As filed with the Securities and Exchange Commission on September 17, 1996
Registration No. 333-08269
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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)
Delaware 8099 65-0617076
(State or other (Primary Standard (I.R.S.
jurisdiction Industrial Employer
of incorporation Classification Identification No.)
or organization) Code Number)
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class of Proposed maximum Proposed maximum Amount of
securities Amount to be offering price per aggregate offering price(1) registration
to be registered registered share(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 of
Prospectus Inside Front Cover Page
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
Indemnification for Securities Act
Liabilities *
</TABLE>
* 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 September 13, 1996, the closing price of the
Common Stock as reported by Nasdaq was $22.13 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 July 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 propective 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 September 16, 1996
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information and representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of any offer to buy
the securities described herein by anyone in any jurisdiction in which such
offer or solicitation is not authorized, or in which the person making the
offer or solicitation is not qualified to do so, or to any person to whom it
is unlawful to make such offer or solicitation. Under no circumstances shall
the delivery of this Prospectus or any sale made pursuant to this Prospectus
create any implication that the information contained in this Prospectus is
correct as of any time subsequent to the date of this Prospectus.
TABLE OF CONTENTS
Page
-----
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
Unaudited Pro Forma Financial Information 21
Management's Discussion and Analysis of
Financial Condition and Results of Operations 39
Business 51
Management 63
Certain Transactions 68
Principal Stockholders 70
Description of Debentures 71
Description of Capital Stock 78
Certain United States Federal Income Tax Consequences 80
Selling Securityholders 83
Plan of Distribution 85
Legal Matters 86
Experts 86
Additional Information 88
Index to Financial Statements F-1
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
See "Risk Factors" for information that should be considered by prospective
investors.
The Company
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 163 physicians and acquired
several medical support service companies and a medical facility development
company. The Company also owns a 43.75% interest (and has agreed to purchase
the remaining interests) in a newly formed management services organization
in Connecticut and a 50% interest in a newly formed management services
organization in Georgia that provide management services to independent
physician associations composed of over 375 multi-specialty physicians.
Increasing concern over the cost of health care in the United States has
led to numerous changes affecting the physician provider community, including
the development of managed care and risk-based contracting arrangements.
Based on data from the United States Health Care Financing Administration,
industry sources have estimated that in 1995 the nation's 650,000 physicians
generated approximately $200 billion in physician service revenues. The
Company believes independent physicians are inadequately prepared to respond
to the changing health care market because they typically have high operating
costs relative to revenue and lack both purchasing power with vendors and
sufficient capital to purchase new clinical equipment and management
information systems. In order to be competitive, many physicians are seeking
affiliations with larger entities, including physician practice management
companies.
The Company believes that the providers of disease management services in
the United States, including cancer care providers, are highly fragmented.
There are approximately 6,000 oncologists practicing in the United States,
most of whom practice alone or in small groups, and there are hundreds of
independent outpatient and free-standing cancer treatment centers. This
fragmentation results, in part, from the fact that the treatment of cancer
frequently requires a multi-disciplinary approach in a variety of settings
involving numerous health care professionals with different specializations.
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 61 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, Connecticut and Washington, D.C./Baltimore
areas. The Company intends to establish additional LPNs by affiliating with
IPAs.
The Company also provides medical facility development services to related
and unrelated third parties for the establishment of health parks, medical
malls and medical office buildings. Such services include project finance
assistance, project management, construction management, construction design
engineering, physician recruitment, leasing and marketing. While the Company
incurs certain administrative and other expenses in the course of providing
such services, it does not incur costs of construction or risks of project
ownership. The Company's strategy in financing its projects is to involve
future tenants as significant investors in and owners of the developed
medical facilities. Because most of its tenants are physicians and medical
support service companies, the Company believes that the relationships that
it develops with these parties through its medical facility development
efforts will greatly enhance the Company's ability to affiliate with
physicians and acquire physician practices and medical support service
companies. Further, the Company believes that medical facility development in
certain markets will aid in the integration of its affiliated physicians and
medical support services.
The Company affiliates with physicians through management agreements with
physician practices or employment agreements with individual physicians. When
affiliating with physicians, the Company generally acquires the assets of the
physicians' practices, including its equipment, furniture, fixtures and
supplies and, in some cases, goodwill and management service agreements, of
the physicians' practices. Currently, the Company manages the practices of
132 physicians and employs another 31 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 July 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 AND PRO FORMA FINANCIAL AND OPERATING DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Historical (1) Pro Forma (2)
----------------------------------------------------------------- --------------------------
Combined
June 24,
1994 Combined Consolidated Combined Consolidated Consolidated
(inception) Year Month Six Six Six Combined
to Ended Ended Months Months Months Year
December December January Ended Ended Ended Ended
31, 31, 31, June 30, July 31, July 31, December 31,
1994 1995 1996(3) 1995 1996(3) 1996 1995
----------- ---------- ---------- -------- ---------- ---------- ------------
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue $ 2,447 $ 70,733 $10,715 $19,984 $77,631 $88,211 $150,229
--------- -------- -------- ------ -------- -------- ---------
Operating expenses:
Cost of affiliated physician
management services -- 9,656 2,797 -- 17,412 21,837 44,737
Salaries, wages and benefits 2,142 31,976 3,637 12,202 23,833 26,461 50,306
Depreciation and amortization 107 3,863 535 1,394 3,266 3,678 7,300
Rent 249 4,503 565 1,398 3,441 3,965 7,342
Earn out payment -- 1,271 -- 1,111 -- -- --
Provision for closure loss -- 2,500 -- -- -- -- 2,500
Other 1,098 22,900 3,434 6,847 20,986 23,237 40,762
--------- -------- -------- ------ -------- -------- ----------
3,596 76,669 10,968 22,952 68,938 79,178 152,947
--------- -------- -------- ------ -------- -------- ----------
Income (loss) from operations (1,149) (5,936) (253) (2,968) 8,693 9,033 (2,718)
--------- -------- -------- ------ -------- -------- ----------
Interest expense 95 4,852 812 1,110 810 3,448 6,907
Minority interest 52 806 81 292 58 -- --
Other nonoperating (revenue)
expense -- -- -- -- -- -- (48)
(Income) loss from investment
in affiliates -- (569) 30 (219) (269) (269) (647)
--------- -------- -------- ------ -------- -------- ----------
Income (loss) before income
taxes (1,296) (11,025) (1,176) (4,151) 8,094 5,854 (8,930)
Income tax expense (4) -- -- -- -- 3,032 2,193 --
--------- -------- -------- ------ -------- -------- ----------
Net income (loss) $(1,296) $(11,025) $(1,176) $(4,151) $ 5,062 $ 3,661 $ (8,930)
========= ======== ======== ====== ======== ======== ==========
Net income per share (5) $ 0.23
========
Pro forma income (loss) per share (6) $ 0.16 $ (0.49)
======== ==========
Operating Data (Unaudited):
Number of Affiliated physicians (7):
Cancer -- 55 55 18 61 61 61
Primary care -- 14 14 10 21 21 21
Other speciality -- 34 34 -- 56 81 81
Revenues:
Cancer services $ 685 $ 44,905 $ 6,712 $10,667 $44,273 $45,628 $ 81,969
Non-cancer physician services -- 7,705 2,281 1,121 15,873 24,145 45,789
Other medical services 1,762 18,123 1,722 8,196 10,086 11,039 18,842
Medical facility development -- -- -- -- 7,399 7,399 3,629
--------- -------- -------- ------ -------- -------- ----------
Total $ 2,447 $ 70,733 $10,715 $19,984 $77,631 $88,211 $150,229
========= ======== ======== ====== ======== ======== ==========
</TABLE>
7
<PAGE>
July 31, 1996
----------------------------
Actual As Adjusted (8)
-------- ----------------
(Unaudited) (Unaudited)
Balance Sheet Data:
Cash and cash equivalents $111,666 $ 94,726
Working capital 131,566 125,908
Total assets 264,621 277,181
Long-term debt, less current maturities 13,646 13,646
Convertible Subordinated Debentures 100,000 100,000
Total shareholders' equity 132,813 141,313
(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) Gives effect to (i) the Acquisitions, (ii) the sale of the Common Stock
offered in the Company's January 1996 initial public offering and the
application of the net proceeds therefrom, as if such transactions had
occurred as of January 1, 1995, and (iii) the issuance of the Debentures
in the Debt Offering and the application of the net proceeds therefrom as
if such transactions had occurred as of January 1, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Acquisition Summary." Adjustments have been made as
required to each of the entities' historical results of operations to
give effect to the completion of such Acquisitions and the initial public
offering. See "Unaudited Pro Forma Financial Information."
(3) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(4) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
(5) Net income per share is calculated based upon 21,689,631 weighted average
shares outstanding.
(6) Pro forma loss per share for the year ended December 31, 1995 has been
calculated based upon 18,074,117 shares outstanding which was derived as
follows: (i) total shares outstanding prior to the Company's January 1996
initial public offering of 13,307,450 shares (which includes pro forma
total shares outstanding at December 31, 1995 of 11,207,450 shares plus
266,666 shares issued for the purchase of the Nutrichem, Inc. minority
interest plus 1,833,334 shares issued in the Formation to certain
stockholders of DASCO (as defined herein), plus (ii) 4,766,667 shares
from which the initial public offering proceeds were used to repay debt
and amounts due to shareholder in the amount of $71,500.
Pro forma net income per share for the six months ended July 31, 1996 has
been calculated based upon 22,573,777 shares outstanding which was derived
as follows: 21,864,202 actual shares outstanding at July 31, 1996 plus
363,442 shares committed to be issued pursuant to an Acquisition plus
346,126 shares (assuming a share price at $21.625) committed to be issued
during the next year in connection with several Acquisitions. The conversion
of the Debentures issued in June 1996 is not assumed because the effect is
anti-dilutive.
(7) Includes both employed and managed physicians. There were 31 employed
physicians at July 31, 1996.
(8) Adjusted to give effect to the Acquisitions subsequent to July 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 $5.1 million
from February 1, 1996 to July 31, 1996, there can be no assurance that the
Company will continue to be profitable. See "Unaudited Pro Forma Combined
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Risks Related to Growth Strategy
The Company's strategy involves growth primarily through acquisition. The
Company is subject to various risks associated with its acquisition growth
strategy, including the risk that the Company will be unable to identify,
recruit or acquire suitable acquisition candidates or to integrate and manage
the acquired practices or companies. The growth of the Company is largely
dependent on the Company's ability to form networks of affiliated physicians
from its acquired practices, to manage and control costs, and to realize
economies of scale. Any failure of the Company to implement economically
feasible acquisitions and affiliations may have a material adverse effect on
the Company. There can be no assurance that the Company will be able to
achieve and manage planned growth, that the assets of physician practice
groups or other health care providers will continue to be available for
acquisition by the Company, that the liabilities assumed by the Company in
any acquisition will not have a material adverse effect on the Company, or
that the addition of physician practice groups or other health care providers
will be profitable for the Company.
The Company has entered into letters of intent 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 and anticipates closing this financing during September 1996.
If additional funds are raised through the issuance of equity securities,
dilution to the Company's stockholders may result, and if additional funds
are raised through the incurrence of debt, the Company likely would become
subject to restrictions on its operations and finances. There can be no
assurance that the Company will be able to raise additional capital when
needed on satisfactory terms or at all. Any limitation on the Company's
ability to obtain additional financing could have a material adverse effect
on the Company. See "Certain Transactions."
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 July 31, 1996, the Company's total assets were approximately $264.6
million, of which approximately $47.9 million, or approximately 18.1% 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 July 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. See "Unaudited Pro Forma Combined Financial Information."
Risks Associated with Managed Care Contracts
As an increasing percentage of patients come under the control of managed
care entities, the Company believes that its success will be, in part,
dependent upon the Company's ability to negotiate contracts with health
maintenance organizations ("HMOs"), employer groups and other private third
party payors pursuant to which services will be provided on a risk-sharing or
capitated basis. Under some of these agreements, a health care 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 $19.1 million at July 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 53.1% of the outstanding shares of
Common Stock. In addition, the Company has granted and is likely in the
future to grant the Company's executive officers and directors options to
acquire shares of Common Stock pursuant to the Company's 1995 Equity
Incentive Plan. As a result, such executive officers and directors, should
they choose to act together, will be able to determine the outcome of
corporate actions requiring stockholder approval and to control the election
of the Company's Board of Directors. This ownership may have the effect of
discouraging unsolicited offers to acquire the Company. See "Principal
Stockholders."
Dependence Upon Key Personnel and DASCO
The Company is dependent upon the ability and experience of its executive
officers, and there can be no assurance that the Company will be able to retain
all of such officers. The failure of such officers to remain active in the
Company's management could have a material adverse effect on the Company. The
Company currently has employment contracts with Messrs. Sands and Rendina,
Edward E. Goldman, M.D., 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 July 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
324,252 shares of Common Stock were issued in connection with a subsequent
Acquisition. All of such 13,631,702 shares are "restricted securities" within
the meaning of the Securities Act. Subject to the contractual lockup provisions
discussed below and unless the resale of the shares is registered under the
Securities Act, these shares may not be sold in the open market until after the
second anniversary of the closing date of the 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 July
31, 1996.
July 31, 1996
---------------
Historical
---------------
(Unaudited)
(In thousands)
Current portion of long-term debt $ 2,650
Current portion of related party debt 130
Current portion of due to shareholder 77
-------------
Total current portion of long-term debt 2,857
=============
Long-term debt, net of current portion 13,646
Due to shareholder, net of current portion --
Convertible Subordinated Debentures 100,000
-------------
Total long-term debt 113,646
-------------
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;
21,864,202 shares issued and outstanding 219
Additional paid-in capital 140,317
Retained earnings (deficit) (7,723)
-------------
Total shareholders' equity 132,813
-------------
Total capitalization $246,459
=============
17
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
June 24, 1994
(inception) Six Months Year Month Six Months
to Ended Ended Ended Ended
December 31, 1994 June 30, 1995 December 31, 1995 January 31, 1996 July 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 3.55x
</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 six months ended June 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, $1.8 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.
High Low
----- -------
January 23, 1996 through January 31, 1996 $23.50 $15.00
February 1, 1996 through April 30, 1996 23.63 18.50
April 30, 1996 through July 31, 1996 25.75 18.00
August 1, 1996 through September 13, 1996 25.50 21.25
On September 13, 1996 the last reported sale price of the Common Stock was
$22.13. As of September 13, 1996 there were approximately 100 holders of record
of the Company's Common Stock.
DIVIDEND POLICY
The Company has never paid cash dividends and does not anticipate paying
cash dividends in the foreseeable future. It is the present intention of the
Board of Directors to reinvest all earnings in the business of the Company to
support future growth.
18
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
(In thousands, except share data)
The selected historical financial data set forth below have been derived
from the financial statements of the Company. The combined financial
statements of the Company as of December 31, 1994 and December 31, 1995 and
for the period from June 24, 1994 (inception) to December 31, 1994 and the
year ended December 31, 1995, together with the notes thereto and the related
report of Coopers & Lybrand L.L.P., independent accountants, are included
elsewhere in this Prospectus. The selected historical financial data of the
Company should be read in conjunction with the related financial statements
and notes thereto appearing elsewhere in this Prospectus. The selected pro
forma financial data set forth below at July 31, 1996 and for the year ended
December 31, 1995 and the six months ended July 31, 1996 have been derived
from the unaudited pro forma financial statements of the Company. The pro
forma selected financial data are not necessarily indicative of the actual
results of operations or financial position that would have been achieved had
the Acquisitions been completed as of January 1, 1995, nor are the statements
necessarily indicative of the Company's future results of operations or
financial position. See "Unaudited Pro Forma Financial Information."
<TABLE>
<CAPTION>
Historical (1) Pro Forma (2)
----------------------------------------------------------------- --------------------------
Combined
June 24,
1994 Combined Consolidated Combined Consolidated Consolidated
(inception) Year Month Six Six Six Combined
to Ended Ended Months Months Months Year
December December January Ended Ended Ended Ended
31, 31, 31, June 30, July 31, July 31, December 31,
1994 1995 1996 (3) 1995 1996 (3) 1996 1995
----------- ---------- ---------- -------- ---------- ---------- ------------
(Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenue $ 2,447 $ 70,733 $10,715 $19,984 $77,631 $88,211 $150,229
--------- -------- -------- ------ -------- -------- ----------
Operating expenses:
Cost of affiliated physician
management services -- 9,656 2,797 -- 17,412 21,837 44,737
Salaries, wages and benefits 2,142 31,976 3,637 12,202 23,833 26,461 50,306
Depreciation and amortization 107 3,863 535 1,394 3,266 3,678 7,300
Rent 249 4,503 565 1,398 3,441 3,965 7,342
Earn-out payment -- 1,271 -- 1,111 -- -- --
Provision for closure loss -- 2,500 -- -- -- -- 2,500
Other 1,098 22,900 3,434 6,847 20,986 23,237 40,762
--------- -------- -------- ------ -------- -------- ----------
3,596 76,669 10,968 22,952 68,938 79,178 152,947
--------- -------- -------- ------ -------- -------- ----------
Income (loss) from operations (1,149) (5,936) (253) (2,968) 8,693 9,033 (2,718)
--------- -------- -------- ------ -------- -------- ----------
Interest expense 95 4,852 812 1,110 810 3,448 6,907
Minority interest 52 806 81 292 58 -- --
Other nonoperating (revenue)
expense -- -- -- -- -- -- (48)
Income from investments in
affiliates -- (569) 30 (219) (269) (269) (647)
--------- -------- -------- ------ -------- -------- ----------
Income (loss) before income
taxes (1,296) (11,025) (1,176) (4,151) 8,094 5,854 (8,930)
Income tax expense (4) -- -- -- -- 3,032 2,193 --
--------- -------- -------- ------ -------- -------- ----------
Net income (loss) $(1,296) $(11,025) $(1,176) $(4,151) $ 5,062 $ 3,661 $ (8,930)
========= ======== ======== ====== ======== ======== ==========
Net income per share (5) $ 0.23
========
Pro forma income (loss) per
share (6) $ 0.16 $ (0.49)
======== ==========
</TABLE>
19
<PAGE>
July 31, 1996
----------------------------
Actual As Adjusted (7)
-------- ----------------
(Unaudited) (Unaudited)
Balance Sheet Data:
Cash and cash equivalents $111,666 $ 94,726
Working capital 131,566 125,908
Total assets 264,621 277,181
Long-term debt, less current maturities 13,646 13,646
Convertible Subordinated Debentures 100,000 100,000
Total shareholders' equity 132,813 141,313
(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) Gives effect to (i) the Acquisitions, (ii) the sale of the Common Stock
offered in the Company's January 1996 initial public offering and the
application of the net proceeds therefrom, and (iii) the issuance of the
Debentures in the Debt Offering and the application of the net proceeds,
therefrom as if all such transactions had occurred as of January 1, 1995.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisition Summary." Adjustments have been made
as required to each of the entities' historical results of operations to
give effect to the completion of such Acquisitions, the initial public
offering and the Debt Offering. See "Unaudited Pro Forma Financial
Information."
(3) In January 1996, the Company changed its fiscal year end from December 31
to January 31.
(4) Provisions for income taxes have not been reflected in the combined
financial statements because there is no taxable income on a combined
basis.
(5) Net income per share is calculated based upon 21,689,631 weighted average
shares outstanding.
(6) Pro forma loss per share for the year ended December 31, 1995 has been
calculated based upon 18,074,117 shares outstanding which was derived as
follows: (i) total shares outstanding prior to the Company's January 1996
initial public offering of 13,307,450 shares (which includes pro forma
total shares outstanding at December 31, 1995 of 11,207,450 shares plus
266,666 shares issued for the purchase of the Nutrichem, Inc. minority
interest plus 1,833,334 shares issued in the Formation to certain
stockholders of DASCO), plus (ii) 4,766,667 shares from which the
initial public offering proceeds were used to repay debt and amounts due
to shareholder in the amount of $71,500.
Pro forma net income per share for the six months ended July 31, 1996 has
been calculated based upon 22,573,777 shares outstanding which was derived
as follows: 21,864,202 actual shares outstanding at July 31, 1996 plus
363,442 shares committed to be issued pursuant to an Acquisition plus
346,126 shares (assuming a share price at $21.625) committed to be issued
during the next year, in connection with several Acquisitions. The
conversion of the Debentures issued in June 1996 is not assumed because the
effect is anti-dilutive.
(7) Adjusted to give effect to the Acquisitions subsequent to July 31, 1996.
20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Statements of Operations for the six
months ended July 31, 1996 and the year ended December 31, 1995 have been
prepared to reflect the Acquisitions as if they had been completed on January 1,
1995. Adjustments have been made as required to each of the entities' historical
results of operations to give effect to the completion of the Acquisitions. The
Unaudited Pro Forma Statements of Operations for the six months ended July 31,
1996 and the year ended December 31, 1995 give effect to both the Company's
January 1996 initial public offering and the Debt Offering and the application
of the net proceeds therefrom, as if such transactions had occurred as of
January 1, 1995. The Unaudited Pro Forma Consolidated Balance Sheet at July 31,
1996 gives effect to the Acquisitions that were completed subsequent to July 31,
1996 as if they had occurred on July 31, 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Unaudited Pro Forma Financial Information has been prepared by the
Company based on the audited financial statements of certain of the
Acquisitions, which statements are included elsewhere in this Prospectus, and
the unaudited financial statements of other Acquisitions, which statements
are not included herein (as they are not significant), adjusted where
necessary, with respect to pre-acquisition periods, to the basis of
accounting used in the Company's Audited Financial Statements. The Unaudited
Pro Forma Financial Information is not indicative of the results that would
have occurred if the transactions had occurred on the dates indicated or
which may be realized in the future. The Unaudited Pro Forma Financial
Information should be read in conjunction with the historical financial
statements of the companies acquired in connection with the Acquisitions and
the notes thereto included elsewhere in this Prospectus.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
July 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Acquisitions
Completed Pro Forma
Subsequent to Notes As Adjusted
Historical July 31, 1996 Receivable July 31,
(A) (B) (C) 1996
-------- ------------- -------- -----------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $111,666 ($ 6,940) ($10,000) $ 94,726
Receivables
Accounts receivable, net 29,434 1,283 -- 30,717
Other receivables 229 -- -- 229
Notes receivable -- -- 10,000 10,000
Prepaid assets and other current assets 3,588 -- -- 3,588
-------- ------------- -------- -----------
Total current assets 144,917 (5,657) -- 139,260
-------- ------------- -------- -----------
Property, plant and equipment, net 40,011 353 -- 40,364
Notes receivable 350 2,800 -- 3,150
Goodwill, net 47,914 8,211 -- 56,125
Management services agreements, net 19,108 6,853 -- 25,961
Investments in affiliates 3,237 -- -- 3,237
Other assets 9,084 -- 9,084
-------- ------------- -------- -----------
Total assets $264,621 $12,560 -- $277,181
======== ============= ======== ===========
Liabilities
Accounts payable 5,631 -- -- 5,631
Current portion of debt and capital leases 2,650 -- -- 2,650
Current portion of related party debt 130 -- -- 130
Due to shareholder, current 77 -- -- 77
Accrued compensation 884 -- -- 884
Other accrued liabilities 3,980 -- -- 3,980
Accrued interest -- shareholder -- -- -- --
-------- ------------- -------- -----------
Total current liabilities 13,352 -- -- 13,352
-------- ------------- -------- -----------
Due to shareholder -- -- -- --
Long term debt, less current maturities 13,646 -- -- 13,646
Convertible Subordinated Debentures 100,000 -- -- 100,000
Other long term liabilities 3,067 5,349 -- 8,416
Minority interest 1,743 (1,289) -- 454
-------- ------------- -------- -----------
Total liabilities 131,808 4,060 -- 135,868
-------- ------------- -------- -----------
Shareholders' Equity
Common stock 219 -- -- 219
Additional paid-in capital 140,317 8,500 -- 148,817
Retained earnings (7,723) -- -- (7,723)
-------- ------------- -------- -----------
Total shareholders' equity 132,813 8,500 -- 141,313
-------- ------------- -------- -----------
Total liabilities &
shareholders' equity $264,621 $12,560 $ -- $277,181
======== ============= ======== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet.
22
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET--SUPPLEMENTAL INFORMATION
July 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Ankle
and Foot Physician's
Insignia Care Atlantic Center of Choice
Kelley for Woman, P.A. Pediatrics Tampa Bay, P.A. Management, LLC
------- ---------------- ----------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ (100) $(1,430) $(163) $ (695) $(3,800)
Receivables
Accounts receivable, net -- 800 96 -- --
Other receivables -- -- -- -- --
Notes receivable -- -- -- -- --
Prepaid assets and other
current assets -- -- -- -- --
----- -------------- --------- -------------- ----------------
Total current assets (100) (630) (67) (695) (3,800)
Property, plant and equipment, net -- 150 68 135 --
Notes receivable -- -- -- -- 2,800
Goodwill, net -- -- -- -- 8,211
Management services agreements, net 500 2,400 95 2,800 --
Investments in affiliates -- -- -- -- --
Other assets -- -- -- -- --
----- -------------- --------- -------------- ----------------
Total assets $ 400 $ 1,920 $ 96 $2,240 $ 7,211
===== ============== ========= ============== ================
Liabilities
Accounts payable -- -- -- -- --
Current portion of debt and capital
leases -- -- -- -- --
Current portion of related party
debt -- -- -- -- --
Due to shareholder, current -- -- -- -- --
Accrued compensation -- -- -- -- --
Other accrued liabilities -- -- -- -- --
Accrued interest -- shareholder -- -- -- -- --
----- -------------- --------- -------------- ----------------
Total current liabilities -- -- -- -- --
----- -------------- --------- -------------- ----------------
Due to shareholder -- -- -- -- --
Long term debt, less current
maturities -- -- -- -- --
Convertible Subordinated Debentures -- -- -- -- --
Other long term liabilities 400 1,920 96 2,240
Minority interest -- -- -- -- (1,289)
----- -------------- --------- -------------- ----------------
Total liabilities 400 1,920 96 2,240 (1,289)
----- -------------- --------- -------------- ----------------
Shareholders' Equity
Common stock -- -- -- -- --
Additional paid in capital -- -- -- -- 8,500
Retained earnings -- -- -- -- --
----- -------------- --------- -------------- ----------------
Total shareholders' equity -- -- -- -- 8,500
----- -------------- --------- -------------- ----------------
Total liabilities &
shareholders' equity $ 400 $ 1,920 $ 96 $2,240 $ 7,211
===== ============== ========= ============== ================
</TABLE>
Acquisitions
Georgia Completed
Surgical Subsequent to
Associates July 31, 1996
----------- ------------------
Assets
Cash and cash equivalents $ (752) $(6,940)
Receivables
Accounts receivable, net 387 1,283
Other receivables -- --
Notes receivable -- --
Prepaid assets and other
current assets -- --
--------- ----------------
Total current assets (365) (5,657)
Property, plant and equipment, net -- 353
Notes receivable -- 2,800
Goodwill, net -- 8,211
Management services agreements, net 1,058 6,853
Investments in affiliates -- --
Other assets -- --
--------- ----------------
Total assets $ 693 $12,560
========= ================
Liabilities
Accounts payable -- --
Current portion of debt and capital
leases -- --
Current portion of related party
debt -- --
Due to shareholder, current -- --
Accrued compensation -- --
Other accrued liabilities -- --
Accrued interest -- shareholder -- --
--------- ----------------
Total current liabilities -- --
--------- ----------------
Due to shareholder -- --
Long term debt, less current
maturities -- --
Convertible Subordinated Debentures -- --
Other long term liabilities 693 5,349
Minority interest -- (1,289)
--------- ----------------
Total liabilities 693 4,060
--------- ----------------
Shareholders' Equity
Common stock -- --
Additional paid in capital -- 8,500
Retained earnings -- --
--------- ----------------
Total shareholders' equity -- 8,500
--------- ----------------
Total liabilities &
shareholders' equity $ 693 $12,560
========= ================
See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(In thousands)
(A) Represents the historical unaudited consolidated balance sheet of the
Company at July 31, 1996.
(B) Represents the Acquisitions completed subsequent to July 31, 1996.
(C) Represents a loan made by the Company during August 1996.
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended July 31, 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------- ----------------------------------------
Financing/
PhyMatrix Acquisitions Offering
Corp. Acquisitions Adjustments Adjustments
(A) (B) (B) (M) Combined
--------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues from services $41,107 $ 804 $ -- $ -- $ 41,911
Net revenues from management
service agreements 36,524 9,776 -- -- 46,300
------- -------- -------- ------- -----------
Total revenue 77,631 10,580 -- -- 88,211
------- -------- -------- ------- -----------
Operating expenses:
Cost of affiliated physician
management services 17,412 4,545 (120) -- 21,837
Salaries, wages and benefits 23,833 2,494 134 -- 26,461
Professional fees 2,004 277 -- -- 2,281
Supplies 11,580 741 -- -- 12,321
Utilities 1,179 172 -- -- 1,351
Depreciation and amortization 3,266 69 343 -- 3,678
Rent 3,441 524 -- -- 3,965
Other 6,223 1,061 -- -- 7,284
------- -------- -------- ------- -----------
68,938 9,883 357 -- 79,178
------- -------- -------- ------- -----------
Income (loss) from operations 8,693 697 (357) -- 9,033
------- -------- -------- ------- -----------
Interest (income) expense, net 810 18 19 2,601 3,448
Minority interest 58 -- (58) -- --
Other nonoperating (revenue) expenses -- (25) 25 -- --
Income from investments in affiliates (269) -- -- -- (269)
------- -------- -------- ------- -----------
Income (loss) before income taxes 8,094 704 (343) (2,601) 5,854
Income tax expense 3,032 -- -- (839) 2,193
------- -------- -------- ------- -----------
Net income (loss) $ 5,062 $ 704 $(343) $(1,762) $ 3,661
======= ======== ======== ======= ===========
Net income per share $ 0.23
=======
Pro forma net income per share $ 0.16
===========
Number of shares used in pro forma
net income per share 22,573,777(Q)
===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Operations.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS --
Supplemental Schedule
Summary of Acquisitions (C)
For the Six Months Ended July 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Atlanta All
Gastroenterology Other Total
Associates, P.C. (R) Acquisitions
-------------------- -------- -------------
<S> <C> <C> <C>
Net revenues from services $ -- $ 804 $ 804
Net revenues from management service
agreements 1,434 8,342 9,776
------------------ ------ -----------
Total revenue 1,434 9,146 10,580
Operating expenses:
Cost of affiliated physician management
services 741 3,804 4,545
Salaries, wages and benefits 356 2,138 2,494
Professional fees 39 238 277
Supplies 51 690 741
Utilities 32 140 172
Depreciation and amortization 17 52 69
Rent 83 441 524
Other 106 955 1,061
------------------ ------ -----------
1,425 8,458 9,883
------------------ ------ -----------
Income (loss) from operations 9 688 697
------------------ ------ -----------
Interest (income) expense, net 3 15 18
-----------
Minority interest -- -- --
Other nonoperating (revenue) expenses (8) (17) (25)
Income from investment in affiliates -- -- --
------------------ ------ -----------
Net income (loss) $ 14 $ 690 $ 704
================== ====== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Statements of
Operations.
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS --
Supplemental Schedule
Summary of Adjustments for Acquisitions (D)
For the Six Months Ended July 31, 1996
(In thousands)
<TABLE>
<CAPTION>
Uromed Atlanta Physician's All
Technologies, Gastroenterology Choice Other Total
Inc. Associates, P.C. Management, LLC (R) Adjustments
------------- ---------------- --------------- -------- --------------
<S> <C> <C> <C> <C> <C>
Net revenues from services $ -- $ -- $ -- $ -- $ --
Net revenues from management service
agreements -- -- -- -- --
----------- -------------- ------------- ------ ------------
Total revenue -- -- -- -- --
Operating expenses:
Cost of affiliated physician management
services (F) -- (107) -- (13) (120)
Salaries, wages and benefits -- -- -- 134 134
Professional fees -- -- -- -- --
Supplies -- -- -- -- --
Utilities -- -- -- -- --
Depreciation and amortization (L) -- -- 156 187 343
Rent -- -- -- -- --
Other -- -- -- -- --
----------- -------------- ------------- ------ ------------
-- (107) 156 308 357
----------- -------------- ------------- ------ ------------
Income (loss) from operations -- 107 (156) (308) (357)
----------- -------------- ------------- ------ ------------
Interest (income) expense, net -- (5) 39 (15) 19
Minority interest (I) (69) -- 11 -- (58)
Other nonoperating (revenue) expenses -- 8 -- 17 25
Income from investment in affiliates
----------- -------------- ------------- ------ ------------
Net income (loss) $(69) $ 104 $(206) $(310) $(343)
=========== ============== ============= ====== ============
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Statements of
Operations.
27
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------- ----------------------------------------
Financing/
PhyMatrix Acquisitions Offering
Corp. Acquisitions Adjustments Adjustments
(A) (B) (B) (M) Combined
-------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues from services $ 48,360 $15,267 $(1,425) $ -- $ 62,202
Net revenues from management
service agreements
22,373 63,923 1,731 -- 88,027
------ -------- -------- ------- -----------
Total revenue 70,733 79,190 306 -- 150,229
------ -------- -------- ------- -----------
Operating expenses:
Cost of affiliated physician
management services 9,656 25,466 9,615 -- 44,737
Salaries, wages and benefits 31,976 19,547 (1,217) -- 50,306
Professional fees 2,845 4,434 (2,267) -- 5,012
Supplies 11,864 9,078 (1,061) -- 19,881
Utilities 1,308 856 (166) -- 1,998
Depreciation and amortization 3,863 1,936 1,501 -- 7,300
Rent 4,503 4,607 (1,768) -- 7,342
Earn out payment 1,271 -- (1,271) -- --
Provision for closure loss 2,500 -- -- -- 2,500
Other 6,883 8,888 (1,900) -- 13,871
------ -------- -------- ------- -----------
76,669 74,812 1,466 -- 152,947
------ -------- -------- ------- -----------
Income (loss) from operations (5,936) 4,378 (1,160) -- (2,718)
------ -------- -------- ------- -----------
Interest (income) expense, net 4,852 184 (5,036) 6,907 6,907
Minority interest 806 -- (806) -- --
Other nonoperating (revenue) expenses -- (302) 254 -- (48)
Income from investments in affiliates (569) -- (78) -- (647)
------ -------- -------- ------- -----------
Net income (loss) (N) $(11,025) $ 4,496 $ 4,506 $(6,907) $ (8,930))
====== ======== ======== ======= ===========
Pro forma net loss per share $ (0.49)
===========
Number of shares used in pro forma
net loss per share 18,074,117(Q)
===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statement of
Operations.
28
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS--SUPPLEMENTAL SCHEDULE
Summary of Acquisitions (C)
For the Year Ended December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
Oncology-
Hematology
Associates,
P.A. and
DASCO Oncology-
Aegis Whittle Development Hematology
Health Varnell Corporation Georgia Infusion Osler
Systems, and and Cancer Therapy, Medical,
Inc. Bedoya, P.A. Affiliates Specialists Inc. Inc.
------- ------------ ------------ ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from services $719 $ -- $3,629 $ -- $ -- $ --
Net revenues from
management service
agreements -- 2,201 -- 10,910 2,404 9,031
----- ----------- ----------- ----------- ----------- -------
Total revenue 719 2,201 3,629 10,910 2,404 9,031
----- ----------- ----------- ----------- ----------- -------
Operating expenses:
Cost of affiliated
physician management
services -- 1,211 -- 3,465 580 3,923
Salaries, wages and
benefits 230 440 2,815 878 537 1,932
Professional fees 18 36 217 1,589 -- 168
Supplies 70 29 -- 3,158 628 493
Utilities 9 27 -- 18 -- 18
Depreciation and
amortization 70 -- 12 113 25 214
Rent 37 59 166 749 113 730
Other 165 238 249 1,123 157 669
----- ----------- ----------- ----------- ----------- -------
599 2,040 3,459 11,093 2,040 8,147
----- ----------- ----------- ----------- ----------- -------
Income (loss) from
operations 120 161 170 (183) 364 884
----- ----------- ----------- ----------- ----------- -------
Interest (income) expense,
net 26 8 (6) 42 18 79
Minority interest -- -- -- -- -- --
Other nonoperating
(revenue) expenses -- -- -- (25) (23) (3)
Income from investments
in affiliates -- -- -- -- -- --
----- ----------- ----------- ----------- ----------- -------
Net income (loss) $ 94 $ 153 $ 176 $ (200) $ 369 $ 808
===== =========== =========== =========== =========== =======
</TABLE>
<TABLE>
<CAPTION>
Oncology Atlanta
and Radiation Gastro- Physician's
Radiation Care, Inc. enterology Choice All
Associates, and Associates, Management, Other Total
Pinnacle Inc. Subsidiaries P.C. LLC (R) Acquisitions
------- --------------- ----------- ------------- ------------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues from services $1,353 $ -- $ 5,279 $ -- $ 8 $ 4,279 $15,267
Net revenues from
management service
agreements -- 10,858 -- 4,991 -- 23,528 63,923
----- ------------- --------- ------------ ----------- ----- ---------
Total revenue 1,353 10,858 5,279 4,991 8 27,807 79,190
----- ------------- --------- ------------ ----------- ----- ---------
Operating expenses:
Cost of affiliated
physician management
services -- 3,275 -- 2,795 -- 10,217 25,466
Salaries, wages and
benefits 640 1,326 2,597 1,085 65 7,002 19,547
Professional fees 8 1,825 87 56 3 427 4,434
Supplies 490 1,014 228 192 -- 2,776 9,078
Utilities 57 76 100 109 1 441 856
Depreciation and
amortization 29 (63) 1,195 45 1 295 1,936
Rent 91 287 512 264 4 1,595 4,607
Other 185 897 2,019 443 (14) 2,757 8,888
----- ------------- --------- ------------ ----------- ----- ---------
1,500 8,637 6,738 4,989 60 25,510 74,812
----- ------------- --------- ------------ ----------- ----- ---------
Income (loss) from
operations (147) 2,221 (1,459) 2 (52) 2,297 4,378
----- ------------- --------- ------------ ----------- ----- ---------
Interest (income) expense,
net 42 15 (72) 17 (10) 25 184
Minority interest -- -- -- -- -- -- --
Other nonoperating
(revenue) expenses (108) -- (48) (1) -- (94) (302)
Income from investments
in affiliates -- -- -- -- -- -- --
----- ------------- --------- ------------ ----------- ----- ---------
Net income (loss) $ (81) $ 2,206 $(1,339) $ (14) $(42) $ 2,366 $ 4,496
===== ============= ========= ============ =========== ===== =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of
Operations.
29
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATION--SUPPLEMENTAL SCHEDULE
Summary of Adjustments For Acquisitions (D)
For the Year Ended December 31, 1995
(In thousands)
<TABLE>
<CAPTION>
Oncology-
Hematology
Associates,
DASCO P.A. and
Whittle Development Oncology-
Aegis Varnell Corporation Hematology
Uromed Health and and Georgia Infusion
Technologies Systems, Bedoya, Affiliate Cancer Therapy,
Inc. Inc. Inc. (P) Specialists Inc.
---------- --------- ------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from services $ -- $ -- $ -- $ -- $ -- $ --
Net revenues from management
service agreements -- -- -- -- 1,731 (K) --
-------- -------- ----- ----------- ----------- -----------
Total revenue -- -- -- -- 1,731 --
-------- -------- ----- ----------- ----------- -----------
Operating expenses:
Cost of affiliated physician
management services (F) -- -- 308 -- 2,480 457
Salaries, wages and benefits -- -- -- -- -- --
Professional fees -- -- -- -- (439) --
Supplies -- -- -- -- -- --
Utilities -- -- -- -- -- --
Depreciation and amortization
(L) (3) 71 43 240 323 11
Rent (H) -- -- -- -- (291) --
Earnout payment (O) -- -- -- -- -- --
Other (H) -- (167) (J) -- -- 165 --
-------- -------- ----- ----------- ----------- -----------
(3) (96) 351 240 2,238 468
-------- -------- ----- ----------- ----------- -----------
Income (loss) from operations 3 96 (351) (240) (507) (468)
-------- -------- ----- ----------- ----------- -----------
Interest (income) expense, net 47 (206) (8) (165) (19) (18)
Minority interest (I) (149) -- -- -- -- --
Other nonoperating (revenue)
expense -- -- -- -- 25 --
Income from investments
in affiliates -- -- -- (78) (P) -- --
-------- -------- ----- ----------- ----------- -----------
$ 105 $ 302 $(343) $ 3 $ (513) $(450)
======== ======== ===== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Atlanta
Oncology Radiation Gastro- Physician's
Osler Radiation Care, Inc. enterology Choice All Total
Nutrichem, Medical, Associates, and Associates, Management, Other Acquisition
Inc. Inc. Pinnacle P.A. Subsidiaries P.C. LLC (R) Adjustments
------- ------ ------ --------- ---------- -------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues from
services $ -- $ -- $ -- $ -- $ (1,425)(E) $ -- $ -- $ -- $(1,425)
Net revenues from
management service
agreements -- -- -- -- -- -- -- -- 1,731
------ ----- ----- -------- -------- ------- ------- ---- --------
Total revenue -- -- -- -- (1,425) -- -- -- 306
------ ----- ----- -------- -------- ------- ------- ---- --------
Operating expenses:
Cost of affiliated
physician management
services (F) -- 1,044 -- 5,253 -- (396) -- 469 9,615
Salaries, wages and
benefits -- 38 504 (1,326) (F) (1,509) (E) -- -- 1,076(G) (1,217)
Professional fees -- -- -- (1,825) (F) (3) (E) -- -- -- (2,267)
Supplies -- -- -- (1,014) (F) (47) (E) -- -- -- (1,061)
Utilities -- -- -- (76) (F) (90) (E) -- -- -- (166)
Depreciation and
amortization (L) 182 320 (14) 402 (735) -- 151 510 1,501
Rent (H) -- (488) -- (287) (562) (E) -- -- (140) (1,768)
Earnout payment (O) (1,271) -- -- -- -- -- -- -- (1,271)
Other (H) -- -- -- (897) (F) (1,444) (E) -- 27 416 (1,900)
------ ----- ----- -------- -------- ------- ------- ---- --------
(1,089) 914 490 230 (4,390) (396) 178 2,331 1,466
------ ----- ----- -------- -------- ------- ------- ---- --------
Income (loss) from
operations 1,089 (914) (490) (230) 2,965 396 (178) (2,331) (1,160)
------ ----- ----- -------- -------- ------- ------- ---- --------
Interest (income)
expense, net (395) (282) (56) (160) (1,532) (17) 10 (2,235) (5,036)
Minority interest (I) (657) -- -- -- -- -- -- -- (806)
Other nonoperating
(revenue) expense -- 2 108 -- 48 (E) -- -- 71 254
Income from investments
in affiliates -- -- -- -- -- -- -- -- (78)
------ ----- ----- -------- -------- ------- ------- ---- --------
$ 2,141 $ (634) $(542) $ (70) $ 4,449 $ 413 $(188) $ (167) $ 4,506
====== ===== ===== ======== ======== ======= ======= ==== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Statements of
Operations.
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(Dollars in thousands)
A. Represents the unaudited historical consolidated statement of operations
of the Company for the six months ended July 31, 1996 and the audited
historical combined statement of operations of the Company for the year
ended December 31, 1995.
B. Represents the historical combined statement of operations of the
Acquisitions and the adjustments to the historical combined statement of
operations of the Acquisition from either January 1, 1995 or February 1,
1996 until the earlier of the date such Acquisitions were completed by the
Company or July 31, 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition Summary" for a
summary of the Acquisitions.
C. Represents the historical statement of operations of each of the
Acquisitions from either January 1, 1995 or February 1, 1996 until the
earlier of the date such Acquisitions were completed by the Company or
July 31, 1996. In the case of Georgia Cancer Specialists, the historical
statement of operations includes Georgia Oncology-Hematology Clinic, P.C.
and Cancer Specialists of Georgia, P.C., as the two entities merged to
form Georgia Cancer Specialists. All Other represents Acquisitions which
are not significant to the Unaudited Pro Forma Statement of Operations.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisition Summary" for a summary of the
Acquisitions.
D. Represents the adjustments to the historical statement of operations for
each of the Acquisitions from either January 1, 1995 or February 1, 1996
until the earlier of the date such Acquisitions were completed by the
Company or July 31, 1996. All Other represents Acquisitions which are not
significant to the Unaudited Pro Forma Statement of Operations. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Acquisition Summary" for a summary of the Acquisitions.
E. During March 1995, the Company purchased the stock of Oncology Therapies,
Inc. ("OTI") which owns and operates outpatient radiation therapy centers
utilized in the treatment of cancer and diagnostic imaging centers. The
unaudited pro forma adjustments related to this purchase are as follows:
1. The Company closed five of the radiation therapy centers. The
unaudited pro forma adjustments include the elimination of the
results of operations for these closed centers. The following
unaudited pro forma adjustments exclude the elimination of
depreciation (which amounted to $1,140 for the year ended December
31, 1995). See Note L, as it relates to the unaudited pro forma
adjustments for depreciation for OTI on a consolidated basis.
Year Ended
December 31,
1995
-----------------
(In thousands)
Net revenues from services $ 1,425
Operating Expenses
Salaries, wages and benefits 1,509
Professional fees 3
Supplies 47
Utilities 90
Rent 562
Other 290
---------------
2,501
---------------
Net loss $(1,076)
===============
2. The unaudited pro forma adjustments also include the elimination of
the following non-recurring income and expenses as follows:
31
<PAGE>
Year Ended
December 31,
1995
-----------------
(In thousands)
Merger transaction expenses $1,106
F. Adjusts costs of affiliated physician services to the percentage or amount
specified in each of the management services agreements.
G. Adjusts employed physicians salaries (included in all other) to the amount
as specified per the employment agreements entered into as a result of the
Acquisitions. Such changes in salary are supported by the employment
contracts.
Increases salaries, wages and benefits by $504 for the year ended December
1995 to reflect employment agreements entered into during October 1995 in
conjunction with the acquisitions of Pinnacle.
H. Adjusts for rent and other expenses based on the terms of the agreements.
I. Eliminates minority interest expense as shown below for the year ended
December 31, 1995 and the six months ended July 31, 1996, respectively,
related to Uromed and Nutrichem. Such minority stockholders have or will
be exchanging their shares for shares in the Company.
Six Months
Ended Year Ended
July 31, 1996 December 31, 1995
(In thousands)
Nutrichem $ -- $657
Uromed 69 149
-------------- ----------------
Total $69 $806
============== ================
J. Eliminates $167 of Other expenses for the year ended December 31, 1995
reflected on the financial statements of Aegis prior to the purchase by
the Company. The financial statements of Aegis reflect expenses related to
another business operated by Aegis which was not purchased by the Company.
Therefore, since such expenses were not related to the operations of the
assets purchased by the Company, they were eliminated.
K. Increases revenue for the year ended December 31, 1995 by $1,731 to
reflect the terms of an amended management services agreement which now
requires the Company to purchase the revenues of a practice that the
Company began managing in April 1995. Such amended management services
agreement was the result of a merger between a medical oncology practice
managed by the Company starting in April 1995 and a medical oncology
practice which began to be managed by the Company during August 1995.
L. Adjusts depreciation and amortization expense to properly reflect the
allocation of the purchase price as required per purchase accounting for
each of the Acquisitions.
Amounts allocated or to be allocated to intangibles (Goodwill and
Management Service Agreements) and the related amortization expense on a
pro forma basis for each of the Acquisitions is as follows:
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
--------------------
Management Six Twelve Amortization
Service Months Months Period
Business Acquired Goodwill Agreements Amortization Amortization (Years)
- ------------------------------------------ ------- --------- ----------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Recent Acquisitions
Employed physicians(1) $5,702 -- $143 $285 20
Medical support service companies:
(bullet) Phylab/Miramer Lab 118 -- 3 6 20
(bullet) Pinnacle Associates, Inc. 472 -- 6 12 40
32
<PAGE>
Amounts Allocated
to Intangibles
--------------------
Management Six Twelve Amortization
Service Months Months Period
Business Acquired Goodwill Agreements Amortization Amortization (Years)
- ------------------------------------------ ------- --------- ----------- ----------- ------------
(In thousands)
(bullet) Aegis Health Systems, Inc. $ 6,227 -- $ 156 $ 311 20
(bullet) Lithotripsy America, Inc. 3 -- -- -- 20
(bullet) Radiation Care, Inc. and
Subsidiaries 8,623 -- 108 216 40
(bullet) First Choice Home Care Services
of Boca Raton, Inc. 2,622 -- 66 131 20
First Choice Health Care
Services of
Ft. Lauderdale, Inc.
First Choice Home Care Services
Inc.
(bullet) Nutrichem, Inc. 9,800 -- 123 245 40
(bullet) Uromed Technologies, Inc. 2,376 -- 59 119 20
Managed physician practices
(bullet) Symington -- 30 2 3 10
(bullet) Venkat Mani -- 141 7 14 10
(bullet) Whittle, Varnell & Bedoya, Inc. -- 289 7 14 20
(bullet) West Shore Urology -- 27 1 1 20
(bullet) Oncology Care Associates -- 47 1 2 20
(bullet) Oncology & Radiation Associates,
P.A. -- 9,582 240 479 20
(bullet) Osler Medical, Inc. -- 4,277 107 214 20
(bullet) Georgia Cancer Specialists -- 3,384 169 339 10
(bullet) Oncology-Hematology Associates,
P.A. and Oncology-Hematology
Infusion Therapy, Inc. -- 313 10 21 15
(bullet) Busch -- 430 11 22 20
(bullet) Dal Yoo -- 260 7 13 20
(bullet) Bress & Sinor (2) -- 500 13 25 20
(bullet) Kelley -- 500 13 25 20
(bullet) Atlanta Metro Urology -- 350 9 18 20
(bullet) Koerner, Taub & Flaxman -- 211 5 11 20
(bullet) Georgia Surgical Associates -- 1,058 13 26 40
(bullet) Insignia Care for Women, P.A. -- 2,400 30 60 40
(bullet) Atlantic Pediatrics -- 95 2 5 20
(bullet) Ankle and Foot Center of Tampa
Bay, P.A. -- 2,800 35 70 40
Management Services Organization
(bullet) Physicians Choice Management,
LLC 11,232 -- 140 281 40
(bullet) Central Georgia Management, LLC 900 -- 23 45 20
Medical facility development
(bullet) DASCO Development Corporation
and Affiliate ("DASCO") 9,814 -- 123 245 40
------- --------- ----------- -----------
Total Acquisitions $57,889 $26,694 $1,632 $3,258
======= ========= =========== ===========
</TABLE>
(1) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Novoa, Lawler, Cutler and Surowitz.
(2) This practice was merged into Oncology Care Associates during June
1996.
33
<PAGE>
Amount recorded as fixed assets and the related depreciation expense on a
pro forma basis for each of the Acquisitions is as follows:
<TABLE>
<CAPTION>
Fixed Six Twelve
Assets Months Months Depreciable
Business Acquired Acquired Depreciation Depreciation Life
- ------------------------------------------- ---------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Acquisitions
Employed Physicians(1) $ 764 $ 55 $ 109 7
Medical Support Service Companies:
(bullet) Phylab 18 2 3 7
(bullet) Pinnacle Associates, Inc. 70 5 10 7
(bullet) Aegis Health Systems, Inc. 705 50 101 7
(bullet) Lithotripsy America, Inc. 295 21 42 7
(bullet) Radiation Care, Inc. and
Subsidiaries 23,000(2) 1,115 2,230 Various
(bullet) First Choice Home Care Services
of Boca Raton, Inc. 28 2 4 7
First Choice Health Care Services
of Ft. Lauderdale, Inc.
First Choice Health Care
Services, Inc.
(bullet) Nutrichem, Inc. 173 13 25 7
(bullet) Uromed Technologies, Inc. 1,400 100 200 7
Managed Physicians Practices:
(bullet) Symington 17 2 3 7
(bullet) Venkat Mani 50 3 7 7
(bullet) Whittle, Varnell and Bedoya, P.A. 253 18 36 7
(bullet) Oncology Care Associates 156 11 22 7
(bullet) West Shore Urology 1,853 73 145 (3)
(bullet) Osler Medical, Inc. 7,452 240 481 (4)
(bullet) Cancer Specialists of Georgia,
Inc. 1,561 112 223 7
(bullet) Oncology-Hematology Associates,
P.A. and Oncology-Hematology
Infusion Therapy, Inc. 281 20 40 7
(bullet) Georgia Oncology-Hematology
Clinic, P.C. 631 45 90 7
(bullet) Busch 203 15 29 7
(bullet) Dal Yoo 37 3 5 7
(bullet) Atlanta Metro Urology 125 9 18 7
(bullet) Koerner, Taub & Flaxman 165 12 24 7
(bullet) Atlanta Gastroenterology
Associates, P.C. 635 17 45 Various
(bullet) Insignia Care for Women, P.A. 150 11 21 7
(bullet) Atlantic Pediatrics 68 5 10 7
(bullet) Ankle and Foot Center of Tampa
Bay, P.A. 135 10 19 7
Medical Facility Development
(bullet) DASCO 45 3 6 7
-------- --------- ---------
Total Acquisitions $40,270 $1,972 $3,948
======== ========= =========
</TABLE>
34
<PAGE>
(1) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Novoa, Lawler, Cutler and Surowitz.
(2) Excludes equipment written off at the closed centers.
(3) Capital leases of $1,569 are being depreciated over 15 years, which
represents the terms of the lease, all other fixed assets are being
depreciated over 7 years.
(4) A capital lease of $6,283 is being depreciated over 20 years, which
represents the term of the lease, all other fixed assets are being
depreciated over 7 years.
M. The following table represents pro forma interest expense based on the
debt outstanding on the Unaudited Pro Forma Balance Sheet at July 31,
1996. The Unaudited Pro Forma Statements of Operations reflect interest
expense, based on the $116,502,693 of outstanding debt, of $8,400,000 and
$4,194,000 for the year ended December 31, 1995 and the six months ended
July 31, 1996, respectively. The Unaudited Pro Forma Statements of
Operations also reflect interest income, based on the $12,800,000 of notes
receivable entered into subsequent to July 31, 1996, of $1,493,000 and
$746,000 for the year ended December 31, 1995 and the six months ended
July 31, 1996, respectively.
35
<PAGE>
Pro Forma
------------------------
Six
Months
Ended Year Ended
July July 31, December 31,
31, 1996 1995
1996(1) Interest Interest
------- -------- ------------
(In thousands)
Notes payable due to four individuals
payable in eight equal semi-annual
installments of $28,125, including
interest at 8% through November
1998. $ 113 $ 4 $ 9
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. 394 15 30
Notes payable assumed in conjunction
with the acquisition of Pinnacle
with interest rates ranging from 6%
to 10%. 731 29 57
Notes payable to a bank collateralized
by the assets of a multi-specialty
group practice, payable in monthly
installments of $20,608, at 8.75%
and a final payment in August 2000. 797 35 70
Note payable to the former
shareholders of a medical oncology
practice in South Florida, payable
in ten equal semi-annual
installments of $682,867, including
interest at 9%. The note payable is
collateralized by an irrevocable
letter of credit. 4,964 223 447
Convertible note payable to Oncology
Care Associates with a maturity date
of May 1997 and an interest rate at
6%. 300 4 18
Note payable to Mr. Gosman with a
maturity date of January 1998 and an
interest rate at the prime rate. 77 3 6
Convertible Subordinated Debentures,
due 2003 with interest due
semi-annually at 6.75%. 100,000 3,375 6,750
Capital lease obligations with
maturity dates through September
2015 and interest rates ranging from
8.75% to 12%. 9,127 506 1,013
----- ------ ----------
$116,503 $4,194 $8,400
===== ====== ==========
(1) Includes actual debt at July 31, 1996.
36
<PAGE>
N. No income tax provision is required due to the Company's tax losses and
the inability of the Company to use the benefits which primarily accrued
to Mr. Gosman.
O. Adjusts to eliminate the expenses recorded during the year ended December
31, 1995 on the Nutrichem contingent note. These expenses relate to a
bonus based on earnings and continued employment. This represents the
maximum amount that can be earned because the earnings threshold upon
which the payment is based was reached at December 31, 1995.
P. Adjusts for income from investment in affiliates as follows:
Year Ended
December 31,
1995
-----------------
(In thousands)
DASCO (Purchased 50% interest in May 1995) $(78)
---------------
Q. Pro forma loss per share for the year ended December 31, 1995 has been
calculated based upon 18,074,117 shares outstanding which was derived
as follows: total shares outstanding prior to offering of 13,307,450 plus
shares of 4,766,667 from which the proceeds of such shares were used to
repay debt and amounts due to shareholder in the amount of $71,500.
Pro forma net income per share for the six months ended July 31, 1996 has
been calculated based upon 22,573,777 shares outstanding which was derived as
follows: 21,864,202 actual shares outstanding at July 31, 1996 plus 363,442
shares committed to be issued pursuant to an Acquisition plus 346,126 shares
(assuming a share price at $21.625) committed to be issued during the next
year, pursuant to several Acquisitions. The conversion of the Debentures
issued in June 1996 is not assumed because the effect is anti-dilutive.
R. "All Other" for Acquisitions represents those entities which individually
are not material to the Unaudited Pro Forma Statement of Operations. A
summary of these entities with the respective historical revenues,
historical net income (loss), adjustments to revenue and adjustments to
net income (loss) are as follows:
Acquisitions
<TABLE>
<CAPTION>
Six Months Ended July 31, 1996
-------------------------------------------------------------
(In thousands)
Pro Forma
Historical Pro Forma Adjustments to
Historical Net Income Adjustments to Net Income
Entity Revenues (Loss) Revenue (Loss)
- ----------------------------------------- ---------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Lawler $ 210 $ 61 $-- $ (89)
Busch 226 (1) -- (1)
Dal Yoo 132 9 -- 14
Kelley 382 68 -- (32)
Bress & Sinor 840 1 -- 80
Family Practice Associates 594 33 -- (103)
Koerner, Taub & Flaxman 717 -- -- (6)
Atlanta Metro Urology 850 (20) -- 25
Insignia Care for Women, P.A. 1,835 76 -- 65
Georgia Surgical Associates 1,429 301 -- (264)
Atlantic Pediatrics 366 7 -- --
Ankle and Foot Center of Tampa Bay, P.A. 1,565 155 -- 1
Total $9,146 $690 $-- $(310)
======== ========== ============ ============
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-----------------------------------------------------------
(In thousands)
Pro Forma
Historical Pro Forma Adjustments to
Historical Net Income Adjustments to Net Income
Entity Revenues (Loss) Revenue (Loss)
- ---------------------------------------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
West Shore Urology $ 2,035 $ 275 $-- $ (340)
Oncology Care Associates 2,438 157 -- (148)
Venkat Mani 767 455 -- (485)
Symington 340 23 -- (60)
Novoa 306 26 -- (73)
Jaffer 257 125 -- (180)
Hunter 245 1 -- (16)
Herman 181 131 -- (131)
Dandiya 126 45 -- (15)
Cano 221 (9) -- (60)
Canasi 169 75 -- (59)
Bansal & Mistry 316 185 -- (150)
Phylab -- -- -- (6)
Lithotripsy America, Inc. -- -- -- (21)
Alpert 286 (2) -- (40)
Lawler 1,007 290 -- (402)
Busch 776 4 -- 21
Dal Yoo 396 31 -- 51
Kelley 764 141 -- (65)
Bress & Sinor 2,016 1 -- 198
Family Practice Associates 1,165 (3) -- (68)
Koerner, Taub & Flaxman 1,725 118 -- (262)
Atlanta Metro Urology 2,084 50 -- (36)
Insignia Care for Women, P.A. 3,671 151 -- 130
Georgia Surgical Associates 2,800 (27) -- 98
Atlantic Pediatrics 776 70 -- (32)
Ankle and Foot Center of Tampa Bay, P.A. 2,940 53 -- 265
Central Georgia Management, LLC -- -- -- (45)
Corporate Overhead -- -- -- 1,764
---------- ---------- -------------- --------------
Total $27,807 $2,366 $-- $ (167)
========== ========== ============== ==============
</TABLE>
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company is a physician practice management company that provides
management services to disease specialty and primary care physicians and
provides related medical support services. The Company's strategy is to
develop networks of disease specialty and primary care physicians supported
by related diagnostic and therapeutic medical support services in order to
provide a continuum of health care services in specific geographic locations.
The Company also provides medical facility development services to related
and unrelated third parties in connection with the establishment of health
parks, medical malls and medical office buildings.
Since the Company commenced operations in June 1994, it has developed its
current business primarily through the acquisition of the businesses and
assets of physician practices and medical support service companies. As of
July 31, 1996, the Company had affiliated with 138 physicians, acquired
several medical support service companies, acquired a medical facility
development company, and acquired a 43.75% interest in a management services
organization in Connecticut and a 50% interest in a management services
organization in Georgia that provide management services to independent
physician associations composed of over 375 multi-specialty physicians.
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 (collectively, the
"Acquisitions") made by the Company with the respective purchase dates,
purchase prices, and amounts allocated to intangibles:
<TABLE>
<CAPTION>
Amounts Allocated
to Intangibles
-----------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
---------------------------------------------- ----------------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Employed physicians (A) Various $ 7,078,162 $5,702,296 --
Medical support service companies:
(bullet) Uromed Technologies, Inc. September 1994 3,661,751 2,375,914 --
(bullet) Nutrichem, Inc. November 1994 12,924,371 9,799,793 --
(bullet) First Choice Home Care Services of
Boca Raton, Inc. November 1994 2,910,546 2,622,061 --
(bullet) First Choice Health Care Services of
Ft. Lauderdale, Inc.
(bullet) First Choice Health Care Services,
Inc.
(bullet) Mobile Lithotripter of Indiana
Partners December 1994 2,663,000 -- --
(bullet) Radiation Care, Inc. and Subsidiaries March 1995 41,470,207 8,623,330 --
(bullet) Aegis Health Systems, Inc. April 1995 7,162,770 6,227,770 --
(bullet) Phylab/Miramer Lab October 1995 133,081 118,649 --
(bullet) Pinnacle Associates, Inc. November 1995 --(B) 471,576 --
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 6,100,492 -- 2,738,429
(bullet) Oncology & Radiation Associates, P.A. September 1995 10,786,997 -- 9,581,773
(bullet) Osler Medical, Inc. September 1995 6,696,104 -- 4,276,969
39
<PAGE>
Amounts Allocated
to Intangibles
-----------------------
Management
Date Purchase Service
Business Acquired Purchased Price Goodwill Contracts
---------------------------------------------- ----------------- ------------ --------- ----------
(bullet) West Shore Urology October 1995 554,447 -- 27,204
(bullet) Whittle, Varnell and Bedoya, P.A. November 1995 984,711 -- 288,564
(bullet) Oncology Care Associates November 1995/
July 1996 1,032,939 -- 547,886
(bullet) Symington December 1995 121,667 -- 29,566
(bullet) Venkat Mani December 1995 443,429 -- 140,839
(bullet) Atlanta Gastroenterology April 1996 6,100,000 -- --
(bullet) Busch May 1996 759,637 -- 429,545
(bullet) Kelley June 1996 500,000 -- 500,000
(bullet) Dal Yoo June 1996 394,427 -- 259,874
(bullet) Koerner, Taub & Flaxman July 1996 830,339 -- 210,567
(bullet) Atlanta Metro Urology July 1996 705,189 -- 350,000
(bullet) Insignia Care for Women, P.A. August 1996 3,350,000 -- 2,400,000
(bullet) Atlantic Pediatrics August 1996 259,000 -- 95,000
(bullet) Ankle and Foot Center of Tampa Bay,
P.A. August 1996 2,935,000 -- 2,800,000
(bullet) Georgia Surgical Associates August 1996 1,445,000 -- 1,058,000
Medical facility development:
(bullet) DASCO Development Corporation and May 1995/
Affiliate January 1996 9,813,856(C) 9,813,856 --
Management Services Organizations:
(bullet) Physicians Choice Management, LLC December 1995 13,350,000(D) 11,232,413 --
(bullet) Central Georgia Medical Management,
LLC April 1996 1,250,000 900,000 --
</TABLE>
(A) Includes Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer,
Cano, Herman, Barza, Novoa, Lawler, Cutler and Surowitz.
(B) Entire purchase price is contingent and is based on earnings with a
maximum purchase price of $5.2 million.
(C) The Company acquired 50% of DASCO in May 1995 and the remaining 50% was
acquired simultaneous with the initial public offering in January 1996.
See "Medical Facility Development Acquisitions."
(D) The Company agreed to acquire the 56.25% interest it does not currently
own. See "Management Services Organizations"
Physician Practice Acquisitions
During the year ended December 31, 1995, the Company purchased the assets
of Drs. Bansal, Mistry, Dandiya, Canasi, Alpert, Hunter, Jaffer, Cano,
Herman, Barza and Novoa and in conjunction with those purchases entered into
employment agreements with 14 physicians in Florida. The total purchase price
for these assets was $3,950,386. The purchase price was allocated to these
assets at their fair market value, including goodwill of $2,925,885. During
the six months ended July 31, 1996, the Company purchased the assets of and
entered into employment agreements with Drs. Lawler, Cutler and Surowitz. The
total purchase price for these assets was $2,069,376 in cash and $1,058,400
payable in Common Stock of the Company to be issued during the second quarter
of 1997. The Common Stock to be issued is based upon the average price of the
stock during the five business days prior to the issuance and was allocated
to the assets at their fair market value including goodwill of $2,776,411.
The resulting goodwill is being amortized over 20 years.
During July 1995, the Company purchased the assets of and entered into a
15-year management agreement with Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc. a medical oncology practice in
Baltimore, Maryland with three medical oncologists. The purchase price for
these assets was approximately
40
<PAGE>
$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 $6,100,492 in
cash. In addition, during April 1995, the Company purchased the assets of and
entered into a 10-year management agreement with Georgia Oncology-Hematology
Clinic, P.C. a medical oncology practice with eight oncologists in Atlanta,
Georgia. The purchase price for these assets was approximately $2,099,353 in
cash. During August 1995, these two medical oncology practices consolidated
and formed a new entity, Georgia Cancer Specialists, Inc. The Company entered
into a new 10-year management agreement with the consolidated practice during
August 1995. For its services under this management agreement, the Company
receives 41.5% of the net practice revenues less the cost of pharmaceutical
and/or ancillary products. In each of the second through fifth years of the
term of this agreement, the fee payable to the Company is decreased by 1%.
The Company also purchased for $180,000 a 46% interest in I Systems, Inc., a
company affiliated with one of the practices which is engaged in the business
of claims processing and related services. The purchase of this 46% interest
is being accounted for by the equity method. The Company has the option to
purchase up to an additional 30% interest in the affiliated Company for
$33,333 in cash for each additional one percent of ownership interest
purchased. The Company and the affiliated company entered into a three-year
service agreement pursuant to which certain billing and collection services
will be provided to the Company. The purchase price of the above acquisitions
was allocated to the assets at their fair market value, including management
service agreements of $3,383,877. The resulting intangible is being amortized
over 10 years.
During September 1995, the Company purchased the assets of and entered
into a 20-year management agreement with Osler Medical, Inc., a 22 physician
multi-specialty group practice in Melbourne, Florida. The purchase price for
these assets was approximately $4,318,832 plus the assumption of debt of
$1,490,272. The Company also entered into a 20-year capital lease for the
main offices of the practice with a total obligation of $6,283,483. An
affiliate of the Company has provided a guarantee of such payments under the
lease. During the first five years of the management agreement, the Company
will receive a management fee equal to 45% of the annual net revenues of the
practice. Thereafter, the management fee increases to 47% of annual net
revenues. The management fee percentage for net revenues of the initial
physician group will be reduced based upon a set formula to a minimum of 31%
based upon the achievement of certain predetermined benchmarks. The
management agreement also provides that, during the period from January 1,
1996 through December 31, 2005, to the extent annual net revenues of the
practice are less than $10,838,952, the Company's management fee is reduced
up to a maximum reduction of $1,500,000 per year. The Company has agreed to
expend up to $1,500,000 per year for each of the first three years of the
management agreement to assist in the expansion activities of the practice.
During the second quarter of 1996, the Company also acquired certain
copyright and trademark interests for a purchase price of $887,000. The
purchase price for the practice's assets acquired to date was allocated to
such assets at their fair market value, including management service
agreements of $4,276,969. The resulting intangible is being amortized over 20
years.
During September 1995, the Company purchased the assets of and entered
into a 20-year management agreement with Oncology & Radiation Associates,
P.A. a medical oncology practice with 19 oncologists in South Florida. The
purchase price for these assets was $5,383,660 in cash plus the assumption of
debt of $5,403,337. The debt is collateralized by an irrevocable letter of
credit issued by NationsBank of Florida, N.A. ("NationsBank"), the collateral
for which had been provided by Mr. Gosman prior to the Company's initial
public offering. The management fee paid to the Company for services rendered
has two components: a base management fee and a variable management fee. The
base management fee is $2,100,000 per year, subject to adjustment to an
amount not less than $1,350,000 during the first five years of the agreement
and not less than $700,000 thereafter. The variable management fee is equal
to 35.5% of certain revenues, subject to increase in certain circumstances.
The
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purchase price for the practice's assets was allocated to the assets at their
fair market value, including management service agreements of $9,581,773. The
resulting intangible is being amortized over 20 years.
During the fourth quarter of 1995, the Company purchased the assets of and
entered into management service agreements with West Shore Urology; Whittle,
Varnell and Bedoya, P.A.; Oncology Care Associates; Venkat Mani; and
Symington consisting of 14 physicians including two oncologists. The total
purchase price for these assets was $2,637,193 in cash. The Company also
entered into a 15-year capital lease with a total obligation of $1,569,171.
The purchase price for the practices' assets was allocated to assets at their
fair market value, including management service agreements of $534,059. The
resulting intangible is being amortized over ten to 20 years.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered
into a 40-year management agreement with the medical practice in exchange for
324,252 shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction has been accounted for using the
pooling-of-interests method of accounting. Pursuant to the management
agreement, the Company will receive a base management fee, an incentive
management fee, and a percentage of all net ancillary service income.
During May 1996, the Company amended its existing management agreement
with Oncology Care Associates and extended the term of the agreement to 20
years. Simultaneously, the Company expanded the Oncology Care Associates
practice by adding three oncologists the practices of whom the Company
acquired for $500,000. $200,000 of such purchase price was paid in cash and
$300,000 was paid in the form of a convertible note with a maturity in May
1997. The Company has the option to make such $300,000 payment at its
discretion in either cash or Common Stock of the Company with such number of
shares to be based upon the average price of the stock during the five
business days preceding such date. The purchase price has been allocated to
the assets at their fair market value, including management service
agreements of approximately $500,000. The Company will receive an annual base
management fee and an incentive management fee. The resulting intangible is
being amortized over 20 years.
During May and June 1996, the Company entered into agreements to purchase
the assets of and enter into 20-year management agreements with three
physician practices consisting of four physicians. All of the acquisitions
have since been consummated, except that one of the acquisitions closed in
escrow pending the satisfaction of certain conditions. These practices are
located in South Florida, Bethesda, Maryland and Washington, D.C. The total
purchase price for the assets of these practices was $1,654,064. Of this
amount, $703,110 was paid in cash and $950,954 of such purchase price is
payable in Common Stock of the Company to be issued during May and June 1997.
The number of shares of Common Stock of the Company to be issued is based
upon the average price of the stock during the five business days prior to
the issuance. The value of the Common Stock to be issued has been recorded in
other long term liabilities at July 31, 1996. The purchase price has been
allocated to the assets at their fair market value, including management
service agreements of approximately $1,189,419. The Company will receive an
annual base management fee and an incentive management fee under each
agreement. The resulting intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase
price for these assets was approximately $830,339, which was paid in cash.
The purchase price has been allocated to these assets at their fair market
value, including management service agreements of approximately $210,567. The
Company will receive a management fee under the management agreements based
upon a percentage of the net revenues of the practice. The resulting
intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $705,189. Of such purchase price,
$425,189 was paid in cash and $280,000 is payable during July 1997 in Common
Stock of the Company with such number of shares to be based upon the average
price of the stock during the five business days prior to the issuance. The
value of the Common Stock to be issued has been recorded in other long term
liabilities at July 31, 1996. The purchase price has been allocated to these
assets at their fair market value, including management service agreements of
approximately $350,000. The Company will receive an annual base management
fee and an incentive management fee. The resulting intangible is being
amortized over 20 years.
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During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,350,000. Of such purchase price, $1,430,000 was
paid in cash and $1,920,000 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
purchase price will be allocated to these assets at their fair market value,
including management service agreements of approximately $2,400,000. The
Company will receive an annual base management fee and an incentive
management fee. The resulting intangible will be amortized over 40 years.
During August 1996, the Company purchased the assets of three physicians
in Florida. The purchase price for these assets was $259,071. Of such
purchase price, $163,435 was paid in cash and $95,636 is payable during
August 1997 in Common Stock of the Company with such number of shares to be
purchased based upon the average price of the stock during the five business
days prior to the issuance. The purchase will be allocated to these assets at
their fair market value, including management service agreements of
approximately $95,636. The resulting intangible will be amortized over 20
years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with 10 physicians in Florida. The purchase
price for these assets was $2,935,139. Of such purchase price, $695,139 was
paid in cash and $2,240,000 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
purchase price will be allocated to these assets at their fair market value,
including management service agreements of approximately $2,800,000. The
Company will receive an annual base management fee and an incentive
management fee. The resulting intangible will be amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40-year management agreement with four physicians in Georgia. The purchase
price for these assets was $1,445,278. Of such purchase price, $752,478 was
paid in cash and $692,800 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
purchase price will be allocated to these assets at their fair market value,
including management service agreements of approximately $1,057,631. The
Company will receive an annual base management fee and an incentive
management fee. The resulting intangible will be amortized over 40 years.
Medical Support Service Companies Acquisitions
During September 1994, an 80% owned subsidiary of the Company purchased
substantially all of the assets of Uromed Technologies, Inc. ("Uromed"), a
provider of lithotripsy services in Florida, for a Base Purchase Price of
$2,564,137 plus the assumption of capital lease obligations of $1,097,614.
The Final Purchase Price equals the Base Purchase Price plus the amount by
which Stockholders' Equity exceeded $450,000 on the Closing Date. A Final
Purchase Price payment of $283,000 was accrued at December 31, 1994 and paid
during May 1995. The former shareholders of Uromed will also receive an
earnings contingency payment of $274,000 which has been accrued at December
31, 1995. The acquisition was accounted for under the purchase method of
accounting. The purchase price was allocated to assets at their fair market
value including goodwill of $2,375,914. The resulting intangible is being
amortized over 20 years. The Company intends to acquire the outstanding 20%
interest in the subsidiary.
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.
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During November 1994, the Company acquired all of the assets and assumed
certain liabilities of First Choice Health Care Services of Ft. Lauderdale,
Inc., First Choice Health Care Services, Inc. and First Choice Home Care
Services of Boca Raton, Inc., home health care companies doing business in
Florida, for a total purchase price of $2,910,546 in cash. The purchase price
was allocated to assets at the fair market value, including goodwill of
$2,622,061. The resulting intangible is being amortized over 20 years.
During December 1994, the Company purchased a 36.8% partnership interest
in Mobile Lithotripter of Indiana Partners, a provider of lithotripsy
services in Indiana, from Mobile Lithotripter of Indiana, Limited, for
$2,663,000 in cash. This investment is being accounted for by the equity
method.
During March 1995, the Company acquired by merger all of the outstanding
shares of stock of Oncology Therapies, Inc. (formerly known as Radiation
Care, Inc. and referred to herein as "OTI") for $2.625 per share. OTI owns
and operates outpatient radiation therapy centers utilized in the treatment
of cancer and diagnostic imaging centers. OTI's centers are located in
Alabama, California, Florida, Georgia, North Carolina, South Carolina,
Tennessee and Virginia. The total purchase price for the stock (not including
transaction costs and 26,800 shares subject to appraisal rights) was
approximately $41,470,207. The purchase price was paid by a combination of
cash on hand, loans from Mr. Gosman and net proceeds from long term debt
financing of approximately $17,278,000. The long term debt financing was paid
in full during January 1996 with the proceeds of the Company's initial public
offering. The Company closed five of OTI's radiation therapy centers and has
accrued approximately $3,134,028 primarily as a reserve for the estimated
amount of the remaining lease obligation. Of this amount $2,188,635 was
recorded as an adjustment to the purchase price and $945,393 was recorded as
a charge in the fourth quarter of 1995. In addition, the Company also
recorded a charge during the fourth quarter of 1995 of $1,554,607, which
represents the writedown of assets to their estimated fair market value. The
purchase price paid in connection with the OTI merger was allocated to assets
at their fair market value, including goodwill of $8,623,330. The resulting
intangible is being amortized over 40 years.
During April 1995, the Company purchased from Aegis Health Systems, Inc.
for $7,162,770 all of the assets used in its lithotripsy services business.
The purchase price consisted of approximately $3,592,362 in cash and
$3,570,408 in a promissory note. The outstanding principal balance and any
unpaid interest became due and payable upon the closing of the Company's
initial public offering and was paid in full during January 1996. The
obligations, evidenced by the promissory note, were secured by $1,000,000
which was in escrow and included in other assets at December 31, 1995. The
purchase price was allocated to assets at their fair market value including
goodwill of $6,227,770. The resulting intangible is being amortized over 20
years.
During November 1995 the Company acquired by merger Pinnacle Associates,
Inc. ("Pinnacle"), an Atlanta, Georgia infusion therapy services company. In
connection with the Pinnacle merger there is a $5,200,000 maximum payment
that may be required to be paid that is based on earnings and will be made in
the form of shares of Common Stock of the Company valued as of the earnings
measurement date. The amount of such contingent payment has not yet been
determined, however, the Company believes that the impact on the financial
statements is immaterial. The contingent consideration represents the full
purchase price. On the merger date, the liabilities assumed exceeded the fair
market value of the assets acquired by approximately $471,576 and such amount
was recorded as goodwill and is being amortized over 40 years.
Management Services Organization
During December 1995, the Company obtained a 43.75% interest in Physicians
Choice Management, LLC, a newly formed management services organization
("MSO") that provides management services to an independent physician
association ("IPA") composed of over 330 physicians based in Connecticut. The
Company acquired this interest in exchange for a payment of $1.5 million to
existing shareholders, ($1.0 million paid during 1995 and $.5 million paid
during the second quarter of 1996) and a capital contribution of $2.0 million
to the Company ($1.5 million paid during 1995 and $.5 million paid during the
second quarter of 1996). The Company's balance sheet as of July 31, 1995
includes the 56.25% interest not owned by the Company as minority interest.
The Company acquired an option, which expires in May 1998, to increase its
ownership in the MSO to 50% for an additional investment of $2.0 million, of
which $1.0 million would represent an additional capital contribution to the
MSO and $1.0 million would represent the purchase of additional units
currently owned by the IPA. The Company has paid a nonrefundable amount of
$350,000 for such option. In addition, upon the IPO the Company granted
options
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to purchase 300,000 shares of Common Stock to certain MSO employees in
conjunction with their employment agreements. These options vest over a two year
period with the exercise price equaling the fair market value of the Company's
stock on the date such shares become exercisable. During August 1996, the
Company agreed to acquire the remaining 56.25% interest for a payment of
$1,000,000 in cash plus 363,442 shares of Common Stock. The Company has also
agreed to loan the selling shareholders $2.8 million in the event that they
incur a tax liability related to the sale.
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, a newly formed MSO that provides management services
to an IPA composed of 45 physicians based in Georgia. The Company acquired
this interest in exchange for a payment of $550,000 to existing shareholders
and a capital contribution of $700,000 to the MSO. The Company's balance
sheet as of July 31, 1996 includes the 50% interest not owned by the Company
as minority interest. The owners of the other 50% interest in the MSO have a
put option to the Company to purchase their interests. This put option vests
over a four year period. The price to the Company to purchase these interests
shall equal 40% of the MSO's net operating income as of the most recent
fiscal year multiplied by the price earnings ratio of the Company. The
minimum price earnings ratio used in such calculation will be 4 and the
maximum 10.
Medical Facility Development Acquisitions
On May 31, 1995, Mr. Gosman purchased a 50% ownership interest in DASCO
Development Corporation and DASCO Development West, Inc. (collectively,
"DASCO"), a medical facility development services company providing such
services to related and unrelated third parties in connection with the
development of medical malls, health parks and medical office buildings. The
purchase price consisted of $5.2 million in cash and $4.6 million in notes,
which were guaranteed by Mr. Gosman. Upon the closing of the Company's
initial public offering, Messrs. Gosman, Sands and Rendina, the Company's
principal promoters, and certain management and founder stockholders
exchanged their ownership interests in DASCO for shares of Common Stock equal
to a total of $55 million or 3,666,667 shares. The Company believes that its
medical facility development services and project finance strategy are a
significant component of the Company's overall business strategy. The
historical book value of Messrs. Sands and Rendina's interest in DASCO is
$22,735. The initial 50% purchase price was allocated to assets at their fair
market value, primarily goodwill of $9.8 million with the exchange recorded
at historical value. At December 31, 1995 DASCO was being accounted for using
the equity method.
Accounting Treatment
Each of the Acquisitions was accounted for under the purchase method of
accounting, except where noted otherwise above.
The Company's relationships with its affiliated physicians are set forth
in various asset purchase agreements, management service agreements, and
employment and consulting agreements. Through the asset purchase agreement,
the Company acquires the equipment, furniture, fixtures, supplies and, in
certain instances, service agreements, of a physician practice at the fair
market value of the assets. The accounts receivable are typically purchased
at the net realizable value. The purchase price of the practice generally
consists of cash and the assumption of certain debt, leases and other
contracts necessary for the operation of the practice. The management
services or employment agreements delineate the responsibilities and
obligations of each party.
Net revenues from management service agreements include the contractual
fees earned (which equals the net revenues generated by the physician
practices) under its management services agreements with physicians. Under
the agreements, the Company is contractually responsible and at risk for the
operating costs of the medical groups. The costs include the reimbursement of
all medical practice operating costs and the fixed and variable contractual
management fees (which are reflected as cost of affiliated physician
management services) as defined and stipulated in the agreements.
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Results of Operations
Historical
Three Months and Six Months Ended July 31, 1996 Compared to Three Months and
Six Months Ended June 30, 1995
The following discussion reviews the results of operations for the three
and six months ended July 31, 1996 (the "1996 Quarter" and "1996 Period"),
respectively, compared to the three and six months ended June 30, 1995 (the
"1995 Quarter" and "1995 Period"), respectively.
Historical Revenues
The Company derives revenues from health care services, medical facility
development services and management service organizations. Within the health
care segment, the Company distinguishes between revenues from cancer
services, non-cancer physician services and other medical support services.
Cancer services include physician practice management services to oncology
practices and certain medical support services, including radiation therapy,
diagnostic imaging and infusion therapy. Non-cancer physician services
include physician practice management services to all practices managed by
the Company other than oncology practices. Other medical support services
include home health care services and lithotripsy.
Net revenues were $13.3 million and $20.0 million for the 1995 Quarter and
the 1995 Period, respectively. Of these amounts, $8.6 million and $10.7
million or 64.3% and 53.4% of such revenues was attributable to cancer
services; $.9 million and $1.1 million or 6.8% and 5.6% was related to
non-cancer physician services; and $3.9 million and $8.2 million or 28.9% and
41.0% of such revenues was attributable to other medical support services for
the 1995 Quarter and the 1995 Period, respectively.
Net revenues were $40.4 million and $77.6 million for the 1996 Quarter and
the 1996 Period, respectively. Such revenues during this period consisted of
$23.1 million and $44.3 million or 57.2% and 57.0% related to cancer
services; $8.6 million and $15.9 million or 21.4% and 20.4% related to
non-cancer physician services; $4.9 million and $10.1 million or 12.2% and
13.0% related to other medical support services; and $3.7 million and $7.4
million or 9.2% and 9.5% related to medical facility development. As of July
31, 1996, the Company had affiliations with 61 physicians providing cancer
related services, 20 employed primary care physicians and 57 other multigroup
or specialty physicians.
Historical Expenses
For the 1996 Quarter, the 1996 Period, the 1995 Quarter and the 1995
Period, expressed as a percentage of net revenues, general corporate expenses
were 5.0%, 4.4%, 7.2% and 8.5%, respectively. General corporate expenses, as
a percentage of net revenues, were higher during the 1995 Quarter and the
1995 Period than the 1996 Quarter and the 1996 Period due to the commencement
of operations of the Company during the 1995 Quarter and the 1995 Period.
The Company's cost of affiliated physician management services was $8.9
million and $17.4 million for the 1996 Quarter and the 1996 Period,
respectively. There were no costs of affiliated physician management services
during the 1995 Quarter or the 1995 Period. Cost of affiliated physician
management services represents the fixed and variable contractual management
fees as defined and stipulated in the management agreements. Revenue for
these managed physician practices was $19.4 million and $36.5 million for the
1996 Quarter and the 1996 Period, respectively.
The Company's depreciation and amortization expense increased by $.6
million from the 1995 Quarter to the 1996 Quarter and $1.9 million from the
1995 Period to the 1996 Period. The increase is a result of the Acquisitions
and the allocation of the purchase prices as required per purchase
accounting.
The Company's rent expense increased by $.7 million from the 1995 Quarter
to the 1996 Quarter and $2.0 million from the 1995 Period to the 1996 Period.
Rent and lease expenses as a percentage of net revenue will vary based on the
size of each of the affiliated practice offices, the number of satellite
offices and the current market rental rate for medical office space in the
particular geographic markets.
The Company's earn-out payment during the 1995 Period of $1.1 million
represents a payment to Nutrichem on the contingent note entered into in
conjunction with the acquisition of Nutrichem.
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The Company's net interest expense decreased by $.2 million from the 1995
Quarter to the 1996 Quarter and $.3 million from the 1995 Period to the 1996
Period. Interest income of $.6 million and $1.1 million was earned during the
1996 Quarter and the 1996 Period, respectively, on the remaining proceeds
from the Company's 1996 initial public offering and Convertible Subordinated
Debenture Offering.
No income tax provision was required during the 1995 Quarter or the 1995
Period due to the Company's tax loss and the inability of the Company to use
the benefits which prior to the completion of the initial public offering
primarily accrued to Mr. Gosman.
Medical Facility Development
The Company, through its investment in DASCO, provides medical facility
development services to related and unrelated third parties in connection
with the establishment of health parks, medical malls and medical office
buildings. The Company believes that the development of such facilities, in
certain markets, will aid in the integration of its affiliated physicians and
medical support services and will provide future opportunities to affiliate
with physicians and acquire future physician practices or support services.
Further, the Company believes that the development of health parks, medical
malls and medical office buildings in certain markets will aid in the
integration of its affiliated physicians and medical support services.
The Company derives its medical facility development service revenues from
the provision of a variety of services. In rendering such services, the
Company generates income without bearing the costs of construction, expending
significant capital or incurring substantial indebtedness. Generally,
revenues are recognized at the time services are performed, except for
development fees which are recognized in accordance with the related
development agreements.
The Company typically receives the following compensation for its
services: development fees (including management of land acquisition,
subdivision, zoning, surveying, site planning, permitting and building
design), general contracting management fees, leasing and marketing fees,
project cost savings income (based on the difference between total budgeted
project costs and actual costs) and consulting fees.
The amount of development fees and leasing and marketing fees are stated
in the development and marketing agreements. Those agreements also provide
the basis for payment of the fees. The financing fees and consulting fees are
generally not included in specific agreements but are negotiated and
disclosed in project pro formas provided to the owners of the buildings and
hospital clients. Specific agreements usually incorporate those pro formas
and provide that the projects will be developed in conformity therewith.
General contracting management fees and project cost savings income are
included in guaranteed maximum cost contracts entered into with the general
contractor. These contracts are usually approved by the owners which in many
cases include hospital clients and prospective tenants. During the 1996
Quarter and the 1996 Period, the Company's medical facility development
generated revenues of $3.7 million and $7.4 million and pre-tax income (prior
to allocation of general corporate expenses) of $2.0 million and $3.8
million, respectively.
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.
Historical Revenues
Net revenues of $2.4 million for the period from June 24, 1994 to December
31, 1994 include revenues from the Acquisitions completed during the period
September through December 1994. Of this amount, $.7 million or 28% of such
revenues was attributable to cancer services; and $1.8 million or 72% of such
revenues was attributable to other medical support services. The Company had
no physician related revenues during this period.
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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.
Historical Expenses
For the period from June 24, 1994 to December 31, 1994 and for the year
ended December 31, 1995, expressed as a percentage of net revenues, general
corporate expenses were 67% and 5%, respectively. In 1994, general corporate
expenses were relatively high due to the expenses incurred in connection with
the commencement of operations of the Company. General corporate expenses
will continue to increase in gross dollars, but this expense as a percentage
of net revenues is expected to continue to decline. No income tax provision
is required due to the Company's current tax loss and the inability of the
Company to use the benefits which prior to the completion of the initial
public offering primarily accrued to Mr. Gosman.
Pro Forma
The Unaudited Pro Forma Statements of Operations present the results of
operations of the Company for the year ended December 31, 1995 and the six
months ended July 31, 1996 as if the Acquisitions, the sale of the Common
Stock offered in the Company's January 1996 initial public offering and the
application of the net proceeds therefrom had been consummated on January 1,
1995, and the issuance of the Debentures in the Debt Offering and the
application of the net proceeds therefrom as if such transactions had
occurred as of January 1, 1995. The Unaudited Pro Forma Combined Balance
Sheet reflects the Acquisitions subsequent to July 31, 1996 as if they had
occurred on July 31, 1996. Such Pro Forma Combined Financial Information is
based on the historical financial information of the Acquisitions adjusted to
reflect the purchase price and the elimination of various non-recurring
income and expenses as further described in the Notes to the Unaudited Pro
Forma Combined Financial Information. Such Unaudited Pro Forma Combined
Financial Information does not include operational or other changes which
might have been effected by the Company's management. The Unaudited Pro Forma
Combined Financial Information is not necessarily indicative of the results
that would have occurred if the transactions had occurred on the dates
indicated or which may be realized in the future.
Pro Forma Revenues
The pro forma results of operations reflect the Acquisitions, including
the Company's affiliation with 163 physicians, revenues from the related
medical support services, and revenues from medical facility development.
Pro forma net revenues for the year ended December 31, 1995 include revenues
from all of the Acquisitions as if the Acquisitions had occurred on January 1,
1995. Such revenues consisted of $82.0 million or 54.6% related to cancer
services (of which $49.9 million or 60.9% of cancer services revenues related to
oncologists' services); $45.8 million or 30.5% related to non-cancer physician
services; $18.8 million or 12.5% related to other medical support services, and
$3.6 million or 2.4% related to medical facility development services.
Pro forma net revenues for the six months ended July 31, 1996 include
revenues from all of the Acquisitions as if the Acquisitions had occurred on
February 1, 1996. Such revenues consisted of $45.6 million or 51.7% related
to cancer services (of which $26.4 million or 57.9% of cancer services revenues
related to oncologists' services); $24.2 million or 27.4% related to
non-cancer physician services; $11.0 million or 12.5% related to other
medical support services; and $7.4 million or 8.4% related to medical
facility development services.
Pro Forma Expenses
The pro forma results of operations included the actual general corporate
expenses incurred by the Company. General corporate expenses as a percent of
net revenues were 2.4% and 3.9% for the year ended December 31, 1995 and the six
months ended July 31, 1996, respectively.
The pro forma results of operations include the cost of affiliated
physician management services which were $44.7 million and $21.8 million for
the year ended December 31, 1995 and the six months ended July 31, 1996,
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respectively. Revenue for these managed physician practices was $88.0 million
and $46.3 million for the year ended December 31, 1995 and the six months
ended July 31, 1996, respectively. No income tax provision is required for
the year ending December 31, 1995 due to the Company's current pro forma tax
loss.
The nature of the affiliated practices affects the cost of affiliated
physician management services, salaries, wages and benefits, supplies,
depreciation and amortization. These expenses as a percentage of net revenue
will vary based on the mix of physician specialties.
Rent and lease expenses as a percentage of net revenue will vary based on
the size of each of the affiliated practice offices, the number of satellite
offices and the current market rental rate for medical office space in the
particular geographic markets.
Other costs as a percentage of net revenue will vary based on the ability
of the Company to centralize these costs, negotiate more favorable pricing
and institute stronger budgeting controls.
Medical Facility Development
On a pro forma basis the Company's medical facility development generated
revenues of $3.6 million and $7.4 million and a pre-tax loss of $.2 million
and pre-tax net income of $3.8 million (prior to corporate overhead) for the
year ended December 31, 1995 and the six months ended July 31, 1996,
respectively.
