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 fiscal year ended April
30, 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: (407) 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 June 12, 1996, the number of outstanding shares of the registrant's
Common Stock, par value $0.01 per share, was 21,854,202.
<PAGE>
PHYMATRIX CORP.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
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PART I -- FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements.
Balance Sheets -- April 30, 1996 (unaudited) and December 31, 1995 3
Statements of Operations (unaudited) -- Three Months Ended April
30, 1996 and Three Months Ended March 31, 1995 4
Statements of Cash Flows (unaudited) -- Three Months Ended April
30, 1996 and Three Months Ended March 31, 1995 5
Notes to Financial Statements (unaudited) -- Three Months Ended
April 30, 1996 and Three Months Ended March 31, 1995 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and 9-16
Results of Information
</TABLE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
See accompanying notes to financial statements
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
PHYMATRIX CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
April 30, January 31, December 31,
1996 1996 1995
----------- ------------ -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $34,142,173 $46,113,619 $ 3,596,913
Receivables
Accounts receivable, net 24,447,358 21,562,477 20,710,846
Other receivables 179,513 678,411 569,923
Notes receivable -- -- 516,000
Prepaid expenses and other current assets 1,987,038 1,202,399 1,276,535
----------- ------------ -------------
Total current assets 60,756,082 69,556,906 26,670,217
Property, plant and equipment, net 39,087,961 38,719,086 39,359,328
Notes receivable 100,000 100,000 170,400
Goodwill, net 47,006,150 44,979,865 31,931,453
Management service agreements, net 16,574,707 15,816,042 16,376,636
Investment in affiliates 3,272,028 3,256,783 12,925,129
Other assets (including restricted cash) 7,623,278 7,578,791 4,753,710
----------- ------------ -------------
Total assets $174,420,206 $180,007,473 $132,186,873
=========== ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $2,334,188 $ 2,552,306 $ 26,662,510
Current portion of related party debt 2,435,294 4,740,588 4,740,588
Due to shareholder--current 5,376,000 5,376,000 --
Accounts payable 4,293,252 5,333,791 5,353,210
Accrued compensation 824,288 1,151,268 1,124,316
Accrued liabilities 5,392,961 6,194,108 9,367,532
Accrued interest--shareholder 228,480 -- 1,708,174
----------- ----------- -------------
Total current liabilities 20,884,463 25,348,061 48,956,330
Due to shareholder, less current portion 6,310,882 10,147,287 36,690,180
Long-term debt and capital leases, less current portion 13,855,411 13,653,437 28,847,923
Other long term liabilities 2,127,632 2,314,544 2,511,122
Minority interest 1,730,630 1,335,167 2,502,970
----------- ----------- -------------
Total liabilities 44,909,018 52,798,496 119,508,525
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000 shares
authorized; 21,529,950 shares issued and outstanding 215,300 215,300 --
Additional paid in capital 140,502,110 140,491,557 25,000,000
Retained earnings (deficit) (11,206,222) (13,497,880) (12,321,652)
----------- ------------ -------------
Total shareholders' equity 129,511,188 127,208,977 12,678,348
----------- ------------ -------------
Total liabilities and shareholders' equity $174,420,206 $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 Consolidated Combined
Three Months One Month Three Months
Ended Ended Ended
------------ ------------ ------------
April 30, January 31, March 31,
1996 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net revenue from services $20,052,278 $ 4,636,127 $ 6,669,100
Net revenue from management service agreements 17,154,816 6,079,109 --
----------- ----------- -----------
Total revenue 37,207,094 10,715,236 6,669,100
----------- ----------- -----------
Operating costs and administrative expenses
Cost of affiliated physician management services 8,533,111 2,796,623 --
Salaries, wages and benefits 11,659,915 3,636,973 4,510,135
Professional fees 901,598 287,095 447,336
Supplies 5,482,904 1,916,013 601,479
Utilities 584,605 175,653 135,654
Depreciation and amortization 1,592,711 535,300 338,057
Rent 1,706,075 565,106 326,396
Earn out payment -- -- 1,111,111
Provision for bad debts 580,248 256,989 34,621
Other 2,308,679 799,460 1,043,757
----------- ----------- -----------
