
Acquisitions, net of cash acquired (6,980,003) 54,252 (29,562,838)
----------- ------ ------------
Net cash used by investing activities (8,998,895) 580,986 (31,521,950)
----------- ------- ------------
Cash flows from financing activities
Capital contributions - - 12,036,287
Advances from (repayment to) shareholder (15,446,759) (23,123,170) 23,079,169
Proceeds from issuance of common stock 205,000 114,563,221 -
Proceeds from issuance of convertible
subordinated debentures 97,102,738 - -
Release of cash collateral 1,537,282 1,000,000 -
Cash collateralizing notes payable - (5,403,337) -
Offering costs (2,211,765) - -
Other assets (131,250) - -
Repayment of debt (5,466,118) (43,335,682) (1,937,035)
----------- ------------ -----------
Net cash provided by financing activities 75,589,128 43,701,032 33,178,421
---------- ---------- ----------
Increase in cash and cash equivalents 65,552,575 42,516,706 375,003
Cash and cash equivalents, beginning of period 46,113,619 3,596,913 677,245
---------- --------- -------
Cash and cash equivalents, end of period $111,666,194 $46,113,619 $1,052,248
============ =========== ==========
Supplemental disclosure of cash flow
information
Cash paid during period for:
Interest $1,479,014 $2,876,636 $812,837
========== ========== ========
Taxes $2,716,928 $ - $ -
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months and Six Months Ended July 31, 1996,
One Month Ended January 31, 1996
and Three Months and Six Months Ended June 30, 1995
(Unaudited)
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. 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 six months ended July 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 an initial public offering ("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
$111,302,643, 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 $97,102,738. 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
July 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 $1,632,569. The
6
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months and Six Months Ended July 31, 1996,
One Month Ended January 31, 1996
and Three Months and Six Months Ended June 30, 1995
(Unaudited)
purchase price was allocated to these assets at their fair market value
including goodwill of $1,582,849. 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 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 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 will
receive an annual base management fee and an incentive management fee. 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 $1,654,064. Of this amount $703,110 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 July 31,
1996. The purchase price has been allocated to the assets at their fair market
value, including management service agreements of approximately $1,189,419. 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 $830,339, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of approximately $210,567. The Company
will receive 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 $705,189. Of such purchase price $425,189
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
July 31, 1996. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of approximately
$350,000. The Company will receive an annual base management fee and an
incentive management fee. The resulting intangible is being amortized over 20
years.
7
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months and Six Months Ended July 31, 1996,
One Month Ended January 31, 1996
and Three Months and Six Months Ended June 30, 1995
(Unaudited)
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 $1,495,207. Of this amount, $436,807 was 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 July 31, 1996. The purchase
price has been allocated to these assets at their fair market value including
goodwill of $1,193,562. The resulting intangible is being amortized over 20
years.
During the six months ended July 31, 1996 and June 30, 1995, the Company
acquired the assets and assumed certain liabilities of physician practices,
medical support service companies and management service organizations. The
transactions had the following non-cash impact on the balance sheets:
July 31, June 30,
1996 1995
---- ----
Current assets $1,742,127 $6,186,180
Property, plant and equipment 851,418 28,702,801
Intangibles 7,228,386 24,968,354
Other noncurrent assets - 2,180,662
Current liabilities (1,476,665) (4,435,642)
Debt (302,452) (27,879,988)
Noncurrent liabilities (350,000) (159,529)
Equity (712,811) -
3. 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 stockholder.
During the six months ended July 31, 1996, the Company repaid (i) $4,610,588
of related party indebtedness to the former shareholders of DASCO Development
Corporation and (ii) $15,446,759 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 and anticipates closing
on this financing during September 1996.
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 $2,897,262 have been deferred and are being amortized over the
life of the Debentures.
4. RELATED PARTY TRANSACTIONS
8
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months and Six Months Ended July 31, 1996,
One Month Ended January 31, 1996
and Three Months and Six Months Ended June 30, 1995
(Unaudited)
During the six months ended July 31, 1996, the Company contracted with an
entity 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 a medical mall being constructed by such
entity. During the six months ended July 31, 1996 the Company recorded revenues
in the amount of $1,079,568 related to such services.
5. NET INCOME PER SHARE
Net income per common share is based upon the weighted average number of
common shares outstanding during the period. For the three and six months ended
July 31, 1996, the weighted average number of common shares outstanding were
21,845,841 and 21,689,631, 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 six months ended July 31, 1996, conversion of the
6-3/4% Convertible Subordinated Debentures issued in June 1996, is not assumed
because the effect is anti-dilutive.
