As filed with the Securities and Exchange Commission on July 30, 1996
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
PHYMATRIX CORP.
(Exact name of registrant as specified in its charter)
Delaware 8099 65-0617076
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
777 South Flagler Drive
West Palm Beach, FL 33401
(407) 655-3500
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(Address, including zip code, and telephone number, including area code
of Registrant's principal executive offices)
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Abraham D. Gosman
PhyMatrix Corp.
777 South Flagler Drive
West Palm Beach, FL 33401
(407) 655-3500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies of communications to:
Michael J. Bohnen, Esquire
Nutter, McClennen & Fish, LLP
One International Place
Boston, MA 02110
(617) 439-2000
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. |_|
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Proposed maximum Proposed maximum Amount of
Title of each class of securities to Amount to be offering price per aggregate offering price(1) registration
be registered registered share(1) fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value 5,000,000 shares $23.63 $118,150,000 $40,742
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, based upon the average of the high and low prices per
share of Common Stock reported on The Nasdaq National Market on July
26, 1996.
The Registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE>
PHYMATRIX CORP.
Cross Reference Sheet Showing Location in Prospectus
of Information Required by Form S-4
<TABLE>
<CAPTION>
Registration Statement Item Location in Prospectus
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Outside Front Cover Page of Registration Statement;
Cover Page of Prospectus Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus
3. Risk Factors, Ratio of Earnings to Fixed Charges and Risk Factors; The Company
Other Information
4. Terms of the Transaction Outside Front Cover Page of Registration Statement
5. Pro Forma Financial Information *
6. Material Contracts with the Company Being Acquired *
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters *
8. Interests of Named Experts and Counsel Validity of the Common Stock; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities *
10. Information with Respect to S-3 Registrants *
11. Incorporation of Certain Information by Reference *
12. Information with Respect to S-2 or S-3 Registrants *
13. Incorporation of Certain Information by Reference *
14. Information with Respect to Registrants Other Than The Company; Summary Financial Data; Price
S-3 or S-2 Registrants Range of Common Stock; Dividend Policy; Selected
Financial Data; Unaudited Pro Forma Financial
Information; Management's Discussion and Analysis
of Financial Condition and Results of Operation;
Business; Description of Capital Stock; Combined Financial
Statements
15. Information with Respect to S-3 Companies *
16. Information with Respect to S-2 or S-3 Companies *
17. Information with Respect to Companies Other Than
S-3 or S-2 Companies *
18. Information if Proxies, Consents or Authorizations
are to be Solicited Management; Certain Transactions; Principal Stockholders
19. Information if Proxies, Consents or Authorizations
are not to be Solicited or in an Exchange Offer Management; Certain Transactions; Principal Stockholders
</TABLE>
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* Omitted as inapplicable as of the date of filing this Registration Statement;
such information may be included in pre-effective or post-effective amendments
to this Registration Statement or supplements to this prospectus contained
herein.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION
July 30, 1996
5,000,000 Shares
PhyMatrix Corp.
a Physician Practice Management Company
Common Stock
----------
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
This Prospectus relates to 5,000,000 shares of common stock,
$.01 par value per share (the "Common Stock"), of PhyMatrix Corp. (the
"Company") that may be offered and issued by the Company from time to time in
connection with acquisitions of other businesses or properties by the Company.
PhyMatrix intends to concentrate its acquisitions in areas
related to the current business of PhyMatrix. If the opportunity arises,
however, PhyMatrix may attempt to make acquisitions that are either
complementary to its present operations or which it considers advantageous even
though they may be dissimilar to its present activities. The consideration for
any such acquisition may consist of shares of Common Stock, cash, notes or other
evidences of debt, assumptions of liabilities or a combination thereof, as
determined from time to time by negotiations between PhyMatrix and the owners or
controlling persons of businesses or properties to be acquired.
The shares covered by this Prospectus may be issued in
exchange for shares of capital stock, partnership interests or other assets
representing an interest, direct or indirect, in other companies or other
entities, in exchange for assets used in or related to the business of such
companies or entities, or otherwise pursuant to the agreements providing for
such acquisitions. The terms of such acquisitions and of the issuance of shares
of Common Stock under acquisition agreements will generally be determined by
direct negotiations with the owners or controlling persons of the businesses or
properties to be acquired or, in the case of entities that are more widely held,
through exchange offers to stockholders or documents soliciting the approval of
statutory mergers, consolidations or sales of assets. It is anticipated that the
shares of Common Stock issued in any such acquisition will be valued at a price
reasonably related to the market value of the Common Stock either at the time of
agreement on the terms of an acquisition or at or about the time of delivery of
the shares.
It is not expected that underwriting discounts or commissions
will be paid by the Company in connection with issuances of shares of Common
Stock under this Prospectus. However, finders' fees or brokers' commissions may
be paid from time to time in connection with specific acquisitions, and such
fees may be paid through the issuance of shares of Common Stock covered by this
Prospectus. Any person receiving such a fee may be deemed to be an underwriter
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
PhyMatrix's Common Stock is listed on The Nasdaq National
Market under the symbol "PHMX." The closing market price of PhyMatrix Common
Stock on The Nasdaq National Market on July 26, 1996 was $24.50.
---------------
Prospective investors should carefully consider the factors
set forth under the section "Risk Factors" beginning on page 8.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Date of this Prospectus is , 1996
<PAGE>
No dealer, salesperson or any other person has been authorized
to give any information or to make any representations other than those
contained in this Prospectus, and, if given or made, such information and
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell or a solicitation
of any offer to buy the securities described herein by anyone in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making the offer or solicitation is not qualified to do so, or to any
person to whom it is unlawful to make such offer or solicitation. Under no
circumstances shall the delivery of this Prospectus or any sale made pursuant to
this Prospectus create any implication that the information contained in this
Prospectus is correct as of any time subsequent to the date of this Prospectus.
------------------------------
TABLE OF CONTENTS
Page
----
The Company........................................................... 3
Summary Financial Data................................................ 6
Risk Factors.......................................................... 8
Price Range of Common Stock........................................... 15
Dividend Policy....................................................... 15
Selected Financial Data............................................... 16
Unaudited Pro Forma Financial Information............................. 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......................................... 30
Business.............................................................. 41
Management............................................................ 54
Certain Transactions.................................................. 60
Principal Stockholders................................................ 62
Description of Capital Stock.......................................... 62
Validity of Common Stock.............................................. 66
Experts............................................................... 66
Additional Information................................................ 68
Index to Financial Statements......................................... F-1
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this
Prospectus. See "Risk Factors" for information that should be considered by
prospective investors.
The Company
The Company was incorporated in October 1995 to combine the
business operations of certain companies (the "Related Companies") controlled by
Abraham D. Gosman, the Company's Chairman, President and Chief Executive
Officer. The business operations of the Related Companies were acquired from
third parties in transactions completed between September 1994 and January 1996.
Simultaneously with the closing of the Company's initial public offering on
January 23, 1996, the Related Companies were transferred to the Company in
exchange for 13,307,450 shares of Company Common Stock (the "Formation"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions." The Related Companies or the Company
have acquired those companies and physician practices discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Acquisition Summary."
The Company is a physician practice management company which
provides management services to disease specialty and primary care physicians
and provides related medical support services. The Company's primary strategy is
to develop disease management networks in specific geographic locations by
acquiring physician practices and affiliating with disease specialty and primary
care physicians. Where appropriate, the Company supports its affiliated
physicians with related diagnostic and therapeutic medical support services. The
Company's medical support services include radiation therapy, diagnostic
imaging, infusion therapy, home health care and lithotripsy services. Since its
first acquisition in September 1994, the Company has acquired the practices of
and affiliated with 128 physicians and acquired several medical support service
companies and a medical facility development company. The Company also owns a
43.75% interest in a newly formed management services organization in
Connecticut and a 50% interest in a newly formed management services
organization in Georgia that provide management services to independent
physician associations composed of over 375 multi-specialty physicians.
Increasing concern over the cost of health care in the United
States has led to numerous changes affecting the physician provider community,
including the development of managed care and risk-based contracting
arrangements. Based on data from the United States Health Care Financing
Administration, industry sources have estimated that in 1995 the nation's
650,000 physicians generated approximately $200 billion in physician service
revenues. The Company believes independent physicians are inadequately prepared
to respond to the changing health care market because they typically have high
operating costs relative to revenue and lack both purchasing power with vendors
and sufficient capital to purchase new clinical equipment and management
information systems. In order to be competitive, many physicians are seeking
affiliations with larger entities, including physician practice management
companies.
The Company believes that the providers of disease management
services in the United States, including cancer care providers, are highly
fragmented. There are approximately 6,000 oncologists practicing in the United
States, most of whom practice alone or in small groups, and there are hundreds
of independent outpatient and free-standing cancer treatment centers. This
fragmentation results, in part, from the fact that the treatment of cancer
frequently requires a multi-disciplinary approach in a variety of settings
involving numerous health care professionals with different specializations.
-3-
<PAGE>
The Company believes that its strategy of acquiring and
integrating independent physician practices and medical support services into
specialty networks creates synergies, achieves operating efficiencies and
responds to the cost-containment initiatives of payors, particularly managed
care companies. The Company has focused its disease management efforts on the
acquisition of oncology practices and, to date, has acquired the practices of
and affiliated with 60 oncologists. The Company also provides comprehensive
cancer-related support services at 11 radiation treatment centers and two
diagnostic imaging centers and manages infusion therapy services from three
regional offices. The Company intends to develop additional disease management
services for the treatment of other chronic illnesses such as diabetes,
cardiovascular diseases and infectious diseases.
In certain targeted markets, the Company organizes its
affiliated physicians and related medical support services into integrated
clusters of disease specialty and primary care networks, which it terms local
provider networks ("LPNs"). LPNs are designed to provide a comprehensive range
of physician and medical support services within specific geographic regions.
The Company believes that its LPN structure will achieve operating efficiencies
and enhance its ability to secure contracts with managed care organizations. The
Company currently has contracts with managed care organizations under which the
Company and its affiliated physicians provide certain cancer- related health
care services to over 200,000 covered lives. To date, the Company has
established an LPN in each of the Southeast Florida, Atlanta, Connecticut and
Washington, D.C./Baltimore areas. The Company intends to establish additional
LPNs by affiliating with IPAs.
The Company also provides medical facility development
services to related and unrelated third parties for the establishment of health
parks, medical malls and medical office buildings. Such services include project
finance assistance, project management, construction management, construction
design engineering, physician recruitment, leasing and marketing. While the
Company incurs certain administrative and other expenses in the course of
providing such services, it does not incur costs of construction or risks of
project ownership. The Company's strategy in financing its projects is to
involve future tenants as significant investors in and owners of the developed
medical facilities. Because most of its tenants are physicians and medical
support service companies, the Company believes that the relationships that it
develops with these parties through its medical facility development efforts
will greatly enhance the Company's ability to affiliate with physicians and
acquire physician practices and medical support service companies. Further, the
Company believes that medical facility development in certain markets will aid
in the integration of its affiliated physicians and medical support services.
The Company affiliates with physicians through management
agreements with physician practices or employment agreements with individual
physicians. When affiliating with physicians, the Company generally acquires the
assets of the physicians' practices, including its equipment, furniture,
fixtures and supplies and, in some cases, goodwill and management service
agreements, of the physicians' practices. Currently, the Company manages the
practices of 98 physicians and employs another 30 physicians. The Company
derives revenues from affiliated physicians through management fees charged to
managed physician practices and from charges to third parties for services
provided by employed physicians.
The Company manages its home health care and lithotripsy
services from eight local or regional offices. The Company also operates seven
mobile lithotripters which provide services to approximately 70 hospitals and
other health care facilities.
The Company's objective is to be a leader in the physician
practice management industry. The Company plans to achieve this objective by:
(i) developing disease management networks in specific geographic locations by
acquiring the practices of and affiliating with high profile disease specialty
and primary care physicians, multi-specialty physician groups and independent
practice associations, (ii) organizing its physician practices and related
medical support services into LPNs, (iii) utilizing its medical facility
development services to promote its affiliations and acquisitions as well as the
integration of its affiliated physicians and medical support services; (iv)
pursuing contractual arrangements with managed care organizations, (v)
implementing information systems to improve patient care and provide outcome
studies and other data and (vi) achieving
-4-
<PAGE>
operating efficiencies through the consolidation of the overhead and
administrative functions of its physician practices.
The Company's principal place of business is 777 South Flagler
Drive, West Palm Beach, Florida 33401; and its telephone number at that address
is (407) 655-3500. Unless otherwise indicated or required by the context,
references to the "Company" include its consolidated subsidiaries.
Prospective investors are cautioned that the statements in
this Prospectus that are not descriptions of historical facts may be
forward-looking statements, including, but not limited to, statements contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such statements reflect management's current views, are based on
many assumptions and are subject to risks and uncertainties. Actual results
could differ materially from those currently anticipated due to a number of
factors, including, but not limited to, those discussed in "Risk Factors."
-5-
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Historical (1) Pro Forma (2)
---------------------------------------------------------------------------------- --------------
Combined Combined Consolidated
June 24, 1994 Combined Consolidated Three Three Combined
(inception) Year Month Months Months Year
to Ended Ended Ended Ended Ended
December 31, December 31, January 31, March 31, April 30, December 31,
1994 1995 1996(3) 1995 1996(3) 1995
------ ------ --------- ------ --------- -----
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue.................... $ 2,447 $ 70,733 $10,715 $ 6,669 $37,207 $125,110
------- -------- ------- ------- ------- --------
Operating expenses:
Cost of affiliated
physician management
services.................. -- 9,656 2,797 -- 8,533 34,612
Salaries, wages and
benefits................... 2,142 31,976 3,637 4,510 11,660 43,619
Depreciation and
amortization............... 107 3,863 535 338 1,593 6,612
Rent......................... 249 4,503 565 326 1,706 6,079
Earn out payment............. -- 1,271 -- 1,111 -- --
Provision for closure loss... -- 2,500 -- -- -- 2,500
Other........................ 1,098 22,900 3,434 2,264 9,858 35,410
------ ------- ------- ------ ------- --------
3,596 76,669 10,968 8,549 33,350 128,832
------ ------- ------- ------ ------- -------
Income (loss) from
operations................... (1,149) (5,936 (253) (1,880) 3,857 (3,722)
-------- -------- -------- -------- ------- ---------
Interest expense............... 95 4,852 812 320 269 8,443
Minority interest.............. 52 806 81 105 34 --
Other nonoperating
(revenue) expense............ -- -- -- -- -- (44)
(Income) loss from investment
in affiliates................ -- (569 30 -- (142) (647)
-------- ---------- --------- --------- ----------- ------------
Income (loss) before income
taxes........................ (1,296) (11,025) (1,176) (2,305) 3,696 (11,464)
Income tax provision (4)....... -- -- -- -- 1,404 --
-------- ---------- ---------- --------- --------- ------------
Net income (loss).............. $(1,296) $ (11,025) $(1,176) $(2,305) $ 2,292 $(11,464)
======== ========= ======== ======== ======== =========
Net income per share (5)....... $ 0.11
=======
Pro forma (loss) per
share (6).................... $ (0.63)
=========
Operating Data
(Unaudited)
Number of Affiliated
physicians (7):
Cancer....................... -- 55 55 10 55 55
Primary care................. -- 14 14 4 15 14
Other speciality............. -- 34 34 -- 34 34
Revenues:
Cancer services.............. $ 685 $ 44,905 $ 6,712 $ 2,106 $21,133 $78,793
Non-cancer physician
services..................... -- 7,705 2,281 220 7,234 23,846
Other medical services....... 1,762 18,123 1,722 4,343 5,172 18,842
Medical facility development. -- -- -- -- 3,668 3,629
-------- ----------- ---------- ---------- --------- -----------
Total........ $ 2,447 $ 70,733 $10,715 $ 6,669 $37,207 $125,110
======= ======== ======= ======= ======= ========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
April 30, 1996
-----------------------------------------------------------------
Actual As Adjusted (8)
----------------------------- ---------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $ 34,142 $117,682
Working capital.............................. 39,872 129,105
Total assets................................. 174,420 261,460
Long-term debt, less current maturities...... 20,166 12,899
Convertible Subordinated Debentures.......... -- 100,000
Total shareholders' equity................... 129,511 129,511
</TABLE>
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(1) The Company was incorporated in October 1995 to combine the business
operations of certain companies (the "Related Companies") controlled by
Abraham D. Gosman, the Company's Chairman, President and Chief
Executive Officer. See Note 3 of Notes to Combined Financial Statements
of the Company. The business operations of the Related Companies were
acquired from third parties in transactions completed between September
1994 and January 1996. Simultaneously with the closing of the Company's
initial public offering on January 23, 1996, the Related Companies were
transferred to the Company in exchange for 13,307,450 shares of Company
Common Stock (the "Formation"). The historical combined (representing
periods prior to the Formation) or consolidated financial data
represents the combined or consolidated financial position and results
of operations of the Company and the Related Companies for the periods
presented, in each case from the respective dates of acquisition. Each
of the Acquisitions (as defined herein), except where noted, was
accounted for under the purchase method of accounting. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(2) Gives effect to (i) those Acquisitions which were completed as of
January 31, 1996, (ii) the sale of the Common Stock offered in the
Company's January 1996 initial public offering and the application of
the net proceeds therefrom and (iii) the issuance of the Company's 6
3/4% Convertible Subordinated Debentures (the "Debentures") in the debt
offering completed on June 26, 1996 (the "Debt Offering") and the
application of the net proceeds therefrom, as if such transactions had
occurred as of January 1, 1995. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Acquisition Summary." Adjustments have been made as required to each of
the entities' historical results of operations to give effect to the
completion of such Acquisitions and the initial public offering. See
"Unaudited Pro Forma Combined Financial Information."
(3) In January 1996, the Company changed its fiscal year end from December
31 to January 31.
(4) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
(5) Net income per share is calculated based upon 21,529,950 total shares
outstanding.
(6) Pro forma loss per share has been calculated based upon 18,074,117
shares outstanding which was derived as follows: (i) total shares
outstanding prior to the Company's January 1996 initial public offering
of 13,307,450 shares (which includes pro forma total shares outstanding
at December 31, 1995 of 11,207,450 shares plus 266,666 shares issued
for the purchase of the Nutrichem, Inc. minority interest plus
1,833,334 shares issued in the Formation to certain stockholders of
DASCO (as defined herein)), plus (ii) shares of 4,766,667 from which
the initial public offering proceeds were used to repay debt and
amounts due to shareholder in the amount of $71,500.
(7) Includes both employed and managed physicians. There were 25 employed
physicians at April 30, 1996.
(8) Adjusted to give effect to the sale of the Debentures offered in the
Debt Offering and the application of the net proceeds therefrom.
-7-
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective purchasers should carefully consider the factors set forth below
before purchasing the shares of Common Stock offered hereby.
Limited Operating History
The Company has a limited operating history and acquired its first
operating company in September 1994. All of the businesses acquired by the
Company in the Acquisitions, with the exception of DASCO Development Corporation
and DASCO Development West, Inc. (collectively, "DASCO"), were operated by
managements unaffiliated with the Company's management or with each other. From
the Company's inception in June 1994 through January 31, 1996, the Company
recorded losses in the amount of approximately $13.5 million. Although the
Company recorded a profit in the amount of $2.3 million from February 1, 1996 to
April 30, 1996, there can be no assurance that the Company will continue to be
profitable. See "Unaudited Pro Forma Combined Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Related to Growth Strategy
The Company's strategy involves growth primarily through acquisition.
The Company is subject to various risks associated with its acquisition growth
strategy, including the risk that the Company will be unable to identify,
recruit or acquire suitable acquisition candidates or to integrate and manage
the acquired practices or companies. The growth of the Company is largely
dependent on the Company's ability to form networks of affiliated physicians
from its acquired practices, to manage and control costs, and to realize
economies of scale. Any failure of the Company to implement economically
feasible acquisitions and affiliations may have a material adverse effect on the
Company. There can be no assurance that the Company will be able to achieve and
manage planned growth, that the assets of physician practice groups or other
health care providers will continue to be available for acquisition by the
Company, that the liabilities assumed by the Company in any acquisition will not
have a material adverse effect on the Company, or that the addition of physician
practice groups or other health care providers will be profitable for the
Company.
The Company has entered into letters of intent to acquire the practices
of and affiliate with additional physicians and with other entities. While the
Company intends to pursue the consummation of the transactions described in
these letters of intent, there can be no assurance that any or all of these
transactions will be consummated.
Need for Additional Financing
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 requires
ongoing capital expenditures. The Company expects that its capital needs over
the next several years will substantially exceed capital generated from
operations, the net proceeds of the initial public offering and the net proceeds
of the Debt Offering. To finance its capital needs, the Company plans both to
incur indebtedness apart from the Debt Offering 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 has
received a commitment from PNC Bank, National Association, for a $30 million
revolving credit facility and anticipates closing this financing on or about
August 15, 1996. If additional funds are raised through the issuance of equity
securities, dilution to the Company's stockholders may result, and if additional
funds are raised through the incurrence of debt, the Company likely would become
subject to restrictions on its operations and finances. There can be no
assurance that the Company will be able to raise additional capital when needed
on satisfactory terms or at all. Any limitation on the Company's ability to
obtain additional financing could have a material adverse effect on the Company.
See "Certain Transactions."
-8-
<PAGE>
Government Regulation
Providers of health care services, including physicians and other
clinicians, are subject to extensive federal and state regulation. The fraud and
abuse provisions of the Social Security Act prohibit the solicitation, payment,
receipt or offering of any direct or indirect remuneration in return for, or the
inducement of, the referral of patients, items or services that are paid for, in
whole or in part, by Medicare or Medicaid. These laws also impose significant
penalties for false or improper billings for physician services and impose
restrictions on physicians' referrals for designated health services to entities
with which they have financial relationships. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil monetary penalties and exclusion from participation in the
Medicare and Medicaid programs. Similar state laws also apply to the Company.
Such exclusion and penalties, if applied to the Company's affiliated physician
groups or medical support service providers, could have a material adverse
effect on the Company. See "Business -- Government Regulation."
The laws of many states prohibit business corporations such as the
Company from exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements, such as
splitting fees with physicians. These laws and their interpretations vary from
state to state and are enforced by both the courts and regulatory authorities,
each with broad discretion. Expansion of the operations of the Company to
certain jurisdictions may require structural and organizational modifications of
the Company's form of relationship with physician groups, which could have an
adverse effect on the Company. There can be no assurance that the Company's
physician management agreements will not be challenged as constituting the
unlicensed practice of medicine or that the enforceability of the provisions of
such agreements, including non-competition agreements, will not be limited.
Under certain provisions of the Omnibus Budget Reconciliation Act of
1993 known as "Stark II," physicians who refer Medicare and Medicaid patients to
the Company for certain designated services may not own stock in the Company,
and the Company may not accept such referrals from physicians who own stock in
the Company. Stark II contains an exemption which applies to the Company during
any year if at the end of the previous fiscal year the Company had stockholders'
equity in the amount of at least $75 million. The Company was not eligible for
this exemption as of its fiscal year ending December 31, 1995. In 1996, the
Company changed its fiscal year end to January 31, at which time it satisfied
the Stark II stockholders' equity exception. Violation of Stark II by the
Company could have a material adverse effect on the Company.
The Company believes that its operations are conducted in material
compliance with applicable laws, however, the Company has not received a legal
opinion to this effect and many aspects of the Company's business operations
have not been the subject of state or federal regulatory interpretation.
Moreover, as a result of the Company providing both physician practice
management services and medical support services, the Company may be the subject
of more stringent review by regulatory authorities, and there can be no
assurance that a review of the Company's operations by such authorities will not
result in a determination that could have a material adverse effect on the
Company or its affiliated physicians. Additionally, there can be no assurance
that the health care regulatory environment will not change so as to restrict
the Company's or the affiliated physicians' existing operations or their
expansion. The regulatory framework of certain jurisdictions may limit the
Company's expansion into, or ability to continue operations within, such
jurisdictions if the Company is unable to modify its operational structure to
conform to such regulatory framework or to obtain necessary approvals, licenses
and permits. Any limitation on the Company's ability to expand could have a
material adverse effect on the Company. See "Business -- Government Regulation."
Dependence on Third Party Reimbursement; Trends and Cost Containment
Substantially all of the Company's patient service revenues are derived
from third party payors. For the year ended December 31, 1995, the Company
derived approximately 60% of its net patient service revenues from
non-government payors and approximately 40% from government sponsored health
care programs
-9-
<PAGE>
(principally, Medicare and Medicaid). The Company's revenues and profitability
may be materially adversely affected by the current trend within the health care
industry toward cost containment as government and private third party payors
seek to impose lower reimbursement and utilization rates and negotiate reduced
payment schedules with service providers. The Company believes that this trend
will continue to result in a reduction from historical levels of per-patient
revenue. Continuing budgetary constraints at both the federal and state level
and the rapidly escalating costs of health care and reimbursement programs have
led, and may continue to lead, to significant reductions in government and other
third party reimbursements for certain medical charges and to the negotiation of
reduced contract rates or capital or other financial risk-shifting payment
systems by third party payors with service providers. Both the federal
government and various states are considering imposing limitations on the amount
of funding available for various health care services. The Company cannot
predict whether or when any such proposals will be adopted or, if adopted and
implemented, what effect, if any, such proposals would have on the Company.
Further reductions in payments to physicians or other changes in reimbursement
for health care services could have a material adverse effect on the Company,
unless the Company is otherwise able to offset such payment reductions.
Rates paid by private third party payors, including those that provide
Medicare supplemental insurance, are based on established physician, clinic and
hospital charges and are generally higher than Medicare payment rates. Changes
in the mix of the Company's patients among the non-government payors and
government sponsored health care programs, and among different types of
non-government payor sources, could have a material adverse effect on the
Company.
The Company is a provider of certain medical treatment and diagnostic
services including, but not limited to radiation therapy, infusion therapy,
lithotripsy and home care. Because many of these services receive governmental
reimbursement, they may be subject from time to time to changes in both the
degree of regulation and level of reimbursement. Additionally, factors such as
price competition and managed care also could reduce the Company's revenues. See
"Business -- Reimbursement and Cost Containment."
There can be no assurance that payments under governmental and private
third party payor programs will not be reduced or will, in the future, be
sufficient to cover costs allocable to patients eligible for reimbursement
pursuant to such programs, or that any reductions in the Company's revenues
resulting from reduced payments could be offset by the Company through cost
reductions, increased volume, introduction of new procedures or otherwise. See
"Business -- Reimbursement and Cost Containment."
Risks Related to Goodwill
At April 30, 1996, the Company's total assets were approximately $174.4
million, of which approximately $47.0 million, or approximately 26.9% of total
assets, was goodwill. Goodwill is the excess of cost over the fair value of the
net assets of businesses acquired. There can be no assurance that the value of
such goodwill will ever be realized by the Company. This goodwill is being
amortized on a straight-line basis over varying periods. The Company evaluates
on a regular basis whether events and circumstances have occurred that indicate
all or a portion of the carrying amount of goodwill may no longer be
recoverable, in which case an additional charge to earnings would become
necessary. Although at April 30, 1996, the net unamortized balance of goodwill
is not considered to be impaired, any such future determination requiring the
write-off of a significant portion of unamortized goodwill would adversely
affect the Company's results of operations. See "Unaudited Pro Forma Combined
Financial Information."
Risks Associated with Managed Care Contracts
As an increasing percentage of patients come under the control of
managed care entities, the Company believes that its success will be, in part,
dependent upon the Company's ability to negotiate contracts with health
maintenance organizations ("HMOs"), employer groups and other private third
party payors pursuant to which services will be provided on a risk-sharing or
capitated basis. Under some of these agreements, a health care
-10-
<PAGE>
provider accepts a predetermined amount per member per month in exchange for
providing all covered services to patients. Such contracts pass much of the
economic risk of providing care from the payor to the provider. The Company's
success in implementing its strategy of entering into such contracts in markets
served by the Company could result in greater predictability of revenues, but
increased risk to the Company resulting from uncertainty regarding expenses. To
the extent that patients or enrollees covered by such contracts require more
frequent or extensive care than is anticipated, additional costs would be
incurred, resulting in a reduction in operating margins. In the worst case,
revenues associated with risk-sharing contracts or capitated provider networks
would be insufficient to cover the costs of the services provided. Any such
reduction or elimination of earnings could have a material adverse effect on the
Company. Moreover, there is no certainty that the Company will be able to
establish and maintain satisfactory relationships with third party payors, many
of which already have existing provider structures in place and may not be able
or willing to re-arrange their provider networks. Increasingly, some
jurisdictions are taking the position that capitated agreements in which the
provider bears the risk should be regulated by insurance laws. As a consequence,
the Company may be limited in some of the states in which it operates in its
attempt to enter into or arrange capitated agreements for its affiliated
physician practices, employee physicians or medical support service providers
when those capitated arrangements involve the assumption of risk.
Dependence on Physicians and Other Medical Service Providers
The Company is dependent upon its affiliations with physicians and
other medical support service providers. The Company has entered into management
and/or employment agreements with most of its physicians and other medical
service providers for terms ranging from seven to 20 years. A significant number
of the Company's affiliated physicians and other medical service providers have
the right to terminate their contracts before the expiration of their respective
terms. In the event that a significant number of such physicians or providers
terminate their contracts or become unable or unwilling to continue in their
roles, the Company's business could be materially adversely affected. Intangible
assets related to management service agreements were $16.6 million at April 30,
1996. Under certain of its agreements, the Company guarantees that the net
revenues of the practices managed by the Company will not decrease below the net
revenues that existed immediately prior to the dates of such agreements. See
"Business."
Competition
Competition in the physician practice management industry is intense.
Several companies that have established operating histories and greater
resources than the Company are pursuing acquisition, development and management
activities similar to those of the Company. In addition, some hospitals,
clinics, health care companies, HMOs and insurance companies provide services
similar to those provided by the Company. There can be no assurance that the
Company will be able to compete effectively with such competitors, that
additional competitors will not enter the market or that such competition will
not make it more difficult to consummate acquisitions, undertake development
projects and provide management services on terms beneficial to the Company. The
Company also believes that changes in governmental and private reimbursement
policies among other factors have resulted in increased competition among
providers of medical services to consumers. There can be no assurance that the
Company will be able to compete effectively in the markets that it serves. In
addition, from time to time, medical facilities developed by the Company may
lease space to physician practices or medical support service companies that
compete with the Company's services in a particular local market. See "Business
- -- Competition."
Potential Liability and Insurance; Legal Proceedings
The provision of medical services entails an inherent risk of
professional malpractice and other similar claims. The Company believes that it
does not engage in the practice of medicine, however, the Company could be
implicated in such a claim through one of its providers, and there can be no
assurance that claims, suits or complaints relating to services delivered by an
affiliated physician or medical service provider will not
-11-
<PAGE>
be asserted against the Company in the future. Although the Company maintains
insurance it believes is adequate both as to risks and amounts, there can be no
assurance that any claim asserted against the Company for professional or other
liability will be covered by, or will not exceed the coverage limits of, such
insurance.
The availability and cost of professional liability insurance has been
affected by various factors, many of which are beyond the control of the
Company. There can be no assurance that the Company will be able to maintain
insurance in the future at a cost that is acceptable to the Company, or at all.
Any claim made against the Company not fully covered by insurance could have a
material adverse effect on the Company.
The Company is currently a party to, or has agreed to
indemnify certain other parties with respect to, various lawsuits relating to
the acquisition of one of its subsidiaries and the operation of the subsidiary
prior to the acquisition. There can be no assurance that such lawsuits will be
resolved favorably to the Company. See "Business -- Legal Proceedings."
Medical Facility Development
The Company engages in the development of health parks, medical malls
and medical office buildings and, in connection with these projects, enters into
development contracts for the provision of all or some of the following
services: project finance assistance, project management, construction
management, construction design engineering consultation, physician recruitment,
leasing and marketing. Many of these contracts hold the Company liable for any
development cost overruns and also require the Company to indemnify the owner of
the medical facility and the owner of the land on which a medical facility is
developed against certain liabilities or losses. As a result, the Company, which
is not a contractor, enters into construction contracts with general contractors
to construct its projects for a "guaranteed maximum cost" and requires the
general contractors to maintain performance bonds and to indemnify the Company
against certain liabilities and losses. Any claim for development cost overruns
not covered by a performance bond or any request for indemnification by the
owner of the medical facility or the owner of the land on which a medical
facility is developed, if the Company is not indemnified by others, could have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Medical Facility
Development" and "Business -- Medical Facility Development."
Control by Existing Stockholders
Mr. Gosman, Donald A. Sands and Bruce A. Rendina, the Company's
principal promoters beneficially own approximately 47% of the outstanding shares
of Common Stock and all of the Company's executive officers and directors as a
group beneficially own approximately 54.3% of the outstanding shares of Common
Stock. In addition, the Company has granted and is likely in the future to grant
the Company's executive officers and directors options to acquire shares of
Common Stock pursuant to the Company's 1995 Equity Incentive Plan. As a result,
such executive officers and directors, should they choose to act together, will
be able to determine the outcome of corporate actions requiring stockholder
approval and to control the election of the Company's Board of Directors. This
ownership may have the effect of discouraging unsolicited offers to acquire the
Company. See "Principal Stockholders."
Dependence Upon Key Personnel and DASCO
The Company is dependent upon the ability and experience of its
executive officers, and there can be no assurance that the Company will be able
to retain all of such officers. The failure of such officers to remain active in
the Company's management could have a material adverse effect on the Company.
The Company currently has employment contracts with Messrs. Sands and Rendina,
Edward E. Goldman, M.D., Jeannette M. McGill, Robert A. Miller and William A.
Sanger. The Company also has been dependent upon the existing and anticipated
contributions of its principal promoters, Messrs. Gosman, Sands and Rendina, and
DASCO. The Company believes that DASCO and the experience of Messrs. Sands and
Rendina in the medical facility
-12-
<PAGE>
development business will contribute to the profitability of the Company's
medical facility development services and to the success of the Company as a
whole by facilitating the Company's acquisition of physician practices,
affiliation with physicians and integration of affiliated physicians and medical
support service companies. See "Business -- Strategy." There can be no assurance
that the anticipated contributions of Messrs. Sands and Rendina and of DASCO
will be realized, and the failure of such contributions to be realized could
have a material adverse effect on the Company.
Rights of Holders of the Company's Debentures
On June 26, 1996, the Company completed the Debt Offering of
$100,000,000 aggregate principal amount of the Debentures pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"). The Debentures were initially issued under an
indenture dated as of June 15, 1996 (the "Indenture"). The Indenture provides
the holders of the Debentures with certain rights that could affect the market
price of the Common Stock and could have the effect of discouraging a third
party from attempting to obtain control of the Company. The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Indenture, including the definition therein of certain terms.
The Debentures are convertible into Common Stock at any time after the
60th day following the date of original issuance and prior to redemption or
final maturity, initially at a conversion price of $28.20 per share. The
conversion price is subject to adjustment upon the occurrence of certain events
including the distribution of additional shares of the Common Stock to holders
of the capital stock of the Company at a price below fair market value, the
distribution of other securities of the Company or the Company's assets to
holders of the Common Stock and extraordinary cash distributions and tender
offers by the Company. In addition, the Company may reduce the conversion price
in order that any event treated for federal income tax purposes as a dividend of
stock or stock rights will not be taxable to the recipient or, if that is not
possible, to diminish any income taxes that are payable because of such event.
In the event of a consolidation or merger or the sale or transfer of
the Company's assets, the holders of the Debentures have the right to convert
their Debentures into the kind and amount of consideration receivable upon such
an event by a holder of the number of shares of Common Stock into which such
Debentures might have been converted immediately prior to such an event.
Furthermore, the Company may not engage in a consolidation or merger or a sale,
conveyance or transfer of property or assets, unless the other party to such
transaction is a corporation, partnership or trust organized under the laws of
the United States or any state thereof or the District of Columbia and expressly
assumes the obligations of the Company under the Indenture and the transaction
complies with the terms of the Indenture.
In the event of a change in control of the Company, each holder of the
Debentures will have the right, at the holder's option, to require the Company
to repurchase all or a portion of such holder's Debentures at a price equal to
100% of the principal amount thereof, plus accrued interest to the date of
repurchase. Failure by the Company to repurchase the Debentures when required
will result in an Event of Default (as such term is defined in the Indenture).
Upon the occurrence of an Event of Default, the principal and premium, if any,
on the outstanding Debentures may be declared, or may automatically become, due
and payable immediately.
The Company has filed a registration statement on Form S-1 with the
Securities and Exchange Commission (the "Commission") relating to the resale of
the Debentures and the resale of the shares of Common Stock initially issuable
upon conversion of the Debentures by any holders of the Debentures that did not
purchase the Debentures under the registration statement. If the registration
statement ceases to be effective or usable for the offer and sale of the
Debentures and such shares of Common Stock for a period of time exceeding 90
days in the aggregate in any one-year period or 30 days in any calendar quarter,
the Company is required to pay liquidated damages to each holder of the
Debentures or such shares Common Stock.
-13-
<PAGE>
Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock in the public market
during or after the offering of securities hereby, or otherwise, or the
perception that such sales could occur, may adversely affect prevailing market
prices of the Common Stock and could impair the future ability of the Company to
raise capital through an offering of its equity securities. In connection with
the Formation, the Company issued 13,307,450 shares of Common Stock to Messrs.
Gosman, Sands and Rendina and certain other management and founder stockholders.
An additional 324,252 shares of Common Stock were issued in connection with a
subsequent acquisition. All of such 13,631,702 shares are "restricted
securities" within the meaning of the Securities Act. Subject to the contractual
lockup provisions discussed below and unless the resale of the shares is
registered under the Securities Act, these shares may not be sold in the open
market until after the second anniversary of the closing date of the offering
and then only in compliance with the applicable requirements of Rule 144.
In connection with the Company's initial public offering of Common Stock, the
Company and the holders of all of the 13,307,450 shares of Common Stock issued
in connection with the Formation agreed not to offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock until
July 21, 1996 without the prior written consent of Smith Barney Inc. In
addition, in connection with the Debt Offering, the Company and its directors
and executive officers agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities convertible
into or exercisable or exchangeable for Common Stock until September 20, 1996.
At such time as the Company becomes eligible to use a registration statement
on Form S-3 which could occur approximately one year after the date of the
initial public offering, holders of all the above-mentioned securities have
the right to demand registration under the Securities Act of shares of Common
Stock. See "Description of Common Stock - Registration Rights." Such holders
also have the right to have shares of Common Stock included in certain future
registered public offerings of Common Stock. The Securities and Exchange
Commission has proposed certain amendments to Rule 144 that would reduce to one
year the holding period required prior to restricted securities becoming
eligible for resale in the public market under Rule 144 and would reduce to two
years the holding period required prior to a person becoming eligible to effect
sales under Rule 144(k). This proposal, if adopted, would result in a
substantial number of shares of Common Stock becoming eligible for resale in the
public markets significantly sooner than would otherwise be the case, which
could adversely affect the market price for the Common Stock. No assurance can
be given concerning whether or when such proposal will be adopted by the
Commission.
In connection with the Debt Offering, the Company filed a registration
statement on Form S-1 with the Commission relating to the resale of $100,000,000
aggregate principal amount of the Debentures, and the resale of up to 3,546,099
shares of the Common Stock initially issuable upon conversion of the Debentures
by any holders of the Debentures that did not purchase the Debentures under the
registration statement.
Possible Volatility of Stock Price
There can be no assurance that any active public market for the Common
Stock will continue during or after the offering of securities hereby. From time
to time during or after the offering of securities hereby, there may be
significant volatility in the market price for the Common Stock. Quarterly
operating results of the Company, changes in general conditions in the economy
or the health care industry, or other developments affecting the Company or its
competitors could cause the market price of the Common Stock to fluctuate
substantially. The equity markets have, on occasion, experienced significant
price and volume fluctuations that have affected the market prices for many
companies' securities and that have often been unrelated to the operating
performance of these companies. Concern about the potential effects of health
care reform measures has contributed to the volatility of stock prices of
companies in health care and related industries and may similarly affect the
price of the Common Stock. Any such fluctuations that occur during or after the
closing of the offering may adversely affect the market price of the Common
Stock.
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<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on The Nasdaq National Market under the
symbol "PHMX." The following table sets forth for each period indicated the high
and low sale prices for the Common Stock as reported by The Nasdaq National
Market.
High Low
---- ---
January 23, 1996 through January 31, 1996 $23.50 $15.00
February 1, 1996 through April 30, 1996 23.63 18.50
April 30, 1996 through July 26, 1996 25.75 18.00
On July 26, 1996, the last reported sale price of the Common Stock was
$24.50. As of July 26, 1996, there were approximately 100 holders of record of
the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends and does not anticipate
paying cash dividends in the foreseeable future. It is the present intention of
the Board of Directors to reinvest all earnings in the business of the Company
to support future growth.
-15-
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(In thousands, except share data)
The selected historical financial data set forth below have been derived from
the financial statements of the Company. The combined financial statements of
the Company as of December 31, 1994 and December 31, 1995 and for the period
from June 24, 1994 (inception) to December 31, 1994 and the year ended
December 31, 1995, together with the notes thereto and the related report of
Coopers & Lybrand L.L.P., independent accountants, are included elsewhere in
this Prospectus. The selected historical financial data of the Company should
be read in conjunction with the related financial statements and notes
thereto appearing elsewhere in this Prospectus. The selected pro forma
combined financial data set forth below at April 30, 1996 and for the year
ended December 31, 1995 have been derived from the unaudited pro forma
combined financial statements of the Company. The pro forma selected
financial data are not necessarily indicative of the actual results of
operations or financial position that would have been achieved had the
Acquisitions been completed as of January 1, 1995, nor are the statements
necessarily indicative of the Company's future results of operations or
financial position. See "Unaudited Pro Forma Combined Financial Information."
<TABLE>
<CAPTION>
Pro Forma
Historical (1) (2)
----------------------------------------------------------------- ------------
Combined
June 24, Combined
1994 Combined Consolidated Three Consolidated
(inception) Year Month Months Three Combined
to Ended Ended Ended Months Year
December December January March Ended Ended
31, 31, 31, 31, April 30, December 31,
1994 1995 1996 (3) 1995 1996 (3) 1995
----------- ---------- ---------- -------- ---------- ------------
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue $ 2,447 $ 70,733 $10,715 $ 6,669 $37,207 $125,110
--------- -------- -------- ------ -------- ----------
Operating expenses:
Cost of affiliated physician
management services -- 9,656 2,797 -- 8,533 34,612
Salaries, wages and benefits 2,142 31,976 3,637 4,510 11,660 43,619
Depreciation and amortization 107 3,863 535 338 1,593 6,612
Rent 249 4,503 565 326 1,706 6,079
Earn-out payment -- 1,271 -- 1,111 -- --
Provision for closure loss -- 2,500 -- -- -- 2,500
Other 1,098 22,900 3,434 2,264 9,858 35,410
--------- -------- -------- ------ -------- ----------
3,596 76,669 10,968 8,549 33,350 128,832
--------- -------- -------- ------ -------- ----------
Income (loss) from operations (1,149) (5,936) (253) (1,880) 3,857 (3,722)
--------- -------- -------- ------ -------- ----------
Interest expense 95 4,852 812 320 269 8,433
Minority interest 52 806 81 105 34 --
Other nonoperating (revenue)
expense -- -- -- -- -- (44)
Income from investments in
affiliates -- (569) 30 -- (142) (647)
--------- -------- -------- ------ -------- ----------
Income (loss) before income taxes (1,296) (11,025) (1,176) (2,305) 3,696 (11,464)
Income tax expense (4) -- -- -- -- 1,404 --
--------- -------- -------- ------ -------- ----------
Net income (loss) $(1,296) $(11,025) $(1,176) $(2,305) $ 2,292 $ (11,464)
========= ======== ======== ====== ======== ==========
Net income per share (5) $ 0.11
========
Pro forma (loss) per share (6) $ (0.63)
==========
</TABLE>
16
<PAGE>
April 30, 1996
--------------------------
As Adjusted
Actual (7)
-------- --------------
(Unaudited) (Unaudited)
Balance Sheet Data:
Cash and cash equivalents $ 34,142 $117,682
Working capital 39,872 129,105
Total assets 174,420 261,460
Long-term debt, less current maturities 20,166 12,899
Convertible Subordinated Debentures -- 100,000
Total shareholders' equity 129,511 129,511
(1) The Company was incorporated in October 1995 to combine the business
operations of certain companies (the "Related Companies") controlled by
Abraham D. Gosman, the Company's Chairman, President and Chief Executive
Officer. See Note 3 of Notes to Combined Financial Statements of the
Company. The business operations of the Related Companies were acquired
from third parties in transactions completed between September 1994 and
January 1996. Simultaneously with the closing of the Company's initial
public offering on January 23, 1996, the Related Companies were
transferred to the Company in exchange for 13,307,450 shares of Company
Common Stock (the "Formation"). The historical combined (representing
periods prior to the Formation) or consolidated financial data represents
the combined or consolidated financial position and results of operations
of the Company and the Related Companies for the periods presented, in
each case from the respective dates of acquisition. Each of the
Acquisitions (as defined herein), except where noted, was accounted for
under the purchase method of accounting.
(2) Gives effect to (i) those Acquisitions which were completed as of January
31, 1996, (ii) the sale of the Common Stock offered in the Company's
January 1996 initial public offering and the application of the net
proceeds therefrom, and (iii) the issuance of the Debentures in the Debt
Offering and the application of the net proceeds, therefrom as if all
such transactions had occurred as of January 1, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Acquisition Summary." Adjustments have been made as required to each
of the entities' historical results of operations to give effect to the
completion of such Acquisitions, the initial public offering and the Debt
Offering. See "Unaudited Pro Forma Combined Financial Information."
(3) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(4) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
(5) Net income per share is calculated based upon 21,529,950 total shares
outstanding.
(6) Pro forma loss per share has been calculated based upon 18,074,117 shares
outstanding which was derived as follows: (i) total shares outstanding
prior to the Company's January 1996 initial public offering of 13,307,450
shares (which includes pro forma total shares outstanding at December 31,
1995 of 11,207,450 shares plus 266,666 shares issued for the purchase of
the Nutrichem, Inc. minority interest plus 1,833,334 shares issued in the
Formation to certain stockholders of DASCO), plus (ii) shares of
4,766,667 from which the initial public offering proceeds were used to
repay debt and amounts due to shareholder in the amount of $71,500.
(7) Adjusted to give effect to the sale of the Debentures offered in the Debt
Offering and the application of the net proceeds therefrom.
17
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 1995 has been prepared to reflect those Acquisitions
that were completed as of January 31, 1996 as if they had been completed on
January 1, 1995. Adjustments have been made as required to each of the
entities' historical results of operations to give effect to the completion
of the Acquisitions. The Unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1995 give effect to both the Company's
January 1996 initial public offering and the Debt Offering and the
application of the net proceeds therefrom, as if such transactions had
occurred as of January 1, 1995. The Unaudited Pro Forma Consolidated Balance
Sheet at April 30, 1996 gives effect to the Debt Offering and the application
of net proceeds therefrom as if the offering had occurred on April 30, 1996.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Unaudited Pro Forma Combined Financial Information has been prepared by
the Company based on the audited financial statements of certain of the
Acquisitions, which statements are included elsewhere in this Prospectus, and
the unaudited financial statements of other Acquisitions, which statements
are not included herein (as they are not significant), adjusted where
necessary, with respect to pre-acquisition periods, to the basis of
accounting used in the Company's Audited Financial Statements. The Unaudited
Pro Forma Combined Financial Information is not indicative of the results
that would have occurred if the transactions had occurred on the dates
indicated or which may be realized in the future. The Unaudited Pro Forma
Combined Financial Information should be read in conjunction with the
historical financial statements of the companies acquired in connection with
the Acquisitions and the notes thereto included elsewhere in this Prospectus.
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
April 30, 1996
(In thousands)
Pro Forma
As Adjusted
Historical Offering April 30,
(A) Adjustments Reference 1996
-------- ---------- ---------- -----------
Assets
Cash and cash (B), (C),
equivalents $ 34,142 $ 83,540 (D) $117,682
Receivables
Accounts receivable, net 24,447 -- 24,447
Other receivables 180 -- 180
Notes receivable -- -- --
Prepaid assets and other
current assets 1,987 -- 1,987
-------- ---------- ----------
Total current assets 60,756 83,540 144,296
-------- ---------- ----------
Property, plant and
equipment, net 39,088 -- 39,088
Notes receivable 100 -- 100
Goodwill, net 47,006 -- 47,006
Management services
agreements, net 16,575 -- 16,575
Investments in
affiliates 3,272 -- 3,272
Other assets 7,623 3,500 (B) 11,123
-------- ---------- ----------
Total assets $174,420 $ 87,040 $261,460
======== ========== ==========
Liabilities
Accounts payable 4,293 -- 4,293
Current portion of debt
and capital leases 2,334 (317) (C) 2,017
Current portion of
related party debt 2,435 -- 2,435
Due to shareholder,
current 5,376 (5,376) (D) --
Accrued compensation 824 -- 824
Other accrued
liabilities 5,393 -- 5,393
Accrued interest --
shareholder 229 -- 229
-------- ---------- ----------
Total current
liabilities 20,884 (5,693) 15,191
-------- ---------- ----------
Due to shareholder 6,311 (6,311) (D) --
Long term debt, less
current maturities 13,855 (956) (C) 12,899
Convertible Subordinated
Debentures -- 100,000 (B) 100,000
Other long term
liabilities 2,128 -- 2,128
Minority interest 1,731 -- 1,731
-------- --------- ----------
Total liabilities 44,909 87,040 131,949
-------- --------- ----------
Shareholders' Equity
Common stock 215 -- 215
Additional paid-in
capital 140,502 -- 140,502
Retained earnings (11,206) -- (11,206)
-------- --------- -----------
Total shareholders'
equity 129,511 -- 129,511
-------- --------- ----------
Total liabilities &
shareholders'
equity $ 174,420 $ 87,040 $261,460
======== ========= ==========
See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet.
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands)
(A) Represents the historical unaudited consolidated balance sheet of the
Company at April 30, 1996.
(B) Represents the issuance of the Debentures in the Debt Offering and the
proceeds therefrom, net of underwriting commissions and other expenses.
(C) Represents the repayment of $1,273 in notes payable to a bank ($317 of
which is current), collateralized by the assets of a multi-specialty
group practice.
(D) Represents the repayment of $11,687 due to shareholder ($5,376 of which
is current).
20
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------- ---------------------------------------
Financing/
PhyMatrix Acquisition Offering
Corp. Acquisitions Adjustments Adjustments
(A) (B) (B) (M) Combined
-------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues from services $ 48,360 $13,087 $ (1,425) $ -- $ 60,022
Net revenues from management
service agreements
22,373 40,984 1,731 -- 65,088
------ -------- ------- ------- -----------
Total revenue 70,733 54,071 306 -- 125,110
------ -------- ------- ------- -----------
Operating expenses:
Cost of affiliated physician
management services 9,656 14,302 10,654 -- 34,612
Salaries, wages and benefits 31,976 13,230 (1,587) -- 43,619
Professional fees 2,845 4,071 (2,267) -- 4,649
Supplies 11,864 7,175 (1,061) -- 17,978
Utilities 1,308 436 (166) -- 1,578
Depreciation and amortization 3,863 1,681 1,068 -- 6,612
Rent 4,503 3,344 (1,768) -- 6,079
Earn out payment 1,271 -- (1,271) -- --
Provision for closure loss 2,500 -- -- -- 2,500
Other 6,883 6,249 (1,927) -- 11,205
------ -------- ------- ------- -----------
76,669 50,488 1,675 -- 128,832
------ -------- ------- ------- -----------
Income (loss) from operations (5,936) 3,583 (1,369) -- (3,722)
------ -------- ------- ------- -----------
Interest (income) expense, net 4,852 141 (4,993) 8,433 8,433
Minority interest 806 -- (806) -- --
Other nonoperating (revenue)
expenses -- (231) 187 -- (44)
Income from investments in
affiliates (569) -- (78) -- (647)
------ -------- ------- ------- -----------
Net income (loss) (N) $(11,025) $ 3,673 $ 4,321 $(8,433) $ (11,464)
====== ======== ======= ======= ===========
Pro forma net loss per share $ (0.63)
===========
Number of shares used in pro forma
net loss per share 18,074,117(Q)
===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined
Statement of Operations.
21
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS--SUPPLEMENTAL SCHEDULE
Summary of Acquisitions (C)
For the Year Ended December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
Oncology-
Hematology
Associates,
P.A. and
Whittle DASCO Oncology-
Aegis Varnell Development Hematology
Health and Corporation Georgia Infusion Osler
Systems, Bedoya, and Cancer Therapy, Medical,
Inc. P.A. Affiliates Specialists Inc. Inc.
---- --------- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from services $719 $ -- $3,629 $ -- $ -- $ --
Net revenues from management
service agreements -- 2,201 -- 10,910 2,404 9,031
-- ------- ----- ------ -------- ----
Total revenue 719 2,201 3,629 10,910 2,404 9,031
-- ------- ----- ------ -------- ----
Operating expenses:
Cost of affiliated physician
management services -- 1,211 -- 3,465 580 3,923
Salaries, wages and benefits 230 440 2,815 878 537 1,932
Professional fees 18 36 217 1,589 -- 168
Supplies 70 29 -- 3,158 628 493
Utilities 9 27 -- 18 -- 18
Depreciation and amortization 70 -- 12 113 25 214
Rent 37 59 166 749 113 730
Other 165 238 249 1,123 157 669
-- ------- ----- ------ -------- ----
599 2,040 3,459 11,093 2,040 8,147
-- ------- ----- ------ -------- ----
Income (loss) from operations 120 161 170 (183) 364 884
-- ------- ----- ------ -------- ----
Interest (income) expense,
net 26 8 (6) 42 18 79
Minority interest -- -- -- -- -- --
Other nonoperating (revenue)
expenses -- -- -- (25) (23) (3)
Income from investments
in affiliates -- -- -- -- -- --
-- ------- ----- ------ -------- ----
Net income (loss) $ 94 $ 153 $ 176 $ (200) $ 369 $ 808
== ======= ===== ====== ======== ====
</TABLE>
<TABLE>
<CAPTION>
Oncology Radiation
and Care,
Radiation Inc. All
Associates, and Other Total
Pinnacle Inc. Subsidiaries (R) Acquisitions
----- ------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues from services $1,353 $ -- $ 5,279 $2,107 $13,087
Net revenues from management
service agreements -- 10,858 -- 5,580 40,984
--- ----------- ------- --------- ---------
Total revenue 1,353 10,858 5,279 7,687 54,071
--- ----------- ------- --------- ---------
Operating expenses:
Cost of affiliated physician
management services -- 3,275 -- 1,848 14,302
Salaries, wages and benefits 640 1,326 2,597 1,835 13,230
Professional fees 8 1,825 87 123 4,071
Supplies 490 1,014 228 1,065 7,175
Utilities 57 76 100 131 436
Depreciation and amortization 29 (63) 1,195 86 1,681
Rent 91 287 512 600 3,344
Other 185 897 2,019 547 6,249
--- ----------- ------- --------- ---------
1,500 8,637 6,738 6,235 50,488
--- ----------- ------- --------- ---------
Income (loss) from operations (147) 2,221 (1,459) 1,452 3,583
--- ----------- ------- --------- ---------
Interest (income) expense,
net 42 15 (72) (11) 141
Minority interest -- -- -- -- --
Other nonoperating (revenue)
expenses (108) -- (48) (24) (231)
Income from investments
in affiliates -- -- -- -- --
--- ----------- ------- --------- ---------
Net income (loss) $ (81) $ 2,206 $(1,339) $1,487 $ 3,673
=== =========== ======= ========= =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined
Statement of Operations.
22
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATION--SUPPLEMENTAL SCHEDULE
Summary of Adjustments For Acquisitions (D)
For the Year Ended December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
Oncology-
Hematology
Associates,
DASCO P.A. and
Whittle Development Oncology-
Aegis Varnell Corporation Hematology
Uromed Health and and Georgia Infusion
Technologies Systems, Bedoya, Affiliate Cancer Therapy,
Inc. Inc. Inc. (P) Specialists Inc.