Total operating costs and administrative expenses 33,349,846 10,969,212 8,548,546
Interest expense, net 40,991 811,495 287,480
Interest expense, shareholder 228,480 -- 32,601
Minority interest 34,041 81,135 105,277
Income from investment in affiliates (141,947) 29,622 --
----------- ----------- -----------
Income (loss) before provision for income taxes 3,695,683 (1,176,228) (2,304,804)
Income tax expense 1,404,025 -- --
----------- ----------- -----------
Net income (loss) $ 2,291,658 $(1,176,228) $(2,304,804)
=========== =========== ===========
Net income (loss) per share $ 0.11 $ (0.05)
=========== ===========
Number of shares 21,529,950 21,529,950
=========== ===========
</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
Three Months One Month Three Months
Ended Ended Ended
------------ ------------- --------------
April 30, January 31, March 31,
1996 1996 1995
----------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 2,291,658 $(1,176,228) $ (2,304,794)
Noncash items included in net income (loss):
Depreciation and amortization 1,592,711 535,300 338,057
Other (15,245) 430,334 (106,045)
Changes in receivables (3,214,260) (739,635) (836,249)
Changes in accounts payable and accrued liabilities (1,141,673) (5,240,454) 207,840
Changes in other assets (248,777) (206,344) (129,972)
--------- ------------ -----------
Net cash used by operating activities (735,586) (6,397,027) (2,831,163)
--------- ------------ -----------
Cash flows from investing activities
Capital expenditures (682,709) (184,460) (113,789)
Sale of assets -- 24,794 --
Repayment of notes receivable -- 686,400 --
Other assets (84,285) -- --
Acquisitions, net of cash acquired (2,738,114) 54,252 (16,601,955)
--------- ------------ -----------
Net cash used by investing activities (3,505,108) 580,986 (16,715,744)
--------- ------------ -----------
Cash flows from financing activities
Capital contributions -- -- 12,036,287
Advances from (repayment to) shareholder (3,836,405) (23,123,170) 9,482,556
Proceeds from issuance of common stock -- 114,563,221 --
Release of cash collateral -- 1,000,000 --
Cash collateralizing note payable -- (5,403,337) --
Offering costs (929,409) -- --
Other assets -- -- (222,500)
Repayment of debt (2,964,938) (38,703,967) (1,080,321)
--------- ------------ -----------
Net cash provided (used) by financing activities (7,730,752) 48,332,747 20,216,022
--------- ------------ -----------
Increase (decrease) in cash and cash equivalents (11,971,446) 42,516,706 669,115
Cash and cash equivalents, beginning of period 46,113,619 3,596,913 677,245
--------- ------------ -----------
Cash and cash equivalents, end of period $ 34,142,173 $46,113,619 $ 1,346,360
========= ============ ===========
Supplemental disclosure of cash flow information
Cash paid during period for: Interest $ 671,113 $2,876,636 $ 297,374
========= ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months Ended April 30, 1996,
One Month Ended January 31, 1996
and Three Months Ended March 31, 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 ended April 30, 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.
(2) INITIAL PUBLIC OFFERING
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
$111,685,681, which was net of underwriting commissions and 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.
(3) 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
April 30, 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 for
these assets was $1,631,699. The purchase price was allocated to these assets at
their fair market value including goodwill of $1,581,979. The resulting
intangible is being amortized over 20 years.
During the three months ended April 30, 1996 and March 31, 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:
6
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months Ended April 30, 1996,
One Month Ended January 31, 1996
and Three Months Ended March 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
April
30, March 31,
1996 1995
-------- ----------
<S> <C> <C>
Current assets $ -- $3,548,797
Property, plant and
equipment 693,220 27,028,456
Intangibles 3,038,394 8,696,178
Other noncurrent assets -- 1,185,774
Current liabilities -- (2,597,623)
Debt (643,500) (19,470,992)
Noncurrent liabilities (350,000) (1,788,635)
</TABLE>
(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 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 April 1996, the Company repaid $2,305,294 of related party
indebtedness to one of the shareholders of DASCO Development Corporation.