Liquidity and Capital Resources
Cash used by operating activities was $1.0 million for the 1996 Period and
$1.3 million for the 1995 Period. During the 1995 Period the Company had a
loss of $4.2 million which included $1.4 million of depreciation and
amortization. In addition, during the 1995 Period accounts receivables
decreased by approximately $.5 million. During the 1996 Period the Company
had net income of $5.1 million which included $3.3 million of depreciation
and amortization. In addition, during the 1996 Period accounts receivable
increased by approximately $6.5 million and accounts payables and accrued
liabilities decreased by approximately $1.0 million.
Cash used by investing activities was $9.0 million and $31.5 million for
the 1996 Period and 1995 Period, respectively. This primarily represents the
funds required by the Company for the acquisition of physician practices and
medical support service companies.
Cash provided by financing activities was $75.6 million for the 1996
Period and represents (i) net proceeds from the issuance of Convertible
Subordinated Debentures of $97.1 million; (ii) proceeds from the issuance of
Common Stock pursuant to stock options and offering costs related to the
initial public offering of $.2 million and $2.2 million, respectively; (iii)
repayment of debt and amounts due to shareholder of $5.5 million and $15.4
million, respectively; (iv) the release of restricted cash collateralizing
debt of $1.5 million; and (v) financing costs and fees of $.1 million. Cash
provided by financing activities was $33.2 million for the 1995 Period which
primarily represents the $35.1 million in capital contributions and advances
from shareholder offset by the repayment of $1.9 million in debt outstanding.
At July 31, 1996, the Company's principal source of liquidity consisted of
$111.7 million in cash. Working capital of $131.6 increased by $153.9 million
from December 31, 1995 to July 31, 1996 primarily as a result of the $209.4
million of net proceeds received from the Company's initial public offering
and Convertible Subordinated Debenture offering, offset by the repayment of
approximately $87.4 million of indebtedness and certain obligations arising
from the Acquisitions. The Company also had $13.4 million of current
liabilities, including approximately $2.9 million of indebtedness maturing
before July 31, 1997. Further, the Company also has completed Acquisitions
subsequent to July 31, 1996 which required approximately $4.1 million in cash
to complete and has also used $12.8 million in cash to loan to third parties.
During 1995, the Company entered into a management agreement with a
22-physician multi-specialty group practice pursuant to which the Company has
agreed to expend up to $1.5 million per year in each of the next three years
to assist in the expansion activities of the practice. In addition, the
Company agreed to acquire certain copyright and trademark interests of the
practice for $.9 million. These interests were acquired during June 1996.
In conjunction with certain of its acquisitions the Company has agreed to
make payments in shares of Common Stock of the Company which are generally
issued one year from the closing date of such acquisitions with the
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number of shares generally determined based upon the average price of the
stock during the five business days prior to the date of issuance. As of July
31, 1996 the Company had committed to issue $1,889,354 of Common Stock of the
Company using the methodology discussed above. Subsequent to July 31, 1996
the Company has committed to issue an additional $5,349,000 of Common Stock
of the Company using this same methodology.
The Company's acquisition and expansion programs will require substantial
capital resources. In addition, the operation of physician groups, integrated
networks and related medical support service companies, and the development
and implementation of the Company's management information systems, will
require ongoing capital expenditures. The Company expects that its capital
needs over the next several years will substantially exceed capital generated
from operations. To finance its capital needs, the Company plans both to
incur indebtedness and to issue, from time to time, additional debt or equity
securities, including Common Stock or convertible notes, in connection with
its acquisitions and affiliations. The Company currently has a commitment
from a bank to fund $30 million of working capital and acquisition financing
needs.
The Company expects that the working capital and cash generated from
operations and amounts available under an acquisition/working capital line
for which the Company has received a commitment from a bank together with the
proceeds of the Convertible Subordinated Debenture offering will be adequate
to satisfy the Company's cash requirements for the next 12 months. However,
there can be no assurance that the Company will not be required to seek
additional financing during this period. The failure to raise the funds
necessary to finance its future cash requirements would adversely affect the
Company's ability to pursue its strategy and could adversely affect its
results of operations for future periods.
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BUSINESS
The Company provides management services to disease specialty and primary
care physicians and related medical support services. The Company's primary
strategy is to develop disease management networks in specific geographic
locations by acquiring physician practices and affiliating with disease
specialty and primary care physicians. Where appropriate, the Company
supports its affiliated physicians with related diagnostic and therapeutic
medical support services. The Company's medical support services include
radiation therapy, diagnostic imaging, infusion therapy, home health care and
lithotripsy services. Since its first acquisition in September 1994, the
Company has acquired the practices of and affiliated with 163 physicians and
acquired eight medical support service companies and a medical facility
development company. The Company also owns a 43.75% interest (and has agreed
to purchase the remaining interests) in a newly formed management services
organization that provides management services to an independent physician
association composed of over 330 multi-specialty physicians and a 50%
interest in a second management services organization that provides
management services to an independent practice association composed of 45
primary care physicians.
The Company believes that its strategy of acquiring and integrating
independent physician practices and medical support services into specialty
networks creates synergies, achieves operating efficiencies and responds to
the cost-containment initiatives of payors, particularly managed care
companies. The Company has focused its disease management efforts on the
acquisition of oncology practices. To date, the Company has acquired the
practices of and affiliated with 61 oncologists and provides comprehensive
cancer-related support services including radiation therapy, infusion therapy
and diagnostic imaging. The Company intends to develop additional disease
management services for the treatment of other chronic illnesses such as
diabetes, cardiovascular diseases and infectious diseases.
In certain targeted markets, the Company organizes its affiliated
physicians and related medical support services into integrated clusters of
disease specialty and primary care networks, which it terms local provider
networks ("LPNs"). LPNs are designed to provide a comprehensive range of
physician and medical support services within specific geographic regions.
The Company believes that its LPN structure will achieve operating
efficiencies and enhance its ability to secure contracts with managed care
organizations. To date, the Company has contracts with managed care
organizations under which the Company and its affiliated physicians provide
cancer-related health care services to over 200,000 covered lives. To date,
the Company has established an LPN in each of the Southeast Florida, Atlanta,
Connecticut and Washington, D.C./Baltimore areas.
As part of its strategy to integrate physician practices, the Company
provides medical facility development services to related and unrelated third
parties for the development of health parks, medical malls and medical office
buildings. Such services include project finance assistance, project
management, construction management, construction design engineering,
physician recruitment, leasing and marketing. While the Company incurs
certain administrative and other expenses in the course of providing such
services, it does not incur costs of construction or risks of project
ownership. The Company's strategy in financing its projects is to involve
future tenants as significant investors in and owners of the developed
medical facilities. Because most of its tenants are physicians and medical
support service companies, the Company believes that the relationships that
it develops with these parties through its medical facility development
efforts will greatly enhance the Company's ability to affiliate with
physicians and acquire physician practices and medical support service
companies. Further, the Company believes that the development of health
parks, medical malls and medical office buildings in certain markets will aid
in the integration of its affiliated physicians and medical support services.
Industry
Overview
Industry sources forecast that national health care spending in 1995 will
exceed $1 trillion with approximately $200 billion directly attributable to
physician services. Increasing concern over the cost of health care in the
United States has led to numerous initiatives to contain the growth of health
care expenditures, particularly in the government entitlement programs of
Medicare and Medicaid. These concerns and initiatives have contributed to the
growth of managed care. Managed care typically involves a third party
(frequently the payor) governing the provision of health care with the
objective of ensuring delivery in a high quality and cost effective manner.
One
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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
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evolution of disease specialty treatment networks will play a major role in
managed care contracting as payors recognize that both cost savings and the
quality of care are improved when reimbursement and health care services
target a specific illness or disease through coordinated networks of health
care providers.
Strategy
The Company's strategy is to develop, operate and manage integrated
disease specialty and primary care physician networks which provide high
quality, cost-effective physician and related medical support services. The
key elements of this strategy are to:
Acquire Physician Practices. The Company seeks to acquire the practices of
and affiliate, in its target markets, with (i) high profile disease specialty
and primary care physicians, (ii) multi-specialty physician groups and (iii)
independent physician associations. By affiliating with leading physicians
and physician groups in a given community, the Company can secure a large
patient base, ensure appropriate, quality treatment and maintain patient
satisfaction. Additionally, as the Company affiliates with physicians in
certain markets, it makes available to these physicians medical support
services, including the Company's radiation therapy, diagnostic imaging,
lithotripsy, infusion and home health care services. By integrating these
acquired disease specialty and primary care medical practices with related
medical support services, the Company is able to develop a continuum of care
in its target markets.
Develop Practice Networks. In conjunction with its acquisition strategy,
the Company seeks to build integrated networks of disease specialty and
primary care physicians in targeted markets termed local provider units or
"LPNs." To form the foundation of an LPN, the Company typically acquires a
core physician practice, which may be either a disease specialty or primary
care practice. The Company then seeks to acquire or affiliate with additional
physician practices and medical support services related to that core
practice as well as other medical specialties outside the scope of the core
practice. Through the implementation of this strategy, the Company seeks to
provide a comprehensive range of health care services within a given region,
thereby enhancing its ability to enter into contractual arrangements with
managed care organizations.
Facilitate Acquisitions and Integration Through Development. As a part of
its strategy to affiliate with physicians and acquire physician practices and
medical support service companies, the Company provides medical facility
development services to related and unrelated third parties for the
establishment of health parks, medical malls and medical office buildings.
The Company believes that the relationships that it fosters with 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.
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Physician Affiliation
To date, the Company has affiliated with 163 physicians in the following
locations:
<TABLE>
<CAPTION>
No. of
Physicians
Under
LPN Contract Specialties
-------------------------------- -------- -----------------------------------------------
<S> <C> <C>
South Florida 104 Primary Care, Oncology, Cardiology,
Gastroenterology, Neurology, Podiatry,
Rheumatology, Obstetrics-Gynecology, General
and Vascular Surgery, Dermatology, Pulmonary,
Orthopedic and Radiology
Atlanta 39 Oncology, Gastroenterology, Urology, and
Surgery
Washington, D.C./Baltimore 12 Oncology and Infectious Diseases
Other Markets 8 Oncology and Surgery
------
Total Physicians 163
======
</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 132 physicians and employs another 31 physicians.
With the exception of 10 radiation oncologists employed by the Company
through OTI, the Company purchased the practices of all of its 163 affiliated
physicians. The Company derives revenues from affiliated physicians through
management fees charged to managed physician practices and from charges to
third parties for services provided by employed physicians.
The Company's relationships with its affiliated physicians are set forth
in various asset purchase, management services, employment and consulting
agreements. Through the asset purchase agreement, the Company acquires at
fair market value the assets of the practice. The accounts receivable are
typically purchased at the net realizable value. The purchase price of the
assets of a physician practice generally consists of cash and the assumption
of certain debt, leases and other contracts necessary for the operation of
the practice.
The Company and its affiliated physicians enter into management services
or employment agreements which delineate the responsibilities and obligations
of each party. The management services agreements generally have a 10 to
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
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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 six months ended July 31, 1996 were $36.5
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
55
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urologists in Atlanta. During August 1996, the Company entered into a
management agreement with four surgeons in Atlanta. The Company is presently
negotiating with over 75 physician providers and is assessing the opportunity
to create a comprehensive health park in the Atlanta area.
In the South Florida market, the Company initially developed affiliate
relationships with six primary care physicians. Subsequently, the Company has
contracted with 19 oncologists and currently operates a cancer care network
which through capitated managed care contracts provides services to
approximately 137,000 covered lives. In addition, the Company provides
infusion therapy, home health, diagnostic and rehabilitation services in its
South Florida LPN.
In the Washington, D.C./Baltimore area, the Company operates three
radiation centers and provides infusion therapy services through its managed
care contracts and physician affiliations. The Company has affiliated with
eight medical and radiation oncologists. In addition, the Company entered
into a letter of intent with the Medlantic Healthcare Group in Washington,
D.C. (and its Washington Hospital Center and Washington Cancer Institute) for
the formation and operation of the Washington Regional Oncology Network. This
network will be dedicated to obtaining contracts for cancer care in the
Washington region and also includes the formation of a joint venture for the
management of the Washington Ambulatory Infusion Center.
The Company believes that cancer-related LPNs provide the greatest
opportunity for contracting with managed care and risk-based third party
payors and has entered into affiliate agreements with 61 oncologists. Net
revenues for the cancer related LPNs for the six months ended July 31, 1996
were $44.3 million. In its South Florida, Atlanta and Washington,
D.C./Baltimore LPNs, the Company has assembled three discrete networks of
cancer physicians and related cancer care services, and as a result, the
Company provides services pursuant to managed care contracts to over 200,000
covered lives. Under these contracts, the Company and its affiliate
physicians provide some or all of the following services: medical and
radiation oncology services, bone marrow transplants, infusion therapy,
diagnostic services and home care. The Company has also developed cancer care
networks with unaffiliated entities for contracting purposes in certain
markets.
Independent Physician Associations
The Company owns a 43.75% interest in a newly formed management services
organization (and has agreed to purchase the remaining interests) that
provides management services to an independent physician association ("IPA")
composed of over 330 physicians based in Connecticut and a 50% interest in a
newly formed management services organization that provides management
services to an IPA composed of 45 primary care physicians in Georgia. An IPA
is generally composed of a group of geographically diverse independent
physicians who form an association for the purpose of contracting as a single
entity. The IPA structure not only increases the purchasing power of the
constituent practices, but also provides a foundation for the development of
an integrated physician network. The Company believes that many IPAs will
merge with other practice groups to develop larger integrated medical groups,
thereby becoming increasingly attractive to managed care companies. The
Company intends to capitalize on its affiliations with IPAs to establish
additional LPNs.
The Company also seeks to enter into agreements to manage capitated
provider networks. The Company expects that under these agreements, it would
receive a fixed management fee based upon contract revenues as well as a
certain percentage of risk pools.
Medical Facility Development
The Company provides medical facility development services to related and
unrelated third parties for the establishment of health parks, medical malls
and medical office buildings. A "health park" is an integrated health care
environment comprised of several buildings which links physician practices,
medical support services and subacute care facilities on a single campus. A
"medical mall," often found in a health park, combines physician offices with
related medical support services such as diagnostic imaging, physical
rehabilitation, laboratory services and wellness programs in one facility.
The Company also develops office buildings which serve physicians and
providers of ancillary medical services.
The Company believes that the convenience of "one-stop" scheduling and
medical related services together with on-site treatment provided at the
Company's developed medical facilities will increase patient satisfaction and
cost-efficiency. By providing a centralized delivery site for
state-of-the-art technology, information systems and patient care models, a
full continuum of care can be provided by a wide range of physician
specialties and medical
56
<PAGE>
support services at one location. The Company believes that physicians will
find affiliation with such facilities attractive and that third party payors
will seek to contract with physician practices and related medical support
service companies operating in such facilities.
The Company's medical facility development services include project
finance assistance, project management, construction management, construction
design engineering, consulting, physician recruitment, leasing and marketing.
The Company currently has 15 projects under development and has facilities
under construction in Florida, Texas, California and Arizona. The Company
also has four projects under contract and anticipates that construction of
such facilities will begin during 1996. Net revenues for the six months ended
July 31, 1996 were $7.4 million.
Under its development agreements, the Company is generally obligated to
secure funding for and guaranty the maximum cost of a project. In order to
minimize the risks from these obligations, the Company enters into
construction agreements with general contractors to construct the project for
a "guaranteed maximum cost." Furthermore, each construction agreement
provides for indemnification of the Company by the general contractor for
certain losses and damages. Each construction agreement also requires the
contractor to obtain and maintain a performance bond and a labor and material
payment bond, written by a surety company with a Best's Key Guide Rating of
not less than A+12 and satisfactory to the owner of the land on which a
project is developed and the construction lender.
Among the Company's development clients are some of the largest for-profit
public hospital companies in the United States. To date, the Company's
clients and primary negotiators of the Company's fees generally have been the
land owners or land lessors of the developed sites. Negotiations generally
include the Company, the entities which own the developed projects, the land
lessor (if applicable) and, in many cases, the prospective tenants of the
office space. The Company offers its physician-tenants an opportunity to
become equity investors in the facility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Medical Facility
Development." The compensation received by the Company is based upon
negotiated amounts for each service provided. Although the Company does not
maintain an ownership interest in the facilities it develops, certain of the
Company's officers and directors have an interest in such facilities. See
"Certain Transactions." In each transaction between the Company and a
facility in which certain of its officers and directors have an interest,
third parties, including the land owners and land lessors of the sites and
the unaffiliated investors in the facility, participate in establishment of
fees to the Company. All transactions between the Company and affiliated
owners and physicians are and will continue to be based upon competitive
bargaining and are and will be on terms no less favorable to the Company than
those provided to unaffiliated parties. In addition, the Company monitors
development fees in the industry to ensure that its fees in such transactions
meet this standard.
The Company believes that its medical facility development services and
project finance strategy are a significant component of the Company's overall
business strategy. The Company's project finance strategy focuses upon the
involvement of its future tenants as significant investors in and owners of
the medical facilities developed by the Company. Because its tenants are
physicians and medical support service companies, the Company believes that
the relationships that it develops through its medical facility development
efforts will greatly enhance the Company's ability to affiliate with
physicians and acquire physician practices and medical support service
companies. The development of medical facilities by the Company is intended
to enhance the creation of the new group practices, increase the number of
integrated medical service delivery sites and promote alternative delivery
models for third party payors in its developed sites. The Company believes
that such activity, in turn, will aid in the integration of its affiliated
physicians and medical support service companies.
Information Systems
The Company believes that effective and efficient integration of clinical
and financial data provides a competitive advantage in bidding for managed
care contracts and contributes to a company's success in the complex
reimbursement environment of the health care industry. The Company also
believes that the use of technology can improve patient care by improving
physician access to patient information. Therefore, the Company is in the
process of selecting management information systems designed to facilitate
the transmittal and coordination of important patient and operational data.
The Company's objective is to implement a system which consists of three
specific
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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. 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
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subjecting such arrangements to lengthy, expensive investigations and
prosecutions initiated by federal and state governmental officials. In
particular, the Office of the Inspector General of the U.S. Department of
Health and Human Services has expressed concern that the acquisition of
physician practices by entities in a position to receive referrals from such
physicians in conjunction with the physicians' continued practice in
affiliation with the purchaser could violate the Anti-kickback Amendments.
In July 1991, in part to address concerns regarding the Anti-kickback
Amendments, the federal government published regulations that provide
exceptions, or "safe harbors," for certain transactions that will be deemed
not to violate the Anti-kickback Amendments. Among the safe harbors included
in the regulations were provisions relating to the sale of physician
practices, management and personal services agreements and employee
relationships. Additional safe harbors were published in September 1993
offering protections under the Anti- kickback Amendments to eight new
activities, including referrals within group practices consisting of active
investors. Proposed amendments to clarify these safe harbors were published
in July 1994 which, if adopted, would cause substantive retroactive changes
to the 1991 regulations. Although the Company believes that it is not in
violation of the Anti- kickback Amendments, some of its operations do not fit
within any of the existing or proposed safe harbors.
The Company believes that, although it is receiving remuneration under
management services agreements, it is not in a position to make or influence
the referral of patients or services reimbursed under government programs to
the physician groups, and therefore, believes it has not violated the
Anti-kickback Amendments. In certain states, the Company is a separate
provider of Medicare or state health program reimbursed services. To the
extent the Company is deemed by state or federal authorities to be either a
referral source or a separate provider under its management services
agreements and to receive referrals from physicians, the financial
arrangement under these agreements could be subject to scrutiny and
prosecution under the Anti-kickback Amendments. Violation of the
Anti-kickback Amendments is a felony, punishable by fines up to $25,000 per
violation and imprisonment for up to five years. In addition, the Department
of Health and Human Services may impose civil penalties excluding violators
from participation in Medicare or state health programs.
Significant prohibitions against physician referrals were enacted, subject
to certain exemptions, by Congress in the Omnibus Budget Reconciliation Act
of 1993. These prohibitions, commonly known as "Stark II," amended prior
physician self-referral legislation known as "Stark I" by dramatically
enlarging the field of physician-owned or physician-interested entities to
which the referral prohibitions apply. Effective January 1, 1995 and subject
to certain exemptions, Stark II prohibits a physician or a member of his
immediate family from referring Medicare or Medicaid patients to an entity
providing "designated health services" in which the physician has an
ownership or investment interest, or with which the physician has entered
into a compensation arrangement including the physician's own group practice.
The designated health services include the provision of radiology and other
diagnostic services, radiation therapy services, physical and occupational
therapy services, durable medical equipment, parenteral and enteral
nutrients, certain equipment and supplies, prosthetics, orthotics, outpatient
prescription drugs, home health services and inpatient and outpatient
hospital services. The penalties for violating Stark II include a prohibition
on Medicaid and Medicare reimbursement and civil penalties of as much as
$15,000 for each violative referral and $100,000 for participation in a
"circumvention scheme." A physician's ownership of publicly traded securities
of a corporation with equity exceeding $75 million as of the end of its most
recent fiscal year is not deemed to constitute an ownership or investment
interest in that corporation under Stark II. The Company was not be eligible
for this exemption as of its fiscal year ending December 31, 1995. In 1996,
after completion of the initial public offering, the 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
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some of these physician groups may make referrals to the Company for
services, the Company cannot expect to receive income from the making of such
referrals.
Many states have adopted similar prohibitions against payment intended to
induce referrals of Medicaid and other third party payor patients. The State
of Florida, for instance, enacted a Patient Self-Referral Act in April 1992
that severely restricts patient referrals for certain services, prohibits
mark-ups of certain procedures, requires disclosure of ownership in a
business to which patients are referred and places other regulations on
health care providers. The Company believes it is likely that other states
will adopt similar legislation. Accordingly, expansion of the operations of
the Company to certain jurisdictions may require it to comply with such
jurisdictions' regulations which could lead to structural and organizational
modifications of the Company's form of relationships with physician groups.
Such changes, if any, could have an adverse effect on the Company.
The Company is in the process of adopting a formal compliance program
designed to prevent violations of Stark II and the Anti-kickback Amendments
in both its acquisitions and day to day operations. The Company intends to
hire a full-time compliance officer to implement and monitor the compliance
program.
Laws in all states regulate the business of insurance and the operation of
HMOs. Many states also regulate the establishment and operation of networks
of health care providers. While these laws do not generally apply to the
hiring and contracting of physicians by other health care providers, there
can be no assurance that regulatory authorities of the states in which the
Company operates would not apply these laws to require licensure of the
Company's operations as an insurer, as an HMO or as a provider network. The
Company believes that it is in compliance with these laws in the states in
which it does business, but there can be no assurance that future
interpretations of insurance and health care network laws by regulatory
authorities in these states or in the states into which the Company may
expand will not require licensure or a restructuring of some or all of the
Company's operations.
Reimbursement and Cost Containment
Approximately 40% of the revenue of the Company's affiliated physician
groups is derived from payments made by government sponsored health care
programs (principally, Medicare and Medicaid). As a result, any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. The U.S. Congress has
passed a fiscal year 1996 budget resolution that calls for reductions in the
rate of spending increases over the next seven years of $270 billion in the
Medicare program and $182 billion in the Medicaid program. Through the
Medicare program, the federal government has implemented a resource- based
relative value scale ("RBRVS") payment methodology for physician services.
This methodology went into effect in 1992 and will continue to be implemented
in annual increments through December 31, 1996. RBRVS is a fee schedule that,
except for certain geographical and other adjustments, pays similarly
situated physicians the same amount for the same services. The RBRVS is
adjusted each year and is subject to increases or decreases at the discretion
of Congress. The implementation of RBRVS may result in reductions in payment
rates for procedures provided by physicians under current contract with the
Company. 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
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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.
Employees
As of July 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)
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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.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information as of June 21, 1996
concerning the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- -------------------------- -- -----------------------------------------------------
<S> <C> <C>
Abraham D. Gosman 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
</TABLE>
The following is a biographical summary of the experience of the executive
officers and directors of the Company:
Abraham D. Gosman has served since June 1994 as an executive officer of
the Company and is presently the Chairman of the Board of Directors,
President and Chief Executive Officer of the Company. Previously, he founded
and was the principal owner of The Mediplex Group, Inc. ("Mediplex"), a
diversified health care company, and its predecessor companies for more than
15 years, with the exception of the period from April 1986 to August 1990
when Mediplex was owned by Avon Products, Inc. ("Avon"). He was the Chief
Executive Officer of Mediplex from its inception to September 1988 and
assumed that position again after Mediplex was purchased from Avon in August
1990. In addition, Mr. Gosman has served as Chairman of the Board of Trustees
and Chief Executive Officer of Meditrust, the nation's largest health care
real estate investment trust, since its inception in 1985.
Frederick R. Leathers has served since June 1994 as the Chief Financial
Officer and Treasurer of the Company. Previously, he served as Treasurer,
Chief Financial Officer and Principal Accounting Officer of Mediplex from
October 1991 to June 1994, Corporate Controller from May 1991 to October 1991
and held the 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.
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Edward E. Goldman, M.D. has served since October 1994 as President of a
subsidiary of the Company, since October 1995 as an executive officer of the
Company and is presently Executive Vice President of Physician Development.
Dr. Goldman is a board certified family practice physician and previously
served as Chairman of PAL-MED Health Services from February 1983 to September
1994, a multi-specialty IPA which provides physicians services and manages
health care related services.
Francis S. Tidikis has served since January 1996 as Executive Vice
President of Marketing of the Company. Mr. Tidikis has served as Senior Vice
President of Physician Management Services for Tenet Healthcare Corporation
since March 1995. Mr. Tidikis has been with Tenet Healthcare Corporation and
its predecessor, National Medical Enterprises, since April 1981, serving as
Executive Vice President of the Eastern District from June 1991 to February
1995 and as Vice President of Operations for the Eastern Region Hospital
Group from February 1984 to September 1990. Mr. Tidikis currently serves as a
director of Professional Liability Insurance Company.
Don S. Harvey has served as an operations officer of the Company since
April 1995 and as an executive officer since October 1995 and is presently
Vice President of Operations. He was a consultant to the Company from January
1995 to April 1995. Mr. Harvey served as Executive Vice President and Chief
Operating Officer of JFK Medical Center in Atlantis, Florida from April 1990
to December 1994, where he developed and managed medical related services.
Donald A. Sands has served as the Vice President--Medical Facility
Development since January 1996. He has served since 1995 as Chairman of the
Board and Chief Executive Officer of DASCO. Previously, Mr. Sands served as
President of DASCO from 1985. From 1984 to 1985, he was Director of
Development for Loews Hotels and was Counsel for Westin Hotel Company from
1979 to 1984.
Hugh L. Carey has served as a director of the Company since February 21,
1996. Currently, he is Chairman of the Board of Advisors of Cambridge
Partners, L.L.C. He served as an Executive Vice President of W.R. Grace &
Company from January 1989 to December 1995. He was Governor of the State of
New York from January 1974 to January 1982. He is currently a director of
Triarc Companies, Inc.
Joseph N. Cassese has served as a director of the Company since January
29, 1996. Mr. Cassese was the President of Mediplex from March 1986 to March
1988 and again from August 1990 to December 1991. Mr. Cassese was also a Vice
President of A.M.A. Advisory Corp., the advisor to Meditrust, from April 1988
to August 1990. Mr. Cassese has been retired since December 1991.
John T. Chay has served as a director of the Company since April 15, 1996.
Mr. Chay has served as an executive officer of Nutrichem, Inc. which he
co-founded in November 1993 and has served since June 1991 as Chief Executive
Officer of The HealthLink Group, Inc., a practice management consulting firm
which he also founded.
David M. Livingston, M.D. has served as a director of the Company since
January 29, 1996. Dr. Livingston has been a Director of Dana-Farber Cancer
Institute in Boston, Massachusetts since 1991 and has been employed as a
physician at the Institute since 1973. He currently serves as Chairman of the
Institute's Department of Medicine. He is also the Emil Frei Professor of
Medicine at Harvard Medical School where he has taught since 1973.
Bruce A. Rendina has served as a director of the Company since January 29,
1996. Mr. Rendina has served since 1994 as President of DASCO, which he
co-founded with Mr. Sands. Previously, he served as its Executive Vice
President from 1987 to 1994.
Stephen E. Ronai has served as a director of the Company since January 29,
1996. Mr. Ronai has been a partner in the Connecticut law firm of Murtha,
Cullina, Richter and Pinney since 1984 where he serves as Chairman of the
firm's Health Care Department. He is a member of the American Academy of
Healthcare Attorneys of the American Hospital Association, and from 1989 to
1995 he served as a member of the Board of Directors of the National Health
Lawyers Association.
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The Board of Directors is divided into three classes, with staggered
three-year terms. The initial terms of Messrs. Rendina and Ronai will expire
at the Company's 1996 annual meeting; of Mr. Cassese and Dr. Livingston at
the Company's 1997 annual meeting; and of Messrs. Gosman, Carey and Chay at
the Company's 1998 annual meeting. Successors to the directors whose terms
expire at each annual meeting are eligible for election for three- year
terms. A director holds office until the annual meeting for the year in which
his term expires and until his successor is elected and qualified. These
provisions may make it more difficult for holders of the Common Stock to
remove the directors and officers of the Company than if all directors were
elected on an annual basis.
Officers are appointed by and serve at the discretion of the Board of
Directors. The officers, other than Mr. Gosman, will devote substantially all
of their business time to the business and affairs of the Company.
Executive Committee. The members of the Executive Committee of the
Company's Board of Directors are Messrs. Gosman, Rendina and Cassese. The
Executive Committee exercises all the powers of the Board of Directors
between meetings of the Board of Directors, except such powers as are
reserved to the Board of Directors by law.
Audit Committee. The members of the Audit Committee of the Company's Board
of Directors are Messrs. Carey and Ronai, both of whom are independent
directors. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans for and results of the audit, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range
of audit and non-audit fees and reviews the adequacy of the Company's
internal accounting controls.
Compensation Committee. The members of the Compensation Committee of the
Company's Board of Directors are Messrs. Cassese, Carey and Ronai. The
Compensation Committee establishes a general compensation policy for the
Company and approves increases both in directors' fees and in salaries paid
to officers and senior employees of the Company. The Compensation Committee
administers all of the Company's employee benefit plans. The Compensation
Committee determines, subject to the provisions of the Company's plans, the
directors, officers and employees of the Company eligible to participate in
any of the plans, the extent of such participation and terms and conditions
under which benefits may be vested, received or exercised.
Equity Incentive Committee. The members of the Equity Incentive Committee
of the Company's Board of Directors are Messrs. Cassese and Ronai. The Equity
Incentive Committee determines who shall receive awards under the 1995 Equity
Incentive Plan, from those employees, consultants and directors who are
eligible to participate in the Equity Plan, the type of award to be made, the
number of shares of Common Stock which may be acquired pursuant to the award
and the specific terms and conditions of each award.
Compensation Committee Interlocks and Insider Participation
In 1995, the Company did not have a Compensation Committee or any other
committee of the Board of Directors performing similar functions. Decisions
concerning compensation of executive officers were made by Mr. Gosman, the
Chairman, Chief Executive Officer and President of Company.
Compensation of Directors
Officers who are members of the Board of Directors do not receive
compensation for serving on the Board. Each other member of the Board
receives annual compensation of $15,000 for serving on the Board, plus a fee
of $1,000 for each Board of Directors' meeting attended. In addition, such
directors receive an additional fee of $500 for each committee meeting
attended, except that only one fee will be paid in the event that more than
one such meeting is held on a single day. All directors receive reimbursement
of reasonable expenses incurred in attending Board and committee meetings and
otherwise carrying out their duties. Each non-employee director who was a
member of the Compensation Committee at the time of the closing of the
initial public offering received options to purchase 10,000 shares of Common
Stock upon the closing of the offering at the initial public offering price
pursuant to the Equity Plan. Each director who is a member of the
Compensation Committee on the first business day following each annual
meeting of the shareholders will receive the option to purchase 2,500 shares
of Common Stock. Any of such options granted to a member of the Compensation
Committee under the Equity Plan will be exercisable one year following the
date of grant.
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Executive Compensation
The following table sets forth certain information regarding compensation
paid or accrued by the Company during the period June 24, 1994 (inception) to
December 31, 1994 and the year ended December 31, 1995, to the Company's
Chief Executive Officer and to each of the Company's four other most highly
compensated executive officers (the "Named Executive Officers") during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation All Other
Salary Compensation(1)
Name and Principal Position Year ($) ($)
- ----------------------------------------------- --- ---------- -------------
<S> <C> <C> <C>
Abraham D. Gosman 1995 225,000 --
Chairman, President and Chief Executive
Officer 1994 116,682
Frederick R. Leathers 1995 229,487 290
Chief Financial Officer and Treasurer 1994 102,057
Robert A. Miller 1995 206,382 102
Executive Vice President of Acquisitions 1994 101,916
Edward E. Goldman, M.D 1995 400,000 --
Executive Vice President of Physician
Development 1994 133,333
William A. Sanger 1995 304,571 174
Executive Vice President and Chief Operating
Officer 1994 98,038
</TABLE>
(1) Amounts indicated are for life insurance premiums paid by the Company.
Employment Agreements
The Company has entered into an employment agreement with Dr. Goldman that
provides for an initial three year term automatically renewable for an
initial period of two years and for successive periods of one year
thereafter, unless either party elects not to renew. The base salary for Dr.
Goldman under the agreement is $400,000 per year. In addition, he is entitled
to receive bonuses and benefits, including health insurance, dental
insurance, short and long term disability, life insurance and a car
allowance. The agreement may be terminated by the Company without cause upon
30 days notice (180 days notice after the first anniversary of the agreement)
and with cause (as defined in the agreement) effective immediately upon
notice. Dr. Goldman may terminate the agreement immediately if the Company
fails to fulfill its obligations thereunder or without cause upon 30 days
notice. In the event that Dr. Goldman is terminated without cause, he is
entitled to receive his base salary for the lesser of (i) the remaining term
of the then current employment period or (ii) 12 months following the
effective date of his termination of employment. The agreement contains
restrictive covenants prohibiting Dr. Goldman from competing with the
Company, or soliciting employees of the Company to leave, during his
employment and for a period of two years after termination of the agreement,
other than after a termination by the Company without cause or by Dr. Goldman
for good reason.
The Company has entered into an employment agreement with Mr. Miller that
provides for an initial two year term that is automatically renewable for
successive one year periods, unless either party elects not to renew. The
base salary for Mr. Miller under the agreement is $300,000 per year. In
addition, he is entitled to receive such bonuses and benefits as the Company,
in its sole discretion, may provide to its executive officers. The agreement
may be terminated by the Company without cause upon 15 days notice and with
cause (as defined in the agreement) immediately upon notice. Mr. Miller may
terminate the agreement immediately upon written notice to the Company in the
event of any material breach by the Company of its obligations thereunder. In
the event Mr. Miller is terminated without cause, he is entitled to receive
his base salary for 12 months 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).
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The Company has entered into an employment agreement with Mr. Sanger that
provides for an initial three year term that is automatically renewable for
successive one year periods until either party elects not to renew. The base
salary for Mr. Sanger under the agreement is $300,000 per year. In addition,
he is entitled to receive bonuses and benefits, including health insurance,
dental insurance, short and long term disability, life insurance and a car
allowance. The agreement may be terminated by the Company without cause and
with cause (as defined in the agreement) effective immediately upon written
notice. Mr. Sanger may terminate the agreement upon written notice to the
Company, if the Company fails to pay any sums due or perform substantially
all of its duties and obligations under the agreement. In the event that Mr.
Sanger is terminated without cause, he is entitled to receive his base salary
for 12 months following the effective date of his termination of employment.
The agreement contains restrictive covenants prohibiting Mr. Sanger from
competing with the Company, or soliciting employees of the Company to leave
during his term of the agreement and for a period of twelve months thereafter
(if Mr. Sanger is terminated with cause or if he chooses not to renew the
agreement).
1995 Equity Incentive Plan
The Company maintains the 1995 Equity Incentive Plan (the "Equity Plan"),
which provides for the award ("Award") of up to two million shares of Common
Stock in the form of incentive stock options ("ISOs"), non- qualified stock
options ("Non-Qualified Stock Options"), bonus stock, restricted stock,
performance stock units and stock appreciation rights. All employees,
directors and consultants of the Company and any of its subsidiaries are
eligible to participate in the Equity Plan, except directors who are members
of the Equity Incentive Committee (the "Committee"). In addition, certain
directors are eligible for non-discretionary grants under the Equity Plan.
The Equity Plan is administered by the Committee, which determines who
shall receive Awards from those employees and directors who are eligible to
participate in the Equity Plan, the type of Award to be made, the number of
shares of Common Stock which may be acquired pursuant to the Award and the
specific terms and conditions of each Award, including the purchase price,
term, vesting schedule, restrictions on transfer and any other conditions and
limitations applicable to the Awards or their exercise. The purchase price
per share of Common Stock cannot be less than 100% of the fair market value
of the Common Stock on the date of grant with respect to ISOs and not less
than 50% of the fair market value of the Common Stock on the date of grant
with respect to Non-Qualified Options. ISOs cannot be exercisable more than
ten years following the date of grant and Non-Qualified Stock Options cannot
be exercisable more than ten years and one day following the date of grant.
The Committee may at any time accelerate the exercisability of all or any
portion of any option.
Each Award may be made alone, in addition to or in relation to any other
Award. The terms of each Award need not be identical, and the Committee need
not treat participants uniformly. Except as otherwise provided by the Equity
Plan or a particular Award, any determination with respect to an Award may be
made by the Committee at the time of award or at any time thereafter. The
Committee determines whether Awards are settled in whole or in part in cash,
Common Stock, other securities of the Company, Awards or other property. The
Committee may permit a participant to defer all or any portion of a payment
under the Equity Plan, including the crediting of interest on deferred
amounts denominated in Common Stock. Such a deferral may have no effect for
purposes of determining the timing of taxation of payments. In the event of
certain corporate events, including a merger, consolidation, dissolution,
liquidation or the sale of substantially all of the Company's assets, all
Awards become fully exercisable and realizable.
The Committee may amend, modify or terminate any outstanding Award,
including substituting therefor another Award of the same or a different
type, changing the date of exercise or realization, and converting an ISO to
a Non-Qualified Stock Option, if the participant consents to such action, or
if the Committee determines that the action would not materially and
adversely affect the participant. Awards may not be made under the Equity
Plan after November 14, 2005, but outstanding Awards may extend beyond such
date.
The number of shares of Common Stock issuable pursuant to the Equity Plan
may not be changed except by approval of the stockholders. However, in the
event that the Committee determines that any stock dividend, extraordinary
cash dividend, creation of a class of equity securities, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination,
exchange of shares, warrants or rights offering to purchase Common Stock at a
price substantially below fair market value, or other similar transaction
affects the Common Stock such that an adjustment is required to preserve the
benefits intended to be made available under the Equity Plan, the
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<PAGE>
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 July 31, 1996, the Company had outstanding borrowings from Mr. Gosman
of approximately $77,000, which borrowings were made for working capital
purposes and to fund certain of the Acquisitions. At December 31, 1995 the
Company also had a $19.5 million loan from NationsBank, which was guaranteed by
Mr. Gosman. Mr. Gosman did not receive any consideration for this or any other
guarantee he has provided on behalf of the Company. The $19.5 million loan was
repaid from the net proceeds of the initial public offering. After repayments to
Mr. Gosman made from the net proceeds of the initial public offering totalling
$28.7 million, the Company owed Mr. Gosman approximately $10.8 million, 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, 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
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<PAGE>
with respect to acquisition indebtedness through the assumption by the Company
of Mr. Gosman's obligation to pay such Acquisition indebtedness and of the
obligation to provide cash collateral for the letter of credit.
The Company occupies office space for its principal offices in West Palm
Beach, Florida under the terms of a lease which the Company assumed from a
company the stockholders and executive officers of which include Messrs.
Gosman, Leathers, Miller and Sanger and Dr. Goldman. The Company estimates
that the total amount of lease payments to be made under the assumed lease
through the end of the current lease term will equal approximately $1.8 million.
In connection with the Formation, the following executive officers and
directors of the Company received the indicated number of shares of Common
Stock in exchange for their shares of common stock of the Related Companies:
Mr. Gosman (including shares held for the benefit of his two adult sons),
8,282,305; Mr. Rendina, 916,667; Mr. Chay, 133,333; Mr. Sands, 916,667; Mr.
Leathers, 459,505; Mr. Miller, 459,505; Mr. Sanger, 336,224; and Dr. Goldman,
168,112.
Various persons who upon the closing of the initial public offering and
the Formation became employees and/or officers of the Company were employees
and/or officers of companies the stockholders and executive officers of which
included Mr. Gosman and Mr. Leathers. The services of such employees and/or
officers were provided to the Company at cost prior to the Formation under
the terms of a management agreement.
From time to time, the Company may charter an airplane and flight services
at competitive rates from two companies owned by Mr. Gosman.
DASCO provides development and other services in connection with the
establishment of health parks, medical malls and medical office buildings.
DASCO provides these services to or for the benefit of the owners of the new
facilities, which owners are either corporations or limited partnerships. Mr.
Sands and Mr. Rendina have acquired equity interest in the entities which own
23 of the 26 facilities developed by DASCO. The collective interests of
Messrs. Sands and Rendina range from 17% to 100%. In addition, as of December
31, 1995, Mr. Gosman individually and as trustee for his two adult sons and
Messrs. Leathers, Miller and Sanger and Dr. Goldman have acquired limited
partnership interests ranging from 14% to 36% in the entities which own seven
facilities being developed by the Company through DASCO. The Company (through
DASCO) also is providing construction management, development, marketing and
consulting services to an entity principally owned by Mr. Gosman in
connection with the development by such entity of a medical mall. During the
six months ended July 31, 1996, the Company recorded revenues in the
amount of $1,079,568 related to such services. DASCO has and continues to
provide all of its medical facility development services to affiliated
parties on terms no less favorable to the Company than those provided to
unaffiliated parties.
Meditrust, a publicly traded real estate investment trust with assets in
excess of $1.7 billion dollars of which Mr. Gosman is the Chairman of the
Board and Chief Executive Officer, has provided financing in the aggregate
amount of $150.0 million for the development of 15 facilities developed by
DASCO.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of July 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:
Amount of Beneficial Ownership
------------------------------
Shares
Beneficially Percentage
Name Owned Owned
--------------------------------------- ------------ --------------
Abraham D. Gosman (1) 8,192,164 37.4%
Putnam Investments, Inc.(2) 2,322,300 10.6
Frederick R. Leathers 459,505 2.1
William A. Sanger 336,224 1.5
Robert A. Miller 459,505 2.1
Edward E. Goldman, M.D 168,112 *
Joseph N. Cassese -- *
David M. Livingston, M.D -- *
Bruce A. Rendina 916,667 4.2
Stephen E. Ronai 4,000 *
Hugh L. Carey -- *
John T. Chay 142,833 *
All directors and executive officers
as a group (15 persons) 11,622,344 53.1
* 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.
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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.
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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
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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 July 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:
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Redemption
Year Price
----- ----------
1999 103.86%
2000 102.89%
2001 101.93%
2002 100.96%
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
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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
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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
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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.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 41,000,000 shares
of capital stock, which includes 40,000,000 shares of Common Stock and
1,000,000 shares of preferred stock ("Preferred Stock").
Common Stock
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders, and such
holders do not have cumulative voting rights. Subject to preferences that may
be applicable to any outstanding shares of Preferred Stock, holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors of the Company out of
funds legally available therefor. See "Dividend Policy." All outstanding
shares of Common Stock are, and the shares to be sold in the offering when
issued and paid for will be, fully paid and nonassessable and the holders
thereof will have no preferences or conversion, exchange or pre-emptive
rights. In the event of any liquidation, dissolution or winding-up of the
affairs of the Company, holders of Common Stock will be entitled to share
ratably in the assets of the Company remaining after payment or provision for
payment of all of the Company's debts and obligations and liquidation
payments to holders of outstanding shares of Preferred Stock, if any.
Preferred Stock
The Preferred Stock, if issued, would have priority over the Common Stock
with respect to dividends and to other distributions, including the
distribution of assets upon liquidation. The Preferred Stock may be issued in
one or more series without further stockholder authorization, and the Board
of Directors is authorized to fix and determine the terms, limitations and
relative rights and preferences of the Preferred Stock, to establish series
of Preferred Stock and to fix and determine the variations as among series.
The Preferred Stock, if issued, may be subject to repurchase or redemption by
the Company. The Board of Directors, without approval of the holders of the
Common Stock, can issue Preferred Stock with voting and conversion rights
(including multiple voting rights) which could adversely affect the rights of
holders of Common Stock. In addition to having a preference with respect to
dividends or liquidation proceeds, the Preferred Stock, if issued, may be
entitled to the allocation of capital gains from the sale of the Company's
assets. Although the Company has no present plans to issue any shares of
Preferred Stock following the closing of the offering, the issuance of shares
of Preferred Stock, or the issuance of rights to purchase such shares, may
have the effect of delaying, deferring or preventing a change in control of
the Company or an unsolicited acquisition proposal.
Classified Board of Directors
The Charter and By-laws of the Company provide for the Board of Directors
to be divided into three classes of directors, as nearly equal in number as
is reasonably possible, serving staggered terms so that directors' initial
terms will expire either at the 1996, 1997 or 1998 annual meeting of the
stockholders. Starting 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.
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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.
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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
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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.
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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
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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. and
Robertson, Stephens & Company which have acted as Initial Purchasers and
underwriters for the Company and Lehman Brothers Inc. and Morgan Stanley & Co.,
Incorporated 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, Smith Barney Inc. and or by or on behalf of the Selling
Securityholders.
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<TABLE>
<CAPTION>
Principal Number of
Amount of Conversion
Debentures Shares Percentage of
Beneficially Percentage of That May Common Stock
Owned That May Debentures Be Sold Outstanding
Name (1) Be Sold (1) Outstanding (2) (3)
- --------------------------------------- -------------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Bank of New York 1,920,000 1.9% 68,085 *
Bankers Trust Company 7,815,000 7.8 277,127 1.3%
Bear Stearns Securities Corp. 11,500,000 11.5 407,801 1.9
Boston Safe & Deposit Trust Co. 15,800,000 15.8 560,283 2.6
Brown Brothers Harriman & Co. 250,000 * 8,865 *
BT Securities Corp. 1,650,000 1.7 58,510 *
Chase Manhattan Bank, N.A. (The) 1,500,000 1.5 53,191 *
Chemical Bank 880,000 * 31,205 *
Chase Manhattan Bank Trust Co. of
California, N.A. 500,000 * 17,730 *
Citibank, N.A. 2,780,000 2.8 98,581 *
CS First Boston Corporation (The) 2,000,000 2.0 70,921 *
Custodial Trust Company 3,330,000 3.3 118,085 *
Deutsche Morgan Grenfell/C.J. Lawrence
Inc. 1,850,000 1.9 65,602 *
First Interstate Bank of California 3,000,000 3.0 106,382 *
First Trust Company 800,000 * 28,368 *
First National Bank of Maryland (The) 220,000 * 7,801 *
Lehman Brothers, Inc. 2,750,000 2.8 97,517 *
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 350,000 * 12,411 *
Oak Tree Capital Management 2,390,000 2.4 84,751 *
PaineWebber, Inc. 750,000 * 26,595 *
PNC National Association 100,000 * 3,546 *
Republic New York Securities Corp. 500,000 * 17,730 *
Robertson, Stephens & Company, L.P. 300,000 * 10,638 *
Salomon Brothers Inc. 1,250,000 1.3 44,326 *
Sanwa Bank California 2,230,000 2.2 79,078 *
Smith Barney, Inc. 9,300,000 9.3 329,787 1.5
SSB-Custodian 11,810,000 11.8 418,794 1.9
Trust Company of the West 1,270,000 1.3 45,035 *
Wagner, Stott & Co. 1,000,000 1.0 35,460 *
</TABLE>
(1) The information set forth herein is as of September 9, 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 21,864,202 shares of Common Stock outstanding as of July
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.
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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
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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.
The financial statements of DASCO Development Corporation and Affiliate as
of September 30, 1995 and for the period from January 1, 1995 to September
30, 1995, included in this Prospectus and appearing elsewhere in this
Registration Statement have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as indicated in their report with respect thereto,
and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
The financial statements of DASCO Development Corporation and Affiliate
for the years ended December 31, 1994, 1993 and 1992, included in this
Prospectus and appearing elsewhere in this Registration Statement, have been
audited by Bober, Markey & Company, independent accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Radiation Care, Inc. and Subsidiaries for the
year ended December 31, 1994, the nine months ended December 31, 1993 and the
year ended March 31, 1993, included in this Prospectus and appearing
elsewhere in this Registration Statement, have been audited by Coopers &
Lybrand L.L.P., independent accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Aegis Health Systems, Inc. for the years ended
December 31, 1994, 1993 and 1992, included in this Prospectus and appearing
elsewhere in this Registration Statement, have been audited by Coopers &
Lybrand L.L.P., independent accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Oncology & Radiation Associates, P.A. as of
December 31, 1993 and 1994 and September 12, 1995, and for the period from
inception (September 1, 1992) to December 31, 1992, the years ended December
31, 1993 and 1994 and the period from January 1, 1995 to September 12, 1995,
included in this Prospectus and appearing elsewhere in this Registration
Statement, have been audited by Arthur Andersen LLP, independent 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 in giving said report.
The financial statements of Osler Medical, Inc. as of September 14, 1995
and for the period from January 1, 1995 through September 14, 1995, included
in this Prospectus and appearing elsewhere in this Registration Statement,
have been audited by Arthur Andersen LLP, independent 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 in giving said report.
The financial statements of Osler Medical (a Partnership) for the years
ended December 31, 1994 and 1993, included in this Prospectus and appearing
elsewhere in this Registration Statement, have been audited by Hoyman,
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<PAGE>
Dobson & Company, P.A., independent accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Georgia Oncology-Hematology Clinic, P.C. and
Subsidiary for the year ended December 31, 1994 included in this Prospectus
and appearing elsewhere in this Registration Statement, have been audited by
Babush, Neiman, Kornman & Johnson, independent accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc. for the year ended December 31,
1994 and the financial statements of Oncology-Hematology Associates, P.A. for
the year ended December 31, 1993, included in this Prospectus and appearing
elsewhere in this Registration Statement, have been audited by Weil, Akman,
Baylin & Coleman, P.A., independent accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Cancer Specialists of Georgia, P.C. as of July
31, 1995 and for the period from November 1, 1994 to July 31, 1995, included
in this Prospectus and appearing elsewhere in this Registration Statement
have been audited by Coopers & Lybrand LLP, independent accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Mobile Lithotripter of Indiana Partners for
the years ended September 30, 1995, 1994 and the period February 12, 1993
(date of inception) to September 30, 1993, included in this Prospectus and
appearing elsewhere in this Registration Statement, have been audited by
Katz, Sapper & Miller, LLP, independent accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
The financial statements of UroMed Technologies, Inc. for the period
January 1 to September 28, 1994 and the years ended December 31, 1993 and
1992, included in this Prospectus and appearing elsewhere in this
Registration Statement, have been audited by Roy Cline, CPA, PA, independent
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Nutrichem, Inc. for the period January 1 to
November 17, 1994 and the ten months ended December 31, 1993, included in
this Prospectus and appearing elsewhere in this Registration Statement, have
been audited by Regan, Russell, Schickner & Shah, P.A., independent
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The financial statements of First Choice Home Care, Inc. and First Choice
Health Care Services of Ft. Lauderdale, Inc. for the period January 1 to
November 22, 1994 and the year ended December 31, 1993, included in this
Prospectus and appearing elsewhere in this Registration Statement, have been
audited by Patrick & Associates, P.A., independent accountants, as indicated
in their reports with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing.
The financial statements of Whittle, Varnell and Bedoya, P.A. as of
December 31, 1993 and 1994 and for the years ended December 31, 1993 and
1994, included in this Prospectus and appearing elsewhere in this
Registration Statement, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
The financial statements of Pinnacle Associates, Inc. as of December 31,
1994 and 1993 and the year ended December 31, 1994 and the period from
October 21, 1993 (inception) to December 31, 1993, included in this
Prospectus and appearing elsewhere in this Registration Statement, have been
audited by Coopers & Lybrand L.L.P., independent accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
The financial statements of Atlanta Gastroenterology Associates, P.C. as
of January 31, 1996 and 1995 and for the years ended January 31, 1996 and
1995, included in this Prospectus and appearing elsewhere in this
87
<PAGE>
Registration Statement, have been audited by Frazier & Deeter, LLC,
independent auditors, as indicated in their report with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Physician's Choice Management, LLC as of
December 31, 1995 and for the period August 11, 1995 (inception) to December
31, 1995, included in this Prospectus and appearing elsewhere in this
Registration Statement, have been audited by Friedberg, Smith & Co., P.C.,
independent auditors, 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.
88
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
PHYMATRIX CORP
Balance Sheets--July 31, 1996 (unaudited) January 31, 1996 (unaudited)
and December 31, 1995 ................................................ F-6
Statements of Operations (unaudited)--three and six months ended
July 31, 1996, one month ended January 31, 1996 and three and six
months ended June 30, 1995 ........................................... F-7
Statements of Cash Flows (unaudited)--six months ended July 31, 1996,
one month ended January 31, 1996 and six months ended June 30, 1995 .. F-8
Notes to Financial Statements (unaudited) .............................. F-9
PHYMATRIX CORP.
Report of Coopers & Lybrand L.L.P. Independent Accountants ............. F-14
Combined Balance Sheets as of December 31, 1995 and 1994 ............... F-15
Combined Statements of Operations for the year ended December 31, 1995
and the period June 24, 1994 (inception) to December 31, 1994 ........ F-16
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-17
Combined Statements of Cash Flows for the year ended December 31, 1995
and the period June 24, 1994 (inception) to December 31, 1994 ........ F-18
Notes to Combined Financial Statements ................................. F-19
Acquisitions
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Report of Coopers & Lybrand L.L.P., Independent Accountants ............ F-36
Combined Balance Sheet as of September 30, 1995 ........................ F-37
Combined Statement of Income and Retained Earnings for the nine month
period ended September 30, 1995 ...................................... F-38
Combined Statement of Cash Flows for the nine month period ended
September 30, 1995 ................................................... F-39
Notes to Combined Financial Statements ................................. F-40
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Report of Bober, Markey & Company, Independent Accountants ............. F-43
Combined Balance Sheets as of December 31, 1994, 1993 and 1992 ......... F-44
Combined Statements of Income and Retained Earnings for the years ended
December 31, 1994, 1993 and 1992 ..................................... F-45
Combined Statements of Cash Flows for the years ended December 31, 1994,
1993 and 1992 ........................................................ F-46
Notes to Combined Financial Statements ................................. F-47
RADIATION CARE, INC. AND SUBSIDIARIES
Report of Coopers & Lybrand L.L.P. Independent Accountants ............. F-50
Consolidated Balance Sheets as of December 31, 1994 and 1993 ........... F-51
Consolidated Statements of Operations for the year ended December 31,
1994, the nine months ended December 31, 1993 and the year ended March
31, 1993 ............................................................. F-52
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1994, the nine months ended December 31, 1993, and the
year ended March 31, 1993 ............................................ F-53
Consolidated Statements of Cash Flows for the year ended December 31,
1994, the nine months ended December 31, 1993 and the year ended
March 31, 1993 ....................................................... F-54
Notes to Consolidated Financial Statements ............................. F-55
AEGIS HEALTH SYSTEMS, INC.
Report of Coopers & Lybrand L.L.P. Independent Accountants ............. F-66
Balance Sheets as of March 31, 1995 (unaudited) and December 31, 1994
and 1993 ............................................................. F-67
F-1
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
Statements of Operations for the three months ended March 31, 1995 and
1994 (unaudited) and the years ended December 31, 1994, 1993 and 1992 F-68
Statements of Cash Flows for the three months ended March 31, 1995 and
1994 (unaudited) and the years ended December 31, 1994, 1993 and 1992 F-69
Notes to Financial Statements .......................................... F-70
ONCOLOGY & RADIATION ASSOCIATES, P.A.
Report of Arthur Andersen LLP, Independent Accountants ................. F-73
Balance Sheets as of December 31, 1993 and 1994 and September 12, 1995 . F-74
Statements of Operations for the period September 1, 1992 (inception) to
December 31, 1992 and for the years ended December 31, 1993 and 1994
and for the period January 1, 1995 to September 12, 1995 ............. F-75
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1993 and 1994, and for the period January 1, 1995 to
September 12, 1995 ................................................... F-76
Statements of Cash Flows for the period September 1, 1992 (inception) to
December 31, 1992 and for the years ended December 31, 1993 and 1994
and for the period January 1, 1995 to September 12, 1995 ............. F-77
Notes to Financial Statements .......................................... F-78
OSLER MEDICAL, INC.
Report of Arthur Andersen LLP, Independent Accountants ................. F-81
Balance Sheet as of September 14, 1995 ................................. F-82
Statement of Operations and Retained Earnings for the period from
January 1, 1995 to September 14, 1995 ................................ F-83
Statement of Cash Flows for the period from January 1, 1995 to
September 14, 1995 ................................................... F-84
Notes to Financial Statements .......................................... F-85
OSLER MEDICAL
Report of Hoyman, Dobson & Company, P.A., Independent Public Accountants F-89
Balance Sheets as of December 31, 1994 and 1993 ........................ F-90
Statements of Income and Partners' Capital for the years ended
December 31, 1994 and 1993 ........................................... F-91
Statements of Cash Flows for the years ended December 31, 1994 and 1993 F-92
Notes to Financial Statements .......................................... F-93
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
Balance Sheet as of April 14, 1995 (unaudited) ......................... F-100
Statement of Operations and Retained Earnings for the period January 1,
1995--April 14, 1995 (unaudited) ..................................... F-101
Statement of Cash Flows for the period January 1, 1995--April 14, 1995
(unaudited) .......................................................... F-102
GEORGIA ONCOLOGY--HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Report of Babush, Neiman, Kornman & Johnson, Independent Accountants ... F-103
Consolidated Balance Sheet as of December 31, 1994 ..................... F-104
Consolidated Statement of Operations and Retained Earnings for the year
ended December 31,1994 ............................................... F-105
Consolidated Statement of Cash Flows for the year ended December 31,
1994 ................................................................. F-106
Notes to Consolidated Financial Statements ............................. F-107
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND ONCOLOGY-HEMATOLOGY INFUSION
THERAPY, INC.
Combined Balance Sheet as of July 25, 1995 (unaudited) ................. F-111
Combined Statement of Operations and Retained Earnings for the period
January 1, 1995 through July 25, 1995 (unaudited) .................... F-112
F-2
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
Combined Statement of Cash Flows for the period January 1, 1995 through
July 25, 1995 (unaudited) ............................................ F-113
ONCOLOGY--HEMATOLOGY ASSOCIATES, P.A. AND ONCOLOGY--HEMATOLOGY INFUSION
THERAPY, INC.
Report of Weil, Akman, Baylin & Coleman, P.A., Independent Accountants . F-114
Combined Balance Sheets as of December 31, 1994 and 1995 ............... F-115
Combined Statements of Operations and Retained Earnings for the year
ended December 31, 1994 and 1993 (Oncology-Hematology Associates,
P.A.) for the period March 7, 1994 (Date of inception) through
December 31, 1994 (Oncology-Hematology Infusion Therapy, Inc.) ....... F-116
Combined Statements of Cash Flows for the year ended December 31, 1994
and 1993 (Oncology-Hematology Associates, P.A.) for the period March
7, 1994 (Date of inception) through December 31, 1994
(Oncology-Hematology Infusion Therapy, Inc.) ......................... F-117
Notes to the Financial Statements ...................................... F-118
CANCER SPECIALISTS OF GEORGIA, P.C.
Report of Coopers & Lybrand L.L.P., Independent Accountants ............ F-123
Balance Sheet as of July 31, 1995 ...................................... F-124
Statement of Operations and Retained Earnings (Accumulated Deficit) for
the nine month period ended July 31, 1995 ............................ F-125
Statement of Cash Flows for the nine month period ended July 31, 1995 .. F-126
Notes to Financial Statements .......................................... F-127
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
Report of Katz, Sapper & Miller, LLP, Independent Accountants .......... F-131
Balance Sheets as of September 30, 1995 and 1994 ....................... F-132
Statements of Income for the years ended September 30, 1995 and 1994 and
the period from February 12, 1993 (date of formation) to September 30,
1993 ................................................................. F-133
Statements of Partners' Capital for the years ended September 30, 1995
and 1994 and the period from February 12, 1993 (date of formation) to
September 30, 1993 ................................................... F-134
Statements of Cash Flows for the years ended September 30, 1995 and 1994
and the period from February 12, 1993 (date of formation) to
September 30, 1995 ................................................... F-135
Notes to Financial Statements .......................................... F-136
UROMED TECHNOLOGIES, INC.
Report of Roy Cline, CPA, PA, Independent Accountants .................. F-139
Balance Sheets as of September 28, 1994 and December 31, 1993 and 1992 . F-140
Statement of Income and Retained Earnings for the period ended
September 28, 1994 and the years ended December 31, 1993 and 1992 .... F-141
Statement of Cash Flows for the period ended September 28, 1994 and the
years ended December 31, 1993 and 1992 ............................... F-142
Notes to Financial Statements .......................................... F-143
NUTRICHEM, INC.
Report of Regan, Russell, Schickner & Shah, P.A., Independent
Accountants .......................................................... F-147
Balance Sheets as of November 17, 1994 and December 31, 1993 ........... F-148
Statements of Income for the period ended November 17, 1994 and the year
ended December 31, 1993 .............................................. F-149
Statements of Retained Earnings for the period ended November 17, 1994
and the year ended December 31, 1993 ................................. F-150
Statements of Cash Flows for the period ended November 17, 1994 and the
year ended December 31, 1993 ......................................... F-151
F-3
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
Notes to Financial Statements .......................................... F-153
FIRST CHOICE HOME CARE, INC.
Report of Patrick & Associates, PA, Independent Accountants ............ F-155
Balance Sheets as of December 31, 1993 and November 22, 1994 ........... F-156
Statements of Income and Retained Earnings for the year ending December
31, 1993 and interim period ending November 22, 1994 ................. F-157
Statements of Cash Flows for the year ending December 31, 1993 and
interim period ending November 22, 1994 .............................. F-158
Notes to Financial Statements .......................................... F-159
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
Report of Patrick & Associates, PA, Independent Accountants ............ F-161
Balance Sheets as of December 31, 1993 and November 22, 1994 ........... F-162
Statements of Income and Retained Earnings for the year ended December
31, 1993 and interim period ending November 22, 1994 ................. F-163
Statements of Cash Flows for the year ended December 31, 1993 and
interim period ending November 22, 1994 .............................. F-164
Notes to Financial Statements .......................................... F-165
WHITTLE, VARNELL AND BEDOYA, P.A.
Report of Arthur Andersen LLP, Independent Accountants ................. F-167
Balance Sheets as of December 31, 1993 and 1994 and September 30, 1995
(unaudited) .......................................................... F-168
Statements of Operations and Retained Earnings for the years ended
December 31, 1993 and 1994 and the nine month periods ended September
30, 1994 and 1995 (unaudited) ........................................ F-169
Statements of Cash Flows for the years ended December 31, 1993 and 1994
and the nine month periods ended September 30, 1994 and 1995
(unaudited) .......................................................... F-170
Notes to Financial Statements .......................................... F-171
PINNACLE ASSOCIATES, INC.
Report of Coopers & Lybrand L.L.P., Independent Accountants ............ F-176
Consolidated Balance Sheets as of September 30, 1995 (unaudited),
December 31, 1994 and December 31, 1993 .............................. F-177
Consolidated Statements of Operations for the period January 1, 1995 to
September 30, 1995 (unaudited), the year ended December 31, 1994 and
the period October 21, 1993 (inception) to December 31, 1993 ......... F-178
Consolidated Statements of Stockholders' Deficit for the period
January 1, 1995 to September 30, 1995 (unaudited), the year ended
December 31, 1994 and the period October 21, 1993 (inception) to
December 31, 1993 .................................................... F-179
Consolidated Statements of Cash Flows for the period January 1, 1995 to
September 30, 1995 (unaudited), the year ended December 31, 1994 and
the period October 21, 1993 (inception) to December 31, 1993 ......... F-180
Notes to Consolidated Financial Statements ............................. F-181
ATLANTA GASTROENTEROLOGY ASSOCIATES, P.C.
Independent Auditors' Report ........................................... F-184
Financial Statements:
Balance Sheets as of January 31, 1996 and 1995 ........................ F-185
Statements of Operations and Retained Earnings for the years ended
January 31, 1996 and 1995 ............................................ F-186
Statements of Cash Flows for the years ended
January 31, 1996 and 1995 ............................................ F-187
Notes to Financial Statements ......................................... F-188
F-4
<PAGE>
PHYMATRIX CORP.
INDEX TO FINANCIAL STATEMENTS--(Continued)
PHYSICIAN'S CHOICE MANAGEMENT, LLC
Independent Auditors' Report ........................................... F-191
Financial Statements:
Balance Sheet as of December 31, 1995 ................................. F-192
Statement of Operations and Members' Equity for the period from
August 11, 1995 to December 31, 1995 ................................. F-193
Statement of Cash Flows for the period from
August 11, 1995 to December 31, 1995 ................................. F-194
Notes to Financial Statements ......................................... F-195
</TABLE>
F-5
<PAGE>
PHYMATRIX CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
July 31, January 31, December 31,
1996 1996 1995
------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .......................................... $ 111,666,194 $ 46,113,619 $ 3,596,913
Receivables:
Accounts receivable, net .......................................... 29,433,626 21,562,477 20,710,846
Other receivables ................................................. 229,282 678,411 569,923
Notes receivable .................................................. -- -- 516,000
Prepaid expenses and other current assets .......................... 3,587,884 1,202,399 1,276,535
------------- ------------- -------------
Total current assets ............................................. 144,916,986 69,556,906 26,670,217
Property, plant and equipment, net ................................. 40,011,263 38,719,086 39,359,328
Notes receivable ................................................... 350,000 100,000 170,400
Goodwill, net ...................................................... 47,913,972 44,979,865 31,931,453
Management service agreements, net ................................. 19,107,669 15,816,042 16,376,636
Investment in affiliates ........................................... 3,237,531 3,256,783 12,925,129
Other assets (including restricted cash) ........................... 9,083,769 7,578,791 4,753,710
------------- ------------- -------------
Total assets ...................................................... $ 264,621,190 $ 180,007,473 $ 132,186,873
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of debt and capital leases ......................... $ 2,649,963 $ 2,552,306 $ 26,662,510
Current portion of related party debt .............................. 130,000 4,740,588 4,740,588
Due to shareholder--current ........................................ 76,528 5,376,000 --
Accounts payable ................................................... 5,630,748 5,333,791 5,353,210
Accrued compensation ............................................... 884,033 1,151,268 1,124,316
Accrued liabilities ................................................ 3,979,954 6,194,108 9,367,532
Accrued interest--shareholder ...................................... -- -- 1,708,174
------------- ------------- -------------
Total current liabilities ........................................ 13,351,226 25,348,061 48,956,330
Due to shareholder, less current portion ........................... -- 10,147,287 36,690,180
Long-term debt and capital leases, less current
portion ............................................................. 13,646,202 13,653,437 28,847,923
Convertible subordinated debentures ................................ 100,000,000 -- --
Other long term liabilities ........................................ 3,066,951 2,314,544 2,511,122
Minority interest .................................................. 1,743,402 1,335,167 2,502,970
------------- ------------- -------------
Total liabilities ................................................ 131,807,781 52,798,496 119,508,525
Commitments and contingencies
Shareholders' equity:
Common Stock, par value $.01; 40,000,000 shares
authorized; 21,864,202 shares issued and
outstanding at July 31, 1996 ..................................... 218,642 215,300 --
Additional paid in capital ......................................... 140,317,327 140,491,557 25,000,000
Retained earnings (deficit) ........................................ (7,722,560) (13,497,880) (12,321,652)
------------- ------------- -------------
Total shareholders' equity ....................................... 132,813,409 127,208,977 12,678,348
------------- ------------- -------------
Total liabilities and shareholders' equity .......................... $ 264,621,190 $ 180,007,473 $ 132,186,873
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Combined Consolidated Consolidated Combined
Three Three One Six Six
Months Months Month Months Months
Ended Ended Ended Ended Ended
July 31, June 30, January 31, July 31, June 30,
1996 1995 1996 1996 1995
----------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net revenue from services ... $ 21,055,244 $ 13,315,206 $ 4,636,127 $ 41,107,522 $ 19,984,306
Net revenue from management
service agreements ........ 19,368,739 -- 6,079,109 36,523,555 --
------------ ------------ ------------ ------------ ------------
Total revenue ............ 40,423,983 13,315,206 10,715,236 77,631,077 19,984,306
------------ ------------ ------------ ------------ ------------
Operating costs and
administrative expenses:
Cost of affiliated physician
management services ...... 8,879,136 -- 2,796,623 17,412,247 --
Salaries, wages and benefits 12,172,957 7,692,060 3,636,973 23,832,872 12,202,195
Professional fees .......... 1,102,847 661,241 287,095 2,004,445 1,108,577
Supplies ................... 6,097,539 2,170,157 1,916,013 11,580,443 2,771,636
Utilities .................. 593,915 307,446 175,653 1,178,520 443,100
Depreciation and
amortization .............. 1,672,977 1,055,410 535,300 3,265,688 1,393,467
Rent ....................... 1,734,748 1,071,320 565,106 3,440,823 1,397,716
Earn out payment ........... -- -- -- -- 1,111,111
Provision for bad debts .... 740,529 220,790 256,989 1,320,777 255,411
Other ...................... 2,593,179 1,225,450 799,460 4,901,858 2,269,207
------------ ------------ ------------ ------------ ------------
Total operating costs and
administrative expenses 35,587,827 14,403,874 10,969,212 68,937,673 22,952,420
------------ ------------ ------------ ------------ ------------
Interest expense, net ....... 399,421 475,336 551,607 440,412 762,816
Interest expense, shareholder 140,886 314,241 259,888 369,366 346,842
Minority interest ........... 24,193 186,787 81,135 58,234 292,064
Income from investment in
affiliates ................ (127,051) (219,204) 29,622 (268,998) (219,204)
------------ ------------ ------------ ------------ ------------
Income (loss) before
provision for income taxes 4,398,707 (1,845,828) (1,176,228) 8,094,390 (4,150,632)
Income tax expense .......... 1,627,856 -- -- 3,031,881 --
------------ ------------ ------------ ------------ ------------
Net income (loss) ........... $ 2,770,851 $ (1,845,828) $ (1,176,228) $ 5,062,509 $ (4,150,632)
============ ============ ============ ============ ============
Net income (loss) per
weighted average share .... $ 0.13 $ (0.08) $ 0.23
------------ ------------ ------------
Weighted average number of
shares outstanding ........ 21,845,841 14,204,305 21,689,631
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
PHYMATRIX CORP.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Consolidated Consolidated Combined
Six Months One Month Six Months
Ended Ended Ended
July 31, January 31, June 30,
1996 1996 1995
----------- --------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ................................ $ 5,062,509 $ (1,176,228) $ (4,150,632)
Noncash items included in net income (loss):
Depreciation and amortization ................... 3,265,688 535,300 1,393,467
Other ........................................... 19,252 430,334 --
Changes in receivables .......................... (6,493,010) (739,635) 465,332
Changes in accounts payable and accrued
liabilities ....................................... (1,012,392) (796,011) 1,489,758
Changes in other assets ......................... (1,879,705) (19,072) (479,393)
----------- --------------- -------------
Net cash used by operating activities .......... (1,037,658) (1,765,312) (1,281,468)
----------- --------------- -------------
Cash flows from investing activities
Capital expenditures ............................. (1,684,607) (184,460) (929,512)
Sale of assets ................................... -- 24,794 --
Notes receivable ................................. (250,000) 686,400 (1,029,600)
Other assets ..................................... (84,285) -- --
Acquisitions, net of cash acquired ............... (6,980,003) 54,252 (29,562,838)
----------- --------------- -------------
Net cash used by investing activities .......... (8,998,895) 580,986 (31,521,950)
----------- --------------- -------------
Cash flows from financing activities
Capital contributions ............................ -- -- 12,036,287
Advances from (repayment to) shareholder ......... (15,446,759) (23,123,170) 23,079,169
Proceeds from issuance of common stock ........... 205,000 114,563,221 --
Proceeds from issuance of convertible subordinated
debentures ...................................... 97,102,738 -- --
Release of cash collateral ....................... 1,537,282 1,000,000 --
Cash collateralizing notes payable ............... -- (5,403,337) --
Offering costs ................................... (2,211,765) -- --
Other assets ..................................... (131,250) -- --
Repayment of debt ................................ (5,466,118) (43,335,682) (1,937,035)
----------- --------------- -------------
Net cash provided by financing activities ...... 75,589,128 43,701,032 33,178,421
----------- --------------- -------------
Increase in cash and cash equivalents ............. 65,552,575 42,516,706 375,003
Cash and cash equivalents, beginning of period .... 46,113,619 3,596,913 677,245
----------- --------------- -------------
Cash and cash equivalents, end of period .......... $111,666,194 $ 46,113,619 $ 1,052,248
----------- --------------- -------------
Supplemental disclosure of cash flow information
Cash paid during period for:
Interest ........................................ $ 1,479,014 $ 2,876,636 $ 812,837
=========== =============== =============
Taxes ........................................... $ 2,716,928 $ -- $ --
=========== =============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS
Three Months and Six Months Ended July 31, 1996, One Month Ended January 31,
1996
and Three Months and Six Months Ended June 30, 1995
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited interim financial statements include the
accounts of PhyMatrix Corp. ("the Company") and the combination of business
entities which had been operated under common control. These interim
financial statements have been prepared in accordance with generally accepted
accounting principles and the requirements of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted. It
is management's opinion that the accompanying interim financial statements
reflect all adjustments (which are normal and recurring) necessary for a fair
presentation of the results for the interim periods. These interim financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Special Report on Form
10-K for the year ended December 31, 1995. Operating results for the three
months and six months ended July 31, 1996 are not necessarily indicative of
results that may be expected for the year. In January 1996, the Company
changed its fiscal year end from December 31 to January 31 and financial
statements as of and for the one month period ended January 31, 1996 are
included herein.
The Company filed a Registration Statement on Form S-1 with the Securities
and Exchange Commission in connection with an initial public offering ("IPO")
which became effective January 23, 1996. In connection with the IPO, the
Company issued 8,222,500 shares of Common Stock. Net proceeds to the Company
were $111,302,643, which was net of underwriting discounts, commissions and
other expenses. The Company used approximately $71,500,000 from the net
proceeds of the IPO to repay certain indebtedness and obligations that arose
from certain acquisitions. The remaining net proceeds have and will continue
to be used for general corporate purposes, including future acquisitions and
working capital.
During June 1996, the Company raised $100 million through the sale of its
63/4% Convertible Subordinated Debentures ( the "Debentures") to certain
institutional investors and non-U.S. investors. The Debentures will be
convertible into shares of the Company's Common Stock and are due in 2003.
Net proceeds to the Company from the Debentures, after deduction of the
initial purchasers' discounts, commissions and other expenses, were
$97,102,738. The Company used approximately $10,752,000 from the net proceeds
of the Debenture offering to repay advances from the principal shareholder.
During July 1996, the Company filed a Registration Statement on form S-1 with
the Securities and Exchange Commission to register the resale of the
Debentures by the holders thereof.
During July 1996, the Company also filed a Registration Statement on Form
S-4 with the Securities and Exchange Commission with respect to the
registration of an aggregate of up to 5,000,000 shares of Common Stock which
may be issued by the Company from time to time in connection with various
acquisitions that it may make.
2. ACQUISITIONS
During April 1996, the Company purchased a 50% interest in Central Georgia
Medical Management, LLC, a newly formed management services organization
("MSO") that provides management services to an independent physician
association ("IPA") composed of 45 physicians based in Georgia. The Company
acquired this interest in exchange for a payment of $550,000 to existing
shareholders and a capital contribution of $700,000 to the Company. The
Company's balance sheet at July 31, 1996 includes the 50% interest not owned
by the Company as minority interest. The owners of the other 50% interest in
the MSO have a put option to the Company to purchase their interests. This
put option vests over a four year period. The price to the Company to
purchase these interests equals 40% of the MSO's net operating income as of
the most recent fiscal year multiplied by the price earnings ratio of the
Company. The minimum price earnings ratio used in such calculation will be 4
and the maximum 10.
During April 1996, the Company purchased the assets of and entered into an
employment agreement with one physician in Florida. The total purchase price,
which was paid in cash, for these assets was $1,632,569. The purchase
F-9
<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 $1,582,849. The resulting intangible is being amortized over 20
years.
During May 1996, the Company purchased the stock of Atlanta
Gastroenterology Associates, P.C. pursuant to a tax free merger and entered
into a 40-year management agreement with the medical practice in exchange for
324,252 shares of Common Stock of the Company having a value of approximately
$6,100,000. The transaction has been accounted for using the
pooling-of-interests method of accounting. Pursuant to the management
agreement, the Company will receive a base management fee, an incentive
management fee and a percentage of all net ancillary service income.
During May 1996, the Company amended its existing management agreement
with Oncology Care Associates and extended the term of the agreement to 20
years. Simultaneously, the Company expanded the Oncology Care Associates
practice by adding three oncologists the practices of whom the Company
acquired for $500,000. $200,000 of such purchase price was paid in cash and
$300,000 was paid in the form of a convertible note due in May 1997. The
Company has the option to make such $300,000 payment at its discretion in
either cash or Common Stock of the Company with such number of shares to be
based upon the average price of the stock during the five business days
preceding the due date. The purchase price has been allocated to the assets
at their fair market value, including management service agreements of
approximately $500,000. The Company will receive an annual base management
fee and an incentive management fee. The resulting intangible is being
amortized over 20 years.
During May and June, 1996, the Company entered into agreements to purchase
the assets of and enter into 20-year management agreements with three
physician practices consisting of four physicians. All of these acquisitions
have since been consummated, except that one of the acquisitions closed in
escrow pending the satisfaction of certain conditions. These practices are
located in South Florida, Bethesda, Maryland and Washington, D.C. The total
purchase price for the assets of these practices was $1,654,064. Of this
amount $703,110 was paid in cash and $950,954 of such purchase price is
payable in Common Stock of the Company to be issued during May and June 1997.
The number of shares of Common Stock of the Company to be issued is based
upon the average price of the stock during the five business days prior to
the issuance. The value of the Common Stock to be issued has been recorded in
other long term liabilities at July 31, 1996. The purchase price has been
allocated to the assets at their fair market value, including management
service agreements of approximately $1,189,419. The Company will receive an
annual base management fee and an incentive management fee under each
agreement. The resulting intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20-year management agreement with four physicians in Florida. The purchase
price for these assets was approximately $830,339, which was paid in cash.
The purchase price has been allocated to these assets at their fair market
value, including management service agreements of approximately $210,567. The
Company will receive a management fee under the management agreements based
upon a percentage of the net revenues of the practice. The resulting
intangible is being amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into a
20 year management agreement with three urologists in Atlanta, Georgia. The
purchase price for these assets was $705,189. Of such purchase price $425,189
was paid in cash and $280,000 is payable during July 1997 in Common Stock of
the Company with such number of shares to be based upon the average price of
the stock during the five business days prior to the issuance. The value of
the Common Stock to be issued has been recorded in other long term
liabilities at July 31, 1996. The purchase price has been allocated to these
assets at their fair market value, including management service agreements of
approximately $350,000. The Company will receive an annual base management
fee and an incentive management fee. The resulting intangible is being
amortized over 20 years.
During July 1996, the Company purchased the assets of and entered into
employment agreements with two physicians in Florida. The total purchase
price for these assets was $1,495,207. Of this amount, $436,807 was paid
F-10
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. ACQUISITIONS (Continued)
in cash and $1,058,400 is payable during July 1997 in Common Stock of the
Company with such number of shares to be based upon the value of the stock
during the five business days prior to the issuance. The value of the Common
Stock to be issued has been recorded in other long term liabilities at July
31, 1996. The purchase price has been allocated to these assets at their fair
market value including goodwill of $1,193,562. The resulting intangible is
being amortized over 20 years.
During the six months ended July 31, 1996 and June 30, 1995, the Company
acquired the assets and assumed certain liabilities of physician practices,
medical support service companies and management service organizations. The
transactions had the following non-cash impact on the balance sheets:
July 31, June 30,
1996 1995
---------- -------------
Current assets ............. $ 1,742,127 $ 6,186,180
Property, plant and
equipment ................ 851,418 28,702,801
Intangibles ................ 7,228,386 24,968,354
Other noncurrent assets .... -- 2,180,662
Current liabilities ........ (1,476,665) (4,435,642)
Debt ....................... (302,452) (27,879,988)
Noncurrent liabilities ..... (350,000) (159,529)
Equity ..................... (712,811) --
3. LONG TERM DEBT
During January 1996, the Company used approximately $71,500,000 from the
proceeds of the IPO, to repay the following indebtedness and obligations of
the Company that arose from certain acquisitions: (i) a promissory note to
Aegis Health Systems, Inc. in the amount of $3,796,503 (including interest);
(ii) a contingent note to the former shareholders of Nutrichem, Inc., net of
a tax loan receivable due from the shareholders, in the amount of $3,854,595
(including interest); (iii) a note payable to a financing institution in
connection with the purchase of Oncology Therapies, Inc. in the amount of
$15,585,023 (including interest); (iv) a note payable to NationsBank of
Florida, N.A. in the amount of $19,586,531 (including interest); and (v) a
partial payment of $28,676,743 on the note payable to Abraham D. Gosman, the
Company's President, Chief Executive Officer, Chairman and principal
stockholder.
During the six months ended July 31, 1996, the Company repaid (i)
$4,610,588 of related party indebtedness to the former shareholders of DASCO
Development Corporation and (ii) $15,446,759 on the note payable to Mr.
Gosman.
During May 1996, the Company received a commitment from PNC Bank, National
Association, for a $30 million revolving credit facility and anticipates
closing on this financing during September 1996.
During June 1996, the Company issued $100,000,000 of the Debentures which
are due in 2003 and bear interest at the rate of 63/4% per annum. The
Debentures are convertible into Common Stock of the Company at any time after
August 20, 1996 at a conversion price of $28.20 per share. The Debentures are
not redeemable by the Company prior to June 18, 1999. Offering costs of
approximately $2,897,262 have been deferred and are being amortized over the
life of the Debentures.
F-11
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. RELATED PARTY TRANSACTIONS
During the six months ended July 31, 1996, the Company contracted with an
entity principally owned by the Company's Chairman of the Board, President
and Chief Executive Officer to provide construction management, development,
marketing and consulting services for a medical mall being constructed by
such entity. During the six months ended July 31, 1996 the Company recorded
revenues in the amount of $1,079,568 related to such services.
5. NET INCOME PER SHARE
Net income per common share is based upon the weighted average number of
common shares outstanding during the period. For the three and six months
ended July 31, 1996, the weighted average number of common shares outstanding
were 21,845,841 and 21,689,631, respectively. When dilutive, stock options
(less the number of treasury shares assumed to be purchased from the
proceeds) are included in the calculation of the weighted average number of
common shares outstanding. For the three and six months ended July 31, 1996,
conversion of the 63/4% Convertible Subordinated Debentures issued in June
1996, is not assumed because the effect is anti-dilutive.
6. SUBSEQUENT EVENTS
During August 1996, the Company purchased the assets of and entered into a
40 year management agreement with eight physicians in Florida. The purchase
price for these assets was $3,350,000. Of such purchase price, $1,430,000 was
paid in cash and $1,920,000 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
purchase price will be allocated to these assets at their fair market value,
including management service agreements of approximately $2,400,000. The
Company will receive an annual base management fee and an incentive
management fee. The resulting intangible will be amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40 year management agreement with four physicians in Georgia. The purchase
price for these assets was $1,445,278. Of such purchase price, $752,478 was
paid in cash and $692,800 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
purchase price will be allocated to these assets at their fair market value,
including management service agreements of approximately $1,057,631. The
Company will receive an annual base management fee and an incentive
management fee. The resulting intangible will be amortized over 40 years.
During August 1996, the Company purchased the assets of and entered into a
40 year management agreement with 10 physicians in Florida. The purchase
price for these assets was $2,935,139. Of such purchase price, $695,139 was
paid in cash and $2,240,000 is payable during August 1997 in Common Stock of
the Company with such number of shares to be purchased based upon the average
price of the stock during the five business days prior to the issuance. The
purchase price will be allocated to these assets at their fair market value,
including management service agreements of approximately $2,800,000. The
Company will receive an annual base management fee and an incentive
management fee. The resulting intangible will be amortized over 40 years.
During August 1996, the Company purchased the assets of three physicians
in Florida. The purchase price for these assets was $259,071. Of such
purchase price, $163,435 was paid in cash and $95,636 is payable during
August 1997 in Common Stock of the Company with such number of shares to be
purchased based upon the average price of the stock during the five business
days prior to the issuance. The purchase will be allocated to these assets at
their fair market value, including management service agreements of
approximately $95,636. The resulting intangible will be amortized over 20
years.
During August 1996, the Company agreed to acquire the remaining 56.25%
ownership interest in Physicians Choice Management, LLC, a management
services organization ("MSO") that provides management services to an
independent physician association ("IPA") composed of over 330 physicians in
Connecticut. The Company had
F-12
<PAGE>
PHYMATRIX CORP.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. SUBSEQUENT EVENTS (Continued)
acquired a 43.75% ownership interest in December 1995. The Company agreed to
acquire the remaining interests in exchange for a payment of $1,000,000 in
cash plus 363,442 shares of Common Stock of the Company. The Company has also
agreed to loan the selling shareholders $2.8 million in the event that they
incur a tax liability related to the sale.
During August 1996, the Company loaned $10 million to an unrelated
healthcare entity. The principal and interest are due in one installment on
August 15, 1997. Interest on the loan will accrue at the rate of prime plus
2%.
During August 1996, the Company sold the assets of and assigned the
obligations related to its radiation therapy center in Nashville, Tennessee
to a third party for a purchase price of $1,500,000. The Company's estimated
investment in such assets was approximately $1,225,000 and the Company will
record a gain of approximately $275,000 related to such sale during the third
quarter.
F-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders
DASCO Development Corporation and Affiliate
West Palm Beach, Florida
We have audited the accompanying combined balance sheet of DASCO
Development Corporation and Affiliate as of September 30, 1995, and the
related combined statements of income and retained earnings and cash flows
for the nine month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DASCO Development
Corporation and Affiliate as of September 30, 1995, and the results of their
operations and their cash flows for the nine month period then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
November 6, 1995
F-36
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED BALANCE SHEET
September 30, 1995
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 59,771
Accounts receivable from related parties ......................................... 180,292
Advances on development projects ................................................. 434,353
Other current assets ............................................................. 3,086
--------
Total current assets ......................................................... 677,502
Property and equipment, net ...................................................... 39,708
--------
Total assets ................................................................. $717,210
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................. $ 57,449
Accrued liabilities .............................................................. 175,429
Accrued distributions ............................................................ 319,056
Unearned revenues ................................................................ 119,806
--------
Total current liabilities .................................................... 671,740
--------
Commitments
Stockholders' equity:
Common stock:
Dasco: $.01 par value, 100,000 shares authorized; 2,000 issued and outstanding .. 20
Dasco West: no par value, 400,000 shares authorized; 200,000 issued and
outstanding .................................................................... 200
Additional paid in capital ....................................................... 280
Retained earnings ................................................................ 44,970
--------
Total stockholders' equity ................................................... 45,470
--------
Total liabilities and stockholders' equity ................................... $717,210
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
For the nine month period ended September 30, 1995
Revenues ................................................ $2,566,142
----------
Expenses:
Salaries, benefits and payroll taxes .................. 1,737,021
Occupancy ............................................. 118,992
Other general and administrative ...................... 320,332
----------
Total expenses ..................................... 2,176,345
----------
Income from operations ................................. 389,797
----------
Other income (expense):
Interest income ....................................... 9,658
Interest expense ...................................... (12,442)
----------
Other income (expense) ............................. (2,784)
----------
Net income ............................................. 387,013
Distributions .......................................... (319,056)
Retained earnings, beginning of period ................. (22,987)
----------
Retained earnings, end of period ....................... $ 44,970
==========
Net income per common share ............................ $ 1.92
==========
Weighted average shares outstanding .................... 202,000
==========
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENT OF CASH FLOWS
for the nine month period ended September 30, 1995
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income .................................................................... $ 387,013
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation ................................................................. 9,715
Changes in operating assets and liabilities:
Accounts receivable from related parties .................................... (79,118)
Advances on development projects ............................................ (434,353)
Other current assets ........................................................ (3,086)
Accounts payable ............................................................ 48,198
Accrued liabilities ......................................................... 128,347
Due from shareholder ........................................................ 12,700
Unearned revenues ........................................................... 19,806
---------
Net cash provided by operating activities ................................. 89,222
---------
Cash flows from investing activities:
Purchases of property and equipment ........................................... (22,839)
---------
Net cash used in investing activities ..................................... (22,839)
---------
Cash flows from financing activities:
Advances under line of credit ................................................. 297,000
Repayments under line of credit ............................................... (297,000)
Proceeds from loans from stockholders ......................................... 215,638
Repayments on loans from stockholders ......................................... (380,221)
Distributions to stockholders ................................................. (124,789)
---------
Net cash used in financing activities ..................................... (289,372)
---------
Net decrease in cash and cash equivalents ..................................... (222,989)
Cash and cash equivalents, beginning of period ................................ 282,760
---------
Cash and cash equivalents, end of period ...................................... $ 59,771
=========
Supplemental disclosures:
Interest paid ................................................................ $ 12,442
=========
Noncash financing activities:
During the nine month period ended September 30, 1995, distributions of $319,056 were
declared and accrued.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Notes to Combined Financial Statements
1. Summary of Significant Accounting Policies:
Nature of Operations
DASCO Development Corporation and Affiliate (the "Company") is engaged in
the development, construction, management, marketing and leasing of
outpatient healthcare and medical office facilities throughout the United
States. The Company's headquarters are located in West Palm Beach, Florida
and it has regional offices in La Jolla, California, Plymouth Meeting,
Pennsylvania, and Las Vegas, Nevada.
Principles of Combined Financial Statements
The accompanying combined financial statements include the accounts of
DASCO Development Corporation and DASCO Development West, Inc. as they are
under common control.
Significant intercompany transactions and balances have been eliminated in
the combined financial statements.
Revenue Recognition
Generally, revenues are recognized at the time services are performed
except for development fees which are recognized in accordance with the
related development agreement which generally calls for achievement of
milestones such as receipt of building permit and percentage completion of
building shell.
Income Taxes
The Company has elected to be taxed under the provisions of the Internal
Revenue Code Section 1361. Under those provisions, the Company does not pay
federal or state corporate income taxes on its taxable income. Instead, the
stockholders are liable for individual income taxes on their proportionate
share of the Company's taxable income. Accordingly, no provision for federal
income taxes is reflected in the accompanying combined financial statements.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three months or
less when purchased to be cash equivalents.
Advances on Development Projects
Advances on development projects relate to direct costs incurred in
connection with development transactions in progress. Such costs are
reimbursed from the owner of the project at the time of closing of the
project loan. If the project is not ultimately consummated, the capitalized
costs are charged to income at the time it is determined that the project is
not feasible.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for
using accelerated methods over estimated useful lives of the assets, which
are generally five years. When assets are retired or otherwise disposed, the
cost and related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is reflected in income for the period. The cost of
maintenance and repairs is charged to operations as incurred, significant
renewals and betterments are capitalized.
Unearned Revenue
Unearned revenue, which relates to marketing fees received in advance of
execution of the related lease agreement, is recognized at the time the
related lease agreement is executed with the applicable tenant.
F-40
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
Notes to Combined Financial Statements (Continued)
2. Property and Equipment:
Property and equipment at September 30, 1995, is comprised of:
Office equipment ........................... $ 62,463
Less: accumulated depreciation ............. (22,755)
--------
Property and equipment, net ................ $ 39,708
========
Depreciation expense for the nine month period ended September 30, 1995,
was $9,715.
3. Line of Credit:
The Company has entered into a $1,500,000 line of credit with a financial
institution which is used to fund working capital needs. The line matures on
August 31, 1996, and bears interest at the 30 day commercial paper rate plus
2.9% (8.7% at September 30, 1995). The line of credit is collateralized by
assets of the Company and is guaranteed by the Company's stockholders. No
amounts were outstanding under the line of credit at September 30, 1995.
4. Commitments:
Leases
The Company leases commercial property and equipment under noncancelable
operating lease arrangements expiring between 1996 and 2005.
Future minimum rental payments under the operating leases at September 30,
1995, are as follows:
1996 ..................... $ 135,000
1997 ..................... 122,000
1998 ..................... 127,000
1999 ..................... 133,000
2000 ..................... 138,000
Thereafter ............... 680,000
----------
Total .................... $1,335,000
==========
Rental expense amounted to approximately $112,000 during the nine months
ended September 30, 1995.