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from services $ -- $ -- $ -- $ -- $ -- $ --
Net revenues from management
service agreements -- -- -- -- 1,731 (K) --
--------- --------- --------- --------- --------- -----------
Total revenue -- -- -- -- 1,731 --
--------- --------- --------- --------- --------- -----------
Operating expenses:
Cost of affiliated physician
management services (F) -- -- 308 -- 2,480 457
Salaries, wages and benefits -- -- -- -- -- --
Professional fees -- -- -- -- (439) --
Supplies -- -- -- -- -- --
Utilities -- -- -- -- -- --
Depreciation and amortization (L) (3) 71 43 240 323 11
Rent (H) -- -- -- -- (291) --
Earnout payment (O) -- -- -- -- -- --
Other (H) -- (167) (J) -- -- 165 --
--------- --------- --------- --------- --------- -----------
(3) (96) 351 240 2,238 468
--------- --------- --------- --------- --------- -----------
Income (loss) from operations 3 96 (351) (240) (507) (468)
--------- --------- --------- --------- --------- -----------
Interest (income) expense, net 47 (206) (8) (165) (19) (18)
Minority interest (I) (149) -- -- -- -- --
Other nonoperating (revenue)
expense -- -- -- -- 25 --
Income from investments
in affiliates -- -- -- (78) (P) -- --
--------- --------- --------- --------- --------- -----------
$105 $ 302 $(343) $ 3 $ (513) $(450)
========= ========= ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Radiation
Oncology Care,
Osler Radiation Inc. Total
Nutrichem, Medical, Associates, and All Acquisition
Inc. Inc. Pinnacle P.A. Subsidiaries Other (R) Adjustments
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues from services $ -- $ -- $ -- $ -- $(1,425)(E) $ -- $ (1,425)
Net revenues from management
service agreements -- -- -- -- -- -- 1,731
------- ------- ------- ------- ------- ------- ---------
Total revenue -- -- -- -- (1,425) -- 306
------- ------- ------- ------- ------- ------- ---------
Operating expenses:
Cost of affiliated physician
management services (F) -- 1,044 -- 5,253 -- 1,112 10,654
Salaries, wages and benefits -- 38 504 (1,326) (F) (1,509) (E) 706 (1,587)
Professional fees -- -- -- (1,825) (F) (3) (E) -- (2,267)
Supplies -- -- -- (1,014) (F) (47) (E) -- (1,061)
Utilities -- -- -- (76) (F) (90) (E) -- (166)
Depreciation and amortization (L) 182 276 (14) 402 (735) 272 1,068
Rent (H) -- (488) -- (287) (562) (E) (140) (1,768)
Earnout payment (O) (1,271) -- -- -- -- -- (1,271)
Other (H) -- -- -- (897) (F) (1,444) (E) 416 (1,927)
------- ------- ------- ------- ------- ------- ---------
(1,089) 870 490 230 (4,390) 2,366 1,675
------- ------- ------- ------- ------- ------- ---------
Income (loss) from operations 1,089 (870) (490) (230) 2,965 (2,366) (1,369)
------- ------- ------- ------- ------- ------- ---------
Interest (income) expense, net (395) (282) (56) (160) (1,532) (2,199) (4,993)
Minority interest (I) (657) -- -- -- -- -- (806)
Other nonoperating (revenue)
expense -- 2 108 -- 48 (E) 4 187
Income from investments
in affiliates -- -- -- -- -- -- (78)
------- ------- ------- ------- ------- ------- ---------
$2,141 $ (590) $(542) $ (70) $ 4,449 $ (171) $ 4,321
======= ======= ======= ======= ======= ======= =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined
Statement of Operations.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Dollars in thousands)
A. Represents the audited historical combined statement of operations of the
Company for the year ended December 31, 1995.
B. Represents the historical combined statement of operations of the
Acquisitions from January 1, 1995 until the earlier of the date such
Acquisitions were completed by the Company or December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Acquisition Summary" for a summary of the Acquisitions.
C. Represents the historical statement of operations of each of the
Acquisitions from January 1, 1995 until the earlier of the date such
Acquisitions were completed by the Company or December 31, 1995. In the
case of Georgia Cancer Specialists, the historical statement of operations
includes Georgia Oncology-Hematology Clinic, P.C. and Cancer Specialists
of Georgia, P.C., as the two entities merged to form Georgia Cancer
Specialists. All Other represents Acquisitions which are not significant
to the Unaudited Pro Forma Combined Statement of Operations. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Acquisition Summary" for a summary of the Acquisitions.
D. Represents the adjustments to the historical statement of operations for
each of the Acquisitions from January 1, 1995 until the earlier of the
date such Acquisitions were completed by the Company or December 31, 1995.
All Other represents Acquisitions which are not significant to the
Unaudited Pro Forma Combined Statement of Operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
-- Acquisition Summary" for a summary of the Acquisitions.
E. During March 1995, the Company purchased the stock of Oncology Therapies,
Inc. ("OTI") which owns and operates outpatient radiation therapy centers
utilized in the treatment of cancer and diagnostic imaging centers. The
unaudited pro forma adjustments related to this purchase are as follows:
1. The Company closed five of the radiation therapy centers. The
unaudited pro forma adjustments include the elimination of the results
of operations for these closed centers. The following unaudited pro
forma adjustments exclude the elimination of depreciation (which
amounted to $1,140 for the year ended December 31, 1995). See Note L,
as it relates to the unaudited pro forma adjustments for depreciation
for OTI on a consolidated basis.
Year Ended
December 31, 1995
(In thousands)
Net revenues from services $ 1,425
Operating Expenses
Salaries, wages and
benefits 1,509
Professional fees 3
Supplies 47
Utilities 90
Rent 562
Other 290
--------
2,501
--------
Net loss $(1,076)
========
2. The unaudited pro forma adjustments also include the elimination of
the following non-recurring income and expenses as follows:
24
<PAGE>
Year Ended
December 31,
----------------
1995
(In thousands)
Merger transaction expenses $1,106
F. Adjusts costs of affiliated physician services to the percentage or amount
specified in each of the management services agreements.
G. Adjusts employed physicians salaries (included in all other) to the amount
as specified per the employment agreements entered into as a result of the
Acquisitions. Such changes in salary are supported by the employment
contracts.
Increases salaries, wages and benefits by $504 for the year ended December
1995 to reflect employment agreements entered into during October 1995 in
conjunction with the acquisitions of Pinnacle.
H. Adjusts for rent and other expenses based on the terms of the agreements.
I. Eliminates minority interest expense as shown below for the year ended
December 31, 1995 related to Uromed and Nutrichem. Such minority
stockholders have or will be exchanging their shares for shares in the
Company.
Year Ended
December 31,
----------------
1995
(In thousands)
Nutrichem $657
Uromed 149
--------
Total $806
========
J. Eliminates $167 of Other expenses for the year ended December 31, 1995
reflected on the financial statements of Aegis prior to the purchase by
the Company. The financial statements of Aegis reflect expenses related to
another business operated by Aegis which was not purchased by the Company.
Therefore, since such expenses were not related to the operations of the
assets purchased by the Company, they were eliminated.
K. Increases revenue for the year ended December 31, 1995 by $1,731 to
reflect the terms of an amended management services agreement which now
requires the Company to purchase the revenues of a practice that the
Company began managing in April 1995. Such amended management services
agreement was the result of a merger between a medical oncology practice
managed by the Company starting in April 1995 and a medical oncology
practice which began to be managed by the Company during August 1995.
L. Adjusts depreciation and amortization expense to properly reflect the
allocation of the purchase price as required per purchase accounting for
each of the Acquisitions.
Amounts allocated to intangibles (Goodwill and Management Service
Agreements) as of April 30, 1996 and the related amortization expense on a
pro forma basis for each of the Acquisitions is as follows:
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
--------------------
Management Twelve Amortization
Service Months Period
Business Acquired Goodwill Agreements Amortization (Years)
- ---------------------------------------- -------- --------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Recent Acquisitions
Employed physicians (1) $2,833 -- $142 20
Medical support service companies:
(bullet) Phylab/Miramer Lab 116 -- 6 20
(bullet) Pinnacle Associates, Inc. 432 -- 11 40
25
<PAGE>
(bullet) Aegis Health Systems, Inc. $6,227 -- $311 20
(bullet) Lithotripsy America, Inc. 3 -- -- 20
(bullet) Radiation Care, Inc. and
Subsidiaries 8,623 -- 216 40
(bullet) First Choice Home Care
Services of Boca Raton, Inc. 2,622 -- 131 20
First Choice Health Care Services of
Ft. Lauderdale, Inc.
First Choice Home Care Services Inc.
(bullet) Nutrichem, Inc. 9,800 -- 245 40
(bullet) Uromed Technologies, Inc. 2,376 -- 119 20
Managed physician practices
(bullet) Symington -- 30 3 10
(bullet) Venkat Mani -- 141 14 10
(bullet) Whittle, Varnell & Bedoya,
Inc. -- 289 14 20
(bullet) West Shore Urology -- 24 1 20
(bullet) Oncology Care Associates -- 47 2 20
(bullet) Oncology & Radiation
Associates, P.A. -- 9,579 479 20
(bullet) Osler Medical, Inc. -- 3,373 169 20
(bullet) Georgia Cancer Specialists -- 3,348 335 10
(bullet) Oncology-Hematology
Associates, P.A. and
Oncology-Hematology Infusion
Therapy, Inc. -- 313 21 15
Management Services Organization
(bullet) Physicians Choice Management,
LLC 3,016 -- 151 20
Medical facility development
(bullet) DASCO Development Corporation
and Affiliate ("DASCO") 9,756 -- 244 40
------- --------- -----------
Total Acquisitions $45,804 $17,144 $2,614
======= ========= ===========
</TABLE>
(1)Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman and Novoa.
Amount recorded as fixed assets and the related depreciation expense on a
Pro Forma basis for each of the Acquisitions is as follows:
Twelve
Fixed Assets Month Depreciable
Business Acquired Acquired Depreciation Life
------------------------------- ------------- ----------- -----------
(In thousands)
Acquisitions
Employed Physicians (1) $ 605 $ 86 7
Medical Support Service
Companies:
(bullet) Phylab 18 3 7
(bullet) Pinnacle Associates, Inc. 70 10 7
(bullet) Aegis Health Systems, Inc. 705 101 7
(bullet) Lithotripsy America, Inc. 295 42 7
(bullet) Radiation Care, Inc.
and Subsidiaries 23,000(2) 2,230 Various
26
<PAGE>
(bullet) First Choice Home
Care Services of Boca
Raton, Inc. $ 28 $ 4 7
First Choice Health Care
Services of Ft. Lauderdale,
Inc.
First Choice Health Care
Services, Inc.
(bullet) Nutrichem, Inc. 173 25 7
(bullet) Uromed Technologies,
Inc. 1,400 200 7
Managed Physicians Practices:
(bullet) Symington 17 3 7
(bullet) Venkat Mani 50 7 7
(bullet) Whittle, Varnell and
Bedoya, P.A. 253 36 7
(bullet) Oncology Care
Associates 156 22 7
(bullet) West Shore Urology 1,853 145 (3)
(bullet) Osler Medical, Inc. 7,452 481 (4)
(bullet) Cancer Specialists of
Georgia, Inc. 1,561 223 7
(bullet) Oncology-Hematology
Associates, P.A. and
Oncology-Hematology
Infusion Therapy,
Inc. 281 40 7
(bullet) Georgia
Oncology-Hematology
Clinic, P.C. 631 90 7
Medical Facility Development
(bullet) DASCO 45 6 7
----------- ---------
Total Acquisitions $38,593 $3,754
=========== =========
(1) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Novoa, and Lawler.
(2) Excludes equipment written off at the closed centers.
(3) Capital leases of $1,569 are being depreciated over 15 years, which
represents the terms of the lease, all other fixed assets are being
depreciated over 7 years.
(4) A capital lease of $6,283 is being depreciated over 20 years, which
represents the term of the lease, all other fixed assets are being
depreciated over 7 years.
M. The following table represents pro forma interest expense based on the
debt outstanding on the Unaudited Balance Sheet at April 30, 1996. The
Unaudited Pro Forma Statement of Operations reflects interest expense,
based on the $117,351,777 of outstanding debt, of which $8,433,449 for the
year ended December 31, 1995 is related to the debt outstanding after the
Debt Offering.
27
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma
----------- -------------
Year Ended Year Ended
December December
31, 31,
April 30, 1995 Pro Forma 1995
1996 (1) Interest (2) Interest
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Notes payable due to four individuals
payable in eight equal semi-annual
installments of $28,125, including
interest at 8% through November
1998. $ 140,634 $ 11,251 $ 140,634 $ 11,251
Note payable to a bank collateralized
by the assets of a multi-specialty
group practice, payable in monthly
installments of $14,027, including
interest at 7.50% and a final
payment in February 1999. 354,337 26,575 -- --
Notes payable assumed in conjunction
with the acquisition of Pinnacle
with interest rates ranging from 6%
to 10%. 731,422 57,042 731,422 57,042
Notes payable to a bank
collateralized by the assets of a
multi-specialty group practice,
payable in monthly installments of
$20,608, at 8.75% and a final
payment in August 2000. 918,779 80,393 -- --
Notes payable to the shareholders of
DASCO, payable in May 1996,
including interest at 6.37%. 2,305,294 146,847 2,305,294 146,847
Note payable to the former
shareholders of a medical oncology
practice in South Florida, payable
in ten equal semi-annual
installments of $682,867, including
interest at 9%. The note payable is
collateralized by an irrevocable
letter of credit. 4,963,687 446,732 4,963,687 446,732
Note payable to Mr. Gosman with a
maturity date of January 1998 and
an interest rate at the prime rate. 11,686,882 1,051,819 -- --
Convertible Subordinated Debentures,
due 2003 with interest due
semi-annually at 6.75%. -- -- 100,000,000 6,750,000
Capital lease obligations with
maturity dates through September
2015 and interest rates ranging
from 8.75% to 12%. 9,210,740 1,021,577 9,210,740 1,021,577
--------- --------- --------- -----------
$30,311,775 $2,842,236 $117,351,777 $8,433,449
========= ========= ========= ===========
</TABLE>
28
<PAGE>
(1) Includes actual debt at April 30, 1996.
(2) Adjusted to give effect to the Debt Offering and the application of
the net proceeds therefrom.
N. No income tax provision is required due to the Company's tax losses and
the inability of the Company to use the benefits which primarily accrued
to Mr. Gosman.
O. Adjusts to eliminate the expenses recorded during the year ended December
31, 1995 on the Nutrichem contingent note. These expenses relate to a
bonus based on earnings and continued employment. This represents the
maximum amount that can be earned because the earnings threshold upon
which the payment is based was reached at December 31, 1995.
P. Adjusts for income from investment in affiliates as follows:
Year Ended
December 31,
1995
----------------
(In thousands)
DASCO (Purchased 50% interest in May 1995) $(78)
---------------
Q. Pro forma loss per share has been calculated based upon 18,074,117 shares
outstanding which was derived as follows: total shares outstanding prior
to offering of 13,307,450 plus shares of 4,766,667 from which the proceeds
of such shares were used to repay debt and amounts due to shareholder in
the amount of $71,500.
R. "All Other" for Acquisitions represents those entities which individually
are not material to the Unaudited Pro Forma Combined Statement of
Operations. A summary of these entities with the respective historical
revenues, historical net income (loss), adjustments to revenue and
adjustments to net income (loss) are as follows:
Acquisitions
Year Ended December 31, 1995
---------------------------------------------------
(In thousands)
Historical Pro Forma Pro Forma
Net Adjustments Adjustments to
Historical Income to Net Income
Entity Revenues (Loss) Revenue (Loss)
- ------------------------ -------- -------- --------- --------------
West Shore Urology $2,035 $ 275 $-- $ (340)
Oncology Care Associates 2,438 157 -- (148)
Venkat Mani 767 455 -- (485)
Symington 340 23 -- (60)
Novoa 306 26 -- (73)
Jaffer 257 125 -- (180)
Hunter 245 1 -- (16)
Herman 181 131 -- (131)
Dandiya 126 45 -- (15)
Cano 221 (9) -- (60)
Canasi 169 75 -- (59)
Bansal & Mistry 316 185 -- (150)
Phylab -- -- -- (6)
Lithotripsy America, Inc. -- -- -- (21)
Alpert 286 (2) -- (40)
Physicians Choice
Management, LLC -- -- -- (151)
Corporate Overhead -- -- -- 1,764
-------- -------- --------- -------------
Total $7,687 $1,487 $-- $ (171)
======== ======== ========= =============
29
<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
Purchase Service
Business Acquired Date 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:
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 Boca
Raton, Inc................................... November 1994 2,910,546 2,622,061 --
o First Choice Health Care Services of Ft.
Lauderdale, Inc.
o First Choice Health Care Services, Inc.
o Mobile Lithotripter of Indiana Partners...... December 1994 2,663,085 -- --
o Radiation Care, Inc. and Subsidiaries........ March 1995 41,470,207 8,623,236 --
o Aegis Health Systems, Inc.................... April 1995 7,162,375 6,227,375 --
o Phylab/Miramer Lab........................... October 1995 130,653 116,221 --
o Pinnacle Associates, Inc..................... November 1995 --(B) 432,339 --
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
--------------
Management
Purchase Service
Business Acquired Date Purchased Price Goodwill Contracts
- ----------------- -------------- ----- -------- ---------
<S> <C> <C> <C> <C>
Managed physician practices:
o Georgia Oncology-Hematology Clinic,
P.C.......................................... April 1995 2,099,353 -- 645,448
o Oncology-Hematology Associates P.A.
and Oncology-Hematology Infusion
Therapy, Inc................................. July 1995 1,541,523 -- 312,740
o Cancer Specialists of Georgia, Inc........... August 1995 6,064,950 -- 2,702,887
o Oncology & Radiation Associates, P.A......... September 1995 10,784,648 -- 9,579,424
o Osler Medical, Inc........................... September 1995 5,792,876 -- 3,373,741
o West Shore Urology........................... October 1995 550,859 -- 23,616
o Whittle, Varnell and Bedoya, P.A............. November 1995 984,711 -- 288,564
o Oncology Care Associates..................... November 1995 532,232 -- 47,179
o Symington.................................... December 1995 121,667 -- 29,566
o Venkat Mani.................................. December 1995 443,429 -- 140,839
Medical facility development:
o DASCO Development Corporation and Affiliate.. May 1995/
January 1996 9,755,568(C) 9,755,568 --
Management Services Organization:
o Physicians Choice Management, LLC............ December 1995 3,850,000 3,015,928 --
o 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
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<PAGE>
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 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 Company acquired these copyright and trademark interests for
$887,000 during June 1996. The purchase price for the practice's assets acquired
as of April 30, 1996 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
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<PAGE>
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., 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 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 $2,663,085 in cash. This investment is being accounted for by the equity
method.
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<PAGE>
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 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 $8,623,236. The resulting
intangible is being amortized over 40 years.
During April 1995, the Company purchased from Aegis Health
Systems, Inc. ("Aegis") 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 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
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<PAGE>
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 four 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, 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 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.
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<PAGE>
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 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.
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.
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<PAGE>
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.
Year Ended December 31, 1995 Compared to Period from June 24, 1994 to December
31, 1994
The following discussion reviews the historical results of
operations for the year ended December 31, 1995 and the period from June 24,
1994 to December 31, 1994. The pro forma results of operations are presented for
the year ended December 31, 1995.
Historical and Pro Forma
The Combined Historical Audited Financial Statements and the
Notes thereto and the Unaudited Pro Forma Combined Financial Information and
Notes thereto included elsewhere in this Prospectus present the results of
operations of the entities which were operated under common control on a
combined basis. All of the entities were acquired by the Company subsequent to
June 23, 1994. As a result of the Acquisitions, the Company believes that any
period to period comparisons and percentage relationships within periods are not
meaningful.
The Unaudited Pro Forma Combined Statement of Operations
presents the results of operations of the Company for the year ended December
31, 1995 as if the Acquisitions which were completed as of January 31, 1996 and
both the sale of the Common Stock in the Company's initial public offering (at a
public offering price of $15.00 per share) and the Debt Offering and the
application of the net proceeds therefrom had been consummated on January 1,
1995. Such Pro Forma Combined Statement of Operations is based on the historical
financial information of the Acquisitions which were completed as of January 31,
1996 adjusted to reflect the purchase price and the elimination of various
non-recurring income and expenses as further described in the Notes to the
Unaudited Pro Forma Combined Statement of Operations. Such Unaudited Pro Forma
Combined Statement of Operations does not include operational or other changes
which might have been effected by the Company's management. The Unaudited Pro
Forma Combined Statement of Operations is not necessarily indicative of the
results that would have occurred if the transactions had occurred on the dates
indicated or which may be realized in the future.
Historical Revenues
Net revenues of $2.4 million for the period from June 24, 1994
to December 31, 1994 include revenues from the Acquisitions completed during the
period September through December 1994. Of this amount, $.7 million or 28% of
such revenues was attributable to cancer services; and $1.8 million or 72% of
such revenues was attributable to other medical support services. The Company
had no physician related revenues during this period.
Net revenues of $70.7 million for the period from January 1,
1995 to December 31, 1995 include revenues from the Acquisitions completed
during the period June 24, 1994 to December 31, 1995. Such revenues during this
period consisted of $44.9 million or 63% related to cancer services; $7.7
million or 11% related to non-cancer physician services; and $18.1 million or
26% related to other medical support services. As of December 31, 1995, the
Company had affiliations with 55 physicians providing cancer related services,
14 employed primary care physicians, and 34 other multigroup or specialty
physicians.
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Pro Forma Revenues
The pro forma results of operations reflect the Acquisitions
including the Company's affiliation with 103 physicians and revenues from the
related medical support services.
Pro forma net revenues for the year ended December 31, 1995
include revenues from all of the Acquisitions which were completed as of January
31, 1996 as if they had occurred on January 1, 1995. Such revenues consisted of
$78.8 million or 63% related to cancer services (of which $70.0 million or 89%
of cancer services revenues related to oncologists' services); $23.9 million or
19% related to non-cancer physician services; $18.8 million or 15% related to
other medical support services; and $3.6 million or 3% related to medical
facility development services.
Historical Expenses
For the period from June 24, 1994 to December 31, 1994 and for
the year ended December 31, 1995, expressed as a percentage of net revenues,
general corporate expenses were 67% and 5%, respectively. In 1994, general
corporate expenses were relatively high due to the expenses incurred in
connection with the commencement of operations of the Company. General corporate
expenses will continue to increase in gross dollars, but this expense as a
percentage of net revenues is expected to continue to decline. No income tax
provision is required due to the Company's current 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.
Pro Forma Expenses
The pro forma results of operations for the year ended
December 31, 1995 included the actual general corporate expenses incurred by the
Company. General corporate expenses as a percent of net revenues were 2.8% for
the year ended December 31, 1995.
The pro forma results of operations include the cost of
affiliated physician management services which was $34.6 million for the year
ended December 31, 1995. Revenue for these managed physician practices was $65.1
million for the year ended December 31, 1995. No income tax provision is
required due to the Company's current pro forma tax loss.
The nature of the affiliated practices affects the cost of
affiliated physician management services, salaries, wages and benefits,
supplies, depreciation and amortization. These expenses as a percentage of net
revenue will vary based on the mix of physician specialties.
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.
Other costs as a percentage of net revenue will vary based on
the ability of the Company to centralize these costs, negotiate more favorable
pricing and institute stronger budgeting controls.
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
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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.
On a pro forma basis the Company's medical facility
development generated revenues of $3.6 million pre-tax loss of $70,000 for the
year ended December 31, 1995. 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.
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, on a pro forma basis after completion of
the Debt Offering and the application of the net proceeds therefrom, the
Company's principal source of liquidity consisted of $117.7 million in cash.
Working capital of $129.1 on a pro forma basis increased by $151.4 million from
December 31, 1995 to April 30, 1996 primarily as a result of (i) the $111.7
million of net proceeds received from the Company's initial public offering
offset by
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repayment of approximately $71.5 million of indebtedness, (ii) the $96.5 million
of net proceeds from the Debt Offering offset by the repayment of approximately
$13.0 million of indebtedness and (iii) the payment of certain obligations
arising from the Acquisitions. The Company also had $15.2 million of current
liabilities, including approximately $4.5 million of indebtedness maturing
before April 30, 1997. Further, the Company also has completed Acquisitions
subsequent to April 30, 1996 which required approximately $2.6 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, subsequent
to April 30, 1996, the Company has acquired 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 $96.5 million from the Debt Offering that the Company
received in June 1996. 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.
The Company expects that the working capital, the net proceeds
of the Debt Offering 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 will be adequate to satisfy the Company's cash
requirements for the next 12 months. However, there can be no assurance that the
Company will not be required to seek additional financing during this period.
The failure to raise the funds necessary to finance its future cash requirements
would adversely affect the Company's ability to pursue its strategy and could
adversely affect its results of operations for future periods.
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BUSINESS
The Company provides management services to disease specialty
and primary care physicians and related medical support services. The Company's
primary strategy is to develop disease management networks in specific
geographic locations by acquiring physician practices and affiliating with
disease specialty and primary care physicians. Where appropriate, the Company
supports its affiliated physicians with related diagnostic and therapeutic
medical support services. The Company's medical support services include
radiation therapy, diagnostic imaging, infusion therapy, home health care and
lithotripsy services. Since its first acquisition in September 1994, the Company
has acquired the practices of and affiliated with 128 physicians and acquired
eight medical support service companies and a medical facility development
company. The Company also owns a 43.75% interest in a newly formed management
services organization that provides management services to an independent
physician association composed of over 330 multi-specialty physicians and a 50%
interest in a second management services organization that provides management
services to an independent practice association composed of 45 primary care
physicians.
The Company believes that its strategy of acquiring and
integrating independent physician practices and medical support services into
specialty networks creates synergies, achieves operating efficiencies and
responds to the cost-containment initiatives of payors, particularly managed
care companies. The Company has focused its disease management efforts on the
acquisition of oncology practices. To date, the Company has acquired the
practices of and affiliated with 60 oncologists and provides comprehensive
cancer-related support services including radiation therapy, infusion therapy
and diagnostic imaging. The Company intends to develop additional disease
management services for the treatment of other chronic illnesses such as
diabetes, cardiovascular diseases and infectious diseases.
In certain targeted markets, the Company organizes its
affiliated physicians and related medical support services into integrated
clusters of disease specialty and primary care networks, which it terms local
provider networks ("LPNs"). LPNs are designed to provide a comprehensive range
of physician and medical support services within specific geographic regions.
The Company believes that its LPN structure will achieve operating efficiencies
and enhance its ability to secure contracts with managed care organizations. To
date, the Company has contracts with managed care organizations under which the
Company and its affiliated physicians provide cancer-related health care
services to over 200,000 covered lives. To date, the Company has established an
LPN in each of the Southeast Florida, Atlanta, Connecticut and Washington,
D.C./Baltimore areas.
As part of its strategy to integrate physician practices, the
Company provides medical facility development services to related and unrelated
third parties for the development of health parks, medical malls and medical
office buildings. Such services include project finance assistance, project
management, construction management, construction design engineering, physician
recruitment, leasing and marketing. While the Company incurs certain
administrative and other expenses in the course of providing such services, it
does not incur costs of construction or risks of project ownership. The
Company's strategy in financing its projects is to involve future tenants as
significant investors in and owners of the developed medical facilities. Because
most of its tenants are physicians and medical support service companies, the
Company believes that the relationships that it develops with these parties
through its medical facility development efforts will greatly enhance the
Company's ability to affiliate with physicians and acquire physician practices
and medical support service companies. 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.
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Industry
Overview
Industry sources forecast that national health care spending
in 1995 will exceed $1 trillion with approximately $200 billion directly
attributable to physician services. Increasing concern over the cost of health
care in the United States has led to numerous initiatives to contain the growth
of health care expenditures, particularly in the government entitlement
programs of Medicare and Medicaid. These concerns and initiatives have
contributed to the growth of managed care. Managed care typically involves
a third party (frequently the payor) governing the provision of health care
with the objective of ensuring delivery in a high quality and cost effective
manner. One method for achieving this objective is the implementation of
capitated payment systems in which traditional fee for service methods of
compensating health care providers are abandoned or modified in favor of
systems that create incentives for the provider to manage the health care
needs of a defined population for a set fee.
Physician Practice Management
Health care in the United States historically has been
delivered by a fragmented system of health care providers, including hospitals,
individual physicians and small groups of specialist and primary care
physicians. According to industry sources, approximately 650,000 physicians are
actively involved in patient care in the United States. A 1993 American Medical
Association study estimates that there are over 86,000 physicians practicing in
3,600 multi-specialty group practices of three or more physicians and over
82,000 physicians practicing in 12,700 single specialty group practices in the
United States.
The focus on cost containment has placed many solo practices,
small to mid-sized physician groups and single specialty group practices at a
significant disadvantage because they typically have high operating costs
relative to revenue and little purchasing power with vendors of supplies. These
physician practices often lack the capital to purchase new clinical equipment
and technologies, such as information systems, necessary to enter into
sophisticated risk sharing contracts with payors. Additionally, these physicians
often do not have formal ties with other providers nor the ability to offer
coordinated care across a variety of specialties, thus reducing their
competitive position, particularly with managed care companies, relative to
larger provider organizations.
As a result of these changes in the market place, physicians
are increasingly abandoning traditional private practice in favor of
affiliations with larger organizations, such as the Company, that offer
sophisticated information systems, management expertise and capital resources.
Many payors and their intermediaries, including governmental entities and HMOs,
are increasingly looking to outside providers of physician management services
to develop and maintain quality outcome management programs and patient care
data. In addition, such payors and intermediaries look to share the risk of
providing health care services through capitation arrangements which provide for
fixed payments for patient care over a specified period of time.
Disease Management: Cancer and Other Diseases
Disease management is the comprehensive management of a
patient's medical care as it relates to the treatment of a specific chronic
illness. According to industry sources, costs (including direct health care
costs and indirect costs) associated with cancer, diabetes, cardiovascular
disease and certain infectious diseases exceeded $500 billion in 1994. Despite
the current consolidation of the health care industry, the providers of the
components of disease management services, including cancer care providers,
remain highly fragmented.
The provision of cancer care is a significant and growing
market. According to the American Cancer Society, the estimated number of cancer
cases diagnosed annually in the United States (excluding certain skin cancers)
increased from approximately 782,000 in 1980 to approximately 1.2 million in
1994, an increase of 53%. This increase is attributable to a number of factors,
including a growing and aging population. In
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addition, earlier diagnosis and more effective treatment have increased the
five-year survival rate of cancer patients from approximately 33% in the 1960s
to 53% in 1994, and over eight million Americans alive today have been diagnosed
with cancer.
Because more than 100 complex diseases compose what is
commonly termed cancer, its treatment often requires a multi-disciplinary
approach, involving numerous health care professionals with different
specializations and a variety of treatment settings, including physician
offices, hospitals, outpatient facilities and free-standing cancer treatment
centers. Cancer treatment centers may provide certain services, including
radiation therapy and infusion therapy, but they generally do not integrate
these services with the physician practice. The Company believes that the
current fragmented system for treating cancer is inefficient, costly and
inhibits effective disease management.
The Company believes that the acquisition and integration of
previously independent health care practices into a disease specialty network
provides a substantial opportunity both to derive significant synergies and
operating efficiencies and to contract with managed care companies for a full
continuum of disease specific care. The Company expects the development of such
networks and systems not only to enhance productivity and improve the quality of
care, but also to meet the cost containment objectives of third party payors.
The Company believes that the evolution of disease specialty treatment networks
will play a major role in managed care contracting as payors recognize that both
cost savings and the quality of care are improved when reimbursement and health
care services target a specific illness or disease through coordinated networks
of health care providers.
Strategy
The Company's strategy is to develop, operate and manage
integrated disease specialty and primary care physician networks which provide
high quality, cost-effective physician and related medical support services. The
key elements of this strategy are to:
Acquire Physician Practices. The Company seeks to acquire the
practices of and affiliate, in its target markets, with (i) high profile disease
specialty and primary care physicians, (ii) multi-specialty physician groups and
(iii) independent physician associations. By affiliating with leading physicians
and physician groups in a given community, the Company can secure a large
patient base, ensure appropriate, quality treatment and maintain patient
satisfaction. Additionally, as the Company affiliates with physicians in certain
markets, it makes available to these physicians medical support services,
including the Company's radiation therapy, diagnostic imaging, lithotripsy,
infusion and home health care services. By integrating these acquired disease
specialty and primary care medical practices with related medical support
services, the Company is able to develop a continuum of care in its target
markets.
Develop Practice Networks. In conjunction with its acquisition
strategy, the Company seeks to build integrated networks of disease specialty
and primary care physicians in targeted markets termed local provider units or
"LPNs." To form the foundation of an LPN, the Company typically acquires a core
physician practice, which may be either a disease specialty or primary care
practice. The Company then seeks to acquire or affiliate with additional
physician practices and medical support services related to that core practice
as well as other medical specialties outside the scope of the core practice.
Through the implementation of this strategy, the Company seeks to provide a
comprehensive range of health care services within a given region, thereby
enhancing its ability to enter into contractual arrangements with managed care
organizations.
Facilitate Acquisitions and Integration Through Development.
As a part of its strategy to affiliate with physicians and acquire physician
practices and medical support service companies, the Company provides medical
facility development services to related and unrelated third parties for the
establishment of health parks, medical malls and medical office buildings. The
Company believes that the relationships that it fosters with
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physicians and medical support service companies (which may be tenants and/or
owners of the medical facilities developed by the Company), will enhance the
Company's affiliation and acquisition prospects and aid in the integration of
its affiliated physicians and medical support service companies.
Contract with Managed Care Companies. The Company actively
pursues contractual arrangements with managed care organizations. Within its
LPNs, the Company seeks to provide an appropriate balance of physician and
medical services to attract managed care payors. Depending upon the particular
market, the Company may develop disease specialty networks which can be used to
procure managed care contracts pursuant to which the Company's affiliated
physicians are responsible for providing all or a portion of disease specific
health care services to a particular patient population, or the Company may
develop a broader array of services designed to enhance its ability to attract
comprehensive managed care contracts.
Implement Integrated Information Systems. The Company intends
to continue to develop its integrated information management systems so as to
improve patient care by improving physician access to patient information. The
Company believes these processing capabilities will further enhance its ability
to service managed care contracts by providing access to the clinical and
financial data necessary to perform outcome studies, cost analyses, utilization
reviews and other analyses which can provide the information necessary for the
managed care community to evaluate and contract with the Company and its health
care providers.
Achieve Operating Efficiencies. The Company seeks to achieve
operating efficiencies through the consolidation of physician practices. By
consolidating overhead, including billing, collections, accounting and payroll,
the Company believes that it can realize significant operating efficiencies. In
addition, by rendering support and management functions, the Company enables its
affiliated physicians to spend a higher proportion of their time with patients,
thereby improving patient care and enhancing revenue.
Physician Affiliation
To date, the Company has affiliated with 128 physicians in the
following locations:
<TABLE>
<CAPTION>
No. of
Physicians
Under
LPN Contract Specialties
- --- -------- -----------
<S> <C> <C>
South Florida................ 73 Primary Care, Oncology, Cardiology,
Gastroenterology, Neurology, Podiatry,
Rheumatology, Obstetrics-Gynecology, General and
Vascular Surgery, Dermatology, Pulmonary,
Orthopedic and Radiology
Atlanta...................... 42 Oncology, Gastroenterology and Urology
Washington, D.C./Baltimore... 8 Oncology and Infectious Diseases
Other Markets................ 5 Oncology and Surgery
----
Total Physicians............. 128
===
</TABLE>
The Company affiliates with physicians through management
agreements with physician practices or employment agreements with individual
physicians. When affiliating with physicians, the Company generally acquires the
assets of the physician practice, including its equipment, furniture, fixtures
and supplies and, in some cases, service contracts and goodwill. Currently, the
Company manages the practices of 98 physicians and employs another 30
physicians. With the exception of 12 radiation oncologists employed by the
Company
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through OTI, the Company purchased the practices of all of its 128 affiliated
physicians. The Company derives revenues from affiliated physicians through
management fees charged to managed physician practices and from charges to third
parties for services provided by employed physicians.
The Company's relationships with its affiliated physicians are
set forth in various asset purchase, management services, employment and
consulting agreements. Through the asset purchase agreement, the Company
acquires at fair market value the assets of the practice. The accounts
receivable are typically purchased at the net realizable value. The purchase
price of the assets of a physician practice generally consists of cash and the
assumption of certain debt, leases and other contracts necessary for the
operation of the practice.
The Company and its affiliated physicians enter into
management services or employment agreements which delineate the
responsibilities and obligations of each party. The management services
agreements generally have a 10 to 20-year term. The employment agreements
generally have a seven to 10-year term, and in most instances, the contracting
physicians can extend the terms of their employment agreements in five-year
increments for an unlimited duration until they reach a specified age. The
management services agreements provide that the physicians are responsible for
the provision of all medical services and the Company is responsible solely for
the management and operation of all other aspects of the affiliated practice.
The Company provides the equipment, facilities and supplies necessary to operate
the medical practice and employs substantially all of a practice's non-physician
personnel, except those whose services are directly related to the provision of
medical care. The management and administration of the practice, including
managed care contracting, rests with the Company. Generally, a management
services agreement with a physician practice group cannot be terminated by
either the Company or the practice group prior to its stated expiration date
without cause. The Company's employment agreements generally are terminable by
the physicians upon 90 to 180-days notice. Ordinarily, the Company reserves the
right to renegotiate terms of the management services agreement if there are
significant changes in reimbursement levels. Upon termination for cause or at
the expiration of a physician's relationship with the Company, the Company has
the right to require the affiliated physicians to repurchase certain assets
originally purchased by the Company and assets acquired during the term of the
relationship.
For providing services under the management services
agreements entered into prior to April 30, 1996, physicians generally receive a
fixed percentage of net revenue of the practice. "Net revenue" is defined as all
revenue computed on an accrual basis generated by or on behalf of the practice
after taking into account certain contractual adjustments or allowances. Net
revenues for these management services agreements for the three months ended
April 30, 1996 were $17.2 million. The revenue is generated from professional
medical services furnished to patients personally by physicians or other
clinicians under physician supervision. In several of the practices, the Company
has guaranteed that the net revenues of the practice will not decrease below the
net revenues that existed immediately prior to the agreement with the Company.
Additionally, in certain practices, the Company charges a fixed or variable
management fee. Under management services agreements entered into after April
30, 1996, the Company has received a fixed base management fee and a variable
incentive fee.
The Company believes a shared governance approach is critical
to the long-term success of a physician practice management company. In this
regard, the Company's agreements provide for physician concurrence on critical
strategic issues such as annual operating and capital budgets, fee structures
and schedules and the practice's strategic plan. The strategic plan developed
for the affiliated physician practices addresses both the future addition of
practitioners and the expansion of locations and services. The Company works
closely with its affiliated physicians to target and recruit new physicians and
merge or integrate other groups and specialties.
Medical Support Services
As part of its strategy to provide a comprehensive range of
health care services in its markets, the Company provides certain medical
support services related to the management of disease and episodic care,
including radiation therapy, diagnostic imaging, infusion therapy, home health
care and lithotripsy services.
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These services are provided both as part of the Company's LPN structure and
separately in certain markets in which there is a competitive advantage to do
so.
Within the scope of its disease specialty networks, the
Company delivers a broad array of medical support services. The Company supports
its cancer networks with radiation therapy (the Company has 11 radiation therapy
centers in six states), infusion therapy (the Company provides infusion therapy
in several states which are managed from three regional offices), diagnostic
imaging (the Company has two centers in two states) and home health care
services (the Company provides home health care services in six South Florida
counties which are managed from five local offices).
The Company also provides lithotripsy services and currently
operates one fixed site and seven mobile lithotripters which provide lithotripsy
services in Arkansas, Florida, Indiana, Kansas, Kentucky, Missouri, Oklahoma,
Tennessee and Texas. These services are managed from three regional offices.
Lithotripsy is a non-invasive procedure that utilizes shock waves to fragment
kidney stones, and is the preferred alternative to surgery for kidney stones,
suitable for the treatment of over 90% of the applicable patients. The Company
provides its mobile lithotripsy services under contracts with approximately 70
hospitals and other health care facilities. The hospital or health care facility
normally pays the Company on a per procedure basis. The Company's contracts with
such hospitals and facilities generally have terms of one to three years.
LPNs
Upon entering a target market, the Company seeks to acquire a
core practice group, affiliate with additional physician group practices and
acquire, develop or affiliate with related medical support services to form an
LPN. The Company undertakes market analyses and demographic studies to evaluate
the business opportunities in a particular geographic area and seeks to
capitalize on these opportunities by developing relationships with appropriate
physicians and other health care providers. Within each LPN, the Company seeks a
balance between primary care and specialty physicians and to integrate certain
related medical support services for the ultimate purpose of providing a
strategic network of comprehensive medical services attractive to managed care
and risk-based third party contractors. In certain markets, the Company
establishes relationships with unaffiliated entities for the purpose of
contracting with managed care companies. The Company currently has identified
the South Florida, Atlanta, Connecticut and Baltimore/Washington, D.C. areas as
its initial target markets and the Arizona, Pittsburgh and Tampa Bay areas as
its secondary target markets.
The development of the Company's Atlanta LPN provides an
example of the implementation of the Company's development strategy. In Atlanta,
the Company acquired three radiation centers in March 1995 and has since created
a comprehensive cancer disease management network of 22 oncologists in 17 sites.
The Company's Atlanta LPN continues to develop by affiliating with primary care
and multi-specialty groups to create a comprehensive, fully-integrated regional
network. During May 1996, the Company entered into a management agreement with
eight gastroenterologists in Atlanta. During July 1996, the Company entered into
a management agreement with three urologists in Atlanta. The Company is
presently negotiating with over 75 physician providers and is assessing the
opportunity to create a comprehensive health park in the Atlanta area.
In the South Florida market, the Company initially developed
affiliate relationships with six primary care physicians. Subsequently, the
Company has contracted with 19 oncologists and currently operates a cancer care
network which through capitated managed care contracts provides services to
approximately 137,000 covered lives. In addition, the Company provides infusion
therapy, home health, diagnostic and rehabilitation services in its South
Florida LPN.
In the Washington, D.C./Baltimore area, the Company operates
three radiation centers and provides infusion therapy services through its
managed care contracts and physician affiliations. The Company has affiliated
with eight medical and radiation oncologists. In addition, the Company entered
into a letter of intent with the Medlantic Healthcare Group in Washington, D.C.
(and its Washington Hospital Center and Washington
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Cancer Institute) for the formation and operation of the Washington Regional
Oncology Network. This network will be dedicated to obtaining contracts for
cancer care in the Washington region and also includes the formation of a joint
venture for the management of the Washington Ambulatory Infusion Center.
The Company believes that cancer-related LPNs provide the
greatest opportunity for contracting with managed care and risk-based third
party payors and has entered into affiliate agreements with 60 oncologists. Net
revenues for the cancer related LPNs for the three months ended April 30, 1996
were $21.1 million. In its South Florida, Atlanta and Washington, D.C./Baltimore
LPNs, the Company has assembled three discrete networks of cancer physicians and
related cancer care services, and as a result, the Company provides services
pursuant to managed care contracts to over 200,000 covered lives. Under these
contracts, the Company and its affiliate physicians provide some or all of the
following services: medical and radiation oncology services, bone marrow
transplants, infusion therapy, diagnostic services and home care. The Company
has also developed cancer care networks with unaffiliated entities for
contracting purposes in certain markets.
Independent Physician Associations
The Company owns a 43.75% interest in a newly formed
management services organization that provides management services to an
independent physician association ("IPA") composed of over 330 physicians based
in Connecticut and a 50% interest in a newly formed management services
organization that provides management services to an IPA composed of 45 primary
care physicians in Georgia. An IPA is generally composed of a group of
geographically diverse independent physicians who form an association for the
purpose of contracting as a single entity. The IPA structure not only increases
the purchasing power of the constituent practices, but also provides a
foundation for the development of an integrated physician network. The Company
believes that many IPAs will merge with other practice groups to develop larger
integrated medical groups, thereby becoming increasingly attractive to managed
care companies. The Company intends to capitalize on its affiliations with IPAs
to establish additional LPNs.
The Company also seeks to enter into agreements to manage
capitated provider networks. The Company expects that under these agreements, it
would receive a fixed management fee based upon contract revenues as well as a
certain percentage of risk pools.
Medical Facility Development
The Company provides medical facility development services to
related and unrelated third parties for the establishment of health parks,
medical malls and medical office buildings. A "health park" is an integrated
health care environment comprised of several buildings which links physician
practices, medical support services and subacute care facilities on a single
campus. A "medical mall," often found in a health park, combines physician
offices with related medical support services such as diagnostic imaging,
physical rehabilitation, laboratory services and wellness programs in one
facility. The Company also develops office buildings which serve physicians and
providers of ancillary medical services.
The Company believes that the convenience of "one-stop"
scheduling and medical related services together with on-site treatment provided
at the Company's developed medical facilities will increase patient satisfaction
and cost-efficiency. By providing a centralized delivery site for
state-of-the-art technology, information systems and patient care models, a full
continuum of care can be provided by a wide range of physician specialties and
medical support services at one location. The Company believes that physicians
will find affiliation with such facilities attractive and that third party
payors will seek to contract with physician practices and related medical
support service companies operating in such facilities.
The Company's medical facility development services include
project finance assistance, project management, construction management,
construction design engineering, consulting, physician recruitment, leasing and
marketing. The Company currently has 15 projects under development and has
facilities under
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construction in Florida, Texas, California and Arizona. The Company also has
four projects under contract and anticipates that construction of such
facilities will begin during 1996. Net revenues for the three months ended April
30, 1996 were $3.7 million.
Under its development agreements, the Company is generally
obligated to secure funding for and guaranty the maximum cost of a project. In
order to minimize the risks from these obligations, the Company enters into
construction agreements with general contractors to construct the project for a
"guaranteed maximum cost." Furthermore, each construction agreement provides for
indemnification of the Company by the general contractor for certain losses and
damages. Each construction agreement also requires the contractor to obtain and
maintain a performance bond and a labor and material payment bond, written by a
surety company with a Best's Key Guide Rating of not less than A+12 and
satisfactory to the owner of the land on which a project is developed and the
construction lender.
Among the Company's development clients are some of the
largest for-profit public hospital companies in the United States. To date, the
Company's clients and primary negotiators of the Company's fees generally have
been the land owners or land lessors of the developed sites. Negotiations
generally include the Company, the entities which own the developed projects,
the land lessor (if applicable) and, in many cases, the prospective tenants of
the office space. The Company offers its physician-tenants an opportunity to
become equity investors in the facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Medical Facility
Development." The compensation received by the Company is based upon negotiated
amounts for each service provided. Although the Company does not maintain an
ownership interest in the facilities it develops, certain of the Company's
officers and directors have an interest in such facilities. See "Certain
Transactions." In each transaction between the Company and a facility in which
certain of its officers and directors have an interest, third parties, including
the land owners and land lessors of the sites and the unaffiliated investors in
the facility, participate in establishment of fees to the Company. All
transactions between the Company and affiliated owners and physicians are and
will continue to be based upon competitive bargaining and are and will be on
terms no less favorable to the Company than those provided to unaffiliated
parties. In addition, the Company monitors development fees in the industry to
ensure that its fees in such transactions meet this standard.
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 Company's project finance strategy
focuses upon the involvement of its future tenants as significant investors in
and owners of the medical facilities developed by the Company. Because its
tenants are physicians and medical support service companies, the Company
believes that the relationships that it develops through its medical facility
development efforts will greatly enhance the Company's ability to affiliate with
physicians and acquire physician practices and medical support service
companies. The development of medical facilities by the Company is intended to
enhance the creation of the new group practices, increase the number of
integrated medical service delivery sites and promote alternative delivery
models for third party payors in its developed sites. The Company believes that
such activity, in turn, will aid in the integration of its affiliated physicians
and medical support service companies.
Information Systems
The Company believes that effective and efficient integration
of clinical and financial data provides a competitive advantage in bidding for
managed care contracts and contributes to a company's success in the complex
reimbursement environment of the health care industry. The Company also believes
that the use of technology can improve patient care by improving physician
access to patient information. Therefore, the Company is in the process of
selecting management information systems designed to facilitate the transmittal
and coordination of important patient and operational data. The Company's
objective is to implement a system which consists of three specific areas:
practice management, electronic clinical records and comprehensive care and
management reporting. The implementation of the system selected will occur in
stages, as the Company
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continues to analyze and support the systems in place in its existing and
acquired physician practices and medical support service companies.
Competition
The physician practice management industry is highly
competitive. The Company competes with local and national providers of physician
management and certain other medical services and for the recruitment of
physicians. Certain of the Company's competitors have access to substantially
greater financial, management and other resources than the Company. The majority
of the competition faced by the Company is based primarily on cost and quality.
Each of the affiliated physicians has entered into an agreement not to compete
with the operations of the Company both during the term of the applicable
agreement and a period of one year or greater thereafter.
Government Regulation
Various state and federal laws regulate the relationship
between providers of health care services, physicians and other clinical
services, and as a business in the health care industry, the Company is subject
to these laws and regulations. The Company's medical support services, for
example, are subject to various licensing and certification requirements
including Certificate of Need regulations. The Company is also subject to laws
and regulations relating to business corporations in general. The Company
believes its operations are in material compliance with applicable laws;
however, the Company has not received a legal opinion from counsel that its
operations are in material compliance with applicable laws and many aspects of
the Company's business operations have not been the subject of state or federal
regulatory interpretation. Moreover, as a result of the Company providing both
physician practice management services and medical support services, the Company
may be the subject of more stringent review by the regulatory authorities, and
there can be no assurance that a review of the Company's or the affiliated
physicians' businesses by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or the
affiliated physicians or that the health care regulatory environment will not
change so as to restrict the Company's or the affiliated physicians' existing
operations or their expansion.
The laws of many states prohibit business corporations such as
the Company from practicing medicine and employing physicians to practice
medicine. In those states where the Company employs physicians, it believes its
operations are in material compliance with applicable laws. The Company does not
exercise influence or control over the practice of medicine by the physicians
with whom it contracts. Accordingly, the Company believes that it is not in
violation of applicable state laws relating to the practice of medicine. The
laws in most states regarding the corporate practice of medicine have been
subjected to limited judicial and regulatory interpretation and, therefore, no
assurances can be given that the Company's activities will be found to be in
compliance, if challenged. In addition to prohibiting the practice of medicine,
numerous states prohibit entities like the Company from engaging in certain
health care related activities such as fee-splitting with physicians.
There are state and federal statutes imposing substantial
penalties, including civil and criminal fines and imprisonment, on health care
providers that fraudulently or wrongfully bill governmental or other third party
payors for health care services. The federal law prohibiting false billings
allows a private person to bring a civil action in the name of the United States
government for violations of its provisions. The Company believes it is in
material compliance with such laws, but there can be no assurances that the
Company's activities will not be challenged or scrutinized by governmental
authorities. Moreover, technical Medicare and other reimbursement rules affect
the structure of physician billing arrangements. The Company believes it is in
material compliance with such regulations, but upon review, regulatory
authorities could conclude otherwise, and in such event, the Company may have to
modify its relationship with its affiliated physician groups. Noncompliance with
such regulations may adversely affect the operation of the Company and subject
it and such physician groups to penalties and additional costs.
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Certain provisions of the Social Security Act, commonly
referred to as the "Anti-kickback Amendments," prohibit the offer, payment,
solicitation or receipt of any form of remuneration either in return for the
referral of Medicare or state health program patients or patient care
opportunities, or in return for the recommendation, arrangement, purchase, lease
or order of items or services that are covered by Medicare or state health
programs. The Anti-kickback Amendments are broad in scope and have been broadly
interpreted by courts in many jurisdictions. Read literally, the statute places
at risk many otherwise legitimate business arrangements, potentially subjecting
such arrangements to lengthy, expensive investigations and prosecutions
initiated by federal and state governmental officials. In particular, the Office
of the Inspector General of the U.S. Department of Health and Human Services has
expressed concern that the acquisition of physician practices by entities in a
position to receive referrals from such physicians in conjunction with the
physicians' continued practice in affiliation with the purchaser could violate
the Anti-kickback Amendments.
In July 1991, in part to address concerns regarding the
Anti-kickback Amendments, the federal government published regulations that
provide exceptions, or "safe harbors," for certain transactions that will be
deemed not to violate the Anti-kickback Amendments. Among the safe harbors
included in the regulations were provisions relating to the sale of physician
practices, management and personal services agreements and employee
relationships. Additional safe harbors were published in September 1993 offering
protections under the Anti-kickback Amendments to eight new activities,
including referrals within group practices consisting of active investors.
Proposed amendments to clarify these safe harbors were published in July 1994
which, if adopted, would cause substantive retroactive changes to the 1991
regulations. Although the Company believes that it is not in violation of the
Anti-kickback Amendments, some of its operations do not fit within any of the
existing or proposed safe harbors.
The Company believes that, although it is receiving
remuneration under management services agreements, it is not in a position to
make or influence the referral of patients or services reimbursed under
government programs to the physician groups, and therefore, believes it has not
violated the Anti-kickback Amendments. In certain states, the Company is a
separate provider of Medicare or state health program reimbursed services. To
the extent the Company is deemed by state or federal authorities to be either a
referral source or a separate provider under its management services agreements
and to receive referrals from physicians, the financial arrangement under these
agreements could be subject to scrutiny and prosecution under the Anti-kickback
Amendments. Violation of the Anti-kickback Amendments is a felony, punishable by
fines up to $25,000 per violation and imprisonment for up to five years. In
addition, the Department of Health and Human Services may impose civil penalties
excluding violators from participation in Medicare or state health programs.
Significant prohibitions against physician referrals were
enacted, subject to certain exemptions, by Congress in the Omnibus Budget
Reconciliation Act of 1993. These prohibitions, commonly known as "Stark II,"
amended prior physician self-referral legislation known as "Stark I" by
dramatically enlarging the field of physician-owned or physician-interested
entities to which the referral prohibitions apply. Effective January 1, 1995 and
subject to certain exemptions, Stark II prohibits a physician or a member of his
immediate family from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which the physician has an ownership
or investment interest, or with which the physician has entered into a
compensation arrangement including the physician's own group practice. The
designated health services include the provision of radiology and other
diagnostic services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral nutrients,
certain equipment and supplies, prosthetics, orthotics, outpatient prescription
drugs, home health services and inpatient and outpatient hospital services. The
penalties for violating Stark II include a prohibition on Medicaid and Medicare
reimbursement and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." A
physician's ownership of publicly traded securities of a corporation with equity
exceeding $75 million as of the end of its most recent fiscal year is not deemed
to constitute an ownership or investment interest in that corporation under
Stark II. The Company was not be eligible for this exemption as of its fiscal
year ending December 31, 1995. In 1996, after completion of the initial public
offering, the
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Company changed its fiscal year end to January 31. The Company believes that it
presently satisfies the Stark II stockholders' equity exception and that its
compensation arrangements satisfy other applicable exceptions in Stark II.
The Company believes that its activities are not in violation
of Stark I or Stark II; however, the Stark legislation is broad and ambiguous.
Interpretative regulations clarifying the provisions of Stark I were issued on
August 14, 1995 and Stark II regulations have yet to be proposed. While the
Company believes it is in compliance with the Stark legislation, future
regulations could require the Company to modify the form of its relationships
with the affiliated physician groups. Moreover, the violation of Stark I or II
by the Company's affiliated physician groups could result in significant fines
and loss of reimbursement which would adversely affect the Company. The Anti-
Kickback and Stark laws prevent the Company from requiring referrals from
affiliated physician groups. Although some of these physician groups may make
referrals to the Company for services, the Company cannot expect to receive
income from the making of such referrals.
Many states have adopted similar prohibitions against payment
intended to induce referrals of Medicaid and other third party payor patients.
The State of Florida, for instance, enacted a Patient Self-Referral Act in April
1992 that severely restricts patient referrals for certain services, prohibits
mark-ups of certain procedures, requires disclosure of ownership in a business
to which patients are referred and places other regulations on health care
providers. The Company believes it is likely that other states will adopt
similar legislation. Accordingly, expansion of the operations of the Company to
certain jurisdictions may require it to comply with such jurisdictions'
regulations which could lead to structural and organizational modifications of
the Company's form of relationships with physician groups. Such changes, if any,
could have an adverse effect on the Company.
The Company is in the process of adopting a formal compliance
program designed to prevent violations of Stark II and the Anti-kickback
Amendments in both its acquisitions and day to day operations. The Company
intends to hire a full-time compliance officer to implement and monitor the
compliance program.
Laws in all states regulate the business of insurance and the
operation of HMOs. Many states also regulate the establishment and operation of
networks of health care providers. While these laws do not generally apply to
the hiring and contracting of physicians by other health care providers, there
can be no assurance that regulatory authorities of the states in which the
Company operates would not apply these laws to require licensure of the
Company's operations as an insurer, as an HMO or as a provider network. The
Company believes that it is in compliance with these laws in the states in which
it does business, but there can be no assurance that future interpretations of
insurance and health care network laws by regulatory authorities in these states
or in the states into which the Company may expand will not require licensure or
a restructuring of some or all of the Company's operations.