(5) RELATED PARTY TRANSACTIONS
During the three months ended April 30, 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 three months ended April 30, 1996 the Company recorded
revenues in the amount of $304,020 related to such services.
(6) SUBSEQUENT EVENTS
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 on or about June 30, 1996.
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 will be 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 will be allocated to the assets at their fair
7
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months Ended April 30, 1996,
One Month Ended January 31, 1996
and Three Months Ended March 31, 1995
(Unaudited)
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 will be amortized over 20 years.
Subsequent to April 30, 1996, the Company has entered into agreements to
purchase the assets of and enter into 20-year management agreements with three
physician practices consisting of four physicians. Two of these agreements have
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 $1,520,530. Of this amount
$685,416 was paid in cash and $835,114 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
purchase price will be allocated to the assets at their fair market value,
including management service agreements of approximately $1,155,871. The Company
will receive an annual base management fee and an incentive management fee for
each agreement. The resulting intangible will be amortized over 20 years.
During June 1996, the Company announced that it intends, subject to market
and other conditions, to raise $100 million through the sale of convertible
subordinated debentures to certain institutional investors and non-U.S.
investors and up to $15 million if an over-allotment option to be granted is
exercised in full. The debentures will be convertible into shares of the
Company's Common Stock. The securities to be offered will not be registered
under the Securities Act of 1933, as amended, or applicable state securities
laws, and may not be offered or sold absent registration under the Securities
Act and applicable state securities laws or available exemptions from
registrations.
8
<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. To date, the
Company has focused on disease management primarily in the area of cancer care.
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 April 30,
1996, the Company had affiliated with 104 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
April 30, 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 through $5,528,611 $4,416,390 $ --
April 1996
Medical support service companies:
(bullet) Uromed Technologies, Inc. September 1994 3,661,751 2,375,914 --
(bullet) Nutrichem, Inc. November 1994 12,924,371 9,799,793 --
(bullet) First Choice Home Care Services of
Boca Raton, Inc. November 1994 2,910,546 2,622,061 --
(bullet) First Choice Health Care Services
of Ft. Lauderdale, Inc.
(bullet) First Choice Health Care Services,
Inc.
(bullet) Mobile Lithotripter of Indiana
Partners December 1994 2,663,000 -- --
(bullet) Radiation Care, Inc. and
Subsidiaries March 1995 41,470,207 8,623,236 --
(bullet) Aegis Health Systems, Inc. April 1995 7,162,375 6,227,375 --
(bullet) Phylab/Miramer Lab October 1995 130,653 116,221 --
(bullet) Pinnacle Associates, Inc. November 1995 --(B) 432,339 --
Managed physician practices:
(bullet) Georgia Oncology-Hematology
Clinic, P.C. April 1995 2,099,353 -- 645,448
(bullet) Oncology-Hematology Associates
P.A. and Oncology-Hematology Infusion
Therapy, Inc. July 1995 1,541,523 -- 312,740
(bullet) Cancer Specialists of Georgia,
Inc. August 1995 6,064,950 -- 2,702,887
(bullet) Oncology & Radiation Associates,
P.A. September 1995 10,784,648 -- 9,579,424
(bullet) Osler Medical, Inc. September 1995 5,792,876 -- 3,373,741
(bullet) West Shore Urology October 1995 550,859 -- 23,616
9
<PAGE>
(bullet) Whittle, Varnell and Bedoya, P.A. November 1995 $984,711 $ -- $288,564
(bullet) Oncology Care Associates November 1995 532,232 -- 47,179
(bullet) Symington December 1995 121,667 -- 29,566
(bullet) Venkat Mani December 1995 443,429 -- 140,839
Medical facility development:
(bullet) DASCO Development Corporation and May 1995/
Affiliate January 1996 9,755,568(C) 9,755,568 --
Management Services Organization:
(bullet) Physicians Choice Management, LLC December 1995 3,850,000 3,015,928 --
(bullet) Central Georgia Medical
Management, LLC April 1996 1,250,000 900,000 --
</TABLE>
(A)Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Barza, Novoa and Lawler.