Employment Agreements
The Company has entered into various employment agreements with key
employees. These agreements generally are for a one year period and are
automatically renewed. Amounts to be paid under these agreements during the
next twelve months are approximately $443,000.
5. Related Party Transactions:
The properties developed by the Company are owned by partnerships that are
owned in part by the Company's stockholders individually. The Company's
stockholders individually also own the stock of the corporations which serve
as the managing general partners of these partnerships.
Revenues during the nine month period ended September 30, 1995, were
generated principally from related parties.
The Company is a party to a noncancelable lease for its premises which is
owned in part by the Company's stockholders. Under the terms of this lease,
the Company is obligated to pay $113,522 during the year ended
F-41
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
5. Related Party Transactions: (Continued)
September 30, 1996. The lease includes scheduled base rent increases over the
term of the lease. The total amount of the base rent payments is being
charged to expense on the straight-line method over the term of the lease. In
addition to the base rent payment, the Company pays a monthly allocation of
the buildings' operating expenses. Included in accrued liabilities at
September 30, 1995, is approximately $18,900 related to the excess of rent
expense over cash payments since inception of the lease. Future minimum lease
payments due under this lease are reflected in Note 4.
Rent expense under this lease during the nine month period ended
September 30, 1995, was approximately $92,000.
6. Disclosures About Fair Value of Financial Instruments:
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of
Financial Instruments", which requires disclosure of fair value information
about financial instruments. The carrying amounts reported in the balance
sheet for cash and cash equivalents and short term borrowing approximate fair
value due to the short term nature of these instruments.
7. Change in Shareholder:
On May 31, 1995, 50% of the outstanding common stock of the Company was
purchased by a private investor. This individual is also the Chairman of the
Board of Directors of the lending institution which has provided financing
for certain of the projects developed by the Company. There was no change in
the outstanding stock or capitalization of the Company as a result of this
transaction.
The private investor and the other two owners of the Company have agreed
to contribute the stock of the Company to Continuum Care Corporation
(Continuum), in support of their initial public offering, in exchange for
common stock of Continuum.
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Dasco Development Corporation and Affiliate
West Palm Beach, Florida
We have audited the accompanying combined balance sheets of Dasco
Development Corporation and Affiliate as of December 31, 1994, 1993 and 1992,
and the related combined statements of income and retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Dasco Development
Corporation and Affiliate as of December 31, 1994, 1993 and 1992, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
BOBER, MARKEY & COMPANY
July 31, 1995
F-43
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED BALANCE SHEETS
December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
--------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ............... $ 282,760 $ 69,929 $ 26,603
Related party accounts receivable ....... 101,174 54,076 76,466
Advances on development projects ........ -- 642,433 284,929
Due from shareholders ................... 12,700 500 9,800
Related party notes receivable .......... -- 911,460 910,911
--------- ----------- -----------
Total current assets ................ 396,634 1,678,398 1,308,709
Net property, plant and equipment ........ 26,584 6,360 8,999
--------- ----------- -----------
Total assets ............................. $ 423,218 $ 1,684,758 $ 1,317,708
========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit .......................... $ -- $ 299,000 $ --
Accounts payable ........................ 9,251 102,350 7,716
Accrued and withheld payroll and taxes .. 39,182 19,669 11,350
Accrued state income taxes .............. 7,900 -- --
Accrued distributions ................... 124,789 -- --
Deposits ................................ -- -- 6,435
Related party demand notes payable ...... 164,583 1,704,341 1,544,050
--------- ----------- -----------
Total current liabilities ........... 345,705 2,125,360 1,569,551
Unearned revenues ........................ 100,000 2,629 --
Stockholders' equity
Common stock ............................ 500 500 300
Retained earnings ....................... (22,987) (443,731) (252,143)
--------- ----------- -----------
Total stockholders' equity .......... (22,487) (443,231) (251,843)
--------- ----------- -----------
Total Liabilities and stockholders' equity $ 423,218 $ 1,684,758 $ 1,317,708
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
---------- --------- ----------
<S> <C> <C> <C>
Revenues $ 4,371,000 $ 931,535 $ 918,589
Expenses Salaries, benefits and payroll taxes 1,611,861 904,381 535,108
Occupancy .................................. 101,125 77,158 69,740
Other general and administrative ........... 374,394 73,706 155,619
---------- --------- ----------
Total expenses .......................... 2,087,380 1,055,245 760,467
---------- --------- ----------
Income (loss) from operations ............... 2,283,620 (123,710) 158,122
Other (expenses) income
Interest income ............................ 95,880 64,076 52,011
Interest expense ........................... (120,736) (131,954) (101,758)
---------- --------- ----------
Total other (expenses) income ........... (24,856) (67,878) (49,747)
---------- --------- ----------
Net income (loss) ........................... 2,258,764 (191,588) 108,375
Distributions ............................... (1,838,020) -- --
Beginning retained earnings ................. (443,731) (252,143) (360,518)
---------- --------- ----------
Ending retained earnings .................... $ (22,987) $ (443,731) $(252,143)
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ...................................... $ 2,258,764 $(191,588) $ 108,375
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation .......................................... 5,914 2,639 3,235
(Increase) decrease in due from shareholders .......... (12,200) 9,300 (8,540)
(Increase) decrease in accounts receivable ............ (47,098) 22,390 (76,466)
(Increase) decrease in advances on development projects 642,433 (357,504) (217,420)
Increase (decrease) in accounts payable ............... (93,099) 94,634 754
Increase in accrued and withheld payroll and taxes .... 19,513 8,319 3,015
Increase in accrued state income taxes ................ 7,900 -- --
Increase in accrued distributions ..................... 124,789 -- --
Increase (decrease) in deposits ....................... -- (6,435) 6,435
Increase in unearned revenues ......................... 97,371 2,629 --
----------- --------- ---------
Net cash provided (used) by operating activities ... 3,004,287 (415,616) (180,612)
Cash flows from investing activities
Proceeds from repayment of related party notes
receivable ........................................... 911,460 -- --
Investment in related party notes receivable .......... -- (549) (422,286)
Equipment additions ................................... (26,138) -- (2,337)
----------- --------- ---------
Net cash provided (used) by investing activities .. 885,322 (549) (424,623)
Cash flows from financing activities
Net repayments on line of credit ...................... (299,000) 299,000 (218,640)
Net borrowings on loans payable ....................... (1,539,758) 160,291 760,542
Issuance of capital stock ............................. -- 200 --
Distributions paid .................................... (1,838,020) -- --
----------- --------- ---------
Net cash provided (used) by financing activities .. (3,676,778) 459,491 541,902
----------- --------- ---------
Net increase (decrease) in cash and cash equivalents ... 212,831 43,326 (63,333)
Cash and cash equivalents--beginning of year ........... 69,929 26,603 89,936
----------- --------- ---------
Cash and cash equivalents--end of year ................. $ 282,760 $ 69,929 $ 26,603
=========== ========= =========
Supplemental disclosures
Interest paid ......................................... $ 120,741 $ 131,954 $ 105,431
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Years Ended December 31, 1994, 1993 and 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
DASCO Development Corporation and Affiliate (the "Company") is engaged in
the development, construction, management, marketing and leasing of
outpatient healthcare and medical office facilities throughout the United
States. The Company's headquarters are located in West Palm Beach, Florida
and has regional offices in La Jolla, California, opened in February 24,
1993, Plymouth Meeting, Pennsylvania, opened June 1, 1995 and Las Vegas,
Nevada, opened July 1, 1995.
Principles of Combination
The accompanying combined financial statements include the accounts of
DASCO Development Corporation and DASCO Development West, Inc., as they are
under common control. DASCO Development West, Inc. commenced operations on
March 1, 1993.
Significant intercompany transactions and balances have been eliminated in
the combined financial statements.
Revenue Recognition
Generally, revenues are recognized at the time services are performed
except for development fees which are recognized in accordance with the
related development agreement which generally calls for achievement of
milestones such as receipt of building permit and percentage completion of
building shell.
Income Taxes
The Company has elected S Corporation status under the Internal Revenue
Code. All income and expense items of the Company are to be recognized in the
tax returns of the stockholders. Accordingly, no provision for federal income
taxes is reflected in the accompanying combined financial statements.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. At December 31, 1994, the entire
balance was comprised of cash equivalents including treasury notes,
government obligations, and high grade corporate securities.
Advances on Development Projects
Advances on development projects relate to direct costs incurred in
connection with development transactions in progress. Such costs are
reimbursed from the owner of the project at the time of closing of the
project loan. If the project is not ultimately consummated, the capitalized
costs are charged to income at the time it is determined that the project is
not feasible.
Property and Equipment
Office equipment and leasehold improvements are being depreciated using
accelerated methods over estimated useful lives, which are generally five
years. When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is reflected in income for the period. The cost of maintenance
and repairs is charged to operations as incurred; significant renewals and
betterments are capitalized.
Unearned Revenue
Unearned revenue, which relates to marketing fees received in advance of
execution of the related lease agreement, is recognized at the time the
related lease agreement is executed with the applicable tenant.
F-47
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
Fair Value of Financial Instruments
In December 1991, the FASB issued SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, which requires certain disclosures about fair
value of certain financial instruments such as notes payable and notes
receivable. The statement applies to the Company's financial statements for
the year ending December 31, 1995. The impact of the statement on the
Company's financial statement disclosures is not determinable.
2. RELATED PARTY NOTES RECEIVABLE
Notes receivable as of December 31, 1994, 1993 and 1992, consist of demand
notes receivable from related parties with interest rates ranging from seven
to eleven percent.
3. PROPERTY AND EQUIPMENT
The major classes are:
December 31,
-------------------------------
1994 1993 1992
-------- ------- -------
Office equipment ........... $ 33,624 $13,486 $13,486
Construction in progress ... 6,000 -- --
-------- ------- -------
39,624 13,486 13,486
Accumulated depreciation ... (13,040) (7,126) (4,487)
-------- ------- -------
$ 26,584 $ 6,360 $ 8,999
======== ======= =======
4. RELATED PARTY NOTES PAYABLE
Notes payable at December 31, 1994, 1993 and 1992 consist of demand
unsecured notes payable to related parties with interest rates ranging from
seven to ten percent.
5. LINE OF CREDIT
The Company has an unsecured $300,000 line of credit available in which
there was no balance as of December 31, 1994, $299,000 balance as of December
31,1993, and no balance as of December 31, 1992. The interest rate on the
line was prime plus one percent. This line of credit expired in 1994.
6. LEASE COMMITMENTS
The Company leases commercial property and equipment under operating
leases.
Minimum future rental payments under noncancelable operating leases having
remaining terms in excess of one year as of December 31, 1994 for each of the
next five years and in the aggregate are:
1995 ..................................... $ 110,960
1996 ..................................... 117,052
1997 ..................................... 119,405
1998 ..................................... 124,687
1999 ..................................... 129,148
Subsequent to 1999 ....................... 725,710
----------
Total minimum future lease payments .. $1,326,962
==========
F-48
<PAGE>
DASCO DEVELOPMENT CORPORATION AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
7. RELATED PARTY TRANSACTIONS
The properties developed by the Company are owned by partnerships that are
owned in part by the Company's stockholders individually. The Company's
stockholders individually also own the stock of the corporations which serve
as the managing general partners of these partnerships.
Revenues in 1994, 1993 and 1992 were generated principally from related
parties.
Paramount Real Estate Services, Inc., a property management firm
controlled by the Company's shareholders, provides management services on a
fee basis for properties developed by the Company. In addition, included in
revenues for 1994, 1993 and 1992 is $44,931, $52,691 and $1,275,
respectively, from Paramount Real Estate Services, Inc.
The Company leases office space from entities which are owned in part by
the Company's stockholders. The Company paid rents in the amount of $93,106
for 1994, $71,010 for 1993, and $64,373 for 1992 under these lease
arrangements which expire in 2004. The Company is obligated to pay $107,010
for 1995 with annual increases equal to 5% of the base rent amount for each
year until lease expiration.
8. STOCKHOLDERS' EQUITY
Combined common stock including paid-in capital of $280 of DASCO
Development Corporation consists of the following:
DASCO Development Corporation
$.01 stated value, authorized 20,000 shares; 2,000 issued and
outstanding at December 31, 1994, 1993, and 1992 ...................... $300
DASCO Development West, Inc.
No par value, authorized 400,000 shares; 200,000 issued and outstanding
at December 31, 1994 and 1993 ......................................... $200
The Board of Directors declared a distribution of $124,789 during December
1994 for payment in early 1995. This amount is reflected as accrued
distributions at December 31, 1994.
9. SUBSEQUENT EVENT
On May 31, 1995, 50% of the outstanding common stock of the Company was
purchased by a private investor. This individual is also the Chairman of the
Board of Directors of the lending institution which has provided financing
for certain of the projects developed by the Company. There was no change in
the outstanding stock or capitalization of the Company as a result of this
transaction.
The Company opened new regional offices in Plymouth Meeting, Pennsylvania
on June 1, 1995 and Las Vegas, Nevada on July 1, 1995.
F-49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders of Radiation Care, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Radiation
Care, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows
for the year ended December 31, 1994, the nine month period ended December
31, 1993 and the year ended March 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Radiation
Care, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and cash flows for the year ended
December 31, 1994, the nine month period ended December 31, 1993 and the year
ended March 31, 1993 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
October 5, 1995
F-50
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1994 and 1993
<TABLE>
<CAPTION>
December 31, December 31,
1994 1993
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents ........................................ $ 9,947,849 $ 2,801,139
Investments in marketable securities (Note 3) .................... 207,107 14,902,078
Patient accounts receivable, less allowance for doubtful accounts
of $418,152 and $466,838 at December 31, 1994 and 1993,
respectively .................................................... 3,215,894 3,926,859
Current portion of receivable from affiliate (Note 4) ............ 596,023 508,103
Note receivable .................................................. 375,000
Accrued interest receivable ...................................... 50,940 104,232
Other current assets ............................................. 299,848 420,788
------------ -----------
Total current assets ......................................... 14,317,661 23,038,199
Investment in affiliate (Note 4) .................................. 1,000,000 5,044,747
Receivable from affiliate, exclusive of current portion (Note 4) .. 762,615 1,358,636
Investments in managed centers (Note 5) ........................... 1,010,360
Property and equipment, net (Notes 6 and 7) ....................... 30,068,244 39,304,478
Goodwill and other intangible assets, net of accumulated
amortization of $991,523 and $1,019,115 at December 31, 1994 and
1993, respectively (Notes 6 and 14) ............................ 7,998,609 12,606,022
Deposits and other assets ......................................... 1,122,450 1,426,021
------------ -----------
Total assets ................................................. $ 55,269,579 $ 83,78,463
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt (Note 8) ....................... $ 737,832 $ 2,653,033
Current portion of capital lease obligations (Note 13) ........... 952,989 924,802
Accounts payable ................................................. 2,446,261 2,597,918
Accrued expenses ................................................. 1,423,828 790,486
Income taxes payable ............................................. 58,000 41,371
------------ -----------
Total current liabilities .................................... 5,618,910 7,007,610
Long-term debt, exclusive of current portion (Note 8) ............. 833,659 9,450,997
Capital lease obligations, exclusive of current portion (Note 13) . 1,252,498 2,215,756
------------ -----------
Total liabilities ............................................ 7,705,067 18,674,363
------------ -----------
Commitments and contingencies (Notes 12 and 13)
Stockholders' equity (Notes 8, 9, and 11):
Preferred stock, $.01 par value, shares authorized 6,000,000 and
1,000,000 shares at December 31, 1994 and 1993 respectively:
none outstanding
Common stock, $.01 par value, 00,000 shares authorized;
18,052,167 shares issued and outstanding ....................... 180,522 180,522
Additional paid-in capital ....................................... 73,215,363 73,441,200
Accumulated deficit .............................................. (22,087,035) (4,312,107)
Unrealized losses on investments in marketable securities ........ (20,294)
------------ -----------
51,288,556 69,309,615
Less treasury stock at cost, 1,644,305 and 1,852,478 shares at
December 31, 1994 and 1993, respectively ........................ (3,724,044) (4,195,515)
------------ -----------
Stockholders' equity--net .................................... 47,564,512 65,114,100
------------ -----------
$ 55,269,579 $83,788,463
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December Year Ended
December 31, 31, March 31,
1994 1993 1993
------------ ------------ ------------
<S> <C> <C> <C>
Patient revenues, net ............................... $ 25,785,560 $ 22,330,113 $ 27,797,837
Cost of revenues .................................... 18,856,207 14,909,266 17,208,305
------------ ------------ ------------
Gross profit ........................................ 6,929,353 7,420,847 10,589,532
Operating expenses
Selling, general and administrative
Related party--rent (Note 12) ...................... 266,050 232,391 308,141
Other .............................................. 10,733,999 8,250,443 10,120,322
Provision for doubtful accounts ..................... 936,019 876,923 1,362,835
Amortization of intangibles ......................... 530,490 439,772 497,672
Provision for closing a center (Note 6) ............. 400,000 731,502
Provision for write-down of assets (Note 6) ......... 5,587,563
Provision for settlement of legal matters (Note 13) . 2,000,000
------------ ------------ ------------
Total operating expenses ........................ 20,454,121 10,531,031 12,288,970
------------ ------------ ------------
Loss from operations ................................ (13,524,768) (3,110,184) (1,699,438)
------------ ------------ ------------
Other income (expense)
Interest income ..................................... 975,450 1,017,539 2,038,022
Interest income--related party (Note 4) ............. 256,926 239,858 299,175
Interest expense .................................... (1,021,569) (1,251,306) (1,728,553)
Loss on sale of investments in marketable securities (554,889)
Equity in income (loss) of affiliate (Note 4) ....... (72,580) (102,863) 72,246
Provision for loss on sale of investment in affiliate
(Note 4) .......................................... (3,989,764)
Gains (losses) on investments in managed centers, net
(Note 5) .......................................... 394,739 (261,475)
Rental income--related party (Note 4) ............... 188,644 141,482 151,957
Other ............................................... 28,257 59,713 34,190
------------ ------------ ------------
Other income (expense)--net ........................ (3,794,786) (157,052) 867,037
------------ ------------ ------------
Loss before income taxes and extraordinary item ..... (17,319,554) (3,267,236) (832,401)
Provision for income taxes--current ................. 22,264 50,004 120,750
------------ ------------ ------------
Loss before extraordinary item ...................... $(17,341,818) $ (3,317,240) $ (953,151)
Extraordinary item--loss on early extinguishment of
debt (Note 8) ...................................... (433,110)
------------ ------------ ------------
Net loss ............................................ $(17,774,928) $ (3,317,240) $ (953,151)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1994, the nine months ended December 31, 1993
and the year ended March 31, 1993
<TABLE>
<CAPTION>
Unrealized
Losses
on
Investments
Common Stock Additional in Total
--------------------- Paid-in Accumulated Marketable Treasury Stockholders'
Shares Amount Capital Deficit Securities Stock Equity
---------- -------- ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 31,
1992 ............ 15,649,957 $156,500 $60,880,484 $ (41,716) $60,995,268
Issuance of common
stock for
acquisitions
(Note 14) ....... 2,143,210 21,432 12,670,082 12,691,514
Issuance of
warrants
(Note 9) ........ 133,233 133,233
Exercise of
warrants (Note 9) 180,000 1,800 1,800
Exercise of stock
options ......... 79,000 790 79,737 $ 3,473 84,000
Purchase of common
stock
(Note 9) ........ (1,475,973) (1,475,973)
Issuance of
treasury stock to
401(k) Savings
Plan (Note 11) .. (917) 32,541 31,624
Net loss ......... (953,151) (953,151)
---------- -------- ----------- ------------ -------- ----------- -----------
Balance March 31,
1993 ............ 18,052,167 180,522 73,762,619 (994,867) (1,439,959) 71,508,315
Exercise of stock
options ......... (323,029) 466,379 143,350
Purchase of common
stock
(Note 9) ........ (3,469,566) (3,469,566)
Issuance of
treasury stock to
401(k) Savings
Plan (Note 11) .. 1,610 247,631 249,241
Net loss ......... (3,317,240) (3,317,240)
---------- -------- ----------- ------------ -------- ----------- -----------
Balance December
31, 1993 ........ 18,052,167 180,522 73,441,200 (4,312,107) (4,195,515) 65,114,100
Exercise of stock
options ......... (53,754) 96,254 42,500
Issuance of
treasury stock to
401(k) Savings
Plan (Note 11) .. (172,083) 375,217 203,134
Unrealized losses
on investments in
marketable
securities ...... $(20,294) (20,294)
Net loss ......... (17,774,928) (17,774,928)
---------- -------- ----------- ------------ -------- ----------- -----------
Balance December
31, 1994 ........ 18,052,167 $180,522 $73,215,363 $(22,087,035) $(20,294) $(3,724,044) $47,564,512
========== ======== =========== ============ ======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
1994 1993 1993
------------ ------------ --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................. $(17,774,928) $ (3,317,240) $ (953,151)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization .......................... 6,188,767 4,730,757 5,378,251
Provision for doubtful accounts ........................ 936,019 876,923 1,362,835
Provision for closing a center--noncash items .......... 400,000 666,975
Loss on sale of property and equipment ................. 272,483
Equity in (earnings) loss of affiliate ................. 72,580 102,863 (72,246)
Provision for loss on sale of investment in affiliate .. 3,989,764
Provision for write-down of assets ..................... 5,587,563
Losses on sale of investments in marketable securities . 554,889
(Gain) loss on investments in managed centers .......... (394,739) 261,475
Issuance of stock to 401(k) Savings Plan ............... 203,134 249,241 31,624
Extraordinary item--loss on extinguishment of debt ..... 433,110
Other noncash expenses ................................. 48,374 54,421 68,862
Change in assets and liabilities, net of effect of
acquisitions:
Patient accounts receivable ............................ (225,054) 19,679 (2,486,785)
Receivable from affiliate .............................. 508,101 331,255 293,886
Accrued interest receivable ............................ 53,292 64,989 30,290
Other current assets ................................... 120,940 783,710 (718,183)
Accounts payable and accrued expenses .................. 81,685 (1,040,228) 1,057,589
Income taxes payable ................................... 16,629 18,206 8,700
------------ ------------ --------------
Cash provided by operating activities ................. 800,126 3,803,026 4,274,155
------------ ------------ --------------
INVESTING ACTIVITIES:
Purchases of investments ................................ (6,648,837) (5,034,829) (30,902,953)
Sales of investments .................................... 14,129,871 6,280,485 4,672,182
Maturities of investments ............................... 6,638,754 12,006,914 12,627,900
Additions to property and equipment, net ................ (751,746) (5,772,347) (14,436,434)
Proceeds from the sale of property and equipment ........ 2,658,072 -- 162,218
Distributions from affiliate ............................ -- 110,500 58,500
Note receivable ......................................... 375,000 (375,000) --
Deposits and other assets ............................... 285,974 (316,131) (638,437)
Investments in managed centers .......................... -- (1,271,835) --
Disposition of investments in managed centers ........... 1,405,099 -- --
Cash payments for acquisitions, net of cash acquired .... -- -- (2,606,195)
------------ ------------ --------------
Cash provided by (used in) investing activities ......... 18,092,187 5,627,757 (31,063,219)
------------ ------------ --------------
FINANCING ACTIVITIES:
Proceeds from issuance of treasury stock ................ 42,500 143,350 85,800
Payments on long-term debt .............................. (10,853,032) (6,349,033) (1,087,979)
Payments on capital lease obligations ................... (935,071) (670,743) (979,100)
Proceeds from issuance of long-term debt ................ -- -- 1,800,000
Payments of stock offering costs ........................ -- -- (164,678)
Payments of debt issue costs ............................ -- -- (30,165)
Treasury stock acquired ................................. -- (3,469,566) (1,475,973)
------------ ------------ --------------
Cash used in financing activities ....................... (11,745,603) (10,345,992) (1,852,095)
------------ ------------ --------------
Increase (decrease) in cash and cash equivalents ......... 7,146,710 (915,209) (28,641,159)
Cash and cash equivalents, beginning of period ........... 2,801,139 3,716,348 32,357,507
------------ ------------ --------------
Cash and cash equivalents, end of period ................. $ 9,947,849 $ 2,801,139 $ 3,716,348
============ ============ ==============
Supplemental disclosures of cash flow information:
Interest paid (net of amount capitalized) ............... $ 1,004,143 $ 1,204,621 $ 1,602,952
============ ============ ==============
Income taxes paid ....................................... $ 5,635 $ 31,798 $ 112,050
============ ============ ==============
Capital lease obligations ............................... $ -- $ -- $ 1,906,599
============ ============ ==============
Issuance of common stock and liabilities assumed in
connection with acquisitions (Note 14)...................
</TABLE>
Supplemental disclosures of noncash investing and financing activities:
Included in accounts payable at December 31, 1993 and March 31, 1993 are
amounts related to the purchase of property and equipment totaling $724,964
and $2,604,019, respectively.
See notes to consolidated financial statements.
F-54
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended December 31, 1994, the nine months ended December 31, 1993
and the year ended March 31, 1993
1. ORGANIZATION & MERGER WITH ONCOLOGY THERAPIES, INC.
Radiation Care, Inc. ("RCI") and its wholly owned subsidiaries
(collectively the "Company") provide outpatient radiation therapy and
diagnostic imaging services. The Company was incorporated in November 1990
and began treating patients in June 1991. The Company owns and operates
seventeen radiation therapy centers and three diagnostic imaging centers, and
owns a 65% interest in a fourth diagnostic imaging center (sold January 31,
1995--see Note 4).
On November 21, 1994, the Company entered into an agreement to merge with
Oncology Therapies, Inc. in a transaction in which the Company's stockholders
will receive $2.625 in cash for each outstanding share of the Company's
common stock. The merger was completed on March 21, 1995. The Company
incurred approximately $2,500,000 of expenses, of which $1,424,393 were
charged to 1994 operations, associated with structuring and completing the
merger. This amount includes financial advisor fees, legal and accounting
fees, certain liability insurance premiums, severance payments, and expenses
for printing, mailing, and processing related to consummation of the merger.
The Company had change-in-control agreements with its senior officers. The
merger constitutes a change in control pursuant to such agreements. Total
payments that resulted from such agreements approximated $345,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year. Effective December 31, 1993, the Company adopted a fiscal year
ending on December 31. Accordingly, the resulting transition period, which
ended December 31, 1993, covers a nine month period.
Principles of Consolidation. The consolidated financial statements include
the accounts of RCI and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents. For the purposes of the statement of cash flows,
the Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents.
Investments. The equity method of accounting is used for investments when the
Company has a noncontrolling ownership interest in another company that is
greater than 20%. Under the equity method of accounting, original investments
are recorded at cost and adjusted by the Company's share of undistributed
earnings or losses of such companies and the amortization of underlying
intangibles.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Statement addresses the accounting for investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. The Company has classified its investments in
marketable securities as available-for-sale securities which, under the
Statement, are reported at fair value with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity. There was no cumulative effect of this change in accounting
principle. Gains or losses on the sale of investments in marketable
securities are determined by specific identification of the cost of the
securities sold.
Provision for Doubtful Accounts. The Company records a provision for doubtful
accounts for the portion of unrecognized revenues which it estimates may not
be ultimately collected. The provision includes any contractual adjustments
in excess of those estimated at the time revenue is recognized and other
differences between recorded revenues and collections from third-party payors
and patients. The provision and related allowance are adjusted periodically,
based upon the Company's evaluation of historical collection experience with
specific payors for particular services, anticipated reimbursement levels
with specific payors for new services for which the Company may not have had
significant historical collection experience, industry reimbursement trends,
and other relevant factors.
F-55
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment. Property and equipment is stated at cost. The cost
and related accumulated depreciation of property and equipment sold or
otherwise disposed are eliminated from the accounts and the resulting gains
or losses are reflected in income. Depreciation is generally computed using
the straight-line method over the estimated useful life of an asset. Assets
recorded under capital leases are amortized over their estimated useful lives
or the lease terms, as appropriate.
Goodwill. The excess of the purchase price over the fair value of the net
assets acquired in business combinations accounted for by the purchase method
is amortized on a straight-line basis over a 25-year period. The Company
periodically assesses the recoverability of goodwill, when there are
indications of potential goodwill impairment based on estimates of
undiscounted future cash flows from operations for the applicable business
acquired. The amount of impairment is calculated by comparing anticipated
discounted future income from acquired businesses with the carrying value of
the related goodwill. In performing this analysis, management considers such
factors as current results, trends and future prospects, in addition to other
economic factors (see Note 6).
The Company is required to implement Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1996. As the Company currently
continually evaluates the realizability of its long-lived assets, including
goodwill and intangibles, adoption of the statement is not anticipated to
have a material effect on the Company's financial statements at the date of
adoption.
Organization Costs. Organization costs are being amortized on a
straight-line basis over a five-year period.
Income Taxes. Deferred income taxes are determined based on the difference
between financial statement and tax bases of assets and liabilities using
enacted rates in effect for the year in which the differences are expected to
reverse. To the extent management is uncertain that deferred tax assets will
be realized, a valuation allowance is established.
Debt Issue Costs. Debt issue costs are deferred and are being amortized
using the interest method over the term of the related debt.
Revenue Recognition. Patient revenues are recognized net of contractual
adjustments and represent the estimated net realizable amounts from
third-party payors and patients for services rendered.
Charity Care. The Company has a policy of providing charity care to
patients who are unable to pay for the Company's services. Since the Company
does not expect payments from such patients, estimated charges for charity
care are not included in patient revenues.
Reclassifications. Certain reclassifications have been made to the prior
years' financial statements to conform to the presentation in the
December 31, 1994 financial statements.
3. INVESTMENTS IN MARKETABLE SECURITIES
The market value of investments in marketable securities was $207,107 and
$14,929,560 at December 31, 1994 and 1993, respectively. At December 31, 1993
gross unrealized gains and losses on investments in marketable securities
were $89,046 and $61,564, respectively.
4. INVESTMENT IN AFFILIATE AND RECEIVABLE FROM AFFILIATE
The Company has a 65% limited partnership interest in ParkView Imaging
Center, L.P. ("PVIC"). This noncontrolling limited partnership interest is
accounted for using the equity method of accounting. The difference between
the Company's recorded investment balance and the Company's proportionate
share of the underlying
F-56
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equity in the net assets of PVIC at December 31, 1994 was $427,564.
Summarized financial data of PVIC as of December 31, 1994 and 1993 and for
the year ended December 31, 1994 and the nine months ended December 31, 1993
follows:
December 31,
------------------------
1994 1993
---------- ----------
Balance Sheet Data:
Total current assets ..................... $ 888,060 $ 620,214
Property and equipment, net .............. 1,754,865 2,017,116
Other assets ............................. 12,353 19,323
---------- ----------
Total assets .......................... $2,655,278 $2,656,653
========== ===========
Total current liabilities ................ $ 836,223 $ 650,976
Total long-term liabilities .............. 965,456 1,428,051
Total partners' capital .................. 853,599 577,626
---------- ----------
Total liabilities and partners' capital $2,655,278 $2,656,653
========== ===========
Income Statement Data:
Patient revenues, net .................... $2,140,946 $1,720,667
Cost of revenues and expenses ............ 1,853,132 1,638,258
---------- ----------
Net income ............................ $ 287,814 $ 82,409
========== ==========
The Company leased equipment to PVIC under a noncancellable long-term
lease accounted for by the Company as a direct financing lease. The Company
recognized interest income of $256,926, $239,858 and $299,175 related to the
leasing facility for the year ended December 31, 1994, the nine months ended
December 31, 1993 and the year ended March 31, 1993, respectively.
Additionally, the Company leased certain office space to PVIC. Such lease is
accounted for as an operating lease and the Company recognized $188,644,
$141,482 and $151,957 of rental income for the year ended December 31, 1994,
the nine months ended December 31, 1993 and the year ended March 31, 1993,
respectively. Future minimum lease payments due from PVIC together with the
present value of future minimum lease payments under the equipment leases
from affiliate are as follows:
Direct
Year Ended December 31, Financing Operating
- ------------------------------------------------- ---------- ---------
1995 .......................................... $ 761,484 $188,634
1996 .......................................... 761,484 188,634
1997 .......................................... 63,458
---------- ---------
Total ......................................... 1,586,426 $377,268
========
Less amounts representing interest and
executory costs ............................... (227,788)
----------
Present value of minimum receipts ............. 1,358,638
Less current portion .......................... (596,023)
----------
Receivable from affiliate, long-term portion .. $ 762,615
==========
In November 1994, the Company agreed to sell Community Clinicians Leasing,
L.P. ("CCL") which included its investment in PVIC to The Columbia HCA Health
System for $1,250,000. In December 1994, the agreement was revised and the
sales price was reduced by $250,000 to $1,000,000. The Columbia HCA Health
System was the general partner of PVIC and owned the remaining 35% interest
in PVIC. During the year ended December 31, 1994, the Company provided for an
anticipated loss on sale of its investment in affiliate of $3,989,764 as a
result of this agreement. This amount represents the difference between the
Company's recorded investment balance and the agreed-upon sales price of CCL.
The transaction was completed on January 31, 1995.
F-57
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. INVESTMENTS IN MANAGED CENTERS
The Company entered into agreements in 1993 to manage three radiation
therapy centers, one that had begun operations and two that were under
development. The centers were independently owned. These agreements had a
four-year term during which the Company was to manage the operations of the
centers for a fee based on a percentage of collected revenues. In addition,
the Company entered into agreements that provided the Company with the option
to purchase each of the centers, based on an agreed pricing computation, for
a period of two years beginning eighteen months after the projected opening
date of each center. Consideration for the purchases could be in cash or
common stock of the Company to be negotiated at the time of the purchase. The
Company paid $100,000 per center as consideration for the purchase options.
The Company loaned the centers amounts for working capital requirements,
provided certain temporary financing for building improvements, and provided
certain financing for the acquisition of real estate. The loans for working
capital requirements and the loans for the acquisition of real estate were
expected to be repaid from future operating cash flows of the centers. The
loans for building improvements were expected to be repaid through permanent
financing at the completion of construction. As of December 31, 1993, the
Company had advanced a total of $1,271,835 under these loan agreements at an
interest rate of 7%.
Due to the nature of the Company's relationship with the managed centers,
including the loan arrangements and the options to purchase the centers, the
amounts loaned to the centers were accounted for similar to equity method
investments. As a result of this accounting treatment, the Company was
required to record any start-up losses, and subsequent operating income to
the extent of previously recognized losses, of the managed centers as gains
or losses on the investments in managed centers in the period in which the
income or losses of the centers is recognized. During the year ended December
31, 1994 and the nine months ended December 31, 1993, the Company recognized
losses on investments in managed centers of $367,283 and $261,475,
respectively. The cumulative amount of any potential losses on the
investments was limited to the amount invested in each center. The Company
did not guarantee any debt of the managed centers and was not at risk beyond
its investment balance. See Note 7 regarding machinery and equipment sold to
centers under development which the Company manages.
In April 1994, the Company and the owners of the managed centers agreed to
terminate the management agreements and the purchase option agreements. All
loans to the managed centers and accrued interest were repaid to the Company.
The consideration paid for the purchase options also was refunded. In
addition, the Company received agreed-upon management fees for two of the
centers that had begun operations. Accordingly, the Company reversed all
previously recorded losses on investments in managed centers in April 1994.
During the year ended December 31, 1994, the Company recognized a gain on
investments in managed centers totaling $762,022, which included the reversal
of previously recorded losses, interest income on the loans to the managed
centers, and management fees. Subsequent to termination of the management
agreements, there are no outstanding amounts due from or to the managed
centers and the Company has no further obligations with regard to the
financing or management of the operations of the managed centers.
6. PROVISION FOR WRITE-DOWN OF ASSETS
During the year ended December 31, 1994, the Company incurred a charge of
$5,587,563 which includes a provision for write-off of unamortized goodwill
at one of the Company's diagnostic imaging centers of $3,915,932 and the
write-down of property and equipment at two of the Company's radiation
therapy centers of $1,671,631. The provision for write-off of goodwill and
write-down of property and equipment was a result of management's continuing
assessment of the recoverability of assets based on estimates of future
undiscounted cash flows from operations of the applicable businesses. During
the year ended December 31, 1994, such assessment considered the impending
merger with Oncology Therapies, Inc. discussed in Note 1, the impending
effects of contingencies discussed in Note 13, continuing operating losses at
the individual centers and management's determination that the operating
losses were likely to continue for the foreseeable future. Such assessment
considered the effects of the above events on all the Company's long-lived
assets on a center-by-center basis. Prior to 1994, the Company
F-58
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
did not believe the likelihood of adverse effects on the Company, as a result
of Omnibus Budget Reconciliation Act of 1993 ("OBRA 1993"), were probable.
Management's assessment of the likelihood of adverse effects associated with
OBRA 1993 became probable during 1994 as a result of management concluding
that the Company would be unable to meet the public company exemption under
OBRA 1993. It was in light of such events that management estimated and
recognized asset impairments during 1994. The write-down of property and
equipment included medical equipment and leasehold improvements at centers
located in Rockville, Maryland and Falls Church, Virginia. In addition, the
Company recorded a charge of $400,000 related to costs associated with the
probable closing of one of the radiation therapy centers. The amount of the
provision is primarily for estimated lease termination costs.
In September 1993, the Company made the decision to close its radiation
therapy center in Columbia, South Carolina. The center, which had been
operating for two years, had not treated a sufficient volume of patients to
attain profitability, and management determined that it was not likely to
become profitable in the foreseeable future. Losses were minimized by
transferring equipment and miscellaneous furnishings and supplies to new
centers. The provision for expenses related to the closing of the center was
$731,502, which included the write-off of certain leasehold improvements of
$593,929, transportation and storage costs of $70,750, severance compensation
to employees of $32,823, and other miscellaneous expenses of $34,000.
7. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
Estimated
Useful
Life December 31,
----------------------------
(years) 1994 1993
------- ------------ ------------
<S> <C> <C> <C>
Machinery and equipment ...................... 4 - 10 $ 31,441,163 $ 34,215,689
Leasehold improvements ....................... 10 - 12 12,034,679 13,400,465
Computers .................................... 5 2,726,629 2,713,741
Furniture and fixtures ....................... 5 - 7 841,393 864,458
Automobiles .................................. 3 - 5 188,600 208,649
------------ ------------
Total ........................................ 47,232,464 51,403,002
Less accumulated depreciation and amortization (17,164,220) (12,098,524)
------------ ------------
Property and equipment, net .................. $ 30,068,244 $ 39,304,478
============ ============
</TABLE>
Included in machinery and equipment at December 31, 1993 are assets with a
total cost of $2,946,171 and total accumulated depreciation of $491,373 which
were taken out of service and sold to centers under development which the
Company managed in 1994 (see Note 5). No losses on the transfer and sale of
such equipment were recognized.
The Company capitalizes interest as a component of the cost of the
property and equipment constructed for its own use. Interest of $33,070 and
$67,014 was capitalized during the nine months ended December 31, 1993 and
the year ended March 31, 1993, respectively.
Included in machinery and equipment at December 31, 1994 and 1993 are
assets under capital leases of $4,580,943 at both dates with accumulated
amortization of $2,752,035 and $1,763,909, respectively.
Depreciation expense, including amortization of capital lease assets, was
$5,658,276, $4,306,120, and $4,880,579 for the year ended December 31, 1994,
the nine months ended December 31, 1993 and the year ended March 31, 1993,
respectively.
F-59
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. LONG-TERM DEBT
The Company had a $15,000,000 credit agreement with a commercial bank. The
credit agreement, as amended, consisted of a $10,000,000 term loan and a
$5,000,000 revolving credit facility. At December 31, 1993, the Company had
$3,800,000 available to borrow under the revolving credit facility. Under the
agreement, the Company had the option of making "Eurodollar" loans or "Base
Rate" loans. Eurodollar loans bore interest at a fixed rate per annum equal
to LIBOR for the current interest period plus 2-3/4% (an interest period may
be one, two, three, or six months, as selected by the Company). Base Rate
loans bore interest at a rate per annum, fluctuating daily, equal to the
higher of the prime rate plus 1-1/2% or the federal funds rate plus 2%.
Interest on Eurodollar loans was payable at the end of the applicable
interest period and interest on Base Rate loans was payable monthly. At
December 31, 1993 there was outstanding under the credit agreement
$10,200,000 bearing interest at rates ranging from 6.01% to 6.19%.
Patient accounts receivable and certain property and equipment were
pledged as collateral under the credit agreement. In addition, the Company
was required to meet certain financial covenants primarily related to net
worth and long-term debt. The agreement also limited the amount of dividends
that could be paid by the Company.
The aggregate principal amount of the term loan was payable in quarterly
installments of $500,000 which commenced on September 30, 1993. In September
1994, the Company repaid all outstanding indebtedness under its credit
agreement. In connection with the cancellation of the credit agreement, the
Company recognized an extraordinary loss of $433,110 during the year ended
December 31, 1994. The extraordinary loss represents the write-off of the
remaining balances of $272,119 of debt discount and $160,991 of debt issue
costs associated with the credit agreement.
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1994 1993
---------- -----------
<S> <C> <C>
Borrowings under the credit agreement described above, net of unamortized
discount of $320,493 at December 31, 1993 ............................. $ 9,879,507
Notes payable to a financial institution, due in monthly installments of
$74,177 including interest ranging from 10.5% to 12.0% through January
1997. Certain property and equipment are pledged as collateral on the
notes ................................................................. $1,571,491 2,224,523
---------- -----------
Total .................................................................. 1,571,491 12,104,030
Less amounts due within one year ........................................ (737,832) (2,653,033)
---------- -----------
Long-term debt .......................................................... $ 833,659 $ 9,450,997
========== ===========
</TABLE>
At December 31, 1994, scheduled aggregate long-term debt maturities were
$737,832 in 1995 and $833,659 in 1996.
9. COMMON STOCK AND WARRANTS
In February 1992, the Company sold 6,250,000 shares of common stock at $8
a share in its initial public offering. On September 4, 1992, the
stockholders of the Company approved an increase in the authorized number of
the Company's common shares to 50,000,000.
In September 1992, the Company's Board of Directors authorized the use of
up to $5,000,000 to purchase the Company's common shares in the open market,
from time to time. During 1992 and 1993, the Company purchased 2,088,792
shares for a total of $4,945,539, of which 259,137 shares have been
contributed to the Company's 401(k) Plan and 185,350 shares have been used
for options exercised by employees. At December 31, 1994, the remaining
1,644,305 shares are being held as treasury shares.
F-60
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended March 31, 1992, the Company issued to its lending
bank warrants to purchase 356,067 shares of the Company's common stock or
preferred stock at a price of $.01 per share. The difference of $352,506
between the fair value of the warrants (valued at $1.00 per warrant or
$356,067 in total) and the exercise price ($.01 per warrant or $3,561 in
total) has been charged to discount on debt and has been credited to
additional paid-in capital. On June 11, 1992, the Company agreed to issue an
additional 93,933 warrants to its lending bank, of which 16,675 are
exercisable at $.01 per share and 77,258 are exercisable at $8 per share. The
difference of $133,233 between the fair value of the 16,675 warrants (valued
at $8 per warrant or $133,400 in total) and the exercise price ($.01 per
warrant or $167 in total) has been charged to discount on debt and has been
credited to additional paid-in capital. The warrants may be exercised at any
time through June 1, 2001 and the number of warrants issued are subject to
adjustment in certain events to prevent dilution. The Company has granted the
holder of the warrants certain rights with respect to the registration under
the Securities Act of 1933 of the warrants and the shares issuable upon their
exercise. During the year ended March 31, 1993, 180,000 warrants were
exercised at $.01 per share. At December 31, 1994, 192,742 warrants
exercisable at $.01 per share and 77,258 warrants exercisable at $8.00 per
share were outstanding.
10. INCOME TAXES
The Company has elected, for income tax purposes, a March 31 year end. At
December 31, 1994 the Company had available net operating loss carryforwards
of approximately $27,945,000 for federal income tax purposes, which expire
beginning in 2007. As a result of the merger discussed in Note 1, the Company
underwent an ownership change as defined in Section 382 of the Internal
Revenue Code of 1986, as amended. This ownership change substantially limits
the ability of the Company to utilize its net operating loss carryforwards in
future years.
Income tax computed at the federal statutory rate for the year ended
December 31, 1994, for the nine months ended December 31, 1993, and for the
year ended March 31, 1993 differs from the amount provided as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended Year Ended
December 31, 1994 December 31, 1993 March 31, 1993
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) at statutory rate $(5,888,648) (34.0)% $(1,110,860) (34.0)% $(283,016) (34.0)%
State taxes, less federal tax
effect ........................ (571,545) (3.3) (107,448) (3.3)
Surtax exemption ............... (8,414) (1.0)
Change in valuation allowance .. 4,598,162 26.5 1,047,001 32.0 117,140 14.1
Nondeductible amortization and
write-off of intangibles ...... 1,548,642 8.8 214,060 6.6 203,822 24.5
Merger expense ................. 484,294 2.8
Other .......................... (148,641) (0.8) 7,251 0.2 91,218 10.9
----------- ---- ----------- ---- --------- ----
Provision for income taxes ..... $ 22,264 -- $ 50,004 1.5% $ 120,750 14.5%
=========== ==== =========== ==== ========= ====
</TABLE>
Components of deferred income taxes at December 31, 1994 and 1993 are as
follows:
1994 1993
---------- ------------
Deferred income tax assets:
Net operating loss carryforwards ..... $10,898,834 $5,336,764
Start-up costs ....................... 111,458 185,091
Allowance for doubtful accounts ...... 163,079 182,067
Other ................................ 552,418 590,175
----------- ----------
11,725,789 6,294,097
----------- ----------
F-61
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income tax liabilities:
Property and depreciation ............ (5,101,717) (4,268,188)
----------- ----------
Valuation allowance ................... (6,624,072) (2,025,909)
----------- ----------
Net deferred income taxes ............. $ -- $ --
=========== ===========
Increases in the Company's valuation allowance during the year ended
December 31, 1994 reflect management's assessment of the Company's ability to
realize, in future periods, deferred tax assets.
11. EMPLOYEE BENEFITS
401(K) Savings Plan. Effective March 1, 1993, the Company adopted a
voluntary savings plan for eligible employees under Section 401(k) of the
Internal Revenue Code, whereby participants may contribute a percentage of
their compensation up to the maximum annual amount allowed under the Code.
The plan provides for matching contributions by the Company of the first 5%
of salary contributed by the employee. The Company's contributions are made
on a quarterly basis with the Company stock which vests upon the completion
of three years of service by the employee.
Expense recorded for the savings plan was $203,134, $249,241, and $31,624
for the year ended December 31, 1994, the nine months ended December 31,
1993, and the year ended March 31, 1993, respectively.
Stock Option Plan. The Company's 1991 Amended and Restated
Statutory-Nonstatutory Stock Option Plan (the "Plan") permits the Company to
grant statutory and non-statutory options to purchase shares of common stock
to certain directors, officers, and other key employees of the Company as
well as certain consultants and advisors. There are 3,500,000 shares of the
Company's common stock reserved for issuance under the Plan. Options
generally become exercisable over a three-year period, with a portion of the
shares issuable pursuant to each option becoming exercisable at each
anniversary of the grant. The options expire ten years after the date of
grant.
During 1994, the Company approved a plan to offer new option grants to
certain officers and other key employees who had previously received stock
option grants. The plan allowed employees the opportunity to cancel their
previous grant and receive a new grant of stock options. The number of shares
that may be purchased under the new stock option grant was determined by a
formula based on the relationship of the exercise price of the previous grant
to the closing price of the Company's common stock on February 1, 1994, the
date of the new option grant. Participation in the exchange of stock option
grants by employees was completely voluntary. The total number of options
outstanding that were eligible for exchange was 638,400 with exercise prices
ranging from $2.75 to $12.75. The total number of options exchanged was
391,400 with exercise prices ranging from $2.75 to $12.75. In return for the
options exchanged, 166,646 new options were issued at an exercise price of
$2.13 and the previously issued options were cancelled.
In March 1995, in connection with the merger of the Company with Oncology
Therapies, Inc. (see Note 1), the Company approved a plan to loan to
employees the proceeds necessary to exercise all vested options and
simultaneously repurchase the shares of common stock issued in connection
with the exercise of such options and repay the amounts loaned to employees.
This plan was executed simultaneously with the closing of the merger. In
total, $1,414,548 was loaned to employees and subsequently repaid to the
Company and options to purchase 771,669 shares of common stock were exercised
with exercise prices ranging from $1.00 to $2.13. These shares of common
stock were then repurchased by the Company at a merger consideration of
$2.625 per share. All other outstanding options were canceled as part of the
merger agreement.
12. RELATED PARTY TRANSACTIONS
The Company had, through September 1993, an office lease agreement for one
of its centers with a corporation, the stock of which is owned in part by the
former chairman of the Company. Rental expense of $32,000 and $48,000 was
incurred on this lease during the nine months ended December 31, 1993 and the
year ended March 31, 1993, respectively.
F-62
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has entered into an office lease agreement for one of its
centers with a corporation, the stock of which is owned in part by a former
director of the Company. Rental expense of $101,328, $74,473, and $94,800 was
incurred on this lease for the year ended December 31, 1994, for the nine
months ended December 31, 1993, and for the year ended March 31, 1993,
respectively.
In March 1992, the Company began leasing an airplane for use in managing
its centers and investigating acquisition and development opportunities, some
of which are not accessible to commercial aircraft, from a corporation that
is primarily owned by the former chairman of the Company at the rate of
$7,000 per month. Rental expense of $84,000, $63,000, and $84,000 was
incurred on this lease for the year ended December 31, 1994, for the nine
months ended December 31, 1993, and for the year ended March 31, 1993,
respectively. The Company incurred other third-party costs in connection with
the operation of the leased airplane.
Prior to the merger, CTC had entered into a service contract with an
entity, related by common owners, to provide technical services. CTC paid a
monthly fee based on the number of scans read. Expenses included in cost of
revenues related to this contract were $502,878, $392,422, and $632,083 for
the year ended December 31, 1994, the nine months ended December 31, 1993 and
the year ended March 31, 1993, respectively.
CTC owns a 2.5% interest in a limited partnership that leases office space
to the Company under an agreement that expires in September 1995. Rental
expense related to this space was $80,722, $62,918, and $81,341 for the year
ended December 31, 1994, the nine months ended December 31, 1993 and the year
ended March 31, 1993, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company leases office space, generally under ten-year noncancelable
operating lease agreements. The lease agreements contain escalation clauses
for increases in operating costs. In addition, the Company leases an airplane
under a noncancelable operating lease with a related party and certain
machinery and equipment under capital and operating leases. Aggregate future
minimum lease commitments under operating leases and capital leases with an
initial or remaining lease term in excess of one year, including amounts
payable to related parties, together with the present value of the minimum
capital lease payments at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending December 31, Leases Leases
- ------------------------------------------------------ ---------- -----------
<S> <C> <C>
1995 ................................................. $ 1,932,266 $1,129,993
1996 ................................................. 1,890,832 783,403
1997 ................................................. 1,735,852 317,018
1998 ................................................. 1,656,045 304,935
1999 ................................................. 1,630,129 25,361
Thereafter ........................................... 6,160,418 --
----------- ----------
Total ............................................ $15,005,542 2,560,710
===========
Less amounts representing interest and executory costs (355,223)
Present value of minimum payments .................... 2,205,487
Less current portion ................................. (952,989)
----------
Long-term portion of capital lease obligations ....... $1,252,498
==========
</TABLE>
Rental expense, including rent paid to related parties, for the year ended
December 31, 1994, the nine months ended December 31 1993, and the year ended
March 31, 1993 was $2,153,924, $1,616,981, and $1,823,471, respectively.
F-63
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company carries liability insurance covering general and medical
malpractice liability with annual limits of $15 million per occurrence and in
the aggregate with respect to each of its centers. Management believes such
coverage is adequate to cover claims, if any, that may result.
Since June 1992, a federal grand jury sitting in Atlanta, Georgia had been
investigating whether referrals by physicians who are stockholders of the
Company have been in compliance with the Medicare law. Beginning in October
1994, the Company engaged in active negotiations with representatives of the
Federal Government to resolve the matters that have been the subject of this
investigation of the Company. On December 15, 1994, the Company and the
Federal Government entered into an agreement to settle the grand jury
investigation. Under the terms of the settlement, the Company consented to a
civil judgment, providing for its payment of $2,000,000 and an injunction
against violations of the Medicare "anti-kickback" law. In agreeing to the
settlement, the Company did not admit that any of its activities violated the
Medicare law or any other law. An expense of $2,000,000 related to the
settlement is included in the Company's statement of operations for the year
ended December 31, 1994.
On February 16, 1995, six former stockholders of RCI filed a consolidated
amended Class Action Complaint in Delaware Chancery Court (In re Radiation
Care, Inc. Shareholders Litigation. Consolidated C.A promptly. No. 13805)
against RCI. Thomas Haire, Gerald King, Charles McKay, Abraham Gosman.
Oncology Therapies of America, Inc. ("OTA") and A.M.A. Financial Corporation,
("AMA") alleging that the RCI stockholders should have received greater
consideration for their RCI stock when RCI was merged with and into the
Company. Plaintiffs allege breaches of fiduciary duty by the former RCI
directors, as well as aiding and abetting such fiduciary duty breaches by Mr.
Gosman, OTA and AMA. Plaintiffs seek compensatory or recissionary damages of
an undisclosed amount on behalf of all RCI stockholders, together with an
award of the costs and attorneys' fees associated with the action. No class
has been certified in this litigation and plaintiffs' counsel have granted an
indefinite extension for the defendants to answer or otherwise respond to the
Complaint. Plaintiffs have taken no discovery and there has been virtually no
activity in the litigation since plaintiffs' filing of the consolidated
amended Class Action Complaint. The Company intends to file an answer denying
any liability in connection with this litigation.
On August 4, 1995, 26 former stockholders of RCI filed a Complaint for
Money Damages against Richard D'Amico, Ted Crowley, Thomas Haire, Gerald
King, Charles McKay and Randy Walker (all former RCI officers and directors)
in the Superior Court of Fulton County, in the State of Georgia (Southeastern
Capital Resources, L.L.C. et al. v. Richard D'Amico et al., Civil Action No.
E41225). Two of the plaintiffs have withdrawn from the litigation. Plaintiffs
allege a breach of fiduciary duty by the former RCI directors Haire, King and
McKay, a "conspiracy" by the RCI officer defendants D'Amico, Crowley and
Walker, and negligence by all defendants. Plaintiffs seek additional
consideration for their shares of RCI common stock in the form of
compensatory and monetary damages in the amount of $5.7 million, plus
punitive damages, interest, costs and attorneys fees. On September 22, 1995,
the defendants filed an Answer denying any liability in connection with this
matter.
On September 18, 1995, two former stockholders of RCI filed a Complaint
for Money Damages against RCI, OTA, Mr. Haire, Mr. King and Mr. McKay in the
Superior Court of Fulton County in the State of Georgia (Dennis E. Ellingwood
and Gregory W. Cotter v. Oncology Therapies, Inc., et al., Civil Action No.
34 727-E191464). Plaintiffs allege negligence, negligent misrepresentation
and a breach of fiduciary duty by former RCI directors Haire, King and McKay
and by RCI and OTA on the principles of respondeat superior. Plaintiffs seek
compensatory money damages in an amount of not less than $165,925 for one
plaintiff and $32,997 for the other, plus punitive damages, interest, costs
and attorneys fees. Plaintiffs allege essentially that they were induced to
invest in RCI as a result of a variety of misrepresentations and material
omissions made by RCI in its communications with its stockholders.
The Company believes that it has meritorious defense in all the
above-described pending actions. Although the resolution of these matters may
have a material adverse effect on the Company's financial condition, results
of operations and liquidity, the ultimate outcome of the litigation described
in the preceding three paragraphs cannot presently be determined.
Accordingly, no provision for any loss that may result upon resolution of
these suits has been made in the consolidated financial statements.
F-64
<PAGE>
RADIATION CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A substantial portion of the Company's revenues has historically been
derived from patients referred to its centers by physicians who are
stockholders of the Company, and loss of such referrals would have a material
adverse effect on the future operations of the Company. In August 1993, OBRA
1993 was enacted. OBRA 1993 contains provisions that will, beginning January
1, 1995, restrict most physicians from referring Medicare or Medicaid
patients to radiation therapy and diagnostic imaging providers in which they
have a financial interest. OBRA 1993 contains an exemption for a financial
interest consisting of the ownership of investment securities that may be
purchased on terms generally available to the public in a company with $75
million of stockholders' equity as of its most recent fiscal year on or
preceding December 31, 1994 and with securities listed on a national trading
market, including NASDAQ. As of December 31, 1994, the Company's
stockholders' equity was approximately $47.6 million. Due to the merger
discussed in Note 1, the Company's management does not believe OBRA 93 will
adversely affect the Company's future operations.
14. ACQUISITIONS
On April 3, 1992, the Company exchanged 543,675 shares of its common stock
for all of the outstanding shares of common stock of Computerized Tomography
Center, Inc. ("CTC"). CTC operates an outpatient diagnostic imaging facility.
The combination has been accounted for as a pooling of interests and the
historical financial statements of the Company have been restated to include
the operations of CTC.
On May 8, 1992, the Company purchased the net assets of Peachtree Medical
Diagnostics Center ("PMDC"), a center of Peachtree Medical Diagnostics, L.P.,
for a total purchase price of approximately $3,951,950 (before acquisition
costs of $73,246), payable with 395,195 shares of the Company's common stock.
PMDC operates an outpatient diagnostics imaging facility. The excess of the
purchase price over the fair value of the net assets was $4,340,208. The
Company assumed liabilities of $1,416,000 in connection with the acquisition.
The acquisition has been accounted for as a purchase and has been included in
the Company's operations from May 8, 1992.
On May 27, 1992, the Company purchased the common stock of Biltmore
Advanced Imaging Center, Inc. ("BAIC"), which operates an outpatient
diagnostic imaging facility, for a total purchase price of $3,835,000 (before
acquisition costs of $495,000), payable with 464,846 shares of the Company's
common stock. The Company guaranteed by acquiring a letter of credit in the
amount of $3,250,000 that the value of the 464,846 shares to be sold by the
former shareholders of BAIC through January 31, 1993 would be at least
$3,250,000. The Company satisfied its additional purchase price obligation to
such shareholders by paying cash of $1,491,664 in February 1993. The excess
of the purchase price over the fair value of the net assets was $4,605,313.
The Company assumed liabilities of $2,812,000 in connection with the
acquisition. The acquisition has been accounted for as a purchase and has
been included in the Company's operations from May 27, 1992.
On June 10, 1992, the Company purchased the net assets of Community
Clinicians Leasing, L.P. ("CCL") for a total purchase price of $4,760,000
(before acquisition costs of $571,000), payable with 568,358 shares of the
Company's common stock. CCL owns a 65% interest in ParkView Imaging Center,
L.P. ("PVIC"), which operates an outpatient diagnostic imaging facility (see
Note 4). The Company guaranteed that the value of the shares issued would be
a minimum of $3,500,000 on or about the effective date of the Registration
Statement which covered the underlying shares or the Company would issue such
number of additional shares necessary to bring the consideration at that date
to $3,500,000. Accordingly, as of February 11, 1993, the Company issued
293,175 shares of common stock in satisfaction of this obligation. Since the
additional consideration was contingent on the future market value of the
shares issued on June 10, 1992, the issuance of such additional shares does
not result in an increase to the acquisition purchase price or to paid-in
capital. The Company assumed liabilities of $3,097,000 in connection with the
acquisition. The acquisition has been accounted for as a purchase and has
been included in the Company's operations from June 10, 1992.
F-65
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Aegis Health Systems, Inc.
We have audited the accompanying balance sheets of Aegis Health Systems,
Inc. as of December 31, 1994 and 1993, and the related statements of
operations and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aegis Health Systems,
Inc. as of December 31, 1994 and 1993, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Oklahoma City, Oklahoma
August 24, 1995
F-66
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
March 31,
1995 1994 1993
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Trade accounts receivable ........................ $ 214,450 $ 266,066 $ 284,767
Other current assets ............................. 36,429 -- --
----------- ----------- -----------
Total current assets ......................... 250,879 266,066 284,767
Property, plant and Equipment, net of accumulated
depreciation ...................................... 1,318,775 1,397,386 1,574,327
Organizational Costs, net .......................... -- -- 1,282
Other Assets ....................................... 3,114 3,309 3,309
----------- ----------- -----------
Total assets ................................. $ 1,572,768 $ 1,666,761 $ 1,863,685
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current Liabilities
Book overdraft ................................... $ 32,234 $ 81,126 $ 43,902
Accounts payable and accrued liabilities ......... 295,942 238,886 210,636
Current maturities of long-term debt ............. 1,110,001 1,040,415 809,838
Current maturities of capital lease obligations .. 33,120 32,296 242,176
----------- ----------- -----------
Total current liabilities .................... 1,471,297 1,392,723 1,306,552
Long-term obligations
Long-term debt ................................... 730,372 913,225 346,599
Capital lease obligations ........................ 129,213 137,807 292,525
----------- ----------- -----------
Total liabilities ............................ 2,330,882 2,443,775 1,945,676
Commitments and contingencies (Note 7) ............. -- -- --
Stockholder's deficit
Common stock, $1 par, 50,000 shares authorized,
5,001 shares issued and outstanding .............. 5,001 5,001 5,001
Distributions in excess of earnings ............. (763,115) (781,995) (86,992)
----------- ----------- -----------
Total stockholder's deficit .................. (758,114) (776,994) (81,991)
----------- ----------- -----------
Total liabilities and stockholder's deficit .. $ 1,572,768 $ 1,666,761 $ 1,863,685
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
---------------------- -------------------------------------
1995 1994 1994 1993 1992
--------- --------- ----------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues ...................... $ 719,313 $ 608,079 $ 2,741,890 $2,034,582 $1,697,313
--------- --------- ----------- ---------- ----------
Costs and expenses
Operating expenses ..................... 270,953 215,712 813,404 606,817 491,254
General and administrative expenses .... 323,767 304,180 1,212,898 1,119,839 933,488
Interest expense ....................... 25,729 45,678 243,049 234,907 173,523
Other expense .......................... 4,577 1,610 26,303 10,528 863
--------- --------- ----------- ---------- ----------
Total costs and expenses ............. 625,026 567,180 2,295,654 1,972,091 1,599,128
--------- --------- ----------- ---------- ----------
Net Income (Note 5) ..................... 94,287 40,899 446,236 62,491 98,185
Distributions in excess of earnings,
beginning of period ................... (781,995) (86,992) (86,992) (19,944) (71,797)
Distributions to stockholder ............ (75,407) (96,606) (1,141,239) (129,539) (46,332)
--------- --------- ----------- ---------- ----------
Distributions in excess of earnings, end
of period ............................. $(763,115) $(142,699) $ (781,995) $ (86,992) $ (19,944)
========= ========= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
--------------------- ------------------------------------
1995 1994 1994 1993 1992
--------- --------- ----------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net Income ........................... $ 94,287 $ 40,899 $ 446,236 $ 62,491 $ 98,185
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation and amortization ....... 78,611 78,273 315,271 278,766 203,423
Change in assets and liabilities ....
Increase (decrease) in trade
accounts receivable ............. 51,616 (14,062) 18,701 (160,733) 42,350
Increase (decrease) in other current
assets ........................... (36,429) (30,965) -- -- 30,621
Increase (decrease) in other assets 195 -- -- 2,966 (1,863)
Increase (decrease) in accounts
payable and accrued liabilities .. 57,056 74,244 28,250 170,714 9,847
--------- --------- ----------- --------- ---------
Net cash provided by operating
activities ....................... 245,336 148,389 808,458 354,204 382,563
--------- --------- ----------- --------- ---------
Cash flows used in investing activities
Capital expenditures ................. -- (3,166) (37,217) (256,325) (16,358)
Proceeds from sale of assets ......... -- -- -- -- 92,589
--------- --------- ----------- --------- ---------
Net cash provided (used) by
investing activities ............. -- (3,166) (37,217) (256,325) 76,231
--------- --------- ----------- --------- ---------
Cash flows provided by financing
activities
Borrowings under notes payable ....... -- -- 1,842,680 372,132 18,979
Payments on notes payable ............ (95,574) (136,308) (1,056,898) (360,660) (516,997)
Net borrowings (payments) on revolving
credit loans ........................ (17,693) 2,211 11,421 91,213 105,899
Principal payments on capital lease
obligations ......................... (7,770) (11,866) (464,429) (100,344) (20,119)
Distributions to stockholder ........... (75,407) (96,606) (1,141,239) (129,539) (46,332)
Increase (decrease) in book overdraft (48,892) 97,346 37,224 29,319 (224)
--------- --------- ----------- --------- ---------
Net cash provided (used) by
financing activities ............. (245,336) (145,223) (771,241) (97,879) (458,794)
--------- --------- ----------- --------- ---------
Net change in cash ..................... $ -- $ -- $ -- $ -- $ --
========= ========= =========== ========= =========
Supplemental cash flow information:
Cash paid during the year for interest $ 24,716 $ 45,678 $ 226,532 $ 202,665 $ 180,005
========= ========= =========== ========= =========
Supplemental disclosure of noncash
investing and financing activities:
Capital lease obligations assumed ... $ -- $ 99,831 $ 99,831 $ 611,130 $ --
========= ========= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
Aegis Health Systems, Inc. (the "Company") was incorporated in the State
of Oklahoma on May 19, 1989. The Company's primary business involves
providing lithotripsy services to hospitals, ambulatory surgery centers and
other health care facilities.
2. Summary of Significant Accounting Policies
Property, Plant and Equipment. Property, plant and equipment are recorded
at cost, or in the case of leased assets under capital leases, the present
value of future lease payments. When assets are sold or retired, the costs of
the assets and related accumulated depreciation are removed from the accounts
and any gain or loss is included in operations. Repairs and maintenance are
charged to expense as incurred.
Depreciation and amortization, including amortization of leased assets
under capital leases, are computed using the straight-line method over their
estimated useful lives as follows:
Buildings ................................. 31.5 years
Leasehold improvements .................... 10 years
Equipment ................................. 5-7 years
Furniture and office equipment ............ 7 years
Vehicles .................................. 5 years
Organizational Costs. Organizational costs are stated at cost and are
amortized under the straight-line method over their expected useful life of
five years.
Unaudited Interim Periods. The financial information as of March 31, 1995
and for the three-month periods ended March 31, 1995 and 1994 are unaudited.
The management of the Company believes that all adjustments, which consist
only of normal recurring adjustments, necessary for a fair presentation of
the balance sheet, statements of operations and statements of cash flows at
the date and for the period indicated have been included.
3. Property, Plant and Equipment
Property, plant and equipment consists of the following at December 31:
1994 1993
----------- ----------
Land and buildings ......................... $ 91,891 $ 91,891
Leasehold improvements ..................... 3,349 3,349
Equipment .................................. 2,102,713 1,595,950
Furniture and office equipment ............. 16,421 16,421
Vehicles ................................... 40,045 9,591
Leased assets under capital leases ......... 210,961 675,873
----------- ----------
2,465,380 2,393,075
Accumulated depreciation ................... (1,067,994) (818,748)
----------- ----------
Net property and equipment ................ $ 1,397,386 $1,574,327
=========== ==========
F-70
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Long-Term Debt
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1994 1993
-------- ----------
<S> <C> <C>
Notes payable to banks, interest rates from 7.95% to
12%, due January 15, 1995 through October 1, 1998,
collateralized by accounts receivable and certain
property and equipment ................................. $ 135,258 $ 177,032
Notes payable to finance companies, interest rates from
11% to 21%, due May 1, 1995 through June 1, 1997,
collateralized by equipment ............................ 1,609,849 782,293
Revolving line of credit, interest at 9.75%, due October
4, 1995, collateralized by accounts receivable ......... 208,533 197,112
--------- ----------
1,953,640 1,156,437
Less current portion ................................... 1,040,415 809,838
--------- ----------
$ 913,225 $ 346,599
========== ==========
</TABLE>
All long-term debt is personally guaranteed by the Company's stockholder.
Aggregate maturities of long-term debt at December 31, 1994 are as
follows:
1995 ....... $1,040,415
1996 ....... 757,282
1997 ....... 115,078
1998 ....... 9,803
1999 ....... 10,669
Thereafter . 20,393
----------
$1,953,640
==========
5. Income Taxes
The stockholder of the Company has elected to adopt the provisions of
Subchapter S of the Internal Revenue Code of 1986. As a result, the Company
is not subject to corporate income taxes, except for taxes on capital gains,
if any. Accordingly, no provisions have been made in the accompanying
financial statements for federal and state income taxes since such taxes are
liabilities of the individual stockholder and the amounts thereof depend upon
his tax situation.
The Company's tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the stockholder could be changed if adjustments in the
distributable income were ultimately sustained by the taxing authorities.
6. Related Party Transactions
During 1994, the Company executed various notes payable to extinguish
certain debt of affiliated entities owned by the Company's stockholder. Prior
to executing the new notes, the Company had made all principal and interest
payments of the affiliates' debt. Principal amounts outstanding under such
notes payable totaled $703,791 at December 31, 1994.
Also, the Company paid certain operating expenses on behalf of these
affiliated entities. Amounts paid by the Company on behalf of the affiliated
entities for principal, interest and operating expenses totaled $1,078,837,
$145,813 and $44,489 for 1994, 1993 and 1992, respectively. Such amounts have
been included in distributions to the Company's stockholder.
F-71
<PAGE>
AEGIS HEALTH SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Leases
Future minimum lease payments under capital and noncancelable operating
leases as of December 31, 1994 are as follows:
Capital Operating
Fiscal Year Lease Leases
- ----------------------------------------- ------ ---------
1995 .................................... $ 48,214 $35,706
1996 .................................... 47,802 23,804
1997 .................................... 45,741 --
1998 .................................... 45,741 --
1999 .................................... 24,327 --
Thereafter .............................. 1,865 --
-------- -------
Total minimum obligations .............. 213,690 $59,510
=======
Less estimated interest ................ 43,587
--------
Present value of net minimum obligations $170,103
========
Rent expenses amounted to approximately $36,773, $37,673 and $27,092 in
1994, 1993 and 1992, respectively.
8. Subsequent Event
On April 12, 1995, the Company sold all of the assets used in its business
of providing lithotripsy services to CCC National Lithotripsy, Inc. for
consideration totaling $7,134,815. Pursuant to the Agreement for Purchase and
Sale of Assets, the Company sold certain property, plant and equipment,
including two mobile lithotripter systems and certain accounts receivable and
cash in an amount not to exceed $230,000 and assigned existing service
contracts as well as leases related to one stationary lithotripter system and
two semi-tractors. The purchase price was derived based on the value of the
assets sold and the net revenues generated by the Company's lithotripsy
operations, which excludes certain administrative and other costs included in
the Company's financial statements.
As a result of the sale, the Company paid all of its remaining debt
obligations and presently has no operations.
F-72
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Oncology & Radiation Associates, P.A.:
We have audited the accompanying balance sheets of Oncology & Radiation
Associates, P.A. (a Florida corporation) as of December 31, 1993 and 1994 and
as of September 12, 1995, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(September 1, 1992) to December 31, 1992 and for each of the two years in the
period ended December 31, 1994 and for the period from January 1, 1995 to
September 12, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Oncology & Radiation
Associates, P.A. as of December 31, 1993 and 1994 and as of September 12,
1995, and the results of its operations and its cash flows for the period
from inception (September 1, 1992) to December 31, 1992 and for each of the
two years in the period ended December 31, 1994 and for the period from
January 1, 1995 to September 12, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 26, 1995.
F-73
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
September 12,
1993 1994 1995
----------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 269,438 $ 6,256 $1,140,007
Accounts receivable, net of allowances of $5,747,352,
$6,131,128 and $5,863,246 in 1993, 1994 and 1995,
respectively .......................................... 1,156,251 1,499,834 2,006,767
Prepaid expenses ........................................ 33,777 73,792 70,732
----------- ---------- ----------
Total current assets ................................ 1,459,466 1,579,882 3,217,506
----------- ---------- ----------
Property and equipment, net ............................. 183,554 168,477 193,762
----------- ---------- ----------
Covenant not-to-compete, net of accumulated amortization
of $279,206 and $501,779 in 1994 and 1995, respectively 899,630 620,424 397,852
----------- ---------- ----------
Total assets ....................................... $ 2,542,650 $2,368,783 $3,809,120
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses ................... $ 650,306 $ 657,114 $1,068,180
Short-term debt ......................................... 318,750 -- --
Current portion of long-term debt ....................... 279,206 299,390 315,480
Due to stockholders ..................................... 1,103,058 900,259 642,495
Deferred revenue ........................................ -- -- 105,000
----------- ---------- ----------
Total current liabilities ........................... 2,351,320 1,856,763 2,131,155
Long-term debt, net of current portion .................. 620,424 321,034 82,372
----------- ---------- ----------
Total liabilities ................................... 2,971,744 2,177,797 2,213,527
----------- ---------- ----------
Commitments and contingencies (Notes 1 and 7)
Stockholders' equity:
Common stock, $.001 par value, 500 shares authorized, 156
shares issued and outstanding ......................... 1 1 1
Retained earnings (deficit) ............................. (429,095) 190,985 1,595,592
----------- ---------- ----------
Total stockholders' equity (deficit) ................ (429,094) 190,986 1,595,593
----------- ---------- ----------
Total liabilities and stockholders' equity
(deficit) ......................................... $ 2,542,650 $2,368,783 $3,809,120
=========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
F-74
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Period
Inception From
(September 1, Year Ended January 1, 1995
1992) to December 31, to
December 31, ------------------------ September 12,
1992 1993 1994 1995
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net patient revenue .................. $2,025,630 $7,847,205 $13,151,687 $10,857,924
Operating costs and expenses:
Salaries and benefits ............... 880,061 4,996,798 7,804,457 5,778,034
Medical supplies expense ............ 197,892 550,800 965,752 1,014,486
Data processing fees ................ 23,192 155,187 406,305 307,928
General and malpractice insurance ... 86,214 369,522 576,079 442,285
Depreciation and amortization ....... 12,870 80,254 348,170 262,296
Provision for bad debts ............. 71,798 30,000 -- --
Other operating expenses ............ 201,453 1,712,521 1,172,353 833,748
---------- ---------- ----------- -----------
Total operating costs and expenses 1,473,480 7,895,082 11,273,116 8,638,777
---------- ---------- ----------- -----------
Operating income (loss) .......... 552,150 (47,877) 1,878,571 2,219,147
Other income (expense):
Interest income ..................... -- 5,212 13,455 12,889
Interest expense .................... -- (3,778) (17,062) (27,429)
---------- ---------- ----------- -----------
Total other income (expense) ..... -- 1,434 (3,607) (14,540)
---------- ---------- ----------- -----------
Net income (loss) ................ $ 552,150 $ (46,443) $ 1,874,964 $ 2,204,607
========== ========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
F-75
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Retained
---------------- Earnings
Shares Amount (Deficit) Total
------- ------ ----------- -----------
Issuance of shares at inception 63 $ 1 $ -- $ 1
Net income .................... -- -- 552,150 552,150
--- --- ----------- -----------
BALANCE, December 31, 1992 .... 63 1 552,150 552,151
Issuance of shares ........... 93 -- -- --
Net loss ..................... -- -- (46,443) (46,443)
Distributions to stockholders -- -- (934,802) (934,802)
--- --- ----------- -----------
BALANCE, December 31, 1993 .... 156 1 (429,095) (429,094)
Net income ................... -- -- 1,874,964 1,874,964
Distributions to stockholders -- -- (1,254,884) (1,254,884)
--- --- ----------- -----------
BALANCE, December 31, 1994 .... 156 1 190,985 190,986
Net income ................... -- -- 2,204,607 2,204,607
Distributions to stockholders -- -- (800,000) (800,000)
--- --- ----------- -----------
BALANCE, September 12, 1995 ... 156 $ 1 $ 1,595,592 $ 1,595,593
=== === =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-76
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
(September 1,
1992) to Year Ended Period
December 31, ----------------------- From January 1, 1995
1992 1993 1994 to Sept. 12, 1995
----------- --------- ----------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................... $ 552,150 $ (46,443) $ 1,874,964 $ 2,204,607
----------- --------- ----------- -----------
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization ....... 12,870 80,254 348,170 262,296
Provision for bad debts ............. 71,798 30,000 -- --
Changes in assets and liabilities:
Accounts receivable ................ (1,051,800) (205,229) (343,583) (506,933)
Prepaid expenses ................... -- (33,777) (40,015) 3,060
Accounts payable and accrued
expenses ......................... 380,977 325,605 6,808 411,066
Deferred revenue ................... -- -- -- 105,000
----------- --------- ----------- -----------
Total adjustments ................. (586,155) 196,853 (28,620) 274,489
----------- --------- ----------- -----------
Net cash (used in) provided by
operating activities ............ (34,005) 150,410 1,846,344 2,479,096
----------- --------- ----------- -----------
Cash flows from investing activities:
Capital expenditures ................. -- (54,487) (53,887) (65,008)
----------- --------- ----------- -----------
Cash flows from financing activities:
Borrowings on short-term debt ........ -- 318,750 -- --
Payments on short-term debt .......... -- -- (318,750) --
Payments on long-term debt ........... -- -- (279,206) (222,573)
Due to stockholders .................. 322,476 501,096 (202,799) (257,764)
Distributions to stockholders ........ -- (934,802) (1,254,884) (800,000)
----------- --------- ----------- -----------
Net cash provided by (used in)
financing activities ............ 322,476 (114,956) (2,055,639) (1,280,337)
----------- --------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents ............ 288,471 (19,033) (263,182) 1,133,751
Cash and cash equivalents, beginning of
period ............................... -- 288,471 269,438 6,256
----------- --------- ----------- -----------
Cash and cash equivalents, end of period $ 288,471 $ 269,438 $ 6,256 $ 1,140,007
=========== ========= =========== ===========
Supplemental disclosure of noncash
transactions:
Note payable under covenant not-
to-compete .......................... $ -- $ 899,630 $ -- $ --
=========== ========= =========== ===========
Contribution of property and
equipment ........................... $ 222,209 $ -- $ -- $ --
=========== ========= =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
F-77
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1994 and September 12, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business
Oncology & Radiation Associates, P.A. (the "Company") is a Florida
corporation organized on September 1, 1992 to provide medical oncology and
radiation services. The Company operates two radiation departments at area
hospitals and eight medical oncology offices throughout Dade County. The
Company has a December 31 year-end.
On September 13, 1995, the Company entered into an asset purchase
agreement and a 20-year management service agreement with Continuum Care
Corporation ("Continuum"), an unaffiliated entity. Continuum will pay the
Company $10,653,000 which includes the purchase of certain assets, as
defined. Terms of the agreement specify $5,250,000 to be paid initially with
the remaining $5,403,000 to be paid semi-annually, incurring interest at 9%,
over the next five years. Continuum will receive the first $2.1 million of
the Company's profits, as defined, and an agreed-upon percentage of the
remaining profit over the term of the management service agreement.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Included in the cash and cash equivalents balances are
interest-bearing deposits of $1,068,536 in 1995. There were no
interest-bearing deposits at December 31, 1993 and 1994.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using accelerated methods over the
estimated useful lives of the assets ranging from 5 to 7 years.
d. Accounts Receivable and Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third-party payors such as insurance companies (47%) and
government-sponsored health care programs (35%). These receivables are
presented net of an estimated allowance for contractual adjustments and
uncollectible receivables. Contractual adjustments result from the difference
between the rates for services performed and reimbursement amounts from the
government-sponsored health care programs and insurance companies for such
services.
At September 12, 1995, deferred revenue represents that portion of monthly
managed care fees received in advance and related to the period from
September 13, 1995 through September 30, 1995.
e. Income Taxes
The Company is an S Corporation for tax reporting purposes; as such, its
income is directly taxed to its stockholders and, therefore, no income tax
provision is reflected in the accompanying statements of operations. Had the
Company been a C Corporation during 1992, 1993, 1994 and 1995, the unaudited
pro forma provision for income taxes would be approximately $215,000, $0,
$731,000 and $860,000, respectively.
f. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, prepaid expenses, other assets and accounts payable and accrued
expenses are reflected in the accompanying financial statements at cost which
approximates fair value.
g. Covenant Not-To-Compete
The covenant not-to-compete is amortized on a straight-line basis over the
three-year term of the related agreement (see Note 6).
F-78
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
-------------------
September 12,
1993 1994 1995
-------- --------- ---------
Furniture, fixtures and equipment $277,147 $ 319,424 $ 390,060
Leasehold improvements .......... -- 11,502 13,923
-------- --------- ---------
277,147 330,926 403,983
Less: Accumulated depreciation .. (93,593) (162,449) (210,221)
-------- --------- ---------
$183,554 $ 168,477 $ 193,762
======== ========= =========
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31,
-------------------
September 12,
1993 1994 1995
-------- -------- -----------
Accounts payable ............ $249,587 $341,484 $ 380,000
Accrued hospital fees ....... 400,719 315,630 279,705
Accrued salaries and benefits -- -- 408,475
-------- -------- ----------
$650,306 $657,114 $1,068,180
======== ======== ==========
4. SHORT-TERM DEBT
Short-term debt consists of a note payable which bears interest at prime
plus 1%. This note was repaid in 1994.
5. DUE TO STOCKHOLDERS
Due to stockholders consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------- September 12,
1993 1994 1995
---------- -------- --------
<S> <C> <C> <C>
Amounts payable under employment agreements $ 365,391 $532,524 $477,202
Noninterest-bearing advances .............. 185,292 165,292 165,293
Distributions payable ..................... 552,375 202,443 --
---------- -------- --------
$1,103,058 $900,259 $642,495
========== ======== ========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of a note payable for the Company's covenant
not-to-compete, which bears interest at 7% and is payable in monthly
installments of $27,778, through December 30, 1996. Future maturities are as
follows:
Year Ended December 31, Amount
-------------------------- --------
1995 ..................... $299,390
1996 ..................... 321,034
--------
$620,424
========
F-79
<PAGE>
ONCOLOGY & RADIATION ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. COMMITMENTS AND CONTINGENCIES:
a. Employment Agreements
The Company has employment agreements with certain physicians and/or
stockholders. Future minimum payments under such agreements are as follows:
Year Ended December 31, Amount
-------------------------- ----------
1995 ..................... $1,316,417
1996 ..................... 734,083
1997 ..................... 425,000
1998 ..................... 175,000
1999 ..................... 175,000
----------
$2,825,500
==========
b. Insurance
The physicians employed by the Company are required to maintain insurance
coverage for their professional malpractice claims as a condition of
employment. Such insurance provides for coverage to the extent individual
claims do not exceed $1,000,000 per incident and $3,000,000 in the aggregate
per year. Upon termination of employment, each physician is required to
purchase insurance coverage for the remaining outstanding exposure related to
incidents which may be incurred, but reported subsequent to the termination
of their employment. Accordingly, the Company does not provide reserves for
such claims.
c. Operating Leases
The Company leases equipment and office space under operating leases which
expire through 1997. Future annual minimum payments under operating leases
are as follows:
Year Ended December 31, Amount
-------------------------- --------
1995 ..................... $244,655
1996 ..................... 213,769
1997 ..................... 138,568
--------
$596,992
========
Rent expense of approximately $2,213, $205,000, $286,000 and $213,000 was
incurred in 1992, 1993, 1994 and 1995, respectively.
d. Legal Matters
An employee of the Company has filed a claim with the Equal Employment
Opportunity Commission. The Company denies liability and is defending the
claim vigorously. The Company and legal counsel are unable to estimate the
amount of any potential loss as a result of this claim, but believes the
loss, if any, would not materially affect the operations of the Company.
F-80
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Osler Medical, Inc.:
We have audited the accompanying balance sheet of Osler Medical, Inc. (a
Florida corporation) as of September 14, 1995, and the related statements of
operations and retained earnings and cash flows for the period from January
1, 1995 through September 14, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Osler Medical, Inc. as of
September 14, 1995, and the results of its operations and its cash flows for
the period from January 1, 1995 through September 14, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
October 26, 1995.
F-81
<PAGE>
OSLER MEDICAL, INC.
BALANCE SHEET
SEPTEMBER 14, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 355,728
Accounts receivable, net of allowances of $505,031 ................................ 1,515,264
Prepaid expenses .................................................................. 34,736
----------
Total current assets .......................................................... 1,905,728
PROPERTY AND EQUIPMENT, net ....................................................... 1,179,409
OTHER ASSETS ...................................................................... 15,621
----------
Total assets .................................................................. $3,100,758
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ............................................. $ 814,413
Deferred income taxes ............................................................. 294,500
Current portion of long-term debt ................................................. 354,297
Due to stockholder ................................................................ 34,175
----------
Total current liabilities ..................................................... 1,497,385
LONG-TERM DEBT, net of current portion ............................................ 1,316,221
----------
Total liabilities ............................................................. 2,813,606
----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 20,000 shares authorized, no shares issued and
outstanding ..................................................................... --
Common stock, Class A, $.01 par value, 20,000 shares authorized, 11,000 shares
issued and outstanding .......................................................... 110
Common stock, Class B, $.01 par value, 20,000 shares authorized, 1,000 shares
issued and outstanding .......................................................... 10
Retained earnings ................................................................. 287,032
----------
Total stockholders' equity .................................................... 287,152
----------
Total liabilities and stockholders' equity .................................... $3,100,758
==========
</TABLE>
The accompanying notes to financial statements are an integral part
of this balance sheet.
F-82
<PAGE>
OSLER MEDICAL, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 14, 1995
NET PATIENT REVENUE $9,031,159
----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits 5,171,905
Medical supplies 473,530
Rent expense 610,023
Malpractice insurance 514,147
Depreciation expense 226,142
Provision for bad debts 63,634
Other operating expenses 1,084,642
----------
Total operating costs and expenses 8,144,023
----------
Operating income 887,136
INTEREST EXPENSE 78,919
----------
Income before provision for income taxes 808,217
PROVISION FOR INCOME TAXES (315,000)
----------
Net income 493,217
ACCUMULATED DEFICIT, beginning of period (206,185)
----------
RETAINED EARNINGS, end of period $ 287,032
==========
The accompanying notes to financial statements are an integral part
of this statement.
F-83
<PAGE>
OSLER MEDICAL, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH SEPTEMBER 14, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................... $ 493,217
-----------
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation ................................................................. 226,142
Provision for bad debts ...................................................... 63,634
Provision for deferred income taxes .......................................... 294,500
Changes in assets and liabilities:
Accounts receivable ......................................................... (213,343)
Prepaid expenses ............................................................ (34,736)
Other assets ................................................................ 28,300
Accounts payable and accrued expenses ....................................... 539,300
-----------
Total adjustments ......................................................... 903,797
-----------
Net cash provided by operating activities ................................. 1,397,014
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .......................................................... (203,659)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt .................................................. 2,181,080
Payments on long-term debt .................................................... (1,669,530)
Due to stockholders ........................................................... (1,626,086)
-----------
Net cash used in financing activities ..................................... (1,114,536)
-----------
Net increase in cash and cash equivalents ................................. 78,819
CASH AND CASH EQUIVALENTS, beginning of period ................................ 276,909
-----------
CASH AND CASH EQUIVALENTS, end of period ...................................... $ 355,728
===========
</TABLE>
The accompanying notes to financial statements are an integral part
of this statement.
F-84
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 14, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business
Osler Medical, Inc. (the "Company") is a Florida corporation. Prior to
April 1, 1995, the Company operated as a partnership. The partnership was
originally organized in September 1985. The Company provides multi-specialty
medical services and has a December 31 year-end.
On September 15, 1995, the Company sold various assets to Continuum Care
Corporation, an unaffiliated entity, for approximately $3,600,000.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Approximately $185,000 was in excess of Federally insured limits
at September 14, 1995.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using accelerated methods over the
estimated useful lives of the assets ranging from 5 to 7 years. Leasehold
improvements are amortized over their estimated lives of 31.5 years using the
straight-line method.
d. Accounts Receivable and Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third-party payors such as insurance companies (27%), patients
(13%) and government-sponsored health care programs (60%). These receivables
are presented net of an estimated allowance for contractual adjustments and
uncollectible receivables. Contractual adjustments result from the difference
between the rates for services performed and reimbursement amounts from the
government-sponsored health care programs and insurance companies for such
services.
e. Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires that deferred income taxes be recognized for
the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting basis at rates based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
f. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, prepaid expenses, other assets and accounts payable and accrued
expenses are reflected in the accompanying financial statements at cost which
approximates fair value.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 14, 1995:
Furniture, fixtures and equipment . $ 2,347,283
Leasehold improvements ............ 531,320
-----------
2,878,603
Less: Accumulated depreciation .... (1,699,194)
-----------
$ 1,179,409
===========
F-85
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following at
September 14, 1995:
Accounts payable .............. $176,006
Accrued self-insurance (Note 7) 362,420
Income taxes payable .......... 20,500
Accrued salaries and benefits . 255,487
--------
$814,413
========
4. DUE TO STOCKHOLDER
Due to stockholder represents a note bearing interest at 10.5%, payable in
monthly installments of approximately $7,700 through January 1996.
5. LONG-TERM DEBT
Long-term debt consists of the following at September 14, 1995:
<TABLE>
<CAPTION>
<S> <C>
Note payable in monthly installments of $14,206 through February 1999, bearing
interest at 7.5% and secured by various assets of the Company ................... $ 504,995
Note payable in monthly installments of $20,608 through August 2000, bearing
interest at 8.75% and secured by various assets of the Company .................. 985,275
Capital lease payable in monthly installments of $2,778 through 2000 bearing
interest
at 4% ........................................................................... 150,878
Capital lease payable in monthly installments of $525 through 1999, bearing
interest
at 8% ........................................................................... 23,570
Capital lease payable in monthly installments of $494 through 1997, bearing
interest
at 8% ........................................................................... 5,800
----------
$1,670,518
==========
</TABLE>
Future maturities for the twelve months ending September 14 are as
follows:
Capital
Notes Leases
Payable Payable Total
----------- ----------- -----------
1996 ............................. $ 293,363 $ 64,982 $ 358,345
1997 ............................. 327,600 41,880 369,480
1998 ............................. 355,488 39,636 395,124
1999 ............................. 282,661 39,636 322,297
2000 ............................. 231,158 13,885 245,043
----------- ----------- -----------
1,490,270 200,019 1,690,289
Less: Amount representing interest -- (19,771) (19,771)
----------- ----------- -----------
$ 1,490,270 $ 180,248 $ 1,670,518
=========== =========== (354,297)
Less: Current portion ............ -----------
$ 1,316,221
===========
F-86
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. INCOME TAXES
The provision for income taxes reflects an estimate of taxes from the date
the Company elected C-Corporation status, April 1, 1995, to September 14,
1995, and consists of the following:
Current ........ $ 20,500
Deferred ....... 294,500
---------
$315,000
=========
Federal ........ 283,000
State .......... 32,000
---------
$315,000
=========
A reconciliation of the tax provision at the statutory rate of 34% to the
effective tax rate is as follows:
Tax provision at the statutory rate ............................... $ 283,000
State income taxes ................................................ 32,000
---------
$ 315,000
=========
Deferred income taxes consist of the following:
Book/tax differences in recording accounts receivable ............. $ 591,000
Book/tax differences in recording prepaid expenses ................ 13,500
Book/tax differences in recording accounts payable and accrued
expenses ....................................................... (310,000)
---------
$ 294,500
=========
7. COMMITMENTS AND CONTINGENCIES
a. Service Agreements
The Company has service agreements with terms in excess of one year.
Future payments under these agreements are as follows:
Twelve Months
Ending September 14 Total
---------------------- ----------
1996 ................. $ 200,197
1997 ................. 206,709
1998 ................. 212,437
1999 ................. 160,073
2000 ................. 115,111
Thereafter ........... 140,017
----------
$1,034,544
==========
b. Operating Leases
The Company leases equipment and office space under operating leases which
expire through 2001. All of these leases of office space are with a
partnership owned by stockholders of the Company. Future annual minimum
payments under operating leases are as follows:
F-87
<PAGE>
OSLER MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Twelve Months Related Unaffiliated
Ending September 14 Party Parties Total
-------------------- ---------- ------------- ----------
1996 ............... $ 698,434 $136,743 $ 835,177
1997 ............... 709,489 174,762 884,251
1998 ............... 747,616 138,153 885,769
1999 ............... 795,565 105,537 901,102
2000 ............... 995,538 40,750 1,036,288
Thereafter ......... 320,819 -- 320,819
---------- -------- ----------
$4,267,461 $595,945 $4,863,406
========== ======== ==========
Rent expense of approximately $610,000 was incurred for the period from
January 1, 1995 through September 14, 1995. All of this expense was
associated with the related party.
c. Malpractice Insurance
The physicians employed by the Company have insurance coverage for their
professional malpractice claims which is paid for them by the Company. Such
insurance provides for coverage to the extent individual claims do not exceed
$250,000--$2,000,000 per incident and $750,000--$4,000,000 in the aggregate
per year, depending on the physician's coverage.