Reimbursement and Cost Containment
Approximately 40% of the revenue of the Company's affiliated
physician groups is derived from payments made by government sponsored health
care programs (principally, Medicare and Medicaid). As a result, any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. The U.S. Congress has
passed a fiscal year 1996 budget resolution that calls for reductions in the
rate of spending increases over the next seven years of $270 billion in the
Medicare program and $182 billion in the Medicaid program. Through the Medicare
program, the federal government has implemented a resource-based relative value
scale ("RBRVS") payment methodology for physician services. This methodology
went into effect in 1992 and will continue to be implemented in annual
increments through December 31, 1996. RBRVS is a fee schedule that, except for
certain geographical and other adjustments, pays similarly situated physicians
the same amount for the same services. The RBRVS is adjusted each year and is
subject to increases or decreases at the discretion of Congress. The
implementation of RBRVS may result in reductions in payment rates for procedures
provided by physicians under current contract with the Company.
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RBRVS-type payment systems have also been adopted by certain private third party
payors and may become a predominant payment methodology. A broader
implementation of such programs would reduce payments by private third party
payors and could indirectly reduce the Company's operating margins to the extent
that the cost of providing management services related to such procedures could
not be proportionately reduced. To the extent the Company's costs increase, the
Company may not be able to recover such cost increases from government
reimbursement programs. In addition, because of cost containment measures and
market changes in nongovernmental insurance plans, the Company may not be able
to shift cost increases to nongovernmental payors. The Company expects a
reduction from historical levels in per patient Medicare revenue received by
certain of the physician groups with which the Company contracts; however, the
Company does not believe such reductions would, if implemented, result in a
material adverse effect on the Company.
In addition to current governmental regulation, the Clinton
Administration and several members of Congress have proposed legislation for
comprehensive reforms affecting the payment for and availability of health care
services. Aspects of certain of such health care proposals, such as reductions
in Medicare and Medicaid payments, if adopted, could adversely affect the
Company. Other aspects of such proposals, such as universal health insurance
coverage and coverage of certain previously uncovered services, could have a
positive impact on the Company's business. It is not possible at this time to
predict what, if any, reforms will be adopted by Congress or state legislatures,
or when such reforms would be adopted and implemented. As health care reform
progresses and the regulatory environment accommodates reform, it is likely that
changes in state and federal regulations will necessitate modifications to the
Company's agreements and operations. While the Company believes it will be able
to restructure in accordance with applicable laws and regulations, the Company
cannot assure that such restructuring in all cases will be possible or
profitable.
Rates paid by private third party payors, including those that
provide Medicare supplemental insurance, are based on established physician,
clinic and hospital charges and are generally higher than Medicare payment
rates. Changes in the mix of the Company's patients among the non-government
payors and government sponsored health care programs, and among different types
of non-government payor sources, could have a material adverse effect on the
Company.
The Company is a provider of certain medical treatment and
diagnostic services including, but not limited to radiation therapy, infusion
therapy, lithotripsy and home care. Because many of these services receive
governmental reimbursement, they may be subject from time to time to changes in
both the degree of regulation and level of reimbursement. Additionally, factors
such as price competition and managed care could also reduce the Company's
revenues. See "Business -- Government Regulation."
Insurance
Health care companies, such as the Company, are subject to
medical malpractice, personal injury and other liability claims which are
customary risks inherent in the operation of health care facilities and
provision of health care services. The Company maintains property insurance
equal to the amount management deems necessary to replace the property, and
liability and professional malpractice insurance policies in the amount of
$20,000,000 (annual aggregate) and with such coverages and deductibles which are
deemed appropriate by management, based upon historical claims, industry
standards and the nature and risks of its business. The Company provides medical
malpractice insurance for its employee physicians in the amount of $1,000,000
per claim and $3,000,000 annual aggregate and also requires that non-employee
physicians practicing at its facilities carry medical malpractice insurance to
cover their respective individual professional liabilities. There can be no
assurance that a future claim will not exceed available insurance coverages or
that such coverages will continue to be available for the same scope of
coverages at reasonable premium rates. Any substantial increase in the cost of
such insurance or the unavailability of any such coverages could have a material
adverse effect on the Company's business.
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Employees
As of April 30, 1996, the Company employed approximately 1,200
persons, approximately 700 of whom were full-time employees. The Company
believes that its labor relations are good.
Legal Proceedings
The Company is subject to legal proceedings in the ordinary
course of its business. The Company does not believe that any such legal
proceedings will have a material adverse effect on the Company, although there
can be no assurance to this effect.
A subsidiary of the Company, OTI (formerly Radiation Care,
Inc., "RCI") is subject to the litigation described below which relates to
events prior to the Company's operation of RCI, and the Company has agreed to
indemnify and defend certain defendants in the litigation who were former
directors and officers of RCI subject to certain conditions.
In December 1994, prior to its merger with the Company in
March 1995, RCI entered into a settlement agreement with the federal government
arising out of claims under the fraud-and-abuse provisions of the Medicare law.
Under the settlement agreement, RCI, without admitting that it violated the law,
consented to a civil judgment providing for its payment of $2 million to the
federal government and the entry of an injunction against violations of such
provisions.
On February 16, 1995, six former stockholders of RCI filed a
consolidated amended Class Action Complaint in Delaware Chancery Court (In re
Radiation Care, Inc. Shareholders Litigation, Consolidated C.A. No. 13805)
against RCI, Thomas Haire, Gerald King, Charles McKay, Abraham Gosman, Oncology
Therapies of America, Inc. ("OTA") and A.M.A. Financial Corporation, ("AMA")
alleging that the RCI stockholders should have received greater consideration
for their RCI stock when RCI was merged with the Company. Plaintiffs allege
breaches of fiduciary duty by the former RCI directors, as well as aiding and
abetting of such fiduciary duty breaches by Mr. Gosman, OTA and AMA. Plaintiffs
seek compensatory or rescissionary damages of an undisclosed amount on behalf of
all RCI stockholders, together with an award of the costs and attorneys' fees
associated with the action. No class has been certified in this litigation. On
May 18, 1996, the Company filed an Answer denying any liability in connection
with this litigation. The Company intends to vigorously defend against this
litigation.
On August 4, 1995, 26 former stockholders of RCI filed a
Complaint for Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire,
Gerald King, Charles McKay and Randy Walker (all former RCI officers and
directors) in the Superior Court of Fulton County, in the State of Georgia
(Southeastern Capital Resources, L.L.C. et al. v. Richard D'Amico et al., Civil
Action No. E41225). Two of the plaintiffs have withdrawn from the litigation.
Plaintiffs allege a breach of fiduciary duty by the former RCI directors Haire,
King and McKay, a conspiracy by the RCI officer defendants D'Amico, Crowley and
Walker, and negligence by all defendants. Plaintiffs seek additional
consideration for their shares of RCI common stock in the form of compensatory
and monetary damages in the amount of $5.7 million, plus punitive damages,
interest, costs and attorneys fees. On September 22, 1995, the defendants filed
an Answer denying any liability in connection with this litigation. On October
23, 1995, the defendants filed a motion to stay the action pending resolution of
the Delaware class action which was heard by the Court on January 29, 1996 and
denied on April 9, 1996. Plaintiffs have filed a motion with a proposed amended
complaint adding four plaintiffs to the action, upon which the court has not yet
acted. The Company is not a party to this litigation and its exposure is limited
to its obligation under its by-laws to indemnify the former officers and
directors of RCI to the fullest extent permitted by Delaware law. The Company
intends to vigorously defend against this litigation.
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On March 18, 1996, the Company settled a claim filed by two
former stockholders of RCI (Dennis E. Ellingwood and Gregory W. Cotter v.
Oncology Therapies, Inc. et al., Civil Action No. 341727-E191464). The terms of
this settlement are confidential.
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information as of June
21, 1996 concerning the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Abraham D. Gosman ........ 66 Chairman of the Board of Directors,
President and Chief Executive Officer
Frederick R. Leathers .... 38 Chief Financial Officer and Treasurer
William A. Sanger ........ 45 Executive Vice President and Chief
Operating Officer
Robert A. Miller ......... 41 Executive Vice President of Acquisitions
Edward E. Goldman, M.D. .. 51 Executive Vice President of Physician
Development
Francis S. Tidikis ....... 48 Executive Vice President of Marketing
Jeannette M. McGill ...... 45 Executive Vice President of Finance
Don S. Harvey ............ 38 Vice President of Operations
Donald A. Sands .......... 45 Vice President-- Medical Facility Development
Hugh L. Carey ............ 76 Director
Joseph N. Cassese ........ 66 Director
John T. Chay ............. 38 Director
David M. Livingston, M.D. 55 Director
Bruce A. Rendina ......... 42 Director
Stephen E. Ronai ......... 59 Director
</TABLE>
The following is a biographical summary of the experience of
the executive officers and directors of the Company:
Abraham D. Gosman has served since June 1994 as an executive
officer of the Company and is presently the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company. Previously, he founded and
was the principal owner of The Mediplex Group, Inc. ("Mediplex"), a diversified
health care company, and its predecessor companies for more than 15 years, with
the exception of the period from April 1986 to August 1990 when Mediplex was
owned by Avon Products, Inc. ("Avon"). He was the Chief Executive Officer of
Mediplex from its inception to September 1988 and assumed that position again
after Mediplex was purchased from Avon in August 1990. In addition, Mr. Gosman
has served as Chairman of the Board of Trustees and Chief Executive Officer of
Meditrust, the nation's largest health care real estate investment trust, since
its inception in 1985.
Frederick R. Leathers has served since June 1994 as the Chief
Financial Officer and Treasurer of the Company. Previously, he served as
Treasurer, Chief Financial Officer and Principal Accounting Officer of Mediplex
from October 1991 to June 1994, Corporate Controller from May 1991 to October
1991 and held the
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position of Assistant Controller from May 1986 to May 1987. He was Treasurer of
A.M.A. Advisory Corp. (the advisor to Meditrust) and Controller of Meditrust
from July 1988 to January 1991. Mr. Leathers was associated with State Street
Bank and Trust Company, Inc. in the mutual funds division from May 1987 to July
1988.
William A. Sanger has served since September 1994 as the
Executive Vice President and Chief Operating Officer of the Company. Previously,
he served as the President and Chief Executive Officer of JFK Medical Center in
Atlantis, Florida from February 1992 to September 1994 where he developed
integrated delivery networks and implemented a comprehensive physician
acquisition strategy. He served as Executive Vice President and Chief Operating
Officer of Saint Vincent Medical Center, Toledo, Ohio from January 1990 to
February 1992.
Robert A. Miller has served since June 1994 as an executive
officer of the Company and is presently Executive Vice President of
Acquisitions. Previously, he served as Senior Vice President/Development
Operations of Mediplex from September 1992 and Vice President from June 1991.
Mr. Miller served as Regional Operations Director for New Medico Associates from
January 1991 to October 1991. Previously, Mr. Miller was Vice President of
Hospital Operations of Glenbeigh, Inc., where he was employed from 1979 through
1991.
Edward E. Goldman, M.D. has served since October 1994 as
President of a subsidiary of the Company, since October 1995 as an executive
officer of the Company and is presently Executive Vice President of Physician
Development. Dr. Goldman is a board certified family practice physician and
previously served as Chairman of PAL-MED Health Services from February 1983 to
September 1994, a multi-specialty IPA which provides physicians services and
manages health care related services.
Francis S. Tidikis has served since January 1996 as Executive
Vice President of Marketing of the Company. Mr. Tidikis has served as Senior
Vice President of Physician Management Services for Tenet Healthcare Corporation
since March 1995. Mr. Tidikis has been with Tenet Healthcare Corporation and its
predecessor, National Medical Enterprises, since April 1981, serving as
Executive Vice President of the Eastern District from June 1991 to February 1995
and as Vice President of Operations for the Eastern Region Hospital Group from
February 1984 to September 1990. Mr. Tidikis currently serves as a director of
Professional Liability Insurance Company.
Jeannette M. McGill has served since September 1994 as a
financial officer of the Company, and since October 1995 as an executive officer
of the Company and is presently Executive Vice President of Finance. Ms. McGill
served as President and Principal Stockholder of McGill, Roselli, Ayala and
Hoppman, a certified public accounting firm in West Palm Beach, Florida from
July 1983 to September 1994. Ms. McGill specialized in accounting and financial
planning for physician practices.
Don S. Harvey has served as an operations officer of the
Company since April 1995 and as an executive officer since October 1995 and is
presently Vice President of Operations. He was a consultant to the Company from
January 1995 to April 1995. Mr. Harvey served as Executive Vice President and
Chief Operating Officer of JFK Medical Center in Atlantis, Florida from April
1990 to December 1994, where he developed and managed medical related services.
Donald A. Sands has served as the Vice President - Medical
Facility Development since January 1996. He has served since 1995 as Chairman of
the Board and Chief Executive Officer of DASCO. Previously, Mr. Sands served as
President of DASCO from 1985. From 1984 to 1985, he was Director of Development
for Loews Hotels and was Counsel for Westin Hotel Company from 1979 to 1984.
Hugh L. Carey has served as a director of the Company since
February 21, 1996. Currently, he is Chairman of the Board of Advisors of
Cambridge Partners, L.L.C. He served as an Executive Vice President
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of W.R. Grace & Company from January 1989 to December 1995. He was Governor of
the State of New York from January 1974 to January 1982. He is currently a
director of Triarc Companies, Inc.
Joseph N. Cassese has served as a director of the Company
since January 29, 1996. Mr. Cassese was the President of Mediplex from March
1986 to March 1988 and again from August 1990 to December 1991. Mr. Cassese was
also a Vice President of A.M.A. Advisory Corp., the advisor to Meditrust, from
April 1988 to August 1990. Mr. Cassese has been retired since December 1991.
John T. Chay has served as a director of the Company since
April 15, 1996. Mr. Chay has served as an executive officer of Nutrichem, Inc.
which he co-founded in November 1993 and has served since June 1991 as Chief
Executive Officer of The HealthLink Group, Inc., a practice management
consulting firm which he also founded.
David M. Livingston, M.D. has served as a director of the
Company since January 29, 1996. Dr. Livingston has been a Director of
Dana-Farber Cancer Institute in Boston, Massachusetts since 1991 and has been
employed as a physician at the Institute since 1973. He currently serves as
Chairman of the Institute's Department of Medicine. He is also the Emil Frei
Professor of Medicine at Harvard Medical School where he has taught since 1973.
Bruce A. Rendina has served as a director of the Company since
January 29, 1996. Mr. Rendina has served since 1994 as President of DASCO, which
he co-founded with Mr. Sands. Previously, he served as its Executive Vice
President from 1987 to 1994.
Stephen E. Ronai has served as a director of the Company since
January 29, 1996. Mr. Ronai has been a partner in the Connecticut law firm of
Murtha, Cullina, Richter and Pinney since 1984 where he serves as Chairman of
the firm's Health Care Department. He is a member of the American Academy of
Healthcare Attorneys of the American Hospital Association, and from 1989 to 1995
he served as a member of the Board of Directors of the National Health Lawyers
Association.
The Board of Directors is divided into three classes, with
staggered three-year terms. The initial terms of Messrs. Rendina and Ronai will
expire at the Company's 1996 annual meeting; of Mr. Cassese and Dr. Livingston
at the Company's 1997 annual meeting; and of Messrs. Gosman, Carey and Chay at
the Company's 1998 annual meeting. Successors to the directors whose terms
expire at each annual meeting are eligible for election for three-year terms. A
director holds office until the annual meeting for the year in which his term
expires and until his successor is elected and qualified. These provisions may
make it more difficult for holders of the Common Stock to remove the directors
and officers of the Company than if all directors were elected on an annual
basis.
Officers are appointed by and serve at the discretion of the
Board of Directors. The officers, other than Mr. Gosman, will devote
substantially all of their business time to the business and affairs of the
Company.
Executive Committee. The members of the Executive Committee of
the Company's Board of Directors are Messrs. Gosman, Rendina and Cassese. The
Executive Committee exercises all the powers of the Board of Directors between
meetings of the Board of Directors, except such powers as are reserved to the
Board of Directors by law.
Audit Committee. The members of the Audit Committee of the
Company's Board of Directors are Messrs. Carey and Ronai, both of whom are
independent directors. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans for and results of the audit, approves professional
services provided by the
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independent public accountants, reviews the independence of the independent
public accountants, considers the range of audit and non-audit fees and reviews
the adequacy of the Company's internal accounting controls.
Compensation Committee. The members of the Compensation
Committee of the Company's Board of Directors are Messrs. Cassese, Carey and
Ronai. The Compensation Committee establishes a general compensation policy for
the Company and approves increases both in directors' fees and in salaries paid
to officers and senior employees of the Company. The Compensation Committee
administers all of the Company's employee benefit plans. The Compensation
Committee determines, subject to the provisions of the Company's plans, the
directors, officers and employees of the Company eligible to participate in any
of the plans, the extent of such participation and terms and conditions under
which benefits may be vested, received or exercised.
Equity Incentive Committee. The members of the Equity
Incentive Committee of the Company's Board of Directors are Messrs. Cassese and
Ronai. The Equity Incentive Committee determines who shall receive awards under
the 1995 Equity Incentive Plan, from those employees, consultants and directors
who are eligible to participate in the Equity Plan, the type of award to be
made, the number of shares of Common Stock which may be acquired pursuant to the
award and the specific terms and conditions of each award.
Compensation Committee Interlocks and Insider Participation
In 1995, the Company did not have a Compensation Committee or
any other committee of the Board of Directors performing similar functions.
Decisions concerning compensation of executive officers were made by Mr.
Gosman, the Chairman, Chief Executive Officer and President of Company.
Compensation of Directors
Officers who are members of the Board of Directors do not
receive compensation for serving on the Board. Each other member of the Board
receives annual compensation of $15,000 for serving on the Board, plus a fee of
$1,000 for each Board of Directors' meeting attended. In addition, such
directors receive an additional fee of $500 for each committee meeting attended,
except that only one fee will be paid in the event that more than one such
meeting is held on a single day. All directors receive reimbursement of
reasonable expenses incurred in attending Board and committee meetings and
otherwise carrying out their duties. Each non-employee director who was a member
of the Compensation Committee at the time of the closing of the initial public
offering received options to purchase 10,000 shares of Common Stock upon the
closing of the offering at the initial public offering price pursuant to the
Equity Plan. Each director who is a member of the Compensation Committee on the
first business day following each annual meeting of the shareholders will
receive the option to purchase 2,500 shares of Common Stock. Any of such options
granted to a member of the Compensation Committee under the Equity Plan will be
exercisable one year following the date of grant.
Executive Compensation
The following table sets forth certain information regarding
compensation paid or accrued by the Company during the period June 24, 1994
(inception) to December 31, 1994 and the year ended December 31, 1995, to the
Company's Chief Executive Officer and to each of the Company's four other most
highly compensated executive officers (the "Named Executive Officers") during
1995.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation All Other
Salary Compensation(1)
Name and Principal Position Year ($) ($)
- ---------------------------------------------------------- --------------------- ----------------------- --------------------
<S> <C> <C> <C>
Abraham D. Gosman......................................... 1995 225,000 --
Chairman, President and Chief Executive Officer 1994 116,682
Frederick R. Leathers..................................... 1995 229,487 290
Chief Financial Officer and Treasurer 1994 102,057
Robert A. Miller.......................................... 1995 206,382 102
Executive Vice President of Acquisitions 1994 101,916
Edward E. Goldman, M.D.................................... 1995 400,000 --
Executive Vice President of Physician 1994 133,333
Development
William A. Sanger......................................... 1995 304,571 174
Executive Vice President and Chief Operating 1994 98,038
Officer
</TABLE>
(1) Amounts indicated are for life insurance premiums paid by the Company.
Employment Agreements
The Company has entered into an employment agreement with Dr.
Goldman that provides for an initial three year term automatically renewable for
an initial period of two years and for successive periods of one year
thereafter, unless either party elects not to renew. The base salary for Dr.
Goldman under the agreement is $400,000 per year. In addition, he is entitled to
receive bonuses and benefits, including health insurance, dental insurance,
short and long term disability, life insurance and a car allowance. The
agreement may be terminated by the Company without cause upon 30 days notice
(180 days notice after the first anniversary of the agreement) and with cause
(as defined in the agreement) effective immediately upon notice. Dr. Goldman may
terminate the agreement immediately if the Company fails to fulfill its
obligations thereunder or without cause upon 30 days notice. In the event that
Dr. Goldman is terminated without cause, he is entitled to receive his base
salary for the lesser of (i) the remaining term of the then current employment
period or (ii) 12 months following the effective date of his termination of
employment. The agreement contains restrictive covenants prohibiting Dr. Goldman
from competing with the Company, or soliciting employees of the Company to
leave, during his employment and for a period of two years after termination of
the agreement, other than after a termination by the Company without cause or by
Dr. Goldman for good reason.
The Company has entered into an employment agreement with Mr.
Miller that provides for an initial two year term that is automatically
renewable for successive one year periods, unless either party elects not to
renew. The base salary for Mr. Miller under the agreement is $300,000 per year.
In addition, he is entitled to receive such bonuses and benefits as the Company,
in its sole discretion, may provide to its executive officers. The agreement may
be terminated by the Company without cause upon 15 days notice and with cause
(as defined in the agreement) immediately upon notice. Mr. Miller may terminate
the agreement immediately upon written notice to the Company in the event of any
material breach by the Company of its obligations thereunder. In the event Mr.
Miller is terminated without cause, he is entitled to receive his base salary
for 12 months
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following the effective date of his termination of employment. The agreement
contains restrictive covenants prohibiting Mr. Miller from competing with the
Company, or soliciting employees of the Company to leave, during his employment
and for a period of twelve months after termination of the agreement (if Mr.
Miller is terminated with cause or if he chooses not to renew).
The Company has entered into an employment agreement with Mr.
Sanger that provides for an initial three year term that is automatically
renewable for successive one year periods until either party elects not to
renew. The base salary for Mr. Sanger under the agreement is $300,000 per year.
In addition, he is entitled to receive bonuses and benefits, including health
insurance, dental insurance, short and long term disability, life insurance and
a car allowance. The agreement may be terminated by the Company without cause
and with cause (as defined in the agreement) effective immediately upon written
notice. Mr. Sanger may terminate the agreement upon written notice to the
Company, if the Company fails to pay any sums due or perform substantially all
of its duties and obligations under the agreement. In the event that Mr. Sanger
is terminated without cause, he is entitled to receive his base salary for 12
months following the effective date of his termination of employment. The
agreement contains restrictive covenants prohibiting Mr. Sanger from competing
with the Company, or soliciting employees of the Company to leave during his
term of the agreement and for a period of twelve months thereafter (if Mr.
Sanger is terminated with cause or if he chooses not to renew the agreement).
1995 Equity Incentive Plan
The Company maintains the 1995 Equity Incentive Plan (the
"Equity Plan"), which provides for the award ("Award") of up to two million
shares of Common Stock in the form of incentive stock options ("ISOs"),
non-qualified stock options ("Non-Qualified Stock Options"), bonus stock,
restricted stock, performance stock units and stock appreciation rights. All
employees, directors and consultants of the Company and any of its subsidiaries
are eligible to participate in the Equity Plan, except directors who are members
of the Equity Incentive Committee (the "Committee"). In addition, certain
directors are eligible for non-discretionary grants under the Equity Plan.
The Equity Plan is administered by the Committee, which
determines who shall receive Awards from those employees and directors who are
eligible to participate in the Equity Plan, the type of Award to be made, the
number of shares of Common Stock which may be acquired pursuant to the Award and
the specific terms and conditions of each Award, including the purchase price,
term, vesting schedule, restrictions on transfer and any other conditions and
limitations applicable to the Awards or their exercise. The purchase price per
share of Common Stock cannot be less than 100% of the fair market value of the
Common Stock on the date of grant with respect to ISOs and not less than 50% of
the fair market value of the Common Stock on the date of grant with respect to
Non-Qualified Options. ISOs cannot be exercisable more than ten years following
the date of grant and Non-Qualified Stock Options cannot be exercisable more
than ten years and one day following the date of grant. The Committee may at any
time accelerate the exercisability of all or any portion of any option.
Each Award may be made alone, in addition to or in relation to
any other Award. The terms of each Award need not be identical, and the
Committee need not treat participants uniformly. Except as otherwise provided by
the Equity Plan or a particular Award, any determination with respect to an
Award may be made by the Committee at the time of award or at any time
thereafter. The Committee determines whether Awards are settled in whole or in
part in cash, Common Stock, other securities of the Company, Awards or other
property. The Committee may permit a participant to defer all or any portion of
a payment under the Equity Plan, including the crediting of interest on deferred
amounts denominated in Common Stock. Such a deferral may have no effect for
purposes of determining the timing of taxation of payments. In the event of
certain corporate events, including a merger, consolidation, dissolution,
liquidation or the sale of substantially all of the Company's assets, all Awards
become fully exercisable and realizable.
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The Committee may amend, modify or terminate any outstanding
Award, including substituting therefor another Award of the same or a different
type, changing the date of exercise or realization, and converting an ISO to a
Non-Qualified Stock Option, if the participant consents to such action, or if
the Committee determines that the action would not materially and adversely
affect the participant. Awards may not be made under the Equity Plan after
November 14, 2005, but outstanding Awards may extend beyond such date.
The number of shares of Common Stock issuable pursuant to the
Equity Plan may not be changed except by approval of the stockholders. However,
in the event that the Committee determines that any stock dividend,
extraordinary cash dividend, creation of a class of equity securities,
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination, exchange of shares, warrants or rights offering to purchase Common
Stock at a price substantially below fair market value, or other similar
transaction affects the Common Stock such that an adjustment is required to
preserve the benefits intended to be made available under the Equity Plan, the
Committee may adjust equitably the number and kind of shares of stock or
securities in respect of which Awards may be made under the Equity Plan, the
number and kind of shares subject to outstanding Awards, and the award, exercise
or conversion price with respect to any of the foregoing, and if considered
appropriate, the Committee may make provision for a cash payment with respect to
an outstanding Award. In addition, upon the adoption of a plan or agreement
concerning a change in control, sale of substantially all the assets, or
liquidation or dissolution of the Company, all Awards which are not then fully
exercisable or realizable become so. Common Stock subject to Awards which expire
or are terminated prior to exercise or Common Stock which has been forfeited
under the Equity Plan will be available for future Awards under the Equity Plan.
Both treasury shares and authorized but unissued shares may be used to satisfy
Awards under the Equity Plan.
The Equity Plan may be amended from time to time by the Board
of Directors or terminated in its entirety; however, no amendment may be made
without stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirement, including any requirement for
stockholder approval under Section 16(b) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or any successor provision.
The Company did not award any options during 1994, however, in
connection with the Formation, upon the closing of the initial public offering,
the Company granted options under the Equity Plan in exchange for outstanding
options to purchase stock of certain Related Companies which outstanding
options, at the time that they were issued by the Related Companies, had an
exercise prices at least equal to the fair market value of common stock of the
Related Companies.
CERTAIN TRANSACTIONS
During 1994 and 1995, the Related Companies and Mr. Gosman
completed the acquisition of various companies and businesses which were
transferred to the Company in connection with the Formation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Acquisition Summary" for a description of the Acquisitions.
As of April 30, 1996, the Company had outstanding borrowings
from Mr. Gosman of approximately $11.7 million, which borrowings were made for
working capital purposes and to fund certain of the Acquisitions. At December
31, 1995 the Company also had a $19.5 million loan from NationsBank, which was
guaranteed by Mr. Gosman. Mr. Gosman did not receive any consideration for this
or any other guarantee he has provided on behalf of the Company. The $19.5
million loan was repaid from the net proceeds of the initial public offering.
After repayments to Mr. Gosman made from the net proceeds of the initial public
offering totalling $28.7 million, the Company owed Mr. Gosman approximately
$10.8 million. All amounts loaned to the Company by Mr. Gosman accrue interest
at a floating rate equal to NationsBank's prime rate. The Company agreed to
repay in full the amount owed to Mr. Gosman from the proceeds of any public
offering by
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the Company of its debt or equity securities; and to repay Mr. Gosman from the
proceeds of any institutional debt financing by the Company for working capital
purposes, except that the amount to be repaid from such institutional debt
financing proceeds would not exceed 25% of the maximum amount available to be
borrowed under the terms of the financing. Pursuant to such agreement, the $11.7
million the Company owed Mr. Gosman (including additional amounts borrowed since
the closing of the initial public offering) was repaid from the net proceeds of
the Debt Offering.
In connection with the acquisition of OTI in March 1995, Mr.
Gosman guaranteed until the later of the satisfaction of certain financial
covenants or July 31, 1998 the repayment by a subsidiary of the Company of a
portion of the $17.5 million in acquisition financing from FINOVA Capital
Corporation ("FINOVA"). Mr. Gosman's liability under the guarantee was limited
to no more than $6.1 million. The Company used the net proceeds of the initial
public offering to repay in full its obligations to FINOVA.
During 1995, in addition to the guarantee discussed above, Mr.
Gosman guaranteed the payment by the Company of indebtedness in the amount of
$4.6 million incurred in connection with the acquisition of DASCO, all of which
was repaid during 1996. In addition, Mr. Gosman executed a reimbursement
agreement and provided collateral for a letter of credit to secure other
indebtedness of the Company in the amount of $5.4 million incurred in connection
with the acquisition of Oncology & Radiation Associates, P.A. Upon the closing
of the initial public offering, the Company obtained the release of Mr. Gosman
from these guarantees and from his other obligations with respect to acquisition
indebtedness through the assumption by the Company of Mr. Gosman's obligation to
pay such Acquisition indebtedness and of the obligation to provide cash
collateral for the letter of credit.
The Company occupies office space for its principal offices in
West Palm Beach, Florida under the terms of a lease which the Company assumed
from a company the stockholders and executive officers of which include Messrs.
Gosman, Leathers, Miller and Sanger and Dr. Goldman. The Company estimates that
the total amount of lease payments to be made under the assumed lease through
the end of the current lease term will equal approximately $1.8 million.
In connection with the Formation, the following executive
officers and directors of the Company received the indicated number of shares of
Common Stock in exchange for their shares of common stock of the Related
Companies: Mr. Gosman (including shares held for the benefit of his two adult
sons), 8,282,305; Mr. Rendina, 916,667; Mr. Chay, 133,333; Mr. Sands, 916,667;
Mr. Leathers, 459,505; Mr. Miller, 459,505; Mr. Sanger, 336,224; and Dr.
Goldman, 168,112.
Various persons who upon the closing of the initial public
offering and the Formation became employees and/or officers of the Company were
employees and/or officers of companies the stockholders and executive officers
of which included Mr. Gosman and Mr. Leathers. The services of such employees
and/or officers were provided to the Company at cost prior to the Formation
under the terms of a management agreement.
From time to time, the Company may charter an airplane and
flight services at competitive rates from two companies owned by Mr. Gosman.
DASCO provides development and other services in connection
with the establishment of health parks, medical malls and medical office
buildings. DASCO provides these services to or for the benefit of the owners of
the new facilities, which owners are either corporations or limited
partnerships. Mr. Sands and Mr. Rendina have acquired equity interest in the
entities which own 23 of the 26 facilities developed by DASCO. The collective
interests of Messrs. Sands and Rendina range from 17% to 100%. In addition, as
of December 31, 1995, Mr. Gosman individually and as trustee for his two adult
sons and Messrs. Leathers, Miller and Sanger and Dr. Goldman have acquired
limited partnership interests ranging from 14% to 36% in the entities which own
seven facilities being developed by the Company through DASCO. The Company
(through DASCO) also
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is providing construction management, development, marketing and consulting
services to an entity principally owned by Mr. Gosman in connection with the
development by such entity of a medical mall. During the three months ended
April 30, 1996, the Company recorded revenues in the amount of $304,020 related
to such services. DASCO has and continues to provide all of its medical facility
development services to affiliated parties on terms no less favorable to the
Company than those provided to unaffiliated parties.
Meditrust, a publicly traded real estate investment trust with
assets in excess of $1.7 billion dollars of which Mr. Gosman is the Chairman of
the Board and Chief Executive Officer, has provided financing in the aggregate
amount of $150.0 million for the development of 15 facilities developed by
DASCO.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of April 30, 1996, certain information
regarding the beneficial ownership of shares of Common Stock by each person
known by the Company to be the beneficial owner of more than 5% of outstanding
Common Stock, by each director and each of the Named Executive Officers of the
Company and by all directors and executive officers as a group. Except as
indicated in the footnotes, all of such shares of Common Stock set forth in the
following table are owned directly, and the indicated person has sole voting and
investment power with respect to all Common Stock shown as beneficially owned by
such person:
Amount of Beneficial
Ownership
-----------------------------
Name Shares
Beneficially Percentage
Owned Owned
----------- -----------
Abraham D. Gosman (1) 8,282,305 38.5%
Frederick R. Leathers 459,505 2.1
William A. Sanger 336,224 1.6
Robert A. Miller 459,505 2.1
Edward E. Goldman, M.D. 168,112 *
Joseph N. Cassese -- *
David M. Livingston, M.D. -- *
Bruce A. Rendina 916,667 4.3
Stephen E. Ronai 4,000 *
Hugh L. Carey -- *
John T. Chay 142,833 *
All directors and executive officers as a group
(15 persons) 11,698,484 54.3
*Less than one percent.
(1)Includes 4,000,000 shares held by Mr. Gosman as trustee for the
benefit of his two adult sons. Mr. Gosman's business address is
PhyMatrix Corp., 777 South Flagler Drive, West Palm Beach, FL 33401.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of
41,000,000 shares of capital stock, which includes 40,000,000 shares of Common
Stock and 1,000,000 shares of preferred stock ("Preferred Stock").
Common Stock
Holders of Common Stock are entitled to one vote for each
share held of record on all matters to be submitted to a vote of the
stockholders, and such holders do not have cumulative voting rights. Subject to
preferences that may be applicable to any outstanding shares of Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors of the Company
out of funds legally available therefor. See "Dividend Policy." All outstanding
shares of Common Stock are, and the shares to be sold in the offering when
issued and paid for will be, fully paid and nonassessable and the holders
thereof will have no preferences or conversion, exchange or pre-emptive rights.
In the event of any liquidation, dissolution or winding-up of the affairs of the
Company, holders of Common Stock will be entitled to share ratably in the assets
of the Company remaining after payment or provision for payment of all of the
Company's debts and obligations and liquidation payments to holders of
outstanding shares of Preferred Stock, if any.
Preferred Stock
The Preferred Stock, if issued, would have priority over the
Common Stock with respect to dividends and to other distributions, including the
distribution of assets upon liquidation. The Preferred Stock may be issued in
one or more series without further stockholder authorization, and the Board of
Directors is authorized to fix and determine the terms, limitations and relative
rights and preferences of the Preferred Stock, to establish series of Preferred
Stock and to fix and determine the variations as among series. The Preferred
Stock, if issued, may be subject to repurchase or redemption by the Company. The
Board of Directors, without approval of the holders of the Common Stock, can
issue Preferred Stock with voting and conversion rights (including multiple
voting rights) which could adversely affect the rights of holders of Common
Stock. In addition to having a preference with respect to dividends or
liquidation proceeds, the Preferred Stock, if issued, may be entitled to the
allocation of capital gains from the sale of the Company's assets. Although the
Company has no present plans to issue any shares of Preferred Stock following
the closing of the offering, the issuance of shares of Preferred Stock, or the
issuance of rights to purchase such shares, may have the effect of delaying,
deferring or preventing a change in control of the Company or an unsolicited
acquisition proposal.
Classified Board of Directors
The Charter and By-laws of the Company provide for the Board
of Directors to be divided into three classes of directors, as nearly equal in
number as is reasonably possible, serving staggered terms so that directors'
initial terms will expire either at the 1996, 1997 or 1998 annual meeting of the
stockholders. Starting
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with the 1996 annual meeting of the stockholders, one class of directors will be
elected each year for a three-year term. See "Management."
The Company believes that a classified Board of Directors will
help to assure the continuity and stability of the Board of Directors and the
Company's business strategies and policies as determined by the Board of
Directors, since a majority of the directors at any given time will have had
prior experience as directors of the Company. The Company believes that this, in
turn, will permit the Board of Directors to more effectively represent the
interests of its stockholders.
With a classified Board of Directors, at least two annual
meetings of stockholders, instead of one, generally will be required to effect a
change in the majority of the Board of Directors. As a result, a provision
relating to a classified Board of Directors may discourage proxy contests for
the election of directors or purchases of a substantial block of the Common
Stock because such a provision could operate to prevent a rapid change in
control of the Board of Directors. The classification provision also could have
the effect of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of the Company. Under the Certificate of
Incorporation, a director of the Company may be removed only for cause by a vote
of the holders of at least 75% of the outstanding shares of the capital stock of
the Company entitled to vote in the election of directors.
Advance Notice Provisions for Stockholder Proposals and Stockholder Nominations
of Directors
The By-laws establish an advance notice procedure with regard
to the nomination by the stockholders of the Company of candidates for election
as directors (the "Nomination Procedure") and with regard to other matters to be
brought by stockholders before a meeting of stockholders of the Company (the
"Business Procedure").
The Nomination Procedure requires that a stockholder give
written notice to the Secretary of the Company, delivered to or mailed and
received at the principal executive officers of the corporation not less than 60
days nor more than 90 days prior to the meeting, in proper form, of a planned
nomination for the Board of Directors. Detailed requirements as to the form and
timing of that notice are specified in the By-laws. If the Chairman of the Board
of Directors determines that a person was not nominated in accordance with the
Nomination Procedure, such person will not be eligible for election as a
director.
Under the Business Procedure, a stockholder seeking to have
any business conducted at an annual meeting must give written notice to the
Secretary of the Company, delivered to or mailed and received at the principal
executive officers of the corporation not less than 60 days nor more than 90
days prior to the meeting, in proper form. Detailed requirements as to the form
and timing of that notice are specified in the By-laws. If the Chairman of the
Board of Directors determines that such business was not properly brought before
such meeting in accordance with the Business Procedure, such business will not
be conducted at such meeting.
Although the By-laws do not give the Board of Directors any
power to approve or disapprove stockholder nominations for the election of
directors or of any other business desired by stockholders to be conducted at an
annual or any other meeting, the By-laws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if the proper procedures are not followed or (ii)
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
Fair Price Provision for Certain Business Combinations
The Company's Certificate of Incorporation contains a
provision which requires that certain proposed business combinations (the
"Business Combinations") between the Company or any of its subsidiaries,
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individually, and an "Interested Stockholder" (as defined below) either must be
(i) approved by the Board of Directors of the Company, provided a majority of
"Continuing Directors" (as defined below) voted in favor of such transaction, or
(ii) for a certain minimum sum, determined by a fixed formula as set forth in
the Company's charter.
An "Interested Stockholder" is defined in the Certificate of
Incorporation as (i) any beneficial owner, either directly or indirectly, of 10%
or more of the voting power of the outstanding voting stock of the Company
immediately prior to a proposed Business Combination, who was not a beneficial
owner one week before the closing of the Company's initial public offering, (ii)
an Affiliate (as defined in the Exchange Act) of the Company who was not an
Affiliate one week before the closing of the Company's initial public offering,
or (iii) an assignee of or a successor in interest to the beneficial ownership
of any shares of capital stock which were within two years prior thereto
beneficially owned by a person under clause (i) hereof, so long as such
assignment or succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering, within the meaning of
the Securities Act, as amended. As a result of the foregoing, Mr. Gosman and
certain other stockholders of the Company prior to the closing of the Company's
initial public offering would not be deemed to be an Interested Stockholders and
would, therefore, not be subject to this provision.
A "Continuing Director" is either (i) a director who is not an
Affiliate or Associate (as defined in the Exchange Act) of an Interested
Stockholder and who was a director of the Company prior to that time when the
Interested Stockholder became an Interested Stockholder, or (ii) a director who
is so designated by a majority of the Continuing Directors then serving on the
Company's Board of Directors.
The Company believes that this provision will ensure that in
the event of a proposal of a certain business combination with an interested
party, the stockholders of the Company will not be coerced into selling their
shares or will receive a fair price in consideration therefor. This provision
could make certain business combinations with particular parties more difficult
and could discourage an Interested Stockholder from contemplating or attempting
a Business Combination with the Company.
Other Provisions
Special Meetings of the Stockholders of the Company. The
Company' By-laws provide that a special meeting of the stockholders of the
Company may be called only by the Chairman of the Board of Directors or by order
of the Board of Directors. This provision prevents stockholders from calling a
special meeting of stockholders and potentially limits the stockholders' ability
to offer proposals to meetings of stockholders, if no special meetings are
otherwise called by the Chairman or the Board or Board of Directors.
Amendment of the By-laws. The Company's Certificate of
Incorporation provides that the By-laws only may be amended only by a vote of
the directors or by a rate of at least 75% of the outstanding shares of the
Company's stock entitled to vote in the election of directors.
No Action by Written Consent. The Company's Certificate of
Incorporation does not permit the Company's stockholders to act by written
consent. As a result, any action to be taken by the Company's stockholders must
be taken at a duly called meeting of the stockholders.
Delaware Takeover Statute
The Company is subject to Section 203 of the DGCL which, with
certain exceptions, prohibits a Delaware corporation from engaging in any of a
broad range of business combinations with any "interested stockholder" for a
period of three years following the date that such stockholder became an
interested stockholder, unless: (i) prior to such date, the Board of Directors
of the corporation approved either the
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business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and officers and (b) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or
(iii) on or after such date, the business combination is approved by the Board
of Directors and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66-2/3% of the outstanding voting stock which
is not owned by the interested stockholder. An "interested stockholder" is
defined as any person that is (a) the owner of 15% or more of the outstanding
voting stock of the corporation or (b) an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
VALIDITY OF COMMON STOCK
Certain legal matters in connection with the shares of Common
Stock being offered hereby will be passed upon by Nutter, McClennen & Fish, LLP,
Boston, Massachusetts, counsel to the Company.
EXPERTS
The combined financial statements of PhyMatrix Corp. for the
year ended December 31, 1995 and for the period from June 24, 1994 (inception)
through December 31, 1994, included in this Prospectus and appearing elsewhere
in this Registration Statement have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as indicated in their report with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The financial statements of DASCO Development Corporation and
Affiliate as of September 30, 1995 and for the period from January 1, 1995 to
September 30, 1995, included in this Prospectus and appearing elsewhere in this
Registration Statement have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as indicated in their report with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The financial statements of DASCO Development Corporation and
Affiliate for the years ended December 31, 1994, 1993 and 1992, included in this
Prospectus and appearing elsewhere in this Registration Statement, have been
audited by Bober, Markey & Company, independent accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Radiation Care, Inc. and
Subsidiaries for the year ended December 31, 1994, the nine months ended
December 31, 1993 and the year ended March 31, 1993, included in this Prospectus
and appearing elsewhere in this Registration Statement, have been audited by
Coopers & Lybrand L.L.P., independent accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Aegis Health Systems, Inc. for the
years ended December 31, 1994, 1993 and 1992, included in this Prospectus and
appearing elsewhere in this Registration Statement, have been audited by Coopers
& Lybrand L.L.P., independent accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing.
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<PAGE>
The financial statements of Oncology & Radiation Associates,
P.A. as of December 31, 1993 and 1994 and September 12, 1995, and for the period
from inception (September 1, 1992) to December 31, 1992, the years ended
December 31, 1993 and 1994 and the period from January 1, 1995 to September 12,
1995, included in this Prospectus and appearing elsewhere in this Registration
Statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing giving said reports.
The financial statements of Osler Medical, Inc. as of
September 14, 1995 and for the period from January 1, 1995 through September 14,
1995, included in this Prospectus and appearing elsewhere in this Registration
Statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing giving said reports.
The financial statements of Osler Medical (a Partnership) for
the years ended December 31, 1994 and 1993, included in this Prospectus and
appearing elsewhere in this Registration Statement, have been audited by Hoyman,
Dobson & Company, P.A., independent accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Georgia Oncology-Hematology
Clinic, P.C. and Subsidiary for the year ended December 31, 1994 included in
this Prospectus and appearing elsewhere in this Registration Statement, have
been audited by Babush, Neiman, Kornman & Johnson, independent accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The financial statements of Oncology-Hematology Associates,
P.A. and Oncology-Hematology Infusion Therapy, Inc. for the year ended December
31, 1994 and the financial statements of Oncology-Hematology Associates, P.A.
for the year ended December 31, 1993, included in this Prospectus and appearing
elsewhere in this Registration Statement, have been audited by Weil, Akman,
Baylin & Coleman, P.A., independent accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Cancer Specialists of Georgia,
P.C. as of July 31, 1995 and for the period from November 1, 1994 to July 31,
1995, included in this Prospectus and appearing elsewhere in this Registration
Statement have been audited by Coopers & Lybrand LLP, independent accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The financial statements of Mobile Lithotripter of Indiana
Partners for the years ended September 30, 1995, 1994 and the period February
12, 1993 (date of inception) to September 30, 1993, included in this Prospectus
and appearing elsewhere in this Registration Statement, have been audited by
Katz, Sapper & Miller, LLP, independent accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The financial statements of UroMed Technologies, Inc. for the
period January 1 to September 28, 1994 and the years ended December 31, 1993 and
1992, included in this Prospectus and appearing elsewhere in this Registration
Statement, have been audited by Roy Cline, CPA, PA, independent accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
The financial statements of Nutrichem, Inc. for the period
January 1 to November 17, 1994 and the ten months ended December 31, 1993,
included in this Prospectus and appearing elsewhere in this Registration
-66-
<PAGE>
Statement, have been audited by Regan, Russell, Schickner & Shah, P.A.,
independent accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The financial statements of First Choice Home Care, Inc. and
First Choice Health Care Services of Ft. Lauderdale, Inc. for the period January
1 to November 22, 1994 and the year ended December 31, 1993, included in this
Prospectus and appearing elsewhere in this Registration Statement, have been
audited by Patrick & Associates, P.A., independent accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Whittle, Varnell and Bedoya, P.A.
as of December 31, 1993 and 1994 and for the years ended December 31, 1993 and
1994, included in this Prospectus and appearing elsewhere in this Registration
Statement, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing giving said reports.
The financial statements of Pinnacle Associates, Inc. as of
December 31, 1994 and 1993 and the year ended December 31, 1994 and the period
from October 21, 1993 (inception) to December 31, 1993, included in this
Prospectus and appearing elsewhere in this Registration Statement, have been
audited by Coopers & Lybrand L.L.P., independent accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the United States Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-4
(together with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act covering the shares of Common Stock. This
Prospectus does not contain all the information set forth in the Registration
Statement, and the exhibits and schedules thereto. For further information, with
respect to the Company and the Common Stock, reference is made to the
Registration Statement, and the exhibits and schedules thereto, which can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and the Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that submit
electronic filings to the Commission. Statements made in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete, and reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference.
The Company is subject to the informational requirements of
the Exchange Act, and, in accordance therewith, files periodic reports and other
information with the Commission. For further information with respect to the
Company, reference is hereby made to such reports and other information which
can be inspected and copied at the public reference facilities maintained by the
Commission referenced above.
The Company's Common Stock is listed for trading on Nasdaq
under the trading symbol "PHMX." Reports, proxy statements and other information
about the Company also may be inspected at the offices of Nasdaq Operations,
1735 K Street, N.W., Washington, D.C. 20006.
-67-
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
PHYMATRIX CORP
Balance Sheets--April 30, 1996 (unaudited) January 31, 1996 (unaudited) and December 31, 1995 F-5
Statements of Operations (unaudited)--three months ended April 30, 1996, one month ended January
31, 1996 and three months ended March 31, 1995 F-6
Statements of Cash Flows (unaudited)--three months ended April 30, 1996, one month ended January
31, 1996 and three months ended March 31, 1995 F-7
Notes to Financial Statements (unaudited) F-8
PHYMATRIX CORP.
Report of Coopers & Lybrand L.L.P. Independent Accountants F-11
Combined Balance Sheets as of December 31, 1995 and 1994 F-12
Combined Statements of Operations for the year ended December 31, 1995
and the period June 24, 1994 (inception) to December 31, 1994 F-13
Combined Statements of Changes in Shareholders' Equity for the year ended
December 31, 1995 and the period June 24, 1994 (inception) to December 31, 1994 F-14
Combined Statements of Cash Flows for the year ended December 31, 1995
and the period June 24, 1994 (inception) to December 31, 1994 F-15
Notes to Combined Financial Statements F-16
Acquisitions
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Report of Coopers & Lybrand L.L.P., Independent Accountants F-33
Combined Balance Sheet as of September 30, 1995 F-34
Combined Statement of Income and Retained Earnings for the nine month period ended
September 30, 1995 F-35
Combined Statement of Cash Flows for the nine month period ended September 30, 1995 F-36
Notes to Combined Financial Statements F-37
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Report of Bober, Markey & Company, Independent Accountants F-40
Combined Balance Sheets as of December 31, 1994, 1993 and 1992 F-41
Combined Statements of Income and Retained Earnings for the years ended December 31, 1994, 1993
and 1992 F-42
Combined Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 F-43
Notes to Combined Financial Statements F-44
RADIATION CARE, INC. AND SUBSIDIARIES
Report of Coopers & Lybrand L.L.P. Independent Accountants F-47
Consolidated Balance Sheets as of December 31, 1994 and 1993 F-48
Consolidated Statements of Operations for the year ended December 31, 1994, the nine months
ended December 31, 1993 and the year ended March 31, 1993 F-49
Consolidated Statements of Stockholders' Equity for the year ended December 31, 1994, the nine
months ended December 31, 1993, and the year ended March 31, 1993 F-50
Consolidated Statements of Cash Flows for the year ended December 31, 1994, the nine months ended
December 31, 1993 and the year ended March 31, 1993 F-51
Notes to Consolidated Financial Statements F-52
F-1
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
Page
--------
AEGIS HEALTH SYSTEMS, INC.
Report of Coopers & Lybrand L.L.P. Independent Accountants F-63
Balance Sheets as of March 31, 1995 (unaudited) and December 31, 1994 and 1993 F-64
Statements of Operations for the three months ended March 31, 1995 and 1994 (unaudited) and
the years ended December 31, 1994, 1993 and 1992 F-65
Statements of Cash Flows for the three months ended March 31, 1995 and 1994 (unaudited) and
the years ended December 31, 1994, 1993 and 1992 F-66
Notes to Financial Statements F-67
ONCOLOGY & RADIATION ASSOCIATES, P.A.
Report of Arthur Andersen LLP, Independent Accountants F-70
Balance Sheets as of December 31, 1993 and 1994 and September 12, 1995 F-71
Statements of Operations for the period September 1, 1992 (inception) to December 31, 1992 and
for the years ended December 31, 1993 and 1994 and for the period January 1, 1995 to
September 12, 1995 F-72
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1993 and 1994,
and for the period January 1, 1995 to September 12, 1995 F-73
Statements of Cash Flows for the period September 1, 1992 (inception) to December 31, 1992 and
for the years ended December 31, 1993 and 1994 and for the period January 1, 1995 to
September 12, 1993 F-74
Notes to Financial Statements F-75
OSLER MEDICAL, INC.
Report of Arthur Andersen LLP, Independent Accountants F-78
Balance Sheet as of September 14, 1995 F-79
Statement of Operations and Retained Earnings for the period from January 1, 1995 to
September 14, 1995 F-80
Statement of Cash Flows for the period from January 1, 1995 to September 14, 1995 F-81
Notes to Financial Statements F-82
OSLER MEDICAL
Report of Hoyman, Dobson & Company, P.A., Independent Public Accountants F-86
Balance Sheets as of December 31, 1994 and 1993 F-87
Statements of Income and Partners' Capital for the years ended December 31, 1994 and 1993 F-88
Statements of Cash Flows for the years ended December 31, 1994 and 1993 F-89
Notes to Financial Statements F-90
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
Balance Sheet as of April 14, 1995 (unaudited) F-97
Statement of Operations and Retained Earnings for the period
January 1, 1995--April 14, 1995 (unaudited) F-98
Statement of Cash Flows for the period January 1, 1995--April 14, 1995 (unaudited) F-99
GEORGIA ONCOLOGY--HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Report of Babush, Neiman, Kornman & Johnson, Independent Accountants F-100
Consolidated Balance Sheet as of December 31, 1994 F-101
Consolidated Statement of Operations and Retained Earnings for the year ended December 31,
1994 F-102
Consolidated Statement of Cash Flows for the year ended December 31, 1994 F-103
Notes to Consolidated Financial Statements F-104
F-2
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
Page
--------
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND ONCOLOGY-HEMATOLOGY
INFUSION THERAPY, INC.
Combined Balance Sheet as of July 25, 1995 (unaudited) F-108
Combined Statement of Operations and Retained Earnings for the period January 1, 1995 through July
25, 1995 (unaudited) F-109
Combined Statement of Cash Flows for the period January 1, 1995 through July 25, 1995
(unaudited) F-110
ONCOLOGY--HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY--HEMATOLOGY INFUSION THERAPY, INC.
Report of Weil, Akman, Baylin & Coleman, P.A., Independent Accountants F-111
Combined Balance Sheets as of December 31, 1994 and 1993 F-112
Combined Statements of Operations and Retained Earnings for the year ended December 31,
1994 and 1993 (Oncology-Hematology Associates, P.A.) for the period March 7, 1994 (Date of
inception) through December 31, 1994 (Oncology-Hematology Infusion Therapy, Inc.) F-113
Combined Statements of Cash Flows for the year ended December 31, 1994 and 1993 (Oncology-
Hematology Associates, P.A.) for the period March 7, 1994 (Date of inception) through
December 31, 1994 (Oncology-Hematology Infusion Therapy, Inc.) F-114
Notes to the Financial Statements F-115
CANCER SPECIALISTS OF GEORGIA, P.C.
Report of Coopers & Lybrand L.L.P., Independent Accountants F-120
Balance Sheet as of July 31, 1995 F-121
Statement of Operations and Retained Earnings (Accumulated Deficit) for the nine month period
ended July 31, 1995 F-122
Statement of Cash Flows for the nine month period ended July 31, 1995 F-123
Notes to Financial Statements F-124
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
Report of Katz, Sapper & Miller, LLP, Independent Accountants F-128
Balance Sheets as of September 30, 1995 and 1994 F-129
Statements of Income for the years ended September 30, 1995 and 1994 and the period from February
12, 1993 (date of formation) to September 30, 1993 F-130
Statements of Partners' Capital for the years ended September 30, 1995 and 1994 and the period
from February 12, 1993 (date of formation) to September 30, 1993 F-131
Statements of Cash Flows for the years ended September 30, 1995 and 1994 and the period from
February 12, 1993 (date of formation) to September 30, 1993 F-132
Notes to Financial Statements F-133
UROMED TECHNOLOGIES, INC.
Report of Roy Cline, CPA, PA, Independent Accountants F-136
Balance Sheets as of September 28, 1994 and December 31, 1993 and 1992 F-137
Statement of Income and Retained Earnings for the period ended September 28, 1994 and the
years ended December 31, 1993 and 1992 F-138
Statement of Cash Flows for the period ended September 28, 1994 and the years ended
December 31, 1993 and 1992 F-139
Notes to Financial Statements F-140
NUTRICHEM, INC.
Report of Regan, Russell, Schickner & Shah, P.A., Independent Accountants F-144
Balance Sheets as of November 17, 1994 and December 31, 1993 F-145
F-3
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
Page
--------
Statements of Income for the period ended November 17, 1994 and the year ended December 31, 1993 F-146
Statements of Retained Earnings for the period ended November 17, 1994 and the year ended December
31, 1993 F-147
Statements of Cash Flows for the period ended November 17, 1994 and the year ended
December 31, 1993 F-148
Notes to Financial Statements F-150
FIRST CHOICE HOME CARE, INC.
Report of Patrick & Associates, PA, Independent Accountants F-152
Balance Sheets as of December 31, 1993 and November 22, 1994 F-153
Statements of Income and Retained Earnings for the year ending December 31, 1993 and interim
period ending November 22, 1994 F-154
Statements of Cash Flows for the year ending December 31, 1993 and interim period ending November
22, 1994 F-155
Notes to Financial Statements F-156
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
Report of Patrick & Associates, PA, Independent Accountants F-158
Balance Sheets as of December 31, 1993 and November 22, 1994 F-159
Statements of Income and Retained Earnings for the year ended December 31, 1993 and interim period
ending November 22, 1994 F-160
Statements of Cash Flows for the year ended December 31, 1993 and interim period ending November
22, 1994 F-161
Notes to Financial Statements F-162
WHITTLE, VARNELL AND BEDOYA, P.A.
Report of Arthur Andersen LLP, Independent Accountants F-164
Balance Sheets as of December 31, 1993 and 1994 and September 30, 1995 (unaudited) F-165
Statements of Operations and Retained Earnings for the years ended December 31, 1993 and
1994 and the nine month periods ended September 30, 1994 and 1995 (unaudited) F-166
Statements of Cash Flows for the years ended December 31, 1993 and 1994 and the nine month periods
ended September 30, 1994 and 1995 (unaudited) F-167
Notes to Financial Statements F-168
PINNACLE ASSOCIATES, INC.
