As filed with the Securities and Exchange Commission on December 17, 1996
Registration No. 333-08269
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
PHYMATRIX CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 8099 65-0617076
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
777 South Flagler Drive
West Palm Beach, FL 33401
(561) 655-3500
(Address, including zip code, and telephone number, including
area code of Registrant's principal executive offices)
-------------
Abraham D. Gosman
PhyMatrix Corp.
777 South Flagler Drive
West Palm Beach, FL 33401
(561) 655-3500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------
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 any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933 check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If the Form is a post-effective amendment filed pursuant to Rule 426(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
----------------
<TABLE>
CALCULATION OF REGISTRATION FEE
========================================================================================================
<CAPTION>
Proposed
maximum Proposed maximum Amount of
Title of each class of Amount to be offering price aggregate offering registration
securities to be registered registered per share(1) price(1) fee
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6-3/4% Convertible Subordinated $100,000,000 100% $100,000,000 $34,483(2)
Debentures due 2003
- ---------------------------------------------------------------------------------------------------------
Shares of Common Stock, $.01 3,546,099 Not applicable Not Applicable None
par value shares(3)
==========================================================================================================
</TABLE>
(1) Determined pursuant to Rule 457(i) under the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee.
(2) Previously paid.
(3) Includes the number of shares of Common Stock into which the Debentures
being registered hereunder may be converted at the initial conversion
price, together with such additional indeterminate number of shares as
may become issuable upon conversion by reason of adjustments to the
conversion price. No registration fee is required for Common Stock
reserved for conversion, because such shares will be issued for no
additional consideration.
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-1
<TABLE>
<CAPTION>
Registration Statement Item Location in Prospectus
--------------------------- ----------------------
<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover Pages of Registration
Statement and Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front Cover Page
of
Prospectus
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges Prospectus Summary; Risk Factors; Ratio of
Earnings to Fixed Charges; The Company
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price *
6. Dilution *
7. Selling Security Holders Selling Securityholders
8. Plan of Distribution Outside Front Cover Page; Plan of
Distribution
9. Description of Securities to Be Registered Description of Debentures; Description of
Common Stock
10. Interests of Named Experts and Counsel *
11. Information with Respect to the Registrant Prospectus Summary; Summary Financial Data;
The Company; Capitalization; Ratio of
Earnings to Fixed Charges; Price Range of
Common Stock; Dividend Policy; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operation; Business; Management; Certain
Transactions; Principal Stockholders;
Description of Debentures; Description of
Capital Stock; Combined Financial Statements
12. Disclosure of Commission Position on *
</TABLE>
Indemnification for Securities Act
Liabilities
- -------------
* Omitted as inapplicable.
<PAGE>
PROSPECTUS
Phymatrix Corp.
a Physician Practice Management Company
$100,000,000
6-3/4% Convertible Subordinated Debentures due 2003
3,546,099 Shares of Common Stock, par value $.01 per share
- -------------
This Prospectus relates to the resale of $100,000,000 aggregate principal
amount of 6-3/4% Convertible Subordinated Debentures due 2003 (the
"Debentures") of PhyMatrix, Corp., a Delaware corporation (sometimes referred
to herein as the "Company"), issued to the initial purchasers of the
Debentures (the "Initial Purchasers") in private placements consummated on
June 26, 1996 (the "Debt Offering"), and the resale of up to 3,546,099 shares
of the Common Stock, par value $.01 per share (the "Common Stock"), of the
Company which are initially issuable upon conversion of Debentures by any
holders of Debentures that did not purchase the Debentures under the
Registration Statement (of which this Prospectus is a part). The Registration
Statement (of which this Prospectus is a part) does not cover the issuance of
shares of Common Stock upon conversion of the Debentures into shares of
Common Stock. The Debentures and such shares of Common Stock issued upon
conversion of the Debentures may be offered from time to time for the
accounts of holders of Debentures named herein or in supplements to this
Prospectus (the "Selling Securityholders"). See "Plan of Distribution."
Information concerning the Selling Securityholders may change from time to
time and will be set forth in Supplements to this Prospectus. The Company
will not receive any proceeds from the offering of the Debentures or the
shares of Common Stock issuable upon conversion thereof.
The Debentures are convertible into Common Stock of PhyMatrix Corp. at
any time after August 25, 1996 and at or before maturity, unless previously
redeemed, at a conversion price of $28.20 per share, subject to adjustment in
certain events. The Common Stock of the Company is traded on The Nasdaq
National Market under the symbol PHMX. On December 13, 1996, the closing
price of the Common Stock as reported by Nasdaq was $14.00 per share.
The Debentures do not provide for a sinking fund. The Debentures are not
redeemable by the Company prior to June 18, 1999. Thereafter, the Debentures
are redeemable at the option of the Company, in whole or in part, at anytime,
at the redemption prices set forth in this Prospectus, together with accrued
interest. Upon a Repurchase Event (as defined herein), each holder of
Debentures shall have the right, at the holder's option, to require the
Company to repurchase such holder's Debentures at a purchase price equal to
100% of the principal amount thereof, plus accrued interest. See "Description
of Debentures--Certain Rights to Require Repurchase of Debentures."
The Debentures are unsecured obligations of the Company and are
subordinate to all present and future Senior Indebtedness (as defined herein)
of the Company. As of October 31, 1996, the Company had Senior Indebtedness
in the amount of approximately $7.3 million. The Indenture will not restrict
the incurrence of any other indebtedness or liabilities by the Company or its
subsidiaries. See "Description of Debentures--Subordination."
All of the Debentures were issued initially pursuant to an exemption from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), provided by Section 4(2) thereof or Regulation D
thereunder and, to the Company's knowledge, were transferred to the Selling
Securityholders pursuant to Rule 144A or Regulation S under the Securities
Act or to Selling Securityholders meeting the definition of institutional
accredited investors under Rule 501(a)(1), (2), (3) or (7) under the
Securities Act. Debentures resold pursuant to the Registration Statement (of
which this Prospectus is a part) will no longer be eligible for trading in
Private Offerings, Resales and Trading through Automated Linkages ("PORTAL")
Market.
The Selling Securityholders, acting as principals for their own account,
directly, through agents designated from time to time, or through brokers,
dealers, agents or underwriters also to be designated, may sell all or a
portion of the Debentures or shares of Common Stock which may be offered
hereby by them from time to time on terms to be determined at the time of
sale. The aggregate proceeds to the Selling Securityholders from the sale of
Debentures and Common Stock which may be offered hereby by the Selling
Securityholders will be the purchase price of such Debentures or Common Stock
less commissions, if any. For information concerning indemnification
arrangements between the Company and the Selling Securityholders, see "Plan
of Distribution."
The Selling Securityholders and any brokers, dealers, agents or
underwriters that participate with the Selling Securityholders in the
distribution of the Debentures or shares of Common Stock may be deemed to be
"underwriters" within the meaning of the Securities Act, in which event any
commissions received by such broker-dealers, agents or underwriters and any
profit on the resale of the Debentures or shares of Common Stock purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
The Company intends that the Registration Statement of which this
Prospectus is a part will remain effective for a period of three years from the
effective date hereof or such earlier date as of which such Registration
Statement is no longer required for the transfer of the subject securities. The
Company has agreed to bear certain expenses in connection with the registration
and sale of the Debentures and Common Stock being offered by the Selling
Securityholders.
-------------
See "Risk Factors" beginning on page 9 for certain information
that should be considered by prospective investors.
-------------
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 December 17, 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
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary 3
Risk Factors 9
The Company 16
Use of Proceeds 16
Capitalization 17
Ratio of Earnings to Fixed Charges 18
Price Range of Common Stock 18
Dividend Policy 18
Selected Financial Data 19
Management's Discussion and Analysis of Financial Condition and
Results of Operations 21
Business 32
Management 44
Certain Transactions 49
Principal Stockholders 51
Description of Debentures 52
Description of Capital Stock 59
Certain United States Federal Income Tax Consequences 61
Selling Securityholders 64
Plan of Distribution 66
Legal Matters 67
Experts 67
Additional Information 67
Index to Financial Statements F-1
</TABLE>
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
PhyMatrix Corp. (the "Company"), a physician practice management company,
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 174 physicians and acquired
several medical support service companies and a medical facility development
company. More recently the Company has also focused on expanding its
physician affiliations through the management of independent physician
associations ("IPA's") by management service organizations ("MSO's") in which
the Company has ownership interests. The Company owns interests in MSO's in
Connecticut, Georgia, New Jersey and New York that provide management
services to IPA's composed of over 1,470 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.
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 62 oncologists. The Company also provides comprehensive
cancer-related support services at 10 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
3
<PAGE>
of the Southeast Florida, Atlanta and Washington, D.C./Baltimore areas and in
the tri-state area of Connecticut, New York and New Jersey. The Company intends
to establish additional LPNs by affiliating with additional 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
144 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 operating
efficiencies through the consolidation of the overhead and administrative
functions of its physician practices.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Securities Offered $100,000,000 principal amount of 6-3/4% Convertible
Subordinated Debentures due 2003 (the "Debentures") and
3,546,099 shares of Common Stock, $.01 par value (the "Common
Stock") issuable upon conversion of the Debentures.
Payment of Interest June 15 and December 15, commencing December 15, 1996.
Maturity of Debentures June 15, 2003
Conversion The Debentures are convertible into Common Stock of the
Company at the option of the holder at any time after August
25, 1996 and at or before maturity, unless previously
redeemed, at $28.20 per share, subject to adjustment upon the
occurrence of certain events. See "Description of
Debentures--Conversion Rights."
Subordination Subordinated to all present and future Senior Indebtedness of
the Company. At October 31, 1996, the Company had Senior
Indebtedness in the amount of approximately $7.3 million. See
"Capitalization." The Indenture (as defined herein) contains
no limitation on the incurrence of indebtedness (including
Senior Indebtedness) or other liabilities by the Company and
its subsidiaries. See "Description of
Debentures--Subordination."
Redemption The Debentures are not redeemable by the Company prior to
June 18, 1999. Thereafter, the Debentures are redeemable, in
whole or in part, at anytime, at the redemption prices set
forth in this Prospectus, together with accrued interest. See
"Description of Debentures-- Optional Redemption."
Redemption at Holder's Option In the event that there shall occur a Repurchase Event (as
defined herein), each holder of the Debentures shall have the
right, at the holder's option, to require the Company to
repurchase such holder's Debentures at 100% of their
principal amount, plus accrued interest. The term Repurchase
Event is limited to transactions involving a Change in
Control (as defined herein), and does not include other
events that might adversely affect the financial condition of
the Company or result in a downgrade in the credit rating (if
any) of the Debentures. The Company's ability to repurchase
the Debentures following a Repurchase Event is dependent upon
the Company's having sufficient funds and may be limited by
the terms of the Company's Senior Indebtedness or the
subordination provisions of the Indenture. There can be no
assurance that the Company will be able to repurchase the
Debentures upon the occurrence of a Repurchase Event. See
"Description of Debentures--Certain Rights to Require
Repurchase of Debentures."
5
<PAGE>
Use of Proceeds The Company will not receive any proceeds from the sale of
the Debentures or the shares of Common Stock hereunder.
Trading Prior to the resale thereof pursuant to this Prospectus each
of the Debentures was eligible for trading in Private
Offerings, Resales and Trading through the PORTAL Market.
Debentures sold pursuant to this Prospectus will no longer be
eligible for trading in the PORTAL Market. The Company's
Common Stock is quoted on The Nasdaq National Market under
the Symbol "PHMX."
</TABLE>
-------------
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."
6
<PAGE>
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Historical (1)
----------------------------------------------------------------------------
Combined Combined Consolidated
June 24, 1994 Combined Consolidated Nine Nine
(inception) Year Month Months Months
to Ended Ended Ended Ended
December 31, December 31, January 31, September 30, October 31,
1994 1995 1996(2) 1995 1996(2)
--------------- -------------- -------------- --------------- --------------
(Audited) (Audited) (Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue $ 2,447 $ 70,733 $10,715 $40,118 $129,369
--------------- -------------- -------------- --------------- --------------
Operating expenses:
Cost of affiliated physician management
services -- 9,656 2,797 2,280 29,664
Salaries, wages and benefits 2,142 31,976 3,637 21,425 38,300
Depreciation and amortization 107 3,863 535 2,348 5,216
Rent 249 4,503 565 2,701 5,643
Earn out payment -- 1,271 -- 1,271 --
Provision for closure loss -- 2,500 -- -- --
Other 1,098 22,900 3,434 13,588 36,628
--------------- -------------- -------------- --------------- --------------
3,596 76,669 10,968 43,613 115,451
--------------- -------------- -------------- --------------- --------------
Income (loss) from operations (1,149) (5,936) (253) (3,495) 13,918
--------------- -------------- -------------- --------------- --------------
Interest expense 95 4,852 812 2,766 1,093
Minority interest 52 806 81 564 58
(Income) loss from investment in
affiliates -- (569) 30 (342) (496)
--------------- -------------- -------------- --------------- --------------
Income (loss) before income taxes (1,296) (11,025) (1,176) (6,483) 13,263
Income tax expense (3) -- -- -- -- 4,918
--------------- -------------- -------------- --------------- --------------
Net income (loss) $(1,296) $(11,025) $(1,176) $(6,483) $ 8,345
=============== ============== ============== =============== ==============
Net income per share (4) $ 0.38
==============
Operating Data (Unaudited):
Number of Affiliated physicians (5):
Cancer -- 55 55 55 62
Primary care -- 14 14 12 19
Other speciality -- 34 34 22 93
Revenues:
Cancer services $ 685 $ 44,905 $ 6,712 $24,461 $ 69,586
Non-cancer physician services -- 7,705 2,281 2,615 32,561
Other medical services 1,762 18,123 1,722 13,042 15,197
Medical facility development -- -- -- -- 12,025
--------------- -------------- -------------- --------------- --------------
Total $ 2,447 $ 70,733 $10,715 $40,118 $129,369
=============== ============== ============== =============== ==============
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
October 31, 1996
----------------
(Unaudited)
<S> <C>
Balance Sheet Data:
Cash and cash equivalents $ 91,837
Working capital 117,510
Total assets 289,754
Long-term debt, less current maturities 13,999
Convertible Subordinated Debentures 100,000
Total shareholders' equity 144,519
</TABLE>
- -------------
(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 since September 1994.
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 the Company's 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) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(3) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
(4) Net income per share is calculated based upon 21,968,654 weighted average
shares outstanding.
(5) Includes both employed and managed physicians. There were 30 employed
physicians at October 31, 1996.
8
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective purchasers of the Debentures or shares of Common Stock offered
hereby should carefully consider the factors set forth below before
purchasing the Debentures or 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 $8.3 million
from February 1, 1996 to October 31, 1996, there can be no assurance that the
Company will continue to be profitable. See "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 and agreements 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 and agreements, 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 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 has received a
commitment from PNC Bank, National Association, for a $30 million revolving
credit facility. 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."
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
9
<PAGE>
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 (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
10
<PAGE>
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 October 31, 1996, the Company's total assets were approximately $289.8
million, of which approximately $59.2 million, or approximately 20.4% 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 October 31, 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.
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 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.
11
<PAGE>
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 40 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 $30.0 million at October 31, 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 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
12
<PAGE>
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 46% of the outstanding shares of Common
Stock and all of the Company's executive officers and directors as a group
beneficially own approximately 53.9% 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. Effective January 1, 1997, Mr. Sands has resigned as Chairman of the
Board and Chief Executive Officer of DASCO and as Vice President--Medical
Facility Development of 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., 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 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.
Subordination of Debentures
The Debentures are subordinate in right of payment to all current and
future Senior Indebtedness of the Company. Senior Indebtedness consists of
all secured indebtedness of the Company, whether existing on or created or
incurred after the date of the issuance of the Debentures, that is not made
subordinate to or pari passu with the Debentures by the instrument creating
the indebtedness. At October 31, 1996, the Company had Senior Indebtedness in
the amount of approximately $7.3 million. The Indenture does not limit the
amount of additional indebtedness, including Senior Indebtedness, which the
Company can create, incur, assume or guarantee. By reason of such
subordination of the Debentures, in the event of insolvency, bankruptcy,
liquidation, reorganization, dissolution or winding up of the business of the
Company or upon a default in payment with respect to any Senior Indebtedness
of the Company or an event of default with respect to such indebtedness
resulting in the acceleration thereof, the assets of the Company will be
available to pay the amounts due on the Debentures only after all Senior
Indebtedness of the Company has been paid in full. See "Description of
Debentures."
Limitations on Repurchase of Debentures Upon a Repurchase Event
In the event of a Repurchase Event, which includes a Change in Control (as
defined herein), 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 repurchase date. The Company's ability
to repurchase the Debentures upon a Repurchase Event may be limited by the
terms of the Company's Senior Indebtedness and the subordination provisions
of the Indenture. Further, the ability of the Company to repurchase
Debentures upon a Repurchase Event will be dependent on the availability of
sufficient funds and compliance with applicable securities laws. Accordingly,
there can be no assurance that the Company will be able to repurchase the
Debentures upon a Repurchase Event. The term "Repurchase Event" is
13
<PAGE>
limited to certain specified transactions and may not include other events
that might adversely affect the financial condition of the Company or result
in a downgrade of any credit rating of the Debentures nor would the
requirement that the Company offer to repurchase the Debentures upon a
Repurchase Event necessarily afford holders of the Debentures protection in
the event of a highly leveraged reorganization, merger or similar transaction
involving the Company. See "Description of Debentures."
Absence of Public Market; Transfer Restrictions
There is no existing public market for the Debentures and there can be no
assurance as to the liquidity of any markets that may develop for the
Debentures, the ability of the holders to sell their Debentures or the price
at which holders of the Debentures may be able to sell their Debentures.
Future trading prices of the Debentures will depend on many factors,
including, among other things, prevailing interest rates, the Company's
operating results, the price of the Common Stock and the market for similar
securities. The Initial Purchasers have informed the Company that the Initial
Purchasers intend to make a market in the Debentures offered hereby, however,
the Initial Purchasers are not obligated to do so and any such market making
activity may be terminated at any time without notice to the holders of the
Debentures. Prior to the resale thereof pursuant to this Prospectus each of
the Debentures was eligible for trading in Private Offerings, Resales and
Trading through the PORTAL Market. Debentures sold pursuant to this
Prospectus will no longer be eligible for trading in the PORTAL Market. The
Company does not intend to apply for listing of the Debentures on any
securities exchange.