(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 $3,896,912. The purchase price was allocated to these assets at their
fair market value, including goodwill of $2,834,411. During the quarter ended
April 30, 1996, the Company purchased the assets of and entered into an
employment agreement with Dr. Lawler. The total purchase price for these assets
was $1,631,699 and was allocated to the assets at their fair market value
including goodwill of $1,581,979. 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 $1,541,523 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 $312,740. 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 $6,064,950 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
10
<PAGE>
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 $3,348,335.
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 $4,302,604 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. The Company also has agreed that on the earlier of
the second anniversary of the Company's acquisition of the practice or 120 days
after the offering, it will acquire certain copyright and trademark interests
for a purchase price equal to the lesser of $887,000 or the fair market value
thereof. 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 $3,373,741. 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 $5,381,311 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 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 $9,579,424. 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 $2,632,898 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 $529,764. The resulting intangible is being
amortized over ten to 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
11
<PAGE>
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 twenty 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 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 offering. The Company has established a plan to close
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
$8,623,236. The resulting intangible is being amortized over 40 years.
During April 1995, the Company purchased from Aegis Health Systems, Inc. for
$7,162,375 all of the assets used in its lithotripsy services business. The
purchase price consisted of approximately $3,591,967 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 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 $6,227,375. 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
12
<PAGE>
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 $432,339 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 330 physicians based in Connecticut. The Company
acquired this interest in exchange for a payment of $1.0 million to existing
shareholders, a payment of an additional $500,000 to existing shareholders
during the next six months (which has been included in accrued liabilities at
December 31, 1995), a capital contribution of $1.5 million to the Company and a
commitment to make an additional $500,000 capital contribution during the next
six months. The Company's balance sheet as of December 31, 1995 includes the
56.25% interest not owned by the Company as minority interest. The Company also
has 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, 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 quarter multiplied
by the price earnings ratio of the Company. 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 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
April 30, 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 for $9.6 million 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 $5.0 million in cash and $4.6 million
in notes, which are guaranteed by Mr. Gosman. Upon the closing of the 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 $9.7
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 audited combined financial
statements of the Company for the period June 24, 1994 through December 31, 1994
and for the year ended December 31, 1995 have been prepared to reflect the
combination of
13
<PAGE>
these business entities which have operated since their purchase date under
common control. See Notes 6 and 7 of Notes to Combined Financial Statements for
information regarding the amortization of intangibles.
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. See "Business --
Physician Affiliation."
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 Ended April 30, 1996 Compared to Three Months Ended March 31,
1995
The following discussion reviews the results of operations for the three
months ended April 30, 1996 (the "1996 Quarter") compared to the three months
ended March 31, 1995 (the "1995 Quarter").
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 $6.7 million for the 1995 Quarter. Of this amount, $2.1
million or 31.6% of such revenues was attributable to cancer services; $.2
million or 3.3% was related to non-cancer physician services, and $4.3 million
or 65.1% of such revenues was attributable to other medical support services.
Net revenues for the 1996 Quarter were $37.2 million. Such revenues during
this period consisted of $21.1 million or 56.8% related to cancer services; $7.2
million or 19.4% related to non-cancer physician services; $5.2 million or 13.9%
related to other medical support services; and $3.7 million or 9.9% related to
medical facility development. As of April 30, 1996, the Company had affiliations
with 55 physicians providing cancer related services, 15 employed primary care
physicians, and 34 other multigroup or specialty physicians.
Expenses
For the 1996 Quarter and the 1995 Quarter, expressed as a percentage of net
revenues, general corporate expenses were 3.9% and 10.9%, respectively. General
corporate expenses, as a percentage of net revenues, were higher during the 1995
Quarter than the 1996 Quarter due to the recent commencement of operations of
the Company.
The Company's cost of affiliated physician management services was $8.5
million for the 1996 Quarter. There were no costs of affiliated physician
management services during the 1995 Quarter. 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 $17.2 million for the 1996 Quarter.