Report of Coopers & Lybrand L.L.P., Independent Accountants F-173
Consolidated Balance Sheets as of September 30, 1995 (unaudited), December 31, 1994 and December
31, 1993 F-174
Consolidated Statements of Operations for the period January 1, 1995 to September 30, 1995
(unaudited), the year ended December 31, 1994 and the period October 21, 1993 (inception) to
December 31, 1993 F-175
Consolidated Statements of Stockholders' Deficit for the period January 1, 1995 to September 30,
1995 (unaudited), the year ended December 31, 1994 and the period October 21, 1993
(inception) to December 31, 1993 F-176
Consolidated Statements of Cash Flows for the period January 1, 1995 to September 30, 1995
(unaudited), the year ended December 31, 1994 and the period October 21, 1993 (inception) to
December 31, 1993 F-177
Notes to Consolidated Financial Statements F-178
</TABLE>
F-4
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
PHYMATRIX CORP.
BALANCE SHEETS
<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 at April 30, 1996 and
January 31, 1996 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.
F-5
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated
Three Consolidated Combined
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 40,991 551,607 287,480
Interest expense, shareholder 228,480 259,888 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 $ (0.08)
=========== ===========
Weighted average number of shares outstanding 21,529,950 14,204,305
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated
Three Consolidated Combined
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) (796,011) 207,840
Changes in other assets (248,777) (19,072) (129,972)
--------- --------- -----------
Net cash used by operating activities (735,586) (1,765,312) (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) (43,335,682) (1,080,321)
--------- --------- -----------
Net cash provided (used) by financing activities (7,730,752) 43,701,032 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.
F-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
(1) ORGANIZATION AND BASIS OF PRESENTATION (Unaudited)
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 the unaudited 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:
F-8
<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
F-9
<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 $585,416 was paid in cash and
$935,114 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.
F-10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of PhyMatrix Corp. (formerly known as Continuum Care
Corporation):
We have audited the accompanying combined balance sheets of PhyMatrix
Corp. (formerly known as Continuum Care Corporation) as of December 31, 1995
and December 31, 1994 and the related combined statements of operations,
changes in shareholders' equity and cash flows for the year ended December
31, 1995 and the period from June 24 (inception) to December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of PhyMatrix Corp.
(formerly known as Continuum Care Corporation) as of December 31, 1995 and
December 31, 1994 and the combined results of its operations and its cash
flows for the year ended December 31, 1995 and the period from June 24
(inception) to December 31, 1994 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 27, 1996
F-11
<PAGE>
PHYMATRIX CORP.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December December
31, 31, December 31,
1995 1995 1994
----------- ----------- -------------
(Unaudited)
(Note 20)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 43,322,227 $ 3,596,913 $ 677,245
Receivables
Accounts receivable, net of allowance for doubtful
accounts of $7,819,577 and $962,641 at December 31,
1995 and 1994, respectively 20,710,846 20,710,846 3,778,467
Other receivables 1,210,414 569,923 --
Notes receivable (Note 4) -- 516,000 --
Prepaid expenses and other current assets 1,289,227 1,276,535 393,126
------------ ------------ -----------
Total current assets 66,532,714 26,670,217 4,848,838
Property, plant and equipment, net (Note 5) 39,429,918 39,359,328 1,686,624
Notes receivable (Note 4) -- 170,400 --
Goodwill, net (Note 6) 44,439,219 31,931,453 6,210,679
Management service agreements, net (Note 7) 16,376,636 16,376,636 --
Investment in affiliates (Note 8) 3,387,820 12,925,129 2,661,511
Other assets (including restricted cash) 7,035,497 4,753,710 --
------------ ------------ -----------
Total assets $177,201,804 $132,186,873 $15,407,652
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases (Note 10) $ 2,962,636 $ 26,662,510 $ 457,250
Current portion of related party debt (Note 10) 4,740,588 4,740,588 --
Accounts payable 5,398,411 5,353,210 693,171
Accrued compensation 1,194,424 1,124,316 205,288
Accrued liabilities (Note 9) 4,238,994 9,367,532 902,900
Accrued interest -- shareholder (Note 13) -- 1,708,174 --
------------ ------------ -----------
Total current liabilities 18,535,053 48,956,330 2,258,609
Due to shareholder (Note 3 and 13) 10,751,764 36,690,180 --
Long-term debt and capital leases, less current
maturities (Note 10) 13,942,113 28,847,923 911,534
Other long term liabilities (Note 9) 3,710,045 2,511,122 --
Minority interest 1,305,758 2,502,970 570,533
------------ ------------ -----------
Total liabilities 48,244,733 119,508,525 3,740,676
Commitments and contingencies (Note 12)
Shareholders' equity
Additional paid in capital 141,485,681 25,000,000 12,963,713
Retained earnings (deficit) (12,528,610) (12,321,652) (1,296,737)
------------ ------------ -----------
Total shareholders' equity 128,957,071 12,678,348 11,666,976
------------ ------------ -----------
Total liabilities and shareholders' equity $177,201,804 $132,186,873 $15,407,652
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
PHYMATRIX CORP.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
June 24
(inception)
Year Ended to
December 31, December 31,
1995 1994
------------ -------------
<S> <C> <C>
Net revenue from services $ 48,360,716 $ 2,446,821
Net revenue from management service agreements 22,372,566 --
------------ -----------
Total revenue 70,733,282 2,446,821
------------ -----------
Operating costs and administrative expenses
Cost of affiliated physician management services 9,655,973 --
Salaries, wages and benefits 29,708,554 1,207,750
Salaries, wages and benefits -- related party (Note 13) 2,267,891 934,200
Professional fees 2,571,459 58,665
Professional fees -- related party (Note 13) 273,941 253,995
Supplies 11,864,514 404,911
Utilities 1,307,564 77,416
Depreciation and amortization 3,862,519 107,387
Rent 4,043,465 56,244
Rent -- related party (Note 13) 459,732 192,242
Earn out payment (Note 3) 1,271,000 --
Provision for closure loss (Note 3) 2,500,000 --
Provision for bad debts 744,111 --
Other 5,409,676 53,665
Other -- related party (Note 13) 728,116 249,316
------------ -----------
Total operating costs and administrative expenses 76,668,515 3,595,791
Interest expense, net 3,144,027 95,069
Interest expense -- shareholder (Note 13) 1,708,174 --
Minority interest 806,637 52,698
Income from investment in affiliates (569,156) --
------------ -----------
Loss (Note 2) $(11,024,915) $(1,296,737)
============ ===========
Loss per pro forma share $ (0.98) $ (0.12)
============ ===========
Number of shares used in loss per pro forma share 11,207,450 11,207,450
============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
PHYMATRIX CORP.
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the year ended December 31, 1995
and the period June 24 (inception) to December 31, 1994
<TABLE>
<CAPTION>
Retained
Additional Earnings
Paid-In (Accumulated
Capital Deficit) Total
---------- ------------ -------------
<S> <C> <C> <C>
Balances -- June 24, 1994 -- -- --
Capital contribution $12,963,713 -- $ 12,963,713
Loss for the period June 24, 1994 (inception)
to December 31, 1994 -- ($ 1,296,737) (1,296,737)
----------- ------------ ------------
Balances -- December 31, 1994 12,963,713 (1,296,737) 11,666,976
Capital contribution 12,036,287 -- 12,036,287
Loss for the year ended December 31, 1995 -- (11,024,915) (11,024,915)
----------- ------------ ------------
Balances -- December 31, 1995 $25,000,000 $(12,321,652) $ 12,678,348
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE>
PHYMATRIX CORP.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
June 24
(inception)
Year Ended to
December 31, December 31,
1995 1994
------------ -------------
<S> <C> <C>
Cash flows from operating activities
Loss $(11,024,915) $ (1,296,737)
Noncash items included in net loss:
Depreciation and amortization 3,862,519 107,387
Writedown of assets 1,554,607 --
Other 140,151 --
Changes in receivables (5,419,998) (389,442)
Changes in accounts payable and accrued liabilities 8,221,039 242,612
Changes in other assets (1,425,016) 2,473
------------ ------------
Net cash used by operating activities (4,091,613) (1,333,707)
------------ ------------
Cash flows from investing activities
Capital expenditures (1,167,230) (107,348)
Notes receivable (1,029,600) --
Repayments on notes receivable 343,200 --
Purchase of investments in affiliates (9,790,588) (2,661,511)
Other assets (20,287) --
Acquisitions, net of cash acquired (Note 17) (44,365,741) (8,183,902)
------------ ------------
Net cash used by investing activities (56,030,246) (10,952,761)
------------ ------------
Cash flows from financing activities
Capital contributions 12,036,287 12,963,713
Advances of funds from shareholder 36,690,180 --
Offering costs (1,030,632) --
Proceeds from issuance of debt 19,143,127 --
Repayment of debt (3,797,435) --
------------ ------------
Net cash provided by financing activities 63,041,527 12,963,713
------------ ------------
Increase in cash and cash equivalents 2,919,668 677,245
Cash and cash equivalents, beginning of period 677,245 --
------------ ------------
Cash and cash equivalents, end of period $ 3,596,913 $ 677,245
============ ============
Supplemental disclosure of cash flow information
Cash paid during period for:
Interest $ 2,754,082 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
PhyMatrix Corp. (the "Company"), formerly known as Continuum Care
Corporation, was formed to create a health care company which consummated an
Initial Public Offering (the "offering") during January 1996 (see Note 19)
and simultaneously exchanged shares of its common stock for all of the
outstanding common stock of several business entities (the "IPO entities")
which have been operated under common control by Mr. Gosman and for DASCO
Development Corporation and Affiliate (collectively, "DASCO"), by Messrs.
Gosman, Rendina and Sands, (collectively Principal Shareholders of the
Company) since their respective dates of acquisition (see Note 3). The IPO
entities are as follows:
DASCO Development Corporation and Affiliate
CCC-Infusion, Inc.
Nutrichem, Inc.
First Choice Health Care Services of Ft. Lauderdale, Inc.
First Choice Home Care, Inc.
First Choice Health Care Services, Inc.
CCC-Indiana Lithotripsy, Inc.
Lithotripsy America, Inc.
CCC National Lithotripsy, Inc.
CCC-Lithotripsy, Inc.
Oncology Therapies of America, Inc.
Phychoice, Inc.
Each of the acquisitions of the business entities, except where noted in
Note 3, was accounted for under the purchase method of accounting and was
recorded at the price paid by Mr. Gosman when he purchased the entities from
a third party. The audited combined financial statements for the period June
24, 1994 (inception) through December 31, 1994 and the year ended December
31, 1995 have been prepared to reflect the combination of these business
entities which have operated since their purchase date under common control.
These combined financial statements have been prepared to reflect the
combination of business entities which have been operated under common
control. Because certain of these entities operated under common control are
nontaxpaying (i.e., primarily S Corporations which results in taxes being the
responsibility of the respective owners), the financial statements have been
presented on a pretax basis, as further described in Note 2.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates Used in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used when accounting for the collectibility of receivables and third
party settlements, depreciation and amortization, taxes and contingencies.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid instruments with
original maturities at the time of purchase of three months or less.
Revenue Recognition
Net revenue from services is reported at the estimated realizable amounts
from patients, third-party payors and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and
retroactive adjustments. Provisions for estimated third-party payor
settlements and adjustments are estimated in
F-16
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the period the related services are rendered and adjusted in future periods
as final settlements are determined. The provision and related allowance are
adjusted periodically, based upon an evaluation of historical collection
experience with specific payors for particular services, anticipated
reimbursement levels with specific payors for new services, industry
reimbursement trends, and other relevant factors.
Net revenues from management service agreements include the contractual
fees earned (which equal the net revenue 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.
Accounts receivable, net at December 31, 1995 equaled $20,710,846 which
was 29.3% of total revenue of $70,733,282 for the year ending December 31,
1995. During the year ended December 31, 1995 the Company acquired several
businesses (see Note 3). The historical results of operations do not include
the revenues from such acquisitions prior to their purchase by the Company.
These result in accounts receivable equaling 29.3% of total revenues for the
year ended December 31, 1995. On an annualized basis, the accounts receivable
balance at December 31, 1995 would represent a much smaller percentage of
revenues and is not considered to be unusual for these types of businesses.
Third Party Reimbursement
For the year ended December 31, 1995 and for the period from June 24, 1994
(inception) to December 31, 1994, approximately 40% and 34%, respectively, of
the Company's net revenue was primarily from the participation of the
Company's home health care entities and physician practices in Medicare
programs. Medicare compensates the Company on a "cost reimbursement" basis
for home health care, meaning Medicare covers all reasonable costs incurred
in providing home health care. Medicare compensates the Company for physician
services based on predetermined fee schedules. In addition to extensive
existing governmental health care regulation, there are numerous initiatives
at the federal and state levels for comprehensive reforms affecting the
payment for and availability of health care services. Legislative changes to
federal or state reimbursement systems could adversely and retroactively
affect recorded revenues.
Property and Equipment
Additions are recorded at cost and depreciation is recorded principally by
use of the straight-line method of depreciation for buildings, improvements
and equipment over their useful lives. Upon disposition, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss
is included in income. Maintenance and repairs are charged to expense as
incurred. Major renewals or improvements are capitalized. Assets recorded
under capital leases are amortized over their estimated useful lives for the
lease terms, as appropriate.
Income Taxes
Certain of the entities to be purchased by the Company are S Corporations
or partnerships; accordingly, income tax liabilities are the responsibility
of the respective owners or partners. Provisions for income taxes and
deferred assets and liabilities of the taxable entities have not been
reflected in these combined financial statements since there is no taxable
income on a combined basis.
Goodwill
Goodwill relates to the excess of cost over the value of net assets of the
businesses acquired. Amortization is calculated on a straight line basis over
periods ranging from ten to forty years. The overall business strategy of the
Company includes the acquisition and integration of independent physician
practices and medical support
F-17
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
services. The Company will also utilize its medical facility development
services to further promote affiliations and acquisitions. The Company
believes that this strategy creates synergies, achieves operating
efficiencies and responds to the cost containment objectives of payors, all
of which will provide benefits for the foreseeable future. The Company has
initiated the implementation of this strategy through the acquisition of
DASCO which provides medical facility development services, the acquisition
of OTI (as defined below) which provides radiation therapy and diagnostic
imaging services, the acquisition of oncology practices and medical support
service companies (such as Nutrichem) and the affiliation with oncologists.
Periodically management assesses, based on undiscounted cash flows, if there
has been a permanent impairment in the carrying value of its goodwill and, if
so, the amount of any such impairment by comparing anticipated discounted
future operating income from acquired businesses with the carrying value of
the related goodwill. In performing this analysis, management considers such
factors as current results, trends and future prospects, in addition to other
economic factors.
The Company is required to implement Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1996. As the Company currently
continually evaluates the realizability of its long-lived assets, including
goodwill and intangibles, adoption of the statement is not anticipated to
have a material effect on the Company's financial statements at the date of
adoption.
Management Service Agreements
Management service agreements consist of the costs of purchasing the
rights to manage medical oncology and physician groups. These costs are
amortized over the initial noncancelable terms of the related management
service agreements ranging from 10 to 20 years. Under the long-term
agreements, the medical groups have agreed to provide medical services on an
exclusive basis only through facilities managed by the Company. The
agreements are noncancelable except for performance defaults. In the event a
medical group breaches the agreement, or if the Company terminates with
cause, the medical group is required to purchase all related assets,
including the unamortized portion of any intangible assets, including
management service agreement, at the then net book value.
Investments
The equity method of accounting is used for investments when there exists
a noncontrolling ownership interest in another company that is greater than
20%. Under the equity method of accounting, original investments are recorded
at cost and adjusted by the Company's share of earnings or losses of such
companies, net of distributions.
3. ACQUISITIONS
The following table sets forth the acquisitions made by the Company as of
December 31, 1995, 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 $3,700,783 $2,595,178 $--
November 1995
Medical support service companies:
(bullet) Uromed Technologies, Inc. September 1994 3,661,751 2,375,914 --
(bullet) Nutrichem, Inc. November 1994 8,924,371 7,007,833 --
(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.
</TABLE>
F-18
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
-----------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
- ---------------------------------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
(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 8,418,160 --
(bullet) Aegis Health Systems, Inc. April 1995 7,162,375 6,227,375 --
(bullet) Phylab October 1995 130,653 111,813 --
(bullet) Pinnacle November 1995 --(B) 382,139 --
Managed physician practices:
(bullet) Georgia Oncology-Hematology Clinic, P.C. April 1995 2,099,353 -- 645,448
(bullet) Oncology-Hematology Associates P.A. July 1995 1,541,523 -- 312,740
and Oncology-Hematology Infusion Therapy, Inc.
(bullet) Cancer Specialists of Georgia, Inc. August 1995 5,735,571 -- 2,373,508
(bullet) Oncology & Radiation Associates, P.A. September 1995 10,784,648 -- 9,579,424
(bullet) Osler Medical September 1995 5,792,160 -- 3,373,025
(bullet) West Shore Urology October 1995 550,859 -- --
(bullet) Whittle, Varnell and Bedoya, P.A. November 1995 909,084 -- 212,937
(bullet) Oncology Care Associates November 1995 486,947 -- 1,894
(bullet) Symington December 1995 102,106 -- 10,006
(bullet) Venkat Mani December 1995 401,372 -- 98,782
Medical facility development:
(bullet) DASCO Development Corporation and
Affiliate (50% interest) May 1995 9,610,588(C) -- --
Management Services Organization:
(bullet) Physicians Choice Management, LLC December 1995 3,850,000 2,975,000 --
</TABLE>
- -------------
(A) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Barza and Novoa.
(B) Entire purchase price is contingent and is based on earnings with a
maximum purchase price of $5.2 million.
(C) 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 $3,700,783. The purchase price was allocated to these
assets at their fair market value, including goodwill of $2,595,178. The
resulting goodwill is being amortized over twenty 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
F-19
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
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
fifteen 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 $5,735,571 in
cash. In addition, during April 1995, the Company purchased the assets of and
entered into a ten-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 ten-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 $3,018,956. The resulting
intangible is being amortized over ten 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 $4,301,888 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 $3,373,025. The resulting intangible is being amortized over
twenty 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
F-20
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
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 twenty years.
During the fourth quarter of 1995, the Company 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 $2,450,368 in cash. The Company also entered into a 15-year
capital lease with a total obligation of $1,569,171. The purchase price was
allocated to assets at their fair market value, including management service
agreements of $323,619. The resulting intangible is being amortized over ten
to twenty 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., 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
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 has been
recorded during the year ended December 31, 1995. The remaining $5,395,667
has been allocated to goodwill at December 31, 1995 and will be amortized
prospectively. 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 forty years. Subsequent to the offering, the Company
acquired the outstanding 20% interest in Nutrichem in exchange for 266,666
shares of Common Stock.
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 twenty 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
F-21
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
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 $8,418,160. The resulting intangible is being amortized over
forty years.
During April 1995, the Company purchased from Aegis Health Systems, Inc.
("Aegis") 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 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 $6,227,375. The resulting
intangible is being amortized over twenty 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. At December 31, 1995 the contingent payment has not been
earned. 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 $382,139 and such amount was recorded as
goodwill and is being amortized over forty 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 275 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 balance sheet 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.
F-22
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
Medical Facility Development Acquisitions
On May 31, 1995, Mr. Gosman purchased for $9.6 million a 50% ownership
interest in 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 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
and will be allocated to assets at their fair market value, primarily
goodwill of $9.6 million with the exchange recorded at historical value. At
December 31, 1995 DASCO is being accounted for using the equity method (see
Note 8).
4. NOTES RECEIVABLE
During April 1995, the Company funded a tax loan in the amount of
$1,029,600 to the former Shareholders of Nutrichem. The tax loan was
required, pursuant to the terms of the Purchase Agreement, to convert the
books from the cash basis to the accrual basis prior to the closing. The loan
bears interest at 7.75% per annum and payments are due in six installments at
$172,000 per installment on May 1 and October 1, 1995 and April 1 and October
1 of each year thereafter until October 1, 1997. The tax loan was paid in
full during January 1996.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated
Useful
Life December 31,
------------------------
(Years) 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Building 15 - 20 $ 7,852,653 $ --
Furniture and fixtures 5 - 7 5,312,385 154,999
Equipment 7 - 10 21,789,876 1,583,574
Automobiles 3 - 5 50,058 --
Computer software 5 950,346 14,699
Leasehold improvements 4 - 20 6,045,393 3,592
----------- ----------
Property and equipment, gross 42,000,711 1,756,864
Less accumulated depreciation (2,641,383) (70,240)
----------- ----------
Property and equipment, net $39,359,328 $1,686,624
=========== ==========
</TABLE>
Depreciation expense was $2,761,008 and $70,240, respectively, for the
year ended December 31, 1995 and the period June 24, 1994 (inception) to
December 31, 1994.
Included in property and equipment at December 31, 1995 and 1994 are
assets under capital leases of $9,483,145 and $1,250,875, respectively, with
accumulated depreciation of $842,879 and $46,459, respectively.
F-23
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
6. GOODWILL
Amounts reflected in Goodwill, prior to any amortization, by amortization
period are as follows:
<TABLE>
<CAPTION>
Amortization
Period Goodwill
- ------------------ ------------
<S> <C>
20 years $17,346,388
40 years 15,425,993
</TABLE>
Accumulated amortization of goodwill was $840,928 and $37,147 at December
31, 1995 and 1994, respectively.
7. MANAGEMENT SERVICE AGREEMENTS
Amounts reflected in Management Service Agreements, prior to any
amortization, by amortization period (which equals the term of such
management service agreements) are as follows:
<TABLE>
<CAPTION>
Management
Service
Amortization Period Agreements
- ------------------- -----------
<S> <C>
10 years $ 3,018,956
15 years 312,740
20 years 13,299,682
</TABLE>
Accumulated amortization of management service agreements was $254,741 at
December 31, 1995.
8. INVESTMENT IN AFFILIATES
On December 31, 1994, the Company purchased a 36.8% interest in Mobile
Lithotripter of Indiana Partners, for $2,663,000. During May, 1995, Mr.
Gosman purchased a 50% interest in DASCO, a medical facility development
services company, for $9,610,000 (See Note 3 -- Medical Facility Development
Acquisitions). During August 1995, the Company purchased a 46% interest in I
Systems, Inc., for $180,000. I Systems, Inc. is engaged in the business of
claims processing and related services. These investments are being accounted
for using the equity method at December 31, 1995. Upon the completion of the
offering, the remaining 50% interest in DASCO was purchased and DASCO will be
consolidated prospectively.
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1995 1994
--------- --------
<S> <C> <C>
Accrued closure costs $ 570,000 $ --
Accrued rent 799,551 --
Accrued property taxes 119,134 --
Accrued professional fees 445,250 --
Accrued offering costs 885,770 --
Accrued interest 738,317 95,548
Accrued bonus payments 4,718,564 707,820
Other 1,090,946 99,532
---------- --------
Total accrued
liabilities $9,367,532 $902,900
========== ========
</TABLE>
The accrued closure costs are for the closure of five radiation therapy
centers acquired when the Company purchased OTI (see Note 3). Closure costs
in the amount of $3,134,028 were accrued at December 31, 1995, $2,564,028 of
this amount is classified as a long term liability.
F-24
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES
Long-term debt, notes payable and capital leases consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
----------- ----------
<S> <C> <C>
Note payable due to four individuals payable in eight equal semi-
annual installments of $28,125, including interest at 8%
through November 1998. $ 140,625 $ 225,000
Related party note payable due to three individuals payable on
demand including interest at 10%. One of the notes for $30,000
is collateralized by the cash and accounts receivable of
Pinnacle 130,000 --
Note payable to a bank interest payable monthly at the prime rate
plus 2% (10.50% at December 31, 1995) with a maturity date of
April 1996. 201,422 --
Line of credit note payable to a bank, due and payable on demand,
interest at the prime rate (8.50% at December 31, 1995). 400,000 --
Note payable to a bank, collateralized by the assets of a multi-
specialty group practice, payable in monthly installments of
$14,027, including interest at 7.50% and a final payment in
February 1999. 472,181 --
Note payable to a bank, collateralized by the assets of a multi-
specialty group practice, payable in monthly installments of
$20,608, at 8.75% and a final payment in August 2000. 918,779 --
Note payable in two equal installments in April 1996 and 1997 (or
earlier upon a reorganization which includes an initial public
offering), including interest at 8%. 3,567,408 --
Related party notes payable to the shareholders of DASCO, payable
in May 1996, including interest at 6.37%. 4,610,588 --
Note payable to the former shareholders of a medical oncology
practice in South Florida, payable in ten equal semi-annual
installments of $682,867, which includes interest at 9%. The
note payable is collateralized by an irrevocable letter of
credit, the collateral for which has been provided by Mr.
Gosman. 5,403,337 --
Note payable to a financing institution with a maturity date of
March 2000, a final payment of $2,187,500, and an interest
rate at the prime rate plus 3% (11.50% at December 31, 1995). 15,743,466 --
Note payable to NationsBank, with a maturity date of June 1996
and an interest rate at the prime rate plus .375% (8.875% at
December 31, 1995). This note payable was personally
guaranteed by Mr. Gosman. 19,500,000 --
Note payable to Mr. Gosman with a maturity date of January 1998
and an interest rate at the prime rate (8.50% at December 31,
1995). 36,690,180 --
Capital lease obligations with maturity dates through September
2015 and interest rates ranging from 8.75% to 12%. 9,163,215 1,143,784
---------- ---------
96,941,201 1,368,784
F-25
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASES (Continued)
December 31,
-------------------------
Less current portion of capital leases (756,767) (401,000)
Less current portion of debt (25,905,743) (56,250)
Less current portion of related party debt (4,740,588) --
------------ ---------
Long term debt and capital leases $ 65,538,103 $ 911,534
============ =========
</TABLE>
The following is a schedule of future minimum principal payments of the
Company's long-term debt and the present value of the minimum lease
commitments:
<TABLE>
<CAPTION>
Capital
Debt Leases
----------- -------------
<S> <C> <C>
Through December 31, 1996 $ 30,646,331 $ 1,719,007
Through December 31, 1997 6,186,372 1,274,938
Through December 31, 1998 4,774,757 1,275,690
Through December 31, 1999 5,050,847 1,045,125
Through December 31, 2000 4,429,508 1,004,484
Thereafter -- 14,027,514
------------ ------------
Total 51,087,815 20,346,758
Less amounts representing interest and executory
costs -- (11,183,551)
------------ ------------
Present value of minimum lease payments -- 9,163,207
Less current portion (30,646,331) (756,767)
------------ ------------
Long term portion $ 20,441,484 $ 8,406,439
============ ============
</TABLE>
During the year ended December 31, 1995, the Company purchased, for
$915,000, two mobile lithotripters that had previously been leased by the
Company.
11. LEASE COMMITMENTS
The Company leases various office space and certain equipment pursuant to
operating lease agreements.
Future minimum lease commitments consisted of the following at December
31:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 6,780,500
1997 6,428,506
1998 5,434,231
1999 4,931,465
2000 3,404,819
Thereafter 16,398,213
-----------
$43,377,734
===========
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings in the ordinary course of its
business and includes the litigation related to OTI as mentioned below. While
the Company cannot estimate the ultimate settlements, if any, it does not
believe that any such legal proceedings, including those related to OTI, will
have a material adverse effect on the Company, its liquidity, financial
position or results of operations, although there can be no assurance to this
effect.
F-26
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
The Company has entered into employment agreements with certain of its
employees, which include, among other terms, noncompetition provisions and
salary and benefits continuation.
The Company has also entered into contingent payment arrangements pursuant
to several acquisitions (see Note 3).
The Company has committed to expend up to $1,500,000 per year for each of
three years to assist in the expansion activities of a 22-physician
multi-specialty group practice it entered into a management agreement with in
September 1995. In addition, the Company has agreed to acquire certain
copyright and trademark interests of the practice (see Note 3).
A subsidiary of the Company, OTI, (formerly Radiation Care, Inc., "RCI")
is subject to the litigation described below which related to events prior to
the Company's operation of RCI, and the Company has agreed to indemnify and
defend certain defendants in the litigation who were former directors and
officers of RCI subject to certain conditions.
In December, 1994, prior to its merger with the Company in March 1995, RCI
entered into a settlement agreement with the federal government arising out
of claims under the fraud-and-abuse provisions of the Medicare law. Under the
settlement agreement, RCI, without admitting that it violated the law,
consented to a civil judgment providing for its payment of $2 million and the
entry of an injunction against violations of such provisions.
On February 16, 1995, six former RCI shareholders filed a consolidated
amended Class Action Complaint in Delaware Chancery Court (In Re Radiation
Care, Inc. Shareholders Litigation, Consolidated C.A. No. 13805) against RCI,
Thomas Haire, Gerald King, Charles McKay, Abraham Gosman, Oncology Therapies
of America, Inc. and A.M.A. Financial Corp., alleging that the RCI
shareholders should have been paid more for their RCI stock when RCI was
acquired by the Company. Plaintiffs allege breaches of fiduciary duty by the
former RCI directors, as well as aiding and abetting of said fiduciary duty
breaches by Mr. Gosman, Oncology Therapies of America, Inc. and A.M.A.
Financial Corp. Plaintiffs seek compensatory or rescissionary damages of an
undisclosed amount of behalf of all RCI shareholders, together with an award
of the costs and attorneys' fees associated with the action. No class has
been certified in this litigation and, in early 1995, plaintiffs' counsel
granted an indefinite extension within which for the defendants to answer or
otherwise respond to the Complaint and to plaintiffs' document requests.
Plaintiffs have taken no discovery and there has been virtually no activity
in the litigation since plaintiffs' filing of the consolidated amended class
action complaint. On April 6, 1996, plaintiffs' counsel contacted the Company
for additional document requests and a response to their requests. The
Company has not yet answered the complaint and no other proceedings have
taken place. The Company intends to vigorously defend against the plaintiffs'
requests.
On August 4, 1995, 26 former shareholders of RCI filed a Complaint for
Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire, Gerald
King, Charles McKay and Randy Walker (all former RCI officers and directors)
in the Superior Court of Fulton County, in the State of Georgia (Southeastern
Capital Resources, L.L.C. et al v. Richard D'Amico et al, Civil Action No.
E41225). The Company (OTI) has agreed to assume the defense and indemnify the
defendants subject to certain conditions set forth in an agreement with the
defendants. The Complaint contains five counts--breach of fiduciary duty
counts against former RCI directors Haire, King and McKay, a "conspiracy"
Count against the RCI officer defendants D'Amico, Crowley, and Walker, and a
negligence count against all defendants. Paintiffs seek additional
consideration for their shares of RCI stock in the form of compensatory and
monetary damages. The Company has agreed to assume, subject to certain
conditions, the defense of the individual defendants in this litigation. An
Answer or other response is currently due September 22, 1995. The defendants
will be filing an answer denying any liability in connection with this
matter. On October 23, 1995, the defendants filed a motion to stay the action
pending resolution of the Delaware class action which was heard
F-27
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
12. COMMITMENTS AND CONTINGENCIES (Continued)
by the court on January 29, 1996. On April 9, 1996, Company counsel learned
that the court has denied the motion and that a written decision reflecting
the court's decision would be forthcoming. Plaintiffs have filed a motion
with a proposed amended complaint adding four plaintiffs to the action, upon
which the court has not yet acted. The Company is not a party to this
litigation and its exposure in this litigation is limited to OTI's obligation
under its by-laws to indemnify the former officers and directors of RCI to
the fullest extent permitted by Delaware law. The Company intends to
vigorously defend the plaintiffs' demands.
13. RELATED PARTY
For the year ended December 31, 1995 and the period June 24, 1994
(inception) to December 31, 1994, Continuum Care of Massachusetts, Inc.,
whose principal shareholder is Mr. Gosman, provided management services to
the Company. Fees for these services in the amount of $3,729,680 and
$1,629,753, respectively, have been included in the financial statements and
consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
--------- -----------
<S> <C> <C>
Salaries, wages and
benefits $2,267,891 $ 934,200
Professional fees 273,941 253,955
Rent 459,732 192,242
Other 728,116 249,316
---------- ----------
$3,729,680 $1,629,753
========== ==========
</TABLE>
Included in other expenses are expenses incurred in connection with the
use of an airplane which is owned by Mr. Gosman. Such fees are based on the
discretion of Continuum Care of Massachusetts, Inc.. and may not be
indicative of what they would have been if the Company had performed these
services internally or had contracted for such services with unaffiliated
entities. Included in rent is rent expense of approximately $415,000 and
$156,000 for the year ended December 31, 1995 and the period June 24, 1994
(inception) to December 31, 1994, respectively, for the Company's principal
office space in West Palm Beach, Florida. The lessee of the office space is
Continuum Care of Massachusetts, Inc.. The current lease term expires
December 31, 1999. The Company assumed the lease from Continuum Care of
Massachusetts, Inc. upon the consummation of the offering.
In connection with the purchase of Nutrichem during November 1994, the
Company is required to make contingent note payments in the amount of
$4,444,444 which has been accrued at December 31, 1995. Payments on the
contingent note are based on attaining certain earnings thresholds. The
$4,444,444 which has been accrued represents the maximum remaining amount
that can be earned because the earnings threshold upon which the payment is
based was reached during 1995. The contingent note is personally guaranteed
by Mr. Gosman. The contingent note was paid in full during January 1996 with
the proceeds from the offering.
During March 1995, the Company incurred a $17,500,000 note payable to a
financing institution in connection with the purchase of OTI, Mr. Gosman
personally guaranteed a portion of the $17,500,000. Mr. Gosman's liability
under the guarantee was limited to no more than $6,125,000. The note was paid
in full during January 1996 with the proceeds from the offering.
During May 1995, Mr. Gosman incurred $4,610,588 of debt payable, which has
been included in these financial statements, to the shareholders of DASCO in
connection with the purchase of 50% of the outstanding stock of DASCO. The
notes bear interest at 6.37% per annum with a maturity of May 1996.
DASCO provides development and other services in connection with the
establishment of health parks, medical malls and medical office buildings.
DASCO provides these services to or for the benefit of the owners of the new
F-28
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
13. RELATED PARTY (Continued)
facilities, which owners are either corporations or limited partnerships. Mr.
Sands and Mr. Rendina have acquired equity interest, as of December 31, 1995,
in the owners of 19 of the 20 facilities developed by DASCO and interests
ranging from 6% to 100% collectively for Mr. Sands and Mr. Rendina. In
addition, as of December 31, 1995, Mr. Gosman individually and as trustee for
his two adult sons and certain executive officers have acquired limited
partnership interests ranging from 23% to 47% in the owners of three
facilities being developed by the Company through DASCO.
Meditrust, a publicly traded real estate investment trust with assets in
excess of $1.7 billion of which Mr. Gosman is the Chairman of the Board and
Chief Executive Officer, has provided construction financing to customers of
DASCO in the aggregate amount of $59,897,000 for nine facilities developed by
DASCO, and at December 31, 1995 was providing financing to customers of DASCO
in the aggregate amount of $6,750,000 for one facility under development by
the Company through DASCO.
At December 31, 1995, the Company had borrowed $36,690,180 from Mr.
Gosman. Interest on such outstanding indebtedness at the prime rate of
interest during the year ended December 31, 1995 was $1,708,174. During
January 1996, the Company repaid Mr. Gosman $28,676,743 of such advances with
the proceeds of the offering.
During July 1995, the Company purchased the assets of and entered into a
15-year management agreement with a medical oncology practice with three
medical oncologists. An affiliate of the Company, Continuum Care of
Massachusetts, Inc., guarantees the performance of the Company's obligations
under the management agreement.
During August 1995, the Company purchased a 46% interest in a company
engaged in the business of claims processing and related services. This
entity provides certain billing and collection services to one of the medical
oncology practices owned by the Company.
During September 1995, the Company provided a letter of credit in the
amount of $5,403,337 to a seller in connection with entering into a
management agreement and purchasing the assets of a medical oncology
practice. Prior to the completion of the offering, the collateral for the
letter of credit was provided by Mr. Gosman.
During September 1995, the Company refinanced $19,500,000 of an amount
owed to Mr. Gosman with NationsBank. The $19,500,000 amount refinanced with
NationsBank and outstanding at December 31, 1995 is personally guaranteed by
Mr. Gosman. The $19,500,000 was paid in full during January 1996 with the
proceeds of the offering.
During November 1995, the Company assumed $180,000 of notes payable to
four former shareholders of Pinnacle when the Company merged with Pinnacle.
One of these notes for $50,000 was repaid during December 1995. The remaining
notes bear interest at 10% and are payable upon demand.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The methods and assumptions used to estimate the fair value of each class
of financial instruments, for which it is practicable to estimate that value,
and the estimated fair values of the financial instruments are as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short effective
maturity of these instruments.
Long-term Debt
The fair value of the Company's long-term debt and capital leases is
estimated based on the current rates offered to the Company for debt of the
same remaining maturities. The carrying amount and fair value of long-term
debt and capital leases, including current maturities and related party debt,
at December 31, 1995 and December 31, 1994 is $96,941,201 and $1,368,784,
respectively.
F-29
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
15. EMPLOYEE BENEFIT PLAN
On January 1, 1995, the Company began sponsoring a 401(k) plan, covering
substantially all of its employees. Contributions under the 401(k) plan equal
50% of the participants' contributions up to a maximum of $400 per
participant per year.
16. INCOME TAXES
At December 31, 1995, the Company had available net operating loss
carryforwards of approximately $30,949,000 for federal income tax purposes,
which expire beginning in 2007 related to OTI. As a result of the purchase,
OTI underwent an ownership change as defined in Section 382 of the Internal
Revenue Code of 1986, as amended. This ownership change substantially limits
the ability of the Company to utilize $29,284,000 of its net operating loss
carryforwards in future years. No benefit has been provided for these loss
carryforwards based on uncertainty as to ultimate realizations. There were no
deferred taxes at December 31, 1995 since the various entities that comprised
the Company were either S Corporations or partnerships.
Components of deferred income taxes at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
December 31,
1995
------------
<S> <C>
Deferred income tax assets:
Net operating loss carryforwards $12,070,000
Start-up costs 37,800
Allowance for doubtful accounts 284,000
Other 689,000
-----------
13,080,800
-----------
Deferred income tax liabilities:
Property and depreciation (3,807,000)
-----------
Deferred income taxes 9,273,800
Valuation allowance (9,273,800)
-----------
Net deferred income taxes $ --
===========
</TABLE>
FAS 109 specifies that deferred tax assets are to be reduced by a
valuation allowance if it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Substantially all of this
allowance relates to deferred tax assets and liabilities existing at the date
of each acquisition.
17. SUPPLEMENTAL CASH FLOW INFORMATION
During the year ended December 31, 1995 and the period from June 24, 1994
to December 31, 1994 the Company acquired the assets and assumed certain
liabilities of the entities described in Note 3. The transactions had the
following non-cash impact on the balance sheets:
F-30
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
17. SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
----------- ------------
<S> <C> <C>
Current assets $ 12,463,007 $ 3,784,624
Property, plant and equipment 40,817,404 1,603,347
Intangibles 43,155,934 6,247,825
Other noncurrent assets 2,197,691 --
Current liabilities (8,174,988) (1,611,446)
Debt (43,179,672) (1,322,614)
Noncurrent liabilities (2,913,635) (517,834)
</TABLE>
18. STOCK OPTION PLAN
The Company has adopted a stock option plan for issuance of common stock
to key employees and directors of the Company. Under this plan, the exercise
provision and price of the options will be established on an individual basis
generally with the exercise price of the options being not less than the
market price of the underlying stock at the date of grant. The Company issued
options simultaneously with the completion of the offering to purchase
approximately 1,071,333 shares at the fair market value at the date of grant.
The options generally will become exercisable beginning in the first year
after grant in 20% - 33% increments per year and expire 10 years after the
date of grant. In addition, the Company will grant options to purchase
137,500 shares of common stock of the Company (68,750 shares at $3.00 per
share and 68,750 shares at $5.00 per share) in exchange for outstanding
options to purchase stock of the IPO entities which were granted during 1995
at no less than the fair market value at the time of grant. Options to
purchase 26,250 shares at $3.00 per share and 26,250 shares at $5.00 per
share have vested at December 31, 1995. The remaining options will become
exercisable in 25% - 33% increments per year and expire 10 years after the
date of grant.
19. SUBSEQUENT EVENTS
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with the initial public offering which
became effective January 23, 1996. Pursuant to such offering, the Company
issued 8,222,500 shares of Common Stock. Net proceeds to the Company from the
stock issue, after deduction of underwriters' commissions and offering
expenses, were $112,485,681.
During January 1996, the Company used approximately $71,500,000, from the
proceeds of the offering, to repay the following indebtedness and obligations
of the Company that arose from certain acquisitions: (i) a promissory note to
Aegis in the amount of $3,796,503 (including interest); (ii) a contingent
note to the shareholders of Nutrichem, 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
OTI in the amount of $15,585,023 (including interest); (iv) a note payable to
NationsBank in the amount of $19,586,531 (including interest); and (v) a
partial payment of $28,676,743 on the note payable to Mr. Gosman.
After the completion of the offering, the Company changed its fiscal year
end from December 31 to January 31.
20. PRO FORMA RESULTS (UNAUDITED)
The unaudited pro forma combined balance sheet at December 31, 1995 has
been prepared assuming the issuance of 8,222,500 shares of Common Stock and
the application of the net proceeds therefrom, including the repayment of
indebtedness (see Note 19) and the reclassification of initial public
offering costs included in other
F-31
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
20. PRO FORMA RESULTS (UNAUDITED) (Continued)
assets to additional paid in capital as if the offering had occurred on
December 31, 1995. The unaudited pro forma combined balance sheet at December
31, 1995 also assumes the acquisition, simultaneous with the offering, of the
remaining 50% ownership interest in DASCO and the remaining 20% ownership
interest in Nutrichem.
The accompanying financial statements include the results of operations
derived from the entities purchased by the Company. The following unaudited
pro forma information presents the results of operations of the Company for
the years ended December 31, 1995 and 1994 as if the acquisition of the
entities purchased to date had been consummated on January 1, 1995 and
January 1, 1994. Such unaudited pro forma information is based on the
historical financial information of the entities that have been purchased and
does not include operational or other changes which might have been effected
pursuant to the Company's management.
The unaudited pro forma information presented below is for illustrative
informational purposes only and is not necessarily indicative of results
which would have been achieved or results which may be achieved in the future
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Pro Forma
-------------------------
December
31, December 31,
1995 1994
---------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $125,342 $107,438
Loss (11,871) (22,555)
Loss per share
(1) $ (0.89) $ (1.62)
======== ========
</TABLE>
- -------------
(1) Pro forma loss per share has been calculated based on 13,307,450 shares
outstanding.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders
DASCO Development Corporation and Affiliate
West Palm Beach, Florida
We have audited the accompanying combined balance sheet of DASCO
Development Corporation and Affiliate as of September 30, 1995, and the
related combined statements of income and retained earnings and cash flows
for the nine month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DASCO Development
Corporation and Affiliate as of September 30, 1995, and the results of their
operations and their cash flows for the nine month period then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
November 6, 1995
F-33
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED BALANCE SHEET
September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,771
Accounts receivable from related parties 180,292
Advances on development projects 434,353
Other current assets 3,086
---------
Total current assets 677,502
Property and equipment, net 39,708
---------
Total assets $ 717,210
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,449
Accrued liabilities 175,429
Accrued distributions 319,056
Unearned revenues 119,806
---------
Total current liabilities 671,740
---------
Commitments
Stockholders' equity:
Common stock:
Dasco: $.01 par value, 100,000 shares authorized; 2,000 issued and outstanding 20
Dasco West: no par value, 400,000 shares authorized; 200,000 issued and
outstanding 200
Additional paid in capital 280
Retained earnings 44,970
---------
Total stockholders' equity 45,470
---------
Total liabilities and stockholders' equity $ 717,210
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
For the nine month period ended September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Revenues $2,566,142
----------
Expenses:
Salaries, benefits and payroll taxes 1,737,021
Occupancy 118,992
Other general and administrative 320,332
----------
Total expenses 2,176,345
----------
Income from operations 389,797
----------
Other income (expense):
Interest income 9,658
Interest expense (12,442)
----------
Other income (expense) (2,784)
----------
Net income 387,013
Distributions (319,056)
Retained earnings, beginning of period (22,987)
----------
Retained earnings, end of period $ 44,970
==========
Net income per common share $ 1.92
==========
Weighted average shares outstanding 202,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
for the nine month period ended September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $ 387,013
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 9,715
Changes in operating assets and liabilities:
Accounts receivable from related parties (79,118)
Advances on development projects (434,353)
Other current assets (3,086)
Accounts payable 48,198
Accrued liabilities 128,347
Due from shareholder 12,700
Unearned revenues 19,806
---------
Net cash provided by operating activities 89,222
---------
Cash flows from investing activities:
Purchases of property and equipment (22,839)
---------
Net cash used in investing activities (22,839)
---------
Cash flows from financing activities:
Advances under line of credit 297,000
Repayments under line of credit (297,000)
Proceeds from loans from stockholders 215,638
Repayments on loans from stockholders (380,221)
Distributions to stockholders (124,789)
---------
Net cash used in financing activities (289,372)
---------
Net decrease in cash and cash equivalents (222,989)
Cash and cash equivalents, beginning of period 282,760
---------
Cash and cash equivalents, end of period $ 59,771
=========
Supplemental disclosures:
Interest paid $ 12,442
=========
Noncash financing activities:
During the nine month period ended September 30, 1995, distributions of
$319,056 were declared and accrued.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies:
Nature of Operations
DASCO Development Corporation and Affiliate (the "Company") is engaged in
the development, construction, management, marketing and leasing of
outpatient healthcare and medical office facilities throughout the United
States. The Company's headquarters are located in West Palm Beach, Florida
and it has regional offices in La Jolla, California, Plymouth Meeting,
Pennsylvania, and Las Vegas, Nevada.
Principles of Combined Financial Statements
The accompanying combined financial statements include the accounts of
DASCO Development Corporation and DASCO Development West, Inc. as they are
under common control.
Significant intercompany transactions and balances have been eliminated in
the combined financial statements.
Revenue Recognition
Generally, revenues are recognized at the time services are performed
except for development fees which are recognized in accordance with the
related development agreement which generally calls for achievement of
milestones such as receipt of building permit and percentage completion of
building shell.
Income Taxes
The Company has elected to be taxed under the provisions of the Internal
Revenue Code Section 1361. Under those provisions, the Company does not pay
federal or state corporate income taxes on its taxable income. Instead, the
stockholders are liable for individual income taxes on their proportionate
share of the Company's taxable income. Accordingly, no provision for federal
income taxes is reflected in the accompanying combined financial statements.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three months or
less when purchased to be cash equivalents.
Advances on Development Projects
Advances on development projects relate to direct costs incurred in
connection with development transactions in progress. Such costs are
reimbursed from the owner of the project at the time of closing of the
project loan. If the project is not ultimately consummated, the capitalized
costs are charged to income at the time it is determined that the project is
not feasible.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for
using accelerated methods over estimated useful lives of the assets, which
are generally five years. When assets are retired or otherwise disposed, the
cost and related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is reflected in income for the period. The cost of
maintenance and repairs is charged to operations as incurred, significant
renewals and betterments are capitalized.
Unearned Revenue
Unearned revenue, which relates to marketing fees received in advance of
execution of the related lease agreement, is recognized at the time the
related lease agreement is executed with the applicable tenant.
F-37
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Notes to Combined Financial Statements (Continued)
2. Property and Equipment:
Property and equipment at September 30, 1995, is comprised of:
<TABLE>
<CAPTION>
<S> <C>
Office equipment $ 62,463
Less: accumulated depreciation (22,755)
--------
Property and equipment, net $ 39,708
========
</TABLE>
Depreciation expense for the nine month period ended September 30, 1995,
was $9,715.
3. Line of Credit:
The Company has entered into a $1,500,000 line of credit with a financial
institution which is used to fund working capital needs. The line matures on
August 31, 1996, and bears interest at the 30 day commercial paper rate plus
2.9% (8.7% at September 30, 1995). The line of credit is collateralized by
assets of the Company and is guaranteed by the Company's stockholders. No
amounts were outstanding under the line of credit at September 30, 1995.
4. Commitments:
Leases
The Company leases commercial property and equipment under noncancelable
operating lease arrangements expiring between 1996 and 2005.
Future minimum rental payments under the operating leases at September 30,
1995, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 135,000
1997 122,000
1998 127,000
1999 133,000
2000 138,000
Thereafter 680,000
----------
Total $1,335,000
==========
</TABLE>
Rental expense amounted to approximately $112,000 during the nine months
ended September 30, 1995.
Employment Agreements
The Company has entered into various employment agreements with key
employees. These agreements generally are for a one year period and are
automatically renewed. Amounts to be paid under these agreements during the
next twelve months are approximately $443,000.
5. Related Party Transactions:
The properties developed by the Company are owned by partnerships that are
owned in part by the Company's stockholders individually. The Company's
stockholders individually also own the stock of the corporations which serve
as the managing general partners of these partnerships.
Revenues during the nine month period ended September 30, 1995, were
generated principally from related parties.
The Company is a party to a noncancelable lease for its premises which is
owned in part by the Company's stockholders. Under the terms of this lease,
the Company is obligated to pay $113,522 during the year ended
F-38
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
5. Related Party Transactions: (Continued)
September 30, 1996. The lease includes scheduled base rent increases over the
term of the lease. The total amount of the base rent payments is being
charged to expense on the straight-line method over the term of the lease. In
addition to the base rent payment, the Company pays a monthly allocation of
the buildings' operating expenses. Included in accrued liabilities at
September 30, 1995, is approximately $18,900 related to the excess of rent
expense over cash payments since inception of the lease. Future minimum lease
payments due under this lease are reflected in Note 4.
Rent expense under this lease during the nine month period ended September
30, 1995, was approximately $92,000.
6. Disclosures About Fair Value of Financial Instruments:
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments", which requires disclosure of fair value information
about financial instruments. The carrying amounts reported in the balance
sheet for cash and cash equivalents and short term borrowing approximate fair
value due to the short term nature of these instruments.
7. Change in Shareholder:
On May 31, 1995, 50% of the outstanding common stock of the Company was
purchased by a private investor. This individual is also the Chairman of the
Board of Directors of the lending institution which has provided financing
for certain of the projects developed by the Company. There was no change in
the outstanding stock or capitalization of the Company as a result of this
transaction.
The private investor and the other two owners of the Company have agreed
to contribute the stock of the Company to Continuum Care Corporation
(Continuum), in support of their initial public offering, in exchange for
common stock of Continuum.
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Dasco Development Corporation and Affiliate
West Palm Beach, Florida
We have audited the accompanying combined balance sheets of Dasco
Development Corporation and Affiliate as of December 31, 1994, 1993 and 1992,
and the related combined statements of income and retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dasco Development
Corporation and Affiliate as of December 31, 1994, 1993 and 1992, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
BOBER, MARKEY & COMPANY
July 31, 1995
F-40
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED BALANCE SHEETS
December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
------- --------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $282,760 $ 69,929 $ 26,603
Related party accounts receivable 101,174 54,076 76,466
Advances on development projects -- 642,433 284,929
Due from shareholders 12,700 500 9,800
Related party notes receivable -- 911,460 910,911
-------- ---------- ----------
Total current assets 396,634 1,678,398 1,308,709
Net property, plant and equipment 26,584 6,360 8,999
-------- ---------- ----------
Total assets $423,218 $1,684,758 $1,317,708
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit $ -- $ 299,000 $ --
Accounts payable 9,251 102,350 7,716
Accrued and withheld payroll and taxes 39,182 19,669 11,350
Accrued state income taxes 7,900 -- --
Accrued distributions 124,789 -- --
Deposits -- -- 6,435
Related party demand notes payable 164,583 1,704,341 1,544,050
-------- ---------- ----------
Total current liabilities 345,705 2,125,360 1,569,551
Unearned revenues 100,000 2,629 --
Stockholders' equity
Common stock 500 500 300
Retained earnings (22,987) (443,731) (252,143)
-------- ---------- ----------
Total stockholders' equity (22,487) (443,231) (251,843)
-------- ---------- ----------
Total Liabilities and stockholders' equity $423,218 $1,684,758 $1,317,708
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ----------
<S> <C> <C> <C>
Revenues $ 4,371,000 $ 931,535 $ 918,589
Expenses Salaries, benefits and payroll taxes 1,611,861 904,381 535,108
Occupancy 101,125 77,158 69,740
Other general and administrative 374,394 73,706 155,619
----------- --------- ---------
Total expenses 2,087,380 1,055,245 760,467
----------- --------- ---------
Income (loss) from operations 2,283,620 (123,710) 158,122
Other (expenses) income
Interest income 95,880 64,076 52,011
Interest expense (120,736) (131,954) (101,758)
----------- --------- ---------
Total other (expenses) income (24,856) (67,878) (49,747)
----------- --------- ---------
Net income (loss) 2,258,764 (191,588) 108,375
Distributions (1,838,020) -- --
Beginning retained earnings (443,731) (252,143) (360,518)
----------- --------- ---------
Ending retained earnings $ (22,987) $ (443,731) $(252,143)
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 2,258,764 $(191,588) $ 108,375
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 5,914 2,639 3,235
(Increase) decrease in due from shareholders (12,200) 9,300 (8,540)
(Increase) decrease in accounts receivable (47,098) 22,390 (76,466)
(Increase) decrease in advances on development projects 642,433 (357,504) (217,420)
Increase (decrease) in accounts payable (93,099) 94,634 754
Increase in accrued and withheld payroll and taxes 19,513 8,319 3,015
Increase in accrued state income taxes 7,900 -- --
Increase in accrued distributions 124,789 -- --
Increase (decrease) in deposits -- (6,435) 6,435
Increase in unearned revenues 97,371 2,629 --
---------- --------- ---------
Net cash provided (used) by operating activities 3,004,287 (415,616) (180,612)
Cash flows from investing activities
Proceeds from repayment of related party notes receivable 911,460 -- --
Investment in related party notes receivable -- (549) (422,286)
Equipment additions (26,138) -- (2,337)
---------- --------- ---------
Net cash provided (used) by investing activities 885,322 (549) (424,623)
Cash flows from financing activities
Net repayments on line of credit (299,000) 299,000 (218,640)
Net borrowings on loans payable (1,539,758) 160,291 760,542
Issuance of capital stock -- 200 --
Distributions paid (1,838,020) -- --
---------- --------- ---------
Net cash provided (used) by financing activities (3,676,778) 459,491 541,902
---------- --------- ---------
Net increase (decrease) in cash and cash equivalents 212,831 43,326 (63,333)
Cash and cash equivalents--beginning of year 69,929 26,603 89,936
---------- --------- ---------
Cash and cash equivalents--end of year $ 282,760 $ 69,929 $ 26,603
=========== ========= =========
Supplemental disclosures
Interest paid $ 120,741 $ 131,954 $ 105,431
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1993 and 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
DASCO Development Corporation and Affiliate (the "Company") is engaged in
the development, construction, management, marketing and leasing of
outpatient healthcare and medical office facilities throughout the United
States. The Company's headquarters are located in West Palm Beach, Florida
and has regional offices in La Jolla, California, opened in February 24,
1993, Plymouth Meeting, Pennsylvania, opened June 1, 1995 and Las Vegas,
Nevada, opened July 1, 1995.
Principles of Combination
The accompanying combined financial statements include the accounts of
DASCO Development Corporation and DASCO Development West, Inc., as they are
under common control. DASCO Development West, Inc. commenced operations on
March 1, 1993.
Significant intercompany transactions and balances have been eliminated in
the combined financial statements.
Revenue Recognition
Generally, revenues are recognized at the time services are performed
except for development fees which are recognized in accordance with the
related development agreement which generally calls for achievement of
milestones such as receipt of building permit and percentage completion of
building shell.
Income Taxes
The Company has elected S Corporation status under the Internal Revenue
Code. All income and expense items of the Company are to be recognized in the
tax returns of the stockholders. Accordingly, no provision for federal income
taxes is reflected in the accompanying combined financial statements.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. At December 31, 1994, the entire
balance was comprised of cash equivalents including treasury notes,
government obligations, and high grade corporate securities.
Advances on Development Projects
Advances on development projects relate to direct costs incurred in
connection with development transactions in progress. Such costs are
reimbursed from the owner of the project at the time of closing of the
project loan. If the project is not ultimately consummated, the capitalized
costs are charged to income at the time it is determined that the project is
not feasible.
Property and Equipment
Office equipment and leasehold improvements are being depreciated using
accelerated methods over estimated useful lives, which are generally five
years. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is reflected in income for the period. The cost of maintenance
and repairs is charged to operations as incurred; significant renewals and
betterments are capitalized.
Unearned Revenue
Unearned revenue, which relates to marketing fees received in advance of
execution of the related lease agreement, is recognized at the time the
related lease agreement is executed with the applicable tenant.
F-44
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Fair Value of Financial Instruments
In December 1991, the FASB issued SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, which requires certain disclosures about fair
value of certain financial instruments such as notes payable and notes
receivable. The statement applies to the Company's financial statements for
the year ending December 31, 1995. The impact of the statement on the
Company's financial statement disclosures is not determinable.