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 687,694 shares of Common Stock were issued in
connection with subsequent Acquisitions. All of such 13,995,144 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 issuance of such shares and then only in compliance with the
applicable requirements of Rule 144. 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 Company's initial public offering, holders of
all the above-mentioned restricted securities have the right to demand
registration under the Securities Act of shares of Common Stock. Such holders
also have the right to have shares of Common Stock included in certain future
registered public offerings of Common Stock. See--"Description of Capital
Stock-- Registration Rights." The Securities and Exchange Commission (the
"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 potential future acquisitions of physician practices or
medical support service companies, the Company has filed a registration
statement on Form S-4 to register up to 5,000,000 shares of Common Stock that
may be issued as some or all of the consideration paid for such acquisitions.
14
<PAGE>
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.
15
<PAGE>
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 since September 1994. 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's principal place of business is 777 South Flagler Drive, West
Palm Beach, Florida 33401; and its telephone number at that address is (561)
655-3500. Unless otherwise indicated or required by the context, references
to the "Company" include its consolidated subsidiaries.
USE OF PROCEEDS
The Debentures and shares of Common Stock offered by the Selling
Securityholders are not being sold by the Company, and the Company will not
receive any proceeds from the sale thereof.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
October 31, 1996.
<TABLE>
<CAPTION>
October 31, 1996
----------------
(Unaudited)
(In thousands)
<S> <C>
Current portion of long-term debt $ 2,886
Total current portion of long-term debt 2,886
================
Long-term debt, net of current portion 13,999
Convertible Subordinated Debentures 100,000
----------------
Total long-term debt 113,999
----------------
Shareholders' equity:
Preferred Stock, par value $.01; 1,000,000 shares authorized;
none issued or outstanding --
Common Stock, par value $.01; 40,000,000 shares authorized;
22,238,144 shares issued and outstanding 222
Additional paid-in capital 148,736
Retained earnings (deficit) (4,439)
----------------
Total shareholders' equity 144,519
----------------
Total capitalization $258,518
================
</TABLE>
17
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
June 24, 1994
(inception) Nine Months Year Month Nine Months
to Ended Ended Ended Ended
December 31, 1994 September 30, 1995 December 31, 1995 January 31, 1996 October 31, 1996
------------------ ------------------ ------------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Ratio less than 1.0x less than 1.0x less than 1.0x less than 1.0x 3.18
</TABLE>
For purposes of computing the ratio of earnings to fixed charges, earnings
represent income from operations before minority interest and income taxes,
plus fixed charges. Earnings also includes the equity in less-than-fifty-
percent-owned investees only to the extent of distributions. Fixed charges
include interest, amortization of financing costs and the portion of
operating rental expense which management believes is representative of the
interest component of rental expense. For the period from June 24, 1994
(inception) to December 31, 1994, the nine months ended September 30, 1995,
the year ended December 31, 1995 and the month ended January 31, 1996 for
purposes of computing the ratio of earnings to fixed charges, the Company had
earnings deficiencies of $1.1 million, $6.7 million, $4.1 million and $.2
million, respectively.
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.
<TABLE>
<CAPTION>
High Low
-----------------
<S> <C> <C>
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 31, 1996 25.75 18.00
August 1, 1996 through October 31, 1996 25.25 16.00
November 1, 1996 through December 31, 1996 17.75 11.25
</TABLE>
On December 13, 1996 the last reported sale price of the Common Stock was
$14.00. As of December 13, 1996, there were approximately 120 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.
18
<PAGE>
SELECTED HISTORICAL 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.
<TABLE>
<CAPTION>
Historical (1)
----------------------------------------------------------------------------
Combined Combined Consolidated
June 24, 1994 Combined Consolidated Nine Nine
(inception) Year Month Months Months
to Ended Ended Ended Ended
December 31, December 31, January 31, September 30, October 31,
1994 1995 1996 (2) 1995 1996 (2)
--------------- -------------- -------------- --------------- --------------
(Audited) (Audited) (Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue $ 2,447 $ 70,733 $10,715 $40,118 $129,369
--------------- -------------- -------------- --------------- --------------
Operating expenses:
Cost of affiliated physician
management services -- 9,656 2,797 2,280 29,664
Salaries, wages and benefits 2,142 31,976 3,637 21,425 38,300
Depreciation and amortization 107 3,863 535 2,348 5,216
Rent 249 4,503 565 2,701 5,643
Earn-out payment -- 1,271 -- 1,271 --
Provision for closure loss -- 2,500 -- -- --
Other 1,098 22,900 3,434 13,588 36,628
--------------- -------------- -------------- --------------- --------------
3,596 76,669 10,968 43,613 115,451
--------------- -------------- -------------- --------------- --------------
Income (loss) from operations (1,149) (5,936) (253) (3,495) 13,918
--------------- -------------- -------------- --------------- --------------
Interest expense 95 4,852 812 2,766 1,093
Minority interest 52 806 81 564 58
Income from investments in
affiliates -- (569) 30 (342) (496)
--------------- -------------- -------------- --------------- --------------
Income (loss) before income taxes (1,296) (11,025) (1,176) (6,483) 13,263
Income tax expense (3) -- -- -- -- 4,918
--------------- -------------- -------------- --------------- --------------
Net income (loss) $(1,296) $(11,025) $(1,176) $(6,483) $ 8,345
=============== ============== ============== =============== ==============
Net income per share (4) $ 0.38
==============
</TABLE>
<TABLE>
<CAPTION>
October 31, 1996
----------------
(Unaudited)
<S> <C>
Balance Sheet Data:
Cash and cash equivalents $ 91,837
Working capital 117,510
Total assets 289,754
Long-term debt, less current maturities 13,999
Convertible Subordinated Debentures 100,000
Total shareholders' equity 144,519
</TABLE>
19
<PAGE>
- -------------
(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 since September 1994.
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) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(3) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
(4) Net income per share is calculated based upon 21,968,654 weighted average
shares outstanding.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company is a physician practice management company that provides
management services to disease specialty and primary care physicians and
provides related medical support services. The Company's strategy is to
develop networks of disease specialty and primary care physicians supported
by related diagnostic and therapeutic medical support services in order to
provide a continuum of health care services in specific geographic locations.
The Company also provides medical facility development services to related
and unrelated third parties in connection with the establishment of health
parks, medical malls and medical office buildings.
Since the Company commenced operations in June 1994, it has developed its
current business primarily through the acquisition of the businesses and
assets of physician practices and medical support service companies. More
recently the Company has also focused on expanding its physician affiliations
through the management of IPA's by management service organizations ("MSO's")
in which the Company has ownership interests. As of October 31, 1996, the
Company had affiliated through management and/or employment agreements with
174 physicians, acquired several medical support service companies, acquired
a medical facility development company, and acquired a management services
organization in Connecticut with 375 physicians, a 50% interest in a
management services organization with 45 physicians in Georgia and an 80%
interest in a management services organization with 450 physicians in New
Jersey (collectively, the "Acquisitions").
In January 1996, the Company changed its fiscal year end from December 31
to January 31.
Acquisition Summary
The following table sets forth the Acquisitions made by the Company as of
October 31, 1996 with the respective purchase dates, purchase prices, and
amounts allocated to intangibles:
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
---------------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
- ----------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Employed physicians (A) Various through
October 1996 $ 7,300,995 $5,965,807 --
Medical support service companies:
(bullet) Uromed Technologies, Inc. September 1994 3,681,718 2,395,881 --
(bullet) Nutrichem, Inc. November 1994 12,924,371 9,799,793 --
(bullet) First Choice Home Care Services of Boca Raton,
Inc. November 1994 2,910,546 2,622,061 --
(bullet) First Choice Health Care Services of
Ft.Lauderdale, Inc.
(bullet) First Choice Health Care Services, Inc.
(bullet) Mobile Lithotripter of Indiana Partners December 1994 2,663,000 -- --
(bullet) Radiation Care, Inc. and Subsidiaries March 1995 41,470,207 8,623,239 --
(bullet) Aegis Health Systems, Inc. April 1995 7,163,125 6,228,126 --
(bullet) Phylab/Miramer Lab October 1995 133,081 118,649 --
(bullet) Pinnacle Associates, Inc. November 1995 --(B) 471,967 --
Managed physician practices:
(bullet) Georgia Oncology-Hematology Clinic, P.C. April 1995 2,099,353 -- 645,448
(bullet) Oncology-Hematology Associates P.A. and
Oncology-Hematology Infusion Therapy, Inc. July 1995 1,542,953 -- 314,170
(bullet) Cancer Specialists of Georgia, Inc. August 1995 6,101,671 -- 2,739,611
21
<PAGE>
Amounts Allocated
to Intangibles
---------------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
- ----------------- --------------- --------------- ------------- -------------
(bullet) Oncology & Radiation Associates, P.A. September 1995 11,120,500 -- 10,719,105
(bullet) Osler Medical, Inc. September 1995/
August 1996 7,040,129 -- 4,484,304
(bullet) West Shore Urology October 1995 556,005 -- 28,761
(bullet) Whittle, Varnell and Bedoya, P.A. November 1995 1,006,472 -- 310,325
(bullet) Oncology Care Associates November 1995/
May 1996 1,067,705 -- 582,653
(bullet) Symington December 1995 121,667 -- 29,566
(bullet) Venkat Mani December 1995 443,429 -- 140,839
(bullet) Atlanta Gastroenterology May 1996 6,100,000 -- --
(bullet) Busch May 1996 782,738 -- 452,646
(bullet) Kelley June 1996 500,000 -- 500,000
(bullet) Dal Yoo June 1996 394,427 -- 259,874
(bullet) Koerner, Taub & Flaxman July 1996 937,909 -- 318,137
(bullet) Atlanta Metro Urology July 1996 737,354 -- 382,165
(bullet) Ankle & Foot Center of Tampa Bay, P.A. August 1996 3,181,765 -- 3,048,457
(bullet) Insignia Care for Women, P.A. August 1996 3,311,606 -- 2,497,974
(bullet) Georgia Surgical Associates, P.C. August 1996 1,529,419 -- 1,096,922
(bullet) Physicians Consultant and Management
Corporation September 1996 2,000,000(C) 2,371,910 --
(bullet) Boynton GI Group October 1996 1,331,521 -- 660,000
(bullet) Outpatient Center of Boynton Beach, LTD October 1996 4,258,821 -- 2,368,448
Medical facility development:
(bullet) DASCO Development Corporation and Affiliate May 1995/
January 1996 9,813,856(D) 9,813,856 --
Management Services Organizations:
(bullet) Physicians Choice Management, LLC December 1995 13,350,000 11,262,231 --
(bullet) Central Georgia Medical Management, LLC April 1996 1,263,573 913,573 --
(bullet) New Jersey Medical Management, LLC September 1996 420,861 508,360 --
</TABLE>
- -------------
(A) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Barza, Novoa, Lawler, Cutler and Surowitz.
(B) Entire purchase price is contingent and is based on earnings with a
maximum purchase price of $5.2 million.
(C) In addition to the $2,000,000 purchase price, there is a contingent
payment up to a maximum of $10,000,000 based on the earnings before taxes
during the next five years.
(D) The Company acquired 50% of DASCO in May 1995 and the remaining 50% was
acquired simultaneous with the initial public offering in January 1996.
See Medical Facility Development Acquisitions.
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the assets
of Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer, Cano,
Herman, Barza and Novoa and in conjunction with those purchases entered into
employment agreements with 14 physicians in Florida. The total purchase price
for these assets was $4,111,404. The purchase price was allocated to these
assets at their fair market value, including goodwill of $3,127,580. During
22
<PAGE>
the nine months ended October 31, 1996, the Company purchased the assets of
and entered into employment agreements with Drs. Lawler, Cutler and Surowitz.
The total purchase price for these assets was $2,131,191 in cash and
$1,058,400 payable in Common Stock of the Company to be issued during the
second quarter of 1997. The Common Stock to be issued is based upon the
average price of the stock during the five business days prior to the
issuance and was allocated to the assets at their fair market value including
goodwill of $2,838,227. The resulting goodwill is being amortized over 20
years.
During July 1995, the Company purchased the assets of and entered into a
15-year management agreement with Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc. a medical oncology practice in
Baltimore, Maryland with three medical oncologists. The purchase price for
these assets was approximately $1,542,953 in cash. An affiliate of the
Company guarantees the performance of the Company's obligations under the
management agreement. For its management services, the Company will receive
41.6% of the net revenues of the practice less the salaries and benefits of
medical personnel whose services are billed incident to the practice of
medicine and which are employed by the practice. The Company has guaranteed
that the minimum amount that will be retained by the practice for each of the
first eight years will be $1,627,029 and for each of years nine and ten will
be $1,301,619. The purchase price was allocated to the assets at their fair
market value, including management service agreements of approximately
$314,170. The resulting intangible is being amortized over 15 years.
During August 1995, the Company purchased the assets of Cancer Specialists
of Georgia, Inc. a medical oncology practice with 11 oncologists in Atlanta,
Georgia. The purchase price for these assets was approximately $6,101,674 in
cash. In addition, during April 1995, the Company purchased the assets of and
entered into a 10-year management agreement with Georgia Oncology-Hematology
Clinic, P.C. a medical oncology practice with eight oncologists in Atlanta,
Georgia. The purchase price for these assets was approximately $2,099,353 in
cash. During August 1995, these two medical oncology practices consolidated
and formed a new entity, Georgia Cancer Specialists, Inc. The Company entered
into a new 10-year management agreement with the consolidated practice during
August 1995. For its services under this management agreement, the Company
receives 41.5% of the net practice revenues less the cost of pharmaceutical
and/or ancillary products. In each of the second through fifth years of the
term of this agreement, the fee payable to the Company is decreased by 1%.
The Company also purchased for $180,000 a 46% interest in I Systems, Inc., a
company affiliated with one of the practices which is engaged in the business
of claims processing and related services. The purchase of this 46% interest
is being accounted for by the equity method. The Company has the option to
purchase up to an additional 30% interest in the affiliated Company for
$33,333 in cash for each additional one percent of ownership interest
purchased. The Company and the affiliated company entered into a three-year
service agreement pursuant to which certain billing and collection services
will be provided to the Company. The purchase price of the above acquisitions
was allocated to the assets at their fair market value, including management
service agreements of $3,385,059. The resulting intangible is being amortized
over 10 years.
During September 1995, the Company purchased the assets of and entered
into a 20-year management agreement with Osler Medical, Inc., a 22 physician
multi-specialty group practice in Melbourne, Florida. The purchase price for
these assets was approximately $4,414,582 plus the assumption of debt of
$1,490,272. The Company also entered into a 20-year capital lease for the
main offices of the practice with a total obligation of $6,283,483. An
affiliate of the Company has provided a guarantee of such payments under the
lease. During the first five years of the management agreement, the Company
will receive a management fee equal to 45% of the annual net revenues of the
practice. Thereafter, the management fee increases to 47% of annual net
revenues. The management fee percentage for net revenues of the initial
physician group will be reduced based upon a set formula to a minimum of 31%
based upon the achievement of certain predetermined benchmarks. The
management agreement also provides that, during the period from January 1,
1996 through December 31, 2005, to the extent annual net revenues of the
practice are less than $10,838,952, the Company's management fee is reduced
up to a maximum reduction of $1,500,000 per year. The Company has agreed to
expend up to $1,500,000 per year for each of the first three years of the
management agreement to assist in the expansion activities of the practice.
During the second quarter of 1996, the Company also acquired certain
copyright and trademark interests for a purchase price of $887,000. During
August 1996, the Company purchased the assets and entered into a management
agreement with Atlantic Pediatrics. The purchase price for these assets was
$248,273. Simultaneous with the closing, Atlantic Pediatrics was merged into
Osler Medical, Inc. The total purchase price for the assets acquired was
allocated
23
<PAGE>
to such assets at their fair market value, including management service
agreements of $4,484,304. The resulting intangible is being amortized over 20
years.
During September 1995, the Company purchased the assets of and entered
into a 20-year management agreement with Oncology & Radiation Associates,
P.A. a medical oncology practice with 19 oncologists in South Florida. The
purchase price for these assets was $5,717,163 in cash plus the assumption of
debt of $5,403,337. The debt is collateralized by an irrevocable letter of
credit issued by NationsBank of Florida, N.A. ("NationsBank"), the collateral
for which had been provided by Mr. Gosman prior to the Company's initial
public offering. The management fee paid to the Company for services rendered
has two components: a base management fee and a variable management fee. The
base management fee is $2,100,000 per year, subject to adjustment to an
amount not less than $1,350,000 during the first five years of the agreement
and not less than $700,000 thereafter. The variable management fee is equal
to 35.5% of certain revenues, subject to increase in certain circumstances.
The purchase price for the practice's assets was allocated to the assets at
their fair market value, including management service agreements of
$10,719,105. The resulting intangible is being amortized over 20 years.
During the fourth quarter of 1995, the Company purchased the assets of and
entered into management service agreements with West Shore Urology; Whittle,
Varnell and Bedoya, P.A.; Oncology Care Associates; Venkat Mani; and
Symington consisting of 14 physicians including two oncologists. The total
purchase price for these assets was $2,695,278 in cash. The Company also
entered into a 15-year capital lease with a total obligation of $1,569,171.
The purchase price for the practices' assets was allocated to assets at their
fair market value, including management service agreements of $592,144. The
resulting intangible is being amortized over ten to 20 years.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered
into a 40-year management agreement with the medical practice in exchange for
324,252 shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction has been accounted for using the
pooling-of-interests method of accounting. Pursuant to the management
agreement, the Company will receive a base management fee, an incentive
management fee, and a percentage of all net ancillary service income.
During May 1996, the Company amended its existing management agreement
with Oncology Care Associates and extended the term of the agreement to 20
years. Simultaneously, the Company expanded the Oncology Care Associates
practice by adding three oncologists the practices of whom the Company
acquired for $500,000. $200,000 of such purchase price was paid in cash and
$300,000 was paid in the form of a convertible note with a maturity in May
1997. The Company has the option to make such $300,000 payment at its
discretion in either cash or Common Stock of the Company with such number of
shares to be based upon the average price of the stock during the five
business days preceding such date. The purchase price has been allocated to
the assets at their fair market value, including management service
agreements of approximately $500,000. The Company will receive an annual base
management fee based upon a percentage of the net revenues of the practice.
The resulting intangible is being amortized over 20 years.
During May and June 1996, the Company entered into agreements to purchase
the assets of and enter into 20-year management agreements with three
physician practices consisting of four physicians. All of the acquisitions
have since been consummated, except that one of the acquisitions closed in
escrow pending the satisfaction of certain conditions. These practices are
located in South Florida, Bethesda, Maryland and Washington, D.C. The total
purchase price for the assets of these practices was $1,677,165. Of this
amount, $726,211 was paid in cash and $950,954 of such purchase price is
payable in Common Stock of the Company to be issued during May and June 1997.