6. SUBSEQUENT EVENTS
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 $3,350,000. Of such purchase price, $1,430,000 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
will be allocated to these assets at their fair market value, including
management service agreements of approximately $2,400,000. The Company will
receive an annual base management fee and an incentive management fee. The
resulting intangible will be 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 $1,445,278. Of such purchase price, $752,478 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
will be allocated to these assets at their fair market value, including
management service agreements of approximately $1,057,631. The Company will
receive an annual base management fee and an incentive management fee. The
resulting intangible will be 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 $2,935,139. Of such purchase price, $695,139 was paid in cash
and $2,240,000 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 will be
allocated to these assets at their fair market value, including management
service agreements of approximately $2,800,000. The Company will receive an
annual base management fee and an incentive management fee. The resulting
intangible will be amortized over 40 years.
During August 1996, the Company purchased the assets of three physicians in
Florida. The purchase price for these assets was $259,071. Of such purchase
price, $163,435 was paid in cash and $95,636 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 will be allocated to these assets at their fair market
value, including management service agreements of approximately $95,636.
The resulting intangible will be amortized over 20 years.
During August 1996, the Company agreed to acquire 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 330 physicians in Connecticut.
The Company had acquired a 43.75% ownership interest in December 1995.
9
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months and Six Months Ended July 31, 1996,
One Month Ended January 31, 1996
and Three Months and Six Months Ended June 30, 1995
(Unaudited)
The Company agreed to acquire 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 has also agreed to loan the selling shareholders $2.8 million in the
event that they incur a tax liability related to the sale.
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 will accrue at the rate of prime plus 2%.
During August 1996, the Company sold the assets of and assigned the
obligations related to its radiation therapy center in Nashville, Tennessee to a
third party for a purchase price of $1,500,000. The Company's estimated
investment in such assets was approximately $1,225,000 and the Company will
record a gain of approximately $275,000 related to such sale during the third
quarter.
10
<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. As of July 31,
1996, the Company had affiliated with 138 physicians, acquired several medical
support service companies, acquired a medical facility development company, and
acquired a 43.75% interest in a management services organization in Connecticut
and a 50% interest in a management services organization in Georgia that provide
management services to independent physician associations composed of over 375
multi-specialty physicians (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
July 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> <C>
Employed physicians (A) Various $7,078,162 $5,702,296 --
through April
1996
Medical support service companies:
o Uromed Technologies, Inc. September 1994 3,661,751 2,375,914 --
o Nutrichem, Inc. November 1994 12,924,371 9,799,793 --
o First Choice Home Care Services of November 1994 2,910,546 2,622,061 --
Boca Raton, Inc.
o First Choice Health Care Services of
Ft. Lauderdale, Inc.
o First Choice Health Care Services,
Inc.
o Mobile Lithotripter of Indiana December 1994 2,663,000 -- --
Partners
o Radiation Care, Inc. and Subsidiaries March 1995 41,470,207 8,623,330 --
o Aegis Health Systems, Inc. April 1995 7,162,770 6,227,770 --
o Phylab/Miramer Lab October 1995 133,081 118,649 --
o Pinnacle Associates, Inc. November 1995 --(B) 471,576 --
Managed physician practices:
o Georgia Oncology-Hematology Clinic, April 1995 2,099,353 -- 645,448
P.C.
o Oncology-Hematology Associates P.A. July 1995 1,542,953 -- 314,170
and Oncology-Hematology Infusion
Therapy, Inc.
o Cancer Specialists of Georgia, Inc. August 1995 6,100,492 -- 2,738,429
o Oncology & Radiation Associates, P.A. September 1995 10,786,997 -- 9,581,773
o Osler Medical, Inc. September 1995 6,696,104 -- 4,276,969
o West Shore Urology October 1995 554,447 -- 27,204
o Whittle, Varnell and Bedoya, P.A. November 1995 984,711 -- 288,564
11
<PAGE>
o Oncology Care Associates November 1995/ 1,032,939 -- 547,886
July 1996
o Symington December 1995 121,667 -- 29,566
o Venkat Mani December 1995 443,429 -- 140,839
o Atlanta Gastroenterology April 1996 6,100,000 -- --
o Busch May 1996 759,637 -- 429,545
o Kelley June 1996 500,000 -- 500,000
o Dal Yoo June 1996 394,427 -- 259,874
o Koerner, Taub & Flaxman July 1996 830,339 -- 210,567
o Atlanta Metro Urology July 1996 705,189 -- 350,000
Medical facility development:
o DASCO Development Corporation and May 1995/ 9,813,856(C) 9,813,856 --
Affiliate January 1996
Management Services Organization:
o Physicians Choice Management, LLC December 1995 3,850,000 3,021,413 --
o Central Georgia Medical April 1996 1,250,000 900,000 --
Management, LLC
</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) 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 $3,950,386. The purchase price was allocated to these assets at their
fair market value, including goodwill of $2,925,885. During the six months ended
July 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 $2,069,376 in cash and $1,058,400 payable in Common Stock of
the Company to be issued during the second 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 $2,776,411. 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.