2. RELATED PARTY NOTES RECEIVABLE
Notes receivable as of December 31, 1994, 1993 and 1992, consist of demand
notes receivable from related parties with interest rates ranging from seven
to eleven percent.
3. PROPERTY AND EQUIPMENT
The major classes are:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1993 1992
------- ------ --------
<S> <C> <C> <C>
Office equipment $ 33,624 $13,486 $13,486
Construction in progress 6,000 -- --
-------- ------- -------
39,624 13,486 13,486
Accumulated depreciation (13,040) (7,126) (4,487)
-------- ------- -------
$ 26,584 $ 6,360 $ 8,999
======== ======= =======
</TABLE>
4. RELATED PARTY NOTES PAYABLE
Notes payable at December 31, 1994, 1993 and 1992 consist of demand
unsecured notes payable to related parties with interest rates ranging from
seven to ten percent.
5. LINE OF CREDIT
The Company has an unsecured $300,000 line of credit available in which
there was no balance as of December 31, 1994, $299,000 balance as of December
31,1993, and no balance as of December 31, 1992. The interest rate on the
line was prime plus one percent. This line of credit expired in 1994.
6. LEASE COMMITMENTS
The Company leases commercial property and equipment under operating
leases.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1994 for each of the
next five years and in the aggregate are:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 110,960
1996 117,052
1997 119,405
1998 124,687
1999 129,148
Subsequent to 1999 725,710
----------
Total minimum future lease payments $1,326,962
==========
</TABLE>
F-45
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
7. RELATED PARTY TRANSACTIONS
The properties developed by the Company are owned by partnerships that are
owned in part by the Company's stockholders individually. The Company's
stockholders individually also own the stock of the corporations which serve
as the managing general partners of these partnerships.
Revenues in 1994, 1993 and 1992 were generated principally from related
parties.
Paramount Real Estate Services, Inc., a property management firm
controlled by the Company's shareholders, provides management services on a
fee basis for properties developed by the Company. In addition, included in
revenues for 1994, 1993 and 1992 is $44,931, $52,691 and $1,275,
respectively, from Paramount Real Estate Services, Inc.
The Company leases office space from entities which are owned in part by
the Company's stockholders. The Company paid rents in the amount of $93,106
for 1994, $71,010 for 1993, and $64,373 for 1992 under these lease
arrangements which expire in 2004. The Company is obligated to pay $107,010
for 1995 with annual increases equal to 5% of the base rent amount for each
year until lease expiration.
8. STOCKHOLDERS' EQUITY
Combined common stock including paid-in capital of $280 of DASCO
Development Corporation consists of the following:
<TABLE>
<CAPTION>
<S> <C>
DASCO Development Corporation
$.01 stated value, authorized 20,000 shares; 2,000 issued and
outstanding at December 31, 1994, 1993, and 1992 $300
DASCO Development West, Inc.
No par value, authorized 400,000 shares; 200,000 issued and outstanding
at December 31, 1994 and 1993 $200
</TABLE>
The Board of Directors declared a distribution of $124,789 during December
1994 for payment in early 1995. This amount is reflected as accrued
distributions at December 31, 1994.
9. SUBSEQUENT EVENT
On May 31, 1995, 50% of the outstanding common stock of the Company was
purchased by a private investor. This individual is also the Chairman of the
Board of Directors of the lending institution which has provided financing
for certain of the projects developed by the Company. There was no change in
the outstanding stock or capitalization of the Company as a result of this
transaction.
The Company opened new regional offices in Plymouth Meeting, Pennsylvania
on June 1, 1995 and Las Vegas, Nevada on July 1, 1995.
F-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders of Radiation Care, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Radiation
Care, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year ended December 31, 1994, the nine month period ended December
31, 1993 and the year ended March 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Radiation
Care, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and cash flows for the year ended
December 31, 1994, the nine month period ended December 31, 1993 and the year
ended March 31, 1993 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
October 5, 1995
F-47
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1994 and 1993
<TABLE>
<CAPTION>
December
31, December 31,
1994 1993
----------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 9,947,849 $ 2,801,139
Investments in marketable securities (Note 3) 207,107 14,902,078
Patient accounts receivable, less allowance for doubtful
accounts of $418,152 and $466,838 at December 31, 1994 and
1993, respectively 3,215,894 3,926,859
Current portion of receivable from affiliate (Note 4) 596,023 508,103
Note receivable 375,000
Accrued interest receivable 50,940 104,232
Other current assets 299,848 420,788
------------ -----------
Total current assets 14,317,661 23,038,199
Investment in affiliate (Note 4) 1,000,000 5,044,747
Receivable from affiliate, exclusive of current portion (Note 4) 762,615 1,358,636
Investments in managed centers (Note 5) 1,010,360
Property and equipment, net (Notes 6 and 7) 30,068,244 39,304,478
Goodwill and other intangible assets, net of accumulated
amortization of $991,523 and $1,019,115 at December 31, 1994
and 1993, respectively (Notes 6 and 14) 7,998,609 12,606,022
Deposits and other assets 1,122,450 1,426,021
------------ -----------
Total assets $ 55,269,579 $83,788,463
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note 8) $ 737,832 $ 2,653,033
Current portion of capital lease obligations (Note 13) 952,989 924,802
Accounts payable 2,446,261 2,597,918
Accrued expenses 1,423,828 790,486
Income taxes payable 58,000 41,371
------------ -----------
Total current liabilities 5,618,910 7,007,610
Long-term debt, exclusive of current portion (Note 8) 833,659 9,450,997
Capital lease obligations, exclusive of current portion (Note
13) 1,252,498 2,215,756
------------ -----------
Total liabilities 7,705,067 18,674,363
------------ -----------
Commitments and contingencies (Notes 12 and 13)
Stockholders' equity (Notes 8, 9, and 11):
Preferred stock, $.01 par value, shares authorized 6,000,000 and
1,000,000 shares at December 31, 1994 and 1993 respectively:
none outstanding
Common stock, $.01 par value, 50,000,000 shares authorized;
18,052,167 shares issued and outstanding 180,522 180,522
Additional paid-in capital 73,215,363 73,441,200
Accumulated deficit (22,087,035) (4,312,107)
Unrealized losses on investments in marketable securities (20,294)
--------- ----------
51,288,556 69,309,615
Less treasury stock at cost, 1,644,305 and 1,852,478 shares at
December 31, 1994 and 1993, respectively (3,724,044) (4,195,515)
------------ -----------
Stockholders' equity--net 47,564,512 65,114,100
------------ -----------
$ 55,269,579 $83,788,463
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December Year Ended
December 31, 31, March 31,
1994 1993 1993
------------ ----------- ------------
<S> <C> <C> <C>
Patient revenues, net $ 25,785,560 $22,330,113 $27,797,837
Cost of revenues 18,856,207 14,909,266 17,208,305
------------ ----------- -----------
Gross profit 6,929,353 7,420,847 10,589,532
Operating expenses
Selling, general and administrative
Related party--rent (Note 12) 266,050 232,391 308,141
Other 10,733,999 8,250,443 10,120,322
Provision for doubtful accounts 936,019 876,923 1,362,835
Amortization of intangibles 530,490 439,772 497,672
Provision for closing a center (Note 6) 400,000 731,502
Provision for write-down of assets (Note 6) 5,587,563
Provision for settlement of legal matters (Note 13) 2,000,000
------------ ----------- -----------
Total operating expenses 20,454,121 10,531,031 12,288,970
------------ ----------- -----------
Loss from operations (13,524,768) (3,110,184) (1,699,438)
------------ ----------- -----------
Other income (expense)
Interest income 975,450 1,017,539 2,038,022
Interest income--related party (Note 4) 256,926 239,858 299,175
Interest expense (1,021,569) (1,251,306) (1,728,553)
Loss on sale of investments in marketable securities (554,889)
Equity in income (loss) of affiliate (Note 4) (72,580) (102,863) 72,246
Provision for loss on sale of investment in affiliate
(Note 4) (3,989,764)
Gains (losses) on investments in managed centers, net
(Note 5) 394,739 (261,475)
Rental income--related party (Note 4) 188,644 141,482 151,957
Other 28,257 59,713 34,190
------------ ----------- -----------
Other income (expense)--net (3,794,786) (157,052) 867,037
------------ ----------- -----------
Loss before income taxes and extraordinary item (17,319,554) (3,267,236) (832,401)
Provision for income taxes--current 22,264 50,004 120,750
---------- --------- ----------
Loss before extraordinary item $(17,341,818) $(3,317,240) $ (953,151)
Extraordinary item--loss on early extinguishment of
debt (Note 8) (433,110)
------------ ----------- -----------
Net loss $(17,774,928) $(3,317,240) $ (953,151)
============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1994, the nine months ended December 31, 1993
and the year ended March 31, 1993
<TABLE>
<CAPTION>
Unrealized
Losses on
Investments
Common Stock Additional in Total
---------------------- Paid-in Accumulated Marketable Treasury Stockholders'
Shares Amount Capital Deficit Securities Stock Equity
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March
31, 1992 15,649,957 $156,500 $60,880,484 $ (41,716) $ 60,995,268
Issuance of
common stock
for
acquisitions
(Note 14) 2,143,210 21,432 12,670,082 12,691,514
Issuance of
warrants
(Note 9) 133,233 133,233
Exercise of
warrants (Note
9) 180,000 1,800 1,800
Exercise of
stock options 79,000 790 79,737 $ 3,473 84,000
Purchase of
common stock
(Note 9) (1,475,973) (1,475,973)
Issuance of
treasury stock
to 401(k)
Savings Plan
(Note 11) (917) 32,541 31,624
Net loss (953,151) (953,151)
---------- -------- ---------- ------------ -------- ----------- ------------
Balance March
31, 1993 18,052,167 180,522 73,762,619 (994,867) (1,439,959) 71,508,315
Exercise of
stock options (323,029) 466,379 143,350
Purchase of
common stock
(Note 9) (3,469,566) (3,469,566)
Issuance of
treasury stock
to 401(k)
Savings Plan
(Note 11) 1,610 247,631 249,241
Net loss (3,317,240) (3,317,240)
---------- -------- ---------- ------------ -------- ----------- ------------
Balance December
31, 1993 18,052,167 180,522 73,441,200 (4,312,107) (4,195,515) 65,114,100
Exercise of
stock options (53,754) 96,254 42,500
Issuance of
treasury stock
to 401(k)
Savings Plan
(Note 11) (172,083) 375,217 203,134
Unrealized
losses on
investments in
marketable
securities $(20,294) (20,294)
Net loss (17,774,928) (17,774,928)
---------- -------- ---------- ------------ -------- ----------- ------------
Balance December
31, 1994 18,052,167 $180,522 $73,215,363 $(22,087,035) $(20,294) $(3,724,044) $ 47,564,512
========== ======== =========== ============ ======== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December Year Ended
December 31, 31, March 31,
1994 1993 1993
------------ ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(17,774,928) $ (3,317,240) $ (953,151)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 6,188,767 4,730,757 5,378,251
Provision for doubtful accounts 936,019 876,923 1,362,835
Provision for closing a center--noncash items 400,000 666,975
Loss on sale of property and equipment 272,483
Equity in (earnings) loss of affiliate 72,580 102,863 (72,246)
Provision for loss on sale of investment in affiliate 3,989,764
Provision for write-down of assets 5,587,563
Losses on sale of investments in marketable securities 554,889
(Gain) loss on investments in managed centers (394,739) 261,475
Issuance of stock to 401(k) Savings Plan 203,134 249,241 31,624
Extraordinary item--loss on extinguishment of debt 433,110
Other noncash expenses 48,374 54,421 68,862
Change in assets and liabilities, net of effect of
acquisitions:
Patient accounts receivable (225,054) 19,679 (2,486,785)
Receivable from affiliate 508,101 331,255 293,886
Accrued interest receivable 53,292 64,989 30,290
Other current assets 120,940 783,710 (718,183)
Accounts payable and accrued expenses 81,685 (1,040,228) 1,057,589
Income taxes payable 16,629 18,206 8,700
------------ ------------ ------------
Cash provided by operating activities 800,126 3,803,026 4,274,155
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (6,648,837) (5,034,829) (30,902,953)
Sales of investments 14,129,871 6,280,485 4,672,182
Maturities of investments 6,638,754 12,006,914 12,627,900
Additions to property and equipment, net (751,746) (5,772,347) (14,436,434)
Proceeds from the sale of property and equipment 2,658,072 -- 162,218
Distributions from affiliate -- 110,500 58,500
Note receivable 375,000 (375,000) --
Deposits and other assets 285,974 (316,131) (638,437)
Investments in managed centers -- (1,271,835) --
Disposition of investments in managed centers 1,405,099 -- --
Cash payments for acquisitions, net of cash acquired -- -- (2,606,195)
------------ ------------ ------------
Cash provided by (used in) investing activities 18,092,187 5,627,757 (31,063,219)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of treasury stock 42,500 143,350 85,800
Payments on long-term debt (10,853,032) (6,349,033) (1,087,979)
Payments on capital lease obligations (935,071) (670,743) (979,100)
Proceeds from issuance of long-term debt -- -- 1,800,000
Payments of stock offering costs -- -- (164,678)
Payments of debt issue costs -- -- (30,165)
Treasury stock acquired -- (3,469,566) (1,475,973)
------------ ------------ ------------
Cash used in financing activities (11,745,603) (10,345,992) (1,852,095)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 7,146,710 (915,209) (28,641,159)
Cash and cash equivalents, beginning of period 2,801,139 3,716,348 32,357,507
------------ ------------ ------------
Cash and cash equivalents, end of period $ 9,947,849 $ 2,801,139 $ 3,716,348
============ ============ ============
Supplemental disclosures of cash flow information:
Interest paid (net of amount capitalized) $ 1,004,143 $ 1,204,621 $ 1,602,952
============ ============ ============
Income taxes paid $ 5,635 $ 31,798 $ 112,050
============ ============ ============
Capital lease obligations $ -- $ -- $ 1,906,599
============ ============ ============
Issuance of common stock and liabilities assumed in
connection with acquisitions (Note 14)
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
Included in accounts payable at December 31, 1993 and March 31, 1993 are
amounts related to the purchase of property and equipment totaling $724,964
and $2,604,019, respectively.
See notes to consolidated financial statements.
F-51
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1994, the nine months ended December 31, 1993
and the year ended March 31, 1993
1. ORGANIZATION & MERGER WITH ONCOLOGY THERAPIES, INC.
Radiation Care, Inc. ("RCI") and its wholly owned subsidiaries
(collectively the "Company") provide outpatient radiation therapy and
diagnostic imaging services. The Company was incorporated in November 1990
and began treating patients in June 1991. The Company owns and operates
seventeen radiation therapy centers and three diagnostic imaging centers, and
owns a 65% interest in a fourth diagnostic imaging center (sold January 31,
1995--see Note 4).
On November 21, 1994, the Company entered into an agreement to merge with
Oncology Therapies, Inc. in a transaction in which the Company's stockholders
will receive $2.625 in cash for each outstanding share of the Company's
common stock. The merger was completed on March 21, 1995. The Company
incurred approximately $2,500,000 of expenses, of which $1,424,393 were
charged to 1994 operations, associated with structuring and completing the
merger. This amount includes financial advisor fees, legal and accounting
fees, certain liability insurance premiums, severance payments, and expenses
for printing, mailing, and processing related to consummation of the merger.
The Company had change-in-control agreements with its senior officers. The
merger constitutes a change in control pursuant to such agreements. Total
payments that resulted from such agreements approximated $345,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year. Effective December 31, 1993, the Company adopted a fiscal
year ending on December 31. Accordingly, the resulting transition period,
which ended December 31, 1993, covers a nine month period.
Principles of Consolidation. The consolidated financial statements include
the accounts of RCI and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents. For the purposes of the statement of cash
flows, the Company considers all highly liquid instruments purchased with
original maturities of three months or less to be cash equivalents.
Investments. The equity method of accounting is used for investments when
the Company has a noncontrolling ownership interest in another company that
is greater than 20%. Under the equity method of accounting, original
investments are recorded at cost and adjusted by the Company's share of
undistributed earnings or losses of such companies and the amortization of
underlying intangibles.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Statement addresses the accounting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. The Company has classified its investments in
marketable securities as available-for-sale securities which, under the
Statement, are reported at fair value with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity. There was no cumulative effect of this change in accounting
principle. Gains or losses on the sale of investments in marketable
securities are determined by specific identification of the cost of the
securities sold.
Provision for Doubtful Accounts. The Company records a provision for
doubtful accounts for the portion of unrecognized revenues which it estimates
may not be ultimately collected. The provision includes any contractual
adjustments in excess of those estimated at the time revenue is recognized
and other differences between recorded revenues and collections from
third-party payors and patients. The provision and related allowance are
adjusted periodically, based upon the Company's evaluation of historical
collection experience with specific payors for particular services,
anticipated reimbursement levels with specific payors for new services for
which the Company may not have had significant historical collection
experience, industry reimbursement trends, and other relevant factors.
F-52
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment. Property and equipment is stated at cost. The cost
and related accumulated depreciation of property and equipment sold or
otherwise disposed are eliminated from the accounts and the resulting gains
or losses are reflected in income. Depreciation is generally computed using
the straight-line method over the estimated useful life of an asset. Assets
recorded under capital leases are amortized over their estimated useful lives
or the lease terms, as appropriate.
Goodwill. The excess of the purchase price over the fair value of the net
assets acquired in business combinations accounted for by the purchase method
is amortized on a straight-line basis over a 25-year period. The Company
periodically assesses the recoverability of goodwill, when there are
indications of potential goodwill impairment based on estimates of
undiscounted future cash flows from operations for the applicable business
acquired. The amount of impairment is calculated by comparing anticipated
discounted future income from acquired businesses with the carrying value of
the related goodwill. In performing this analysis, management considers such
factors as current results, trends and future prospects, in addition to other
economic factors (see Note 6).
The Company is required to implement Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1996. As the Company currently
continually evaluates the realizability of its long-lived assets, including
goodwill and intangibles, adoption of the statement is not anticipated to
have a material effect on the Company's financial statements at the date of
adoption.
Organization Costs. Organization costs are being amortized on a
straight-line basis over a five-year period.
Income Taxes. Deferred income taxes are determined based on the difference
between financial statement and tax bases of assets and liabilities using
enacted rates in effect for the year in which the differences are expected to
reverse. To the extent management is uncertain that deferred tax assets will
be realized, a valuation allowance is established.
Debt Issue Costs. Debt issue costs are deferred and are being amortized
using the interest method over the term of the related debt.
Revenue Recognition. Patient revenues are recognized net of contractual
adjustments and represent the estimated net realizable amounts from
third-party payors and patients for services rendered.
Charity Care. The Company has a policy of providing charity care to
patients who are unable to pay for the Company's services. Since the Company
does not expect payments from such patients, estimated charges for charity
care are not included in patient revenues.
Reclassifications. Certain reclassifications have been made to the prior
years' financial statements to conform to the presentation in the December
31, 1994 financial statements.
3. INVESTMENTS IN MARKETABLE SECURITIES
The market value of investments in marketable securities was $207,107 and
$14,929,560 at December 31, 1994 and 1993, respectively. At December 31, 1993
gross unrealized gains and losses on investments in marketable securities
were $89,046 and $61,564, respectively.
4. INVESTMENT IN AFFILIATE AND RECEIVABLE FROM AFFILIATE
The Company has a 65% limited partnership interest in ParkView Imaging
Center, L.P. ("PVIC"). This noncontrolling limited partnership interest is
accounted for using the equity method of accounting. The difference between
the Company's recorded investment balance and the Company's proportionate
share of the underlying
F-53
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equity in the net assets of PVIC at December 31, 1994 was $427,564.
Summarized financial data of PVIC as of December 31, 1994 and 1993 and for
the year ended December 31, 1994 and the nine months ended December 31, 1993
follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1994 1993
--------- -----------
<S> <C> <C>
Balance Sheet Data:
Total current assets $ 888,060 $ 620,214
Property and equipment, net 1,754,865 2,017,116
Other assets 12,353 19,323
---------- ----------
Total assets $2,655,278 $2,656,653
========== ==========
Total current liabilities $ 836,223 $ 650,976
Total long-term liabilities 965,456 1,428,051
Total partners' capital 853,599 577,626
---------- ----------
Total liabilities and partners' capital $2,655,278 $2,656,653
========== ==========
Income Statement Data:
Patient revenues, net $2,140,946 $1,720,667
Cost of revenues and expenses 1,853,132 1,638,258
---------- ----------
Net income $ 287,814 $ 82,409
========== ==========
</TABLE>
The Company leased equipment to PVIC under a noncancellable long-term
lease accounted for by the Company as a direct financing lease. The Company
recognized interest income of $256,926, $239,858 and $299,175 related to the
leasing facility for the year ended December 31, 1994, the nine months ended
December 31, 1993 and the year ended March 31, 1993, respectively.
Additionally, the Company leased certain office space to PVIC. Such lease is
accounted for as an operating lease and the Company recognized $188,644,
$141,482 and $151,957 of rental income for the year ended December 31, 1994,
the nine months ended December 31, 1993 and the year ended March 31, 1993,
respectively. Future minimum lease payments due from PVIC together with the
present value of future minimum lease payments under the equipment leases
from affiliate are as follows:
<TABLE>
<CAPTION>
Direct
Year Ended December 31, Financing Operating
- ------------------------------------------------------ -------- ----------
<S> <C> <C>
1995 $ 761,484 $188,634
1996 761,484 188,634
1997 63,458
---------- ---------
Total 1,586,426 $377,268
========
Less amounts representing interest and executory costs (227,788)
----------
Present value of minimum receipts 1,358,638
Less current portion (596,023)
----------
Receivable from affiliate, long-term portion $ 762,615
==========
</TABLE>
In November 1994, the Company agreed to sell Community Clinicians Leasing,
L.P. ("CCL") which included its investment in PVIC to The Columbia HCA Health
System for $1,250,000. In December 1994, the agreement was revised and the
sales price was reduced by $250,000 to $1,000,000. The Columbia HCA Health
System was the general partner of PVIC and owned the remaining 35% interest
in PVIC. During the year ended December 31, 1994, the Company provided for an
anticipated loss on sale of its investment in affiliate of $3,989,764 as a
result of this agreement. This amount represents the difference between the
Company's recorded investment balance and the agreed-upon sales price of CCL.
The transaction was completed on January 31, 1995.
F-54
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INVESTMENTS IN MANAGED CENTERS
The Company entered into agreements in 1993 to manage three radiation
therapy centers, one that had begun operations and two that were under
development. The centers were independently owned. These agreements had a
four-year term during which the Company was to manage the operations of the
centers for a fee based on a percentage of collected revenues. In addition,
the Company entered into agreements that provided the Company with the option
to purchase each of the centers, based on an agreed pricing computation, for
a period of two years beginning eighteen months after the projected opening
date of each center. Consideration for the purchases could be in cash or
common stock of the Company to be negotiated at the time of the purchase. The
Company paid $100,000 per center as consideration for the purchase options.
The Company loaned the centers amounts for working capital requirements,
provided certain temporary financing for building improvements, and provided
certain financing for the acquisition of real estate. The loans for working
capital requirements and the loans for the acquisition of real estate were
expected to be repaid from future operating cash flows of the centers. The
loans for building improvements were expected to be repaid through permanent
financing at the completion of construction. As of December 31, 1993, the
Company had advanced a total of $1,271,835 under these loan agreements at an
interest rate of 7%.
Due to the nature of the Company's relationship with the managed centers,
including the loan arrangements and the options to purchase the centers, the
amounts loaned to the centers were accounted for similar to equity method
investments. As a result of this accounting treatment, the Company was
required to record any start-up losses, and subsequent operating income to
the extent of previously recognized losses, of the managed centers as gains
or losses on the investments in managed centers in the period in which the
income or losses of the centers is recognized. During the year ended December
31, 1994 and the nine months ended December 31, 1993, the Company recognized
losses on investments in managed centers of $367,283 and $261,475,
respectively. The cumulative amount of any potential losses on the
investments was limited to the amount invested in each center. The Company
did not guarantee any debt of the managed centers and was not at risk beyond
its investment balance. See Note 7 regarding machinery and equipment sold to
centers under development which the Company manages.
In April 1994, the Company and the owners of the managed centers agreed to
terminate the management agreements and the purchase option agreements. All
loans to the managed centers and accrued interest were repaid to the Company.
The consideration paid for the purchase options also was refunded. In
addition, the Company received agreed-upon management fees for two of the
centers that had begun operations. Accordingly, the Company reversed all
previously recorded losses on investments in managed centers in April 1994.
During the year ended December 31, 1994, the Company recognized a gain on
investments in managed centers totaling $762,022, which included the reversal
of previously recorded losses, interest income on the loans to the managed
centers, and management fees. Subsequent to termination of the management
agreements, there are no outstanding amounts due from or to the managed
centers and the Company has no further obligations with regard to the
financing or management of the operations of the managed centers.
6. PROVISION FOR WRITE-DOWN OF ASSETS
During the year ended December 31, 1994, the Company incurred a charge of
$5,587,563 which includes a provision for write-off of unamortized goodwill
at one of the Company's diagnostic imaging centers of $3,915,932 and the
write-down of property and equipment at two of the Company's radiation
therapy centers of $1,671,631. The provision for write-off of goodwill and
write-down of property and equipment was a result of management's continuing
assessment of the recoverability of assets based on estimates of future
undiscounted cash flows from operations of the applicable businesses. During
the year ended December 31, 1994, such assessment considered the impending
merger with Oncology Therapies, Inc. discussed in Note 1, the impending
effects of contingencies discussed in Note 13, continuing operating losses at
the individual centers and management's determination that the operating
losses were likely to continue for the foreseeable future. Such assessment
considered the effects of the above events on all the Company's long-lived
assets on a center-by-center basis. Prior to 1994, the Company
F-55
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
did not believe the likelihood of adverse effects on the Company, as a result
of Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993"), were probable.
Management's assessment of the likelihood of adverse effects associated with
OBRA 1993 became probable during 1994 as a result of management concluding
that the Company would be unable to meet the public company exemption under
OBRA 1993. It was in light of such events that management estimated and
recognized asset impairments during 1994. The write-down of property and
equipment included medical equipment and leasehold improvements at centers
located in Rockville, Maryland and Falls Church, Virginia. In addition, the
Company recorded a charge of $400,000 related to costs associated with the
probable closing of one of the radiation therapy centers. The amount of the
provision is primarily for estimated lease termination costs.
In September 1993, the Company made the decision to close its radiation
therapy center in Columbia, South Carolina. The center, which had been
operating for two years, had not treated a sufficient volume of patients to
attain profitability, and management determined that it was not likely to
become profitable in the foreseeable future. Losses were minimized by
transferring equipment and miscellaneous furnishings and supplies to new
centers. The provision for expenses related to the closing of the center was
$731,502, which included the write-off of certain leasehold improvements of
$593,929, transportation and storage costs of $70,750, severance compensation
to employees of $32,823, and other miscellaneous expenses of $34,000.
7. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
Estimated
Useful
Life December 31,
----------------------------
(years) 1994 1993
------- ----------- -------------
<S> <C> <C> <C>
Machinery and equipment 4 - 10 $ 31,441,163 $ 34,215,689
Leasehold improvements 10 - 12 12,034,679 13,400,465
Computers 5 2,726,629 2,713,741
Furniture and fixtures 5 - 7 841,393 864,458
Automobiles 3 - 5 188,600 208,649
------------ ------------
Total 47,232,464 51,403,002
Less accumulated depreciation and amortization (17,164,220) (12,098,524)
------------ ------------
Property and equipment, net $ 30,068,244 $ 39,304,478
============ ============
</TABLE>
Included in machinery and equipment at December 31, 1993 are assets with a
total cost of $2,946,171 and total accumulated depreciation of $491,373 which
were taken out of service and sold to centers under development which the
Company managed in 1994 (see Note 5). No losses on the transfer and sale of
such equipment were recognized.
The Company capitalizes interest as a component of the cost of the
property and equipment constructed for its own use. Interest of $33,070 and
$67,014 was capitalized during the nine months ended December 31, 1993 and
the year ended March 31, 1993, respectively.
Included in machinery and equipment at December 31, 1994 and 1993 are
assets under capital leases of $4,580,943 at both dates with accumulated
amortization of $2,752,035 and $1,763,909, respectively.
Depreciation expense, including amortization of capital lease assets, was
$5,658,276, $4,306,120, and $4,880,579 for the year ended December 31, 1994,
the nine months ended December 31, 1993 and the year ended March 31, 1993,
respectively.
F-56
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. LONG-TERM DEBT
The Company had a $15,000,000 credit agreement with a commercial bank. The
credit agreement, as amended, consisted of a $10,000,000 term loan and a
$5,000,000 revolving credit facility. At December 31, 1993, the Company had
$3,800,000 available to borrow under the revolving credit facility. Under the
agreement, the Company had the option of making "Eurodollar" loans or "Base
Rate" loans. Eurodollar loans bore interest at a fixed rate per annum equal
to LIBOR for the current interest period plus 2-3/4% (an interest period may
be one, two, three, or six months, as selected by the Company). Base Rate
loans bore interest at a rate per annum, fluctuating daily, equal to the
higher of the prime rate plus 1-1/2% or the federal funds rate plus 2%.
Interest on Eurodollar loans was payable at the end of the applicable
interest period and interest on Base Rate loans was payable monthly. At
December 31, 1993 there was outstanding under the credit agreement
$10,200,000 bearing interest at rates ranging from 6.01% to 6.19%.
Patient accounts receivable and certain property and equipment were
pledged as collateral under the credit agreement. In addition, the Company
was required to meet certain financial covenants primarily related to net
worth and long-term debt. The agreement also limited the amount of dividends
that could be paid by the Company.
The aggregate principal amount of the term loan was payable in quarterly
installments of $500,000 which commenced on September 30, 1993. In September
1994, the Company repaid all outstanding indebtedness under its credit
agreement. In connection with the cancellation of the credit agreement, the
Company recognized an extraordinary loss of $433,110 during the year ended
December 31, 1994. The extraordinary loss represents the write-off of the
remaining balances of $272,119 of debt discount and $160,991 of debt issue
costs associated with the credit agreement.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
--------- ------------
<S> <C> <C>
Borrowings under the credit agreement described above, net of unamortized
discount of $320,493 at December 31, 1993 $ 9,879,507
Notes payable to a financial institution, due in monthly installments of
$74,177 including interest ranging from 10.5% to 12.0% through January
1997. Certain property and equipment are pledged as collateral on the
notes $1,571,491 2,224,523
---------- -----------
Total 1,571,491 12,104,030
Less amounts due within one year (737,832) (2,653,033)
---------- -----------
Long-term debt $ 833,659 $ 9,450,997
========== ===========
</TABLE>
At December 31, 1994, scheduled aggregate long-term debt maturities were
$737,832 in 1995 and $833,659 in 1996.
9. COMMON STOCK AND WARRANTS
In February 1992, the Company sold 6,250,000 shares of common stock at $8
a share in its initial public offering. On September 4, 1992, the
stockholders of the Company approved an increase in the authorized number of
the Company's common shares to 50,000,000.
In September 1992, the Company's Board of Directors authorized the use of
up to $5,000,000 to purchase the Company's common shares in the open market,
from time to time. During 1992 and 1993, the Company purchased 2,088,792
shares for a total of $4,945,539, of which 259,137 shares have been
contributed to the Company's 401(k) Plan and 185,350 shares have been used
for options exercised by employees. At December 31, 1994, the remaining
1,644,305 shares are being held as treasury shares.
F-57
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended March 31, 1992, the Company issued to its lending
bank warrants to purchase 356,067 shares of the Company's common stock or
preferred stock at a price of $.01 per share. The difference of $352,506
between the fair value of the warrants (valued at $1.00 per warrant or
$356,067 in total) and the exercise price ($.01 per warrant or $3,561 in
total) has been charged to discount on debt and has been credited to
additional paid-in capital. On June 11, 1992, the Company agreed to issue an
additional 93,933 warrants to its lending bank, of which 16,675 are
exercisable at $.01 per share and 77,258 are exercisable at $8 per share. The
difference of $133,233 between the fair value of the 16,675 warrants (valued
at $8 per warrant or $133,400 in total) and the exercise price ($.01 per
warrant or $167 in total) has been charged to discount on debt and has been
credited to additional paid-in capital. The warrants may be exercised at any
time through June 1, 2001 and the number of warrants issued are subject to
adjustment in certain events to prevent dilution. The Company has granted the
holder of the warrants certain rights with respect to the registration under
the Securities Act of 1933 of the warrants and the shares issuable upon their
exercise. During the year ended March 31, 1993, 180,000 warrants were
exercised at $.01 per share. At December 31, 1994, 192,742 warrants
exercisable at $.01 per share and 77,258 warrants exercisable at $8.00 per
share were outstanding.
10. INCOME TAXES
The Company has elected, for income tax purposes, a March 31 year end. At
December 31, 1994 the Company had available net operating loss carryforwards
of approximately $27,945,000 for federal income tax purposes, which expire
beginning in 2007. As a result of the merger discussed in Note 1, the Company
underwent an ownership change as defined in Section 382 of the Internal
Revenue Code of 1986, as amended. This ownership change substantially limits
the ability of the Company to utilize its net operating loss carryforwards in
future years.
Income tax computed at the federal statutory rate for the year ended
December 31, 1994, for the nine months ended December 31, 1993, and for the
year ended March 31, 1993 differs from the amount provided as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, 1994 December 31, 1993 March 31, 1993
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) at statutory rate $(5,888,648) (34.0)% $(1,110,860) (34.0)% $(283,016) (34.0)%
State taxes, less federal tax
effect (571,545) (3.3) (107,448) (3.3)
Surtax exemption (8,414) (1.0)
Change in valuation allowance 4,598,162 26.5 1,047,001 32.0 117,140 14.1
Nondeductible amortization and
write-off of intangibles 1,548,642 8.8 214,060 6.6 203,822 24.5
Merger expense 484,294 2.8
Other (148,641) (0.8) 7,251 0.2 91,218 10.9
----------- ----- ------------ ----- --------- -----
Provision for income taxes $ 22,264 -- $ 50,004 1.5% $ 120,750 14.5%
=========== ===== ============ ===== ========= =====
</TABLE>
Components of deferred income taxes at December 31, 1994 and 1993 are as
follows:
<TABLE>
<CAPTION>
1994 1993
---------- ------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $10,898,834 $5,336,764
Start-up costs 111,458 185,091
Allowance for doubtful accounts 163,079 182,067
Other 552,418 590,175
----------- ----------
11,725,789 6,294,097
----------- ----------
F-58
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1994 1993
---------- ------------
Deferred income tax liabilities:
Property and depreciation (5,101,717) (4,268,188)
---------- ----------
Valuation allowance (6,624,072) (2,025,909)
---------- ----------
Net deferred income taxes $ -- $ --
========== ==========
</TABLE>
Increases in the Company's valuation allowance during the year ended
December 31, 1994 reflect management's assessment of the Company's ability to
realize, in future periods, deferred tax assets.
11. EMPLOYEE BENEFITS
401(K) Savings Plan. Effective March 1, 1993, the Company adopted a voluntary
savings plan for eligible employees under Section 401(k) of the Internal
Revenue Code, whereby participants may contribute a percentage of their
compensation up to the maximum annual amount allowed under the Code. The plan
provides for matching contributions by the Company of the first 5% of salary
contributed by the employee. The Company's contributions are made on a
quarterly basis with the Company stock which vests upon the completion of
three years of service by the employee.
Expense recorded for the savings plan was $203,134, $249,241, and $31,624
for the year ended December 31, 1994, the nine months ended December 31,
1993, and the year ended March 31, 1993, respectively.
Stock Option Plan. The Company's 1991 Amended and Restated
Statutory-Nonstatutory Stock Option Plan (the "Plan") permits the Company to
grant statutory and non-statutory options to purchase shares of common stock
to certain directors, officers, and other key employees of the Company as
well as certain consultants and advisors. There are 3,500,000 shares of the
Company's common stock reserved for issuance under the Plan. Options
generally become exercisable over a three-year period, with a portion of the
shares issuable pursuant to each option becoming exercisable at each
anniversary of the grant. The options expire ten years after the date of
grant.
During 1994, the Company approved a plan to offer new option grants to
certain officers and other key employees who had previously received stock
option grants. The plan allowed employees the opportunity to cancel their
previous grant and receive a new grant of stock options. The number of shares
that may be purchased under the new stock option grant was determined by a
formula based on the relationship of the exercise price of the previous grant
to the closing price of the Company's common stock on February 1, 1994, the
date of the new option grant. Participation in the exchange of stock option
grants by employees was completely voluntary. The total number of options
outstanding that were eligible for exchange was 638,400 with exercise prices
ranging from $2.75 to $12.75. The total number of options exchanged was
391,400 with exercise prices ranging from $2.75 to $12.75. In return for the
options exchanged, 166,646 new options were issued at an exercise price of
$2.13 and the previously issued options were cancelled.
In March 1995, in connection with the merger of the Company with Oncology
Therapies, Inc. (see Note 1), the Company approved a plan to loan to
employees the proceeds necessary to exercise all vested options and
simultaneously repurchase the shares of common stock issued in connection
with the exercise of such options and repay the amounts loaned to employees.
This plan was executed simultaneously with the closing of the merger. In
total, $1,414,548 was loaned to employees and subsequently repaid to the
Company and options to purchase 771,669 shares of common stock were exercised
with exercise prices ranging from $1.00 to $2.13. These shares of common
stock were then repurchased by the Company at a merger consideration of
$2.625 per share. All other outstanding options were canceled as part of the
merger agreement.
12. RELATED PARTY TRANSACTIONS
The Company had, through September 1993, an office lease agreement for one
of its centers with a corporation, the stock of which is owned in part by the
former chairman of the Company. Rental expense of $32,000 and $48,000 was
incurred on this lease during the nine months ended December 31, 1993 and the
year ended March 31, 1993, respectively.
F-59
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has entered into an office lease agreement for one of its
centers with a corporation, the stock of which is owned in part by a former
director of the Company. Rental expense of $101,328, $74,473, and $94,800 was
incurred on this lease for the year ended December 31, 1994, for the nine
months ended December 31, 1993, and for the year ended March 31, 1993,
respectively.
In March 1992, the Company began leasing an airplane for use in managing
its centers and investigating acquisition and development opportunities, some
of which are not accessible to commercial aircraft, from a corporation that
is primarily owned by the former chairman of the Company at the rate of
$7,000 per month. Rental expense of $84,000, $63,000, and $84,000 was
incurred on this lease for the year ended December 31, 1994, for the nine
months ended December 31, 1993, and for the year ended March 31, 1993,
respectively. The Company incurred other third-party costs in connection with
the operation of the leased airplane.
Prior to the merger, CTC had entered into a service contract with an
entity, related by common owners, to provide technical services. CTC paid a
monthly fee based on the number of scans read. Expenses included in cost of
revenues related to this contract were $502,878, $392,422, and $632,083 for
the year ended December 31, 1994, the nine months ended December 31, 1993 and
the year ended March 31, 1993, respectively.
CTC owns a 2.5% interest in a limited partnership that leases office space
to the Company under an agreement that expires in September 1995. Rental
expense related to this space was $80,722, $62,918, and $81,341 for the year
ended December 31, 1994, the nine months ended December 31, 1993 and the year
ended March 31, 1993, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company leases office space, generally under ten-year noncancelable
operating lease agreements. The lease agreements contain escalation clauses
for increases in operating costs. In addition, the Company leases an airplane
under a noncancelable operating lease with a related party and certain
machinery and equipment under capital and operating leases. Aggregate future
minimum lease commitments under operating leases and capital leases with an
initial or remaining lease term in excess of one year, including amounts
payable to related parties, together with the present value of the minimum
capital lease payments at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending December 31, Leases Leases
- ------------------------------------------------------ ---------- -----------
<S> <C> <C>
1995 $ 1,932,266 $1,129,993
1996 1,890,832 783,403
1997 1,735,852 317,018
1998 1,656,045 304,935
1999 1,630,129 25,361
Thereafter 6,160,418 --
----------- ----------
Total $15,005,542 2,560,710
===========
Less amounts representing interest and executory costs (355,223)
Present value of minimum payments 2,205,487
Less current portion (952,989)
----------
Long-term portion of capital lease obligations $1,252,498
==========
</TABLE>
Rental expense, including rent paid to related parties, for the year ended
December 31, 1994, the nine months ended December 31 1993, and the year ended
March 31, 1993 was $2,153,924, $1,616,981, and $1,823,471, respectively.
F-60
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company carries liability insurance covering general and medical
malpractice liability with annual limits of $15 million per occurrence and in
the aggregate with respect to each of its centers. Management believes such
coverage is adequate to cover claims, if any, that may result.
Since June 1992, a federal grand jury sitting in Atlanta, Georgia had been
investigating whether referrals by physicians who are stockholders of the
Company have been in compliance with the Medicare law. Beginning in October
1994, the Company engaged in active negotiations with representatives of the
Federal Government to resolve the matters that have been the subject of this
investigation of the Company. On December 15, 1994, the Company and the
Federal Government entered into an agreement to settle the grand jury
investigation. Under the terms of the settlement, the Company consented to a
civil judgment, providing for its payment of $2,000,000 and an injunction
against violations of the Medicare "anti-kickback" law. In agreeing to the
settlement, the Company did not admit that any of its activities violated the
Medicare law or any other law. An expense of $2,000,000 related to the
settlement is included in the Company's statement of operations for the year
ended December 31, 1994.
On February 16, 1995, six former stockholders of RCI filed a consolidated
amended Class Action Complaint in Delaware Chancery Court (In re Radiation
Care, Inc. Shareholders Litigation. Consolidated C.A promptly. No. 13805)
against RCI. Thomas Haire, Gerald King, Charles McKay, Abraham Gosman.
Oncology Therapies of America, Inc. ("OTA") and A.M.A. Financial Corporation,
("AMA") alleging that the RCI stockholders should have received greater
consideration for their RCI stock when RCI was merged with and into the
Company. Plaintiffs allege breaches of fiduciary duty by the former RCI
directors, as well as aiding and abetting such fiduciary duty breaches by Mr.
Gosman, OTA and AMA. Plaintiffs seek compensatory or recissionary damages of
an undisclosed amount on behalf of all RCI stockholders, together with an
award of the costs and attorneys' fees associated with the action. No class
has been certified in this litigation and plaintiffs' counsel have granted an
indefinite extension for the defendants to answer or otherwise respond to the
Complaint. Plaintiffs have taken no discovery and there has been virtually no
activity in the litigation since plaintiffs' filing of the consolidated
amended Class Action Complaint. The Company intends to file an answer denying
any liability in connection with this litigation.
On August 4, 1995, 26 former stockholders of RCI filed a Complaint for
Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire, Gerald
King, Charles McKay and Randy Walker (all former RCI officers and directors)
in the Superior Court of Fulton County, in the State of Georgia (Southeastern
Capital Resources, L.L.C. et al. v. Richard D'Amico et al., Civil Action No.
E41225). Two of the plaintiffs have withdrawn from the litigation. Plaintiffs
allege a breach of fiduciary duty by the former RCI directors Haire, King and
McKay, a "conspiracy" by the RCI officer defendants D'Amico, Crowley and
Walker, and negligence by all defendants. Plaintiffs seek additional
consideration for their shares of RCI common stock in the form of
compensatory and monetary damages in the amount of $5.7 million, plus
punitive damages, interest, costs and attorneys fees. On September 22, 1995,
the defendants filed an Answer denying any liability in connection with this
matter.
On September 18, 1995, two former stockholders of RCI filed a Complaint
for Money Damages against RCI, OTA, Mr. Haire, Mr. King and Mr. McKay in the
Superior Court of Fulton County in the State of Georgia (Dennis E. Ellingwood
and Gregory W. Cotter v. Oncology Therapies, Inc., et al., Civil Action No.
34 727-E191464). Plaintiffs allege negligence, negligent misrepresentation
and a breach of fiduciary duty by former RCI directors Haire, King and McKay
and by RCI and OTA on the principles of respondeat superior. Plaintiffs seek
compensatory money damages in an amount of not less than $165,925 for one
plaintiff and $32,997 for the other, plus punitive damages, interest, costs
and attorneys fees. Plaintiffs allege essentially that they were induced to
invest in RCI as a result of a variety of misrepresentations and material
omissions made by RCI in its communications with its stockholders.
The Company believes that it has meritorious defense in all the
above-described pending actions. Although the resolution of these matters may
have a material adverse effect on the Company's financial condition, results
of operations and liquidity, the ultimate outcome of the litigation described
in the preceding three paragraphs cannot presently be determined.
Accordingly, no provision for any loss that may result upon resolution of
these suits has been made in the consolidated financial statements.
F-61
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A substantial portion of the Company's revenues has historically been
derived from patients referred to its centers by physicians who are
stockholders of the Company, and loss of such referrals would have a material
adverse effect on the future operations of the Company. In August 1993, OBRA
1993 was enacted. OBRA 1993 contains provisions that will, beginning January
1, 1995, restrict most physicians from referring Medicare or Medicaid
patients to radiation therapy and diagnostic imaging providers in which they
have a financial interest. OBRA 1993 contains an exemption for a financial
interest consisting of the ownership of investment securities that may be
purchased on terms generally available to the public in a company with $75
million of stockholders' equity as of its most recent fiscal year on or
preceding December 31, 1994 and with securities listed on a national trading
market, including NASDAQ. As of December 31, 1994, the Company's
stockholders' equity was approximately $47.6 million. Due to the merger
discussed in Note 1, the Company's management does not believe OBRA 93 will
adversely affect the Company's future operations.
14. ACQUISITIONS
On April 3, 1992, the Company exchanged 543,675 shares of its common stock
for all of the outstanding shares of common stock of Computerized Tomography
Center, Inc. ("CTC"). CTC operates an outpatient diagnostic imaging facility.
The combination has been accounted for as a pooling of interests and the
historical financial statements of the Company have been restated to include
the operations of CTC.
On May 8, 1992, the Company purchased the net assets of Peachtree Medical
Diagnostics Center ("PMDC"), a center of Peachtree Medical Diagnostics, L.P.,
for a total purchase price of approximately $3,951,950 (before acquisition
costs of $73,246), payable with 395,195 shares of the Company's common stock.
PMDC operates an outpatient diagnostics imaging facility. The excess of the
purchase price over the fair value of the net assets was $4,340,208. The
Company assumed liabilities of $1,416,000 in connection with the acquisition.
The acquisition has been accounted for as a purchase and has been included in
the Company's operations from May 8, 1992.
On May 27, 1992, the Company purchased the common stock of Biltmore
Advanced Imaging Center, Inc. ("BAIC"), which operates an outpatient
diagnostic imaging facility, for a total purchase price of $3,835,000 (before
acquisition costs of $495,000), payable with 464,846 shares of the Company's
common stock. The Company guaranteed by acquiring a letter of credit in the
amount of $3,250,000 that the value of the 464,846 shares to be sold by the
former shareholders of BAIC through January 31, 1993 would be at least
$3,250,000. The Company satisfied its additional purchase price obligation to
such shareholders by paying cash of $1,491,664 in February 1993. The excess
of the purchase price over the fair value of the net assets was $4,605,313.
The Company assumed liabilities of $2,812,000 in connection with the
acquisition. The acquisition has been accounted for as a purchase and has
been included in the Company's operations from May 27, 1992.
On June 10, 1992, the Company purchased the net assets of Community
Clinicians Leasing, L.P. ("CCL") for a total purchase price of $4,760,000
(before acquisition costs of $571,000), payable with 568,358 shares of the
Company's common stock. CCL owns a 65% interest in ParkView Imaging Center,
L.P. ("PVIC"), which operates an outpatient diagnostic imaging facility (see
Note 4). The Company guaranteed that the value of the shares issued would be
a minimum of $3,500,000 on or about the effective date of the Registration
Statement which covered the underlying shares or the Company would issue such
number of additional shares necessary to bring the consideration at that date
to $3,500,000. Accordingly, as of February 11, 1993, the Company issued
293,175 shares of common stock in satisfaction of this obligation. Since the
additional consideration was contingent on the future market value of the
shares issued on June 10, 1992, the issuance of such additional shares does
not result in an increase to the acquisition purchase price or to paid-in
capital. The Company assumed liabilities of $3,097,000 in connection with the
acquisition. The acquisition has been accounted for as a purchase and has
been included in the Company's operations from June 10, 1992.
F-62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Aegis Health Systems, Inc.
We have audited the accompanying balance sheets of Aegis Health Systems,
Inc. as of December 31, 1994 and 1993, and the related statements of
operations and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aegis Health Systems,
Inc. as of December 31, 1994 and 1993, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Oklahoma City, Oklahoma
August 24, 1995
F-63
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
March 31,
1995 1994 1993
--------- --------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Trade accounts receivable $ 214,450 $ 266,066 $ 284,767
Other current assets 36,429 -- --
---------- ---------- ----------
Total current assets 250,879 266,066 284,767
Property, plant and Equipment, net of accumulated
depreciation 1,318,775 1,397,386 1,574,327
Organizational Costs, net -- -- 1,282
Other Assets 3,114 3,309 3,309
---------- ---------- ----------
Total assets $1,572,768 $1,666,761 $1,863,685
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Book overdraft $ 32,234 $ 81,126 $ 43,902
Accounts payable and accrued liabilities 295,942 238,886 210,636
Current maturities of long-term debt 1,110,001 1,040,415 809,838
Current maturities of capital lease obligations 33,120 32,296 242,176
---------- ---------- ----------
Total current liabilities 1,471,297 1,392,723 1,306,552
Long-term obligations
Long-term debt 730,372 913,225 346,599
Capital lease obligations 129,213 137,807 292,525
---------- ---------- ----------
Total liabilities 2,330,882 2,443,775 1,945,676
Commitments and contingencies (Note 7) -- -- --
Stockholder's deficit
Common stock, $1 par, 50,000 shares authorized,
5,001 shares issued and outstanding 5,001 5,001 5,001
Distributions in excess of earnings (763,115) (781,995) (86,992)
---------- ---------- ----------
Total stockholder's deficit (758,114) (776,994) (81,991)
---------- ---------- ----------
Total liabilities and stockholder's deficit $1,572,768 $1,666,761 $1,863,685
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
---------------------- --------------------------------------
1995 1994 1994 1993 1992
--------- --------- ---------- --------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues $ 719,313 $ 608,079 $ 2,741,890 $2,034,582 $1,697,313
--------- --------- ----------- ---------- ----------
Costs and expenses
Operating expenses 270,953 215,712 813,404 606,817 491,254
General and administrative
expenses 323,767 304,180 1,212,898 1,119,839 933,488
Interest expense 25,729 45,678 243,049 234,907 173,523
Other expense 4,577 1,610 26,303 10,528 863
--------- --------- ----------- ---------- ----------
Total costs and expenses 625,026 567,180 2,295,654 1,972,091 1,599,128
--------- --------- ----------- ---------- ----------
Net Income (Note 5) 94,287 40,899 446,236 62,491 98,185
Distributions in excess of
earnings, beginning of period (781,995) (86,992) (86,992) (19,944) (71,797)
Distributions to stockholder (75,407) (96,606) (1,141,239) (129,539) (46,332)
--------- --------- ----------- ---------- ----------
Distributions in excess of
earnings, end of period $(763,115) $(142,699) $ (781,995) $ (86,992) $ (19,944)
========= ========= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
-------------------- ------------------------------------
1995 1994 1994 1993 1992
-------- -------- ---------- -------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net Income $ 94,287 $ 40,899 $ 446,236 $ 62,491 $ 98,185
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 78,611 78,273 315,271 278,766 203,423
Change in assets and liabilities
Increase (decrease) in trade accounts
receivable 51,616 (14,062) 18,701 (160,733) 42,350
Increase (decrease) in other current assets (36,429) (30,965) -- -- 30,621
Increase (decrease) in other assets 195 -- -- 2,966 (1,863)
Increase (decrease) in accounts payable and
accrued liabilities 57,056 74,244 28,250 170,714 9,847
--------- --------- ----------- --------- ---------
Net cash provided by operating activities 245,336 148,389 808,458 354,204 382,563
--------- --------- ----------- --------- ---------
Cash flows used in investing activities
Capital expenditures -- (3,166) (37,217) (256,325) (16,358)
Proceeds from sale of assets -- -- -- -- 92,589
--------- --------- ----------- --------- ---------
Net cash provided (used) by investing
activities -- (3,166) (37,217) (256,325) 76,231
--------- --------- ----------- --------- ---------
Cash flows provided by financing activities
Borrowings under notes payable -- -- 1,842,680 372,132 18,979
Payments on notes payable (95,574) (136,308) (1,056,898) (360,660) (516,997)
Net borrowings (payments) on revolving credit
loans (17,693) 2,211 11,421 91,213 105,899
Principal payments on capital lease
obligations (7,770) (11,866) (464,429) (100,344) (20,119)
Distributions to stockholder (75,407) (96,606) (1,141,239) (129,539) (46,332)
Increase (decrease) in book overdraft (48,892) 97,346 37,224 29,319 (224)
--------- --------- ----------- --------- ---------
Net cash provided (used) by financing
activities (245,336) (145,223) (771,241) (97,879) (458,794)
--------- --------- ----------- --------- ---------
Net change in cash $ -- $ -- $ -- $ -- $ --
========= ========= =========== ========= =========
Supplemental cash flow information:
Cash paid during the year for interest $ 24,716 $ 45,678 $ 226,532 $ 202,665 $ 180,005
========= ========= =========== ========= =========
Supplemental disclosure of noncash investing
and financing activities:
Capital lease obligations assumed $ -- $ 99,831 $ 99,831 $ 611,130 $ --
========= ========= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Aegis Health Systems, Inc. (the "Company") was incorporated in the State
of Oklahoma on May 19, 1989. The Company's primary business involves
providing lithotripsy services to hospitals, ambulatory surgery centers and
other health care facilities.
2. Summary of Significant Accounting Policies
Property, Plant and Equipment. Property, plant and equipment are recorded at
cost, or in the case of leased assets under capital leases, the present value
of future lease payments. When assets are sold or retired, the costs of the
assets and related accumulated depreciation are removed from the accounts and
any gain or loss is included in operations. Repairs and maintenance are
charged to expense as incurred.
Depreciation and amortization, including amortization of leased assets
under capital leases, are computed using the straight-line method over their
estimated useful lives as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings 31.5 years
Leasehold improvements 10 years
Equipment 5-7 years
Furniture and office equipment 7 years
Vehicles 5 years
</TABLE>
Organizational Costs. Organizational costs are stated at cost and are
amortized under the straight-line method over their expected useful life of
five years.
Unaudited Interim Periods. The financial information as of March 31, 1995 and
for the three-month periods ended March 31, 1995 and 1994 are unaudited. The
management of the Company believes that all adjustments, which consist only
of normal recurring adjustments, necessary for a fair presentation of the
balance sheet, statements of operations and statements of cash flows at the
date and for the period indicated have been included.
3. Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Land and buildings $ 91,891 $ 91,891
Leasehold improvements 3,349 3,349
Equipment 2,102,713 1,595,950
Furniture and office equipment 16,421 16,421
Vehicles 40,045 9,591
Leased assets under capital leases 210,961 675,873
----------- ----------
2,465,380 2,393,075
Accumulated depreciation (1,067,994) (818,748)
----------- ----------
Net property and equipment $ 1,397,386 $1,574,327
=========== ==========
</TABLE>
F-67
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Long-Term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
-------- ----------
<S> <C> <C>
Notes payable to banks, interest rates from 7.95% to 12%, due
January 15, 1995 through October 1, 1998, collateralized by
accounts receivable and certain property and equipment $ 135,258 $ 177,032
Notes payable to finance companies, interest rates from 11% to
21%, due May 1, 1995 through June 1, 1997, collateralized by
equipment 1,609,849 782,293
Revolving line of credit, interest at 9.75%, due October 4,
1995, collateralized by accounts receivable 208,533 197,112
---------- ----------
1,953,640 1,156,437
Less current portion 1,040,415 809,838
---------- ----------
$ 913,225 $ 346,599
========== ==========
</TABLE>
All long-term debt is personally guaranteed by the Company's stockholder.
Aggregate maturities of long-term debt at December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $1,040,415
1996 757,282
1997 115,078
1998 9,803
1999 10,669
Thereafter 20,393
----------
$1,953,640
==========
</TABLE>
5. Income Taxes
The stockholder of the Company has elected to adopt the provisions of
Subchapter S of the Internal Revenue Code of 1986. As a result, the Company
is not subject to corporate income taxes, except for taxes on capital gains,
if any. Accordingly, no provisions have been made in the accompanying
financial statements for federal and state income taxes since such taxes are
liabilities of the individual stockholder and the amounts thereof depend upon
his tax situation.
The Company's tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the stockholder could be changed if adjustments in the
distributable income were ultimately sustained by the taxing authorities.