14
<PAGE>
The Company's depreciation and amortization expense was $1.6 million for the
1996 Quarter and $.3 million for the 1995 Quarter. The increase is a result of
the acquisition of the businesses and assets of physician practices and medical
support service companies and the allocation of the purchase prices as required
per purchase accounting.
The Company's rent expense was $1.7 million for the 1996 Quarter and $.3 million
for the 1995 Quarter. 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 Quarter represents a payment
to Nutrichem on the contingent note entered into in conjunction with the
acquisition of Nutrichem.
The Company's net interest expense was $.3 million for the 1996 Quarter and
the 1995 Quarter. Interest income of $.5 million was earned during the 1996
Quarter on the remaining proceeds from the Company's 1996 initial public
offering.
No income tax provision was required during the 1995 Quarter 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 the Company's medical facility
development generated revenues of $3.7 million and pre-tax income (prior to
allocation of general corporate expenses) of $1.9 million.
Liquidity and Capital Resources
Cash used by operating activities was $.7 million for the 1996 Quarter and
$2.8 million for the 1995 Quarter. During the 1995 Quarter the Company had a
loss of $2.3 million which included $.3 million of depreciation and
amortization. In addition, during the 1995 Quarter accounts receivables
increased by approximately $.8 million. During the 1996 Quarter the Company had
net income of $2.3 million which included $1.6 million of depreciation and
amortization. In addition, during the 1996 quarter accounts receivable increased
by approximately $3.2 million and accounts payables and accrued liabilities
decreased by approximately $1.1 million.
15
<PAGE>
Cash used by investing activities was $3.5 million and $16.7 million for the
1996 Quarter and 1995 Quarter, respectively. This primarily represents the funds
required by the Company for the acquisition of physician practices and medical
support service companies.
Cash used by financing activities was $7.7 million for the 1996 Quarter.
During the 1996 Quarter, the Company repaid $3.0 million of debt outstanding as
well as $3.8 million of advances from shareholder. Cash provided by financing
activities was $20.2 million for the 1995 Quarter which primarily represents the
$21.5 million in capital contributions and advances from shareholder offset by
the repayment of $1.1 million in debt outstanding.
At April 30, 1996, the Company's principal source of liquidity consisted of
$34.1 million in cash. Working capital of $39.9 increased by $62.2 million from
December 31, 1995 to April 30, 1996 primarily as a result of the $111.7 million
of net proceeds received from the Company's initial public offering offset by
the repayment of approximately $71.5 million of indebtedness and certain
obligations arising from the Acquisitions. The Company also had $20.9 million of
current liabilities, including approximately $10.1 million of indebtedness
maturing before April 30, 1997. Further, the Company also has completed
Acquisitions subsequent to April 30, 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 has
agreed to acquire certain copyright and trademark interests of the practice for
$.9 million.
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 and the net proceeds of the offering. 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 $30 million commitment from a Bank to fund working capital and
acquisition financing needs. In addition, during June 1996, the Company
announced that it intends, subject to market and other conditions, to raise $100
million through the sale of convertible subordinated debentures to certain
institutional investors and non-U.S. investors and up to $15 million if an
over-allotment option to be granted is exercised in full. The debenturess will
be convertible into shares of the Company's Common Stock. The securities to be
offered will not be registered under the Securities Act of 1933, as amended, or
applicable state securities laws, and may not be offered or sold absent
registration under the Securities Act and applicable state securities laws or
available exemptions from registrations.
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
anticipated proceeds of the 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 debenture offering will be successful or 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
- - -------
27 Financial Data Schedule
(b) Reports on Form 8-K
PhyMatrix filed a Current Report on Form 8-K dated February 2, 1996 during the
period covered by this Quarterly Report on Form 10-Q reporting under Item 8 a
change in the Company's fiscal year end from December 31 to January 31.
16
<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 14th day of June, 1996.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
--------------------------
Chief Financial Officer, Treasurer
and Principal Accounting Officer
<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 14th day of June, 1996.
PHYMATRIX CORP.
By:
--------------------------
Chief Financial Officer, Treasurer
and Principal Accounting Officer
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