Upon termination of employment, physicians are not required to purchase
insurance coverage for the remaining outstanding exposure related to
incidents which may be incurred, but reported subsequent to the termination
of their employment. Accordingly, the Company has reserved $362,420 to
provide for this self-insured exposure.
8. BENEFIT PLAN
The Company provides a defined contribution plan under Section 401(k) of
the Internal Revenue Code to substantially all of its employees. Employer
contributions are discretionary and no such contributions were made to the
plan for the period from January 1, 1995 through September 14, 1995.
9. RELATED PARTY
The Company has contracted to provide report reading services to an entity
owned by a stockholder of the Company. The Company received $14,500 for these
services for the period from January 1, 1995 through September 14, 1995.
F-88
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Directors and Stockholders
of Continuum Care Corporation:
We have audited the accompanying balance sheets of Osler Medical (a
Partnership) as of December 31, 1994 and 1993, and the related statements of
income and partners' capital, and cash flows for the years then ended. These
financial statements are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Osler Medical as of
December 31, 1994 and 1993, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
Hoyman, Dobson & Company, P.A.
July 27, 1995
F-89
<PAGE>
OSLER MEDICAL
BALANCE SHEETS
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .................................... $ 276,909 $ 615,221
Accounts receivable, net of allowance for doubtful accounts of
$469,693 in 1994 and $387,749 in 1993 ...................... 1,361,555 1,186,418
Loans receivable, related parties ............................ 4,000 --
---------- ----------
Total current assets ..................................... 1,642,464 1,801,639
---------- ----------
Property and equipment, at cost less accumulated depreciation
of $1,473,033 in 1994 and $1,275,019 in 1993 ............... 1,201,892 783,094
Deposits ..................................................... 43,921 7,520
---------- ----------
Total assets ............................................. $2,888,277 $2,592,253
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Line of credit ............................................... $ 569,801 $ 294,218
Accounts payable and accrued expenses ........................ 264,413 622,910
Refunds payable .............................................. 10,700 4,400
Current portion of obligation under capital lease ............ 5,187 4,710
Current portion of long-term debt ............................ 205,125 158,382
Distributions payable to partners ............................ 1,565,570 1,525,640
---------- ----------
Total current liabilities ................................ 2,620,796 2,610,260
---------- ----------
Long-term liabilities and Obligation under Capital Lease ..... 4,727 9,914
Long-term debt, less current portion ......................... 468,939 94,691
---------- ----------
Total long-term liabilities .............................. 473,666 104,605
---------- ----------
Total Liabilities ............................................ 3,094,462 2,714,865
Partners' capital ............................................ (206,185) (122,612)
---------- ----------
Total liabilities and partners' capital ...................... $2,888,277 $2,592,253
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-90
<PAGE>
OSLER MEDICAL
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
December 31, 1994 and 1993
1994 1993
----------- -----------
Revenue:
Gross patient revenue ............. $12,246,700 $10,685,039
Patient write-offs and refunds .... (3,255,819) (2,740,428)
----------- -----------
Net patient revenue ........... 8,990,881 7,944,611
Salaries, wages and benefits ...... 2,994,383 1,804,151
Professional fees ................. 89,724 63,821
Supplies .......................... 701,752 490,088
Utilities ......................... 54,952 43,587
Depreciation and amortization. .... 264,190 156,280
Rent .............................. 722,676 696,973
Other ............................. 867,527 1,388,282
----------- -----------
Total Operation Expenses .......... 5,695,204 4,643,182
----------- -----------
Operating income .............. 3,295,677 3,301,429
Other income (expense):
Miscellaneous income .............. 1,489 2,967
Interest expense .................. (93,543) (38,776)
Gain (loss) on disposal of assets . (3,773) 300
----------- -----------
Net other income (expense) .... (95,827) (35,509)
----------- -----------
Net Income ........................ 3,199,850 3,265,920
Partners' capital--beginning of
year .............................. (122,612) (99,310)
Contributed capital ............... -- 300,000
Distributions to the partners ..... (3,283,423) (3,589,222)
----------- -----------
Partners' capital--end of year .... $ (206,185) $ (122,612)
=========== ===========
The accompanying notes are an integral part of these statements.
F-91
<PAGE>
OSLER MEDICAL
STATEMENTS OF CASH FLOWS
Years ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Cash received from patients ................................ $ 8,822,044 $ 7,779,722
Cash paid to suppliers and employees ....................... (5,794,423) (4,195,094)
Interest paid .............................................. (93,543) (38,776)
----------- -----------
Net cash provided by operating activities .............. 2,934,078 3,545,852
----------- -----------
Cash flows from investing activities:
Capital acquisitions ....................................... (686,751) (517,209)
Collection of related party loans .......................... -- 2,888
Related party loans extended ............................... (4,000) --
Deposit paid for capital acquisition ....................... (30,000) --
Proceeds from sale of capital assets ....................... -- 10,710
----------- -----------
Net cash used by investing activities .................. (720,751) (503,611)
----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt ............................... 700,000 80,000
Net borrowings under line of credit ........................ 275,583 59,354
Repayment of long-term debt ................................ (279,009) (84,673)
Distributions paid to partners ............................. (3,243,503) (3,422,627)
Partners' buy-in ........................................... -- 300,000
Payments on capital lease obligation ....................... (4,710) (4,277)
----------- -----------
Net cash used by financing activities .................. (2,551,639) (3,072,223)
----------- -----------
Net decrease in cash and cash equivalents .................. (338,312) (29,982)
Cash and cash equivalents, January 1 ....................... 615,221 645,203
----------- -----------
Cash and cash equivalents, December 31 ..................... $ 276,909 $ 615,221
=========== ===========
Reconciliation of net income to net cash provided by
operating activities:
Net income ................................................. $ 3,199,850 $ 3,265,920
----------- -----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation .............................................. 264,190 117,505
Loss (gain) on disposal of assets ......................... 3,773 (300)
Increase in accounts receivable ........................... (175,137) (163,109)
Increase in deposits ...................................... (6,401) --
Increase (decrease) in accounts payable and accrued
expenses ................................................. (358,497) 327,576
Increase (decrease) in refunds payable .................... 6,300 (1,740)
----------- -----------
Total adjustments ......................................... (265,772) 279,932
----------- -----------
Net cash provided by operating activities .............. $ 2,934,078 $ 3,545,852
=========== ===========
Supplemental schedule of noncash investing and financing
activities:
Increase in distributions to partners incurred from cash to
accrual conversion ....................................... $ (127,854) $ (170,818)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-92
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 and 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business. Osler Medical, organized in September 1985 as a partnership, is a
multi-specialty medical group which utilizes the latest in diagnostic
equipment. Approximately fifty-seven percent of the Partnership's patients
are Medicare, Medicaid or Workers' Compensation recipients.
Basis of Accounting. The Partnership presents its financial statements
on the accrual basis of accounting. Revenues are recognized when they are
earned and expenses are recognized when they are incurred.
Cash Equivalents. For purposes of the statement of cash flows, the
Partnership considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Depreciation Method. The cost of property and equipment is depreciated
over the estimated useful lives of the related assets. Leasehold improvements
are depreciated over the lesser of the term of the related lease or the
estimated useful lives of the assets. Depreciation is computed on the
accelerated cost recovery system and the modified accelerated cost recovery
system as appropriate.
Income Taxes. Osler Medical is not a taxpaying entity for federal income
tax purposes, and thus no income tax expense has been recorded in the
statements. Income from the partnership is taxed to the partners through
their individual returns.
2. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31, 1994
and 1993:
1994
<TABLE>
<CAPTION>
Accumulated Net Book Useful
Cost Depreciation Value Lives
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Automobiles ..................... $ 11,347 $ 8,079 $ 3,268 5 years
Computer equipment .............. 175,437 55,638 119,799 5 years
Laboratory equipment ............ 2,102 922 1,180 5-7 years
Office equipment ................ 402,848 306,782 96,066 5-7 years
Medical equipment ............... 589,460 511,757 77,703 5-7 years
Diagnostic equipment ............ 945,701 535,691 410,010 5-7 years
Leasehold improvements .......... 523,951 37,608 486,343 5-39 years
Property held under capital lease 24,079 16,556 7,523 5 years
---------- ---------- ----------
Total ........................... $2,674,925 $1,473,033 $1,201,892
========== ========== ==========
</TABLE>
F-93
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Net
Accumulated Book Useful
1993 Cost Depreciation Value Lives
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Automobiles ..................... $ 11,347 $ 5,900 $ 5,447 5 years
Computer equipment .............. 43,732 23,647 20,085 5 years
Laboratory equipment ............ 20,131 18,308 1,823 5-7 years
Office equipment ................ 347,626 262,779 84,847 5-7 years
Medical equipment ............... 544,015 499,136 44,879 5-7 years
Diagnostic equipment ............ 848,087 429,902 418,185 5-7 years
Leasehold improvements .......... 219,096 21,798 197,298 5-39 years
Property held under capital lease 24,079 13,549 10,530 5 years
---------- ---------- --------
Total ........................... $2,058,113 $1,275,019 $783,094
========== ========== ========
</TABLE>
Depreciation expense charged to operations in 1994 and 1993 was $264,190
and $117,505, respectively.
The property held under capital lease is diagnostic equipment.
3. LINE OF CREDIT
At December 31, 1994, Osler had three lines of credit available with a
bank totaling $800,000. As of December 31, 1994 there were outstanding draws
against the lines of $569,801, $369,801 of this amount is due on demand and
$200,000 is due March 31, 1995. Interest is payable monthly on all three
lines of credit at the bank prime rate (8.5% at December 31, 1994) plus 2.0%.
The lines of credit are collateralized by all accounts receivable, machinery,
furniture, fixtures, equipment and leasehold improvements of Osler Medical.
The partners of Osler Medical have personally guaranteed the debts.
Osler Medical had a $300,000 line of credit with a bank at December 31,
1993. As of December 31, 1993 there were outstanding draws against the line
of $294,218 which were due March 31, 1994. Interest is payable monthly at the
bank prime rate (6.0% at December 31, 1994). The line of credit is
collateralized by all accounts receivable, machinery, furniture, fixtures,
equipment and leasehold improvements of Osler Medical. The partners of Osler
Medical have personally guaranteed the debt.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following is a summary of accounts payable and accrued expenses at
December 31, 1994 and 1993:
1994 1993
-------- --------
Accounts payable $137,476 $448,619
Accrued wages 44,191 56,007
Contract labor 17,942 91,059
Accrued vacation 29,690 --
Other accrued liabilities 35,114 27,225
-------- --------
$264,413 $622,910
======== ========
Employees of Osler Medical are entitled to paid personal leave days,
depending on job classifications, length of service and other factors. Until
December 31, 1994, the Company did not have an accounting software system
which tracked accrued personal days. It is, therefore, impracticable for
Osler Medical to estimate the amount of the liability at December 31, 1993,
and accordingly, no liability has been recorded. The amount of compensated
absences at December 31, 1994 can be reasonably determined and the liability
has been recorded in accounts payable and accrued expenses in the
accompanying financial statement.
F-94
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. LONG TERM DEBT
Long term debt outstanding as of December 31, 1994 and 1993 consists of
the following:
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Note payable to bank in monthly installments of $14,026 including
interest at 7.5%, beginning February 1994; secured by machinery,
furniture and equipment .......................................... $ 579,373 $ --
Note payable to bank; principal and interest due in full on
January 8, 1994; interest accrues at .5% over the bank prime rate
(6.0% at December 31, 1993); secured by machinery, furniture and
equipment ........................................................ -- 80,000
Note payable to P.A. of partner in monthly installments of $7,738,
including interest at 8.75%, beginning February 1991,
uncollateralized ................................................. 94,691 173,073
--------- ---------
Total .............................................................. 674,064 253,073
Less current portion ............................................... (205,125) (158,382)
--------- ---------
Total long-term debt ............................................... $ 468,939 $ 94,691
========= =========
</TABLE>
Following are maturities of long-term debt for each of the next five
years:
Year ending December 31, Amount
-------------------------- --------
1995 ..................... $205,125
1996 ..................... 146,089
1997 ..................... 149,163
1998 ..................... 160,743
1999 ..................... 12,944
--------
$674,064
========
Total interest expense for the year ended December 31, 1994 and 1993 was
$93,543 and $38,776, respectively.
6. OPERATING LEASE
Osler Medical is the lessee of office space and equipment under various
leases expiring in various years through 2002. Some of the leases are with
related parties, see Note 11.
Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of December 31, 1994 are as
follows:
Year ending December 31, Amount
----------------------------------------- ----------
1995 .................................... $ 843,814
1996 .................................... 870,673
1997 .................................... 885,561
1998 .................................... 887,655
1999 .................................... 904,252
Subsequent to 1999 ...................... 1,087,255
----------
Total minimum future rental payments .... $5,479,210
==========
Osler Medical has several leases for office space and equipment with a
partnership of two of the partners of Osler Medical. These leases have
scheduled rent increases calculated as follows: the base rent is increased
annually
F-95
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
from the previous years rent by the greater of six percent or any increase in
the consumer price index (CPI). However, that percent is never to exceed
twelve percent or be greater than two percent above the published CPI.
Rent expense paid for operating leases for the year ended December 31,
1994 and 1993 was $771,173 and $731,278, respectively.
7. CAPITAL LEASE
Osler Medical is the lessee of diagnostic equipment under a capital lease
expiring in 1996. The asset and liability under this capital lease are
recorded at the lower of the present value of the minimum leases payments or
the fair market value of the asset. The asset is depreciated over the lesser
of the lease term or its estimated productive life. Depreciation of this
asset is included in depreciation expense for 1994 and 1993.
Minimum future lease payments under the capital lease as of December 31,
1994 are as follows:
Year ending December 31, Amount
- -------------------------------------------- -------
1995 ....................................... $ 5,920
1996 ....................................... 4,940
-------
Total minimum lease payments ............... 10,860
Less: amount representing interest ......... 946
-------
Present value of net minimum lease payments. $ 9,914
=======
Total interest expense on this capital lease was $1,210 and $1,643 for the
years ended December 31, 1994 and 1993, respectively.
8. MAINTENANCE AND SERVICE AGREEMENTS
The Partnership has entered into several equipment maintenance agreements
and one service agreement with a related party having various expiration
dates through the year 2000.
Minimum future payments under maintenance and service agreements having
remaining terms in excess of one year as of December 31, 1994 are as follows:
Year ending December 31, Amount
- ------------------------------------ ----------
1995 ............................... $ 222,687
1996 ............................... 204,035
1997 ............................... 207,810
1998 ............................... 214,342
1999 ............................... 137,728
Subsequent to 1999 ................. 214,957
----------
Total minimum future rental payments $1,201,559
==========
Maintenance and service costs charged to operations under these agreements
for the years ended December 31, 1994 and 1993 were $125,322 and $117,209,
respectively.
9. EMPLOYEE RETIREMENT PLAN
The Partnership sponsors a profit-sharing plan which allows substantially
all full-time employees to defer compensation under Section 401 (k) of the
Internal Revenue Code and the employer to electively contribute to the plan.
Employer contributions to the plan are made at the discretion of the Board of
Directors.
There were no employer contributions made to the plan for the years ended
December 31, 1994 and 1993.
F-96
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. INCOME TAXES
The partnership is not subject to income tax. Income is taxed directly to
its partners. The partnership reported income of approximately $3,083,700 and
$3,100,500 for income tax purposes, for the years ended December 31, 1994 and
December 31, 1993, respectively. The difference between taxable income and
the income reflected in the financial statements results primarily from
timing differences in reporting revenues and expenses for financial and tax
purposes. Such timing differences result from the use of the accrual basis
method of accounting for financial reporting and cash basis method for tax
reporting.
11. RELATED PARTY TRANSACTIONS
Osler Medical has several operating leases with a partnership of two of
the partners in Osler. The leases are for office space and equipment. The
leases for office space are for ten years beginning on dates from January
1990, to December 1990. Rental expense for the office space was $658,475 and
$636,407 for the years ended December 31, 1994 and 1993, respectively. Future
minimum lease payments under these leases are included in Note 6. The
equipment lease with the partnership ended in April 1993. At the end of the
lease, the lessor offered and Osler chose to exercise an option to purchase
the leased equipment for $1. This bargain purchase was not part of the
original operating lease agreement. Rental expense under this lease for the
year ended December 31, 1993 was $56,000.
Osler Medical also entered into a management agreement with the
partnership described above. The management agreement is for a term of ten
years beginning on December 1990. Management expense under this agreement was
$64,201 and $60,566 for the years ended December 31, 1994 and 1993,
respectively. Minimum future payments under this agreement are included in
Note 8.
Osler Medical has a note payable to a P.A. owned by one of the partners of
Osler Medical. The outstanding balance on this note at December 31, 1994 and
1993 was $94,691 and $173,073, respectively. See Note 5 for the terms of the
note.
Osler Medical has contracted to provide report reading services to a
Company owned by one of the partners of Osler Medical. The Company paid Osler
$33,946 and $61,986 for reading services for the years ended December 31,
1994 and December 31, 1993, respectively.
12. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Partnership to
concentrations of credit risk consist primarily of temporary cash
investments. The Partnership places its temporary cash investments with a
financial institution. The amount of credit exposure in excess of
federally-insured limits at December 31, 1994 and December 31, 1993 was
$260,596 and $163,397, respectively.
13. COMMITMENTS AND CONTINGENCIES
A. Self Insurance
The Partnership has an agreement whereby it is self insuring the health
care of its employees and covered dependents up to $10,000 per year per
employee and covered dependents. Health care expenses of covered individuals
in excess of $10,000 per year are paid out of insurance purchased by the
Partnership. Administration of the self insurance is handled by an insurance
company. Funds advanced for claims are recorded as current assets and charged
to expenses as claims are paid. The annual aggregate stop loss under this
insurance plan was approximately $293,000 and $138,000 for the years ended
December 31, 1994 and 1993, respectively. The annual aggregate liability
calculated by the insurance company for the insurance coverage for years
ended December 31, 1994 and 1993 was $148,950 and $137,976, respectively. The
total amount of claims and premiums paid by the Partnership under this policy
for the years ended December 31, 1994 and 1993 were $207,337 and $189,122,
respectively. The Partnership has accrued $35,114 and $27,225 at December 31,
1994 and 1993 for claims incurred but not reported.
F-97
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
B. Professional Employment Agreement
Osler Medical entered into an employment agreement with a physician on
July 14, 1994. Under this agreement, the partnership will pay the physician
$10,000 as an incentive to exercise a partnership purchase option. If the
option is not exercised the incentive money must be repaid to Osler Medical.
In addition, the agreement guarantees the physician a monthly gross salary of
$10,000 for the first six months of employment. Starting the seventh month of
employment, the physician will be paid based upon a compensation formula in
the agreement. The agreement ends July 9, 1997 unless terminated prior to
that date with 120 days written notice and mutual agreement of the parties.
14. SUBSEQUENT EVENTS
A. Line of Credit
The Partnership entered into a line of credit for $198,603 in April 1995.
The funds were borrowed to pay off an existing line of credit due on May 31,
1995. This line of credit is due June 30, 1995. Interest is payable monthly
at the bank prime rate plus 2.0%. The line is secured by all accounts
receivable, machinery, equipment, furniture, fixtures and leasehold
improvements of Osler Medical and is cross-collateralized. The line is
personally guaranteed by the partners of Osler Medical.
The Partnership entered into a line of credit on June 21, 1995 for
$500,000. The amount paid off an existing $300,000 line of credit. The line
is due on demand. Interest is payable monthly at the bank prime rate plus
2.0%. The line is secured by all accounts receivable, machinery, equipment,
furniture, fixtures and leasehold improvements of Osler Medical and is
cross-collateralized. The line is personally guaranteed by the partners of
Osler Medical.
On July 12, 1995, the Partnership consolidated its three existing lines of
credit ($300,000, $198,603 and $500,000) into a note of $998,603. The note is
payable in monthly installments of $20,608, including interest at 8.75% per
annum, beginning August 17, 1995. The note is collateralized by all accounts
receivable, machinery, equipment, furniture, fixtures, and leasehold
improvements of Osler Medical and is cross-collateralized. The note is
personally guaranteed by the partners of Osler Medical. The following
maturities of this note payable are as follows:
Year ending December 31, Amount
-------------------------- --------
1995 ..................... $ 83,217
1996 ..................... 199,721
1997 ..................... 199,721
1998 ..................... 199,721
1999 ..................... 116,502
--------
Subsequent to 1999 ....... $998,603
========
B. Capital Lease
The Partnership signed a five year capital lease agreement on March 17,
1995. The lease is for diagnostic equipment valued at $150,878. The following
is the minimum future lease payments for this capital lease are as follows:
F-98
<PAGE>
OSLER MEDICAL
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year ending December 31, Amount
--------------------------------------- --------
1995 .................................. $ 24,999
1996 .................................. 33,332
1997 .................................. 33,332
1998 .................................. 33,332
1999 .................................. 33,332
Subsequent to 1999 .................... 8,333
--------
Total minimum lease payments .......... 166,659
Less: amount representing interest .... 15,781
--------
Present value of minimum lease payments $150,878
========
C. Change in Tax Status
Effective January 1, 1995, Osler Medical changed its tax status from a
partnership to a C-Corporation.
D. Sale of the Partnership
Osler Medical is in the process of negotiating an agreement to sell all of
the assets, properties and businesses used in the practice and owned by the
Partnership to an unrelated party for approximately $3,600,000. The assets
which are not included in the sale are goodwill, patient lists and medical
records, cash or cash equivalents on hand and on deposit in banks and the
personal assets of the physicians.
F-99
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
BALANCE SHEET
As of April 14, 1995
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash ........................................................................... $ 276,651
Accounts receivable ............................................................ 1,242,634
Inventory ...................................................................... 113,723
Prepaid expenses ............................................................... 14,201
----------
Total current assets ....................................................... 1,647,209
Net property and equipment ..................................................... 438,863
Other assets
Deferred taxes ................................................................. 58,123
Investment in subsidiary ....................................................... 27,477
----------
Total other assets ......................................................... 85,600
Total assets ............................................................... $2,171,672
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................................... 12,282
Accrued expenses and other liabilities ......................................... 61,636
Note payable--line of credit ................................................... --
Note payable--stockholders ..................................................... 440,300
Current portion of long term debt .............................................. 155,992
Deferred income taxes .......................................................... 183,793
----------
Total current liabilities .................................................. 854,003
Long term debt less current portion ............................................ 219,899
----------
Total liabilities .......................................................... 1,073,902
Stockholders' equity
Common stock--Class A $.05 par value, 4,800 shares authorized; 4,601 shares
issued ....................................................................... 230
Common stock--Class B $.05 par value, 5,200 shares authorized, 1,600 shares
issued ....................................................................... 80
Additional paid in capital ..................................................... 61,815
Retained earnings .............................................................. 1,035,645
----------
Total stockholders' equity ................................................. 1,097,770
Total liabilities and stockholders' equity ..................................... $2,171,672
==========
</TABLE>
F-100
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
For the period January 1, 1995--April 14, 1995
(unaudited)
Revenue
Drug sales, net ................................... $1,418,839
Less cost of sales ................................ 503,994
----------
Gross profit from drug sales .................... 914,845
Patient revenues, net ............................. 1,159,674
----------
Gross profit from drug sales and patient revenues 2,074,519
Other revenues .................................... 25,570
----------
Total revenues .................................... 2,100,089
----------
Operating expenses
Physician compensation ............................ 597,044
Clinic salaries, wages and benefits ............... 484,134
Clinic rents ...................................... 72,897
Clinic supplies ................................... 84,166
Other clinic costs ................................ 194,064
Depreciation ...................................... 19,529
Interest .......................................... 9,732
----------
Total operating expenses ...................... 1,461,566
----------
Net income before income taxes .................... 638,523
Income taxes ...................................... 20,902
----------
Net income ........................................ 617,621
Retained earnings, beginning ...................... 418,024
----------
Retained earnings, ending ......................... $1,035,645
==========
F-101
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C.
STATEMENT OF CASH FLOWS
For the period January 1, 1995--April 14, 1995
(unaudited)
Cash flows from operating activities
Net income .................................................... $ 617,621
Adjustments to reconcile net income to net cash (used)
in operating activities
Depreciation ................................................. 19,529
Equity in income of subsidiary ............................... 105
Changes in operating assets and liabilities
Accounts receivable ......................................... 9,831
Inventory ................................................... 49,907
Prepaid expenses ............................................ 12,312
Accounts payable ............................................ (131,148)
Accrued expenses and other liabilities ...................... (957,590)
---------
Net cash (used) in operating activities ................... (379,433)
---------
Cash flows from investing activities
Purchase of property and equipment ............................ (209)
---------
Net cash used by investing activities ..................... (209)
---------
Cash flows from financing activities
Payment of notes payable--line of credit ...................... (237,000)
Payments of long-term debt .................................... (41,563)
Proceeds from notes payable--stockholders. .................... 199,500
---------
Net cash (used) by financing activities ................... (79,063)
---------
Net decrease in cash .......................................... (458,705)
Cash, beginning of year ....................................... 735,356
---------
Cash, end of year ............................................. $ 276,651
=========
Supplemental disclosures:
Cash paid during the year for interest ........................ $ 9,732
=========
Cash paid during the year for income taxes .................... $ 20,902
=========
F-102
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Georgia Oncology-Hematology Clinic, P.C.
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Georgia
Oncology-Hematology Clinic, P.C. and Subsidiary as of December 31, 1994 and
the related consolidated statements of operations and retained earnings, and
cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Georgia
Oncology-Hematology Clinic, P.C. and Subsidiary as of December 31, 1994, and
the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
BABUSH, NEIMAN, KORNMAN & JOHNSON
June 26, 1995
F-103
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents ....................................................... $ 747,970
Accounts receivable, less allowance for doubtful accounts of $339,006 ........... 1,297,413
Inventory ....................................................................... 163,630
Prepaid expenses ................................................................ 26,709
----------
Total current assets ........................................................ 2,235,722
Net property and equipment ...................................................... 458,183
----------
Other assets
Deferred taxes .................................................................. 58,123
----------
Total assets .................................................................... $2,752,028
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ................................................................ $ 173,606
Accrued expenses and other liabilities .......................................... 1,019,226
Note payable--line of credit .................................................... 237,000
Note payable--stockholders ...................................................... 240,800
Current portion of long-term debt ............................................... 155,255
Deferred income taxes ........................................................... 183,793
----------
Total current liabilities ...................................................... 2,009,680
Long-term debt, less current portion ............................................ 262,199
----------
Total liabilities ............................................................. 2,271,879
----------
Stockholders' equity
Common stock--Class A, $.05 par value, 4,800 shares authorized; 4,601 shares
issued ........................................................................ 230
Common stock--Class B, $.05 par value, 5,200 shares authorized; 1,600 shares
issued ........................................................................ 80
Additional paid-in capital ...................................................... 61,815
Retained earnings ............................................................... 418,024
----------
Total stockholders' equity ..................................................... 480,149
----------
Total liabilities and stockholders' equity ...................................... $2,752,028
==========
</TABLE>
See notes to consolidated financial statements
F-104
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
For the year ended December 31, 1994
Revenues
Drug sales net .................................... $4,502,513
Less cost of sales ................................ 2,519,182
----------
Gross profit from drug sales .................... 1,983,331
Patient revenues, net ............................. 4,099,952
----------
Gross profit from drug sales and patient revenues 6,083,283
Other revenues .................................... 13,897
----------
Total revenues .................................... 6,097,180
----------
Operating Expenses
Physician compensation ............................ 2,659,297
Clinic salaries, wages and benefits ............... 1,671,337
Clinic rents ...................................... 216,415
Clinic supplies ................................... 287,752
Other clinic costs ................................ 1,048,524
Depreciation ...................................... 115,792
Interest .......................................... 52,984
----------
Total operating expenses ...................... 6,052,101
----------
Income before income taxes ........................ 45,079
Income taxes ...................................... 11,393
----------
Net income ........................................ 33,686
Retained earnings, beginning ...................... 387,838
Distributions ..................................... (3,500)
----------
Retained earnings, ending ......................... $ 418,024
==========
See notes to consolidated financial statements
F-105
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended December 31, 1994
Cash flows from operating activities
Net income .................................................... $ 33,686
Adjustments to reconcile net income to net cash provided
by operating activities
Loss on disposal of property and equipment ................... 745
Depreciation ................................................. 115,792
Provision for bad debts ...................................... 179,424
Deferred income taxes ........................................ (5,816)
Changes in operating assets and liabilities
Accounts receivable ......................................... (495,521)
Inventory ................................................... (85,421)
Prepaid expenses ............................................ (3,227)
Accounts payable ............................................ 51,615
Accrued expenses and other liabilities ...................... 686,925
---------
Net cash provided by operating activities ..................... 478,202
---------
Cash flows from investing activities
Proceeds from disposal of property and equipment .............. 100
Purchase of property and equipment ............................ (192,003)
Other assets .................................................. 6,000
---------
Net cash used by investing activities ......................... (185,903)
---------
Cash flows from financing activities
Proceeds from notes payable--line of credit ................... 137,000
Payments of long-term debt .................................... (140,999)
Proceeds from long-term debt .................................. 170,576
Proceeds from notes payable--stockholders ..................... 210,000
Distributions ................................................. (3,500)
---------
Net cash provided by financing activities ..................... 373,077
---------
Net increase in cash .......................................... 665,376
Cash, beginning of year ....................................... 82,594
---------
Cash, end of year ............................................. $ 747,970
=========
Supplemental disclosures
Cash paid during the year for interest ........................ $ 52,984
=========
Cash paid during the year for income taxes .................... $ 4,397
=========
Purchase of property and equipment financed by notes payable .. $ 116,877
=========
See notes to consolidated financial statements
F-106
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements
A. Accounting Policies
Description of Business. Georgia Oncology-Hematology Clinic, P.C. (the
"Corporation") was incorporated in 1975 under the laws of Georgia. The
Corporation was formed to operate medical oncology facilities in Atlanta,
Georgia. The Corporation offers a comprehensive range of medical oncology
services at three facilities in the Atlanta area.
Property and Equipment. Property and equipment are stated at cost.
Depreciation of property and equipment is generally calculated over the
estimated useful lives of the assets using accelerated methods. Depreciation
of leasehold improvements is calculated on a straight line basis over the
term of the lease. Routine maintenance and repairs are charged to expenses as
incurred, while costs of betterments and renewals are capitalized.
Income Taxes. The Corporation is taxable under provisions of the Internal
Revenue Code. The Corporation recognizes deferred income tax on all
significant timing differences between financial and income tax reporting
(see Note H).
Net Revenues. Net revenues are reported at the estimated realizable amounts
from patients, third-party payors, and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and
retroactive adjustments. Provisions for estimated third-party payor
settlements and adjustments are estimated in the period the related services
are rendered and adjusted in future periods as final settlements are
determined. During the year ended December 31, 1994, approximately 41% of net
revenue was received under the Medicare program and 2% under state
reimbursement programs. The Medicare program and state reimbursement programs
pay physician services based on fee schedules which are determined by the
related government agency. The Corporation has negotiated agreements with
managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the
Corporation.
Inventory. Inventory is stated at the lower of first-in first-out, cost or
market.
Principles of Consolidation. The consolidated financial statements include
the accounts of Georgia Oncology-Hematology Clinic, P.C. and its wholly
owned subsidiary, Georgia Oncology-Hematology Services, Inc. All material
intercompany transactions have been eliminated.
B. Net Property and Equipment
Major classifications of property and equipment and their respective
depreciable lives are summarized below:
Depreciable
Lives Total
--------- ----------
Furniture and equipment ...................... 5-7
years $ 693,950
Leasehold improvements ....................... 3-13
years 537,894
--------- ----------
1,231,844
Less accumulated depreciation and amortization 773,661
----------
Total ........................................ $ 458,183
==========
C. Notes Payable
During 1994, the Corporation obtained a line of credit from a bank in the
amount of $250,000. The line of credit matures on May 31, 1995. Interest is
charged at the prime rate plus 0.5%. The accounts receivable of the
Corporation are pledged as collateral against the line of credit. The amount
outstanding under the line of credit at December 31, 1994 was $237,000 with
available credit of $13,000.
F-107
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
At various times, the Corporation has obtained notes from its
stockholders. The notes are unsecured and are payable on demand. Interest is
charged at the prime rate. Amounts outstanding under the notes at December
31, 1994 were $240,800. All notes from stockholders and related accrued
interest were repaid in May, 1995.
The prime rate at December 31, 1994 was 8.5%.
D. Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, due in monthly installments of $8,253 plus interest at the
prime rate plus 0.5% through November 1997 collateralized by furniture, fixtures
and equipment ................................................................... $ 288,845
Note payable to a bank, due in monthly installments of $1,500 plus interest at 7%
through February 1997, collateralized by computer equipment ..................... 38,699
Note payable to a corporation, due in monthly installments of $2,440 including
principal and interest at 7% through March 1997 collateralized by furniture,
fixtures and equipment .......................................................... 60,800
Note payable to a corporation, due in monthly installments of $1,168 including
principal and interest at 7% through March 1997 collateralized by leasehold
improvements .................................................................... 29,110
---------
Total long-term debt ............................................................. 417,454
Less current maturities ........................................................... (155,255)
---------
Long-term debt, less current maturities ........................................... $ 262,199
=========
</TABLE>
At December 31, 1994 scheduled aggregate long-term debt maturities are as
follows:
Year Ending December 31, Amount
-------------------------- ---------
1995 ..................... $155,255
1996 ..................... 158,019
1997 ..................... 104,180
---------
$417,454
=========
E. Operating Leases
Leases that do not meet the criteria for capitalization are classified as
operating leases with related rentals charged to operations as incurred.
Under agreements classified as operating leases, the Company leases
facilities for its three locations and certain equipment. The lease for one
of the locations, with an aggregate monthly expense of $8,287 expires on
January 31, 1996. This lease has been renewed for five years.
The lease for the second location, with an aggregate monthly expense of
$4,700 plus direct costs expires on May 31, 1997. The Company has an option
to renew this lease for five years. The lease for the third location, with an
aggregate monthly expense of $1,608 in 1994, expires on November 30, 1996.
The Company has an option to renew this lease for five years with rent
increasing by 5% each year.
F-108
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
The following is a schedule by year of future minimum lease payments under
operating leases as of December 31, 1994.
Year Ending December 31,
--------------------------
1995 ..................... $182,008
1996 ..................... 181,044
1997 ..................... 125,214
1998 ..................... 99,444
1999 ..................... 99,444
Thereafter ............... 107,731
---------
Total .............. $794,885
=========
Total rent expense for the year ended December 31, 1994 was $216,415.
F. Employee Benefit Plan
The Corporation has a qualified defined contribution 401(k) Profit Sharing
Plan covering substantially all employees. Employee contributions in the form
of pretax salary deferrals are discretionary and are determined based upon a
percentage of each employee's compensation, as defined. Employer
contributions are determined at the discretion of the Company. Contributions
to the plan totalled $176,521 for the year ended December 31, 1994.
G. Contingencies
The Corporation maintains general liability and malpractice insurance
providing the Corporation with coverage of $5 million per incident and $7
million in aggregate. As of December 31, 1994, there were no asserted
malpractice claims against the Corporation; accordingly, no amounts for
potential losses have been accrued in the accompanying financial statements.
In addition, the Corporation has not accrued for a loss of unreported
incidents or for losses in excess of insurance coverage, as the amount, if
any, cannot be reasonably estimated and the profitability of an adverse
outcome cannot be determined at this time. It is the opinion of management
that the ultimate resolution of any unasserted claims will not have a
material adverse effect on the financial position or operating results of the
Corporation.
H. Income Taxes
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Corporation's deferred tax liabilities and assets as of
December 31, 1994 were as follows:
December 31,
1994
------------
Deferred current tax liabilities:
Cash to accrual adjustments ....... $342,461
Deferred current tax assets:
Cash to accrual adjustments ....... 158,668
--------
Net deferred current tax liabilities $183,793
========
Deferred long-term tax assets:
Depreciable and amortizable assets $ 58,123
========
F-109
<PAGE>
GEORGIA ONCOLOGY-HEMATOLOGY CLINIC, P.C. AND SUBSIDIARY
Notes to Consolidated Financial Statements--(Continued)
The provision for income taxes for the year ended December 31, 1994 is as
follows:
Current:
Federal ............. $14,520
State ............... 2,689
-------
17,209
-------
Deferred:
Federal ............. (5,468)
State ............... (348)
-------
(5,816)
-------
Net income tax expense $11,393
=======
I. Related Party Transactions
The Corporation has loans from its stockholders amounting to $240,800 at
December 31, 1994 (see Note C).
J. Subsequent Events
On April 17, 1995, PhyChoice, Inc. acquired the operating assets of the
Corporation. Simultaneous with the acquisition, the Corporation entered into
a 10-year management services agreement with PhyChoice, Inc. The management
services agreement became effective April 17, 1995. The Company has entered
into merger discussions with Cancer Specialists of Georgia, P.C.
K. Deposits in Excess of Federally Insured Limits
The Company has cash deposits with a financial institution which fluctuate
in excess of federally insured limits. If this financial institution were not
to honor its contractual obligation to the Company then the Company could
incur losses. Management is of the opinion that there is no risk because of
the financial strength of the financial institution. At December 31, 1994,
the Company had cash deposits of $1,007,183 with the financial institution
resulting in $907,183 being at risk.
F-110
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED BALANCE SHEET
JULY 25, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................................ $ 236,422
Accounts receivable, less allowances for adjustments and doubtful accounts ....... 692,839
Prepaid expenses ................................................................. 111,107
----------
Total current assets ......................................................... 1,040,368
----------
PROPERTY AND EQUIPMENT, less accumulated depreciation of $124,952 ................ 158,518
----------
PROPERTY UNDER CAPITAL LEASES, less accumulated amortization of $29,578 .......... 37,879
----------
OTHER ASSETS
Organization costs, less accumulated amortization of $246 ........................ 574
Other assets ..................................................................... 10,000
----------
Total other assets ........................................................... 10,574
----------
Total assets ................................................................. $1,247,339
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................................. $ 108,160
Other accrued expenses and liabilities ........................................... 67,944
Due to related party ............................................................. 6,400
Current portion of obligations under capital leases .............................. 7,731
Deferred income taxes--current ................................................... 142,630
Accrued income taxes ............................................................. 25,000
----------
Total current liabilities .................................................... 357,865
----------
OTHER LIABILITIES
Obligations under capital leases ................................................. 36,875
Deferred income taxes ............................................................ 12,870
----------
Total other liabilities ...................................................... 49,745
----------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value; 75 and 600 shares authorized, issued and
outstanding .................................................................... 675
Additional paid-in capital ....................................................... 24,243
Retained earnings ................................................................ 814,811
----------
Total stockholders' equity ................................................... 839,729
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................... $1,247,339
==========
</TABLE>
F-111
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE PERIOD JANUARY 1, 1995 THROUGH JULY 25, 1995
REVENUE
Net patient service revenue ......... $2,403,860
Other income ........................ 22,969
----------
Total revenue ................... 2,426,829
----------
OPERATING EXPENSES
Cost of affiliated physician services 579,881
Salaries, wages and benefits ........ 537,283
Rents and leases .................... 112,645
Supplies ............................ 628,048
Other operating costs ............... 157,567
Depreciation and amortization ....... 24,767
Net interest expense ................ 18,411
----------
Net operating expenses .......... 2,058,602
----------
NET INCOME (LOSS) BEFORE INCOME TAXES 368,227
INCOME TAX
Current ............................. 25,000
Deferred ............................ 16,730
----------
41,730
----------
NET INCOME .......................... 326,497
RETAINED EARNINGS--BEGINNING OF
PERIOD ............................ 488,314
----------
RETAINED EARNINGS--END OF PERIOD .... $ 814,811
==========
F-112
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 1995 THROUGH JULY 25, 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................... $ 326,497
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................................ 24,767
Deferred income taxes ........................................ 16,730
Changes in operating assets and liabilities:
Accounts receivable, net .................................... (177,143)
Prepaid expenses ............................................ (25,164)
Deposits .................................................... 1,064
Accounts payable ............................................ 18,475
Other accrued expenses and liabilities ...................... (19,495)
Due to related party ........................................ (1,100)
Accrued income taxes ........................................ 25,000
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 189,631
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ............................ (16,335)
---------
NET CASH (USED) BY INVESTING ACTIVITIES ................... (16,335)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations ......................... (7,689)
---------
NET CASH (USED) BY FINANCING ACTIVITIES ................... (7,689)
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... 165,607
CASH AND CASH EQUIVALENTS--BEGINNING OF PERIOD ................ 70,815
---------
CASH AND CASH EQUIVALENTS--END OF PERIOD ...................... $ 236,422
=========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ........................ $ 18,411
=========
Purchase of equipment with proceeds of capital lease
obligations ................................................. $ 19,220
=========
F-113
<PAGE>
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
Certified Public Accountants
201 West Padonia Road, Suite 600
Timonium, Maryland 21093-2186
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc.
We have audited the accompanying combined balance sheets of
Oncology-Hematology Associates, P.A. and Oncology-Hematology Infusion
Therapy, Inc. (1994 only) as of December 31, 1994 and 1993, and the related
combined statements of operations and retained earnings and cash flows for
the years then ended of Oncology-Hematology Associates, P.A. and for the
period March 7, 1994 (date of inception) through December 31, 1994 of
Oncology-Hematology Infusion Therapy, Inc. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
combined financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of
Oncology-Hematology Associates, P.A. and Oncology-Hematology Infusion
Therapy, Inc. (1994 only) at December 31, 1994 and 1993, and the results of
its operations and its cash flows for the years then ended and from March 7,
1994 (date of inception) through December 31, 1994 of Oncology-Hematology
Infusion Therapy, Inc. in conformity with generally accepted accounting
principles.
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
Timonium, Maryland
August 4, 1995
F-114
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED BALANCE SHEETS
DECEMBER 31,
1994 1995
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .............................. $ 70,815 $194,081
Accounts receivable, less allowances for adjustments and
doubtful accounts .................................... 515,696 465,201
Prepaid expenses ....................................... 85,943 76,574
Deposits ............................................... 1,064 --
-------- --------
Total current assets ............................... 673,518 735,856
-------- --------
PROPERTY AND EQUIPMENT, less accumulated depreciation of
$107,911 in 1994 and $87,710 in 1993 ................. 159,224 67,930
-------- --------
PROPERTY UNDER CAPITAL LEASES, less accumulated
amortization of $21,948 in 1994 and $13,213 in 1993 .. 26,289 17,942
-------- --------
OTHER ASSETS
Organization costs, less accumulated amortization of
$150 ................................................. 670 --
Other assets ........................................... 10,000 10,000
-------- --------
Total other assets ................................. 10,670 10,000
-------- --------
Total Assets ........................................... $869,701 $831,728
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ....................................... $ 89,685 $ 22,169
Other accrued expenses and liabilities ................. 87,439 74,985
Due to related party ................................... 7,500 --
Current portion of obligations under capital leases .... 9,844 6,448
Deferred income taxes--current ......................... 125,570 155,700
-------- --------
Total current liabilities .......................... 320,038 259,302
-------- --------
OTHER LIABILITIES
Obligations under capital leases ....................... 23,231 17,496
Deferred income taxes .................................. 13,200 9,600
-------- --------
Total other liabilities ............................ 36,431 27,096
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value; 75 (1993 and 1994) and
600 shares (1994 only) authorized, issued and
outstanding .......................................... 675 75
Additional paid-in capital ............................. 24,243 18,843
Retained earnings ...................................... 488,314 526,512
-------- --------
Total stockholders' equity ......................... 513,232 545,330
-------- --------
Total liabilities and stockholders' equity ............. $869,701 $831,728
======== ========
The accompanying notes are an integral part of these financial statements.
F-115
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, (ONCOLOGY-HEMATOLOGY
ASSOCIATES, P.A.) FOR THE PERIOD MARCH 7, 1994 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1994 (ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.)
1994 1993
---------- ----------
REVENUE
Net patient service revenue ......... $3,738,339 $3,397,458
Other income ........................ 10,211 44,196
---------- ----------
Total revenue ................... 3,748,550 3,441,654
---------- ----------
OPERATING EXPENSES
Cost of affiliated physician services 1,401,663 1,479,424
Salaries, wages and benefits ........ 864,690 731,714
Rents and leases .................... 157,269 129,663
Supplies ............................ 1,038,571 982,007
Other operating costs ............... 206,600 147,010
Depreciation and amortization ....... 29,086 20,487
Net interest expense ................ 19,299 12,028
---------- ----------
Net operating expenses .......... 3,717,178 3,502,333
---------- ----------
NET INCOME (LOSS) BEFORE INCOME TAXES 31,372 (60,679)
INCOME TAX (BENEFIT) ................ (26,530) (61,316)
NET INCOME .......................... 57,902 637
RETAINED EARNINGS AT BEGINNING OF
YEAR .............................. 526,412 525,775
DISTRIBUTIONS TO STOCKHOLDERS ....... (96,000) --
---------- ----------
RETAINED EARNINGS AT END OF YEAR .... $ 488,314 $ 526,412
========== ==========
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, (ONCOLOGY-HEMATOLOGY
ASSOCIATES, P.A.) FOR THE PERIOD MARCH 7, 1994 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1994 (ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.)
1994 1993
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................... $ 57,902 637
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 29,086 20,487
Deferred income taxes ............................... (26,530) (61,340)
Changes in operating assets and liabilities:
Accounts receivable, net ........................... (50,495) 193,404
Prepaid expenses ................................... (9,369) (5,030)
Other assets ....................................... -- (10,000)
Deposits ........................................... (1,064) --
Accounts payable ................................... 67,516 (9,437)
Other accrued expenses and liabilities ............. 12,454 22,428
Due to related party ............................... 7,500 --
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 87,000 151,149
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ................... (111,495) (18,688)
Organizational costs ................................. (820) --
--------- --------
NET CASH (USED) BY INVESTING ACTIVITIES .......... (112,315) (18,688)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations ................ (7,951) (3,872)
Issuance of capital stock ............................ 600 --
Additional paid in capital ........................... 5,400 --
Dividends paid ....................................... (96,000) --
--------- --------
NET CASH (USED) BY FINANCING ACTIVITIES .......... (97,951) (3,872)
--------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS . (123,266) 128,589
CASH AND CASH EQUIVALENTS--BEGINNING OF YEAR ......... 194,081 65,492
--------- --------
CASH AND CASH EQUIVALENTS--END OF YEAR ............... $ 70,815 $194,081
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ............... $ 19,299 $ 12,028
========= ========
Cash paid during the year for income taxes ........... $ -- $ 24
========= ========
The accompanying notes are an integral part of these financial statements.
F-117
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Oncology-Hematology Associates, P.A. and Oncology-Hematology Infusion
Therapy were incorporated on January 1, 1978 and February 4, 1994,
respectively, under the laws of the State of Maryland. The Companies were
formed to operate oncology and hematology facilities in Clinton and
Greenbelt, Maryland, dedicated to providing comprehensive cancer treatment
and diagnosis.
Basis of Combination
The combined financial statements for the 1994 year include the financial
statements of Oncology-Hematology Associates, P.A. and Oncology-Hematology
Infusion Therapy, Inc. which are related through common ownership and
management. All intercompany transactions and accounts have been eliminated
in combination.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
Property and equipment are carried at cost and are depreciated on the
straight-line method over the following lives:
Life (Years)
-------------
Leasehold improvements ...... 15
Furniture and fixtures ...... 7
Equipment ................... 7
Data processing equipment ... 5
Income Taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes. Deferred taxes relate primarily to the differences between reporting
the financial statements on the accrual basis and the income tax return on
the cash basis. The deferred tax assets and liabilities represent the future
tax return consequences of these differences, which will either be taxable or
deductible when the assets or liabilities are recovered or settled.
The stockholders of Oncology-Hematology Infusion Therapy, Inc. have
consented to the Company's election to come within the provisions of Section
1372(A) of the Internal Revenue Code which provides that income of the
Corporation will be taxed directly to its stockholders; thus no provision for
Federal income taxes has been provided.
Net Revenue
Net revenue is reported at the estimated realizable amounts from patients,
third-party payors and others for services rendered. Revenue under certain
third-party payor agreements is subject to audit and retroactive adjustments.
Provisions for estimated third-party payor settlements and adjustments are
estimated in the period the related services are rendered and adjusted in
future periods as final settlements are determined. The Medicare and Medicaid
programs pay physician services based on fee schedules which are determined
by the related government agency. The Company has negotiated agreements with
managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the
Company.
Cost of Affiliated Physician Services
Cost of affiliated physician services represents salaries, bonuses and
selected benefits paid to the affiliated physicians. Physicians compensation
generally is determined based on the excess of collections over expenses
prior to physician compensation.
F-118
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE B. CASH
Oncology-Hematology Associates P.A. maintains cash balances at a local
bank. Cash accounts at banks are insured by the FDIC for up to $100,000.
Amounts in excess of insured limits were approximately $10,200 at December
31, 1994 and $35,528 at December 31, 1993.
NOTE C. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31,:
1994 1993
--------- ---------
Accounts Receivable ................... $ 830,179 $ 824,971
Less: Adjustments for third party payor (294,483) (344,770)
Allowance for doubtful accounts . (20,000) (15,000)
--------- ---------
Accounts receivable--net .............. $ 515,696 $ 465,201
========= =========
NOTE D. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,:
1994 1993
--------- --------
Leasehold improvements .......... $ 103,009 $ 43,885
Furniture, fixtures and equipment 82,023 51,454
Data processing equipment ....... 82,103 60,301
--------- --------
267,135 155,640
Less: accumulated depreciation .. (107,911) (87,710)
--------- --------
Property and equipment--net ..... $ 159,224 $ 67,930
========= ========
The statement of income includes depreciation expense of $20,201 for the
year ended December 31, 1994 and $14,256 for the year ended December 31,
1993.
NOTE E. PROPERTY UNDER CAPITAL LEASES
All property under capital leases have been leased from a partnership
owned exclusively by the Company's shareholders. Property under capital
leases consisted of the following at December 31,:
1994 1993
-------- --------
Medical equipment ............... $ 29,942 $ 15,510
Computer equipment .............. 18,295 15,645
-------- --------
48,237 31,155
Less: accumulated depreciation .. (21,948) (13,213)
-------- --------
Property under capital
leases--net ................... $ 26,289 $ 17,942
======== ========
The statement of income includes depreciation expense of $8,735 for the
year ended December 31, 1994 and $6,231 for the year ended December 31,
1993.
F-119
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE F. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases equipment under capital leases. The leases require
monthly payments which vary from $25 to $1,200 and mature through October
1999. Under the terms of the leases, the Company has a bargain purchase
option at the end of each lease.
Future minimum lease payments under the capital leases at December 31,
1994 are as follows:
1995 .................................. $29,550
1996 .................................. 21,300
1997 .................................. 20,300
1998 .................................. 15,300
1999 and thereafter ................... 3,950
-------
Total minimum lease payments ......... 90,400
Less: amount representing interest ... 57,325
-------
Value of minimum lease payments ...... 33,075
Current portion of lease obligations . 9,844
-------
Long-term portion of lease obligations $23,231
=======
The statement of income includes interest expense of $19,299 for the year
ended December 31, 1994 and $12,028 for the year ended December 31, 1993.
NOTE G. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting
for income taxes to the liability method required by Financial Accounting
Standards Board (FASB) Statement No. 109, "Accounting for Income Taxes."
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and
assets as of December 31, were as follows:
1994 1993
-------- --------
Current deferred tax liabilities:
Cash to accrual adjustments ....... $147,350 $177,200
Current deferred tax assets:
Cash to accrual adjustments ....... (21,780) (21,500)
-------- --------
Net deferred current tax liabilities $125,570 $155,700
======== ========
Long-term deferred tax liabilities:
Cash to accrual adjustments ....... $ 19,400 $ 17,800
Long-term deferred tax assets:
Depreciable and amortizable assets (6,200) (8,200)
-------- --------
Net deferred long-term liabilities . $ 13,200 9,600
======== =========
F-120
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
The provision for income taxes consisted of the following at December 31,:
1994 1993
-------- ---------
Current income tax
(benefit)
Federal .................. $ -- $ --
State .................... -- 24
Deferred taxes ........... (26,530) (61,340)
-------- --------
$(26,530) $(61,316)
======== ========
NOTE H. RELATED PARTY TRANSACTIONS
The Company paid building and equipment rentals of $24,720 in 1993 and
$54,720 in 1994 per lease agreements to a partnership formed 100% by the
Company's shareholders for its Greenbelt office. The Company also paid
rent of $93,530 in 1993 and $26,700 in 1994 for its Clinton office space
from a partnership in which the Company's shareholders own 11.28%. Payroll
and other expenses were paid by the Company for the operation of a jointly
owned medical lab proportionate to the number of tests done specifically
for the Company. At December 31, 1994, $2,060 was payable by the Company
as a result of the related party transactions. There were no amounts due
at December 31, 1993.
NOTE I. COMMITMENTS
The Company leases its principal place of business and equipment from a
partnership partially owned by its shareholders. The minimum annual
rentals total $92,990 plus property taxes. The leases expire in October
1995 and November 1995.
The Company leases its secondary place of business and equipment from a
partnership owned by the Company's shareholders. The minimum annual
rentals total $54,720 plus insurance and taxes. The leases expire in
September 1996 and December 1999.
Minimum annual rental payments are as follows:
Years Ended
December 31,
-------------------
1995 .............. $114,260
1996 .............. 58,540
1997 .............. 30,000
1998 .............. 30,000
1999 and thereafter 30,000
--------
$262,800
========
Minimum annual rentals to be received from noncancelable subleases are as
follows:
1995 ............... $ 8,400
1996 ............... 3,500
-------
$11,900
=======
F-121
<PAGE>
ONCOLOGY-HEMATOLOGY ASSOCIATES, P.A. AND
ONCOLOGY-HEMATOLOGY INFUSION THERAPY, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
NOTE J. CONTINGENCIES
In addition to the general liability and malpractice insurance carried by
the individual physicians, the Company maintains general liability and
malpractice insurance providing the Company with coverage of $1,000,000
per incident and $3,000,000 in aggregate per doctor. As of December 31,
1994, there were no asserted malpractice claims against the Company,
accordingly, no amounts for potential losses have been accrued in the
accompanying financial statements. In addition, the Company has not
accrued a loss for unreported incidents or for losses in excess of
insurance coverage, as the amount, if any, cannot be reasonably estimated
and the probability of an adverse outcome cannot be determined at this
time. It is the opinion of management that the ultimate resolution of any
unasserted claims will not have a material adverse effect on the financial
position or operating results of the Company.
NOTE K. SUBSEQUENT EVENT
In July 1995, Phychoice, Inc. acquired the operating assets of the
Company. Along with the acquisitions, the Company entered into a 15 year
management services agreement with Phychoice, Inc. The management services
agreement became effective on July 6, 1995.
NOTE L. PROFIT SHARING PLAN
The Company has a profit sharing plan and money purchase pension plan. All
employees 25 or older with three years of service during which 1,000 hours
of service are completed are eligible to participate. Contributions to the
plan are made annually as determined, within plan limits, by the Company.
The Company contribution for the year ended December 31, 1994, was $33,854
and $113,907 for the profit sharing plan and money purchase pension plan,
respectively. For the year ended December 31, 1993, $36,877 and $104,946
was contributed for the profit sharing and money purchase pension plans,
respectively.
F-122
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Cancer Specialists of Georgia, P.C.:
We have audited the accompanying balance sheet of Cancer Specialists of
Georgia, P.C. as of July 31, 1995 and the related statements of operations
and retained earnings (accumulated deficit) and cash flows for the nine month
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cancer Specialists of
Georgia, P.C. as of July 31, 1995 and the results of its operations and its
cash flows for the nine month period then ended in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 9, 1996
F-123
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
BALANCE SHEET
JULY 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................................... $ 8,833
Accounts receivable, less allowance for doubtful accounts of $501,337 ... 1,692,965
Inventory ............................................................... 114,940
Prepaid expenses and other .............................................. 17,584
----------
Total current assets ................................................ 1,834,322
----------
NET PROPERTY AND EQUIPMENT .............................................. 224,822
----------
OTHER ASSETS:
Deferred income taxes ................................................... 38,622
Goodwill and other intangibles, net of accumulated amortization of
$17,583 ............................................................... 143,417
----------
Total other assets .................................................. 182,039
----------
TOTAL ASSETS ........................................................ $2,241,183
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank overdraft .......................................................... $ 97,820
Accounts payable ........................................................ 1,074,029
Accrued expenses and other liabilities .................................. 660,123
Notes payable ........................................................... 758,974
Current portion of long-term debt ....................................... 112,428
Deferred income taxes ................................................... 35,185
----------
Total current liabilities ........................................... 2,738,559
----------
TOTAL LIABILITIES ................................................... 2,738,559
----------
Commitments and contingencies (Notes E and G) ........................... --
STOCKHOLDERS' DEFICIT:
Common stock, no par value; 200,000 shares authorized;
1,500 shares issued and outstanding ................................... 1,500
Accumulated deficit ..................................................... (498,876)
----------
Stockholders' deficit ............................................... (497,376)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ......................... $2,241,183
==========
</TABLE>
See notes to financial statements.
F-124
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
For the nine month period ended July 31, 1995
REVENUES
Drug sales, net ................................. $ 5,104,710
Less cost of sales .............................. 2,647,762
-----------
Gross profit from drug sales ................ 2,456,948
Patient revenues, net ........................... 4,504,518
-----------
6,961,466
OTHER REVENUES .................................. 12,949
-----------
TOTAL REVENUES .............................. 6,974,415
-----------
OPERATING EXPENSES
Physician compensation .......................... 1,912,862
Clinic salaries, wages and benefits. ............ 1,500,365
Management fees--related party (Note I). ........ 1,713,609
Clinic and equipment rents--related party
(Note I) ..................................... 605,494
Clinic and equipment rents ...................... 220,725
Clinic supplies ................................. 384,277
Other clinic costs .............................. 951,438
Provision for bad debts ......................... 501,337
Provision for write-off of intangible asset ..... 86,644
Depreciation and amortization ................... 95,835
Interest ........................................ 39,675
-----------
TOTAL OPERATING EXPENSES .................... 8,012,261
-----------
NET LOSS BEFORE INCOME TAX BENEFIT .............. (1,037,846)
INCOME TAX BENEFIT .............................. 231,006
-----------
NET LOSS ........................................ (806,840)
RETAINED EARNINGS, BEGINNING .................... 307,964
-----------
ACCUMULATED DEFICIT, ENDING ..................... $ (498,876)
===========
See notes to financial statements.
F-125
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
STATEMENT OF CASH FLOWS
For the nine month period ended July 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................................... $(806,840)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization ............................... 95,835
Provision for bad debts ..................................... 501,337
Provision for write-off of intangible asset ................. 86,644
Deferred income taxes ....................................... (231,006)
Amortization of discount on debt ............................ 8,991
Changes in operating assets and liabilities:
Accounts receivable ........................................ (528,462)
Inventory .................................................. 6,719
Prepaid expenses and other ................................. 5,916
Accounts payable ........................................... (29,829)
Accrued expenses and other liabilities. .................... 343,932
----------
NET CASH USED BY OPERATING ACTIVITIES ........................ (546,763)
----------
CASH FLOWS FOR INVESTING ACTIVITIES
Purchase of property and equipment ........................... (1,295)
----------
NET CASH USED BY INVESTING ACTIVITIES ........................ (1,295)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in bank overdraft ..................................... 97,820
Proceeds from notes payable .................................. 448,974
Payments of long-term debt ................................... (287,015)
----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 259,779
----------
NET DECREASE IN CASH ......................................... (288,279)
CASH, BEGINNING OF PERIOD .................................... 297,112
----------
CASH, END OF PERIOD .......................................... $ 8,833
==========
SUPPLEMENTAL DISCLOSURES
Cash paid during the period for interest ..................... $ 29,651
==========
See notes to financial statements.
F-126
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS
A. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--Cancer Specialists of Georgia, P.C. (the
"Corporation") was incorporated in 1988 under the laws of Georgia. The
Corporation's fiscal year is the calendar year. These financial statements
are for the nine month period ended July 31, 1995. The Corporation was formed
to operate medical oncology facilities in Atlanta, Georgia. The Corporation
offers a comprehensive range of medical oncology services at eleven
facilities in the Atlanta area.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation of property and equipment is generally calculated over the
estimated useful lives of the assets using accelerated methods. Depreciation
of leasehold improvements is calculated on a straight line basis over the
term of the lease. Routine maintenance and repairs are charged to expense as
incurred, while costs of betterments and renewals are capitalized.
INCOME TAXES--The Corporation is taxable under provisions of the Internal
Revenue Code. The Corporation recognizes deferred income tax on all
significant timing differences between financial and income tax reporting.
(See Note H)
NET REVENUES--Net revenues are reported at the estimated realizable amounts
from patient, third-party payors, and others for services rendered. Revenue
under certain third-party payor agreements is subject to audit and
retroactive adjustments. Provisions for estimated third-party payor
settlements and adjustments are estimated in the period the related services
are rendered and adjusted in future periods as final settlements are
determined. During the nine month period ended July 31, 1995, approximately
40% of net revenue was received under the Medicare program and 1% under state
reimbursement programs. The Medicare program and state reimbursement programs
pay physician services based on fee schedules which are determined by the
related government agency. The Corporation has negotiated agreements with
managed care organizations to provide physician services based on fee
schedules. No individual managed care organization is material to the
Corporation.
INVENTORY--Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
GOODWILL AND OTHER INTANGIBLES--The excess of purchase price over the fair
value of assets acquired in a business combination accounted for by the
purchase method (goodwill) and the value assigned to non-competition
agreements are amortized on a straight-line basis over a 15-year period. The
Corporation periodically assesses the recoverability of goodwill when there
are indications of potential goodwill impairment based on estimates of
undiscounted future cash flows for the applicable business acquired. The
amount of impairment is calculated by comparing anticipated discounted future
income from acquired businesses with the carrying value of the related
goodwill. In performing this analysis, management considers such factors as
current results, trends and future prospects, in addition to other economic
factors.
The Company is required to implement Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" in 1996. As the Company currently
continually evaluates the realizability of its long-lived assets, including
goodwill and intangibles, adoption of the statement is not anticipated to
have a material effect on the Company's financial statements at the date of
adoption.
F-127
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
B. NET PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective
depreciable lives are summarized below:
Depreciable
Lives Total
------------------ ---------
Furniture and equipment ............... 7 years $ 25,295
Leasehold improvements ................ 7-13 years 338,602
---------
363,897
Less accumulated depreciation and
amortization ........................ (139,075)
---------
Total ............................. $ 224,822
=========
C. NOTES PAYABLE
The Corporation has a line of credit from a bank in the amount $250,000.
The line of credit matures on August 30, 1995. Interest is payable monthly at
the prime rate minus 0.5%. The amount outstanding under the line of credit at
July 31, 1995 was $210,130 with available credit of $39,870. The line of
credit is collateralized by accounts receivable of the Corporation.
At July 31, 1995, the Corporation had a note payable to a bank in the
amount of $248,844. The note was payable on July 31, 1995 and was repaid
subsequent to this date without penalty. Interest was payable monthly at the
prime rate minus 0.5%. The note payable was collateralized by accounts
receivable of the Corporation.
At July 31, 1995, the Corporation had a note payable to a bank in the
amount of $150,000. The note was payable on July 28, 1995 and was repaid
subsequent to this date without penalty. Interest was payable monthly at the
prime rate minus 0.5%. The note payable was collateralized by accounts
receivable of the Corporation.
At July 31, 1995, the Corporation had notes payable to two of its
stockholders for a total amount of $150,000. The notes are payable in
quarterly installments beginning on August 1, 1995 and mature May 1, 1996.
Interest is payable quarterly at the prime rate plus 0.5%. The notes payable
are collateralized by accounts receivable of the Corporation.
The prime rate at July 31, 1995 was 8.75%.
D. LONG-TERM DEBT
The long-term debt is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank, due in monthly installments of $11,165 including principal and
interest at 6.75% through August 1995, collateralized by personal guaranties from
the stockholders ................................................................... $ 33,701
Non-interest bearing note issued in connection with acquisition of assets of a
practice, due in monthly installments of $16,082 through December 1995, face amount
of $192,978 (less unamortized discount of $1,681 based on imputed interest rate of
8.5%) .............................................................................. 78,727
---------
Total long-term debt ............................................................. 112,428
Less current maturities .......................................................... (112,428)
---------
Long-term debt, less current maturities .......................................... $ --
=========
</TABLE>
F-128
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
E. OPERATING LEASES
All leases are classified as operating leases with related rentals charged
to operations as incurred. Under agreements classified as operating leases,
the Company leases facilities for its eleven locations and most of its
medical and business equipment.
The following is a schedule by year of future minimum lease payments under
operating leases as of July 31, 1995.
Year Ending
December 31, Amount
----------------------------------------------------- ----------
1995 (for the period August 1--December 31, 1995) ... $ 616,395
1996 ................................................ 1,040,494
1997 ................................................ 994,113
1998 ................................................ 736,506
1999 ................................................ 620,403
Thereafter .......................................... 1,426,841
----------
Total ........................................... $5,434,752
==========
Total rent expense for the nine months ended July 31, 1995 was $826,219.
F. EMPLOYEE BENEFIT PLAN
During 1995 the Corporation had a qualified defined contribution plan
covering substantially all employees. Contributions were determined each year
at the employers' discretion. There were no contributions for the nine month
period ended July 31, 1995.
G. CONTINGENCIES
The Corporation maintains general liability and malpractice insurance
providing the Corporation with coverage of $1 million per incident and $3
million in aggregate. As of July 31, 1995, there were no asserted malpractice
claims against the Corporation; accordingly, no amounts for potential losses
have been accrued in the accompanying financial statements.
H. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Corporation's deferred tax liabilities and assets as of
July 31, 1995 were as follows:
Deferred Current Tax Liabilities
Cash to accrual adjustments ............... $720,175
Deferred Current Tax Assets
Cash to accrual adjustments ............... 684,990
---------
Net Deferred Current Tax Liabilities ........ $ 35,185
=========
Deferred Long-Term Tax Assets
Depreciable and amortizable assets ........ $ 38,622
=========
F-129
<PAGE>
CANCER SPECIALISTS OF GEORGIA, P.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The provision for income taxes for the nine month period ended July 31,
1995 is as follows:
Current
Federal ............. $ --
State ............... --
---------
--
---------
Deferred
Federal ............. (217,146)
State ............... (13,860)
---------
(231,006)
---------
NET INCOME TAX BENEFIT $(231,006)
=========
I. RELATED PARTY TRANSACTIONS
The Corporation has a management agreement with a company whose
stockholders include two of the stockholders of the Corporation and a family
member of one of the stockholders of the Corporation. The management company
provides practice management and billing and collections services. The
management agreement provides for a fee equivalent to 16% of adjusted net
collections. Expenses related to the management agreement were $1,713,609 for
the nine month period ended July 31, 1995.
The Corporation has office leases for two of its clinics with a
partnership that is owned by three stockholders of the Corporation and a
family member of a stockholder. Rental expense of $231,750 was incurred on
these leases during the nine month period ended July 31, 1995.
The Corporation leases certain medical and business equipment from a
partnership that is owned by a stockholder of the Corporation and certain
family members of the stockholder. Rental expense of $285,418 was incurred on
this lease during the nine month period ended July 31, 1995.
The Corporation leases certain medical and business equipment from a
partnership that is owned by a stockholder of the Corporation and certain
family members of the stockholder. Rental Expense of $46,017 was incurred on
this lease during the nine month period ended July 31, 1995.
The Corporation leases certain medical and business equipment from a
corporation that is owned by a stockholder of the Corporation and certain
family members of the stockholder. Rental expense of $42,309 was incurred on
this lease during the nine month period ended July 31, 1995.
J. PROVISION FOR WRITE-OFF OF INTANGIBLE ASSET
In July 1995, the Corporation recorded a provision of $86,644 for the
write-off of the remaining unamortized balance of a noncompetition agreement.
The individual with whom the agreement had been made is now deceased.
Therefore, the Corporation determined that the noncompetition agreement no
longer had any value.
K. SUBSEQUENT EVENTS
On August 15, 1995, PhyChoice, Inc. acquired the operating assets of the
Corporation. Also, on August 15, 1995, the Corporation merged with Georgia
Oncology-Hematology Clinic, P.C. to form Georgia Cancer Specialists, P.C.
Simultaneous with the acquisition of assets and the merger, the newly formed
Georgia Cancer Specialists, P.C. entered into a 10-year management services
agreement with PhyChoice, Inc. The management services agreement became
effective August 15, 1995.
F-130
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
Mobile Lithotripter of Indiana Partners
We have audited the balance sheets of Mobile Lithotripter of Indiana
Partners as of September 30, 1995 and 1994, and the related statements of
income, partners' capital and cash flows for the years then ended and for the
period from February 12, 1993 (date of formation) to September 30, 1993.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mobile Lithotripter of
Indiana Partners at September 30, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended and for the period
from February 12, 1993 to September 30, 1993 in conformity with generally
accepted accounting principles.
KATZ, SAPPER & MILLER, LLP
Certified Public Accountants
Indianapolis, Indiana
October 25, 1995
F-131
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
BALANCE SHEETS
September 30, 1995 and 1994
1995 1994
---------- ----------
ASSETS
CURRENT ASSETS
Cash and equivalents--Note 6 ........................ $ 442,187 $ 383,971
Accounts receivable--hospitals ...................... 265,381 260,672
Prepaid expenses .................................... 5,512 20,023
---------- ----------
Total Current Assets ............................ 713,080 664,666
---------- ----------
EQUIPMENT
Medical and office equipment. ....................... 950,984 520,664
Less: Accumulated amortization ...................... 250,577 171,772
---------- ----------
Total Equipment ................................. 700,407 348,892
---------- ----------
OTHER ASSETS
Goodwill, net of amortization of $1,277,378 in 1995
and $798,362 in 1994 ............................. 5,907,875 6,386,892
---------- ----------
TOTAL ASSETS .................................... $7,321,362 $7,400,450
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable and accrued expenses ............... $ 52,746 $ 28,807
Current maturities of long-term debt--Note 2 ........ 173,124
---------- ----------
Total Current Liabilities ....................... 52,746 201,931
LONG-TERM DEBT
Equipment lease obligation--Note 2 .................. 144,106
---------- ----------
Total liabilities ............................... 52,746 346,037
PARTNERS' CAPITAL--Note 6 ........................... 7,268,616 7,054,413
---------- ----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL ............. $7,321,362 $7,400,450
========== ==========
See Accompanying Notes to Financial Statements.
F-132
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
STATEMENTS OF INCOME
Years Ended September 30, 1995 and 1994 and
Period from February 12, 1993 to September 30, 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -----------
<S> <C> <C> <C>
REVENUE
Rental income--Note 3 $2,399,731 $1,990,894 $1,467,614
Supply income 159,650 132,680 110,980
Interest income 18,272 8,933 2,408
---------- ---------- ----------
Total Revenue 2,577,653 2,132,507 1,581,002
---------- ---------- ----------
COSTS AND EXPENSES
Operating--Notes 4 and 5 481,481 429,651 313,008
Amortization and depreciation 587,027 582,809 387,325
General and administrative--
Note 4 217,899 206,500 158,249
Interest expense 27,517 48,236 41,889
---------- ---------- ----------
Total Costs and Expenses 1,313,924 1,267,196 900,471
---------- ---------- ----------
NET INCOME $1,263,729 $ 865,311 $ 680,531
========== ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-133
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
STATEMENTS OF PARTNERS' CAPITAL
Years Ended September 30, 1995 and 1994 and
Period from February 12, 1993 to September 30, 1993
<TABLE>
<CAPTION>
<S> <C>
Cash contributed by T(2) Medical, Inc. ............................................ $ 4,507,153
Assets and goodwill contributed to Mobile Lithotripter of Indiana Limited, an
Indiana Limited Partnership ..................................................... 7,131,571
Special distribution to Mobile Lithotripter of Indiana Limited, an Indiana Limited
Partnership ..................................................................... (4,507,153)
-----------
NET INITIAL PARTNERS' CAPITAL ..................................................... 7,131,571
Net income for the period ......................................................... 680,531
Distributions to partners ......................................................... (150,000)
-----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1993 ........................................... 7,662,102
Net income for the year ........................................................... 865,311
Distributions to partners ......................................................... (1,473,000)
-----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1994 ........................................... 7,054,413
Net income for the year ........................................................... 1,263,729
Distributions to partners ......................................................... (1,049,526)
-----------
PARTNERS' CAPITAL AT SEPTEMBER 30, 1995--Note 6 ................................... $ 7,268,616
===========
</TABLE>
See Accompanying Notes to Financial Statements.
F-134
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1995 and 1994 and
Period from February 12, 1993 to September 30, 1995
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income .......................................... $ 1,263,729 $ 865,311 $ 680,531
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of equipment ....... 108,010 103,792 67,980
Amortization of goodwill ......................... 479,017 479,017 319,345
Loss on abandonment of equipment ................. 5,260
(Increase) decrease in certain current assets:
Accounts receivable--hospitals .................. (4,709) (2,765) (257,907)
Prepaid expenses ................................ 14,511 7,253 (27,276)
Increase (decrease) in certain current
liabilities:
Accounts payable and accrued expenses ........... 23,939 (8,275) 37,082
----------- ----------- -----------
Net cash provided by operating activities ...... 1,889,757 1,444,333 819,755
----------- ----------- -----------
INVESTING ACTIVITIES
Acquisitions of equipment ........................... (464,785) (10,784)
----------- -----------
Net cash (used) by investing activities. ........ (464,785) (10,784)
------------ -----------
FINANCING ACTIVITIES
Principal payments on long-term debt ................ (317,230) (153,639) (92,694)
Cash contributed by T(2) Medical, Inc ............... 4,507,153
Special distribution to Mobile Lithotripter of
Indiana Limited, an Indiana Limited Partnership .. (4,507,153)
Distributions to partners ........................... (1,049,526) (1,473,000) (150,000)
----------- ----------- -----------
Net cash (used) by financing activities ......... (1,366,756) (1,626,639) (242,694)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .... 58,216 (193,090) 577,061
CASH AND EQUIVALENTS
Beginning of Period ................................. 383,971 577,061
----------- ----------- -----------
End of Period ....................................... $ 442,187 $ 383,971 $ 577,061
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest expense ...................... $ 27,517 $ 48,236 $ 41,889
Noncash investing and financing activities:
Assets and liabilities contributed by Mobile
Lithotripter of Indiana Limited, an Indiana
Limited Partnership:
Goodwill ......................................... $ 7,185,254
Medical equipment under capital lease ............ 509,880
Lease obligation on medical equipment ............ (563,563)
Trade-in value of tractor .......................... 24,038
</TABLE>
See Accompanying Notes to Financial Statements.
F-135
<PAGE>
MOBILE LITHOTRIPTER OF INDIANA PARTNERS
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mobile Lithotripter of Indiana Partners (the Partnership) was formed as an
Indiana general partnership on February 12, 1993 by T(2) Medical, Inc. (T(2), a
publicly-held company, and Mobile Lithotripter of Indiana Limited, an Indiana
Limited Partnership (MLIL). Unless earlier terminated in accordance with the
specific provisions of the Partnership Agreement, the Partnership terminates
on February 11, 2012. T(2) was designated as the "Managing Partner" of the
Partnership.
The Partnership operates a mobile extracorporeal renal shockwave
lithotripter and rents it to various hospitals located in Indiana. Most of
the stockholders of MLI, Inc., general partner of MLIL, are urologists who
are members of the medical staffs of the hospitals which rent the
lithotripter. The Partnership commenced operations in February 1993.
Upon formation of the Partnership, T(2) contributed cash of $4,507,153 and
MLIL contributed substantially all of its assets and business, other than its
accounts receivable and cash on hand, to the Partnership. The Partnership
also assumed MLIL's liabilities and hospital rental agreements. The value of
the net assets contributed to the Partnership by MLIL was $7,131,571,
including goodwill of $7,185,254 attributable to the business and the
relationships with the hospitals previously served by MLIL. Immediately after
the formation of the Partnership, MLIL received a special distribution from
the Partnership of the $4,507,153 of cash which had been contributed by T(2).
The acquisition of the MLIL assets was accounted for by the purchase method,
with T(2) acquiring 63.2% of the Partnership. Thus, MLIL retained a 36.8%
interest in the Partnership.
On December 31, 1994, MLIL sold its remaining 36.8% interest in the
Partnership to CCC-Indiana Lithotripsy, Inc., a wholly-owned subsidiary of
Phymatrix Corp., for $2,638,085. T(2) merged into Coram Healthcare Corporation
in July 1994.
Cash and Equivalents: For purposes of the statement of cash flows, cash
equivalents include bank time deposits with original maturities of three
months or less. The Partnership maintains its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The Partnership has not
experienced any losses in such accounts.
Equipment: Medical equipment under capital lease was recorded at its fair
value on the date it was contributed to the Partnership and is being
amortized over five years using the straight-line method. Equipment purchased
subsequently was recorded at cost and is being depreciated over the expected
useful lives using the straight-line method.
Goodwill: Relates primarily to the value attributed to the business and the
relationships with various Indiana hospitals served by the Partnership and
its predecessor, MLIL. Goodwill totaling $7,185,254 is being amortized on a
straightline basis over fifteen years.
Income Taxes: No provision for income taxes is required because the allocated
shares of the Partnership's income or loss are included in the income tax
returns of the partners.
NOTE 2--EQUIPMENT LEASE
The Partnership leased a mobile extracorporeal renal shockwave
lithotripter housed in a custom trailer and truck tractor under a five-year
noncancellable capital lease assumed by the Partnership on February 12, 1993.
The lease obligation was payable in monthly installments of $16,823,
including interest imputed at 12%. However, the capital lease was paid in
full in August 1995.
F-136
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership also assumed a three-year service contract for corrective
and preventative maintenance for the lithotripter. Service expense paid
pursuant to this agreement was $72,615 for the year ended September 30, 1995,
$118,261 for the year ended September 30, 1994, and $84,506 for the period
ended September 30, 1993. The contract was cancelled in June 1995, when the
Partnership entered into a thirteen-month service contract with
Servicetrends, a wholly-owned subsidiary of Coram Healthcare Corporation.
Service expense paid pursuant to this new agreement was $23,125 for the year
ended September 30, 1995. The new service contract requires payments totaling
$69,375 in the year ending September 30, 1996.
NOTE 3--RENTAL AGREEMENTS
The Partnership rents its lithotripter to hospitals under three-year
operating leases which include two rental options. Option A was selected by
six hospitals and has a stated fee per lithotripsy procedure with no minimum
usage fee required. Option B was selected by seven hospitals and has
discounted fees based on increased usage and requires a minimum rental fee
which varies by hospital. A hospital may change to the other option after the
initial twelve-month period. The rental agreements are renewable in 1996.
Minimum future rentals to be received under Option B leases total $207,954
for the year ending September 30, 1996.
NOTE 4--RELATED PARTY TRANSACTIONS
Pursuant to a management agreement dated February 12, 1993, MLI, Inc., the
general partner of MLIL, received a monthly management fee based on 7.5% of
the annual pre-tax profits of the Partnership. Effective January 1995, MLI,
Inc. receives a monthly management fee of $9,000. Management fees paid to
MLI, Inc. were $112,981 and $108,275 for the years ended September 30, 1995
and 1994, respectively, and $80,901 for the period ended September 30, 1993.
The Partnership pays consulting fees of $2,000 per month through May 31,
1996, to Heritage Group, Inc., an affiliate of one of MLIL's limited
partners. Consulting fees paid to Heritage Group, Inc. were $24,000 for each
of the years ended September 30, 1995 and 1994, and $16,000 for the period
ended September 30, 1993.
The Partnership purchased supplies from Servicetrends totaling $8,000 in
the year ended September 30, 1995.
NOTE 5--PENSION PLAN
The Partnership contributes to a multi-employer defined contribution
pension plan for all employees who are at least twenty-one years old and who
have a half year of service with the Partnership. Partnership contributions
to the Plan are based on 11% of each participant's annual salary.
Contributions by the Partnership were $15,157 and $13,106 for the years ended
September 30, 1995 and 1994, respectively, and $10,448 for the period ended
September 30, 1993.
NOTE 6--SUBSEQUENT EVENT
On October 9, 1995, the Partnership distributed cash of $200,000 to its
partners.
F-137
<PAGE>
UROMED TECHNOLOGIES, INC.
CONTENTS
Page
------
Independent Auditor's Report ........................ F-139
Financial Statements:
Balance Sheet ...................................... F-140
Statement of Income and Retained Earnings .......... F-141
Statement of Cash Flows ............................ F-142
Financial Notes .................................... F-143
Additional Material:
Schedule of General and Administrative Expenses .... F-146
F-138
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
UroMed Technologies, Inc.
We have audited the accompanying balance sheets of UroMed Technologies,
Inc., as of September 28, 1994, December 31, 1993 and 1992, and the related
statements of income and retained earnings and cash flows for the periods
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of UroMed Technologies,
Inc., as of September 28, 1994, December 31, 1993 and 1992, and the results
of its operations and its cash flows for the periods then ended in conformity
with generally accepted accounting principles.
Our audit of the financial statements included in this report was directed
to an expression of our opinion on these statements taken as a whole. The
additional material presented in this report has been subjected to certain
audit procedures applied in connection with our audit of the basic financial
statements. The additional material, while not considered necessary to the
fair presentation of the financial position, results of operations, and cash
flows of the Company, is, in our opinion, fairly stated in all material
respects when considered in relation to the financial statements taken as a
whole.
ROY CLINE, CPA, PA
CERTIFIED PUBLIC ACCOUNTANTS
June 22, 1995
F-139
<PAGE>
UROMED TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, December 31, December 31,
1994 1993 1992
----------- ---------- ------------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash .................................................. $ 50,332 $ 73,423 $ 24,988
Accounts receivable ................................... 392,827 140,847 16,312
Prepaid expenses ...................................... -- 2,021 498
---------- -------- --------
Total Current Assets ................................ 443,159 216,291 41,798
Property and Equipment ................................ 1,390,915 698,326 --
Other Assets .......................................... -- 5,000 --
---------- -------- --------
Total Assets ........................................ $1,834,074 $919,617 $ 41,798
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of capital lease obligations .......... $ 306,183 $176,071 $ --
Accounts payable ...................................... -- 24,419 --
Accrued bonuses ....................................... 200,000 -- --
Accrued expenses ...................................... 45,144 10,024 5,498
---------- -------- --------
Total Current Liabilities ........................... 551,327 210,514 5,498
---------- -------- --------
Long-Term Liabilities
Stockholder loan ...................................... -- 27,000 75,018
Capital lease obligations, exclusive of current portion 791,430 384,957 --
---------- -------- --------
Total Long-Term Liabilities ......................... 791,430 411,957 75,018
---------- -------- --------
Stockholders' Equity
Common stock, $1 par value, 500 shares authorized, 332
shares issued and outstanding, 168 shares held in
treasury ............................................ 500 500 500
Retained earnings ..................................... 559,816 365,645 (39,218)
---------- -------- --------
560,316 366,145 (38,718)
Less treasury stock, at cost, 168 shares .............. 68,999 68,999 --
---------- -------- --------
Total Stockholders' Equity .......................... 491,317 297,146 (38,718)
---------- -------- --------
Total Liabilities and Stockholders' Equity .......... $1,834,074 $919,617 $ 41,798
========== ======== ========
</TABLE>
The accompanying financial notes are an integral part of the
financial statements.
F-140
<PAGE>
UROMED TECHNOLOGIES, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
----------- ------------ ------------
<S> <C> <C> <C>
Revenues Earned ...................... $1,740,469 $1,159,967 $ 23,500
Cost of Revenues ..................... 400,535 415,370 38,196
----------- ---------- --------
Gross Profit ......................... 1,339,934 744,597 (14,696)
General and Administrative Expenses .. 800,695 309,699 24,503
----------- ---------- --------
Income From Operations ............... 539,239 434,898 (39,199)
Other Income (Expense)
Interest expense ................... (65,068) (30,035) (19)
----------- ---------- --------
Net Income (Loss) .................... 474,171 404,863 (39,218)
Retained Earnings, beginning of period 365,645 (39,218) --
Less Dividends ....................... 280,000 -- --
----------- ---------- --------
Retained Earnings, end of period ..... $ 559,816 $ 365,645 $(39,218)
========== ========== ========
</TABLE>
The accompanying financial notes are an integral part of the
financial statements.
F-141
<PAGE>
UROMED TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
----------- ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Cash received from customers ................... $1,488,489 $1,035,433 $ 7,188
Cash paid to suppliers and employees ........... (900,095) (678,620) (57,699)
Interest paid .................................. (65,068) (30,035) (19)
---------- ---------- --------
Net Cash Provided (Used) In Operating Activities 523,326 326,778 (50,530)
---------- ---------- --------
Cash Flows From Investing Activities
Cash payments for the purchase of property ..... (80,080) (142,353) --
Payment of deposits ............................ 5,000 (5,000) --
---------- ---------- --------
Net Cash Provided (Used) In Investing Activities (75,080) (147,353) --
---------- ---------- --------
Cash Flows From Financing Activities
Proceeds from issuance of common stock ......... -- -- 500
Borrowings from stockholder .................... -- -- 75,018
Purchase of treasury stock ..................... -- (68,999) --
Repayments on stockholder loan ................. (27,000) (48,019)
Dividends paid ................................. (280,000) -- --
Payments on capital lease obligations .......... (164,337) (13,972) --
---------- ---------- --------
Net Cash Provided (Used) by Financing Activities (471,337) (130,990) 75,518
---------- ---------- --------
Net Increase (Decrease) in Cash ................ (23,091) 48,435 24,988
Cash, beginning of period ...................... 73,423 24,988 --
---------- ---------- --------
Cash, end of period ............................ $ 50,332 $ 73,423 $ 24,988
========== ========== ========
</TABLE>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED (USED) BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net income (loss) for the period ........................ $ 474,171 $ 404,863 $(39,218)
--------- --------- --------
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation and amortization .......................... 88,413 19,027 --
(Increase) decrease in accounts receivable ............. (251,980) (124,534) (16,312)
(Increase) decrease in prepaid expenses ................ 2,021 (1,523) (498)
Increase (decrease) in accounts payable ................ (24,419) 24,419 --
Increase (decrease) in accrued liabilities ............. 235,120 4,526 5,498
--------- --------- --------
Total Adjustments ...................................... 49,155 (78,085) (11,312)
--------- --------- --------
Net Cash Provided (Used) In Operating Activities ....... $ 523,326 $ 326,778 $(50,530)
========= ========= ========
Supplemental disclosures:
Capital lease obligations incurred in connected with
asset acquisitions
Assets acquired ........................................ $ 781,002 $ 717,353 $ --
Liabilities assumed .................................... 700,922 575,000 --
--------- --------- --------
Cash given ............................................. $ 80,080 $ 142,353 $ --
========= ========= ========
</TABLE>
The accompanying financial notes are an integral part of
the financial statements.
F-142
<PAGE>
UROMED TECHNOLOGIES, INC.
FINANCIAL NOTES
1. Summary of Significant Accounting Policies
Company's Activities and Operating Cycle
The Company was incorporated June 8, 1992 under the laws of the State of
Florida. The Company is engaged in the business of providing medical
lithotripsy services to Florida-based hospitals and ambulatory surgery
centers. The Company staffs its mobile lithotripters with a licensed tractor
trailer operator and a licensed radiographic technologist who assists the
attending physician. The mobile lithotripter makes scheduled visits to
various client hospitals and ambulatory surgery centers where local
urologists generally perform one or more procedures per site visit.
Revenue Recognition
Revenue is recognized at the Company's established rates at the time
services are provided. Net calculated adjustments arising under reimbursement
rates with third party payors are accrued on an estimated basis in the period
in which the services are rendered and adjusted as final settlements are
determined.
Property and Equipment
Property and equipment is recorded at cost. For financial statement
purposes depreciation is provided over the estimated useful lives of the
related assets using the straight-line method. The estimated useful lives of
the depreciable assets are:
Mobile Lithotripter Units ........ 10 years
Lithotripter Unit Improvements ... 10 years
Furniture and Equipment .......... 10 years
Office Machinery ................. 7 years
Lease agreements for equipment, which are equivalent to installment
purchase contracts, are recognized as capital leases by the Company. All of
the Company's capital leases have bargain purchase options and the Company is
amortizing the related assets over their estimated economic lives.
Expenditures for maintenance and repairs are charged to operations as
incurred. The cost of assets sold or retired and the related amounts of
accumulated depreciation are eliminated from the accounts in the year of
disposal and the resulting gains or losses are included in operations.
Income Taxes
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S corporation. In lieu of corporate income
taxes, the shareholders of an S corporation are taxed on their proportionate
share of the company's taxable income. Therefore, no provision or liability
for Federal income taxes has been included in the financial statements.
Bad Debts
Individual customer accounts are reviewed periodically for collectibility.
Specifically identified uncollectible amounts are charged to expense in the
period in which the accounts are deemed worthless.
Cash Flows
For purposes of reporting cash flows, cash includes demand deposits with
banks.
F-143
<PAGE>
UROMED TECHNOLOGIES, INC.
FINANCIAL NOTES--(Continued)
2. Stockholders' Equity
The following is the changes in stockholders' equity:
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
----------- ---------- ------------
<S> <C> <C> <C>
Beginning Balance .......................... $ 297,146 $(38,718) $ --
Common stock issued, $1 par value, 500
shares authorized, issued and outstanding -- -- 500
Less treasury stock 168 shares ............. -- (68,999) --
Net Income (Loss) .......................... 474,171 404,863 (39,218)
Less dividends ............................. (280,000) -- --
--------- -------- --------
Total Stockholders' Equity ............... $ 491,317 $297,146 $(38,718)
========= ======== ========
</TABLE>
3. Commitments and Contingencies
In the normal course of business, the company entered into a capital lease
agreement in September 1993. As of December 31, 1993, the equipment was not
fully operational. The equipment became fully operational in March, 1994. At
that time, the company paid interest payments only for three months then the
first lease payment of principal and interest was due June 24, 1994.
4. Property and Equipment
The Company's property, equipment, and the related depreciation and
amortization:
<TABLE>
<CAPTION>
Accumulated Net
Original Current Amortization- Book
Cost Depreciation Depreciation Value
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lithotripter Unit Improvements $ 217,694 $13,696 $ 13,696 $ 203,998
Mobile Lithotripter Units ..... 1,270,000 73,933 92,698 1,177,302
Furniture and Equipment ....... 9,163 717 978 8,185
Office machinery .............. 1,497 67 67 1,430
---------- ------- -------- ----------
Totals for September 28, 1994 $1,498,354 $88,413 $107,439 $1,390,915
========== ======= ======== ==========
Trailer ....................... $ 134,475 $13,447 $ 13,447 $ 121,028
Mobile Lithotripter Unit ...... 575,000 4,792 4,792 570,208
Office furniture .............. 7,878 788 788 7,090
---------- ------- -------- ----------
Totals for December 31, 1993 $ 717,353 $19,027 $ 19,027 $ 698,326
========== ======= ======== ==========
</TABLE>
F-144
<PAGE>
UROMED TECHNOLOGIES, INC.
FINANCIAL NOTES--(Continued)
5. Capital Lease Obligation
<TABLE>
<CAPTION>
Period Ended Year Ended Inception to
September 28, December 31, December 31,
1994 1993 1992
----------- ---------- ------------
<S> <C> <C> <C>
Capital lease obligation payable in monthly
installments of $18,285 including interest at 9%,
collateralized by Mobile Lithotripter, final payment
due November 1996 .................................. $ 430,465 $561,028 $--
Capital lease obligation payable in monthly
installments of $14,427 including interest at 9%,
collateralized by Mobile Lithotripter, final payment
due May 1999 ....................................... 667,148 -- --
---------- -------- ---
Total amount due ..................................... 1,097,613 561,028 --
Amount due within one year ........................... 306,183 176,071 $--
---------- -------- ---
Long-term amount ..................................... $ 791,430 $384,957 $--
========== ======== ===
</TABLE>
The following is the future minimum lease payments.
<TABLE>
<CAPTION>
Period Ended Year Ended
September December Inception to
28, 31, December 31,
------------ ----------- -------------
<S> <C> <C> <C>
1994 ...................................... $ $219,418 $--
1995 ...................................... 392,543 219,418 --
1996 ...................................... 392,543 201,133 --
1997 ...................................... 209,694 -- --
1998 ...................................... 173,125 -- --
1999 ...................................... 115,416 -- --
---------- -------- ---
Total minimum lease payments .............. 1,283,321 639,969 --
Less amounts representing interest ........ 185,708 78,941 --
---------- -------- ---
Present value of net minimum lease payments $1,097,613 $561,028 $--
========== ======== ===
</TABLE>
6. Profit-Sharing Plan
All employees are eligible to participate in the Company's Profit-Sharing
Plan as long as they are at least 21 years of age and have completed one year
of employment. The Plan provides for contributions by the Company in such
amounts as management may determine. The profit-sharing contributions charged
to operations were $57,367 for the period ended September 28, 1994.