6. Related Party Transactions
During 1994, the Company executed various notes payable to extinguish
certain debt of affiliated entities owned by the Company's stockholder. Prior
to executing the new notes, the Company had made all principal and interest
payments of the affiliates' debt. Principal amounts outstanding under such
notes payable totaled $703,791 at December 31, 1994.
Also, the Company paid certain operating expenses on behalf of these
affiliated entities. Amounts paid by the Company on behalf of the affiliated
entities for principal, interest and operating expenses totaled $1,078,837,
$145,813 and $44,489 for 1994, 1993 and 1992, respectively. Such amounts have
been included in distributions to the Company's stockholder.
F-68
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Leases
Future minimum lease payments under capital and noncancelable operating
leases as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Lease Leases
----------- ------ ---------
<S> <C> <C>
1995 $ 48,214 $35,706
1996 47,802 23,804
1997 45,741 --
1998 45,741 --
1999 24,327 --
Thereafter 1,865 --
-------- -------
Total minimum obligations 213,690 $59,510
=======
Less estimated interest 43,587
--------
Present value of net minimum obligations $170,103
========
</TABLE>
Rent expenses amounted to approximately $36,773, $37,673 and $27,092 in
1994, 1993 and 1992, respectively.
8. Subsequent Event
On April 12, 1995, the Company sold all of the assets used in its business
of providing lithotripsy services to CCC National Lithotripsy, Inc. for
consideration totaling $7,134,815. Pursuant to the Agreement for Purchase and
Sale of Assets, the Company sold certain property, plant and equipment,
including two mobile lithotripter systems and certain accounts receivable and
cash in an amount not to exceed $230,000 and assigned existing service
contracts as well as leases related to one stationary lithotripter system and
two semi-tractors. The purchase price was derived based on the value of the
assets sold and the net revenues generated by the Company's lithotripsy
operations, which excludes certain administrative and other costs included in
the Company's financial statements.
As a result of the sale, the Company paid all of its remaining debt
obligations and presently has no operations.
F-69
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Oncology & Radiation Associates, P.A.:
We have audited the accompanying balance sheets of Oncology & Radiation
Associates, P.A. (a Florida corporation) as of December 31, 1993 and 1994 and
as of September 12, 1995, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(September 1, 1992) to December 31, 1992 and for each of the two years in the
period ended December 31, 1994 and for the period from January 1, 1995 to
September 12, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oncology & Radiation
Associates, P.A. as of December 31, 1993 and 1994 and as of September 12,
1995, and the results of its operations and its cash flows for the period
from inception (September 1, 1992) to December 31, 1992 and for each of the
two years in the period ended December 31, 1994 and for the period from
January 1, 1995 to September 12, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 26, 1995.
F-70
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
September 12,
1993 1994 1995
--------- --------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 269,438 $ 6,256 $1,140,007
Accounts receivable, net of allowances of
$5,747,352, $6,131,128 and $5,863,246 in 1993,
1994 and 1995, respectively 1,156,251 1,499,834 2,006,767
Prepaid expenses 33,777 73,792 70,732
---------- ---------- ----------
Total current assets 1,459,466 1,579,882 3,217,506
---------- ---------- ----------
Property and equipment, net 183,554 168,477 193,762
---------- ---------- ----------
Covenant not-to-compete, net of accumulated
amortization of $279,206 and $501,779 in 1994 and
1995, respectively 899,630 620,424 397,852
---------- ---------- ----------
Total assets $2,542,650 $2,368,783 $3,809,120
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 650,306 $ 657,114 $1,068,180
Short-term debt 318,750 -- --
Current portion of long-term debt 279,206 299,390 315,480
Due to stockholders 1,103,058 900,259 642,495
Deferred revenue -- -- 105,000
---------- ---------- ----------
Total current liabilities 2,351,320 1,856,763 2,131,155
Long-term debt, net of current portion 620,424 321,034 82,372
---------- ---------- ----------
Total liabilities 2,971,744 2,177,797 2,213,527
---------- ---------- ----------
Commitments and contingencies (Notes 1 and 7)
Stockholders' equity:
Common stock, $.001 par value, 500 shares
authorized, 156 shares issued and outstanding 1 1 1
Retained earnings (deficit) (429,095) 190,985 1,595,592
---------- ---------- ----------
Total stockholders' equity (deficit) (429,094) 190,986 1,595,593
---------- ---------- ----------
Total liabilities and stockholders' equity
(deficit) $2,542,650 $2,368,783 $3,809,120
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral
part of these balance sheets.
F-71
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period
Period from From
Inception January 1,
(September 1, Year Ended 1995
1992) to December 31, to
December 31, ----------------------- September 12,
1992 1993 1994 1995
------------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Net patient revenue $2,025,630 $7,847,205 $13,151,687 $10,857,924
Operating costs and expenses:
Salaries and benefits 880,061 4,996,798 7,804,457 5,778,034
Medical supplies expense 197,892 550,800 965,752 1,014,486
Data processing fees 23,192 155,187 406,305 307,928
General and malpractice insurance 86,214 369,522 576,079 442,285
Depreciation and amortization 12,870 80,254 348,170 262,296
Provision for bad debts 71,798 30,000 -- --
Other operating expenses 201,453 1,712,521 1,172,353 833,748
---------- ---------- ----------- -----------
Total operating costs and expenses 1,473,480 7,895,082 11,273,116 8,638,777
---------- ---------- ----------- -----------
Operating income (loss) 552,150 (47,877) 1,878,571 2,219,147
Other income (expense):
Interest income -- 5,212 13,455 12,889
Interest expense -- (3,778) (17,062) (27,429)
---------- ---------- ----------- -----------
Total other income (expense) -- 1,434 (3,607) (14,540)
---------- ---------- ----------- -----------
Net income (loss) $ 552,150 $ (46,443) $ 1,874,964 $ 2,204,607
========== ========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-72
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
----------------------
Retained
Earnings
Shares Amount (Deficit) Total
--------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
Issuance of shares at inception 63 $1 $ -- $ 1
Net income -- -- 552,150 552,150
--- -- ----------- -----------
BALANCE, December 31, 1992 63 1 552,150 552,151
Issuance of shares 93 -- -- --
Net loss -- -- (46,443) (46,443)
Distributions to stockholders -- -- (934,802) (934,802)
--- -- ----------- -----------
BALANCE, December 31, 1993 156 1 (429,095) (429,094)
Net income -- -- 1,874,964 1,874,964
Distributions to stockholders -- -- (1,254,884) (1,254,884)
--- -- ----------- -----------
BALANCE, December 31, 1994 156 1 190,985 190,986
Net income -- -- 2,204,607 2,204,607
Distributions to stockholders -- -- (800,000) (800,000)
--- -- ----------- -----------
BALANCE, September 12, 1995 156 $1 $ 1,595,592 $ 1,595,593
=== == =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-73
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
(September 1, Year Ended Period
1992) to December 31, From January 1,
December 31, ---------------------- 1995
1992 1993 1994 to Sept. 12, 1995
------------- -------- ---------- ------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 552,150 $ (46,443) $ 1,874,964 $ 2,204,607
----------- --------- ----------- -----------
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization 12,870 80,254 348,170 262,296
Provision for bad debts 71,798 30,000 -- --
Changes in assets and liabilities:
Accounts receivable (1,051,800) (205,229) (343,583) (506,933)
Prepaid expenses -- (33,777) (40,015) 3,060
Accounts payable and accrued
expenses 380,977 325,605 6,808 411,066
Deferred revenue -- -- -- 105,000
----------- --------- ----------- -----------
Total adjustments (586,155) 196,853 (28,620) 274,489
----------- --------- ----------- -----------
Net cash (used in) provided by
operating activities (34,005) 150,410 1,846,344 2,479,096
----------- --------- ----------- -----------
Cash flows from investing activities:
Capital expenditures -- (54,487) (53,887) (65,008)
----------- --------- ----------- -----------
Cash flows from financing activities:
Borrowings on short-term debt -- 318,750 -- --
Payments on short-term debt -- -- (318,750) --
Payments on long-term debt -- -- (279,206) (222,573)
Due to stockholders 322,476 501,096 (202,799) (257,764)
Distributions to stockholders -- (934,802) (1,254,884) (800,000)
----------- --------- ----------- -----------
Net cash provided by (used in)
financing activities 322,476 (114,956) (2,055,639) (1,280,337)
----------- --------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 288,471 (19,033) (263,182) 1,133,751
Cash and cash equivalents, beginning of
period -- 288,471 269,438 6,256
----------- --------- ----------- -----------
Cash and cash equivalents, end of period $ 288,471 $ 269,438 $ 6,256 $ 1,140,007
=========== ========= =========== ===========
Supplemental disclosure of noncash
transactions:
Note payable under covenant not-
to-compete $ -- $ 899,630 $ -- $ --
=========== ========= =========== ===========
Contribution of property and
equipment $ 222,209 $ -- $ -- $ --
=========== ========= =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral
part of these statements.
F-74
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1994 and September 12, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business
Oncology & Radiation Associates, P.A. (the "Company") is a Florida
corporation organized on September 1, 1992 to provide medical oncology and
radiation services. The Company operates two radiation departments at area
hospitals and eight medical oncology offices throughout Dade County. The
Company has a December 31 year-end.
On September 13, 1995, the Company entered into an asset purchase
agreement and a 20-year management service agreement with Continuum Care
Corporation ("Continuum"), an unaffiliated entity. Continuum will pay the
Company $10,653,000 which includes the purchase of certain assets, as
defined. Terms of the agreement specify $5,250,000 to be paid initially with
the remaining $5,403,000 to be paid semi-annually, incurring interest at 9%,
over the next five years. Continuum will receive the first $2.1 million of
the Company's profits, as defined, and an agreed-upon percentage of the
remaining profit over the term of the management service agreement.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Included in the cash and cash equivalents balances are
interest-bearing deposits of $1,068,536 in 1995. There were no
interest-bearing deposits at December 31, 1993 and 1994.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using accelerated methods over the
estimated useful lives of the assets ranging from 5 to 7 years.
d. Accounts Receivable and Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third-party payors such as insurance companies (47%) and
government-sponsored health care programs (35%). These receivables are
presented net of an estimated allowance for contractual adjustments and
uncollectible receivables. Contractual adjustments result from the difference
between the rates for services performed and reimbursement amounts from the
government-sponsored health care programs and insurance companies for such
services.
At September 12, 1995, deferred revenue represents that portion of monthly
managed care fees received in advance and related to the period from
September 13, 1995 through September 30, 1995.
e. Income Taxes
The Company is an S Corporation for tax reporting purposes; as such, its
income is directly taxed to its stockholders and, therefore, no income tax
provision is reflected in the accompanying statements of operations. Had the
Company been a C Corporation during 1992, 1993, 1994 and 1995, the unaudited
pro forma provision for income taxes would be approximately $215,000, $0,
$731,000 and $860,000, respectively.
f. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, prepaid expenses, other assets and accounts payable and accrued
expenses are reflected in the accompanying financial statements at cost which
approximates fair value.
g. Covenant Not-To-Compete
The covenant not-to-compete is amortized on a straight-line basis over the
three-year term of the related agreement (see Note 6).
F-75
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
September 12,
1993 1994 1995
------- -------- -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment $277,147 $ 319,424 $ 390,060
Leasehold improvements -- 11,502 13,923
-------- --------- ---------
277,147 330,926 403,983
Less: Accumulated depreciation (93,593) (162,449) (210,221)
-------- --------- ---------
$183,554 $ 168,477 $ 193,762
======== ========= =========
</TABLE>
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------
September 12,
1993 1994 1995
------- ------- -------------
<S> <C> <C> <C>
Accounts payable $249,587 $341,484 $ 380,000
Accrued hospital fees 400,719 315,630 279,705
Accrued salaries and benefits -- -- 408,475
-------- -------- ----------
$650,306 $657,114 $1,068,180
======== ======== ==========
</TABLE>
4. SHORT-TERM DEBT
Short-term debt consists of a note payable which bears interest at prime
plus 1%. This note was repaid in 1994.
5. DUE TO STOCKHOLDERS
Due to stockholders consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
September 12,
1993 1994 1995
--------- ------- -------------
<S> <C> <C> <C>
Amounts payable under employment agreements $ 365,391 $532,524 $477,202
Noninterest-bearing advances 185,292 165,292 165,293
Distributions payable 552,375 202,443 --
---------- -------- --------
$1,103,058 $900,259 $642,495
========== ======== ========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of a note payable for the Company's covenant
not-to-compete, which bears interest at 7% and is payable in monthly
installments of $27,778, through December 30, 1996. Future maturities are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
----------------------------- ---------
<S> <C>
1995 $299,390
1996 321,034
--------
$620,424
========
</TABLE>
F-76
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. COMMITMENTS AND CONTINGENCIES:
a. Employment Agreements
The Company has employment agreements with certain physicians and/or
stockholders. Future minimum payments under such agreements are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
- ----------------------- -----------
<S> <C>
1995 $1,316,417
1996 734,083
1997 425,000
1998 175,000
1999 175,000
----------
$2,825,500
==========
</TABLE>
b. Insurance
The physicians employed by the Company are required to maintain insurance
coverage for their professional malpractice claims as a condition of
employment. Such insurance provides for coverage to the extent individual
claims do not exceed $1,000,000 per incident and $3,000,000 in the aggregate
per year. Upon termination of employment, each physician is required to
purchase insurance coverage for the remaining outstanding exposure related to
incidents which may be incurred, but reported subsequent to the termination
of their employment. Accordingly, the Company does not provide reserves for
such claims.
c. Operating Leases
The Company leases equipment and office space under operating leases which
expire through 1997. Future annual minimum payments under operating leases
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Amount
- ----------------------- ---------
<S> <C>
1995 $244,655
1996 213,769
1997 138,568
--------
$596,992
========
</TABLE>
Rent expense of approximately $2,213, $205,000, $286,000 and $213,000 was
incurred in 1992, 1993, 1994 and 1995, respectively.
d. Legal Matters
An employee of the Company has filed a claim with the Equal Employment
Opportunity Commission. The Company denies liability and is defending the
claim vigorously. The Company and legal counsel are unable to estimate the
amount of any potential loss as a result of this claim, but believes the
loss, if any, would not materially affect the operations of the Company.
F-77
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Osler Medical, Inc.:
We have audited the accompanying balance sheet of Osler Medical, Inc. (a
Florida corporation) as of September 14, 1995, and the related statements of
operations and retained earnings and cash flows for the period from January
1, 1995 through September 14, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Osler Medical, Inc. as of
September 14, 1995, and the results of its operations and its cash flows for
the period from January 1, 1995 through September 14, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 26, 1995.
F-78
<PAGE>
OSLER MEDICAL, INC.
BALANCE SHEET
SEPTEMBER 14, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 355,728
Accounts receivable, net of allowances of $505,031 1,515,264
Prepaid expenses 34,736
----------
Total current assets 1,905,728
PROPERTY AND EQUIPMENT, net 1,179,409
OTHER ASSETS 15,621
---------
Total assets $3,100,758
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 814,413
Deferred income taxes 294,500
Current portion of long-term debt 354,297
Due to stockholder 34,175
----------
Total current liabilities 1,497,385
LONG-TERM DEBT, net of current portion 1,316,221
----------
Total liabilities 2,813,606
----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 20,000 shares authorized, no shares issued and
outstanding --
Common stock, Class A, $.01 par value, 20,000 shares authorized, 11,000 shares
issued and outstanding 110
Common stock, Class B, $.01 par value, 20,000 shares authorized, 1,000 shares
issued and outstanding 10
Retained earnings 287,032
----------
Total stockholders' equity 287,152
----------
Total liabilities and stockholders' equity $3,100,758
==========
</TABLE>
The accompanying notes to financial statements are an integral
part of this balance sheet.
F-79
<PAGE>
OSLER MEDICAL, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 14, 1995
<TABLE>
<CAPTION>
<S> <C>
NET PATIENT REVENUE $9,031,159
----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 5,171,905
Medical supplies 473,530
Rent expense 610,023
Malpractice insurance 514,147
Depreciation expense 226,142
Provision for bad debts 63,634
Other operating expenses 1,084,642
----------
Total operating costs and expenses 8,144,023
----------
Operating income 887,136
INTEREST EXPENSE 78,919
----------
Income before provision for income taxes 808,217
PROVISION FOR INCOME TAXES (315,000)
----------
Net income 493,217
ACCUMULATED DEFICIT, beginning of period (206,185)
----------
RETAINED EARNINGS, end of period $ 287,032
==========
</TABLE>
The accompanying notes to financial statements are an integral
part of this statement.
F-80
<PAGE>
OSLER MEDICAL, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 14, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 493,217
-----------
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation 226,142
Provision for bad debts 63,634
Provision for deferred income taxes 294,500
Changes in assets and liabilities:
Accounts receivable (213,343)
Prepaid expenses (34,736)
Other assets 28,300
Accounts payable and accrued expenses 539,300
-----------
Total adjustments 903,797
-----------
Net cash provided by operating activities 1,397,014
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (203,659)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 2,181,080
Payments on long-term debt (1,669,530)
Due to stockholders (1,626,086)
-----------
Net cash used in financing activities (1,114,536)
-----------
Net increase in cash and cash equivalents 78,819
CASH AND CASH EQUIVALENTS, beginning of period 276,909
-----------
CASH AND CASH EQUIVALENTS, end of period $ 355,728
===========
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-81
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 14, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business
Osler Medical, Inc. (the "Company") is a Florida corporation. Prior to
April 1, 1995, the Company operated as a partnership. The partnership was
originally organized in September 1985. The Company provides multi- specialty
medical services and has a December 31 year-end.
On September 15, 1995, the Company sold various assets to Continuum Care
Corporation, an unaffiliated entity, for approximately $3,600,000.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Approximately $185,000 was in excess of Federally insured limits
at September 14, 1995.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using accelerated methods over the
estimated useful lives of the assets ranging from 5 to 7 years. Leasehold
improvements are amortized over their estimated lives of 31.5 years using the
straight-line method.
d. Accounts Receivable and Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third-party payors such as insurance companies (27%), patients
(13%) and government-sponsored health care programs (60%). These receivables
are presented net of an estimated allowance for contractual adjustments and
uncollectible receivables. Contractual adjustments result from the difference
between the rates for services performed and reimbursement amounts from the
government-sponsored health care programs and insurance companies for such
services.
e. Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires that deferred income taxes be recognized for
the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting basis at rates based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
f. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, prepaid expenses, other assets and accounts payable and accrued
expenses are reflected in the accompanying financial statements at cost which
approximates fair value.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 14, 1995:
<TABLE>
<CAPTION>
<S> <C>
Furniture, fixtures and equipment $ 2,347,283
Leasehold improvements 531,320
-----------
2,878,603
Less: Accumulated depreciation (1,699,194)
-----------
$ 1,179,409
===========
</TABLE>
F-82
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
September 14, 1995:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable $176,006
Accrued self-insurance (Note 7) 362,420
Income taxes payable 20,500
Accrued salaries and benefits 255,487
--------
$814,413
========
</TABLE>
4. DUE TO STOCKHOLDER
Due to stockholder represents a note bearing interest at 10.5%, payable in
monthly installments of approximately $7,700 through January 1996.
5. LONG-TERM DEBT
Long-term debt consists of the following at September 14, 1995:
<TABLE>
<CAPTION>
<S> <C>
Note payable in monthly installments of $14,206 through February 1999, bearing
interest at 7.5% and secured by various assets of the Company $ 504,995
Note payable in monthly installments of $20,608 through August 2000, bearing
interest at 8.75% and secured by various assets of the Company 985,275
Capital lease payable in monthly installments of $2,778 through 2000 bearing
interest
at 4% 150,878
Capital lease payable in monthly installments of $525 through 1999, bearing
interest
at 8% 23,570
Capital lease payable in monthly installments of $494 through 1997, bearing
interest at 8% 5,800
----------
$1,670,518
==========
</TABLE>
Future maturities for the twelve months ending September 14 are as
follows:
<TABLE>
<CAPTION>
Capital
Notes Leases
Payable Payable Total
------------ ----------- -----------
<S> <C> <C> <C>
1996 $ 293,363 $ 64,982 $ 358,345
1997 327,600 41,880 369,480
1998 355,488 39,636 395,124
1999 282,661 39,636 322,297
2000 231,158 13,885 245,043
---------- -------- ----------
1,490,270 200,019 1,690,289
Less: Amount representing interest -- (19,771) (19,771)
---------- -------- ----------
$1,490,270 $180,248 $1,670,518
========== ========
Less: Current portion (354,297)
----------
$1,316,221
==========
</TABLE>
F-83
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. INCOME TAXES
The provision for income taxes reflects an estimate of taxes from the date
the Company elected C-Corporation status, April 1, 1995, to September 14,
1995, and consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Current $ 20,500
Deferred 294,500
--------
$315,000
========
Federal 283,000
State 32,000
--------
$315,000
========
</TABLE>
A reconciliation of the tax provision at the statutory rate of 34% to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
<S> <C>
Tax provision at the statutory rate $ 283,000
State income taxes 32,000
---------
$ 315,000
=========
Deferred income taxes consist of the following:
Book/tax differences in recording accounts receivable $ 591,000
Book/tax differences in recording prepaid expenses 13,500
Book/tax differences in recording accounts payable and
accrued expenses (310,000)
---------
$ 294,500
=========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
a. Service Agreements
The Company has service agreements with terms in excess of one year.
Future payments under these agreements are as follows:
<TABLE>
<CAPTION>
Twelve Months
Ending September 14 Total
- -------------------- ----------
<S> <C>
1996 $ 200,197
1997 206,709
1998 212,437
1999 160,073
2000 115,111
Thereafter 140,017
----------
$1,034,544
==========
</TABLE>
b. Operating Leases
The Company leases equipment and office space under operating leases which
expire through 2001. All of these leases of office space are with a
partnership owned by stockholders of the Company. Future annual minimum
payments under operating leases are as follows:
F-84
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Twelve Months Related Unaffiliated
Ending September 14 Party Parties Total
---------------------- ------------ ---------- ----------
<S> <C> <C> <C>
1996 $ 698,434 $136,743 $ 835,177
1997 709,489 174,762 884,251
1998 747,616 138,153 885,769
1999 795,565 105,537 901,102
2000 995,538 40,750 1,036,288
Thereafter 320,819 -- 320,819
---------- -------- ----------
$4,267,461 $595,945 $4,863,406
========== ======== ==========
</TABLE>
Rent expense of approximately $610,000 was incurred for the period from
January 1, 1995 through September 14, 1995. All of this expense was
associated with the related party.
c. Malpractice Insurance
The physicians employed by the Company have insurance coverage for their
professional malpractice claims which is paid for them by the Company. Such
insurance provides for coverage to the extent individual claims do not exceed
$250,000--$2,000,000 per incident and $750,000--$4,000,000 in the aggregate
per year, depending on the physician's coverage.
Upon termination of employment, physicians are not required to purchase
insurance coverage for the remaining outstanding exposure related to
incidents which may be incurred, but reported subsequent to the termination
of their employment. Accordingly, the Company has reserved $362,420 to
provide for this self-insured exposure.
8. BENEFIT PLAN
The Company provides a defined contribution plan under Section 401(k) of
the Internal Revenue Code to substantially all of its employees. Employer
contributions are discretionary and no such contributions were made to the
plan for the period from January 1, 1995 through September 14, 1995.
9. RELATED PARTY
The Company has contracted to provide report reading services to an entity
owned by a stockholder of the Company. The Company received $14,500 for these
services for the period from January 1, 1995 through September 14, 1995.
F-85
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Directors and Stockholders
of Continuum Care Corporation:
We have audited the accompanying balance sheets of Osler Medical (a
Partnership) as of December 31, 1994 and 1993, and the related statements of
income and partners' capital, and cash flows for the years then ended. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Osler Medical as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Hoyman, Dobson & Company, P.A.
July 27, 1995
F-86
<PAGE>
OSLER MEDICAL
BALANCE SHEETS
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
--------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 276,909 $ 615,221
Accounts receivable, net of allowance for doubtful accounts of
$469,693 in 1994 and $387,749 in 1993 1,361,555 1,186,418
Loans receivable, related parties 4,000 --
---------- ----------
Total current assets 1,642,464 1,801,639
---------- ----------
Property and equipment, at cost less accumulated depreciation
of $1,473,033 in 1994 and $1,275,019 in 1993 1,201,892 783,094
Deposits 43,921 7,520
---------- ----------
Total assets $2,888,277 $2,592,253
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Line of credit $ 569,801 $ 294,218
Accounts payable and accrued expenses 264,413 622,910
Refunds payable 10,700 4,400
Current portion of obligation under capital lease 5,187 4,710
Current portion of long-term debt 205,125 158,382
Distributions payable to partners 1,565,570 1,525,640
---------- ----------
Total current liabilities 2,620,796 2,610,260
---------- ----------
Long-term liabilities and Obligation under Capital Lease 4,727 9,914
Long-term debt, less current portion 468,939 94,691
---------- ----------
Total long-term liabilities 473,666 104,605
---------- ----------
Total Liabilities 3,094,462 2,714,865
Partners' capital (206,185) (122,612)
---------- ----------
Total liabilities and partners' capital $2,888,277 $2,592,253
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-87
<PAGE>
OSLER MEDICAL
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---------- ------------
<S> <C> <C>
Revenue:
Gross patient revenue $12,246,700 $10,685,039
Patient write-offs and refunds (3,255,819) (2,740,428)
----------- -----------
Net patient revenue 8,990,881 7,944,611
Salaries, wages and benefits 2,994,383 1,804,151
Professional fees 89,724 63,821
Supplies 701,752 490,088
Utilities 54,952 43,587
Depreciation and amortization. 264,190 156,280
Rent 722,676 696,973
Other 867,527 1,388,282
----------- -----------
Total Operation Expenses 5,695,204 4,643,182
----------- -----------
Operating income 3,295,677 3,301,429
Other income (expense):
Miscellaneous income 1,489 2,967
Interest expense (93,543) (38,776)
Gain (loss) on disposal of assets (3,773) 300
----------- -----------
Net other income (expense) (95,827) (35,509)
----------- -----------
Net Income 3,199,850 3,265,920
Partners' capital--beginning of
year (122,612) (99,310)
Contributed capital -- 300,000
Distributions to the partners (3,283,423) (3,589,222)
----------- -----------
Partners' capital--end of year $ (206,185) $ (122,612)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-88
<PAGE>
OSLER MEDICAL
STATEMENTS OF CASH FLOWS
Years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from patients $ 8,822,044 $ 7,779,722
Cash paid to suppliers and employees (5,794,423) (4,195,094)
Interest paid (93,543) (38,776)
----------- -----------
Net cash provided by operating activities 2,934,078 3,545,852
----------- -----------
Cash flows from investing activities:
Capital acquisitions (686,751) (517,209)
Collection of related party loans -- 2,888
Related party loans extended (4,000) --
Deposit paid for capital acquisition (30,000) --
Proceeds from sale of capital assets -- 10,710
----------- -----------
Net cash used by investing activities (720,751) (503,611)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt 700,000 80,000
Net borrowings under line of credit 275,583 59,354
Repayment of long-term debt (279,009) (84,673)
Distributions paid to partners (3,243,503) (3,422,627)
Partners' buy-in -- 300,000
Payments on capital lease obligation (4,710) (4,277)
----------- -----------
Net cash used by financing activities (2,551,639) (3,072,223)
----------- -----------
Net decrease in cash and cash equivalents (338,312) (29,982)
Cash and cash equivalents, January 1 615,221 645,203
----------- -----------
Cash and cash equivalents, December 31 $ 276,909 $ 615,221
=========== ===========
Reconciliation of net income to net cash provided by
operating activities:
Net income $ 3,199,850 $ 3,265,920
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 264,190 117,505
Loss (gain) on disposal of assets 3,773 (300)
Increase in accounts receivable (175,137) (163,109)
Increase in deposits (6,401) --
Increase (decrease) in accounts payable and accrued
expenses (358,497) 327,576
Increase (decrease) in refunds payable 6,300 (1,740)
----------- -----------
Total adjustments (265,772) 279,932
----------- -----------
Net cash provided by operating activities $ 2,934,078 $ 3,545,852
=========== ===========
Supplemental schedule of noncash investing and financing
activities:
Increase in distributions to partners incurred from cash to
accrual conversion $ (127,854) $ (170,818)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-89
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. Osler Medical, organized in September 1985 as a partnership, is a
multi-specialty medical group which utilizes the latest in diagnostic equipment.
Approximately fifty-seven percent of the Partnership's patients are Medicare,
Medicaid or Workers' Compensation recipients.
Basis of Accounting. The Partnership presents its financial statements on
the accrual basis of accounting. Revenues are recognized when they are earned
and expenses are recognized when they are incurred.
Cash Equivalents. For purposes of the statement of cash flows, the
Partnership considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Depreciation Method. The cost of property and equipment is depreciated over
the estimated useful lives of the related assets. Leasehold improvements are
depreciated over the lesser of the term of the related lease or the estimated
useful lives of the assets. Depreciation is computed on the accelerated cost
recovery system and the modified accelerated cost recovery system as
appropriate.
Income Taxes. Osler Medical is not a taxpaying entity for federal income
tax purposes, and thus no income tax expense has been recorded in the
statements. Income from the partnership is taxed to the partners through their
individual returns.
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 1994
and 1993:
1994
<TABLE>
<CAPTION>
Accumulated Net Book Useful
Cost Depreciation Value Lives
--------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Automobiles $ 11,347 $ 8,079 $ 3,268 5 years
Computer equipment 175,437 55,638 119,799 5 years
Laboratory equipment 2,102 922 1,180 5-7 years
Office equipment 402,848 306,782 96,066 5-7 years
Medical equipment 589,460 511,757 77,703 5-7 years
Diagnostic equipment 945,701 535,691 410,010 5-7 years
Leasehold improvements 523,951 37,608 486,343 5-39 years
Property held under capital lease 24,079 16,556 7,523 5 years
---------- ---------- ----------
Total $2,674,925 $1,473,033 $1,201,892
========== ========== ==========
</TABLE>
F-90
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
1993
<TABLE>
<CAPTION>
Accumulated Net Book Useful
Cost Depreciation Value Lives
--------- ------------ ------- --------------
<S> <C> <C> <C> <C>
Automobiles $ 11,347 $ 5,900 $ 5,447 5 years
Computer equipment 43,732 23,647 20,085 5 years
Laboratory equipment 20,131 18,308 1,823 5-7 years
Office equipment 347,626 262,779 84,847 5-7 years
Medical equipment 544,015 499,136 44,879 5-7 years
Diagnostic equipment 848,087 429,902 418,185 5-7 years
Leasehold improvements 219,096 21,798 197,298 5-39 years
Property held under capital lease 24,079 13,549 10,530 5 years
---------- ---------- -------- ----------
Total $2,058,113 $1,275,019 $783,094
========== ========== ========
</TABLE>
Depreciation expense charged to operations in 1994 and 1993 was $264,190
and $117,505, respectively.
The property held under capital lease is diagnostic equipment.
3. LINE OF CREDIT
At December 31, 1994, Osler had three lines of credit available with a
bank totaling $800,000. As of December 31, 1994 there were outstanding draws
against the lines of $569,801, $369,801 of this amount is due on demand and
$200,000 is due March 31, 1995. Interest is payable monthly on all three
lines of credit at the bank prime rate (8.5% at December 31, 1994) plus 2.0%.
The lines of credit are collateralized by all accounts receivable, machinery,
furniture, fixtures, equipment and leasehold improvements of Osler Medical.
The partners of Osler Medical have personally guaranteed the debts.
Osler Medical had a $300,000 line of credit with a bank at December 31,
1993. As of December 31, 1993 there were outstanding draws against the line
of $294,218 which were due March 31, 1994. Interest is payable monthly at the
bank prime rate (6.0% at December 31, 1994). The line of credit is
collateralized by all accounts receivable, machinery, furniture, fixtures,
equipment and leasehold improvements of Osler Medical. The partners of Osler
Medical have personally guaranteed the debt.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of accounts payable and accrued expenses at
December 31, 1994 and 1993:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Accounts payable $137,476 $448,619
Accrued wages 44,191 56,007
Contract labor 17,942 91,059
Accrued vacation 29,690 --
Other accrued liabilities 35,114 27,225
-------- --------
$264,413 $622,910
======== ========
</TABLE>
Employees of Osler Medical are entitled to paid personal leave days,
depending on job classifications, length of service and other factors. Until
December 31, 1994, the Company did not have an accounting software system
which tracked accrued personal days. It is, therefore, impracticable for
Osler Medical to estimate the amount of the liability at December 31, 1993,
and accordingly, no liability has been recorded. The amount of compensated
absences at December 31, 1994 can be reasonably determined and the liability
has been recorded in accounts payable and accrued expenses in the
accompanying financial statement.
F-91
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. LONG TERM DEBT
Long term debt outstanding as of December 31, 1994 and 1993 consists of
the following:
<TABLE>
<CAPTION>
1994 1993
-------- ----------
<S> <C> <C>
Note payable to bank in monthly installments of $14,026 including
interest at 7.5%, beginning February 1994; secured by machinery,
furniture and equipment $ 579,373 $ --
Note payable to bank; principal and interest due in full on January
8, 1994; interest accrues at .5% over the bank prime rate (6.0% at
December 31, 1993); secured by machinery, furniture and equipment -- 80,000
Note payable to P.A. of partner in monthly installments of $7,738,
including interest at 8.75%, beginning February 1991,
uncollateralized 94,691 173,073
--------- ---------
Total 674,064 253,073
Less current portion (205,125) (158,382)
--------- ---------
Total long-term debt $ 468,939 $ 94,691
========= =========
</TABLE>
Following are maturities of long-term debt for each of the next five
years:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ ---------
<S> <C>
1995 $205,125
1996 146,089
1997 149,163
1998 160,743
1999 12,944
--------
$674,064
========
</TABLE>
Total interest expense for the year ended December 31, 1994 and 1993 was
$93,543 and $38,776, respectively.
6. OPERATING LEASE
Osler Medical is the lessee of office space and equipment under various
leases expiring in various years through 2002. Some of the leases are with
related parties, see Note 11.
Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------- ----------
<S> <C>
1995 $ 843,814
1996 870,673
1997 885,561
1998 887,655
1999 904,252
Subsequent to 1999 1,087,255
----------
Total minimum future rental payments $5,479,210
==========
</TABLE>
Osler Medical has several leases for office space and equipment with a
partnership of two of the partners of Osler Medical. These leases have
scheduled rent increases calculated as follows: the base rent is increased
annually
F-92
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
from the previous years rent by the greater of six percent or any increase in
the consumer price index (CPI). However, that percent is never to exceed
twelve percent or be greater than two percent above the published CPI.
Rent expense paid for operating leases for the year ended December 31,
1994 and 1993 was $771,173 and $731,278, respectively.
7. CAPITAL LEASE
Osler Medical is the lessee of diagnostic equipment under a capital lease
expiring in 1996. The asset and liability under this capital lease are
recorded at the lower of the present value of the minimum leases payments or
the fair market value of the asset. The asset is depreciated over the lesser
of the lease term or its estimated productive life. Depreciation of this
asset is included in depreciation expense for 1994 and 1993.
Minimum future lease payments under the capital lease as of December 31,
1994 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------- -------
<S> <C>
1995 $ 5,920
1996 4,940
-------
Total minimum lease payments 10,860
Less: amount representing interest 946
-------
Present value of net minimum lease payments. $ 9,914
=======
</TABLE>
Total interest expense on this capital lease was $1,210 and $1,643 for the
years ended December 31, 1994 and 1993, respectively.
8. MAINTENANCE AND SERVICE AGREEMENTS
The Partnership has entered into several equipment maintenance agreements
and one service agreement with a related party having various expiration
dates through the year 2000.
Minimum future payments under maintenance and service agreements having
remaining terms in excess of one year as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------- ----------
<S> <C>
1995 $ 222,687
1996 204,035
1997 207,810
1998 214,342
1999 137,728
Subsequent to 1999 214,957
----------
Total minimum future rental payments $1,201,559
==========
</TABLE>
Maintenance and service costs charged to operations under these agreements
for the years ended December 31, 1994 and 1993 were $125,322 and $117,209,
respectively.
9. EMPLOYEE RETIREMENT PLAN
The Partnership sponsors a profit-sharing plan which allows substantially
all full-time employees to defer compensation under Section 401 (k) of the
Internal Revenue Code and the employer to electively contribute to the plan.
Employer contributions to the plan are made at the discretion of the Board of
Directors.
There were no employer contributions made to the plan for the years ended
December 31, 1994 and 1993.
F-93
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES
The partnership is not subject to income tax. Income is taxed directly to
its partners. The partnership reported income of approximately $3,083,700 and
$3,100,500 for income tax purposes, for the years ended December 31, 1994 and
December 31, 1993, respectively. The difference between taxable income and
the income reflected in the financial statements results primarily from
timing differences in reporting revenues and expenses for financial and tax
purposes. Such timing differences result from the use of the accrual basis
method of accounting for financial reporting and cash basis method for tax
reporting.
11. RELATED PARTY TRANSACTIONS
Osler Medical has several operating leases with a partnership of two of
the partners in Osler. The leases are for office space and equipment. The
leases for office space are for ten years beginning on dates from January
1990, to December 1990. Rental expense for the office space was $658,475 and
$636,407 for the years ended December 31, 1994 and 1993, respectively. Future
minimum lease payments under these leases are included in Note 6. The
equipment lease with the partnership ended in April 1993. At the end of the
lease, the lessor offered and Osler chose to exercise an option to purchase
the leased equipment for $1. This bargain purchase was not part of the
original operating lease agreement. Rental expense under this lease for the
year ended December 31, 1993 was $56,000.
Osler Medical also entered into a management agreement with the
partnership described above. The management agreement is for a term of ten
years beginning on December 1990. Management expense under this agreement was
$64,201 and $60,566 for the years ended December 31, 1994 and 1993,
respectively. Minimum future payments under this agreement are included in
Note 8.
Osler Medical has a note payable to a P.A. owned by one of the partners of
Osler Medical. The outstanding balance on this note at December 31, 1994 and
1993 was $94,691 and $173,073, respectively. See Note 5 for the terms of the
note.
Osler Medical has contracted to provide report reading services to a
Company owned by one of the partners of Osler Medical. The Company paid Osler
$33,946 and $61,986 for reading services for the years ended December 31,
1994 and December 31, 1993, respectively.
12. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Partnership to
concentrations of credit risk consist primarily of temporary cash
investments. The Partnership places its temporary cash investments with a
financial institution. The amount of credit exposure in excess of
federally-insured limits at December 31, 1994 and December 31, 1993 was
$260,596 and $163,397, respectively.
13. COMMITMENTS AND CONTINGENCIES
A. Self Insurance
The Partnership has an agreement whereby it is self insuring the health
care of its employees and covered dependents up to $10,000 per year per
employee and covered dependents. Health care expenses of covered individuals
in excess of $10,000 per year are paid out of insurance purchased by the
Partnership. Administration of the self insurance is handled by an insurance
company. Funds advanced for claims are recorded as current assets and charged
to expenses as claims are paid. The annual aggregate stop loss under this
insurance plan was approximately $293,000 and $138,000 for the years ended
December 31, 1994 and 1993, respectively. The annual aggregate liability
calculated by the insurance company for the insurance coverage for years
ended December 31, 1994 and 1993 was $148,950 and $137,976, respectively. The
total amount of claims and premiums paid by the Partnership under this policy
for the years ended December 31, 1994 and 1993 were $207,337 and $189,122,
respectively. The Partnership has accrued $35,114 and $27,225 at December 31,
1994 and 1993 for claims incurred but not reported.
F-94
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
B. Professional Employment Agreement
Osler Medical entered into an employment agreement with a physician on
July 14, 1994. Under this agreement, the partnership will pay the physician
$10,000 as an incentive to exercise a partnership purchase option. If the
option is not exercised the incentive money must be repaid to Osler Medical.
In addition, the agreement guarantees the physician a monthly gross salary of
$10,000 for the first six months of employment. Starting the seventh month of
employment, the physician will be paid based upon a compensation formula in
the agreement. The agreement ends July 9, 1997 unless terminated prior to
that date with 120 days written notice and mutual agreement of the parties.
14. SUBSEQUENT EVENTS
A. Line of Credit
The Partnership entered into a line of credit for $198,603 in April 1995.
The funds were borrowed to pay off an existing line of credit due on May 31,
1995. This line of credit is due June 30, 1995. Interest is payable monthly
at the bank prime rate plus 2.0%. The line is secured by all accounts
receivable, machinery, equipment, furniture, fixtures and leasehold
improvements of Osler Medical and is cross-collateralized. The line is
personally guaranteed by the partners of Osler Medical.
The Partnership entered into a line of credit on June 21, 1995 for
$500,000. The amount paid off an existing $300,000 line of credit. The line
is due on demand. Interest is payable monthly at the bank prime rate plus
2.0%. The line is secured by all accounts receivable, machinery, equipment,
furniture, fixtures and leasehold improvements of Osler Medical and is
cross-collateralized. The line is personally guaranteed by the partners of
Osler Medical.
On July 12, 1995, the Partnership consolidated its three existing lines of
credit ($300,000, $198,603 and $500,000) into a note of $998,603. The note is
payable in monthly installments of $20,608, including interest at 8.75% per
annum, beginning August 17, 1995. The note is collateralized by all accounts
receivable, machinery, equipment, furniture, fixtures, and leasehold
improvements of Osler Medical and is cross-collateralized. The note is
personally guaranteed by the partners of Osler Medical. The following
maturities of this note payable are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ --------
<S> <C>
1995 $ 83,217
1996 199,721
1997 199,721
1998 199,721
1999 116,502
--------
Subsequent to 1999 $998,603
========
</TABLE>
B. Capital Lease
The Partnership signed a five year capital lease agreement on March 17,
1995. The lease is for diagnostic equipment valued at $150,878. The following
is the minimum future lease payments for this capital lease are as follows:
F-95
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------- --------
<S> <C>
1995 $ 24,999
1996 33,332
1997 33,332
1998 33,332
1999 33,332
Subsequent to 1999 8,333
--------
Total minimum lease payments 166,659
Less: amount representing interest 15,781
--------
Present value of minimum lease payments $150,878
========
</TABLE>
C. Change in Tax Status
Effective January 1, 1995, Osler Medical changed its tax status from a
partnership to a C-Corporation.
D. Sale of the Partnership
Osler Medical is in the process of negotiating an agreement to sell all of
the assets, properties and businesses used in the practice and owned by the
Partnership to an unrelated party for approximately $3,600,000. The assets
which are not included in the sale are goodwill, patient lists and medical
records, cash or cash equivalents on hand and on deposit in banks and the
personal assets of the physicians.
F-96
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
BALANCE SHEET
As of April 14, 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash $ 276,651
Accounts receivable 1,242,634
Inventory 113,723
Prepaid expenses 14,201
----------
Total current assets 1,647,209
Net property and equipment 438,863
Other assets
Deferred taxes 58,123
Investment in subsidiary 27,477
----------
Total other assets 85,600
Total assets $2,171,672
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 12,282
Accrued expenses and other liabilities 61,636
Note payable--line of credit --
Note payable--stockholders 440,300
Current portion of long term debt 155,992
Deferred income taxes 183,793
----------
Total current liabilities 854,003
Long term debt less current portion 219,899
----------
Total liabilities 1,073,902
Stockholders' equity
Common stock--Class A $.05 par value, 4,800 shares authorized; 4,601 shares
issued 230
Common stock--Class B $.05 par value, 5,200 shares authorized, 1,600 shares
issued 80
Additional paid in capital 61,815
Retained earnings 1,035,645
----------
Total stockholders' equity 1,097,770
Total liabilities and stockholders' equity $2,171,672
==========
</TABLE>
F-97
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
For the period January 1, 1995--April 14, 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
Revenue
Drug sales, net $1,418,839
Less cost of sales 503,994
----------
Gross profit from drug sales 914,845
Patient revenues, net 1,159,674
----------
Gross profit from drug sales and patient revenues 2,074,519
Other revenues 25,570
----------
Total revenues 2,100,089
----------
Operating expenses
Physician compensation 597,044
Clinic salaries, wages and benefits 484,134
Clinic rents 72,897
Clinic supplies 84,166
Other clinic costs 194,064
Depreciation 19,529
Interest 9,732
----------
Total operating expenses 1,461,566
----------
Net income before income taxes 638,523
Income taxes 20,902
-----------
Net income 617,621
Retained earnings, beginning 418,024
----------
Retained earnings, ending $1,035,645
==========
</TABLE>
F-98
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
STATEMENT OF CASH FLOWS
For the period January 1, 1995--April 14, 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net income $ 617,621
Adjustments to reconcile net income to net cash (used) in operating
activities
Depreciation 19,529
Equity in income of subsidiary 105
Changes in operating assets and liabilities
Accounts receivable 9,831
Inventory 49,907
Prepaid expenses 12,312
Accounts payable (131,148)
Accrued expenses and other liabilities (957,590)
---------
Net cash (used) in operating activities (379,433)
---------
Cash flows from investing activities
Purchase of property and equipment (209)
---------
Net cash used by investing activities (209)
---------
Cash flows from financing activities
Payment of notes payable--line of credit (237,000)
Payments of long-term debt (41,563)
Proceeds from notes payable--stockholders. 199,500
---------
Net cash (used) by financing activities (79,063)
---------
Net decrease in cash (458,705)
Cash, beginning of year 735,356
---------
Cash, end of year $ 276,651
=========
Supplemental disclosures:
Cash paid during the year for interest $ 9,732
=========
Cash paid during the year for income taxes $ 20,902
=========
</TABLE>
F-99
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Georgia Oncology-Hematology Clinic, P.C.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Georgia
Oncology-Hematology Clinic, P.C. and Subsidiary as of December 31, 1994 and
the related consolidated statements of operations and retained earnings, and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Georgia
Oncology-Hematology Clinic, P.C. and Subsidiary as of December 31, 1994, and
the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
BABUSH, NEIMAN, KORNMAN & JOHNSON
June 26, 1995
F-100
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 747,970
Accounts receivable, less allowance for doubtful accounts of $339,006 1,297,413
Inventory 163,630
Prepaid expenses 26,709
----------
Total current assets 2,235,722
Net property and equipment 458,183
----------
Other assets
Deferred taxes 58,123
----------
Total assets $2,752,028
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 173,606
Accrued expenses and other liabilities 1,019,226
Note payable--line of credit 237,000
Note payable--stockholders 240,800
Current portion of long-term debt 155,255
Deferred income taxes 183,793
----------
Total current liabilities 2,009,680
Long-term debt, less current portion 262,199
----------
Total liabilities 2,271,879
----------
Stockholders' equity
Common stock--Class A, $.05 par value, 4,800 shares authorized; 4,601 shares
issued 230
Common stock--Class B, $.05 par value, 5,200 shares authorized; 1,600 shares
issued 80
Additional paid-in capital 61,815
Retained earnings 418,024
----------
Total stockholders' equity 480,149
----------
Total liabilities and stockholders' equity $2,752,028
==========
</TABLE>
See notes to consolidated financial statements
F-101
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
Revenues
Drug sales net $4,502,513
Less cost of sales 2,519,182
----------
Gross profit from drug sales 1,983,331
Patient revenues, net 4,099,952
----------
Gross profit from drug sales and patient revenues 6,083,283
Other revenues 13,897
----------
Total revenues 6,097,180
----------
Operating Expenses
Physician compensation 2,659,297
Clinic salaries, wages and benefits 1,671,337
Clinic rents 216,415
Clinic supplies 287,752
Other clinic costs 1,048,524
Depreciation 115,792
Interest 52,984
----------
Total operating expenses 6,052,101
----------
Income before income taxes 45,079
Income taxes 11,393
----------
Net income 33,686
Retained earnings, beginning 387,838
Distributions (3,500)
----------
Retained earnings, ending $ 418,024
==========
</TABLE>
See notes to consolidated financial statements
F-102
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities
Net income $ 33,686
Adjustments to reconcile net income to net cash provided by operating
activities
Loss on disposal of property and equipment 745
Depreciation 115,792
Provision for bad debts 179,424
Deferred income taxes (5,816)
Changes in operating assets and liabilities
Accounts receivable (495,521)
Inventory (85,421)
Prepaid expenses (3,227)
Accounts payable 51,615
Accrued expenses and other liabilities 686,925
---------
Net cash provided by operating activities 478,202
---------
Cash flows from investing activities
Proceeds from disposal of property and equipment 100
Purchase of property and equipment (192,003)
Other assets 6,000
---------
Net cash used by investing activities (185,903)
---------
Cash flows from financing activities
Proceeds from notes payable--line of credit 137,000
Payments of long-term debt (140,999)
Proceeds from long-term debt 170,576
Proceeds from notes payable--stockholders 210,000
Distributions (3,500)
---------
Net cash provided by financing activities 373,077
---------
Net increase in cash 665,376
Cash, beginning of year 82,594
---------
Cash, end of year $ 747,970
=========
Supplemental disclosures
Cash paid during the year for interest $ 52,984
=========
Cash paid during the year for income taxes $ 4,397
=========
Purchase of property and equipment financed by notes payable $ 116,877
=========
</TABLE>
See notes to consolidated financial statements
F-103
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A. Accounting Policies
Description of Business. Georgia Oncology-Hematology Clinic, P.C. (the
"Corporation") was incorporated in 1975 under the laws of Georgia. The
Corporation was formed to operate medical oncology facilities in Atlanta,
Georgia. The Corporation offers a comprehensive range of medical oncology
services at three facilities in the Atlanta area.
Property and Equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is generally calculated over the
estimated useful lives of the assets using accelerated methods. Depreciation of
leasehold improvements is calculated on a straight line basis over the term of
the lease. Routine maintenance and repairs are charged to expenses as incurred,
while costs of betterments and renewals are capitalized.
Income Taxes. The Corporation is taxable under provisions of the Internal
Revenue Code. The Corporation recognizes deferred income tax on all significant
timing differences between financial and income tax reporting (see Note H).
Net Revenues. Net revenues are reported at the estimated realizable amounts
from patients, third-party payors, and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for estimated third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
adjusted in future periods as final settlements are determined. During the year
ended December 31, 1994, approximately 41% of net revenue was received under the
Medicare program and 2% under state reimbursement programs. The Medicare program
and state reimbursement programs pay physician services based on fee schedules
which are determined by the related government agency. The Corporation has
negotiated agreements with managed care organizations to provide physician
services based on fee schedules. No individual managed care organization is
material to the Corporation.
Inventory. Inventory is stated at the lower of first-in first-out, cost or
market.
Principles of Consolidation. The consolidated financial statements include
the accounts of Georgia Oncology- Hematology Clinic, P.C. and its wholly owned
subsidiary, Georgia Oncology-Hematology Services, Inc. All material intercompany
transactions have been eliminated.
B. Net Property and Equipment
Major classifications of property and equipment and their respective
depreciable lives are summarized below:
<TABLE>
<CAPTION>
Depreciable
Lives Total
---------- ----------
<S> <C> <C>
Furniture and equipment 5-7 years $ 693,950
Leasehold improvements 3-13 years 537,894
---------- ----------
1,231,844
Less accumulated depreciation and amortization 773,661
----------
Total $ 458,183
==========
</TABLE>
C. Notes Payable
During 1994, the Corporation obtained a line of credit from a bank in the
amount of $250,000. The line of credit matures on May 31, 1995. Interest is
charged at the prime rate plus 0.5%. The accounts receivable of the
Corporation are pledged as collateral against the line of credit. The amount
outstanding under the line of credit at December 31, 1994 was $237,000 with
available credit of $13,000.
F-104
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
At various times, the Corporation has obtained notes from its
stockholders. The notes are unsecured and are payable on demand. Interest is
charged at the prime rate. Amounts outstanding under the notes at December
31, 1994 were $240,800. All notes from stockholders and related accrued
interest were repaid in May, 1995.
The prime rate at December 31, 1994 was 8.5%.
D. Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, due in monthly installments of $8,253 plus interest at the
prime rate plus 0.5% through November 1997 collateralized by furniture, fixtures
and equipment $ 288,845
Note payable to a bank, due in monthly installments of $1,500 plus interest at 7%
through February 1997, collateralized by computer equipment 38,699
Note payable to a corporation, due in monthly installments of $2,440 including
principal and interest at 7% through March 1997 collateralized by furniture,
fixtures and equipment 60,800
Note payable to a corporation, due in monthly installments of $1,168 including
principal and interest at 7% through March 1997 collateralized by leasehold
improvements 29,110
---------
Total long-term debt 417,454
Less current maturities (155,255)
---------
Long-term debt, less current maturities $ 262,199
=========
</TABLE>
At December 31, 1994 scheduled aggregate long-term debt maturities are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
------------------------ ---------
<S> <C>
1995 $155,255
1996 158,019
1997 104,180
--------
$417,454
========
</TABLE>
E. Operating Leases
Leases that do not meet the criteria for capitalization are classified as
operating leases with related rentals charged to operations as incurred.
Under agreements classified as operating leases, the Company leases
facilities for its three locations and certain equipment. The lease for one
of the locations, with an aggregate monthly expense of $8,287 expires on
January 31, 1996. This lease has been renewed for five years.
The lease for the second location, with an aggregate monthly expense of
$4,700 plus direct costs expires on May 31, 1997. The Company has an option
to renew this lease for five years. The lease for the third location, with an
aggregate monthly expense of $1,608 in 1994, expires on November 30, 1996.
The Company has an option to renew this lease for five years with rent
increasing by 5% each year.
F-105
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
The following is a schedule by year of future minimum lease payments under
operating leases as of December 31, 1994.
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1995 $182,008
1996 181,044
1997 125,214
1998 99,444
1999 99,444
Thereafter 107,731
--------
Total $794,885
========
</TABLE>
Total rent expense for the year ended December 31, 1994 was $216,415.
F. Employee Benefit Plan
The Corporation has a qualified defined contribution 401(k) Profit Sharing
Plan covering substantially all employees. Employee contributions in the form
of pretax salary deferrals are discretionary and are determined based upon a
percentage of each employee's compensation, as defined. Employer
contributions are determined at the discretion of the Company. Contributions
to the plan totalled $176,521 for the year ended December 31, 1994.
G. Contingencies
The Corporation maintains general liability and malpractice insurance
providing the Corporation with coverage of $5 million per incident and $7
million in aggregate. As of December 31, 1994, there were no asserted
malpractice claims against the Corporation; accordingly, no amounts for
potential losses have been accrued in the accompanying financial statements.
In addition, the Corporation has not accrued for a loss of unreported
incidents or for losses in excess of insurance coverage, as the amount, if
any, cannot be reasonably estimated and the profitability of an adverse
outcome cannot be determined at this time. It is the opinion of management
that the ultimate resolution of any unasserted claims will not have a
material adverse effect on the financial position or operating results of the
Corporation.
H. Income Taxes
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Corporation's deferred tax liabilities and assets as of
December 31, 1994 were as follows:
<TABLE>
<CAPTION>
December 31,
1994
--------
<S> <C>
Deferred current tax liabilities:
Cash to accrual adjustments $342,461
Deferred current tax assets:
Cash to accrual adjustments 158,668
--------
Net deferred current tax liabilities $183,793
========
Deferred long-term tax assets:
Depreciable and amortizable assets $ 58,123
========
</TABLE>
F-106
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
The provision for income taxes for the year ended December 31, 1994 is as
follows:
<TABLE>
<CAPTION>
<S> <C>
Current:
Federal $14,520
State 2,689
-------
17,209
-------
Deferred:
Federal (5,468)
State (348)
-------
(5,816)
-------
Net income tax expense $11,393
=======
</TABLE>
I. Related Party Transactions
The Corporation has loans from its stockholders amounting to $240,800 at
December 31, 1994 (see Note C).
J. Subsequent Events
On April 17, 1995, PhyChoice, Inc. acquired the operating assets of the
Corporation. Simultaneous with the acquisition, the Corporation entered into
a 10-year management services agreement with PhyChoice, Inc. The management
services agreement became effective April 17, 1995. The Company has entered
into merger discussions with Cancer Specialists of Georgia, P.C.
K. Deposits in Excess of Federally Insured Limits
The Company has cash deposits with a financial institution which fluctuate
in excess of federally insured limits. If this financial institution were not
to honor its contractual obligation to the Company then the Company could
incur losses. Management is of the opinion that there is no risk because of
the financial strength of the financial institution. At December 31, 1994,
the Company had cash deposits of $1,007,183 with the financial institution
resulting in $907,183 being at risk.