The number of shares of Common Stock of the Company to be issued is based
upon the average price of the stock during the five business days prior to
the issuance. The value of the Common Stock to be issued has been recorded in
other long term liabilities at October 31, 1996. The purchase price has been
allocated to the assets at their fair market value, including management
service agreements of $812,520. The Company will receive an annual base
management fee and an incentive management fee under each agreement. The
resulting intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase
price for these assets was approximately $937,909, which was paid in cash.
The purchase price has been allocated to these assets at their fair market
value, including management
24
<PAGE>
service agreements of $318,137. The Company will receive a management fee
under the management agreements based upon a percentage of the net revenues
of the practice. The resulting intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $737,354. Of such purchase price,
$457,354 was paid in cash and $280,000 is payable during July 1997 in Common
Stock of the Company with such number of shares to be based upon the average
price of the stock during the five business days prior to the issuance. The
value of the Common Stock to be issued has been recorded in other long term
liabilities at October 31, 1996. The purchase price has been allocated to
these assets at their fair market value, including management service
agreements of approximately $382,165. The Company will receive an annual base
management fee and an incentive management fee. The resulting intangible is
being amortized over 20 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,311,606. Of such purchase price, $1,391,606 was
paid in cash and $1,920,000 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $2,497,974. The Company receives
an annual base management fee and an incentive management fee. The resulting
intangible is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase
price for these assets was $1,529,419. Of such purchase price, $836,619 was
paid in cash and $692,800 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $1,096,922. The Company receives
an annual base management fee and an incentive management fee. The resulting
intangible is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase
price for these assets was $3,181,765. Of such purchase price, $807,365 was
paid in cash and $2,374,400 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $3,048,457. The Company receives
an annual base management fee and an incentive management fee. The resulting
intangible is being amortized over 40 years.
During September 1996, the Company purchased the stock of Physicians
Consultant and Management Corporation ("PCMC"), a company based in Florida
that provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. The base purchase price
was $2,000,000 with $1,000,000 of such amount due on February 1, 1997. There
is also a contingent payment up to a maximum of $10,000,000 based on PCMC's
earnings before taxes during the next five years which shall be paid in cash
and/or Common Stock of the Company. The purchase price has been allocated to
the assets at their fair market value including goodwill of approximately
$2,372,000. The resulting intangible is being amortized over 30 years.
During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,331,521. Of such purchase price $796,521 was
paid in cash and $535,000 is payable during October 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
Company will receive an annual base management fee and an incentive
management fee. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $660,000.
The resulting intangible is being amortized over 20 years.
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease
whereby the surgical center was leased to a partnership with an initial term
of 15 years. In addition, the Company entered into a 20-year management
agreement pursuant to which the Company receives a management fee which is
based upon the performance of the surgical center. The purchase price for
these
25
<PAGE>
assets was $3,035,196 plus the assumption of debt of $1,223,625 which
consists of $717,557 in a mortgage payable and $506,068 in capital leases.
The purchase price has been allocated to the assets at their fair market
value, including management service agreements of $2,368,448. The resulting
intangible is being amortized over 20 years.
Medical Support Service Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc. ("Uromed"), a
provider of lithotripsy services in Florida, for a Base Purchase Price of
$2,584,103 plus the assumption of capital lease obligations of $1,097,614.
The Final Purchase Price equals the Base Purchase Price plus the amount by
which Stockholders' Equity exceeded $450,000 on the Closing Date. A Final
Purchase Price payment of $283,000 was accrued at December 31, 1994 and paid
during May 1995. The former shareholders of Uromed also received an earnings
contingency payment of $274,000 during the third quarter of 1996. The
acquisition was accounted for under the purchase method of accounting. The
purchase price was allocated to assets at their fair market value including
goodwill of $2,395,881. The resulting intangible is being amortized over 20
years. The Company intends to acquire the outstanding 20% interest in the
subsidiary.
During November 1994, the Company purchased 80% of the stock of Nutrichem,
Inc. ("Nutrichem"), an infusion therapy company doing business in Maryland,
Virginia and the District of Columbia, for $3,528,704 in cash and a
contingent note in the amount of $6,666,667, subject to adjustments. During
the year ended December 31, 1995, the Company made payments on the contingent
note of $2,657,732 (including interest of $435,510). Subsequent to the
Company's initial public offering, the contingent note (which had an
outstanding principal balance of $4,444,444 at December 31, 1995) was paid
from the net proceeds of the offering. A charge of $1,271,000 related to this
contingent note was recorded during the year ended December 31, 1995. The
remaining $5,395,667 was allocated to goodwill at December 31, 1995 and is
being amortized. The purchase price was allocated to assets at the fair
market value including total goodwill of $7,007,833. The resulting intangible
is being amortized over 40 years. Subsequent to the initial public offering,
the Company acquired the outstanding 20% interest in Nutrichem in exchange
for 266,666 shares of Common Stock resulting in additional purchase price and
goodwill of $4,000,000 and $2,791,960, respectively.
During November 1994, the Company acquired all of the assets and assumed
certain liabilities of First Choice Health Care Services of Ft. Lauderdale,
Inc., First Choice Health Care Services, Inc. and First Choice Home Care
Services of Boca Raton, Inc., home health care companies doing business in
Florida, for a total purchase price of $2,910,546 in cash. The purchase price
was allocated to assets at the fair market value, including goodwill of
$2,622,061. The resulting intangible is being amortized over 20 years.
During December 1994, the Company purchased a 36.8% partnership interest
in Mobile Lithotripter of Indiana Partners, a provider of lithotripsy
services in Indiana, from Mobile Lithotripter of Indiana, Limited, for
$2,663,000 in cash. This investment is being accounted for by the equity
method.
During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation
Care, Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns
and operates outpatient radiation therapy centers utilized in the treatment
of cancer and diagnostic imaging centers. OTI's centers are located in
Alabama, California, Florida, Georgia, North Carolina, South Carolina,
Tennessee and Virginia. The total purchase price for the stock (not including
transaction costs and 26,800 shares subject to appraisal rights) was
approximately $41,470,207. The purchase price was paid by a combination of
cash on hand, loans from Mr. Gosman and net proceeds from long term debt
financing of approximately $17,278,000. The long term debt financing was paid
in full during January 1996 with the proceeds of the Company's initial public
offering. The Company closed five of OTI's radiation therapy centers and has
accrued approximately $3,134,028 primarily as a reserve for the estimated
amount of the remaining lease obligation. Of this amount $2,188,635 was
recorded as an adjustment to the purchase price and $945,393 was recorded as
a charge in the fourth quarter of 1995. In addition, the Company also
recorded a charge during the fourth quarter of 1995 of $1,554,607, which
represents the writedown of assets to their estimated fair market value. The
purchase price paid in connection with the OTI merger was allocated to assets
at their fair market value, including goodwill of $8,623,239. The resulting
intangible is being amortized over 40 years.
During April 1995, the Company purchased from Aegis Health Systems, Inc.
for $7,163,126 all of the assets used in its lithotripsy services business.
The purchase price consisted of approximately $3,592,718 in cash and
26
<PAGE>
$3,570,408 in a promissory note. The outstanding principal balance and any
unpaid interest became due and payable upon the closing of the Company's
initial public offering and was paid in full during January 1996. The
obligations, evidenced by the promissory note, were secured by $1,000,000
which was in escrow and included in other assets at December 31, 1995. The
purchase price was allocated to assets at their fair market value including
goodwill of $6,228,126. The resulting intangible is being amortized over 20
years.
During November 1995 the Company acquired by merger Pinnacle Associates,
Inc. ("Pinnacle"), an Atlanta, Georgia infusion therapy services company. In
connection with the Pinnacle merger there is a $5,200,000 maximum payment
that may be required to be paid that is based on earnings and will be made in
the form of shares of Common Stock of the Company valued as of the earnings
measurement date. The amount of such contingent payment has not yet been
determined, however, the Company believes that the impact on the financial
statements is immaterial. The contingent consideration represents the full
purchase price. On the merger date, the liabilities assumed exceeded the fair
market value of the assets acquired by approximately $471,967 and such amount
was recorded as goodwill and is being amortized over 40 years.
Management Services Organizations
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, a newly formed management services organization
("MSO") that provides management services to an independent physician
association ("IPA") composed of over 375 physicians based in Connecticut. The
Company acquired this interest in exchange for a payment of $1.5 million to
existing shareholders, ($1.0 million paid during 1995 and $.5 million paid
during the second quarter of 1996) and a capital contribution of $2.0 million
to the Company ($1.5 million paid during 1995 and $.5 million paid during the
second quarter of 1996). In addition, upon the IPO the Company granted
options to purchase 300,000 shares of Common Stock to certain MSO employees
in conjunction with their employment agreements. These options vest over a
two year period with the exercise price equaling the fair market value of the
Company's stock on the date such shares become exercisable. During September
1996, the Company acquired the remaining 56.25% ownership interest in
Physicians Choice Management, LLC. The Company acquired the remaining
interests in exchange for a payment of $1,000,000 in cash plus 363,442 shares
of Common Stock of the Company. The Company also committed to loan the
selling shareholders $2,800,000 to pay the tax liability related to the sale.
As of October 31, 1996, $1,581,000 of the loan amount committed had been
advanced to the selling shareholders by the Company. The total purchase price
for the 100% interest has been allocated to these assets at their fair market
value including goodwill of $11,262,231. The resulting intangible is being
amortized over 40 years.
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, a newly formed MSO that provides management services
to an IPA composed of 45 physicians based in Georgia. The Company acquired
this interest in exchange for a payment of $550,000 to existing shareholders
and a capital contribution of $700,000 to the MSO. The Company's balance
sheet as of October 31, 1996 includes the 50% interest not owned by the
Company as minority interest. The owners of the other 50% interest in the MSO
have a put option to the Company to purchase their interests. This put option
vests over a four year period. The price to the Company to purchase these
interests shall equal 40% of the MSO's net operating income as of the most
recent fiscal year multiplied by the price earnings ratio of the Company. The
minimum price earnings ratio used in such calculation will be 4 and the
maximum 10.
During September 1996, the company purchased an 80% interest in New Jersey
Medical Management, LLC, a newly formed MSO that provides management services
to an IPA with more than 450 physicians in New Jersey. The Company acquired
this interest in exchange for a payment of $350,000 to existing shareholders.
The Company's balance sheet at October 31, 1996 includes the 20% interest not
owned by the Company as minority interest.
Medical Facility Development Acquisitions
On May 31, 1995, Mr. Gosman purchased a 50% ownership interest in DASCO
Development Corporation and DASCO Development West, Inc. (collectively,
"DASCO"), a medical facility development services company providing such
services to related and unrelated third parties in connection with the
development of medical malls, health parks and medical office buildings. The
purchase price consisted of $5.2 million in cash and $4.6 million in notes,
which were guaranteed by Mr. Gosman. Upon the closing of the Company's
initial public offering, Messrs. Gosman, Sands and Rendina, the Company's
principal promoters, and certain management and founder
27
<PAGE>
stockholders exchanged their ownership interests in DASCO for shares of
Common Stock equal to a total of $55 million or 3,666,667 shares. The Company
believes that its medical facility development services and project finance
strategy are a significant component of the Company's overall business
strategy. The historical book value of Messrs. Sands and Rendina's interest
in DASCO is $22,735. The initial 50% purchase price was allocated to assets
at their fair market value, primarily goodwill of $9.8 million with the
exchange recorded at historical value. At December 31, 1995 DASCO was being
accounted for using the equity method.
Accounting Treatment
Each of the Acquisitions was accounted for under the purchase method of
accounting, except where noted otherwise above.
The Company's relationships with its affiliated physicians are set forth
in various asset and stock purchase agreements, management service
agreements, and employment and consulting agreements. Through the asset
and/or stock purchase agreement, the Company acquires the equipment,
furniture, fixtures, supplies and, in certain instances, service agreements,
of a physician practice at the fair market value of the assets. The accounts
receivable are typically purchased at the net realizable value. The purchase
price of the practice generally consists of cash, notes and/or Common Stock
of the Company and the assumption of certain debt, leases and other contracts
necessary for the operation of the practice. The management services or
employment agreements delineate the responsibilities and obligations of each
party.
Net revenues from management service agreements include the revenues
generated by the physician practices. The Company is contractually
responsible and at risk for the operating costs of medical groups under
certain agreements. Expenses include the reimbursement of all medical
practice operating costs and all payments to physicians (which are reflected
as cost of affiliated physician management services) as required under the
various management agreements.
Results of Operations
Three Months and Nine Months Ended October 31, 1996 Compared to Three Months
and Nine Months Ended September 30, 1995
The following discussion reviews the results of operations for the three
and nine months ended October 31, 1996 (the "1996 Quarter" and "1996
Period"), respectively, compared to the three and nine months ended September
30, 1995 (the "1995 Quarter" and "1995 Period"), respectively.
Revenues
The Company derives revenues from health care services and medical
facility development services. Within the health care segment, the Company
distinguishes between revenues from cancer services, non-cancer physician
services and other medical support services. Cancer services include
physician practice management services to oncology practices and certain
medical support services, including radiation therapy, diagnostic imaging and
infusion therapy. Non-cancer physician services include physician practice
management services to all practices managed by the Company other than
oncology practices. Other medical support services include home health care
services and lithotripsy.
Net revenues were $20.1 million and $40.1 million for the 1995 Quarter and
the 1995 Period, respectively. Of these amounts, $13.8 million and $24.5
million or 68.5% and 61.1% of such revenues was attributable to cancer
services; $1.5 million and $2.6 million or 7.4% and 6.5% was related to
non-cancer physician services; and $4.8 million and $13.0 million or 24.1%
and 32.4% of such revenues was attributable to other medical support services
for the 1995 Quarter and the 1995 Period, respectively.
Net revenues were $51.7 million and $129.4 million for the 1996 Quarter
and the 1996 Period, respectively. Such revenues during this period consisted
of $25.3 million and $69.6 million or 48.9% and 53.8% related to cancer
services; $16.7 million and $32.6 million or 32.2% and 25.2% related to
non-cancer physician services; $5.1 million and $15.2 million or 9.9% and
11.7% related to other medical support services; and $4.6 million and $12.0
million or 9.0% and 9.3% related to medical facility development. As of
October 31, 1996, the Company had affiliations with 62 physicians providing
cancer related services, 19 employed primary care physicians, 93 other
multigroup or specialty physicians and 870 physicians through the management
of IPA's by MSO's.
28
<PAGE>
Expenses
For the 1996 Quarter, the 1996 Period, the 1995 Quarter and the 1995
Period, expressed as a percentage of net revenues, general corporate expenses
were 4.2%, 4.4%, 5.4% and 11.0%, respectively. General corporate expenses, as
a percentage of net revenues, were higher during the 1995 Quarter and the
1995 Period than the 1996 Quarter and the 1996 Period due to the commencement
of operations of the Company during the 1995 Quarter and the 1995 Period.
The Company's cost of affiliated physician management services was $2.3
million for the 1995 Quarter and the 1995 Period. The cost of affiliated
physician management services was $12.3 million and $29.7 million during the
1996 Quarter and the 1996 Period, respectively. Cost of affiliated physician
management services represents the fixed and variable contractual management
fees as defined and stipulated in the management agreements. Revenue for
these managed physician practices was $7.1 million for the 1995 Quarter and
1995 Period and $24.9 million and $61.5 million for the 1996 Quarter and the
1996 Period, respectively.
The Company's depreciation and amortization expense increased by $1.0
million from the 1995 Quarter to the 1996 Quarter and $2.9 million from the
1995 Period to the 1996 Period. The increase is a result of the Acquisitions
and the allocation of the purchase prices as required per purchase
accounting.
The Company's rent expense increased by $.9 million from the 1995 Quarter
to the 1996 Quarter and $2.9 million from the 1995 Period to the 1996 Period.
Rent and lease expenses as a percentage of net revenue will vary based on the
size of each of the affiliated practice offices, the number of satellite
offices and the current market rental rate for medical office space in the
particular geographic markets.
The Company's earn-out payment during the 1995 Period of $1.3 million
represents a payment to Nutrichem on the contingent note entered into in
conjunction with the acquisition of Nutrichem. During the 1996 Quarter the
Company sold its Nashville radiation therapy center to a third party for $1.5
million which resulted in a gain on sale of approximately $260,000. In
addition, during the 1996 Quarter the Company recorded a charge of $250,000
related to the termination of an employment agreement with a physician. These
two nonrecurring items have been included in other expenses on the statements
of operations during the 1996 Quarter and the 1996 Period.
The Company's net interest expense decreased by $1.4 million from the 1995
Quarter to the 1996 Quarter and $1.7 million from the 1995 Period to the 1996
Period. Interest income of $1.5 million and $2.7 million was earned during
the 1996 Quarter and the 1996 Period, respectively, on the remaining proceeds
from the Company's 1996 initial public offering and Convertible Subordinated
Debenture offering.
No income tax provision was required during the 1995 Quarter or the 1995
Period due to the Company's tax loss and the inability of the Company to use
the benefits which prior to the completion of the initial public offering
primarily accrued to Mr. Gosman.
Medical Facility Development
The Company, through its investment in DASCO, provides medical facility
development services to related and unrelated third parties in connection
with the establishment of health parks, medical malls and medical office
buildings. The Company believes that the development of such facilities, in
certain markets, will aid in the integration of its affiliated physicians and
medical support services and will provide future opportunities to affiliate
with physicians and acquire future physician practices or support services.
Further, the Company believes that the 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),
29
<PAGE>
general contracting management fees, leasing and marketing fees, project cost
savings income (based on the difference between total budgeted project costs
and actual costs) and consulting fees.
The amount of development fees and leasing and marketing fees are stated
in the development and marketing agreements. Those agreements also provide
the basis for payment of the fees. The financing fees and consulting fees are
generally not included in specific agreements but are negotiated and
disclosed in project pro formas provided to the owners of the buildings and
hospital clients. Specific agreements usually incorporate those pro formas
and provide that the projects will be developed in conformity therewith.
General contracting management fees and project cost savings income are
included in guaranteed maximum cost contracts entered into with the general
contractor. These contracts are usually approved by the owners which in many
cases include hospital clients and prospective tenants. During the 1996
Quarter and the 1996 Period, the Company's medical facility development
generated revenues of $4.6 million and $12.0 million and pre-tax income
(prior to allocation of general corporate expenses) of $2.3 million and $6.2
million, respectively.