7. Event Subsequent to the Date of the Report of Independent Auditor
On September 29, 1994, the Company sold substantially all of its assets
for cash and the assumption of the Company's lease obligations.
F-145
<PAGE>
UROMED TECHNOLOGIES, INC.
SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
Period
Ended Year Ended
September December Inception to
28, 31, December 31,
1994 1993 1992
----------- ---------- ------------
Accounting fees ............. $ 17,162 $ 6,524 $ 217
Salary--officers ............ 333,000 128,939 8,308
Advertising and promotion ... 4,571 9,229 1,263
Auto and truck .............. 26,723 5,229 --
Bank charges ................ -- 92 31
Continuing education ........ 1,298 -- --
Professional fees ........... 36,215 135 --
Contract labor .............. 1,766 741 --
Contributions ............... 2,000 500 --
Depreciation and amortization 88,413 19,027 --
Dues and subscriptions ...... 210 709 --
Insurance expense ........... 46,331 27,917 4,542
Legal fees .................. 2,551 3,932 --
Licenses and taxes .......... 7,584 -- 437
Travel and entertainment .... 35,498 41,756 --
Office expense .............. 1,634 8,710 341
Medical directors ........... 97,500 -- --
Miscellaneous ............... 2,879 95 --
Office salaries ............. -- -- 6,058
Rent--location .............. 5,634 11,571 850
Taxes--payroll .............. 16,995 26,425 1,556
Telephone and utilities ..... 15,364 18,168 900
Pension contribution ........ 57,367 -- --
-------- -------- -------
Total ................... $800,695 $309,699 $24,503
======== ======== =======
F-146
<PAGE>
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
NUTRICHEM, INC.
We have audited the accompanying balance sheets of Nutrichem, Inc. as of
November 17, 1994, and December 31, 1993 and the related statements of
income, retained earnings, and cash flows for the periods then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nutrichem, Inc. as of
November 17, 1994 and December 31, 1993, and the results of its operations
and its cash flows for the periods then ended in conformity with generally
accepted accounting principles.
The December 31, 1993 financial statements were previously reviewed, and
our report thereon, dated February 24, 1994, stated we were not aware of any
material modifications that should be made to those statements for them to be
in conformity with generally accepted accounting principles. However, a
review is substantially less in scope than an audit and does not provide a
basis for the expression of an opinion on the financial statement taken as a
whole.
Regan, Russell, Schickner & Shah, P.A.
September 13, 1995
F-147
<PAGE>
NUTRICHEM, INC.
BALANCE SHEETS
NOVEMBER 17, 1994 AND DECEMBER 31, 1993
1994 1993
--------- -----------
ASSETS
Current assets:
Cash ............................................. $ 452,509 $ 103,468
Marketable securities ............................ 24,875 --
Accounts receivable (net of allowance
of $402,052 and $0, respectively) ............. 2,455,506 950,838
Loan receivable--stockholder ..................... 28,000 --
Inventory ........................................ 139,135 --
Deposits ......................................... 12,421 17,000
Advances to employees ............................ 1,405 2,030
---------- ----------
Total current assets ......................... 3,113,851 1,073,336
---------- ----------
Property and equipment:
Machinery and equipment .......................... 150,521 6,656
Transportation equipment ......................... 15,200 40,999
Office furniture and fixture ..................... 26,080 19,303
Leasehold improvements ........................... 3,592 3,592
---------- ----------
195,393 70,550
Less: Accumulated depreciation ................... 21,954 2,849
---------- ----------
173,439 67,701
---------- ----------
$3,287,290 $1,141,037
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 311,766 $ 110,723
Loan payable--stockholders ....................... -- 102,902
Payroll taxes payable ............................ 6,114 17,136
Accrued payroll .................................. 12,644 --
Other accrued expenses ........................... 17,594 41,585
---------- ----------
Total current liabilities .................... 348,118 272,346
---------- ----------
Stockholders' equity:
Common stock--no par value; authorized
5,000 shares; issued and
outstanding 1,000 shares ...................... 1,000 1,000
Retained earnings ................................ 2,938,172 867,691
---------- ----------
2,939,172 868,691
---------- ----------
$3,287,290 $1,141,037
========== ==========
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-148
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF INCOME
For the Period Ended November 17, 1994 and December 31, 1993
1994 1993
Amount Amount
--------- -----------
Earned Revenues ................................... $4,492,523 $2,142,122
---------- ----------
Direct Expenses:
Medications and related costs .................... 957,920 414,648
Medical supplies. ................................ 79,145 50,185
Salaries--pharmacist ............................. 49,821 62,151
Outside pharmacy services ........................ 73,155 91,922
Nursing costs .................................... 175,118 62,511
Medical consultation fees ........................ 128,053 67,650
Other direct expenses ............................ 13,800 15,644
---------- ----------
Total direct expenses. ............................ 1,477,012 764,711
---------- ----------
Operating, Selling and Administrative
Expenses:
Auto expenses .................................... 42,656 9,251
Bookkeeping services ............................. 23,768 10,766
Commissions ...................................... 249,123 --
Conventions, meetings, and seminars .............. 17,442 25,906
Depreciation ..................................... 28,996 2,849
Entertainment .................................... 41,425 13,383
Insurance ........................................ 43,689 11,482
Legal and professional expenses .................. 42,485 23,118
Miscellaneous .................................... 8,948 --
Office expense ................................... 64,844 19,138
Pension expense .................................. -- 41,585
Rent ............................................. 18,491 13,686
Salaries--office ................................. 103,435 30,124
Salaries--officers ............................... 174,487 155,339
Taxes--payroll ................................... 36,255 13,489
Telephone and answering service .................. 48,986 36,702
---------- ----------
Total operating, selling and administrative
expenses .......................................... 945,030 406,818
---------- ----------
Net Income ........................................ $2,070,481 $ 970,593
========== ==========
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-149
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF RETAINED EARNINGS
For the Period Ended November 17, 1994 and December 31, 1993
1994 1993
---------- ---------
ACCUMULATED ADJUSTMENTS
ACCOUNT
Balance--Beginning ........... $ 867,691 $ --
Net Income ................... 2,070,481 970,593
Stockholder Distributions .... -- (102,902)
---------- ---------
Balance--Ending .............. $2,938,172 $ 867,691
========== =========
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-150
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF CASH FLOWS
For the Period Ended November 17, 1994 and December 31, 1993
<TABLE>
<CAPTION>
1994 1993
----------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income .............................................. $ 2,070,481 $ 970,593
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ........................................... 28,996 2,849
(Increase) Decrease in operating assets:
Inventory .............................................. (139,135) --
Marketable securities .................................. (24,875) --
Accounts receivable .................................... (1,504,668) (950,838)
Deposits ............................................... 4,579 (17,000)
Increase (Decrease) in operating liabilities:
Accounts payable ....................................... 201,043 110,723
Payroll taxes payable .................................. (11,022) 17,136
Accrued payroll ........................................ 12,644 --
Other accrued expenses ................................. (23,991) 41,585
----------- ---------
Net cash provided by operating activities ............... $ 614,052 $ 175,048
=========== =========
</TABLE>
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-151
<PAGE>
NUTRICHEM, INC.
STATEMENTS OF CASH FLOWS
For the Period Ended November 17, 1994 and December 31, 1993
1994 1993
--------- --------
Net Cash Provided by Operating Activities ...... $ 614,052 $175,048
--------- --------
Cash Flows From Investing Activities:
Proceeds from sale of fixed assets ............. 45,605 --
Purchase of equipment .......................... (180,339) (70,550)
Advances to employees .......................... -- (2,030)
Loan repayment from employees .................. 625 --
Loan to stockholders ........................... (28,000) --
--------- --------
Net cash used by investing activities .......... (162,109) (72,580)
--------- --------
Cash Flow From Financing Activities:
Debt reduction ................................. (102,902) --
Proceeds from issuance of stock ................ -- 1,000
--------- --------
Net cash (used) provided by financing activities (102,902) 1,000
--------- --------
Net Increase in Cash ........................... 349,041 103,468
Cash--Beginning ................................ 103,468 --
--------- --------
Cash--Ending ................................... $ 452,509 $103,468
========= ========
See Independent Audit Report.
The accompanying notes are an integral part of these financial statements.
F-152
<PAGE>
NUTRICHEM, INC.
NOTES TO FINANCIAL STATEMENTS
November 17, 1994 and December 31, 1993
NOTE 1--Summary of Significant Accounting Policies
This summary of significant accounting policies of Nutrichem, Inc. is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's
management who is responsible for their integrity and objectivity. These
accounting policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial
statements.
Business activity. The Company is a Maryland corporation organized to
provide medical services on an out-patient or in-home basis. The Company's
significant service operations commenced in March 1993. The Company has a
year end of December 31.
Inventory. The Company values inventories at the lower of cost (first-in,
first-out method) or market. The inventory consists of medication and medical
supplies.
Property and equipment. Property and equipment are stated at cost.
Individual purchases over $300 and improvements which prolong the useful life
of an asset are capitalized, while expenditures for maintenance, small items
and minor repairs are expensed as incurred. Depreciation for financial
statement purposes is calculated on the straight-line method and is provided
on a consistent basis, based upon the estimated useful life of the particular
asset. The Company has adopted the Modified Accelerated Cost Recovery System
(MACRS) for income tax purposes.
Income taxes. Effective January 1, 1994, the Company changed its method of
accounting for income tax purposes from overall cash basis to overall accrual
basis under Internal Revenue Code 446, Revenue Procedure 92-74. On November 17,
1994, CCC-Infusion, Inc., a "C" Corporation purchased 80% of the outstanding
stock of Nutrichem, Inc. As a result of this stock transfer, Nutrichem Inc.'s
status as a Subchapter "S" corporation terminated under Internal Revenue Code
Section 1361 (b) (1) (B). Consequently, the Company is taxed as a "S"
Corporation for the short year ended November 17, 1994 and as a "C" Corporation
for the period November 18, 1994 through December 31, 1994. As such, profits and
losses of the "S" Corporation for the short-year ended November 17, 1994 are
passed through to the stockholders and are recorded on their personal income tax
returns.
NOTE 2--Accounts Receivable
At November 17, 1994, the allowance for contractual adjustments and bad
debts amounted to $402,052. The allowance is based on the Company's
collection history and current trends.
At December 31, 1993, accounts receivable includes unbilled accounts
receivable in the amount of $447,070 for services provided prior to December
31, 1993. Subsequent to December 31, 1993, the Company has collected all of
its accounts receivable outstanding at December 31, 1993.
NOTE 3--Related Party Transaction
At November 17, 1994, the Company had an outstanding loan receivable from
its stockholder, Raj Mantena amounting to $28,000. The loan was repaid
December 4, 1994.
At December 31, 1993, the Company had outstanding loans payable to its
stockholders, John Chay and Raj Mantena, amounting to $27,372 and $75,530
respectively, totaling $102,902. The loans are payable upon demand.
See Independent Audit Report.
F-153
<PAGE>
NUTRICHEM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
November 17, 1994 and December 31, 1993
NOTE 4--Pension Plan
The Company has a simplified employee pension plan that covers all
qualified employees. Contributions to the plan are at the discretion of the
Board of Directors. For the period ended November 17, 1994, the Board of
Director's have elected not to contribute to the plan. During 1993,
contributions to the plan charged to operations were $41,586.
NOTE 5--Supplemental Disclosures of Cash Flow Information
Noncash Financing Activities
For the period ending December 31, 1993, the Company had noncash financing
activities in the amount of $102,902 relating to stockholder distributions
and loans.
See Independent Audit Report.
F-154
<PAGE>
To the Stockholders of
FirstChoice Home Care, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheet of FirstChoice Home Care,
Inc. (an S corporation) as of December 31, 1993, and November 22, 1994, and
the related statements of income, retained earnings, and cash flows for the
year and the interim ten months and 22 days then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of
FirstChoice Home Care, Inc. as of December 31, 1993, and November 22, 1994,
and the results of their operations and their cash flows for the year and
interim period then ended in conformity with generally accepted accounting
principles.
Patrick & Associates, P.A.
June 8, 1995
See Independent Audit Report.
F-155
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
BALANCE SHEETS
December 31, 1993, and November 22, 1994
1993 1994
------- ---------
ASSETS
Current Assets:
Cash ................................................. $ 25,686 $ 67,406
Accounts receivable .................................. 385,864 116,244
Prepaid expenses ..................................... 7,755 1,333
Due from shareholders ................................ 20 31,137
-------- --------
Total current assets ............................. $419,325 $216,120
Property & Equipment:
Furniture and fixtures ............................... 15,717 15,611
Less accumulated depreciation ........................ (1,474) (4,374)
-------- --------
Total Property & Equipment ....................... 14,243 11,237
Other Assets:
Organization cost .................................... 17,275 12,957
Deposits ............................................. 537 537
-------- --------
Total other assets ............................... 17,812 13,494
-------- --------
Total assets ..................................... $451,380 $240,851
======== ========
LIABILITIES
Current liabilities:
Accounts payable ..................................... $215,011 $131,652
Note payable--Medicare ............................... 15,402 0
Payroll taxes payable ................................ 4,555 8,810
Accrued payroll ...................................... 14,206 11,084
Accrued pension contribution ......................... 54,457 0
Due to related parties ............................... 27,917 0
Other current liabilities ............................ 583 0
Other accrued expenses ............................... 0 10,535
Notes payable--current portion ....................... 105,000 105,000
-------- --------
Total current liabilities ........................ $437,131 $267,081
Long term Liabilities:
Accrued vacation liabilities ......................... 31,663 55,163
------- ---------
Total liabilities ................................ $468,794 $322,244
EQUITY
Common stock (par value $.01, 100,000 shares
authorized,
2,000 issued) ...................................... 20 20
Accumulated deficit .................................. (17,434) (81,413)
-------- --------
Total equity ..................................... (17,414) (81,393)
-------- --------
Total liabilities and equity ......................... $451,380 $240,851
======== ========
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-156
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF INCOME AND RETAINED EARNINGS
Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
1993 1994
--------- -----------
Net patient service revenue . $1,757,001 $2,448,645
Operating expenses:
Professional care of patients 1,065,670 1,489,830
Administrative and general .. 631,872 880,420
Depreciation and amortization 6,451 7,009
Interest expense ............ 10,105 21,966
Rent expense ................ 77,660 115,449
---------- ----------
Total operating expenses .... 1,791,758 2,514,674
---------- ----------
Net operating loss .......... (34,757) (66,029)
Other income ................ 1,070 2,050
---------- ----------
Net loss .................... (33,687) (63,979)
Accumulated
deficit--beginning .......... 16,253 (17,434)
---------- ----------
Accumulated deficit--ending . $ (17,434) $ (81,413)
========== ==========
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-157
<PAGE>
FIRST CHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF CASH FLOWS
For Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
1993 1994
--------- --------
Cash flow from operating activities
Net loss ....................................... $ (33,687) $(63,979)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense .......................... 1,503 2,691
Amortization expense .......................... 4,711 4,318
(Increase) Decrease in:
Accounts receivable .......................... (187,420) 269,620
Due from related parties ..................... 0 (31,117)
Prepaid expenses ............................. (7,755) 6,422
Deposits ..................................... 1,346 0
Increase (Decrease) in:
Trade accounts & notes payable ............... 224,333 (98,761)
Payroll taxes payable ........................ 4,149 4,255
Accrued expenses ............................. 6,287 (47,044)
Other current liabilities .................... 583 (583)
Due to related parties ....................... 0 (27,917)
Accrued vacation liabilities ................. 31,663 23,500
--------- --------
Total adjustments .......................... 79,400 105,384
--------- --------
Net cash provided by operating activities ...... 45,713 41,405
Cash flows from investing activities
Purchase of equipment .......................... (15,717) 315
--------- --------
Net cash used by investing activities .......... (15,717) 315
--------- --------
Cash flows from financing activities
Payment on short term notes .................... (12,149) 0
--------- --------
Net cash provided by financing activities ...... (12,149) 0
--------- --------
Net decrease in cash ........................... 17,847 41,720
Beginning cash ................................. 7,839 25,686
--------- --------
Ending cash .................................... $ 25,686 $ 67,406
========= ========
Supplemental Disclosures
Interest paid .................................. $ 10,105 $ 21,966
Income taxes paid .............................. $ 0 $ 0
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-158
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS
December 31, 1993, and November 22, 1994
NOTE 1--Summary of Significant Accounting Policies
This summary of significant accounting policies of FirstChoice Health
Care, Inc. (the Company) is presented to assist in the understanding of the
Company's financial statements. The financial statements and notes are the
representation of Company's management who are responsible for their
integrity and objectivity. Management's accounting policies conform with the
generally accepted accounting principles and have been consistently applied
in the preparation of these financial statements.
Business Activity. The Company provides health care services "in the home"
based on a course of treatment prescribed by the patients' physician. The
Company is compensated for its services primarily by Medicare, but
compensation can also be from Medicaid, private payments and private
insurance.
Concentrations of Credit Risk. At November 22, 1994, amounts due from
Medicare were $113,095.
Cash. Cash, for purposes of the statement of cash flows consists of checking
and bank money market accounts.
Revenue and Cost Recognition. The primary funding source, Medicare,
compensates the Company on a "cost reimbursement" basis, meaning Medicare
covers all reasonable cost incurred in providing patient care. Therefore,
there will be no "profit" in the traditional sense. "Profit" is realized
indirectly through owners' compensation and benefits, acquisition of assets,
and deferred compensation.
Depreciation. Depreciation is determined principally on the straight-line
method over the estimated useful lives of the assets, using the American
Hospital Association's "Estimated Useful Lives of Depreciable Hospital
Assets" Guidebook, 1983 edition or 1988 edition. If an asset is not in the
AHA Guide, regulations of the Internal Revenue Service are used.
Income Taxes. The Company has elected to be taxed as an "S" corporation,
where net income is generally reported on a pro-rata basis to each
shareholder, who in turn reports that income on their personal income tax
return.
NOTE 2--Related Party Transactions
Intercompany transactions occur between First Choice Network (Home Office)
and First Choice Health Care Services of Ft. Lauderdale, Inc. Both of these
entities are wholly owned by the shareholders of this Company. Intercompany
transactions consist primarily of loans to and from these companies and the
providing of administrative and general services at cost. It is the practice
of the Company to liquidate this balance on a periodic basis.
NOTE 3--Property and Equipment
The majority of the equipment used by the Company has been acquired
through operating leases, and are therefore not capitalized. Property and
equipment purchased is carried at cost. Expenditures for maintenance and
repairs are charged as the expense is incurred.
See Independent Audit Report.
F-159
<PAGE>
FIRSTCHOICE HOME CARE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment are summarized by major classification as follows:
December 31, November 22,
1993 1994
------------ ------------
Computer Equipment ............................. $15,275 $13,795
Allocation of Home Office Property and Equipment 442 1,816
------- -------
15,717 15,611
Less Accumulated Depreciation .................. 1,474 4,374
------- -------
Net Property and Equipment ..................... $14,243 $11,237
======= =======
NOTE 4--Notes Payable
Notes payable consist of notes due to six individuals. The notes are
renewable on an annual basis at the discretion of the lender. Most of the
notes are collateralized by accounts receivable. All of the notes have an
annual interest rate of 15% of principal and were paid as a condition of the
sale described in Note 7.
NOTE 5--Pension Plan
The Company has sponsored a defined contribution pension plan, covering
substantially all of its employees. The plan is a qualified plan under ERISA.
Enrollment for employees is in January and July of each year. If the enrolled
employee was still employed at year end, the Company accrued a contribution
equal to 12% of the employee's current year gross wage. The accrued
contribution must be paid to the plan by September 15 of the following year.
The expense recorded in 1993 was $54,457. The plan has been terminated in
1994 as a result of the sale described in Note 7 and all vested amounts will
be distributed.
NOTE 6--Contingencies
The Company derives a substantial portion of its revenues through cost
reimbursement from Medicare. The reimbursements are based on quarterly
interim reports followed by an annual final cost report submitted to the
intermediary for the Medicare system. These reports are subject to audit and
adjustments for a period of three years following the final cost report
filing date. Should subsequent audits result in adjustment of previously
submitted costs, these adjustments would be made as an offset to future
revenues, which could have an impact on future operation. Future revenues of
the Company, as a contractor with the federal government, could be affected
by future legislation, should the Medicare system be changed in any material
manner.
NOTE 7--Sale of Business Assets
The Company entered into an asset purchase agreement with FC DST-9 Act.
Corp. on August 30, 1994, to sell essentially all of the assets and
liabilities, including the corporate name, of this Company for $900,000. This
sale was completed on November 22, 1994. All accrued amounts due to the
shareholders of this company were paid at that closing. All amounts due on
notes payable to individuals were paid along with interest on November 22,
1994. These statements do not reflect any of the effects of this sale
transaction.
See Independent Audit Report.
F-160
<PAGE>
To the Stockholders of
First Choice Health Care of Ft. Lauderdale, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheet of First Choice Health Care
Services of Ft. Lauderdale, Inc. (an S corporation) as of December 31, 1993,
and November 22, 1994, and the related statements of income, retained
earnings, and cash flows for the year and the interim ten months and 22 days
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of First
Choice Health Care Services of Ft. Lauderdale, Inc. as of December 31, 1993,
and November 22, 1994, and the results of their operations and their cash
flows for the year and interim period then ended in conformity with generally
accepted accounting principles.
Patrick & Associates, P.A.
June 8, 1995
See Independent Audit Report.
F-161
<PAGE>
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
BALANCE SHEETS
December 31, 1993, and November 22, 1994
1993 1994
--------- ---------
ASSETS
Current assets
Cash ............................................. $ 53,445 $ 16,104
Accounts receivable .............................. 409,990 357,135
Due from related parties ......................... 27,917 2,070
--------- ---------
Total current assets ........................... 491,352 375,309
Property & Equipment
Furniture and fixtures ........................... 17,425 23,013
Less accumulated depreciation .................... (3,415) (7,213)
--------- ---------
Total Property & Equipment ..................... 14,010 15,800
Other assets
Deposits ......................................... 4,175 3,913
--------- ---------
Total assets ................................... $ 509,537 $ 395,022
========= =========
LIABILITIES
Current liabilities
Accounts payable--trade .......................... $ 156,345 $ 210,644
Note payable--Medicare ........................... 8,015 57,060
Payroll taxes payable ............................ 14,698 11,260
Accrued payroll .................................. 33,874 14,701
Accrued pension contribution ..................... 145,543 16,217
Other current liabilities ........................ 7,751 205,000
Notes payable--current ........................... 205,000 31,117
--------- ---------
Total Current Liabilities ...................... 571,226 545,999
Long term liabilities
Accrued vacation liabilities ..................... 68,228 78,362
--------- ---------
Total liabilities .............................. $ 639,454 $ 624,361
EQUITY
Common Stock (par value $1, 7,000 shares
authorized,
100 issued) .................................... 100 100
Accumulated deficit .............................. (130,017) (229,439)
--------- ---------
Total equity ................................... (129,917) (229,339)
--------- ---------
Total liabilities and equity ..................... $ 509,537 $ 395,022
========= =========
The accompanying notes are an integral part of these financial statements.
See Independent Audit Report.
F-162
<PAGE>
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF INCOME AND RETAINED EARNINGS
Year Ending December 31, 1993, and Interim Period Ending November 22, 1994
1993 1994
---------- ----------
Net patient service revenue . $4,060,691 $5,343,636
Operating expenses:
Professional care of patients 2,353,134 3,855,465
Administrative and general .. 1,528,149 1,396,519
Depreciation ................ 2,441 4,267
Interest expense ............ 46,716 30,203
Rent expense ................ 103,448 158,716
---------- ----------
Total operating expenses .... 4,033,888 5,445,170
---------- ----------
Net operating income ........ 26,803 (101,534)
Other income ................ 2,569 2,112
---------- ----------
Net income .................. 29,372 (99,422)
Accumulated
deficit--beginning .......... (159,389) (130,017)
---------- ----------
Accumulated deficit--ending . $ (130,017) $ (229,439)
========== ==========
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-163
<PAGE>
FIRST CHOICE HEALTH CARE OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
STATEMENTS OF CASH FLOWS
For Year Ending December 31, 1993, and Interim Period
Ending November 22, 1994
1993 1994
--------- ---------
Cash flows from operating activities
Net income .................................... $ 29,372 $ (99,422)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense ......................... 2,441 4,267
(Increase) Decrease in:
Accounts receivable ......................... 121,275 52,855
Due from related parties .................... 0 25,847
Deposits .................................... 4,822 262
Increase (Decrease) in:
Trade accounts & notes payable .............. (73,994) 46,284
Bank Overdraft .............................. 0 57,060
Payroll taxes payable ....................... (21,216) (3,438)
Accrued expenses ............................ (48,647) (164,716)
Other current liabilities ................... 1,398 8,466
Due to related parties ...................... 0 31,117
Accrued vacation liabilities ................ 23,119 10,134
--------- ---------
Total adjustments ......................... 9,198 68,138
--------- ---------
Net cash provided by operating activities ..... 38,570 (31,284)
Cash flows from investing activities:
Purchase of equipment ......................... (8,521) (6,057)
Net cash used by investing activities ......... (8,521) (6,057)
Cash flows from financing activities:
Payment on short term notes ................... (147,278) 0
--------- ---------
Net cash provided by financing activities ..... (147,278) 0
--------- ---------
Net decrease in cash .......................... (117,229) (37,341)
Beginning cash ................................ 170,674 53,445
--------- ---------
Ending cash ................................... $ 53,445 $ 16,104
========= =========
Supplemental Disclosures:
Interest paid ................................. $ 46,716 $ 30,203
Income taxes paid ............................. $ 0 $ 0
The accompanying notes are an integral part of these statements.
See Independent Audit Report.
F-164
<PAGE>
FIRST CHOICE HEALTH CARE SERVICES OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS
December 31, 1993, and November 22, 1994
NOTE 1--Summary of Significant Accounting Policies
This summary of significant accounting policies of First Choice Health
Care Services of Ft. Lauderdale, Inc. (the Company) is presented to assist in
the understanding of the Company's financial statements. The financial
statements and notes are the representation of Company's management who are
responsible for their integrity and objectivity. Management's accounting
policies conform with the generally accepted accounting principles and have
been consistently applied in the preparation of these financial statements.
Business Activity. The Company provides health care services "in the home"
based on a course of treatment prescribed by the patients' physician. The
Company is compensated for its services primarily by Medicare, but
compensation can also be from Medicaid, private payments and private
insurance.
Concentrations of Credit Risk. November 22, 1994, amounts due from Medicare
were $399,819 less an accrued amount of $42,785.
Cash. Cash, for purposes of the statement of cash flows consists of checking
and bank money market accounts.
Revenue and Cost Recognition. The primary funding source, Medicare,
compensates the Company on a "cost reimbursement" basis, meaning Medicare
covers all reasonable cost incurred in providing patient care. Therefore,
there will be no "profit" in the traditional sense. "Profit" is realized
indirectly through owners' compensation and benefits, acquisition of assets,
and deferred compensation.
Depreciation. Depreciation is determined principally on the straight-line
method over the estimated useful lives of the assets, using the American
Hospital Association's "Estimated Useful Lives of Depreciable Hospital
Assets" Guidebook, 1983 edition or 1988 edition. If an asset is not in the
AHA Guide, regulations of the Internal Revenue Service are used.
Income Taxes. The Company has elected to be taxed as an "S" corporation,
where net income is generally reported on a pro-rata basis to each
shareholder, who in turn reports that income on their personal income tax
return.
NOTE 2--Related Party Transactions
Intercompany transactions occur between First Choice Network (Home Office)
and First Choice Home Care, Inc. Both of these entities are wholly owned by
the shareholders of the Company. Intercompany transactions consist primarily
of loans to and from these companies and the providing of administrative and
general services at cost. It is the practice of the Company to liquidate this
balance on a periodic basis.
NOTE 3--Property and Equipment
The majority of the equipment used by the Company has been acquired
through operating leases, and are therefore not capitalized. Property and
equipment purchased is carried at cost. Expenditures for maintenance and
repairs are charged as the expense is incurred.
See Independent Audit Report.
F-165
<PAGE>
FIRST CHOICE HEALTH CARE SERVICES OF FT. LAUDERDALE, INC.
BOCA RATON, FLORIDA
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and equipment are summarized by major classification as follows:
December 31, November 22,
1993 1994
---------- ------------
Computer and communication equipment ........... $ 7,043 $10,599
Leasehold improvements ......................... 5,661 5,662
Furniture ...................................... 3,648 3,931
Allocation of home office property and equipment 1,073 2,821
------- -------
Total ........................................ 17,425 23,013
Less: accumulated depreciation ............... 3,415 7,213
------- -------
Total ........................................ $14,010 $15,800
======= =======
NOTE 4--Notes Payable
Notes payable consist of notes due to six individuals. These notes are
renewable on an annual basis at the discretion of the lender. Most of the
notes are collateralized by accounts receivable. All of the notes have an
annual interest rate of 15% of principal and were paid as a condition of the
sale described in Note 7.
NOTE 5--Pension Plan
The Company has sponsored a defined contribution pension plan, covering
substantially all of its employees. The plan is a qualified plan under ERISA.
Enrollment for employees is in January and July of each year. If the enrolled
employee was still employed at year end, the Company accrued a contribution
equal to 12% of the employee's current year gross wage. The accrued
contribution must be paid to the plan by September 15 of the following year.
The expense recorded in 1993 was $145,543. The plan has been terminated in
1994 as a result of the sale described in Note 7 and all vested amounts will
be distributed.
NOTE 6--Contingencies
The Company derives a substantial portion of its revenues through cost
reimbursement from Medicare. The reimbursements are based on quarterly
interim reports followed by an annual final cost report submitted to the
intermediary for the Medicare system. These reports are subject to audit and
adjustments for a period of three years following the final cost report
filing date. Should subsequent audits result in adjustment of previously
submitted costs, these adjustments would be made as an offset to future
revenues, which could have an impact on future operation. Future revenues of
the Company, as a contractor with the federal government, could be affected
by future legislation, should the Medicare system be changed in any material
manner.
NOTE 7--Sale of Business Assets
The Company entered into an asset purchase agreement with FC DST-10 Acq.
Corp. on August 30, 1994, to sell essentially all of the assets and
liabilities, including the corporate name, of this Company for $1,000,000.
This sale was completed on November 22, 1994. All accrued amounts due to the
shareholders of this company were paid at that closing. All amounts due on
notes payable to individuals were paid along with interest on November 22,
1994. These statements do not reflect any of the effects of this sale
transaction.
See Independent Audit Report.
F-166
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Whittle, Varnell and Bedoya, P.A.:
We have audited the accompanying balance sheets of Whittle, Varnell and
Bedoya, P.A. (a Florida corporation) as of December 31, 1993 and 1994, and
the related statements of operations and retained earnings and cash flows for
the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Whittle, Varnell and Bedoya,
P.A. as of December 31, 1993 and 1994, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
September 20, 1995.
F-167
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1993 1994 1995
-------- -------- -------------
ASSETS (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 17,490 $ 85,098 $ 69,858
Accounts receivable, net of allowances of $149,344
in 1993, $185,381 in 1994 and $188,590 (unaudited)
in 1995 .......................................... 271,889 337,497 350,240
Prepaid expenses ................................... 6,872 9,680 --
-------- -------- --------
Total current assets ........................... 296,251 432,275 420,098
PROPERTY AND EQUIPMENT, net ........................ 132,501 112,996 144,792
DUE FROM STOCKHOLDER ............................... 8,020 6,762 8,405
OTHER ASSETS ....................................... 8,317 8,317 8,114
-------- -------- --------
Total assets ................................... $445,089 $560,350 $581,409
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses .............. $ 78,982 $151,973 $ 78,058
Deferred income taxes .............................. 63,400 82,000 115,000
Revolving line of credit ........................... 44,468 35,349 27,455
Current portion of long-term debt .................. 20,382 22,205 26,000
-------- -------- --------
Total current liabilities ...................... 207,232 291,527 246,513
LONG-TERM DEBT, net of current portion ............. 69,078 46,873 27,884
-------- -------- --------
Total liabilities .............................. 276,310 338,400 274,397
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 7, 8 and 10)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized,
300 shares issued and outstanding ................ 300 300 300
Additional paid-in capital ......................... 7,200 7,200 7,200
Retained earnings .................................. 161,279 214,450 299,512
-------- -------- --------
Total stockholders' equity ..................... 168,779 221,950 307,012
-------- -------- --------
Total liabilities and stockholders' equity ..... $445,089 $560,350 $581,409
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-168
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the Nine-Month
For the Years Ended Periods
December 31, Ended September 30,
----------------------- ------------------------
1993 1994 1994 1995
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
NET PATIENT REVENUE ........................ $1,814,696 $2,514,824 $1,882,415 $1,980,965
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Salaries and benefits ..................... 1,153,467 1,437,648 1,069,520 1,232,025
Physician stockholders' payroll in excess
of base salary .......................... 286,103 513,159 286,136 323,577
Direct facility expenses .................. 299,416 339,182 320,581 246,016
Provision for bad debts ................... 119,475 148,305 81,846 40,285
---------- ---------- ---------- ----------
Total operating costs and expenses ..... 1,858,461 2,438,294 1,758,083 1,841,903
---------- ---------- ---------- ----------
Operating (loss) income ................ (43,765) 76,530 124,332 139,062
OTHER INCOME ............................... 6,502 10,741 -- --
---------- ---------- ---------- ----------
(Loss) income before provision for
income taxes ......................... (37,263) 87,271 124,332 139,062
PROVISION FOR INCOME TAXES ................. -- 34,100 48,000 54,000
---------- ---------- ---------- ----------
Net (loss) income ...................... (37,263) 53,171 76,332 85,062
RETAINED EARNINGS, beginning of year ....... 198,542 161,279 161,279 214,450
---------- ---------- ---------- ----------
RETAINED EARNINGS, end of year ............. $ 161,279 $ 214,450 $ 237,611 $ 299,512
========== ========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-169
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended Nine-Month Periods
December 31, Ended September 30,
--------------------- --------------------
1993 1994 1994 1995
--------- --------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ....................... $ (37,263) $ 53,171 $ 76,332 $ 85,062
--------- --------- -------- --------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation ........................... 44,142 47,845 23,500 33,999
Provision for bad debts ................ 119,475 148,305 81,846 40,285
Deferred tax provision ................. -- 18,600 63,600 33,000
Changes in assets and liabilities:
Accounts receivable ................... (97,874) (213,913) (35,710) (53,028)
Prepaid expenses ...................... 176 (2,808) (68,700) 9,680
Other assets .......................... 7,223 -- (16) 203
Accounts payable and accrued
expenses ............................ (76,045) 72,991 (71,482) (73,915)
--------- --------- -------- --------
Total adjustments .................... (2,903) 71,020 (6,962) (9,776)
--------- --------- -------- --------
Net cash (used in) provided by
operating activities ............... (40,166) 124,191 69,370 75,286
--------- --------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures .................... (99,294) (28,340) (8,646) (62,509)
Due from stockholder .................... (8,020) 1,258 759 (1,643)
--------- --------- -------- --------
Net cash used in investing activities (107,314) (27,082) (7,887) (64,152)
--------- --------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Borrowings on revolving line of credit .. 18,507 -- -- --
Payments on revolving line of credit .... -- (9,119) (5,140) (7,894)
Borrowings on long-term debt ............ 43,753 -- -- --
Payments on long-term debt .............. -- (20,382) (12,446) (18,480)
--------- --------- -------- --------
Net cash provided by (used in)
financing activities ............... 62,260 (29,501) (17,586) (26,374)
--------- --------- -------- --------
Net (decrease) increase in cash and
cash equivalents ................... (85,220) 67,608 43,897 (15,240)
CASH AND CASH EQUIVALENTS, beginning of
year ................................... 102,710 17,490 17,490 85,098
--------- --------- -------- --------
CASH AND CASH EQUIVALENTS,
end of year ............................ $ 17,490 $ 85,098 $ 61,387 $ 69,858
--------- --------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid .......................... $ 12,623 $ 12,606 $ 54 $ 7,342
--------- --------- -------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-170
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Business
Whittle, Varnell and Bedoya, P.A. (the "Company") is a Florida corporation
organized on December 31, 1989, to provide medical cardiology services. The
Company operates in area hospitals and maintains one office in Palm Beach
County and another in Martin County.
b. Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the date of purchase to be cash
equivalents. Included in the cash and cash equivalents balance as of December
31, 1993 and 1994, and September 30, 1995, are interest-bearing deposits
$2,306, $2,214 and $43,367 (unaudited), respectively.
c. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using accelerated methods over the
estimated useful lives of the assets ranging from five to seven years.
d. Accounts Receivable and Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third-party payors such as insurance companies (50%), patients
(5%) and government-sponsored health care programs (40%). These receivables
are presented net of an estimated allowance for contractual adjustments and
uncollectible receivables. Contractual adjustments result from the difference
between the rates for services performed and reimbursement amounts from the
government-sponsored health care programs and insurance companies for such
services.
e. Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes," which requires that deferred income taxes be recognized for
the tax consequences in future years of differences between the tax basis of
assets and liabilities and their financial reporting basis at rates based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
f. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value
of certain financial instruments. Cash and cash equivalents, accounts
receivable, prepaid expenses, other assets, accounts payable and accrued
expenses and long-term debt are reflected in the accompanying financial
statements at cost which approximates fair value.
g. Interim Financial Data
In the opinion of the management of the Company, the accompanying
unaudited combined financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the
financial position of the Company as of September 30, 1995, and the results
of operations for the nine-month periods ended September 30, 1994 and 1995.
The results of operations and cash flows for the nine-month period ended
September 30, 1995 are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 1995.
F-171
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
--------------------- September 30,
1993 1994 1995
--------- --------- ---------
(Unaudited)
Furniture, fixtures and equipment $ 348,350 $ 360,680 $ 379,536
Leasehold improvements .......... 9,061 8,561 16,955
--------- --------- ---------
357,411 369,241 396,491
Less: Accumulated depreciation .. (224,910) (256,245) (251,699)
--------- --------- ---------
$ 132,501 $ 112,996 $ 144,792
========= ========= =========
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
December 31,
------------------ September 30,
1993 1994 1995
------- -------- -------
(Unaudited)
Accounts payable ....... $ -- $ 11,203 $17,058
Accrued payroll taxes .. 20,081 80,834 --
Accrued pension expenses 58,901 44,436 40,000
Income tax payable ..... -- 15,500 21,000
------- -------- -------
$78,982 $151,973 $78,058
======= ======== =======
4. REVOLVING LINE OF CREDIT
The revolving line of credit bears interest at 8.5%, is unsecured and has
no specified repayment terms. The amount available to borrow against the line
of credit is approximately $65,000 at December 31, 1994 and $73,000
(unaudited) at September 30, 1995.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------- September 30,
1993 1994 1995
-------- -------- ------------
(Unaudited)
<S> <C> <C> <C>
Capital lease obligation, bearing interest at 15%,
payable in monthly installments of $1,326 through July
1997 ................................................. $ 46,530 $ 35,748 $ 26,100
Notes payable, bearing interest between 8% and 18%,
payable in average monthly installments of
approximately $1,100 through March 1998 .............. 42,930 33,330 27,784
-------- -------- --------
89,460 69,078 53,884
Less--Current portion .................................. (20,382) (22,205) (26,000)
-------- -------- --------
$ 69,078 $ 46,873 $ 27,884
======== ======== ========
</TABLE>
F-172
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future maturities of long-term debt as of December 31, 1994 are as
follows:
Capital Note
Year Leases Payable Total
- ---- ------ ------ --------
1995 ............................. $15,913 $ 9,105 $25,018
1996 ............................. 15,913 10,083 25,996
1997 ............................. 9,282 11,168 20,450
1998 ............................. -- 2,974 2,974
------- ------- -------
$41,108 $33,330 74,438
======= =======
Less: Amount representing interest (5,360)
-------
$69,078
=======
6. INCOME TAXES
The provision for income taxes consists of the following:
For the Year For the
Ended Nine-Month Periods
December 31, Ended September 30,
-------------- -------------------
1993 1994 1994 1995
---- ------- -------- --------
(Unaudited)
Current .. $-- $15,500 $(15,600) $21,000
Deferred . -- 18,600 63,600 33,000
--- ------- -------- -------
$-- $34,100 $ 48,000 $54,000
--- ------- -------- -------
Federal .. $-- $29,700 $ 42,000 $47,000
State .... -- 4,400 6,000 7,000
--- ------- -------- -------
$-- $34,100 $ 48,000 $54,000
=== ======= ======== =======
A reconciliation of the tax provision at the statutory rate of 34% to the
effective tax rate is as follows:
For the
For the Year Ended Nine-Month Periods
December 31, Ended September 30
------------------ ------------------
1993 1994 1994 1995
-------- ------- ------- -------
(Unaudited)
Tax provision at the
statutory rate ........... $(12,700) $29,700 $42,000 $47,000
State income taxes .......... (1,900) 4,400 6,000 7,000
Net operating loss carried
forward .................. 14,600 -- -- --
-------- ------- ------- -------
$ -- $34,100 $48,000 $54,000
======== ======= ======= =======
F-173
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1993 1994 1995
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Book/tax differences in recording accounts
receivable .................................. $106,000 $132,000 $137,000
Book/tax difference in recording prepaid
expenses ..................................... 3,000 3,000 --
Book/tax difference in recording accounts
payable and accrued expenses ................ (31,000) (53,000) (22,000)
Net operating loss carried forward ............. (14,600) -- --
-------- -------- --------
$ 63,400 $ 82,000 $115,000
======== ======== ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
a. Employment Agreements
The Company has an employment agreement with a physician. Future minimum
payments under this agreement as of December 31, 1994 are as follows:
Year Amount
---- --------
1995 ........... $150,000
1996 ........... 87,500
--------
$237,500
========
b. Insurance
The physicians employed by the Company are required to maintain insurance
coverage for their professional malpractice claims as a condition of
employment. Such insurance provides for coverage to the extent individual
claims do not exceed $1,000,000 per incident and $3,000,000 in the aggregate
per year. The Company maintains occurrence-based malpractice insurance
coverage. Accordingly, the Company does not provide reserves for professional
malpractice claims.
c. Operating Leases
The Company leases automobiles for the stockholders and office space under
operating leases which expire through 1998. Future annual minimum payments
under operating leases as of December 31, 1994 are as follows:
Year Amount
---- --------
1995 ........... $ 88,004
1996 ........... 81,910
1997 ........... 65,332
1998 ........... 21,333
--------
$256,579
========
Rent expense of $54,956, $64,849, $42,846 (unaudited) and $47,219
(unaudited) was incurred in the years ended December 31, 1993 and 1994 and
the nine-month periods ended September 30, 1994 and 1995, respectively.
F-174
<PAGE>
WHITTLE, VARNELL AND BEDOYA, P.A.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. BENEFIT PLAN
The Company provides retirement benefits for substantially all of its
employees under a defined contribution plan. Contributions to the plan
amounted to $70,797 and $94,445 for the years ended December 31, 1993 and
1994, respectively, and $62,000 (unaudited) and $80,763 (unaudited) for the
nine-month periods ended September 30, 1994 and 1995, respectively.
9. RELATED PARTY TRANSACTIONS
"Due from Stockholder" in the accompanying balance sheet at December 31,
1993 and 1994 consists of an advance to a physician stockholder. The amount
is noninterest-bearing and has no specified repayment terms.
10. SUBSEQUENT EVENTS
Subsequent to year-end, the Company began negotiations to enter into an
asset purchase and long-term management service agreement with Continuum Care
Corporation, an unaffiliated entity. As of September 20, 1995, the terms of
this agreement had not been finalized.
F-175
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Pinnacle Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Pinnacle
Associates, Inc. as of December 31, 1994 and 1993, and the related
consolidated statements of operations, changes in stockholders' deficit and
cash flows for the year ended December 31, 1994 and for the period from
October 21 (inception) to December 31, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pinnacle
Associates, Inc. as of December 31, 1994 and 1993 and the consolidated
results of its operations and its cash flows for the year ended December 31,
1994 and for the period from October 21 (inception) to December 31, 1993 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
December 14, 1995
See Independent Audit Report.
F-176
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, December 31,
1995 1994 1993
------------ --------- --------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash ................................................ $ 13,940 $ 7,666 $ 1,174
Trade accounts receivable, less allowance for
doubtful accounts of $3,358 in 1994 and $0 in 1993 567,127 75,019 --
Inventory ........................................... 45,181 50,718 --
Prepaid expenses .................................... 5,586 -- --
Other assets ........................................ 7,113 13,762 5,285
---------- --------- --------
Total current assets ............................ 638,947 147,165 6,459
Property and equipment, net of accumulated
depreciation ...................................... 73,114 92,924 10,716
Organization costs, net amortization ................ 3,500 4,250 --
---------- --------- --------
Total assets. ................................... $ 715,561 $ 244,339 $ 17,175
========== ========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable .................................... 233,729 71,029 --
Accrued liabilities ................................. 75,561 30,655 --
Interest payable .................................... 7,712 4,718 --
Line of credit ...................................... 400,000 400,000 30,000
Note payable ........................................ 50,000 50,000 --
Loan payable to officers ............................ 250,000 318 32,095
---------- --------- --------
Total current liabilities ....................... 1,017,002 556,720 62,095
Commitments and contingencies (Note 4) .............. -- -- --
Stockholders' deficit:
Common stock, $.01 par 20,000,000; shares authorized;
issued and outstanding, 6,622,500 shares at
September 30, 1995, 6,457,500 shares at December
31, 1994 and 9,000,000 shares at December 31, 1993 66,225 65,475 90,000
Due to from stockholders ............................ (59,400) (59,400) (89,100)
Additional paid-in capital .......................... 616,275 542,025 --
Accumulated deficit ................................. (924,541) (860,481) (45,820)
---------- --------- --------
Total stockholders' deficit. .................... (301,411) (312,381) (44,920)
---------- --------- --------
Total liabilities and stockholders' deficit ..... $ 715,561 $ 244,339 $ 17,175
========== ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-177
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
January 1, January 1, October 21,
to to (inception)
September December to
30, 31, December 31,
1995 1994 1993
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Operating revenues ................ $1,206,832 $ 303,508 $ --
Costs and expenses:
Operating expenses ................ 484,130 134,636
General and administrative expenses 841,804 953,915 45,820
----------- ----------- ------------
Total costs and expenses ...... 1,325,934 1,088,551 45,820
----------- ----------- ------------
(119,102) (785,043) (45,820)
----------- ----------- ------------
Other income (expense):
Interest expense .................. (36,871) (19,280) --
Interest income ................... -- 1,166 --
Loss on equity investment ......... -- (12,500) --
Proceeds from sale of investment .. 12,500 -- --
Other income, net ................. 79,413 996 --
----------- ----------- ------------
Net loss .......................... $ (64,060) $ (814,661) $(45,820)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-178
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------- Due from Paid-In Accumulated Stockholders'
Shares Amount Stockholders Capital Deficit Deficit
--------- -------- ------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 21, 1993
Issuance of common stock . 9,000,000 $ 90,000 $(89,100) $ -- $ 900
Net loss ................. $ (45,820) (45,820)
--------- -------- -------- -------- --------- ---------
Balance, December 31, 1993 9,000,000 90,000 (89,100) -- (45,820) (44,920)
Issuance of common stock . 597,500 5,975 591,525 597,500
Retirement of common stock (3,000,000) (30,000) 29,700 -- (300)
Repurchase of common stock (50,000) (500) (49,500) (50,000)
Net loss ................. (814,661) (814,661)
--------- -------- -------- -------- --------- ---------
Balance, December 31, 1994 6,547,500 65,475 (59,400) 542,025 (860,481) (312,381)
Issuance of common stock . 75,000 750 74,250 75,000
Net loss ................. (64,060) (64,060)
--------- -------- -------- -------- --------- ---------
Balance, September 30,
1995 (unaudited) ....... 6,622,500 $ 66,225 $(59,400) $616,275 $(924,541) $(301,441)
========= ======== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-179
<PAGE>
PINNACLE ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
October 21,
January 1, to January 1, to (inception) to
September 30, December 31, December 31,
1995 1994 1993
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................... $ (64,060) $(814,661) $(45,820)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization ...................... 25,969 22,702 290
Loss on sale of fixed assets ....................... (423)
Change in assets and liabilities:
(Increase) in trade accounts receivable ........... (492,108) (75,019) --
(Increase) decrease in inventory .................. 5,537 (50,718) --
(Increase) decrease in prepaid expenses and
organization costs .............................. 1,063 (13,478) (5,285)
Increase (decrease) in accounts payable ........... 162,700 71,029 --
Increase (decrease) in accrued expenses ........... 44,906 30,655 --
Increase (decrease) in accrued interest ........... 2,994 4,718 --
--------- --------- --------
Net cash used in operating activities .......... (312,999) (825,195) (50,815)
Cash flows used in investing activities:
Additions to property and equipment ................ (5,409) (106,196) (11,006)
Proceeds from sale of fixed assets ................. -- 2,462 --
Net cash provided (used by investing
activities) .................................. (5,409) (103,736) (11,006)
--------- --------- --------
Cash flows provided by financing activities:
Proceeds from issuance of common stock ............. 75,000 547,200 900
Borrowings from officers ........................... 249,682 318 32,095
Borrowings under notes payable ..................... -- 50,000 --
Payments on loans to officers ...................... -- (32,095) --
Borrowings on revolving line of credit ............. -- 370,000 30,000
--------- --------- --------
Net cash provided (used by financing
activities) .................................. 324,682 935,423 62,995
--------- --------- --------
Net change in cash ................................. 6,274 6,492 1,174
Cash, beginning of period. ......................... 7,666 1,174 --
--------- --------- --------
Cash, end of period ................................ $ 13,940 $ 7,666 $ 1,174
========= ========= ========
Supplemental cash flow information:
Cash paid during the year for interest ............. $ 33,876 19,280 --
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
See Independent Audit Report.
F-180
<PAGE>
PINNACLE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies:
Description of Business
Pinnacle Associates Inc. (the "Company") was incorporated on October 21,
1993 under the laws of Georgia and began treating patients in April 1994. The
Company was formed to provide management and administrative services for
physicians as well as physician directed infusion therapy programs for the
physician's patients while remaining part of the physician's practice. The
Company offers services in Pittsburgh and Atlanta.
Principles of Consolidation
The consolidated financial statements include the accounts of Pinnacle
Associates, Inc. and its related entities. All intercompany transactions and
balances have been eliminated in consolidation.
Inventory
Inventory is stated at the lower of cost, as determined on the first-in
first-out method, or market.
Investments
The equity method of accounting is used for investments when the Company
has a non-controlling ownership interest in another company that is greater
than 20%. Under the equity method of accounting, original investments are
recorded at cost and adjusted by the company's share of undistributed
earnings or losses of such companies and the amortization of underlying
intangibles.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is generally calculated over the estimated useful lives of the
assets using accelerated methods. Routine maintenance and repairs are charged
to expenses as incurred, while costs of betterments and renewals are
capitalized.
Organization Costs
Organization costs are being amortized on a straight-line basis over a
five year period.
Income Taxes
The stockholder of the Company has elected to adopt the provisions of
Subchapter S of the Internal Revenue Code of 1986. As a result, the Company
is not subject to corporate income taxes, except for taxes on capital gains,
if any. Accordingly, no provisions have been made in the accompanying
financial statements for federal and state income taxes since such taxes are
liabilities of the individual stockholder and the amounts thereof depend upon
his tax situation.
The Company's tax returns are subject to examination by federal and state
taxing authorities. In the event of an examination of such tax returns, the
liability of the stockholder could be changed if adjustments in the
distributable income were ultimately sustained by the taxing authorities.
See Independent Audit Report.
F-181
<PAGE>
PINNACLE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Property and Equipment:
December 31,
Depreciable ------------------
Lives 1994 1993
--------------- -------- -------
Furniture and equipment ..... 5-7 years $ 45,949 $ 8,073
Computer and software. ...... 5-7 years 68,619 2,933
-------- -------
114,568 11,006
Less accumulated depreciation (21,644) (290)
-------- -------
Total ....................... $ 92,924 $10,716
======== =======
3. Line of Credit:
On November 24, 1993 the Company obtained a line of credit from a bank in
the amount of $200,000 which is due and payable on demand. On June 14, 1994,
the Company obtained an additional $200,000 line of credit with the same
payment terms. Interest is payable monthly for each line of credit at the
bank's variable prime rate which was 8.5% at December 31, 1994. The amount
outstanding under the line of credit at December 31, 1994 and 1993 was
$400,000 and $30,000, respectively. A former partner and officer of the
Company has personally guaranteed the line of credit.
4. Commitments and Contingencies:
The Company leases various facilities, equipment and vehicles under lease
arrangements. Rent expense under all operating leases was $62,338 and $10,016
at December 31, 1994 and 1993, respectively. Future minimum lease payments
under these leases are as follows:
1995 ...................... $ 39,739
1996 ...................... 40,886
1997 ...................... 33,008
1998 ...................... 33,040
1999 ...................... 5,538
Thereafter ................ --
--------
Total minimum lease
payments .................. $152,211
========
5. Related Party Transactions:
The Company issued a $50,000 note which is payable on demand to a former
stockholder of the Company at 8% interest. Since the Company's inception,
several of the Company's officers and shareholders have provided services to
the Company for which no compensation has been reflected on these financial
statements.
6. Investment:
During 1994, the Company had purchased for $12,500 a 50% investment in an
affiliated company owned by certain stockholders of the Company. The
Company's share of the losses of the investment for 1994 exceeded the
carrying value of the investment. This investment was accounted for using the
equity method. At December 31, 1994, the investment balance was written down
to zero, reflecting the adjusted basis of the investment. Subsequent to
December 31, 1994, the equity investment was sold for $12,500 to a former
stockholder and officer of the Company.
See Independent Audit Report.
F-182
<PAGE>
PINNACLE ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Subsequent Events:
As of November 30, 1995, the Company opened several new programs in
seventeen locations, increasing the total number of program locations to nine
cities from two cities at December 31, 1994.
During November, the Company was acquired by Continuum Care Corporation.
In connection with the acquisition, the Company may receive up to $5,200,000.
The payment will represent the full purchase price and will be made in the
form of shares of Common Stock of Continuum Care Corporation. The ultimate
purchase price will be allocated to assets, primarily goodwill, at their fair
market value and amortized prospectively over the remainder of the forty year
period.
F-183
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Atlanta Gastroenterology Associates, P.C.
Atlanta, Georgia
We have audited the accompanying balance sheets of Atlanta
Gastroenterology Associates, P.C. as of January 31, 1996 and 1995, and the
related statements of operations and retained earnings, and cash flows for
the years then ended. These financial statements are the responsibility of
the Practice's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Atlanta Gastroenterology
Associates, P.C. as of January 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Frazier & Deeter, LLC
July 9, 1996
F-184
<PAGE>
ATLANTA GASTROENTEROLOGY ASSOCIATES, P.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
January 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash (Note 8) .............................................................. $ 110,644 $ 219,486
Patient receivables, net of contractual adjustments and allowances for
doubtful accounts (Notes 2 and 8) ........................................ 821,773 801,557
Income taxes receivable .................................................... 4,285 --
---------- ----------
Total current assets ................................................... 936,702 1,021,043
Net property and equipment, at cost (Note 3) ............................... 181,659 187,468
---------- ----------
Total assets ........................................................... $1,118,361 $1,208,511
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 5) ................................. $ 20,000 $ 20,000
Borrowings under line of credit (Note 4) ................................... 155,000 200,000
Current portion of obligation under capital lease (Note 7) ................. 4,099 5,145
Accounts payable ........................................................... 66,574 58,851
Accrued payroll and payroll taxes .......................................... 67,010 63,902
Income taxes payable ....................................................... -- 14,842
Deferred income taxes ...................................................... 281,712 280,734
---------- ----------
Total current liabilities .............................................. 594,395 643,474
---------- ----------
Long-term debt, less current portion included above (Note 5) ............... 53,332 73,332
Obligation under capital lease, less current portion included above (Note 7) -- 4,960
---------- ----------
Total liabilities ...................................................... 647,727 721,766
========== ==========
Commitments (Notes 6, 7 and 9) -- --
Stockholders' Equity:
Common stock, $1 par value; 1,000,000 shares authorized; 500 shares issued
and outstanding .......................................................... 500 500
Retained earnings .......................................................... 470,134 486,245
---------- ----------
Total stockholders' equity ............................................. 470,634 486,745
---------- ----------
Total Liabilities and Stockholders' Equity ............................. $1,118,361 $1,208,511
========== ==========
</TABLE>
See notes to financial statements.
F-185
<PAGE>
ATLANTA GASTROENTEROLOGY ASSOCIATES, P.C.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For the Year Ended
January 31,
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Professional fees, net .............................. $4,991,267 $4,939,845
---------- ----------
Practice overhead:
Cost of physicians services ......................... 2,795,292 2,748,489
Cost of staff services .............................. 1,085,295 1,038,342
Office and practice expenses ........................ 1,063,121 1,100,945
Depreciation and amortization ....................... 44,548 43,280
---------- ----------
Total practice overhead ......................... 4,988,256 4,931,056
---------- ----------
Practice income 3,011 8,789
---------- ----------
Other income (expense):
Interest expense .................................... (16,905) (11,577)
Miscellaneous income ................................ 750 --
---------- ----------
Total other income (expense) .................... (16,155) (11,577)
---------- ----------
(Loss) before (provision) benefit for income taxes .. (13,144) (2,788)
---------- ----------
(Provision) benefit for federal and state income
taxes:
Current ............................................. (1,989) (14,842)
Deferred ............................................ (978) 4,886
---------- ----------
Total provision for income taxes ................ (2,967) (9,956)
---------- ----------
Net loss (16,111) (12,744)
Retained earnings, beginning of year ................ 486,245 498,989
---------- ----------
Retained earnings, end of year ...................... $ 470,134 $ 486,245
========== ==========
</TABLE>
See notes to financial statements.
F-186
<PAGE>
ATLANTA GASTROENTEROLOGY ASSOCIATES, P.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended January 31,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
(Decrease) Increase in Cash
Cash flows from operating activities:
Cash received from patients ................................................. $ 4,971,051 $ 4,936,272
Cash paid for physicians services ........................................... (2,795,292) (2,748,489)
Cash paid for staff services ................................................ (1,082,186) (1,036,393)
Cash paid for general and administrative .................................... (1,055,399) (1,090,082)
Other income received ....................................................... 750 --
Interest paid ............................................................... (16,905) (11,577)
Income taxes paid ........................................................... (21,116) --
----------- -----------
Net cash provided by operating activities ................................. 903 49,731
----------- -----------
Cash flows from investing activities:
Capital expenditures ........................................................ (38,739) (53,041)
----------- -----------
Net cash used in investing activities ..................................... (38,739) (53,041)
----------- -----------
Cash flows from financing activities:
Net (repayments) borrowings on line of credit ............................... (45,000) 9,000
Proceeds from issuance of long-term debt .................................... -- 100,000
Principal payments on long-term debt ........................................ (26,006) (11,054)
----------- -----------
Net cash (used in) provided by financing activities ....................... (71,006) 97,946
----------- -----------
Net (decrease) increase in cash ............................................. (108,842) 94,636
Cash, beginning of year ..................................................... 219,486 124,850
Cash, end of year ........................................................... $ 110,644 $ 219,486
=========== ===========
Reconciliation of Net (Loss) to Net Cash Provided by Operating Activities
Net (loss) .................................................................. $ (16,111) $ (12,744)
----------- -----------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ............................................... 44,548 43,280
Changes in assets and liabilities:
(Increase) in patient receivables ........................................... (20,216) (3,573)
(Increase) in income taxes receivable ....................................... (4,285) --
Increase in accounts payable ................................................ 7,723 10,862
Increase in accrued payroll and payroll taxes ............................... 3,108 1,950
(Decrease) increase in income taxes payable ................................. (14,842) 14,842
Increase (decrease) in deferred income taxes ................................ 978 (4,886)
----------- -----------
Total adjustments ....................................................... 17,014 62,475
----------- -----------
Net cash provided by operating activities ................................... $ 903 $ 49,731
=========== ===========
</TABLE>
See notes to financial statements.
F-187
<PAGE>
ATLANTA GASTROENTEROLOGY ASSOCIATES, P.C.
Notes to Financial Statements
January 31, 1996 and 1995
1. Description of business and summary of significant accounting policies:
Atlanta Gastroenterology Associates, P.C. (the Practice) was incorporated
on August 13, 1976 for the purpose of providing gastroenterological medical
services for patients in the metropolitan Atlanta area.
The following is a summary of the more important accounting principles and
policies followed by the Practice:
Revenue recognition
These financial statements are prepared on the accrual basis of
accounting. Professional fees for patient services are recognized when
services are performed.
Property and equipment
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation is computed using accelerated methods over the assets' estimated
useful lives.
Expenditures for maintenance and repairs are charged to income as
incurred. Additions and betterments are capitalized. The cost of properties
sold or otherwise disposed of, and the accumulated depreciation thereon is
eliminated from the property and reserve accounts, and resulting gains and
losses are reflected in income.
Income taxes
The Practice adopted Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting for Income Taxes," which requires recognition of
deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based
on the differences between the financial statement and tax bases on assets
and liabilities using enacted tax rates in effect for the current year. These
temporary differences result primarily from differences in the Practice using
cash basis reporting for the income tax return and accrual basis reporting
for the financial statements.
Use of estimates
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.
Fair value of financial instruments
At January 31, 1996 and 1995, the carrying value of financial instruments
such as cash, patient receivables, trade payables, other liabilities,
borrowings under line of credit and long-term debt approximated their fair
values.
2. Professional fees:
Professional fees are billed at gross amounts and are adjusted at the time
of payment for contractual adjustments with Medicare and Medicaid, insurance
companies and other paying agents. The patient receivables also include
accounts that eventually will be written-off.
For the year ended January 31, 1996, the amount of contractual adjustments
and bad debts included in patient receivables were $427,579 and $34,669,
respectively.
For the year ended January 31, 1995, the amount of contractual adjustments
and bad debts included in patient receivables were $476,597 and $35,873,
respectively.
F-188
<PAGE>
ATLANTA GASTROENTEROLOGY ASSOCIATES, P.C.
Notes to Financial Statements (Continued)
January 31, 1996 and 1995
3. Property and equipment:
Property and equipment are summarized as follows:
January 31,
----------------------
1996 1995
--------- ---------
Furniture and fixtures ......................... $ 199,841 $ 199,841
Computer equipment ............................. 115,978 111,788
Medical equipment .............................. 144,171 111,296
Office equipment ............................... 34,227 32,554
Leasehold improvements ......................... 96,950 96,950
Equipment under capital lease .................. 22,321 22,321
--------- ---------
Total property and equipment ................. 613,488 574,750
Less: Accumulated depreciation and
amortization ................................. (431,829) (387,282)
--------- ---------
$ 181,659 $ 187,468
========= =========
Accumulated amortization of equipment under capital lease was $16,511 and
$14,187 at January 31, 1996 and 1995, respectively.
4. Borrowings under line of credit:
The Practice has borrowings under a line of credit with a bank bearing
interest at prime plus .50%, payable on demand. At January 31, 1996 and 1995,
the Practice had borrowings under the line of credit of $155,000 and
$200,000, respectively. The prime rate at January 31, 1996 was 8.25%.
5. Long-term debt:
Long-term debt consists of the following:
January 31,
--------------------
1996 1995
------- ---------
Note payable to bank, unsecured, payments due in
monthly installments of $1,667 plus interest at prime
plus 1.00% through September, 1999. ................. $ 73,332 $ 93,332
Less: Current portion ................................. (20,000) (20,000)
-------- --------
Long-term portion ..................................... $ 53,332 $ 73,332
======== ========
The following is a schedule, by years of maturities, of long-term debt:
Year ending January 31,
- --------------------------
1997 ..................... $20,000
1998 ..................... 20,000
1999 ..................... 20,000
2000 ..................... 13,332
-------
$73,332
=======
6. Profit sharing plan:
The Practice adopted a contributory defined contribution 401(k) profit
sharing plan effective January 1, 1994 for all eligible employees. The
Practice matches employee contributions $.25 per employee dollar
contribution,
F-189
<PAGE>
ATLANTA GASTROENTEROLOGY ASSOCIATES, P.C.
Notes to Financial Statements (Continued)
January 31, 1996 and 1995
up to 25% of the maximum statutory employee contribution amount. The Practice
contributed approximately $16,000 to the plan in each of the years ended
January 31, 1996 and 1995. The plan was terminated in May, 1996. (See
Note 9).
7. Capital and operating lease obligations:
Capital lease
The Practice leases certain medical equipment under a capital lease
arrangement which expires September, 1996. The present value of the net
minimum lease payments excluding interest at January 31, 1996 and 1995 is
$4,099 and $10,105, respectively.
Operating leases
The Practice leases office facilities under non-cancellable operating
leases. Rent expense under operating leases for the years ended January 31,
1996 and 1995 was $253,802 and $192,067, respectively.
Total future minimum rentals under operating leases as of January 31, 1996
are as follows:
Year ending January 31,
- --------------------------
1997 ..................... $ 233,974
1998 ..................... 231,874
1999 ..................... 207,070
2000 ..................... 205,006
2001 ..................... 205,006
----------
$1,082,930
==========
8. Concentration of credit risk:
The majority of the Practice's revenues are derived from patients located
in the metropolitan Atlanta area who receive gastroenterological services.
This medical field and geographic concentration of patients sets up a
concentration of credit risk with respect to patient fees.
Credit and insurance evaluations are performed on each patient. Losses
pertaining to those credit and insurance risks, in the aggregate, have not
exceeded managements' expectations.
The Practice maintains its cash in accounts which, at times, may exceed
federally insured limits. The Practice has not experienced any losses in such
accounts. The Practice believes it is not exposed to any significant credit
risk on cash.
9. Subsequent event:
On May 15, 1996, the shareholders of the Practice sold all of their stock
in the Practice to another unrelated entity. Subsequent to this transaction,
the Practice terminated its existing physicians' employment agreements,
restructured various employee benefit plans, and entered into a management
services agreement with a new entity formed by the Practice's physicians for
the delivery of medical services.
F-190
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Managing Members
Physician's Choice Management, LLC.
Ridgefield, Connecticut
We have audited the accompanying balance sheet of Physician's Choice
Management, LLC. (a limited liability company) as of December 31, 1995, and
the related statement of operations and members' equity, and cash flows for
the period August 11, 1995 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Physician's Choice
Management, LLC. as of December 31, 1995 and the results of its operations
and its cash flows for the period August 11, 1995 to December 31, 1995 in
conformity with generally accepted accounting principles.
Friedberg, Smith & Co., P.C.
January 16, 1996
F-191
<PAGE>
PHYSICIAN'S CHOICE MANAGEMENT, LLC.
(a limited liability company)
BALANCE SHEET
December 31, 1995
ASSETS
Current Assets
Cash (Note 2) ................................ $1,607,597
----------
Equipment and Improvements (Note 1) ............
Furniture and Office Equipment ................ 36,928
Leasehold Improvements ........................ 2,319
----------
Total ........................................ 39,247
Less: Accumulated Depreciation and
Amortization ................................. 1,003
----------
Equipment and Improvements, Net .............. 38,244
Other Asset--Security Deposit (Note 6) ......... 8,307
----------
TOTAL ASSETS ................................... $1,654,148
==========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities ............................
Accrued Expenses and Taxes .................... $ 20,076
Non-Current Liabilities ........................
Deferred Unit Option Advance (Note 4) ......... 175,000
----------
Total Liabilities ............................ 195,076
Members' Equity (Notes 1, 3 and 6) ............. 1,459,072
----------
TOTAL LIABILITIES AND MEMBERS' EQUITY .......... $1,654,148
==========
See notes to financial statements.
F-192
<PAGE>
PHYSICIAN'S CHOICE MANAGEMENT, LLC.
(a limited liability company)
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
Period August 11, 1995 (inception)
to December 31, 1995
Revenue
Fee Income .......................... $ 8,315
----------
Operating Expenses ...................
Wages ............................... 58,716
Payroll Taxes ....................... 6,755
Office Expenses ..................... 6,608
Rent (Note 6) ....................... 4,153
Consulting .......................... 3,118
Education ........................... 2,285
Data Processing ..................... 1,152
Insurance ........................... 604
Telephone ........................... 951
Advertising ......................... 398
Bank Charges ........................ 809
Dues and Fees ....................... 195
Entertainment ....................... 733
Allocation of Administrative Costs
to Physician's Choice, LLC. (Note
5) ................................. (27,185)
Depreciation (Note 1) ............... 1,003
----------
Total Operating Expenses ......... 60,295
----------
Loss before Other Income ............. (51,980)
Other Income--Interest ............... 9,952
----------
Net Loss ............................. (42,028)
Members' Equity--Beginning (Note 1) .. --
Contributions from Members ........... 2,001,100
Member Subscription Receivable (Note 3) (500,000)
----------
Members' Equity--Ending .............. $1,459,072
==========
See notes to financial statements.
F-193
<PAGE>
PHYSICIAN'S CHOICE MANAGEMENT, LLC.
(a limited liability company)
STATEMENT OF CASH FLOWS
Period August 11, 1995 (inception)
to December 31, 1995
Increase (Decrease In Cash)
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net Loss ............................................................... $ (42,028)
----------
Adjustments to Reconcile Net Loss to Net Cash Provided (Used) By
Operating Activities:
Depreciation .......................................................... 1,003
Change in Assets and Liabilities:
Accrued Expenses and Taxes ........................................... 20,076
----------
Total Adjustments ................................................... 21,079
----------
Net Cash Used by Operating Activities ............................... (20,949)
----------
Cash Flows from Investing Activities ....................................
Acquisition of Equipment and Improvements .............................. (39,247)
Increase in Security Deposit ........................................... (8,307)
----------
Net Cash Used by Investing Activities ............................... (47,554)
----------
Cash Flows from Financing Activities
Contributions from Members ............................................. 1,501,100
Proceeds from Deferred Unit Option Advance ............................. 175,000
----------
Net Cash Provided by Financing Activities ........................... 1,676,100
----------
Net Increase in Cash .................................................... 1,607,597
Cash - Beginning of Period .............................................. --
----------
Cash - Ending of Period ................................................. $1,607,597
==========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Members' Subscription Receivable ........................................ $ 500,000
==========
</TABLE>
See notes to financial statements.
F-194
<PAGE>
PHYSICIAN'S CHOICE MANAGEMENT, LLC.
(a limited liability company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Physician's Choice Management, LLC. (a limited liability company)
(Company) provides services to physician networks and medical groups.
Form of Ownership
On August 11, 1995, the Company was organized as a limited liability
company under the laws of the State of Connecticut. A limited liability
company is treated as a partnership for federal income tax purposes and
provides all of its members with limited liability attributes of a
corporation.
Basis of Accounting
The Company uses the accrual method of accounting for financial reporting
purposes and the cash basis of accounting for income tax reporting.
Profits and losses are allocated equally for 1995 based upon unit
ownership in the Company. Commencing in 1996 profits and losses will be
allocated using a predetermined formula as defined in the Company's operating
agreement based upon type of ownership.
Equipment and Improvements
Equipment and improvements are stated at cost. Depreciation and
amortization are computed by the straight-line method for financial
reporting purposes and by accelerated methods for income tax reporting
purposes over the estimated useful lives of the assets ranging from 5 to 39
years.
Use of Estimates
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 financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 - CONCENTRATION OF CASH CREDIT RISK AND DISCLOSURE OF FINANCIAL
INSTRUMENTS
The Company maintains its cash accounts in one commercial bank. The
accounts at the bank are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. In addition, the Company maintains an
uninsured money market account at the bank. A summary of the total insured
and uninsured cash balances at December 31, 1995 is as follows:
Total Cash in Bank ....... $1,628,101
Portion Insured by FDIC .. 41,671
----------
Uninsured Cash Balances .. $1,586,430
==========
The carrying amount of cash is a reasonable estimate of fair value.
F-195
<PAGE>
PHYSICIAN'S CHOICE MANAGEMENT, LLC.
(a limited liability company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
NOTE 3 - MEMBER SUBSCRIPTION RECEIVABLE
One of the Company's members made an initial capital contribution of
$2,000,000 of which $1,500,000 was paid in 1995 with the balance of $500,000
required to be paid prior to June 1996 without interest.
NOTE 4 - DEFERRED UNIT OPTION ADVANCE
During 1995, the Company granted an option to one of its members to
acquire an additional 4 units of ownership in the Company for $1,000,000 in
consideration for a nonrefundable deposit of $175,000. The option expires in
May 1998. The exercise of the option for the above units must occur
simultaneously with the simultaneous exercise of a similar option with an
affiliated company, Physician's Choice, LLC.
If the option is not exercised the $175,000 deposit will be reflected as
income.
NOTE 5 - ALLOCATION OF ADMINISTRATIVE COSTS TO PHYSICIAN'S CHOICE, LLC.
During 1995, the Company charged an affiliate $27,185 for administrative
costs.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Lease
The Company leases its office space under an operating lease extending to
November 1997 at $4,153 per month plus utilities.
Rent expense charged to operations for the period August 11, 1995
(inception) to December 31, 1995 was $4,153.
Future minimum annual rentals at December 31, 1995, under this lease are:
Years Ending December 31, Amount
----------------------------------- --------
1996 .............................. $49,840
1997 .............................. 45,687
-------
Total ............................. $95,527
=======
Employment Agreements
The Company has entered into employment agreements with its three managing
members. The agreements extend through November 1999 and provide two of the
managing members with compensation commencing in the second year of the
agreements to be 25% of net income as defined, not to exceed $300,000,
$350,000 and $375,000, during the second, third and fourth years of the
agreement, respectively. The third managing member will receive annual
compensation of $150,000.
The agreement automatically terminates upon death, disability or by cause
as defined therein and the Company may terminate the agreements without
cause. The third managing member is entitled to receive severance in the
amount of $150,000 if the Company terminates the agreement without cause.
F-196
<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.
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
* 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:
No. of Shares of
Name Common Stock
--------------------------- ------------------
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
(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:
No. of Shares of
Name Common Stock
--------------------------- ------------------
Steven J. Morris 117,475
R. Cater Davis, Jr. 88,559
Norman L. Elliot 59,109
Alan Sunshine 59,109
The Debentures offered pursuant to this Registration Statement were
initially issued by the Company on June 26, 1996, to the following Initial
Purchasers:
Principal
Name Amount
- ----------------------------- ---------------
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
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 Coopers & Lybrand L.L.P.
*23.3 Consent of Bober, Markey & Company
*23.4 Consent of Coopers & Lybrand L.L.P.
II-3
<PAGE>
Exhibit No. Exhibit
- -------------- --------------------------------------------------------------------------------------------
*23.5 Consent of Coopers & Lybrand L.L.P.
*23.6 Consent of Arthur Andersen LLP
*23.7 Consent of Hoyman, Dobson & Company
*23.8 Consent of Babush, Neiman, Kornman & Johnson
*23.9 Consent of Weil, Akman, Baylin & Coleman
*23.10 Consent of Coopers & Lybrand L.L.P.
*23.11 Consent of Katz, Sapper & Miller, LLP
*23.12 Consent of Roy Cline, CPA, PA
*23.13 Consent of Regan, Russell, Schickner & Shah, P.A.
*23.14 Consent of Patrick & Associates, P.A.
*23.15 Consent of Patrick & Associates, P.A.
*23.16 Consent of Coopers & Lybrand L.L.P.
*23.17 Consent of Frazier & Deeter, LLC
*23.18 Consent of Friedberg, Smith & Co., P.C.
+23.19 Consent of Nutter, McClennen & Fish, LLP (contained in Exhibit 5)
24.1 Power of Attorney (contained 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 16th day of
September 1996.
PHYMATRIX CORP.
By: /s/ Abraham D. Gosman
---------------------------------------
Abraham D. Gosman
Chairman of the Board of Directors,
President and Chief Executive Officer
The registrant and each person whose signature appears below on this
Registration Statement hereby constitutes and appoints Frederick R. Leathers
and Michael J. Bohnen, and each of them, with full power to act without the
other, his true and lawful, attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all
amendments (including post-effective amendments and amendments thereto) to
this Registration Statement on Form S-1 of the registrant, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary fully to
all intents and purposes as he might or could do in person thereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
/s/ Abraham D. Gosman September 16, 1996
- ------------------------------
Abraham D. Gosman
Chairman of the Board of
Directors, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ Frederick R. Leathers September 16, 1996
- ------------------------------
Frederick R. Leathers
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Joseph N. Cassese September 16, 1996
- ------------------------------
Joseph N. Cassese
Director
/s/ David Livingston, M.D. September 9, 1996
- ------------------------------
David Livingston, M.D.
Director
/s/ Bruce Rendina September 10, 1996
- ------------------------------
Bruce Rendina
Director
II-5
<PAGE>
/s/ Stephen E. Ronai September 13, 1996
- ------------------------------
Stephen E. Ronai, Esq.
Director
/s/ Hugh L. Carey September 16, 1996
- ------------------------------
Governor Hugh L. Carey
Director
/s/ John Chay September 9, 1996
- ------------------------------
John Chay
Director
II-6
PHYMATRIX CORP.
and
CHEMICAL BANK,
as Trustee
INDENTURE
Dated as of June 15, 1996
$100,000,000
6-3/4% Convertible Subordinated Debentures due 2003
A-5
<PAGE>
Certain Sections of this Indenture relating to
Sections 310 through 318 of the
Trust Indenture Act of 1939:
S 310 (a)(1).............
609
(a)(2) ...................
609
(a)(3) ................... Not Applicable
(a)(4) ................... Not Applicable
(a)(5) ...................
609
(b) ...................
608
S 311 (a)................
613
(b) ...................
613
S 312 (a)................
701
...................
702(a)
(b) ...................
702(b)
(c) ...................
702(c)
S 313 (a)................
703(a)
(b) ...................
703(a)
(c) ...................
703(a)
(d) ...................
703(b)
S 314 (a)................
704
(a)(4) ...................
1004
(b) ................... Not Applicable
(c)(1) ...................
102
(c)(2) ...................
102
(c)(3) ................... Not Applicable
(d) ................... Not Applicable
(e) ...................
102
S 315 (a)................
601
i
<PAGE>
(b) ...................
602
(c) ...................
601
(d) ...................
601
(e) ...................
514
S 316 (a)(1)(A)..........
502
...................
512
(a)(1)(B) ...................
513
(a)(2) ................... Not Applicable
(b) ...................
508
(c) ...................
104(c)
S 317 (a)(1).............
503
(a)(2) ...................
504
(b) ...................
1003
S 318 (a)................
107
- ------------------------
Note: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.
ii
<PAGE>
TABLE OF CONTENTS
*
Page
Parties................................................................... 1
Recitals of the Company................................................... 1
ARTICLE ONE
Definitions and Other Provisions
of General Application......... 1
SECTION 101. Definitions............................. 1
"Act" ........................................ 2
"Affiliate" ........................................ 2
"Authenticating Agent".................................. 2
"Beneficial Owner"...................................... 2
"Board of Directors" ................................... 2
"Board Resolution"...................................... 2
"Business Day" ........................................ 2
"Cedel" ........................................ 2
"Change in Control"..................................... 3
"Closing Date" ........................................ 3
"Commission" ........................................ 3
"Common Stock" ........................................ 3
"Company" ........................................ 3
"Company Guarantee"..................................... 3
"Company Request"....................................... 3
"Corporate Trust Office"................................ 3
"Corporation" ........................................ 3
"Current Market Price".................................. 4
"DTC" ........................................ 4
"Defaulted Interest".................................... 4
"Definitive Security" or "Definitive Securities"........ 4
"Depositary" ........................................ 4
"Euroclear" ........................................ 4
"Event of Default"...................................... 4
"Exchange Act" ........................................ 4
"Global Security or "Global Securities"................. 4
"Guarantee" ........................................ 4
- --------
*Note: This table of contents shall not, for any purposes,
be deemed to be a part of the Indenture.
iii
<PAGE>
"Guarantor" ........................................ 4
"Holder" ........................................ 4
"Indenture" ........................................ 4
"Initial Purchasers".................................... 5
"Interest Payment Date"................................. 5
"Maturity" ........................................ 5
"Officers' Certificate"................................. 5
"144A Global Note"...................................... 5
"Obligations" ........................................ 5
"Opinion of Counsel".................................... 5
"Outstanding" ........................................ 5
"Paying Agent" ........................................ 6
"Permitted Holder"...................................... 6
"Person" ........................................ 6
"Predecessor Security".................................. 6
"Purchase Agreement".................................... 7
"Record Date" ........................................ 7
"Redemption Date"....................................... 7
"Redemption Price"...................................... 7
"Registration Rights Agreement"......................... 7
"Regular Record Date"................................... 7
"Regulation S" ........................................ 7
"Regulation S Global Security".......................... 7
"Repurchase Date"....................................... 7
"Repurchase Event"...................................... 7
"Repurchase Price"...................................... 7
"Resale Restriction Termination Date"................... 7
"Responsible Officer"................................... 7
"Securities Custodian".................................. 8
"Security Register" and "Security Registrar"............ 8
"Senior Indebtedness"................................... 8
"Shelf Registration Statement........................... 8
"Special Record Date"................................... 8
"Stated Maturity"....................................... 9
"Subsidiary" ........................................ 9
"Transfer Restricted Securities"........................ 9
"Trust Indenture Act"................................... 9
"Trustee" ........................................ 9
"Vice President"........................................ 9
"Wholly Owned Subsidiary"............................... 9
SECTION 102. Compliance Certificates and Opinions.............. 9
SECTION 103. Form of Documents Delivered to Trustee............ 10
SECTION 104. Acts of Holders; Record Dates..................... 11
SECTION 105. Notices, Etc., to Trustee and Company............. 12
SECTION 106. Notice to Holders; Waiver......................... 12
iv
<PAGE>
SECTION 107. Conflict with Trust Indenture Act................. 13
SECTION 108. Effect of Headings and Table of Contents.......... 13
SECTION 109. Successors and Assigns............................ 13
SECTION 110. Separability Clause............................... 13
SECTION 111. Benefits of Indenture............................. 13
SECTION 112. Governing Law..................................... 14
SECTION 113. Legal Holidays.................................... 14
SECTION 114. No Security Interest Created...................... 14
SECTION 115. Limitation on Individual Liability................ 14
ARTICLE TWO
Security Forms........................................ 15
SECTION 201. Forms Generally................................... 15
SECTION 202. Form of Face of Security.......................... 16
SECTION 203. Form of Reverse of Global Securities
and Definitive Security......................... 20
SECTION 204. Form of Trustee's Certificate of Authentication... 29
ARTICLE THREE
The Securities........................................ 30
SECTION 301. Title and Terms................................... 30
SECTION 302. Denominations..................................... 31
SECTION 303. Execution, Authentication, Delivery and Dating.... 31
SECTION 304. Temporary Securities.............................. 32
SECTION 305. Registration, Registration of
Transfer and Exchange........................... 32
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.. 41
SECTION 307. Payment of Interest; Interest Rights Preserved.... 42
SECTION 308. Persons Deemed Owners............................. 44
SECTION 309. Cancellation...................................... 44
SECTION 310. Computation of Interest........................... 44
ARTICLE FOUR
Satisfaction and Discharge............................ 45
SECTION 401. Satisfaction and Discharge of Indenture........... 45
SECTION 402. Application of Trust Money........................ 46
SECTION 403. Reinstatement..................................... 46
v
<PAGE>
ARTICLE FIVE
Remedies.............................................. 47
SECTION 501. Events of Default................................. 47
SECTION 502. Acceleration of Maturity; Rescission
and Annulment................................... 49
SECTION 503. Collection of Indebtedness and
Suits for Enforcement by Trustee................ 50
SECTION 504. Trustee May File Proofs of Claim.................. 51
SECTION 505. Trustee May Enforce Claims Without
Possession of Securities........................ 51
SECTION 506. Application of Money Collected.................... 51
SECTION 507. Limitation on Suits............................... 52
SECTION 508. Unconditional Right of Holders to
Receive Principal, Premium and
Interest and to Convert........................ 53
SECTION 509. Restoration of Rights and Remedies................ 53
SECTION 510. Rights and Remedies Cumulative.................... 53
SECTION 511. Delay or Omission Not Waiver...................... 53
SECTION 512. Control by Holders................................ 54
SECTION 513. Waiver of Past Defaults........................... 54
SECTION 514. Undertaking for Costs............................. 54
ARTICLE SIX
The Trustee........................................... 55
SECTION 601. Certain Duties and Responsibilities............... 55
SECTION 602. Notice of Defaults................................ 56
SECTION 603. Certain Rights of Trustee......................... 56
SECTION 604. Not Responsible for Recitals or
Issuance of Securities.......................... 57
SECTION 605. May Hold Securities............................... 58
SECTION 606. Money Held in Trust............................... 58
SECTION 607. Compensation and Reimbursement.................... 58
SECTION 608. Disqualification; Conflicting Interests........... 59
SECTION 609. Corporate Trustee Required; Eligibility........... 59
SECTION 610. Resignation and Removal; Appointment
of Successor.................................... 60
SECTION 611. Acceptance of Appointment by Successor............ 61
SECTION 612. Merger, Conversion, Consolidation or
Succession to Business.......................... 62
SECTION 613. Preferential Collection of Claims
Against Company................................. 62
SECTION 614. Appointment of Authenticating Agent............... 62
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company..... 64
vi
<PAGE>
SECTION 701. Company to Furnish Trustee Names and
Addresses of Holders............................ 64
SECTION 702. Preservation of Information; Communication to
Holders........................................... 65
SECTION 703. Reports by Trustee................................ 65
SECTION 704. Reports by Company................................ 65
SECTION 705. Rule 144A Information Requirement................. 66
ARTICLE EIGHT
Consolidation, Merger, Conveyance,
Transfer or Lease................................... 66
SECTION 801. Company May Consolidate, Etc., Only on Certain
Terms............................................. 66
SECTION 802. Successor Substituted............................. 67
ARTICLE NINE
Supplemental Indentures............................... 67
SECTION 901. Supplemental Indentures Without Consent
of Holders...................................... 67
SECTION 902. Supplemental Indentures with Consent
of Holders...................................... 68
SECTION 903. Execution of Supplemental Indentures.............. 69
SECTION 904. Effect of Supplemental Indentures................. 69
SECTION 905. Conformity with Trust Indenture Act............... 69
SECTION 906. Reference in Securities to Supplemental
Indentures...................................... 69
SECTION 907. Notice of Supplemental Indenture.................. 70
ARTICLE TEN
Covenants............................................. 70
SECTION 1001. Payment of Principal, Premium and Interest........ 70
SECTION 1002. Maintenance of Office or Agency................... 70
SECTION 1003. Money for Security Payments to Be Held in Trust... 70
SECTION 1004. Statement by Officers as to Default............... 72
SECTION 1005. Existence......................................... 72
SECTION 1006. Waiver of Certain Covenants....................... 72
ARTICLE ELEVEN
Redemption of Securities.............................. 72
SECTION 1101. Right of Redemption............................... 72
SECTION 1102. Applicability of Article.......................... 73
vii
<PAGE>
SECTION 1103. Election to Redeem; Notice to Trustee............. 73
SECTION 1104. Selection by Trustee of Securities
to be Redeemed.................................. 73
SECTION 1105. Notice of Redemption.............................. 74
SECTION 1106. Deposit of Redemption Price....................... 74
SECTION 1107. Securities Payable on Redemption Date............. 75
SECTION 1108. Securities Redeemed in Part....................... 75
ARTICLE TWELVE
Guarantees............................................ 76
SECTION 1201. Unconditional Guarantees.......................... 76
SECTION 1202. Addition of Guarantors............................ 76
ARTICLE THIRTEEN
Subordination of Securities........................... 76
SECTION 1301. Securities Subordinated to Senior Indebtedness.... 76
SECTION 1302. Payment Over of Proceeds Upon Dissolution, Etc.... 76
SECTION 1303. Prior Payment to Senior Indebtedness upon
Acceleration of Securities........................ 78
SECTION 1304. No Payment When Senior Indebtedness in Default.... 78
SECTION 1305. Payment Permitted If No Default................... 79
SECTION 1306. Subrogation to Rights of Holders of Senior
Indebtedness...................................... 79
SECTION 1307. Provisions Solely to Define Relative Rights....... 79
SECTION 1308. Trustee to Effectuate Subordination............... 80
SECTION 1309. No Waiver of Subordination Provisions............. 80
SECTION 1310. Notice to Trustee................................. 80
SECTION 1311. Reliance on Judicial Order or Certificate of
Liquidating Agent................................. 81
SECTION 1312. Trustee Not Fiduciary for Holders of Senior
Indebtedness...................................... 82
SECTION 1313. Rights of Trustee as Holder of Senior
Indebtedness; Preservation of
Trustee's Rights................................ 82
SECTION 1314. Article Applicable to Paying Agents............... 82
SECTION 1315. Certain Conversions Deemed Payment................ 82
SECTION 1316. No Suspension of Remedies......................... 83
ARTICLE FOURTEEN
Conversion of Securities.............................. 83
SECTION 1401. Conversion Privilege and Conversion Price......... 83
viii
<PAGE>
SECTION 1402. Exercise of Conversion Privilege.................. 84
SECTION 1403. Fractions of Shares............................... 84
SECTION 1404. Adjustment of Conversion Price.................... 85
SECTION 1405. Notice of Adjustments of Conversion Price......... 91
SECTION 1406. Notice of Certain Corporate Action................ 92
SECTION 1407. Company to Reserve Common Stock................... 93
SECTION 1408. Taxes on Conversions.............................. 93
SECTION 1409. Covenant as to Common Stock....................... 93
SECTION 1410. Cancellation of Converted Securities.............. 93
SECTION 1411. Provisions of Consolidation, Merger
or Sale of Assets............................... 94
SECTION 1412. Trustee's Disclaimer.............................. 94
ARTICLE FIFTEEN
Right to Require Repurchase........................... 95
SECTION 1501. Right to Require Repurchase....................... 95
SECTION 1502. Notice; Method of Exercising Repurchase Right..... 95
SECTION 1503. Deposit of Repurchase Price....................... 96
SECTION 1504. Securities Not Repurchased on Repurchase Date..... 96
SECTION 1505. Securities Repurchased in Part.................... 97
SECTION 1506. Certain Definitions............................... 97
ix
<PAGE>
INDENTURE, dated as of June 15, 1996 between PHYMATRIX CORP.,
a corporation duly organized and existing under the laws of the State of
Delaware (herein called the "Company"), having its principal executive offices
at 777 South Flagler Drive, West Palm Beach, Florida 32811, and Chemical Bank, a
New York banking corporation, as Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of
its 6-3/4% Convertible Subordinated Debentures due 2003 (herein called the
"Securities") of substantially the tenor and amount hereinafter set forth, and
to provide therefor the Company has duly authorized the execution and delivery
of this Indenture.
All things necessary to make the Securities, when executed by
the Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid agreement of the Company, in accordance with their and its terms, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities, as follows:
ARTICLE ONE
Definitions and Other Provisions
of General Application
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles, and, except as otherwise herein expressly
provided, the term "generally accepted accounting
<PAGE>
principles" with respect to any computation required and permitted
hereunder shall mean such accounting principles as are generally
accepted and accepted and adopted by the Company at the date of this
Indenture; and
(4) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to
any particular Article, Section or other subdivision.
Certain terms used in Articles Twelve, Thirteen and Fourteen
are defined in such Articles.
"Act", when used with respect to any Holder, has the meaning
specified in Section 104.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Authenticating Agent" means any Person authorized by the
Trustee pursuant to Section 614 to act on behalf of the Trustee to authenticate
Securities.
The term "Beneficial Owner" is determined in accordance with
Rule 13d-3, promulgated by the Commission under the Exchange Act.
"Board of Directors" means either the board of directors of
the Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in New York, New
York or the city in which the Corporate Trust Office is located are authorized
or obligated to close by law or executive order.
"Cedel" means Cedel Bank societe anonyme.
"Change in Control" has the meaning specified in Section 1506.
"Closing Date" means June 26, 1996.
2
<PAGE>
"Commission" means the Securities and Exchange Commission as
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"Common Stock" includes any stock of any class of the Company
which has no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding-up of
the Company and which is not subject to redemption by the Company. However,
subject to the provisions of Section 1411, shares issuable on conversion of
Securities shall include only shares of the class designated as Common Stock of
the Company at the date of this Indenture or shares of any class or classes
resulting from any reclassification or reclassifications thereof and which have
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and which are not subject to redemption by the Company; provided, that if at any
time there shall be more than one such resulting class, the shares of each such
class then so issuable shall be substantially in the proportion which the total
number of shares of such class resulting from all such reclassifications bears
to the total number of shares of all such classes resulting from all such
reclassifications.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Guarantee" has the meaning specified in Section 1201.
"Company Request" or "Company Order" means a written request
or order signed in the name of the Company by its Chairman of the Board, its
President or a Vice President, and by its Treasurer, an Assistant Treasurer, its
Secretary or an Assistant Secretary, and delivered to the Trustee.