F-107
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED BALANCE SHEET
JULY 25, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 236,422
Accounts receivable, less allowances for adjustments and doubtful accounts 692,839
Prepaid expenses 111,107
----------
Total current assets 1,040,368
----------
PROPERTY AND EQUIPMENT, less accumulated depreciation of $124,952 158,518
----------
PROPERTY UNDER CAPITAL LEASES, less accumulated amortization of $29,578 37,879
----------
OTHER ASSETS
Organization costs, less accumulated amortization of $246 574
Other assets 10,000
----------
Total other assets 10,574
----------
Total assets $1,247,339
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 108,160
Other accrued expenses and liabilities 67,944
Due to related party 6,400
Current portion of obligations under capital leases 7,731
Deferred income taxes--current 142,630
Accrued income taxes 25,000
----------
Total current liabilities 357,865
----------
OTHER LIABILITIES
Obligations under capital leases 36,875
Deferred income taxes 12,870
----------
Total other liabilities 49,745
----------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value; 75 and 600 shares authorized, issued and
outstanding 675
Additional paid-in capital 24,243
Retained earnings 814,811
----------
Total stockholders' equity 839,729
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,247,339
==========
</TABLE>
F-108
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD JANUARY 1, 1995 THROUGH JULY 25, 1995
<TABLE>
<CAPTION>
<S> <C>
REVENUE
Net patient service revenue $2,403,860
Other income 22,969
----------
Total revenue 2,426,829
----------
OPERATING EXPENSES
Cost of affiliated physician services 579,881
Salaries, wages and benefits 537,283
Rents and leases 112,645
Supplies 628,048
Other operating costs 157,567
Depreciation and amortization 24,767
Net interest expense 18,411
----------
Net operating expenses 2,058,602
----------
NET INCOME (LOSS) BEFORE INCOME TAXES 368,227
INCOME TAX
Current 25,000
Deferred 16,730
----------
41,730
----------
NET INCOME 326,497
RETAINED EARNINGS--BEGINNING OF
PERIOD 488,314
----------
RETAINED EARNINGS--END OF PERIOD $ 814,811
==========
</TABLE>
F-109
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1995 THROUGH JULY 25, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 326,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 24,767
Deferred income taxes 16,730
Changes in operating assets and liabilities:
Accounts receivable, net (177,143)
Prepaid expenses (25,164)
Deposits 1,064
Accounts payable 18,475
Other accrued expenses and liabilities (19,495)
Due to related party (1,100)
Accrued income taxes 25,000
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 189,631
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (16,335)
---------
NET CASH (USED) BY INVESTING ACTIVITIES (16,335)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations (7,689)
---------
NET CASH (USED) BY FINANCING ACTIVITIES (7,689)
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 165,607
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD 70,815
---------
CASH AND CASH EQUIVALENTS--END OF PERIOD $ 236,422
=========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 18,411
=========
Purchase of equipment with proceeds of capital lease
obligations $ 19,220
=========
</TABLE>
F-110
<PAGE>
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
Certified Public Accountants
201 West Padonia Road, Suite 600
Timonium, Maryland 21093-2186
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc.
We have audited the accompanying combined balance sheets of
Oncology-Hematology Associates, P.A. and Oncology-Hematology Infusion
Therapy, Inc. (1994 only) as of December 31, 1994 and 1993, and the related
combined statements of operations and retained earnings and cash flows for
the years then ended of Oncology- Hematology Associates, P.A. and for the
period March 7, 1994 (date of inception) through December 31, 1994 of
Oncology-Hematology Infusion Therapy, Inc. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
combined financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of
Oncology-Hematology Associates, P.A. and Oncology-Hematology Infusion
Therapy, Inc. (1994 only) at December 31, 1994 and 1993, and the results of
its operations and its cash flows for the years then ended and from March 7,
1994 (date of inception) through December 31, 1994 of Oncology-Hematology
Infusion Therapy, Inc. in conformity with generally accepted accounting
principles.
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
Timonium, Maryland
August 4, 1995
F-111
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
1994 1995
----------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 70,815 $194,081
Accounts receivable, less allowances for adjustments and
doubtful accounts 515,696 465,201
Prepaid expenses 85,943 76,574
Deposits 1,064 --
-------- --------
Total current assets 673,518 735,856
-------- --------
PROPERTY AND EQUIPMENT, less accumulated depreciation of
$107,911 in 1994 and $87,710 in 1993 159,224 67,930
-------- --------
PROPERTY UNDER CAPITAL LEASES, less accumulated
amortization of $21,948 in 1994 and $13,213 in 1993 26,289 17,942
-------- --------
OTHER ASSETS
Organization costs, less accumulated amortization of $150 670 --
Other assets 10,000 10,000
-------- --------
Total other assets 10,670 10,000
-------- --------
Total Assets $869,701 $831,728
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 89,685 $ 22,169
Other accrued expenses and liabilities 87,439 74,985
Due to related party 7,500 --
Current portion of obligations under capital leases 9,844 6,448
Deferred income taxes--current 125,570 155,700
-------- --------
Total current liabilities 320,038 259,302
-------- --------
OTHER LIABILITIES
Obligations under capital leases 23,231 17,496
Deferred income taxes 13,200 9,600
-------- --------
Total other liabilities 36,431 27,096
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value; 75 (1993 and 1994) and
600 shares (1994 only) authorized, issued and
outstanding 675 75
Additional paid-in capital 24,243 18,843
Retained earnings 488,314 526,512
-------- --------
Total stockholders' equity 513,232 545,330
-------- --------
Total liabilities and stockholders' equity $869,701 $831,728
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-112
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, (ONCOLOGY-HEMATOLOGY
ASSOCIATES, P.A.) FOR THE PERIOD MARCH 7, 1994 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1994 (ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.)
<TABLE>
<CAPTION>
1994 1993
--------- -----------
<S> <C> <C>
REVENUE
Net patient service revenue $3,738,339 $3,397,458
Other income 10,211 44,196
---------- ----------
Total revenue 3,748,550 3,441,654
---------- ----------
OPERATING EXPENSES
Cost of affiliated physician services 1,401,663 1,479,424
Salaries, wages and benefits 864,690 731,714
Rents and leases 157,269 129,663
Supplies 1,038,571 982,007
Other operating costs 206,600 147,010
Depreciation and amortization 29,086 20,487
Net interest expense 19,299 12,028
---------- ----------
Net operating expenses 3,717,178 3,502,333
---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES 31,372 (60,679)
INCOME TAX (BENEFIT) (26,530) (61,316)
NET INCOME 57,902 637
RETAINED EARNINGS AT BEGINNING OF
YEAR 526,412 525,775
DISTRIBUTIONS TO STOCKHOLDERS (96,000) --
---------- ----------
RETAINED EARNINGS AT END OF YEAR $ 488,314 $ 526,412
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-113
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, (ONCOLOGY-HEMATOLOGY
ASSOCIATES, P.A.) FOR THE PERIOD MARCH 7, 1994 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1994 (ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.)
<TABLE>
<CAPTION>
1994 1993
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 57,902 637
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 29,086 20,487
Deferred income taxes (26,530) (61,340)
Changes in operating assets and liabilities:
Accounts receivable, net (50,495) 193,404
Prepaid expenses (9,369) (5,030)
Other assets -- (10,000)
Deposits (1,064) --
Accounts payable 67,516 (9,437)
Other accrued expenses and liabilities 12,454 22,428
Due to related party 7,500 --
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 87,000 151,149
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (111,495) (18,688)
Organizational costs (820) --
--------- --------
NET CASH (USED) BY INVESTING ACTIVITIES (112,315) (18,688)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations (7,951) (3,872)
Issuance of capital stock 600 --
Additional paid in capital 5,400 --
Dividends paid (96,000) --
--------- --------
NET CASH (USED) BY FINANCING ACTIVITIES (97,951) (3,872)
--------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (123,266) 128,589
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR 194,081 65,492
--------- --------
CASH AND CASH EQUIVALENTS--END OF YEAR $ 70,815 $194,081
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 19,299 $ 12,028
========= ========
Cash paid during the year for income taxes $ -- $ 24
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-114
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Oncology-Hematology Associates, P.A. and Oncology-Hematology Infusion
Therapy were incorporated on January 1, 1978 and February 4, 1994,
respectively, under the laws of the State of Maryland. The Companies were
formed to operate oncology and hematology facilities in Clinton and
Greenbelt, Maryland, dedicated to providing comprehensive cancer treatment
and diagnosis.
Basis of Combination
The combined financial statements for the 1994 year include the financial
statements of Oncology-Hematology Associates, P.A. and Oncology-Hematology
Infusion Therapy, Inc. which are related through common ownership and
management. All intercompany transactions and accounts have been eliminated
in combination.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
Property and equipment are carried at cost and are depreciated on the
straight-line method over the following lives:
<TABLE>
<CAPTION>
Life (Years)
-------------
<S> <C>
Leasehold improvements 15
Furniture and fixtures 7
Equipment 7
Data processing equipment 5
</TABLE>
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes relate primarily to the differences between reporting
the financial statements on the accrual basis and the income tax return on
the cash basis. The deferred tax assets and liabilities represent the future
tax return consequences of these differences, which will either be taxable or
deductible when the assets or liabilities are recovered or settled.
The stockholders of Oncology-Hematology Infusion Therapy, Inc. have
consented to the Company's election to come within the provisions of Section
1372(A) of the Internal Revenue Code which provides that income of the
Corporation will be taxed directly to its stockholders; thus no provision for
Federal income taxes has been provided.
Net Revenue
Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to audit and retroactive adjustments.
Provisions for estimated third-party payor settlements and adjustments are
estimated in the period the related services are rendered and adjusted in
future periods as final settlements are determined. The Medicare and Medicaid
programs pay physician services based on fee schedules which are determined
by the related government agency. The Company has negotiated agreements with
managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the
Company.
Cost of Affiliated Physician Services
Cost of affiliated physician services represents salaries, bonuses and
selected benefits paid to the affiliated physicians. Physicians compensation
generally is determined based on the excess of collections over expenses
prior to physician compensation.
F-115
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE B. CASH
Oncology-Hematology Associates P.A. maintains cash balances at a local
bank. Cash accounts at banks are insured by the FDIC for up to $100,000.
Amounts in excess of insured limits were approximately $10,200 at December
31, 1994 and $35,528 at December 31, 1993.
NOTE C. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31,:
<TABLE>
<CAPTION>
1994 1993
-------- ----------
<S> <C> <C>
Accounts Receivable $ 830,179 $ 824,971
Less: Adjustments for third party payor (294,483) (344,770)
Allowance for doubtful accounts (20,000) (15,000)
--------- ---------
Accounts receivable--net $ 515,696 $ 465,201
========= =========
</TABLE>
NOTE D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Leasehold improvements $ 103,009 $ 43,885
Furniture, fixtures and equipment 82,023 51,454
Data processing equipment 82,103 60,301
--------- --------
267,135 155,640
Less: accumulated depreciation (107,911) (87,710)
--------- --------
Property and equipment--net $ 159,224 $ 67,930
========= ========
</TABLE>
The statement of income includes depreciation expense of $20,201 for the
year ended December 31, 1994 and $14,256 for the year ended December 31,
1993.
NOTE E. PROPERTY UNDER CAPITAL LEASES
All property under capital leases have been leased from a partnership
owned exclusively by the Company's shareholders. Property under capital
leases consisted of the following at December 31,:
<TABLE>
<CAPTION>
1994 1993
------- ---------
<S> <C> <C>
Medical equipment $ 29,942 $ 15,510
Computer equipment 18,295 15,645
-------- --------
48,237 31,155
Less: accumulated depreciation (21,948) (13,213)
-------- --------
Property under capital
leases--net $ 26,289 $ 17,942
======== ========
</TABLE>
The statement of income includes depreciation expense of $8,735 for the
year ended December 31, 1994 and $6,231 for the year ended December 31,
1993.
F-116
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE F. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases equipment under capital leases. The leases require
monthly payments which vary from $25 to $1,200 and mature through October
1999. Under the terms of the leases, the Company has a bargain purchase
option at the end of each lease.
Future minimum lease payments under the capital leases at December 31,
1994 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $29,550
1996 21,300
1997 20,300
1998 15,300
1999 and thereafter 3,950
-------
Total minimum lease payments 90,400
Less: amount representing interest 57,325
-------
Value of minimum lease payments 33,075
Current portion of lease obligations 9,844
-------
Long-term portion of lease obligations $23,231
=======
</TABLE>
The statement of income includes interest expense of $19,299 for the year
ended December 31, 1994 and $12,028 for the year ended December 31, 1993.
NOTE G. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting
for income taxes to the liability method required by Financial Accounting
Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets as of December 31, were as follows:
<TABLE>
<CAPTION>
1994 1993
------- --------
<S> <C> <C>
Current deferred tax liabilities:
Cash to accrual adjustments $147,350 $177,200
Current deferred tax assets:
Cash to accrual adjustments (21,780) (21,500)
-------- --------
Net deferred current tax liabilities $125,570 $155,700
======== ========
Long-term deferred tax liabilities:
Cash to accrual adjustments $ 19,400 $ 17,800
Long-term deferred tax assets:
Depreciable and amortizable assets (6,200) (8,200)
-------- --------
Net deferred long-term liabilities $ 13,200 9,600
======== ========
</TABLE>
F-117
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
The provision for income taxes consisted of the following at December 31,:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Current income tax
(benefit)
Federal $ -- $ --
State -- 24
Deferred taxes (26,530) (61,340)
-------- --------
$(26,530) $(61,316)
======== ========
</TABLE>
NOTE H. RELATED PARTY TRANSACTIONS
The Company paid building and equipment rentals of $24,720 in 1993 and
$54,720 in 1994 per lease agreements to a partnership formed 100% by the
Company's shareholders for its Greenbelt office. The Company also paid
rent of $93,530 in 1993 and $26,700 in 1994 for its Clinton office space
from a partnership in which the Company's shareholders own 11.28%. Payroll
and other expenses were paid by the Company for the operation of a jointly
owned medical lab proportionate to the number of tests done specifically
for the Company. At December 31, 1994, $2,060 was payable by the Company
as a result of the related party transactions. There were no amounts due
at December 31, 1993.
NOTE I. COMMITMENTS
The Company leases its principal place of business and equipment from a
partnership partially owned by its shareholders. The minimum annual
rentals total $92,990 plus property taxes. The leases expire in October
1995 and November 1995.
The Company leases its secondary place of business and equipment from a
partnership owned by the Company's shareholders. The minimum annual
rentals total $54,720 plus insurance and taxes. The leases expire in
September 1996 and December 1999.
Minimum annual rental payments are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
<S> <C>
1995 $114,260
1996 58,540
1997 30,000
1998 30,000
1999 and thereafter 30,000
--------
$262,800
========
</TABLE>
Minimum annual rentals to be received from noncancelable subleases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 8,400
1996 3,500
-------
$11,900
=======
</TABLE>
F-118
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE J. CONTINGENCIES
In addition to the general liability and malpractice insurance carried by
the individual physicians, the Company maintains general liability and
malpractice insurance providing the Company with coverage of $1,000,000
per incident and $3,000,000 in aggregate per doctor. As of December 31,
1994, there were no asserted malpractice claims against the Company,
accordingly, no amounts for potential losses have been accrued in the
accompanying financial statements. In addition, the Company has not
accrued a loss for unreported incidents or for losses in excess of
insurance coverage, as the amount, if any, cannot be reasonably estimated
and the probability of an adverse outcome cannot be determined at this
time. It is the opinion of management that the ultimate resolution of any
unasserted claims will not have a material adverse effect on the financial
position or operating results of the Company.
NOTE K. SUBSEQUENT EVENT
In July 1995, Phychoice, Inc. acquired the operating assets of the
Company. Along with the acquisitions, the Company entered into a 15 year
management services agreement with Phychoice, Inc. The management services
agreement became effective on July 6, 1995.
NOTE L. PROFIT SHARING PLAN
The Company has a profit sharing plan and money purchase pension plan. All
employees 25 or older with three years of service during which 1,000 hours
of service are completed are eligible to participate. Contributions to the
plan are made annually as determined, within plan limits, by the Company.
The Company contribution for the year ended December 31, 1994, was $33,854
and $113,907 for the profit sharing plan and money purchase pension plan,
respectively. For the year ended December 31, 1993, $36,877 and $104,946
was contributed for the profit sharing and money purchase pension plans,
respectively.
F-119
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Cancer Specialists of Georgia, P.C.:
We have audited the accompanying balance sheet of Cancer Specialists of
Georgia, P.C. as of July 31, 1995 and the related statements of operations
and retained earnings (accumulated deficit) and cash flows for the nine month
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cancer Specialists of
Georgia, P.C. as of July 31, 1995 and the results of its operations and its
cash flows for the nine month period then ended in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 9, 1996
F-120
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
BALANCE SHEET
JULY 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 8,833
Accounts receivable, less allowance for doubtful accounts of $501,337 1,692,965
Inventory 114,940
Prepaid expenses and other 17,584
----------
Total current assets 1,834,322
----------
NET PROPERTY AND EQUIPMENT 224,822
----------
OTHER ASSETS:
Deferred income taxes 38,622
Goodwill and other intangibles, net of accumulated amortization of $17,583 143,417
----------
Total other assets 182,039
----------
TOTAL ASSETS $2,241,183
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ 97,820
Accounts payable 1,074,029
Accrued expenses and other liabilities 660,123
Notes payable 758,974
Current portion of long-term debt 112,428
Deferred income taxes 35,185
----------
Total current liabilities 2,738,559
----------
TOTAL LIABILITIES 2,738,559
----------
Commitments and contingencies (Notes E and G) --
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 200,000 shares authorized;
1,500 shares issued and outstanding 1,500
Accumulated deficit (498,876)
----------
Stockholders' deficit (497,376)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $2,241,183
==========
</TABLE>
See notes to financial statements.
F-121
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
For the nine month period ended July 31, 1995
<TABLE>
<CAPTION>
<S> <C>
REVENUES
Drug sales, net $ 5,104,710
Less cost of sales 2,647,762
-----------
Gross profit from drug sales 2,456,948
Patient revenues, net 4,504,518
-----------
6,961,466
OTHER REVENUES 12,949
-----------
TOTAL REVENUES 6,974,415
-----------
OPERATING EXPENSES
Physician compensation 1,912,862
Clinic salaries, wages and benefits. 1,500,365
Management fees--related party (Note I). 1,713,609
Clinic and equipment rents--related party (Note I) 605,494
Clinic and equipment rents 220,725
Clinic supplies 384,277
Other clinic costs 951,438
Provision for bad debts 501,337
Provision for write-off of intangible asset 86,644
Depreciation and amortization 95,835
Interest 39,675
-----------
TOTAL OPERATING EXPENSES 8,012,261
-----------
NET LOSS BEFORE INCOME TAX BENEFIT (1,037,846)
INCOME TAX BENEFIT 231,006
-----------
NET LOSS (806,840)
RETAINED EARNINGS, BEGINNING 307,964
-----------
ACCUMULATED DEFICIT, ENDING $ (498,876)
===========
</TABLE>
See notes to financial statements.
F-122
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
STATEMENT OF CASH FLOWS
For the nine month period ended July 31, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(806,840)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 95,835
Provision for bad debts 501,337
Provision for write-off of intangible asset 86,644
Deferred income taxes (231,006)
Amortization of discount on debt 8,991
Changes in operating assets and liabilities:
Accounts receivable (528,462)
Inventory 6,719
Prepaid expenses and other 5,916
Accounts payable (29,829)
Accrued expenses and other liabilities. 343,932
---------
NET CASH USED BY OPERATING ACTIVITIES (546,763)
---------
CASH FLOWS FOR INVESTING ACTIVITIES
Purchase of property and equipment (1,295)
---------
NET CASH USED BY INVESTING ACTIVITIES (1,295)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank overdraft 97,820
Proceeds from notes payable 448,974
Payments of long-term debt (287,015)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 259,779
---------
NET DECREASE IN CASH (288,279)
CASH, BEGINNING OF PERIOD 297,112
---------
CASH, END OF PERIOD $ 8,833
=========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest $ 29,651
=========
</TABLE>
See notes to financial statements.
F-123
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--Cancer Specialists of Georgia, P.C. (the
"Corporation") was incorporated in 1988 under the laws of Georgia. The
Corporation's fiscal year is the calendar year. These financial statements are
for the nine month period ended July 31, 1995. The Corporation was formed to
operate medical oncology facilities in Atlanta, Georgia. The Corporation offers
a comprehensive range of medical oncology services at eleven facilities in the
Atlanta area.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation of property and equipment is generally calculated over the
estimated useful lives of the assets using accelerated methods. Depreciation of
leasehold improvements is calculated on a straight line basis over the term of
the lease. Routine maintenance and repairs are charged to expense as incurred,
while costs of betterments and renewals are capitalized.
INCOME TAXES--The Corporation is taxable under provisions of the Internal
Revenue Code. The Corporation recognizes deferred income tax on all significant
timing differences between financial and income tax reporting. (See Note H)
NET REVENUES--Net revenues are reported at the estimated realizable amounts
from patient, third-party payors, and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. Provisions for estimated third-party payor settlements and
adjustments are estimated in the period the related services are rendered and
adjusted in future periods as final settlements are determined. During the nine
month period ended July 31, 1995, approximately 40% of net revenue was received
under the Medicare program and 1% under state reimbursement programs. The
Medicare program and state reimbursement programs pay physician services based
on fee schedules which are determined by the related government agency. The
Corporation has negotiated agreements with managed care organizations to provide
physician services based on fee schedules. No individual managed care
organization is material to the Corporation.
INVENTORY--Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
GOODWILL AND OTHER INTANGIBLES--The excess of purchase price over the fair
value of assets acquired in a business combination accounted for by the purchase
method (goodwill) and the value assigned to non- competition agreements are
amortized on a straight-line basis over a 15-year period. The Corporation
periodically assesses the recoverability of goodwill when there are indications
of potential goodwill impairment based on estimates of undiscounted future cash
flows for the applicable business acquired. The amount of impairment is
calculated by comparing anticipated discounted future income from acquired
businesses with the carrying value of the related goodwill. In performing this
analysis, management considers such factors as current results, trends and
future prospects, in addition to other economic factors.
The Company is required to implement Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1996. As the Company currently
continually evaluates the realizability of its long-lived assets, including
goodwill and intangibles, adoption of the statement is not anticipated to
have a material effect on the Company's financial statements at the date of
adoption.
F-124
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
B. NET PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective
depreciable lives are summarized below:
<TABLE>
<CAPTION>
Depreciable
Lives Total
--------- ---------
<S> <C> <C>
Furniture and equipment 7 years $ 25,295
Leasehold improvements 7-13 years 338,602
---------
363,897
Less accumulated depreciation and amortization (139,075)
---------
Total $ 224,822
=========
</TABLE>
C. NOTES PAYABLE
The Corporation has a line of credit from a bank in the amount $250,000.
The line of credit matures on August 30, 1995. Interest is payable monthly at
the prime rate minus 0.5%. The amount outstanding under the line of credit at
July 31, 1995 was $210,130 with available credit of $39,870. The line of
credit is collateralized by accounts receivable of the Corporation.
At July 31, 1995, the Corporation had a note payable to a bank in the
amount of $248,844. The note was payable on July 31, 1995 and was repaid
subsequent to this date without penalty. Interest was payable monthly at the
prime rate minus 0.5%. The note payable was collateralized by accounts
receivable of the Corporation.
At July 31, 1995, the Corporation had a note payable to a bank in the
amount of $150,000. The note was payable on July 28, 1995 and was repaid
subsequent to this date without penalty. Interest was payable monthly at the
prime rate minus 0.5%. The note payable was collateralized by accounts
receivable of the Corporation.
At July 31, 1995, the Corporation had notes payable to two of its
stockholders for a total amount of $150,000. The notes are payable in
quarterly installments beginning on August 1, 1995 and mature May 1, 1996.
Interest is payable quarterly at the prime rate plus 0.5%. The notes payable
are collateralized by accounts receivable of the Corporation.
The prime rate at July 31, 1995 was 8.75%.
D. LONG-TERM DEBT
The long-term debt is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, due in monthly installments of $11,165 including principal and
interest at 6.75% through August 1995, collateralized by personal guaranties from
the stockholders $ 33,701
Non-interest bearing note issued in connection with acquisition of assets of a
practice, due in monthly installments of $16,082 through December 1995, face amount
of $192,978 (less unamortized discount of $1,681 based on imputed interest rate of
8.5%) 78,727
---------
Total long-term debt 112,428
Less current maturities (112,428)
---------
Long-term debt, less current maturities $ --
=========
</TABLE>
F-125
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
E. OPERATING LEASES
All leases are classified as operating leases with related rentals charged
to operations as incurred. Under agreements classified as operating leases,
the Company leases facilities for its eleven locations and most of its
medical and business equipment.
The following is a schedule by year of future minimum lease payments under
operating leases as of July 31, 1995.
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ----------
<S> <C>
1995 (for the period August 1--December 31, 1995) $ 616,395
1996 1,040,494
1997 994,113
1998 736,506
1999 620,403
Thereafter 1,426,841
----------
Total $5,434,752
==========
</TABLE>
Total rent expense for the nine months ended July 31, 1995 was $826,219.
F. EMPLOYEE BENEFIT PLAN
During 1995 the Corporation had a qualified defined contribution plan
covering substantially all employees. Contributions were determined each year
at the employers' discretion. There were no contributions for the nine month
period ended July 31, 1995.
G. CONTINGENCIES
The Corporation maintains general liability and malpractice insurance
providing the Corporation with coverage of $1 million per incident and $3
million in aggregate. As of July 31, 1995, there were no asserted malpractice
claims against the Corporation; accordingly, no amounts for potential losses
have been accrued in the accompanying financial statements.
H. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Corporation's deferred tax liabilities and assets as of
July 31, 1995 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred Current Tax Liabilities
Cash to accrual adjustments $720,175
Deferred Current Tax Assets
Cash to accrual adjustments 684,990
--------
Net Deferred Current Tax Liabilities $ 35,185
========
Deferred Long-Term Tax Assets
Depreciable and amortizable assets $ 38,622
========
</TABLE>
F-126
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The provision for income taxes for the nine month period ended July 31,
1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Current
Federal $ --
State --
---------
--
---------
Deferred
Federal (217,146)
State (13,860)
---------
(231,006)
---------
NET INCOME TAX BENEFIT $(231,006)
=========
</TABLE>
I. RELATED PARTY TRANSACTIONS
The Corporation has a management agreement with a company whose
stockholders include two of the stockholders of the Corporation and a family
member of one of the stockholders of the Corporation. The management company
provides practice management and billing and collections services. The
management agreement provides for a fee equivalent to 16% of adjusted net
collections. Expenses related to the management agreement were $1,713,609 for
the nine month period ended July 31, 1995.
The Corporation has office leases for two of its clinics with a
partnership that is owned by three stockholders of the Corporation and a
family member of a stockholder. Rental expense of $231,750 was incurred on
these leases during the nine month period ended July 31, 1995.
The Corporation leases certain medical and business equipment from a
partnership that is owned by a stockholder of the Corporation and certain
family members of the stockholder. Rental expense of $285,418 was incurred on
this lease during the nine month period ended July 31, 1995.
The Corporation leases certain medical and business equipment from a
partnership that is owned by a stockholder of the Corporation and certain
family members of the stockholder. Rental Expense of $46,017 was incurred on
this lease during the nine month period ended July 31, 1995.
The Corporation leases certain medical and business equipment from a
corporation that is owned by a stockholder of the Corporation and certain
family members of the stockholder. Rental expense of $42,309 was incurred on
this lease during the nine month period ended July 31, 1995.
J. PROVISION FOR WRITE-OFF OF INTANGIBLE ASSET
In July 1995, the Corporation recorded a provision of $86,644 for the
write-off of the remaining unamortized balance of a noncompetition agreement.
The individual with whom the agreement had been made is now deceased.
Therefore, the Corporation determined that the noncompetition agreement no
longer had any value.
K. SUBSEQUENT EVENTS
On August 15, 1995, PhyChoice, Inc. acquired the operating assets of the
Corporation. Also, on August 15, 1995, the Corporation merged with Georgia
Oncology-Hematology Clinic, P.C. to form Georgia Cancer Specialists, P.C.
Simultaneous with the acquisition of assets and the merger, the newly formed
Georgia Cancer Specialists, P.C. entered into a 10-year management services
agreement with PhyChoice, Inc. The management services agreement became
effective August 15, 1995.
F-127
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Mobile Lithotripter of Indiana Partners
We have audited the balance sheets of Mobile Lithotripter of Indiana
Partners as of September 30, 1995 and 1994, and the related statements of
income, partners' capital and cash flows for the years then ended and for the
period from February 12, 1993 (date of formation) to September 30, 1993.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mobile Lithotripter of
Indiana Partners at September 30, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended and for the period
from February 12, 1993 to September 30, 1993 in conformity with generally
accepted accounting principles.
KATZ, SAPPER & MILLER, LLP
Certified Public Accountants
Indianapolis, Indiana
October 25, 1995
F-128
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
BALANCE SHEETS
September 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents--Note 6 $ 442,187 $ 383,971
Accounts receivable--hospitals 265,381 260,672
Prepaid expenses 5,512 20,023
---------- ----------
Total Current Assets 713,080 664,666
---------- ----------
EQUIPMENT
Medical and office equipment. 950,984 520,664
Less: Accumulated amortization 250,577 171,772
---------- ----------
Total Equipment 700,407 348,892
---------- ----------
OTHER ASSETS
Goodwill, net of amortization of $1,277,378 in 1995
and $798,362 in 1994 5,907,875 6,386,892
---------- ----------
TOTAL ASSETS $7,321,362 $7,400,450
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 52,746 $ 28,807
Current maturities of long-term debt--Note 2 173,124
---------- ----------
Total Current Liabilities 52,746 201,931
LONG-TERM DEBT
Equipment lease obligation--Note 2 144,106
---------- ----------
Total liabilities 52,746 346,037
PARTNERS' CAPITAL--Note 6 7,268,616 7,054,413
---------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $7,321,362 $7,400,450
========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-129
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
STATEMENTS OF INCOME
Years Ended September 30, 1995 and 1994 and
Period from February 12, 1993 to September 30, 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -----------
<S> <C> <C> <C>
REVENUE
Rental income--Note 3 $2,399,731 $1,990,894 $1,467,614
Supply income 159,650 132,680 110,980
Interest income 18,272 8,933 2,408
---------- ---------- ----------
Total Revenue 2,577,653 2,132,507 1,581,002
---------- ---------- ----------
COSTS AND EXPENSES
Operating--Notes 4 and 5 481,481 429,651 313,008
Amortization and depreciation 587,027 582,809 387,325
General and administrative--Note 4 217,899 206,500 158,249
Interest expense 27,517 48,236 41,889
---------- ---------- ----------
Total Costs and Expenses 1,313,924 1,267,196 900,471
---------- ---------- ----------
NET INCOME $1,263,729 $ 865,311 $ 680,531
========== ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-130
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
STATEMENTS OF PARTNERS' CAPITAL
Years Ended September 30, 1995 and 1994 and
Period from February 12, 1993 to September 30, 1993
<TABLE>
<CAPTION>
<S> <C>
Cash contributed by T2 Medical, Inc. $ 4,507,153
Assets and goodwill contributed to Mobile Lithotripter of Indiana Limited, an
Indiana Limited Partnership 7,131,571
Special distribution to Mobile Lithotripter of Indiana Limited, an Indiana Limited
Partnership (4,507,153)
-----------
NET INITIAL PARTNERS' CAPITAL 7,131,571
Net income for the period 680,531
Distributions to partners (150,000)
-----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1993 7,662,102
Net income for the year 865,311
Distributions to partners (1,473,000)
-----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1994 7,054,413
Net income for the year 1,263,729
Distributions to partners (1,049,526)
-----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1995--Note 6 $ 7,268,616
===========
</TABLE>
See Accompanying Notes to Financial Statements.
F-131
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1995 and 1994 and
Period from February 12, 1993 to September 30, 1995
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,263,729 $ 865,311 $ 680,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of equipment 108,010 103,792 67,980
Amortization of goodwill 479,017 479,017 319,345
Loss on abandonment of equipment 5,260
(Increase) decrease in certain current assets:
Accounts receivable--hospitals (4,709) (2,765) (257,907)
Prepaid expenses 14,511 7,253 (27,276)
Increase (decrease) in certain current
liabilities:
Accounts payable and accrued expenses 23,939 (8,275) 37,082
----------- ----------- -----------
Net cash provided by operating activities 1,889,757 1,444,333 819,755
----------- ----------- -----------
INVESTING ACTIVITIES
Acquisitions of equipment (464,785) (10,784)
----------- -----------
Net cash (used) by investing activities. (464,785) (10,784)
----------- -----------
FINANCING ACTIVITIES
Principal payments on long-term debt (317,230) (153,639) (92,694)
Cash contributed by T2 Medical, Inc 4,507,153
Special distribution to Mobile Lithotripter of
Indiana Limited, an Indiana Limited Partnership (4,507,153)
Distributions to partners (1,049,526) (1,473,000) (150,000)
----------- ----------- -----------
Net cash (used) by financing activities (1,366,756) (1,626,639) (242,694)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 58,216 (193,090) 577,061
CASH AND EQUIVALENTS
Beginning of Period 383,971 577,061
----------- ----------- -----------
End of Period $ 442,187 $ 383,971 $ 577,061
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest expense $ 27,517 $ 48,236 $ 41,889
Noncash investing and financing activities:
Assets and liabilities contributed by Mobile
Lithotripter of Indiana Limited, an Indiana
Limited Partnership:
Goodwill $ 7,185,254
Medical equipment under capital lease 509,880
Lease obligation on medical equipment (563,563)
Trade-in value of tractor 24,038
</TABLE>
See Accompanying Notes to Financial Statements.
F-132
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mobile Lithotripter of Indiana Partners (the Partnership) was formed as an
Indiana general partnership on February 12, 1993 by T2 Medical, Inc. (T2), a
publicly-held company, and Mobile Lithotripter of Indiana Limited, an Indiana
Limited Partnership (MLIL). Unless earlier terminated in accordance with the
specific provisions of the Partnership Agreement, the Partnership terminates
on February 11, 2012. T2 was designated as the "Managing Partner" of the
Partnership.
The Partnership operates a mobile extracorporeal renal shockwave
lithotripter and rents it to various hospitals located in Indiana. Most of
the stockholders of MLI, Inc., general partner of MLIL, are urologists who
are members of the medical staffs of the hospitals which rent the
lithotripter. The Partnership commenced operations in February 1993.
Upon formation of the Partnership, T2 contributed cash of $4,507,153 and
MLIL contributed substantially all of its assets and business, other than its
accounts receivable and cash on hand, to the Partnership. The Partnership
also assumed MLIL's liabilities and hospital rental agreements. The value of
the net assets contributed to the Partnership by MLIL was $7,131,571,
including goodwill of $7,185,254 attributable to the business and the
relationships with the hospitals previously served by MLIL. Immediately after
the formation of the Partnership, MLIL received a special distribution from
the Partnership of the $4,507,153 of cash which had been contributed by T2.
The acquisition of the MLIL assets was accounted for by the purchase method,
with T2 acquiring 63.2% of the Partnership. Thus, MLIL retained a 36.8%
interest in the Partnership.
On December 31, 1994, MLIL sold its remaining 36.8% interest in the
Partnership to CCC-Indiana Lithotripsy, Inc., a wholly-owned subsidiary of
Phymatrix Corp., for $2,638,085. T2 merged into Coram Healthcare Corporation
in July 1994.
Cash and Equivalents: For purposes of the statement of cash flows, cash
equivalents include bank time deposits with original maturities of three
months or less. The Partnership maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The Partnership has not
experienced any losses in such accounts.
Equipment: Medical equipment under capital lease was recorded at its fair
value on the date it was contributed to the Partnership and is being
amortized over five years using the straight-line method. Equipment purchased
subsequently was recorded at cost and is being depreciated over the expected
useful lives using the straight-line method.
Goodwill: Relates primarily to the value attributed to the business and the
relationships with various Indiana hospitals served by the Partnership and
its predecessor, MLIL. Goodwill totaling $7,185,254 is being amortized on a
straightline basis over fifteen years.
Income Taxes: No provision for income taxes is required because the allocated
shares of the Partnership's income or loss are included in the income tax
returns of the partners.
NOTE 2--EQUIPMENT LEASE
The Partnership leased a mobile extracorporeal renal shockwave
lithotripter housed in a custom trailer and truck tractor under a five-year
noncancellable capital lease assumed by the Partnership on February 12, 1993.
The lease obligation was payable in monthly installments of $16,823,
including interest imputed at 12%. However, the capital lease was paid in
full in August 1995.
F-133
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership also assumed a three-year service contract for corrective
and preventative maintenance for the lithotripter. Service expense paid
pursuant to this agreement was $72,615 for the year ended September 30, 1995,
$118,261 for the year ended September 30, 1994, and $84,506 for the period
ended September 30, 1993. The contract was cancelled in June 1995, when the
Partnership entered into a thirteen-month service contract with
Servicetrends, a wholly-owned subsidiary of Coram Healthcare Corporation.
Service expense paid pursuant to this new agreement was $23,125 for the year
ended September 30, 1995. The new service contract requires payments totaling
$69,375 in the year ending September 30, 1996.
NOTE 3--RENTAL AGREEMENTS
The Partnership rents its lithotripter to hospitals under three-year
operating leases which include two rental options. Option A was selected by
six hospitals and has a stated fee per lithotripsy procedure with no minimum
usage fee required. Option B was selected by seven hospitals and has
discounted fees based on increased usage and requires a minimum rental fee
which varies by hospital. A hospital may change to the other option after the
initial twelve-month period. The rental agreements are renewable in 1996.
Minimum future rentals to be received under Option B leases total $207,954
for the year ending September 30, 1996.
NOTE 4--RELATED PARTY TRANSACTIONS
Pursuant to a management agreement dated February 12, 1993, MLI, Inc., the
general partner of MLIL, received a monthly management fee based on 7.5% of
the annual pre-tax profits of the Partnership. Effective January 1995, MLI,
Inc. receives a monthly management fee of $9,000. Management fees paid to
MLI, Inc. were $112,981 and $108,275 for the years ended September 30, 1995
and 1994, respectively, and $80,901 for the period ended September 30, 1993.
The Partnership pays consulting fees of $2,000 per month through May 31,
1996, to Heritage Group, Inc., an affiliate of one of MLIL's limited
partners. Consulting fees paid to Heritage Group, Inc. were $24,000 for each
of the years ended September 30, 1995 and 1994, and $16,000 for the period
ended September 30, 1993.
The Partnership purchased supplies from Servicetrends totaling $8,000 in
the year ended September 30, 1995.
NOTE 5--PENSION PLAN
The Partnership contributes to a multi-employer defined contribution
pension plan for all employees who are at least twenty-one years old and who
have a half year of service with the Partnership. Partnership contributions
to the Plan are based on 11% of each participant's annual salary.
Contributions by the Partnership were $15,157 and $13,106 for the years ended
September 30, 1995 and 1994, respectively, and $10,448 for the period ended
September 30, 1993.
NOTE 6--SUBSEQUENT EVENT
On October 9, 1995, the Partnership distributed cash of $200,000 to its
partners.
F-134
<PAGE>
UROMED TECHNOLOGIES, INC.
CONTENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Independent Auditor's Report F-136
Financial Statements:
Balance Sheet F-137
Statement of Income and Retained Earnings F-138
Statement of Cash Flows F-139
Financial Notes F-140
Additional Material:
Schedule of General and Administrative Expenses F-143
</TABLE>
F-135
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
UroMed Technologies, Inc.
We have audited the accompanying balance sheets of UroMed Technologies,
Inc., as of September 28, 1994, December 31, 1993 and 1992, and the related
statements of income and retained earnings and cash flows for the periods
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of UroMed Technologies,
Inc., as of September 28, 1994, December 31, 1993 and 1992, and the results
of its operations and its cash flows for the periods then ended in conformity
with generally accepted accounting principles.
Our audit of the financial statements included in this report was directed
to an expression of our opinion on these statements taken as a whole. The
additional material presented in this report has been subjected to certain
audit procedures applied in connection with our audit of the basic financial
statements. The additional material, while not considered necessary to the
fair presentation of the financial position, results of operations, and cash
flows of the Company, is, in our opinion, fairly stated in all material
respects when considered in relation to the financial statements taken as a
whole.
ROY CLINE, CPA, PA
CERTIFIED PUBLIC ACCOUNTANTS
June 22, 1995
F-136
<PAGE>
UROMED TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, December 31, December 31,
1994 1993 1992
---------- -------- --------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash $ 50,332 $ 73,423 $ 24,988
Accounts receivable 392,827 140,847 16,312
Prepaid expenses -- 2,021 498
---------- -------- --------
Total Current Assets 443,159 216,291 41,798
Property and Equipment 1,390,915 698,326 --
Other Assets -- 5,000 --
---------- -------- --------
Total Assets $1,834,074 $919,617 $ 41,798
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of capital lease obligations $ 306,183 $176,071 $ --
Accounts payable -- 24,419 --
Accrued bonuses 200,000 -- --
Accrued expenses 45,144 10,024 5,498
---------- -------- --------
Total Current Liabilities 551,327 210,514 5,498
---------- -------- --------
Long-Term Liabilities
Stockholder loan -- 27,000 75,018
Capital lease obligations, exclusive of current
portion 791,430 384,957 --
---------- -------- --------
Total Long-Term Liabilities 791,430 411,957 75,018
---------- -------- --------
Stockholders' Equity
Common stock, $1 par value, 500 shares
authorized, 332 shares issued and outstanding,
168 shares held in treasury 500 500 500
Retained earnings 559,816 365,645 (39,218)
---------- -------- --------
560,316 366,145 (38,718)
Less treasury stock, at cost, 168 shares 68,999 68,999 --
---------- -------- --------
Total Stockholders' Equity 491,317 297,146 (38,718)
---------- -------- --------
Total Liabilities and Stockholders' Equity $1,834,074 $919,617 $ 41,798
========== ======== ========
</TABLE>
The accompanying financial notes are an integral part of the financial
statements.
F-137
<PAGE>
UROMED TECHNOLOGIES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Period
Ended Year Ended
September December Inception to
28, 31, December 31,
1994 1993 1992
----------- ---------- ------------
<S> <C> <C> <C>
Revenues Earned $1,740,469 $1,159,967 $ 23,500
Cost of Revenues 400,535 415,370 38,196
---------- ---------- --------
Gross Profit 1,339,934 744,597 (14,696)
General and Administrative Expenses 800,695 309,699 24,503
---------- ---------- --------
Income From Operations 539,239 434,898 (39,199)
Other Income (Expense)
Interest expense (65,068) (30,035) (19)
---------- ---------- --------
Net Income (Loss) 474,171 404,863 (39,218)
Retained Earnings, beginning of period 365,645 (39,218) --
Less Dividends 280,000 -- --
---------- ---------- --------
Retained Earnings, end of period $ 559,816 $ 365,645 $(39,218)
========== ========== ========
</TABLE>
The accompanying financial notes are an integral part of the financial
statements.
F-138
<PAGE>
UROMED TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
------------- ------------ --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Cash received from customers $1,488,489 $1,035,433 $ 7,188
Cash paid to suppliers and employees (900,095) (678,620) (57,699)
Interest paid (65,068) (30,035) (19)
---------- ---------- --------
Net Cash Provided (Used) In Operating Activities 523,326 326,778 (50,530)
---------- ---------- --------
Cash Flows From Investing Activities
Cash payments for the purchase of property (80,080) (142,353) --
Payment of deposits 5,000 (5,000) --
---------- ---------- --------
Net Cash Provided (Used) In Investing Activities (75,080) (147,353) --
---------- ---------- --------
Cash Flows From Financing Activities
Proceeds from issuance of common stock -- -- 500
Borrowings from stockholder -- -- 75,018
Purchase of treasury stock -- (68,999) --
Repayments on stockholder loan (27,000) (48,019)
Dividends paid (280,000) -- --
Payments on capital lease obligations (164,337) (13,972) --
---------- ---------- --------
Net Cash Provided (Used) by Financing Activities (471,337) (130,990) 75,518
---------- ---------- --------
Net Increase (Decrease) in Cash (23,091) 48,435 24,988
Cash, beginning of period 73,423 24,988 --
---------- ---------- --------
Cash, end of period $ 50,332 $ 73,423 $ 24,988
========== ========== ========
</TABLE>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net income (loss) for the period $ 474,171 $ 404,863 $(39,218)
--------- --------- --------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 88,413 19,027 --
(Increase) decrease in accounts receivable (251,980) (124,534) (16,312)
(Increase) decrease in prepaid expenses 2,021 (1,523) (498)
Increase (decrease) in accounts payable (24,419) 24,419 --
Increase (decrease) in accrued liabilities 235,120 4,526 5,498
--------- --------- --------
Total Adjustments 49,155 (78,085) (11,312)
--------- --------- --------
Net Cash Provided (Used) In Operating Activities $ 523,326 $ 326,778 $(50,530)
========= ========= ========
Supplemental disclosures:
Capital lease obligations incurred in connected
with asset acquisitions
Assets acquired $ 781,002 $ 717,353 $ --
Liabilities assumed 700,922 575,000 --
--------- --------- --------
Cash given $ 80,080 $ 142,353 $ --
========= ========= ========
</TABLE>
The accompanying financial notes are an integral part of the financial
statements.
F-139
<PAGE>
UROMED TECHNOLOGIES, INC.
FINANCIAL NOTES
1. Summary of Significant Accounting Policies
Company's Activities and Operating Cycle
The Company was incorporated June 8, 1992 under the laws of the State of
Florida. The Company is engaged in the business of providing medical
lithotripsy services to Florida-based hospitals and ambulatory surgery
centers. The Company staffs its mobile lithotripters with a licensed tractor
trailer operator and a licensed radiographic technologist who assists the
attending physician. The mobile lithotripter makes scheduled visits to
various client hospitals and ambulatory surgery centers where local
urologists generally perform one or more procedures per site visit.
Revenue Recognition
Revenue is recognized at the Company's established rates at the time
services are provided. Net calculated adjustments arising under reimbursement
rates with third party payors are accrued on an estimated basis in the period
in which the services are rendered and adjusted as final settlements are
determined.
Property and Equipment
Property and equipment is recorded at cost. For financial statement
purposes depreciation is provided over the estimated useful lives of the
related assets using the straight-line method. The estimated useful lives of
the depreciable assets are:
<TABLE>
<CAPTION>
<S> <C>
Mobile Lithotripter Units 10 years
Lithotripter Unit Improvements 10 years
Furniture and Equipment 10 years
Office Machinery 7 years
</TABLE>
Lease agreements for equipment, which are equivalent to installment
purchase contracts, are recognized as capital leases by the Company. All of
the Company's capital leases have bargain purchase options and the Company is
amortizing the related assets over their estimated economic lives.
Expenditures for maintenance and repairs are charged to operations as
incurred. The cost of assets sold or retired and the related amounts of
accumulated depreciation are eliminated from the accounts in the year of
disposal and the resulting gains or losses are included in operations.
Income Taxes
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporate income
taxes, the shareholders of an S corporation are taxed on their proportionate
share of the company's taxable income. Therefore, no provision or liability
for Federal income taxes has been included in the financial statements.
Bad Debts
Individual customer accounts are reviewed periodically for collectibility.
Specifically identified uncollectible amounts are charged to expense in the
period in which the accounts are deemed worthless.
Cash Flows
For purposes of reporting cash flows, cash includes demand deposits with
banks.
F-140
<PAGE>
UROMED TECHNOLOGIES, INC.
FINANCIAL NOTES--(Continued)
2. Stockholders' Equity
The following is the changes in stockholders' equity:
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
--------------- -------------- ----------------
<S> <C> <C> <C>
Beginning Balance $ 297,146 $(38,718) $ --
Common stock issued, $1 par value, 500
shares authorized, issued and outstanding -- -- 500
Less treasury stock 168 shares -- (68,999) --
Net Income (Loss) 474,171 404,863 (39,218)
Less dividends (280,000) -- --
--------- -------- --------
Total Stockholders' Equity $ 491,317 $297,146 $(38,718)
========= ======== ========
</TABLE>
3. Commitments and Contingencies
In the normal course of business, the company entered into a capital lease
agreement in September 1993. As of December 31, 1993, the equipment was not
fully operational. The equipment became fully operational in March, 1994. At
that time, the company paid interest payments only for three months then the
first lease payment of principal and interest was due June 24, 1994.
4. Property and Equipment
The Company's property, equipment, and the related depreciation and
amortization:
<TABLE>
<CAPTION>
Accumulated Net
Original Current Amortization- Book
Cost Depreciation Depreciation Value
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lithotripter Unit Improvements $ 217,694 $13,696 $ 13,696 $ 203,998
Mobile Lithotripter Units 1,270,000 73,933 92,698 1,177,302
Furniture and Equipment 9,163 717 978 8,185
Office machinery 1,497 67 67 1,430
---------- ------- -------- ----------
Totals for September 28, 1994 $1,498,354 $88,413 $107,439 $1,390,915
========== ======= ======== ==========
Trailer $ 134,475 $13,447 $ 13,447 $ 121,028
Mobile Lithotripter Unit 575,000 4,792 4,792 570,208
Office furniture 7,878 788 788 7,090
---------- ------- -------- ----------
Totals for December 31, 1993 $ 717,353 $19,027 $ 19,027 $ 698,326
========== ======= ======== ==========
</TABLE>
F-141
<PAGE>
UROMED TECHNOLOGIES, INC.
FINANCIAL NOTES--(Continued)
5. Capital Lease Obligation
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
--------------- -------------- ----------------
<S> <C> <C> <C>
Capital lease obligation payable in monthly
installments of $18,285 including interest at 9%,
collateralized by Mobile Lithotripter, final payment
due November 1996 $ 430,465 $561,028 $--
Capital lease obligation payable in monthly
installments of $14,427 including interest at 9%,
collateralized by Mobile Lithotripter, final payment
due May 1999 667,148 -- --
---------- -------- ---
Total amount due 1,097,613 561,028 --
Amount due within one year 306,183 176,071 $--
---------- -------- ---
Long-term amount $ 791,430 $384,957 $--
========== ======== ===
</TABLE>
The following is the future minimum lease payments.
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
---------------- --------------- -----------------
<S> <C> <C> <C>
1994 $ -- $219,418 $--
1995 392,543 219,418 --
1996 392,543 201,133 --
1997 209,694 -- --
1998 173,125 -- --
1999 115,416 -- --
---------- -------- ---
Total minimum lease payments 1,283,321 639,969 --
Less amounts representing interest 185,708 78,941 --
---------- -------- ---
Present value of net minimum lease payments $1,097,613 $561,028 $--
========== ======== ===
</TABLE>
6. Profit-Sharing Plan
All employees are eligible to participate in the Company's Profit-Sharing
Plan as long as they are at least 21 years of age and have completed one year
of employment. The Plan provides for contributions by the Company in such
amounts as management may determine. The profit-sharing contributions charged
to operations were $57,367 for the period ended September 28, 1994.
7. Event Subsequent to the Date of the Report of Independent Auditor
On September 29, 1994, the Company sold substantially all of its assets
for cash and the assumption of the Company's lease obligations.
F-142
<PAGE>
UROMED TECHNOLOGIES, INC.
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
--------------- -------------- ----------------
<S> <C> <C> <C>
Accounting fees $ 17,162 $ 6,524 $ 217
Salary--officers 333,000 128,939 8,308
Advertising and promotion 4,571 9,229 1,263
Auto and truck 26,723 5,229 --
Bank charges -- 92 31
Continuing education 1,298 -- --
Professional fees 36,215 135 --
Contract labor 1,766 741 --
Contributions 2,000 500 --
Depreciation and amortization 88,413 19,027 --
Dues and subscriptions 210 709 --
Insurance expense 46,331 27,917 4,542
Legal fees 2,551 3,932 --
Licenses and taxes 7,584 -- 437
Travel and entertainment 35,498 41,756 --
Office expense 1,634 8,710 341
Medical directors 97,500 -- --
Miscellaneous 2,879 95 --
Office salaries -- -- 6,058
Rent--location 5,634 11,571 850
Taxes--payroll 16,995 26,425 1,556
Telephone and utilities 15,364 18,168 900
Pension contribution 57,367 -- --
-------- -------- -------
Total $800,695 $309,699 $24,503
======== ======== =======
</TABLE>
F-143
<PAGE>
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
NUTRICHEM, INC.
We have audited the accompanying balance sheets of Nutrichem, Inc. as of
November 17, 1994, and December 31, 1993 and the related statements of
income, retained earnings, and cash flows for the periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nutrichem, Inc. as of
November 17, 1994 and December 31, 1993, and the results of its operations
and its cash flows for the periods then ended in conformity with generally
accepted accounting principles.
The December 31, 1993 financial statements were previously reviewed, and
our report thereon, dated February 24, 1994, stated we were not aware of any
material modifications that should be made to those statements for them to be
in conformity with generally accepted accounting principles. However, a
review is substantially less in scope than an audit and does not provide a
basis for the expression of an opinion on the financial statement taken as a
whole.
Regan, Russell, Schickner & Shah, P.A.
September 13, 1995
F-144
<PAGE>
NUTRICHEM, INC.
BALANCE SHEETS
NOVEMBER 17, 1994 AND DECEMBER 31, 1993
<TABLE>
<CAPTION>
1994 1993
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 452,509 $ 103,468
Marketable securities 24,875 --
Accounts receivable (net of allowance of $402,052 and
$0, respectively) 2,455,506 950,838
Loan receivable--stockholder 28,000 --
Inventory 139,135 --
Deposits 12,421 17,000
Advances to employees 1,405 2,030
---------- ----------
Total current assets 3,113,851 1,073,336
---------- ----------
Property and equipment:
Machinery and equipment 150,521 6,656
Transportation equipment 15,200 40,999
Office furniture and fixture 26,080 19,303
Leasehold improvements 3,592 3,592
---------- ----------
195,393 70,550
Less: Accumulated depreciation 21,954 2,849
---------- ----------
173,439 67,701
---------- ----------
$3,287,290 $1,141,037
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 311,766 $ 110,723
Loan payable--stockholders -- 102,902
Payroll taxes payable 6,114 17,136
Accrued payroll 12,644 --
Other accrued expenses 17,594 41,585
---------- ----------
Total current liabilities 348,118 272,346
---------- ----------
Stockholders' equity:
Common stock--no par value; authorized 5,000 shares;
issued and outstanding 1,000 shares 1,000 1,000
Retained earnings 2,938,172 867,691
---------- ----------
2,939,172 868,691
---------- ----------
$3,287,290 $1,141,037
========== ==========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-145
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF INCOME
For the Period Ended November 17, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1994 1993
Amount Amount
--------- -----------
<S> <C> <C>
Earned Revenues $4,492,523 $2,142,122
---------- ----------
Direct Expenses:
Medications and related costs 957,920 414,648
Medical supplies. 79,145 50,185
Salaries--pharmacist 49,821 62,151
Outside pharmacy services 73,155 91,922
Nursing costs 175,118 62,511
Medical consultation fees 128,053 67,650
Other direct expenses 13,800 15,644
---------- ----------
Total direct expenses. 1,477,012 764,711
---------- ----------
Operating, Selling and Administrative
Expenses:
Auto expenses 42,656 9,251
Bookkeeping services 23,768 10,766
Commissions 249,123 --
Conventions, meetings, and seminars 17,442 25,906
Depreciation 28,996 2,849
Entertainment 41,425 13,383
Insurance 43,689 11,482
Legal and professional expenses 42,485 23,118
Miscellaneous 8,948 --
Office expense 64,844 19,138
Pension expense -- 41,585
Rent 18,491 13,686
Salaries--office 103,435 30,124
Salaries--officers 174,487 155,339
Taxes--payroll 36,255 13,489
Telephone and answering service 48,986 36,702
---------- ----------
Total operating, selling and administrative
expenses 945,030 406,818
---------- ----------
Net Income $2,070,481 $ 970,593
========== ==========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-146
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF RETAINED EARNINGS
For the Period Ended November 17, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1994 1993
--------- ----------
<S> <C> <C>
ACCUMULATED ADJUSTMENTS ACCOUNT
Balance--Beginning $ 867,691 $ --
Net Income 2,070,481 970,593
Stockholder Distributions -- (102,902)
---------- ---------
Balance--Ending $2,938,172 $ 867,691
========== =========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-147
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF CASH FLOWS
For the Period Ended November 17, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 2,070,481 $ 970,593
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 28,996 2,849
(Increase) Decrease in operating assets:
Inventory (139,135) --
Marketable securities (24,875) --
Accounts receivable (1,504,668) (950,838)
Deposits 4,579 (17,000)
Increase (Decrease) in operating liabilities:
Accounts payable 201,043 110,723
Payroll taxes payable (11,022) 17,136
Accrued payroll 12,644 --
Other accrued expenses (23,991) 41,585
----------- ---------
Net cash provided by operating activities $ 614,052 $ 175,048
=========== =========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-148
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF CASH FLOWS
For the Period Ended November 17, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Net Cash Provided by Operating Activities $ 614,052 $175,048
--------- --------
Cash Flows From Investing Activities:
Proceeds from sale of fixed assets 45,605 --
Purchase of equipment (180,339) (70,550)
Advances to employees -- (2,030)
Loan repayment from employees 625 --
Loan to stockholders (28,000) --
--------- --------
Net cash used by investing activities (162,109) (72,580)
--------- --------
Cash Flow From Financing Activities:
Debt reduction (102,902) --
Proceeds from issuance of stock -- 1,000
--------- --------
Net cash (used) provided by financing activities (102,902) 1,000
--------- --------
Net Increase in Cash 349,041 103,468
Cash--Beginning 103,468 --
--------- --------
Cash--Ending $ 452,509 $103,468
========= ========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-149
<PAGE>
NUTRICHEM, INC.