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 Combined Historical Audited Financial Statements and the Notes thereto
and the Unaudited Pro Forma Combined Financial Information and Notes thereto
included elsewhere in this Offering Memorandum 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.
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.
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.
Liquidity and Capital Resources
Cash provided by operating activities was $2.3 million for the 1996
Period. Cash used by operating activities was $.6 million for the 1995
Period. During the 1995 Period the Company had a loss of $6.5 million which
included $2.3 million of depreciation and amortization. In addition, during
the 1995 Period accounts receivables increased by approximately $2.1 million.
During the 1996 Period the Company had net income of $8.3 million which
included $5.2 million of depreciation and amortization. In addition, during
the 1996 Period accounts receivable and other assets increased by
approximately $12.5 million and accounts payables and accrued liabilities
increased by approximately $1.5 million.
Cash used by investing activities was $31.3 million and $50.5 million for
the 1996 Period and 1995 Period, respectively. This primarily represents the
funds required by the Company for the acquisition of physician practices
30
<PAGE>
and medical support service companies. In addition, during the 1996 Period
the Company loaned $10 million to an unrelated healthcare entity and $1.6
million to the selling shareholders of Physicians Choice Management, LLC to
pay the tax liability related to the sale.
Cash provided by financing activities was $74.7 million for the 1996
Period and represents (i) net proceeds from the issuance of Convertible
Subordinated Debentures of $96.7 million; (ii) proceeds from the issuance of
Common Stock pursuant to stock options and offering costs and other primarily
related to the initial public offering of $.2 million and $2.5 million,
respectively; (iii) repayment of debt and amounts due to shareholder of $6.2
million and $15.5 million, respectively; and (iv) the release of restricted
cash collateralizing debt of $2.0 million. Cash provided by financing
activities was $62.4 million for the 1995 Period which primarily represents
the $45.9 million in capital contributions and advances from shareholder, the
$19.5 million proceeds from the issuance of debt offset by the repayment of
$2.8 million in debt outstanding.
At October 31, 1996, the Company's principal source of liquidity consisted
of $91.8 million in cash. Working capital of $117.5 million increased by
$139.8 million from December 31, 1995 to October 31, 1996 primarily as a
result of the $207.9 million of net proceeds received from the Company's
initial public offering and Convertible Subordinated Debenture offering,
offset by the repayment of approximately $91.6 million of indebtedness and
certain obligations arising from the Acquisitions. The Company also had $22.9
million of current liabilities, including approximately $2.9 million of
indebtedness maturing before October 31, 1997. Further, the Company also has
completed Acquisitions subsequent to October 31, 1996 which required
approximately $.9 million in cash to complete.
During 1995, the Company entered into a management agreement with a
22-physician multi-specialty group practice pursuant to which the Company has
agreed to expend up to $1.5 million per year in each of the next three years
to assist in the expansion activities of the practice. In addition, the
Company agreed to acquire certain copyright and trademark interests of the
practice for $.9 million. These interests were acquired during June 1996.
During 1996, the Company purchased the stock of a company based in Florida
that provides the managed health care industry with assistance in provider
relations, utilization review and quality assurance. In conjunction with this
acquisition, the Company may be required to make a contingent payment up to a
maximum of $10 million based on the acquired company's earnings before taxes
during the next five years. The payment, if required, shall be paid in cash
and/or Common Stock of the Company.
In conjunction with the acquisition of Physicians Choice Management, LLC
the Company has committed to loan the selling shareholders $2.8 million to
pay the tax liability related to the sale. As of October 31, 1996, $1.6
million of the loan amount committed had been advanced to the selling
shareholders by the Company.
In conjunction with certain of its acquisitions the Company has agreed to
make payments in shares of Common Stock of the Company which are generally
issued one year from the closing date of such acquisitions with the number of
shares generally determined based upon the average price of the stock during
the five business days prior to the date of issuance. As of October 31, 1996
the Company had committed to issue $7.4 million of Common Stock of the
Company using the methodology discussed above.
The Company's acquisition and expansion programs will require substantial
capital resources. In addition, the operation of physician groups, integrated
networks and related medical support service companies, and the development
and implementation of the Company's management information systems, will
require ongoing capital expenditures. The Company expects that its capital
needs over the next several years will substantially exceed capital generated
from operations. To finance its capital needs, the Company plans both to
incur indebtedness and to issue, from time to time, additional debt or equity
securities, including Common Stock or convertible notes, in connection with
its acquisitions and affiliations. The Company currently has a commitment
from a bank to fund $30 million of working capital and acquisition financing
needs.
The Company expects that the working capital and cash generated from
operations and amounts available under an acquisition/working capital line
for which the Company has received a commitment from a bank together with the
proceeds of the Convertible Subordinated Debenture offering will be adequate
to satisfy the Company's cash requirements for the next 12 months. However,
there can be no assurance that the Company will not be required to seek
additional financing during this period. The failure to raise the funds
necessary to finance its future cash requirements would adversely affect the
Company's ability to pursue its strategy and could adversely affect its
results of operations for future periods.
31
<PAGE>
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 174 physicians and acquired eight
medical support service companies and a medical facility development company.
More recently the Company has also focused on expanding its physician
affiliations through the management of IPA's by management service organizations
MSO's in which the Company has ownership interests.The Company owns interests in
MSO's in Connecticut, Georgia, New Jersey and New York that provide management
services to IPA's composed of over 1,470 multi-specialty 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 62 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,
and Washington, D.C./Baltimore areas and the tri-state area of Connecticut, New
York and New Jersey.
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.
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
32
<PAGE>
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 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
33
<PAGE>
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 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.
34
<PAGE>
Physician Affiliation
To date, the Company has affiliated with 174 physicians in the following
locations:
<TABLE>
<CAPTION>
No. of
Physicians
Under
LPN Contract Specialties
- --- ---------- -----------
<S> <C> <C>
South Florida 111 Primary Care, Oncology, Cardiology,
Gastroenterology, Neurology, Podiatry, Rheumatology,
Obstetrics-Gynecology, General and Vascular Surgery,
Dermatology, Pulmonary, Orthopedic and Radiology
Atlanta 36 Oncology, Gastroenterology, Urology, and Surgery
Washington, D.C./Baltimore 13 Oncology and Infectious Diseases
Other Markets 14 Oncology and Surgery
----
Total Physicians 174
====
</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 144 physicians and employs another 30 physicians.
With the exception of 10 radiation oncologists employed by the Company
through OTI, the Company purchased the practices of all of its 174 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/or stock 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
40-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. 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
35
<PAGE>
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
generally received a fixed base management fee and a variable incentive fee.
Net revenues for these management services agreements for the nine months
ended October 31, 1996 were $61.5 million.
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. 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 10 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. During August 1996, the Company entered into a management
agreement with four surgeons
36
<PAGE>
in Atlanta. The Company is presently negotiating with additional 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 169,000 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 an agreement with the Medlantic Healthcare Group in Washington, D.C.
(and its Washington Hospital Center and Washington 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.
In keeping with its strategy of expanding its Northeast presence in New
York, New Jersey and Connecticut, since July 1996, the Company has become
affiliated with more than 1,000 additional physicians through IPA's to bring its
total Northeast IPA physician affiliations to approximately 1,425, with more
than 600 in New York's five boroughs, 375 in Connecticut and 450 in New Jersey.
In October 1996, the Company agreed to an exclusive arrangement with North Shore
Health System of Manhasset, New York, to jointly develop, own and operate
medical facilities in five metropolitan New York counties. In November 1996, the
Company signed a letter of intent to manage University Physicians Group of
Staten Island, a 130 physician primary care group. In addition, in November
1996, the Company was selected by the Health Insurance Plan of New Jersey
("HIP") to assist in reorganizing the medical delivery services in 18 health
care centers.
The Company has also expanded its managed care capabilities through the
purchase of Physicians Consultant & Management Corporation, a company founded in
1987, which provides management services to national and local physician
networks containing approximately 1,200 physician members. Through its existing
networks this Company facilitates the delivery of health care services to
approximately 6,000,000 member patients. This acquisition increases the managed
care capabilities of the Company into additional specialty carve-out physician
networks and provides an opportunity to expand existing relationships with
established managed care organizations.
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 62 oncologists. Net
revenues for the cancer related LPNs for the nine months ended October 31,
1996 were $69.6 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 100% interest in a newly formed MSO that provides
management services to an IPA composed of over 330 physicians based in
Connecticut, a 50% interest in a newly formed MSO that provides management
services to an IPA composed of 45 primary care physicians in Georgia, an 80%
interest in a newly formed MSO that provides management services to an IPA
composed of over 450 physicians in New Jersey and a 51% interest in a newly
formed MSO that provides management services to an IPA composed of over 600
physicians in New York. 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
37
<PAGE>
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 11 projects under development and has facilities
under construction in Florida, Texas, California, Oregon and Arizona. The
Company also has seven projects under contract and anticipates that
construction of such facilities will begin during the next six months. Net
revenues for the nine months ended October 31, 1996 were $12.0 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.
38
<PAGE>
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 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.
39
<PAGE>
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.
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
40
<PAGE>
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 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 has adopted 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 hired 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
41
<PAGE>
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. 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.
42
<PAGE>
Employees
As of October 31, 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). Three 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. A consent order was
entered by the Court on August 30, 1996 adding four plaintiffs to the action.
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.
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.
43
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information as of December 13, 1996
concerning the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- ---- --------
<S> <C> <C>
Abraham D. Gosman 67 Chairman of the Board of Directors, President and Chief
Executive Officer
Frederick R. Leathers 38 Chief Financial Officer and Treasurer
William A. Sanger 46 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 49 Executive Vice President of Marketing
Don S. Harvey 38 Vice President of Operations
Donald A. Sands 45 Vice President--Medical Facility Development
Hugh L. Carey 77 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
Eric Moskow 38 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. In October 1996,
Mr. Gosman became Chairman of the Board of Trustees of CareMatrix
Corporation, an assisted living development and management company.
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 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.
44
<PAGE>
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 served from January 1996 to March 1996 as Executive
Vice President of Marketing of the Company. Since March 1996, he has assumed
the role of Executive Vice President of Operations. Mr. Tidikis had served as
Senior Vice President of Physician Management Services for Tenet Healthcare
Corporation since March 1995. Mr. Tidikis had 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.
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
Senior 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. Mr. Sands has served since 1995 as Chairman of
the Board and Chief Executive Officer of DASCO. He has resigned as Chairman of
the Board and Chief Executive Officer of DASCO and as Vice President--Medical
Facility Development of the Company effective January 1, 1997. 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 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 Vice President of Mediplex from January 1976 to
March 1986 and 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 and Executive Committee for Research and
as a Trustee of the Institute. 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 the National
Health Lawyers Association. From 1989 to 1995 he served as a member of the
Board of Directors of the National Health Lawyers Association. He also
formerly served as Chairman of the Board of Trustees of the Connecticut
Hospital Association.
45
<PAGE>
Eric Moskow, M.D., age 38, has served as a director of the Company and has
been Executive Vice President of Strategic Planning of the Company since
September 1996. He founded Physician's Choice Management, LLC ("Physician's
Choice") in October 1995 and served as its Executive Vice President from October
1995 to October 1996. Prior to establishing Physician's Choice, he served as
Medical Director for Mediplex of Ridgefield from November 1994 to August 1996
and as Associate Medical Director for US Healthcare in Connecticut from 1988 to
1990. Dr. Moskow is board-certified in internal medicine and has served as
President of the Family Medical Associates of Ridgefield for the past nine
years.
The Board of Directors is divided into three classes, with staggered
three-year terms. The terms of Mr. Cassese and Drs. Livingston and Moskow will
expire at the Company's 1997 annual meeting; the terms of Messrs. Gosman, Carey
and Chay at the Company's 1998 annual meeting; and the terms of Messrs. Redina
and Ronai will expire at the Company's 1999 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 and Compliance Committee. The members of the Audit and Compliance
Committee of the Company's Board of Directors are Messrs. Carey and Ronai and
Dr. Livingston. The Audit and Compliance 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 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. The Audit and Compliance
Committee also oversees the Company's Compliance Program and the
implementation and adherence to the Company's Standards of Conduct, both of
which are designed to ensure maintenance of high ethical standards and
compliance with all legal (health-care related and other) requirements
applicable to the Company.
Compensation Committee. The members of the Compensation Committee of the
Company's Board of Directors are Messrs. Cassese and Carey. 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 including the 1995 Equity
Incentive Plan. The Compensation Committee determines, subject to the
provisions of the Company's plans, the directors, officers, employees and
consultants 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.
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 $500 for each committee meeting
attended, except that only one fee will be paid in the event that more than
one such meeting is held on a single day. All directors receive reimbursement
of reasonable expenses incurred in attending Board and committee meetings and
otherwise carrying out their duties. Each non-employee director who was a
member of the Compensation Committee at the time of the closing of the
initial public offering received
46
<PAGE>
options to purchase 10,000 shares of Common Stock upon the closing of the
offering at the initial public offering price pursuant to the Equity Plan.
Each director who is a member of the Compensation Committee on the first
business day following each annual meeting of the shareholders will receive
the option to purchase 2,500 shares of Common Stock. Any of such options
granted to a member of the Compensation Committee under the Equity Plan will
be exercisable one year following the date of grant.
Executive Compensation
The following table sets forth certain information regarding compensation
paid or accrued by the Company during the period June 24, 1994 (inception) to
December 31, 1994 and the year ended December 31, 1995, to the Company's
Chief Executive Officer and to each of the Company's four other most highly
compensated executive officers (the "Named Executive Officers") during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual All Other
Compensation Compensation
Salary (1)
Name and Principal Position Year ($) ($)
- --------------------------- ---- ------------ ------------
<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 Development 1994 133,333 --
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)
47
<PAGE>
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
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 three 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 Compensation 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.
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.
48
<PAGE>
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 October 31, 1996, the Company had no outstanding borrowings from Mr.
Gosman. At December 31, 1995 the Company 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, which was repaid from the net
proceeds of the Debt Offering. 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 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,
49
<PAGE>
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 $1.3
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 is providing construction management, development, marketing and
consulting services to entities principally owned by Mr. Gosman in connection
with the development by such entity of medical facilities. During the nine
months ended October 31, 1996, the Company recorded revenues in the amount of
$2,374,000 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 $154.0 million for the development of 15 facilities developed by
DASCO.
Mr. Ronai is a partner in the Connecticut law firm of Murtha, Cullina,
Richter and Pinney which has been retained to perform certain legal services
for the Company.
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, a newly formed management services organization that
provides management services to an independent physician association composed
of over 300 physicians based in Connecticut ("Physician's Choice"). The
Company acquired this interest in exchange for a payment of $1.5 million to
the stockholders of Physician's Choice, including Dr. Moskow. During
September 1996, the Company acquired the remaining 56.25% interest from such
stockholders for a payment of $1 million in cash plus 363,442 shares of the
Company's Common Stock.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of October 31, 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:
<TABLE>
<CAPTION>
Amount of Beneficial
Ownership
---------------------------
Shares
Beneficially Percentage
Name Owned Owned
- ---- ------------ ----------
<S> <C> <C>
Abraham D. Gosman (1) 8,372,626 37.7%
Putnam Investments, Inc. (2) 2,322,300 10.4
Frederick R. Leathers 460,505 2.1
William A. Sanger 336,224 1.5
Robert A. Miller (3) 459,655 2.1
Edward E. Goldman, M.D 168,112 *
Joseph N. Cassese 30,000 *
David M. Livingston, M.D -- *
Bruce A. Rendina 916,667 4.1
Stephen E. Ronai 14,000 *
Hugh L. Carey -- *
John T. Chay 142,833 *
Eric Moskow 235,252 1.1
All directors and executive officers as a group (15 persons) 12,110,292 53.9
</TABLE>
- -------------
* 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.
(2) Putnam Investments, Inc. ("PIT") and its wholly-owned subsidiary Putnam
Investment Management, Inc. ("PIM") have shared dispositive power with
respect to such shares, including 1,096,700 shares with respect to which
Putnam New Opportunities Fund (the "Fund") has shared voting and
dispositive power. The address of PIT, PIM and the Fund is One Post
Office Square, Boston, Massachusetts 02109. The foregoing is based upon
the Schedule 13G dated July 10, 1996 filed by PIT, PIM and the Fund.
(3) Includes 150 shares owned by Mr. Miller's minor sons with respect to
which Mr. Miller disclaims beneficial ownership.
51
<PAGE>
DESCRIPTION OF DEBENTURES
The Debentures initially were issued under an indenture dated as of June
15, 1996 (the "Indenture") between the Company and Chemical Bank, as trustee
(the "Trustee"). Holders of the Debentures and shares of Common Stock
acquired upon conversion thereof are entitled to certain rights under the
Registration Rights Agreement dated as of June 21, 1996 between the Company
and the Initial Purchasers (the "Registration Rights Agreement"). The
following summaries of certain provisions of the Indenture and the
Registration Rights Agreement do not purport to be complete and are subject
to, and are qualified in their entirety by reference to, all of the
provisions of the Indenture and the Registration Rights Agreement, including
the definition therein of certain terms. Wherever particular sections or
defined terms of the Indenture or the Registration Rights Agreement are
referred to, such sections or defined terms are incorporated herein by
reference. Copies of the Indenture and the Registration Rights Agreement are
available from the Company or the Initial Purchasers upon request.
General
The Debentures will be unsecured obligations of the Company, will be
limited to $100,000,000 in aggregate principal amount and will mature on June
15, 2003. The Debentures will bear interest at the rate per annum shown on
the front cover of this Prospectus from the date of original issuance of
Debentures pursuant to the Indenture, or from the most recent Interest
Payment Date to which interest has been paid or provided for, payable
semiannually on June 15 and December 15 of each year, commencing December 15,
1996, to the Person in whose name the Debenture (or any predecessor
Debenture) is registered at the close of business on the preceding June 1 or
December 1, as the case may be. Interest on the Debentures will be paid on
the basis of a 360-day year of 12 30- day months.
Principal of, and premium, if any, and interest on, the Debentures will be
payable (i) in respect of Debentures held of record by the Depository Trust
Company ("DTC") or its nominee in same day funds on or prior to the payment
dates with respect to such amounts and (ii) in respect of Debentures held of
record by holders other than DTC or its nominee at the office of the Trustee
in New York, New York, and the Debentures may be surrendered for transfer,
exchange or conversion at the office of the Trustee in New York, New York. In
addition, with respect to Debentures held of record by holders other than DTC
or its nominee, payment of interest may be made at the option of the Company
by check mailed to the address of the persons entitled thereto as it appears
in the Register for the Debentures on the Regular Record Date for such
interest.