"Corporate Trust Office" means the office of the Trustee in
New York, New York, which initially shall be 450 West 33rd Street, 15th Floor,
New York, New York 10001, at which at any particular time its corporate trust
business shall principally be administered.
"Corporation" means a corporation, association, company,
joint-stock company or business trust.
"Current Market Price" has the meaning specified in Section
1404.
"DTC" has the meaning specified in Section 305(a).
"Defaulted Interest" has the meaning specified in Section 307.
"Definitive Security" or "Definitive Securities" means a
Security or Securities that are in the form of the Security set forth in
Sections 202 and 203 hereof, containing the legend
3
<PAGE>
specified for a Definitive Security and not including the additional language
referred to in footnote 1 or the additional schedule referred to in footnote 2.
"Depositary" has the meaning specified in Section 305(a).
"Euroclear" means Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear System.
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Global Security or "Global Securities" means a Security or
Securities in the form of the Security set forth in Sections 202, 203 and 204
hereof containing the legend specified for a Global Security, the additional
language referred to in footnote 1 and the additional schedule referred to in
footnote 2.
"Guarantee" means each of the guarantees of the Securities by
the Guarantors.
"Guarantor" means each of the entities set forth on Schedule I
hereto and any other Person that hereafter becomes a Wholly Owned Subsidiary
until (i) it is no longer a Wholly Owned Subsidiary or (ii) a successor replaces
it and, thereafter, means the successor.
"Holder" means a Person in whose name a Security is registered
in the Security Register.
"Indenture" means this instrument as originally executed or as
it may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively.
"Initial Purchasers" means Smith Barney Inc., Dean Witter
Reynolds Inc., Paine Webber Incorporated, Piper Jaffray Inc., Robertson,
Stephens & Company and The Robinson-Humphrey Company, Inc.
"Interest Payment Date" means the Stated Maturity of an
instalment of interest on the Securities.
"Maturity", when used with respect to any Security, means the
date on which the principal of such Security becomes due and payable as therein
or herein provided, whether at the Stated Maturity thereof or by declaration of
acceleration, redemption or otherwise.
"Officers' Certificate" means a certificate, in form
reasonably satisfactory to the Trustee, signed by the Chairman of the Board, the
Chief Executive Officer, the President or a
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Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or
an Assistant Secretary, of the Company, and delivered to the Trustee. One of the
officers signing an Officers' Certificate given pursuant to Section 1004 shall
be the principal executive, financial or accounting officer of the Company.
"144A Global Note" has the meaning specified in Section 201.
"Obligations" means the principal of, premium, if any, and
interest on the Securities and all other amounts due and payable under this
Indenture and the Securities and all other obligations and liabilities of the
Company, whether direct or indirect, absolute or contingent, due or to become
due, now existing or hereafter incurred, which may arise under, out of or in
connection with this Indenture and the Securities or any other documents made,
delivered or given in connection therewith, whether on account of principal,
premium, if any, interest, reimbursement obligations, fees, indemnities, costs,
expenses or otherwise.
"Opinion of Counsel" means a written opinion, in form
reasonably satisfactory to the Trustee, of counsel, who may be counsel for or an
employee of the Company, and who shall be acceptable to the Trustee.
"Outstanding", when used with respect to Securities, means, as
of the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:
(i) Securities theretofore canceled by the Trustee or
delivered to the Trustee for cancellation;
(ii) Securities, or portions thereof, for the payment or
redemption of which moneys in the necessary amount have been
theretofore deposited with the Trustee or any Paying Agent (other than
the Company) in trust or set aside and segregated in trust by the
Company (if the Company shall act as its own Paying Agent) for the
Holders of such Securities; provided, that if such Securities, or
portions thereof, are to be redeemed, notice of such redemption has
been duly given pursuant to this Indenture or provision therefor
satisfactory to the Trustee has been made; and
(iii) Securities which have been paid pursuant to
Section 306 or in exchange for or in lieu of which other Securities
have been authenticated and delivered pursuant to this Indenture, other
than any such Securities in respect of which there shall have been
presented to the Trustee proof satisfactory to it that such Securities
are held by a bona fide purchaser in whose hands such Securities are
valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
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in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which a Responsible Officer of the Trustee
knows to be so owned shall be so disregarded. Securities so owned which have
been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Company or any
other obligor upon the Securities or any Affiliate of the Company or of such
other obligor.
"Paying Agent" means any Person authorized by the Company to
pay the principal of and premium, if any, or interest on any Securities on
behalf of the Company.
"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.
"Person" means any individual, Corporation, partnership,
limited liability company, joint venture, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that evidenced
by such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 306 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security.
"Purchase Agreement" means that certain Purchase Agreement
dated May 24, 1996 between the Company and the Initial Purchasers.
"Record Date" means either a Regular Record Date or a Special
Record Date, as applicable.
"Redemption Date", when used with respect to any Security to
be redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to
be redeemed, means the price at which it is to be redeemed pursuant to this
Indenture on the applicable Redemption Date.
"Registration Rights Agreement" means that certain
Registration Rights Agreement dated as of May 24, 1996 between the Company and
the Initial Purchasers.
"Regular Record Date", for the interest payable on any
Interest Payment Date means June 1 or December 1 (whether or not a Business
Day), as the case may be, next
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preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act of
1933, as amended.
"Regulation S Global Security" has the meaning specified in
Section 201.
"Repurchase Date" has the meaning specified in Section 1501.
"Repurchase Event" has the meaning specified in Section 1506.
"Repurchase Price" has the meaning specified in Section 1501.
"Resale Restriction Termination Date" means, with respect to
any Security, the date which is three years after the later of (i) the original
issue date of such Security and (ii) the last date on which the Company or any
Affiliate of the Company was the owner of such Security (or any Predecessor
Security).
"Responsible Officer" means, when used with respect to the
Trustee, any officer of the Trustee with direct responsibility for the
administration of this Indenture, and any other officer of the Trustee to whom
any corporate trust matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"Securities Custodian" means the Trustee, as custodian with
respect to the Securities in global form, or any successor entity thereto.
"Security Register" and "Security Registrar" have the
respective meanings specified in Section 305(a).
"Senior Indebtedness" means (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, (b) all secured indebtedness of the Company for money borrowed, 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 Securities
or (ii) ranks pari passu in right of payment with the Securities, and (b) any
amendments, renewals, extensions, modifications, refinancings and refundings of
the foregoing. For the purposes of this definition, "secured indebtedness" when
used with respect to the Company means 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
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Company for the payment of the purchase price of property or assets evidenced by
a note or similar instrument, (iii) any obligation of, or any such obligation
guaranteed by, 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 preceding clauses (i), (ii),
(iii), (iv), (v) and (vi) which the Company has guaranteed or for which the
Company is otherwise liable.
"Shelf Registration Statement" means the Registration
Statement with respect to the Common Stock the Issuer is required to file
pursuant to the Registration Rights Agreement.
"Special Record Date" for the payment of any Defaulted
Interest means a date fixed by the Trustee pursuant to Section 307.
"Stated Maturity", when used with respect to any Security or
any instalment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such instalment of
interest is due and payable.
"Subsidiary" means a corporation more than 50% of the
outstanding voting stock of which is owned, directly or indirectly, by the
Company or by one or more other Subsidiaries or by the Company and one or more
other Subsidiaries. For the purposes of this definition, "voting stock" means
stock which ordinarily has voting power for the election of directors, whether
at all times or only so long as no senior class of stock has such voting power
by reason of any contingency.
"Transfer Restricted Securities" means Securities that bear or
are required to bear the legend set forth in Section 305(k) hereof.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as
in force at the date as of which this instrument was executed; provided,
however, that in the event the Trust Indenture Act of 1939 is amended after such
date, "Trust Indenture Act" means, to the extent required by any such amendment,
the Trust Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Vice President", when used with respect to the Company means
any vice president, whether or not designated by a number or a word or words
added before or after the title "vice president".
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"Wholly Owned Subsidiary" means a Subsidiary all the capital
stock of which (other than directors' qualifying shares) is owned by the Company
or another Wholly Owned Subsidiary.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee
to take any action under any provision of this Indenture, the Company shall
furnish to the Trustee such certificates and opinions as may be required under
the Trust Indenture Act. Each such certificate or opinion shall be given in the
form of an Officers' Certificate, if to be given by an officer of the Company,
or an Opinion of Counsel, if to be given by counsel, and shall comply with the
requirements of the Trust Indenture Act and any other requirement set forth in
this Indenture.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that each individual or firm signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual
or such firm, he has or they have made such examination or
investigation as is necessary to enable him or them to express an
informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether, in the opinion of each such
individual or such firm, such condition or covenant has been complied
with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified
by or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any Person may certify to
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certification or opinion
of, or representations by, counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such certificate or Opinion of Counsel may
be based, insofar as
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it relates to factual matters, upon a certificate of public officials or upon a
certificate or opinion of, or representations by, an officer or officers of the
Company stating that the information with respect to such factual matters is in
the possession of the Company, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.
SECTION 104. Acts of Holders; Record Dates.
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 601) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any
such instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(c) The Company may, in the circumstances permitted by the
Trust Indenture Act, fix any day as the record date for the purpose of
determining the Holders entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action, or to vote on
any action, authorized or permitted to be given or taken by Holders. If not set
by the Company prior to the first solicitation of a Holder made by any Person in
respect of any such action, or, in the case of any such vote, prior to such
vote, the record date for any such action or vote shall be the 30th day (or, if
later, the date of the most recent list of Holders required to be provided
pursuant to Section 701) prior to such first solicitation or vote, as the case
may be. With regard to any record date, only the Holders on such date (or their
duly designated proxies) shall be entitled to give or take, or vote on, the
relevant action.
(d) The ownership of Securities shall be proved by the
Security Register.
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(e) Any Act of the Holder of any Security shall bind every
future Holder of the same Security and the Holder of every Security issued upon
the registration of transfer therefor or in exchange therefor or in lieu thereof
in respect of anything done, omitted or suffered to be done by the Trustee or
the Company in reliance thereon, whether or not notation of such action is made
upon such Security.
(f) Without limiting the foregoing, a Holder entitled
hereunder to give or take any action hereunder with regard to any particular
Security may do so with regard to all or any part of the principal amount of
such Security or by one or more duly appointed agents each of which may do so
pursuant to such appointment with regard to all or any different part of such
principal amount.
SECTION 105. Notices, Etc., to Trustee and Company.
Any Act of Holders or other documents provided or permitted by
this Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust Office,
Attention: Corporate Trustee Administration Department, or at any other
address previously furnished in writing to the Holders and the Company
by the Trustee; or
(2) the Company by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage
prepaid, to the Company, addressed to it at the address of its
principal executive offices specified in the first paragraph of this
instrument or at any other address previously furnished in writing to
the Trustee by the Company.
All such notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered; five Business Days after
being deposited in the mail, registered or certified with postage prepaid, if
mailed; when answered back if telexed; when receipt acknowledged, if telecopied;
and the next Business Day after timely delivery to the courier, if sent by
nationally recognized overnight air courier guaranteeing next day delivery.
SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any
event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if made, given, furnished or filed in writing to each Holder
affected by such event, at his address as it appears in the Security Register,
not later than the latest date (if any), and not earlier than the earliest date
(if any), prescribed for the giving of such notice. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
Person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
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precedent to the validity of any action taken in reliance upon such waiver. All
such notices and communications shall be deemed to have been duly given: at the
time delivered by hand, if personally delivered; five Business Days after being
deposited in the mail, registered or certified with postage prepaid, if mailed;
when answered back if telexed; when receipt acknowledged, if telecopied; and the
next Business Day after timely delivery to the courier, if sent by nationally
recognized overnight air courier guaranteeing next day delivery.
In case by reason of the suspension of regular mail service or
by reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.
SECTION 107. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act or another provision that would be required
or deemed under such Act to be a part of and govern this Indenture if this
Indenture were subject thereto, the latter provision shall control. If any
provision of this Indenture modifies or excludes any provision of the Trust
Indenture Act that may be so modified or excluded, the latter provision shall be
deemed to apply to this Indenture as so modified or to be excluded, as the case
may be.
SECTION 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
SECTION 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company
and the Trustee shall bind each of their respective successors and assigns,
whether so expressed or not.
SECTION 110. Separability Clause.
In case any provision in this Indenture or in the Securities
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder, the Holders of Securities and, with respect to Article
Twelve, the holders of Senior Indebtedness, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
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SECTION 112. Governing Law.
This Indenture and the Securities shall be governed by and
construed in accordance with the laws of the State of New York, but without
regard to the principles of conflicts of laws thereof.
SECTION 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date
or Stated Maturity of any Security or the last date on which a Holder has the
right to convert his Securities shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Securities)
payment of interest or principal and premium if any, or conversion of the
Securities need not be made on such date, but may be made on the next succeeding
Business Day with the same force and effect as if made on the Interest Payment
Date or Redemption Date, or at the Stated Maturity, or on such last day for
conversion; provided, that no interest shall accrue for the period from and
after such Interest Payment Date, Redemption Date or Stated Maturity, as the
case may be, to the next succeeding Business Day.
SECTION 114. No Security Interest Created.
Nothing in this Indenture or in the Securities, express or
implied, shall be construed to constitute a security interest under the Uniform
Commercial Code or similar legislation, as now or hereafter enacted and in
effect in any jurisdiction where property of the Company or its Subsidiaries is
or may be located.
SECTION 115. Limitation on Individual Liability.
No recourse under or upon any obligation, covenant or
agreement contained in this Indenture or in any Security, or for any claim based
thereon or otherwise in respect thereof, shall be had against any incorporator,
shareholder, officer or director, as such, past, present or future, of the
Company or any successor Person, either directly or through the Company, whether
by virtue of any constitution, statute or rule of law, or by the enforcement of
any assessment or penalty or otherwise; it being expressly understood that this
Indenture and the obligations issued hereunder are solely corporate obligations,
and that no such personal liability whatever shall attach to, or is or shall be
incurred by, the incorporators, shareholders, officers or directors, as such, of
the Company or any successor Person, or any of them, because of the creation of
the indebtedness hereby authorized, or under or by reason of the obligations,
covenants or agreements contained in this Indenture or in any Security or
implied therefrom; and that any and all such personal liability of every name
and nature, either at common law or in equity or by constitution or statute, of,
and any and all such rights and claims against, every such incorporator,
shareholder, officer or director, as such, because of the creation of the
indebtedness hereby authorized, or under or by reason of the obligations,
covenants or agreements contained in this Indenture or in any Security or
implied therefrom, are hereby expressly waived and released as a condition of,
and as a consideration for, the execution of this Indenture and the issuance of
such Security.
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ARTICLE TWO
Security Forms
SECTION 201. Forms Generally.
The Securities and the Trustee's certificate of authentication
shall be in substantially the forms set forth in this Article, with such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture, and may have such letters, numbers or
other marks of identification and such legends or endorsements placed thereon as
may be required to comply with any organizational document, any applicable law
or with the rules of any securities exchange on which the Securities are listed
or as may, consistently herewith, be determined by the officers executing such
Securities, as evidenced by their execution of the Securities.
The Securities issued in definitive form shall be
substantially in the form set forth in Sections 202 and 203 hereof.
Unless issued in definitive form, Securities issued and sold
in reliance on Rule 144A shall be issued in the form of one or more global
securities (the "144A Global Security"), the face of which shall be
substantially in the form set forth in Section 202 hereof and the reverse of
which shall be substantially in the form set forth in Section 203 hereof, which
144A Global Security shall be deposited on behalf of the purchasers of the
Securities represented thereby with the Trustee, as custodian for the
Depositary, and registered in the name of the nominee of the Depositary, duly
executed by the Company and authenticated as provided for herein.
Securities offered and sold outside the United States in
reliance on Regulation S may be evidenced in the form of one or more permanent
global Securities (the "Regulation S Global Security"), the face of which shall
be substantially in the form set forth in Section 202 hereof and the reverse of
which shall be substantially in the form set forth in Section 203 hereof, which
Regulation S Global Security shall be deposited on behalf of the purchasers of
the Securities represented thereby with the Trustee, as custodian for the
Depositary, and registered in the name of a nominee of the Depositary, duly
executed by the Company and authenticated by the Trustee or an authenticating
agent as provided herein, for credit to the accounts of the respective
depositaries for Euroclear and Cedel (or such other accounts as they may
direct). Prior to or on the 40th day after the later of the commencement of the
offering of the Securities and the Closing Date (the "Restricted Period"),
beneficial interests in the Regulation S Global Security may only be held
through Morgan Guaranty Trust Company of New York, Brussels office, as operator
of Euroclear or Cedel or another agent member of Euroclear and Cedel acting for
and on behalf of them, unless delivery is made though the 144A Global Security
in accordance with the certification requirements hereof. During the Restricted
Period, interests in the Regulation S Global Security may be exchanged for
interests in the Restricted Global Security or for Definitive Securities only in
accordance with the certification requirements
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described in Section 305 below.
Each Global Security shall represent such of the outstanding
Securities as shall be specified therein and each shall provide that it shall
represent the aggregate amount of outstanding Securities from time to time
endorsed thereon and that the aggregate amount of outstanding Securities
represented thereby may from time to time be reduced or increased, as
appropriate, to reflect exchanges and redemptions. Any endorsement of a Global
Security to reflect the amount of any increase or decrease in the amount of
outstanding Securities represented thereby shall be made by the Trustee or the
Securities Custodian, at the direction of the Trustee, in accordance with
instructions given by the Holder thereof.
The Definitive Securities shall be printed, lithographed,
typewritten or engraved or produced by any combination of these methods on steel
engraved borders or may be produced in any other manner permitted by the rules
of any securities exchange on which the Securities may be listed, all as
determined by the officers executing such Securities, as evidenced by their
execution of such Securities.
SECTION 202. Form of Face of Security.
LEGENDS FOR GLOBAL SECURITY:
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR
SECURITIES IN DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A
WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE
DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE
DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH
SUCCESSOR DEPOSITARY. UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW
YORK) ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE &
CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND
ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED,
SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT
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FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES
NOT TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE
"RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF
THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATED PERSON OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY
PREDECESSOR OF SUCH SECURITY) UNLESS SUCH OFFER, SALE OR OTHER TRANSFER IS (A)
TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, INSIDE THE UNITED STATES TO A PERSON
THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) INSIDE THE UNITED STATES TO
AN INSTITUTIONAL ACCREDITED INVESTOR (AS DEFINED IN RULE 501(A)(1), (2), (3) OR
(7) UNDER THE SECURITIES ACT OF 1933) THAT PRIOR TO SUCH TRANSFER, FURNISHES TO
THE [TRUSTEE] [TRANSFER AGENT] A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE
SECURITIES EVIDENCED HEREBY (WHICH FORM OF LETTER CAN BE OBTAINED FROM THE
[TRUSTEE] [TRANSFER AGENT], (E) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT,
OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S
RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C), (D),
(E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION
AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE
FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS
SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE THEN HOLDER OF THIS SECURITY
AFTER THE RESALE RESTRICTION TERMINATION DATE.
LEGENDS FOR DEFINITIVE SECURITY:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY
STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED,
TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
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<PAGE>
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES
NOT TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE
"RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF
THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATED PERSON OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY
PREDECESSOR OF SUCH SECURITY) UNLESS SUCH OFFER, SALE OR OTHER TRANSFER IS (A)
TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, INSIDE THE UNITED STATES TO A PERSON
THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) INSIDE THE UNITED STATES TO
AN INSTITUTIONAL ACCREDITED INVESTOR (AS DEFINED IN RULE 501(A)(1), (2), (3) OR
(7) UNDER THE SECURITIES ACT OF 1933) THAT PRIOR TO SUCH TRANSFER, FURNISHES TO
THE [TRUSTEE] [TRANSFER AGENT] A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THE
SECURITIES EVIDENCED HEREBY (WHICH FORM OF LETTER CAN BE OBTAINED FROM THE
[TRUSTEE] [TRANSFER AGENT], (E) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE
THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT,
OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S
RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C), (D),
(E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION
AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE
FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS
SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE THEN HOLDER OF THIS SECURITY
AFTER THE RESALE RESTRICTION TERMINATION DATE.
PHYMATRIX CORP.
6-3/4% Convertible Subordinated Debentures due 2003
No. ________ $___________
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PhyMatrix Corp., a corporation duly organized and existing
under the laws of the State of Delaware (herein called the "Company", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to __________________________, or
registered assigns, the principal sum of ________________ Dollars [or such
greater or lesser amount as indicated on the Schedule of Exchanges of Securities
on the reverse hereof](1) on June 15, 2003, and to pay interest thereon from the
date of original issuance of Securities pursuant to the Indenture or from and
including the most recent Interest Payment Date to which interest has been paid
or duly provided for, semi-annually on June 15 and December 15 in each year,
commencing December 15, 1996, at the rate of 6-3/4% per annum, until the
principal hereof is paid or made available for payment and promises to pay any
liquidated damages which may be payable pursuant to Section 4 of the
Registration Rights Agreement on the Interest Payment Dates. The interest so
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in the Indenture, be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on the Regular Record Date for such interest, which shall be the June 1
or December 1 (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date. Any such interest not so punctually paid
or duly provided for will forthwith cease to be payable to the Holder on such
Regular Record Date and may either be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Securities may be listed and upon such notice as may be required by such
exchange, all as more fully provided in the Indenture. Notice of a Special
Record Date shall be given to Holders of Securities not less than 10 days prior
to such Special Record Date. Payment of the principal of and premium, if any,
and interest on this Security will be made (i) in respect of Securities held of
record by the Depositary or its nominee in same day funds on or prior to the
respective payment dates and (ii) in respect of Securities held of record by
Holders other than the Depositary or its nominee at the office or agency of the
Company maintained for that purpose pursuant to Section 1002 of the Indenture,
in each case in such coin or currency of the United States of America as of the
time of payment is legal tender for payment of public and private debts;
provided, however, that at the option of the Company payment of interest in
respect of Securities held of record by Holders other than the Depositary or its
nominee may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register.
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been
executed by the Trustee
- --------
(1) This phrase should be included only if the Security is issued in global
form.
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<PAGE>
referred to on the reverse hereof by manual signature, this Security shall not
be entitled to any benefit under the Indenture or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed under its corporate seal.
Dated: _________________ PHYMATRIX CORP.
By _________________________
Attest:
- ------------------------
SECTION 203. Form of Reverse of Global Securities and
Definitive Security.
This Security is one of a duly authorized issue of Securities
of the Company designated as its 6-3/4% Convertible Subordinated Debentures due
2003 (herein called the "Securities"), limited in aggregate principal amount to
$115,000,000 (including Securities issuable pursuant to the Initial Purchasers'
over-allotment option, as provided for in the Purchase Agreement dated June 21,
1996 between the Company and the Initial Purchasers), issued and to be issued
under an Indenture, dated as of June 15, 1996 (herein called the "Indenture"),
between the Company and Chemical Bank, as Trustee (herein called the "Trustee",
which term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the Trustee, the holders of Senior Indebtedness and
the Holders of the Securities and of the terms upon which the Securities are,
and are to be, authenticated and delivered.
Subject to and upon compliance with the provisions of the
Indenture, the Holder of this Security is entitled, at his option, at any time
on or after the 60th day following the date of original issuance of Securities
pursuant to the Indenture and on or before the close of business on June 15,
2003, or in case this Security or a portion hereof is called for redemption,
then in respect of this Security or such portion hereof until and including, but
(unless the Company defaults in making the payment due upon redemption) not
after, the close of business on the second Business Day preceding the Redemption
Date, to convert this Security (or any portion of the principal amount hereof
which is $1,000 or an integral multiple thereof), at the principal amount
hereof, or of such portion, into fully paid and non-assessable shares
(calculated as to each conversion to the nearest 1/100th of a share) of Common
Stock at a conversion price equal to $28.20 principal amount for each share of
Common Stock (or at the current adjusted conversion price if an adjustment has
been made as provided in the Indenture) by surrender of this Security, duly
endorsed or assigned to the Company or in blank, to the Company at its
19
<PAGE>
office or agency maintained for that purpose pursuant to Section 1002 of the
Indenture, accompanied by written notice to the Company in the form provided in
this Security (or such other notice as is acceptable to the Company) that the
Holder hereof elects to convert this Security, or if less than the entire
principal amount hereof is to be converted, the portion hereof to be converted,
and, in case such surrender shall be made during the period from the opening of
business on any Regular Record Date next preceding any Interest Payment Date to
the close of business on such Interest Payment Date (unless this Security or the
portion thereof being converted has been called for redemption), also
accompanied by payment in New York Clearing House funds, or other funds
acceptable to the Company of an amount equal to the interest payable on such
Interest Payment Date on the principal amount of this Security then being
converted. Subject to the aforesaid requirement for payment and, in the case of
a conversion after the Regular Record Date next preceding any Interest Payment
Date and on or before such Interest Payment Date, to the right of the Holder of
this Security (or any Predecessor Security) of record at such Regular Record
Date to receive an instalment of interest (with certain exceptions provided in
the Indenture), no payment or adjustment is to be made upon conversion on
account of any interest accrued hereon or on account of any dividends on the
Common Stock issued upon conversion. No fractional shares or scrip representing
fractions of shares will be issued on conversion, but instead of any fractional
share the Company shall pay a cash adjustment as provided in the Indenture. The
conversion price is subject to adjustment as provided in the Indenture. In
addition, the Indenture provides that in case of certain consolidations or
mergers to which the Company is a party or the sale or transfer of all or
substantially all of the assets of the Company, the Indenture shall be amended,
without the consent of any Holders of Securities, so that this Security, if then
outstanding, will be convertible thereafter, during the period this Security
shall be convertible as specified above, only into the kind and amount of
securities, cash and other property receivable upon the consolidation, merger,
sale or transfer by a holder of the number of shares of Common Stock into which
this Security might have been converted immediately prior to such consolidation,
merger, sale or transfer (assuming such holder of Common Stock failed to
exercise any rights of election and received per share the kind and amount
received per share by a plurality of non-electing shares).
The Securities are subject to redemption upon not less than 15
and not more than 60 days' notice by mail, at any time on or after June 18,
1999, as a whole or in part, at the election of the Company, at the Redemption
Prices set forth below (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:
20
<PAGE>
Redemption Redemption
Year Price Year Price
1999.....................103.86% 2001......................101.93%
2000.....................102.89% 2002......................100.96%
In certain circumstances involving the occurrence of a
Repurchase Event (as defined in the Indenture), the Holder hereof shall have the
right to require the Company to repurchase this Security at 100% of the
principal amount hereof, together with accrued interest to the Repurchase Date,
but interest installments whose Stated Maturity is on or prior to such
Repurchase Date will be payable to the Holders of such Securities, or one or
more Predecessor Securities, of record at the close of business on the relevant
Record Dates referred to on the face hereof, all as provided in the Indenture.
In the event of redemption or conversion of this Security in
part only, a new Security or Securities for the unredeemed or unconverted
portion hereof will be issued in the name of the Holder hereof upon the
cancellation hereof.
The indebtedness evidenced by this Security is, in all
respects, subordinate and subject in right of payment to the prior payment in
full of all Senior Indebtedness, and this Security is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this Security,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination so provided, and (c)
appoints the Trustee his attorney-in-fact for any and all such purposes.
If an Event of Default shall occur and be continuing, the
principal of all the Securities may be declared due and payable in the manner
and with the effect provided in the Indenture.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders of the Securities under
the Indenture at any time by the Company and the Trustee with the consent of the
Holders of not less than a majority in aggregate principal amount of the
Securities at the time Outstanding, and, under certain limited circumstances, by
the Company and the Trustee without the consent of the Holders. The Indenture
also contains provisions permitting the Holders of specified percentages in
aggregate principal amount of the Securities at the time Outstanding, on behalf
of the Holders of all the Securities, to waive compliance by the Company with
certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the registration
of transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this
Security or of the
21
<PAGE>
Indenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of and premium, if any, and interest on
this Security at the times, place and rate, and in the coin or currency, herein
prescribed or to convert this Security as provided in the Indenture. The payment
obligations of the Company are guaranteed by each Wholly Owned Subsidiary
pursuant to a guarantee agreement between the Trustee and each Wholly Owned
Subsidiary.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is registrable in
the Security Register, upon surrender of this Security for registration of
transfer at the office or agency of the Company in any place where the principal
of and any premium and interest on this Security are payable, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities,
of authorized denominations and for the same aggregate principal amount, will be
issued to the designated transferee or transferees.
The Securities are issuable only in fully registered form
without coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities are exchangeable for a like aggregate principal amount of Securities
of a different authorized denomination, as requested by the Holder surrendering
the same.
No service charge shall be made for any such registration of
transfer or exchange except as provided in the Indenture, and the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Security is registered as the owner
hereof for all purposes, except as provided in this Security, whether or not
this Security be overdue, and neither the Company, the Trustee nor any such
agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the
Indenture shall have the meanings assigned to them in the Indenture. The Company
will furnish to any Holder upon written request and without charge a copy of the
Indenture and/or the Registration Rights Agreement.
22
<PAGE>
[FORM OF CONVERSION NOTICE]
TO PHYMATRIX CORP.
The undersigned registered owner of this Security hereby
irrevocably exercises the option to convert this Security, or the portion hereof
(which is $1,000 or a multiple thereof) designated below, into shares of Common
Stock in accordance with the terms of the Indenture referred to in this
Security, and directs that the shares issuable and deliverable upon the
conversion, together with any check in payment for a fractional share and any
Security representing any unconverted principal amount hereof, be issued and
delivered to the registered owner hereof unless a different name has been
provided below. If this Notice is being delivered on a date after the close of
business on a Regular Record Date and prior to the close of business on the
related Interest Payment Date, this Notice is accompanied by payment in New York
Clearing House funds, or other funds acceptable to the Company, of an amount
equal to the interest payable on such Interest Payment Date on the principal of
this Security to be converted (unless this Security has been called for
redemption). If shares or any portion of this Security not converted are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto. Any amount required to be
paid by the undersigned on account of interest accompanies this Security.
Dated: _________________________
_________________________
Signature(s)
Signature(s) must be guaranteed by a commercial bank or
trust company or a member firm of a national stock exchange
if shares of Common Stock are to be delivered, or Securities
to be issued, other than to and in the name of the
registered owner.
_________________________
Signature Guarantee
23
<PAGE>
Fill in for registration of shares of Common Stock if they
are to be delivered, or Securities if they are to be issued,
other than to and in the name of the registered owner:
______________________________
(Name)
______________________________
(Street Address)
______________________________
(City, State and zip code)
(Please print name and address)
Register: _____ Common Stock
_____ Securities
(Check appropriate line(s)).
Principal amount to be converted
(if less than all):
$__________,000
___________________________
Social Security or other Taxpayer
Identification Number of owner
24
<PAGE>
[ASSIGNMENT FORM]
If you the Holder want to assign this Security, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Security to
________________________________________________________________________________
(Insert assignee's social security or tax ID number) ___________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code) and irrevocably appoint
________________________________________________________________________________
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
Date: ____________________________ Your signature: ____________________________
(Sign exactly as your name
appears on the face of this
Security)
Signature Guarantee: ___________________________________________________________
25
<PAGE>
[OPTION OF HOLDER TO ELECT PURCHASE]
If you wish to have this Security purchased by the Company
pursuant to Section 1501 of the Indenture, check the Box: [ ]
If you wish to have a portion of this Security (which is
$1,000 or an integral multiple thereof) purchased by the Company pursuant to
Section 1501 of the Indenture, state the amount you wish to have purchased:
$____________________________
Date: ___________________ Your Signature(s): _________________________
Tax Identification No.: ____________________
(Sign exactly as your name appears on the face of this Security)
Signature Guarantee: ____________________________________
26
<PAGE>
[FORM OF SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES(2)]
The following exchanges of a part of this Global Security for
Definitive Securities have been made:
Amount of Amount of Principal Signature of
decrease in increase in Amount of this authorized
Principal Principal Global Security signatory of
Amount of this Amount of this following such Trustee or
Date of Global Global decrease (or Securities
Exchange Security Security increase) Custodian
1.
2.
3.
4.
5.
SECTION 204. Form of Trustee's Certificate of Authentication.
The Trustee's certificate of authentication shall be in
substantially the following form:
This is one of the Securities referred to in the
within-mentioned Indenture.
Chemical Bank,
as Trustee
By ____________________________
Authorized Officer
- --------
(2) This Schedule should be included only if the Security is issued in
global form.
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<PAGE>
ARTICLE THREE
The Securities
SECTION 301. Title and Terms.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to $115,000,000
(including $15,000,000 aggregate principal amount of Securities that may be sold
to the Initial Purchasers by the Company upon exercise of the over-allotment
option granted pursuant to the Purchase Agreement), except for Securities
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other Securities pursuant to Section 304, 305, 306, 906,
1108, 1402 or 1505.
The Securities shall be known and designated as the "6-3/4%
Convertible Subordinated Debentures due 2003" of the Company. Their Stated
Maturity shall be June 15, 2003 and they shall bear interest at the rate of 6
3/4% per annum, from the date of original issuance of Securities pursuant to
this Indenture or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, as the case may be, payable semi-annually on
June 15 and December 15, commencing December 15, 1996, until the principal
thereof is paid or made available for payment.
The principal of and premium, if any, and interest on the
Securities shall be payable (i) in respect of Securities held of record by the
Depositary or its nominee in same day funds on or prior to the respective
payment dates and (ii) in respect of Securities held of record by Holders other
than the Depositary or its nominee at the office or agency of the Company
maintained for such purpose pursuant to Section 1002; provided, however, that at
the option of the Company payment of interest to Holders of record other than
the Depositary may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register.
The Securities shall be subject to the transfer restrictions
set forth in Section 305.
The Securities shall be redeemable as provided in Article
Eleven.
The Securities shall be subordinated in right of payment to
Senior Indebtedness as provided in Article Thirteen.
The Securities shall be convertible as provided in Article
Fourteen.
The Securities shall be subject to repurchase at the option of
the Holder as provided in Article Fifteen.
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<PAGE>
SECTION 302. Denominations.
The Securities shall be issuable only in fully registered form
without coupons and only in denominations of $1,000 and any integral multiple
thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by
its Chairman of the Board, its Chief Executive Officer, its President or one of
its Vice Presidents, under its corporate seal or a facsimile thereof reproduced
thereon attested by its Secretary or one of its Assistant Secretaries. The
signature of any of these officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Securities executed by the
Company to the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities; and the Trustee in accordance
with such Company Order shall either at one time or from time to time pursuant
to such instructions as may be described therein authenticate and deliver such
Securities as in this Indenture provided and not otherwise. Such Company Order
shall specify the amount of Securities to be authenticated and the date on which
the original issue of Securities is to be authenticated, and shall certify that
all conditions precedent to the issuance of such Securities contained in this
Indenture have been complied with. The aggregate principal amount of Securities
Outstanding at any time may not exceed the amount set forth above except as
provided in Section 306.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose unless there appears on such
Security a certificate of authentication substantially in the form provided for
herein duly executed by the Trustee by manual signature, and such certificate
upon any Security shall be conclusive evidence, and the only evidence, that such
Security has been duly authenticated and delivered hereunder and is entitled to
the benefits of the Indenture. The Trustee may appoint an Authenticating Agent
pursuant to the terms of Section 614.
29
<PAGE>
SECTION 304. Temporary Securities.
Pending the preparation of Definitive Securities, the Company
may execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the Definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as evidenced by their
execution of such Securities. Every such temporary Security shall be executed by
the Company and shall be authenticated and delivered by the Trustee upon the
same conditions and in substantially the same manner, and with the same effect,
as the Definitive Security or Securities in lieu of which it is issued.
If temporary Securities are issued, the Company will cause
Definitive Securities to be prepared without unreasonable delay. After the
preparation of Definitive Securities, the temporary Securities shall be
exchangeable for Definitive Securities upon surrender of the temporary
Securities at any office or agency of the Company designated pursuant to Section
1002, without charge to the Holder. Upon surrender for cancellation of any one
or more temporary Securities the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor one or more Definitive Securities
of a like principal amount of authorized denominations. Until so exchanged the
temporary Securities shall in all respects be entitled to the same benefits
under this Indenture as Definitive Securities.
SECTION 305. Registration, Registration of Transfer and Exchange.
(a) The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office and in
any other office or agency designated pursuant to Section 1002 being herein
sometimes collectively referred to as the "Security Register") in which, subject
to such reasonable regulations as it may prescribe, the Company shall provide
for the registration of Securities and of transfers of Securities. The Trustee
is hereby appointed "Security Registrar" for the purpose of registering
Securities and transfers of Securities as herein provided. At all reasonable
times the Security Register shall be open for inspection by the Company.
The Company initially appoints The Depository Trust Company
("DTC") to act as depositary (the "Depositary") with respect to the Global
Security(ies).
The Company initially appoints the Trustee to act as
Securities Custodian with respect to the Global Security(ies).
(b) With respect to the transfer and exchange of Definitive
Securities, when Definitive Securities are presented to the Security Registrar
with the request (x) to register the transfer of the Definitive Securities or
(y) to exchange such Definitive Securities for an equal principal amount of
Definitive Securities of other authorized denominations,
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the Security Registrar shall register the transfer or make the exchange as
requested if its requirements for such transactions are met; provided, however,
that the Definitive Securities presented or surrendered for registration of
transfer or exchange:
(i) shall be duly endorsed or accompanied by a
written instruction of transfer in form satisfactory to the
Security Registrar duly executed by the Holder thereof or by
its attorney, duly authorized in writing; and
(ii) shall, in the case of Transfer Restricted
Securities that are Definitive Securities, be accompanied by
the following additional information and documents, as
applicable:
(A) if such Transfer Restricted Security is
being delivered to the Security Registrar by a Holder
for registration in the name of such Holder, without
transfer, a certification from such Holder to that
effect (in substantially the form of Exhibit A
hereto); or
(B) if such Transfer Restricted Security is
being transferred to a "qualified institutional
buyer" (as defined in Rule 144A under the Securities
Act) in reliance on Rule 144A under the Securities
Act or pursuant to an exemption from registration in
accordance with Rule 144 or Regulation S under the
Securities Act or pursuant to an effective
registration statement under the Securities Act, a
certification to that effect (in substantially the
form of Exhibit A hereto) and, in the case of a
transfer in accordance with Rule 144 or Regulation S
under the Securities Act, an Opinion of Counsel
reasonably acceptable to the Company and to the
Security Registrar to the effect that such transfer
is in compliance with the Securities Act; or
(C) if such Transfer Restricted Security is
being transferred in reliance on another exemption
from the registration requirements of the Securities
Act, a certification to that effect (in substantially
the form of Exhibit A hereto) and an Opinion of
Counsel reasonably acceptable to the Company and to
the Security Registrar to the effect that such
transfer is in compliance with the Securities Act.
(c) The following restrictions apply to any transfer of a
Definitive Security for a beneficial interest in a 144A Global Security. A
Definitive Security may not be exchanged for a beneficial interest in a 144A
Global Security except until and upon satisfaction of the requirements set forth
below. Upon receipt by the Trustee of a Definitive Security, duly endorsed or
accompanied by appropriate instruments of transfer, in form satisfactory to the
Trustee, together with:
(i) if such Definitive Security is a Transfer
Restricted
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Security, certification, substantially in the form of Exhibit
A hereto, that such Definitive Security is being transferred
to a "qualified institutional buyer" (as defined in Rule 144A
under the Securities Act) in accordance with Rule 144A; and
(ii) whether or not such Definitive Security is
a Transfer Restricted Security, written instructions directing
the Trustee to make, or to direct the Securities Custodian to
make, an endorsement on the 144A Global Security to reflect an
increase in the aggregate principal amount of the Securities
represented by the 144A Global Security,
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Securities Custodian, the
aggregate principal amount of Securities represented by the 144A Global Security
to be increased accordingly. If no 144A Global Securities are then outstanding,
the Company shall execute and, upon receipt of an authentication order in the
form of a Company Order in accordance with Section 303, the Trustee shall
authenticate a new 144A Global Security in the appropriate principal amount.
(d) The following restrictions apply to any transfer of a
Definitive Security for a beneficial interest in a Regulation S Global Security.
A Definitive Security may not be exchanged for a beneficial interest in a
Regulation S Global Security except until and upon satisfaction of the
requirements set forth below. Upon receipt by the Trustee of a Definitive
Security, duly endorsed or accompanied by appropriate instruments of transfer,
in form satisfactory to the Trustee, together with:
(i) if such Definitive Security is a Transfer
Restricted Security, certification, substantially in the form
of Exhibit A hereto, that such Definitive Security is being
transferred in accordance with Regulation S; and
(ii) whether or not such Definitive Security is
a Transfer Restricted Security, written instructions directing
the Trustee to make, or to direct the Securities Custodian to
make, an endorsement on the Regulation S Global Security to
reflect an increase in the aggregate principal amount of the
Securities represented by the Regulation S Global Security,
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Securities Custodian, the
aggregate principal amount of Securities represented by the Regulation S Global
Security to be increased accordingly. If no Regulation S Global Securities are
then outstanding, the Company shall execute and, upon receipt of an
authentication order in the form of a Company Order in accordance with Section
303, the Trustee shall authenticate a new Regulation S Global Security in the
appropriate principal amount.
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(e) The transfer and exchange of Global Securities or
beneficial interests therein shall be effected through the Depositary, in
accordance with this Indenture (including the restrictions on transfer set forth
herein) and the procedures of the Depositary therefor.
(f) With respect to the transfer of a beneficial interest in a
144A Global Security for a Definitive Security:
(i) Any Person having a beneficial interest in
a 144A Global Security may upon request exchange such
beneficial interest for a Definitive Security. Upon receipt by
the Trustee of written instructions or such other form of
instructions as is customary for the Depositary or its nominee
on behalf of any Person having a beneficial interest in a 144A
Global Security constituting a Transfer Restricted Security
only, and receipt by the Trustee of the following additional
information and documents (all of which may be submitted by
facsimile):
(A) if such beneficial interest is being
transferred to the Person designated by the
Depositary as being the beneficial owner, a
certification from such Person to that effect (in
substantially the form of Exhibit A hereto); or
(B) if such beneficial interest is being
transferred to a "qualified institutional buyer" (as
defined in Rule 144A under the Securities Act) in
accordance with Rule 144A under the Securities Act or
pursuant to an exemption from registration in
accordance with Rule 144 or Regulation S under the
Securities Act or pursuant to an effective
registration statement under the Securities Act, a
certification to that effect from the transferor (in
substantially the form of Exhibit A hereto) and, in
the case of a transfer in accordance with Rule 144 or
Regulation S under the Securities Act, an Opinion of
Counsel reasonably acceptable to the Company and to
the Security Registrar to the effect that such
transfer is in compliance with the Securities Act; or
(C) if such beneficial interest is being
transferred in reliance on another exemption from the
registration requirements of the Securities Act, a
certification to that effect from the transferee or
transferor (in substantially the form of Exhibit A
hereto) and an Opinion of Counsel from the transferee
or transferor reasonably acceptable to the Company
and to the Security Registrar to the effect that such
transfer is in compliance with the Securities Act,
then the Trustee or the Securities Custodian, at the direction
of the Trustee, will cause, in accordance with the standing
instructions and procedures existing between the Depositary
and the Securities Custodian, the aggregate
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principal amount of the Global Security to be reduced and,
following such reduction, the Company will execute and, upon
receipt of an authentication order in the form of a Company
Order in accordance with Section 303, the Trustee will
authenticate and deliver to the transferee a Definitive
Security.
(ii) Definitive Securities issued in exchange
for a beneficial interest in a 144A Global Security pursuant
to this Section 305 shall be registered in such names and in
such authorized denominations as the Depositary, pursuant to
instructions from its direct or indirect participants or
otherwise, shall instruct the Trustee. The Trustee shall
deliver such Definitive Securities to the Persons in whose
names such Securities are so registered.
(g) With respect to the transfer of a beneficial interest in a
Regulation S Global Security for a beneficial interest in a 144A Global
Security, any Person having a beneficial interest in a Regulation S Global
Security may upon request exchange such beneficial interest for an interest in a
144A Global Security. Upon receipt by the Trustee of written instructions or
such other form of instructions as is customary for the Depositary or its
nominee on behalf of any Person having a beneficial interest in a Regulation S
Global Security constituting a Transfer Restricted Security only, and receipt by
the Trustee of the following additional information and documents (all of which
may be submitted by facsimile):
(i) instructions given in accordance with the
procedures of Euroclear or Cedel, the Depositary and the
Securities Custodian, as the case may be, from or on behalf of
a beneficial owner of an interest in the Regulations S Global
Security directing the Trustee, as transfer agent, to credit
or cause to be credited a beneficial interest in the 144A
Global Security in an amount equal to the beneficial interest
in the Regulation S Global Security to be exchanged or
transferred,
(ii) a written order given in accordance with the
procedures of Euroclear or Cedel, the Depositary and the
Securities Custodian, as the case may be, containing
information regarding the account with the Depositary to be
credited with such increase and the name of such account, and
(iii) if such beneficial interest is being
transferred to a "qualified institutional buyer" (as defined
in Rule 144A under the Securities Act) in accordance with Rule
144A under the Securities Act, a certification to that effect
from the transferor (in substantially the form of Exhibit A
hereto),
then the Trustee, as transfer agent, shall promptly deliver appropriate
instructions to the Depositary, its nominee, or the custodian for the
Depositary, as the case may be, to reduce or reflect on its records a reduction
of the Regulation S Global Security by the aggregate principal amount of the
beneficial interest in such Regulation S Global Security to be
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exchanged or transferred, and the Trustee, as transfer agent, shall promptly
deliver appropriate instructions to the Depositary, its nominee, or the
custodian for the Depositary, as the case may be, concurrently with such
reduction, increase or reflect on its records an increase of the principal
amount of the 144A Global Security by the aggregate principal amount of the
beneficial interest in the Regulation S Global Security to be so exchanged or
transferred, and to credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the 144A Global Security
equal to the reduction in the principal amount of the Regulation S Global
Security.
(h) With respect to the transfer of a beneficial interest in a
144A Global Security for a beneficial interest in a Regulation S Global
Security, any Person having a beneficial interest in a 144A Global Security may
upon request exchange such beneficial interest for an interest in a Regulation S
Global Security. Upon receipt by the Trustee of written instructions or such
other form of instructions as is customary for the Depositary or its nominee on
behalf of any Person having a beneficial interest in a 144A Global Security
constituting a Transfer Restricted Security only, and receipt by the Trustee of
the following additional information and documents (all of which may be
submitted by facsimile):
(i) instructions given in accordance with the
procedures of the Depositary and the Securities Custodian, as
the case may be, from or on behalf of a holder of a beneficial
interest in the 144A Global Security, directing the Trustee,
as transfer agent, to credit or cause to be credited a
beneficial interest in the Regulation S Global Security in an
amount equal to the beneficial interest in the 144A Global
Security to be exchanged or transferred,
(ii) a written order given in accordance with the
procedures of the Depositary and the Securities Custodian, as
the case may be, containing information regarding the
Euroclear or Cedel account to be credited with such increase
and the name of such account, and
(iii) if such beneficial interest is being
transferred pursuant to an exemption from registration in
accordance with Rule 144 or Regulation S under the Securities
Act or pursuant to an effective registration statement under
the Securities Act, a certification to that effect from the
transferor (in substantially the form of Exhibit A hereto)
and, in the case of a transfer in accordance with Rule 144 or
Regulation S under the Securities Act, an Opinion of Counsel
reasonably acceptable to the Company and to the Security
Registrar to the effect that such transfer is in compliance
with the Securities Act,
then the Trustee, as transfer agent, shall promptly deliver appropriate
instructions to the Depositary, its nominee, or the custodian for the
Depositary, as the case may be, to reduce or reflect on its records a reduction
of the 144A Global Security by the aggregate principal
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amount of the beneficial interest in such 144A Global Security to be so
exchanged or transferred from the relevant participant, and the Trustee, as
transfer agent, shall promptly deliver appropriate instructions to the
Depositary, its nominee, or the custodian for the Depositary, as the case may
be, concurrently with such reduction, to increase or reflect on its records an
increase of the principal amount of such Regulation S Global Security by the
aggregate principal amount of the beneficial interest in such 144A Global
Security to be so exchanged or transferred, and to credit or cause to be
credited to the account of the Person specified in such instructions (who shall
be Morgan Guaranty Trust Company of New York, Brussels office, as operator of
Euroclear or Cedel or another agent member of Euroclear or Cedel, or both, as
the case may be, acting for and on behalf of them) a beneficial interest in such
Regulation S Global Security equal to the reduction in the principal amount of
such 144A Global Security.
(i) Notwithstanding any other provisions of this Indenture
(other than the provisions set forth in subsection (g) of this Section 305), a
Global Security may not be transferred as a whole except by the Depositary to a
nominee of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(j) The following relates to the authentication of Definitive
Securities in absence of the Depositary. If at any time: (i) the Depositary for
the Securities notifies the Company that the Depositary is unwilling or unable
to continue as Depositary for the Global Securities and a successor Depositary
for the Global Securities is not appointed by the Company within 90 days after
delivery of such notice; or (ii) the Company, at its sole discretion, notifies
the Trustee in writing that it elects to cause the issuance of Definitive
Securities under this Indenture, then the Company will execute, and the Trustee,
upon receipt of a Company Order in accordance with Section 303 requesting the
authentication and delivery of Definitive Securities, will authenticate and
deliver Definitive Securities, in an aggregate principal amount equal to the
principal amount of the Global Securities, in exchange for such Global
Securities.
(k) (i) Except as permitted by the following paragraph (ii),
each Security certificate evidencing the Global Securities and the Definitive
Securities (and all Securities issued in exchange therefor or substitution
thereof) shall bear a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR
OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS
SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
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THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO
OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE
"RESALE RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE
LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE
COMPANY OR ANY AFFILIATED PERSON OF THE COMPANY WAS THE OWNER OF THIS
SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY) UNLESS SUCH OFFER, SALE
OR OTHER TRANSFER IS (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT,
(C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO
RULE 144A, TO A PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED
INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT
THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING
MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT
OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S
UNDER THE SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT,
SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH
OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (D) OR (E) TO REQUIRE THE
DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING
CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS SECURITY
IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE THEN HOLDER OF THIS
SECURITY AFTER THE RESALE RESTRICTION TERMINATION DATE.
(ii) Upon any sale or transfer of a Transfer
Restricted Security (including any Transfer Restricted
Security represented by a Global Security) pursuant to Rule
144 under the Securities Act or an effective registration
statement under the Securities Act (including the Shelf
Registration Statement):
(A) in the case of any Transfer Restricted
Security that is a Definitive Security, the Security
Registrar shall permit the Holder thereof to exchange
such Transfer Restricted Security for a Definitive
Security that does not bear the legend set forth
above and rescind any restriction on the transfer of
such Transfer Restricted Security; provided, however,
that with respect to a transfer made in reliance
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upon Rule 144 or an effective registration statement,
the Holders thereof shall certify in writing to the
Security Registrar that such request is being made
pursuant to Rule 144 or an effective registration
statement (such Certification to be substantially in
the form of Exhibit A hereto) and, in the case of a
transfer made in reliance upon Rule 144, shall be
accompanied by an Opinion of Counsel reasonably
acceptable to the Company and to the Security
Registrar to the effect that such transfer is in
compliance with the Securities Act; and
(B) any such Transfer Restricted Security
represented by a Global Security shall not be subject
to the provisions set forth in (i) above (such sales
or transfers being subject only to the provisions of
Section 305(e) hereof); provided, however, that with
respect to any request for an exchange of a Transfer
Restricted Security that is represented by a Global
Security for a Definitive Security that does not bear
a legend, which request is made in reliance upon Rule
144 or an effective registration statement, the
Holder thereof shall certify in writing to the
Security Registrar that such request is being made
pursuant to Rule 144 or an effective registration
statement (such certification to be substantially in
the form of Exhibit A hereto) and, in the case of a
transfer made in reliance upon Rule 144, shall be
accompanied by an Opinion of Counsel reasonably
acceptable to the Company and to the Security
Registrar to the effect that such transfer is in
compliance with the Securities Act.
(l) At such time as all beneficial interests in a Global
Security have either been exchanged for Definitive Securities, redeemed,
repurchased or cancelled, such Global Security shall be returned to or retained
and cancelled by the Trustee. At any time prior to such cancellation, if any
beneficial interest in a Global Security is exchanged for Definitive Securities,
redeemed, repurchased or cancelled, the principal amount of Securities
represented by such Global Security shall be reduced and an endorsement shall be
made on such Global Security, by the Trustee or the Securities Custodian, at the
direction of the Trustee, to reflect such reduction.
(m) All Definitive Securities and Global Securities issued
upon any registration of transfer or exchange of Definitive Securities or Global
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Definitive
Securities or Global Securities surrendered upon such registration of transfer
or exchange.
To permit registrations of transfer and exchanges, the Company
shall execute and the Trustee shall authenticate Definitive Securities and
Global Securities at the Security Registrar's request.
No service charge to a Holder shall be made for any
registration of transfer
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or exchange of Securities except as provided in Section 306. The Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration of transfer or
exchange of Securities, other than exchanges pursuant to Section 304, 905, 1108
or 1402 not involving any transfer.
The Company or the Security Registrar shall not be required
(i) to issue, register the transfer of or exchange any Security during a period
beginning at the opening of business 15 days before the day of the mailing of a
notice of redemption of Securities selected for redemption under Section 1104
and ending at the close of business on the day of such mailing, or (ii) to
register the transfer of or exchange any Definitive Security or beneficial
interest in any Global Security so selected for redemption in whole or in part,
except the unredeemed portion of any Definitive Security being redeemed in part.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security is surrendered to the Trustee, the
Company shall execute and the Trustee shall authenticate and deliver in exchange
therefor a new Security of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any Security
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of like tenor and principal amount and bearing a number not contemporaneously
outstanding. The Trustee may charge the Company for the Trustee's expenses in
replacing such Security.
In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of
any destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
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The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually
paid or duly provided for, on any Interest Payment Date shall be paid to the
Person in whose name that Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest. Payment of interest will be made (i) in respect of Securities held by
the Depositary or its nominee, in same day funds on or prior to the respective
Interest Payment Dates and (ii) in respect of Securities held of record by
Holders other than the Depositary or its nominee, at the office of the Trustee
in New York, New York or at such other office or agency of the Company as it
shall maintain for that purpose pursuant to Section 1002; provided, however,
that, at the option of the Company, interest on any Security held of record by
Holders other than the Depositary or its nominee may be paid by mailing checks
to the addresses of the Holders thereof as such addresses appear in the
Securities Register.
Any interest on any Security which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities (or their
respective Predecessor Securities) are registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest which shall be fixed in the following manner. The Company
shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Security and the date of the proposed
payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be
paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
Clause provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall be not more than
15 days and not less than 10 days prior to the date of the proposed
payment and not less than 10 days after the receipt by the Trustee of
the notice of the proposed payment. The Trustee shall promptly notify
the Company of such Special Record Date and, in the name and at the
expense of the Company, shall cause notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor to be
mailed, first-class postage prepaid, to each Holder at his address as
it appears in the Security Register, not less than 10 days prior to
such Special Record Date. Notice of the proposed
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payment of such Defaulted Interest and the Special Record Date therefor
having been so mailed, such Defaulted Interest shall be paid to the
Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on such Special
Record Date and shall no longer be payable pursuant to the following
Clause (2).
(2) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange on which the Securities may be listed, and upon
such notice as may be required by such exchange, if, after notice given
by the Company to the Trustee of the proposed payment pursuant to this
Clause, such manner of payment shall be deemed practicable by the
Trustee.
Subject to the foregoing provisions of this Section, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.
In the case of any Security which is converted after any
Regular Record Date and on or prior to the next succeeding Interest Payment Date
(other than any Security whose Maturity is prior to such Interest Payment Date),
interest whose Stated Maturity is on such Interest Payment Date shall be payable
on such Interest Payment Date notwithstanding such conversion, and such interest
(whether or not punctually paid or duly provided for) shall be paid to the
Person in whose name that Security (or one or more Predecessor Securities) is
registered at the close of business on such Regular Record Date; provided,
however, that Securities so surrendered for conversion shall (except in the case
of Securities or portions thereof called for redemption) be accompanied by
payment in New York Clearing House funds or other funds acceptable to the
Company of an amount equal to the interest payable on such Interest Payment Date
on the principal amount being surrendered for conversion. Except as otherwise
expressly provided in the immediately preceding sentence, in the case of any
Security which is converted, interest whose Stated Maturity is after the date of
conversion of such Security shall not be payable.
SECTION 308. Persons Deemed Owners.
Prior to due presentment of a Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Security is registered as the owner of
such Security for the purpose of receiving payment of principal of and premium,
if any, and (subject to Section 307) interest on such Security and for all other
purposes whatsoever, whether or not such Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
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SECTION 309. Cancellation.
All Securities surrendered for payment, redemption,
registration of transfer, exchange or conversion shall, if surrendered to any
Person other than the Trustee, be delivered to the Trustee and shall be promptly
canceled by it. The Company may at any time deliver to the Trustee for
cancellation any Securities previously authenticated and delivered hereunder
which the Company may have acquired in any manner whatsoever, and all Securities
so delivered shall be promptly canceled by the Trustee. No Securities shall be
authenticated in lieu of or in exchange for any Securities canceled as provided
in this Section, except as expressly permitted by this Indenture. All canceled
Securities held by the Trustee shall be disposed of in accordance with the
Trustee's standard procedures unless the Trustee is otherwise directed by a
Company Order.
SECTION 310. Computation of Interest.
Interest on the Securities shall be computed on the basis of a
360-day year of twelve 30-day months.
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of
further effect (except as expressly provided for in this Article Four), and the
Trustee, at the expense of the Company, shall execute proper instruments
acknowledging satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and
delivered (other than (i) Securities which have been
destroyed, lost or stolen and which have been replaced or paid
as provided in Section 306 and (ii) Securities for whose
payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust, as
provided in Section 1003) have been delivered to the Trustee
for cancellation; or
(B) all such Securities not theretofore delivered to
the Trustee for cancellation
(i) have become due and payable, or
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(ii) will become due and payable at their Stated
Maturity within one year, or
(iii) are to be called for redemption within one
year under arrangements satisfactory to the Trustee for the
giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company, or
(iv) are delivered to the Trustee for Conversion
in accordance with Article Fourteen,
and the Company, in the case of (i), (ii), (iii) or (iv)
above, has irrevocably deposited or caused to be deposited
with the Trustee as trust funds in trust for the purpose an
amount in cash sufficient (without consideration of any
investment of such cash) to pay and discharge the entire
indebtedness on such Securities not theretofore delivered to
the Trustee for cancellation for principal and premium, if
any, and interest to the date of such deposit (in the case of
Securities which have become due and payable) or to the Stated
Maturity or Redemption Date, as the case may be; provided that
the Trustee shall have been irrevocably instructed to apply
such amount to said payments with respect to the Securities;
(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this
Indenture, the following rights or obligations under the Securities and this
Indenture shall survive until otherwise terminated or discharged hereunder: (a)
Article Thirteen, Article Fourteen and the Company's obligations under Sections
304, 305, 306, 1002 and 1003, in each case with respect to any Securities
described in subclause (B) of Clause (1) of this Section, (b) this Article Four,
(c) the rights, powers, trusts, duties and immunities of the Trustee hereunder,
including the obligations of the Company to the Trustee under Section 607, and
the obligations of the Company to any Authenticating Agent under Section 614 and
(d) if money shall have been deposited with the Trustee pursuant to subclause
(B) of Clause (1) of this Section, the rights of Holders of any Securities
described in subclause (B) of Clause (1) of this Section to receive, solely from
the trust fund described in such subclause (B), payments in respect of the
principal of, and premium (if any) and interest on, such Securities when such
payment are due.
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SECTION 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section
1003, all money deposited with the Trustee pursuant to Section 401 shall be held
in trust and applied by it, in accordance with the provisions of the Securities
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal and premium, if
any, and interest for whose payment such money has been deposited with the
Trustee. All moneys deposited with the Trustee pursuant to Section 401 (and held
by it or any Paying Agent) for the payment of Securities subsequently converted
shall be returned to the Company upon Company Request.
SECTION 403. Reinstatement.
If the Trustee or the Paying Agent is unable to apply any
money in accordance with this Article Four by reason of any order or judgment of
any court or governmental authority enjoining, restraining or otherwise
prohibiting such application, then the Company's obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article Four until such time as the
Trustee or Paying Agent is permitted to apply all money held in trust with
respect to the Securities; provided, however, that if the Company makes any
payment of principal of or any premium or interest on any Security following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of the Securities to receive such payment from the money so held
in trust.
ARTICLE FIVE
Remedies
SECTION 501. Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be occasioned by the provisions of Article Thirteen or be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body);
(1) default in the payment of the principal of or premium, if
any, on any Security at its Maturity, whether or not such payment is
prohibited by the provisions of Article Thirteen; or
(2) default in the payment of any interest upon any Security
when it becomes due and payable, whether or not such payment is
prohibited by the provisions of Article Thirteen, and continuance of
such default for a period of 30
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days; or
(3) failure to provide timely notice of a Repurchase Event as
required in accordance with the provisions of Article Fifteen; or
(4) default in the payment of the Repurchase Price in respect
of any Security on the Repurchase Date therefor in accordance with the
provisions of Article Fifteen, whether or not such payment is
prohibited by the provisions of Article Thirteen; or
(5) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section specifically dealt with), and continuance of such default
or breach for a period of 60 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder; or
(6) a default under any bond, debenture, note or other
evidence of indebtedness for money borrowed by the Company or any
Subsidiary 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,
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 $5,000,000 when due and payable after the
expiration of any applicable grace period with respect thereto or shall
have resulted in indebtedness in excess of $5,000,000 becoming or being
declared due and payable prior to the date on which it would otherwise
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, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities 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
stating that such notice is a "Notice of Default" hereunder; or
(7) the entry by a court having jurisdiction in the premises
of (A) a decree or order for relief in respect of the Company or any
Subsidiary in an involuntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other
similar law or (B) a decree or order adjudging the Company or any
Subsidiary a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition
of or in respect of
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the Company or any Subsidiary under any applicable Federal or State
law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any
Subsidiary or of any substantial part of its property, or ordering the
winding up or liquidation of its affairs, and the continuance of any
such decree or order for relief or any such other decree or order
unstayed and in effect for a period of 90 consecutive days; or
(8) the commencement by the Company or any Subsidiary of a
voluntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or of any
other case or proceeding to be adjudicated a bankrupt or insolvent, or
the consent by it to the entry of a decree or order for relief in
respect of the Company or any Subsidiary in an involuntary case or
proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or to the commencement
of any bankruptcy or insolvency case or proceeding against it, or the
filing by it of a petition or answer or consent seeking reorganization
or relief under any applicable Federal or State law, or the consent by
it to the filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of the Company or any Subsidiary
or of any substantial part of its property, or the making by it of a
general assignment for the benefit of creditors, or the admission by it
in writing of its inability to pay its debts generally as they become
due, or the taking of corporate action by the Company or any Subsidiary
in furtherance of any such action.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than as specified in
subparagraph (7) or (8) of Section 501) occurs and is continuing, then and in
every such case the Trustee or the Holders of not less than 25% in principal
amount of the Outstanding Securities may declare the principal of all the
Securities to be due and payable immediately, by a notice in writing to the
Company (and to the Trustee if given by Holders), and upon any such declaration
such principal plus any interest accrued on the securities to the date of
declaration shall become immediately due and payable. If an Event of Default
specified in subparagraph (7) or (8) of Section 501 occurs and is continuing,
then the principal of, premium, if any, and accrued and unpaid interest, if any,
on all of the Securities shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder of Securities.
At any time after such a declaration of acceleration has been
made and before a judgment or decree for payment of the money due has been
obtained by the Trustee as hereinafter in this Article provided, the Holders of
a majority in principal amount of the Outstanding Securities, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient
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to pay
(A) all overdue interest on all Securities,
(B) the principal of and premium, if any, on any
Securities which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate
borne by the Securities,
(C) to the extent that payment of such interest is
lawful, interest upon overdue interest at the rate borne by
the Securities, and
(D) all sums paid or advanced by the Trustee and each
predecessor Trustee, their respective agents and counsel
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee and each predecessor
Trustee, their respective agents and counsel, and any other
amounts due the Trustee or any predecessor Trustee under
Section 607;
and
(2) all Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the Securities that has
become due solely by such declaration of acceleration, have been cured
or waived as provided in Section 513.
No such rescission and waiver shall affect any subsequent default or impair any
right consequent thereon.
SECTION 503. Collection of Indebtedness and Suits for Enforcement
by Trustee.
The Company covenants that if
(1) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(2) default is made in the payment of the principal of or
premium, if any, on any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable on such
Securities for principal and premium, if any, and interest, and, to the extent
that payment of such interest shall be legally enforceable, interest on any
overdue principal and premium, if any, and on any overdue interest, at the rate
borne by the Securities, and, in addition thereto, such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee and
each predecessor Trustee, their respective agents and counsel, and any other
amounts due the
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Trustee or any predecessor Trustee under Section 607.
If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name and as trustee of an express trust, may
institute a judicial proceeding for the collection of the sums so due and unpaid
and may prosecute any such proceeding to judgment or final decree, and may
enforce the same against the Company (or any other obligor upon the Securities)
and collect the moneys adjudged or decreed to be payable in the manner provided
by law out of the property of the Company (or any other obligor upon the
Securities), wherever situated.
If an Event of Default occurs and is continuing, the Trustee
may in its discretion proceed to protect and enforce its rights and the rights
of the Holders by such appropriate judicial proceedings as the Trustee shall
deem most effectual to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in aid of
the exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
In case of any judicial proceeding relative to the Company (or
any other obligor upon the Securities), its property or its creditors, the
Trustee shall be entitled and empowered, by intervention in such proceeding or
otherwise, to take any and all actions authorized under the Trust Indenture Act
in order to have the claims of the Holders and the Trustee allowed in any such
proceeding. In particular, the Trustee shall be authorized to collect and
receive any moneys or other property payable or deliverable on any such claims
and to distribute the same; and any custodian, receiver, assignee, trustee,
liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by each Holder to make such payments to the
Trustee and, in the event that the Trustee shall consent to the making of such
payments directly to the Holders, to pay to the Trustee any amount due it and
each predecessor Trustee for the reasonable compensation, expenses,
disbursements and advances of the Trustee and each predecessor Trustee and their
respective agents and counsel, and any other amounts due the Trustee under
Section 607.
No provision of this Indenture shall be deemed to authorize
the Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Securities or the rights of any Holder thereof or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding;
provided, however, that the Trustee may, on behalf of the Holders, vote for the
election of a trustee in bankruptcy or similar official and may be a member of
the Creditors' Committee.
SECTION 505. Trustee May Enforce Claims Without Possession
of Securities.
All rights of action and claims under this Indenture or the
Securities may be prosecuted and enforced by the Trustee without the possession
of any of the Securities or
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the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name as trustee
of an express trust, and any recovery of judgment shall, after provision for the
payment of the reasonable compensation, expenses, disbursements and advances of
the Trustee and each predecessor Trustee and their respective agents and counsel
and any other amounts due the Trustee or any predecessor Trustee under Section
607, be for the ratable benefit of the Holders of the Securities in respect of
which such judgment has been recovered.
SECTION 506. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article
shall be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of principal
or premium, if any, or interest, upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: Subject to Article Thirteen, to the holders of Senior
Indebtedness;
SECOND: To payment of all amounts due the Trustee under
Section 607;
THIRD: To the payment of the amounts then due and unpaid for
principal of and premium, if any, and interest on the Securities in
respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind,
according to the amounts due and payable on such Securities for
principal and premium, if any, and interest, respectively; and
FOURTH: The balance, if any, to the Company or any other
Person or Persons determined to be entitled thereto.
SECTION 507. Limitation on Suits.
No Holder of any Security shall have any right to institute
any proceeding, judicial or otherwise, with respect to this Indenture, or for
the appointment of a receiver or trustee, or for any other remedy hereunder,
unless
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of
the Outstanding Securities shall have made written request to the
Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
reasonable indemnity satisfactory to it against the costs, expenses and
liabilities to be incurred
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in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert.
Notwithstanding any other provision in this Indenture, the
Holder of any Security shall have the right, which is absolute and
unconditional, to receive payment of the principal of and premium, if any, and
(subject to Section 307) interest on such Security on the respective Stated
Maturities expressed in such Security (or, in the case of redemption, on the
Redemption Date or, in the case of a repurchase pursuant to Article Fifteen, on
the Repurchase Date) and to convert such Security in accordance with Article
Fourteen and to institute suit for the enforcement of any such payment and right
to convert, and such rights shall not be impaired without the consent of such
Holder.
SECTION 509. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities in Section 306, no
right or remedy herein conferred upon or reserved to the Trustee or to the
Holders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
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right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any
Security to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or an acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee or to the Holders may be exercised from time to
time, and as often as may be deemed expedient, by the Trustee or by the Holders,
as the case may be.
SECTION 512. Control by Holders.
The Holders of a majority in principal amount of the
Outstanding Securities shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee; provided, that
(1) such direction shall not be in conflict with any rule of
law or with this Indenture; and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction; and
(3) subject to the provisions of Section 601, the Trustee
shall have the right to decline to follow any such direction if the
Trustee in good faith shall determine that the action so directed would
involve the Trustee in personal liability or would be unduly
prejudicial to Holders not joining in such direction.
SECTION 513. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of
the Outstanding Securities may on behalf of the Holders of all the Securities
waive any past default hereunder and its consequences, except a default
(1) in the payment of the principal of or premium, if any, or
interest on any Security, or
(2) in respect of a covenant or provision hereof which under
Article Nine cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and
any Event of
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Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
SECTION 514. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, a court may require any party litigant in
such suit to file an undertaking to pay the costs of such suit, and may assess
costs against any such party litigant, in the manner and to the extent provided
in the Trust Indenture Act; provided, that neither this Section nor the Trust
Indenture Act shall be deemed to authorize any court to require such an
undertaking or to make such an assessment in any suit instituted by the Company,
in any suit instituted by the Trustee, a suit by a Holder pursuant to Section
508, or a suit by a Holder or Holders of more than 10% in principal amount of
the outstanding Securities.
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities.
The duties and responsibilities of the Trustee shall be as
provided by this Indenture and the Trust Indenture Act for securities issued
pursuant to indentures qualified thereunder. Except as otherwise provided
herein, notwithstanding the foregoing, no provision of this Indenture shall
require the Trustee to expend or risk its own funds or otherwise incur any
financial liability or risk in the performance of any of its duties hereunder,
or in the exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate indemnity
satisfactory to it against such risk or liability is not reasonably assured to
it. Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
The Trustee shall not be liable (x) for any error of judgment made in good faith
by a Responsible Officer or Responsible Officers of the Trustee, unless it shall
be proved that the Trustee was negligent in ascertaining the pertinent facts or
(y) with respect to any action taken or omitted to be taken by it in good faith
in accordance with the direction of the holders of not less than a majority in
aggregate principal amount of the Securities at the time Outstanding relating to
the time, method and place of conducting any proceeding or any remedy available
to the Trustee, or exercising any trust or power conferred upon the Trustee,
under this Indenture. Prior to the occurrence of an Event of Default and after
the curing or waiving of all Events of Default which may have occurred: (i) the
duties and obligations of the Trustee shall be determined solely by the express
provisions of this Indenture and in the Trust Indenture Act, and the Trustee
shall not be liable except for the performance of such duties and obligations as
are specifically set forth in this Indenture and
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in the Trust Indenture Act, and no implied covenants or obligations shall be
read in to this Indenture against the Trustee; and (ii) in the absence of bad
faith on the part of the Trustee, the Trustee may conclusively rely, as to the
truth of the statements and the correctness of the opinions therein, upon any
statements, certificates or opinions furnished to the Trustee and conforming to
the requirements of this Indenture and believed by the Trustee to be genuine and
to have been signed or presented by the proper party or parties; but in the case
of any such statements, certificates or options which by any provisions hereof
are specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform on
their face to the requirements of this Indenture. If an Event of Default has
occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in its
exercise thereof as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
SECTION 602. Notice of Defaults.
The Trustee shall give the Holders notice of any default
hereunder known to it as and to the extent provided by the Trust Indenture Act;
provided, however, that in the case of any default of the character specified in
Section 501(5), no such notice to Holders shall be given until at least 30 days
after the occurrence thereof. For the purpose of this Section, the term
"default" means any event which is, or after notice or lapse of time or both
would become, an Event of Default.
SECTION 603. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other
paper or document believed by it to be genuine and to have been signed
or presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors may be sufficiently
evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, rely upon an Officers'
Certificate;
(d) the Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and
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protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders pursuant to this Indenture, unless
such Holders shall have offered to the Trustee reasonable security or
indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in compliance with such
request or direction;
(f) before the Trustee acts or refrains from acting with
respect to any matter contemplated by this Indenture, it may require an
Officers' Certificate or an Opinion of Counsel, which shall conform to
the provisions of Section 102, and the Trustee shall be protected and
shall not be liable for any action it takes or omits to take in good
faith and without gross negligence in reliance on such certificate or
opinion;
(g) the Trustee shall not be required to give any bond or
surety in respect of the performance of its power and duties hereunder;
(h) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or
attorney;
(i) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder;
(j) the Trustee shall not be charged with knowledge of any
default (as defined in Section 602) or Event of Default unless either
(1) a Responsible Officer of the Trustee shall have actual knowledge of
such default or Event of Default or (2) written notice of such default
or Event of Default shall have been given to the Trustee by the Company
or any Holder; and
(k) the Trustee shall not be liable for any action taken,
suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon
it by this Indenture.
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SECTION 604. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except
the Trustee's certificate of authentication, shall be taken as the statements of
the Company, and the Trustee and any Authenticating Agent assume no
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Indenture or of the Securities. The Trustee
and any Authenticating Agent shall not be accountable for the use or application
by the Company of Securities or the proceeds thereof.
SECTION 605. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any
Security Registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of Securities and, subject to
Sections 608 and 613, may otherwise deal with the Company with the same rights
it would have if it were not Trustee, Authenticating Agent, Paying Agent,
Security Registrar or such other agent.
SECTION 606. Money Held in Trust.
Money held by the Trustee or any Paying Agent in trust
hereunder need not be segregated from other funds except to the extent required
by law. The Trustee or any Paying Agent shall be under no liability for interest
on any money received by it hereunder except as otherwise agreed in writing with
the Company.
SECTION 607. Compensation and Reimbursement.
The Company agrees:
(1) to pay to the Trustee and each predecessor Trustee from
time to time reasonable compensation for all services rendered by it
hereunder (including its services as Security Registrar or Paying
Agent, if so appointed by the Company) (which compensation shall not be
limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(2) except as otherwise expressly provided herein, to
reimburse the Trustee and each predecessor Trustee upon its request for
all reasonable expenses, disbursements and advances incurred or made by
or on behalf of it in connection with the performance of its duties
under any provision of this Indenture (including the reasonable
compensation and the expenses and disbursements of its agents and
counsel and all other Persons not regularly in its employ) except to
the extent any such expense, disbursement or advance may be
attributable to its negligence or bad faith; and
(3) to indemnify the Trustee and each predecessor Trustee
(each an
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"indemnitee") for, and to hold it harmless against, any loss, liability
or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration
of this Indenture or the trusts hereunder and its duties hereunder
(including its services as Security Registrar or Paying Agent, if so
appointed by the Company), including enforcement of this Section 607
and including the costs and expenses of defending itself against or
investigating any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The Company may
defend any claim or threatened claim asserted against an indemnitee for
which an indemnitee may seek indemnity, and the indemnitee shall
cooperate in the defense unless, in the reasonable opinion of the
indemnitee's counsel, the indemnitee has an interest adverse to the
Company or a potential conflict of interest exists between the
indemnitee and the Company, in which case the indemnitee may have
separate counsel and the Company shall pay the reasonable fees and
expenses of such counsel; provided that the Company shall only be
responsible for the reasonable fees and expenses of one law firm (in
addition to local counsel) in any one action or separate substantially
similar actions in the same jurisdiction arising out of the same
general allegations or circumstances, such law firm to be designated by
the indemnitee and reasonably acceptable to the Company.
As security for the performance of the obligations of the
Company under this Section 607, the Trustee shall have a lien prior to the
Securities upon all property and funds held or collected by the Trustee as such,
except funds held in trust for the benefit of the Holders of particular
Securities, and the Securities are hereby subordinated to such prior lien. The
obligations of the Company under this Section to compensate and indemnify the
Trustee and any predecessor Trustee and to pay or reimburse the Trustee and any
predecessor Trustee for expenses, disbursements and advances, and any other
amounts due the Trustee or any predecessor Trustee under Section 607, shall
constitute an additional obligation hereunder and shall survive the satisfaction
and discharge of this Indenture.
When the Trustee or any predecessor Trustee incurs expenses or
renders services in connection with the performance of its obligations hereunder
(including its services as Security Registrar or Paying Agent, if so appointed
by the Company) after an Event of Default specified in Section 501(7) or (8)
occurs, the expenses and the compensation for the services are intended to
constitute expenses of administration under ny applicable bankruptcy, insolvency
or other similar federal or state law to the extent provided in Section
503(b)(5) of Title 11 of the United States Code, as now or hereafter in effect.
SECTION 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest
within the meaning of the Trust Indenture Act, the Trustee shall either
eliminate such interest or resign, to the extent and in the manner provided by,
and subject to the provisions of, the Trust Indenture Act and this Indenture.
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SECTION 609. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be
a Person that (i) is eligible pursuant to the Trust Indenture Act to act as
such, (ii) has (or, in the case of a corporation included in a bank holding
company system, whose related bank holding company has) a combined capacity and
surplus of at least $50,000,000 and (iii) has a Corporate Trust Office in the
Borough of Manhattan, The City of New York, or a designated agent. If such
Person publishes reports of conditions at least annually, pursuant to law or to
the requirements of a Federal or state supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
Person shall be deemed to be its combined capital and surplus as set forth in
its most recent report of condition so published. If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section, it
shall resign immediately in the manner and with the effect hereinafter specified
in this Article.
SECTION 610. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee in
accordance with the applicable requirements of Section 611.
(b) The Trustee may resign at any time by giving written
notice thereof to the Company. If an instrument of acceptance by a successor
Trustee required by Section 611 shall not have been delivered to the resigning
Trustee within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
(c) The Trustee may be removed at any time by an Act of the
Holders of a majority in principal amount of the Outstanding Securities
delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 608
after written request therefor by the Company or by any Holder
who has been a bona fide Holder of a Security for the last six
months, or
(2) the Trustee shall cease to be eligible under
Section 609 and shall fail to resign after written request
therefor by the Company or by any such Holder, or
(3) the Trustee shall become incapable of acting or
shall be adjudged a bankrupt or insolvent or a receiver of the
Trustee or of its property shall be appointed or any public
officer shall take charge or control
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of the Trustee or of its property or affairs for the purpose
of rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, the Company, by a Board Resolution, shall promptly appoint a
successor Trustee and such successor Trustee shall comply with the applicable
requirements of Section 611. If, within one year after such resignation, removal
or incapability, or the occurrence of such vacancy, a successor Trustee shall be
appointed by Act of the Holders of a majority in principal amount of the
Outstanding Securities delivered to the Company and the retiring Trustee, the
successor Trustee so appointed shall, forthwith upon its acceptance of such
appointment in accordance with the applicable requirements of Section 611 become
the successor Trustee and supersede the successor Trustee appointed by the
Company. If no successor Trustee shall have been so appointed by the Company or
the Holders and accepted appointment in the manner required by Section 611, any
Holder who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to all
Holders in the manner provided in Section 106. Each notice shall include the
name of the successor Trustee and the address of its Corporate Trust Office.
SECTION 611. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee; but, on request of the
Company or the successor Trustee, such retiring Trustee shall, upon payment of
its charges, execute and deliver an instrument transferring to such successor
Trustee all the rights, powers and trusts of the retiring Trustee and shall duly
assign, transfer and deliver to such successor Trustee all property and money
held by such retiring Trustee hereunder, subject to the lien, if any, of the
retiring Trustee created by Section 607. Upon request of any such successor
Trustee, the Company shall execute any and all instruments for more fully and
certainly vesting in and confirming to such successor Trustee all such rights,
powers and trusts.
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No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article.
SECTION 612. Merger, Conversion, Consolidation or Succession
to Business.
Any corporation into which the Trustee may be merged or
converted or with it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Trustee shall be a party, or
any corporation succeeding to all or substantially all the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated with the same
effect as if such successor Trustee had itself authenticated such Securities.
SECTION 613. Preferential Collection of Claims Against Company.
If and when the Trustee shall be or become a creditor of the
Company (or any other obligor upon the Securities), the Trustee shall be subject
to the provisions of the Trust Indenture Act regarding the collection of claims
against the Company (or any such other obligor).
SECTION 614. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents
acceptable to and at the expense of the Company which shall be authorized to act
on behalf of the Trustee to authenticate Securities issued upon original issue
and upon exchange, registration of transfer, partial conversion or partial
redemption or pursuant to Section 306, and Securities so authenticated shall be
entitled to the benefits of this Indenture and shall be valid and obligatory for
all purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the authentication and delivery of Securities by the
Trustee or the Trustee's certificate of authentication, such reference shall be
deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a Person organized and doing
business under the laws of the United States of America, any State thereof or
the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $50,000,000 and
subject to supervision or examination by Federal or State authority. If such
Authenticating Agent publishes reports of condition at least annually, pursuant
to law or to the requirements of said supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
Authenticating Agent shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so
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published. If at any time an Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section, such Authenticating Agent shall
resign immediately in the manner and with the effect specified in this Section.
Any Person into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any Person resulting from any
merger, conversion or consolidation to which such Authenticating Agent shall be
a party, or any Person succeeding to the corporate agency or corporate trust
business of an Authenticating Agent, shall continue to be an Authenticating
Agent, provided such Person shall be otherwise eligible under this Section,
without the execution or filing of any paper or any further act on the part of
the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving
written notice thereof to the Trustee and to the Company. The Trustee may at any
time terminate the agency of an Authenticating Agent by giving written notice
thereof to such Authenticating Agent and to the Company. Upon receiving such a
notice of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall mail notice of such
appointment by first-class mail, postage prepaid, to all Holders as their names
and addresses appear in the Security Register. Any successor Authenticating
Agent upon acceptance of its appointment under this Section shall become vested
with all the rights, powers and duties of its predecessor hereunder, with like
effect as if originally named as an Authenticating Agent. No successor
Authenticating Agent shall be appointed unless eligible to act as such under the
provisions of this Section.
Any Authenticating Agent by the acceptance of its appointment
shall be deemed to have represented to the Trustee that it is eligible for
appointment as Authenticating Agent under this Section and to have agreed with
the Trustee that: it will perform and carry out the duties of an Authenticating
Agent as herein set forth, including among other things the duties to
authenticate Securities when presented to it in connection with the original
issuance and with exchanges, registrations of transfer or redemptions or
conversions thereof or pursuant to Section 306; it will keep and maintain, and
furnish to the Trustee from time to time as requested by the Trustee,
appropriate records of all transactions carried out by it as Authenticating
Agent and will furnish the Trustee such other information and reports as the
Trustee may reasonably require; and it will notify the Trustee promptly if it
shall cease to be eligible to act as Authenticating Agent in accordance with the
provisions of this Section. Any Authenticating Agent by the acceptance of its
appointment shall be deemed to have agreed with the Trustee to indemnify the
Trustee against any loss, liability or expense incurred by the Trustee and to
defend any claim asserted against the Trustee by reason of any acts or failures
to act of such Authenticating Agent, but such Authenticating Agent shall have no
liability for any action taken by it in accordance with the specific written
direction of the Trustee.
The Trustee shall not be liable for any act or any failure of the
Authenticating
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Agent to perform any duty either required herein or authorized herein to be
performed by such person in accordance with this Indenture.
The Company agrees to pay to each Authenticating Agent from
time to time reasonable compensation for its services under this Section.
If an appointment is made pursuant to this Section, the
Securities may have endorsed thereon, in addition to the Trustee's certificate
of authentication, an alternative certificate of authentication in the following
form:
This is one of the Securities described in the
within-mentioned Indenture.
CHEMICAL BANK, as Trustee
By ________________________________
As Authenticating Agent
By _____________________________
Authorized Officer
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee Names and Addresses
of Holders.
The Company will furnish or cause to be furnished to the
Trustee
(a) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of such Regular
Record Date, and
(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished.
Notwithstanding the foregoing, so long as the Trustee is the Security Registrar,
no such list shall be required to be furnished.
SECTION 702. Preservation of Information; Communication to Holders.
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(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in
the most recent list furnished to the Trustee as provided in Section
701 and the names and addresses of Holders received by the Trustee in
its capacity as Security Registrar. The Trustee may destroy any list
furnished to it as provided in Section 701 upon receipt of a new list
so furnished.
(b) The rights of Holders to communicate with other Holders
with respect to their rights under this Indenture or under the
Securities, and the corresponding rights and duties of the Trustee,
shall be as provided by the Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company
nor the Trustee nor any agent of either of them shall be held
accountable by reason of any disclosure of information as to names and
addresses of Holders made pursuant to the Trust Indenture Act or
otherwise in accordance with this Indenture.
SECTION 703. Reports by Trustee.
(a) Not later than 60 days following each May 15, the Trustee
shall transmit to Holders such reports concerning the Trustee and its
actions under this Indenture as may be required pursuant to the Trust
Indenture Act at the times and in the manner provided pursuant thereto.
(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock
exchange upon which the Securities are listed, with the Commission and
with the Company. The Company will notify the Trustee when the
Securities are listed on any stock exchange.
SECTION 704. Reports by Company.
The Company shall file with the Trustee for transmission to
the Holders upon written request of the Holders and the Commission, such
information, documents and other reports, and such summaries thereof, as may be
required pursuant to the Trust Indenture Act at the times and in the manner
provided pursuant to such Act; provided, that any such information, documents or
reports required to be filed with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act shall be filed with the Trustee within 15 days after the
same is so required to be filed with the Commission.
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SECTION 705. Rule 144A Information Requirement.
If at any time prior to the Resale Restriction Termination
Date the Company is no longer subject to Section 13 or 15(d) of the Exchange
Act, the Company will furnish to the Holders or beneficial holders of the
Securities and prospective purchasers of the Securities designated by the
Holders of the Securities, upon their request, information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act until the earlier
of (i) the date on which the Securities and the underlying Common Stock are
registered under the Securities Act or (ii) the Resale Restriction Termination
Date.
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
The Company shall not consolidate with or merge into any other
Person or convey, transfer or lease its properties and assets substantially as
an entirety to any Person, and the Company shall not permit any Person to
consolidate with or merge into the Company, unless:
(1) in case the Company shall consolidate with or merge into
another Person or convey, transfer or lease all or substantially all of
its properties and assets to any Person, the Person formed by such
consolidation or into which the Company is merged or the Person which
acquires by conveyance or transfer, or which leases, all or
substantially all of the properties and assets of the Company shall be
a corporation, partnership or trust, shall be organized and validly
existing under the laws of the United States of America, any State
thereof or the District of Columbia and shall expressly assume, by an
indenture supplemental hereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, the due and punctual payment of
the principal of and premium, if any, and interest on all the
Securities and the performance or observance of every covenant of this
Indenture on the part of the Company to be performed or observed and
shall have provided for conversion rights in accordance with Section
1411;
(2) immediately after giving effect to such transaction, no
Event of Default, and no event which, after notice or lapse of time or
both, would become an Event of Default, shall have happened and be
continuing;
(3) such consolidation, merger, conveyance, transfer or lease
does not adversely affect the validity or enforceability of the
Securities; and
(4) the Company or the successor Person has delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that such consolidation,
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merger, conveyance, transfer or lease and, if a supplemental indenture
is required in connection with such transaction, such supplemental
indenture comply with this Article and that all conditions precedent
herein provided for relating to such transaction have been complied
with.
SECTION 802. Successor Substituted.
Upon any consolidation of the Company with, or merger of the
Company into, any other Person or any conveyance, transfer or lease of all or
substantially all of the properties and assets of the Company in accordance with
Section 801, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, transfer or lease is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture with the same effect as if such successor
Person had been named as the Company herein, and thereafter, except in the case
of a transfer by lease, the predecessor Person shall be relieved of all
obligations and covenants under this Indenture and the Securities.
ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when
authorized by a Board Resolution, and the Trustee, at any time and from time to
time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(1) to cause this Indenture to be qualified under the Trust
Indenture Act; or
(2) to 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 Securities; or
(3) to add to the covenants of the Company for the benefit of
the Holders or an additional Event of Default, or to surrender any
right or power conferred herein or in the Securities upon the Company;
or
(4) to secure the Securities; or
(5) to make provision with respect to the conversion rights of
Holders pursuant to the requirements of Section 1411; or
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(6) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities; or
(7) to cure any ambiguity, to correct or supplement any
provision herein or in the Securities which may be defective or
inconsistent with any other provision herein or in the Securities, or
to make any other provisions with respect to matters or questions
arising under this Indenture which shall not be inconsistent with the
provisions of this Indenture; provided, that such action pursuant to
this Clause (7) shall not adversely affect the interests of the Holders
in any material respect and the Trustee may rely upon an opinion of
counsel to that effect.
SECTION 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities, by Act of said Holders delivered
to the Company and the Trustee, the Company, when authorized by a Board
Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders under this Indenture;
provided, however, that no such supplemental indenture shall, without the
consent of the Holder of each Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal
amount thereof or the rate of interest thereon or any premium payable
upon the redemption thereof, or change the place of payment where, or
the coin or currency in which, any Security or any premium or interest
thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity thereof
(or, in the case of redemption, on or after the Redemption Date), or
adversely affect the right to convert any Security as provided in
Article Fourteen (except as permitted by Section 901(5)), or modify the
provisions of Article Fifteen, or the provisions of this Indenture with
respect to the subordination of the Securities, in a manner adverse to
the Holders, or
(2) reduce the percentage in principal amount of the
Outstanding Securities, the consent of whose Holders is required for
any such supplemental indenture, or the consent of whose Holders is
required for any waiver of compliance with certain provisions of this
Indenture or certain defaults hereunder and their consequences provided
for in this Indenture, or
(3) modify any of the provisions of this Section, Section 513
or Section 1006, except to increase any such percentage or to provide
that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each Outstanding Security
affected thereby; provided, however, that this Clause shall not be
deemed to require the consent of any Holder with respect to
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changes in the references to "the Trustee" and concomitant changes in
this Section and Section 1006, or the deletion of this proviso, in
accordance with the requirements of Section 901(6).
It shall not be necessary for any Act of Holders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by,
any supplemental indenture permitted by this Article or the modifications
thereby of the trusts created by this Indenture, the Trustee shall be entitled
to receive, and (subject to Section 601) shall be fully protected in relying
upon, in addition to the certificate and opinion required by Section 102, an
Officers' Certificate and an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this Indenture. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture which adversely affects the Trustee's own rights, duties or immunities
under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this
Article, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes; and
every Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article
shall conform to the requirements of the Trust Indenture Act.
SECTION 906. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Trustee and the
Company, to any such supplemental indenture may be prepared and executed by the
Company and (at the written direction of the Company) authenticated and
delivered by the Trustee in exchange for Outstanding Securities.
SECTION 907. Notice of Supplemental Indenture.
Promptly after the execution by the Company and the Trustee of
any supplemental indenture pursuant to Section 902, the Company shall transmit
to the Holders
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a notice setting forth the substance of such supplemental indenture.
ARTICLE TEN
Covenants
SECTION 1001. Payment of Principal, Premium and Interest.
The Company will duly and punctually pay the principal of and
premium, if any, and interest on the Securities in accordance with the terms of
the Securities and this Indenture.
SECTION 1002. Maintenance of Office or Agency.
The Company will maintain in New York, New York an office or
agency where Securities may be presented or surrendered for payment, where
Securities may be surrendered for registration of transfer, where Securities may
be surrendered for exchange or conversion and where notices and demands to or
upon the Company in respect of the Securities and this Indenture may be served.