12
<PAGE>
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 $6,100,492 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 $3,383,877. 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 $4,318,832 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. The purchase price for the practice's assets acquired to date was
allocated to such assets at their fair market value, including management
service agreements of $4,276,969. The resulting intangible is being amortized
over 20 years.
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 $5,383,660 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 $9,581,773. 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 $2,637,193 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 $534,059. The resulting intangible is being
amortized over ten to 20 years.
13
<PAGE>
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 and an incentive management fee. 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 $1,654,064. Of this amount, $703,110 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 July 31,
1996. The purchase price has been allocated to the assets at their fair market
value, including management service agreements of approximately $1,189,419. 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 $830,339, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of approximately $210,567. The Company
will receive 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 $705,189. Of such purchase price, $425,189
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
July 31, 1996. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of approximately
$350,000. The Company will receive an annual base management fee and an
incentive management fee. 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
$2,564,137 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 will also receive an earnings
contingency payment of $274,000 which has been accrued at December 31, 1995. 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 $2,375,914. The resulting intangible is being amortized over 20
years. The Company intends to acquire the outstanding 20% interest in the
subsidiary.
14
<PAGE>
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
$8,623,330. The resulting intangible is being amortized over 40 years.
During April 1995, the Company purchased from Aegis Health Systems, Inc. for
$7,162,770 all of the assets used in its lithotripsy services business. The
purchase price consisted of approximately $3,592,362 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 $6,227,770. 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 $471,576 and such amount
was recorded as goodwill and is being amortized over 40 years.
15
<PAGE>
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 330 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). The Company's balance sheet as of July 31, 1995 includes the
56.25% interest not owned by the Company as minority interest. The Company
acquired an option, which expires in May 1998, to increase its ownership in the
MSO to 50% for an additional investment of $2.0 million, of which $1.0 million
would represent an additional capital contribution to the MSO and $1.0 million
would represent the purchase of additional units currently owned by the IPA. The
Company has paid a nonrefundable amount of $350,000 for such option. 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 August 1996, the Company agreed to acquire the
remaining 56.25% interest.
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
July 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.
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 purchase agreements, management service agreements, and employment
and consulting agreements. Through the asset 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 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.
16
<PAGE>
Net revenues from management service agreements include the contractual fees
earned (which equals the net revenues generated by the physician practices)
under its management services agreements with physicians. Under the agreements,
the Company is contractually responsible and at risk for the operating costs of
the medical groups. The costs include the reimbursement of all medical practice
operating costs and the fixed and variable contractual management fees (which
are reflected as cost of affiliated physician management services) as defined
and stipulated in the agreements.
Results of Operations
Three Months and Six Months Ended July 31, 1996 Compared to Three Months and Six
Months Ended June 30, 1995
The following discussion reviews the results of operations for the three and
six months ended July 31, 1996 (the "1996 Quarter" and "1996 Period"),
respectively, compared to the three and six months ended June 30, 1995 (the
"1995 Quarter" and "1995 Period"), respectively.
Revenues
The Company derives revenues from health care services, medical facility
development services and management service organizations. 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 $13.3 million and $20.0 million for the 1995 Quarter and
the 1995 Period, respectively. Of these amounts, $8.6 million and $10.7 million
or 64.3% and 53.4% of such revenues was attributable to cancer services; $.9
million and $1.1 million or 6.8% and 5.6% was related to non-cancer physician
services; and $3.9 million and $8.2 million or 28.9% and 41.0% of such revenues
was attributable to other medical support services for the 1995 Quarter and the
1995 Period, respectively.
Net revenues were $40.4 million and $77.6 million for the 1996 Quarter and
the 1996 Period, respectively. Such revenues during this period consisted of
$23.1 million and $44.3 million or 57.2% and 57.0% related to cancer services;
$8.6 million and $15.9 million or 21.4% and 20.4% related to non-cancer
physician services; $4.9 million and $10.1 million or 12.2% and 13.0% related to
other medical support services; and $3.7 million and $7.4 million or 9.2% and
9.5% related to medical facility development. As of July 31, 1996, the Company
had affiliations with 61 physicians providing cancer related services, 20
employed primary care physicians and 57 other multigroup or specialty
physicians.