The Debentures will be issued only in registered form, without coupons and
in denominations of $1,000 or any integral multiple thereof. No service
charge will be made for any transfer or exchange of the Debentures, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge and any other expenses (including the fees and expenses
of the Trustee) payable in connection therewith. The Company is not required
(i) to issue, register the transfer of or exchange any Debentures during a
period beginning at the opening of business 15 days before the day of the
mailing of a notice of redemption and ending at the close of business on the
day of such mailing, or (ii) to register the transfer of or exchange any
Debenture selected for redemption in whole or in part, except the
unredeclined portion of Debentures being redeemed in part.
All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of and premium and interest on any Debenture which
remain unclaimed for two years after such principal, premium or interest
become due and payable may be repaid to the Company. Thereafter, the Holder
of such Debenture may, as an unsecured general creditor, look only to the
Company for payment thereof.
The Indenture does not contain any provisions that would provide
protection to Holders of the Debentures against a sudden and dramatic decline
in credit quality of the Company resulting from any takeover,
recapitalization or similar restructuring, except as described below under
"Certain Rights to Require Repurchase of Debentures."
Conversion Rights
The Debentures will be convertible into Common Stock at any time after
August 25, 1996 (the 60th day following the date of original issuance of the
Debentures) and prior to redemption or final maturity, initially at the
conversion price of $28.20 per share. The right to convert Debentures which
have been called for redemption will terminate at the close of business on
the second business day preceding the Redemption Date. See "Optional
Redemption" below.
52
<PAGE>
The conversion price will be subject to adjustment upon the occurrence of
any of the following events: (i) the subdivision, combination or
reclassification of outstanding shares of Common Stock; (ii) the payment in
shares of Common Stock of a dividend or distribution on any class of capital
stock of the Company; (iii) the issuance of rights or warrants to all holders
of Common Stock entitling them to acquire shares of Common Stock at a price
per share less than the Current Market Price; (iv) the distribution to
holders of Common Stock of shares of capital stock other than Common Stock,
evidences of indebtedness, cash or assets (including securities, but
excluding dividends or distributions paid exclusively in cash and dividends,
distributions, rights and warrants referred to above); (v) a distribution
consisting exclusively of cash (excluding any cash distributions referred to
in (iv) above) to all holders of Common Stock in an aggregate amount that,
together with (A) all other cash distributions (excluding any cash
distributions referred to in (iv) above) made within the 12 months preceding
such distribution and (B) any cash and the fair market value of other
consideration payable in respect of any tender offer by the Company or a
subsidiary of the Company for the Common Stock consummated within the 12
months preceding such distribution, exceeds the greater of (I) 12.5% of the
Company's market capitalization (being the product of the Current Market
Price times the number of shares of Common Stock then outstanding) or (II)
the Company's retained earnings, in each case on the date fixed for
determining the stockholders entitled to such distribution; and (vi) the
consummation of a tender offer made by the Company or any subsidiary of the
Company for the Common Stock which involves an aggregate consideration that,
together with (X) any cash and other consideration payable in respect of any
tender offer by the Company or a subsidiary of the Company for the Common
Stock consummated within the 12 months preceding the consummation of such
tender offer and (Y) the aggregate amount of all cash distributions
(excluding any cash distributions referred to in (iv) above) to all holders
of the Common Stock within the 12 months preceding the consummation of such
tender offer, exceeds the greater of (I) 12.5% of the Company's market
capitalization or (II) the Company's retained earnings, in each case at the
date of consummation of such tender offer. No adjustment of the conversion
price will be required to be made until cumulative adjustments amount to at
least one percent of the conversion price, as last adjusted. Any adjustment
that would otherwise be required to be made shall be carried forward and
taken into account in any subsequent adjustment.
In addition to the foregoing adjustments, the Company will be permitted to
reduce the conversion price as it considers to be advisable 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 holders of the Company Stock or, if that is
not possible, to diminish any income taxes that are otherwise payable because
of such event. In the case of any consolidation or merger of the Company with
any other corporation (other than one in which no change is made in the
Common Stock), or any sale or transfer of all or substantially all of the
assets of the Company, the Holder of any Debenture then outstanding will,
with certain exceptions, have the right thereafter to convert such Debenture
only into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer by a holder of
the number of shares of Common Stock into which such Debenture might have
been converted immediately prior to such consolidation, merger, sale or
transfer; and adjustments will be provided for events subsequent thereto that
are as nearly equivalent as practical to the conversion price adjustments
described above.
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the then
Closing Price at the close of business on the day of conversion. If any
Debentures are surrendered for conversion during the period from the close of
business on any Regular Record Date through and including the next succeeding
Interest Payment Date (except any such Debentures called for redemption),
such Debentures when surrendered for conversion must be accompanied by
payment in next day funds of an amount equal to the interest thereon which
the registered Holder on such Regular Record Date is to receive. Except as
described in the preceding sentence, no interest will be payable by the
Company on converted Debentures with respect to any Interest Payment Date
subsequent to the date of conversion. No other payment or adjustment for
interest or dividends is to be made upon conversion.
Subordination
The payment of the principal of and premium, if any, and interest on the
Debentures will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness. If
there is a payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the
benefit of creditors, marshalling of assets or any bankruptcy, insolvency or
similar proceedings of the Company, the holders of all Senior Indebtedness
will be entitled to receive payment in full of
53
<PAGE>
all amounts due or to become due thereon or provision for such payment in
money or money's worth before the Holders of the Debentures will be entitled
to receive any payment in respect of the principal of or premium, if any, or
interest on the Debentures. In the event of the acceleration of the Maturity
of the Debentures, the holders of all Senior Indebtedness will first be
entitled to receive payment in full in cash of all amounts due thereon or
provision for such payment in money or money's worth before the Holders of
the Debentures will be entitled to receive any payment for the principal of
or premium, if any, or interest on the Debentures. No payments on account of
principal of or premium, if any, or interest on the Debentures or on account
of the purchase or acquisition of Debentures may be made if there has
occurred and is continuing a default in any payment with respect to Senior
Indebtedness, any acceleration of the maturity of any Senior Indebtedness or
if any judicial proceeding is pending with respect to any such default.
Senior Indebtedness is defined in the Indenture as (a) the principal of
and premium, if any, and interest (including, without limitation, any
interest accruing subsequent to the filing of a petition or other action
concerning bankruptcy or other similar proceedings, whether or not
constituting an allowed claim in any such proceedings) on all secured
indebtedness of the Company, whether outstanding on the date of execution of
the Indenture or thereafter created, incurred or assumed, except any such
other indebtedness that by the terms of the instrument or instruments by
which such indebtedness was created or incurred expressly provides that it
(i) is junior in right of payment to the Debentures or (ii) ranks pari passu
in right of payment with the Debentures, and (b) any amendments, renewals,
extensions, modifications, refinancings and refundings of any of the
foregoing. The term "secured indebtedness" when used with respect to the
Company is defined to mean any or all of the following to the extent not
unsecured, as such term is used in Section 279(b)(2)(B) of the Internal
Revenue Code of 1986, as amended: (i) any obligation of the Company for the
repayment of borrowed money (including without limitation fees, penalties and
other obligations in respect thereof), whether or not evidenced by bonds,
debentures, notes or other written instruments, (ii) any deferred payment
obligation of the Company for the payment of the purchase price of property
or assets evidenced by a note or written instrument, (iii) any obligation of
the Company for the payment of rent or other amounts under a lease of
property or assets which obligation is required to be classified and
accounted for as a capitalized lease on the balance sheet of the Company
under generally accepted accounting principles, (iv) any obligation of the
Company for the reimbursement of any obligor of any letter of credit,
banker's acceptance or similar credit transaction, (v) any obligation of the
Company under interest rate swaps, caps, collars, options and similar
arrangements, (vi) any obligation of the Company under any foreign exchange
contract, currency swap agreement, futures contract, currency option contract
or other foreign currency hedge and (vii) any liabilities of others described
in the preceeding clauses (i), (ii), (iii), (iv), (v) and (vi) which the
Company has guaranteed or for which the Company is otherwise liable.
The Debentures are primary obligations of the Company. Each of the
Company's wholly-owned subsidiaries has guaranteed the Company's payment
obligations under the Debentures, so long as such subsidiary is a member of
an affiliated group (within the meaning of Section 279(g) of the Internal
Revenue Code of 1986, as amended) which includes the Company. The
satisfaction by the Company's subsidiaries of their contractual guarantees
may be subject to certain statutory or contractual restrictions, are
contingent upon the earnings of such subsidiaries and are subject to various
business considerations.
The Indenture does not limit or prohibit the incurrence of Senior
Indebtedness. At October 31, 1996, the Company had Senior Indebtedness in the
amount of approximately $7.3 million. The Company also expects to incur
Senior Indebtedness from time to time in the future. See "Capitalization."
Optional Redemption
The Debentures will be redeemable, at the Company's option, in whole or
from time to time in part, at any time on or after June 18, 1999, upon not
less than 15 nor more than 60 days' notice mailed to each Holder of
Debentures to be redeemed at its address appearing in the Security Register
and prior to Maturity at the following Redemption Prices (expressed as
percentages of the principal amount) plus accrued interest to the Redemption
Date (subject to the right of Holders of record on the relevant Regular
Record Date to receive interest due on an Interest Payment Date that is on or
prior to the Redemption Date).
If redeemed during the 12-month period beginning June 15 in the year
indicated (June 18, in the case of 1999), the redemption price shall be:
54
<PAGE>
<TABLE>
<CAPTION>
Redemption
Year Price
------- ------------
<S> <C>
1999 103.86%
2000 102.89%
2001 101.93%
2002 100.96%
</TABLE>
No sinking fund is provided for the Debentures.
Consolidation, Merger and Sale of Assets
The Company will not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an
entity to any Person, or permit any Person to consolidate with or merge into
the Company or convey, transfer or lease its properties substantially as all
entirely to the Company, unless (a) if applicable, the Person formed by such
consolidation or into which the Company is merged or the Person or
corporation which acquires the properties and assets of the Company
substantially as an entirely is a corporation, partnership or trust organized
and validly existing under the laws of the United States or any state thereof
or the District of Columbia and expressly assumes payment of the principal of
and premium, if any, and interest on the Debentures and performance and
observance of each obligation of the Company under the Indenture, (b) after
consummating such consolidation, merger, transfer or lease, no Default or
Event of Default will occur and be continuing, (c) such consolidation, merger
or acquisition does not adversely affect the validity or enforceability of
the Debentures and (d) the Company has delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease complies with the provisions of the
Indenture.
Certain Rights to Require Repurchase of Debentures
In the event of any Repurchase Event (as defined below) occurring after
the date of issuance of the Debentures and on or prior to Maturity, each
Holder of Debentures will have the right, at the Holder's option, to require
the Company to repurchase all or any part of the Holder's Debentures on the
date (the "Repurchase Date") that is 30 days after the date the Company gives
notice of the Repurchase Event as described below at a price (the "Repurchase
Price") equal to 100% of the principal amount thereof, together with accrued
and unpaid interest to the Repurchase Date. On or prior to the Repurchase
Date, the Company shall deposit with the Trustee or a Paying Agent an amount
of money sufficient to pay the Repurchase Price of the Debentures which are
to be repaid on or promptly following the Repurchase Date.
Failure by the Company to provide timely notice of a Repurchase Event, as
provided for below, or to repurchase the Debentures when required under the
preceding paragraph will result in an Event of Default under the Indenture
whether or not such repurchase is permitted by the subordination provisions
of the Indenture.
On or before the 15th day after the occurrence of a Repurchase Event, the
Company is obligated to mail to all Holders of Debentures a notice of the
occurrence of such Repurchase Event and identifying the Repurchase Date, the
date by which the repurchase right must be exercised, the Repurchase Price
for Debentures and the procedures which the Holder must follow to exercise
this right. To exercise the repurchase right, the Holder of a Debenture must
deliver, on or before the close of business on the Repurchase Date, written
notice to the Company (or an agent designated by the Company for such
purpose) and to the Trustee of the Holder's exercise of such right, together
with the certificates evidencing the Debentures with respect to which the
right is being exercised, duly endorsed for transfer.
A "Repurchase Event" shall have occurred upon the occurrence of a Change
in Control (as defined below).
A "Change in Control" shall occur when: (i) all or substantially all of
the Company's assets are sold as an entirety to any person or related group
of persons (other than a Permitted Holder (as defined below)); (ii) there
shall be consummated any consolidation or merger of the Company (A) in which
the Company is not the continuing or surviving corporation (other than a
consolidation or merger with a wholly owned subsidiary of the Company in
which all shares of Common Stock outstanding immediately prior to the
effectiveness thereof are changed into or exchanged for the same
consideration) or (B) pursuant to which the Common Stock would be converted
into cash, securities or other property, in each case other than a
consolidation or merger of the Company in which the
55
<PAGE>
holders of the Common Stock immediately prior to the consolidation or merger
have, directly or indirectly, at least a majority of the total voting power
of all classes of capital stock entitled to vote generally in the election of
directors of the continuing or surviving corporation immediately after such
consolidation or merger in substantially the same proportion as their
ownership of Common Stock immediately before such transaction; (iii) any
person, or any persons acting together which would constitute a "group" for
purposes of Section 13(d) of the Exchange Act (other than a Permitted
Holder), together with any affiliates thereof, shall beneficially own (as
defined in Rule 13d-3 under the Exchange Act) at least 50% of the total
voting power of all classes of capital stock of the Company entitled to vote
generally in the election of directors of the Company; (iv) at any time
during any consecutive two-year period, individuals who at the beginning of
such period constituted the Board of Directors of the Company (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the stockholders of the Company was approved by a
vote of 66-2/3% of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office; or (v) the
Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution.
"Permitted Holder" means (i) each of the Company's current officers and
directors; (ii) the members of the immediate family of Abraham D. Gosman; and
(iii) any group (within the meaning of Section 13(d) of the Exchange Act) of
which Mr. Gosman is a member so long as, with respect to any such group, Mr.
Gosman owns more than 25% of the total voting power of (a) all classes of
capital stock of the acquiring entity entitled to vote generally in the
election of directors of such entity or (b) the securities of the Company
owned by such group.
The right to require the Company to repurchase Debentures as a result of
the occurrence of a Repurchase Event could create an event of default under
Senior Indebtedness of the Company, as a result of which any repurchase
could, absent a waiver, be blocked by the subordination provisions of the
Debentures. See "Subordination." Failure by the Company to repurchase the
Debentures when required will result in an Event of Default with respect to
the Debentures whether or not such repurchase is permitted by the
subordination provisions. The Company's ability to pay cash to the Holders of
Debentures upon a repurchase may be limited by certain financial covenants
contained in the Company's Senior Indebtedness.
In the event a Repurchase Event occurs and the Holders exercise their
rights to require the Company to repurchase Debentures, the Company intends
to comply with applicable tender offer rules under the Exchange Act,
including Rules 13e-4 and 14e-1, as then in effect, with respect to any such
purchase.
The foregoing provisions would not necessarily afford Holders of the
Debentures protection in the event of highly leveraged or other transactions
involving the Company that may adversely affect Holders. In addition, the
foregoing provisions may discourage open market purchases of the Common Stock
or a non-negotiated tender or exchange offer for such stock and, accordingly,
may limit a stockholder's ability to realize a premium over the market price
of the Common Stock in connection with any such transaction.
Events of Default
The following are Events of Default under the Indenture with respect to
the Debentures: (a) default in the payment of principal of or any premium on
any Debenture when due (even if such payment is prohibited by the
subordination provisions of the Indenture); (b) default in the payment of any
interest on any Debenture when due, which default continues for 30 days (even
if such payment is prohibited by the subordination provisions of the
Indenture); (c) failure to provide timely notice of a Repurchase Event as
required by the Indenture; (d) default in the payment of the Repurchase Price
in respect of any Debenture on the Repurchase Date therefor (even if such
payment is prohibited by the subordination provisions of the Indenture); (e)
default in the performance of any other covenant of the Company in the
Indenture which continues for 60 days after written notice as provided in the
Indenture; (f) default under any bond, debenture, note or other evidence of
indebtedness for money borrowed by the Company or any subsidiary of the
Company or under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any indebtedness for
money borrowed by the Company or any subsidiary of the Company, whether such
indebtedness now exists or shall hereafter be created, which default shall
constitute a failure to pay the principal of indebtedness in excess of
$10,000,000 when due and payable after the expiration of any applicable grace
period with respect thereto or shall have resulted in indebtedness in excess
of $10,000,000 becoming or being declared due and payable prior to the date
on which it would otherwise
56
<PAGE>
have become due and payable, without such indebtedness having been
discharged, or such acceleration having been rescinded or annulled, within a
period of 30 days after there shall have been given to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Outstanding Debentures a written notice
specifying such default and requiring the Company to cause such indebtedness
to be discharged or cause such acceleration to be rescinded or annulled; and
(g) certain events in bankruptcy, insolvency or reorganization of the Company
or any subsidiary of the Company.
If an Event of Default with respect to the Debentures shall occur and be
continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Outstanding Debentures then outstanding may declare
the principal of and premium, if any, on all such Debentures to be due and
payable immediately, but if the Company cures all Events of Default (except
the nonpayment of interest on, premium, if any, and principal of any Notes)
and certain other conditions are met, such declaration may be canceled and
past defaults may be waived by the holders of a majority in principal amount
of Outstanding Debentures. If an Event of Default shall occur as a result of
an event of bankruptcy, insolvency or reorganization of the Company or any
subsidiary of the Company, the aggregate principal amount of the Debentures
shall automatically become due and payable. The Company is required to
furnish to the Trustee annually a statement as to the performance by the
Company of certain of its obligations under the Indenture and as to any
default in such performance. The Indenture provides that the Trustee may
withhold notice to the Holders of the Debentures of any continuing default
(except in the payment of the principal of or premium, if any, or interest on
any Debentures) if the Trustee considers it in the interest of Holders of the
Debentures to do so.
Modification, Amendments and Waivers
Modifications and amendments of the Indenture may be made by the Company
and the Trustee without the consent of the Holders to: (a) cause the
Indenture to be qualified under the Trust Indenture Act; (b) evidence the
succession of another Person to the Company and the assumption by any such
successor of the covenants of the Company herein and in the Debentures; (c)
add to the covenants of the Company for the benefit of the Holders or an
additional Event of Default, or surrender any right or power conferred upon
the Company; (d) secure the Debentures; (e) make provision with respect to
the conversion rights of Holders in the event of a consolidation, merger or
sale of assets involving the Company, as required by the Indenture; (f)
evidence and provide for the acceptance of appointment by a successor Trustee
with respect to the Debentures; or (g) cure any ambiguity, correct or
supplement any provision which may be defective or inconsistent with any
other provision, or make any other provisions with respect to matters or
questions arising under the Indenture which shall not be inconsistent with
the provisions of the Indenture, provided, however, that no such
modifications or amendment may adversely affect the interest of Holders in
any material respect.