The Company will give prompt written notice to the Trustee of the location, and
any change in the location, of any such office or agency. If at any time the
Company shall fail to maintain any such required office or agency or shall fail
to furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, and the Company hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more
other offices or agencies where the Securities may be presented or surrendered
for any or all such purposes and may from time to time rescind such
designations; provided, however, that no such designation or rescission shall in
any manner relieve the Company of its obligation to maintain an office or agency
in New York, New York for such purposes. The Company will give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
SECTION 1003. Money for Security Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent,
it will, on or before each due date of the principal of and premium, if any, or
interest on any of the Securities, segregate and hold in trust for the benefit
of the Persons entitled thereto a sum sufficient to pay the principal and
premium, if any, or interest so becoming due until such sums shall be paid to
such Persons or otherwise disposed of as herein provided and will promptly
notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it
will, on
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or prior to 11:00 a.m. (New York City time) on each due date of the principal of
and premium, if any, or interest on any Securities, deposit with a Paying Agent
a sum in same day funds sufficient to pay the principal and any premium and
interest so becoming due, such sum to be held as provided by the Trust Indenture
Act, and (unless such Paying Agent is the Trustee) the Company will promptly
notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the
Trustee or the Company to execute and deliver to the Trustee an instrument in
which such Paying Agent shall agree with the Trustee, subject to the provisions
of this Section, that such Paying Agent will (i) comply with the provisions of
the Trust Indenture Act and this Indenture applicable to it as a Paying Agent
and hold all sums held by it for the payment of principal of or any premium or
interest on the Securities in trust for the benefit of the Persons entitled
thereto until such sums shall be paid to such Persons or otherwise disposed of
as herein provided; (ii) give the Trustee notice of any default by the Company
(or any other obligor upon the Securities) in the making of any payment in
respect of the Securities; and (iii) at any time during the continuance of any
default by the Company (or any other obligor upon the Securities) in the making
of any payment in respect of the Securities, upon the written request of the
Trustee, forthwith pay to the Trustee all sums held in trust by such Paying
Agent for payment in respect of the Securities, and account for any funds
disbursed.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of and
premium, if any, or interest on any Security and remaining unclaimed for two
years after such principal and premium, if any, or interest has become due and
payable shall be paid to the Company on Company Request, or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Security
shall thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in New York, New York, notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
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SECTION 1004. Statement by Officers as to Default.
The Company will deliver to the Trustee, within 120 days after
the end of each fiscal year of the Company ending after the date hereof, an
Officers' Certificate stating whether or not to the best knowledge of the
signers thereof the Company is in default in the performance and observance of
any of the terms, provisions and conditions of this Indenture (without regard to
any period of grace or requirement of notice provided hereunder) and, if the
Company shall be in default, specifying all such defaults and the nature and
status thereof of which they may have knowledge.
SECTION 1005. Existence.
Subject to Article Eight, the Company will do or cause to be
done all things necessary to preserve and keep in full force and effect its
existence, rights (charter and statutory) and franchises and the existence,
rights (charter and statutory) and franchises of each Subsidiary; provided,
however, that the Company shall not be required to preserve any such right or
franchise if the Board of Directors shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the Company and
that the loss thereof is not disadvantageous in any material respect to the
Holders.
SECTION 1006. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with
any covenant or condition set forth in Section 1005, if before the time for such
compliance the Holders of at least a majority in principal amount of the
Outstanding Securities shall, by Act of such Holders, either waive such
compliance in such instance or generally waive compliance with such covenant or
condition, but no such waiver shall extend to or affect such covenant or
condition except to the extent so expressly waived, and, until such waiver shall
become effective, the obligations of the Company and the duties of the Trustee
in respect of any such covenant or condition shall remain in full force and
effect.
ARTICLE ELEVEN
Redemption of Securities
SECTION 1101. Right of Redemption.
The Securities may be redeemed at the election of the Company,
in whole or from time to time in part, at any time on or after June 18, 1999, at
the Redemption Prices specified in the form of Security hereinbefore set forth,
together with accrued interest, to the Redemption Date.
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SECTION 1102. Applicability of Article.
Redemption of Securities at the election of the Company as
permitted by any provision of this Indenture shall be made in accordance with
such provision and this Article.
SECTION 1103. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities pursuant
to Section 1101 shall be evidenced by a Board Resolution. In case of any
redemption at the election of the Company of less than all the Securities, the
Company shall, at least 60 days prior to the Redemption Date fixed by the
Company (unless a shorter period shall be satisfactory to the Trustee), notify
the Trustee of such Redemption Date and of the principal amount of Securities to
be redeemed. In case of any redemption at the election of the Company of all of
the Securities, the Company shall, at least 45 days prior to the Redemption Date
fixed by the Company (unless a shorter period shall be satisfactory to the
Trustee), notify the Trustee of such Redemption Date.
SECTION 1104. Selection by Trustee of Securities to be Redeemed.
If less than all the Securities are to be redeemed, the
particular Securities to be redeemed shall be selected not more than 60 days
prior to the Redemption Date by the Trustee, from the Outstanding Securities not
previously called for redemption, by lot or pro rata or by such other method as
the Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions (equal to $1,000 or any integral multiple
thereof) of the principal amount of Securities of a denomination larger than
$1,000.
If any Security selected for partial redemption is converted
in part before termination of the conversion right with respect to the portion
of the Security so selected, the converted portion of such Security shall be
deemed (so far as may be) to be the portion selected for redemption. Securities
which have been converted during a selection of Securities to be redeemed shall
be treated by the Trustee as Outstanding for the purpose of such selection. In
any case where more than one Security is registered in the same name, the
Trustee in its discretion may treat the aggregate principal amount so registered
as if it were represented by one Security.
The Trustee shall promptly notify the Company and each
Security Registrar in writing of the Securities selected for redemption and, in
the case of any Securities selected for partial redemption, the principal amount
thereof to be redeemed.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to the redemption of Securities
shall relate, in the case of any Securities redeemed or to be redeemed only in
part, to the portion of the principal amount of such Securities which has been
or is to be redeemed.
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SECTION 1105. Notice of Redemption.
Notice of redemption shall be given by first-class mail,
postage prepaid, mailed not less than 15 nor more than 60 days prior to the
Redemption Date, to the Trustee and to each Holder of Securities to be redeemed,
at his address appearing in the Security Register.
All notices of redemption shall state:
(a) the Redemption Date,
(b) the Redemption Price,
(c) if less than all the Outstanding Securities are to be
redeemed, the identification (and, in the case of partial redemption of
any Securities, the principal amounts) of the particular Securities to
be redeemed,
(d) that on the Redemption Date the Redemption Price will
become due and payable upon each such Security to be redeemed and that
(unless the Company shall default in payment of the Redemption Price)
interest thereon will cease to accrue on and after said date,
(e) the conversion price, the date on which the right to
convert the Securities to be redeemed will terminate and the place or
places where such Securities may be surrendered for conversion, and
(f) the place or places where such Securities are to be
surrendered for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the
election of the Company shall be given by the Company or, at the Company's
request received by the Trustee at least 25 days prior to the Redemption Date,
by the Trustee in the name and at the expense of the Company.
SECTION 1106. Deposit of Redemption Price.
At or prior to 9:00 a.m. (New York City time) on any
Redemption Date, the Company shall deposit with the Trustee or with a Paying
Agent (or, if the Company is acting as its own Paying Agent, segregate and hold
in trust as provided in Section 1003) an amount of money in same day funds
sufficient to pay the Redemption Price of, and (except if the Redemption Date
shall be an Interest Payment Date) accrued interest on, all the Securities or
portions thereof which are to be redeemed on that date other than any Securities
called for redemption on that date which have been converted prior to the date
of such deposit.
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If any Security called for redemption is converted, any money
deposited with the Trustee or with any Paying Agent or so segregated and held in
trust for the redemption of such Security shall (subject to any right of the
Holder of such Security or any Predecessor Security to receive interest as
provided in the last paragraph of Section 307) be paid to the Company upon
Company Request or, if then held by the Company, shall be discharged from such
trust.
SECTION 1107. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the
Securities so to be redeemed shall, on the Redemption Date, become due and
payable at the Redemption Price therein specified, and from and after such date
(unless the Company shall default in the payment of the Redemption Price and
accrued interest) such Securities shall cease to bear interest. Upon surrender
of any such Security for redemption in accordance with said notice, such
Security shall be paid by the Company at the Redemption Price, together with
accrued interest to the Redemption Date; provided, however, that installments of
interest whose Maturity is on or prior to the Redemption Date shall be payable
to the Holders of such Securities, or one or more Predecessor Securities,
registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions of Section 307.
If any Security called for redemption shall not be so paid
upon surrender thereof for redemption, the principal and premium, if any, shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Security.
SECTION 1108. Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be
surrendered at an office or agency of the Company maintained for that purpose
pursuant to Section 1002 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and deliver to the Holder of such Security without service
charge, a new Security or Securities, of any authorized denomination as
requested by such Holder, in aggregate principal amount equal to and in exchange
for the unredeemed portion of the principal of the Security so surrendered.
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ARTICLE TWELVE
Guarantees
SECTION 1201. Unconditional Guarantees. The Company shall
cause each Wholly Owned Subsidiary to execute and deliver to the Trustee a
guaranty of the Obligations substantially in the form of Exhibit B hereto
(individually a "Guaranty" and collectively the "Guarantees").
SECTION 1202. Addition of Guarantors. (a) For as long as any
Guarantees are required to remain in effect pursuant to the terms of this
Indenture, promptly but in no event later than 15 days following the acquisition
or creation of any Wholly Owned Subsidiary after the date of this Indenture, the
Company shall cause such Subsidiary to execute and deliver a Guaranty evidencing
its provision of a guarantee in accordance with clause (b) below.
(b) Any Person that was not a Guarantor on the date of the
execution of the Indenture may become a Guarantor by executing and delivering to
the Trustee a a Guaranty.
ARTICLE THIRTEEN
Subordination of Securities
SECTION 1301. Securities Subordinated to Senior Indebtedness.
The Company covenants and agrees, and each Holder of a
Security, by its acceptance thereof, likewise covenants and agrees, that, at all
times and in all respects, the indebtedness represented by the Securities and
the payment of the principal of and premium, if any, and interest on each and
all of the Securities are hereby expressly made subordinate and subject in right
of payment to the prior payment in full of all Senior Indebtedness.
SECTION 1302. Payment Over of Proceeds Upon Dissolution, Etc.
In the event of (a) any insolvency or bankruptcy case or
proceeding, or any receivership, liquidation, reorganization or other similar
case or proceeding, relative to the Company or to its creditors, as such, or to
a substantial part of its assets, or (b) any proceeding for the liquidation,
dissolution or other winding up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or (c) any general
assignment for the benefits of creditors or any other marshalling of assets and
liabilities of the Company, then and in any such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all amounts due or
to become due on or in respect of all Senior Indebtedness; or provision shall be
made for such payment in money or money's worth, before the Holders of the
Securities are entitled to receive any payment
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or distribution of any kind or character, whether in cash, property or
securities, on account of principal of or premium, if any, or interest on the
Securities, and to that end the holders of Senior Indebtedness shall be entitled
to receive, for application to the payment thereof, any payment or distribution
of any kind or character, whether in cash, property or securities, including any
such payment or distribution which may be payable or deliverable by reason of
the payment of any other indebtedness of the Company being subordinated to the
payment of the Securities, which may be payable or deliverable in respect of the
Securities in any such case, proceeding, dissolution, liquidation or other
winding up or event.
In the event that, notwithstanding the foregoing provisions of
this Section, the Trustee or the Holder of any Security shall have received any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Securities, before all Senior Indebtedness is paid in full or payment thereof
provided for, and if such fact shall, at or prior to the time of such payment or
distribution, have been made known to the Trustee or such Holder, as the case
may be, then and in such event such payment or distribution shall be paid over
or delivered forthwith to the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee, agent or other Person making payment or
distribution of assets of the Company for application to the payment of all
Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
For purposes of this Article only, the words "cash, property
or securities" shall not be deemed to include securities of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, which are subordinated
in right of payment to all Senior Indebtedness which may at the time be
outstanding to substantially the same extent as, or to a greater extent than,
the Securities are so subordinated as provided in this Article. The
consolidation of the Company with, or the merger of the Company into, another
Person or the liquidation or dissolution of the Company following the conveyance
or transfer of its properties and assets substantially as an entirety to another
Person upon the terms and conditions set forth in Article Eight shall not be
deemed a dissolution, winding up, liquidation, reorganization, general
assignment for the benefit of creditors or marshalling of assets and liabilities
of the Company for the purposes of this Section if the Person formed by such
consolidation or into which the Company is merged or which acquires by
conveyance or transfer such properties and assets substantially as an entirety,
as the case may be, shall, as a part of such consolidation, merger, conveyance
or transfer, comply with the conditions set forth in Article Eight.
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SECTION 1303. Prior Payment to Senior Indebtedness upon
Acceleration of Securities.
In the event that any Securities are declared due and payable
before their Stated Maturity, then and in such event the holders of Senior
Indebtedness outstanding at the time such Securities so become due and payable
shall be entitled to receive payment in full of all amounts due on or in respect
of such Senior Indebtedness, or provision shall be made for such payment in
money or money's worth, before the Holders of the Securities are entitled to
receive any payment (including any payment which may be payable by reason of the
payment of any other indebtedness of the Company being subordinated to the
payment of the Securities) by the Company on account of the principal of or
premium, if any, or interest on the Securities or on account of the purchase or
other acquisition of Securities.
In the event that, notwithstanding the foregoing, the Company
shall make any payment to the Trustee or the Holder of any Security prohibited
by the foregoing provisions of this Section, and if such fact shall, at or prior
to the time of such payment, have been made known to the Trustee or such Holder,
as the case may be, then and in such event such payment shall be paid over the
delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment
with respect to which Section 1302 would be applicable.
SECTION 1304. No Payment When Senior Indebtedness in Default.
(a) In the event and during the continuation of any default in
the payment of principal of or premium, if any, or interest on any Senior
Indebtedness beyond any applicable grace period with respect thereto, or in the
event that any event of default with respect to any Senior Indebtedness shall
have occurred and be continuing and shall have resulted in such Senior
Indebtedness becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable, unless and until such
event of default shall have been cured or waived or shall have ceased to exist
and such acceleration shall have been rescinded or annulled, or (b) in the event
any judicial proceeding shall be pending with respect to any such default in
payment or event of default, then no payment (including any payment which may be
payable by reason of the payment of any other indebtedness of the Company being
subordinated to the payment of the Securities) shall be made by the Company on
account of the principal of or premium, if any, or interest on the Securities or
on account of the purchase or other acquisition of Securities.
In the event that, notwithstanding the foregoing, the Company
shall make any payment to the Trustee or the Holder of any Security prohibited
by the foregoing provisions of this Section, and if such fact shall, at or prior
to the time of such payment, have been made known to the Trustee or such Holder,
as the case may be, then and in such event such payment shall be paid over and
delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment
with respect to
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which Section 1302 would be applicable.
SECTION 1305. Payment Permitted If No Default.
Nothing contained in this Article or elsewhere in this
Indenture or in any of the Securities shall prevent (a) the Company, at any time
except during the pendency of any case, proceeding, dissolution, liquidation or
other winding up, general assignment for the benefit of creditors or other
marshalling of assets and liabilities of the Company referred to in Section 1302
or under the conditions described in Section 1303 or 1304, from making payments
at any time of principal of and premium, if any, or interest on the Securities,
or (b) the application by the Trustee of any money deposited with it hereunder
to the payment of or on account of the principal of and premium, if any, or
interest on the Securities or the retention of such payment by the Holders, if,
at the time of such application by the Trustee, it did not have knowledge that
such payment would have been prohibited by the provisions of this Article.
SECTION 1306. Subrogation to Rights of Holders of Senior
Indebtedness.
Subject to the payment in full of all amounts due on or in
respect of Senior Indebtedness, the Holders of the Securities shall be
subrogated to the extent of the payments or distributions made to the holders of
such Senior Indebtedness pursuant to the provisions of this Article (equally and
ratably with the holders of all indebtedness of the Company which by its express
terms is subordinated to other indebtedness of the Company to substantially the
same extent as the Securities are subordinated and is entitled to like rights of
subrogation) to the rights of the holders of such Senior Indebtedness to receive
payments and distributions of cash, property and securities applicable to the
Senior Indebtedness until the principal of and premium, if any, and Interest on
the Securities shall be paid in full. For purposes of such subrogation, no
payments or distributions to the holders of the Senior Indebtedness of any cash,
property or securities to which the Holders of the Securities or the Trustee
would be entitled except for the provisions of this Article, and no payments
over pursuant to the provisions of this Article to the holders of Senior
Indebtedness by Holders of the Securities or the Trustee, shall, as among the
Company, its creditors other than holders of Senior Indebtedness and the Holders
of the Securities, be deemed to be a payment or distribution by the Company to
or on account of the Senior Indebtedness.
SECTION 1307. Provisions Solely to Define Relative Rights.
The provisions of this Article are and are intended solely for
the purpose of defining the relative rights of the Holders of the Securities on
the one hand and the holders of Senior Indebtedness on the other hand. Nothing
contained in this Article or elsewhere in this Indenture or in the Securities is
intended to or shall (a) impair, as among the Company, its creditors other than
holders of Senior Indebtedness and the Holders of the Securities, the obligation
of the Company, which is absolute and unconditional, to pay to the Holders of
the Securities the principal of and premium, if any, and interest on the
Securities as and when the same shall become due and payable in accordance with
their
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terms; or (b) affect the relative rights against the Company or the Holders of
the Securities and creditors of the Company other than the holders of Senior
Indebtedness; or (c) prevent the Trustee or the Holder of any Security from
exercising all remedies otherwise permitted by applicable law upon default under
this Indenture, subject to the rights, if any, under this Article of the holders
of Senior Indebtedness to receive cash, property and securities otherwise
payable or deliverable to the Trustee or such Holder.
SECTION 1308. Trustee to Effectuate Subordination.
Each holder of a Security by its acceptance thereof authorizes
and directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article and
appoints the Trustee its attorney-in-fact for any and all such purposes.
SECTION 1309. No Waiver of Subordination Provisions.
No right of any present or future holder of any Senior
Indebtedness to enforce subordination as herein provided shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms, provisions and covenants
of this Indenture, regardless of any knowledge thereof any such holder may have
or be otherwise charged with.
Without in any way limiting the generality of the foregoing
paragraph, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article or
the obligations hereunder of the Holders of the Securities to the holders of
Senior Indebtedness, do any one or more of the following: (i) change the manner,
place or terms of payment or extend the time of payment of, or renew or alter,
Senior Indebtedness, or otherwise amend or supplement in any manner Senior
Indebtedness or any instrument evidencing the same or any agreement under which
Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise
deal with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (iii) release any Person liable in any manner for the collection
of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights
against the Company and any other Person.
SECTION 1310. Notice to Trustee.
The Company shall give prompt written notice to the Trustee of
any fact known to the Company which would prohibit the making of any payment to
or by the Trustee in respect of the Securities. Notwithstanding the provisions
of this Article or any other provision of this Indenture, the Trustee shall not
be charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice
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thereof from the Company or a holder of Senior Indebtedness or from any trustee
therefor; and, prior to the receipt of any such written notice, the Trustee,
subject to the provisions of Section 601, shall be entitled in all respects to
assume that no such facts exist; provided, however, that if the Trustee shall
not have received the notice provided for in this Section at least four Business
Days prior to the date upon which by the terms hereof any money may become
payable for any purpose (including, without limitation, the payment of the
principal of and premium, if any, or interest on any Security), then, anything
herein contained to the contrary notwithstanding, the Trustee shall have full
power and authority to receive such money and to apply the same to the purpose
for which such money was received and shall not be affected by any notice to the
contrary which may be received by it within four Business Days prior to such
date.
Subject to the provisions of Section 601, the Trustee shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a trustee
therefor) to establish that such notice has been given by a holder of Senior
Indebtedness (or a trustee therefor). In the event that the Trustee determines
in good faith that further evidence is required with respect to the right of any
Person as a holder of Senior Indebtedness to participate in any payment or
distribution pursuant to this Article, the Trustee may request such Person to
furnish evidence to the reasonable satisfaction of the Trustee as to the amount
of Senior Indebtedness held by such Person, the extent to which such Person is
entitled to participate in such payment or distribution and any other facts
pertinent to the rights of such Person under this Article, and if such evidence
is not furnished, the Trustee may defer any payment to such Person pending
judicial determination as to the right of such Person to receive such payment.
SECTION 1311. Reliance on Judicial Order or Certificate of
Liquidating Agent.
Upon any payment or distribution of assets of the Company
referred to in this Article, the Trustee, subject to the provisions of Section
601, and the Holders of the Securities shall be entitled to rely upon any order
or decree entered by any court of competent jurisdiction in which such
insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution,
winding up or similar case or proceeding is pending, or a certificate of the
trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for
the benefit of creditors, agent or other Person making such payment or
distribution, delivered to the Trustee or to the Holders of Securities, for the
purpose of ascertaining the Persons entitled to participate in such payment or
distribution, the holders of the Senior Indebtedness and other indebtedness of
the Company, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article.
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SECTION 1312. Trustee Not Fiduciary for Holders of Senior
Indebtedness.
The Trustee shall not be deemed to owe any fiduciary duty to
the holders of Senior Indebtedness and shall not be liable to any such holders
if it shall in good faith mistakenly pay over or distribute to Holders of
Securities or to the Company or to any other Person cash, property or securities
to which holders of Senior Indebtedness shall be entitled by virtue of this
Article or otherwise. With respect to the holders of Senior Indebtedness, the
Trustee undertakes to perform or to observe only such of its covenants and
obligations as are specifically set forth in this Article, and no implied
covenants or obligations with respect to the holders of Senior Indebtedness
shall be read into this Article against the Trustee.
SECTION 1313. Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights.
The Trustee in its individual capacity shall be entitled to
all the rights set forth in this Article with respect to any Senior Indebtedness
which may at any time be held by it, to the same extent as any other holder of
Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of
any of its rights as such holder.
Nothing in this Article shall apply to claims of, or payments
to, the Trustee under or pursuant to Section 607.
SECTION 1314. Article Applicable to Paying Agents.
In case at any time any Paying Agent other than the Trustee
shall have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article shall in such case (unless the context
otherwise requires) be construed as extending to and including such Paying Agent
within its meaning as fully for all intents and purposes as if such Paying Agent
were named in this Article in addition to or in place of the Trustee; provided,
however, that Section 1313 shall not apply to the Company or any Affiliate of
the Company if it or such Affiliate acts as Paying Agent.
SECTION 1315. Certain Conversions Deemed Payment.
For the purposes of this Article only, (1) the issuance and
delivery of junior securities upon conversion of Securities in accordance with
Article Fourteen shall not be deemed to constitute a payment or distribution on
account of the principal of or premium or interest on Securities or on account
of the purchase or other acquisition of Securities, and (2) the payment,
issuance or delivery of cash, property or securities (other than junior
securities) upon conversion of a Security shall be deemed to constitute payment
on account of the principal of such Security. For the purposes of this Section,
the term "junior securities" means (a) shares of any class of capital stock of
the Company and (b) securities of the Company which are subordinated in right of
payment to all Senior Indebtedness which may be outstanding at the time of
issuance or delivery of such securities to
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substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article. Nothing contained in this
Article or elsewhere in this Indenture or in the Securities is intended to or
shall impair, as among the Company, its creditors other than holders of Senior
Indebtedness and the Holders of the Securities, the right, which is absolute and
unconditional, of the Holder of any Security to convert such Security in
accordance with Article Thirteen.
SECTION 1316. No Suspension of Remedies.
Nothing contained in this Article shall limit the right of the
Trustee or the Holders of the Securities to take any action to accelerate the
maturity of the Securities pursuant to the provisions described under Article
Five and as set forth in this Indenture or to pursue any rights or remedies
hereunder or under applicable law, subject to the rights, if any, under this
Article of the holders, from time to time, of Senior Indebtedness to receive the
cash, property or securities receivable upon the exercise of such rights or
remedies.
ARTICLE FOURTEEN
Conversion of Securities
SECTION 1401. Conversion Privilege and Conversion Price.
Subject to and upon compliance with the provisions of this
Article, at the option of the Holder thereof, any Security or any portion of the
principal amount thereof which equals $1,000 or any integral multiple thereof
may be converted at any time after the 60th day following the date of original
issuance of Securities under this Indenture at the principal amount thereof, or
of such portion thereof, into fully paid and nonassessable shares (calculated as
to each conversion to the nearest 1/100 of a share) of Common Stock, at the
conversion price, determined as hereinafter provided, in effect at the time of
conversion. Such conversion right shall expire at the close of business on June
1, 2003. In case a Security or portion thereof is called for redemption, such
conversion right in respect of the Security or portion so called shall expire at
the close of business on the second business day preceding the applicable
Redemption Date, unless the Company defaults in making the payment due upon
redemption.
The price at which shares of Common Stock shall be delivered
upon conversion (herein called the "conversion price") shall be initially $28.20
per share of Common Stock. The conversion price shall be adjusted in certain
instances as provided in paragraphs (a), (b), (c), (d), (e), (f) and (i) of
Section 1404.
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SECTION 1402. Exercise of Conversion Privilege.
In order to exercise the conversion privilege, the Holder of
any Security shall surrender such Security, duly endorsed or assigned to the
Company or in blank, at any office or agency of the Company maintained pursuant
to Section 1002, accompanied by written notice to the Company in the form
provided in the Security (or such other notice as is acceptable to the Company)
at such office or agency that the Holder elects to convert such Security or, if
less than the entire principal amount thereof is to be converted, the portion
thereof to be converted. Securities surrendered for conversion during the period
from the opening of business on any Regular Record Date next preceding any
Interest Payment Date to the close of business on such Interest Payment Date
shall (except in the case of Securities or portions thereof which have been
called for redemption) be accompanied by payment in New York Clearing House
funds or other funds acceptable to the Company of an amount equal to the
interest payable on such Interest Payment Date on the principal amount being
surrendered for conversion. Except as provided in the immediately preceding
sentence and subject to the fourth paragraph of Section 307, no payment or
adjustment shall be made upon any conversion on account of any interest accrued
on the Securities surrendered for conversion or on account of any dividends on
the Common Stock issued upon conversion.
Securities shall be deemed to have been converted immediately
prior to the close of business on the day of surrender of such Securities for
conversion in accordance with the foregoing provisions, and at such time the
rights of the Holders of such Securities as Holders shall cease, and the Person
or Persons entitled to receive the Common Stock issuable upon conversion shall
be treated for all purposes of the record holder or holders of such Common Stock
as and after such time. As promptly as practicable on or after the conversion
date, the Company shall issue and shall deliver at such office or agency a
certificate or certificates for the number of full shares of Common Stock
issuable upon conversion, together with payment in lieu of any fraction of a
share, as provided in Section 1403.
In the case of any Security which is converted in part only,
upon such conversion the Company shall execute and the Trustee shall
authenticate and deliver to the Holder thereof, at the expense of the Company, a
new Security or Securities of authorized denominations in aggregate principal
amount equal to the unconverted portion of the principal amount of such
Security.
SECTION 1403. Fractions of Shares.
No fractional share of Common Stock shall be issued upon
conversion of Securities. If more than one Security shall be surrendered for
conversion at one time by the same Holder, the number of full shares which shall
be issuable upon conversion thereof shall be computed on the basis of the
aggregate principal amount of the Securities (or specified portions thereof) so
surrendered. Instead of any fractional share of Common Stock which would
otherwise be issuable upon conversion of any Security or Securities (or
specified portions thereof), the Company shall pay a cash adjustment in respect
of such
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fraction in an amount equal to the same fraction of the Closing Price (as
hereinafter defined) at the close of business on the day of conversion (or, if
such day is not a Trading Day (as hereafter defined), on the Trading Day
immediately preceding such day).
SECTION 1404. Adjustment of Conversion Price.
(a) In case the Company shall pay or make a dividend or other
distribution on the Common Stock exclusively in Common Stock or shall pay or
make a dividend or other distribution on any other class of capital stock of the
Company which dividend or distribution includes Common Stock, the conversion
price in effect at the opening of business on the day following the date fixed
for the determination of shareholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such conversion price by a fraction
of which the numerator shall be the number of shares of Common Stock outstanding
at the close of business on the date fixed for such determination and the
denominator shall be the sum of such number of shares and the total number of
shares constituting such dividend or other distribution, such reduction to
become effective immediately after the opening of business on the day following
the date fixed for such determination. For the purpose of this paragraph (a),
the number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company. The Company shall not pay any
dividend or make any distribution on shares of Common Stock held in the treasury
of the Company.
(b) Subject to paragraph (g) of this Section, in case the
Company shall pay or make a dividend or other distribution on the Common Stock
consisting exclusively of, or shall otherwise issue to all holders of the Common
Stock, rights or warrants entitling the holders thereof to subscribe for or
purchase shares of Common Stock at a price per share less than the Current
Market Price (determined as provided in paragraph (h) of this Section) on the
date fixed for the determination of shareholders entitled to receive such rights
or warrants, the conversion price in effect at the opening of business on the
day following the date fixed for such determination shall be reduced by
multiplying such conversion price by a fraction of which the numerator shall be
the number of shares of Common Stock outstanding at the close of business on the
date fixed for such determination plus the number of shares of Common Stock
which the aggregate of the offering price of the total number of shares of
Common Stock so offered for subscription or purchase would purchase at such
Current Market Price and the denominator shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. For the purposes of this paragraph (b), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company. The Company shall not issue any rights or warrants in
respect of shares of Common Stock held in the treasury of the Company.
(c) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the conversion price
in effect at the opening
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of business on the day following the day upon which such subdivision becomes
effective shall be proportionately reduced, and, conversely, in case outstanding
shares of Common Stock shall be combined into a smaller number of shares of
Common Stock, the conversion price in effect at the opening of business on the
day following the day upon which such combination becomes effective shall be
proportionately increased, such reduction or increase, as the case may be, to
become effective immediately after the opening of business on the day following
the day upon which subdivision or combination becomes effective.
(d) Subject to the last sentence of this paragraph (d) and to
paragraph (g) of this Section, in case the Company shall, by dividend or
otherwise, distribute to all holders of the Common Stock evidences of its
indebtedness, shares of any class of its capital stock, cash or other assets
(including securities, but excluding any rights or warrants referred to in
paragraph (b) of this Section, excluding any dividend or distribution paid
exclusively in cash and excluding any dividend or distribution referred to in
paragraph (a) of this Section), the conversion price shall be reduced by
multiplying the conversion price in effect immediately prior to the close of
business on the date fixed for the determination of shareholders entitled to
such distribution by a fraction of which the numerator shall be the Current
Market Price (determined as provided in paragraph (h) of this Section) on such
date less the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) on such
date of the portion of the evidences of indebtedness, shares of capital stock,
cash and other assets to be distributed applicable to one share of Common Stock
and the denominator shall be such Current Market Price, such reduction to become
effective immediately prior to the opening of business on the day following such
date. If the Board of Directors determines the fair market value of any
distribution for purposes of this paragraph (d) by reference to the actual or
when-issued trading market for any securities comprising part or all of such
distribution, it must in doing so consider the prices in such market over the
same period used in computing the Current Market Price pursuant to paragraph (h)
of this Section, to the extent possible. For purposes of this paragraph (d), any
dividend or distribution that includes shares of Common Stock, rights or
warrants to subscribe for or purchase shares of Common Stock or securities
convertible into or exchangeable for shares of Common Stock shall be deemed to
be (x) a dividend or distribution of the evidences of indebtedness, cash, assets
or shares of capital stock other than such shares of Common Stock, such rights
or warrants or such convertible or exchangeable securities (making any
conversion price reduction required by this paragraph (d)) immediately followed
by (y) in the case of such shares of Common Stock or such rights or warrants, a
dividend or distribution thereof (making any further conversion price reduction
required by paragraph (a) and (b) of this Section, except any shares of Common
Stock included in such dividend or distribution shall not be deemed "outstanding
at the close of business on the date fixed for such determination" within the
meaning of paragraph (a) of this Section), or (z) in the case of such
convertible or exchangeable securities, a dividend or distribution of the number
of shares of Common Stock as would then be issuable upon the conversion or
exchange thereof, whether or not the conversion or exchange of such securities
is subject to any conditions (making any further conversion price reduction
required by paragraph (a) of this Section, except the shares deemed to
constitute such dividend or distribution shall not be deemed "outstanding
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at the close of business on the date fixed for such determination" within the
meaning of paragraph (a) of this Section).
(e) In case the Company shall, by dividend or otherwise, at
any time distribute to all holders of the Common Stock cash (excluding any cash
that is distributed as part of a distribution referred to in paragraph (d) of
this Section or in connection with a transaction to which Section 1411 applies)
in an aggregate amount that, together with (A) the aggregate amount of any other
distributions to all holders of the Common Stock made exclusively in cash within
the 12 months preceding the date fixed for the determination of shareholders
entitled to such distribution and in respect of which no conversion price
adjustment pursuant to this paragraph (e) has been made previously and (B) the
aggregate of any cash plus the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution) as of such date of determination of consideration payable in respect
of any tender offer by the Company or a Subsidiary for all or any portion of the
Common Stock consummated within the 12 months preceding such date of
determination and in respect of which no conversion price adjustment pursuant to
paragraph (f) of this Section has been made previously, exceeds the greater of
(I) 12.5% of the product of the Current Market Price (determined as provided in
paragraph (h) of this Section) on such date of determination times the number of
shares of Common Stock outstanding on such date or (II) the Company's retained
earnings on the date fixed for determining the stockholders entitled to such
distribution the conversion price shall be reduced by multiplying the conversion
price in effect immediately prior to the close of business on such date of
determination by a fraction of which the numerator shall be the Current Market
Price (determined as provided in paragraph (h) of this Section) on such date
less the amount of cash to be distributed at such time applicable to one share
of Common Stock and the denominator shall be such Current Market Price, such
reduction to become effective immediately prior to the opening of business on
the day after such date.
(f) In case a tender offer made by the Company or any
Subsidiary for all or any portion of the Common Stock shall be consummated and
such tender offer shall involve an aggregate consideration having a fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) as of the last time (the
"Expiration Time") that tenders may be made pursuant to such tender offer (as it
shall have been amended) that, together with (A) the aggregate of the cash plus
the fair market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a Board Resolution) as of the
Expiration Time of the other consideration paid in respect of any other tender
offer by the Company or a Subsidiary for all or any portion of the Common Stock
consummated within the 12 months preceding the Expiration Time and in respect of
which no conversion price adjustment pursuant to this paragraph (f) has been
made previously and (B) the aggregate amount of any distributions to all holders
of the Common Stock made exclusively in cash within the 12 months preceding the
Expiration Time and in respect of which no conversion price adjustment pursuant
to paragraph (e) of this Section has been made previously, exceeds the greater
of (I) 12.5% of the product of the Current Market Price (determined as provided
in paragraph (h) of this Section) immediately prior to the Expiration Time times
the number of shares of
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Common Stock outstanding (including any tendered shares) at the Expiration Time
or (II) the Company's retained earnings as of the Expiration Time, the
conversion price shall be reduced by multiplying the conversion price in effect
immediately prior to the Expiration Time by a fraction of which the numerator
shall be (x) the product of the Current Market Price (determined as provided in
paragraph (h) of this Section) immediately prior to the Expiration Time times
the number of shares of Common Stock outstanding (including any tendered shares
at the Expiration Time minus (y) the fair market value (determined as aforesaid)
of the aggregate consideration payable to shareholders upon consummation of such
tender offer and the denominator shall be the product of (A) such Current Market
Price times (B) such number of outstanding shares at the Expiration Time minus
the number of shares accepted for payment in such tender offer (the "Purchased
Shares"), such reduction to become effective immediately prior to the opening of
business on the day following the Expiration Time; provided, that if the number
of Purchased Shares or the aggregate consideration payable therefor have not
been finally determined by such opening of business, the adjustment required by
this paragraph (f) shall, pending such final determination, be made based upon
the preliminarily announced results of such tender offer, and, after such final
determination shall have been made, the adjustment required by this paragraph
(f) shall be made based upon the number of Purchased Shares and the aggregate
consideration payable therefor as so finally determined.
(g) The reclassification of Common Stock into securities which
include securities other than Common Stock (other than any reclassification upon
a consolidation or merger to which Section 1411 applies) shall be deemed to
involve (i) a distribution of such securities other than Common Stock to all
holders of Common Stock (and the effective date of such reclassification shall
be deemed to be "the date fixed for the determination of shareholders entitled
to such distribution" within the meaning of paragraph (d) of this Section), and
(ii) a subdivision or combination, as the case may be, of the number of shares
of Common Stock outstanding immediately prior to such reclassification into the
number of shares of Common Stock outstanding immediately thereafter (and the
effective date of such reclassification shall be deemed to be "the day upon
which such subdivision becomes effective" or "the day upon which such
combination becomes effective", as the case may be, and "the day upon which such
subdivision or combination becomes effective" within the meaning of paragraph
(c) of this Section).
Rights or warrants issued by the Company to all holders of the
Common Stock entitling the holders thereof to subscribe for or purchase shares
of Common Stock (either initially or under certain circumstances), which rights
or warrants (i) are deemed to be transferred with such shares of Common Stock,
(ii) are not exercisable and (iii) are also issued in respect of future
issuances of Common Stock, in each case in clauses (i) through (iii) until the
occurrence of a specified event or events ("Trigger Event"), shall for purposes
of this Section 1404 not be deemed issued until the occurrence of the earliest
Trigger Event. If any such rights or warrants, including any such existing
rights or warrants distributed prior to the date of this Indenture are subject
to subsequent events, upon the occurrence of each of which such rights or
warrants shall become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the occurrence of each such event
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shall be deemed to be such date of issuance and record date with respect to new
rights or warrants (and a termination or expiration of the existing rights or
warrants without exercise by the holder thereof). In addition, in the event of
any distribution (or deemed distribution) of rights or warrants, or any Trigger
Event with respect thereto, that was counted for purposes of calculating a
distribution amount for which an adjustment to the Conversion Price under this
Section 1404 was made, (1) in the case of any such rights or warrant which shall
all have been redeemed or repurchased without exercise by any holders thereof,
the Conversion Price shall be readjusted upon such final redemption or
repurchase to give effect to such distribution or Trigger Event, as the case may
be, as though it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder or holders of Common Stock with respect to
such rights or warrants (assuming such holder had retained such rights or
warrants), made to all holders of Common Stock as of the date of such redemption
or repurchase, and (2) in the case of such rights or warrants which shall have
expired or been terminated without exercise by any holders thereof, the
Conversion Price shall be readjusted as if such rights and warrants had not been
issued.
Notwithstanding any other provision of this Section 1404 to
the contrary, rights, warrants, evidences of indebtedness, other securities,
cash or other assets (including, without limitation, any rights distributed
pursuant to any stockholder rights plan) shall be deemed not to have been
distributed for purposes of this Section 1404 if the Company makes proper
provision so that each holder of Securities who converts a Security (or any
portion thereof) after the date fixed for determination of stockholders entitled
to receive such distribution shall be entitled to receive upon such conversion,
in addition to the shares of Common Stock issuable upon such conversions, the
amount and kind of such distributions that such holder would have been entitled
to receive if such holder had, immediately prior to such determination date,
converted such Security into Common Stock.
(h) For the purpose of any computation under this paragraph
and paragraphs (b), (d) and (e) of this Section, the current market price per
share of Common Stock (the "Current Market Price") on any date shall be deemed
to be the average of the daily Closing Prices for the five consecutive Trading
Days selected by the Company commencing not more than 20 Trading Days before,
and ending not later than, the date in question; provided, however, that (i) if
the "ex" date for any event (other than the issuance or distribution requiring
such computation) that requires an adjustment to the conversion price pursuant
to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or after the 20th
Trading Day prior to the date in question and prior to the "ex" date for the
issuance or distribution requiring such computation, the Closing Price for each
Trading Day prior to the "ex" date for such other event shall be adjusted by
multiplying such Closing Price by the same fraction by which the conversion
price is so required to be adjusted as a result of such other event, (ii) if the
"ex" date for any event (other than the issuance or distribution requiring such
computation) that requires an adjustment to the conversion price pursuant to
paragraph (a), (b), (c), (d), (e) or (f) above occurs on or after the "ex" date
for the issuance or distribution requiring such computation and on or prior to
the date in question, the Closing Price for each Trading Day on and after the
"ex" date for such other event shall be adjusted by multiplying such Closing
Price by the reciprocal of the fraction by which the
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conversion price is so required to be adjusted as a result of such other event,
and (iii) if the "ex" date for the issuance or distribution requiring such
computation is on or prior to the date in question, after taking into account
any adjustment required pursuant to clause (ii) of this proviso, the Closing
Price for each Trading Day on or after such "ex" date shall be adjusted by
adding thereto the amount of any cash and the fair market value on the date in
question (as determined by the Board of Directors in a manner consistent with
any determination of such value for purposes of paragraph (d) or (e) of this
Section, whose determination shall be conclusive and described in a Board
Resolution) of the evidences of indebtedness, shares of capital stock or assets
being distributed applicable to one share of Common Stock as of the close of
business on the day before such "ex" date. For the purpose of any computation
under paragraph (f) of this Section, the Current Market Price on any date shall
be deemed to be the average of the daily Closing Prices for the five consecutive
Trading Days selected by the Company commencing on or after the latest (the
"Commencement Date") of (i) the date 20 Trading Days before the date in
question, (ii) the date of commencement of the tender offer requiring such
computation and (iii) the date of the last amendment, if any, of such tender
offer involving a change in the maximum number of shares for which tenders are
sought or a change in the consideration offered, and ending not later than the
Expiration Time of such tender offer; provided, however, that if the "ex" date
for any event (other than the tender offer requiring such computation) that
requires an adjustment to the conversion price pursuant to paragraph (a), (b),
(c), (d), (e) or (f) above occurs on or after the Commencement Date and prior to
the Expiration Time for the tender offer requiring such computation, the Closing
Price for each Trading Day prior to the "ex" date for such other event shall be
adjusted by multiplying such Closing Price by the same fraction by which the
conversion price is so required to be adjusted as a result of such other event.
The closing price for any Trading Day (the "Closing Price") shall be the last
reported sales price regular way or, in case no such reported sale takes place
on such day, the average of the reported closing bid and asked prices regular
way, in either case on the New York Stock Exchange or, if the Common Stock is
not listed or admitted to trading on such exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading
or, if not listed or admitted to trading on any national securities exchange, on
the Nasdaq Stock Market's National Market or, if the Common Stock is not listed
or admitted to trading on any national securities exchange or quoted on such
National Market, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
selected from time to time by the Company for that purpose. For purposes of this
paragraph, the term "Trading Day" means each Monday, Tuesday, Wednesday,
Thursday and Friday, other than any day on which securities are generally not
traded on the applicable securities exchange or in the applicable securities
market and the term "'ex' date," (i) when used with respect to any issuance or
distribution, means the first date on which the Common Stock trades regular way
on the relevant exchange or in the relevant market from which the Closing Prices
were obtained without the right to receive such issuance or distribution, (ii)
when used with respect to any subdivision or combination of shares of Common
Stock, means the first date on which the Common Stock trades regular way on such
exchange or in such market after the time at which such subdivision or
combination becomes effective, and (iii) when used with respect to any tender
offer means the first date on which the Common Stock
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trades regular way on such exchange or in such market after the last time that
tenders may be made pursuant to such tender offer (as it shall have been
amended).
(i) The Company may make such reductions in the conversion
price, in addition to those required by paragraphs (a), (b), (c), (d), (e) and
(f) of this Section, as it considers to be advisable (as evidenced by a Board
Resolution) in order that any event treated for federal income tax purposes as a
dividend of stock or stock rights shall not be taxable to the recipients or, if
that is not possible, to diminish any income taxes that are otherwise payable
because of such event.
(j) No adjustment in the conversion price shall be required
unless such adjustment (plus any other adjustments not previously made by reason
of this paragraph (j)) would require an increase or decrease of at least 1% in
the conversion price; provided, however, that any adjustments which by reason of
this paragraph (j) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
(k) Notwithstanding any other provision of this Section 1404,
no adjustment to the conversion price shall reduce the conversion price below
the then par value per share of the Common Stock, and any such purported
adjustment shall instead reduce the conversion price to such par value. The
Company hereby covenants not to take any action to increase the par value per
share of the Common Stock.
SECTION 1405. Notice of Adjustments of Conversion Price.
Whenever the conversion price is adjusted as herein provided:
(a) the Company shall compute the adjusted conversion price in
accordance with Section 1404 and shall prepare an Officers' Certificate
signed by the Treasurer of the Company setting forth the adjusted
conversion price and showing in reasonable detail the facts upon which
such adjustment is based, and such certificate shall forthwith be filed
(with a copy to the Trustee) at each office or agency maintained for
the purpose of conversion of Securities pursuant to Section 1002; and
(b) a notice stating that the conversion price has been
adjusted and setting forth the adjusted conversion price shall
forthwith be prepared, and as soon as practicable after it is prepared,
such notice shall be mailed by the Company to all Holders at their last
addresses as they shall appear in the Security Register.
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SECTION 1406. Notice of Certain Corporate Action.
In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable (i) otherwise than
exclusively in cash or (ii) exclusively in cash in an amount that would
require a conversion price adjustment pursuant to paragraph (e) of
Section 1404; or
(b) the Company shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any other rights (excluding
shares of capital stock or option for capital stock issued pursuant to
a benefit plan for employees, officers or directors of the Company); or
(c) of any reclassification of the Common Stock (other than a
subdivision or combination of the outstanding shares of Common Stock),
or of any consolidation, merger or share exchange to which the Company
is a party and for which approval of any shareholders of the Company is
required, or of the sale or transfer of all or substantially all of the
assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(e) the Company or any Subsidiary shall commence a tender
offer for all or a portion of the outstanding shares of Common Stock
(or shall amend any such tender offer to change the maximum number of
shares being sought or the amount or type of consideration being
offered therefor);
then the Company shall cause to be filed at each office or agency maintained
pursuant to Section 1002, and shall cause to be mailed to all Holders at their
last addresses as they shall appear in the Security Register, at least 21 days
(or 11 days in any case specified in clause (a), (b) or (e) above) prior to the
applicable record, effective or expiration date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution or granting of rights or warrants, or, if a record is not
to be taken, the date as of which the holders of Common Stock of record who will
be entitled to such dividend, distribution, rights or warrants are to be
determined, (y) the date on which such reclassification, consolidation, merger,
share exchange, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up, or (z) the date on which such tender
offer commenced, the date on which such tender offer is scheduled to expire
unless extended, the consideration offered and the other material terms thereof
(or the material terms of any amendment thereto).
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Neither the failure to give any such notice nor any defect therein shall affect
the legality or validity of any action described in clauses (a) through (e) of
this Section 1406.
SECTION 1407. Company to Reserve Common Stock.
The Company shall at all times reserve and keep available,
free from preemptive rights, out of the authorized but unissued Common Stock or
out of the Common Stock held in treasury, for the purpose of effecting the
conversion of Securities, the full number of shares of Common Stock then
issuable upon the conversion of all outstanding Securities. Shares of Common
Stock issuable upon conversion of outstanding Securities shall be issued out of
the Common Stock held in Treasury to the extent available.
SECTION 1408. Taxes on Conversions.
The Company will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock on conversion of
Securities pursuant hereto. The Company shall not, however, be required to pay
any tax which may be payable in respect of any transfer involved in the issue
and delivery of shares of Common Stock in a name other than that of the Holder
of the Security or Securities to be converted, and no such issue or delivery
shall be made unless and until the Person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax has been paid.
SECTION 1409. Covenant as to Common Stock.
The Company covenants that all shares of Common Stock which
may be issued upon conversion of Securities will upon issue be fully paid and
nonassessable and, except as provided in Section 1408, the Company will pay all
taxes, liens and charges with respect to the issue thereof.
SECTION 1410. Cancellation of Converted Securities.
All Securities delivered for conversion shall be delivered to
the Trustee to be canceled by or at the direction of the Trustee, which shall
dispose of the same as provided in Section 309.
SECTION 1411. Provisions of Consolidation, Merger or Sale of Assets.
In case of any consolidation of the Company with, or merger of
the Company into, any other Person, any merger of another Person into the
Company (other than a merger which does not result in any reclassification,
conversion, exchange or cancellation of outstanding shares of Common Stock) or
any sale or transfer of all or substantially all of the assets of the Company,
the Person formed by such consolidation or resulting from such merger or which
acquires such assets, as the case may be, shall execute and deliver to the
Trustee a supplemental indenture providing that the Holder of each Security then
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Outstanding shall have the right thereafter, during the period such Security
shall be convertible as specified in Section 1401, to convert such Security only
into the kind and amount of securities, cash and other property, if any,
receivable upon such consolidation, merger, sale or transfer by a holder of the
number of shares of Common Stock into which such Security might have been
converted immediately prior to such consolidation, merger, sale or transfer,
assuming such holder of Common Stock (i) is not a Person with which the Company
consolidated or into which the Company merged or which merged into the Company
or to which such sale or transfer was made, as the case may be (a "Constituent
Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise
his rights of election, if any, as to the kind or amount of securities, cash and
other property receivable upon such consolidation, merger, sale or transfer
(provided that if the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer is not the same for
each share of Common Stock held immediately prior to such consolidation, merger,
sale or transfer by other than a Constituent Person or an Affiliate thereof and
in respect of which such rights of election shall not have been exercised
("nonelecting share"), then for the purpose of this Section the kind and amount
of securities, cash and other property receivable upon such consolidation,
merger, sale or transfer by each nonelecting share shall be deemed to be the
kind and amount so receivable per share by a plurality of the nonelecting
shares). Such supplemental indenture shall provide for adjustments which, for
events subsequent to the effective date of such supplemental indenture, shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Article. The above provisions of this Section shall similarly apply to
successive consolidations, mergers, sales or transfers.
SECTION 1412. Trustee's Disclaimer.
The Trustee has no duty to determine when an adjustment under
this Article Fourteen should be made, how it should be made or what such
adjustment should be, but may accept as conclusive evidence of the correctness
of any such adjustment, and shall be protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 1405. The Trustee makes no representation as to the
validity or value of any securities or assets issued upon conversion of
Securities, and the Trustee shall not be responsible for the Company's failure
to comply with any provisions of this Article Fourteen.
The Trustee shall not be under any responsibility to determine
the correctness of any provisions contained in any supplemental indenture
executed pursuant to Section 1411, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 1411.
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ARTICLE FIFTEEN
Right to Require Repurchase
SECTION 1501. Right to Require Repurchase.
In the event that there shall occur a Repurchase Event (as
defined in Section 1506), then each Holder shall have the right, at such
Holder's option, to require the Company to purchase, and upon the exercise of
such right, the Company shall, subject to the provisions of Section 1303,
purchase, all or any part of such Holder's Securities on the date (the
"Repurchase Date") that is 30 days after the date the Company gives notice of
the Repurchase Event as contemplated in Section 1502(a) at a price (the
"Repurchase Price") equal to 100% of the principal amount thereof, together with
accrued and unpaid interest to the Repurchase Date.
SECTION 1502. Notice; Method of Exercising Repurchase Right.
(a) On or before the 15th day after the occurrence of a
Repurchase Event, the Company, or at the request of the Company received by the
Trustee at least 40 days prior to the Repurchase Date, the Trustee (in the name
and at the expense of the Company), shall give notice of the occurrence of the
Repurchase Event and of the repurchase right set forth herein arising as a
result thereof by first-class mail, postage prepaid, to the Trustee and to each
Holder of the Securities at such Holder's address appearing in the Security
Register.
Each notice of a repurchase right shall state:
(1) the event constituting the Repurchase Event and the date
thereof,
(2) the Repurchase Date,
(3) the date by which the repurchase right must be exercised,
(4) the Repurchase Price, and
(5) the instructions a Holder must follow to exercise a
repurchase right.
No failure of the Company to give the foregoing notice shall
limit any Holder's right to exercise a repurchase right. The Trustee shall have
no affirmative obligation to determine if there shall have occurred a Repurchase
Event.
(b) To exercise a repurchase right, a Holder shall deliver to
the Company (or an agent designated by the Company for such purpose in the
notice referred to in (a) above) and to the Trustee on or before the close of
business on the Repurchase Date (i) written notice of the Holder's exercise of
such right, which notice shall set forth the name
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<PAGE>
of the Holder, the principal amount of the Security or Securities (or portion of
a Security) to be repurchased, and a statement that an election to exercise the
repurchased right is being made thereby, and (ii) the Security or Securities
with respect to which the repurchase right is being exercised, duly endorsed for
transfer to the Company. Such written notice shall be irrevocable. If the
Repurchase Date falls between any Regular Record Date and the next succeeding
Interest Payment Date, Securities to be repurchased must be accompanied by
payment from the Holder of an amount equal to the interest thereon which the
registered Holder thereof is to receive on such Interest Payment Date.
In the event a repurchase right shall be exercised in
accordance with the terms hereof, the Company shall on the Repurchase Date pay
or cause to be paid in cash to the Holder thereof the Repurchase Price of the
Security or Securities as to which the repurchase right had been exercised. In
the event that a repurchase right is exercised with respect to less than the
entire principal amount of a surrendered Security, the Company shall execute and
deliver to the Trustee and the Trustee shall authenticate for issuance in the
name of the Holder a new Security or Securities in the aggregate principal
amount of the unrepurchased portion of such surrendered security.
SECTION 1503. Deposit of Repurchase Price.
On or prior to the Repurchase Date, the Company shall deposit
with the Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 1003) an amount
of money in same day funds sufficient to pay the Repurchase Price of the
Securities which are to be repaid on the Repurchase Date.
SECTION 1504. Securities Not Repurchased on Repurchase Date.
If any Security surrendered for repurchase shall not be so
paid on the Repurchase Date, the principal shall, until paid, bear interest to
the extent permitted by applicable law from the Repurchase Date at the rate per
annum borne by such Security.
SECTION 1505. Securities Repurchased in Part.
Any Security which is to be repurchased only in part shall be
surrendered at any office or agency of the Company designated for that purpose
pursuant to Section 1002 (with, if the Company or the Trustee so requires, due
endorsement by, or written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and deliver to the Holder of such Security without service
charge, a new Security or Securities of any authorized denomination as requested
by such Holder, in aggregate principal amount equal to and in exchange for the
unrepurchased portion of the principal of the Security so surrendered.
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<PAGE>
SECTION 1506. Certain Definitions.
For purposes of this Article:
(a) A "Repurchase Event" shall have occurred upon the occurrence of a
Change in Control after the date of this Indenture and on or prior to June 1,
2003.
(b) 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);
(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 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 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 (other
than a Permitted Holder) which would constitute a "group" for purposes
of Section 13(d) of the Exchange Act (a "Group"), 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; or
(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 662/3% 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.
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-----------------------------
95
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This instrument may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
PHYMATRIX CORP.
By: __________________________________
Name:
Title:
Attest:
________________________________
CHEMICAL BANK,
as Trustee
By: __________________________________
Name:
Title:
Attest:
________________________________
<PAGE>
)
) ss.
)
On the 26th day of June, 1996, before me personally came
Frederick R. Leathers, to me known, who, being by me duly sworn, did depose and
say that he is Chief Financial Officer and Treasurer of PhyMatrix Corp., one of
the corporations described in and which executed the foregoing instrument; that
he knows the seal of said corporation; that the seal affixed to said instrument
is such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
________________________________
)
) ss.:
)
On the 26th day of June, 1996, before me personally came
Gregory P. Shea, to me known, who, being by me duly sworn, did depose and say
that he is Senior Trust Officer of Chemical Bank, a New York banking corporation
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such seal; that
it was so affixed by authority of the Board of Directors of said corporation;
and that he signed his name thereto by like authority.
/s/ Annabelle DeLuca
<PAGE>
EXHIBIT A
[FORM OF CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR
REGISTRATION OF TRANSFER OF SECURITIES]
CERTIFICATE FOR EXCHANGE OR TRANSFER
Re: PhyMatrix Corp. 6-3/4% Convertible Subordinated Debentures due 2003
This Certificate relates to $_________ principal amount of
Securities held in *____________ book-entry or *____________ definitive form by
_________ (the "Transferor").
The Transferor*:
[ ] has requested the Trustee by written order to deliver in exchange
for its beneficial interest in the Global Security held by the Depositary a
Security or Securities in definitive, registered form of authorized
denominations and an aggregate principal amount equal to its beneficial interest
in such Global Security (or the portion thereof indicated above); or
[ ] has requested the Trustee by written order to deliver in exchange
for its Security or Securities a beneficial interest in the Global Security held
by the Depositary in a principal amount equal to the aggregate principal amount
of such Security or Securities; or
[ ] has requested the Trustee by written order to exchange or register
the transfer of a Security or Securities.
In connection with such request and in respect of each such
security, the Transferor does hereby certify to the Company and the Trustee that
Transferor is familiar with the Indenture relating to the above captioned
Debentures and, as provided in Section 305 of such Indenture, the transfer of
this Security does not require registration under the Securities Act (as defined
below) because*:
[ ] Such Security is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 305(b)(ii)(A), Section 305(g)(iii)
or Section 305(f)(i)(A) of the Indenture).
[ ] Such Security is being transferred to a "qualified institutional
buyer" (as defined in Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act")) in reliance on Rule 144A or pursuant to an exemption
from registration in accordance with
- --------
* Check applicable box.
A-1
<PAGE>
Regulation S under the Securities Act (in satisfaction of Section 305(b)(ii)(B),
Section 305(c)(i), Section 305(d)(i), Section 305(f)(i)(B), Section 305(g)(iii)
or Section 305(h)(iii) of the Indenture). If such Security is being transferred
in accordance with Regulation S under the Securities Act, an opinion of counsel
to the effect that such transfer does not require registration under the
Securities Act accompanies this Certificate (in satisfaction of Section
305(b)(ii)(B), Section 305(f)(i)(B), Section 305(g)(iii) or Section 305(h)(iii)
of the Indenture).
[ ] Such Security is being transferred in accordance with Rule 144
under the Securities Act (in satisfaction of Section 305(b)(ii)(B), Section
305(f)(i)(B), Section 305(g)(iii), Section 305(h)(iii) or Section 305(k)(ii) of
the Indenture). An opinion of counsel to the effect that such transfer does not
require registration under the Securities Act accompanies this Certificate (in
satisfaction of Section 305(b)(ii)(B), Section 305(f)(i)(B), Section
305(g)(iii), Section 305(h)(iii) or Section 305(k)(ii) of the Indenture).
[ ] Such Security is being transferred pursuant to an effective
registration statement under the Securities Act (in satisfaction of Section
305(k)(ii) of the Indenture).
[ ] Such Security is being transferred in reliance on and in compliance
with an exemption from the registration requirements of the Securities Act,
other than Rule 144A, 144 or Regulation S under the Securities Act. An opinion
of counsel to the effect that such transfer does not require registration under
the Securities Act accompanies this Certificate (in satisfaction of Section
305(b)(ii)(C), Section 305(f)(i)(B), Section 305(g)(iii) or Section 305(h)(iii)
of the Indenture).
You are entitled to rely upon this certificate and you are
irrevocably authorized to produce this certificate or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby.
_____________________________________
[INSERT NAME OF TRANSFEROR]
By: _________________________________
Date: _________________________
A-2
<PAGE>
EXHIBIT B
GUARANTY
Reference is made to the Indenture dated as of June 15, 1996 (the "Indenture")
between PhyMatrix Corp. (the "Company") and Chemical Bank (the "Trustee")
regarding up to $115,000,000 in aggregate principal amount of the 6-3/4%
Convertible Subordinated Debentures due 2003 of the Company. As used herein,
capitalized terms shall have the meanings defined in the Indenture. Each of the
undersigned corporations is a Wholly Owned Subsidiary of the Company.
For value received, each of the undersigned corporations severally
guarantees to the Trustee and to the Holders the punctual payment of the
Obligations under the Indenture, as the direct and primary obligation of the
undersigned, waiving all demands and suretyship defenses.
In the event that any of the undersigned corporations shall no longer
be 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, such
corporation shall be thereupon released from all liability hereunder.
* * *
A-3
<PAGE>
SCHEDULE I
Guarantors
Wholly-owned subsidiaries of PhyMatrix Corp.
CCC Duramed, Inc. (a Florida corporation)
CCC Infusion, Inc. (a Florida corporation)
CCC Indiana Lithrotripsy, Inc. (a Florida corporation)
CCC National Lithrotripsy, Inc. (a Florida corporation)
DASCO Development Corporation (a Florida corporation)
DASCO Development West, Inc. (a California corporation)
Lithrotripsy America, Inc. (a Florida corporation)
Oncology Therapies of America, Inc. (a Florida corporation)
PhyMatrix of Atlanta, Inc. (a Delaware corporation)
PhyMatrix of Central Georgia, Inc. (a Delaware corporation)
PhyMatrix Management Company, Inc. (a Florida corporation)
PhyMatrix Physician Management, Inc. (a Delaware corporation)
Pinnacle Associates, Inc. (a Georgia corporation)
Wholly-owned subsidiary of CCC Infusion, Inc.
Nutrichem, Inc. (a Maryland Corporation)
Wholly-owned subsidiaries of Oncology Therapies of America, Inc.
Oncology Therapies, Inc. (a Delaware corporation)
Wholly-owned subsidiaries of Oncology Therapies, Inc.
Atlanta Radiation Care, Inc. (a Delaware corporation)
Biltmore Advanced Imaging Center, Inc. (an Arizona corporation)
Charlotte Radiation Care, Inc. (a Delaware corporation)
Chattanooga Radiation Care, Inc. (a Delaware corporation)
College Park Radiation Care, Inc. (a Delaware corporation)
Computerized Tomography Center, Inc. (a Delaware corporation)
Falls Church Radiation Care, Inc. (a Delaware corporation)
Greenville Radiation Care, Inc. (a Delaware corporation)
Montgomery Radiation Care at Baptist, Inc. (a Delaware corporation)
Montgomery Radiation Care, Inc. (a Delaware corporation)
Nashville Radiation Care, Inc. (a Delaware corporation)
North Atlanta Radiation Care, Inc. (a Delaware corporation)
North Fulton Radiation Care, Inc. (a Delaware corporation)
Northern Virginia Radiation Care, Inc. (a Delaware corporation)
Orlando Radiation Care, Inc. (a Delaware corporation)
Rockville Radiation Care, Inc. (a Delaware corporation)
University Place Radiation Care, Inc. (a Delaware corporation)
Vista Radiation Care, Inc. (a Delaware corporation)
Waldorf Radiation Care, Inc. (a Delaware corporation)
A-4
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of the 27th day of July, 1994 between CCC
of Massachusetts, Inc., a Delaware corporation (the "Company") and William A.
Sanger (hereinafter "Employee").
WHEREAS, the Company believes it is in the Company's best interest to
employ Employee, and Employee desires to be employed by the Company; and
WHEREAS, the Company and Employee desire to set forth the terms and
conditions on which Employee shall be employed by and provide his services to
the Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereby agree as follows:
1. Employment. The Company hereby employs Employee and Employee hereby
accepts such employment, all upon the terms and conditions hereinafter set
forth.
2. Term. Unless sooner terminated pursuant to the provisions of this
Agreement, the initial term of employment under this Agreement shall be for a
period of three (3) years commencing on the date hereof (the "Effective Date")
and ending on the third (3rd) anniversary of the Effective Date. The term of
employment under this Agreement shall thereafter be automatically renewed upon
the then existing terms and conditions of this Agreement, for successive periods
of one (1) year commencing upon the expiration of the initial term of employment
under this Agreement or any renewal term and ending on the first (1st)
anniversary of the commencement of such renewal term unless either the Company
or Employee provides the other with written notice of its election to not renew
the term of employment under this Agreement at least ninety (90) days, but no
more than one hundred eighty (180) days, prior to the expiration of the then
existing term of this Agreement (the initial three (3) year term and all
successive renewal terms of employment are collectively referred to herein as
the "Employment Period").
3. Salary.
------
(a) Except as provided in Section 3(b), Employee shall be
entitled to receive a salary from the Company during the Employment Period at
the rate of Three Hundred Thousand and No/100 Dollars ($300,000.00) per annum
(the "Salary"). The Salary shall be payable in equal installments in accordance
with the normal payroll policies of the Company, which policies may be changed
by the Company from time to time in its sole discretion, but in no event less
frequently than monthly, and shall be subject to all appropriate withholding
taxes. Employee's Salary and other compensation under this Agreement may be
allocated to and paid by any other member entity of the Health Care Group or
Consolidated Entity (as such term's are hereinafter defined), if any, as
determined from time to time by the Board of Directors of the Company.
<PAGE>
(b) Notwithstanding the foregoing, in the event that due to
notice requirements under Employee's existing employment arrangement Employee is
unable to devote his entire business time, energy and skill to the service of
the Company as required under Section 6 of this Agreement immediately upon the
Effective Date of this Agreement, Employee shall devote such of his entire
business time, energy and skill as is possible and in any event shall devote his
entire business time, energy and skill to the service of the Company as required
under Section 6 of this Agreement no later than September 30, 1994. During such
transitional time, Employee shall be compensated at an hourly rate of $144.23
per hour based upon time sheets submitted by Employee specifying the services
performed and the amount of time expended.
4. Benefits; Bonuses.
-----------------
(a) The Salary provided for in Section 3 shall be in addition
to such benefits and bonus programs as the Company, in its sole and absolute
discretion, shall from time to time provide to the company's officers. Such
benefits and bonus programs are subject to change from time to time as
determined by the Board of Directors of the Company; provided, however, in no
event shall the vacation, sick day and car allowance benefits afforded the
Employee on the Effective Date hereof be reduced. The current benefits and bonus
programs which the Company shall provide to Employee are as set forth on the
Schedule of Benefits and Bonus Programs attached hereto as Exhibit "A" and made
a part hereof.
(b) Notwithstanding the foregoing, Employee shall not be
entitled to such benefits and bonus programs until such time as Employee is able
to devote his entire business time, energy and skill to the service of the
Company as required under Section 6 of this Agreement as more fully described in
Section 3(b).
5. Participation.
-------------
(a) Contemplated Structure. The Company, either directly or
through one or more subsidiaries or commonly controlled affiliated entities,
which may or may not be treated as consolidated subsidiaries for tax or
financial reporting purposes, ("Affiliates") intends to engage in certain
businesses in the health care and senior housing industries. There are, however,
no assurances as to which businesses the Company or its Affiliates shall engage
in. It is acknowledged and agreed that the Affiliates may be a single
corporation, partnership, business trust, or other business entity, or a number
of corporations, partnerships, business trusts or other business entities. The
Company or such of its Affiliates as engage in the business of the development
and operation of ventures which provide medical services will hereinafter be
collectively be referred to as the "Medical Services Operations Affiliate." The
Company and any Affiliates will hereinafter be referred to as the "Health Care
Group." It is contemplated, but not assured, that ownership interests in some or
all of the businesses comprising the Health Care Group shall be offered for sale
to the general public pursuant to one or more underwritten initial public
offering(s) of securities.
-2-
<PAGE>
Prior to such time, if necessary or desirable to facilitate an initial public
offering or for other reasons, some or all of the Health Care Group may be
restructured or reorganized into a single entity or group of entities which are
consolidated for financial reporting purposes to include the financial condition
and results of operations of some or all of the entities comprising the Health
Care Group. This single entity or group of consolidated entities which continues
or succeeds to the business of some or all of the Health Care Group will
hereinafter be referred to as a "Consolidated Entity" and more than one
Consolidated Entity may be formed from the businesses constituting the Health
Care Group.
(b) Interest in Health Care Group. Upon the later of (i)
thirty (30) days following the Effective Date of this Agreement or (ii) the
acquisition or formation of each Affiliate in the Health Care Group, Employee
shall be issued such ownership interests as are necessary, which may be in the
form of shares of capital stock, partnership interests or other indicia of
ownership, to provide Employee with a uniform, aggregate initial one percent
(1%) equity ownership interest in the Health Care Group. Such interest(s) shall
hereinafter be referred to as the "Parent Ownership Interests," and shall be
issued to Employee in exchange for aggregate consideration of One Hundred Eighty
Thousand Dollars (U.S. $180,000), which consideration shall be payable
immediately and as a condition to receipt of such Parent Ownership Interests.
Employee acknowledges that his initial one percent (1%) equity ownership in the
Health Care Group may be reduced in the discretion of the Board of Directors of
the Company through a subsequent issuance(s) of ownership interests in a
financing or acquisition transaction, provided that the value received by the
Health Care Group in exchange for such issuance of ownership interests equals or
exceeds the fair market value of such ownership interests.
Employee will pay for the Parent Ownership Interests with a
non-recourse promissory note bearing interest at the lowest rate imputed by the
provisions of the Internal Revenue Code (which interest shall accrue and be
payable upon the maturity of such note) and payable to the order of the Company,
the repayment of which shall be secured by a pledge of all of the rights, title
and interest of Employee in and to the interests received under this Section
5(b) and Section 5(c) pursuant to such instruments of security as may be
reasonably requested by the company to grant it a perfected first priority lien
upon and security interest in such interests (which instruments shall, however,
permit Employee to receive the benefits and privileges of such interests until
the occurrence of a default by Employee under such note). The principal of and
interest accrued upon such note shall mature and be payable in full upon the
earliest to occur of (i) the repurchase of such Parent ownership Interests (or
resulting Shares) pursuant to this Agreement by the Company or an Affiliate for
any reason provided herein or (ii) the closing date of an underwritten initial
public offering of securities of a Consolidated Entity in which the Employee has
been issued Shares (as such term is hereinafter defined) or (iii) the sale or
merger of a Consolidated Entity in a transaction pursuant to which it is not the
surviving entity and in which Employee receives either cash or securities which
can be readily sold for cash (provided, however, that the principal of and
interest accrued upon such note shall mature and be payable in such event only
up to the amount of cash, or securities which can be readily sold for cash,
-3-
<PAGE>
received by Employee if such amount is less than the principal of and interest
accrued upon such note).
Upon the restructure or reorganization of some or all of the
Health Care Group into a Consolidated Entity, Employee agrees to exchange his
Parent Ownership Interests in those Affiliates in the Health Care Group which
become such Consolidated Entity for a portion of the common stockholders equity
or equivalent of such Consolidated Entity such that Employee will own the same
percentage ownership interest of such Consolidated Entity as he did in those
Affiliates in the Health Care Group which become part of such Consolidated
Entity immediately prior to the restructure or reorganization. Employee further
agrees to take all steps necessary, including providing consents, approvals or
affirmative votes, to permit the restructure or reorganization to occur upon the
request of the Board of Directors of the Company.
(c) Interest, in Employee's Affiliate in Health Care Group. In
addition to the Parent Ownership Interests issued to Employee under Section 5(b)
upon the later of (i) thirty (30) days following the Effective Date of this
Agreement or (ii) the acquisition or formation of the Medical Services
Operations Affiliate or any Affiliate constituting the medical Services
operations Affiliate, Employee shall be issued such ownership interests as are
necessary, which may be in the form of shares of capital stock, partnership
interests or other indicia of ownership, to provide Employee with a uniform,
aggregate initial five percent (5%) equity ownership interest in the Medical
Services Operations Affiliate. Such interest(s) shall hereinafter be referred to
as the "Affiliate Ownership Interests." Employee acknowledges that his initial
five percent (5%) equity ownership in the Medical Services Operations Affiliate
may be reduced in the discretion of the Board of Directors of the Company
through a subsequent issuance(s) or ownership interests in a financing or
acquisition transaction, provided that the value received by the Medical
Services operations Affiliate in exchange for such issuance of ownership
interests equals or exceeds the fair market value of such ownership interests.
Upon the restructure or reorganization of some or all of the Medical
Services Operations Affiliate or the Affiliates constituting the Medical
Services Operations Affiliate into a Consolidated Entity, Employee agrees to
exchange his Affiliate Ownership interests in the Medical Services Operations
Affiliate and each Affiliate constituting the Medical Services Operations
Affiliate which becomes part of such Consolidated Entity for a portion of the
common stockholders' equity or equivalent in an amount deemed the economic
equivalent of five percent (5%) of the market value of those Affiliates in the
Medical Services Operations Affiliate which become part of such Consolidated
Entity immediately prior to such restructure or reorganization as determined by
the investment bank underwriting such initial public offering, which market
value shall be calculated in such a manner as to ensure that the aggregate
market value of the component entities of such Consolidated Entity does not
exceed the market value of such Consolidated Entity. Absent fraud or manifest
error, the calculations and determinations of the investment bank underwriting
such initial public offering shall be conclusive and binding upon all parties.
-4-
<PAGE>
Employee further agrees to take all steps necessary, including providing
consents, approvals or affirmative votes, to permit the restructure or
reorganization to occur upon the request of the Board of Directors of the
Company.
(d) Transferability of Shares. The ownership interests of
Employee in the Consolidated Entity, whether received pursuant to Section 5(b)
or 5(c) herein, shall hereinafter be referred to as "Shares," and the term
"Securities" shall hereinafter refer to the Parent Ownership Interests, the
Affiliate Ownership Interests and the Shares.
Employee acknowledges and agrees that the Securities shall not be sold,
donated or transferred (other than as-described below) except if a Consolidated
Entity becomes a publicly-traded company as described herein.
Employee represents and warrants with respect to the Securities that:
(i) Employee has such knowledge and experience in
financial, investment and business matters that he is capable of
evaluating the merits and risks of the respective investment in the
Securities being offered on the terms and conditions set forth herein
and understands the nature and business of the Medical Services
Operations Affiliate, Health Care Group or Consolidated Entity and has
had and will continue to have access to all information, financial or
otherwise, with respect to the Medical Services Operations Affiliate,
Health Care Group or Consolidated Entity during business hours, at the
Company's offices in Palm Beach County, Florida; and
(ii) that there are substantial restrictions on the
transferability of the Securities as evidenced above and the
restrictive legend which shall appear on each certificate representing
each of the Securities, there is presently no public market for the
Securities and no assurances have been given that there will ever be a
public market in the future for the Securities in which case Employee
may have to hold the Securities and it may not be possible for Employee
to liquidate his investment in the Medical Services Operations
Affiliate, Health Care Group or Consolidated Entity.
(e) Option Eligibility. Employee may be awarded options or
other similar rights to purchase common stock or other ownership interests in
the Medical Services Operations Affiliate, Health Care and/or stock appreciation
or other similar rights, in such amounts and with such terms as determined by
the Company's Board of Directors, in its sole and absolute discretion, after
taking into consideration Employee's position, salary and actual and anticipated
contribution to the Medical Services operations Affiliate, Health Care Group,
Consolidated Entity and their member entities.
(f) No Other Rights. Employee shall have no rights to
receive any ownership interests in the Medical Services Operations Affiliate,
Health Care Group, Consolidated Entity or their member entities other than
pursuant to Section 5(b),
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Section 5(c) or the ownership interests acquired as a result of exercising the
stock options, if any, provided pursuant to Section 5(e).
(g) Occurrence of Initial Public Offering.
-------------------------------------
(1) In the event a Consolidated Entity successfully
completes an underwritten initial public offering which includes all or some of
the member entities of the Medical Services operations Affiliate of the Health
Care Group, all Securities of such Consolidated Entity to be issued to Employee
pursuant to Section 5(b) and Section 5(c) shall be registered by the
Consolidated Entity at its expense and in the same registration statement as
used by such Consolidated Entity to effect its initial public offering or such
other registration statement as such Consolidated Entity may choose to permit
free transferability by Employee of the Shares substantially contemporaneously
with the closing of such initial public offering. Employee agrees that the
Shares will be issued subject to possible restrictions on transfer as required
by applicable federal and state securities laws and as reasonably required by
the underwriters in such Consolidated Entity's initial public offering. If such
restrictions restrict Employee from selling all or any portion of such Shares
following the initial public offering, (i) Employee shall be permitted to sell
such portion of his Shares as applicable law or the underwriters permit to be
sold based upon his pro rata share of the total number of shares which
applicable law or the underwriters permit to be sold by the shareholders of such
Consolidated Entity and (ii) such Consolidated Entity shall, at Employee's
option, either purchase a number of Shares from Employee at the public offering
price or provide Employee with a loan, in either case, sufficient to repay the
note referred to above and to pay federal, state or local taxes incurred on the
receipt of such Shares, after taking into consideration the portion of such
Shares Employee is permitted to sell if he is permitted to sell only a portion
of such Shares. Any loan made to Employee pursuant to this section shall be
evidenced by a non-recourse, promissory note bearing interest at the lowest rate
imputed by the Internal Revenue Code (which interest shall accrue and be payable
upon maturity of such note) and payable to the order of the Company, the
repayment of which shall be secured by a pledge of all of the rights, title and
interest of Employee in and to the Shares received by him pursuant to such
instruments of security as may be reasonably requested by the Company to grant
it a perfected first priority lien upon and security interest in such Shares
(which instruments shall, however, permit Employee to receive the benefits and
privileges of such Shares until the occurrence of a default by Employee under
such note). The principal of and interest accrued upon such note shall mature
and be payable in full upon the earliest date upon which such Shares can readily
be sold for cash or readily transferable securities which can be sold for cash.
(2) In the event a Consolidated Entity successfully
completes an underwritten initial public offering and such Consolidated Entity
does not include all of the member entities of the Medical Services operations
Affiliate of the Health Care Group, (i) the Securities of the Consolidated
Entity to be issued to Employee pursuant to Section 5(b) or section 5(c) hereof
shall be registered by the Consolidated Entity in the same manner and subject to
the same restrictions as are set forth above in Section 5(g)(1)(i) and (ii) at
the
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<PAGE>
election of Employee (which election must be exercised thirty (30) days
prior to the closing of such initial public offering), all rights of Employee
pursuant to Section 5(b) or Section 5(c) hereof shall continue in full force and
effect with respect to any subsequent underwritten initial public offering of
another Consolidated Entity (subject, however, to the provisions of Section 5(h)
and Section 5(i) hereof), or, with respect solely to any remaining Affiliate
Ownership Interests, such interests shall be repurchased from the Employee by
the Company within thirty (30) days following such election for a sum equal to
five percent (5%) of the increase in the retained earnings of such of the
Affiliates in the Medical Services Operations Affiliate as are not included in
such Consolidated Entity as measured between the Effective Date of this
Agreement and the month-end immediately preceding the date of such election.
(h) Termination of Employment Agreement Prior to Initial
----------------------------------------------------
Public Offering.
---------------
(1) In the event that, prior to the date upon which a
Consolidated Entity successfully completes an underwritten initial public
offering (regardless of whether all or any of the Services Operations Affiliate
of the Health Care Group is included in such initial Public offering), this
Agreement is terminated by the Company pursuant to Section 10(b), (i) the
Securities issued to Employee pursuant to Section 5(b) shall be subject to
repurchase by the Company at Employee's cost by way of the Company releasing and
discharging Employee from all duties and obligations under the note described in
Section 5(b) and (ii) all securities issued to pursuant to Section 5(c) shall be
subject to repurchase by Employee Company at a total aggregate price of One
Dollar ($1.00).
(2) In the event that, prior to the date upon which a
consolidated Entity successfully completes an underwritten initial public
offering (regardless of whether all or any of the Medical Services Operations
Affiliate of the Health Care Group is included in such initial public offering),
this Agreement is terminated by the Company pursuant to Section 10(a), this
Agreement is terminated by the Employee pursuant to Section 11 or this Agreement
is terminated pursuant to Section 12, (i) the Securities issued to Employee
pursuant to Section 5(b) shall be subject to repurchase by the Company at the
then fair market value thereof at any time within thirty (30) days following
such termination and (ii) the Securities issued to Employee pursuant to Section
5(c) shall be subject to repurchase by the Company (a) at the election of
Employee, for a sum equal to five percent (5%) of the increase in the retained
earnings of the Medical Services Operations Affiliate as measured between the
Effective Date of this Agreement and the month-end immediately preceding the
date of such termination if such election is exercised on or before the third
(3rd) anniversary of the Effective Date of this Agreement or a sum equal to the
then fair market value of such Securities in the event such election is
exercised after the third (3rd) anniversary of the Effective Date of this
Agreement but on or before the fifth (5th) anniversary of the Effective Date of
this Agreement, which purchase shall occur within thirty (30) days following
such election or (b) at the election of the Company, a sum equal to the then
fair market value of such Securities, regardless of when such election is
exercised, which purchase shall occur within thirty (30) days following such
election.
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<PAGE>
(i) Expiration of Employment Agreement Prior to Initial Public
Offering. In the event that a Consolidated Entity has not successfully completed
an underwritten initial public offering on or before the end of the initial term
of employment under this Agreement (or any subsequent renewal thereof) and:
(1) the term of employment under this Agreement is
renewed, the provisions of this Section 5 shall remain in full force and effect;
or
(2) Employee elects not to renew the term of employment
under this Agreement in accordance with Section 2, (a) at any time on or before
the second (2nd) anniversary of the expiration of the term of this Agreement, at
the election of Employee (i) the Company shall be obligated to repurchase the
Securities issued to Employee under Section 5(b) at Employee's cost by way of
the Company releasing and discharging Employee from all duties and obligations
under the note described above and/or (ii) the Company shall be obligated to
purchase all Securities issued to Employee under Section 5(c) for a sum equal to
five percent (5%) of the increase in the retained earnings of the Medical
Services Operations Affiliate as measured between the Effective Date of this
Agreement and the month-end immediately preceding the date of expiration of this
Agreement, which purchases shall occur within thirty (30) days following such
elections and (b) at the election of the Company, at any time on or before the
second (2nd) anniversary of the expiration of this Agreement, but in any event
on the second (2nd) anniversary of the expiration of this Agreement, (i) the
Securities issued to Employee pursuant to Section 5(b) shall be repurchased by
the Company at the then fair market value of such Securities and (ii) the
Securities issued to Employee to Section 5(c) hereof shall be repurchased by the
Company for a sum equal to five percent (5%) of the increase in the retained
earnings of the Medical Services Operations Affiliate as measured between the
Effective Date of this Agreement and the month-end immediately Preceding the
date of such termination, which purchases shall occur within thirty (30) days
following such election(s);
(3) The Company elects not to renew the term of
employment under this Agreement in accordance with Section 2, (a) at any time on
or before the second (2nd) anniversary of the expiration of the term of this
Agreement, at the election of the Employee, Employee may (i) require the Company
to repurchase the Securities issued to Employee pursuant to Section 5(b) at the
then fair market value of such Securities and/or (ii) require the Company to
repurchase the Securities issued to Employee pursuant to Section 5(c) by paying
to Employee at the then fair market value of such Securities, which purchases
shall occur within thirty (30) days following such elections and (b) at the
election of the Company, any time after the second (2nd) anniversary of the
expiration of the term of this Agreement, (i) the Securities issued to Employee
pursuant to Section 5(b) shall be subject to repurchase by the Company at the
then fair market value of such Securities and/or (ii) the Securities issued to
Employee pursuant to Section 5(c) shall be subject to repurchase by the Company
at a sum equal to the then fair market value of such securities, which purchases
shall occur within thirty (30) days following such election(s).
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<PAGE>
(j) Valuations. In the event of a determination of the then
fair market value of the Securities issued to Employee pursuant to Section 5(b)
or Section 5(c) in accordance with any of the foregoing terms and provisions,
such fair market value shall be determined at the expense of the Company by an
investment bank chosen by the Company that regularly underwrites public
offerings on Form 3-1 which investment bank shall value such interest as a
minority, noncontrolling interest in a privately held company. In the event of a
calculation of the increase in the retained earnings of the Medical Services
Operations Affiliate, to the extent not otherwise reflected in the retained
earnings, there shall be added to the retained earnings the amount of any
distributions made during the time period for which such calculation is being
made. Within sixty (60) days following the Effective Date of this Agreement, the
Company shall provide Employee with a statement of the retained earnings of such
of the Medical Services operations Affiliates as exist on the Effective Date of
this Agreement.
(k) From time to time but in no event more frequently than
once every six (6) months, Employee may request in writing, and the Company
shall provide to Employee within sixty (60) calendar days following the
Company's receipt of such written request, a schedule providing the identity of
each of the entities then constituting the Medical Services Operations
Affiliate, Affiliates and Health Care Group; provided, however, that any such
disclosure shall not prevent, limit or inhibit the ability of Abraham D. Gosman
and/or the Company to determine and control from time to time which entities
constitute the member entities of the Medical Services Operations Affiliate, the
Affiliates, the Health Care Group or a Consolidated Entity.
6. Duties.
------
(a) During the Employment Period, Employee agrees to serve
exclusively as the President and Chief Operating Officer of the Medical Services
Operations Affiliate. Employee shall exercise such powers and comply with and
perform such directions and duties in relation to the business and affairs of
the Medical. Services Operations Affiliate as are customarily and ordinarily
exercised and performed by the president or chief operating officer of similar
entities and as may from time to time be vested in or requested by the Board of
Directors of the Company and shall use his best efforts to improve and expand
the business of the Health Care Group or Consolidated Entity. Notwithstanding
any other term or Provision to the contrary contained herein, in no event shall
Employee be obligated to perform any act which would constitute or require the
violation of any federal, state or local law, rule, regulation, ordinance or the
like. Employee shall at all times report to, and his activities shall at all
times be subject to the direction and control of, the Board of Directors of the
Company. Employee shall have no authority to enter into any contracts binding
upon the company, or to create any obligations on the part of the Company, other
than (i) contracts or obligations imposing obligations on the company in an
amount less than Ten Thousand and No/100 Dollars ($10,000.00) and less than one
(1) year in duration; (ii) purchase orders for goods entered into in the
ordinary course of business; and (iii) such other
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<PAGE>
contracts and obligations as shall be specifically authorized from time to time
by the Company in writing.
(b) Except as otherwise provided in Section 3(b), Employee
agrees to devote his entire business time, energy and skill to the service of
the Medical Services Operations Affiliate of the Health Care Group or
Consolidated Entity, and shall perform his duties in a good faith, trustworthy
and businesslike manner, in compliance with the laws of the United States of
America and all other political subdivisions, all for the purpose of advancing
the interests of the Health Care Group or Consolidated Entity. Employee shall at
no time during the Employment Period engage in any other business activity
whether or not such activity is pursued for gain, profit or other pecuniary
advantage. Notwithstanding the foregoing, provided the same shall not interfere
with the performance by Employee of its duties under this Agreement and shall
not violate the terms and provisions of any other provision of this Agreement
(including, but not limited to, Section 14 of this Agreement), Employee may (i)
invest his personal assets in businesses where the form or manner of such
investment will not require services on the part of Employee and in which his
participation is solely that of a passive investor, (ii) serve on the board of
directors of charitable organizations and (iii) provide direction and
consultation to JFK Medical Center in connection with its current merger
discussions.
7. Location of Company Headquarters. Unless otherwise agreed to in
writing by Employee, the parties hereby agree that Employee shall perform his
duties primarily from the Company's offices in Palm Beach County, Florida, as
the same may be relocated from time to time within Palm Beach County, Florida.
8. Business Expenses. Consistent with the Company's policies as in
effect from time to time (including, but not necessarily limited to, a
satisfactory itemized accounting for such expenditures), Employee shall be
reimbursed for ordinary and necessary expenses incurred in promoting the
business of the Health Care Group or Consolidated Entity.
9. Confidentiality. In the course of this employment, the Health Care
Group or Consolidated Entity may disclose or make known to Employee, and
Employee may be given access to or may become acquainted with, certain
information, trade secrets or both, all relating to or useful in the business of
the Health Care Group or Consolidated Entity (collectively "Information") and
which the Company considers proprietary and desires to maintain confidential.
As a material inducement to the Company in entering this Agreement,
Employee covenants and agrees that during the term of this Agreement and at all
times thereafter, Employee shall not in any manner, either directly or
indirectly, divulge, disclose or communicate to any person or firm, except to or
for the Company's benefit as directed by the Company, any of the Information
which he may have acquired in the course of or as an incident to his employment
by the Company, the parties agreeing that such information affects the
successful and effective conduct of the business and goodwill of the Health Care
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<PAGE>
Group or Consolidated Entity, and that any breach of the terms of this Section
is a material breach of this Agreement. All equipment, documents, memoranda,
reports, records, files, materials, samples, books, correspondence, lists,
computer software, other written and graphic records, and the like
(collectively, the "Materials"), affecting or relating to the business of the
Health Care Group or Consolidated Entity, which Employee shall prepare, use,
construct, observe, possess or control shall be and remain the Company's
exclusive property or in the Company's exclusive custody, and must not be
removed from the premises of the Company or given to any person or entity except
as directed by the Board of the Company in writing or except as necessary or
desirable for the benefit of the Health Care Group or Consolidated Entity.
Promptly upon termination of this Agreement for any reason, or completion of the
tasks or duties assigned pursuant hereto, the Materials, Information and all
copies thereof in the custody or control of Employee shall be delivered promptly
to the Company.
Employee acknowledges that all documents and equipment relating to the
business of the Health Care Group or Consolidated Entity, in addition to all
Information and Materials, whether prepared by Employee or otherwise coming into
Employee's possession, are owned by and constitute the exclusive property of the
Company or in the Company's exclusive custody, and all such documents and
equipment must not be removed from the premises of the Company except as
directed by the Company in writing or except as may be necessary or desirable
for the benefit of the Health Care Group or Consolidated Entity.
The covenants of Employee set forth in this Section 9 are separate and
independent covenants for which valuable consideration has been paid, the
receipt, adequacy and sufficiency of which are acknowledged by Employee, and
have also been made by Employee to induce the Company to enter into this
Agreement. Each of the aforesaid covenants may be availed of, or relied upon, by
the Company in any court of competent jurisdiction, and shall form the basis of
injunctive relief and damages including expenses of litigation (including but
not limited to reasonable attorney's fees upon trial and appeal) suffered by the
Company arising out of any breach of the aforesaid covenants by Employee. The
covenants of Employee set forth in this Section 9 are cumulative to each other
and to another covenants of Employee in favor of the Company contained in this
Agreement and shall survive the termination of this Agreement for the purposes
intended. Should any covenant, term or condition in this Section 9 become or be
declared invalid or unenforceable by a court of competent jurisdiction, then the
parties request that such court judicially modify such unenforceable Provision
consistent with the intent of this Section 9 so that it shall be enforceable as
modified.
10. Events of Termination by the Company. This Agreement may be
terminate Company:
(a) Without cause, effective immediately upon delivery of
written notice to Employee by the Company;
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<PAGE>
(b) With cause, effective immediately upon delivery of written
notice to Employee by the Company, provided, however, that if such cause is of
the type described in clause (iv) below and susceptible to being cured, Employee
shall have a period of ten (10) days after written notice has been given or sent
to Employee to effect such cure or such longer period of time as may be required
for such cure, provided Employee has commenced such cure within such ten (10)
days and is diligently prosecuting such cure. A termination shall be deemed to
be "with cause" if the Company determines that Employee has committed or was
involved in:
(i) wrongful misappropriation of the Medical Services
Operations Affiliate, Health Care Group or
Consolidated Entity assets;
(ii) conviction of a felony involving violence,
dishonesty, conversion, theft or misappropriation
of property of another, controlled substances,
moral turpitude or regulatory good standing of
the Company or its Affiliates;
(iii) drug or alcohol abuse which prevents Employee
from performing substantially his duties in the
manner provided herein; or
(iv) if Employee fails to perform substantially his
duties in the manner provided herein or willfully
refuses to perform the duties assigned to him by
the Company in accordance with Section 6 hereof
for any reason other than disability or breaches
any of his other obligations under this
Agreement.
Employee acknowledges the sensitive nature of the services provided by
the Medical Services Operations Affiliate, Health Care Group and Consolidated
Entity and the importance of their reputation in their fields of endeavors and
Employee agrees that his personal actions which have or are likely to negatively
impact upon the reputation, name, goodwill, business or regulatory standing of
the Medical Services Operations Affiliate, Health Care Group or Consolidated
Entity shall be grounds for termination pursuant to this Section 10(b).
11. Events of Termination by Employee. This Agreement may be terminated
by Employee in the event of the failure of the Company to pay any sums due or
issue any interests to be issued hereunder to Employee or perform substantially
any of its other duties and obligations required to be performed or observed
under this Agreement, after written notice has been given by Employee to the
Company, provided, however, that the Company shall have a period of ten (10)
days from delivery of such notice within which to cure the same or such longer
period of time as may be required for such cure, provided the Company has
commenced such cure within such ten (10) days and is diligently prosecuting such
cure.
12. Other Termination of this Agreement. This Agreement shall
immediately terminate upon the occurrence of any of the following events:
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(a) The death of Employee; or
(b) The disability of Employee for ninety (90) consecutive
days or one hundred eighty (180) days in any 12-month Period, during which
Employee does not substantially perform his duties in accordance with Section 6
hereof or perform any other of his obligations under this Agreement.
13. Effects of Termination. Upon the termination of the
Agreement;
(a) Employee's duties shall cease as of the effective date of
termination, provided, however, that Employee will in all events of termination
be responsible for arranging for the smooth transition of duties to appropriate
independent contractors and/or employees of the Company. In the event that the
Company shall request Employee to provide transitional assistance after the
effective date of termination, Employee shall be paid an hourly rate based upon
an 8 hour work day, a 2,080 hour work year and his then current Salary, based
upon time sheets submitted by Employee specifying the services performed and the
amount of time expended.