NOTES TO FINANCIAL STATEMENTS
November 17, 1994 and December 31, 1993
NOTE 1--Summary of Significant Accounting Policies
This summary of significant accounting policies of Nutrichem, Inc. is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's
management who is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial
statements.
Business activity. The Company is a Maryland corporation organized to provide
medical services on an out- patient or in-home basis. The Company's
significant service operations commenced in March 1993. The Company has a
year end of December 31.
Inventory. The Company values inventories at the lower of cost (first-in,
first-out method) or market. The inventory consists of medication and medical
supplies.
Property and equipment. Property and equipment are stated at cost. Individual
purchases over $300 and improvements which prolong the useful life of an
asset are capitalized, while expenditures for maintenance, small items and
minor repairs are expensed as incurred. Depreciation for financial statement
purposes is calculated on the straight-line method and is provided on a
consistent basis, based upon the estimated useful life of the particular
asset. The Company has adopted the Modified Accelerated Cost Recovery System
(MACRS) for income tax purposes.
Income taxes. Effective January 1, 1994, the Company changed its method of
accounting for income tax purposes from overall cash basis to overall accrual
basis under Internal Revenue Code 446, Revenue Procedure 92-74. On November
17, 1994, CCC-Infusion, Inc., a "C" Corporation purchased 80% of the
outstanding stock of Nutrichem, Inc. As a result of this stock transfer,
Nutrichem Inc.'s status as a Subchapter "S" corporation terminated under
Internal Revenue Code Section 1361 (b) (1) (B). Consequently, the Company is
taxed as a "S" Corporation for the short year ended November 17, 1994 and as
a "C" Corporation for the period November 18, 1994 through December 31, 1994.
As such, profits and losses of the "S" Corporation for the short-year ended
November 17, 1994 are passed through to the stockholders and are recorded on
their personal income tax returns.
NOTE 2--Accounts Receivable
At November 17, 1994, the allowance for contractual adjustments and bad
debts amounted to $402,052. The allowance is based on the Company's
collection history and current trends.
At December 31, 1993, accounts receivable includes unbilled accounts
receivable in the amount of $447,070 for services provided prior to December
31, 1993. Subsequent to December 31, 1993, the Company has collected all of
its accounts receivable outstanding at December 31, 1993.
NOTE 3--Related Party Transaction
At November 17, 1994, the Company had an outstanding loan receivable from
its stockholder, Raj Mantena amounting to $28,000. The loan was repaid
December 4, 1994.
At December 31, 1993, the Company had outstanding loans payable to its
stockholders, John Chay and Raj Mantena, amounting to $27,372 and $75,530
respectively, totaling $102,902. The loans are payable upon demand.
See Independent Audit Report.
F-150
<PAGE>
NUTRICHEM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 17, 1994 and December 31, 1993
NOTE 4--Pension Plan
The Company has a simplified employee pension plan that covers all
qualified employees. Contributions to the plan are at the discretion of the
Board of Directors. For the period ended November 17, 1994, the Board of
Director's have elected not to contribute to the plan. During 1993,
contributions to the plan charged to operations were $41,586.
NOTE 5--Supplemental Disclosures of Cash Flow Information
Noncash Financing Activities
For the period ending December 31, 1993, the Company had noncash financing
activities in the amount of $102,902 relating to stockholder distributions
and loans.
See Independent Audit Report.
F-151
<PAGE>
To the Stockholders of
FirstChoice Home Care, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheet of FirstChoice Home Care,
Inc. (an S corporation) as of December 31, 1993, and November 22, 1994, and
the related statements of income, retained earnings, and cash flows for the
year and the interim ten months and 22 days then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of
FirstChoice Home Care, Inc. as of December 31, 1993, and November 22, 1994,
and the results of their operations and their cash flows for the year and
interim period then ended in conformity with generally accepted accounting
principles.
Patrick & Associates, P.A.
June 8, 1995
See Independent Audit Report.
F-152
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
BALANCE SHEETS
December 31, 1993, and November 22, 1994
<TABLE>
<CAPTION>
1993 1994
----------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 25,686 $ 67,406
Accounts receivable 385,864 116,244
Prepaid expenses 7,755 1,333
Due from shareholders 20 31,137
-------- --------
Total current assets $419,325 $216,120
Property & Equipment:
Furniture and fixtures 15,717 15,611
Less accumulated depreciation (1,474) (4,374)
-------- --------
Total Property & Equipment 14,243 11,237
Other Assets:
Organization cost 17,275 12,957
Deposits 537 537
-------- --------
Total other assets 17,812 13,494
-------- --------
Total assets $451,380 $240,851
======== ========
LIABILITIES
Current liabilities:
Accounts payable $215,011 $131,652
Note payable--Medicare 15,402 0
Payroll taxes payable 4,555 8,810
Accrued payroll 14,206 11,084
Accrued pension contribution 54,457 0
Due to related parties 27,917 0
Other current liabilities 583 0
Other accrued expenses 0 10,535
Notes payable--current portion 105,000 105,000
-------- --------
Total current liabilities $437,131 $267,081
Long term Liabilities:
Accrued vacation liabilities 31,663 55,163
-------- --------
Total liabilities $468,794 $322,244
EQUITY
Common stock (par value $.01, 100,000 shares authorized,
2,000 issued) 20 20
Accumulated deficit (17,434) (81,413)
-------- --------
Total equity (17,414) (81,393)
-------- --------
Total liabilities and equity $451,380 $240,851
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-153
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF INCOME AND RETAINED EARNINGS
Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
<TABLE>
<CAPTION>
1993 1994
--------- -----------
<S> <C> <C>
Net patient service revenue $1,757,001 $2,448,645
Operating expenses:
Professional care of patients 1,065,670 1,489,830
Administrative and general 631,872 880,420
Depreciation and amortization 6,451 7,009
Interest expense 10,105 21,966
Rent expense 77,660 115,449
---------- ----------
Total operating expenses 1,791,758 2,514,674
---------- ----------
Net operating loss (34,757) (66,029)
Other income 1,070 2,050
---------- ----------
Net loss (33,687) (63,979)
Accumulated deficit--beginning 16,253 (17,434)
---------- ----------
Accumulated deficit--ending $ (17,434) $ (81,413)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-154
<PAGE>
FIRST CHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF CASH FLOWS
For Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
<TABLE>
<CAPTION>
1993 1994
-------- ----------
<S> <C> <C>
Cash flow from operating activities
Net loss $ (33,687) $(63,979)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense 1,503 2,691
Amortization expense 4,711 4,318
(Increase) Decrease in:
Accounts receivable (187,420) 269,620
Due from related parties 0 (31,117)
Prepaid expenses (7,755) 6,422
Deposits 1,346 0
Increase (Decrease) in:
Trade accounts & notes payable 224,333 (98,761)
Payroll taxes payable 4,149 4,255
Accrued expenses 6,287 (47,044)
Other current liabilities 583 (583)
Due to related parties 0 (27,917)
Accrued vacation liabilities 31,663 23,500
--------- --------
Total adjustments 79,400 105,384
--------- --------
Net cash provided by operating activities 45,713 41,405
Cash flows from investing activities
Purchase of equipment (15,717) 315
--------- --------
Net cash used by investing activities (15,717) 315
--------- --------
Cash flows from financing activities
Payment on short term notes (12,149) 0
--------- --------
Net cash provided by financing activities (12,149) 0
--------- --------
Net decrease in cash 17,847 41,720
Beginning cash 7,839 25,686
--------- --------
Ending cash $ 25,686 $ 67,406
========= ========
Supplemental Disclosures
Interest paid $ 10,105 $ 21,966
Income taxes paid $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-155
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS
December 31, 1993, and November 22, 1994
NOTE 1--Summary of Significant Accounting Policies
This summary of significant accounting policies of FirstChoice Health
Care, Inc. (the Company) is presented to assist in the understanding of the
Company's financial statements. The financial statements and notes are the
representation of Company's management who are responsible for their
integrity and objectivity. Management's accounting policies conform with the
generally accepted accounting principles and have been consistently applied
in the preparation of these financial statements.
Business Activity. The Company provides health care services "in the home"
based on a course of treatment prescribed by the patients' physician. The
Company is compensated for its services primarily by Medicare, but
compensation can also be from Medicaid, private payments and private
insurance.
Concentrations of Credit Risk. At November 22, 1994, amounts due from
Medicare were $113,095.
Cash. Cash, for purposes of the statement of cash flows consists of checking
and bank money market accounts.
Revenue and Cost Recognition. The primary funding source, Medicare,
compensates the Company on a "cost reimbursement" basis, meaning Medicare
covers all reasonable cost incurred in providing patient care. Therefore,
there will be no "profit" in the traditional sense. "Profit" is realized
indirectly through owners' compensation and benefits, acquisition of assets,
and deferred compensation.
Depreciation. Depreciation is determined principally on the straight-line
method over the estimated useful lives of the assets, using the American
Hospital Association's "Estimated Useful Lives of Depreciable Hospital
Assets" Guidebook, 1983 edition or 1988 edition. If an asset is not in the
AHA Guide, regulations of the Internal Revenue Service are used.
Income Taxes. The Company has elected to be taxed as an "S" corporation,
where net income is generally reported on a pro-rata basis to each
shareholder, who in turn reports that income on their personal income tax
return.
NOTE 2--Related Party Transactions
Intercompany transactions occur between First Choice Network (Home Office)
and First Choice Health Care Services of Ft. Lauderdale, Inc. Both of these
entities are wholly owned by the shareholders of this Company. Intercompany
transactions consist primarily of loans to and from these companies and the
providing of administrative and general services at cost. It is the practice
of the Company to liquidate this balance on a periodic basis.
NOTE 3--Property and Equipment
The majority of the equipment used by the Company has been acquired
through operating leases, and are therefore not capitalized. Property and
equipment purchased is carried at cost. Expenditures for maintenance and
repairs are charged as the expense is incurred.
See Independent Audit Report.
F-156
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment are summarized by major classification as follows:
<TABLE>
<CAPTION>
December
31, November 22,
1993 1994
---------- ------------
<S> <C> <C>
Computer Equipment $15,275 $13,795
Allocation of Home Office Property and Equipment 442 1,816
------- -------
15,717 15,611
Less Accumulated Depreciation 1,474 4,374
------- -------
Net Property and Equipment $14,243 $11,237
======= =======
</TABLE>
NOTE 4--Notes Payable
Notes payable consist of notes due to six individuals. The notes are
renewable on an annual basis at the discretion of the lender. Most of the
notes are collateralized by accounts receivable. All of the notes have an
annual interest rate of 15% of principal and were paid as a condition of the
sale described in Note 7.
NOTE 5--Pension Plan
The Company has sponsored a defined contribution pension plan, covering
substantially all of its employees. The plan is a qualified plan under ERISA.
Enrollment for employees is in January and July of each year. If the enrolled
employee was still employed at year end, the Company accrued a contribution
equal to 12% of the employee's current year gross wage. The accrued
contribution must be paid to the plan by September 15 of the following year.
The expense recorded in 1993 was $54,457. The plan has been terminated in
1994 as a result of the sale described in Note 7 and all vested amounts will
be distributed.
NOTE 6--Contingencies
The Company derives a substantial portion of its revenues through cost
reimbursement from Medicare. The reimbursements are based on quarterly
interim reports followed by an annual final cost report submitted to the
intermediary for the Medicare system. These reports are subject to audit and
adjustments for a period of three years following the final cost report
filing date. Should subsequent audits result in adjustment of previously
submitted costs, these adjustments would be made as an offset to future
revenues, which could have an impact on future operation. Future revenues of
the Company, as a contractor with the federal government, could be affected
by future legislation, should the Medicare system be changed in any material
manner.
NOTE 7--Sale of Business Assets
The Company entered into an asset purchase agreement with FC DST-9 Act.
Corp. on August 30, 1994, to sell essentially all of the assets and
liabilities, including the corporate name, of this Company for $900,000. This
sale was completed on November 22, 1994. All accrued amounts due to the
shareholders of this company were paid at that closing. All amounts due on
notes payable to individuals were paid along with interest on November 22,
1994. These statements do not reflect any of the effects of this sale
transaction.
See Independent Audit Report.
F-157
<PAGE>
To the Stockholders of
First Choice Health Care of Ft. Lauderdale, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheet of First Choice Health Care
Services of Ft. Lauderdale, Inc. (an S corporation) as of December 31, 1993,
and November 22, 1994, and the related statements of income, retained
earnings, and cash flows for the year and the interim ten months and 22 days
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of First
Choice Health Care Services of Ft. Lauderdale, Inc. as of December 31, 1993,
and November 22, 1994, and the results of their operations and their cash
flows for the year and interim period then ended in conformity with generally
accepted accounting principles.
Patrick & Associates, P.A.
June 8, 1995
See Independent Audit Report.
F-158
<PAGE>
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
BALANCE SHEETS
December 31, 1993, and November 22, 1994
<TABLE>
<CAPTION>
1993 1994
-------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash $ 53,445 $ 16,104
Accounts receivable 409,990 357,135
Due from related parties 27,917 2,070
--------- ---------
Total current assets 491,352 375,309
Property & Equipment
Furniture and fixtures 17,425 23,013
Less accumulated depreciation (3,415) (7,213)
--------- ---------
Total Property & Equipment 14,010 15,800
Other assets
Deposits 4,175 3,913
--------- ---------
Total assets $ 509,537 $ 395,022
========= =========
LIABILITIES
Current liabilities
Accounts payable--trade $ 156,345 $ 210,644
Note payable--Medicare 8,015 57,060
Payroll taxes payable 14,698 11,260
Accrued payroll 33,874 14,701
Accrued pension contribution 145,543 16,217
Other current liabilities 7,751 205,000
Notes payable--current 205,000 31,117
--------- ---------
Total Current Liabilities 571,226 545,999
Long term liabilities
Accrued vacation liabilities 68,228 78,362
--------- ---------
Total liabilities $ 639,454 $ 624,361
EQUITY
Common Stock (par value $1, 7,000 shares
authorized, 100 issued) 100 100
Accumulated deficit (130,017) (229,439)
--------- ---------
Total equity (129,917) (229,339)
--------- ---------
Total liabilities and equity $ 509,537 $ 395,022
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
See Independent Audit Report.
F-159
<PAGE>
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF INCOME AND RETAINED EARNINGS
Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
<TABLE>
<CAPTION>
1993 1994
--------- -----------
<S> <C> <C>
Net patient service revenue $4,060,691 $5,343,636
Operating expenses:
Professional care of patients 2,353,134 3,855,465
Administrative and general 1,528,149 1,396,519
Depreciation 2,441 4,267
Interest expense 46,716 30,203
Rent expense 103,448 158,716
---------- ----------
Total operating expenses 4,033,888 5,445,170
---------- ----------
Net operating income 26,803 (101,534)
Other income 2,569 2,112
---------- ----------
Net income 29,372 (99,422)
Accumulated deficit--beginning (159,389) (130,017)
---------- ----------
Accumulated deficit--ending $ (130,017) $ (229,439)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-160
<PAGE>
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF CASH FLOWS
For Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
<TABLE>
<CAPTION>
1993 1994
-------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income $ 29,372 $ (99,422)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense 2,441 4,267
(Increase) Decrease in:
Accounts receivable 121,275 52,855
Due from related parties 0 25,847
Deposits 4,822 262
Increase (Decrease) in:
Trade accounts & notes payable (73,994) 46,284
Bank Overdraft 0 57,060
Payroll taxes payable (21,216) (3,438)
Accrued expenses (48,647) (164,716)
Other current liabilities 1,398 8,466
Due to related parties 0 31,117
Accrued vacation liabilities 23,119 10,134
--------- ---------
Total adjustments 9,198 68,138
--------- ---------
Net cash provided by operating activities 38,570 (31,284)
Cash flows from investing activities:
Purchase of equipment (8,521) (6,057)
Net cash used by investing activities (8,521) (6,057)
Cash flows from financing activities:
Payment on short term notes (147,278) 0
--------- ---------
Net cash provided by financing activities (147,278) 0
--------- ---------
Net decrease in cash (117,229) (37,341)
Beginning cash 170,674 53,445
--------- ---------
Ending cash $ 53,445 $ 16,104
========= =========
Supplemental Disclosures:
Interest paid $ 46,716 $ 30,203
Income taxes paid $ 0 $ 0
</TABLE>
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-161
<PAGE>
FIRST CHOICE HEALTH CARE SERVICES OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS
December 31, 1993, and November 22, 1994
NOTE 1--Summary of Significant Accounting Policies
This summary of significant accounting policies of First Choice Health
Care Services of Ft. Lauderdale, Inc. (the Company) is presented to assist in
the understanding of the Company's financial statements. The financial
statements and notes are the representation of Company's management who are
responsible for their integrity and objectivity. Management's accounting
policies conform with the generally accepted accounting principles and have
been consistently applied in the preparation of these financial statements.
Business Activity. The Company provides health care services "in the home"
based on a course of treatment prescribed by the patients' physician. The
Company is compensated for its services primarily by Medicare, but
compensation can also be from Medicaid, private payments and private
insurance.
Concentrations of Credit Risk. November 22, 1994, amounts due from Medicare
were $399,819 less an accrued amount of $42,785.
Cash. Cash, for purposes of the statement of cash flows consists of checking
and bank money market accounts.
Revenue and Cost Recognition. The primary funding source, Medicare,
compensates the Company on a "cost reimbursement" basis, meaning Medicare
covers all reasonable cost incurred in providing patient care. Therefore,
there will be no "profit" in the traditional sense. "Profit" is realized
indirectly through owners' compensation and benefits, acquisition of assets,
and deferred compensation.
Depreciation. Depreciation is determined principally on the straight-line
method over the estimated useful lives of the assets, using the American
Hospital Association's "Estimated Useful Lives of Depreciable Hospital
Assets" Guidebook, 1983 edition or 1988 edition. If an asset is not in the
AHA Guide, regulations of the Internal Revenue Service are used.
Income Taxes. The Company has elected to be taxed as an "S" corporation,
where net income is generally reported on a pro-rata basis to each
shareholder, who in turn reports that income on their personal income tax
return.
NOTE 2--Related Party Transactions
Intercompany transactions occur between First Choice Network (Home Office)
and First Choice Home Care, Inc. Both of these entities are wholly owned by
the shareholders of the Company. Intercompany transactions consist primarily
of loans to and from these companies and the providing of administrative and
general services at cost. It is the practice of the Company to liquidate this
balance on a periodic basis.
NOTE 3--Property and Equipment
The majority of the equipment used by the Company has been acquired
through operating leases, and are therefore not capitalized. Property and
equipment purchased is carried at cost. Expenditures for maintenance and
repairs are charged as the expense is incurred.
See Independent Audit Report.
F-162
<PAGE>
FIRST CHOICE HEALTH CARE SERVICES OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment are summarized by major classification as follows:
<TABLE>
<CAPTION>
December
31, November 22,
1993 1994
---------- ------------
<S> <C> <C>
Computer and communication equipment $ 7,043 $10,599
Leasehold improvements 5,661 5,662
Furniture 3,648 3,931
Allocation of home office property and equipment 1,073 2,821
------- -------
Total 17,425 23,013
Less: accumulated depreciation 3,415 7,213
------- -------
Total $14,010 $15,800
======= =======
</TABLE>
NOTE 4--Notes Payable
Notes payable consist of notes due to six individuals. These notes are
renewable on an annual basis at the discretion of the lender. Most of the
notes are collateralized by accounts receivable. All of the notes have an
annual interest rate of 15% of principal and were paid as a condition of the
sale described in Note 7.
NOTE 5--Pension Plan
The Company has sponsored a defined contribution pension plan, covering
substantially all of its employees. The plan is a qualified plan under ERISA.
Enrollment for employees is in January and July of each year. If the enrolled
employee was still employed at year end, the Company accrued a contribution
equal to 12% of the employee's current year gross wage. The accrued
contribution must be paid to the plan by September 15 of the following year.
The expense recorded in 1993 was $145,543. The plan has been terminated in
1994 as a result of the sale described in Note 7 and all vested amounts will
be distributed.
NOTE 6--Contingencies
The Company derives a substantial portion of its revenues through cost
reimbursement from Medicare. The reimbursements are based on quarterly
interim reports followed by an annual final cost report submitted to the
intermediary for the Medicare system. These reports are subject to audit and
adjustments for a period of three years following the final cost report
filing date. Should subsequent audits result in adjustment of previously
submitted costs, these adjustments would be made as an offset to future
revenues, which could have an impact on future operation. Future revenues of
the Company, as a contractor with the federal government, could be affected
by future legislation, should the Medicare system be changed in any material
manner.
NOTE 7--Sale of Business Assets
The Company entered into an asset purchase agreement with FC DST-10 Acq.
Corp. on August 30, 1994, to sell essentially all of the assets and
liabilities, including the corporate name, of this Company for $1,000,000.
This sale was completed on November 22, 1994. All accrued amounts due to the
shareholders of this company were paid at that closing. All amounts due on
notes payable to individuals were paid along with interest on November 22,
1994. These statements do not reflect any of the effects of this sale
transaction.
See Independent Audit Report.
F-163
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Whittle, Varnell and Bedoya, P.A.:
We have audited the accompanying balance sheets of Whittle, Varnell and
Bedoya, P.A. (a Florida corporation) as of December 31, 1993 and 1994, and
the related statements of operations and retained earnings and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Whittle, Varnell and Bedoya,
P.A. as of December 31, 1993 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
September 20, 1995.
F-164
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
September 30,
1993 1994 1995
----------- ----------- -----------------
ASSETS (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,490 $ 85,098 $ 69,858
Accounts receivable, net of allowances of $149,344
in 1993, $185,381 in 1994 and $188,590 (unaudited)
in 1995 271,889 337,497 350,240
Prepaid expenses 6,872 9,680 --
-------- -------- --------
Total current assets 296,251 432,275 420,098
PROPERTY AND EQUIPMENT, net 132,501 112,996 144,792
DUE FROM STOCKHOLDER 8,020 6,762 8,405
OTHER ASSETS 8,317 8,317 8,114
-------- -------- --------
Total assets $445,089 $560,350 $581,409
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 78,982 $151,973 $ 78,058
Deferred income taxes 63,400 82,000 115,000
Revolving line of credit 44,468 35,349 27,455
Current portion of long-term debt 20,382 22,205 26,000
-------- -------- --------
Total current liabilities 207,232 291,527 246,513
LONG-TERM DEBT, net of current portion 69,078 46,873 27,884
-------- -------- --------
Total liabilities 276,310 338,400 274,397
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 7, 8 and 10)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized,
300 shares issued and outstanding 300 300 300
Additional paid-in capital 7,200 7,200 7,200
Retained earnings 161,279 214,450 299,512
-------- -------- --------
Total stockholders' equity 168,779 221,950 307,012
-------- -------- --------
Total liabilities and stockholders' equity $445,089 $560,350 $581,409
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-165
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the Nine-Month
For the Years Ended Periods
December 31, Ended September 30,
---------------------- ------------------------
1993 1994 1994 1995
--------- --------- --------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
NET PATIENT REVENUE $1,814,696 $2,514,824 $1,882,415 $1,980,965
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 1,153,467 1,437,648 1,069,520 1,232,025
Physician stockholders' payroll in excess
of base salary 286,103 513,159 286,136 323,577
Direct facility expenses 299,416 339,182 320,581 246,016
Provision for bad debts 119,475 148,305 81,846 40,285
---------- ---------- ---------- ----------
Total operating costs and expenses 1,858,461 2,438,294 1,758,083 1,841,903
---------- ---------- ---------- ----------
Operating (loss) income (43,765) 76,530 124,332 139,062
OTHER INCOME 6,502 10,741 -- --
---------- ---------- ---------- ----------
(Loss) income before provision for
income taxes (37,263) 87,271 124,332 139,062
PROVISION FOR INCOME TAXES -- 34,100 48,000 54,000
---------- ---------- ---------- ----------
Net (loss) income (37,263) 53,171 76,332 85,062
RETAINED EARNINGS, beginning of year 198,542 161,279 161,279 214,450
---------- ---------- ---------- ----------
RETAINED EARNINGS, end of year $ 161,279 $ 214,450 $ 237,611 $ 299,512
========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-166
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended Nine-Month Periods
December 31, Ended September 30,
-------------------- --------------------
1993 1994 1994 1995
-------- -------- ------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (37,263) $ 53,171 $ 76,332 $ 85,062
--------- --------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 44,142 47,845 23,500 33,999
Provision for bad debts 119,475 148,305 81,846 40,285
Deferred tax provision -- 18,600 63,600 33,000
Changes in assets and liabilities:
Accounts receivable (97,874) (213,913) (35,710) (53,028)
Prepaid expenses 176 (2,808) (68,700) 9,680
Other assets 7,223 -- (16) 203
Accounts payable and accrued
expenses (76,045) 72,991 (71,482) (73,915)
--------- --------- -------- --------
Total adjustments (2,903) 71,020 (6,962) (9,776)
--------- --------- -------- --------
Net cash (used in) provided by
operating activities (40,166) 124,191 69,370 75,286
--------- --------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (99,294) (28,340) (8,646) (62,509)
Due from stockholder (8,020) 1,258 759 (1,643)
--------- --------- -------- --------
Net cash used in investing activities (107,314) (27,082) (7,887) (64,152)
--------- --------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Borrowings on revolving line of credit 18,507 -- -- --
Payments on revolving line of credit -- (9,119) (5,140) (7,894)
Borrowings on long-term debt 43,753 -- -- --
Payments on long-term debt -- (20,382) (12,446) (18,480)
--------- --------- -------- --------
Net cash provided by (used in)
financing activities 62,260 (29,501) (17,586) (26,374)
--------- --------- -------- --------
Net (decrease) increase in cash and
cash equivalents (85,220) 67,608 43,897 (15,240)
CASH AND CASH EQUIVALENTS,
beginning of year 102,710 17,490 17,490 85,098
--------- --------- -------- --------
CASH AND CASH EQUIVALENTS,
end of year $ 17,490 $ 85,098 $ 61,387 $ 69,858
--------- --------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 12,623 $ 12,606 $ 54 $ 7,342
--------- --------- -------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-167
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business
Whittle, Varnell and Bedoya, P.A. (the "Company") is a Florida corporation
organized on December 31, 1989, to provide medical cardiology services. The
Company operates in area hospitals and maintains one office in Palm Beach
County and another in Martin County.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Included in the cash and cash equivalents balance as of December
31, 1993 and 1994, and September 30, 1995, are interest-bearing deposits
$2,306, $2,214 and $43,367 (unaudited), respectively.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using accelerated methods over the
estimated useful lives of the assets ranging from five to seven years.
d. Accounts Receivable and Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third-party payors such as insurance companies (50%), patients
(5%) and government-sponsored health care programs (40%). These receivables
are presented net of an estimated allowance for contractual adjustments and
uncollectible receivables. Contractual adjustments result from the difference
between the rates for services performed and reimbursement amounts from the
government-sponsored health care programs and insurance companies for such
services.
e. Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires that deferred income taxes be recognized for
the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting basis at rates based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
f. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, prepaid expenses, other assets, accounts payable and accrued
expenses and long-term debt are reflected in the accompanying financial
statements at cost which approximates fair value.
g. Interim Financial Data
In the opinion of the management of the Company, the accompanying
unaudited combined financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of September 30, 1995, and the results
of operations for the nine-month periods ended September 30, 1994 and 1995.
The results of operations and cash flows for the nine-month period ended
September 30, 1995 are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 1995.
F-168
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
September 30,
1993 1994 1995
-------- -------- ----------
(Unaudited)
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 348,350 $ 360,680 $ 379,536
Leasehold improvements 9,061 8,561 16,955
--------- --------- ---------
357,411 369,241 396,491
Less: Accumulated depreciation (224,910) (256,245) (251,699)
--------- --------- ---------
$ 132,501 $ 112,996 $ 144,792
========= ========= =========
</TABLE>
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1993 1994 1995
------ ------- -------------
(Unaudited)
<S> <C> <C> <C>
Accounts payable $ -- $ 11,203 $17,058
Accrued payroll taxes 20,081 80,834 --
Accrued pension expenses 58,901 44,436 40,000
Income tax payable -- 15,500 21,000
------- -------- -------
$78,982 $151,973 $78,058
======= ======== =======
</TABLE>
4. REVOLVING LINE OF CREDIT
The revolving line of credit bears interest at 8.5%, is unsecured and has
no specified repayment terms. The amount available to borrow against the line
of credit is approximately $65,000 at December 31, 1994 and $73,000
(unaudited) at September 30, 1995.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1993 1994 1995
------- ------- -------------
(Unaudited)
<S> <C> <C>
Capital lease obligation, bearing interest at 15%,
payable in monthly installments of $1,326 through July
1997 $ 46,530 $ 35,748 $ 26,100
Notes payable, bearing interest between 8% and 18%,
payable in average monthly installments of
approximately $1,100 through March 1998 42,930 33,330 27,784
-------- -------- --------
89,460 69,078 53,884
Less--Current portion (20,382) (22,205) (26,000)
-------- -------- --------
$ 69,078 $ 46,873 $ 27,884
======== ======== ========
</TABLE>
F-169
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future maturities of long-term debt as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
Capital Note
Year Leases Payable Total
---- ---------- ---------- ------------
<S> <C> <C> <C>
1995 $15,913 $ 9,105 $25,018
1996 15,913 10,083 25,996
1997 9,282 11,168 20,450
1998 -- 2,974 2,974
------- ------- -------
$41,108 $33,330 74,438
======= =======
Less: Amount representing interest (5,360)
-------
$69,078
=======
</TABLE>
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the
For the Year Ended Nine-Month Periods
December 31, Ended September 30,
----------------------- ---------------------------
1993 1994 1994 1995
--------- ---------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Current $ -- $15,500 $(15,600) $21,000
Deferred -- 18,600 63,600 33,000
------- ------- -------- -------
$ -- $34,100 $ 48,000 $54,000
------- ------- -------- -------
Federal $ -- $29,700 $ 42,000 $47,000
State -- 4,400 6,000 7,000
------- ------- -------- -------
$ -- $34,100 $ 48,000 $54,000
======= ======= ======== =======
</TABLE>
A reconciliation of the tax provision at the statutory rate of 34% to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
For the
Nine-Month Periods
For the Year Ended Ended September
December 31, 30,
------------------ ------------------
1993 1994 1994 1995
-------- ------ ------ --------
(Unaudited)
<S> <C> <C> <C> <C>
Tax provision at the
statutory rate $(12,700) $29,700 $42,000 $47,000
State income taxes (1,900) 4,400 6,000 7,000
Net operating loss carried
forward 14,600 -- -- --
-------- ------- ------- -------
$ -- $34,100 $48,000 $54,000
======== ======= ======= =======
</TABLE>
F-170
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
September 30,
1993 1994 1995
------- ------- -------------
(Unaudited)
<S> <C> <C> <C>
Book/tax differences in recording accounts
receivable $106,000 $132,000 $137,000
Book/tax difference in recording prepaid
expenses 3,000 3,000 --
Book/tax difference in recording accounts
payable and accrued expenses (31,000) (53,000) (22,000)
Net operating loss carried forward (14,600) -- --
-------- -------- --------
$ 63,400 $ 82,000 $115,000
======== ======== ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
a. Employment Agreements
The Company has an employment agreement with a physician. Future minimum
payments under this agreement as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Year Amount
- ----- ---------
<S> <C>
1995 $150,000
1996 87,500
--------
$237,500
========
</TABLE>
b. Insurance
The physicians employed by the Company are required to maintain insurance
coverage for their professional malpractice claims as a condition of
employment. Such insurance provides for coverage to the extent individual
claims do not exceed $1,000,000 per incident and $3,000,000 in the aggregate
per year. The Company maintains occurrence-based malpractice insurance
coverage. Accordingly, the Company does not provide reserves for professional
malpractice claims.
c. Operating Leases
The Company leases automobiles for the stockholders and office space under
operating leases which expire through 1998. Future annual minimum payments
under operating leases as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Year Amount
- ----- --------
<S> <C>
1995 $ 88,004
1996 81,910
1997 65,332
1998 21,333
--------
$256,579
========
</TABLE>
Rent expense of $54,956, $64,849, $42,846 (unaudited) and $47,219
(unaudited) was incurred in the years ended December 31, 1993 and 1994 and
the nine-month periods ended September 30, 1994 and 1995, respectively.
F-171
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. BENEFIT PLAN
The Company provides retirement benefits for substantially all of its
employees under a defined contribution plan. Contributions to the plan
amounted to $70,797 and $94,445 for the years ended December 31, 1993 and
1994, respectively, and $62,000 (unaudited) and $80,763 (unaudited) for the
nine-month periods ended September 30, 1994 and 1995, respectively.
9. RELATED PARTY TRANSACTIONS
"Due from Stockholder" in the accompanying balance sheet at December 31,
1993 and 1994 consists of an advance to a physician stockholder. The amount
is noninterest-bearing and has no specified repayment terms.
10. SUBSEQUENT EVENTS
Subsequent to year-end, the Company began negotiations to enter into an
asset purchase and long-term management service agreement with Continuum Care
Corporation, an unaffiliated entity. As of September 20, 1995, the terms of
this agreement had not been finalized.
F-172
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Pinnacle Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Associates, Inc. as of December 31, 1994 and 1993, and the related
consolidated statements of operations, changes in stockholders' deficit and
cash flows for the year ended December 31, 1994 and for the period from
October 21 (inception) to December 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pinnacle
Associates, Inc. as of December 31, 1994 and 1993 and the consolidated
results of its operations and its cash flows for the year ended December 31,
1994 and for the period from October 21 (inception) to December 31, 1993 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 14, 1995
See Independent Audit Report.
F-173
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1995 1994 1993
--------------- -------------- ----------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 13,940 $ 7,666 $ 1,174
Trade accounts receivable, less allowance for
doubtful accounts of $3,358 in 1994 and $0 in 1993 567,127 75,019 --
Inventory 45,181 50,718 --
Prepaid expenses 5,586 -- --
Other assets 7,113 13,762 5,285
---------- --------- --------
Total current assets 638,947 147,165 6,459
Property and equipment, net of accumulated
depreciation 73,114 92,924 10,716
Organization costs, net amortization 3,500 4,250 --
---------- --------- --------
Total assets. $ 715,561 $ 244,339 $ 17,175
========== ========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable 233,729 71,029 --
Accrued liabilities 75,561 30,655 --
Interest payable 7,712 4,718 --
Line of credit 400,000 400,000 30,000
Note payable 50,000 50,000 --
Loan payable to officers 250,000 318 32,095
---------- --------- --------
Total current liabilities 1,017,002 556,720 62,095
Commitments and contingencies (Note 4) -- -- --
Stockholders' deficit:
Common stock, $.01 par 20,000,000; shares authorized;
issued and outstanding, 6,622,500 shares at
September 30, 1995, 6,457,500 shares at December
31, 1994 and 9,000,000 shares at December 31, 1993 66,225 65,475 90,000
Due to from stockholders (59,400) (59,400) (89,100)
Additional paid-in capital 616,275 542,025 --
Accumulated deficit (924,541) (860,481) (45,820)
---------- --------- --------
Total stockholders' deficit. (301,411) (312,381) (44,920)
---------- --------- --------
Total liabilities and stockholders' deficit $ 715,561 $ 244,339 $ 17,175
========== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-174
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
October 21,
January 1, to January 1, to (inception) to
September 30, December 31, December 31,
1995 1994 1993
--------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Operating revenues $1,206,832 $ 303,508 $ --
Costs and expenses:
Operating expenses 484,130 134,636
General and administrative expenses 841,804 953,915 45,820
---------- ---------- --------
Total costs and expenses 1,325,934 1,088,551 45,820
---------- ---------- --------
(119,102) (785,043) (45,820)
---------- ---------- --------
Other income (expense):
Interest expense (36,871) (19,280) --
Interest income -- 1,166 --
Loss on equity investment -- (12,500) --
Proceeds from sale of investment 12,500 -- --
Other income, net 79,413 996 --
---------- ---------- --------
Net loss $ (64,060) $ (814,661) $(45,820)
========== ========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-175
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Total
Due from Paid-In Accumulated Stockholders'
Shares Amount Stockholders Capital Deficit Deficit
---------- ------- ----------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 21, 1993
Issuance of common stock 9,000,000 $ 90,000 $(89,100) $ -- $ 900
Net loss $ (45,820) (45,820)
---------- -------- -------- -------- --------- ---------
Balance, December 31, 1993 9,000,000 90,000 (89,100) -- (45,820) (44,920)
Issuance of common stock 597,500 5,975 591,525 597,500
Retirement of common stock (3,000,000) (30,000) 29,700 -- (300)
Repurchase of common stock (50,000) (500) (49,500) (50,000)
Net loss (814,661) (814,661)
---------- -------- -------- -------- --------- ---------
Balance, December 31, 1994 6,547,500 65,475 (59,400) 542,025 (860,481) (312,381)
Issuance of common stock 75,000 750 74,250 75,000
Net loss (64,060) (64,060)
---------- -------- -------- -------- --------- ---------
Balance, September 30,
1995 (unaudited) 6,622,500 $ 66,225 $(59,400) $616,275 $(924,541) $(301,441)
========== ======== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-176
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
October 21,
January 1, to January 1, to (inception) to
September 30, December 31, December 31,
1995 1994 1993
--------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (64,060) $(814,661) $(45,820)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 25,969 22,702 290
Loss on sale of fixed assets (423)
Change in assets and liabilities:
(Increase) in trade accounts receivable (492,108) (75,019) --
(Increase) decrease in inventory 5,537 (50,718) --
(Increase) decrease in prepaid expenses and
organization costs 1,063 (13,478) (5,285)
Increase (decrease) in accounts payable 162,700 71,029 --
Increase (decrease) in accrued expenses 44,906 30,655 --
Increase (decrease) in accrued interest 2,994 4,718 --
--------- --------- --------
Net cash used in operating activities (312,999) (825,195) (50,815)
Cash flows used in investing activities:
Additions to property and equipment (5,409) (106,196) (11,006)
Proceeds from sale of fixed assets -- 2,462 --
Net cash provided (used by investing
activities) (5,409) (103,736) (11,006)
--------- --------- --------
Cash flows provided by financing activities:
Proceeds from issuance of common stock 75,000 547,200 900
Borrowings from officers 249,682 318 32,095
Borrowings under notes payable -- 50,000 --
Payments on loans to officers -- (32,095) --
Borrowings on revolving line of credit -- 370,000 30,000
--------- --------- --------
Net cash provided (used by financing
activities) 324,682 935,423 62,995
--------- --------- --------
Net change in cash 6,274 6,492 1,174
Cash, beginning of period. 7,666 1,174 --
--------- --------- --------
Cash, end of period $ 13,940 $ 7,666 $ 1,174
========= ========= ========
Supplemental cash flow information:
Cash paid during the year for interest $ 33,876 19,280 --
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-177
<PAGE>
PINNACLE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies:
Description of Business
Pinnacle Associates Inc. (the "Company") was incorporated on October 21,
1993 under the laws of Georgia and began treating patients in April 1994. The
Company was formed to provide management and administrative services for
physicians as well as physician directed infusion therapy programs for the
physician's patients while remaining part of the physician's practice. The
Company offers services in Pittsburgh and Atlanta.
Principles of Consolidation
The consolidated financial statements include the accounts of Pinnacle
Associates, Inc. and its related entities. All intercompany transactions and
balances have been eliminated in consolidation.
Inventory
Inventory is stated at the lower of cost, as determined on the first-in
first-out method, or market.
Investments
The equity method of accounting is used for investments when the Company
has a non-controlling ownership interest in another company that is greater
than 20%. Under the equity method of accounting, original investments are
recorded at cost and adjusted by the company's share of undistributed
earnings or losses of such companies and the amortization of underlying
intangibles.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is generally calculated over the estimated useful lives of the
assets using accelerated methods. Routine maintenance and repairs are charged
to expenses as incurred, while costs of betterments and renewals are
capitalized.
Organization Costs
Organization costs are being amortized on a straight-line basis over a
five year period.
Income Taxes
The stockholder of the Company has elected to adopt the provisions of
Subchapter S of the Internal Revenue Code of 1986. As a result, the Company
is not subject to corporate income taxes, except for taxes on capital gains,
if any. Accordingly, no provisions have been made in the accompanying
financial statements for federal and state income taxes since such taxes are
liabilities of the individual stockholder and the amounts thereof depend upon
his tax situation.
The Company's tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the stockholder could be changed if adjustments in the
distributable income were ultimately sustained by the taxing authorities.
See Independent Audit Report.
F-178
<PAGE>
PINNACLE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Property and Equipment:
<TABLE>
<CAPTION>
December 31,
-------------------------
Depreciable
Lives 1994 1993
----------------- ----------- -----------
<S> <C> <C> <C>
Furniture and equipment 5-7 years $ 45,949 $ 8,073
Computer and software. 5-7 years 68,619 2,933
-------- -------
114,568 11,006
Less accumulated depreciation (21,644) (290)
-------- -------
Total $ 92,924 $10,716
======== =======
</TABLE>
3. Line of Credit:
On November 24, 1993 the Company obtained a line of credit from a bank in
the amount of $200,000 which is due and payable on demand. On June 14, 1994,
the Company obtained an additional $200,000 line of credit with the same
payment terms. Interest is payable monthly for each line of credit at the
bank's variable prime rate which was 8.5% at December 31, 1994. The amount
outstanding under the line of credit at December 31, 1994 and 1993 was
$400,000 and $30,000, respectively. A former partner and officer of the
Company has personally guaranteed the line of credit.
4. Commitments and Contingencies:
The Company leases various facilities, equipment and vehicles under lease
arrangements. Rent expense under all operating leases was $62,338 and $10,016
at December 31, 1994 and 1993, respectively. Future minimum lease payments
under these leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 39,739
1996 40,886
1997 33,008
1998 33,040
1999 5,538
Thereafter --
--------
Total minimum lease
payments $152,211
========
</TABLE>
5. Related Party Transactions:
The Company issued a $50,000 note which is payable on demand to a former
stockholder of the Company at 8% interest. Since the Company's inception,
several of the Company's officers and shareholders have provided services to
the Company for which no compensation has been reflected on these financial
statements.
6. Investment:
During 1994, the Company had purchased for $12,500 a 50% investment in an
affiliated company owned by certain stockholders of the Company. The
Company's share of the losses of the investment for 1994 exceeded the
carrying value of the investment. This investment was accounted for using the
equity method. At December 31, 1994, the investment balance was written down
to zero, reflecting the adjusted basis of the investment. Subsequent to
December 31, 1994, the equity investment was sold for $12,500 to a former
stockholder and officer of the Company.
See Independent Audit Report.
F-179
<PAGE>
PINNACLE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Subsequent Events:
As of November 30, 1995, the Company opened several new programs in
seventeen locations, increasing the total number of program locations to nine
cities from two cities at December 31, 1994.
During November, the Company was acquired by Continuum Care Corporation.
In connection with the acquisition, the Company may receive up to $5,200,000.
The payment will represent the full purchase price and will be made in the
form of shares of Common Stock of Continuum Care Corporation. The ultimate
purchase price will be allocated to assets, primarily goodwill, at their fair
market value and amortized prospectively over the remainder of the forty year
period.
See Independent Audit Report.
F-180
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Company is a Delaware corporation. Reference is made to
Section 145 of the Delaware General Corporation Law, as amended, which provides
that a corporation may indemnify any person who was or is a party to or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceedings, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite an adjudication of liability, but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper. The
Company's Certificate of Incorporation further provides that the Company shall
indemnify its directors and officers to the full extent permitted by the law of
the State of Delaware.
The Company's Certificate of Incorporation provides that the
Company's directors shall not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent that exculpation from liability is not permitted under the Delaware
General Corporation Law as in effect at the time such liability is determined.
The Company maintains an indemnification insurance policy
covering all directors and officers of the Company and its subsidiaries.
II-1
<PAGE>
Item 21. Exhibits and Financial Statements
(a) Exhibits. The following is a list of exhibits which are incorporated as part
of the Registration Statement by reference.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
3.1 Restated Certificate of Incorporation of the Company.
3.2 By-laws of the Company.
+4.1 Indenture with respect to the Company's 6 3/4% Convertible Subordinated Debentures.
+5.1 Opinion of Nutter, McClennen & Fish, LLP as to the legality of the securities registered
hereunder.
10.1 Asset Purchase Agreement dated September 13, 1995 by and between Oncology and
Radiation Associates, P.A. and Oncology Therapies, Inc.
10.2 Agreement for Purchase and Sale of Assets dated September 11, 1995 by
and among Osler Medical, Osler Medical, Inc., Professional Associations
named herein and PhyChoice, Inc.
10.3 Purchase and Sale Agreement dated August 15, 1995 by and among Cancer Specialists of
Georgia, P.C., Temple Associates, Wolverine Associates, Pembroke Group, LLC and
PhyChoice, Inc.
10.4 Agreement for Purchase and Sale of Assets dated April 12, 1995 by and between Aegis
Health Systems, Inc. and CCC National Lithotripsy, Inc.
10.5 Agreement and Plan of Merger dated November 21, 1994 among Oncology Therapies, Inc.,
Radiation Care Acquisition Corp., Radiation Care, Inc., A.M.A. Financial Corporation and
Thomas E. Haire.
10.6 Stock and Asset Purchase Agreement dated October 27, 1994 by and among
Nutrichem, Inc., The Health Link Group, Inc., John Chay, Raj Mantena
and CCC-Infusion, Inc.
10.7 Stock Purchase Agreement dated May 31, 1995 by and among Dasco Development
Corporation, Dasco Development West, Inc., Donald A. Sands, Bruce A. Rendina and
Abraham D. Gosman.
10.8 Management Services Agreement dated August 15, 1995 by and between Georgia Cancer
Specialists I, P.C. and PhyChoice, Inc.
10.9 Management Services Agreement dated September 11, 1995 by and between Osler
Medical, Inc. and PhyChoice, Inc.
10.10 Employment Agreement dated as of January 1, 1995 between DASCO and Bruce A.
Rendina
10.11 Employment Agreement dated as of January 1, 1995 between DASCO and Donald A.
Sands
+10.12 Employment Agreement dated July 27, 1994 between Continuum Care of Massachusetts,
Inc. and William A. Sanger
+10.13 First Amendment to Employment Agreement dated March 13, 1996 between PhyMatrix
Corp. and William A. Sanger
II-2
<PAGE>
+10.14 Employment Agreement dated January 29, 1996 between PhyMatrix Corp. and Robert A. Miller
10.15 Employment Agreement dated September 22, 1994 between Continuum Care of
Massachusetts, Inc. and Edward E. Goldman, M.D.
10.16 1995 Equity Incentive Plan
10.17 Registration Agreement dated January 29, 1996 between PhyMatrix Corp. and various
stockholders of PhyMatrix Corp.
+10.18 Registration Agreement dated June 21, 1996 between PhyMatrix Corp. and the Initial Purchasers of the Company's
debentures.
10.19 Shareholders' Agreement dated as of May 31, 1995 by and among Donald A. Sands, Bruce
A. Rendina, Abraham D. Gosman, DASCO Development Corporation and DASCO
Development West, Inc.
21.1 Subsidiaries of the registrant
*23.1 Consent of Coopers & Lybrand L.L.P.
*23.2 Consent of Coopers & Lybrand L.L.P.
*23.3 Consent of Bober, Markey & Company
*23.4 Consent of Coopers & Lybrand L.L.P.
*23.5 Consent of Coopers & Lybrand L.L.P.
*23.6 Consent of Arthur Andersen LLP
*23.7 Consent of Hoyman, Dobson & Company
*23.8 Consent of Babush, Neiman, Kornman & Johnson
*23.9 Consent of Weil, Akman, Baylin & Coleman
*23.10 Consent of Coopers & Lybrand L.L.P.
*23.11 Consent of Katz, Sapper & Miller, LLP
*23.12 Consent of Roy Cline, CPA, PA
*23.13 Consent of Regan, Russell, Schickner & Shah, P.A.
*23.14 Consent of Patrick & Associates, P.A.
*23.15 Consent of Patrick & Associates, P.A.
*23.16 Consent of Coopers & Lybrand L.L.P.
+23.17 Consent of Nutter, McClennen & Fish, LLP (contained in Exhibit 5)
*24.1 Power of Attorney (Contained on Page II-5)
</TABLE>
* Filed herewith.
+ To be filed by amendment.
All other exhibits are hereby incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No. 33-97854).
II-3
<PAGE>
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement.
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form.
(5) That every prospectus (i) that is filed pursuant to
paragraph (4) immediately preceeding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a apart of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 30th day of
July 1996.
PHYMATRIX CORP.
By: /s/ Abraham D. Gosman
----------------------------------------
Abraham D. Gosman
Chairman of the Board of Directors,
President and Chief Executive Officer
The registrant and each person whose signature appears below
on this Registration Statement hereby constitutes and appoints Michael J. Bohnen
and James E. Dawson, and each of them, with full power to act without the other,
his true and lawful, attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities (until revoked in writing) to sign any and all amendments (including
post-effective amendments and amendments thereto) to this Registration Statement
on Form S-4 of the registrant, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary fully to all intents and purposes as he might or could
do in person thereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ Abraham D. Gosman July 30, 1996
- ---------------------------------------------
Abraham D. Gosman
Chairman of the Board of Directors, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ Frederick R. Leathers July 30, 1996
- ---------------------------------------------
Frederick R. Leathers
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Joseph N. Cassese July 30, 1996
- ---------------------------------------------
Joseph N. Cassese
Director
<PAGE>
/s/ David Livingston, M.D. July 30, 1996
- ---------------------------------------------
David Livingston, M.D.
Director
______________________________________________ July __, 1996
Bruce Rendina
Director
/s/ Stephen E. Ronai July 30, 1996
- ---------------------------------------------
Stephen E. Ronai, Esq.
Director
/s/ Hugh L. Carey July 30, 1996
- ---------------------------------------------
Governor Hugh L. Carey
Director
/s/ John Chay July 30, 1996
- ---------------------------------------------
John Chay
Director
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of PhyMatrix Corp. on
Form S-4 (File No. ) of our report dated March 27, 1996, on our audits of the
combined financial statements and financial statement schedule of PhyMatrix
Corp. We also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 29, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
PhyMatrix Corp. on Form S-4 (File No. 33- ) of our report dated November 6,
1995, on our audits of the financial statements of DASCO Development Corporation
and Affiliate. We also consent to the reference to our firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
Miami, Florida
July 29, 1996
Consent of Independent Accountants
EXHIBIT 23.3
Stanley M. Bober, CPA BOBER, Mark B. Bober, CPA
Richard C. Fedorovich, CPA MARKEY Cindy S. Johnson, CPA
Alan Markey, CPA & Company Michael R. Lee, CPA
Dale A. Ruther, CPA Theresa M. Petit, CPA
==========================================
Certified Public Accountants
A Professional Corporation
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by reference of
our report dated July 31, 1995 with respect to DASCO Development Corporation and
Affiliate in this Registration Statement on Form S-4 filed by PhyMatrix Corp.,
which report is incorporated by reference in this Registration Statement.
/s/ Bober, Markey & Company
BOBER, MARKEY & COMPANY
Akron, Ohio
July 29, 1996
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
PhyMatrix Corp. on Form S-4 (File No. 33- ) of our report dated October 5, 1995,
on our audits of the financial statements of Radiation Care, Inc. and
Subsidiaries. We also consent to the reference to our firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 29, 1996
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement on
Form S-4 (File No. ) of our report dated August 24, 1995, on our audits of the
financial statements of Aegis Health Systems, Inc. as of December 31, 1994, and
1993, and for each of the three years in the period ended December 31, 1994. We
also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Oklahoma City, Oklahoma
July 29, 1996
EXHIBIT 23.6
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
July 29, 1996.
EXHIBIT 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-4 (File No.
33- ) of our report dated July 27, 1995, on our audits of the financial
statements of Osler Medical as of and for the years ended December 31, 1994 and
1993. We also consent to the reference to our firm under the captions "Experts".
/s/ Hoyman, Dobson & Company, P.A.
HOYMAN, DOBSON & COMPANY, P.A.
Melbourne, Florida
July 29, 1996
EXHIBIT 23.8
Babush, Neiman, Kornman & Johnson, LLP
Certified Public Accountants
Eight Piedmont Center, Suite 500
3525 Piedmont Road, Atlanta, Georgia 30305
404/266-1900 FAX 404/266-3436
Internet:http://www.proi.com/bnkj/
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated June 26, 1995 with respect to Georgia
Oncology-Hematology Clinic, P.C. in this Registration Statement on Form S-4
filed by PhyMatrix Corp., which report is incorporated by reference in this
Registration Statement.
/s/ Babush, Neiman, Kornman & Johnson, LLP
BABUSH, NEIMAN, KORNMAN & JOHNSON, LLP
July 29, 1996
Atlanta, Georgia
EXHIBIT 23.9
(410) 561-4411 FAX: (410) 561-4586
WABC
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
201 West Padonia Road, Suite 600
Timonium, Maryland 21093-2186
INDEPENDENT AUDITOR'S CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated August 4, 1995 with respect to Oncology-Hematology
Associates, P.A. and Oncology-Hematology Infusion Therapy, Inc. in this
Registration Statement on Form S-4 filed by PhyMatrix Corp., which report is
incorporated by reference in this Registration Statement.
/s/ Weil, Akman, Baylin & Coleman, P.A.
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
Timonium, Maryland
July 29, 1996
EXHIBIT 23.10
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
PhyMatrix Corp. on Form S-4 (File No. 33- ) of our report dated January 9, 1996,
on our audit of the financial statements of Cancer Specialists of Georgia, P.C.
We also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 29, 1996
EXHIBIT 23.11
INDEPENDENT AUDITOR'S CONSENT
As independent auditors, we hereby consent to the use of our report
dated October 25, 1995, with respect to Mobile Lithotripter of Indiana Partners
in this Registration Statement on Form S-4 filed by PhyMatrix Corp. We also
consent to the reference to us under the heading "Independent Accountants" in
this Prospectus, which is part of such Registration Statement.
/s/ Katz, Sapper & Miller, LLP
KATZ, SAPPER & MILLER, LLP
Indianapolis, Indiana
July 29, 1996
EXHIBIT 23.12
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated June 22, 1995 with respect to UroMed Technologies,
Inc. in this Registration Statement on Form S-4 filed by PhyMatrix Corp., which
report is incorporated by reference in this Registration Statement.
/s/ Roy Cline, CPA, PA
Roy Cline, CPA, PA
Altamonte Springs, Florida
July 29, 1996
EXHIBIT 23.13
REGAN, RUSSELL, SCHICKNER & SHAH, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated September 13, 1995 with respect to the Financial
Statements of Nutrichem, Inc. for periods ended December 31, 1993 and November
17, 1994 in this Registration Statement on Form S-4 filed by PhyMatrix
Corporation.
/s/ Regan, Russell, Schickner & Shah, P.A.
Regan, Russell, Schickner & Shah, P.A.
Columbia, Maryland
July 29, 1996
EXHIBIT 23.14
4040 Woodcock Drive, Suite 230
Patrick & Jacksonville, Florida 32207
Associates, P.A. (904)396-9510 o (904)396-5400 o fax (904)396-9226
- --------------------------------------------------------------------------------
Certified Public Accountants
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated June 8, 1995, with respect to First Choice Home
Care, Inc. in this Registration Statement on Form S-4 filed by PhyMatrix Corp.,
which report is incorporated by reference in this Registration Statement.
/s/ Patrick & Associates, P.A.
Patrick & Associates, P.A.
Jacksonville, Florida
July 29, 1996
EXHIBIT 23.15
4040 Woodcock Drive, Suite 230
Patrick & Jacksonville, Florida 32207
Associates, P.A. (904)396-9510 o (904)396-5400 o fax (904)396-9226
Certified Public Accountants
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the incorporation by
reference of our report dated June 8, 1995, with respect to First Choice Health
Care Services of Ft. Lauderdale, Inc. in this Registration Statement on Form S-4
filed by PhyMatrix Corp., which report is incorporated by reference in this
Registration Statement.
/s/ Patrick & Associates, P.A.
Patrick & Associates, P.A.
Jacksonville, Florida
July 29, 1996
EXHIBIT 23.16
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement of
PhyMatrix Corp. on Form S-4 (File No. 33- ) of our report dated December 14,
1995, on our audits of the financial statements of Pinnacle Associates, Inc. We
also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 29, 1996