Satisfaction and Discharge
The Company may discharge its obligations under the Indenture while
Debentures remain Outstanding if (a) all Outstanding Debentures will become
due and payable at their scheduled maturity within one year or (b) all
Outstanding Debentures are scheduled for redemption within one year, and in
either case the Company has deposited with the Trustee an amount sufficient
to pay and discharge all Outstanding Debentures on the date of their
scheduled maturity or the scheduled date of redemption.
Payments of Principal and Interest
The Indenture will require that payments in respect of the Debentures
(including principal, premium, if any, and interest) held of record by DTC
(including Debentures evidenced by the Restricted Global Note) be made in
same day funds. Payments in respect of the Debentures held of record by
holders other than DTC may, at the option of the Company, be made by check
and mailed to such holders of record as shown on the register for the
Debentures.
Registration Rights; Liquidated Damages
The Company has filed a registration statement on Form S-1 of which this
Prospectus is a part (the "Shelf Registration Statement") pursuant to the
terms of the Registration Rights Agreement. Under the Registration Rights
Agreement, the Company agreed to use its best efforts to cause the Shelf
Registration Statement to become effective on or prior to 90 days from the
latest date of the original issuance of the Debentures and to keep such Shelf
57
<PAGE>
Registration Statement effective until the earlier of such date that is three
years after the effective date thereof or until the Shelf Registration
Statement is no longer required for the transfer of any Debentures or shares
of Common Stock issuable upon conversion of the Debentures (the
"Securities"). Notwithstanding the foregoing, the Company will be permitted
to prohibit offers and sales of Transfer Restricted Securities pursuant to
the Shelf Registration Statement under certain circumstances and subject to
certain conditions (any period during which offers and sales are prohibited
being referred to as a "Suspension Period"). "Transfer Restricted Securities"
means each Debenture and any underlying share of Common Stock until the date
on which such Debenture or underlying share of Common Stock has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement, the date on which such Debenture or
underlying share of Common Stock is distributed to the public pursuant to
Rule 144 under the Securities Act or the date on which such Debenture or
share of Common Stock may be sold or transferred pursuant to Rule 144(k)(or
any similar provisions then in force). If the Shelf Registration Statement
has not become effective on or prior to 90 days from the latest date of the
original issuance of the Debentures, or the Shelf Registration Statement is
filed and declared effective but shall thereafter cease to be effective
(without being succeeded immediately by an additional registration statement
filed and declared effective) or usable for the offer and sale of Transfer
Restricted Securities for a period of time (including any Suspension Period)
which shall exceed 90 days in the aggregate in any one of the one-year
periods ending on the first, second and third anniversaries of the Closing
Date as defined in the Registration Rights Agreement, or which shall exceed
30 days in any calendar quarter (each such event a "Registration Default"),
the Company will pay liquidated damages to each Holder of Transfer Restricted
Securities. The amount of liquidated damages payable during any period during
which a Registration Default shall have occurred and be continuing is that
amount which is equal to one-quarter of one percent (25 basis points) per
annum per $1,000 principal amount, or $0.01 per week per share (subject to
adjustment in the event of stock splits, stock recombinations, stock
dividends and the like) of issued Common Stock constituting Transfer
Restricted Securities, for each 90-day period or part thereof until the
applicable registration statement is filed and the applicable registration
statement is declared effective, or the Shelf Registration Statement again
becomes effective or usable, as the case may be, up to a maximum amount of
liquidated damages of $0.25 per week per $1,000 principal amount of
Debentures or $0.05 per week per share (subject to adjustment as set forth
above) of Common Stock constituting Transfer Restricted Securities. All
accrued liquidated damages shall be paid to holders of Debentures by wire
transfer of immediately available funds or by federal funds check by the
Company on each Damages Payment Date (as defined in the Registration Rights
Agreement). Following the cure of a Registration Default, liquidated damages
will cease to accrue with respect to such Registration Default.
Governing Law
The Indenture and Debentures will be governed by and construed in
accordance with the laws of the State of New York, without giving effect to
such State's conflicts of laws principles.
Information Concerning the Trustee
The Company and its subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee in the ordinary course of
business.
Absence of Public Trading Market
There is no existing market for the Debentures and there can be no
assurance as to the liquidity of any markets that may develop for the
Debentures, the ability of the holders to sell their Debentures or at what
price holders of the Debentures will be able to sell their Debentures. Future
trading prices of the Debentures will depend upon many factors including,
among other things, prevailing interest rates, the Company's operating
results, the price of the Common Stock and the market for similar securities.
The Initial Purchasers have informed the Company that they intend to make a
market in the Debentures offered hereby; however, the Initial Purchasers are
not obligated to do so and any such market making activity may be terminated
at any time without notice to the holders of the Debentures. Prior to the
resale thereof, pursuant to this Prospectus each of the Debentures was
eligible for trading in Private Offerings, Resales and Trading through the
PORTAL Market. Debentures sold pursuant to this Prospectus will no longer be
eligible for trading in the PORTAL Market. The Company does not intend to
apply for listing of the Debentures on any Securities exchange.
58
<PAGE>
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' terms expire
either at the 1997, 1998 or 1999 annual meeting of the stockholders. Starting
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.
59
<PAGE>
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, 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 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 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 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.
60
<PAGE>
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 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.
Registration Rights
The holders of 13,631,702 shares of Common Stock that are restricted
securities pursuant to Rule 144 under the Securities Act ("Rule 144") have
been granted certain rights by the Company with respect to the registration
of such shares under the Securities Act. In particular, if the Company
proposes to register any of its securities under the Securities Act for the
account of certain other security holders, the holders of all such shares of
Common Stock may be entitled to notice of such registration and may be
entitled to include shares of such Common Stock therein. All stockholders
with registration rights also may require the Company to file a registration
statement on Form S-3 under the Securities Act at the Company's expense with
respect to their shares of Common Stock when the Company is eligible to use
such form. These rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number
of shares included in any such registration.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain United States federal
income tax considerations to holders of the Debentures. This discussion is
based upon the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations, Internal Revenue Service ("IRS") rulings, and judicial
decisions now in effect, all of which are subject to change (possibly with
retroactive effect) or different interpretations.
This discussion does not deal with all aspects of United States federal
income taxation that may be important to holders of the Debentures or shares
of Common Stock and does not deal with tax consequences arising under the
laws of any foreign, state or local jurisdiction. This discussion is for
general information only, and does not purport to address all tax
consequences that may be important to particular purchasers in light of their
personal
61
<PAGE>
circumstances, or to certain types of purchasers (such as certain financial
institutions, insurance companies, tax-exempt entities, dealers in
securities or persons who hold the Debentures or Common Stock in connection
with a straddle) that may be subject to special rules. This discussion
assumes that each holder holds the Debentures and the shares of Common Stock
received upon conversion thereof as capital assets.
For the purpose of this discussion, a "Non-U.S. Holder" refers to any
holder who is not a United States person. The term "United States person"
means a citizen or resident of the united States, a corporation or
partnership created or organized in the united States or any state thereof,
or an estate or trust, the income of which is includible in income for United
States federal income tax purposes regardless of its source.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THEIR
PARTICIPATION IN THIS OFFERING, OWNERSHIP AND DISPOSITION OF THE DEBENTURES,
INCLUDING CONVERSION OF THE DEBENTURES, AND THE EFFECT THAT THEIR PARTICULAR
CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES.
Ownership of the Debentures
Interest on Debentures. Interest paid on Debentures will be taxable to a
holder as ordinary interest income in accordance with the holder's methods of
tax accounting at the time that such interest is accrued or (actually or
constructively) received. The Company expects that the Debentures will not be
issued with original issue discount ("OID") within the meaning of the Code.
Constructive Dividend. Certain corporate transactions, such as
distributions of assets to holders of Common Stock, may cause a deemed
distribution to the holders of the Debentures if the conversion price or
conversion ratio of the Debentures is adjusted to reflect such corporation
transaction. Such deemed distributions will be taxable as a dividend, return
of capital, or capital gain in accordance with the earnings and profits rules
discussed under "Dividends on Shares of Common Stock."
Sale or Exchange of Debentures or Shares of Common Stock. In general, a
holder of Debentures will recognize gain or loss upon the sale, redemption,
retirement or other disposition of the Debentures measured by the difference
between the amount of cash and the fair market value of any property received
(except to the extent attributable to the payment of accrued interest) and
the holder's adjusted tax basis in the Debentures. A holder's tax basis in
Debentures generally will equal the cost of the Debentures to the holder
increased by the amount of market discount, if any, previously taken into
income by the holder or decreased by any bond premium theretofore amortized
by the holder with respect to the Debentures. (For the basis and holding
period of shares of Common Stock, see "Conversion of Debentures.") In
general, each holder of Common Stock into which the Debentures have been
converted will recognize gain or loss upon the sale, exchange, redemption, or
other disposition of the Common Stock under rules similar to those applicable
to the Debentures. Special rules may apply to redemptions, or other
disposition of the common stock under rules similar to those applicable to
the Debentures. Special rules may apply to redemptions of the Common stock
which may result in the amount paid being treated as a dividend. Subject to
the market discount rules discussed below, the gain or loss on the
disposition of the Debentures or shares of Common Stock will be capital gain
or loss and will be long-term gain or loss if the Debentures or shares of
Common Stock have been held for more than one year at the time of such
disposition.
Conversion of Debentures. A holder of Debentures will not recognize gain
or loss on the conversion of the Debentures into shares of Common Stock. The
holder's tax basis in the shares of Common Stock received upon conversion of
the Debentures will be equal to the holder's aggregate basis in the
Debentures exchanged therefor (less any portion thereof allocable to cash
received in lieu of a fractional share). The holding period of the shares of
Common Stock received by the holder upon conversion of Debentures will
generally include the period during which the holder held the Debentures
prior to the conversion.
Cash received in lieu of a fractional share of Common Stock should be
treated as a payment in exchange for such fractional share rather than as a
dividend. Gain or loss recognized on the receipt of cash paid in lieu of such
fractional shares generally will equal the difference between the amount of
cash received and the amount of tax basis allocable to the fractional shares.
62
<PAGE>
Market Discount. The resale of Debentures may be affected by the "market
discount" provisions of the Code. For this purpose, the market discount on a
Debenture will generally be equal to the amount, if any, by which the stated
redemption price at maturity of the Debenture immediately after its
acquisition exceeds the holder's tax basis in the debenture. Subject to a de
minimis exception, these provisions generally require a holder of a Debenture
acquired at a market discount to treat as ordinary income any gain recognized
on the disposition of such Debenture to the extent of the "accrued market
discount" on such Debenture at the time of disposition. In general, market
discount on a Debenture will be treated as accruing on a straight-line basis
over the term of such Debenture, or, at the election of the holder, under a
constant yield method. A holder of a Debenture acquired at a market discount
may be required to defer the deduction of a portion of the interest on any
indebtedness incurred or maintained to purchase or carry the Debenture until
the Debenture is disposed of in a taxable transaction, unless the holder
elects to include accrued market discount in income currently.
Dividends on Shares of Common Stock. Distributions on shares of Common
Stock will constitute dividends for United States federal income tax purposes
to the extent of current or accumulated earnings and profits of the Company
as determined under United States federal income tax principles. Dividends
paid to holders that are United States corporations may qualify for the
dividends-received deduction.
To the extent, if any, that a holder receives distributions on shares of
Common Stock that would otherwise constitute dividends for United States
federal income tax purposes but that exceeds current and accumulated earnings
and profits of the Company, such distribution will be treated first as a
non-taxable return of capital reducing the holder's basis in the shares of
Common Stock. Any such distribution in excess of the holder's basis in the
shares of Common Stock will be treated as capital gain.
Certain Federal Income Tax Considerations Applicable to Non-U.S. Holders
Interest on Debentures. Generally, interest paid on the Debentures to a
Non U.S.-Holder will not be subject to United States federal income tax if:
(I) such interest is not effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Holder; (II) the Non-U.S.
Holder does not actually or constructively own 10% or more of the total
voting power of all classes of stock of the Company entitled to vote and is
not a controlled foreign corporation with respect to which the Company is a
"related person" within the meaning of the Code; and (III) the beneficial
owner, under penalty of perjury, certifies that the owner is not a United
States person and provides the owner's name and address. If certain
requirements are satisfied, the certification described in paragraph (III)
above may be provided by a securities clearing organization, a bank, or other
financial institution that holds customers' securities in the ordinary course
of its trade or business. For this purpose, the holder of Debentures would be
deemed to own constructively the Common Stock into which it could be
converted. A holder that is not exempt from tax under these rules will be
subject to United States federal income tax withholding at a rate of 30%
unless the interest is effectively connected with the conduct of a United
States trade or business, in which case the interest will be subject to the
Untied States federal income tax on net income that applies to United States
persons generally. Non-U.S. Holders should consult applicable income tax
treaties, which may provide different rules.
Sales or Exchange of Debentures or Shares of Common Stock. A Non-U.S.
Holder generally will not be subject to United States federal income tax on
gain recognized upon the sale or other disposition unless (I) the gain is
effectively connected with the conduct of a trade or business within the
United States by the Non-U.S. Holder, or (ii) in the case of a Non-U.S.
Holder who is a nonresident alien individual and holds the Common Stock as a
capital asset, such holder is present in the United States for 183 or more
days in the taxable year and certain other circumstances are present. If the
Company is a "United States real property holding corporation," a Non-U.S.
Holder may be subject to federal income tax with respect to gain realized on
the disposition of such shares as if it were effectively connected with a
United States trade or business and the amount realized will be subject to
withholding at the rate of 10%. The amount withheld pursuant to these rules
will be creditable against such Non- U.S. Holder's United States federal
income tax liability and may entitle such Non-U.S. Holder to a refund upon
furnishing the required information to the Internal Revenue Service. Non-U.S.
Holders should consult applicable income tax treaties, which may provide
different rules.
Conversion of Debentures. A Non-U.S. Holder generally will not be subject
to United States federal income tax on the conversion of a Debenture into
shares of Common Stock. To the extent a Non-U.S. Holder receives cash
63
<PAGE>
in lieu of a fractional share on conversion, such cash may give rise to gain
that would be subject to the rules described above with respect to the sale
or exchange of a Debenture or Common Stock.
Dividends on Shares of Common Stock. Generally, any distribution on shares
of Common Stock to a Non- U.S. Holder will be subject to United States
federal income tax withholding at a rate of 30% unless the dividend is
effectively connected with the conduct of trade or business within the United
States by the Non-U.S. Holders, in which case the dividend will be subject to
the United States federal income tax on net income that applies to United
States persons generally (and, with respect to corporate holders and under
certain circumstances, the branch profits tax). Non-U.S. Holders should
consult any applicable income tax treaties, which may provide for a lower
rate of withholding or other rules different from those described above. A
Non-U.S. Holder may be required to satisfy certain certification requirements
in order to claim a reduction of or exemption from withholding under the
foregoing rules.
Information Reporting and Backup Withholding
U.S. Holders. Information reporting and backup withholding may apply to
payments of interest or dividends on or the proceeds of the sale or other
disposition of the Debentures or shares of Common Stock made by the Company
with respect to certain noncorporate U.S. Holders. Such U.S. holders
generally will be subject to backup withholding at a rate of 31% unless the
recipient of such payment supplies a taxpayer identification number,
certified under penalties of perjury, as well as certain other information,
or otherwise establishes, in the manner prescribed by law, an exemption from
backup withholding. Any amount withheld under backup withholding is allowable
as a credit against the U.S. holder's federal income tax, upon furnishing the
required information.
Non-U.S. Holders. Generally, information reporting and backup withholding
of United States federal income tax at a rate of 31% may apply to payments of
principal, interest and premium (if any) to Non-U.S. Holders if the payee
fails to certify that the holder is a Non-U.S. person or if the Company or
its paying agent has actual knowledge that the payee is a United States
person. The 31% backup withholding tax generally will not apply to dividends
paid to foreign holders outside the United States that are subject to 30%
withholding discussed above or that are subject to a tax treaty that reduces
such withholding.
The payment of the proceeds on the disposition of Debenture or shares of
Common Stock to or through the United States office of a United States or
foreign broker will be subject to information reporting and backup
withholding unless the owner provides the certification described above or
otherwise establishes an exemption. The proceeds of the disposition by a
Non-U.S. Holder of Debentures or share of Common Stock to or through a
foreign office of a broker will not be subject to backup withholding.
However, if such broker is a U.S. person, a controlled foreign corporation
for United States tax purposes, or a foreign person 50% or more of whose
gross income from all sources for certain periods is from activities that are
effectively connected with a United States trade or business, information
reporting will apply unless such broker has documentary evidence in its files
of the owner's foreign status and has no actual knowledge to the contrary or
unless the owner otherwise establishes an exemption. Both backup withholding
and information reporting will apply to the proceeds from such dispositions
if the broker has actual knowledge that the payee is a U.S. Holder.
SELLING SECURITYHOLDERS
The following table sets forth information concerning the principal amount
of Debentures beneficially owned by each Selling Securityholder or record holder
of Debentures and the number of shares of Common Stock issuable upon conversion
of the Debentures (the "Conversion Shares") which may be offered from time to
time pursuant to this Prospectus. Other than their ownership of PhyMatrix
Corp.'s securities, none of the Selling Securityholders has had any material
relationship with the Company within the past three years, other than Smith
Barney Inc. which during such period has acted as an Initial Purchaser,
financial advisor and underwriter for the Company, Paine Webber, Inc. which has
acted as an Initial Purchaser and underwriter for the Company and Lehman
Brothers Inc., Morgan Stanley & Co., Incorporated and Bear, Stearns & Co. Inc.
which have acted as underwriters for the Company. The table has been prepared
based on information furnished to the Company by the Depository Trust Company
and or by or on behalf of the Selling Securityholders.