(b) With respect to any termination other than one pursuant to
Section 10(a) of this Agreement, payments made on account of Employee's Salary
shall cease upon the effective date of termination; any amounts due on account
of Employee's Salary for account of services performed prior to the effective
date of termination which have not previously bean paid will be paid (pro rata
through the effective date of termination) within thirty (30) days following
termination. With respect to a termination pursuant to Section 10 (a) of this
Agreement, (i) in the event such termination occurs prior to the first
anniversary of the Effective Date of this Agreement, payments on account of
Employee's Salary for the first year of the initial term of employment under
this Agreement shall continue to be paid in accordance with the terms hereof and
payments on account of Employee's Salary shall continue to be paid to Employee
for an additional period of twelve (12) months in equal monthly installments and
in accordance with the normal payroll policies of the Company but in no event
less frequently than monthly and subject to all appropriate withholding taxes or
(ii) in the event such termination occurs on or after the first anniversary of
the Effective Date of this Agreement, payments on account of Employee's Salary
shall continue to be paid to Employee for a period of twelve (12) months
following the effective date of termination in equal installments and in
accordance with the normal payroll policies of the Company but in no event less
frequently than monthly and subject to all appropriate withholding taxes.
(c) All expenses which are properly reimbursable to Employee
pursuant to Section 8 will be promptly reimbursed following termination.
(d) All other benefits and/or entitlements to participate in
bonus programs, if any, will cease as of the effective date of termination,
subject to Employee's rights to continue medical insurance coverage at his own
expense as provided by applicable law
-13-
<PAGE>
or written Company policy; provided, however, that all policies of insurance
relating solely to Employee shall be assigned to Employee within thirty (30)
days following termination, provided that such assignment shall be at no cost or
expense to the Company, and provided further that such assignment shall state
that it is made subject to the terms and conditions of the policy(ies).
(e) The rights, privileges, benefits, remedies and interests
of the Company and Employee under Section 5 of this Agreement shall be governed
by the terms and provisions of Section 5.14.
14. Non-Competition and Solicitation.
--------------------------------
(a) Scope of Area. Employee acknowledges that he has performed
services or will perform services hereunder, and will acquire knowledge and
proprietary information, which will directly affect the business of the Medical
Services Operations Affiliate, Health Care Group and Consolidated Entity to be
conducted anywhere in the United States of America (the "Area"). Accordingly,
the parties deem it necessary to provide protective non-competition and
non-solicitation provisions in this Agreement.
(b) Non-Compete and Non-Solicit. Employee agrees with
the Company that:
(i) Employee shall not, without the prior written
consent of the Company, which consent shall be within the sole and
exclusive discretion of the Company, within the Area, either directly,
or indirectly, perform services or duties, or engage in the same or
similar business as the Medical Services Operations Affiliate of the
Health Care Group or consolidated Entity in any capacity, whether as a
consultant, director, officer, manager, supervisor or employee of any
entity; and
(ii) Employee shall not employ or attempt to employ, or
assist in employing, any employee of the Health Care Group or Consolidated
Entity (whether or not such employment is full-time, part-time, or is pursuant
to a written contract) other than his personal secretary for the purpose of
having such employee perform services for another company located in the Area.
(c) Term. The covenants of Employee set forth in this Section
14 shall commence upon the Effective Date of this Agreement and continue for the
entire Employment Period through the actual date of termination of this
Agreement and/or of the services of Employee, and, in the event of a termination
or expiration of this Agreement pursuant to Section 10(b) of this Agreement,
Section 12(b) of this Agreement in the event Employee shall thereafter recover
from such disability sufficiently to perform his duties and obligations under
this Agreement or an election by Employee not to renew the term of the
Employment Period pursuant to Section 2 of this Agreement, for a period of
twenty-four (24) months after any such termination or expiration.
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<PAGE>
(d) Exclusion. Notwithstanding any provision to the contrary
set forth in this Section 14, nothing contained in this Section 14 shall
prohibit Employee from performing the services and duties of an administrator of
a general acute care hospital from and after the termination or expiration of
this Agreement for any reason whatsoever.
(e) Injunctive Relief. The covenants of Employee set forth in
this Section 14 are separate and independent covenants for which valuable
consideration has been paid, the receipt, adequacy and sufficiency of which are
acknowledged by Employee, and have also been made by Employee to induce the
Company to enter into this Agreement. Each of the aforesaid covenants may be
availed of, or relied upon, by the Company in any court of competent
jurisdiction, and shall form the basis of injunctive relief and damages
including expenses of litigation (including but not limited to reasonable
attorney's fees upon trial and appeal) suffered by the Company arising out of
any breach of the aforesaid covenants by Employee. The covenants of Employee set
forth in this Section 14 are cumulative to each other and to all other covenants
of Employee in favor of the Company contained in this Agreement and shall
survive the termination of this Agreement for the purposes intended. Should any
covenant, term or condition in this Section 14 become or be declared invalid or
unenforceable by a court of competent jurisdiction, then the parties request
that such court judicially modify such unenforceable provision consistent with
the intent of this section 14 so that it shall be enforceable as modified.
15. Indemnity. Employee shall indemnify and hold harmless the Company,
Medical Services Operations Affiliate, Health Care Group, Consolidated Entity
and their agents, directors, officers, employees, invitee's or guests, and any
of the their other contractors, from and against all claims, losses, costs,
damages and expenses (including without limitation, attorneys' fees) relating to
injury to or death of any person or damage to real or personal property
resulting from or arising in connection with any intentional or willful
misconduct by Employee or relating to the activities of Employee described in
sections 6(b)(ii) and 6(b)(iii) of this Agreement.
16. Entire Agreement. This Agreement represents the entire understanding
and agreement between the parties with respect to the subject matter hereof, and
supersedes all other negotiations, understandings and representations (if any)
made by and between such parties.
17. Amendments. The provisions of this Agreement may not be amended,
supplemented, waived or changed orally, but only by a writing signed by the
party as to whom enforcement of any such amendment, supplement, waiver or
modification is sought and making specific reference to this Agreement.
18. Assignments. The Company shall have the right to assign all of its
rights and obligations under this Agreement to any entity which is the Medical
Services Operations Affiliate of the Health Care Group or Consolidated Entity
and, upon such assignment, this Agreement shall be binding upon and inure to the
benefit of such assign. In the event such
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<PAGE>
assignee shall, at the time of such assignment or thereafter, have a net worth
equal to or greater than $3,000,000 CCC of Massachusetts, Inc. shall be released
and discharged from all duties and obligations under this Agreement and Employee
shall execute such instruments as shall be reasonably requested by CCC of
Massachusetts, Inc. to evidence such release. Employee shall have no right to
assign or delegate any rights or obligations under this Agreement.
19. Binding Effect. All of the terms and provisions of this Agreement,
whether so expressed or not, shall be binding upon, inure to the benefit of, and
be enforceable by the parties and their respective administrators, executors,
legal representatives, heirs, successors and permitted assigns.
20. Severability. If any part of this Agreement or any other Agreement
entered into pursuant hereto is contrary to, prohibited by or deemed invalid
under applicable law or regulation, such provision shall be inapplicable and
deemed omitted to the extent so contrary, prohibited or invalid, but the
remainder hereof shall not be invalidated thereby and shall be given full force
and effect so far as possible.
21. Survival. Notwithstanding anything to the contrary herein, the
provisions of Sections 5, 9, 13, 14 and 15 through 28 shall survive and remain
in effect in accordance with their respective terms in the event this Agreement
or any portion hereof is terminated.
22. Notices. All notices, requests, consents and other communications
required or permitted under this Agreement shall be in writing (including telex
and telegraphic communication) and shall be (as elected by the person giving
such notice) hand delivered by messenger or courier service, telecommunicated,
or mailed (airmail if international) by registered or certified mail (postage
prepaid), return receipt requested, addressed to:
If to Employee: With a Copy to:
William A. Sanger Mirkin & Woolf, P.A.
_________________ Flagler Federal Tower, Suite 580
_________________ 1700 Palm Beach Lakes Boulevard
_________________ West Palm Beach, FL 33401
Attention: Mark H. Mirkin, Esq.
-16-
<PAGE>
If to the Company: With a Copy to:
CCC of Massachusetts, Inc. Gunster, Yoakley & Stewart, P.A.
197 First Avenue 777 South Flagler Drive
Needham, MA 02194 Suite 500
Attention: Richard S. Mann, Esq. West Palm Beach, FL 33401
Attention: Thomas P. Hunt, Esq.
or to such other address as any party may designate by notice complying with the
terms of this Section. Each such notice shall be deemed delivered (a) on the
date delivered if by personal delivery, (b) on the date telecommunicated if by
telegraph, (c) on the date of transmission with confirmed answer back if by
telex or telecopy, and (d) on the date upon which the return receipt is signed
or delivery is refused or the notice is designated by the postal authorities as
not deliverable, as the case may be, if mailed.
23. Waivers. The failure or delay of any party at any time to require
performance by another party of any provision of this Agreement, even if known,
shall not affect the right of such party to require performance of that
provision or to exercise any right, power or remedy hereunder, and any waiver by
any party of any breach of any provision of this Agreement should not be
construed as a waiver of any continuing or succeeding breach of such provision,
a waiver of the provision itself, or a waiver of any right, power or remedy
under this Agreement. No notice to or demand on any party in any case shall, of
itself, entitle such party to any other or further notice or demand in similar
or other circumstances.
24. Enforcement Costs. If any legal action or other proceeding is brought
for the enforcement of this Agreement, or because of an alleged dispute, breach,
default or misrepresentation in connection with any provisions of this
Agreement, the successful or prevailing party or parties shall be entitled to
recover reasonable attorney's fees, court costs and all expenses even if not
taxable as court costs (including, without limitation, all such fees, costs and
expenses incident to appeals and other post-judgment proceedings), incurred in
that action or proceeding, in addition to any other relief to which such party
or parties may be entitled. Attorneys' fees shall include, without limitation,
paralegal fees, investigative fees, administrative costs, sales and use taxes
and all other charges billed by the attorney to the prevailing party.
25. Remedies Cumulative. Except as otherwise expressly provided herein,
no remedy herein conferred upon any party is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing at
law or in equity or by statute or otherwise. No single or partial exercise by
any party of any right, power or remedy hereunder shall preclude any other or
further exercise thereof.
-17-
<PAGE>
26. Governing Law. This Agreement and all transactions contemplated by
this Agreement shall be governed by, and construed and enforced in accordance
with, the internal laws of the State of Florida without regard to principles of
conflicts of laws.
27. Supervening Law. The Company and Employee recognize that this
Agreement is subject to applicable state, local and federal laws and
regulations. The Company and Employee further recognize that the Agreement shall
be subject to amendments in such laws and regulations and to new legislation
such as federal or state economic stabilization programs or health insurance
programs. Any provisions of law that invalidate, or are otherwise inconsistent
with the terms of this Agreement or that would cause any party to be in
violation of law, shall be deemed to have superseded the terms of this
Agreement, provided, however, that the parties shall exercise their best efforts
to accommodate the terms and intent of this Agreement to the greatest extent
possible consistent with requirements of law.
28. Captions. The captions in this Agreement are for convenience and
reference only and in no way define, describe, extend or limit the scope of
intent of this Agreement or the intent of any provision contained in this
Agreement.
29. Corporate Matters. The Company represents and warrants that the
current shareholders, officers and directors of the Company are those identified
on Exhibit "B" attached hereto. Within ten (10) business days following the
Effective Date of this Agreement, the Company shall provide Employee with a
certified copy of a resolution of the Company authorizing the execution and
delivery of this Agreement. Additionally, the Company shall take and shall cause
each of its Affiliates to take such actions as are necessary to issue to
Employee such ownership interests in such Affiliates as are contemplated hereby
and shall provide Employee with a certified copy of such resolutions or actions
of the Company and/or such Affiliates authorizing such actions.
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
CCC of Massachusetts, Inc.
By: /s/ Abraham D. Gosman
-----------------------------
Name:________________________
Title:_______________________
/s/ William A. Sanger
--------------------------------
William A. Sanger
<PAGE>
EXHIBIT "A"
Schedule of Benefits and Bonus Programs
---------------------------------------
SEE FOLLOWING SEVEN (7) PAGES
(Effective as of July 26, 1994 but
subject to change from time to time as
determined by the Board of Directors)
-20-
<PAGE>
I. Health Insurance Options
------------------------
HMO Select
Employee Contribution Chart for
CCC - Corporate
(Bi-Monthly Payroll)
<TABLE>
<CAPTION>
=============================================================================================
CIGNA
HMO HCHP PILGRIM TUFTS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COVERAGE
CATEGORY
1% base Salary + 1% Base Salary + 1% Base Salary + 1% Base Salary +
Employee $4.33 Per $9.07 Per $10.30 Per $4.33 Per
Only Pay Period Pay Period Pay Period Pay Period
- ---------------------------------------------------------------------------------------------
1% Base Salary + 1% Base Salary + 1% Base Salary + 1% Base Salary +
Family $50.00 Per $80.91 Per $75.81 Per $50.00 Per
Pay Period Pay Period Pay Period Pay Period
=============================================================================================
</TABLE>
This Contribution Chart describes the Benchmark Contributions and Other
Contributions for each Coverage Category and for each HMO.
Cigna Indemnity
Employee Contributions
(includes dental and drugs)
(Bi-Monthly Payroll)
EMPLOYEE ONLY 1% base salary +
$37.36 per pay period
FAMILY 1% base salary +
$95.97 per pay period
1
<PAGE>
HMO Select
Employee Contribution Chart for
CCC - St. Mary's Rehab Center
(Bi-Weekly Payroll)
================================================================================
HUMANA
(BENCHMARK) CIGNA
- --------------------------------------------------------------------------------
COVERAGE
CATEGORY
1% Base Salary + 1% Base Salary +
Employee $5.50 Per Pay $23.96 Per Pay
Only Period Period
- --------------------------------------------------------------------------------
Employee/On 1% Base Salary + 1% Base Salary +
Dependent $44.00 Per Pay $77.62 Per Pay
Period Period
- --------------------------------------------------------------------------------
Family 1% Base Salary + 1% Base Salary +
$54.00 Per Pay $87.62 Per Pay
Period Period
================================================================================
This Contribution Chart for your Facility describes the Benchmark Contributions
and Other Contributions for each Coverage Category and for each HMO.
-2-
<PAGE>
II. Dental Insurance
----------------
Eligibility: Regular full time employees
who have medical plan
coverage.
Waiting Period: 90 days
Preventative and Diagnostic Services:
Covered at 100% of reasonable
and customary charges without
a deductible.
Restorative Services:
Deductible: Individual $50
Family $150
Basic Restorative: Covered at 80% of reasonable
and customary charges after
the deductible.
Major Restorative: Covered at 50% of reasonable
and customary charges
after the deductible.
Maximum Benefit: $1,000 per calendar year per
covered individual.
Employee Contribution: Individual $2.00/wk
Family $6.00/wk
Employees contributions for dental plan are on a
single pre-tax basis. Coverage is limited to the same
status (single or family) as medical plan coverage.
III. Short Term Disability
---------------------
Eligibility: Regular full time employees
Waiting Period: 90 days
Benefits: Benefits are payable in the
event you are totally disabled
due to a non-occupation
accident or sickness which is
not covered by workers'
compensation.
The benefit is 66 2/3% of
basic weekly earnings rounded
to the next highest $10 to a
maximum of $200 week.
-3-
<PAGE>
Benefits are paid
beginning with the later of:
a) the 14th day of disability
b) the day after you use up
all your accrued sick days.
Benefits will continue for a
maximum of 26 weeks from the
date of disability.
IV. Long Term Disability
--------------------
Eligibility: Regular full time employees
Waiting Period: 90 days
Benefits: Benefits are payable if you
are disabled for 6 months
or more.
The benefit is 66 2/3% of your
basic monthly earning at the
time you are disabled. The
benefit is coordinated with
Social Security.
The minimum benefit is
$100/month and the maximum
benefit is $6,000/per month.
Benefits are payable for the
duration of the qualifying
disability up to age 65.
Employee Contribution: .79% of annual basic earnings.
Example:
-------
Employee makes $7.00/hr.
$7.00 X 40 hrs = $2.80
$14,500 X .0079 = 115.02 annual
V. Life Insurance
--------------
Eligibility: Regular full time employees
Waiting period: 90 days
Basic Coverage
--------------
Benefits: 100% of your annual basic
earnings rounded to the next
highest $1,000, to a maximum
of $100,000.
-4-
<PAGE>
Benefits reduce to 65% at age
65 and to 50% at age 70.
Employee Contribution: None - Basic Life Insurance is
company paid
Optional Life Insurance Coverage
--------------------------------
Benefit: An additional 100% of your
annual basic earnings rounded
to the next highest $1,000,
to a maximum of $170,000.
Employee Contribution:
Monthly Cost Per $1,000 of
Age Annual Basic Earnings
--- ---------------------
29 yrs or younger $ .16
30-39 yrs .25
40-49 yrs .41
50-59 yrs .99
60-69 yrs 2.12
70 yrs or older 2.80
Example:
-------
Employee age 26 earning $7.00/hr
$7.00 X 2080 hrs. = $14,560 Basic Annual Earnings
$15,000 of Insurance X $.16 per thousand
= $2.40 per month
$ .55 per week
Employee age 32 earning $10.00/hr
$10.00 X 2080 = $20,800 Basic Annual Earnings
$21,000 of Insurance X $.25 per thousand
= $5.25 per month
$1.21 per week
VI. Reimbursement Accounts
----------------------
Eligibility: Regular full time employees.
Waiting Period: 90 days
Benefit: Employees may elect to have
money set aside on a pre-tax
basis for Dependent Care and
Health Care expenses.
-5-
<PAGE>
This benefit is administered
on an annual basis. More
information will be supplied
and enrollment will be
available prior to 1/1/94.
VII. Paid Vacation
-------------
All full time employees are entitled to the following paid
vacations or such other vacations as may be agreed to in writing
by the company with such employee:
Length of Continuous Service Paid Days Off
---------------------------- -------------
After:
1 Year 10 days (2 weeks)
5 Year 15 days (3 weeks)
10 Years 20 days (4 weeks)
VIII. Sick Leave
----------
Full time employees accrue sick time at a rate of one-half (1/2)
day per month up to six days per year.
IX. Holidays
--------
New Year's Day
Washington's Birthday
* Good Friday
Memorial Day
Independence Day
* Rosh Hashanah
* Yom Kippur
Columbus Day
Thanksgiving Day
* Christmas Eve
Christmas Day
* For those employees who observe these holidays, two of the four
may be taken.
XI. Car Allowance
-------------
$450, $550 or $650/month to cover all automobile expenses, as
determined by the company for each employee.
-6-
PHYMATRIX CORP.
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of March 13,
1996, is by and among CCC of Massachusetts, Inc., a Delaware corporation
("CCCM"), William A. Sanger ("Employee") and PhyMatrix Corp., a Delaware
corporation ("PhyMatrix").
Recitals
WHEREAS, CCCM and Employee have entered into an Employment Agreement
dated July 27, 1994 (the "Employment Agreement");
WHEREAS, CCCM has the right under section 18 of the Employment
Agreement and desires to assign its rights and obligations under the Employment
Agreement to PhyMatrix; and
WHEREAS, PhyMatrix and Employee mutually agree that it is in the best
interests of both parties to amend certain provisions of the Employment
Agreement.
Agreement
NOW, THEREFORE, in consideration of the premises contained herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
1. Effective as of the date hereof, CCCM hereby assigns, conveys and
transfers to PhyMatrix all of CCCM's rights and obligations under the Employment
Agreement and PhyMatrix hereby assumes and agrees with CCCM to perform, fulfill
and observe all of the covenants, agreements, obligations and liabilities of
CCCM under the Employment Agreement arising on or after the date hereof.
2. As used in the Employment Agreement, as amended hereby, the term the
"Company" shall mean PhyMatrix.
3. Section 5 of the Employment Agreement is hereby amended by deleting
subsections (b) through (k) in their entirety.
4. Section 6 of the Employment Agreement is hereby amended by deleting
Section 6 in its entirety and all the subsections thereunder and substituting
the following therefor:
1
<PAGE>
6. Duties. During the Employment Period, Employee agrees to serve
as the Executive Vice President and Chief Operating Officer of
the Company. Employee shall exercise such powers and comply with
and perform such directions and duties in relation to the
business and affairs of the Company as are customarily and
ordinarily exercised and performed by the Executive Vice
President and Chief Operating Officer of similar entities and as
may from time to time be vested in or requested by the Board of
Directors of the Company, and shall use his best efforts to
improve and expand the business of the Company and its
Affiliates. Notwithstanding any other term or provision to the
contrary contained herein, in no event shall Employee be
obligated to perform any act which would constitute or require
the violation of any federal, state or local law, rule,
regulation, ordinance or the like. Employee shall at all times
report to, and his activities shall at all times be subject to
the direction and control of, the Board of Directors of the
Company as well as the Chief Executive Officer of the Company,
which officer shall act as the immediate supervisor of Employee.
Employee agrees to devote his entire business time, energy and
skill to the service of the Company and its Affiliates and shall
perform his duties in a good faith, trustworthy and businesslike
manner, in compliance with the laws of the United States of
America and all other political subdivisions, all for the
purpose of advancing the interests of the Company and its
Affiliates. Employee shall at no time engage in any other
business activity whether or not such activity is pursued for
gain, profit or other pecuniary advantage. Notwithstanding the
foregoing, provided the same shall not interfere with the
performance by Employee of his duties under this Agreement and
shall not violate the terms and provisions of any other
provision of this Agreement (including, but not limited to,
Section 14 of this Agreement), Employee may invest his personal
assets in businesses where the form or manner of such investment
will not require services on the part of Employee and in which
his participation is solely that of a passive investor and/or
serve on the board of directors or as an officer of, or as a
volunteer for, charitable, civic or community organizations.
5. Section 13(b) of the Employment Agreement is hereby amended by
adding the following new sentences to the end thereof:
In the event of the expiration of this Agreement because Employee has
elected not to renew the term of the Employment Period pursuant to
Section 2 of this Agreement, during the period (up to a maximum period
of twelve (12) months following the effective date of any such
expiration), if any, that the Company enforces Employee's covenants
pursuant to Section 14(b) of this Agreement, the Company shall continue
to pay the Employee's Salary, subject to reduction by the amount of any
salary received by the Employee from any new employer. Any payments
made pursuant to the preceding sentence shall be made in accordance
with the normal payroll policies of the Company but in no event less
frequently than monthly and subject to all appropriate withholding
taxes.
2
<PAGE>
6. Section 14 is hereby amended by deleting subsections (a) through (c)
in their entirety and inserting the following in lieu thereof:
(a) Scope of Area. Employee acknowledges that he has performed
services or will perform services hereunder, and will acquire knowledge
and proprietary information, which will directly affect the business of
the Company and its subsidiaries to be conducted anywhere in the Untied
States of America (the "Area"). Accordingly, the parties deem it
necessary to provide protective non-competition and non-solicitation
provisions in this Agreement.
(b) Non-Compete and Non-Solicit. Employee covenants and agrees
with the Company that:
(i) Employee shall not, without the prior written
consent of the Company, which consent shall be within the sole and
exclusive discretion of the Company, within the Area, either directly
or indirectly, perform services or duties, or engage in the same or
similar business as the Company or any of its subsidiaries in any
capacity, whether as a consultant, director, officer, stockholder
(other than a stockholder of less than 2% of the outstanding shares of
a publicly held company), manager, supervisor or employee of any
entity; and
(ii) Employee shall not employ or attempt to employ,
or assist in employing, any employee of the Company or any of its
subsidiaries (whether or not such employment is full-time, part-time,
or is pursuant to a written contract) other than his personal secretary
for the purpose of having such employee perform services for another
company located in the Area.
(c) Term. The covenants of Employee set forth in this Section
14 shall commence upon the Effective Date of this Agreement and
continue for the entire Employment Period through the actual date of
termination or expiration of this Agreement and/or of the services of
Employee, except that in the event of a termination of this Agreement
pursuant to Section 10(b) of this Agreement or Section 12(b) of this
Agreement in the event Employee shall thereafter recover from such
disability sufficiently to perform his duties and obligations under
this Agreement or in the event of the expiration of this Agreement
because of an election by Employee not to renew the term of the
Employment Period pursuant to Section 2 of this Agreement, the
covenants set forth in this Section 14 shall continue for a period of
twelve (12) months after any such termination or expiration.
7. Section 29 of the Employment Agreement is hereby amended by deleting
the last sentence of the section therefrom.
3
<PAGE>
8. Except as expressly amended herein, the Employment Agreement shall
remain in full force and effect as heretofore.
IN WITNESS WHEREOF, the parties have set their hands and seals as of
the date first recited above.
/s/ William A. Sanger
William A. Sanger
CCC OF MASSACHUSETTS, INC.
By: /s/ Abraham D. Gosman
Its:
PHYMATRIX CORP.
By: /s/ Abraham D. Gosman
Its:
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made as of January 29, 1996 between PHYMATRIX
CORP., a Delaware corporation (the "Company"), and Robert A. Miller (hereinafter
"Employee").
WHEREAS, the Company believes it is in the Company's best interest to
employ Employee, and Employee desires to be employed by the Company; and
WHEREAS, the Company and Employee desire to set forth the terms and
conditions on which Employee shall be employed by and provide services to the
Company.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. Employment. The Company hereby employs Employee and Employee hereby
accepts such employment, all upon the terms and conditions hereinafter set
forth.
2. Term. Unless sooner terminated pursuant to the provisions of this
Agreement, the initial term of employment under this Agreement shall be for a
period of two (2) years commencing on January 29, 1996 (the "Effective Date")
and ending on January 31, 1998. The term of employment under this Agreement
shall thereafter be automatically renewed upon the then existing terms and
conditions of this Agreement, for successive periods of one (1) year commencing
upon the expiration of the initial term of employment under this Agreement or
any renewal term and ending on the first (1st) anniversary of the commencement
of such renewal term unless either the Company or Employee provides the other
with written notice of its election to not renew the term of employment under
this Agreement at least sixty (60) days, but no more than one hundred eighty
(180) days, prior to the expiration of the then existing term of this Agreement
(the initial term and all successive one (1) year renewal terms of employment
are collectively referred to herein as the "Employment Period").
3. Salary. Employee shall be entitled to receive a salary from the
Company during the Employment Period at the rate of Three Hundred Thousand
Dollars ($300,000) per annum (the "Salary"). The Salary shall be payable in
equal installments in accordance with the normal payroll policies of the Company
(which policies may be changed by the Company from time to time in its sole
discretion), but in no event less frequently than monthly, and shall be subject
to all appropriate withholding taxes. Employee's Salary and other compensation
under this Agreement may be allocated to and paid by any subsidiary or commonly
controlled affiliated entity (which may or may not be treated as consolidated
subsidiaries for tax or financial reporting purposes) (collectively,
"Affiliates"), if any, as determined from time to time by the Board of Directors
of the Company.
4. Benefits; Bonuses. The Salary provided for in Section 3 shall be in
addition to such benefits and bonus programs as the Company, in its sole and
absolute discretion, shall from time to time provide to the Company's executive
officers. Such benefits and bonus
<PAGE>
programs are subject to change from time to time as determined by the Board of
Directors of the Company.
5. Duties. During the Employment Period, Employee agrees to serve as
the Executive Vice President of Acquisitions of the Company. Employee shall
exercise such powers and comply with and perform such directions and duties in
relation to the business and affairs of the Company as are customarily and
ordinarily exercised and performed by the Executive Vice President of
Acquisitions of similar entities and as may from time to time be vested in or
requested by the Board of Directors of the Company, and shall use his best
efforts to improve and expand the business of the Company and its Affiliates.
Notwithstanding any other term or provision to the contrary contained herein, in
no event shall Employee be obligated to perform any act which would constitute
or require the violation of any federal, state or local law, rule, regulation,
ordinance or the like. Employee shall at all times report to, and his activities
shall at all times be subject to the direction and control of, the Board of
Directors of the Company as well as the Chief Executive Officer of the Company,
which officer shall act as the immediate supervisor of Employee. Employee agrees
to devote his entire business time, energy and skill to the service of the
Company and its Affiliates and shall perform his duties in a good faith,
trustworthy and businesslike manner, in compliance with the laws of the United
States of America and all other political subdivisions, all for the purpose of
advancing the interests of the Company and its Affiliates. Employee shall at no
time engage in any other business activity whether or not such activity is
pursued for gain, profit or other pecuniary advantage without the prior written
approval of the Board of Directors of the Company. Notwithstanding the
foregoing, provided the same shall not interfere with the performance by
Employee of his duties under this Agreement and shall not violate the terms and
provisions of any other provision of this Agreement (including, but not limited
to, Section 13 of this Agreement), Employee may invest his personal assets in
businesses where the form or manner of such investment will not require services
on the part of Employee and in which his participation is solely that of a
passive investor and/or serve on the board of directors or as an officer of, or
as a volunteer for, charitable, civic or community organizations.
6. Location of Company Headquarters. Unless otherwise agreed to in
writing by Employee, the parties hereby agree that Employee shall perform his
duties primarily from the Company's offices in West Palm Beach, Florida.
7. Business Expenses. Consistent with the Company's policies as in
effect from time to time (including, but not necessarily limited to, a
satisfactory itemized accounting for such expenditures), Employee shall be
reimbursed for ordinary and necessary expenses incurred in promoting the
business of the Company.
8. Confidentiality.
(a) In the course of his employment, the Company or its Affiliates
may disclose or make known to Employee, and Employee may be given
access to or may become
2
<PAGE>
acquainted with, certain information, trade secrets or both, all
relating to or useful in the business of the Company or its Affiliates
(collectively "Information") and which the Company considers
proprietary and desires to maintain confidential. As a material
inducement to the Company in entering this Agreement, Employee
covenants and agrees that during the term of this Agreement and at all
times thereafter, Employee shall not in any manner, either directly or
indirectly, divulge, disclose or communicate to any person or firm,
except to or for the Company's benefit as directed by the Company, any
of the Information which he/she may have acquired in the course of or
as an incident to his employment by the Company, the parties agreeing
that such information affects the successful and effective conduct of
the business and goodwill of the Company and/or its Affiliates, and
that any breach of the terms of this Section is a material breach of
this Agreement. Notwithstanding the foregoing, nothing in this Section
8 shall preclude Employee from disclosing Information pursuant to
judicial order or Information which has been made properly public
through the release or disclosure by persons other than Employee.
(b) All equipment, documents, memoranda, reports, records, files,
materials, samples, books, correspondence, lists, computer software,
other written and graphic records, and the like (collectively, the
"Materials"), affecting or relating to the business of the Company
and/or its Affiliates, which Employee shall prepare, use, construct,
observe, possess or control shall be and remain the Company's exclusive
property or in the Company's exclusive custody, and must not be removed
from the premises of the Company or given to any person or entity
except as directed by the Company in writing or in connection with the
performance by Employee of his duties hereunder. Promptly upon
termination of this Agreement for any reason, upon completion of the
tasks or duties assigned pursuant hereto or upon the request of the
Company, the Materials, Information and all copies thereof in the
custody or control of Employee shall be delivered promptly to the
Company. Employee acknowledges that all documents and equipment
relating to the business of the Company and/or its Affiliates, in
addition to all Information and Materials, whether prepared by Employee
or otherwise coming into Employee's possession, are owned by and
constitute the exclusive property of the Company or in the Company's
exclusive custody, and all such documents and equipment must not be
removed from the premises of the Company except as directed by the
Company in writing.
(c) The covenants of Employee set forth in this Section 8 are
separate and independent covenants for which valuable consideration has
been paid, the receipt, adequacy and sufficiency of which are
acknowledged by Employee, and have also been made by Employee to induce
the Company to enter into this Agreement. Each of the aforesaid
covenants may be availed of, or relied upon, by the Company in any
court of competent jurisdiction, and shall form the basis of injunctive
relief and damages suffered by the Company arising out of any breach of
the aforesaid covenants by Employee. The covenants of Employee set
forth in this Section 8 are cumulative to each other and to all other
covenants of Employee in favor of the Company contained in this
Agreement and shall survive the termination of this Agreement for the
purposes intended. Should any covenant, term or condition in this
Section 8 become or be declared invalid or unenforceable by a court
3
<PAGE>
of competent jurisdiction, then the parties request that such court
judicially modify such unenforceable provision consistent with the
intent of this Section 8 so that it shall be enforceable as modified.
9. Events of Termination by the Company. This Agreement may be
terminated by the Company:
(a) Without cause, effective immediately upon delivery of fifteen
(15) days' written notice to Employee by the Company; or
(b) With cause, effective immediately upon delivery of written
notice to Employee by the Company, provided, however, that if such
cause is of the type described in clause (iv) or (v) below and
susceptible to being cured, Employee shall have a period of ten (10)
days after written notice has been given or sent to Employee to effect
such cure or such longer period of time as may be required for such
cure, provided Employee has commenced such cure within such ten (10)
days and is diligently prosecuting such cure. A termination shall be
deemed to be "with cause" if the Company determines that Employee has:
(i) knowingly or recklessly misappropriated the assets or
opportunities of the Company or its Affiliates;
(ii) been convicted of a felony involving violence,
dishonesty, conversion, theft or misappropriation of property of
another, controlled substances, moral turpitude or affecting
regulatory good standing of the Company or its Affiliates;
(iii) abused drugs or alcohol in a manner which prevents
Employee from performing his duties in the manner provided
herein;
(iv) knowingly or recklessly failed to perform
substantially his duties in the manner provided herein or
willfully refused to perform the duties assigned to him by the
Company in accordance with Section 5 hereof for any reason other
than disability or breached any of his other obligations under
this Agreement; or
(v) acted knowingly or recklessly in a manner which has
negatively impacted upon the reputation, name, goodwill,
business or regulatory standing of the Company or its
Affiliates, provided, however, that unsubstantiated accusations
shall not form the basis for termination pursuant to this
subsection.
10. Events of Termination by Employee. This Agreement may be terminated
by Employee in the event of any material breach by the Company of its
obligations under this Agreement.
11. Other Termination of this Agreement. This Agreement shall
immediately terminate upon the occurrence of any of the following events:
4
<PAGE>
(a) The death of Employee; or
(b) The disability of Employee, which shall be deemed to have occurred
in the event that Employee is unable to perform his duties hereunder
for ninety (90) consecutive days or one hundred eighty (180) days in
any one-year period.
12. Effects of Termination. Upon the termination of the Agreement:
(a) Employee's duties shall cease as of the effective date of
termination, provided, however, that Employee shall, if the Company
requests, arrange for the smooth transition of duties to appropriate
independent contractors and/or employees of the Company; provided,
however, that such transition period shall not be unreasonable in
length or require an unreasonable amount of Employee's time, all as
determined in the reasonable discretion of the Company. In the event
that the Company shall request Employee to provide transitional
assistance after the effective date of termination, Employee shall be
paid an hourly rate, based upon an 8 hour work day, a 2,080 hour work
year at his then current Salary, based upon time sheets submitted by
Employee specifying the services performed and the amount of time
expended.
(b) With respect to any termination other than pursuant to Section
9(a) or Section 10 of this Agreement, payments made on account of
Employee's Salary shall cease upon the effective date of termination;
any amounts due on account of Employee's Salary for account of services
performed prior to the effective date of termination which have not
previously been paid will be paid (pro rata through the effective date
of termination) as required by applicable law. With respect to a
termination pursuant to Section 9(a) or Section 10 of this Agreement,
Employee's Salary shall continue to be paid for an additional period of
twelve (12) months after the termination, subject to reduction, such
reduction being the amount of salary received by the Employee from any
new employer. In the event of the expiration of this Agreement because
Employee has elected not to renew the term of the Employment Period
pursuant to Section 2 of this Agreement, during the period (up to a
maximum period of twelve (12) months following the effective date of
any such expiration), if any, that the Company enforces Employee's
covenants pursuant to Section 13(b) of this Agreement, the Company
shall continue to pay the Employee's Salary, subject to reduction by
the amount of any salary received by the Employee from any new
employer. All payments made pursuant to this Section 12(b) shall be
made in accordance with the normal payroll policies of the Company but
in no event less frequently than monthly and subject to all appropriate
withholding taxes.
(c) All expenses which are properly reimbursable to Employee
pursuant to Section 7 will be promptly reimbursed following
termination.
(d) All other benefits and/or entitlements to participate in bonus
programs, if any, will cease as of the effective date of termination,
subject to Employee's rights to continue medical insurance coverage at
his own expense as provided by applicable law or
5
<PAGE>
written Company policy; provided, however, that all policies of
insurance relating solely to Employee shall be assigned to Employee
within thirty (30) days following termination, provided that such
assignment shall be at no cost or expense to the Company, and provided
further that such assignment shall state that it is made subject to the
terms and conditions of the policy(ies).
(e) The rights, privileges, benefits, remedies and interests of the
Company and Employee under Section 4 of this Agreement shall be
governed by the terms and provisions of Section 4.
13. Non-Competition and Solicitation.
(a) Employee acknowledges that he/she has performed services or will
perform services hereunder, and will acquire knowledge and proprietary
information, which will directly affect the business of the Company
and/or its Affiliates to be conducted throughout the United States (the
"Area"). Accordingly, the parties deem it necessary to provide
protective non-competition and non-solicitation provisions in this
Agreement.
(b) Employee agrees with the Company that:
(i) Employee shall not, without the prior written consent
of the Company, which consent shall be within the sole and
exclusive discretion of the Company, within the Area, either
directly or indirectly, engage in, perform services or duties
for any company that engages in the same or similar business as
the Company or any of its Affiliates in any capacity, whether as
an owner, shareholder (other than a holder of no more than 2% of
the outstanding shares of a publicly held company), partner,
consultant, director, officer, manager, supervisor or employee
of any entity; and
(ii) Neither Employee nor any company or entity with which
Employee becomes associated in any way shall employ or attempt
to employ, or assist in employing, any employee of the Company
or its Affiliates (whether or not such employment is full-time,
part-time, or is pursuant to a written contract) other than his
personal secretary for the purpose of having such employee
perform services for another company located in the Area.
(c) The covenants of Employee set forth in this Section 13 shall
commence upon the Effective Date of this Agreement and continue for the
entire Employment Period through the actual date of termination or
expiration of this Agreement and/or of the services of Employee, except
that in the event of a termination of this Agreement pursuant to
Section 9(b) of this Agreement or Section 11(b) of this Agreement in
the event Employee shall thereafter recover from such disability
sufficiently to perform his duties and obligations under this Agreement
or in the event of the expiration of this Agreement because of an
election by Employee not to renew the term of the Employment Period
pursuant to Section 2 of this Agreement, the covenants set forth in
this Section 12 shall continue for a period of twelve (12) months after
any such termination or expiration.
6
<PAGE>
(d) The covenants of Employee set forth in this Section 13 are
separate and independent covenants for which valuable consideration has
been paid, the receipt, adequacy and sufficiency of which are
acknowledged by Employee, and have also been made by Employee to induce
the Company to enter into this Agreement. Each of the aforesaid
covenants may be availed of, or relied upon, by the Company in any
court of competent jurisdiction, and shall form the basis of injunctive
relief and damages including expenses of litigation (including, but not
limited to, reasonable attorney's fees upon trial and appeal) suffered
by the Company arising out of any breach of the aforesaid covenants by
Employee. The covenants of Employee set forth in this Section 13 are
cumulative to each other and to all other covenants of Employee in
favor of the Company contained in this Agreement and shall survive the
termination of this Agreement for the purposes intended. Should any
covenant, term or condition in this Section 13 become or be declared
invalid or unenforceable by a court of competent jurisdiction, then the
parties request that such court judicially modify such unenforceable
provision consistent with the intent of this Section 13 so that it
shall be enforceable to the fullest extent permitted by applicable law.
14. Entire Agreement. This Agreement represents the entire
understanding and agreement between the parties with respect to the subject
matter hereof, and supersedes all other negotiations, understandings and
representations (if any) made by and between such parties.
15. Amendments. The provisions of this Agreement may not be amended,
supplemented, waived or changed orally, but only by a writing signed by the
party as to whom enforcement of any such amendment, supplement, waiver or
modification is sought and making specific reference to this Agreement.
16. Assignments. The Company shall have the right to assign all of its
rights and obligations under this Agreement to any Affiliate of the Company or
any person or entity which purchases all or substantially all of the assets of
the Company or its Affiliates or with which the Company merges or consolidates
and, upon such assignment, this Agreement shall be binding upon and inure to the
benefit of such assign and the Company and its Affiliates shall be released and
discharged from all duties and obligations under this Agreement. Employee shall
execute such instruments as shall be reasonably requested by the Company and its
Affiliates to evidence such release. Employee shall have no right to assign or
delegate any rights or obligations under this Agreement.
17. Binding Effect. All of the terms and provisions of this Agreement,
whether so expressed or not, shall be binding upon, inure to the benefit of, and
be enforceable by the parties and their respective administrators, executors,
legal representatives, heirs, successors and permitted assigns.
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<PAGE>
18. Severability. If any part of this Agreement or any other Agreement
entered into pursuant hereto is contrary to, prohibited by or deemed invalid
under applicable law or regulation, such provision shall be inapplicable and
deemed omitted to the extent so contrary, prohibited or invalid, but the
remainder hereof shall not be invalidated thereby and shall be given full force
and effect as permitted by applicable law.
19. Survival. Notwithstanding anything to the contrary herein, the
provisions of Sections 8, 12, 13 and 14 through 26 shall survive and remain in
effect in accordance with their respective terms in the event this Agreement or
any portion hereof is terminated.
20. Notices. All notices, requests, consents and other communications
required or permitted under this Agreement shall be in writing (including telex
and telegraphic communication) and shall be (as elected by the person giving
such notice) hand delivered by messenger or courier service, telecommunicated,
or mailed (airmail if international) by registered or certified mail (postage
prepaid), return receipt requested, addressed to:
If to Employee:
Robert A. Miller
6335 Wood Lake Road
Jupiter, FL 33458
If to the Company: With a Copy to:
PhyMatrix Corp. Nutter, McClennen & Fish, LLP
Suite 1000E, Phillips Point One International Place
777 South Flagler Drive Boston, MA 02110-2699
West Palm Beach, FL 33402 Attn: James E. Dawson, Esq.
Attn: President
or to such other address as any party may designate by notice complying with the
terms of this Section. Each such notice shall be deemed delivered (a) on the
date delivered if by personal delivery, (b) on the date telecommunicated if by
telegraph, (c) on the date of transmission with confirmed answer back if by
telex or telecopy, and (d) on the date upon which the return receipt is signed
or delivery is refused or the notice is designated by the postal authorities as
not deliverable, as the case may be, if mailed.
21. Waivers. The failure or delay of any party at any time to require
performance by another party of any provision of this Agreement, even if known,
shall not affect the right of such party to require performance of that
provision or to exercise any right, power or remedy hereunder, and any waiver by
any party of any breach of any provision of this Agreement should not be
construed as a waiver of any continuing or succeeding breach of such provision,
a waiver of the provision itself, or a waiver of any right, power or remedy
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<PAGE>
under this Agreement. No notice to or demand on any party in any case shall, of
itself, entitle such party to any other or further notice or demand in similar
or other circumstances.
22. Remedies Cumulative. Except as otherwise expressly provided herein,
no remedy herein conferred upon any party is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing at
law or in equity or by statute or otherwise. No single or partial exercise by
any party of any right, power or remedy hereunder shall preclude any other or
further exercise thereof.
23. Governing Law. This Agreement and all transactions contemplated by
this Agreement shall be governed by, and construed and enforced in accordance
with, the internal laws of the State of Florida without regard to principles of
conflicts of laws.
24. Captions. The captions in this Agreement are for convenience and
reference only and in no way define, describe, extend or limit the scope of
intent of this Agreement or the intent of any provision contained in this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
PHYMATRIX CORP.
By: /s/ Abraham D. Gosman
Its
/s/ Robert A. Miller
Robert A. Miller
9
================================================================================
REGISTRATION RIGHTS AGREEMENT
Dated as of June 21, 1996
relating to
$100,000,000 in Aggregate Principal Amount
of 6-3/4% Convertible Subordinated
Debentures due 2003
by and among
PhyMatrix Corp.
and
Smith Barney Inc.,
Dean Witter Reynolds Inc.
PaineWebber Incorporated
Piper Jaffray Inc.
Robertson, Stephens & Company
and
The Robinson-Humphrey Company, Inc.
================================================================================
<PAGE>
This Registration Rights Agreement (this "Agreement") is made
and entered into as of June 21, 1996 by and between PhyMatrix Corp., a Delaware
corporation (the "Company"), and Smith Barney Inc., Dean Witter Reynolds Inc.,
PaineWebber Incorporated, Piper Jaffray Inc., Robertson, Stephens & Company and
The Robinson-Humphrey Company, Inc. (the "Initial Purchasers"), who will
purchase $100,000,000 in aggregate principal amount of 6-3/4% Convertible
Subordinated Debentures due 2003 (the "Debentures") of the Company (excluding up
to an additional $15,000,000 aggregate principal that may be purchased by the
Initial Purchasers pursuant to their over-allotment option) pursuant to the
Purchase Agreement dated June 21, 1996 (the "Purchase Agreement") between the
Company and the Initial Purchasers. In order to induce the Initial Purchasers to
enter into the Purchase Agreement, the Company has agreed to provide the
registration rights set forth in this Agreement for the particular limited
purpose of registering the resale of the Debentures and Common Stock issuable
upon conversion thereof. The execution and delivery of this Agreement is a
condition to the obligations of the Initial Purchasers set forth in the Purchase
Agreement. All defined terms used but not defined herein shall have the meanings
ascribed to them in the Indenture (as defined herein).
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms
shall have the following meanings:
Act: The Securities Act of 1933, as amended.
Closing Date: The date on which the Debentures are first sold
by the Company to the Initial Purchasers pursuant to the Purchase Agreement.
Commission: The Securities and Exchange Commission.
Common Stock: The Common Stock, par value $.01 per share, of
the Company.
Damages Payment Date: With respect to the Debentures or the
Common Stock, as applicable, each Interest Payment Date as defined in the
Indenture.
Effectiveness Date: The date on which the Shelf Registration
Statement is declared effective by the Commission under the Act.
Effectiveness Target Date: As defined in Section 4.
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<PAGE>
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exempt Resales: The transactions in which the Initial
Purchasers propose to sell the Debentures to (i) certain "qualified
institutional buyers" (as such term is defined in Rule 144A under the Act) and
(ii) to certain persons in offshore transactions in reliance on Regulation S
under the Act.
Holders: As defined in Section 2(b) hereof.
Indenture: The Indenture, to be dated as of July 1, 1996,
among the Company and Chemical Bank, as trustee (the "Trustee"), pursuant to
which the Debentures are to be issued, as such Indenture is amended or
supplemented from time to time in accordance with the terms thereof.
Interest Payment Date: As defined in the Indenture.
Latest Issuance Date: The latest date on which any of the
Debentures are originally issued by the Company pursuant to the terms of the
Purchase Agreement.
NASD: The National Association of Securities Dealers, Inc.
Offering Memorandum: The Offering Memorandum, dated June 21,
1996, and all amendments and supplements thereto, relating to the Debentures and
prepared by the Company pursuant to the Purchase Agreement.
Person: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
Preliminary Prospectus: As defined in Section 3(f).
Prospectus: The prospectus included in the Shelf Registration
Statement, as amended or supplemented by any Prospectus Supplement with respect
to the terms of the offering of any portion of the Transfer Restricted
Securities (as defined herein) covered by the Shelf Registration Statement and
by all other amendments and supplements to the prospectus, including
post-effective amendments, and all material which may be incorporated by
reference into such prospectus.
Prospectus Supplement: As defined in Section 5(b).
Record Holder: (i) With respect to any Damages Payment Date
relating to the Debentures, each Person who is registered on the books of the
Registrar as the holder of
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<PAGE>
Debentures on the record date with respect to the Interest Payment Date on which
such Damages Payment Date shall occur and (ii) with respect to any Damages
Payment Date relating to the Common Stock constituting Transfer Restricted
Securities, each Person who is a holder of record of such Common Stock fifteen
days prior to the Damages Payment Date.
Registration Expenses: As defined in Section 6(a).
Shelf Registration Statement: As defined in Section 3(a)
hereof.
Suspension Period: As defined in Section 3(a).
TIA: The Trust Indenture Act of 1939, as amended (15 U.S.C.
Section 77aaa-77bbbb), as in effect on the date of the Indenture.
Transfer Restricted Securities: Each Debenture and share of
Common Stock of the Company issuable upon conversion of a Debenture, until such
Debenture or share (i) has been effectively registered under the Securities Act
and disposed of in accordance with the Shelf Registration Statement covering it,
(ii) is distributed to the public pursuant to Rule 144 or (iii) may be sold or
transferred pursuant to Rule 144(k) (or any similar provisions then in force)
under the Securities Act or otherwise.
Underwriter: Any underwriter, placement agent, selling broker,
dealer manager, qualified independent underwriter or similar securities industry
professional.
Underwritten Registration or Underwritten Offering: An
offering in which securities of the Company are sold to an Underwriter or with
the assistance of such Underwriter for reoffering to the public on a firm
commitment or best efforts basis.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities entitled to
the benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. A Person is
deemed to be a holder of Transfer Restricted Securities (each, a "Holder")
whenever such Person owns of record Transfer Restricted Securities.
3
<PAGE>
SECTION 3. SHELF REGISTRATION
(a) The Company shall cause to be filed with the Commission on
or prior to 45 days after the Latest Issuance Date, a shelf registration
statement pursuant to Rule 415 under the Act (as may then be amended) (the
"Shelf Registration Statement") on Form S-1 or Form S-3, if the use of such form
is then available and as determined by the Company, to cover resales of Transfer
Restricted Securities by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Holders of such Transfer Restricted Securities shall
have provided the representations required pursuant to Section 3(f) hereof. The
Company shall use its reasonable best efforts to cause such Shelf Registration
Statement to be declared effective by the Commission on or prior to 90 days
after the Latest Issuance Date. The Company shall use its best efforts to keep
such Shelf Registration Statement continuously effective for a period ending
three years from the effective date thereof or such shorter period that will
terminate when each of the Transfer Restricted Securities covered by the Shelf
Registration Statement shall cease to be a Transfer Restricted Security. The
Company further agrees to use its best efforts to prevent the happening of any
event that would cause the Shelf Registration Statement to contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or to
be not effective and usable for resale of the Transfer Restricted Securities
during the period that such Shelf Registration Statement is required to be
effective and usable.
Upon the occurrence of any event that would cause the Shelf
Registration Statement (i) to contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or (ii) to be not effective and usable for
resale of Transfer Restricted Securities during the period that such Shelf
Registration Statement is required to be effective and usable, the Company shall
as promptly as practicable file an amendment to the Shelf Registration
Statement, in the case of clause (i), correcting any such misstatement or
omission, and in the case of either clause (i) or (ii), use its best efforts to
cause such amendment to be declared effective and such Shelf Registration
Statement to become usable as soon as practicable thereafter.
Notwithstanding anything to the contrary in this Section 3,
subject to compliance with Sections 4 and 5(b), if applicable, the Company may
prohibit offers and sales of Transfer Restricted Securities pursuant to the
Shelf Registration Statement at any time if (A) (i) it is in possession of
material non-public information, (ii) the Board of Directors of the Company
determines (based on advice of counsel) that such prohibition is necessary in
order to avoid a requirement to disclose such material non-public information
and (iii) the Board of Directors of the Company determines in good faith that
disclosure of
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<PAGE>
such material non-public information would not be in the best interests of the
Company and its shareholders or (B) the Company has made a public announcement
relating to an acquisition or business combination transaction including the
Company and/or one or more of its subsidiaries (i) that is material to the
Company and its subsidiaries taken as a whole and (ii) the Board of Directors of
the Company determines in good faith that offers and sales of Transfer
Restricted Securities pursuant to the Shelf Registration Statement prior to the
consummation of such transaction (or such earlier date as the Board of Directors
shall determine) is not in the best interests of the Company and its
shareholders (the period during which any such prohibition of offers and sales
of Transfer Restricted Securities pursuant to the Shelf Registration Statement
is in effect pursuant to clause (A) or (B) of this subparagraph (a) is referred
to herein as a "Suspension Period"). A Suspension Period shall commence on and
include the date on which the Company provides written notice to Holders of
Transfer Restricted Securities covered by the Shelf Registration Statement that
offers and sales of Transfer Restricted Securities cannot be made thereunder in
accordance with this Section 3 and shall end on the date on which each Holder of
Transfer Restricted Securities covered by the Shelf Registration Statement
either receives copies of a Prospectus Supplement contemplated by Section 5(b)
or is advised in writing by the Company that offers and sales of Transfer
Restricted Securities pursuant to the Shelf Registration Statement and use of
the Prospectus may be resumed.
(b) None of the Company nor any of its security holders (other
than the Holders of Transfer Restricted Securities in such capacity and other
shareholders having registration rights permitting them to participate therein,
and as disclosed in the Offering Memorandum) shall have the right to include any
of the Company's securities in the Shelf Registration Statement.
(c) If the Holders of a majority of the outstanding Transfer
Restricted Securities so elect (with holders of Common Stock constituting
Transfer Restricted Securities being deemed to be Holders of the aggregate
principal amount of Debentures converted into such Common Stock for purposes of
such calculation), an offering of Transfer Restricted Securities pursuant to the
Shelf Registration Statement may be effected in the form of an Underwritten
Offering, provided, however, that notwithstanding anything contained in this
Agreement to the contrary, the Company shall not be required to undertake more
than one such Underwritten Offering during any consecutive 12 month period. The
Holders of the Transfer Restricted Securities to be registered shall pay all
underwriting discounts and commissions of such Underwriters and the fees and
expenses of any counsel for the Holders.
(d) If any of the Transfer Restricted Securities covered by
the Shelf Registration Statement are to be sold in an Underwritten Offering, the
Underwriter(s) that will administer the offering will be selected by the Holders
of a majority of the outstanding Transfer Restricted Securities (with holders of
Common Stock constituting Transfer
5
<PAGE>
Restricted Securities being deemed to be Holders of the aggregate principal
amount of Debentures converted into such Common Stock for purposes of such
calculation); provided, however, that such Underwriter(s) shall be reasonably
satisfactory to the Company.
(e) Each Holder whose Transfer Restricted Securities are
covered by a Shelf Registration Statement filed pursuant to this Section 3
agrees, upon the request of the Underwriter(s) in any Underwritten Offering, not
to effect any sale or distribution of securities of the Company of the same
class as the securities included in such Shelf Registration Statement for a
period of up to 90 days beginning on the date any such Underwritten Offering
made pursuant to such Shelf Registration Statement commences, to the extent
timely notified in writing by such Underwriter(s).
(f) No Holder of Transfer Restricted Securities may include
any of its Transfer Restricted Securities in any Shelf Registration Statement
pursuant to this Agreement unless such Holder furnishes to the Company in
writing, within 10 business days after receipt of a request therefor, such
information as the Company may reasonably request for use in connection with any
Shelf Registration Statement or Prospectus or preliminary Prospectus (a
"Preliminary Prospectus") included therein.
SECTION 4. LIQUIDATED DAMAGES
(a) If (i) the Shelf Registration Statement is not filed with
the Commission on or prior to 45 days after the Latest Issuance Date, (ii) the
Shelf Registration Statement has not been declared effective by the Commission
within 90 days after the Latest Issuance Date (the "Effectiveness Target Date"),
or (iii) 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 useable
for resale for a period of time (including any Suspension Period) which shall
exceed 90 days in the aggregate in any of the one-year periods ending on the
first, second or third anniversaries of the Closing Date, or which shall exceed
30 days in any calendar quarter within any of such one-year periods (each such
event referred to in clauses (i) through (iii), a "Registration Default"), the
Company will pay liquidated damages to each Holder of Transfer Restricted
Securities who has complied with such Holder's obligations under this Agreement.
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 of Debentures, or $0.01 per week per share of Common Stock
(subject to adjustment in the event of stock splits, stock recombinations, stock
dividends and the like) constituting Transfer Restricted Securities, for each
90-day period or part thereof until the applicable registration statement
covering such Transfer Restricted Securities is filed and the applicable
registration
6
<PAGE>
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. The Company shall notify the
Trustee and the Initial Purchasers within one business day after each and every
date on which a Registration Default occurs. All accrued liquidated damages
shall be paid to Record Holders by wire transfer of immediately available funds
or by federal funds check by the Company on the next succeeding Damages Payment
Date. Following the cure of all Registration Defaults, liquidated damages will
cease to accrue with respect to such Registration Default.
All of the Company's obligations set forth in the preceding
paragraph which are outstanding with respect to any Transfer Restricted Security
shall cease at the time such security ceases to be a Transfer Restricted
Security.
The parties hereto agree that the liquidated damages provided
in this Section 4 constitute a reasonable estimate of the damages that will be
incurred by Holders of Transfer Restricted Securities by reason of the failure
of the Shelf Registration Statement to be filed, declared effective or to remain
effective, as the case may be.
SECTION 5. REGISTRATION PROCEDURES
In connection with the Shelf Registration Statement, the
Company will use its best efforts to effect such registration to permit the sale
of the Transfer Restricted Securities being sold in accordance with the intended
method or methods of distribution or disposition thereof, and pursuant thereto
the Company will as expeditiously as possible after the Closing Date:
(a) on or prior to the date 45 days after the Latest Issuance
Date, prepare and file with the Commission a Shelf Registration Statement
relating to the registration on Form S-1 or Form S-3, if the use of such form is
then available and as determined by the Company, for the sale of the Transfer
Restricted Securities in accordance with the intended method or methods of
distribution thereof and shall include all financial statements required to be
included or incorporated by reference therein; cooperate and assist in any
filings required to be made with the NASD and use its reasonable best efforts to
cause such Shelf Registration Statement to become effective and approved by such
governmental agencies or authorities as may be necessary to enable the selling
Holders to consummate the disposition of such Transfer Restricted Securities;
provided, however, that before filing a Shelf Registration Statement or any
Prospectus, or any amendments or supplements thereto, the Company will furnish
to the Holders and the Underwriter(s), if any, copies of all such
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<PAGE>
documents proposed to be filed (except that the Company shall not be required to
furnish any exhibits to such documents, including those incorporated by
reference, unless so requested by a Holder or Underwriter in writing), and the
Company will not file any Shelf Registration Statement or amendment thereto or
any Prospectus or any supplement thereto to which (i) the Underwriter(s), if
any, shall reasonably object or (ii) if there are no Underwriters, the Holders
of a majority of the outstanding Transfer Restricted Securities shall reasonably
object (with holders of Common Stock constituting Transfer Restricted Securities
being deemed to be Holders of the aggregate principal amount of Debentures
converted into such Common Stock for purposes of such calculation), in each such
case within three business days after the receipt thereof. A Holder or
Underwriter, if any, shall be deemed to have reasonably objected to such filing
if the Shelf Registration Statement, amendment, Prospectus or supplement, as
applicable, as proposed to be filed contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading which misstatement or
omission is specifically identified to the Company in writing within such three
business days;
(b) prepare and file with the Commission such amendments and
post-effective amendments to the Shelf Registration Statement as may be
necessary to keep the Shelf Registration Statement effective for the applicable
period set forth in Section 3(a) hereof; cause the Prospectus to be supplemented
by any required supplement thereto (a "Prospectus Supplement"), and as so
supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully
with the applicable provisions of Rules 424 and 430A under the Act in a timely
manner; and comply with the provisions of the Act with respect to the
disposition of all securities covered by such Shelf Registration Statement
during the applicable period in accordance with the intended method or methods
of distribution by the sellers thereof set forth in such Shelf Registration
Statement, Prospectus or Prospectus Supplement;
(c) if requested by the Holders of Transfer Restricted
Securities, or, if the Transfer Restricted Securities are being sold in an
Underwritten Offering, the Underwriter(s) of such Underwritten Offering,
promptly incorporate in the Prospectus, any Prospectus Supplement or
post-effective amendment to the Shelf Registration Statement such information as
the Underwriters and/or the Holders of Transfer Restricted Securities being sold
agree should be included therein relating to the plan of distribution of the
Transfer Restricted Securities, including, without limitation, information with
respect to the principal amount of Debentures and/or the number of shares of
Common Stock being sold to such Underwriter(s), the purchase price being paid
therefor and any other terms with respect to the offering of the Transfer
Restricted Securities to be sold in such offering; and make all required filings
of such Prospectus, Prospectus Supplement or post-effective amendment as soon as
practicable after the Company is notified of the matters to be incorporated in
such Prospectus, Prospectus Supplement or post-effective amendment;
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(d) advise the Underwriter(s), if any, and selling Holders
promptly and, if requested by such Persons, to confirm such advice in writing,
(i) when the Prospectus or any Prospectus Supplement or post-effective amendment
to the Shelf Registration Statement has been filed, and, with respect to the
Shelf Registration Statement or any post-effective amendment thereto, when the
same has become effective, (ii) of any request by the Commission for amendments
to the Shelf Registration Statement or amendments or supplements to the
Prospectus or for additional information relating thereto, (iii) of the issuance
by the Commission of any stop order suspending the effectiveness of the Shelf
Registration Statement under the Act or of the suspension by any state
securities commission of the qualification of the Transfer Restricted Securities
for offering or sale in any jurisdiction, or the initiation of any proceeding
for any of the preceding purposes, (iv) if at any time the representations and
warranties of the Company contemplated by paragraph (m)(i) below cease to be
true and correct, and (v) of the existence of any fact or the happening of any
event that makes any statement of a material fact made in the Shelf Registration
Statement, the Prospectus, any amendment or supplement thereto, or any document
incorporated by reference therein untrue, or that requires the making of any
additions to or changes in the Shelf Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the Shelf
Registration Statement, or any state securities commission or other regulatory
authority shall issue an order suspending the qualification or exemption from
qualification of the Transfer Restricted Securities under state securities or
Blue Sky laws, the Company shall use its best efforts to obtain the withdrawal
or lifting of such order at the earliest possible time;
(e) promptly following the filing of any document that is to
be incorporated by reference into the Shelf Registration Statement or the
Prospectus subsequent to the initial filing of the Shelf Registration Statement,
provide copies of such document (excluding exhibits, unless requested by a
Holder in writing) to the Holders;
(f) furnish to each Holder and each of the Underwriter(s), if
any, without charge, at least one copy of the Shelf Registration Statement, as
first filed with the Commission, and of each amendment thereto, including all
documents incorporated by reference therein and all exhibits (excluding exhibits
to documents incorporated by reference therein unless requested by such Holder
or Underwriter);
(g) deliver to each selling Holder and each of the
Underwriter(s), if any, without charge, as many copies of any Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto as such
Persons may reasonably request; the Company consents to the use of any
Preliminary Prospectus and the Prospectus and any amendments or supplements
thereto by each of the selling Holders and each of the Underwriter(s), if any,
in connection with the public offering and the sale of the Transfer Restricted
Securities covered
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by any Preliminary Prospectus and the Prospectus or any amendments or
supplements thereto;
(h) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders, the Underwriter(s), if any, and
their respective counsel in connection with the registration and qualification
of the Transfer Restricted Securities under the securities or Blue Sky laws of
such jurisdictions as the selling Holders or Underwriter(s) may reasonably
request and do any and all other acts or things necessary or advisable to enable
the disposition in such jurisdiction of the Transfer Restricted Securities
covered by the Shelf Registration Statement; provided, however, that the Company
shall not be required (i) to register or qualify as a foreign corporation where
it is not now so qualified or (ii) to take any action that would subject it to
the service of process in suits, other than as to matters and transactions
relating to the Shelf Registration Statement, in any jurisdiction where it is
not now so subject;
(i) cooperate with the selling Holders and the Underwriter(s),
if any, to facilitate the timely preparation and delivery of certificates
representing Transfer Restricted Securities to be sold and not bearing any
restrictive legends; and enable such Transfer Restricted Securities to be in
such denominations and registered in such names as the Holders or the
Underwriter(s), if any, may request at least two business days prior to any sale
of Transfer Restricted Securities;
(j) use its best efforts to cause the Transfer Restricted
Securities covered by the Shelf Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be reasonably
necessary to enable the seller or sellers thereof or the Underwriter(s), if any,
to consummate the disposition of such Transfer Restricted Securities, subject to
the provisos contained in clause (h) above;
(k) if any fact or event contemplated by clause (d)(v) above
shall exist or have occurred, prepare a post-effective amendment or supplement
to the Shelf Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of Transfer Restricted Securities, the
Prospectus will not contain an untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading;
(l) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of the Shelf Registration Statement
and provide the Trustee under the Indenture and/or the transfer agent for the
Common Stock with printed certificates for the Transfer Restricted Securities
which are in a form eligible for deposit with the Depository Trust Company;
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(m) enter into such agreements (including an underwriting
agreement reasonably acceptable to the Company) and take all such other actions
in connection therewith as may reasonably be required in order to expedite or
facilitate the disposition of the Transfer Restricted Securities pursuant to the
Shelf Registration Agreement, in connection with an Underwritten Registration,
and (i) make such representations and warranties to the Holders and the
Underwriter(s), in form, substance and scope as they may reasonably request and
as are customarily made by issuers to Underwriters in primary Underwritten
Offerings and covering matters including, but not limited to, those set forth in
the Purchase Agreement; (ii) obtain opinions of counsel for the Company and
updates thereof in customary form and covering matters reasonably requested by
the Underwriter(s) of the type customarily covered in legal opinions to
Underwriters in connection with primary Underwritten Offerings addressed to each
selling Holder and the Underwriter requesting the same and covering the matters
as may be reasonably requested by such Holders and Underwriters; (iii) obtain
"cold comfort" letters and updates thereof from the Company's independent
certified public accountants, and the independent certified public accountants
of any other corporation or person ("Other Companies") with respect to which
audited financial statements are required to be included or incorporated by
reference in the Shelf Registration Statement, addressed to the selling Holders
of Transfer Restricted Securities and the Underwriters requesting the same, such
letters to be in customary form and covering matters of the type customarily
covered in "cold comfort" letters to Underwriters in connection with primary
Underwritten Offerings; (iv) set forth in full or incorporate by reference in
the underwriting agreement the indemnification provisions and procedures of
Section 7 hereof with respect to all parties to be indemnified pursuant to said
Section; and (v) deliver such documents and certificates as may be reasonably
requested by the Holders of the Transfer Restricted Securities being sold or the
Underwriter(s) of such Underwritten Offering to evidence compliance with clause
(i) above and with any customary conditions contained in the underwriting
agreement entered into by the Company pursuant to this clause (m). The above
shall be done at or prior to each closing under such underwriting agreement, as
and to the extent required thereunder;
(n) make available at reasonable times and in a reasonable
manner for inspection by a representative of the Holders of the Transfer
Restricted Securities, any Underwriter participating in any disposition pursuant
to such Shelf Registration Statement and any attorney or accountant retained by
such selling Holders or any of the Underwriters all relevant financial and other
records, pertinent corporate documents and properties of the Company and cause
the Company's officers, directors and employees to supply all information
reasonably requested by any such Holder, Underwriter, attorney or accountant in
connection with such Shelf Registration Statement prior to its effectiveness;
provided, however, that such representatives, attorneys or accountants shall
agree to keep confidential (which agreement shall be confirmed in writing in
advance to the Company if the Company shall so request) all information, records
or documents made available to such persons which
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are not otherwise available to the general public unless disclosure of such
records, information or documents is required by court or administrative order
(of which the Company shall have been given prior notice and an opportunity to
defend) after the exhaustion of all appeals therefrom, and to use such
information obtained pursuant to this provision only in connection with the
transaction for which such information was obtained, and not for any other
purpose;
(o) otherwise use its reasonable best efforts to comply with
all applicable rules and regulations of the Commission, and make generally
available to its security holders, as soon as practicable, a consolidated
earnings statement, which consolidated earnings statement shall satisfy the
provisions of Section 11(a) of the Act, for the twelve-month period (i)
commencing at the end of any fiscal quarter in which Transfer Restricted
Securities are sold to Underwriters in a firm commitment or best efforts
Underwritten Offering or (ii) if not sold to Underwriters in such an offering,
beginning with the first month of the Company's first fiscal quarter commencing
after the effective date of the Shelf Registration Statement;
(p) cause the Indenture to be qualified under the TIA, and, in
connection therewith, cooperate with the Trustee and the Holders to effect such
changes to the Indenture as may be required for such Indenture to be so
qualified in accordance with the terms of the TIA; and execute and use its best
efforts to cause the Trustee to execute, all documents as may be required to
effect such changes and all other forms and documents required to be filed with
the Commission to enable such Indenture to be so qualified in a timely manner;
(q) use its best efforts to obtain the withdrawal of any order
suspending the effectiveness of the Shelf Registration Statement at the earliest
possible moment;
(r) cause all Transfer Restricted Securities covered by the
Shelf Registration Statement to be listed on each securities exchange or
quotation system on which similar securities issued by the Company are then
listed if requested by the Holders of a majority of the outstanding Transfer
Restricted Securities (with holders of Common Stock constituting Transfer
Restricted Securities being deemed to be Holders of the aggregate principal
amount of Debentures converted into such Common Stock for purposes of such
calculation) or the Underwriters, if any; cause the Debentures covered by the
Shelf Registration Statement to be rated with the appropriate rating agencies,
if so requested by the Holders of a majority in aggregate principal amount of
such Debentures or the Underwriters; and
(s) cooperate and assist in any filings required to be made
with the NASD and in the performance of any due diligence investigation by any
Underwriter (including any "qualified independent Underwriter" that is required
to be retained in accordance with the
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rules and regulations of the NASD).
Each Holder as to which any Shelf Registration Statement is
being effected agrees to furnish promptly to the Company all information
required to be disclosed in order to make the information previously furnished
to the Company by such Holder not materially misleading or necessary to cause
such Shelf Registration Statement not to omit a material fact with respect to
such Holder necessary in order to make the statements therein not misleading.
Each Holder agrees by acquisition of such Transfer Restricted
Securities that, upon receipt of any notice from the Company of the existence of
any fact of the kind described in Section 5(d)(v) hereof, such Holder will
forthwith discontinue disposition of Transfer Restricted Securities until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 5(k) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the Prospectus may be resumed, and has
received copies of any additional or supplemental filings with respect to the
Prospectus. If so directed by the Company, each Holder will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such Transfer
Restricted Securities current at the time of receipt of such notice. In the
event the Company shall give any such notice, the time period regarding the
effectiveness of the Shelf Registration Statement set forth in Section 3(a)
hereof shall be extended by the number of days during the period from and
including the date of the giving of such notice pursuant to Section 5(d)(v)
hereof to and including the date when each selling Holder covered by such Shelf
Registration Statement shall have received the copies of the supplemented or
amended Prospectus contemplated by Section 5(k) hereof or shall have received
the Advice.
SECTION 6. REGISTRATION EXPENSES
(a) Except as set forth in Section 6(b) hereof, all expenses
incident to the Company's performance of or compliance with this Agreement (the
"Registration Expenses") will be borne by the Company, regardless of whether a
Shelf Registration Statement becomes effective, including without limitation:
(i) all registration and filing fees and expenses (including
filings made with the NASD);
(ii) reasonable fees and expenses of compliance with federal
securities or state blue sky laws;
(iii) expenses of printing (including, without limitation,
expenses of printing
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or engraving certificates for the Transfer Restricted Securities in a
form eligible for deposit with Depository Trust Company and of printing
the Prospectus and any Preliminary Prospectus), messenger and delivery
services and telephone;
(iv) fees and disbursements of counsel for the Company;
(v) fees and disbursements of all independent certified public
accountants of the Company (including the expenses of any special audit
and "cold comfort" letters required by or incidental to the preparation
and filing of a Shelf Registration Statement and Prospectus and the
disposition of Transfer Restricted Securities);
(vi) fees and expenses associated with any NASD filings and
approval required to be made in connection with the Shelf Registration
Statement; and
(vii) fees and expenses of listing the Transfer Restricted
Securities on any securities exchange or quotation system in accordance
with Section 5(r) hereof.
The Company will, in any event, bear its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, rating agency fees and the fees and expenses of any Person, including
special experts, retained by the Company.
(b) The Holders of Transfer Restricted Securities shall bear
the expense of any broker's commission or Underwriter's discount or commission
and the fees and expenses of any counsel for the Holders. In addition, each
Holder of Transfer Restricted Securities shall pay all Registration Expenses to
the extent required by applicable law.
SECTION 7. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless (i) each
of the Initial Purchasers, (ii) each Holder, (iii) each person, if any, who
controls (within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act) either of the Initial Purchasers or any Holder (any of the persons
referred to in this clause (iii) being hereinafter referred to as a "controlling
person") and (iv) the respective officers, directors, partners, employees,
representatives and agents of the Initial Purchasers, any Holder or any
controlling person (any person referred to in clause (i), (ii), (iii) or (iv)
may hereinafter be referred to as a "Non-Company Indemnitee"), to the fullest
extent lawful, from and against any and all losses, claims, damages, liabilities
and judgments caused by any untrue statement or alleged untrue statement of a
material fact contained in the Shelf Registration Statement, Prospectus or
Preliminary Prospectus (or any amendments or supplements thereto), including any
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<PAGE>
document incorporated by reference therein, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except, with respect to
any Non-Company Indemnitee, insofar as such losses, claims, damages, liabilities
or judgments (1) are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information furnished in writing to the
Company by such Non-Company Indemnitee expressly for use therein or (2) with
respect to any Preliminary Prospectus, result from the fact that such
Non-Company Indemnity sold Transfer Restricted Securities to a person to whom
there was not sent or given, at or prior to the written confirmation of such
sale, a copy of the final Prospectus, as amended or supplemented, if the Company
shall have previously furnished copies thereof to such Non-Company Indemnitee in
accordance with this Agreement and the final Prospectus, as amended or
supplemented, would have corrected such untrue statement or omission.
(b) In case any action shall be brought against any Non-Company
Indemnitee, based upon the Shelf Registration Statement, Prospectus, or
Preliminary Prospectus (or any amendments or supplements thereto), and with
respect to which indemnity may be sought against the Company pursuant to this
Section 7, such Non-Company Indemnitee shall promptly notify the Company in
writing and the Company shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses; provided, however,
that the omission so to notify the Company shall not relieve the Company from
any liability that it may have to any Non-Company Indemnitee (except to the
extent that the Company is materially prejudiced or otherwise forfeits
substantive rights or defenses by reason of such failure). Such Non-Company
Indemnitee shall have the right to employ separate counsel in any such action
and participate in the defense thereof, but the fees and expenses of counsel
shall be paid by such Non-Company Indemnitee, unless (i) the employment of such
counsel shall have been specifically authorized in writing by the Company, (ii)
the Company shall have failed to assume the defense and employ counsel or (iii)
the named parties to any such action (including any impleaded parties) include
both such Non-Company Indemnitee and the Company and it would be inappropriate
for the same counsel to represent such Non-Company Indemnitee and the Company
(in which case the Company shall not have the right to assume the defense of
such action on behalf of such Non-Company Indemnitee, it being understood,
however, that the Company shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) for the Non-Company Indemnitees, which firm shall be
designated in writing by the Non-Company Indemnitees and whose fees and expenses
reasonably incurred shall be reimbursed as they are incurred). The Company shall
not be liable for any settlement of any such action effected without the written
consent of the Company, but if settled with the written consent of the Company,
the Company agrees to indemnify and hold harmless any
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Non-Company Indemnitee from and against any amounts payable pursuant to such
written consent in connection with such settlement. Notwithstanding the
immediately preceding sentence, if in any case where the fees and expenses of
counsel are at the expense of the Company and a Non-Company Indemnitee shall
have requested the Company to reimburse such Non-Company Indemnitee for such
fees and expenses of counsel as incurred, the Company agrees that it shall be
liable for any settlement of any action effected without its written consent if
(i) each settlement is entered into more than 30 business days after the receipt
by the Company of the aforesaid request and (ii) the Company shall have failed
to reimburse such Non-Company Indemnitee in accordance with such request for
reimbursement prior to the date of such settlement. The Company shall not,
without the prior written consent of such Non-Company Indemnitee, effect any
settlement of any pending or threatened proceeding in respect of which such
Non-Company Indemnitee is or could have been a party and indemnity could have
been sought hereunder by such Non-Company Indemnitee, unless such settlement
includes an unconditional release of such Non-Company Indemnitee from all
liability on claims that are the subject matter of such proceeding.
(c) Each Holder of Transfer Restricted Securities agrees to
indemnify and hold harmless (i) the Company, (ii) each of the Initial
Purchasers, (iii) each other Holder, (iv) any person controlling (within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company,
the Initial Purchasers and each other Holder and (v) the respective officers,
directors, partners, employees, representatives and agents of each of the
parties referred to in clauses (i), (ii), (iii) and (iv), to the same extent as
the foregoing indemnity from the Company to each of the Non-Company Indemnitees,
but only with respect to information relating to such Holder that was furnished
in writing by such Holder to the Company expressly for use in the Shelf
Registration Statement (or any amendment or supplement thereto). In no event
shall the liability of any selling Holder hereunder be greater in amount than
the dollar amount of the proceeds received by such Holder upon the sales of the
Transfer Restricted Securities giving rise to such indemnification obligation.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to herein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments in such proportion as is appropriate to
reflect the relative fault of the indemnifying party, on the one hand, and the
indemnified party, on the other hand, in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The relative
fault of the indemnifying party, on the one hand, and the indemnified party, on
the other hand, shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
indemnifying
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party, on the one hand, or the indemnified party, on the other hand, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company, each of the Initial Purchasers and each Holder of
Transfer Restricted Securities agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The losses, claims, damages, liabilities or judgments of an indemnified party
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim (but only to the extent such investigation
or defense was reasonably necessary) prior to the indemnifying party's
assumption of the defense thereof or subsequent thereto to the extent permitted
by the second sentence of Section 7(b) hereof. Notwithstanding the provisions of
this Section 7, none of the Holders shall be required to contribute, in the
aggregate, any amount in excess of the amount by which the total amount received
by such Holder with respect to the sale of Transfer Restricted Securities
exceeds the sum of (A) the amount paid by such Holder for such Debentures plus
(B) the amount of any damages which such Holder has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Holders'
obligations to contribute pursuant to this Section 7(d) are several in
proportion to the respective principal amount of Debentures held by each of the
Holders hereunder and not joint.
SECTION 8. RULE 144A
The Company hereby agrees with each Holder, for so long as any
of the Debentures or shares of Common Stock that are Transfer Restricted
Securities remain outstanding and during any such period in which the Company is
not subject to Section 13 or 15(d) of the Exchange Act, to make available to any
Initial Purchaser or any beneficial owner of the Debentures or shares of such
Common Stock in connection with any sale thereof and any prospective purchaser
of such Debentures or Common Stock from such Initial Purchaser or beneficial
owner, the information required by Rule 144A(d)(4) under the Act in order to
permit resales of such Transfer Restricted Securities pursuant to Rule 144A.
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SECTION 9. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Offering
hereunder unless such Holder (a) agrees to sell such Holder's Transfer
Restricted Securities on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements, (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements and (c) furnishes the Company in writing information
in accordance with Section 3(f) and agrees to indemnify and hold harmless the
Company, its directors, its officers who sign the Registration Statement and any
person controlling the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act to the extent contemplated by Section 7(c).
SECTION 10. SELECTION OF UNDERWRITERS
The Holders of Transfer Restricted Securities covered by the
Shelf Registration Statement who desire to do so may sell such Transfer
Restricted Securities in an Underwritten Offering. In any such Underwritten
Offering, the Underwriter(s) that will administer the offering will be selected
by the Holders of the Transfer Restricted Securities included in such offering
in the manner specified in Section 3(c); provided, however, that such
Underwriters must be reasonably satisfactory to the Company and further
provided, however, that notwithstanding anything contained in this Agreement to
the contrary, the Company shall not be required to undertake more than one such
Underwritten Offering during any consecutive 12 month period.
SECTION 11. MISCELLANEOUS
(a) Remedies. Each Holder of Transfer Restricted Securities,
in addition to being entitled to exercise all rights provided herein, and as
provided in the Purchase Agreement and granted by law, including recovery of
damages, will be entitled to specific performance of such Holder's rights under
this Agreement. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this Agreement and hereby agrees to waive the defense in any action for
specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company will not on or
after the date of this Agreement enter into any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders of
Transfer Restricted Securities in this Agreement or otherwise conflicts with the
provisions hereof. The rights granted to the
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Holders of Transfer Restricted Securities hereunder do not in any way conflict
with and are not inconsistent with the rights granted to the holders of the
Company's securities under any other agreements.
(c) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of a majority of the outstanding Transfer Restricted Securities affected by such
amendment, modification, supplement, waiver or departure (with holders of Common
Stock constituting Transfer Restricted Securities being deemed to be Holders of
the aggregate principal amount of Debentures converted into such Common Stock
for purposes of such calculation). Notwithstanding the foregoing, a waiver or
consent to departure from the provisions hereof that relates exclusively to the
rights of Holders of Transfer Restricted Securities whose securities are being
sold pursuant to such Shelf Registration Statement and that does not directly or
indirectly affect the rights of other Holders of Transfer Restricted Securities
shall be valid only with the written consent of Holders of at least 66-2/3% of
the Transfer Restricted Securities being sold, in each case calculated in
accordance with the provisions of Section 3(c).
(d) Notices. All notices and other communications provided for
or permitted hereunder shall be made in writing by hand-delivery, first-class
mail (registered or certified, return receipt requested), telex, telecopier, or
air courier guaranteeing overnight delivery:
(i) if to a Holder of Debentures which are Transfer
Restricted Securities, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar;
(ii) if to a Holder of shares of Common Stock which
are Transfer Restricted Securities, at the address set forth on the
records of Fleet National Bank ("Fleet"), transfer agent and registrar
for the Common Stock, with a copy to Fleet;
(iii) if to the Company or an Initial Purchaser,
initially at its address set forth in the Purchase Agreement and
thereafter at such other address, notice of which is given in
accordance with the provisions of this Section.
All such notices and communications shall be deemed to have
been duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when
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receipt acknowledged, if telecopied; and on the next business day, if timely
delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications
shall be concurrently delivered by the Person giving the same to the Trustee
under the Indenture at the address specified in the Indenture.
(e) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Transfer Restricted Securities; provided,
however, that this Agreement shall not inure to the benefit of or be binding
upon a successor or assign of a Holder of Transfer Restricted Securities unless
and to the extent such successor or assign acquired Transfer Restricted
Securities from such Holder; and provided, further, that nothing herein shall be
deemed to permit any assignment, transfer or any disposition of Transfer
Restricted Securities in violation of the terms of the Purchase Agreement or
applicable law. If any transferee of any Holder shall acquire Transfer
Restricted Securities, in any manner, whether by operation of law or otherwise,
such Transfer Restricted Securities shall be held subject to all of the terms of
this Agreement and by taking and holding such Transfer Restricted Securities
such person shall be conclusively deemed to have agreed to be bound by and to
perform all of the terms and provisions of this Agreement and such Person shall
be entitled to receive the benefits hereof.
(f) Counterparts. This Agreement may be executed in any number
of counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO THE CONFLICTS OF LAW RULES THEREOF.
(i) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(j) Entire Agreement. This Agreement together with the other
Operative
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Documents (as defined in the Purchase Agreement) is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the securities sold pursuant to the Purchase Agreement. This Agreement
supersedes all prior agreements and understandings between the parties with
respect to such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
PhyMatrix Corp.
By: /s/ Frederick R. Leathers
Frederick R. Leathers
Chief Financial Officer and Treasurer
SMITH BARNEY INC.
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
PIPER JAFFRAY INC.
ROBERTSON, STEPHENS & COMPANY
THE ROBINSON-HUMPHREY COMPANY, INC.
BY: SMITH BARNEY INC.
By: /s/ David F. Gately
David F. Gately
Managing Director
21
[Letterhead]
EXHIBIT 23.1
Coopers Coopers & Lybrand L.L.P.
& Lybrand a professional services firm
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
September 13, 1996
[Letterhead]
EXHIBIT 23.2
Coopers Coopers & Lybrand L.L.P.
& Lybrand a professional services firm
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 November 6, 1995, on our
audits of the financial statements of DASCO Development Corporation and
Affiliate. We also consent to the reference to our firm under the caption
"Experts."
/s/ Coopers & Lybrand L.L.P.
Miami, Florida
September 13, 1996
EXHIBIT 23.3
Stanley M. Bober, CPA BOBER, Mark B. Bober, CPA
Richard C. Fedorovich, CPA MARKEY Cindy S. Johnson, CPA
Alan Markey, CPA & Company Michael R. Lee, CPA
Dale A. Ruther, CPA Theresa M. Petit, CPA
==============
Certified Public Accountants
A Professional Corporation
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the inclusion of our report dated
July 31, 1995 with respect to DASCO Development Corporation and Affiliate in
this Registration Statement on Form S-1 filed by PhyMatrix Corp.
/s/ Bober, Markey & Company
BOBER, MARKEY & COMPANY
Akron, Ohio
September 13, 1996
[Letterhead]
EXHIBIT 23.4
Coopers Coopers & Lybrand L.L.P.
& Lybrand a professional services firm
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 October 5, 1995, on our audits
of the financial statements of Radiation Care, Inc. and Subsidiaries. We also
consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 13, 1996
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 (File
No.333-08269) of our report dated August 24, 1995, on our audits of the
financial statements of Aegis Health Systems, Inc. as of December 31, 1994, and
1993, and for each of the three years in the period ended December 31, 1994. We
also consent to the reference to our firm under the caption "Expert."
/s/ Coopers & Lybrand L.L.P.
Oklahoma City, Oklahoma
September 13, 1996
EXHIBIT 23.6
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
West Palm Beach, Florida,
September 13, 1996.
EXHIBIT 23.7
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 (File No.
333-08269) of our report dated July 27, 1995, on or audits of the financial
statements of Osler Medical as of and for the years ended December 31, 1994 and
1993. We also consent to the reference to our firm under the captions "Experts".
/s/ Hoyman, Dobson & Company, P.A.
HOYMAN, DOBSON & COMPANY, P.A.
Melbourne, Florida
September 13, 1996
EXHIBIT 23.8
Babush, Neiman, Kornman & Johnson, LLP
Certified Public Accountants
Eight Piedmont Center, Suite 500
3525 Piedmont Road, Atlanta, Georgia 30305
404/266-1900 FAX 404/266-3436
Internet: http://www.proi.com/bnkj/
INDEPENDENT AUDITOR'S CONSENT
As independent auditors, we hereby consent to the inclusion of our report dated
June 26, 1995 with respect to Georgia Oncology-Hematology Clinic, P.C. in this
Registration Statement on Form S-1 filed by PhyMatrix Corp.
/s/ Babush, Neiman, Kornman & Johnson, LLP
Babush, Neiman, Kornman & Johnson, LLP
September 13, 1996
Atlanta, Georgia
EXHIBIT 23.9
(410) 561-4411 FAX: (410) 561-4586
WABC
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
201 West Padonia Road, Suite 600
Timonium, Maryland 21093-2186
INDEPENDENT AUDITOR'S CONSENT
As independent auditors, we hereby consent to the inclusion of our report dated
August 4, 1995 with respect to Oncology-Hematology Associates, P.A. and
Oncology-Hematology Infusion Therapy, Inc. in this Registration Statement on
Form S-1 filed by PhyMatrix Corp.
/s/ Weil, Akman, Baylin & Coleman, P.A.
WEIL, AKMAN, BAYLIN & COLEMAN, P.A.
Timonium, Maryland
September 13, 1996
[Letterhead]
EXHIBIT 23.10
Coopers Coopers & Lybrand L.L.P.
& Lybrand a professional services firm
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 January 9, 1996, on our audit
of the financial statements of Cancer Specialists of Georgia, P.C. We also
consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 13, 1996
EXHIBIT 23.11
INDEPENDENT AUDITOR'S CONSENT
As independent auditors, we hereby consent to the use of our report
dated October 25, 1995, with respect to Mobile Lithotripter of Indiana Partners
in this Registration Statement on Form S-1 filed by PhyMatrix Corp. We also
consent to the reference to us under the heading "Independent Accountants" in
the Prospectus, which is part of such Registration Statement.
/s/ Katz, Sapper & Miller, LLP
KATZ, SAPPER & MILLER, LLP
Indianapolis, Indiana
September 13, 1996
EXHIBIT 23.12
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the inclusion of our report dated
June 22, 1995 with respect to UroMed Technologies, Inc. in this Registration
Statement on Form S-1 filed by PhyMatrix Corp.
/s/ Roy Cline, CPA
Roy Cline, CPA, PA
Altamonte Springs, Florida
September 13, 1996
[Letterhead]
EXHIBIT 23.13
REGAN, RUSSELL, SCHICKNER & SHAH, P.A.
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the inclusion of our report dated
September 13, 1995 with respect to the Financial Statements of Nutrichem, Inc.
for periods ended December 31, 1993 and November 17, 1994 in this Registration
Statement on Form S-1 filed by PhyMatrix Corporation.
/s/ Regan, Russell, Schickner & Shah, P.A.
Regan, Russell, Schickner & Shah, P.A.
Columbia, Maryland
September 13, 1996
[Letterhead]
EXHIBIT 23.14
4040 Woodcock Drive, Suite 230
Patrick & Jacksonville, Florida 32207
Associates, P.A. (904)396-9510 o (904)396-5400 o fax (904)396-9226
Certified Public Accountants
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the inclusion of our report dated
June 8, 1995, with respect to First Choice Home Care, Inc. in this Registration
Statement on Form S-1 filed by PhyMatrix Corp.
/s/ Patrick & Associates, P.A.
Patrick & Associates, P.A.
Jacksonville, Florida
September 13, 1996
[Letterhead]
EXHIBIT 23.15
4040 Woodcock Drive, Suite 230
Patrick & Jacksonville, Florida 32207
Associates, P.A. (904)396-9510 o (904)396-5400 o fax (904)396-9226
Certified Public Accountants
INDEPENDENT AUDITORS' CONSENT
As independent auditors, we hereby consent to the inclusion of our report dated
June 8, 1995, with respect to First Choice Health Care Services of Ft.
Lauderdale, Inc. in this Registration Statement on Form S-1 filed by PhyMatrix
Corp.
/s/ Patrick & Associates, P.A.
Patrick & Associates, P.A.
Jacksonville, Florida
September 13, 1996
[Letterhead]
EXHIBIT 23.16
Coopers Coopers & Lybrand L.L.P.
& Lybrand a professional service firm
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 December 14, 1995, on our
audits of the financial statements of Pinnacle Associates, Inc. We also consent
to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
September 13, 1996
[Letterhead]
[Logo] Frazier & Deeter, LLC
C E R T I F I E D P U B L I C A C C O U N T A N T S
James F. Frazier, Jr., C.P.A., C.F.E.
1100 Harris Tower David A. Deeter, C.P.A.
233 Peachtree Street, N.E. Robert H. Woosley, C.P.A.
Atlanta, Georgia 30303-1507 Roger W. Lusby, III, C.P.A., C.M.A.
404 659-2213 Ruth A. Bartlett, C.P.A.
404 659-4741 FAX
INDEPENDENT AUDITOR'S CONSENT
As independent auditors, we hereby consent to the use of our report dated July
9, 1996, with respect to Atlanta Gastroenterology Associates, P.C. in this
Registration Statement on Form s-1 filed by PhyMatrix Corp. We also consent to
the reference to us under the heading "Experts" in the Prospectus, which is part
of such Registration Statement.
/s/ Frazier & Deeter, LLC
FRAZIER & DEETER, LLC
Atlanta, Georgia
September 13, 1996
Friedberg, Smith & Co., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
<TABLE>
<S> <C> <C>
HENRY L. KATZ, C.P.A. 855 MAIN STREET MILTON H. FRIEDBERG, C.P.A., 1922-1955
CLAYTON A. FRIEDBERG, C.P.A. BRIDGEPORT, CONN. 06604 HARRY W. BABINEAU, C.P.A., 1939-1960
MURRAY R. GLASS, C.P.A. PHONE (203) 366-5876 FREDERICK R. NEWPORT, C.P.A., 1942-1966
LOUIS G. STRASSER, C.P.A. FAX (203) 366-1924 GEORGE W. MEDER, C.P.A., 1926-1967
DAVID M. ZIEFF, C.P.A. JOSEPH Y. SMITH, C.P.A., 1967-1985
LARRY M. HEILWEIL, C.P.A. -----------------
JOSEPH F. KUBIK, C.P.A. 1250 SUMMER STREET MEMBERS
THOMAS R. DURAND, C.P.A. STAMFORD, CONN. 06905 AMERICAN INSTITUTE OF
ROBERT J. SCHLESS, C.P.A. PHONE (203) 359-1100 CERTIFIED PUBLIC ACCOUNTANTS
EDWARD BACKER, C.P.A. FAX (203) 359-8145
JOSEPH ROSENMAN, C.P.A. CONNECTICUT SOCIETY OF
JOHN P. MCCARTHY, C.P.A. CERTIFIED PUBLIC ACCOUNTANTS
RICHARD P. OFFENBACH, C.P.A.
CIRO J. PIRONE, C.P.A.
WILLIAM H. VAN ALSTYNE, C.P.A.
</TABLE>
Independent Auditor's Consent
-----------------------------
As independent auditors, we hereby consent to the use of our report dated
January 16, 1996, with respect to Physician's Choice Management, LLC in this
Registration Statement on Form S-1 filed by PhyMatrix Corp. We also consent to
the reference to use under the heading "Experts" in the Prospectus, which is
part of such Registration Statement.
/s/ Friedberg, Smith & Co.
September 13, 1996