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 5.0%,
4.4%, 7.2% and 8.5%, 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 $8.9
million and $17.4 million for the 1996 Quarter and the 1996 Period,
respectively. There were no costs of affiliated physician management services
during the 1995 Quarter or the 1995 Period. 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 $19.4 million and $36.5 million for the 1996
Quarter and the 1996 Period, respectively.
17
<PAGE>
The Company's depreciation and amortization expense increased by $.6 million
from the 1995 Quarter to the 1996 Quarter and $1.9 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 $.7 million from the 1995 Quarter to the
1996 Quarter and $2.0 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 $1.1 million
represents a payment to Nutrichem on the contingent note entered into in
conjunction with the acquisition of Nutrichem.
The Company's net interest expense decreased by $.2 million from the 1995
Quarter to the 1996 Quarter and $.3 million from the 1995 Period to the 1996
Period. Interest income of $.6 million and $1.1 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 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 $3.7 million and
$7.4 million and pre-tax income (prior to allocation of general corporate
expenses) of $2.0 million and $3.8 million, respectively.
18
<PAGE>
Liquidity and Capital Resources
Cash used by operating activities was $1.0 million for the 1996 Period and
$1.3 million for the 1995 Period. During the 1995 Period the Company had a loss
of $4.2 million which included $1.4 million of depreciation and amortization. In
addition, during the 1995 Period accounts receivables decreased by approximately
$.5 million. During the 1996 Period the Company had net income of $5.1 million
which included $3.3 million of depreciation and amortization. In addition,
during the 1996 Period accounts receivable increased by approximately $6.5
million and accounts payables and accrued liabilities decreased by approximately
$1.0 million.
Cash used by investing activities was $9.0 million and $31.5 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.
Cash provided by financing activities was $75.6 million for the 1996 Period
and represents (i) net proceeds from the issuance of Convertible Subordinated
Debentures of $97.1 million; (ii) proceeds from the issuance of Common Stock
pursuant to stock options and offering costs related to the initial public
offering of $.2 million and $2.2 million, respectively; (iii) repayment of debt
and amounts due to shareholder of $5.5 million and $15.4 million, respectively;
(iv) the release of restricted cash collateralizing debt of $1.5 million; and
(v) financing costs and fees of $.1 million. Cash provided by financing
activities was $33.2 million for the 1995 Period which primarily represents the
$35.1 million in capital contributions and advances from shareholder offset by
the repayment of $1.9 million in debt outstanding.
At July 31, 1996, the Company's principal source of liquidity consisted of
$111.7 million in cash. Working capital of $131.6 increased by $153.9 million
from December 31, 1995 to July 31, 1996 primarily as a result of the $209.4
million of net proceeds received from the Company's initial public offering and
Convertible Subordinated Debenture offering, offset by the repayment of
approximately $87.4 million of indebtedness and certain obligations arising from
the Acquisitions. The Company also had $13.4 million of current liabilities,
including approximately $2.9 million of indebtedness maturing before July 31,
1997. Further, the Company also has completed Acquisitions subsequent to July
31, 1996 which required approximately $4.1 million in cash to complete and has
also used $12.8 million in cash to loan to third parties.
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.
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 July 31, 1996 the
Company had committed to issue $1,889,354 of Common Stock of the Company using
the methodology discussed above. Subsequent to July 31, 1996 the Company has
committed to issue an additional $5,349,000 of Common Stock of the Company using
this same methodology.
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
19
<PAGE>
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K with the Securities and Exchange
Commission on June 18th and June 27th, 1996 reporting under Item 5 the issuance
of press releases in connection with the Company's issuance of 6 3/4%
Convertible Subordinated Debentures due 2003.
20
<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 11th day of September, 1996.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
----------------------------------
Chief Financial Officer, Treasurer
and Principal Accounting Officer
21
<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 11th day of September, 1996.
PHYMATRIX CORP.
By: __________________________________
Chief Financial Officer, Treasurer
and Principal Accounting Officer
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