64
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount of Number of
Debentures Conversion
Beneficially Percentage of Shares Percentage of
Owned That May Debentures That May Common Stock
Name (1) Be Sold (1) Outstanding Be Sold (2) Outstanding (3)
- -------- -------------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Bank of New York 1,880,000 1.9% 66,666 *
Bankers Trust Company 9,070,000 9.1 321,631 1.4%
Bear Stearns Securities Corp. 4,250,000 4.3 150,709 *
Boston Safe & Deposit Trust Co. 13,515,000 13.5 479,255 2.2
Brown Brothers Harriman & Co. 250,000 * 8,865 *
BT Securities Corp. 1,825,000 1.8 64,716 *
Chase Manhattan Bank, N.A. (The) 1,800,000 1.8 63,829 *
Chemical Bank 130,000 * 4,609 *
Chase Manhattan Bank Trust Co. of
California, N.A. 500,000 * 17,730 *
Citibank, N.A. 2,780,000 2.8 98,581 *
Custodial Trust Company 3,330,000 3.3 118,085 *
Donaldson Lufkin & Jenrette
Securities Corporation 100,000 * 3,546 *
Ell & Co. 295,000 * 10,460 *
Firstar Trust Company 800,000 * 28,368 *
First National Bank of Maryland (The) 170,000 * 6,028 *
Goldman Sachs 550,000 * 19,503 *
Investment Bank and Trust M.F. Custodian 500,000 * 17,730 *
Lehman Brothers, Inc. 2,000,000 2.0 70,921 *
Mercantile, Safe Deposit and Trust Company 3,020,000 3.0 107,092 *
Merrill Lynch, Pierce, Fenner & Smith
Safekeeping 5,000,000 5.0 177,304 *
Morgan Stanley & Co., Incorporated 500,000 * 17,730 *
Morgan Stanley & Co., Incorporated/Prime
Dealer Services Corp. 250,000 * 8,865 *
NBD Bank N.A. 1,435,000 1.4 50,886 *
Northern Trust Co. - Trust 850,000 * 30,141 *
Nesbitt Burns, Inc. 228,000 * 8,085 *
PaineWebber, Inc. 250,000 * 8,865 *
PNC National Association 100,000 * 3,546 *
Pond, Wave & Co. 2,390,000 2.4 84,751 *
Solkeld & Co. 975,000 * 34,574 *
Salomon Brothers Inc. 1,250,000 1.3 44,326 *
Sanwa Bank California 1,175,000 1.2 41,666 *
Smith Barney, Inc. 7,097,000 7.1 251,666 1.1
SSB-Custodian 10,730,000 10.7 380,496 1.7
Wagner, Stott & Co. 50,000 * 1,773 *
Wells Fargo Bank N.A. 3,000,000 3.0 106,382 *
</TABLE>
- -------------
(1) The information set forth herein is as of December 12, 1996 and will be
updated as required.
(2) Assumes conversion of the full amount of Debentures held by such holder
at the initial rate of $28.20 in principal amount of Debentures per share
of Common Stock. Under the terms of the Indenture, fractional shares will
not be issued upon conversion of the Debentures; cash will be paid in
lieu of fractional shares, if any.
(3) Based upon the 22,238,144 shares of Common Stock outstanding as of
October 31, 1996, treating as outstanding the number of Conversion Shares
shown as being issuable upon the assumed conversion by the named holder
of the full amount of such holder's Debentures but not assuming the
conversion of the Debentures of any other holder.
65
<PAGE>
The information concerning the Selling Securityholders may change from
time to time and will be set forth in supplements to this Prospectus. In
addition, the per share conversion price and, therefore, the number of shares
of Common Stock issuable upon conversion of the Debentures is subject to
adjustment under certain circumstances as specified in the Indenture.
Accordingly, the number of shares of Common Stock issuable upon conversion of
the Debentures may change. In addition, the aggregate principal amount of the
Debentures is subject to change as a result of redemptions and conversions
under the Terms of the Indenture. As of the date of this Prospectus, the
aggregate principal amount of Debentures outstanding is $100,000,000, which
may be converted into 3,546,099 shares of Common Stock.
Because the Selling Securityholders may offer all or some of the
Debentures and shares of Common Stock issued upon conversion thereof pursuant
to the offering contemplated by this Prospectus, and to the Company's
knowledge there are currently no agreements, arrangements or understandings
with respect to the sale of any of the Debentures or shares of Common Stock
that may be held by the Selling Securityholders after completion of this
offering, no estimate can be given as to the principal amount of the
Debentures or shares of Common Stock that will be held by Selling
Securityholders after completion of this offering. See "Plan of
Distribution."
PLAN OF DISTRIBUTION
The Selling Securityholders may sell all or a portion of the Debentures
and shares of Common Stock beneficially owned by them and which may be
offered hereby from time to time on any exchange or market on which the
securities are listed or quoted, as applicable, on terms to be determined at
the times of such sales. The Selling Securityholders may also make private
sales directly or through a broker or brokers. Alternatively, any of the
Selling Securityholders may from time to time offer the Debentures or shares
of Common Stock which may be offered hereby and beneficially owned by them
through underwriters, dealers or agents, who may receive compensation in the
form of underwriting discounts, commissions or concessions from the Selling
Securityholders and the purchasers of the Debentures or shares of Common
Stock for whom they may act as agent. Such underwriters, dealers or agents
may include the Initial Purchasers of the Debentures, which may perform
investment banking or other services for or engage in other transactions with
the Company from time to time in the future.
To the extent required, the aggregate principal amount of Debentures and
number of shares of Common Stock to be sold hereby, the names of the Selling
Securityholders, the purchase price, the name of any such agent, dealer or
underwriter and any applicable commissions, discounts or other terms
constituting compensation with respect to a particular offer will be set
forth in an accompanying Prospectus Supplement. The aggregate proceeds to the
Selling Securityholders from the sale of the Debentures or shares of Common
Stock offered by them hereby will be the purchase price of such Debentures or
shares of Common Stock less discounts and commissions, if any.
The Debentures and the shares of Common Stock which may be offered hereby
may be sold from time to time in one or more transactions at fixed offering
prices, which may be changed, or at varying prices determined at the time of
sale or at negotiated prices. Such prices will be determined by the holders
of such securities or by agreement between such holders and underwriters or
dealers who receive fees or commissions in connection therewith.
The outstanding Common Stock is listed for trading on Nasdaq, and the
shares of Common Stock issuable upon conversion of the Debentures have been
authorized for listing on Nasdaq. There is no assurance as to the development
or liquidity of any trading market that may develop for the Debentures.
In order to comply with the securities laws of certain states, if
applicable, the Debentures and shares of Common Stock offered hereby will be
sold in such jurisdictions only through registered or licensed brokers or
dealers. In addition, in certain states the Debentures and shares of Common
Stock offered hereby may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and compliance with
same is effected.
The Selling Securityholders and any broker-dealers, agent or underwriters
that participate with the Selling Securityholders in the distribution of the
Debentures or shares of Common Stock offered hereby may be deemed to be
"underwriters" within the meaning of the Securities Act, in which event any
commissions or discounts received by such broker-dealers, agents or
underwriters and any profit on the resale of the Debentures or shares of
Common
66
<PAGE>
Stock offered hereby and purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company and the Selling Securityholders have agreed to indemnify each
other against certain liabilities arising under the Securities Act. The
Company has agreed to pay all expenses incident to the offer and sale of the
Debentures and Common Stock offered hereby by the Selling Securityholders to
the public, other than selling commissions and fees.
LEGAL MATTERS
Certain legal matters in connection with the Debentures and 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.
ADDITIONAL INFORMATION
The Company has filed with the United States Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-1 (together
with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act covering the shares of Common Stock and
Debentures offered hereby. 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, the
Debentures 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--October 31, 1996 (unaudited) January 31, 1996 (unaudited) and December 31, 1995 F-2
Statements of Operations--three and nine months ended October 31, 1996 (unaudited), one month ended
January 31, 1996 (unaudited), three months ended September 30, 1995 (unaudited), and nine months ended
September 30, 1995 F-3
Statements of Cash Flows--nine months ended October 31, 1996 (unaudited), one month ended January 31,
1996 (unaudited), and nine months ended September 30, 1995 F-4
Notes to Financial Statements (unaudited) F-5
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
</TABLE>
F-1
<PAGE>
PHYMATRIX CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
October 31, January 31, December 31,
1996 1996 1995
------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 91,836,567 $ 46,113,619 $3,596,913
Receivables:
Accounts receivable, net 32,589,968 21,562,477 20,710,846
Other receivables 873,831 678,411 569,923
Notes receivable 10,000,000 -- 516,000
Prepaid expenses and other current assets 5,140,178 1,202,399 1,276,535
----------- ---------- ----------
Total current assets 140,440,544 69,556,906 26,670,217
Property, plant and equipment, net 44,314,050 38,719,086 39,359,328
Notes receivable 1,931,000 100,000 170,400
Goodwill, net 59,227,195 44,979,865 31,931,453
Management service agreements, net 29,990,869 15,816,042 16,376,636
Investment in affiliates 3,335,180 3,256,783 12,925,129
Other assets (including restricted cash) 10,514,874 7,578,791 4,753,710
----------- ---------- ----------
Total assets $289,753,712 $180,007,473 $132,186,873
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases $2,886,155 $2,552,306 $26,662,510
Current portion of related party debt -- 4,740,588 4,740,588
Due to shareholder - current -- 5,376,000 --
Accounts payable 5,115,322 5,333,791 5,353,210
Accrued compensation 1,211,322 1,151,268 1,124,316
Accrued liabilities 13,717,993 6,194,108 9,367,532
Accrued interest - shareholder -- -- 1,708,174
----------- ---------- ----------
Total current liabilities 22,930,792 25,348,061 48,956,330
Due to shareholder, less current portion -- 10,147,287 36,690,180
Long-term debt and capital leases, less current portion 13,998,562 13,653,437 28,847,923
Convertible subordinated debentures 100,000,000 -- --
Other long term liabilities 7,657,441 2,314,544 2,511,122
Minority interest 647,667 1,335,167 2,502,970
----------- ---------- ----------
Total liabilities 145,234,462 52,798,496 119,508,525
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000
Shares authorized; 22,238,144 Shares
issued and outstanding at October 31, 1996 222,381 215,300 --
Additional paid in capital 148,736,432 140,491,557 25,000,000
Retained earnings (deficit) (4,439,563) (13,497,880) (12,321,652)
----------- ---------- ----------
Total shareholders' equity 144,519,250 127,208,977 12,678,348
----------- ---------- ----------
Total liabilities and shareholders' equity $289,753,712 $180,007,473 $132,186,873
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Consolidated Consolidated Consolidated Consolidated Combined
Three Three One Nine Nine
Months Months Month Months Months
Ended Ended Ended Ended Ended
October 31, September 30, January 31, October 31, September 30,
1996 1995 1996 1996 1995
----------- ----------- ----------- ----------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues from services $26,781,310 $13,078,968 $4,636,127 $67,888,832 $33,063,274
Net revenue from management service agreements 24,957,207 7,054,302 6,079,109 61,480,762 7,054,302
---------- --------- --------- ---------- ---------
Total revenue 51,738,517 20,133,270 10,715,236 129,369,594 40,117,576
---------- --------- --------- ---------- ---------
Operating costs and administrative expenses:
Cost of affiliated physician
management services 12,251,717 2,279,615 2,796,623 29,663,964 2,279,615
Salaries, wages and benefits 14,467,408 9,222,359 3,636,973 38,300,280 21,424,554
Professional fees 849,410 756,881 287,095 2,853,855 1,865,458
Supplies 7,345,718 3,712,482 1,916,013 18,926,161 6,484,118
Utilities 722,559 364,214 175,653 1,901,079 807,314
Depreciation and amortization 1,950,077 954,222 535,300 5,215,765 2,347,689
Rent 2,202,321 1,302,984 565,106 5,643,144 2,700,700
Earn out payment -- 159,889 -- -- 1,271,000
Provision for bad debts 457,044 282,849 256,989 1,777,821 538,260
Other 6,267,233 1,624,155 799,460 11,169,091 3,893,362
---------- --------- --------- ---------- ---------
Total operating costs and
administrative expenses 46,513,487 20,659,650 10,969,212 115,451,160 43,612,070
---------- --------- --------- ---------- ---------
Interest expense, net 283,102 968,322 551,607 723,514 1,731,138
Interest expense shareholder -- 688,345 259,888 369,366 1,035,187
Minority interest -- 272,320 81,135 58,234 564,384
Income from investment in affiliates (226,838) (122,560) 29,622 (495,836) (341,764)
---------- --------- --------- ---------- ---------
56,264 1,806,427 922,252 655,278 2,988,945
---------- --------- --------- ---------- ---------
Income (loss) before provision for income taxes 5,168,766 (2,332,807) (1,176,228) 13,263,156 (6,483,439)
Income tax expense 1,885,769 -- -- 4,917,650 --
---------- --------- --------- ---------- ---------
Net income (loss) $3,282,997 ($2,332,807) ($1,176,228) $8,345,506 ($6,483,439)
---------- --------- --------- ---------- ---------
Net income (loss) per weighted average share $0.15 ($0.08) $0.38
---------- --------- ----------
Weighted average number of shares outstanding 22,507,347 14,204,305 21,968,654
---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
Nine Months One Month Nine Months
Ended Ended Ended
October 31, January 31, September 31,
1996 1996 1995
----------- ----------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $8,345,506 ($1,176,228) ($6,483,439)
Noncash items included in net income (loss):
Depreciation and amortization 5,215,765 535,300 2,347,689
Other (272,635) 430,334 80,088
Changes in receivables (8,493,399) (739,635) (2,127,701)
Changes in accounts payable and accrued liabilities 1,513,278 (796,011) 6,866,539
Changes in other assets (3,965,999) (19,072) (1,293,922)
----------- ----------- -----------
Net cash provided (used) by operating activities 2,342,516 (1,765,312) (610,746)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (4,613,077) (184,460) (803,899)
Sale of assets 1,500,000 24,794 --
Notes receivable (11,831,000) 686,400 (1,029,600)
Purchase of investments in affiliates -- -- (9,790,588)
Other investments (1,457,594) -- --
Acquisitions, net of cash acquired (14,906,916) 54,252 (38,915,647)
----------- ----------- -----------
Net cash provided (used) by investing activities (31,308,587) 580,986 (50,539,734)
----------- ----------- -----------
Cash flows from financing activities:
Capital contributions -- -- 12,036,287
Advances from (repayment to) shareholder (15,523,287) (23,123,170) 33,910,040
Proceeds from issuance of common stock 243,010 114,563,221 --
Proceeds from issuance of convertible subordinated debentures 96,661,882 -- --
Proceeds from issuance of debt -- -- 19,500,000
Release of cash collateral 1,996,786 1,000,000 --
Cash collateralizing notes payable -- (5,403,337) --
Offering costs and other (2,458,181) -- (288,939)
Repayment of debt (6,231,191) (43,335,682) (2,768,209)
----------- ----------- -----------
Net cash provided by financing activities 74,689,019 43,701,032 62,389,179
----------- ----------- -----------
Increase in cash and cash equivalents 45,722,948 42,516,706 11,238,699
Cash and cash equivalents, beginning of period 46,113,619 3,596,913 677,245
----------- ----------- -----------
Cash and cash equivalents, end of period $91,836,567 $46,113,619 $11,915,944
=========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during period for:
Interest $1,990,738 $2,876,636 $1,371,570
=========== =========== ===========
Taxes $2,270,557 $-- $--
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months and Nine Months Ended October 31, 1996 (Unaudited)
One Month Ended January 31, 1996 (Unaudited)
and Three Months (Unaudited) and Nine Months Ended September 30, 1995
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited interim financial statements include the accounts
of PhyMatrix Corp. ("the Company") and the combination of business entities
which had been operated under common control prior to the completion of the
initial public offering ("IPO"). These interim financial statements have been
prepared in accordance with generally accepted accounting principles and the
requirements of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is management's opinion that the accompanying interim
financial statements reflect all adjustments (which are normal and recurring)
necessary for a fair presentation of the results for the interim periods. These
interim financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Special Report
on Form 10-K for the year ended December 31, 1995. Operating results for the
three months and nine months ended October 31, 1996 are not necessarily
indicative of results that may be expected for the year. In January 1996, the
Company changed its fiscal year end from December 31 to January 31 and financial
statements as of and for the one month period ended January 31, 1996 are
included herein.
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with the IPO which became effective
January 23, 1996. In connection with the IPO, the Company issued 8,222,500
shares of Common Stock. Net proceeds to the Company were $111,187,154, which was
net of underwriting discounts, commissions and other expenses. The Company used
approximately $71,500,000 from the net proceeds of the IPO to repay certain
indebtedness and obligations that arose from certain acquisitions. The remaining
net proceeds have and will continue to be used for general corporate purposes,
including future acquisitions and working capital.
During June 1996, the Company raised $100 million through the sale of its 6
3/4% Convertible Subordinated Debentures ( the "Debentures") to certain
institutional investors and non-U.S. investors. The Debentures will be
convertible into shares of the Company's Common Stock and are due in 2003. Net
proceeds to the Company from the Debentures, after deduction of the initial
purchasers' discounts, commissions and other expenses, were $96,661,882. The
Company used approximately $10,752,000 from the net proceeds of the Debenture
offering to repay advances from the principal shareholder. During July 1996, the
Company filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission to register the resale of the Debentures by the holders
thereof.
During July 1996, the Company also filed a Registration Statement on Form S-4
with the Securities and Exchange Commission with respect to the registration of
an aggregate of up to 5,000,000 shares of Common Stock which may be issued by
the Company from time to time in connection with various acquisitions that it
may make.
2. ACQUISITIONS
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, a newly formed management services organization ("MSO")
that provides management services to an independent physician association
("IPA") composed of 45 physicians based in Georgia. The Company acquired this
interest in exchange for a payment of $550,000 to existing shareholders and a
capital contribution of $700,000 to the Company. The Company's balance sheet at
October 31, 1996 includes the 50% interest not owned by the Company as minority
interest. The owners of the other 50% interest in the MSO have a put option to
the Company to purchase their interests. This put option vests over a four-year
period. The price to the Company to purchase these interests equals 40% of the
MSO's net operating income as of the most recent fiscal year multiplied by the
price earnings ratio of the Company. The minimum price earnings ratio used in
such calculation will be 4 and the maximum 10.
During April 1996, the Company purchased the assets of and entered into an
employment agreement with one physician in Florida. The total purchase price,
which was paid in cash, for these assets was $1,683,190. The purchase
F-5
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. ACQUISITIONS (Continued)
price was allocated to these assets at their fair market value including
goodwill of $1,633,471. The resulting intangible is being amortized over 20
years.
During May 1996, the Company purchased the stock of Atlanta Gastroenterology
Associates, P.C. pursuant to a tax free merger and entered into a 40-year
management agreement with the medical practice in exchange for 324,252 shares of
Common Stock of the Company having a value of approximately $6,100,000. The
transaction has been accounted for using the pooling-of-interests method of
accounting. Pursuant to the management agreement, the Company receives a base
management fee, an incentive management fee and a percentage of all net
ancillary service income.
During May 1996, the Company amended its existing management agreement with
Oncology Care Associates and extended the term of the agreement to 20 years.
Simultaneously, the Company expanded the Oncology Care Associates practice by
adding three oncologists the practices of whom the Company acquired for
$500,000. $200,000 of such purchase price was paid in cash and $300,000 was paid
in the form of a convertible note due in May 1997. The Company has the option to
make such $300,000 payment at its discretion in either cash or Common Stock of
the Company with such number of shares to be based upon the average price of the
stock during the five business days preceding the due date. The purchase price
has been allocated to the assets at their fair market value, including
management service agreements of approximately $500,000. The Company receives an
annual base management fee based upon a percentage of the net revenues of the
practice. The resulting intangible is being amortized over 20 years.
During May and June 1996, the Company entered into agreements to purchase the
assets of and enter into 20-year management agreements with three physician
practices consisting of four physicians. All of these acquisitions have since
been consummated, except that one of the acquisitions closed in escrow pending
the satisfaction of certain conditions. These practices are located in South
Florida, Bethesda, Maryland and Washington, D.C. The total purchase price for
the assets of these practices was $1,677,165. Of this amount $726,211 was paid
in cash and $950,954 of such purchase price is payable in Common Stock of the
Company to be issued during May and June 1997. The number of shares of Common
Stock of the Company to be issued is based upon the average price of the stock
during the five business days prior to the issuance. The value of the Common
Stock to be issued has been recorded in other long term liabilities at October
31, 1996. The purchase price has been allocated to the assets at their fair
market value, including management service agreements of $812,520. The Company
receives an annual base management fee and an incentive management fee under
each agreement. The resulting intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase price
for these assets was approximately $937,909, which was paid in cash. The
purchase price has been allocated to these assets at their fair market value,
including management service agreements of $318,137. The Company receives a
management fee under the management agreements based upon a percentage of the
net revenues of the practice. The resulting intangible is being amortized over
20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $737,354. Of such purchase price $457,354
was paid in cash and $280,000 is payable during July 1997 in Common Stock of the
Company with such number of shares to be based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
October 31, 1996. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of $382,165. The
Company receives an annual base management fee and an incentive management fee.
The resulting intangible is being amortized over 20 years.
F-6
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. ACQUISITIONS (Continued)
During July 1996, the Company purchased the assets of and entered into
employment agreements with two physicians in Florida. The total purchase price
for these assets was $1,506,400. Of this amount, $448,000 was paid in cash and
$1,058,400 is payable during July 1997 in Common Stock of the Company with such
number of shares to be based upon the value of the stock during the five
business days prior to the issuance. The value of the Common Stock to be issued
has been recorded in other long term liabilities at October 31, 1996. The
purchase price has been allocated to these assets at their fair market value
including goodwill of $1,204,755. The resulting intangible is being amortized
over 20 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,311,606. Of such purchase price, $1,391,606 was
paid in cash and $1,920,000 is payable during August 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at October 31, 1996. The purchase price has been allocated to these assets at
their fair market value, including management service agreements of $2,497,974.
The Company receives an annual base management fee and an incentive management
fee. The resulting intangible is being amortized over 40-years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase price
for these assets was $1,529,419. Of such purchase price, $836,619 was paid in
cash and $692,800 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
October 31, 1996. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of approximately
$1,096,922. The Company receives an annual base management fee and an incentive
management fee. The resulting intangible is being amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase price
for these assets was $3,181,765. Of such purchase price, $807,365 was paid in
cash and $2,374,400 is payable during August 1997 in Common Stock of the Company
with such number of shares to be purchased based upon the average price of the
stock during the five business days prior to the issuance. The value of the
Common Stock to be issued has been recorded in other long term liabilities at
October 31, 1996. The purchase price has been allocated to these assets at their
fair market value, including management service agreements of $3,048,457. The
Company receives an annual base management fee and an incentive management fee.
The resulting intangible is being amortized over 40 years.
During August 1996, the Company expanded the Osler Medical, Inc. practice by
adding three physicians, the practices of whom the Company acquired for
$248,273. The total purchase price was paid in cash. The purchase price has been
allocated to the assets at their fair market value, including management service
agreements of approximately $92,000. The resulting intangible is being amortized
over 20 years.
During September 1996, the Company acquired the remaining 56.25% ownership
interest in Physicians Choice Management, LLC, a management services
organization ("MSO") that provides management services to an independent
physician association ("IPA") composed of over 375 physicians in Connecticut.
The Company had acquired a 43.75% ownership interest in December 1995. The
Company acquired the remaining interests in exchange for a payment of $1,000,000
in cash plus 363,442 shares of Common Stock of the Company. The Company also
committed to loan the selling shareholders $2,800,000 to pay the tax liability
related to the sale. As of October 31, 1996, $1,581,000 of the loan amount
committed had been advanced to the selling shareholders by the Company. The
total purchase price for the 100% interest has been allocated to these assets at
their fair market value including goodwill of $11,262,231. The resulting
intangible is being amortized over 40 years.
F-7
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. ACQUISITIONS (Continued)
During September 1996, the Company purchased the stock of Physicians
Consultant and Management Corporation ("PCMC"), a company based in Florida that
provides the managed health care industry with assistance in provider relations,
utilization review and quality assurance. The base purchase price was $2,000,000
with $1,000,000 of such amount due on February 1, 1997. There is also a
contingent payment up to a maximum of $10,000,000 based on PCMC's earnings
before taxes during the next five years which will be paid in cash and/or Common
Stock of the Company. The purchase price has been allocated to the assets at
their fair market value including goodwill of approximately $2,372,000. The
resulting intangible is being amortized over 30 years.
During September 1996, the Company acquired an 80% interest in New Jersey
Medical Management, LLC, a newly formed MSO that provides management services to
an IPA with more than 450 physicians in New Jersey. The Company acquired this
interest in exchange for a payment of $350,000. The Company's balance sheet at
October 31, 1996 includes the 20% interest not owned as minority interest.
During October 1996, the Company purchased the assets of and entered into
20-year management agreements with five physicians in Florida. The purchase
price for these assets was $1,331,521. Of such purchase price $796,521 was paid
in cash and $535,000 is payable during October 1997 in Common Stock of the
Company with such number of shares to be purchased based upon the average price
of the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term liabilities
at October 31, 1996. The Company receives an annual base management fee and an
incentive management fee. The purchase price has been allocated to these assets
at their fair market value, including management service agreements of $660,000.
The resulting intangible is being amortized over 20 years.
During October 1996, the Company purchased the assets of an outpatient
ambulatory surgical center in Florida. The Company entered into a lease whereby
the surgical center was leased to a partnership with an initial term of 15
years. In addition, the Company entered into a 20-year management agreement
pursuant to which the Company receives a management fee which is based upon the
performance of the surgical center. The purchase price for these assets was
$3,035,196 plus the assumption of debt of $1,223,625 which consists of $717,557
in a mortgage payable and $506,068 in capital leases. The purchase price has
been allocated to the assets at their fair market value, including management
service agreements of $2,368,448. The resulting intangible is being amortized
over 20 years.
During the nine months ended October 31, 1996 and September 30, 1995, the
Company acquired the assets and assumed certain liabilities of physician
practices, medical support service companies, a medical facility development
company and management service organizations. The transactions had the following
non-cash impact on the balance sheets:
October 31, September 30,
1996 1995
---- ----
Current assets $2,910,958 $10,171,434
Property, plant and equipment 4,026,529 38,383,129
Intangibles 30,646,682 38,953,324
Other noncurrent assets 20,441 2,174,662
Current liabilities (5,204,234) (8,149,187)
Debt (1,526,077) (40,829,080)
Noncurrent liabilities (6,754,572) (1,788,635)
Equity (9,212,811) --
F-8
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. NOTES RECEIVABLE
During August 1996, the Company loaned $10 million to an unrelated healthcare
entity. The principal and interest are due in one installment on August 15,
1997. Interest on the loan accrues at the rate of prime plus 2%.
During October 1996, the Company loaned $1,581,000 to Physicians Choice, LLC
pursuant to the agreement under which the Company purchased the remaining
ownership interests in Physicians Choice Management, LLC (see Note 2).
The note has a variable rate of interest and a final maturity in April 2004.
4. LONG TERM DEBT
During January 1996, the Company used approximately $71,500,000 from the
proceeds of the IPO, to repay the following indebtedness and obligations of the
Company that arose from certain acquisitions: (i) a promissory note to Aegis
Health Systems, Inc. in the amount of $3,796,503 (including interest); (ii) a
contingent note to the former shareholders of Nutrichem, Inc., net of a tax loan
receivable due from the shareholders, in the amount of $3,854,595 (including
interest); (iii) a note payable to a financing institution in connection with
the purchase of Oncology Therapies, Inc. in the amount of $15,585,023 (including
interest); (iv) a note payable to NationsBank of Florida, N.A. in the amount of
$19,586,531 (including interest); and (v) a partial payment of $28,676,743 on
the note payable to Abraham D. Gosman, the Company's President, Chief Executive
Officer, Chairman and principal shareholder.
During the nine months ended October 31, 1996, the Company repaid (i)
$4,610,588 of related party indebtedness to the former shareholders of DASCO
Development Corporation and (ii) $15,523,287 on the note payable to Mr. Gosman.
During May 1996, the Company received a commitment from PNC Bank, National
Association, for a $30 million revolving credit facility.
During June 1996, the Company issued $100,000,000 of the Debentures which are
due in 2003 and bear interest at the rate of 6 3/4% per annum. The Debentures
are convertible into Common Stock of the Company at any time after August 20,
1996 at a conversion price of $28.20 per share. The Debentures are not
redeemable by the Company prior to June 18, 1999. Offering costs of
approximately $3,338,118 have been deferred and are being amortized over the
life of the Debentures.
5. RELATED PARTY TRANSACTIONS
During the nine months ended October 31, 1996, the Company contracted with
entities principally owned by the Company's Chairman of the Board, President and
Chief Executive Officer to provide construction management, development,
marketing and consulting services for the medical facilities being constructed
by such entities. During the nine months ended October 31, 1996 the Company
recorded revenues in the amount of $2,374,000 related to such services.
6. NET INCOME PER SHARE
Net income per common share is based upon the weighted average number of
common shares outstanding (including stock required to be issued in the future
pursuant to acquisition agreements) during the period. For the three and nine
months ended October 31, 1996, the weighted average number of common shares
outstanding were 22,507,347 and 21,968,654, respectively. When dilutive, stock
options (less the number of treasury shares assumed to be purchased from the
proceeds) are included in the calculation of the weighted average number of
common shares outstanding. For the three and nine months ended October 31, 1996,
conversion of the 6-3/4% Convertible Subordinated Debentures issued in June
1996, is not assumed because the effect is anti-dilutive.
F-9
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. SUBSEQUENT EVENTS
During November 1996, the Company established New York Network Management,
L.L.C. ("Network"), which is 51% owned by the Company, to purchase the assets
and stock of various entities which comprise Brooklyn Medical Systems ("BMS").
BMS arranges for the delivery of health care services to members through
affiliations with more than 600 physicians in the New York City area. The base
purchase price for Network was $1,200,000 and an additional payment not
exceeding $1,000,000 may be required to be made during the next three years if
certain pre-tax earnings thresholds are achieved. The Company has committed to
fund approximately $2,400,000 to Network during the next three years. Such
advances can be in the form of a demand loan or for additional ownership
interests if the other owners do not elect to contribute their pro-rata share of
any additional capital contribution ($100,000 of additional capital contribution
for an additional 1% interest) in Network. During the first three years the
Company has the option to purchase up to an additional 29% ownership interest.
During years four and five the owners of 29% of Network have the right to
require the Company to purchase their interests at the option price.
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 31, December 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 $3,700,783 $2,595,178 $--
through
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.........................
F-18
<PAGE>
PHYMATRIX CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. ACQUISITIONS (Continued)
Amounts Allocated
to Intangibles
-----------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
------------------------------------- ------------- ----------- --------- ----------
(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. and
Oncology-Hematology
Infusion Therapy, Inc. ... July 1995 1,541,523 -- 312,740
(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:
Amortization Period Goodwill
- ------------------- --------
20 years ......................................... $17,346,388
40 years ......................................... 15,425,993
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:
Management
Service
Amortization Period Agreements
- ------------------- ----------
10 years ......................................... $ 3,018,956
15 years ......................................... 312,740
20 years ......................................... 13,299,682
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:
December 31,
---------------------
1995 1994
---------- --------
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
========== ========
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,
-------------------------
1995 1994
------------ ----------
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:
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
===========
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:
December 31,
------------------------
1995 1994
---------- ----------
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
========== ==========
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:
December 31,
1995
-----------
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 ....................... $ --
===========
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)
December 31,
---------------------------
1995 1994
------------ -----------
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)
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):
Pro Forma
-----------------------------
December 31, December 31,
1995 1994
------------ ------------
(unaudited) (unaudited)
Revenue ...................... $125,342 $107,438
Loss ......................... (11,871) (22,555)
Loss per share (1) ........... $ (0.89) $ (1.62)
========= ========
- -------------
(1) Pro forma loss per share has been calculated based on 13,307,450 shares
outstanding.
F-32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table itemizes the expenses incurred by the Company in
connection with the offering. All amounts are estimated except for the
Registration Fee.
<TABLE>
<S> <C>
Registration Fee $ 34,483
Nasdaq Listing Fee 17,500
Printing and Engraving Expenses 40,000
Legal Fees and Expenses 35,000
Accounting Fees and Expenses 100,000
Miscellaneous 23,017
----------
TOTAL 250,000
</TABLE>
- -------------
* To be completed by amendment.
Item 14. 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 15. Recent Sales of Unregistered Securities
The Company was incorporated in October 1995. In connection with the
initial organization of the Company, 1,000 shares of Common Stock were issued
to Abraham D. Gosman for aggregate consideration in cash of $1,000. Said
shares have since been transferred to the Company and converted into
authorized but unissued shares. Except for this initial issuance, until the
closing of the initial public offering, there were no other issuances of the
Common Stock. In connection with the closing of the initial public offering
on January 29, 1996, and the Formation, the Company issued to the
stockholders of the Related Companies 13,307,450 shares of Common Stock in
the aggregate in exchange for all issued and outstanding shares of common
stock of the Related Companies. The above-stated transactions resulted in the
Company issuing the indicated shares of Common Stock to the following
stockholders:
<TABLE>
<CAPTION>
No. of Shares of
Name Common Stock
- ---- ----------------
<S> <C>
Abraham D. Gosman 8,282,305 (1)
Bruce A. Rendina 916,667
Donald A. Sands 916,667
Joel A. Kanter 459,505
Frederick R. Leathers 459,505
Richard S. Mann 459,505
Robert A. Miller 459,505
William A. Sanger 336,224
Craig J. Wilkos 224,149
James M. Clary, III 168,112
Edward E. Goldman, M.D. 168,112
John T. Chay 133,333
Raj Mantena 133,333
Jonathan Banton 78,452
Kevin Maley 56,038
Michael J. Zaccaro 56,038
</TABLE>
- -------------
(1) Including 4,000,000 shares held by Mr. Gosman as trustee for the benefit
of his two adult sons.
On May 15, 1996, the Company issued an aggregate of 324,252 shares of
Common Stock in connection with the acquisition of Atlanta Gastroenterology
Associates, P.C. to the following stockholders:
<TABLE>
<CAPTION>
No. of Shares of
Name Common Stock
- ---- ----------------
<S> <C>
Steven J. Morris 117,475
R. Cater Davis, Jr. 88,559
Norman L. Elliot 59,109
Alan Sunshine 59,109
</TABLE>
The Debentures offered pursuant to this Registration Statement were
initially issued by the Company on June 26, 1996, to the following Initial
Purchasers:
<TABLE>
<CAPTION>
Name Principal Amount
---- -----------------
<S> <C>
Smith Barney, Inc. $50,001,000
Dean Witter Reynolds Inc. 13,333,000
Paine Webber Incorporated 13,333,000
Robertson, Stephens & Company 13,333,000
Piper Jaffray Inc. 5,000,000
The Robinson-Humphrey Company 5,000,000
</TABLE>
In September 1996, the company issued an aggregate of 363,442 shares of
Common Stock in connection with the remaining 56.25% ownership interest in
Physicians Choice Management, LLC to the following stockholders:
No. of Shares
Name of Common Stock
---- ---------------
Eric Moscow 58,151
Richard Lipton 58,151
Wayne Lipton 29,075
Physicians Choice, LLC 218,065
All the foregoing issuances of shares of Common Stock and Debentures have
been made in reliance upon the exemption from registration afforded by
Section 4(2) under the Securities Act of 1933, as amended, or Regulation D
thereunder.
II-2
<PAGE>
Item 16. 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
+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
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 Nutter, McClennen & Fish, LLP (contained in Exhibit 5)
II-3
<PAGE>
Exhibit No. Exhibit
- ----------- --------
24.1 Power of Attorney (Continued on page II-5)
+25.1 Statement of Eligibility of Trustee
</TABLE>
- -------------
* Filed herewith.
+ Previously filed.
All other exhibits are hereby incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No. 33-97854).
Item 17. 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.
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 17th day of
December 1996.
PHYMATRIX CORP.
By: /s/ Frederick R. Leathers
------------------------------------
Frederick R. Leathers
Chief Financial Officer
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.
<TABLE>
<S> <C>
/s/ * December 17, 1996
--------------------------------
Abraham D. Gosman
Chairman of the Board of
Directors, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ Frederick R. Leathers December 17, 1996
--------------------------------
Frederick R. Leathers
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ *
-------------------------------- December 17, 1996
Joseph N. Cassese
Director
/s/ *
-------------------------------- December 17, 1996
David Livingston, M.D.
Director
/s/ *
-------------------------------- December 17, 1996
Bruce Rendina
Director
II-5
<PAGE>
/s/ *
-------------------------------- December 17, 1996
Stephen E. Ronai, Esq.
Director
/s/ *
-------------------------------- December 17, 1996
Governor Hugh L. Carey
Director
/s/ *
-------------------------------- December 17, 1996
John Chay
Director
*By: /s/ Frederick R. Leathers
-----------------------------
Frederick R. Leathers
Attorney-in-fact
</TABLE>
II-6
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of PhyMatrix Corp.
on Form S-1 (File No. 333-08269) 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
December 17, 1996
